Mish's Global Economic Trend Analysis

Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines
Europe's Ass Backwards Plan to Stimulate Lending
Chart of the Day: Food Stamp Recession Curve
Merkozy Dog-and-Pony Show is Nothing but Fleas; Immense Arrogance, Loose Cannons, No Credibility

Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines

Posted: 07 Dec 2011 07:31 PM PST

On November 30, Central Banks Cut Rates on Dollar Swap Lines which made borrowing at the Fed's discount window cheaper for foreign banks than US banks.

As a result, Dollar-Loan Demand Swells In Europe and Japan

The European Central Bank said demand for three-month dollar loans surged after it cut the cost of the financing almost in half in a coordinated action last week with five other central banks including the Federal Reserve.

The European Central Bank, based in Frankfurt, will lend $50.7 billion to 34 euro area banks on Thursday for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The E.C.B. also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The E.C.B. does not disclose the identity of the banks that borrow.

Six central banks including the Fed, the European Central Bank and the Bank of Japan cut the cost of emergency dollar loans by 50 basis points on Nov. 30 in an effort to ease a credit shortage worsened by Europe's sovereign debt crisis. A basis point is equal to 0.01 percent. On Tuesday, demand for seven-day dollar loans from the Bank of Japan surged to $25 million from $1 million.

"The reduction in the rate seems to have been enough to reduce the stigma in using the facility," said Vincent Chaigneau, rate strategist at Société Générale in Paris.

Discount Window Borrowing Swells by 12,735%

$395 million to $50.7 billion is quite a move. Percentage-wise it is approximately 12,735%. In Japan, demand for loans increased from $1 million to $25 million, a mere 2,400%. The actual demand in Japan is trivial. In Europe, it's not.

Who is desperate for the cash? The ECB will not say. Does the Fed even know or care?

Further information on the discount window, including interest rates, is available from the Federal Reserve System's discount window web site.

Discount Window

US banks going to the Fed's discount window pay .75% for primary credit. European banks going to the Fed's discount window paid a fixed rate of .59%.

That said, US banks are generally not using the discount window given adequate liquidity.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Europe's Ass Backwards Plan to Stimulate Lending

Posted: 07 Dec 2011 12:02 PM PST

Please consider the ass backwards Measures to Stimulate Bank Lending in the EMU.

The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers' deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe's debt crisis. The central bank's insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union, a stance they reiterated today.

Confidence? What Confidence?

There is no confidence. Investors stepped in to buy Italian and Spanish debt hoping to unload to the ECB when it steps up bond purchases in the secondary market. Confidence is nothing more than investors front-running ECB president Mario Draghi's hint that the ECB is about to purchase more sovereign debt.

Ass Backwards Plan

Banks cannot or will not lend in Europe for the same reason they don't in the US.

Banks are undercapitalized
Few credit worthy businesses want to borrow

Cutting rates will not fix either of those problems. Worse yet, and with thanks to French President Nicolas Sarkozy, taxpayers and businesses will bear 100% of the responsibility to recapitalize banks.

Europe is in recession. Yet the fools at the EMU and EU want to increase the VAT, increase property taxes, increase fees, etc, to ensure that French and German banks do not shoulder any responsibility for making idiotic loans.

This may (or may not) increase confidence that banks will not go under, but it sure will not inspire consumers to spend or businesses to borrow.

Moreover, lowering interest rates further will put additional stress on those living on fixed income.

Correct Approach

Force banks, not taxpayers, to take losses for stupid lending decisions
Force banks to raise capital so they are not capital restrained in lending
Reduce public sector spending
Reduce taxes on businesses
Reduce taxes on private citizens

In every instance, except perhaps number three in some countries, the ECB, EU, EMU, and various national leaders have taken the exact wrong approach.

This is a balance sheet recession, not the garden variety in which the standard solution of central bank rate cutting might appear help. Few seems to have figured this out yet.

Worse yet, most of the few who have figured this out are hell-bent on trying various QE strategies proven to be complete failures by Japan and the US.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Chart of the Day: Food Stamp Recession Curve

Posted: 07 Dec 2011 09:11 AM PST

The latest Food Stamp data (now called SNAP) is out. Here is a chart by reader Tim Wallace showing program usage.

I added highlights in yellow to mark recessions based on NBER Business Cycle Expansions. The NBER is the official arbiter of recession start and end dates.

Food Stamp Participation 1969 to Present

click on chart for sharper image

Tim writes ...

The latest food stamp (SNAP) data is available for September 2011. The reporting lags by two months. We have now surged past 46 million, up to 46,268,257 to be exact.

Note that food stamp usage sloped down throughout the Reagan presidency until it started back up in 1989, ahead of the recession that doomed Bush I, then continued for several more years.

The pattern is similar for the recession of 2001. Food stamp usage picked up in 2001 prior to the recession, then continued for four years after the recession ended.

The current recession ended in mid-2009 but usage spirals higher and higher.

You can see that this "recession" is far more devastating than any in the past as the curve is more like a right angle than a curve.

We have added about 20 million in the latest rise and if the trend continues (as it has so far and as it did in the past two recessions), usage will hit 51 million or so in 2013.

Tim

In the last three recessions, a significant change in upward slope in food stamp participation served as a leading indicator of the upcoming recession. Only the second 80's recession failed to meet that pattern.

Based on demographics as well as weak hiring trends, it is reasonable to assume this steep upward slop will continue.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Merkozy Dog-and-Pony Show is Nothing but Fleas; Immense Arrogance, Loose Cannons, No Credibility

Posted: 06 Dec 2011 11:27 PM PST

Within a couple of days German Chancellor Angela Merkel and French President Nicolas Sarkozy will present their "Grand Plan" to save Europe to a formal hearing on EU debt.

Their plan is on the death-bed already, but it does not officially die until formal votes in May as noted in Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?

Merkozy Dog-and-Pony Show is Nothing but Fleas

As with grand plans for the EFSF, still not finalized, the Merkozy plan has morphed into nothing but budget rules that the EMU will not be able to enforce because Sarkozy would not cede fiscal control to the EU. Merkel will not accept Eurobonds, because she can't, by German supreme court ruling.

By any reasonable standard, the Merkozy dog-and-pony show is in reality neither dog nor pony but rather all fleas.

Loose Cannons and No Credibility

Steen Jakobsen, chief economist for Saxo Bank asks Where have your standards gone, Europe?

This week is being touted as the make-or-break week for the Euro and its Euro-zone - we did not get a Grand Plan in Cannes as Sarkozy had promised us, so now it seems we will get a Desperate plan instead.

The EU will always create 'something' which they believe they can sell as progress, but the problem is one of moral and political standards, or rather the lack thereof. Yes, you can buy time by printing money, you can try to fast-track changes to EU treaties, but you simply cannot run away from the dilution of standards from these desperate actions.

This weekend it dawned on me (and yes I am a bit slow) that the real issue here is not whether Europe gets a deal by late Tuesday night, rather it's about how the EU can maintain any shred of credibility on its long-term ability to move the agenda beyond "saving Europe" to the longer term challenge of creating the next upswing in employment, growth and optimism.

This is not a question of the need for a crisis, though I do believe it's the only way we get true progress, it is more about an alarming decline in standards of behaviour by those in power. Simply put, they have become loose cannons. The IMF can lend thousands of per cent of its SDR quotas, the FED can print trillions of dollars if they deem it necessary and soon it appears EU political shenanigans will see the ECB printing money in exchange for politicians in Europe doing what they should have done in 1999.

At its core, perhaps this is what the "occupy" movement is all about: it's a protest against the violation of standards of behaviour by the ruling class, not just against the decisions they have made. And if that is the case, then I agree! We need debt brakes to stop the fiscal bloodshed, and we certainly need standards for how far central banks and politicians can devalue our hard earned, after tax salary by printing money.

This week, the EU's Merkel/Sarkozy will try to force the move toward fiscal union using article 126 in the EU treaty, which basically gives the decision making forum of the EU Council the power to move and strengthen fiscal oversight.

The problem here is that it will be seen, ultimately as what it is: a total dilution of the originally intended standards of EU behaviour and indirectly it also puts us on the road to of transitioning from Euro-17 to perhaps the Euro-10.

I still have the feeling we are about to add a third new low point in the history of the EU history. The first was breaking the original stability-and-growth pact, the second was the ECB's intervention in the peripheral sovereign debt markets in May of last year. Now we have the third and perhaps final straw: no limits, and no accountability to voters, the investors and the future.

So the risk is that the EU wins the battle this week, only to lose the war down the road.

Please let me be wrong.

Steen

Immense Arrogance

Reader Andrea emails ...

Hi Mish,

My comment (and I think I am not alone in Europe): This is a Franco-German agreement drawn and agreed between France and Germany without any involvement or contribution of any kind at any level of the other 25 countries.

Why the hell should the other 25 countries (parliaments or people) approve that?

Irritation, even rage against the Franco-German tandem deciding for everybody is mounting quite fast in other European countries.

The odds to get this plan approved are basically 0.

Best regards,

AC

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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