Money/inflation, the Fed, Banking, Monetary Policy, Dollar, BTC, crypto, Gold

[DougMacG]

M2 money supply is growing this summer at a rate of $60 billion per week.

Scott Grannis:  "This is a follow up to some posts from last month, in which I noted the surprising jump in M2 growth. As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event."

[ccp]

"No matter how you look at it, this is a major event" 

Why can't the Fed just print the money and hand it out to ordinary citizens?

Can't we spend the money better than them?

It would "stimulate" consumers and of course isn't that what the US is a country of sales?

Just give all of us a mill and we all go shopping.

OTOH we are kind of doing that with the welfare state.  1 out of three New Jersians are on the dole.

That is why Brock has an approval rating of 54% in the Jersey shore Jersilicious state.

[Crafty_Dog]

I went to Scott Grannis's blog and read the whole piece as well as some other entries-- as always, Grannis is WELL worth the time.   What I took away is that a major source of the increase is inflows of money fleeing Europe.

1 in 3 in NJ?   Citation?   

I lack citation, I think it was a FOX news piece, but the number I heard was 1 in 7 Americans is on food stamps

[ccp]

I've read but cannot find citation wherein 1 out of 3 NJ residents on public money, soc sec, medicare, medicaid, food stamps, pensions etc.

As for Brocks approval rating it is down 6% in Jersey yet still he holds 54% approval according to a poll in the Home Tribune:

***Poll shows lower approval rating from N.J. residents for Obama
10:34 AM, Aug. 10, 2011  |  10Comments
 New Jerseyans are split over how President Barack Obama handled debt ceiling talks. / The prolonged battle over the nation's debt ceiling has taken a toll on President Obama's approval rating in New Jersey, with 54 percent of residents saying they like the president's job performance, a Monmouth University/NJ Press Media poll showed.

That's down six points from his all-time high of 60 percent in May, in a survey taken shortly after the U.S. killed Osama bin Laden.

Thirty-seven percent of all adults surveyed disapprove of Obama's job performance, while 39 percent of registered voters give the president low marks.***

To think that 54% of people in NJ STILL approve of Brock is incredible.  They want their entitlements which continues to expand.That is why it is remarkable we could possibly have a governor with an R before his name and why he would likely commit political suicide if he was a "strict" conservative.  I am not sure which is worse Kalifornia or Jersilicious.

As for the printing of money increase,
I wasn't cirticizing Scott Grannis piece what I meant was I look at it as a bad thing.  I just don't understand how endlessly printing money M2 can be without any consequences.  I don't know if Scott thinks it good bad or indifferent.  This was my concern though I am obviously not too privy on economics.  Yet I also read economists are also varied in opinions and usually cannot predict much either.

[DougMacG]

Thanks Crafty. I didn't mean to post that without the explanation that M2 would not be the widest measure of money supply that Scott G or Brian W would use.  It goes something like this, M-zero is to count up the physical money. M1 is that plus checking accounts, M2 is that plus savings accounts, M3 includes largerr money funds and MZM (money with zero maturity) includes all money market funds.  M2 is going nuts right now means that people are moving resources out of riskier assets  into FDIC insured savings accounts (safe but almost zero yield), at an alarming rate.  Asylum in an insured savings account, like gold, is the opposite of putting your available investment money into risk-based, economy-driving factory constructions or hiring expansions that we so badly need.

[Crafty_Dog]

Data Watch

--------------------------------------------------------------------------------
The Producer Price Index (PPI) rose 0.2% in July To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/17/2011


The Producer Price Index (PPI) rose 0.2% in July, a larger increase than the consensus expected (0.1%).  Producer prices are up 7.2% versus a year ago.

The increase in PPI in July was largely due to food prices which rose 0.6%.  Energy prices fell 0.6%. The “core” PPI, which excludes food and energy, increased 0.4%, a worrisome, and large, jump.
 
Consumer goods prices gained 0.1% in July and are up 9.1% versus last year.  Capital equipment prices were up 0.4% in July and are up 1.8% in the past year.
 
Core intermediate goods prices increased 0.2% in July and are up 7.8% versus a year ago.  Core crude prices rose 0.7% in July and are up 27.0% in the past twelve months.
 
Implications:  The Federal Reserve is in a bind. The overall producer price index rose a moderate 0.2% in July (7.2% year-over-year), but the "core" PPI, which excludes food and energy, increased 0.4% (2.5% YOY).  At 2.5%, the 12-month increase in “core” producer prices may seem small to many, but these prices are up at a 3.9% annual rate in the past three months – a worrisome increase.  Given that the Fed has used low core price inflation to justify QE2 and 0% interest rates, the acceleration in these prices during recent months creates a serious dilemma.  At the least, it would seem to make a third round of quantitative easing very, very difficult, if not impossible, to justify.  This is especially true because further up the production pipeline, inflation is even worse.  “Core” intermediate prices – components and parts in the production pipeline – rose 0.2% in July and are up 7.8% versus a year ago.  “Core” crude prices – the raw materials of production – are up 27% in the past year.  As a result, it is hard to see producer or consumer prices moderating anytime soon.  Inflation is a clear and present danger and the Fed is behind the curve.

[DougMacG]

"Inflation is a clear and present danger and the Fed is behind the curve."

Inflation of the US$ already occurred and Bernancke was the architect.  My 2 cents is that the inflation which was quantitative expansion of the total dollars in circulation that already occurred - big time.  Price increases or what he is calling 'price inflation' are mere symptoms, unavoidable consequences, of the monetary arson that already occurred.  Price increases aren't a danger, they are a certainty - assuming that normal or healthy demand ever returns to the economy.

Can anyone imagine what oil and gas prices alone would be today if not for the nearly 20% stall of idle, productive capacity of labor and capital, and what skyrocketing energy costs will do to all other prices and to our delicate recovery if it ever begins...

[Crafty_Dog]

The Consumer Price Index (CPI) rose 0.5% in July To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/18/2011


The Consumer Price Index (CPI) rose 0.5% in July versus a consensus expected increase of 0.2%. The CPI is up 3.6% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.6% in July and is up 4.3% in the past year.
 
The increase in the CPI was mostly due to a 2.8% rise in energy prices. Food prices were up 0.4%. Excluding food and energy, the “core” CPI increased 0.2%, matching consensus expectations. Core prices are up 1.8% versus last year.
 
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – fell 0.1% in July and are down 1.3% in the past year. Real weekly earnings are down 1.0% in the past year.
 
Implications: The Consumer Price Index roared ahead 0.5% in July, handily beating consensus estimates.  While most of the increase was due to energy, which rose 2.8% for the month, it’s important to note that nearly all other major categories rose as well.  “Cash” inflation, which excludes the government’s estimate of what homeowners would pay themselves in rent, rose 0.6% in July, the most since November 2008.  This measure of inflation is up 4.3% in the past year.  “Core” inflation (which excludes food and energy) rose 0.2%, matching expectations, and is accelerating.  Over the past year, core prices are up 1.8%, but in the past six months, prices are up at a 2.6% annual rate and an even faster 3.1% rate in the last three months.  This is not welcome news for Fed officials who are trying to justify QE3.  Some say rising inflation is caused by “temporary factors” and will dissipate.  But they can’t explain what caused the temporary factors in the first place.  We believe their hopes of fading inflation will be dashed. In other news this morning, new claims for unemployment benefits rose 9,000 last week to 408,000.  The four-week moving average fell to 403,000 versus 440,000 in May.  Continuing claims for regular state benefits increased 14,000 to 3.70 million.  We are closely watching high-frequency indicators like this to see if there is a sharp downturn in economic activity.  Today’s jobless claims numbers don’t indicate there is one.

[Crafty_Dog]

Doug posted my internet friend Scott Grannis's blog on August 15.  Three days later Larry Kudlow catches up
==========

Scott Grannis is cited again by Larry Kudlow on National Review.

 

http://www.nationalreview.com/articles/274988/deflationary-m2-explosion-larry-kudlow

 

The Deflationary M2 Explosion
Fears over the safety and solvency of European government debt and banks are haunting the stock market.

Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.

This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.

“The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets,” writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.

So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, “The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt.”

Grannis concludes, “In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice.”

On the other hand, all may not be lost — at least from the standpoint of the American economy.

Economist Conrad DeQuadros, who acknowledges the precautionary demand for high cash balances in the current financial uncertainty, believes that the economic data do not yet signal recession. DeQuadros points out that jobless claims, hours worked, retail sales, and industrial production are all picking up. He also notes that profits are still rising, even though their growth is slowing. And C&I business loans have grown at an 8 percent annual rate over the past three months.

I would just add to all this: The biggest problem for the plunging stock market is coming out of Europe. Fears over the safety and solvency of European government debt and banks are haunting the stock market. I still don’t believe it’s 2008. But yes, like everyone else, I’m worried.

That said, we are awash with liquidity everywhere. U.S. banks and companies have more cash than they know what to do with. The problem is they are immobilized by fiscal policy run amok. We desperately need a regulatory rollback and flat-tax reform to boost asset prices and to get banks to loan, companies to invest, and America back to work.

[Crafty_Dog]

I forget whether these have been posted previously. Even if so, they are well worth the watching again:


http://www.garynorth.com/public/7261.cfm

http://www.garynorth.com/public/7261.cfm

[ccp]

US News & World Report  Home Money
 
Could QE3 Help the Economy?
Why another round of quantitative easing might not be a cure-all for the economy
By Meg Handley

Posted: August 11, 2011
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A third bond-buying program by the Federal Reserve—or quantitative easing, as it's commonly called—is likely to resume by the end of the year or in early 2012, Goldman Sachs economists said in a report Wednesday. The forecast comes on the heels of the Federal Reserve's announcement Tuesday that it would keep rates steady at near-zero levels for the next two years.

 
"We have changed our call because [Tuesday's] statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," said the report, which also cited remarks by the Federal Open Market Committee that it would employ additional policy tools if economic conditions deteriorated further.

While this might be welcome news for jittery investors clamoring for Fed intervention to help boost market confidence, experts caution that another round of quantitative easing wouldn't be a panacea for the ailing U.S. economy. Some critics say it would likely amount to just another Band-Aid on the economy's skinned knees.

[In Pictures: 6 Numbers Every Investor Should Follow.]

For starters, the global economic landscape is drastically different than it was when the Fed launched its second quantitative easing program, QE2, in November 2010. Since then, a series of temporary shocks—a catastrophic earthquake in Japan, debt-ceiling drama in Washington, and the sovereign debt crises in the eurozone, coupled with more fundamental economic maladies—have rocked the global financial system to its core. "The old rules we judge the economy by, the old rules we tried—they may not be completely applicable anymore," says Diane Swonk, chief economist at Chicago-based Mesirow Financial.

The challenges policymakers face differ tremendously as well. Back in 2010, deflation was the crisis of the moment, with markets fearing an unavoidable downward spiral of lower prices, weak demand, and massive lay-offs. Despite the many critiques leveled at the bond-buying program, QE2 seems to have staved off deflation, preventing a vicious cycle that could have plunged the United States into an even deeper recession.

Inflation is now the enemy. Through June, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, has increased 3.6 percent over the past 12 months, according to the Bureau of Labor Statistics. (July's CPI is due next week.) At this time last year, the CPI was increasing at an annual rate of 1.1 percent. Core inflation—the index for all items, less food and energy—edged up to 1.6 percent in June, its highest reading since January 2010. (This measure is more closely tracked by the Fed.)

[See Inflation Stands in the Way of QE3.]

"QE2 prevented deflation, which would have been really bad for the jobs situation," says Guy LeBas, chief fixed-income strategist at financial-services firm Janney Montgomery Scott. "Right now the risk of deflation is pretty slim, so there's really no need to expand the [Fed's] balance sheet."

While the economy might have sidestepped a deflation disaster for the time being, a host of other grave economic problems confront the country, the most pressing being less-than-stellar growth over the past few years. According to recent government figures, GDP grew a meager 1.3 percent in the second quarter, revised downward from initial estimates of almost 2 percent. That figure comes on the heels of a stunningly low 0.4 percent GDP growth rate in the first quarter of the year. Exacerbating a situation already rife with uncertainty and angst, the debt-ceiling drama concluded with the first-ever downgrade of U.S. debt, sending shockwaves through equity markets worldwide.

The situation across the pond doesn't look much better. With much of Europe facing rampant public debt problems and equally serious, if not worse, projections for economic growth, investors are on the defensive, fleeing to ultra-safe investments and even cash, draining global equity markets and depressing business confidence and investment.
1 2
 > Reader Comments Read All 6 Comments
 Add Comment
 QE2
I find it humorous that the author writes "QE2 seems to have staved off deflation" and immediately follows that sentence with "Inflation is now the enemy." I guess it's too big of a leap to realize that QE2 actually caused all that inflation right.

I know it's too big of a leap for anyone at USNEWS to realize that deflation doesn't cause recessions. Stick to Keynes, he's done so well for us.

[report comment]
Joe of VA @ Aug 22, 2011 17:09:35 PM

QE3
What did Einstein say about the definition of Insanity

[report comment]
Mr.Wright of TX @ Aug 20, 2011 17:10:33 PM

Tell FED Infrastructure, Not QE3
The Warren Goup sent this letter to Ben Bernanke and the FED. They have not and can not rebuke the merit of it's simplicity and effectiveness. Please read this and give it traction by talking it up. It is a far more effective way to grow the economy than QE3 which just puts more money in the pockets of people who are not the least bit interested in GDP except as underlying assets for their derivatives.

http://www.themarketsvalue.com/2010/12/warren-capital-group-wealth-managers-letter-to-ben-bernanke-.html

[Crafty_Dog]

CCP:

What is the takeaway for you from that article?

[ccp]

Well I am trying to figure out if a QE3 would be good for the country or just a poltical gimmick for Brock and or wall street:
http://finance.yahoo.com/blogs/breakout/markets-awaiting-fed-qe3-matter-153811266.html

[DougMacG]

QE3 is the answer to the question no one should be asking: How can we avoid addressing any of the real, structural, man-made problems that are causing our current economic sickness, but postpone total economic collapse for just a few more months?  Answer, print more money.

Defined in the article, quantitative expansion means the Fed buys our own bonds.  With WHAT?  They are already short on cash to pay bills at the rate of 120 billion dollars a month.

The one last hurdle after raising the debt ceiling to putting any reasonable limit on spending and borrowing is that in order to borrow another dollar there has to be a willing lender.  QE authorizes 'printing' dollars without limit and removing the need to find and negotiate with a willing lender and borrow in a marketplace.  QE means devaluing the investment of all previous people who bought our debt, making it even harder yet to sell in the future in a free marketplace.  QE is a form of dis-honoring the legal obligations of the United States of America.  One might even say that further quantitative expansion in light of all this is - 'almost treasonous'.

[Crafty_Dog]

CCP:

IMHO Doug is exactly right-- like 1 and 2, only much more so, QE3 is profoundly WRONG.

[G M]

CCP:

IMHO Doug is exactly right-- like 1 and 2, only much more so, QE3 is profoundly WRONG.

Wow, it's almost like they have nothing else left to try. 

[Crafty_Dog]

Silver dropped sharply today too

NEW YORK—Gold waded deeper into negative territory as investors continued cashing out after recent record gains.

The most actively traded contract, for December delivery, was recently down $43, or 2.3%, at $1,818.30 a troy ounce on the Comex division of the New York Mercantile Exchange.

Thinly traded August-delivery gold fell $43.60, or 2.4%, to $1,814.70 a troy ounce.

Investors streamed out of the gold market as gold's $100 decline from Tuesday's intraday record spurred investors to lock in the gains earned on gold's fast-paced rally.

"Gold has run up $400 since the middle of July and for a long time it didn't even trade above that level," said Sterling Smith, an analyst at Country Hedging.

Gold prices rallied to a record peak of $1,917.90 this month, an 18% gain that some investors scored in just four weeks.

 
Bloomberg News
 .The rapid rally has been a cause of concern for market watchers in recent days, with some analysts saying a pullback was overdue as gold's parabolic rise appeared overdone.

Investors are also eagerly awaiting a speech Friday by Federal Reserve Chairman Ben Bernanke, who is due to address an economic symposium in Jackson Hole, Wyo. Gold traders will be looking for hints of further monetary stimulus as last year Mr. Bernanke used the event to float the idea of a second round of quantitative easing, or QE2, which was formally launched a few months later.

Gold prices are likely to fare well in the absence of such hints, as many market participants fear the economy will slip into recession without help from the Fed.

However, further monetary stimulus would be "the more positive scenario" for gold prices, as additional liquidity tends to weaken the dollar and raise inflation expectations, said analysts at BNP Paribas. A weaker dollar makes dollar-denominated gold seem cheaper to buyers using foreign currencies, while domestic buyers who worry about inflation would want to stock up on what is widely considered an inflation hedge and a store of value.

BNP Paribas also raised its gold price forecast to average $1,635 a troy ounce this year, from a previous forecast of $1,510. The bank expects gold prices to average $2,080 a troy ounce in 2012, up from a previous forecast of $1,600. The analysts also introduced their 2013 gold price outlook, saying prices will average $2,200 a troy ounce.

[ccp]

Thanks for your thoughts.  It just seems like obvious common sense is that printing more money IS NO different than any Ponzi scheme - borrowing from one to pay off another until the whole thing collapses all the while praying for some miracle like winning the lottery) or in the Fed's case - economic growth to go sky high and flood revenues to cover the borrowing.  (Although in the case of Democrats and Republicans trying to buy off the votes that would otherwise go to Dems - keep spending it all on entitlements anyway)

[DougMacG]

"monetary stimulus is a very ineffective—if not useless—tool to stimulate economic growth"

"As this first chart shows, the inflation-adjusted value of the dollar against a broad basket of currencies today is as low as it's ever been. This is prima facie evidence that dollars are in abundant supply relative to the demand for dollars. Supplying more dollars to the world by buying more Treasuries or by reducing the interest rate paid on bank reserves would only weaken the dollar further, and eventually that can only stimulate inflation. Note that the first two QE programs were begun at a time when the dollar had risen in value during times of financial stress, which is a good indications that dollars at the time were in short supply. There is a legitimate reason for easing monetary policy when the dollar faces conditions of scarcity. That's not the case today."

'Our own' Scott Grannis linked through Real Clear Politics today http://www.realclearmarkets.com/ in our series of famous people who read the forum. 
http://scottgrannis.blogspot.com/2011/08/why-bernankes-jackson-hole-speech-wont.html
Loaded with charts that back up his statements.

[Crafty_Dog]

By ALAN REYNOLDS
One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. "A first option for providing additional monetary accommodation is to expand the Federal Reserve's holdings of longer-term securities," he said, thereby supposedly "bringing down term premiums and lowering the costs of borrowing."

Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.

When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?

The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.

View Full Image

Associated Press
 
Federal Reserve Chairman Ben Bernanke
.The chart also shows that growth of private GDP was also much faster before QE2 than it has been since, and the increase in producer prices (i.e., U.S. business costs) was much more moderate. And that is no coincidence.

Former Obama adviser Christina Romer, writing in the New York Times in late May, said that "a weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working."

Well, foreign goods certainly did become more expensive during the second round of quantitative easing, but it is doubtful that "more Americans are working" as a result. Industrial supplies and materials accounted for 34.5% of U.S. imported goods so far this year, according to the Census Bureau, and capital equipment and parts accounted for an additional 23%. As Fed policy pushed the dollar down, higher prices for imported inputs such as oil, metals and cotton meant higher costs (producer prices) for U.S. manufacturing and transportation.

In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.


Imported goods did indeed become more expensive while the dollar was falling, rising at a 15.1% annual rate over the past three quarters according to the government's report on GDP. But exported U.S. goods also became more expensive, rising at an 11.4% rate over that same period.

The fourth column in the chart shows that net exports were a subtraction from GDP in early 2010 when the private economy was growing most briskly, thus raising the demand for imported materials and components. The rise of dollar commodity costs and producer prices in the wake of QE2 reduced the growth of real imports because it reduced the growth of real GDP.

View Full Image
.Many journalists credit QE2 with raising asset prices, which was certainly true of precious metals but not of housing. It is also true that stock prices generally rose over the past year, but it is implausible to link that to quantitative easing.

Operating earnings per share for the Standard & Poor's 500 companies rose to an estimated $24.86 by June 30, up from $20.40 a year earlier. Fed policy cannot possibly explain that rise in earnings because domestic output slowed and producer prices rose under QE2, while more than 46% of the sales of S&P 500 companies have come from foreign countries.

Berkeley economist Brad DeLong, writing in the Economist, suggests that, "Aggressive central banks can shift expected inflation upward and thus make households fear holding risky debt and equity less because they fear dollar devaluation more." But individual investors often react to such fears by dumping equities and speculating in gold and silver. What good does that do?

In short, the Fed's experiment with quantitative easing from November 2010 to June 2011 was accompanied by a falling dollar and inflated prices of critical industrial commodities, including oil. The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar's weakness.

Every postwar recession but one (1960) has been preceded by a spike in oil prices of the sort we experienced when the dollar fell and oil prices doubled from August 2007 to July 2008 (reaching $142.52), and to a lesser extent when the dollar fell and oil prices rose to $112.30 at the end of April 2011 from $72.91 in late August 2010. Conversely, during the 1997-98 Asian currency devaluations (and soaring dollar), the U.S. experienced a booming domestic economy as the dollar price of oil dropped to $11 by the end of 1998.

Those who are now looking backwards at how poorly the U.S. economy performed under QE2 in order to "forecast" the future appear to be neglecting the potentially beneficial effects of a firmer dollar in deflating the bubble in U.S. commodity costs. In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production. Good riddance.

Mr. Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

[Crafty_Dog]

Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.

Worries about inflation at the Fed have receded in recent weeks and economic data have worsened, putting officials on the lookout for ways to spur economic growth and improve financial conditions.

Chairman Ben Bernanke speaks Thursday in Minneapolis, and is likely to reiterate that the central bank is studying all its options, before officials meet Sept. 20 and 21.

Other Fed officials, meanwhile, are expressing support for additional action.

"The real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment," John Williams, president of the Federal Reserve Bank of San Francisco, said in remarks Wednesday.

New measures could offer "protection against further deterioration in the patient's condition and perhaps help him get back on his feet."

 .The Fed's roundup of regional economic conditions, released Wednesday, described the economy as growing modestly with pockets of weakening activity, waning price pressures and high levels of uncertainty among businesses.

In normal times the Fed moves its target for the federal-funds rate— at which banks lend to each other overnight—to influence borrowing, investment and spending. But that rate already is near zero. The Fed also has purchased $2.325 trillion of Treasury bonds and mortgage debt to push long-term interest rates down.

Though officials aren't certain to take new steps this month, they are looking at alternatives to that controversial bond-buying, known as "quantitative easing." One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.

The move—known to some in markets as "Operation Twist" and to some inside the Fed as "maturity extension"—is meant to further push down long-term interest rates and thus encourage economic activity. The program draws its name from a similar 1960s effort by the U.S. Treasury and the Fed, in which they tried to "twist" interest rates so that long-term rates were lower relative to short-term rates.

Anticipation of the move—along with grim economic news and the Fed's public plan to keep short-term interest rates near zero through 2013—has helped push yields on 10-year Treasury notes, above 3% in late July, to around 2%.

More
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Economic Plans Unlikely to Deliver Fix
Fed's Rosengren Willing to Consider Action if Economy Doesn't Improve
.Although some consumers and businesses are unable or unwilling to borrow more at any interest rate, several Fed officials believe pushing rates still lower can help on the margin.

"There are still some businesses that at a lower cost of funds are going to make investment decisions and hiring decisions based on an ability to lock in those funds at a lower rate," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview.

He lists the program as one that should be considered. "There are people that will be buying homes or refinancing homes" if long-term rates are lower.

Such a step may meet internal resistance. Mr. Rosengren is among a contingent of Fed "doves" who are less worried about inflation and believe the Fed needs to take stronger action to bring down unemployment.

Not everyone agrees, and Mr. Bernanke is striving to build consensus, which makes the decision-making fluid.

Three of the five regional bank presidents who have a vote on monetary policy dissented in August because they didn't want the Fed to pledge to keep interest rates low for another two years, as it chose to do. They seem likely to resist additional actions. "It is unlikely that the [economic] data in September will warrant adding still more accommodation," Minneapolis Fed President Narayana Kocherlakota said in a speech Tuesday.

A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.

The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. Some officials believe the Fed shouldn't reward banks for holding cash instead of making loans.

"I'm not especially pleased with the way that policy tool is working at the moment," Charles Evans, president of the Federal Reserve Bank of Chicago, said in a recent interview. Mr. Rosengren said cutting that rate could give banks more incentive to lend and would further signal the Fed's determination to get the economy going.

Other Fed officials believe that reducing the rate wouldn't do much good because it is already so low, and might instead disturb short-term money markets.

A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.

Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates.

Mr. Bernanke has long favored a specific target for inflation. Some Fed officials, including Mr. Evans, want accompanying clarity for the Fed's unemployment objectives, recognizing the central bank's congressionally imposed mandate to pursue stable inflation and maximum employment.

Targeting unemployment is controversial inside the Fed. The central bank has control of inflation through its control of the nation's money supply.

But unemployment reflects many factors the Fed can't control, and thus some officials feel the central bank shouldn't set targets for it. Sorting out differences on this issue could take time.

The big step that tends to get a lot of attention in financial markets—a third round of bond buying by the central bank—remains an option, but doesn't have strong advocates inside the Fed now.

Some form of "Operation Twist" would be designed to accomplish some of the same objectives as more bond-buying, though most officials agree the effects would be limited.

An analysis by Goldman Sachs economists found that if the Fed replaces all its short-term holdings with long-term holdings, it would have a slightly smaller impact on financial markets than the Fed's $600 billion bond-buying program completed this year. That program seemed to boost stock prices, push down the dollar and help to hold down long-term interest rates, yet the economy stumbled not long after it was introduced. And there are risks—the program could make it harder for the Fed to tighten financial conditions later if inflation shoots higher.

Mr. Rosengren says the Fed should consider an even more radical measure, one not now among steps Mr. Bernanke has said he is evaluating: consider capping medium-term interest rates. If the economy worsens, he notes, the Fed could pledge to cap yields on Treasury bonds with maturities for as long as two years under a certain low level.

"If the economy were continuing to be weak or if we were to get an economic shock from abroad, then I think we would have to think of a variety of innovative ways to try to ensure that the economy picked up or do what we can with monetary policy to try to ensure that," Mr. Rosengren said. "You shouldn't think of us as only having one, two or three tools."

[Crafty_Dog]

I have some problems with this piece, but it makes some very interesting points:
================

Why the Dollar May Last For Much Longer Than We Expect
BY CHARLES HUGH SMITH09/08/2011Print

The only way to value the dollar is in the context of a mercantilist, export-dependent global economy anchored by a sole "importer of last resort," the U.S., which funds these vast imports with its fiat currency, the dollar.

Yesterday I explained why a gold-backed currency cannot replace the fiat dollar without fatally disrupting global Capitalism and the political Status Quo everywhere from China to Europe: Why the U.S. Dollar "Works" and Why a Gold-Backed Currency Doesn't (September 7, 2011).

Today we look at why the fiat dollar is the one essential currency, and as a result, why it will rise in value in the Eurozone crisis ahead. I know this is heresy and sacrilege to those who believe the dollar is doomed, and soon, but if you're not yet locked into one quasi-religious faith or another just yet, then please follow along as I trace out the dynamics of trade and currency valuation.

To understand the essential role of the dollar and how its value is derived via trade flows, let's start with a simplified model of global trade.

Country A manufactures surplus goods and generates surplus services. Since its domestic demand is structurally constrained (for example, a mere 35% of China's GDP is domestic demand), the only way Country A can keep its citizens employed and politically pliable is to sell its surplus in other countries.

This is the basic mercantilist export model of growth pursued by Germany, Japan, South Korea, China et al.: growth and value are created by generating surplus goods and services, and exporting those to other nations.

In sum: Country A has stuff it has to sell to other countries to keep its economy from spiraling into depression. It can demand whatever it wants: gold, moon dust, etc., but it is not in the driver's seat: it has no alternative to dumping its surplus in whatever markets will take it. Managing its exports boils down to getting the best deal possible, but saying "no" is not an option.

There is little demand for Country A's currency, as what it is trading isn't currency, it's stuff: it trades its surplus production (stuff) for somebody else's currency.

Country B has a something called "the world's reserve currency" which is a fancy name for paper money that is universally recognized as a placeholder of value that can be traded everywhere from Burma (pristine $100 bills preferred) to Bolivia (cocaine-laced $100 bills OK) and accepted without question (even counterfeit bills are OK as long as they're the high-quality North Korean counterfeits). Let's call Country B's currency the doru.

Country B has exports, but its demand for imports far exceeds the value of its exports. For all imports over and above the value of its exports, it exchanges its paper money for the imported real goods and services.

Country C has no reserve currency and no gold-backed currency. It has paper money which it can print in unlimited quantities. Country C has exports, but its demand for imports far exceeds the value of its exports. For all imports over and above the value of its exports, it exchanges its paper money for the imported real goods and services.

Country C has a tricky problem. Since its paper money has no intrinsic value, the only value it can possibly have is scarcity value: the supply must be strictly limited so that exporting nations will accept County C's currency (let's call them quatloos) in exchange for tangible goods like oil and iPads.

In effect, Country C is asking exporters to accept a premium on the intrinsically worthless paper, a premium "earned" by scarcity: if there are relatively few quatloos floating around the world, then quatloos may well retain some scarcity value, even though their value based on other factors is basically zero.

The best way for Country C to finance its import trade is to exchange its intrinsically worthless quatloos for "the world's reserve currency," the doru, which is accepted everywhere.

Some would argue that Country C should buy gold with its quatloos, and that would certainly be an excellent trade: worthless paper for gold. But in terms of trade, shipping gold about is hazardous and costly: every nation engaged in trade needs an electronically traded currency that can be transferred, loaned, borrowed and so on, all in the blink of an eye.

Gold is a reliable store of value but it is a cumbersome means of exchange, especially globally.

Furthermore, gold's value in currency or other goods has a history of fluctuating wildly. Those managing quatloos could easily get burned, as the trade they're really managing is quatloos to gold to the reserve currency which can actually be traded globally for goods and services.

Any such commodity-based transactional chain is rife with risk from geopolitics and speculation. From the managers of the quatloo's perspective, the easiest way to lower risk is to cut out the middle step of buying and selling gold, and just buy the reserve currency (the doru) directly.

All this works until Country C succumbs to the temptation to print money to the point it is in surplus rather than scarcity. And what a temptation it is, to "increase our wealth" magically by printing quatloos.

But exporters, forced by circumstance to constantly assess the tradable value of all currencies they trade goods for, will quickly detect that the scarcity value of the quatloo--it's only real value--has rapidly declined.

The cost of imports priced in quatloos in Country C shoots up as quatloos lose scarcity value, and the residents of Country C find they can no longer afford to buy imports. The sales of imports collapses down to match Country C's exports.

These are the key dynamics of trade and currency valuation. Now let's consider Country B, owner of "the world's reserve currency," the doru.

Superficially, it might seem that the only value in dorus is also their scarcity value, and since Country B prints/creates large quantities of dorus every year, many observers make the understandable mistake of claiming the value of the doru should be zero, since it is has little to no scarcity value.

But the value of "the world's reserve currency" is not simply a matter of scarcity, as it is for other lesser fiat (paper) currencies. One factor is the nature of scarcity is different for the doru and the quatloo: the quatloo has only one use in terms of global trade: the imports and exports of Country C.

Since Country C's GDP is a thin sliver of global GDP, then demand for quatloos is limited to importers and tourists.

Compare that to "the world's reserve currency," which is in constant demand as a means of exchange in the entire $60 trillion global economy.

"The world's reserve currency" (in our example, the doru) has another unique feature: everybody eventually needs to exchange quatloos and all other currencies for doru, because that is the only universally accepted means of global exchange. Sure, Country C and its cronies can set up an exchange which only accepts gold and quatloos, but as soon as they need wheat, electronics, and everything else the cronies don't manufacture or harvest, then they will need to exchange the gold or quatloos for "the world's reserve currency."

As a result, the demand for doru ("the world's reserve currency") is stupendous and constant. Since currency is a commodity, albeit one with unique features, its ultimate value as a means of exchange is set by supply and demand. In other words, scarcity is not the only source of value: demand is the key driver of value of any commodity, good or service.

Let's say that Country B's economy is about 25% of global GDP. (In other words, like the U.S.) Let's further assume that Country B prints/creates about 10% of its GDP every year in paper doru.

Now if Country C printed 10% of its GDP every year in newly issued quatloos, the supply of quatloos would quickly overwhelm demand for quatloos, and the value of quatloos globally would crash.

Country B doesn't have that problem, because printing 10% of its GDP is a mere 2.5% of global GDP. Globally, the value of currencies exchanged daily exceeds 10% of Country B's GDP and more or less matches the total value of doru in global trade.

In other words, the demand for exchangable, tradable currency--"the world's reserve currency"-- far exceeds the supply of doru. Printing doru, even in quantity, is like adding a glass of water to a bathtub: the supply increase is not even close to the daily demand.

How did Country B get the "the world's reserve currency" instead of Country C? Most importantly, there has to be enough of the currency to grease the tremendous flows of goods, services, loans and hedges globally: the tiny quantity of quatloos is completely inadequate to the task.

Second, the "the world's reserve currency" must be relatively immune to increases in supply, i.e. money printing. For example, if global GDP is $60 trillion, and daily foreign-exchange trading is $2 trillion, then exactly how much impact can printing $1 trillion of "the world's reserve currency" generate? The answer globally is very little.

The third factor is one which few commentators recognize, sometimes called"the hidden export:" global security. All financial transactions involve trust, some more than others. In terms of currency, the primary trust being offered and accepted is that the mechanics of the currency are transparent and thus so are the risks.

The secondary trust is that the value of the currency will remain stable over the short term, which is long enough for the vast majority of trading.

A third trust is in the stability of the issuing nation. Once again, transparency is key: if that nation's problems are well-known and transparent, then the risks of that currency can be easily and accurately assessed. If its institutions are robust and its trade flows gigantic, then people recognize it's a safer bet to hold dorus than quatloos.

The key mechanism for creating surplus value in advanced Capitalism is trade, and the key mechanism for enabling that trade is a "reserve currency" of sufficient quantity and stability. The Chinese renminbi is a proxy for the U.S. dollar, the euro is unraveling, and the yen is not expansive enough to fund global trade and currency flows.

Envy is a key human trait, and the envy of all those who don't hold/print "the world's reserve currency" is understandable. But you can't create "the world's reserve currency" like some other paper money, as paper money only has two sources of value: demand and trust.

As Jesse of the always-valuable Jesse's Cafe Americain recently wrote (and I paraphrase), people often offer reasons why certain things that have happened could not happen. Conversely, they also often offer reasons why things that can't happen should happen.

At some point the trade imbalance of $600 billion a year between the mercantilist nations and the U.S. will go away, as will the notion that printing paper money is creating wealth, and debts that are unpayable will magically be paid instead of being liquidated or repudiated. The point here is that the Status Quo of all the major trading nations is committed to conserving the present system of fraying imbalances, as their own wealth and power flow from this shaky, unsustainable structure.

[Crafty_Dog]

This piece brings to mind some questions I have been meaning to ask for a while now about the IMF.

If I have my numbers right, the US kicks in 1/6.   Thus the $1T for Greece and the $1T (do I have these numbers right?) mean the US taxpayer, WITHOUT REPRESENTATION, got knicked for $333B!!!  Yet somehow this is never discussed, while a giant game of chicken between Bonehead Boener and Baraq yielded current cuts of $21B this year and $45N next year.  Truly we have gone through the looking glass and partaken of the magic mushrooms there.

Worse yet, the following piece gives me the intuition that we are about to get knicked for several multiples of that.

So, why are we in the IMF?  Qui bono?  What happens if we withdraw?

Marc

Europe Solicits American Advice On Financial Crisis

U.S. Treasury Secretary Tim Geithner will travel to Poland on Friday to meet with eurozone finance ministers. To Stratfor’s knowledge this is the first time an American Treasury secretary has ever been invited to the table. That aloofness is no surprise; the eurozone is a political creation designed to compete with the U.S. dollar. The reason for the sudden break with precedent is equally obvious: the euro is flirting with outright failure, the consequences of which would at a minimum include a new recession. Sharing crisis-mitigation notes makes a great deal of sense for both Americans and Europeans.

Geithner’s presence is particularly useful for two reasons. First, despite the vitriol that is a hallmark of American domestic politics, American monetary policy is remarkably collegial. The transitions between Treasury secretaries are strikingly smooth. Geithner himself worked for the Federal Reserve before coming into his current job, and Geithner’s partners in managing the U.S. system — the chairmen of the Federal Reserve and the Federal Deposit Insurance Corporation — are typically apolitical. Geithner holds the United States’ institutional knowledge on economic crisis management.

“Geithner will undoubtedly point out that the European system is not capable of surviving the intensifying crisis without dramatic changes.”
Second, what Geithner doesn’t know, he can easily and quickly ascertain by calling one of the chairmen mentioned above. This is a somewhat alien concept in Europe, which counts 27 separate banking authorities, 11 different monetary authorities, and at last reckoning some 30 entities with the power to carry out bailout procedures.

Getting everyone on the same page requires weeks of planning, a conference room of not insignificant size and a small army of assistants and translators, followed by weeks of follow-on negotiations in which parliaments and perhaps even the general populace participate in ratification procedures. The last update to the European Union’s bailout program was agreed to July 22, but might not be ready for use before December. In contrast, the key policymakers in the American system can in essence gather at a two-top table for an emergency meeting and have a new policy in place in an hour.

Geithner will undoubtedly point out that the European system is not capable of surviving the intensifying crisis without dramatic changes. Those changes include, but are hardly limited to, federalizing banking regulation, radically altering the European Central Bank’s charter to grant it the tools necessary to mitigate the crisis, forming an iron fence around the endangered European economies so that they don’t crash everyone else, and above all recapitalizing the European banking sector to the tune of hundreds of billions (if not trillions) of euros — so that when trouble further intensifies,  the entire European system doesn’t collapse.

All of these steps are simply illegal under existing European law. Changing that, using European rule-making procedures, would require treaty changes, which entail a minimum two years of negotiations and ratifications. Barring such structural assaults on the problem, all that remains is to discuss crisis-management tools such as those implemented by the United States during the 2008-2009 crisis. The lessons learned there may be tweaked and applied to Europe’s current dilemmas, but all of them will be temporary and marginal if the crisis’ root causes are not addressed.

The Europeans during the meeting will ask the Americans what Washington can do to help. (Technically this is a question for the Federal Reserve chairman, but Ben Bernanke and Geithner have been on each other’s speed dial for some time now.) The answer: Precisely the same thing the American government did during the last financial crisis. At that time global markets seized up due to fear, and banks became afraid to lend to one another. Lending and credit specifically, and economic activity in general, ground to a halt. So the U.S. Federal Reserve granted unlimited low-interest dollar-denominated loans to nearly anyone who wanted them and could provide reasonable collateral. Due to the depth of the crisis, even foreign entities qualified. That bought time for investors, lenders and consumers to recover from their shock. After a few nervous months, normalcy returned and the Fed dialed back the liquidity.

The key words in that summary are “bought time.” While the American economic model comes in for a good amount of criticism — warranted and otherwise — it is a singular, unified system with relatively clear rules and modes of behavior. The European crisis is a crisis precisely because there is no single authority, no single set of enforced rules, and no arbiter besides another summit. When the American system suffered a crisis, the Fed and Treasury could buy time for a broadly functional system to fix itself. The structures that could carry Europe through a crisis have yet to be built.

[Crafty_Dog]

The Producer Price Index (PPI) was unchanged in August To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/14/2011


The Producer Price Index (PPI) was unchanged in August, matching consensus expectations.  Producer prices are up 6.5% versus a year ago.

The lack of change in the overall PPI was largely due to a 1% drop in energy prices offsetting a 1.1% gain in food prices. The “core” PPI, which excludes food and energy, increased 0.1%.
 
Consumer goods prices were flat in August but are up 8.2% versus last year.  Capital equipment prices were down 0.1% in August but are up 1.6% in the past year.
 
Core intermediate goods prices declined 0.1% in August but are up 7.5% versus a year ago.  Core crude prices rose 1.6% in August and are up 24.2% in the past twelve months.
 
Implications:  Lower energy prices have temporarily cooled overall producer price inflation. Although producer prices are up 6.5% in the past year they were unchanged in August and are down at a 0.6% annual rate in the past three months. However, these figures do not give the Federal Reserve extra room for easing. “Core” producer prices, which exclude food and energy, are up at a 3.4% annual rate in the past three months, making it tougher for the Fed to justify a third round of quantitative easing.  Core prices for intermediate goods slipped 0.1% in August but are still up 7.5% in the past year; core crude prices increased 1.6% in August and are up 24.2% versus a year ago. Some of these large gains in core prices further back in the production pipeline will feed through to prices for finished goods. In other recent inflation news, import prices declined 0.4% in August but were up 0.3% excluding oil. Import prices are up 13% versus a year ago and up 5.5% excluding oil. Export prices increased 0.5% in August and 0.3% excluding agriculture. Export prices are up 9.6% from a year ago while prices ex-ag are up 5.5%. This is an environment that calls for monetary restraint, not looser money.
=============
The Consumer Price Index (CPI) rose 0.4% in August To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/15/2011


The Consumer Price Index (CPI) rose 0.4% in August versus a consensus expected increase of 0.2%. The CPI is up 3.8% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) also rose 0.4% in August and is up 4.5% in the past year.
 
Gains in consumer prices were widespread. Energy prices increased 1.2%, food prices were up 0.5% and the “core” CPI, which excludes food and energy, was up 0.2%, matching consensus expectations. Core prices are up 2.0% versus last year.
 
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – fell 0.6% in August and are down 1.9% in the past year. Real weekly earnings are down 1.8% in the past year.
 
Implications: Consumer price inflation came in well above consensus expectations for August, the second month of hot readings.  Consumer prices are now up 3.8% versus a year ago.  This should make it clear to the Federal Reserve that an easy monetary policy is taking a toll on the US economy in the form of higher inflation.  It should also give them great pause before embarking on any measures to ease monetary policy further.  The Fed is likely to discuss these measures at its meeting next week.  Before today’s data, the Fed appeared to be moving toward a program of buying more longer-maturity treasury securities.  We believe this would be a mistake.  The Fed has hidden behind relatively low readings for “core” inflation, which exludes food and energy, to justify its accommodative policy.  But that dog will no longer hunt.  Core prices are up 2.0% from a year ago (at the top of the Fed’s so-called target range), at a 2.7% annual rate in the past six months and a 2.9% annual rate in the past three months.  “Cash” inflation, which excludes the government’s estimate of what homeowners would pay themselves in rent, is up 4.5% in the past year.  Cash inflation is more indicative of the inflation actually being felt by consumers.  In other news this morning, new claims for unemployment benefits rose 11,000 last week to 428,000.  The four-week moving average is 420,000 versus 440,000 in May.  Continuing claims for regular state benefits fell 12,000 to 3.73 million.  High-frequency indicators, like claims, provide real-time data on economic activity.  The increase in claims reflects the same problems with employment we have seen in the past two years, not a double-dip in economic activity.

[G M]

[G M]

http://www.amazon.com/gp/product/B004HYSWC8?ie=UTF8&tag=wwwviolentkicom&linkCode=ur2&camp=1789&creative=9325

We're on the same path as the country above.

[ccp]

Great idea for toilet paper!

[G M]

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100011987/china-to-liquidate-us-treasuries-not-dollars/

China to 'liquidate' US Treasuries, not dollars




By Ambrose Evans-PritchardEconomicsLast updated: September 15th, 2011


China intends to start reducing its portfolio of US debt
 
The debt markets have been warned.
 
A key rate setter-for China's central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.
 
"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.
 
"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."
 
"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.
 
To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France and the hard core.
 
We don't know how much US debt is held by SAFE (State Administration of Foreign Exchange), the bank's FX arm. The figure is thought to be over $2.2 trillion.
 
The Chinese are clearly vexed with Washington, viewing the Fed's QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.
 
Mr Li, one of three outside academics on China's MPC, described the debt deals on Capitol Hill as "just trying to by time", saying it will not be enough to stop America's "debt dynamic" turning dangerous.
 
Fair enough, but let us be clear: the reason China has accumulated the equivalent of 6pc of global GDP in reserves (like the US in the 1920s) is because it has held down its currency to gain market share. As Michael Pettis from Beijing University points out tirelessly, the mercantilist policy hollows out US industries and forces America to choose between debt bubbles or unemployment – or, of course, protectionism, though we are not there yet.
 
Until it abandons that core policy, it has to keep buying foreign assets and lots of dollars. The euro can absorb only so much – 800bn euros so far – before Europeans realize (the French already realize) that Chinese bond purchases are double edged, and the yen the Swissie can't absorb anything at all. (The governments are intervening to stop it). Besides, China has the same misgivings about euro debt as it does about dollar debt. Perhaps more so after Euroland's long-running soap opera.
 
So what Li Daokui said is not bad for the dollar as such. He said there is "$10 trillion" waiting to be invested in the US, if America will open its doors.
 
It is bad for bonds – or will be. The money will go into strategic land purchases all over the world, until the backlash erupts in earnest. It will go into equities, until Capitol Hill has a heart attack. It will go anywhere but debt.
 
Yet another reason to be careful of 10-year Treasuries and Bunds below 2pc yields. There is a big seller out there, just itching to let go.

[Crafty_Dog]

"Fair enough, but let us be clear: the reason China has accumulated the equivalent of 6pc of global GDP in reserves (like the US in the 1920s) is because it has held down its currency to gain market share. As Michael Pettis from Beijing University points out tirelessly, the mercantilist policy hollows out US industries and forces America to choose between debt bubbles or unemployment – or, of course, protectionism, though we are not there yet."

This broaches a deep, important, and pivotal issue in the Chinese-American relationship and with regards to the state of the international economy and its players.

I stand ready to be educated to a better thought process, but at the moment it makes perfect sense to me to say that a key, perhaps THE key problem is that the Chinese are wreaking havoc with their "beggar-thy-neighbor" exchange rate policies and what I understand to be their tight controls on the convertibility of currencies.  At the moment it makes sense to me for the US to have a real eyeball-to-eyeball moment with them until they blink. 

I get that trade wars are bad.  Getting fuct the way we are now is worse.

[G M]

Think Obama has the chops to pull that off?

[G M]

I note that Obama has already cut off F-16s to Taiwan and F-22s and F-35s to America. China is quite pleased by these acts of submission.

[Crafty_Dog]

Of course not.  Of the Reps, should he put his mind to it, Newt does I think.  Perry?  Dunno, he doesn't seem very deep in things international. Mitt?  Too used to getting beat up by the Dems in MA.

(Concerning China, Taiwan, and Baraq-- also to be noted is that the "compromise" of installing better technology into what the Taiwanese already have actually increases the risk of high US tech falling into Chinese hands.  That said, please take any further conversation on the point to the China-US thread.)

[Crafty_Dog]

WSJ:

By JAVIER E. DAVID
NEW YORK—Widespread market speculation that Switzerland may adopt new measures to prevent its currency from inflicting further damage on its export sector sent the franc sharply lower Tuesday, with the move momentarily distracting traders from Europe's ongoing sovereign-debt problems.

In early U.S. trading, speculation ran rampant through the market that the Swiss National Bank—seemingly unhappy that the franc has continued to strengthen despite efforts to weaken it—was mulling a new target rate of CHF1.25 against the euro. The SNB declined to comment on the rumor.

Two weeks after the Swiss National Bank shocked markets by adopting a target rate of CHF1.20 against the euro, the single currency has drifted around that level without actually breaching it. Until recently, shelter-seeking traders have used the franc as an umbrella from the various storms buffeting the global economy.

But heightened fears of a Greek default—and the spillover effects on the global financial system—have sent nervous investors flocking to safe-haven instruments. The SNB is determined to shield the country's exporters from the ravages of a muscular franc, and has indicated a willingness to expend unlimited amounts in order to achieve that goal.

Europe's inability to resolve Greece's festering woes, and new fears about Italy, have put the SNB between the proverbial rock and a hard place, analysts say.

"If they don't step in and buy a lot of euros, they're going to lose a lot of jobs and companies in their export sector," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago, calling it "a devil's trade-off."

But the franc's strength is a direct function of how Europe's raging debt crisis is churning the market. Mr. Busch echoed other analysts who question how effectively the Swiss can continue to counteract safe-haven buying.

"It's really a question of whether Europe get's their act together or not," he added.

The euro spiked as high as 1.2215 francs before paring some of those gains to trade near 1.2157 francs by midday.

Meanwhile, the euro was at $1.3684 compared with $1.3686 late Monday, and at ¥104.70 from ¥104.89. The dollar was at ¥76.51 compared with ¥76.59, while the pound was at $1.5692 from $1.5715. The dollar climbed as high as 0.8922 franc before scaling back to recently trade at 0.8884 franc from 0.8820 franc late Monday.

The ICE Dollar Index, which tracks the dollar against a basket of currencies, was at 77.12, off 0.3%.

Late Monday, Standard & Poor's lowered Italy's credit rating to single-A from A-plus, keeping a negative outlook. The decision converged with dour German economic figures, and heaped more negative sentiment on a market already battered by fears that Europe's sovereign-debt problems will soon infect the global financial system.

Meanwhile, Greece is locked in high-stakes talks with the so-called troika of European Union, European Central Bank and International Monetary Fund officials. The talks hinge on whether Greece can meet certain benchmarks to guarantee the release of a badly needed tranche of funds.

"The euro has been resilient to bad news today in terms of Italy's downgrade and German numbers," said Vassili Serebriakov, foreign exchange strategist at Wells Fargo in New York. "There's some optimism about the troika talks, but overall the market's not really getting much of a shift in sentiment still."

[Crafty_Dog]

Fed Actively Twists But Holds Off on QE3
Today the Federal Reserve announced major changes to
the composition of its balance sheet as well as major
changes to its description of the economy.
From now through the middle of next year, the Fed will
sell $400 billion of Treasury securities with maturities of
three years or less and purchase $400 billion in Treasury
securities with maturities of six years to thirty years. This
is an “active” form of “twisting” the maturities in its
balance sheet in an attempt to bring down long-term
interest rates. It is more aggressive than the “passive”
alternative in which the Fed would roll some of its
maturing short-term Treasury securities into longer-term
Treasury debt. It is unclear at this point whether the Fed
will employ the passive approach in addition to the active
twist of $400 billion.
The Fed also announced that it will cease shifting its
portfolio of mortgage backed securities (MBS) and the
debt of Fannie Mae and Freddie Mac (GSE debt) into
Treasury securities. Since mid-2010, the Fed has reduced
its holdings of these residential mortgage-based assets by
about $300 billion, to $1 trillion from $1.3 trillion, buying
Treasury securities with the principal as MBS and GSE
debt matured. Now the Fed will use the principal to buy
MBS. The Fed did not provide a date for that process to
end. In other words, going forward and for the foreseeable
future the Fed will maintain a stable amount of Treasury
securities and a stable amount of mortgage-based assets.
All of these measures come on top of the decision at the
Fed’s last meeting in early August to commit to
maintaining the current federal funds rate at nearly zero
percent through at least mid-2013.
Notice, however, that neither the active twist nor a passive
twist, nor maintaining the size of its mortgage-related
assets will alter the overall size of the Fed’s balance sheet.
In other words, the Fed did not announce a third round of
quantitative easing. The Fed also did not reduce or
eliminate the interest rate it pays banks on their excess
reserves, another policy move it surely discussed at the
meeting over the last two days.
The changes to the language of the Fed’s statement were
also significant. The Fed noted a modest increase in
household spending but suggested the recovery should be
stronger given the easing of supply-chain disruptions
related to Japan’s disasters. More importantly, the Fed
said downside risks to the economic outlook were
“significant,” including recent problems in “global
financial markets,” an obvious reference to the European
sovereign debt problems. Remarkably, even with
consumer prices up 0.5% in July, 0.4% in August and
3.8% in the past year, the Fed said that “inflation appears
to have moderated since earlier in the year,” the exact
same language it used at the prior meeting. Message to
markets: the Fed does not care about inflation right now.
Three members of the Federal Open Market Committee
(Fisher, Kocherlakota and Plosser), all reserve bank
presidents, not members of the Washington DC-based
Board of Governors, voted against today’s decision to shift
the composition of the Fed’s Treasury assets to longerdated
maturities and maintain the size of the Fed’s
This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable.
Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
mortgage-related assets. These same three members
dissented last month against the decision to commit to
maintaining near zero short-term rates through at least
mid-2013.
We believe the changes announced today are unlikely to
have the beneficial effects on the economy that the Fed
majority thinks. The Fed is clearly trying to reduce
mortgage rates as well as other long-term interest rates.
But the policy measures taken today will, if they have a
financial impact, flatten the slope of the yield curve,
reducing bank earnings.
Moreover, the shift in the composition of the Fed’s
portfolio of Treasury securities means that, on net
(Treasury issuance minus Fed purchases), the federal
government is issuing less long-term debt and more shortterm
debt. This is poor management of the federal debt.
Given historically low interest rates, the federal
government should be issuing more long-term debt and
less short-term debt, not the other way around.
Ultimately, we believe today’s policy moves were more
about appearing to do something than getting actual
results.
Brian S. Wesbury, Chief Economist

[Crafty_Dog]

Wesbury has some interesting thoughts on the Fed's twist, and the sharp downturn in gold and silver (a risk of which I have warned btw-- which has not stopped me from getting badly dinged in silver, but I digress)

http://www.ftportfolios.com/Commentary/EconomicResearch/2011/9/23/bernanke-squashes-gold-bugs

[G M]

Wesbury has some interesting thoughts on the Fed's twist, and the sharp downturn in gold and silver (a risk of which I have warned btw-- which has not stopped me from getting badly dinged in silver, but I digress)

http://www.ftportfolios.com/Commentary/EconomicResearch/2011/9/23/bernanke-squashes-gold-bugs

Oh boy.  More Wesbury Kool-aid!

Say it with me, 211 TRILLION in debt.

The Euro is dying, the USD is the cleanest shirt in the hamper, for now.

[Crafty_Dog]

The wave of selling that has washed over financial markets in recent weeks swamped precious metals on Friday, sending gold and silver prices plummeting and raising the stakes for key weekend meetings of global finance officials.

 Gold and silver prices have seen sharp declines lately, but Barron's economics editor Gene Epstein says the long-term value of the commodities still shines.
.In the past week, the Dow Jones Industrial Average plunged 6.4%, its worst week since October 2008. Currencies, too, have had a wild ride. The dollar this month has soared against its rivals. The euro has tumbled 6% in September, while emerging currencies like Brazil's real have been punished.

Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold's worst week since 1983. Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.

 Precious metals posted deep losses as investors continued to leave the market in favor of cash. Comex silver for September delivery dropped $6.4870, the worst dollar-decline since 1980. Liam Denning has details on The News Hub.
.The week highlighted a growing sense of despondency among investors concerned that policy makers have neither the will nor power to juice their economies.

The broad market declines have added pressure on finance ministers and central bankers as they gather for the International Monetary Fund's annual meeting in Washington this weekend.

"We are in a red zone," said World Trade Organization chief Pascal Lamy, one of many officials attending the meeting. "We are at risk of repeating what happened in 2008"—when market upheaval shook the global economy—"occurring again for different reasons but through the same channel, the financial system."

Friday's exodus from gold and silver underscores the unpredictable and volatile nature of financial markets in recent weeks.

 .Investors have grown increasingly skeptical of policy makers' ability to revive the global economy, and of their willingness to bring about a resolution to the European debt crisis.

The broader rout has left many investors with unexpected losses, driving some to part with some of their better performing investments, among them gold and silver.

The declines are a turnabout for gold, in particular, which has recently found strong demand in good times and bad. It has enjoyed a special status as a safe haven from financial crisis and political turmoil, as well as a hedge against inflation.

Gold has risen six-fold in the past decade, including a 15% gain this year. In August, it reached a nominal record of $1,888.70 per troy ounce, rising on a trajectory that many had speculated could not last.

Gold settled at $1,637.50 an ounce, down 9.6% for the week. Silver, which had risen 28% this year by the end of April, settled at $30.05 per ounce, falling into negative territory for the year.

 Fears of a possible Greek default and the U.S economy dipping back into recession pushed the blue-chip index to its worst weekly decline in nearly three years. Brendan Conway has details on The News Hub.
.Some hedge funds were selling to raise cash to meet margin calls from lenders. Other investors were using proceeds of silver and gold sales to replenish other parts of their portfolios, which had fallen in value in recent sessions, said George Gero, precious metals strategist at RBC Global Futures.

In addition, it appeared that European banks were selling gold, possibly in order to raise cash and shore up their balance sheets, Mr. Gero said. This selling was then magnified by so-called momentum traders whose strategy is to piggyback on moves up or down in price.

Silver faces the added woe of being widely used in industry, and therefore vulnerable to fears that weak economies will consume less. Moreover, the Shanghai Gold Exchange said Friday that it will expand the upper and lower trading limits for its silver contract.

Exchange-traded funds that invest in, and track, the metals also have helped investors move quickly in and out of gold and silver.

"It feels like there's tremendous macro headwinds for the metals," said David Lutz, managing director at Stifel Nicolaus.

The recent downdraft for precious metals came after the Federal Reserve this week acknowledged the economy is in worse shape than it thought, a sign that inflation will be of no concern for some time. As well, economic data out of China and Europe indicated that the global economy continues to lose steam.

"What's exacerbating the situation right now is that the global economy is in bad shape," said Andreas Utermann, global chief investment officer for money manager RCM, a subsidiary of Allianz Global Investors.

On Friday, members of the Group of 20 industrialized and developing nations met to see what measures they could devise to boost confidence in financial markets. But there was little expectation that they would produce anything concrete.

 .The euro fell from nearly $1.38 to end the week at $1.35, and German, French and British stocks all fell too. Stocks in Hong Kong and Seoul fell, too, and the Shanghai Composite suffered its fourth straight week of declines. The Korean won tumbled 9.3% against the dollar, forcing the central bank to intervene.

In the U.S., the Dow's declines this week take the blue-chip index down 18% from its late-April highs. On Friday, the Dow rose 37.65 points, to 10771.48.

The fact that gold is falling along with other assets complicates life for those who bought gold because they thought it would rise or fall independently.

"There is nowhere really to hide at the moment," said Fredrik Nerbrand, global head of asset allocation at HSBC.

[Crafty_Dog]

Also see entries in today's China-US thread:

WSJ

Section: General News - A renewed dispute is looming between Beijing and Washington about the competitive advantages in global trade that China enjoys thanks to its government's rigid control and valuation of its currency, the yuan, also known as the Renminbi [RMB].

In Washington, the U.S. Senate is threatening to legislate trade sanctions against China because of the issue.

By fixing its exchange rate for the yuan below the market value, Beijing keeps its exports cheaper for foreign consumers, providing Chinese manufacturers with a considerable competitive advantage in global trade.

The Economic Policy Institute in the United States reported last week that, since 2001, China's use of exchange rate controls has contributed to the loss of nearly 3 million American jobs.

Sense of entitlement

Arthur Kroeber is managing director of GK Dragonomics. He argues that China sees its undervalued currency and trade surplus as a right - and a key part of its national economic development.

There is no other demonstrated way to become a rich and powerful country other than, at your early stage, to promote exports. One of the tools to promote exports is to run an undervalued exchange rate," said Kroeber. "The Chinese take the view that, 'Everyone else who has gotten rich has used the same technique... we want to get rich; we have the same rights as everyone else.'

Because Beijing's economy depends heavily on exports, Janet de Silva, the dean of the Ivey Business School in Hong Kong, said it is difficult to predict how Beijing might liberalize currency.

If China were to move to full convertibility, the RMB would appreciate greatly, perhaps as much as 20 percent against the U.S. dollar, making Chinese exports less viable, said de Silva.

To level the playing field between U.S. and Chinese manufacturers, U.S. Senate Majority Leader Harry Reid said this week that work will soon begin on a bipartisan bill that would make it easier for China to be labeled a currency manipulator and for trade sanctions to be imposed on Chinese goods.

Pros, cons of trade sanctions

Although many U.S. business groups oppose such legislation for fear of sparking a full-blown trade war with China, Diana Choyleva, of Lombard Street Research, understands the rationale for the bill.

Unfortunately, in the short-term, the U.S. faces a sharp downturn. So, in an election year... protectionist voices are on the rise again. You can imagine; the easiest entity to blame would be the foreigner. And, in this case the U.S. would be right, said Choyleva.

China disagrees that its exchange rate is contributing to American economic woes.

During the recent International Monetary Fund and World Bank meetings, Chinese officials have been keen to point out that the yuan has in fact been gradually appreciating for some time, and this week reached its highest rate since 2005.

In Beijing, foreign ministry spokesman Hong Lei rejected that the exchange rate was affecting the trade balance between China and the United States. He said China hopes the United States will refrain from politicizing the exchange rate and trade issues.

China's aversion to liberalized yuan

Chinese officials have been reluctant to liberalize the yuan because it likely would reduce the competitiveness of Chinese exports and fuel job losses, which could lead to social unrest.

But keeping the yuan under tight government control also carries costs. It means China's currency is not internationally traded, so many global businesses continue to price goods and contracts in dollars.

Analyst Kroeber said Chinese concerns about the stability of the dollar are becoming a catalyst for Beijing to try to internationalize the use of the yuan.

He said that the goal of the Chinese leadership, 10 or 20 years from now, is to create an internationally accessible bond market large enough to make the Chinese yuan a reserve currency like the dollar.

What they've been trying to do is increase the use of renminbi for settling and invoicing trade. If you have concerns about the currency in which your trade is denominated, traditionally U.S. dollars, using your own currency is a good solution to that, said Kroeber.

Strategic use of 'dim sum' bonds

China still restricts foreign investors from broad participation in its economy, but is using Hong Kong as a gateway for investment through programs such as dim sum bonds. These are yuan-denominated debts sold in Hong Kong since 2009 and named after a tasty appetizer much loved in China.

Dim sum bonds are attractive to global brands, such as Tesco and BP, as well as Chinese companies interested in raising and investing money through bonds that have lower repayment rates than those denominated in U.S. currency.

Professor de Silva said foreign and domestic investors in the debt tolerate yields as low as 1.7 percent in the belief they will make more gains as the yuan continues to appreciate.

If we look over the past year, RMB appreciation to the U.S. dollar is around six percent. And, the forecast over the next five years is about four percent per year. So if you take the 1.7 percent yield, plus that four percent yield, it starts to look quite attractive, said de Silva.

Although investors may be banking that the yuan will rise in value, there are still serious doubts about whether a truly liberalized yuan will become a reality anytime soon. As the yuan develops into a more globalized and mature medium of exchange and store of value, Chinese leaders indicate that currency policy will continue on their terms, and not those of China's trading partners. - VOA

[Crafty_Dog]

A different POV from the WSJ:

The world has done surprisingly well since the Great Recession began at not making things worse with trade protectionism. But that may soon change thanks to the U.S. Senate, which is expected to vote as early as this week on the most dangerous trade legislation in many years, the Currency Exchange Rate Oversight Reform Act. This is when an American President would normally step in and defend the U.S. and world economies, but Barack Obama is bobbing and weaving for his own narrow political ends. This is risky business.

Senators Chuck Schumer and Lindsey Graham have pushed since 2005 to impose punitive tariffs on China if the value of the yuan doesn't rise faster. The legislation is now coming to the floor because Senate Democrats want protectionist political cover against unions in return for voting on the free-trade pacts with Colombia, Panama and Korea that President Obama finally sent to Congress yesterday. But what is cynical posturing in Washington may look more threatening to the rest of the world, and once trade wars start they can be hard to stop.

Enlarge Image

CloseAssociated Press
 
The senators speak during a news conference on Sept. 22, to discuss unfair currency manipulation.
.Unlike America's last great trade blunder, the Tariff Act of 1930 (aka Smoot-Hawley), the China bill wouldn't raise tariffs across the board, but would instead allow companies to seek countervailing duties by treating a "misaligned" currency as a subsidy. This would nonetheless open the floodgates to applications from American companies, and the resulting tariffs would violate World Trade Organization rules. China would undoubtedly retaliate, meaning companies and consumers in both countries would lose.

If other countries follow suit, there would be knock-on effects throughout the global economy. As the erstwhile leader of the world's trading system as well as one of its main beneficiaries, the U.S. bears a special responsibility to avoid this outcome.

One reason we are so close to this ledge is that Washington has not led on global and regional liberalization. Free trade is like a bicycle, which needs to be pedaled forward or it tips over. When a President is AWOL on trade as Mr. Obama has been, U.S. politicians succumb to populist temptations. Instead of concentrating on domestic reforms to restore growth, Congressmen tell Americans that their lost prosperity was taken by China rather than by poor policy decisions. So now the U.S. will punish the biggest developing nation, and one of America's main goods suppliers, for its economic success.

The last six years are proof that revaluing the yuan is not the key to reducing China's large and persistent trade surplus with the world. The yuan has appreciated by almost 30% since the middle of 2005, when Mr. Schumer was pushing for a 25% revaluation. But the Chinese surplus has mostly grown and occasionally shrunk during this period in response to other forces.

This is a repeat of the 1980s, when Congress was bashing Japan for keeping the yen low and running large surpluses. As the yen rose from 360 to the dollar to 80 over 25 years, the surplus persisted and continues today, though it has shrunk in relative terms since the bursting of Japan's bubble.

The U.S. can do more to help Beijing avoid Japan's bubble and bust by urging it to reform the financial system that has favored exports. There are already signs that China's state-directed credit explosion of 2009 is leading to an increase in nonperforming bank loans, as well as state firms and local governments in need of bailouts. Wages are also rising, making some Chinese exports less competitive.

Related Video
 Mary O'Grady on the status of the South Korea, Panama, and Colombia free trade agreements.
..As China comes under economic and political strain, it's worth remembering that a major benefit of free trade is its stabilizing effect on rising powers like China. In 1930, Smoot-Hawley and the retaliation it spurred contributed to a collapse of world trade and deepened the global depression. So too did a series of competitive currency devaluations, another tool of trade war. The global economic collapse gave Japan and Germany a push toward fascism. Once trade with the developed world was closed off, ambitious Japanese officers took the initiative to expand the empire to secure markets and raw materials.

Trade brinksmanship is always dangerous, but especially when the world economic recovery is beset by so many other problems. Yet the U.S. political system is now slouching toward protectionism less by design than by a general abdication of leadership.

Democrats want to appease labor to hold the Senate next year. The White House wants to appease Senate Democrats and labor, so it has failed to speak against the tariff bill. White House spokesman Jay Carney says only that it is "reviewing" the legislation and that "we share the goal."

Senate Republicans aren't about to stand in the way, especially when their Presidential front-runner, the supposedly business savvy Mitt Romney, is also calling for unilateral trade duties against China to give his candidacy a populist edge. John Boehner's House Republicans may be the last obstacle to such a destructive bill passing.

***
In "The World in Depression, 1929-1939," the economic historian Charles Kindleberger wrote that one great contributor to depression was the failure of leadership, especially by the U.S. and Britain. Neither of the two leading economies were willing to maintain an open market for the world's goods in a period of distress.

"When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all," Kindleberger wrote. Where's a U.S. President when you really need him?

[G M]

http://finance.yahoo.com/blogs/breakout/strong-dollar-careful-play-184447569.html


"Take a look at the dollar chart for the last year. It's been battered. It's been pummeled," notes Rich Ilczysyzn of MF Global. He believes that dollar weakness will come to an end and he's looking to profit from it.
 
Before we get into the whole "evil Fed debasing our currency" conversation it's important to note that all paper currency is relative. In the long run the dollar may be worthless, but more important is whether or not it's in better shape than the Euro right now. And, yes, it is more about the euro rather than other global currencies.

[DougMacG]

GM,  You raise a very important point here:

"it's important to note that all paper currency is relative"

The two main currencies are the US$ and the Euro.  It is measure at this point the damage we are currently doing to our currency and our standard of living if central point of comparison is the currency of an economic union in collapse.  Like judging the 0-4 Minnesota Vikings against the 0-16 2009 Detroit Lions, the 2011 Euro isn't exactly the gold standard, nor is the Obama-Bernancke dollar.

Why on earth are we striving to copy the economic policies that put Europe in this mess?

[Crafty_Dog]

Stratfor


Summary
The price of copper has dropped 30 percent since early August, reaching a 14-month low. Because businesses in China have been using copper as a financing tool to bypass the tightening of credit markets, the repercussions on the Chinese economy of a sustained drop in the copper price could be widespread. Beijing may not be able to do anything to significantly counter this threat, as copper is already being widely used for financing and Beijing does not want to enforce any new regulations that could sacrifice economic growth and employment.

Analysis
Copper prices have been experiencing increased volatility in recent weeks, dropping 30 percent since early August and reaching a 14-month low as a result of Europe’s deepening debt crisis and the overall slowing of the global economy. China has been using copper as a financing tool, thereby linking it to financial and real estate markets. This means that a sustained drop in the price of the metal — certainly a possibility amid the recent volatility — could deliver an unexpected hit to the Chinese economy.

The Use of Copper in Financial Markets
Even though China is the world’s largest consumer of copper, the drop in prices has not come as a welcome development. This is because of the different ways China uses copper. Though China’s demand for the metal has surged over the last 10 years due to domestic construction, industrial production and the needs of the manufacturing industry, copper has also taken on an important role in financing. An increasing number of Chinese firms have been using copper as a financing tool — stockpiling the metal and using it as collateral — because the government’s measures to curb inflation have limited the firms’ access to credit. Such financing links the price of copper to other key elements of the Chinese economy, including the growing speculative real estate bubble.

China’s tightening monetary policy has made it more difficult to access credit through official channels. As a result, Chinese small- and medium-size enterprises (SMEs) have increasingly turned to copper for use as collateral in loans, which are then funneled into other sectors of the economy. The falling price of copper means that the collateral initially put up for the loans in yuan is no longer worth what it once was, decreasing the likelihood that the borrower will be able to pay back the loan. If firms default on debts, then others connected in the chain will default — and determining where loans have been invested is nearly impossible.

Banks and state-owned enterprises (SOEs) are also potentially vulnerable. A high number of SOEs have also used copper as collateral. These firms are often involved in the real estate sector — even if their primary function is not always directly linked to it — and are therefore exposed to the country’s growing real estate bubble. The government would bail out the more politically favored SOEs if necessary, but that would leave fewer resources to be allocated to the private sector that is crucially important to China’s growth.

How Financing with Copper Works
As China considers raising interest rates further and implementing other measures to tighten credit, businesses continue to use more complicated methods to obtain loans. The procedure for using copper as a financing instrument has typically gone as follows: SMEs and SOEs apply for a low-interest loan to buy copper on the international market using U.S. dollars, deferring payment on the loan for three to nine months. The copper is imported and stockpiled in warehouses in China, and then they take the warehouse receipts to the bank and get around 80-85 percent of the face value to invest or speculate in other markets.

Due to the yuan’s general appreciation against the dollar, the borrower is in theory virtually guaranteed to make a profit during the initial three- to nine-month period, in addition to whatever they earn by their investment of yuan. Because of the apparent upside involved in trading assets purchased with dollars for yuan and the overall tightening credit environment in China, which makes it more difficult to secure loans through other channels, this approach has become quite popular. In fact, according to STRATFOR sources, virtually all copper imported into China over the past three months has been used for financing.



(click here to enlarge image)
Potential Fallout and Beijing’s Response
Beijing issued new regulations in late August requiring banks to place part of the original loan in a low-yielding reserve account instead of allowing it to be used to invest yuan elsewhere in the economy. But because the use of copper as collateral developed as a way to bypass lending regulations, there is no mechanism in place to track how much of the inventory is tied up in these financing deals, meaning the extent of the risk also cannot be measured. But China’s copper demand was up by nearly 100 percent between 2005 and 2009, during which time Chinese gross domestic product rose by only about a third, according to the International Copper Study Group.

There is little doubt that a significant proportion of this copper has been used for financing, given that industrial use alone does not account for the increase. Warehouses bonded to the London Metal Exchange (LME) also saw Chinese copper inventories increase 17 percent in the first quarter of 2011, compared to a drop in the purchasing managers index manufacturing rate to 52.9 percent during the same period, according to the China Federation of Logistics and Purchasing. That this figure only includes inventories registered on the LME again suggests that a high percentage of imported copper is being used to finance credit.

Any move by Beijing to institute new regulations to limit this activity may prove to arrive too late. Speculative tools like copper and real estate have been used in informal and formal lending, making them harder to regulate, thus increasing China’s vulnerability to price declines and financial risk. Beijing understands it needs to clamp down on copper speculation, but it is wary as this may lead to a big rise in nonperforming loans at banks.

A drop in copper prices appears on one hand to be a good thing, since China’s demand for copper is growing faster than production. On the other hand, if the value of China’s stockpiled copper collapses, the impact on those using copper as collateral has widespread ramifications. Such a collapse would result in a much worse outcome for Beijing and would parallel similar problems China faces in managing bubbles in, for instance, real estate. There are few safe investments, and the system is more stressed than it appears.

Beijing will find it hard, while installing new regulations, to achieve the contradictory goals it is pursuing — keeping the economy growing even as it tightens lending. It cannot sacrifice growth and employment, so it is unlikely to take measures to halt the copper financing practice completely.



Read more: China's Threat from Falling Copper Prices | STRATFOR

[ccp]

This news is a couple of days old but I didn't notice it get much press time.  I don't get this for example:

" The government will create a public-private entity that could buy $500 billion in toxic assets, and could be expanded to a trillion dollars."

I wonder if they include solyndra in this calculated brilliant use of tax dollars.  There is no end to kicking the can down the road is there?

****U.S. Treasury Secretary Timothy Geithner speaks during a news conference at the Treasury Department on Tuesday.
 
By Sue Kirchhoff and Pallavi Gogoi, USA TODAY
WASHINGTON — Treasury Secretary Timothy Geithner unveiled a sweeping plan Tuesday to shore up the nation's troubled financial system.
It is designed to deliver as much as $2 trillion to troubled financial markets by having the government partner with the private sector to buy troubled assets from lenders, make more bank capital injections and expand a Federal Reserve lending program.

"Right now critical parts of our financial system are damaged," Geithner said at a Treasury Department press conference, warning that the nation faces the most serious economic crisis since the Great Depression. "Instead of catalyzing recovery, the financial system is working against recovery, and that's the dangerous dynamic we need to change."

The plan is just one part of overall efforts by the Obama administration, including a roughly $800 billion financial stimulus bill passed by the Senate Tuesday, to tackle the loss of millions of jobs, falling home and asset prices and a historic contraction in credit markets.

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said. "We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families."

Markets reacted negatively to the plan, however, with the Dow Jones industrial avereage down nearly 400 points in afternoon trading as investors and market analysts worried about the lack of specifcs in the broad proposal.

"The Financial Stability Plan outlined by Treasury Secretary Geithner this morning ... is obviously a work that is still very much a 'work in progress,'" economic consulting firm Stone and McCarthy said in a note to clients "It is quite possible that it may not be a finished product for an extended period of time."

Geithner's plan attacks the credit crisis on several fronts. First, the Treasury Department would use part of the $350 billion remaining from last year's $700 billion financial rescue fund as seed money, to induce the private sector to buy bad assets from banks. The government will create a public-private entity that could buy $500 billion in toxic assets, and could be expanded to a trillion dollars. Treasury has not yet settled on a final design for the program.

The administration will use another $80 billion in financial rescue funds to expand a recently created $200 billion Federal Reserve program. That program, designed to free up money for student loans, credit cards and auto loans, could also cover bonds backed by commercial real estate and privately issued mortgage-backed securities. The new funding is designed to leverage as much as $1 trillion in overall activity under the Fed program.

Geithner noted that 40% of the money for consumer lending has come through bundling loans into securities and reselling them in financial markets. As those so-called secondary markets have frozen, so has consumer and business lending.

Banks could receive more capital under the plan, which will be funded from the remaining $350 billion of last year's $700 billion financial rescue plan. Geithner said in order to get aid, banks would be subject to beefed up supervision or stress testing, especially big banks. Institutions that need additional capital will be able to access a new funding mechanism using money from the Treasury "as a bridge to private capital," Geithner said.

The renamed "Financial Stability Plan" rolled out by Geithner will also use at least $50 billion from last year's financial rescue law to help prevent home foreclosures. Details of that plan will be announced "in the next few weeks," Geithner said.

The plan relies on the Federal Reserve's willingness to expand current, historic programs to aid financial markets. But Fed Chairman Ben Bernanke faced some skepticism at a Tuesday afternoon hearing on Capitol Hill. Some lawmakers said they were worried that the Fed has already expanded its own balance sheet from about $800 billion to nearly $2 trillion as it created lending programs for stressed financial markets. The lawmakers also said the Fed has not released enough public information about its programs.

Rep. Spencer Bachus, R-Ala., accused the Fed and Treasury of using an "obscure and seldom utilized" provision of law to make unprecedented interventions into the financial markets.

"Not only has there been no disclosure or little oversight or accountability, but there's actually been an active resistance on the part of these agencies to explain their actions or disclose the terms," Bachus said. "We simply know almost nothing about these transactions. We can only guess as to their ultimate success or failure. In future years I'm sure those that write (about) these days will be intrigued and captivated by the question: How could such an unprecedented action have occurred without the consent of the governed?"

Bernanke said the vast bulk of Fed loans are safe and are generating profits. He said the central bank is reviewing its policies to ensure it is providing as much public information as possible. He also said the Fed might have to continue expanding its balance sheet in areas such as student loans, auto loans, and other areas where it could help open up markets.

"With our expansion, we're trying to create and stimulate credit markets where markets have broken down," Bernanke said, adding the Fed wants to "keep looking for opportunity" where it has the tools to get markets working again.

Geithner said he realizes the financial rescue represents a sizable commitment, but noted that many of the amounts were loans and loan guarantees, which means the government eventually will be repaid.

Still, the country should know that the program will involve costs to the government and risks, but he said the alternative of doing nothing would be far riskier.

"As costly as this effort may be, we know that the complete collapse of our financial system would be incalculable for families, for businesses, and for our nation," Geithner said.

The new administration's bailout overhaul seeks to address widespread criticism of how the Bush administration ran the $700 billion program Congress passed in October. Lawmakers in both parties say banks were getting billions of dollars in taxpayer support with few strings attached, and all the government aid was failing to accomplish its primary objective of getting banks to lend more.

Under the overhaul, the Obama administration seeks to deal with those issues by more closely monitoring banks to make sure the money they get is being used to increase lending.

President Obama, speaking at a prime-time news conference Monday night, said his overhaul of the financial rescue program would bring "transparency and oversight" to the heavily criticized program.

He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending in such areas as corporate jets.

The first $350 billion in the bailout program was committed by the Bush administration under the direction of former Treasury Secretary Henry Paulson. In part because of the political outrage over how the program has been run, the Obama administration decided for now against seeking any money beyond the $350 billion that is still to be spent.

Many economists believe $700 billion won't be enough to get the financial system operating normally and the administration will eventually have to ask for billions more. The administration, however, decided to try to increase the power of the program by using smaller amounts of money to harness bigger resources available at the Fed and in the private sector.

Asked about the possibility that his administration will ultimately need more money, Obama said Monday the goal now is to "get this right" because it is important to restore financial market confidence so banks will resume more normal lending.****

[Crafty_Dog]

Do you happen to have the date on that?

[ccp]

I think the 11th - tuesday.

[Crafty_Dog]

By LUCA DI LEO
U.S. wholesale prices rose sharply last month on the back of higher costs for gasoline, food and household detergents, pointing to continued inflation pressures in the production pipeline.

The index of producer prices, which measures how much manufacturers and wholesalers pay for goods and materials, rose by 0.8% in September from August, the Labor Department said Tuesday. It was the biggest monthly gain since April and came after wholesale prices were flat in August and rose by 0.2% in July.

Underlying prices, which strip out volatile food and energy components and are considered a more reliable predictor of future inflation, rose by a more moderate 0.2%.

The figured point to strengthening pipeline inflation, which could limit the Federal Reserve's leeway in providing more stimulus to a weak economy. Fed officials, who worry the recovery could falter due to politicians' inability to agree on growth-boosting measures, need to calibrate their monetary stimulus so that it boosts the economy and jobs without spurring too much inflation.

After a spike in the first half of the year, most Fed officials still expect the price of oil and other commodities to moderate amid slower growth in the U.S. and China, and a potential recession in Europe, which leads to less demand and lower costs for raw materials.

But there's little evidence that is happening. U.S. oil futures turned higher Tuesday, rising above $87 a barrel, despite a Chinese government report showing slightly slower growth there in the most recent quarter. And there was no indication from the U.S. government report that inflation pressures are softening.

Wholesale prices rose by 6.9% compared to September 2010. Underlying pipeline prices, meanwhile, increased by an annual 2.5%, the biggest gain since June 2009.

The breakdown of the monthly changes showed a sharp rise in energy prices -- up 2.3% in September from August -- following declines the previous three months. Last month's increase was led by gasoline prices, which rose by 4.2%.

Food prices rose by 0.6% last month, the fourth monthly increase in a row.

Light motor truck prices accounted for one-third of the rise in underlying wholesale prices. They rose by 0.6% in September from August, following a 0.1% gain the previous month. Higher prices for household detergents also contributed to last month's increase.

The continued inflation pressures mean the Fed's criteria for launching a new round of bond purchases to boost the economy "will not be satisfied anytime soon," Gary Bigg, economist at Bank of America Merrill Lynch, said in a note.

In a rare bit of positive news for the economy, a separate report showed U.S. home builders' sentiment rose to the highest level in 17 months during October as low mortgage rates and favorable home prices spurred a pickup in expectations for sales. Confidence in the market for new, single-family homes increased by four points to 18 this month – the largest monthly gain since the home buyer tax credit boosted the market in April 2010.



====================
The Producer Price Index (PPI) soared 0.8% in September, coming in well above the consensus expected increase of 0.2%.  Producer prices are up 6.9% versus a year ago.
The increase in PPI in September was mostly due to a 2.3% rise in energy prices. Food prices increased 0.6%. The “core” PPI, which excludes food and energy, increased 0.2%.
 
Consumer goods prices climbed 1.0% in September and are up 8.8% versus last year.  Capital equipment prices were up 0.2% in September and are up 1.7% in the past year.
 
Core intermediate goods prices rose 0.2% in September and are up 7.5% versus a year ago.  Core crude prices increased 1.0% in September and are up 20.8% in the past twelve months.
 
Implications:  After no change in producer prices in August, inflation came back with a vengeance in September, rising 0.8%. This spike in prices easily beat the consensus expected gain of 0.2%. Higher energy prices led the way, accounting for most of the rise in overall producer prices. This more than reversed the slippage in energy prices in the prior two months. Meanwhile, food prices continue to escalate, rising 0.6% in September and up at a 9.2% annual rate in the past three months. The “core” PPI, which excludes food and energy, rose 0.2%. This measure is up 2.5% from a year ago and is up at a 3% annual rate in the past three months.  Moreover, some of the large gains in core prices further back in the production pipeline will feed through to prices for finished goods. Core prices for intermediate goods rose 0.2% in September and are up 7.5% in the past year; core crude prices increased 1.0% in September and are up 20.8% versus a year ago. These figures should be enough to show the Federal Reserve that there is no room for a third round of quantitative easing.  In other news this morning, chain store sales continue to look good, up 4.6% versus a year ago according to Redbook Research and 3.6% according to the International Council of Shopping Centers.  We have yet to see any sign of recession.
=================

Gates betting on inflation funds:

http://www.marketwatch.com/story/how-bill-gates-is-betting-on-inflation-2011-10-18?

[DougMacG]

Question to all those interested in this subject: What is the acceptable range for the rate of inflation if we accept that a) deflation is totally unacceptable, b) exact 0% inflation is therefore too close to deflation, and c) that there is quite a margin of error for monetary policy makers working with very imprecise measurements and imprecise tools.

You of course don't have to accept my premises.

[Crafty_Dog]

I have come to doubt the "deflation is bad" hypothesis.

[G M]

I have come to doubt the "deflation is bad" hypothesis.

Oh? Do tell.

[DougMacG]

I have come to doubt the "deflation is bad" hypothesis.

Oh? Do tell.
--------------
I like it when conventional 'wisdom' gets questioned around here. 

One argument is that deflation is not a risk in this environment because of our never ending increases in the money supply, but that is not what Crafty is saying.

If Crafty is correct, the Fed could target inflation at 0% instead of more like 1-3%, then with margin of error in a big economy price increases/decreases might swing 2% up or 2% down averaging 0% and the dollar maintaining all of its value over the long term. 

That is only true as long as deflation is not the expectation.

Deflation has tended to correlate with lousy economic periods, the Great Depression in the US and the end of economic growth in Japan in the early 1990s are examples.  Other studies say that is not always so.  Small deflationary periods have come and gone without major damage.

The risk of deflation is really the risk of spiraling deflation.  It goes something like this: Things are cheaper, but people actually buy less because of low demand and because they know prices keep falling.  Companies sell less and make less on what they do sell at the lowered price.  Businesses either lower wages or layoff workers.  Households have even less to spend, demand falls further, prices fall further and the cycle continues or accelerates.  If or when this happens, it is very difficult cycle to break.