Taming the Fiscal Monster
– Of all our nation’s economic worries, none are scarier than the federal government’s record budget deficits and mounting debt load. Unless we find a way to make big changes to Social Security, Medicare, and other government programs, and also fix our tax code, the economy will break. The vitriol of the midterm elections and the seemingly broken political process only add to the anxiety. It may seem odd given all this, but I’m optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn’t good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult – for context we spend more than $100 billion a year in Iraq and Afghanistan – but it is doable.
Japan passes new $61bn stimulus package
– Japan’s parliament has passed a stimulus package worth about $61bn (£39bn), designed to kick-start the country’s fragile economic recovery. The stimulus was designed to create jobs, Prime Minister Nato Kan said, through measures to help small businesses and boost consumer spending.
Earlier, figures showed that Japanese consumer prices fell for the 20th month in a row in October. The vote in favour of the latest stimulus measures represents a victory for the government, which has struggled to get the package through parliament. The move is in marked contrast to European governments’ policies, which are focusing on cutting spending to secure growth. Japan has been struggling with weak growth, a high yen and deflation. The core consumer price index fell by 0.6% in October compared with a year earlier, official figures showed. This was a slight improvement on the 1.1% price falls seen in September.
Germany Drops Bond Threat
– European governments sought to quell the market turmoil menacing the euro, handing debt-strapped Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to cover a share of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders. In a third move, Greece was told it could have an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal. The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank President Jean-Claude Trichet, who warned it would unsettle bondholders. Germany yesterday backed away from the pitch for an automatic penalty, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis.
Markets give thumbs-down to Irish agreement, as Germany caves in on bail-ins.
– EU and Ireland agree package; overall size is €85bn, with €50bn for Irish budget,€10bn for bank recapitalisation, and €25bn for a contingency fund; interest rates 6%; no haircut for investors; Merkel, Sarkozy and van Rompuy agree bail-in mechanism, as Germany caves in on demand for automatic, or semi-automatic bail-in; agreements forsees CACs, similar to those in emerging market sovereign bonds; Breakingviews says Ireland deal is unlike to appease the markets, as Portugal remains very likely to need assistance under the fund; It is simply extraordinary how much credibility the EU has lost in such a short period of time. Lex says banks in Holland, UK, Belgium and Spain are also too big to save; we say that this morning’s market reaction suggests that the investors remain as concerned about contagion as they were last week; bond yields this morning are higher across the board, with bond spreads unchanged from Friday; the euro continues to weaken; Wolfgang Munchau, meanwhile, makes a proposal to refocus the EFSF on banking, and to pool the sovereign debt. [more]
How Chinese Inflation Policy Will Shape the Yuan-Dollar Exchange Rate
– By freezing its exchange rate and pulling out all the stops on fiscal and monetary stimulus, China got through the global recession with only a mild slowdown in GDP growth. Now it is facing the inflationary consequences. Consumer price inflation, after rising steadily all year, hit a 4.4% annual rate in October, approaching the government’s red line. How will China choose to deal with the inflation threat? The answer is important both for China and its trading partners, because anti-inflation policy will determine what happens to the exchange rate of the yuan over the coming months. Inflation is a key factor in exchange rate developments because the balance of trade depends on the real, not just the nominal, exchange rate–a fact that is not always clearly understood. Everyone knows that we need to adjust nominal wages for inflation to reveal trends in real wages, and adjust nominal interest rates for inflation to find real interest rates. For the same reason, we need to adjust nominal exchange rates for inflation to see what is really happening to the competitive balance between any two countries. In the case of the yuan vs the dollar, the simplest way to make the adjustment is to add the difference between the Chinese and U.S. inflation rates to the rate of nominal appreciation of the yuan.
Richard Alford: “Quantitative Easing Explained” And Its Critics – Richard Alford; former economist, NYFed The YouTube video “Quantitative Easing Explained” has surpassed 2.9 million views. The video is both entertaining and unremittingly critical of the Fed. In defense of the Fed, numerous economists, bloggers and mainstream media pundits have pointed out errors in the video. In doing so, the critics have missed the forest for the trees. While there are errors and oversimplifications in the video, it has resonated with the public because: a) it tapped into widely held perceptions about the Fed and b) the video deftly treated troublesome aspects of Fed policy with comedic license. In fact, the defensiveness of the critics of the video has only served to convince many skeptics of QE2 that its proponents are unwilling to or incapable of seeing the troublesome dimensions attached the bailout packages and the decision to go forward with QE2. The critics of the video and the Fed itself also appear unaware of how much the stature of the Fed has suffered as a result of the financial crisis, the recession, and the bailouts. It behooves the Fed and its defenders to move past narrow definitional/legalistic responses and address the underlying concerns of many citizens and market participants.
Jim Quinn: Lies Across America – Yves here. While Quinn has a deliberately (some might say overly) provocative style and I quibble with some of his supporting arguments, his overarching observation, that America is wedded to an economic model past its sell by date, and that model has damaging social and political consequences, is one I believe will resonate with many readers. From Jim Quinn, of The Burning Platform –The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers. Aldous Huxley had it figured out decades ago:Thanks to compulsory education and the rotary press, the propagandist has been able, for many years past, to convey his messages to virtually every adult in every civilized country.