Central banker urges China to cut US debt holdings: report

Bernanke Rejects Bailouts – Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority. "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed." The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won’t be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies

US Deficit Fixes Needed ‘Fairly Soon,’ CBO’s Elmendorf Says – The U.S. needs to cut its budget deficit soon through changes in spending and tax policies to reduce the risk of a fiscal crisis, according to the head of the nonpartisan Congressional Budget Office.  Changes to U.S. fiscal policy “need to be large, need to affect programs that are popular and tax payments that people make, and it will need to be enacted fairly soon,” Douglas Elmendorf, director of the congressional office that estimates the impact of legislation on the federal budget, said today.  Elmendorf joins economists and policy makers such as Federal Reserve Chairman Ben S. Bernanke in warning about risks to the economy from annual budget deficits running at near 10 percent of gross domestic product for the third year in a row.  “If we do not change our course we will let our past crush our future in a very fundamental budgetary sense,”

Central banker urges China to cut US debt holdings: report – China should further diversify its huge foreign exchange reserves away from U.S. government debt to reduce its risk exposure, a central bank official said in comments published on Monday. "We should change the single-currency focus on buying U.S. Treasuries and adopt a more diversified structure for foreign exchange reserves to reduce risk," Xu Nuojin, deputy-director of the People’s Bank of China in Guangzhou, was quoted as saying.  Analysts estimate that about two-thirds of the reserves, which hit a record $2.65 trillion at the end of September, are parked in dollar assets, although the currency composition is a state secret. China should channel more of its foreign exchange reserves into resources and equities, Xu said.

Yellen Speech May Offer `Proxy’ For Plan to Unwind Fed’s Asset Purchases – Federal Reserve Vice Chairman Janet Yellen presented a possible timeline of about seven years before the Fed’s balance sheet is restored to normal levels, while saying the central bank’s asset purchases will end up creating 3 million jobs by 2012.  Yellen, speaking in Denver on Jan. 8, referred to a model created by Fed economists that assumes the central bank will complete its second round of large-scale Treasuries purchases within a year. The Fed’s balance sheet would stay “elevated” for two years before returning to a normal size over five years, she said, alluding to the economists’ research. 

ECB gives Portugal temporary lifeline, traders say – The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance program, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.  The Reuters report drew official denials from German Chancellor Angela Merkel on down, but economists and market analysts said it was only a question of time before Lisbon too would need a rescue.

FTAlphaville: Casualties of the currency war –  That’s a Nomura chart showing the Brazilian government as the biggest ‘loser’ of the currency war. You know the war we’re talking about: Brazil was the first and loudest to declare it in 2010. Oops. As Nomura remind, that war’s been about emerging markets trying to prevent capital inflows from putting a rocket under a) inflation b) their currencies, now that US quantitative easing has restarted a worldwide hunt for yield. It’s taken central bank policies to an odd, ‘post-modern’ place compared to the traditional tools they use. The problem that we can now thank Brazil for discovering is that it’s become difficult to manage a) and b) simultaneously, especially with generally surging commodity prices worldwide. The chart above brings together changes in inflation before and after quantitative easing was signalled, changes in inflation forecasts, both nominal and real exchange rate changes, and changes in central bank policy rate forecasts and one-year swap rates.


Beyond the Eternal Food Fight –Almost every time  global prices surge and the media and public reach out to analysts for meaning, a decades-long  food fight resumes. The latest price surge is clearcut, bringing food costs up to or past peaks reached in 2008. With  populations and appetites growing, with climate changing, Is this the edge of the cliff or just another bump in a long, climbing road? The combatants:

Portugal? O Nao! – Krugman –

It’s looking as if Portugal is the next eurodomino. I was hoping not — mainly, of course, for the sake of the Portuguese, but also selfishly, because it’s by far the blurriest of the troubled peripheral countries. What I mean by that is that the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn’t all that bad fiscally — debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn’t have surging house prices. There was a lot of private-sector borrowing, but it’s not that easy to explain exactly why. What’s clear, however, is that at this point Portugal faces adjustment problems similar to those of Spain, and possibly worse. Prices and labor costs are out of line with the rest of the eurozone; getting them back in line will require painful internal devaluation, aka deflation; and given the high levels of private debt, deflation will have nasty side effects.


Christie May Cut Medicaid as $10.5 Billion New Jersey Budget Deficit Looms – New Jersey Governor Chris Christie gives his first State of the State speech tomorrow after saying he may cut Medicaid and employee benefits to eliminate a $10.5 billion budget deficit in the second-wealthiest U.S. state.  Christie, who took office a year ago, said he’ll tell lawmakers in his address that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s. The Medicaid program “is one of the things we’re going to have to look at,” Christie said in a Jan. 4 interview.  The 48-year-old chief executive joined 28 other Republican governors asking President Barack Obama and congressional leaders last week for permission to reduce Medicaid outlays below federally prescribed levels. New Jersey budgeted $3.1 billion for Medicaid in the fiscal year ending June 30 and was scheduled to receive $1.1 billion in federal stimulus funding, according to the Treasury Department.


How to gracefully step aside – RECENTLY, the data and graphic wizards here at The Economist put together a tool enabling readers to determine when China will overtake America as the world’s largest economy: Given reasonable assumptions, China will pull ahead within the next ten years. if you play around with the interactive, you’ll find that this isn’t particularly sensitive to changes in the variables. If you double expected American growth from 2.5% per year to 5% per year, you push the key date back from 2019 to…2022. If you then slow China’s growth to 5% annually, you delay il sorpasso to 2028. Absent a total disaster in China, the transition will take place, and that right soon.
Fed profitability datapoint of the day – At the end of 2010, the Federal Reserve system had $2.423 trillion in assets and $2.367 trillion in liabilities, which means that the simplest measure of its total equity — assets minus liabilities — comes to $56.6 billion. The Fed also managed to earn net income of $80.9 billion in 2010. Which means that its return on assets was incredibly high at 3.3%, while its return on equity was an astonishing 143%. I think it’s fair to say that no bank in the history of the world has ever had income of anywhere near $80 billion in one year: that’s over $700 per US household. Somehow, the Fed is making roughly $60 per household per month, and remitting that money straight to the Treasury And it’s a useful reminder of just how massive the Fed’s balance sheet has become — and also of how monetary policy can make a serious dent in the funding-need side of fiscal policy.
The Doctor Might See You Now – That’s the title of a new paper by Craig Garthwaite of Northwestern.� The abstract is this: In the United States, public health insurance programs cover over 90 million individuals. Changes in the scope of these programs potentially can have large effects on physician behavior. This study finds that following the implementation of the State Children’s Health Insurance program, physicians decreased the number of hours spent with patients, but increased participation in the expanded program. Suggestive evidence is found that this decrease in hours was achieved through shorter office visits. These results are consistent with the predictions from a mixed economy model and provide evidence of the potential effects of recently passed public insurance expansions. In other words, whether you favor ACA or not, the supply side constraints are starting to bite.
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