Category: Currency

I Was Wrong, I Apologize

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For those of you have followed my blog for a while, I started it in May of 2007, I have been suggesting that the Euro was likely to supplant the US as the world’s reserve currency.

Well, I missed a couple of things:

  • The fact that the Euro was drawn up by a bunch of neoliberal (which means conservative) economists who has been railing against regulation and the welfare state, which, as the past few years have shown to be an unmitigated disaster.
  • That the Germans, would be … well … Germans.

Now, I’m inclined to believe that, absent a German exit from the Euro, that the unified currency is doomed, and the EU may be as well.

Unlike my hairier brother,* I do not think that another war in Europe is inevitable, though I think that an EU breakup has a potential of leading to some shooting, or, more likely, some sort of a “Cold Peace.”

*The Indians call him “Carpet who walks”.

And the Banksters Win Yet Again

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It looks like the Euro Zone may be letting the big banks get 100¢ on the dollar for bad sovereign debts:

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

The possible move helped push stocks up in Europe and the U.S.

Discussions are taking place against a backdrop of flagging market confidence in the region’s debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.

Euro zone powerhouse Germany is insisting on tighter budgets and private sector involvement (PSI) in bailouts as a precondition for deeper economic integration among euro zone countries.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) — the permanent facility scheduled to start operating from July 2013 — could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

What is going on here is that the European Central Bank (ECB) was structured to eschew one of the most basic activities of a central bank, back-stopping debt sales in the presence of an investor panic.

The problem is that the ECB was structured largely in response to the German experience with hyperinflation in the 1920s, which led to the creation of the ECB as an organization committed to austerity and battling inflation to the exclusion of all other concerns.

I guess I kind of understand this, because, after all, they think that this period of extreme inflation led to the collapse of the German economy in the 1930s, and the rise of the Nazis, and WWII.

Of course, the German central bank of the 1930s was among the tightest of the central banks, and made the German depression particularly brutal, which could also tagged as leading to rise of the Nazis, and WWII.

Of course, if subscribe to the theory that roughly every century a war occurs in Europe, the parallels now, and 1914, when the Very Serious People in Europe, with the memory of the Napoleonic wars (1812), frantically tried to integrate the economies of Europe, which also sounds a lot like the entire Euro currency project.

My brother has predicted a new war in Europe, (see the comments)and this has led me to start looking at rather alarming echos of the past.

What the Shrill One Said

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Yes, Paul Krugman is correct in noting that the US dollar is overvalued, and that the
Chinese Yuan is undervalued.

He only has 800 words, so what should also be noted is that the dollar is not just overvalued versus the Yuan, but versus the whole world, though he does note that the Chinese are deliberately pushing the value of the Yuan in addition.

Since the undervalued Yuan is, at its core, a tariff on Chinese imports, and a subsidy of their exports, it is clear that the sanctions bill in the Senate is justified.

That being said, there are also structural issues that overvalue the US dollar, to the advantage of Wall Street and the disadvantage of Main Street (Hence Robert Rubin’s* full throated support of a “strong dollar policy when he was SecTreas), and these need to be addressed as well.

*Why is this corrupt ratf%$# not under criminal investigation?

Just Mint the Damn Coin Already!

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I haven’t said much on the solutions on the debt ceiling debate, I’ve been more focused on the source of the problem, which is that Obama, in his eagerness to find a way to gut cut Social Security, Medicare, and Medicaid in order to feed his own ego by burnishing his self image as a bipartisan compromiser who brings people together because he’s just so damn awesome.

At this point, it would be good to have a plan B, and while there are a number of ways to work around this, though to my mind is the use of the Treasury’s explicit statutory authority to mint platinum proof coin of arbitrary value, which they could be deposited in the Federal Reserve account and used to keep the debt below the ceiling.

So if they mint a few trillion dollar coins, deposit them in their “checking account”, and it’s off to the races.

But it won’t happen, because Obama still wants to find a way to gut cut Social Security, Medicare, and Medicaid.

What the Shrill One Said

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Paul Krugman offers a data point that shows that default and devaluation works better than austerity and debt peonage.

The spread on an Icelandic CDS is now about a third that of the Irish CDS, which means that their borrowing costs are lower, as is the confidence of the market in their credit.

Rolling the Nobel Laureate:

Why, it’s almost as if defaulting on debts run up by runaway bankers and letting your currency depreciate works better — even from the point of view of investors — than socializing private-sector losses and grimly sticking with a fixed exchange rate.

Or to put this in earthier terms, if you want to survive this sort of financial meltdown, f%$# the banks, not the average citizen.

It Appears that My Prescription for Europe is Not Completely Nuts

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Because Roosevelt Institute fellow Marshall Auerback thinks that the solution is to get Germany out of the Euro zone as well:

…

Perhaps we’re looking at this the wrong way around: Given the continued German aversion to more broadly-based pan European style fiscal programs, which its populace continues to see as nothing but bailouts for lazy Mediterranean free-loaders, there is another way to solve the euro crisis.

Let Germany leave the euro zone.

Let’s leave aside the politics for a moment as there are many who believe that a German exit from the euro zone in effect means the end of the euro because a number of other countries would leave.

So consider this exercise solely from an economic context: The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody devalues against the economic powerhouse which is Germany and the onus for fiscal reflation is now placed on the most recalcitrant member of the European Union. Germany will likely have to bail out its banks, but this is more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace).

I’m not sure if it is reassuring or terrifying that some people who actually know about this sh%$ are agreeing with me.

Fundamentally, the Euro, at Germany’s insistence, was constructed as a bankster’s paradise, and their actions since the meltdown have only made this worse.

Read the full article, and the comment thread, it’s good stuff.

And While They Were Going After bin Laden, They Found Time to Kiss Up To The Banks…

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This awful policy is driven by a desire for campaign donations.

The New York Times has an editorial excoriating the Obama administration for deregulating foreign currency swaps:

A loophole in the law — which the bankers and their friends, including the administration, fought for — allows the Treasury secretary to exempt the instruments. The arguments in favor of exemption, beyond a desire to please the banks, were always unconvincing. They still are. The Treasury Department has asserted that the exempted market is not as risky as other derivatives markets, and therefore does not need full regulation.

That claim has been disputed by research, but even if it were true, it would be a weak argument. For instruments to be relatively safer than the derivatives that blew up in the crisis, necessitating huge bailouts, hardly makes them safe. Worse, dealers could probably find ways to manipulate the exempted transactions so as to hedge and speculate in ways that the law is intended to regulate.

……

The department has also said that because the market works well today, new rules could actually increase instability. That is perhaps the worst argument of all. It validates the antiregulatory ethos that led to the crisis and still threatens to block reform.

The Treasury’s plan will be open for comment for 30 days. Count us opposed.

(emphasis mine)

There can be a fine line between regulatory capture and corruption, and I am not sure on which side this falls.

In a way, this is worse than Bush and His Evil Minions™, because W was (correctly) perceived as a radical, but the actions of “Team Geithner” now firmly entrenched this thinking on both sides of the aisle.

H/t Paul Krugman for the graph pr0n.

So Why is the Yen Skyrocketing?

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Normally, a disaster has a country’s currency falling, but the earthquake, and the nuclear power plant problems have the value of the Yen hitting a post World War II high.

So, why is this happening?

Two words: Carry trade.

You see interest rates in Japan are very low, so some people borrow money in Japan, and invest it elsewhere at higher interest, and thereby pocket the difference in interest rates.

The risk here is that the loans have to be paid back in Yen and if the currency strengthens, then you can end up owing more than you borrowed, a lot more than what you borrowed, and because this is typically very highly leveraged, it means that you lose a lot of money.

What is happening here is the concern that Japan will cash in, or more likely stop buying, US treasuries, because they need to spend the money on reconstruction, which strengthens the yen.

As the ¥ strengthens, the hedgies decide that they need to get their cash back into Yen before it appreciates any more, and so magnifies their losses.

So while normal concerns push the Yen up, you also have panicked (is their any other kind) traders who are desperately trying to buy into a rising market, which pushes up the Yen, which panics the traders more, who try to sell more $AUS or South African Rands to buy Yen, which further pushes it up.

Rinse, lather, repeat.

And the Insanity Continues

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So after a ruinous recession, the economy shrunk by over a fifth, made worse by austerity programs that were intended to maintain a hard peg to the Euro, Estonia’s government has finally achieved the desired result, and at the start of the year, Estonia joins the Euro Zone.

Truth be told, the Estonian government set it up such that there was no choice, since it maintained a hard peg to the Euro, and the Deutsch Mark before that, and almost all the loans outstanding are foreign denominated, so there really never was any sort of fiscal or economic sovereignty in the small Baltic Republic.

If anyone expects an improvement in the standards of living as a result of this though, they are very likely to be disappointed.

Economics Update

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The final numbers for US GDP in the 3rd quarter came in, and they were slightly lower than estimates, with a 2.6%, as opposed to the 2.7% forecast, growth rate, while core inflation was at a 50 year low.

So I don’t think that either inflation or a robust recovery are around the corner, particularly with oil rising above $90/bbl, a 2 year high, which has in turn driven gasoline prices near to $3.00/gallon.

Unfortunately, the dollar has continued to fatten up versus the Euro, because people see more pain and woe from Ireland, Greece, Portugal, Spain, and Italy.

My Faith is Restored in Ron Paul

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While I am in favor of clipping the Federal Reserve’s wings, limiting its scope to monetary issues, and taking regulation largely out of their hands, along with reducing the role of private banks in staffing the boards of the regional Fed banks, Ron Paul just went off the rails again, arguing that the Federal Reserve is an illegal cartel:

Rep. Ron Paul, (R-Texas), who will head a subcommittee overseeing the Federal Reserve in the new Congress, called the central bank a “cartel” and said it had “monopoly control” over the US dollar. “I think we should start ending the Fed by allowing competition. I don’t like the idea that they have monopoly control. It’s a cartel: They get to print the money,” said Paul, who wrote a book called End the Fed.

Paul said that he wanted to “legalize competition,” so that Americans can use gold and silver as legal tender.

The idea that the government, which is what the Federal Reserve is, in a completely f%$#ed up kind of way, should not have a monopoly on the idea of coining money is completely nuts.

I am so over agreeing with him yesterday.

The world is back to normal, though I do rather relish the idea of seeing Dr. Paul grill Bernanke on CSPAN.

Economics Update

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The lede here is that the Federal Reserved has announced another round of quantitative easing (printing money), $600 billion over the next 9 months, more than the the widely forecast $½ trillion, which pushed the US dollar down in currency markets.

Accompanying the statement was a mild, to my mind too mild, statement about how the recovery is not progressing as rapidly as planned.

With the Michigan Consumer Sentiment Index falling, and US GDP growing at a truly anemic 2% rate, I think that they are being too timid, though there is good news with the Chicago Purchasing Managers Index, the Institute for Supply Management’s manufacturing index and non-manufacturing index, and ADP’s private employment survey: all show an increase.

Even more significantly, it appears that retail sales are beating expectations, which may bode well for the all-important holiday shopping season.

Still, real estate looks dead, with mortgage applications remaining flat despite historically low rates.

BTW, here is a blast from the past, monoliner bond insurer Ambac is warning that it might go bankrupt this year.

I’m wondering if this will put a whole raft of municipal bonds in technical default, since if Ambac goes BK, then it no longer has an obligation to fulfill its insurance contracts.

I really don’t know. Does anyone else know?

Full Fed Statement after break:

Press Release

Release Date: November 3, 2010

For immediate release

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

Statement from Federal Reserve Bank of New York Leaving the Board

Economics Update

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Catching up on the economic number dump, first we have the Federal Reserve’s so-called Beige Book, which shows that growth has continued, but it is very sluggish.

This is reinforced by the fact that consumer confidence fell in October, factory production and capacity utilization fell in September, for the first time in a year, though home builder confidence rose (to a truly pathetic 16 where 50 is neutral), and housing starts rose.

We also have some importing news out of China, with their central bank making a surprise increase in its benchmark rate, and Chinese government published new statistics showing that its growth slowed and inflation edged up.

Certainly, it looks like the Central bank is concerned about inflation, and the statistics, even considering the general unreliability of official government statistics, indicate a problem.

One interesting effect of the rate hike is that it should place additional upward pressure on the Yuan.

Because No Matter How Bad it is for the United States, It is Good for the Bankers

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Timothy Geithner has reiterated his support for Bob Rubin’s strong dollar policy:

“It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive,” Geithner added. “It is not a viable, feasible strategy and we will not engage in it.”

Answering audience questions before the Commonwealth Club of California in Palo Alto, he said the United States needed to “work hard to preserve confidence in the strong dollar.”

The dollar is overvalued, particularly with regard to the Chinese Yuan, and it has been for years.

It’s been overvalued, because it makes the US position as a reserve currency more secure, which means more people paying American bankers to hold their money, even as it increases exports and decreases imports, harming the rest of the country.

Once again, when Timothy Geithner has to choose between the country and the banks, he chooses the banks.

Economics Update

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Unemployment Claims 2008-Present

Things aren’t getting better, they are just running out of people to lay off.
H/t The Washington Independent.

It’s jobless Thursday, and initial unemployment claims are back in the 450K-480K “sweet” spot, with initial claims rising 13,000 to 462K, the 4 week moving average rising 2¼K to 459,000, though both continuing and emergency claims fell.

Seeing as how the number really needs to be below 300,000 for any meaningful recovery in jobs, we remain in a bad place.

In non-existent inflation land, we saw producer prices rise 0.4% in September, though that was largely on food, the core rate was 0.1%, and the price of imports fell by 0.3%, even as the trade deficit rose.

I would note here to all the free trade fetishists, we have a deflation problem in our economy right now, and most of it is being imported.

Meanwhile, the us dollar has fallen to a low for the year.

Economics Update

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There is a lot of news today, mostly in currency and international finance, but the lede, at least for a US focused post, which this is, is the Institute for Supply Management’s non-manufacturing index, well above forecast.

In international finance news, we are seeing central banks all over the world beginning to open the spigots again as they see the recovery sputtering.

We have the Bank of Japan engaging in another round of quantitative easing (printing money) by setting up a ¥5 trillion ($60 billion) fund to buy government and private bonds in order to keep interest rates at 0%, and Australia, one of the first countries whose central banks increased rates, has kept rates at 4.5%, surprising the experts who were expecting another rate hike.

Interestingly enough, currency has gone in the opposite direction expects from these actions, with the Australian Dollar approaching a 2-year high, and the US dollar fell.

Generally, interest rate surprises on the low side for other countries would drive the dollar up, but it appears that there is an expectation that the Fed will go heavily back into QE like the BoJ.

There is another potential blip on the horizon, as crude oil appears to be on an upswing again.

This Means Nothing

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The House just passed a bill allowing for sanctions against countries that manipulate their currency, which is actually in accordance with free trade theory; an undervalued currency is a tariff on imports and a subsidy on exports.

The “free trade” absolutists would disagree, arguing since free trade creates democracy, cures rainy days, and keeps your daughter from dating that guy with the tattoo and the tongue studs.

Of course what they are really arguing is that they want to do whatever they can to depress American worker’s wages, because that’s how they get their consulting gigs.

This bill means nothing, and it never will, because it will never pass the Senate, and because in order for the tariff to be enforced, the US Commerce department must rule that the currency is “fundamentally undervalued,” which it will never do, because, it’s run by guys who worry that if they do so, their daughter will start dating that guy with the tattoo and the tongue studs.

Japan Makes Banzai Charge Against Chinese Currency Manipulation

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As a result of Chinese currency manipulation, the Bank or Japan has started selling Yen to keep it from strengthening it too much, which wold kill exports and likely create a trade deficit.

This the first time that this has happened in 6 years, but there is a twist to what the BoJ is doing:

At first glance, the action looks like a something-must-be-done-this-is-something -therefore-this-must-be-done move: a new prime minister and a “bold action” doomed to be proved ineffectual. The FX markets are so enormous (dollar/yen alone trades some $750 billion per day) that it’s hard to believe a single sale of less than $20 billion in yen could even have the short-term effect we saw last night, let alone have any lasting consequences.

But this isn’t just about FX-market intervention. This is also about monetary policy, and that could make a real difference:

………

In other words, the Bank of Japan isn’t simply selling yen, it’s printing yen. (And then selling them.) Given (a) that it’s the central bank and that it can print as many yen as it likes, and (b) that it would actually welcome a bit of inflation, there’s actually a non-negligible chance that this kind of non-sterilized intervention could work.

The term “non-sterilized” means printing money.

The Federal Reserve could do the same thing, and getting the dollar to a reasonable level versus the Chinese Yuan, and some inflation right now would be a good thing.