I just wrote up a post on Goldman’s thoughts on coming ECB policy moves. Goldman’s musings are credible because the author is their chief European economist, who was until a year ago at the top of the ECB’s Monetary Policy Stance Division. And he worked at the ECB for ten years. So he knows what the ECB thinks about monetary policy as well as anyone outside the institution. His comments clarify a few things for me.
His view is that the ECB will not do spread targeting and will instead go for unlimited unsterilized purchases of shorter-duration sovereign debt. I agree. I would also add that the ECB wants to reward peripherals that have Troika programs and stick to their targets. So those will be the sovereigns that get purchases. Ireland comes to mind since they have done well in their program. Spain and Italy would be next if they commit to Troika programs and oversight.
The problem here is that this is just a Super SMP. It has the ECB buying in unlimited quantities for countries that are making fiscal and structural adjustments instead of the ECB making ad-hoc commitments to purchases that are not credible backstops. Now I realize that this is what Joerg Asmussen meant when this exchange occurred:
There are to be bond purchases once more. What makes you think the new programme will be more successful than the first two programmes, which only reduced rates in the short term?
Because it will be better conceived than the old bond-buying programme, the SMP.
But the Super SMP is a moral hazard for banks instead of the reputed moral hazard for sovereigns that a rate target would be. Instead of potentially giving sovereigns an open ended rate target commitment, you are giving banks an open-ended quantity commitment. And they will use it. The Super SMP will work just like QE1 did in the US except instead of the Fed buying toxic MBS indiscriminately and at inflated prices, it’s the ECB buying distressed sovereign debt indiscriminately and at inflated prices. The whole premise of the ECB’s buying again is to have some sort of Bagehot rule that it applies in providing liquidity as a bank lender of last resort. But yet again we see there’s nothing like that going on. Instead, the ECB plans to give one and all comers liquidity and allow them to dump their distressed debt onto the ECB at inflated prices. The result will be an instant improvement in bank balance sheets, all without private money recapitalization. Sounds like a bailout to me.
Das Anlegerportal Unsere Information Ihr Gewinn – boersen-zeitung.de
Given my article about Huw Pill’s comments on the ECB, I thought this interview with him would be interesting
Europe Is Japan? Goldman Expects ECB To Become The BOJ, Purchase Private Assets | ZeroHedge
“We forecast the announcement of measures to permit NCBs to purchase private-sector assets under their own risk to implement ‘credit easing’, within a general framework approved by the Governing Council. This would allow purchases of unsecured bank debt and corporate debt, enabling NCBs to ease private-sector financial conditions where such support is most needed. Progress in centralising banking supervision at the ECB would facilitate such support for the banking sector.”
Europe
Germany Generates Budget Surplus in First Half of 2012 – SPIEGEL ONLINE
When I talk about government deficits and surpluses, I talk about private and foreign sector deficits. With Germany running a surplus, the big offset is the huge current account surplus/capital account deficit. If the German private sector were to dissave, the budget surplus would be even greater.
So what this is telling us is that Germany has such a large current account surplus that it has led to budget surpluses too. That speaks to RISING imbalances and the potential for a marked swing in a global downturn.
What’s more, budget surpluses means draining financial assets from the private sector. So I am not impressed. I am concerned that these surpluses will create complacency.
David McWilliams » Austerity can’t help — we’re heading for mass defaults
“The more new capital is used now to pay these old debts, the more fresh capital is wasted trying to make legitimate poor investment decisions, which were based on nothing more than “hot air” in the first place. It is throwing good money after bad, the ultimate expression of “dead money”.”
Britain
“Bank report to MPs reveals wealthiest boosted by QE and low base rate, but insists policy spared UK from even deeper slump”
BoE concludes QE has not harmed pensions – FT.com
Isn’t this the definition of creating malinvestment, an Austrian economics term: “The paper concludes QE mainly helped underpin the economy by driving down long-term gilt yields, making these unattractive for investors and encouraging them to instead buy equities and corporate bonds. The value lost because of lower yields was largely recovered in rising equity and bond prices.”
New Statesman – Perhaps Iain Duncan Smith will accuse me of peeing on the data
The fiscal clifflet: The forgotten fiscal threat | The Economist
“Here’s the real threat. Even if the Bush tax cuts are extended and the sequester delayed, a huge amount of fiscal drag remains in place. They include the expiration of the payroll tax cut, the expiration of extended unemployment insurance benefits, imposition of a new 3.8% Medicare investment tax on the wealthy, and the bite to discretionary spending embedded in the Budget Control Act and prior continuing resolutions. ISI Group projects $220 billion of fiscal tightening in 2013, or 1.4% of GDP. “
George Osborne: an isolated chancellor | Editorial | Comment is free | The Guardian
“no amount of ministerial bluster can disguise just how badly the economy is doing. The austerity plan imposed by the Treasury is failing by Horse Guards Road’s own standards, since the coalition is having to borrow far more than planned. Going by the Treasury’s own compilation of independent forecasts last week, the government will have to borrow £175bn more from now until 2016 than originally promised. Compared with other large economies in the G20, the UK is matched only by Italy in being in a double-dip recession. The economy has failed Mr Osborne’s rationale for making historic spending cuts, since he claimed that Labour’s bloated public sector was “crowding out” private businesses, which would be set free only once big government was downsized.”
The US
It’s All About The Data – Tim Duy’s Fed Watch
“The minutes of the July 31 – August 1 FOMC meeting are out. In my opinion, they reiterated the importance of the data flow in assessing the Fed’s next move.”
US Fed hints strongly at fresh round of stimulus – Telegraph
The Fed minutes came out and they say that more easing could be coming – just in time for the election in November! Color me sceptical but I can’t see the Fed doing a ton here. Maybe they will — but will it work? I say no.
“Many of those on the Federal Open Market Committee (FOMC) – the equivalent of the Bank of England’s Monetary Policy Committee – also judged that more quantitative easing could offer “additional support” for the economy.”
Even if ‘Fiscal Cliff’ Gets Resolved, Outlook Is Anemic – Real Time Economics – WSJ
“The most distressing aspect of the Congressional Budget Office’s outlook for 2013 isn’t the fact that the U.S. economy will fall into recession if the ‘fiscal cliff’ of looming tax increases and spending cuts becomes reality.
…
No, the most distressing aspect of the report by the nonpartisan CBO, released Wednesday, is that it forecasts that even if we don’t dive off the “fiscal cliff” — and optimists believe even a divided Congress won’t allow that to happen — we still will experience anemic growth in 2013.”
Technology
HP Lowers 2012 Guidance Amid Slowing Sales – Arik Hesseldahl – News – AllThingsD
“Hewlett-Packard just reported its third-quarter earnings, and they’re about as bad as expected.
Most of the negative news was already known. HP front-loaded a lot of the quarter’s dirty laundry in a pre-annoucement on Aug 9. “
Kayak’s First Public Quarter Returns Record Revenues – Tricia Duryee – Commerce – AllThingsD
“In its first earnings report as a public company, Kayak notched record revenues to beat analyst expectations.
The online travel company said second-quarter revenues totaled $76.9 million, a 36 percent increase over the same period a year earlier.”
Still Staying Away from Dell | Crossing Wall Street
“One of my fundamental rules of investing is to never take risk that I don’t need to. Last month, I said I was staying away from Dell and that’s how I feel today.
Warren Buffett said, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.””
BBC News – Hewlett-Packard makes $8.8bn loss in third quarter
“The firm also had to absorb some sizeable restructuring costs, as it looks to cut some 27,000 jobs, or 8% of its global workforce, by 2014.
HP said net revenue in the third quarter fell by 5% to $29.7bn.”
Elsewhere
BBC News – UN study says wealth gap in Latin America increases
“The report by the UN Agency for Human Settlements says that the richest 20% of the population on average earn 20 times more than the poorest 20%.
According to the study, Guatemala is the country with the widest disparity, and Venezuela the most equitable one.”
BBC News – South Africa remembers dead at Lonmin’s Marikana mine
Isn’t this what the massacre is all about: “The price of platinum has leapt to its highest since May.” The whole episode is disgraceful. It is surprising that murder charges aren’t being filed.