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Yes, infinite, in fact.

Put that into your debt to income calculations…

S&P SAYS JAPAN HAS ENOUGH FUNDS TO SERVICE RISING DEBT COSTS

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What seems to be happening is bank ‘funding needs’ are become funding needs of Germany itself.

While this adds to Germany’s funding pressures, this process can go on indefinitely unless/until germany cannot somehow fund itself.

Not long ago the finance ministers announced they had a contingency plan for that possibility but wouldn’t say what that plan was leaving open the possibility they were bluffing. The CDS markets could be the best leading indicators of real trouble. With the US ‘recovery’ hitting a ’soft patch’ of very low and very flat gdp and unemployment rising with productivity gains, an export dependent Eurozone looks like it will continue to struggle.

It just dawned on me that the Bush recovery got help from the fraudulent sub prime lending while it lasted, as the Clinton expansion got an assist from the pie in the sky valuations of the dot com boom, as the Reagan boom was assisted by the fraudulent S and L lending while that lasted. Without that kind of supplemental dose of aggregate demand, the automatic stabilizers alone while braking the decline probably do not produce all that robust of a recovery.

And if we follow the lead of Japan and tighten fiscal with every green shoot we wind up with the same results.

DJ WestLB Was Close To Being Shut Down Over Weekend

June 8 (Dow Jones) — German state-controlled bank WestLB AG was
close to being shut down over the weekend, people familiar with the
situation told Dow Jones Newswires Monday.
Bundesbank President Axel Weber and President of Germany’s BaFin
financial regulator Jochen Sanio threatened to close down the state bank
at crisis talks held over the weekend, the people familiar with the
talks said. It was only after this threat that savings banks agreed to
raise the guarantee framework for the debt-laden bank, the people said.

Late Sunday, WestLB owners said they raised their guarantee
framework for the bank by another EUR4 billion. The people familiar with
the situation said the savings bank agreed to extend the guarantee
umbrella after it was ensured that a solution wouldn’t hamper the spin
off of toxic assets into a so-called “bad”
German bank.

Regional banking associations WLSGV and RSGV together hold more than
50% of the shares, while the state of North Rhine-Westphalia has a 17.5%
stake and NRW.BANK holds 31.1%. NRW.BANK’s owners are the state of North
Rhine-Westphalia with 64.7% and WLSGV and RSGV with 17.6% each.

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Starts off good and then goes bad.

Britain looks to the land of the rising sun with envy

by Ambrose Evans-Pritchard

May 22 (Telegraph) — Perhaps most surprising is that Japan fell in 1998, though it was by then
the world’s top creditor with more than $1.5 trillion of net foreign assets
(now $3 trillion). Lender abroad, it is a mega-debtor at home, the result of
Keynesian pump-priming to fight perma-slump. The stimulus vanished into
those famously empty bridges in Hokkaido.

“The Japanese didn’t take the downgrade seriously,” said Russell Jones, of
RBC Capital, a Japan veteran from the 1990s. “They didn’t think they would
have any trouble funding their debt.”

They were right. Yields on 10-year bonds fell to 1pc by the end of the
decade, and to 0.5pc in the deflation scare of 2003 – confounding those who
expected Japan’s emergency stimulus to stoke inflation and push up yields.

Eisuke Sakakibara, then the finance ministry’s “Mr Yen”, was insouciant
enough to swat aside the Moody’s downgrade as an irrelevance. “Personally, I
think if Moody’s continues to behave like that, the market evaluation of
Moody’s will go down,” he said.

Japan had a crucial advantage: its captive bond market. Some 95pc of
government debt was held by Japanese savers or the big pension funds.

Not! Does not matter. The funds to buy government securities ‘come
from’ the government deficit spending.

Deficit spending adds reserve balances at the central bank,
buying govt securities reduces reserve balances at the same central bank.

It is all a matter of data entry by the central bank its own spread sheet.

The foreign share of UK public debt has risen from 18pc to 34pc over the
past six years. The central banks of Asia, Russia and emerging economies
like gilts because they offered 1pc extra yield over bunds. This was the
“proxy euro” trade.

Does not matter.

“We’re far more vulnerable than Japan ever was,” said Albert Edwards, global
strategist at Société Générale.

Wrong!!!

“Japan had a huge current account surplus
and a strong currency. The UK is a deficit country, at risk of a sterling
collapse.

Yes, the currency might go down, but seems to be doing ok for the moment!

Years of UK macro-mismanagement have dragged the UK economy to the
edge of a precipice.”

As the BOE’s Charles Goodhart once responded,
Yes, they have been telling us that for 300 years.

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Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

by Mark Gilbert

May 21 (Bloomberg) —

The odds on the dollar, Treasury
bonds and the U.S. government’s AAA grade all heading for the
dumpster are shortening.

True, but for the wrong reason. There is no solvency issue, but markets are pricing it in anyway.

While currency forecasting is a mug’s game and bond yields
can’t quite decide whether to dive toward deflation or surge in
anticipation of inflation, every time I think about that credit
rating, I hear what Agent Smith in the “Matrix” movies called
“the sound of inevitability.”

Several policy missteps suggest that investors should stop
trusting — and lending to — the U.S. government. These include
the state’s pressure on Bank of America Corp. to buy Merrill
Lynch & Co.; the priority given to Chrysler LLC’s unions over
the automaker’s secured creditors; and the freedom that some
banks will regain to supersize executive bonuses by giving back
part of the government money bolstering their balance sheets.

When you buy treasury securities the government debits your transaction account and credits your securities account at the Fed.

When those securities mature the government debits your securities account and credits your transaction account. That is all there is too it.

There is no solvency issue at the operational level

Currency markets have been in a weird state of what looks
almost like equilibrium for the past couple of months. What’s
really going on is something akin to an evenly matched tug of
war that fails to move the ribbon tied around the center of the
rope, giving the impression of harmony while powerful forces do
silent battle until someone slips.

“All currencies are being debased dramatically by their
central banks at extraordinary speeds and so in relative terms
it appears there is no currency problem,” Lee Quaintance and
Paul Brodsky of QB Asset Management said in a research note
earlier this month. “In reality, however, paper money is highly
vulnerable to a public catalyst that serves to acknowledge it is
all merely vapor money.”

The ‘value’ is the purchasing power of real goods and services.
The largest and deepest thing for sale is labor.
Seems like currency still buys labor at pretty much the same price as the recent past,
And maybe even a bit more.

In fact, it may buy a bit more of just about everything vs a year ago. Particularly houses and land.

But yes, next year can always bring a different story.

Flesh Wounds

Why pick on the dollar, though? Well, not necessarily
because the U.S. economy is in worse shape than those of the
euro area, the U.K. or Japan. The biggest problem is that
external investors — particularly China — have more skin in
the dollar game than in euros, yen or pounds, which makes the
U.S. currency the most likely candidate to meet the cleaver in a
crisis of confidence about post-crunch government finances.

China owns about $744 billion of U.S. Treasury bonds in its
$2 trillion of foreign-exchange reserves.

Chinese exports, though, are dropping as the global economy
weakens, with overseas shipments declining 23 percent in
April from a year earlier, leaving a nation that has already
expressed concern about its U.S. investments with less to spend
in future.

China doesn’t ’spend’ it’s dollars on real goods and services which is why they
Have a trade surplus in the first place.

They sold things in exchange for ‘dollar balances’ which are financial assets and
then exchanged some of those balances for alternative USD financial assets as they
accumulated $744 billion of financial assets.

‘Heavy Hand of Government’

Those kinds of concerns are starting to surface in a
steepening of the U.S. yield curve, driven by an increase in 10-
and 30-year U.S. Treasury yields.

True, though there is no economic imperative for the treasury to issue a 30 year security in the first place.

In fact, the treasury issuing securities and the Fed later buying them is functionally identical to the treasury never issuing them in the first place.

(note that Charles Goodhart of the Bank of England has recently been proposing the UK do exactly that- cease issuing long securities rather than issuing them and having the BOE buy them.)

The 10-year note currently
yields 3.23 percent, about 235 basis points more than the two-
year security, which marks a near doubling of the spread since
the end of last year.

Yes, though from very low flight to quality yields at the height of the fear of oblivion.

“When the government parks its tanks on capitalism’s
lawns, that spells trouble for those who invest, add value and
create jobs,” says Tim Price, director of investments at PFP
Wealth Management in London. “Trillion-dollar bailouts do not
only leave massive public-sector deficits in their wake, they
also leave the presence of the heavy hand of government all over
industry and markets, so the outlook for government bonds is
less promising than the economic textbooks on deflation would
have us believe.”

A totally confused chain of logic, though government does often reduce shareholder value when it intervenes. But that’s a different point.

Earlier this month, the U.S. reported the first budget
deficit for April in 26 years, with spending exceeding revenue
by $20.9 billion, even though that’s the month when taxpayers
have to stump up to the Internal Revenue Service and the
government’s coffers should be overflowing. So far this fiscal
year, the U.S. shortfall is $802.3 billion, more than five times
the $153.5 billion gap in the year-earlier period.

Those are the ‘automatic stabilizers’ at work, which, fortunately, are out of the hands of
Congress. While they work the ugly way- falling employment and rising transfer payments- they do work to restore net financial assets to the private, non government sectors and thereby reverse the contraction.

Budget deficits = non govt ’savings’ of financial assets
To the penny
It’s even an accounting identity. Not theory. Ask anyone at the CBO.

Deathly Deficit

For the fiscal year ending Sept. 30, the Congressional
Budget Office forecasts a record deficit of $1.75 trillion,

That includes the purchase of financial assets which doesn’t add to aggregate demand.

Up until now the fed has always bought the financial assets when government wanted to do that and that hasn’t ‘counted’ as deficit spending for exactly that reason.

This time around the treasury bought financial assets and confused things, much like 1936 when social security first started and was accounted for off budget rather than consolidated as we quickly figured out was the right way to do it and it’s fortunately been done that way ever since.

almost four times the previous year’s $454.8 billion shortfall
and about 13 percent of gross domestic product. Bear in mind
that the target demanded of European nations wanting to join the
euro was a deficit no greater than 3 percent of GDP.

Yes, which is responsible for their poor economic performance as well.

David Walker, a former U.S. comptroller general,

And foremost US deficit terrorist

wrote in
the Financial Times on May 12 that the U.S.’s top credit rating
looks incompatible with “an accumulated negative net worth” of
more than $11 trillion and “additional off-balance-sheet
obligations” of $45 trillion. “One could even argue that our
government does not deserve a triple A credit rating based on
our current financial condition, structural fiscal imbalances
and political stalemate,” he wrote.

As if government payments are operationally constrained by revenues.

They are not, as chairman Bernanke made clear a few weeks ago
when he explained how he makes payments by changing numbers in bank accounts.

That is the only way there is for government to spend in its own currency, which
is nothing more than the process of making spread sheet entries on its own books.

Any constraints on the US ability to make payments in dollars is necessarily self imposed (and
can just as readily be removed by those wanting to spend the money.)

Said another way, government checks don’t bounce unless government decides to bounce its own checks.

If you want to claim govt won’t pay because it will vote not to pay, fine.

But not because ‘deficits can’t be financed’ or any other nonsense like that.

No Default

It is undeniable that the U.S. government’s ability to
finance its borrowing commitments has deteriorated as its
deficit has ballooned.

The ability to deficit spend is the ability to make entries on its own spreadsheets.
Nothing more.
The idea that that can ‘deteriorate’ indicates a fundamental lack of understanding of monetary operations.

Dropping the U.S. from the top rating
grade, though, wouldn’t mean the nation is about to default on
its debt obligations; there’s a subtle distinction between
ability to pay and propensity to fail to pay.

And a less subtle distinction between knowing how it works and not knowing how it works.

There’s also a
compelling argument that no government should be enjoying the
benefits of a top credit grade in the current financial climate.

There’s nothing to ‘enjoy’ or even care about.

Note Japan was heavily downgraded with a debt to GDP ratio triple the US,
With no ill effects as three month rates remained near 0 for the last
15 years and 10 year Japanese govt bonds fluctuated between .5 and 1.5%

Using the definitions outlined by Standard & Poor’s, a one-
step cut into the AA rated category would nudge the U.S.’s
creditworthiness into a “very strong” capacity to fulfill its
commitments, just weaker than the “extremely strong”
capabilities demanded of AAA rated borrowers.

S&P cannot change the actual creditworthiness of the US, or any other
issuer of its own currency. There can be no solvency issue no matter what they do.

That seems an
appropriately nuanced sanction — albeit one that the rating
companies might turn out to be too cowardly to impose.

(Mark Gilbert is a Bloomberg News columnist. The opinions
expressed are his own.)

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Hi David- been a long time, seems nothing has changed!

(See my 2002 letter to you below)

You downgraded Japan below Botswana, their debt/GDP went to over 150% with annual deficits over 8%, and all with a zero or near zero interest rate policy for over a decade, cds traded up, and 10 year JGB’s were continually issued in any size they wanted at the lowest rates in the world.

This is no accident. It’s inherent in monetary operations with non convertible currency and floating exchange rates. Your analysis is applicable only to fixed exchange rate regimes regarding defaulting on their conversion clauses.

Do the world a favor, reverse your position, and explain the reason for your current and prior errors, thanks!

All the best,

Warren

AN OPEN LETTER TO THE RATINGS AGENCIES

Flawed Logic Destabilizing the World Financial System

Repeated downgrades of Japan by the ratings agencies due to flawed logic have been destabilizing both Japan and the financial world in general. Their monumental error can be traced to a lack of understanding the operational realities of a Government that issues its own currency. For the Government of Japan, payment in yen, its currency of issue, is a simple matter of crediting a member bank account at the BOJ (Bank of Japan). There is no inherent operational constraint for this process. Simply stated, Government checks (payable in yen) will not bounce. The BOJ has the ABILITY to clear any MOF check for ANY size, simply by adding a credit balance to the member bank account in question. Yes, the BOJ could be UNWILLING to clear ANY check, but that is an entirely different matter than being UNABLE to credit an account. Operationally, concepts of the BOJ not having ‘sufficient funds’ to credit member accounts are functionally inapplicable.

As a point of logic, the concept of ABILITY to pay being inherently revenue constrained is not applicable to the issuer of a currency. Any such constraints are necessarily self-imposed (including various ‘no overdraft’ legislation in some countries for the Treasury at the Central Bank). The issuer can always make payment of its currency by crediting the appropriate account or by issuing actual paper currency if demanded by the counter party.

An extreme example is Russia in August 1998. The ruble was convertible into $US at the Russian Central Bank at the rate of 6.45 rubles per $US. The Russian government, desirous of maintaining this fixed exchange rate policy, was limited in its WILLINGNESS to pay by its holdings of $US reserves, since even at very high interest rates holders of rubles desired to exchange them for $US at the Russian Central Bank. Facing declining $US reserves, and unable to obtain additional reserves in international markets, convertibility was suspended around mid August, and the Russian Central Bank has no choice but to allow the ruble to float.

All throughout this process, the Russian Government had the ABILITY to pay in rubles. However, due to its choice of fixing the exchange rate at level above ‘market levels’ it was not, in mid August, WILLING to make payments in rubles. In fact, even after floating the ruble, when payment could have been made without losing reserves, the Russian Government, which included the Treasury and Central Bank, continued to be UNWILLING to make payments in rubles when due, both domestically and internationally. It defaulted on ruble payment BY CHOICE, as it always possessed the ABILITY to pay simply by crediting the appropriate accounts with rubles at the Central Bank.

Why Russia made this choice is the subject of much debate. However, there is no debate over the fact that Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default.

Note that even Turkey, with lira debt in quadrillions, interest rates in the neighborhood of 100%, annual currency depreciation in the neighborhood of 50%, little ‘faith’ in government, and only inflation keeping the debt to gdp ratio from rising, has never missed a lira payment and never had a lira ‘funding crisis.’ Turkey has had problems with its $US debt, but not with its ability to spend lira. Government spending of lira is limited only by the desire to purchase what happens to be offered for sale. It is not and cannot be ‘revenue constrained.’ Operationally, Turkey has the same unlimited ABILITY to pay in its own currency as does Japan, the US, or any other issuer of its own currency.

The Turkish example, and many others, makes it quite obvious that ABILITY to pay in local currency is, in practice as well as in theory, unlimited. ‘Deteriorating debt ratios’ and the like do not inhibit a sovereign’s ABILITY to pay in its currency of issue.

So why have the ratings agencies implied that default risk for holders of Japan’s yen denominated debt has increased to the point of deserving a downgrade? Do they understand that ABILITY to pay is beyond question, and therefore are basing their downgrade on the premise that Japan may at some point be UNWILLING to pay? If so, they have never mentioned that in their country reports.

A few years back, due to political disputes, the US Congress decided to default on US Government debt. The only reason the US Government did not default was because Treasury Secretary Robert Rubin was able to make payment from an account balance undisclosed to Congress. The US Government clearly showed an UNWILLINGNESS to pay that Japan has NEVER shown or even hinted at. Furthermore, again unlike Japan, the US continues this behavior just about every time the self imposed US ‘debt ceiling’ is about to be breached. And yet the ratings agencies have never even considered downgrading the US on WILLINGNESS to pay.

Therefore, one can only conclude 1) Japan has been downgraded on ABILITY to pay, and 2) The logic of the ratings agencies is flawed. In a world where currently there are serious ‘real’ financial problems to address, the ratings agencies have introduced a ‘contrived’ financial problem of substantial magnitude, as many regulations regarding the holdings of securities specify ratings assigned by the leading ratings agencies. Governments have chosen to rely on the ratings agencies for credit analysis, and downgrades often compel banks, insurance companies, pension plans, and other publicly regulated institutions to liquidate the securities in question.

Japan’s yen denominated debt qualifies for a AAA rating. ABILITY to pay is beyond question. WILLINGNESS to pay has never been questioned, even by the agencies engaged in recent downgrades. The destabilizing downgrades are the result of flawed logic.

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This will allow them to raise rates simply by paying interest on reserves and not require them to first ‘unwind’ their portfolio as was the case in Japan.

Press Release

May 20 — The Federal Reserve Board on Wednesday announced the approval of final amendments to Regulation D (Reserve Requirements of Depository Institutions) to liberalize the types of transfers consumers can make from savings deposits and to make it easier for community banks that use correspondent banks to receive interest on excess balances held at Federal Reserve Banks.

The amendments would also ensure that correspondents that are not eligible to receive interest on their own balances at Reserve Banks pass back to their respondents any interest earned on required reserve balances held on behalf of those respondents. The Board is also making other clarifying changes to Regulation D and Regulation I (Issue and Cancellation of Federal Reserve Bank Capital Stock).

The Board has revised Regulation D’s restrictions on the types and number of transfers and withdrawals that may be made from savings deposits. The final amendments increase from three to six the permissible monthly number of transfers or withdrawals from savings deposits by check, debit card, or similar order payable to third parties. Technological advancements have eliminated any rational basis for the distinction between transfers by these means and other types of pre-authorized or automatic transfers subject to the six-per-month limitation.

The Board also approved final amendments to Regulation D to authorize the establishment of excess balance accounts at Federal Reserve Banks. Excess balance accounts are limited-purpose accounts for maintaining excess balances of one or more institutions that are eligible to earn interest on their Federal Reserve balances. Each participant in an excess balance account will designate an institution to act as agent (which may be the participant’s current pass-through correspondent) for purposes of managing the account. The Board is authorizing excess balance accounts to alleviate pressures on correspondent-respondent business relationships in the current unusual financial market environment, which has led some respondents to prefer holding their excess balances in an account at the Federal Reserve, rather than selling them through a correspondent in the federal funds market. A correspondent could hold its respondents’ excess balances in its own account at the Federal Reserve Bank; however, doing so may adversely affect the correspondent’s regulatory leverage ratio. As market conditions evolve, the Board will evaluate the continuing need for excess balance accounts.

In October 2008, the Board adopted an interim final rule amending Regulation D that directed Federal Reserve Banks to pay interest on balances held by eligible institutions in accounts at Reserve Banks. The final rule revises those provisions as they apply to balances of respondents maintained by “ineligible” pass-through correspondents–that is, entities such as nondepository institutions that serve as correspondents but are not eligible to receive interest on the balances they maintain on their own behalf at the Federal Reserve. Specifically, the final rule provides that only required reserve balances maintained in an ineligible correspondent’s account on behalf of its respondents will receive interest. Ineligible correspondents will be required to pass back that interest to their respondents. Both required reserve and excess balances in the account of an eligible pass-through correspondent will continue to receive interest and those correspondents are permitted, but not required, to pass back that interest to their respondents.

The final amendments to Regulations D and I will become effective 30 days after publication in the Federal Register. Excess balance accounts will be available for the reserve maintenance period beginning July 2, 2009.

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The Great Mike Masters Global Inventory Liquidation pretty much ran its course by year end, and now depleted inventories are beginning to be replaced as high and rising government deficits support incomes and savings:

Japan’s Factory Output Rises as Twice Predicted Pace

by Jason Clenfield

Apr 30 (Bloomberg) — Japan’s industrial output rose for the first time in six months, twice the pace predicted by economists, adding to evidence the worst of the recession may be over.

Factory production climbed 1.6 percent from February, when it dropped 9.4 percent, the Trade Ministry said today in Tokyo. The median estimate of 33 economists surveyed by Bloomberg News was for a 0.8 percent gain.

Companies plan to increase production in April and May to replenish inventories that fell 3.3 percent last month, the report showed. Stocks rose after yesterday’s U.S. gross domestic product figures showed consumer spending jumped the most in two years in the first quarter.

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With maybe half the population, and with housing in a slump, Japan still has more actual housing starts than the US.

While the Obama plan is ‘not my first choice’ for a fiscal adjustment, it isn’t ‘nothing’ either, and should be more than sufficient stabilize aggregate demand, albeit at low levels.

This, coupled with low and falling physical inventories, could easily set off a somewhat jobless recovery that initially shows some very high percentage increases in many areas.

The Obamaboom is on the way, along with its consequences.

Japan’s housing starts decline 19% in January

Feb 27 (Kyodo) — Japan’s housing starts fell 18.7% year on year to 70,688 units in January, the second straight month of decline, according to data released Friday by the Land Ministry.

Starts for owner-occupied houses fell 10.8% to 20,057, making for the fourth consecutive month of decline, while those for rental houses dropped 18.4% to 31,628, the second straight month of decline. Starts for condominiums for sale also fell for the second straight month, plunging 26.4% to 18,434.

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Isn’t this sweet???

Clinton, in Japan, talks of ‘harmony’ in US policy

by Arshad Mohammed

Feb 17 (Reuters) — U.S. Secretary of State Hillary Clinton spoke on Tuesday of promoting “balance and harmony” in U.S. foreign policy as she visited Japan, drawing an implicit contrast to the administration of former President George W. Bush.

Clinton began her first full day in Asia with a visit to Tokyo’s Meiji shrine, where she took part in a purification ceremony at the Shinto shrine dedicated to Emperor Meiji, considered the father of modern Japan.

Yes, a US democrat honoring emperors and royalty.

Making her first trip as secretary of state, Clinton plans to consult Japanese officials on how to deal with the global financial crisis,

If she has any ideas why hasn’t she told us?

North Korea’s nuclear programs and the war in Afghanistan, a legacy of the Bush administration.

“I started this morning at the Meiji shrine and was talking to the head priest there who told me about the importance of balance and harmony,” Clinton told about 200 U.S. diplomats and their families at the U.S. embassy.

“It’s not only a good concept for religious shrines, it’s a good concept for America’s role in the world,” she added, without citing Bush by name or the U.S.-led invasion of Iraq, which polarized global opinion. “We need to be looking to create more balance, more harmony.”

Reads like she’s broadening her religious beliefs???

“We’re going to be listening but we’re also going to be asking for more partnerships to come together to try to work with us to handle the problems that none of us can handle alone,” Clinton added, referring partly to the global financial crisis.

Partnerships to do what? No secrets, please!

Japan has been especially hit hard by the economic slowdown. Its economy shrank in the final quarter of 2008 at the fastest rate since the first oil crisis in 1974, and economists bet on another big contraction in January-March.

“These are hard times economically for the Japanese people, just as it is in many places around the world,” Clinton said. “I am absolutely confident we will navigate our way through these difficulties.”

The blind leading the blind, but this time holding hands?

China next…

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Running with tails cut off with a carving knife:

This is what you get when the head of the CB doesn’t understand monetary operations and reserves accounting:

Shirakawa Says BOJ to Limit Asset Buying to Save Balance Sheet

by Jason Clenfield and Toru Fujioka

Feb 5 (Bloomberg) — Bank of Japan Governor Masaaki Shirakawa said the central bank will limit its purchases of stocks and corporate debt to protect its balance sheet and the credibility of the yen.

“We are mindful of the need to eventually end the purchases” as they are “extraordinary measures,” Shirakawa told lawmakers in Tokyo today. Excessive buying would worsen the central bank’s balance sheet and “have a clear impact on the yen’s credibility,” he said.

This what you get when the Finance Minister, Deputy Party Chairman, and former Finance Minister don’t understand monetary operations and reserve accounting:

Nakagawa Says Japan Isn’t Considering Printing Money

by Keiko Ujikane

Feb 6 (Bloomberg) — Japan’s government isn’t considering printing new money, Finance Minister Shoichi Nakagawa said.

He was responding to a report in the Financial Times that ruling party lawmakers would today propose printing 50 trillion yen ($549 billion) of a new currency to be used to pay for stimulating the economy.

“The idea of the government printing money isn’t in my mind,” Nakagawa said at a press briefing in Tokyo today.

“Japan’s economy is worsening rapidly so some people are discussing various ways of financing business activities and daily life.”

Yoshihide Suga, deputy chairman of the ruling Liberal Democratic Party election strategy council, is among the group of politicians that will suggest using 30 trillion yen of the money on projects such as doubling the size of Tokyo’s Haneda airport, the Financial Times reported. The other 20 trillion yen would be for government purchases of stocks and real estate.

Bank of Japan Governor Masaaki Shirakawa said Feb. 3 such a plan would hurt the credibility of the yen and lead to an increase in long-term yields by raising concern about the government’s ability to pay back the debt.

Former Finance Minister Bunmei Ibuki, speaking at a meeting of ruling LDP factions, said currency printed by the government rather than the Bank of Japan would devalue the yen and invite inflation, according to the Yomiuri Newspaper.

Discussions about the printing the money weren’t in the public interest, Ibuki said.

This is what you get when the Prime Minister doesn’t understand monetary operations or reserve accounting:

Japan May Consider 50 Trillion Yen in Scrip, FT Says

by Dave McCombs

Feb 6 (Bloomberg) — An aide to Japan’s Prime Minister Taro Aso and some lawmakers will today propose printing 50 trillion yen ($549 billion) worth of a new currency to be used to pay for stimulating the economy, the Financial Times reported, citing Koutaro Tamura, an upper house Diet member.

Yoshihide Suga, deputy chairman of the ruling Liberal Democratic Party election strategy council, is among the group of politicians that will suggest 30 trillion yen of the scrip for programs for new industries and projects such as doubling the size of Tokyo’s Haneda airport, the report said. The other 20 trillion yen worth of the new currency would be allocated to government purchases of stocks and real estate.

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Very, very sad but true. And not just in Japan.

Restoring output and employment is only a matter of a few spread sheet entries by the government on its own spreadsheet.

Lower interest rates and other forms of ‘monetary policy’ don’t cut it.

What’s needed is a fiscal adjustment large enough to offset the desire of the population not to spend its income.

Operationally, that takes nothing more than debiting and crediting a few accounts on the governments spreadsheet.

Suicides, Homeless Ranks to Swell in Japan as Firms Slash Jobs

by Stuart Biggs and Toko Sekiguchi

Feb 5 (Bloomberg) — Homeless and suicide numbers in Japan may spike as manufacturers including Sony Corp., Panasonic Corp. and Honda Motor Co. fire thousands of workers to cut costs amid the country’s worst recession since World War II, unions said.

Changes in labor law since 1999 have left a third of Japan’s workforce employed on short-term contracts offering little security and no unemployment benefits. Wages are often less than welfare payments and many temporary workers live in company dormitories, leaving newly unemployed also homeless, unions and activists say.

As the number of temporary workers increased, so did poverty levels as 4.3 million, or 8.1 percent of all Japanese households, earned less than 1 million yen ($11,200) in 2007, up from 3.1 million in 2001, according to ministry data.

“It’s totally unstable, unlike anywhere else in the world,” Makoto Kawazoe, an official with the Tokyo Young Contingent Workers Union, said yesterday. “You can’t treat labor like raw materials and expect it to conform to a ‘just in time’ manufacturing system. Labor is live human beings who have to eat and survive.”

Economic woes in Japan historically herald an increase in people taking their own lives in a society that already sees a suicide about every 15 minutes. Fifty-seven percent of the 33,093 who killed themselves in 2007 were jobless, police figures show.

“For political leaders the suicide rate is a sharp warning over policies,” Koichi Kato, a lawmaker for the ruling Liberal Democratic Party, said in an interview this week.

Prime Minister Taro Aso said on Jan. 28 the government will ease regulations barring non-regular workers from unemployment coverage. For example, Japan’s labor ministry plans to reduce the qualification period for benefits to six months in the same job from 12, starting April 1.

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Karim writes:

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Looks like they got it right:

BOJ Struggling To Find Ways To Combat Deflation (Nikkei) – “We have run out of ammunition,” said a senior BOJ official. “We aren’t sure what we can do now.” BOJ Gov. Masaaki Shirakawa is deeply skeptical about the idea of lowering the interest rate down to zero – a policy the bank adopted once. Shirakawa thinks the approach would be ineffective and detrimental to the functioning of the money market. The central bank is also unwilling to revive the so-called quantitative easing. The central bank says it is not clear that the five years of the BOJ’s quantitative easing from March 2001 really produced expected effects. In particular, many in the BOJ are critical of the bank’s attempt to stimulate economic growth by increasing money supply through setting targets for the reserve account balances commercial banks are required to maintain at the central bank. It is now accepted wisdom at the BOJ that this tactics did not work.

Right!

Slowly coming around to the notion that output and employment are functions of fiscal balance.

So maybe the problem with the US car industry is the macro economy more so than management issues???

Maybe they know something about the return of MOF USD purchases?

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• Euro Area Sector Analysis (Released n/a EST)
• US Sector Analysis (Released n/a EST)
• Japan Fiscal Balance as % of GDP (Released n/a EST)

Euro Area Sector Analysis (Dec 17)

 
Karim writes:
Euro-middle of historical range. But with government deficits nearing Maastricht limits (though those limits will be bent, it will be grudging), not much chance for large enough fiscal stimulus to make a difference to private demand.

Yes, deficits seem too small to support higher levels of output and employment.

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US Sector Analysis (Dec 17)

 
Karim writes:
U.S.-still far below peak of early 90s. Nearing levels of earlier this decade, but much private demand growth in recent years fueled by credit (unlikely to be repeated, certainly not to same extent).

Yes, we are still paying the price for allowing the budget to go into surplus. The deficit needs to be substantially higher to restore output and employment, to ‘make up’ for the surplus years that drained the financial equity needed to support the credit structure.

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Japan Fiscal Balance as % of GDP (Dec 17)

 
Karim writes:
Japan-well off recent peaks, in some part due to some fiscal tightening in recent years. Fiscal policy starting to be loosened, but private savings still have ways to go to get back to levels that were associated with the moderate period of domestic demand growth from 2003-2006.

Yes, and with their higher propensity to not spend income they require a higher deficit to sustain output and employment.

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Before the body is cold the MOF has announced they are no longer going to be intimidated by being called ‘currency manipulators’ and ‘outlaws’ by Paulson and are resuming the building of the USD reserves to support their export industries.

Bernanke’s beggar thy neighbor policy is being matched by real action- direct intervention- rather than interest rate rhetoric.

The move in the yuan suggest China has been doing much the same.

This will leave the eurozone all the more vulnerable as they are the only nation not using fiscal policy and ideologically cant buy USD, so the combination of a relatively high euro and weak domestic demand will keep them on the ropes while others recover.

Yen Declines as Nakagawa Says Japan May Take Currency Action

By Kim-Mai Cutler and Stanley White

Dec. 18 (Bloomberg) — The yen weakened from near a 13-year high against the dollar after Japanese Finance Minister Shoichi Nakagawa signaled the nation is ready to intervene in the foreign-exchange market for the first time in four years.

“We will take necessary steps if needed” to limit the currency’s advance and protect the overseas earnings of Japanese exporters, Nakagawa told reporters in Tokyo. The dollar fell to an 11-week low against the euro on speculation the Federal Reserve’s near-zero interest rate policy will reduce the appeal of U.S. assets.

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(email exchange)

Thanks, this is yet another example of the WSJ publishing and thereby promoting authors with no understanding of monetary operations, which means the WSJ editors don’t have any either.

Feel free to send this along the the WSJ with your own introductory comments as well!

>   
>   This is a well written piece, by Mr. Wood of CLSA.
>   

I respectfully don’t agree.

>   
>   He has long maintained a bearish bias which comes through in the
>   article. The points he raises I believe are cogent and logical and ones I
>   have addressed as well over recent days and months.
>   

It doesn’t seem you understand monetary operations either.

>   
>   The end of the article discussing gold I found to be particularly of
>   interest.
>   

The Fed Is Out of Ammunition: A Discredited Dollar Is a Likely Outcome of the Current Crisis

By Christopher Wood

With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.

Yes, as well as fiscal automatic stabilizers working their way to the rescue as always.

Those who want to understand the mechanism might ponder Irving Fisher’s comment in 1933: When it comes to booms gone bust, “over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.”

Irv was writing in the context of the gold standard of the time, and that did very well.

But it’s inapplicable with today’s non convertible currency and floating FX.

The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system.

You can easily have deflation if the deficit is allowed to get and remain too small.

Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.

Pull back in commodity prices mainly, after a long run up, but yes, for now the moment the outlook is deflationary.

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money.

On the gold standard this might have worked, though it would have meant the need to rapidly devalue the conversion rate which would have considered a government default. And this did happen.

Today it is inapplicable with non convertible currency and floating FX.

Yet the Japanese experience of the 1990s — persistent deflationary malaise unresponsive to near zero-percent interest rates — shows that it is not so easy to inflate one’s way out of a debt bust.

Doesn’t show that at all. Just shows the depth of their reluctance to use sufficient deficit spending to restore output and employment via increased domestic demand. They want to be export driven and have paid the price for a long time.

In the U.S., the Fed can only control the supply of money;

No, it only can control the term structure of risk free interest rates.

it cannot control the velocity of money or the rate at which it turns over.

True.

The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.

By identity.

True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

Yes, though offset by increased government deficit spending, increased export revenues (for a while), and increased direct lending by banks to hold in portfolio (which is how it was all done in not so distant past cycles).

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction.

In an effort to lower rates and thereby counter credit contraction.

Thus, the Federal Reserve banks’ total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

So??? Just entries on a government spread sheet with no further ramifications.

But the growth of excess reserves also reflects bank disinterest in lending the money.

So?

This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.

Banking is necessarily pro cyclical- get over it!

Monetarist Bernanke and others blame Japan’s postbubble deflationary downturn on policy errors by the Bank of Japan.

Not me. It was the lack of sufficient deficit spending, as above.

But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR’s New Deal did not end the Great Depression.

Mixing metaphors. The New Deal’s deficit spending was far too small to restore output and employment.

There are no easy policy answers to the current credit convulsion and intensifying financial panic — not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses.

Yes there is an easy answer- make a sufficiently large fiscal adjustment.

This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

Couldn’t be easier. Start with a payroll tax holiday where the treasury makes all FICA payments for employees and employers.

The spread around a few hundred billion in revenue sharing to the states for operations and infrastructure.

Crisis over.

Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.

The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences.

Doesn’t even mention output and employment.

In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors.

Who cares?

Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.

Interesting bit of logic!

Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.

Banks are necessarily pro cyclical- get over it!

Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of “pushing on a string” — i.e., the banks can make credit available but cannot force people to borrow.

Good! Lower taxes for any given amount of government spending. Bring it on! Now!

The Fed Is Out of Ammunition

With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke’s speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

Yes. And not do a lot for output and employment until fiscal adjustment takes hold.

And do we really want to encourage an increase in private leverage? Been there done that, right?

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

I think he’s got it right there.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism —

Hope so. It flies in the face of theory and reality.

and with it the fiat paper-money system in general — as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

Why??? Deflation as above? Deflation is the increase in value of a currency. Disintegration is via inflation???

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the “barbarous relic” scorned by most modern central bankers, may well play a part.

Fleeing the dollar for gold means inflation. He’s been preaching deflation for this whole piece. Can’t have it both ways.

Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of “The Bubble Economy: Japan’s Extraordinary Speculative Boom of the ’80s and the Dramatic Bust of the ’90s” (Solstice Publishing, 2005).

Aha! Hong Kong has a fixed FX policy, much like a gold standard. He’s applying fixed FX analysis to the us which has a floating FX policy.

The WSJ should have told him this and rejected this op-ed piece.

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Nothing an appropriate fiscal package couldn’t immediately turn around.

Fortunately for us, they never have been big on supporting domestic demand.

>   
>   On Fri, Nov 14, 2008 at 6:40 AM, Davin wrote:
>   

• Machine Tool Orders Down 40% In Oct, Falling Under Y100bn
• 5 of 8 Homebuilders Cut FY08 Sales Projections
• Steel Customers Unlikely To Accept Price Hikes
• Used-Car Registrations Down 5.3% In Oct, 20-Year Low For Month
• Govt To Keep Civil Servant Salaries, Bonuses Unchanged For FY08
• New Power Station Puts Damper On Wholesale Electricity Market
• OECD: Japan Will Enter A Period Of Deflation
• Nissan To Cut Japan Output By 72,000 Vehicles From Dec
• Forex: Dollar Sinks To Upper Y96 Range Ahead Of Financial Summit
• Stocks: Snap 3-Day Losing Streak On Wall St Rise, But Upside Capped


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BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say

by Ron Harui and Stanley White

Nov. 6 (Bloomberg) — The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders.

Wrong! Japan can sell yen and buy dollars until the cows come home, if they wanted to. What’s stopping them (so far) is the risk of Paulson’s wrath.

As the US-Paulson/Bernanke/Bush- continues its ‘weak dollar’ policy to support US exports. Falling crude prices have (temporarily?) thwarted their efforts and strengthened the dollar. (And the euro has it’s own special issue as previously discussed.)

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This means they will accept it as collateral for the unlimited USD loans from the Fed.

This will not end well.

BOJ to Accept Asset-Backed Commercial Paper as Collateral from Tuesday

TOKYO (Dow Jones)–The Bank of Japan said Monday it will accept as collateral asset-backed commercial paper guaranteed by the bank’s counterparty financial institutions, starting Tuesday. This is a temporary measure until the end of April 2009 to ease tension in the short-term money market, the BOJ said.

Earlier this month, The BOJ announced a number of steps to ensure the smooth functioning of the country’s money markets, including providing greater access to U.S. dollar funds through a swap agreement with the U.S. Federal Reserve Board, and broadening the kinds of collateral the BOJ would accept for repurchase agreement transactions.

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Unwinding of yen borrowings/shorts is also an increase in what I call ’savings desires’, and drives the trade gap out of surplus towards deficit.

Japan doesn’t like it but it is an improvement in real terms of trade.

The appropriate fiscal response is to move to sustain domestic demand.

Highlights:

Highlights

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