Credit Writedowns » Marshall Auerback

The Elephant in the Room Is Spain, Not Italy

Marshall Auerback — Tue, 07 Feb 2012 21:30:47 +0000

The decision for Europe’s bosses is this: they must ultimately confront the consequences of their policy choices. They can destroy the eurozone by continuing with the same failed mix of policies or by salvaging it by adding what has been missing from the outset: a mechanism for shifting surpluses to the deficit regions in the form of productive investments (as opposed to handouts or loans)

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Jobs data highlight huge potential for capital loss in Treasuries

Marshall Auerback — Fri, 03 Feb 2012 20:45:36 +0000

I have been making a big deal about strength in the household series of employment and the trend in IUCs. These are statistical series that do not get revised out of recognition. They often tell the tale at turning points. Given that past household survey employment and IUC trends have persisted, the current bond market rally will be even more insane and the stock market will probably continue to work higher, even though the favorable seasonable window has closed. I expect the recent trend of large outflows from stocks to bonds over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note

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The ECB is Engaging in Massive QE

Marshall Auerback — Tue, 17 Jan 2012 21:25:12 +0000

Despite the ongoing hawkish rhetoric from the ECB, there are signs that they are getting it: The LTRO can't work, as you're essentially just swapping one liability for another one (albeit more long term in duration, therefore making it better for the banks). But note the way the ECB balance sheet is expanding: The consolidated assets of the European system of Central Banks is now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet is almost two times that of the Fed and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years. Bottom line: the system of European Central Banks (ESCB) has been engaged in massive QE and much more is in the pipeline. With such massive injections of “liquidity” into the European banks, a European Lehman type failure with Lehman’s systemic consequences becomes ever less likely

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The Road to Serfdom

Marshall Auerback — Fri, 11 Nov 2011 01:20:43 +0000

As for Italy itself, the country runs a primary fiscal surplus. As George Soros has noted: “Italy is indebted, but it isn’t insolvent.” Its fiscal deficit to GDP ratio is 60% of the OECD average. It is less than the euro area average. Its ratio of non-financial private debt to GDP is very low relative to other OECD economies. It is not at all like Greece. It has a vibrant tradeable goods sector. It sells things the rest of the world wants. You introduce austerity at this juncture, and you will cause even slower economic growth, higher public debt, thereby creating the very type of Greek style national insolvency crisis that Europe is ostensibly seeking to avoid. And then it will move to France, and ultimately to Germany itself. No passenger is safe when the Titanic hits the iceberg

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Europe’s Non-Solution

Marshall Auerback — Wed, 26 Oct 2011 17:30:41 +0000

Let’s not get bogged down in numbers. The EFSF could have 440 billion euros behind, 1 trillion, 2 trillion, even 10 trillion euros, but it all comes back to the funding sources. The French are right: it makes no sense to implement this program without the backstop of the ECB, which is the only entity that could make any guarantees credible, by virtue of its ability to create unlimited quantities of euros. Both the leading policy makers within the euro zone and market participants continue to conflate two distinct, but related issues: that of national solvency and insufficient aggregate demand. Policy makers want the ECB to do both, but in fact, the ECB is only required to deal with the solvency issue. When you do that in a credible way, then you get the capital markets re-opened and you give countries a better chance to fund themselves again via the capital markets. It means you do not actually need several trillion dollars, because you have a credible backstop in place

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Core Europe Sitting Pretty in their PIIGS Drawn Chariot

Marshall Auerback — Tue, 04 Oct 2011 12:30:00 +0000

The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB -- the only entity that can create new net financial euro denominated assets -- which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating

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The Euro Endgame

Marshall Auerback — Fri, 19 Aug 2011 18:00:00 +0000

There appear to be no happy outcomes here (although as my friend, Tom Ferguson always reminds me, “If you want to have a happy ending, go see a Disney film”). We appear to be entering most dangerous time for Europe since World War

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Massive Iceberg Ahead for the European Monetary Union

Marshall Auerback — Thu, 21 Jul 2011 00:39:44 +0000

Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean “profligates”. Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about “special circumstances” or something without admitting the whole system they imposed on the area is the cause of this crisis

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America’s Rival Oligarchs’ Fight Over the Debt Ceiling

Marshall Auerback — Mon, 11 Jul 2011 01:00:01 +0000

Marshall Auerback argues that President Obama remains close to Wall Street via Geithner, Summers, Rubin, et al. Given the strong mutual cultural antipathy between Wall Street 'Yankees' and Southwestern 'Cowboys', it is not surprising that the 'populist' outrage against Obama has such a tone of viciousness. By contrast, the Wall Street crowd tends to be socially liberal. The bottom line however is that in economics - which is what counts - both groups are predators. The rest of us, we're just caught between two rival groups of oligarchs, with nothing in it for us

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Panicked

Marshall Auerback — Sat, 09 Jul 2011 03:00:59 +0000

Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month. Today’s data should create real palpitations in the White House. This isn’t just a “bump,” but a fully-fledged New York City style pot hole

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On Dickishness

Marshall Auerback — Fri, 01 Jul 2011 16:00:51 +0000

It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it

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The Continuing Eurozone Extend and Pretend

Marshall Auerback — Wed, 29 Jun 2011 20:30:21 +0000

Short of a fiscal union, there are other measures which the Greeks could adopt to make their bonds more attractive to external investors, thereby preventing the markets shutting the country down and refusing to extend further credit to a insolvent country. Warren Mosler and I have suggested Greece could place new debt by inserting a provision stating that, in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region

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A ‘United States of Europe’ or Full Exit from the Euro? (Part 2)

Marshall Auerback — Fri, 24 Jun 2011 18:30:33 +0000

This is the second in a two-part essay on the origins of the sovereign debt crisis. Here the emphasis is on the present situation within the euro zone and the imbalances between the core, dominated by Germany, and the euro zone periphery

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A ‘United States of Europe’ or Full Exit from the Euro? (Part 1)

Marshall Auerback — Fri, 24 Jun 2011 13:45:43 +0000

This is the first in a two-part essay on the origins of the sovereign debt crisis. Here the emphasis is on Germany’s central role in the last century and a half of European history and in the formation of the euro

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Operation Twist

Marshall Auerback — Wed, 15 Jun 2011 20:18:19 +0000

Marshall Auerback and Rob Paenteau explain a method the Fed might use to target interest rates further out on the yield curve

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To Save the Euro, Germany Must Quit the Euro Zone

Marshall Auerback — Wed, 25 May 2011 19:30:41 +0000

Once divorce from the euro is complete, Germany will regain its fiscal freedom. This is itself something the Germans should celebrate, providing their government takes advantage of their newfound fiscal freedom. Remember, once it returns to the Deutsche Mark (DM), Germany becomes the issuer, as opposed to the user of a currency, as is the case under the euro, and is fully sovereign in respect of its fiscal and monetary policy

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IMF’s Predatory Policies to Continue

Marshall Auerback — Thu, 19 May 2011 02:35:02 +0000

Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn

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The Myth that the Banks are Solvent

Marshall Auerback — Thu, 12 May 2011 18:45:49 +0000

As James Galbraith has argued, the problem is said to be no more serious than some clogged plumbing. A bit of Drano in the form of government handouts and guarantees should be sufficient to get credit flowing again. Nonsense. Private debt loads remain too high, income and employment continue to fall, and delinquencies and foreclosures continue to rise. Assets are overvalued even at current depressed prices. Many financial institutions (probably including most of the big ones) are hopelessly insolvent, holding mountains of toxic waste that will never be worth anything

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More on Unemployment Insurance for the 21st Century

Marshall Auerback — Sat, 07 May 2011 19:00:32 +0000

Unemployment insurance for 21st century in the form of a jobs program could end the malinvestment and predations of politicians and foster a strong economy. We need jobs but we must be mindful of predator state capitalism. My proposal below addresses both of those concerns

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QE: The Slogan Masquerading as Serious Policy

Marshall Auerback — Wed, 27 Apr 2011 21:00:20 +0000

Bernanke’s QE2 program has hurt savers, done nothing for banks, and eviscerated middle class living standards

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On Modern Money

Marshall Auerback — Sun, 13 Mar 2011 17:30:06 +0000

The essential idea is that the “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply. As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 is just an arbitrary reflection of the credit circuit. So the supply of money is determined endogenously by the level of GDP, which means it is a dynamic (rather than a static) concept

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A more malign interpretation of increased consumer spending

Marshall Auerback — Wed, 02 Feb 2011 14:20:24 +0000

By Marshall Auerback Yesterday, Ed wrote a good piece on consumer spending and the return of the economy to the status quo ante. I think it’s a little bit more malign than that. There has been a real positive change in the underpinnings of this economic recovery and it all derives from the “consumer conundrum”.

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Bankers Gone Wild in Ireland AND Germany

Marshall Auerback — Mon, 29 Nov 2010 17:00:00 +0000

Marshall Auerback argues that despite a 'blame-a-thon' on Ireleand, Germans banks are really at the core of the eurozone catastrophe

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Chimerica has been a Chimera

Marshall Auerback — Mon, 15 Nov 2010 21:30:29 +0000

This is a post I wrote at New Deal 2.0 on the potential for a disastrous trade war. There has been a considerable amount of discussion about current account imbalances in light of last weekend’s failed G20 summit. For the most part, the meetings focused less on currency levels per se and more on the

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Let’s talk about QE, inflation, and consumer demand

Marshall Auerback — Thu, 11 Nov 2010 19:30:40 +0000

The Fed, for whatever reason, has induced a shift in private portfolio preferences simply by talking about something. But I think the point commentators like the Pragmatic Capitalist make is indisputably correct. The policy itself does nothing. QE is predominately about yields adjusting to levels where investors in aggregate that make investment decisions decide to

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How Do You Say “Hypocrite” in German?

Marshall Auerback — Mon, 08 Nov 2010 23:49:37 +0000

Here’s a re-post of mine from New Deal 2.0 on the Germans and their political rhetoric on QE. Okay, I did a few years of German language study, so I know that the real word for hypocrite is “Heuchler”. But when I read the latest guff from Germany’s Finance Minister criticizing America’s economic policies, I’m

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Amateur Hour at the Federal Reserve

Marshall Auerback — Mon, 08 Nov 2010 18:00:25 +0000

The following is a post I wrote earlier today at Naked Capitalism. I liked Ed’s piece on QE called Does Ben Bernanke Believe The Stuff He Writes?. What caught my eye was his line, "As for monetary policy, while QE does not create new net financial assets, it is money printing because it is a

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MMT: A few thoughts on austerity, currency wars and exchange rates

Marshall Auerback — Mon, 25 Oct 2010 23:00:41 +0000

Given the push toward austerity, I want to make a few remarks about the intersection of full employment with trade and exchange rates. It all begins with the British austerity budget. In regards to that budget, recently presented by the coalition government in the UK, I would say you can’t reduce the budget deficit more

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The US dollar decline is symptomatic of China’s investment bubble

Marshall Auerback — Thu, 14 Oct 2010 20:30:00 +0000

There hasn’t actually been any "QE". You’ve simply had the promise of QE2 and some attempts within the market to front run the actual implementation of the policy. In reality, QE per se has nothing to do with the dollar move, which has two components. One is traders and money managers and trend followers piling

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Helicopter Ben and his QE II having an effect on Japan and the yen

Marshall Auerback — Fri, 08 Oct 2010 18:26:33 +0000

Here is something interesting. The Chinese have reversed policy on diversification into the yen. It was my assumption that the Japanese government’s objections would be acknowledged by the Chinese and that they were not the most recent source of yen strength — at least as of three weeks ago. When I saw that the Japanese

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Chinese credit expansion has no place to put its money

Marshall Auerback — Thu, 07 Oct 2010 19:15:35 +0000

In regards to Ed’s last post on China and trade, the position of Michael Pettis is much closer to mine (and Martin Wolf’s, which he expressed yesterday in the FT). The quote of Pettis that Ed cites does not invalidate my position at all: So after years of dragging its feet, postponing a rebalancing, and

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The US must erect tariffs against China unless they revalue

Marshall Auerback — Tue, 05 Oct 2010 14:00:00 +0000

Yesterday, Ed sent me an article by James Fallows on some 2006 comments by Republican gubernatorial candidate Christine O’Donnell regarding the threat to the United States posed by China. She said China had a "carefully thought out and strategic plan to take over America" and accused one opponent of appeasement for suggesting that the two

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Does a Weaker Currency Equal Default?

Marshall Auerback — Thu, 30 Sep 2010 20:25:14 +0000

Here we go again: the dollar appears to be under sustained attack in the foreign exchange market. To judge from its latest FOMC statement, the Federal Reserve appears to be actively encouraging inflation: “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to

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Why aren’t we using monetary policy to stimulate aggregate demand?

Marshall Auerback — Sun, 19 Sep 2010 15:00:06 +0000

As is often the case, the genesis of this post is a conversation initiated by Edward (Harrison) on the question of why we aren’t using monetary policy to stimulate aggregate demand. That question was posed here by Tyler Cowen at Marginal Revolution. The short answer that I gave Ed is that you can’t really use

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China is Still a Renegade Nation

Marshall Auerback — Sun, 12 Sep 2010 19:00:57 +0000

A few years ago, Chris Dialynas and I wrote a piece which introduced the concept of “renegade economics”. It was derived from a Frank D. Graham’s 1943 essay titled, “Fundamentals of International Monetary Policy.” Graham, a Princeton University economist, wrote: “In international affairs we must therefore strive to reconcile the liberty of the individual, the

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