The Bank of Japan is expected to cut its economic growth forecast on Thursday and predict a very slow exit from deflation, signalling it is ready to ease policy further in coming months if the yen's climb threatens to stunt growth.
The central bank will also detail its 5 trillion-yen ($61.46 billion) asset buying programme announced early this month and may say that it will kick it off before its next rate review in November, sources familiar with the BOJ's thinking said.
With no new steps expected just three weeks after the central bank relaxed its policy, the focus will be on its twice-yearly economic outlook report.
The BOJ is likely to cut its growth forecast for the fiscal year to March 2012 to around 1.5 percent from 1.9 percent predicted three months ago, broadly in line with market forecasts.
It will also for the first time give its forecasts for the following year, which will probably project some recovery in growth and consumer prices rising slightly less than 0.5 percent.
That, however, would still be far from the 1 percent consumer inflation rate that the BOJ wants to see before it starts lifting rates from near-zero levels, keeping alive speculation that it will try to do more to revive the sputtering economy.
Few Options
With borrowing costs at rock bottom and the government's ability to stimulate growth hobbled by public debt twice the size of Japan's economic output, policymakers have few options left to help the economy cope with the yen's strength.
BOJ Governor Masaaki Shirakawa signalled earlier this month that any further easing would probably come in the form of an increase in the pool of funds set aside for purchases of government bonds and other assets.
Expectations that the U.S. Federal Reserve will act more aggressively than the BOJ as it keeps pumping cash into the economy have driven the yen ever closer to its all-time high, prompting the likes of Toyota [TM 70.91 0.04 (+0.06%) ] and Nissan[NSANY 17.89 -0.03 (-0.17%) ] to talk about a sense of crisis in Japanese industry.
Speculation that the Fed may opt for piecemeal fund injections rather than a big-bang, large-scale operation at its Nov. 2-3 meeting has given the dollar some respite. But any Fed decision that would drive the yen past its all-time peaks could prompt further policy easing by the BOJ, sources said.
Such easing would probably come in the form of an increase to the amount of assets the central bank plans to buy. By speeding up the roll-out of the asset buying scheme, the BOJ may signal it would consider such easing as early as next month.
"Asset buying hasn't even started. But depending on market moves and the state of the economy, increasing the amount is something to look into," one of the sources said.
Analysts expect no significant upturn in the economy at least until early next year as the expiry of government subsidies for low-emission cars is set to hit factory output.
The central bank's forecasts are expected to underscore how long and slow Japan's recovery from deflation — a vicious cycle of declining prices, weak demand and investment, and stagnant output — will be.
Under the asset buying scheme, the BOJ plans to begin buying assets in several stages, starting with government bonds. It then hopes to move on to less conventional assets such as exchange traded funds, possibly by early next year, sources said.
To encourage more risk-taking, the BOJ plans to buy corporate bonds rated BBB — the lowest investment-grade bond — and a2 commercial paper, the second tier of this type of short-term debt, the sources said.
Wednesday, October 27, 2010
Economy: Durable Goods Gets Boost from Aircraft Orders - CNBC
New orders for long-lasting U.S. manufactured goods rose more than expected in September as bookings for civilian aircraft surged, but fell when transportation equipment was excluded, a government report showed on Wednesday.
The Commerce Department said durable goods orders increased 3.3 percent, the largest gain since January, after a revised 1.0 percent drop in August. Economists polled by Reuters had expected orders to increase 2.0 percent last month after a previously reported fall of 1.5 percent.
Orders excluding transportation, however, unexpectedly fell 0.8 percent in September after increasing 1.9 percent the prior month. Economists had expected a 0.5 percent gain.
The Commerce Department said durable goods orders increased 3.3 percent, the largest gain since January, after a revised 1.0 percent drop in August. Economists polled by Reuters had expected orders to increase 2.0 percent last month after a previously reported fall of 1.5 percent.
Orders excluding transportation, however, unexpectedly fell 0.8 percent in September after increasing 1.9 percent the prior month. Economists had expected a 0.5 percent gain.
Tuesday, October 26, 2010
Fed Can Provide Support to the Economy: Dudley - CNBC
The U.S. Federal Reserve cannot "wave a magic wand" to fix the economy overnight, but it can provide "essential" support, a top Fed policymaker said on Monday.
Indeed, support will likely be warranted unless economic conditions improve, William Dudley, president of the New York Fed and a permanent voter on the Fed's policy-setting panel, said in a speech at Cornell University.
His comments underline market expectations that the Fed will buy more long-term assets at its next policy-setting meeting on Nov 2-3 to try to revive the economic recovery.
The U.S. central bank cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt to try to boost the economy during the global financial crisis.
However, a Fed colleague known for steady opposition to easy monetary polices said further easing would be a "dangerous gamble" that could set in motion another wrenching boom and bust cycle.
"There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in Lawrence, Kansas, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero.
Hoenig acknowledged he held a minority view on the Fed.
He has used his voting status this year to dissent six times against Fed policies aimed at supporting the recovery.
Dudley, who has been among Fed officials making the case for monetary easing, said the road to full recovery is likely to be "long and bumpy." Momentum is slowing, he said.
"The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately," Dudley said.
"But we can provide essential support for the needed adjustments." Dudley repeated his view that high unemployment and low inflation were inconsistent with the Fed's mandate to maintain price stability and maximum employment.
"I said that I thought further Fed action was likely warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long."
Hoenig, for his part, restated his belief that ultra low interest rates and a more than doubling of the Fed's balance sheet from pre-crisis levels risks creating asset bubbles and sets the stage for another crisis.
Although critics argue further support for the economy could prove inflationary, a former Fed chairman known for his inflation fighting commitment said inflation is unlikely to be a problem for years.
Paul Volcker added he does not see the risk of a damaging spell of falling prices.
"Inflation is not a problem right now. It won't be a problem next year, it won't be a problem for several years," said Volcker, who is now chairman of the Obama administration's Economic Recovery Board, in Boston.
"I see no possibility, frankly, that deflation will take place," he added.
Fed Chairman Ben Bernanke has said signs the weak recovery could be at risk would appear to meet criteria for the Fed to provide further aide, and the debate among most observers is over the scope and pace of easing.
Dudley said whether an incremental approach to asset purchases, or a big-bang approach, would work best would depend on the economic context.
But he downplayed expectations for a November announcement of a new round of quantitative easing — known as QE2.
"I would put very little weight on what is priced in or not priced in to the market," Dudley said in response to reporters' questions. "With QE2 it is a careful assessment of the costs and benefits and to try to judge whether it makes sense to do it or not."
The prospect of further Fed easing has drawn the ire of emerging nations, who say its feeds a flood of capital into their markets as investors seek out higher yields, potentially destabilizing their economies.
However, Dudley said the dollar was not an objective for the U.S. central bank.
If the Fed focused on its dual mandate of full employment and price stability, "the dollar will take care of itself," he said.
Dudley repeated that the Fed is closely monitoring U.S. foreclosures for their potential impact on housing and financial markets and the broader economy.
State and federal officials are investigating allegations that for years banks have not reviewed foreclosure documents properly or have submitted false statements to evict delinquent borrowers.
Indeed, support will likely be warranted unless economic conditions improve, William Dudley, president of the New York Fed and a permanent voter on the Fed's policy-setting panel, said in a speech at Cornell University.
His comments underline market expectations that the Fed will buy more long-term assets at its next policy-setting meeting on Nov 2-3 to try to revive the economic recovery.
The U.S. central bank cut interest rates to near zero and bought $1.7 trillion in mortgage-related and Treasury debt to try to boost the economy during the global financial crisis.
However, a Fed colleague known for steady opposition to easy monetary polices said further easing would be a "dangerous gamble" that could set in motion another wrenching boom and bust cycle.
"There are real risks to quantitative easing," Kansas City Federal Reserve Bank President Thomas Hoenig said in Lawrence, Kansas, referring to extensive asset purchases by the Fed to push borrowing costs lower even though short-term rates are near zero.
Hoenig acknowledged he held a minority view on the Fed.
He has used his voting status this year to dissent six times against Fed policies aimed at supporting the recovery.
Dudley, who has been among Fed officials making the case for monetary easing, said the road to full recovery is likely to be "long and bumpy." Momentum is slowing, he said.
"The Fed cannot wave a magic wand and make the problems remaining from the preceding period of excess vanish immediately," Dudley said.
"But we can provide essential support for the needed adjustments." Dudley repeated his view that high unemployment and low inflation were inconsistent with the Fed's mandate to maintain price stability and maximum employment.
"I said that I thought further Fed action was likely warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long."
Hoenig, for his part, restated his belief that ultra low interest rates and a more than doubling of the Fed's balance sheet from pre-crisis levels risks creating asset bubbles and sets the stage for another crisis.
Although critics argue further support for the economy could prove inflationary, a former Fed chairman known for his inflation fighting commitment said inflation is unlikely to be a problem for years.
Paul Volcker added he does not see the risk of a damaging spell of falling prices.
"Inflation is not a problem right now. It won't be a problem next year, it won't be a problem for several years," said Volcker, who is now chairman of the Obama administration's Economic Recovery Board, in Boston.
"I see no possibility, frankly, that deflation will take place," he added.
Fed Chairman Ben Bernanke has said signs the weak recovery could be at risk would appear to meet criteria for the Fed to provide further aide, and the debate among most observers is over the scope and pace of easing.
Dudley said whether an incremental approach to asset purchases, or a big-bang approach, would work best would depend on the economic context.
But he downplayed expectations for a November announcement of a new round of quantitative easing — known as QE2.
"I would put very little weight on what is priced in or not priced in to the market," Dudley said in response to reporters' questions. "With QE2 it is a careful assessment of the costs and benefits and to try to judge whether it makes sense to do it or not."
The prospect of further Fed easing has drawn the ire of emerging nations, who say its feeds a flood of capital into their markets as investors seek out higher yields, potentially destabilizing their economies.
However, Dudley said the dollar was not an objective for the U.S. central bank.
If the Fed focused on its dual mandate of full employment and price stability, "the dollar will take care of itself," he said.
Dudley repeated that the Fed is closely monitoring U.S. foreclosures for their potential impact on housing and financial markets and the broader economy.
State and federal officials are investigating allegations that for years banks have not reviewed foreclosure documents properly or have submitted false statements to evict delinquent borrowers.
Tuesday, October 12, 2010
Wednesday Look Ahead: Earnings Start to Roll In; JP Morgan in Focus - CNBC
Intel and CSX earnings beats could be positive for stocks Wednesday morning, but it is J.P. Morgan earnings that traders are watching.
The Dow Tuesday closed slightly higher after minutes of the Fed's last meeting showed a Fed mostly convinced that it would restart quantitative easing or even take other steps to stimulate growth if the economy does not improve.
The comments drove the dollar lower, and stocks rebounded from early losses. The Dow finished up 10 at 11,020 and the S&P 500 was up 4 at 1169. Agricultural commodities continued to climb, with corn adding more than 4 percent and soy bean, 2 percent.
"Everyone's waiting to see J.P. Morgan. The Street's always waiting for something, and now we're waiting for earnings," said Pete McCorry, who trades bank stocks at Keefe Bruyette.
Earnings Central
Intel stock was higher in the after-hours Tuesday, after it reported earnings and revenues that topped analysts' expectations. The chip maker earned $0.52 per share on revenues of $11.1 billion, up from $0.33 per share on revenues of $9.4 billion a year earlier. Intel said it continues to see "healthy worldwide demand for computing products of all types."
CSX shares also jumped after the closing bell on its better-than-expected profits and revenues. The rail company reported earnings of $1.08 per share, on revenues of $2.7 billion. CSX said volume was up 10 percent from the year earlier, a slightly lower level than last quarter's 13 percent. But the company said it was increasing capital spending in 2010, and that its positive financial results will also allow it to create jobs.
Besides J.P. Morgan, Host Hotels and Apollo Group report earnings Wednesday.
McCorry said J.P. Morgan will set the tone for the rest of the banking sector when it reports ahead of the opening bell. The company has an investor conference call at 9 a.m. "We've continued to push out what normalized earnings are going to look like (for financials.) We have yet to feel the effect of the true end game of regulation," he said.
"You haven't seen any loan growth and there's talk of QE to add more liquidity to a system that needs more on the demand side, than more liquidity," he said. Quantitative easing is expected to add more money to the banking system, as the Fed expands its balance sheet with the purchase of Treasury securities.
J.P. Morgan, considered a bellwether, is expected to earn $0.89 per share on revenues of $24.3 billion for the third quarter.
Investors will also be listening to the J.P. Morgan conference call for insight into the temporary freeze on foreclosures by lenders amid concerns about flawed processing and shoddy reviews of paperwork. Bank of America has frozen foreclosures in 50 states, while others, like J.P. Morgan and PNC, have suspended them in 23 states. States attorney generals are also looking into the banks' handling of foreclosures.
John Sprow, chief risk officer at Smith Breeden, said the stalled foreclosures are not currently impacting the secondary mortgage market, but they could if the freeze continues for too long. "It remains to be seen how much it mucks up the process. First of all people need to do this correctly. If people are really just rubberstamping things, they need to be careful because it's peoples' homes.
"Obviously, if it stops foreclosures and the halt lasts for an incredibly long time, then it would just be a huge backlog of homes, and if that continues for many months , the housing market possibly gets worse. It's sick, and we're starting to get the sickness out. But if you stop taking the antibiotics, you get sick again. It's going to increase losses. It's not a huge number. If it just stalls things for 45 days, they lose another month and a half of interest that they might other wise have," he said.
Dollar Dilemma
Win Thin, currency strategist at Brown Brothers Harriman, said talk about the foreclosure mess is beginning to become part of the market chatter, but it is so far not having an impact as it is unclear how it might affect the real estate market or economy.
On Tuesday, the prospect of quantitative easing continued to send the dollar lower. The greenback Tuesday slipped another 0.3 percent against the euro, to $1.3916. It fell to 81.8532 yen per dollar, the lowest close since April, 1995.
"The yen isn't that strong if you look at the real effective exchange rate (trade weighted and adjusted for inflation). The yen is about 15 percent weaker than it was in January, 2000," said Thin.
"So forget about the bilateral stuff..the yen is not a huge disaster. Sure, they'd rather have it up at 90, but it's not as disastrous for competitiveness as you would think," he said.
What to Watch
A disappointing auction of $32 billion in 3-year notes weighed on Treasury prices Tuesday and raised concerns about Wednesday's $21 billion auction of reopened 10-year notes. The auction is at 1 p.m.
"It's going to be interesting because the 3-year auction was pretty poor by any metric. I wouldn't call it a disaster. It had the highest dealer take down and lowest indirect bid since January 2009. We got used to 2- and 3-year auctions kind of coming and going, and this showed demand was a little more tepid," said John Briggs, Treasury strategist with RBS. The 3-year note was auctioned at a record low yield of 0.569 percent.
Briggs said the 10-year auction should do well, but it bears watching. "I don't see us going down a lot between now and Nov. 3 (Fed meeting), but I'm pretty wary at these levels. Until you see what the Fed has to say, you don't have much to gain. If there's going to be interest with the Fed (meeting) coming up, it should be in the 10-year note," he said.
There is not much in the way of data Wednesday. Import/export prices are released at 8:30 a.m.
Fed Chairman Ben Bernanke speaks on business innovation in Pittsburgh at 4:10 p.m., and Richmond Fed President Jeffrey Lacker speaks at 7:45 p.m. in Chapel Hill.
Wal-mart continues its investor meeting Wednesday in Bentonville, Ark.
© 2010 CNBC.com
The Dow Tuesday closed slightly higher after minutes of the Fed's last meeting showed a Fed mostly convinced that it would restart quantitative easing or even take other steps to stimulate growth if the economy does not improve.
The comments drove the dollar lower, and stocks rebounded from early losses. The Dow finished up 10 at 11,020 and the S&P 500 was up 4 at 1169. Agricultural commodities continued to climb, with corn adding more than 4 percent and soy bean, 2 percent.
"Everyone's waiting to see J.P. Morgan. The Street's always waiting for something, and now we're waiting for earnings," said Pete McCorry, who trades bank stocks at Keefe Bruyette.
Earnings Central
Intel stock was higher in the after-hours Tuesday, after it reported earnings and revenues that topped analysts' expectations. The chip maker earned $0.52 per share on revenues of $11.1 billion, up from $0.33 per share on revenues of $9.4 billion a year earlier. Intel said it continues to see "healthy worldwide demand for computing products of all types."
CSX shares also jumped after the closing bell on its better-than-expected profits and revenues. The rail company reported earnings of $1.08 per share, on revenues of $2.7 billion. CSX said volume was up 10 percent from the year earlier, a slightly lower level than last quarter's 13 percent. But the company said it was increasing capital spending in 2010, and that its positive financial results will also allow it to create jobs.
Besides J.P. Morgan, Host Hotels and Apollo Group report earnings Wednesday.
McCorry said J.P. Morgan will set the tone for the rest of the banking sector when it reports ahead of the opening bell. The company has an investor conference call at 9 a.m. "We've continued to push out what normalized earnings are going to look like (for financials.) We have yet to feel the effect of the true end game of regulation," he said.
"You haven't seen any loan growth and there's talk of QE to add more liquidity to a system that needs more on the demand side, than more liquidity," he said. Quantitative easing is expected to add more money to the banking system, as the Fed expands its balance sheet with the purchase of Treasury securities.
J.P. Morgan, considered a bellwether, is expected to earn $0.89 per share on revenues of $24.3 billion for the third quarter.
Investors will also be listening to the J.P. Morgan conference call for insight into the temporary freeze on foreclosures by lenders amid concerns about flawed processing and shoddy reviews of paperwork. Bank of America has frozen foreclosures in 50 states, while others, like J.P. Morgan and PNC, have suspended them in 23 states. States attorney generals are also looking into the banks' handling of foreclosures.
John Sprow, chief risk officer at Smith Breeden, said the stalled foreclosures are not currently impacting the secondary mortgage market, but they could if the freeze continues for too long. "It remains to be seen how much it mucks up the process. First of all people need to do this correctly. If people are really just rubberstamping things, they need to be careful because it's peoples' homes.
"Obviously, if it stops foreclosures and the halt lasts for an incredibly long time, then it would just be a huge backlog of homes, and if that continues for many months , the housing market possibly gets worse. It's sick, and we're starting to get the sickness out. But if you stop taking the antibiotics, you get sick again. It's going to increase losses. It's not a huge number. If it just stalls things for 45 days, they lose another month and a half of interest that they might other wise have," he said.
Dollar Dilemma
Win Thin, currency strategist at Brown Brothers Harriman, said talk about the foreclosure mess is beginning to become part of the market chatter, but it is so far not having an impact as it is unclear how it might affect the real estate market or economy.
On Tuesday, the prospect of quantitative easing continued to send the dollar lower. The greenback Tuesday slipped another 0.3 percent against the euro, to $1.3916. It fell to 81.8532 yen per dollar, the lowest close since April, 1995.
"The yen isn't that strong if you look at the real effective exchange rate (trade weighted and adjusted for inflation). The yen is about 15 percent weaker than it was in January, 2000," said Thin.
"So forget about the bilateral stuff..the yen is not a huge disaster. Sure, they'd rather have it up at 90, but it's not as disastrous for competitiveness as you would think," he said.
What to Watch
A disappointing auction of $32 billion in 3-year notes weighed on Treasury prices Tuesday and raised concerns about Wednesday's $21 billion auction of reopened 10-year notes. The auction is at 1 p.m.
"It's going to be interesting because the 3-year auction was pretty poor by any metric. I wouldn't call it a disaster. It had the highest dealer take down and lowest indirect bid since January 2009. We got used to 2- and 3-year auctions kind of coming and going, and this showed demand was a little more tepid," said John Briggs, Treasury strategist with RBS. The 3-year note was auctioned at a record low yield of 0.569 percent.
Briggs said the 10-year auction should do well, but it bears watching. "I don't see us going down a lot between now and Nov. 3 (Fed meeting), but I'm pretty wary at these levels. Until you see what the Fed has to say, you don't have much to gain. If there's going to be interest with the Fed (meeting) coming up, it should be in the 10-year note," he said.
There is not much in the way of data Wednesday. Import/export prices are released at 8:30 a.m.
Fed Chairman Ben Bernanke speaks on business innovation in Pittsburgh at 4:10 p.m., and Richmond Fed President Jeffrey Lacker speaks at 7:45 p.m. in Chapel Hill.
Wal-mart continues its investor meeting Wednesday in Bentonville, Ark.
© 2010 CNBC.com
Debt - US Cities Face Half a Trillion Dollars of Public Pension Deficits - CNBC
Big US cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows.
The gap at the municipal level would be in addition to $3,000 billion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.
“What is yet to be seen is how this burden will be distributed between state and local governments and whether the federal government will be called upon for bail-outs,” said Joshua Rauh of the Kellogg School.
The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the recession.
The combination has raised concern that defaults, which are historically rare in the $2,800 billion municipal bond market where local governments obtain money, could now rise.
“The bondholders would be competing with the pension beneficiaries for scarce government resources,” Mr Rauh said.
Current pension assets for plans sponsored by Philadelphia can only pay for promised benefits through 2015, while Boston and Chicago would deplete their existing funds by 2019.
Cincinnati, Jacksonville, Florida and St Paul have current pension assets that can only pay for promised benefits through 2020.
Local governments use unique accounting methods that many, such as Mr Rauh, believe understate obligations. Based on his estimates, which use US Treasuries as the benchmark, each household already owes an average of $14,165 to current and former municipal public employees in the 50 cities and counties studied.
“Philadelphia has the most immediate cause for concern, as the city can pay existing promises with existing assets only through 2015,” Mr Rauh said, assuming an 8 percent annualized return, the most common benchmark for municipal plans.
In New York City, San Francisco and Boston the total is more than $30,000 a household and, in Chicago, it tops $40,000.
Taxpayers in these areas risk not only local tax increases and service cuts to pay for benefits, but potentially some of the bill for the $3,000 billion unfunded obligations at the state level, the researchers say.
“The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation,” Mr Rauh said.
The research examines 77 pension plans sponsored by 50 major cities and counties and covering about 2 million workers, which is estimated to be two-thirds of workers covered by local pensions. Researchers then extrapolated the results – an unfunded liability of about $5,300 per worker – to come up with the total estimate of $574 billion.
The gap at the municipal level would be in addition to $3,000 billion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.
“What is yet to be seen is how this burden will be distributed between state and local governments and whether the federal government will be called upon for bail-outs,” said Joshua Rauh of the Kellogg School.
The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the recession.
The combination has raised concern that defaults, which are historically rare in the $2,800 billion municipal bond market where local governments obtain money, could now rise.
“The bondholders would be competing with the pension beneficiaries for scarce government resources,” Mr Rauh said.
Current pension assets for plans sponsored by Philadelphia can only pay for promised benefits through 2015, while Boston and Chicago would deplete their existing funds by 2019.
Cincinnati, Jacksonville, Florida and St Paul have current pension assets that can only pay for promised benefits through 2020.
Local governments use unique accounting methods that many, such as Mr Rauh, believe understate obligations. Based on his estimates, which use US Treasuries as the benchmark, each household already owes an average of $14,165 to current and former municipal public employees in the 50 cities and counties studied.
“Philadelphia has the most immediate cause for concern, as the city can pay existing promises with existing assets only through 2015,” Mr Rauh said, assuming an 8 percent annualized return, the most common benchmark for municipal plans.
In New York City, San Francisco and Boston the total is more than $30,000 a household and, in Chicago, it tops $40,000.
Taxpayers in these areas risk not only local tax increases and service cuts to pay for benefits, but potentially some of the bill for the $3,000 billion unfunded obligations at the state level, the researchers say.
“The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation,” Mr Rauh said.
The research examines 77 pension plans sponsored by 50 major cities and counties and covering about 2 million workers, which is estimated to be two-thirds of workers covered by local pensions. Researchers then extrapolated the results – an unfunded liability of about $5,300 per worker – to come up with the total estimate of $574 billion.
Monday, October 11, 2010
College Dropouts Cost Taxpayers Billions: Report - CNBC
Dropping out of college after a year can mean lost time, burdensome debt and an uncertain future for students. Now there's an estimate of what it costs taxpayers. And it runs in the billions.
States appropriated almost $6.2 billion for four-year colleges and universities between 2003 and 2008 to help pay for the education of students who did not return for year two, a report released Monday says.
In addition, the federal government spent $1.5 billion and states spent $1.4 billion on grants for students who didn't start their sophomore years, according to "Finishing the First Lap: The Cost of First-Year Student Attrition in America's Four-Year Colleges and Universities."
The dollar figures, based on government data and gathered by the nonprofit American Institutes for Research, are meant to put an economic exclamation point on the argument that college completion rates need improvement.
But the findings also could give ammunition to critics who say too many students are attending four-year schools — and that pushing them to finish wastes even more taxpayer money.
The Obama administration, private foundations and others are driving a shift from focusing mostly on making college more accessible to getting more students through with a diploma or certificate.
Mark Schneider, a vice president at the American Institutes for Research and former commissioner of the Education Department's National Center for Education Statistics, said the report's goal is to spotlight the costs of losing students after year one, the most common exit door in college.
"We're all about college completion right now, and I agree 100 percent with the college completion agenda and we need a better-educated adult population and workforce," Schneider said.
The cost of educating students who drop out after one year account for between 2 to 8 percent of states' total higher education appropriations, Schneider said.
He said the report emphasizes state spending because states provide most higher education money and hold the most regulatory sway over institutions and can drive change.
Ohio, for example, has moved toward using course and degree completion rates in determining how much money goes to its public colleges and universities instead of solely using enrollment figures.
"We recognize an institution is not going to be perfect on graduation and completion rates," said Eric Fingerhut, chancellor of the Ohio Board of Regents. "But at the same time, we know they can do better than they're doing. And if you place the financial rewards around completion, then you will motivate that."
The AIR report draws from Department of Education data, which Schneider concedes does not provide a full picture.
The figures track whether new full-time students at 1,521 public and private colleges and universities return for year two at the same institution. It doesn't include part-timers, transfers or students who come back later and graduate.
The actual cost to taxpayers may run two to three times higher given those factors and others, including the societal cost of income lost during dropouts' year in college, said Richard Vedder, an Ohio University economics professor.
And tying state appropriations to student performance could just cause colleges to lower their standards, he said.
Robert Lerman, an American University economics professor who, like Vedder, questions promoting college for all, said the report fleshes out the reality of high dropout rates.
But he said it could just as easily be used to argue that less-prepared, less-motivated students are better off not going to college.
"Getting them to go a second year might waste even more money," Lerman said. "Who knows?"
States appropriated almost $6.2 billion for four-year colleges and universities between 2003 and 2008 to help pay for the education of students who did not return for year two, a report released Monday says.
In addition, the federal government spent $1.5 billion and states spent $1.4 billion on grants for students who didn't start their sophomore years, according to "Finishing the First Lap: The Cost of First-Year Student Attrition in America's Four-Year Colleges and Universities."
The dollar figures, based on government data and gathered by the nonprofit American Institutes for Research, are meant to put an economic exclamation point on the argument that college completion rates need improvement.
But the findings also could give ammunition to critics who say too many students are attending four-year schools — and that pushing them to finish wastes even more taxpayer money.
The Obama administration, private foundations and others are driving a shift from focusing mostly on making college more accessible to getting more students through with a diploma or certificate.
Mark Schneider, a vice president at the American Institutes for Research and former commissioner of the Education Department's National Center for Education Statistics, said the report's goal is to spotlight the costs of losing students after year one, the most common exit door in college.
"We're all about college completion right now, and I agree 100 percent with the college completion agenda and we need a better-educated adult population and workforce," Schneider said.
The cost of educating students who drop out after one year account for between 2 to 8 percent of states' total higher education appropriations, Schneider said.
He said the report emphasizes state spending because states provide most higher education money and hold the most regulatory sway over institutions and can drive change.
Ohio, for example, has moved toward using course and degree completion rates in determining how much money goes to its public colleges and universities instead of solely using enrollment figures.
"We recognize an institution is not going to be perfect on graduation and completion rates," said Eric Fingerhut, chancellor of the Ohio Board of Regents. "But at the same time, we know they can do better than they're doing. And if you place the financial rewards around completion, then you will motivate that."
The AIR report draws from Department of Education data, which Schneider concedes does not provide a full picture.
The figures track whether new full-time students at 1,521 public and private colleges and universities return for year two at the same institution. It doesn't include part-timers, transfers or students who come back later and graduate.
The actual cost to taxpayers may run two to three times higher given those factors and others, including the societal cost of income lost during dropouts' year in college, said Richard Vedder, an Ohio University economics professor.
And tying state appropriations to student performance could just cause colleges to lower their standards, he said.
Robert Lerman, an American University economics professor who, like Vedder, questions promoting college for all, said the report fleshes out the reality of high dropout rates.
But he said it could just as easily be used to argue that less-prepared, less-motivated students are better off not going to college.
"Getting them to go a second year might waste even more money," Lerman said. "Who knows?"
EU Debt Crisis - 'Animal Instincts' Dominate Euro Zone Bond Market - CNBC
Investors in euro zone bond markets stand accused of letting “animal spirits” affect their judgment on the risk of a European debt default, creating a situation where financial markets could force weaker countries into excessive budget cutting.
A senior official at the Organization for Economic Co-operation and Development criticized the behavior of some investors that has led to sharp swings in the yields on government bonds issued by Greece, Ireland, Portugal and Spain.
Hans Blommestein, head of bond markets and public debt management at the OECD, told the Financial Times: “The psychology of the markets is very negative and not necessarily based on facts, but rather on animal instincts and spirits that trigger far greater selling in bond markets than is often justified by the data.”
“This creates a cliff effect where markets suddenly fall as investors lose confidence in hitherto safe sovereign assets. This makes it hard to assess reliably the change in sovereign risk and what direction the markets will take.”
Mr Blommestein said there was a danger that some governments might go too far with austerity measures as they sought to reassure investors that they were tackling their deficit problems. That, in turn, could jeopardize their economic recovery.
“The market suddenly perceives the debt of some sovereign is a risk, then demands much higher yields, which creates big difficulties for these countries in funding themselves,” he said.
“The markets are creating a situation where countries could be forced to retrench too far and introduce austere fiscal policies that are not good for their economies as it risks stifling growth.”
Mr Blommestein’s concern centers on Greece, Ireland, Portugal and Spain, which are introducing aggressive fiscal tightening policies.
But he said the “animal spirits” of the market could affect the world’s biggest economies, such as the US and UK, because of the vast debt levels they have taken on to rescue their banks and stimulate their economies. Bond yields in the US and UK have stabilized at record lows.
The OECD, which represents 33 mostly developed countries, is to publish data showing how sharply government bond issuance has risen. Government borrowing is projected to rise to $19,000 billion next year among OECD members, nearly twice that of 2007.
A senior official at the Organization for Economic Co-operation and Development criticized the behavior of some investors that has led to sharp swings in the yields on government bonds issued by Greece, Ireland, Portugal and Spain.
Hans Blommestein, head of bond markets and public debt management at the OECD, told the Financial Times: “The psychology of the markets is very negative and not necessarily based on facts, but rather on animal instincts and spirits that trigger far greater selling in bond markets than is often justified by the data.”
“This creates a cliff effect where markets suddenly fall as investors lose confidence in hitherto safe sovereign assets. This makes it hard to assess reliably the change in sovereign risk and what direction the markets will take.”
Mr Blommestein said there was a danger that some governments might go too far with austerity measures as they sought to reassure investors that they were tackling their deficit problems. That, in turn, could jeopardize their economic recovery.
“The market suddenly perceives the debt of some sovereign is a risk, then demands much higher yields, which creates big difficulties for these countries in funding themselves,” he said.
“The markets are creating a situation where countries could be forced to retrench too far and introduce austere fiscal policies that are not good for their economies as it risks stifling growth.”
Mr Blommestein’s concern centers on Greece, Ireland, Portugal and Spain, which are introducing aggressive fiscal tightening policies.
But he said the “animal spirits” of the market could affect the world’s biggest economies, such as the US and UK, because of the vast debt levels they have taken on to rescue their banks and stimulate their economies. Bond yields in the US and UK have stabilized at record lows.
The OECD, which represents 33 mostly developed countries, is to publish data showing how sharply government bond issuance has risen. Government borrowing is projected to rise to $19,000 billion next year among OECD members, nearly twice that of 2007.
Sunday, October 10, 2010
Oil May Retreat as Markets Question Fundamentals: Survey - CNBC
Oil prices may pullback this week as investors question whether levels over $80 a barrel are consistent with the fundamentals, a CNBC poll of traders and analysts showed.
Last week, Nymex crude futures for November delivery rose $1.08 a barrel, or 1.32 percent, settling Friday at $82.66/bbl. Those gains are unlikely to hold this week, according to CNBC’s weekly survey. That’s despite calls for further U.S. dollar debasement on expectations that more monetary easing is on the way from the Federal Reserve.
Five out of 11 respondents (about 45 percent) forecast price declines, four (around 36 percent) expect the market to remain unchanged while just two (about 18 percent) believe prices will rise. Any upside risk will come from a falling dollar and further evidence in this week’s U.S. inflation data or Tuesday’s Fed minutes that may build the case for further monetary accommodation.
The commodity complex and U.S. equities rallied on Friday despite eagerly anticipated Non-Farm Payrolls declining by 95,000 in September and the unemployment rate remaining unchanged at 9.6 percent from August. Closely-watched private-sector payroll employment rose by 64,000, below expectations.
“For the time being, this is a topsy-turvy market: bad economic news is bullish for oil, because it reinforces the case for QE2; conversely, good economic news is bearish, because it raises doubts about the timing and size of QE2,” wrote Societe Generale analysts Michael Wittner and Stephanie Aymes. “That said, the fact that this key report did not cause prices to regain their mid-week highs tells us that QE2 appears to be mainly priced in already.”
Mark Waggoner at Excel Futures predicts markets will re-focus on the fundamentals this week and expects “a downturn below $80” as supplies continue to build and demand remains constrained.
Societe Generale note that the key dynamic is currently refinery maintenance season in the U.S. and Europe: “For the next few weeks, crude demand should be weak, crude stocks should build, and product stocks should draw.”
Tom Weber, Managing Director at Los Angeles-based Peregrine Financial Group has a neutral to bearish call on oil market. “I closed all long positions today and reversed to short side on the break today,” Weber wrote in an email on Friday. “I expect to see $80 before $85.”
Minority View
The two bulls in the survey form the minority view and expect oil to rise this week as views build in the market for the U.S. dollar to weaken. A pullback in the U.S. dollar makes dollar-denominated commodities like oil cheaper for importers paying in non-dollar currencies like Euros, Sterling or Yen.
“Oil’s going higher,” said David Kotok, CNBC Contributor and CIO of Cumberland Advisors. “Maybe much higher on weaker USD.”
Gavin Wendt, Founding Director and Senior Resource Analyst at MineLife Pty Ltd. agrees: “ Oil will continue to follow the same direction as gold, with a weaker dollar making commodities more attractive. There is a nice floor in place with respect to oil at present which should also help prices stay reasonably firm.”
Bolstering the bull case further -- evidence that the hedge funds are adding to bets that prices will gain. Net long crude oil positions on the New York Mercantile Exchange jumped to more than 165,000 in the week to Oct. 5, the highest since April, the Commodity Futures Trading Commission said on Friday, from about 107,000 a week earlier.
OPEC’s Meets In Vienna
Markets participants will be watching headlines from the Organization of Petroleum Exporting Countries’ ministerial meeting in Vienna on Thursday. The consensus view is that OPEC is unlikely to change oil output targets, delegates told Reuters on Sunday, while Qatar said current oil prices posed no harm to the global economy.
“Since the March OPEC meeting, it has been clear that the producer group is in no hurry to cap prices if they are driven higher by stronger world economic growth,” JP Morgan oil analysts led by Lawrence Eagles said late last month.
In fact, OPEC are largely comfortable with where prices have been for the large part of this year — within a range of $70 to $80 a barrel. OPEC argues that these ranges are sufficiently high enough for producers who need to invest and low enough not to undermine the global economy.
In a possible signal reflecting its stance at this week’s meeting, de facto OPEC leader Saudi Arabia, OPEC's top crude exporter, will supply full contracted volumes of crude oil in November to at least five term buyers in northeast Asia, steady with October levels, Reuters reported, citing traders on Monday.
Last week, Nymex crude futures for November delivery rose $1.08 a barrel, or 1.32 percent, settling Friday at $82.66/bbl. Those gains are unlikely to hold this week, according to CNBC’s weekly survey. That’s despite calls for further U.S. dollar debasement on expectations that more monetary easing is on the way from the Federal Reserve.
Five out of 11 respondents (about 45 percent) forecast price declines, four (around 36 percent) expect the market to remain unchanged while just two (about 18 percent) believe prices will rise. Any upside risk will come from a falling dollar and further evidence in this week’s U.S. inflation data or Tuesday’s Fed minutes that may build the case for further monetary accommodation.
The commodity complex and U.S. equities rallied on Friday despite eagerly anticipated Non-Farm Payrolls declining by 95,000 in September and the unemployment rate remaining unchanged at 9.6 percent from August. Closely-watched private-sector payroll employment rose by 64,000, below expectations.
“For the time being, this is a topsy-turvy market: bad economic news is bullish for oil, because it reinforces the case for QE2; conversely, good economic news is bearish, because it raises doubts about the timing and size of QE2,” wrote Societe Generale analysts Michael Wittner and Stephanie Aymes. “That said, the fact that this key report did not cause prices to regain their mid-week highs tells us that QE2 appears to be mainly priced in already.”
Mark Waggoner at Excel Futures predicts markets will re-focus on the fundamentals this week and expects “a downturn below $80” as supplies continue to build and demand remains constrained.
Societe Generale note that the key dynamic is currently refinery maintenance season in the U.S. and Europe: “For the next few weeks, crude demand should be weak, crude stocks should build, and product stocks should draw.”
Tom Weber, Managing Director at Los Angeles-based Peregrine Financial Group has a neutral to bearish call on oil market. “I closed all long positions today and reversed to short side on the break today,” Weber wrote in an email on Friday. “I expect to see $80 before $85.”
Minority View
The two bulls in the survey form the minority view and expect oil to rise this week as views build in the market for the U.S. dollar to weaken. A pullback in the U.S. dollar makes dollar-denominated commodities like oil cheaper for importers paying in non-dollar currencies like Euros, Sterling or Yen.
“Oil’s going higher,” said David Kotok, CNBC Contributor and CIO of Cumberland Advisors. “Maybe much higher on weaker USD.”
Gavin Wendt, Founding Director and Senior Resource Analyst at MineLife Pty Ltd. agrees: “ Oil will continue to follow the same direction as gold, with a weaker dollar making commodities more attractive. There is a nice floor in place with respect to oil at present which should also help prices stay reasonably firm.”
Bolstering the bull case further -- evidence that the hedge funds are adding to bets that prices will gain. Net long crude oil positions on the New York Mercantile Exchange jumped to more than 165,000 in the week to Oct. 5, the highest since April, the Commodity Futures Trading Commission said on Friday, from about 107,000 a week earlier.
OPEC’s Meets In Vienna
Markets participants will be watching headlines from the Organization of Petroleum Exporting Countries’ ministerial meeting in Vienna on Thursday. The consensus view is that OPEC is unlikely to change oil output targets, delegates told Reuters on Sunday, while Qatar said current oil prices posed no harm to the global economy.
“Since the March OPEC meeting, it has been clear that the producer group is in no hurry to cap prices if they are driven higher by stronger world economic growth,” JP Morgan oil analysts led by Lawrence Eagles said late last month.
In fact, OPEC are largely comfortable with where prices have been for the large part of this year — within a range of $70 to $80 a barrel. OPEC argues that these ranges are sufficiently high enough for producers who need to invest and low enough not to undermine the global economy.
In a possible signal reflecting its stance at this week’s meeting, de facto OPEC leader Saudi Arabia, OPEC's top crude exporter, will supply full contracted volumes of crude oil in November to at least five term buyers in northeast Asia, steady with October levels, Reuters reported, citing traders on Monday.
Saturday, October 9, 2010
IMF Pressured to Play Bigger Role in Currency Disputes - CNBC
World finance leaders called on the IMF Saturday to play a bigger role in supervising the global economy, keeping a close watch on currencies and rich countries' policies to prevent another financial crisis.
The International Monetary Fund's 187 member countries called for "evenhanded surveillance" and said uncovering vulnerabilities in advanced economies was a priority, potentially a major shift for the Fund, which has traditionally tread softly on giving advice to its biggest shareholders.
An uneven pattern of world growth has led to divergent national policy responses that have fueled global tensions as
the U.S. dollar slides and emerging market currencies soar.
Sharp currency shifts have heightened the calls for rebalancing trade and fed worries that emerging markets could be at risk of asset bubbles.
The United States, which has been pressing China aggressively to let its yuan rise faster, had urged nations to give the IMF more clout to referee currency disputes.
"Further action is urgently needed to reinforce the institution's role and effectiveness as a global body for macro-financial surveillance and policy collaboration," the IMF's steering committee said in a closing communique.
The United States and China both appeared to get their points across in the final communique.
Washington wanted the IMF to speak with greater "candor" in advising countries on policy, and that term appears in the statement. Beijing had stressed the need for an "evenhanded" approach, and that word is included twice.
IMF members stopped short of formally endorsing in the communique an IMF proposal that would have established a multilateral surveillance program, an idea that drew mixed reviews from member countries.
They called on the Fund to make in-depth studies of how to better manage capital flows but postponed more concrete decisions until next year.
Eswar Prasad, a former IMF official who is now a senior fellow at the Washington-based Brookings Institution, said the IMF's enhanced surveillance idea sounded awfully familiar.
"The IMF is trying to reinvent the wheel yet again," he said, adding that the proposals were "fancy new names for old surveillance mechanisms" and did not give the IMF any stronger authority to turn their policy advice into action.
"The major economies are each encouraging the IMF to push harder on other countries but showing no willingness to yield to the IMF any such leverage over their own policies," he said.
Look in the Mirror
While the U.S. push was part of its focus on the value of the yuan, China wanted to ensure the Fund also focused intently on policies in the rich world, and member countries agreed.
"Stronger and even-handed surveillance to uncover vulnerabilities in large advanced economies is a priority," the communique said. "Surveillance should also be better focused on financial stability issues and their macroeconomic linkages, and more attentive to cross-border spillovers."
Currencies have become a hot-button issue as countries seek to solidify a shaky economic recovery, particularly in advanced economies.
Liquidity-boosting efforts by the U.S. Federal Reserve have driven down interest rates and led to a weaker dollar, while rigid foreign exchange policies in other countries, notably China, have left emerging markets bearing the brunt of currency adjustment as investors pile into higher-yielding assets.
Dominique Strauss-Kahn, the IMF's managing director, said he would personally attend the Fund's regular economic consultations with the largest systemic players, including the United States, the euro zone, China and Japan.
The IMF already conducts annual economic reviews of most of its member countries and reports on a range of issues including exchange rate moves and monetary and fiscal policy.
The Fund has a mixed track record when it comes to identifying the seeds of crisis and getting countries to change their policies before it is too late.
Some critics argue that the IMF cannot be a respected voice in the global economy until all of its members feel their views are heard on world policy decisions.
"As long as the Fund is seen as an organization in which all decisions are taken by a relatively small number of rich countries, and then announced in the name of the international community, mistrust in the Fund will persist in many regions of the world," Russian Finance Minister Alexei Kudrin said.
The IMF is well aware that its leadership is heavily skewed toward the United States and Europe, and it must give dynamic emerging markets greater power, but no consensus was reached Saturday on how to do that.
The IMF's Strauss-Kahn said he expected an agreement within weeks, which would be in time to meet a self-imposed deadline of deciding by next month's G20 summit in Seoul.
U.S. Treasury Secretary Timothy Geithner said IMF reform and foreign exchange rate policies were directly linked, and if emerging markets want greater say they must release their grip on tightly managed currencies.
Strauss-Kahn put it slightly differently, saying only that with greater representation comes greater responsibility.
"You cannot be at the center and be a freerider," he said.
The International Monetary Fund's 187 member countries called for "evenhanded surveillance" and said uncovering vulnerabilities in advanced economies was a priority, potentially a major shift for the Fund, which has traditionally tread softly on giving advice to its biggest shareholders.
An uneven pattern of world growth has led to divergent national policy responses that have fueled global tensions as
the U.S. dollar slides and emerging market currencies soar.
Sharp currency shifts have heightened the calls for rebalancing trade and fed worries that emerging markets could be at risk of asset bubbles.
The United States, which has been pressing China aggressively to let its yuan rise faster, had urged nations to give the IMF more clout to referee currency disputes.
"Further action is urgently needed to reinforce the institution's role and effectiveness as a global body for macro-financial surveillance and policy collaboration," the IMF's steering committee said in a closing communique.
The United States and China both appeared to get their points across in the final communique.
Washington wanted the IMF to speak with greater "candor" in advising countries on policy, and that term appears in the statement. Beijing had stressed the need for an "evenhanded" approach, and that word is included twice.
IMF members stopped short of formally endorsing in the communique an IMF proposal that would have established a multilateral surveillance program, an idea that drew mixed reviews from member countries.
They called on the Fund to make in-depth studies of how to better manage capital flows but postponed more concrete decisions until next year.
Eswar Prasad, a former IMF official who is now a senior fellow at the Washington-based Brookings Institution, said the IMF's enhanced surveillance idea sounded awfully familiar.
"The IMF is trying to reinvent the wheel yet again," he said, adding that the proposals were "fancy new names for old surveillance mechanisms" and did not give the IMF any stronger authority to turn their policy advice into action.
"The major economies are each encouraging the IMF to push harder on other countries but showing no willingness to yield to the IMF any such leverage over their own policies," he said.
Look in the Mirror
While the U.S. push was part of its focus on the value of the yuan, China wanted to ensure the Fund also focused intently on policies in the rich world, and member countries agreed.
"Stronger and even-handed surveillance to uncover vulnerabilities in large advanced economies is a priority," the communique said. "Surveillance should also be better focused on financial stability issues and their macroeconomic linkages, and more attentive to cross-border spillovers."
Currencies have become a hot-button issue as countries seek to solidify a shaky economic recovery, particularly in advanced economies.
Liquidity-boosting efforts by the U.S. Federal Reserve have driven down interest rates and led to a weaker dollar, while rigid foreign exchange policies in other countries, notably China, have left emerging markets bearing the brunt of currency adjustment as investors pile into higher-yielding assets.
Dominique Strauss-Kahn, the IMF's managing director, said he would personally attend the Fund's regular economic consultations with the largest systemic players, including the United States, the euro zone, China and Japan.
The IMF already conducts annual economic reviews of most of its member countries and reports on a range of issues including exchange rate moves and monetary and fiscal policy.
The Fund has a mixed track record when it comes to identifying the seeds of crisis and getting countries to change their policies before it is too late.
Some critics argue that the IMF cannot be a respected voice in the global economy until all of its members feel their views are heard on world policy decisions.
"As long as the Fund is seen as an organization in which all decisions are taken by a relatively small number of rich countries, and then announced in the name of the international community, mistrust in the Fund will persist in many regions of the world," Russian Finance Minister Alexei Kudrin said.
The IMF is well aware that its leadership is heavily skewed toward the United States and Europe, and it must give dynamic emerging markets greater power, but no consensus was reached Saturday on how to do that.
The IMF's Strauss-Kahn said he expected an agreement within weeks, which would be in time to meet a self-imposed deadline of deciding by next month's G20 summit in Seoul.
U.S. Treasury Secretary Timothy Geithner said IMF reform and foreign exchange rate policies were directly linked, and if emerging markets want greater say they must release their grip on tightly managed currencies.
Strauss-Kahn put it slightly differently, saying only that with greater representation comes greater responsibility.
"You cannot be at the center and be a freerider," he said.
Wednesday, October 6, 2010
EU Debt Crisis - Soros Blames Germany for Europe 'Deflation Spiral' - CNBC
Billionaire investor George Soros blamed Germany for leading the implementation of austerity measures that will throw the euro zone into a "deflation spiral."
Additional fiscal stimulus — and not fiscal discipline — is the way out of the crisis for both Europe and the United States, Soros said in a speech at Columbia University on Tuesday.
"Deficit reduction by a creditor country such as Germany is in direct contradiction of the lessons learnt from the Great Depression of the 1930s. It is liable to push Europe into a period of prolonged stagnation or worse," Soros said.
Germany is unlikely to change its ways, however, because its economy is doing well and because the difficulties of other countries can be blamed on structural rigidities, Soros said.
German Chancellor Angela Merkel also gained the upper hand in a recent G20 meeting where she joined forces with Canada and newly elected Conservative British Prime Minister David Cameron to put pressure on other countries to adopt austerity measures, Soros noted.
As a result, President Barack Obama yielded to the majority and agreed to cut the U.S. budget deficit by half by 2013.
"This may be the right policy but it comes at the wrong time," Soros said.
Soros doesn't think Obama should extend the tax cuts pushed by his predecessor George W.Bush.
Instead, he says, the government should direct the extra money coming from higher taxes into fiscal measures to stimulate investment, not consumption.
Additional fiscal stimulus — and not fiscal discipline — is the way out of the crisis for both Europe and the United States, Soros said in a speech at Columbia University on Tuesday.
"Deficit reduction by a creditor country such as Germany is in direct contradiction of the lessons learnt from the Great Depression of the 1930s. It is liable to push Europe into a period of prolonged stagnation or worse," Soros said.
Germany is unlikely to change its ways, however, because its economy is doing well and because the difficulties of other countries can be blamed on structural rigidities, Soros said.
German Chancellor Angela Merkel also gained the upper hand in a recent G20 meeting where she joined forces with Canada and newly elected Conservative British Prime Minister David Cameron to put pressure on other countries to adopt austerity measures, Soros noted.
As a result, President Barack Obama yielded to the majority and agreed to cut the U.S. budget deficit by half by 2013.
"This may be the right policy but it comes at the wrong time," Soros said.
Soros doesn't think Obama should extend the tax cuts pushed by his predecessor George W.Bush.
Instead, he says, the government should direct the extra money coming from higher taxes into fiscal measures to stimulate investment, not consumption.
Tuesday, October 5, 2010
Japan's Move Spurs Global Markets, But Critics Shrug - CNBC
For years, Japan has flooded its moribund economy with money: interest rates near zero, asset purchases by the central bank and public works projects that have dammed the nation’s rivers and paved remote mountain roads.
Japan’s central bank redoubled that effort Tuesday, lowering its benchmark interest rate to a range of zero percent to 0.1 percent — a symbolic, if slight, edging down from the previous 0.1 percent. The Bank of Japan also said it would set up a fund of 5 trillion yen, or $60 billion, to buy government bonds, commercial paper and other assets in a bid to shore up a faltering economic recovery.
Stock markets around the world reacted favorably, as investors apparently saw it as a sign that central bankers in leading markets will continue trying to stoke their economies.
And yet, there seems to be a widespread sentiment in Japan that the announcement on Tuesday may do little to reverse the strong yen and persistent deflation that threaten the economic recovery.
Some economists say the Bank of Japan is still not doing enough to get funds flowing again into the economy, and that its soft-spoken governor, Masaaki Shirakawa, must open up the money hose even further. Others say that easy money has been available in Japan for so long that more funds in the economy will do little to get the country out of its slump.
Still others say the problem is not the amount of money in the economy. Japan’s woes, they insist, stem from how that money is allocated — to “zombie” companies propped up by easy money, or immense income transfers to the country’s burgeoning elderly — things the central bank has little power to change.
The money that the central bank had already been pumping into the economy, they say, has either sat in bank coffers — bank lending has been sluggish, despite loose monetary policy — or lent out to the same venerable but obsolete companies by loan officers untrained and ill-equipped to identify new promising entrepreneurs and other more dynamic, creative borrowers.
The easy credit, in fact, has “further impaired the efficient allocation of resources,” Ryutaro Kono, chief economist for Japan at BNP Paribas, said in a note to clients Tuesday. “The proper policy response,” he said, “should be to facilitate structural reform.”
Masamichi Adachi, an economist at JPMorgan in Tokyo, said that established companies “lacked imagination” to take advantage of the easy money by proactively expanding overseas, for example, or taking other risks to bolster their businesses.
“Japan’s low growth and deflation may be partly caused by the corporate segment remaining somewhat profitable and competitive, thus unwilling to take on risks,” Mr. Adachi said in a note earlier this year.
Households have also been reluctant to spend, because of a combination of factors, including pessimism over future income after two decades of sluggish economic growth and the rising value of cash in a deflationary economy. (When prices are falling, cash in hand is worth more every day.)
With the interest rate cut, the central bank effectively reintroduces a policy of a zero interest rate for the first time since July 2006. But given the already low rate that was in place, the effect may be largely symbolic. “Though there will be debate over the effects of the monetary loosening, I believe the Bank of Japan has done all it can at this time,” Hirokata Kusaba, an economist at the Mizuho Research Institute in Tokyo, said in a note. But that also meant that the bank “had now depleted most of its policy options.”
The other way that the central bank had hoped to bolster the economy was to weaken the yen, which has battered the nation’s export industry.
A strong yen hurts Japanese exporters by making their goods more expensive overseas and eroding the value of their overseas revenue. Despite the weaknesses in the Japanese economy, the yen tends to strengthen against other currencies in times of global financial uncertainty, partly because the country still runs a current-account surplus.
The yen’s value is also related to the difference between Japanese interest rates and those elsewhere. Low rates in Japan could give investors more incentive to sell the yen to invest in higher-yielding currencies, which would weaken the yen. More purchases by the central bank of government bonds and other assets could have a similar effect.
But Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi-UFJ, said the measures announced Tuesday would offer only “a temporary boost” to the dollar-yen exchange rate. Intervention by the Japanese government in currency markets has also failed to reverse the upward trend in the yen.
Indeed, the yen initially fell against the dollar after the announcement, but it later rebounded to 83.40 to the dollar, stronger than before the rate change.
“From market reactions, we can see that Japan ultimately cannot look to monetary policy alone to solve problems like deflation and the strong yen,” said Mr. Kusaba at Mizuho Research Institute. “From now on, the market will be watching what actions Japan takes on the fiscal and policy front.”
But there are only so many rivers to dam and mountain roads to pave.
Japan’s central bank redoubled that effort Tuesday, lowering its benchmark interest rate to a range of zero percent to 0.1 percent — a symbolic, if slight, edging down from the previous 0.1 percent. The Bank of Japan also said it would set up a fund of 5 trillion yen, or $60 billion, to buy government bonds, commercial paper and other assets in a bid to shore up a faltering economic recovery.
Stock markets around the world reacted favorably, as investors apparently saw it as a sign that central bankers in leading markets will continue trying to stoke their economies.
And yet, there seems to be a widespread sentiment in Japan that the announcement on Tuesday may do little to reverse the strong yen and persistent deflation that threaten the economic recovery.
Some economists say the Bank of Japan is still not doing enough to get funds flowing again into the economy, and that its soft-spoken governor, Masaaki Shirakawa, must open up the money hose even further. Others say that easy money has been available in Japan for so long that more funds in the economy will do little to get the country out of its slump.
Still others say the problem is not the amount of money in the economy. Japan’s woes, they insist, stem from how that money is allocated — to “zombie” companies propped up by easy money, or immense income transfers to the country’s burgeoning elderly — things the central bank has little power to change.
The money that the central bank had already been pumping into the economy, they say, has either sat in bank coffers — bank lending has been sluggish, despite loose monetary policy — or lent out to the same venerable but obsolete companies by loan officers untrained and ill-equipped to identify new promising entrepreneurs and other more dynamic, creative borrowers.
The easy credit, in fact, has “further impaired the efficient allocation of resources,” Ryutaro Kono, chief economist for Japan at BNP Paribas, said in a note to clients Tuesday. “The proper policy response,” he said, “should be to facilitate structural reform.”
Masamichi Adachi, an economist at JPMorgan in Tokyo, said that established companies “lacked imagination” to take advantage of the easy money by proactively expanding overseas, for example, or taking other risks to bolster their businesses.
“Japan’s low growth and deflation may be partly caused by the corporate segment remaining somewhat profitable and competitive, thus unwilling to take on risks,” Mr. Adachi said in a note earlier this year.
Households have also been reluctant to spend, because of a combination of factors, including pessimism over future income after two decades of sluggish economic growth and the rising value of cash in a deflationary economy. (When prices are falling, cash in hand is worth more every day.)
With the interest rate cut, the central bank effectively reintroduces a policy of a zero interest rate for the first time since July 2006. But given the already low rate that was in place, the effect may be largely symbolic. “Though there will be debate over the effects of the monetary loosening, I believe the Bank of Japan has done all it can at this time,” Hirokata Kusaba, an economist at the Mizuho Research Institute in Tokyo, said in a note. But that also meant that the bank “had now depleted most of its policy options.”
The other way that the central bank had hoped to bolster the economy was to weaken the yen, which has battered the nation’s export industry.
A strong yen hurts Japanese exporters by making their goods more expensive overseas and eroding the value of their overseas revenue. Despite the weaknesses in the Japanese economy, the yen tends to strengthen against other currencies in times of global financial uncertainty, partly because the country still runs a current-account surplus.
The yen’s value is also related to the difference between Japanese interest rates and those elsewhere. Low rates in Japan could give investors more incentive to sell the yen to invest in higher-yielding currencies, which would weaken the yen. More purchases by the central bank of government bonds and other assets could have a similar effect.
But Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi-UFJ, said the measures announced Tuesday would offer only “a temporary boost” to the dollar-yen exchange rate. Intervention by the Japanese government in currency markets has also failed to reverse the upward trend in the yen.
Indeed, the yen initially fell against the dollar after the announcement, but it later rebounded to 83.40 to the dollar, stronger than before the rate change.
“From market reactions, we can see that Japan ultimately cannot look to monetary policy alone to solve problems like deflation and the strong yen,” said Mr. Kusaba at Mizuho Research Institute. “From now on, the market will be watching what actions Japan takes on the fiscal and policy front.”
But there are only so many rivers to dam and mountain roads to pave.
Monday, October 4, 2010
Bank of Japan Reverts to Zero Rates in Surprise Move - CNBC
The Bank of Japan on Tuesday effectively reverted to zero interest rates on growing signs the
strong yen is hurting a fragile economy, surprising markets and preceding the Federal Reserve in stepping up its expansionary monetary policy.
The central bank also decided to set up, as a temporary measure, a 5 trillion yen ($60 billion) fund to buy assets ranging from government bonds and short-term government securities to commercial paper and corporate bonds, and will also accept another 30 trillion yen of those assets as collateral under a loan scheme.
The BOJ said it would guide the overnight call rate at a range of zero to 0.1 percent, against the previous target of 0.1 percent. It also pledged to keep rates effectively at zero until
prices were seen stabilising.
"The BOJ is bringing its monetary policy closer to quantitative easing, allowing market rates to hover near zero and pledging to keep a near-zero interest rate policy in the longer term until prices stabilise," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"These steps are more aggressive than markets had expected. The BOJ's decision is a surprise and will have an impact on currencies due to the message it delivers."
Central Banks Under Pressure
The surprise move weakened the yen against the dollar, pushed up Japanese government bond futures and helped stock prices turn positive.
The decision to cut interest rates was made by a unanimous vote, but board member Miyako Suda opposed including government bonds among the type of assets the BOJ could buy using its pool of funds.
The BOJ is not the only central bank under pressure to do more to support an economy that is showing signs of faltering.
Financial markets expect the Fed to embark upon another round of asset buying to bolster a sluggish recovery as early as its November meeting. There are also calls within the Bank of England for further easing, although the bank has kept markets guessing on whether it will indeed do so.
In Japan, slowing export growth, a surprise fall in factory output and companies' worries that the strong yen may hurt the outlook have heightened the case for the central bank to ease
policy.
The government, which intervened in the currency market last month to stem sharp yen gains, has piled pressure on the BOJ for fresh action to support the economy.
But BOJ officials have been struggling to reach a consensus on whether to use some of the bank's depleted policy options now or later, and how aggressive any measure should be.
The BOJ had already been edging nearer to quantitative easing by allowing the yen pumped into markets through currency intervention to remain in the financial system, instead of
draining it.
strong yen is hurting a fragile economy, surprising markets and preceding the Federal Reserve in stepping up its expansionary monetary policy.
The central bank also decided to set up, as a temporary measure, a 5 trillion yen ($60 billion) fund to buy assets ranging from government bonds and short-term government securities to commercial paper and corporate bonds, and will also accept another 30 trillion yen of those assets as collateral under a loan scheme.
The BOJ said it would guide the overnight call rate at a range of zero to 0.1 percent, against the previous target of 0.1 percent. It also pledged to keep rates effectively at zero until
prices were seen stabilising.
"The BOJ is bringing its monetary policy closer to quantitative easing, allowing market rates to hover near zero and pledging to keep a near-zero interest rate policy in the longer term until prices stabilise," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"These steps are more aggressive than markets had expected. The BOJ's decision is a surprise and will have an impact on currencies due to the message it delivers."
Central Banks Under Pressure
The surprise move weakened the yen against the dollar, pushed up Japanese government bond futures and helped stock prices turn positive.
The decision to cut interest rates was made by a unanimous vote, but board member Miyako Suda opposed including government bonds among the type of assets the BOJ could buy using its pool of funds.
The BOJ is not the only central bank under pressure to do more to support an economy that is showing signs of faltering.
Financial markets expect the Fed to embark upon another round of asset buying to bolster a sluggish recovery as early as its November meeting. There are also calls within the Bank of England for further easing, although the bank has kept markets guessing on whether it will indeed do so.
In Japan, slowing export growth, a surprise fall in factory output and companies' worries that the strong yen may hurt the outlook have heightened the case for the central bank to ease
policy.
The government, which intervened in the currency market last month to stem sharp yen gains, has piled pressure on the BOJ for fresh action to support the economy.
But BOJ officials have been struggling to reach a consensus on whether to use some of the bank's depleted policy options now or later, and how aggressive any measure should be.
The BOJ had already been edging nearer to quantitative easing by allowing the yen pumped into markets through currency intervention to remain in the financial system, instead of
draining it.
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