21-Oct (Financial Times) — “Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation,” Janet Yellen told an audience in Denver.

The comments highlight the continued appetite within the Fed for further action if the economy does not improve and suggest that another round of quantitative easing is the leading option. Ms Yellen has been regarded as an advocate for stimulative monetary policy during recent years.

But she did not imply that further action is imminent and did not highlight the option of buying mortgage-backed securities, as another Fed governor, Daniel Tarullo, did in a speech on Thursday.

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By RON PAUL
20-Oct (The Wall Street Journal) — To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.

…The Fed fails to grasp that an interest rate is a price, the price of time. Attempting to manipulate that price is as destructive as any other government price control.

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21-Oct (Reuters) — The Eurogroup of euro zone finance ministers has approved the payment of the next tranche of 8 billion euros ($11 billion) under Greece’s EU/IMF bailout programme — pending approval from the International Monetary Fund, the ministers said in a statement on Friday.

“We have agreed to endorse the disbursement of the next tranche of financial assistance to Greece in the context of the current economic adjustment programme,” said the statement from the Eurogroup, which was meeting in Brussels on Friday evening.

“The disbursement is expected to take place in the first half of November, pending the approval by the Board of the International Monetary Fund,” it said.

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PG View: While it is acknowledged by the troika itself that the Greek financial situation continues to deteriorate and the country is being further hobbled by massive strikes and protests, by all-means give them another €8 bln.

21-Oct (CNBC) — France’s push to use more European Central Bank money to fight the euro zone debt crisis has run into strong resistance from Germany and other EU partners, leaving Paris increasingly isolated before a crucial summit.

The rift between Europe’s two biggest powers has already forced leaders to tack on an extra summit in the coming week. They will now meet twice — on Sunday and Wednesday — to try to adopt a comprehensive strategy to fight the crisis that began in Greece, spread to Ireland and Portugal and is now threatening to engulf bigger economies in the 17-nation currency area.

Senior European sources said Berlin and Paris were still at loggerheads on two core elements of a plan to build a firewall around Greece and stabilise bond markets — how to scale up the euro zone’s rescue fund and how to reduce Greek debt.

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21-Oct (Bloomberg) — The budget committee in Germany’s lower house of parliament approved guidelines for the region’s rescue fund that exclude proposals on how to leverage its firepower, said Ulrich Scharlack, spokesman of the parliamentary group of Chancellor Angela Merkel’s Christian Democratic Union.

“We assume that the leveraging” of the European Financial Stability Facility “will be decided at the Brussels summit on Oct. 23,” Scharlack said by telephone today, adding that this decision would then have to be presented to the budget committee in Berlin for approval before Merkel could return to Brussels for a second European summit on Oct. 26.

European leaders will hold two summits in four days in an effort to break a deadlock on how to tackle the region’s debt crisis. The budget committee called on Merkel to ensure there is no EFSF leveraging via the European Central Bank and that the fund isn’t allowed to operate as a bank.

Germany’s guarantees to the EFSF of as much as 211 billion euros ($292 billion) must not be exceeded, the committee said.

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PG View: No leverage and no additional funds from Germany…that does not bode well for the upcoming summits.

21-Oct (Bloomberg) — France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, according to Standard & Poor’s.

The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report dated today. These assume low economic growth and a double-dip recession in the first set of circumstances, and add an interest-rate shock to the recession in the second.

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21-Oct (USAGOLD) — Gold has rebounded strongly into the range as the dollar tumbled to new post-WWII lows against the yen. The break of key support in USD-JPY put the greenback under broader pressure. Despite the recent concession that this weekend’s EU summit will not net the promised solution for Europe’s debt/banking crisis, even the euro rebounded to pressure its 5-week high versus the dollar.

The yen has benefited from safe-haven flows in recent years, primarily because they have been living in a zero interest rate environment with high debt for two-decades. They seem comparatively stable. The yen was bolstered further when the field of safe-haven currencies was narrowed early last month with the Swiss pegging the franc to the euro. The latest record high in the yen is already heightening expectations that the BoJ will intervene to protect Japanese exporters.

We’ve made note of the global currency wars repeatedly in recent years. In a global economy, nobody wants a strong currency because it makes exported goods less competitive; and therefore a beggar-thy-neighbor race to the bottom ensues. Of course there are repercussions for currency debasement as well; most notably, higher inflation.

If policymakers in Japan move to hinder the safe-haven appeal of the yen, that all-but leaves gold as the last haven standing…

• Canada CPI +0.2% in Sep; +3.2% y/y, above market expectations. Core surged to +2.2% y/y, also above expectations.
• France business confidence fell to 97 in Oct, below market expectations, vs 99 in Sep.
• S&P: France Likely to Lose Top Rating in Stressed Economic Scenario.
• Germany Ifo business climate fell to 106.4 in Oct, above expectations, vs negative revised 107.4 in Sep; expectations falls to 97.0, current assessment drops to 116.7.

21-Oct (Bloomberg) — The amount the European Central Bank borrowed from the Federal Reserve’s dollar swap facility rose to $1.9 billion, the most in 17 months, as U.S. prime money market funds cut lending to the region’s banks.

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21-Oct (The Wall Street Journal) — Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery—the housing and mortgage markets—by working to push down mortgage rates.

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21-Oct (The Wall Street Journal) — Europe’s efforts to deliver a comprehensive plan to resolve the euro-zone debt crisis were in danger of unraveling Thursday as disagreement between Germany and France over virtually every point forced the 27-nation bloc to concede a much-anticipated summit of European Union leaders on Sunday won’t produce an agreement.

The leaders of the euro zone’s two largest economies are key to any deal on addressing the nearly two-year-old sovereign-debt crisis.

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PG View: …but, but they promised a coordinated plan by the end of the month just 2-weeks ago. What I’m hearing is there is no coordination and there is no plan.

By Ambrose Evans-Pritchard
20-Oct (The Telegraph) — The EU-IMF bail-out machinery would require an extra €250bn or more to stabilize eurozone debt markets, forcing Germany and EU’s creditor states to vastly increase rescue commitments.

The report, due Friday, said a double-dip recession would lead to a downgrade of “one or two notches” for France, Spain, Italy, Ireland and Portugal, both because of tumbling tax revenues and the extra costs of propping up banks.

The scenario looks increasingly likely after Germany slashed its growth forecast from 1.8pc to 1pc for 2012. Greece and Portugal are contracting at alarming speeds. Italy and Spain are already in industrial recession.

“Confidence surveys have fallen off a cliff over past three months,” said Marchel Alexandrovich from Jefferies Fixed Income. “The lagged effects of fiscal and monetary tightening are still working their way through the system so it looks highly likely that we are in recession now.”

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20-Oct (CNBC) — A market tethered to hopes for a European debt crisis solution is likely to remain in a state of confusion, even if two upcoming summits exceed muted expectations.

As a result, market volatility will continue until there are some signs that the EU is finally getting its debt crisis under control. And the betting is now that it could take months or more for the situation to get resolved.

“Even if the Europeans come up with something very robust that shows they’re going to try to deal with the crisis, this is going to be a long slog,” says Bill Isaac, head of financial institutions practice at FTI Consulting in Vienna Va. “The problem is a bunch of countries are way overextended and somebody’s going to have to take some losses.”

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PG View: Like I said in this morning’s report, the troika’s credibility is deteriorating rapidly…

20-Oct (The Telegraph) — Despite another day of violent protests on Athens’ streets, politicians backed the bill 154 to 144 after desperate pleas from Greek senior ministers.

Meanwhile, a leaked report from the latest “troika” mission revealed that officials from the European Union, European Central Bank and International Monetary Fund (IMF) have concluded that the €159bn Greek bail-out agreed three months ago is no longer adequate to stabilise Athens.

The officials said Greece’s financial situation had deteriorated significantly since the vast bail-out was agreed in July.

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PG View: The inadequacy of the bailout means that Greece will have to pile even more austerity on its people, who are already on the verge of snapping. Or, they could just let Greece go and hope they have an adequate firewall against contagion. Those hopes were largely dashed today as well, as the EU scrambles to put together a second summit on expectations that there really is no plan to be revealed on Sunday.

20-Oct (Financial Times) — European leaders will be forced to hold a second summit, perhaps as early as Wednesday, because of the inability of German and France to reach a deal on how to increase the firepower of the eurozone’s €440bn rescue fund.

European leaders confirmed that a high-stakes summit on Sunday aimed at finalising a plan to shore up the eurozone would proceed. But one senior German official said that no substantive decisions would be taken on giving additional resources to the fund, called the European Financial Stability Facility, so it could tackle the growing threat to large eurozone banks and the Italian bond market.

“There will be no agreements,” said the senior German official. “This will now happen Wednesday at the earliest.”

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20-Oct (NPR) — Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.

It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.

…”There’s such a thing as too much debt,” he says. “But also such a thing, perhaps, as too little.”

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PG View: Sort of mute as there’s no chance we’ll be paying down our monstrous debt any time soon, but an interesting read nonetheless.

20-Oct (BBC) — EU leaders are to hold another summit by Wednesday, because they will not be able to agree a rescue plan for the euro on Sunday.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said a crisis strategy would be discussed on Sunday and adopted at the next meeting.

EU leaders need to agree a second bailout for Greece, how to recapitalise banks and a stronger bailout fund.

President Sarkozy also called for talks with the private sector.

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PG View: Well that pretty much seals the deal, there is no coordinated plan to be revealed on Sunday…maybe they’ll have something for us on Wednesday…

Risk-Off As Hopes of Debt Crisis Resolution from EU Summit Fade

20-Oct (USAGOLD) — Gold has fallen deeper into the range as fading hopes that a solution to the European sovereign debt/banking crisis will be revealed at this weekend’s EU summit. The rise in risk aversion weighed on the euro and stocks, lifted the dollar, which in turn pressured the yellow metal.

Die Welt hinted this morning that there was a chance that the EU summit might be delayed. That assertion was refuted by EU officials, but ongoing disagreements between Germany and France have been increasingly on display this week. This leaves many investors thinking that when the closing gavel falls on Sunday, that despite the assurances of 2-weeks ago, Europe still won’t be any closer to a real solution to its woes.

This is quickly becoming a credibility issue; as the troika is increasingly being seen the purveyor of hollow assurances and false hopes. At some point, the market may just give up on them; and that’s when all bets are off. Once credibility is lost, it is frequently very difficult to regain.

While rising doubts have created a risk-off environment, if fears of systemic risks suddenly rise as a result of the troika’s failure — or inability — to act, the safe-haven aspect of physical gold would likely be catapulted back to the fore. For now, we continue to see solid interest on dips within the range.

• US Philly Fed index rebounded to 8.7 in Oct, well above market expectations of -9.0, vs -17.5 Sep.
• US existing home sales -3.0% to 4.91 mln in Sep, about what was expected.
• US leading indicators +0.2% in Sep, in line with expectations, vs +0.3% in Aug.
• US initial jobless claims -6k to 403k in the week ended 15-Oct, vs upward revised 409k in the previous week.
• UK retail sales +0.6% in Sep, above market expectations, vs negatively revised -0.4% in Aug; 0.6% y/y.
• Germany PPI +0.3% m/m in Sep, in line with expectations; 5.5% y/y.
• Switzerland trade balance CHF1.9 bln in Sep.
• Japan leading index (revised) -0.3% m/m in Aug, vs -0.8% previously; coincidence index revised higher to 0.5%.

20-Oct (Der Spiegel) — How can the reach of the euro backstop fund be maximized without forcing governments to throw more money at it? European leaders are considering a finance tool that would attract private investors and greatly expand the reach of the fund.

It is already an immense sum of money: Euro-zone countries have provided guarantees worth €780 billion to the currency backstop fund known as the European Financial Stability Facility. It has a lending capacity of €440 billion, with which it is to help out deeply indebted members of the currency union.

As large as it is, though, it already appears that the EFSF could in fact be too small.

…What, then, is a currency union to do? The magic word is “leveraging.” Euro-zone leaders are looking for a finance tool which could make the impact of the EFSF as large as possible.

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20-Oct (Reuters) — The euro fell against the dollar on Thursday after a report that the German government had not ruled out a postponement of the EU summit planned for this Sunday to grapple with the euro zone debt crisis.

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Let There Be Inflation

I put up a post last week that is indicative of the rising calls for the Fed to do more in the face of legislative gridlock in Congress that continues to hinder further fiscal response to our economic woes here in the United States. Calls for additional stimulus couched as a “jobs bill” have gone nowhere, escalating pressure on the Fed to do something…anything…to increase economic activity and generate some jobs.

Some have called for the Fed to focus on the “maximum employment” portion of its dual mandate rather than “stable prices.” Some believe that in targeting inflation at a higher level, it will incent consumers to make purchases sooner rather than later because the good or service that they desire would carry a higher price in the future. This would create demand for goods and services, which has been conspicuously absent during the lackluster recovery as consumers have focused on paying down debt and increasing their rate of savings amid broad-based economic uncertainty. Renewed demand would then increase employment, or so the argument goes.

The calls for inflation targeting gained momentum this week with Goldman Sachs’ called on the Fed to target GDP. While targeting a higher level of GDP rather than inflation might be more palatable from a marketing standpoint, they are essentially one and the same. Goldman economists wrote in a report that “while a shift to a nominal GDP level target would be a big decision, it would be consistent with the Fed’s dual employment and price mandate.” With only monetary policy at their disposal and interest rates already at zero percent, about the only option to increase GDP is expansion of the monetary base. That in turn devalues the dollar and creates inflation along with that additional economic activity.

It has always been my view that Fed Chairman Bernanke views deflation as a far greater evil than inflation, and he is therefore perhaps predisposed to allowing higher inflation to develop; and in fact to perhaps target inflation. Bernanke strongly emphasized clarity in a speech in Boston on Tuesday, saying, “The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans,” Bernanke said today in a speech in Boston. “Forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.”

Following that speech, PIMCO’s Bill Gross tweeted the following: Bernanke’s emphasis on “communications” is likely code for “targeting” nominal GDP or unemployment.

Apparently it was Gross’ opinion that the Fed chairman was echoing the recommendation of Goldman Sachs. Whether we ultimately see GDP targeting, unemployment targeting or outright inflation targeting, inflation is likely to be exactly what we get. Gold is of course the classic hedge against inflation and the requisite dollar devaluation.

18-Oct (Financial Times) — France warned on Tuesday that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend.
More video

In sharp contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”.

Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent.”

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19-Oct (USAGOLD) — Gold has returned to consolidative mode after rebounding from yesterday’s intraday sell-off on rumors that Germany and France had agreed to a plan to expand the European bailout fund to €2 trillion and recapitalize banks to meet a 9% capital ratio. It wasn’t abundantly clear whether the €2 trillion was inclusive of the recapitalization or not, as rumors always seem to lack details.

This initially struck me as unlikely as the Merkel administration had gone to great lengths early in the week to temper expectations of the Franco-German plan that is to be revealed at this weekend’s EU summit. And indeed the rumor was quickly refuted by an EU official late yesterday. The market is back in “wait and see” mode until the weekend, when presumably details will be announced.

• US CPI +0.3% in Sep, in line with expectations; core +0.1%, below expectations of +0.2%.
• US housing starts surged 15% to 658k in Sep on strong multi-family starts, well above market expectations of 590k, vs 572k Aug.
• Canada leading indicator -0.1% in Sep, below market expectations of +0.1%, vs unch in Aug.
• Eurozone current account (sa) -€6.3 bln in Aug, vs upward revised -€6.8 bln in Jul.
• Norges Bank holds steady on deposit rate at 2.5%.
• Japan All-Industry Index (sa) -0.5% m/m in Aug, vs 0.4% in Jul.

19-Oct (Reuters) — Demonstrators clashed with police in front of the Greek parliament on Wednesday as tens of thousands rallied at the start of a general strike timed to coincide with a vote on a bitterly resented new round of austerity measures.

Protesters showered police with stones and fire bombs on the steps of the parliament building, forcing them to retreat. The boom of tear gas canisters fired by police rang out over Syntagma Square while black smoke curled into the air.

For the first time since the crisis broke out two years ago, demonstrators reached the steps of the neo-classical building and there was a bitter tang of tear gas inside, a Reuters reporter said.

With memories still fresh of the running battles that marked anti-austerity protests in June, more than 5,000 police had deployed on the streets and the mood among the demonstrators was angry.

“We have no future here. All young people want to go abroad and they are right to do so,” said Anastasia Kolokotsa, 17, protesting outside parliament.

“There are no jobs, there is nothing here.”

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19-Oct (USAToday) — Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers.

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what’s owed on home loans and credit cards.

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