by Ezra Klein
16-May (Washington Post) — There’s some chance that House Speaker John Boehner’s threat to provoke another debt-ceiling crisis doesn’t much matter. If it does matter, it’s only because fiscal policy has already gone very, very wrong.

…So we’re not likely to have a “debt-ceiling crisis.” We’re either likely to solve our fiscal problems early in the year in way that defuses Boehner’s debt-ceiling threat or we’re likely to spend 2013 in a state of permanent crisis in which Congress lights the economy on fire by failing on the Bush tax cuts, the automatic spending cuts, the debt ceiling, and the appropriation bills needed to keep the federal government open.

That’s not a scenario that looks like August 2011, when the debt ceiling was the only thing on the docket. It’s an economic crisis that looks more like September 2008, when Lehman was collapsing. And in that world, it’s so hard to predict the resulting financial chaos, public outrage, interest group pressure, and political terror that it’s almost impossible to say anything about how the crisis would be resolved, or who might benefit.

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Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

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PG View: General tenor of the FOMC seems a tad more dovish this time around.

16-May (USAGOLD) — The range low in gold at 1522.40 successfully contained the downside in overseas trading as ongoing concerns about Greece and the eurozone as a whole persist, contributing to risk aversion. The euro has tested below 1.2700 for the first time since January, keeping the dollar underpinned. US stocks rebounded on some encouraging data, providing gold with a little nudge higher.

New Greek elections have been scheduled for June 16 after it was acknowledged yesterday that efforts to form a coalition government have failed. A senior Greek judge will head a caretaker-government in the interim. The market is likely to remain on edge ahead of the new election, amid expectations that the anti-austerity Syriza party is going to garner even greater support the next time around.

In the meantime, there may be a good old-fashion bank run brewing in Greece, with more than €1 bln withdrawn already this week. At this rate, Greek banks will have to be recapitalized at some point and there are already rumblings of an LTRO3.

However, as BoE governor Mervyn King adroitly pointed out, what Greece and the broader periphery faces is not a liquidity crisis at all, but rather a solvency crisis. Certainly, spooling up the printing presses could provide Greek banks with the liquidity they need to cover withdrawals, but that does nothing to resolve the core fiscal issues that led to the crisis in the first place. If you fail to address solvency in a meaningful way, you may as well prepare to print to infinity and beyond.

• US industrial production +1.1% in Apr, well above market expectations of +0.5%, vs negative revised -0.6% in Mar; cap use rises to 79.2%.
• US housing starts +2.6% to 717k in Apr, above expectations of 679k, vs upward revised 699k in Mar.
• Canada manufacturing shipments +1.9% in Mar, well above market expectations of +0.2%, vs -0.3% in Feb.
• UK ILO unemployment rate 8.2% in Mar, vs 8.3% in Feb.
• Eurozone CPI +0.5% m/m in Apr, in-line with expectations, vs 1.3% m/m in Mar; +2.6% y/y. Core +1.6% y/y.
• Eurozone trade balance (sa) €4.3 bln in Mar, vs upward revised €4.0 bln in Feb.
• Portugal unemployment rate rose to 14.9% in Q1, vs 14.0% in Q4-11.

16-May (WSJ Blogs) — Whatever happens to Greece, whether it continues to use the euro or decides to give it up, the fundamental problem of imbalances within the euro zone still needs to be addressed.

Bank of England Governor Mervyn King reiterated the point at Wednesday’s quarterly Inflation Report press conference. Europe, he said, faces a crisis of solvency, not liquidity.

This distinction is of crucial importance.

There is widespread hope that somehow the European Central Bank will step in and save the day, perhaps through yet further rounds of its LTRO program of liquidity injections into the banking sector. But, as King pointed out, all this does is to increase the banking sector’s dependence on the central bank. It doesn’t actually solve anything, but rather merely gives a short-term palliative to an ongoing crisis.

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16-May (CNN) — Greece will hold new elections on June 17, state media reported Wednesday, after Greeks pulled hundreds of millions of euros out the banking system amid fears that the country will not be able to stay in the European Union’s single currency.

Setting the date for a new vote comes 10 days after a national election where voters punished the major parties for harsh budget cuts, leaving no party able to form a government.

A caretaker administration led by a senior judge will run the country until the new vote.

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15-May (Der Spiegel) — A large portion of Germany’s massive gold reserves are stored abroad, mainly in the Federal Reserve in New York. But are the bars really where they are supposed to be? A dispute has broken out over whether the central bank needs to check on its gold, or if Germany can trust its international partners.

Germany has gold reserves of just under 3,400 tons, the second-largest reserves in the world after the United States. Much of that is in the safekeeping of central banks outside Germany, especially in the US Federal Reserve in New York. One would think that with such a valuable stash, worth around €133 billion ($170 billion), the German government would want to keep a close eye on its whereabouts. But now a bizarre dispute has broken out between different German institutions over how closely the reserves should be checked.

Germany’s federal audit office, the Bundesrechnungshof, which monitors the German government’s financial management, is unhappy with how Germany’s central bank, the Bundesbank, keeps tabs on its gold. According to media reports, the auditors are dissatisfied with the fact that gold reserves in Frankfurt are more closely monitored than those held abroad.

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15-May (The Hill) — Treasury Secretary Tim Geithner on Tuesday warned Speaker John Boehner (R-Ohio) against playing with the U.S. debt ceiling.

Boehner, who’s giving a speech on the economy later in the day, will say that the debt ceiling, set to be breached early next year, should not be raised unless greater spending cuts and reforms are enacted, according to prepared remarks released by the Speaker’s office.

…“This commitment to meet the obligations of the nation, this commitment to protect the creditworthiness of the country, is a fundamental commitment that you can never call into question or violate,” Geithner said Tuesday in reaction to the leaked Boehner remarks.

“You can’t put that into question, you can’t put that into doubt, you can’t threaten to put that into service … of the partisan political agenda of any side of the American political spectrum. It is not responsible to do that,” he said in his address to the Peterson Foundation.

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PG View: You had to know that the debt ceiling debate was going to come back around before the November elections…right?

15-May (Financial Times) — Andrea Stautberg, 27, and her husband James wanted to buy a house after finishing graduate school in 2009. But in the face of a tough economic climate, uncertain job prospects and $115,000 in student loan payments, the couple instead decided to save money by living with James’s parents in Texas.

They stayed for more than a year – longer than the three months they had planned – before deciding to rent a flat.

“We are looking to buy a house, but have yet to get preapproved,” said Ms Stautberg. “We lived with his parents for as long as we did to pay back our student loans and still save for a down payment.”

The Stautbergs’s story illustrates how difficult it has become for young Americans to buy their first homes, despite low interest rates and years of declining house prices.

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15-May (USAGOLD) — Greece announced earlier in the New York session that ongoing talks centered on forming a coalition government had broken-down, breaking the relative calm of this Tuesday morning. Stocks tumbled, the euro fell below 1.2800 for the first time since January. The dollar surged and gold retreated back to the low end of yesterday’s range.

New election are now almost a certainty and if the anti-austerity Syriza party garners even more support the next time around as is widely expected, there’s going to be an interesting clash between a new Greek government and the troika. I wouldn’t be surprised if there were a secret hope across euroland that Greece gives Belgium a run for its money for the record term of a caretaker government. You may recall that Belgium went 541-days without a government from the general election on 13-Jun-10 to the swearing-in of a coalition government on 06-Dec-11.

At this point’, given the magnitude of moves in both the dollar and the euro, gold is holding up relatively well. Yesterday’s low at 1548.15 is intact, providing an intervening support level ahead of 1534.06 and the range low at 1522.40.

• US CPI unch in Apr, below expectations of +0.1%; core +0.2% on expectations of +0.1%.
• NY Empire State index 17.1 in May, well above market expectations of 9.3, vs 6.6 in Apr.
• US retail sales +0.1% in Apr, below market expectations of +0.2%, vs negative revised +0.7% in Mar; ex-auto +0.1% on expectations of +0.2%.
• Eurozone Q1 GDP (sa) – 1st Release unch q/q, above expectations of -0.2%, vs -0.3% in Q4-11; unch y/y.
• Individual preliminary Q1 y/y GDPs: Germany 1.2%, France 0.3%, Italy -1.3%, Portugal -2.2%, Greece -6.2%.
• Germany ZEW Economic Sentiment tumbles to 10.8 in May, below expectations of 16.5, vs 23.4 in Apr; Current Situation rises to 44.1.
• Turkey unemployment rate (sa) rises to 10.4% in Apr, vs 10.2% in Mar.
• Japan consumer confidence index (sa) slips to 40.0 in Apr, vs 40.3 in Mar.
• Japan tertiary industry index (sa) -0.4% m/m in Mar, vs unch in Feb.
• Japan machinery orders ex-Elec&Ship -3.5% m/m in Mar, vs +4.8% in Feb.
• Singapore retail sales (nominal) +9.1% y/y in Mar, vs 19.0% y/y in Feb.
• South Korea unemployment rate (sa) steady at 3.4% in Apr.

*** This is an updated and corrected version. The IMF has NOT stated that it plans to buy $2.3 billion of gold as reserves. INSTEAD, the IMF has only stated that it plans to increase its reserves. ***

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15-May (WSJ Blogs) — Here’s the headline that has jolted global markets over the last few minutes:

*DJ Greek Coalition Talks Have Failed-Presidency

Just like that, stock futures have erased earlier gains, European stocks are sharply lower and the euro has fallen below $1.28 for the first time since January. Commodities are in the red and safe-haven Treasurys are getting a lift after Greece’s president admitted defeat in his talks with party leaders to form a coalition government.

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PG View: While gold has retreated into negative territory as well, it remains comparatively well supported, relative to the euro.

15-May (BBC) — Greece is set to go to the polls again after days of coalition talks failed to produce agreement on a new government, says the leader of the Socialist Pasok party, Evangelos Venizelos.

A final round of talks on Tuesday morning broke up without a deal.

In elections on 6 May, a majority of Greek voters backed parties opposed to austerity plans demanded by the EU and IMF in return for two bailouts.

A caretaker government will be appointed on Wednesday, reports say.

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15-May (MNI) — A third round of “quantitative easing” is not something Federal Reserve policymakers are eager to undertake, but the odds of QE3 could increase considerably to the extent that Europe’s debt crisis reintensifies and threatens to worsen U.S. financial conditions and undermine economic growth, officials say.

The Fed has been watching anxiously as political rebellion against austerity in Greece and elsewhere has aggravated European financial strains and heightened speculation about an eventual crack-up of Europe’s single-currency system.

…David Altig, director of research for the Atlanta Fed, told MNI Monday that the European crisis is already dimming U.S. growth prospects and said that if it further damages the economy while also increasing deflation risks, it could contribute to the launching of QE3.

Another senior official, who did not wish to be identified, was even more emphatic in saying that the European mess could necessitate QE3, depending on how the domestic economic picture evolves.

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14-May (WSJblogs) — German Chancellor Angela Merkel is currently having a hard time in Europe with her austerity course.

But matters have suddenly got more uncomfortable at home too. Some German newspapers Monday have interpreted Sunday’s election defeat for her party as the beginning of her own political end.

The devastating loss of her conservative Christian Democrats in German state elections will make her life more difficult because the stronger center-left opposition will demand more concessions from Germany’s austerity policy.

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14-May (Derp Spiegel) — After Greek voters rejected austerity in last week’s election, plunging the country into a political crisis, Europe has been searching for a Plan B for Greece. It’s time to admit that the EU/IMF rescue plan has failed. Greece’s best hopes now lie in a return to the drachma.

…Two years after the government in Athens requested the first emergency loans in Brussels, the European debt crisis is reaching a turning point. Europe and the international community pumped about €240 billion ($312 billion) into the Balkan nation, government employees were let go, pensions were slashed and a series of restructuring programs were approved.

But even though the country is virtually being governed by the European Commission and the IMF, Greece’s debts are higher than ever and the recession is worsening. As the political situation becomes increasingly chaotic, new elections seem all the more likely.

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14-May (Der Spiegel) — Last week Chancellor Angela Merkel’s austerity policy suffered twin blows in Europe when Socialist Francois Hollande, a critic of her strict approach, won the French presidency and Greek voters firmly rejected the painful reforms imposed on them.

On Sunday came a further major setback for Merkel when her conservative Christian Democrats suffered a big defeat in an election in the country’s most populous state, North Rhine-Westphalia (NRW). It weakens her at home at a time when opposition to her crisis strategy is mounting across Europe.

The CDU saw their support plunge to just 26.3 percent, down from nearly 35 percent in 2010, and the worst result in the state since World War II. The center-left Social Democrats (SPD) won 39.1 percent of the vote and will have enough seats to form a stable majority with the Greens.

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Heightened Greek Woes Boost Dollar, Weigh on Gold

14-May (USAGOLD) — The euro fell to new 4-month lows below 1.2900 as a last ditch effort by Greek President Papoulias to forge a coalition government also seem destined for failure. New elections are looking increasingly likely; and as we discussed last week, the anti-austerity Syriza is expected to garner even more support the next time around. Discussions of Greece exiting the EMU are now being conducted in the open…and by just about everyone.

Nonetheless, I think all the parties involved are frightened of the implications of a Greek default and abandonment of the euro. This may give Alexis Tsipras, the leader of Syriza the upper-hand in any negotiations. Certainly he is negotiating from a position of weakness, and truth be told, Greece has much to lose. However, if Tsipras can make the troika believe he’s just desperate (or crazy) enough to bail-out of the single currency, he just may be able to wring additional concessions out of them.

In fact, I think the die has been cast in recent years: Policymakers around the world seem prepared to do whatever it takes to hold the global financial system together at all-cost. They’ve done this by papering over excessive debt with even more debt and currency, in some instances in exchange for austerity. But I’m not entirely convinced that the austerity is an absolutely necessary prerequisite.

The Bundesbank and the German Finance Ministry suggesting last week that they would be willing to “tolerate” above target inflation is perhaps an initial indication that Greece and the rest of the periphery need not necessarily make all the concessions moving forward. In forcing the troika to bend somewhat to his will, Tsipras will likely garner considerable political capital in Greece.

Not that living conditions are going to materially improve if Greece becomes a permanent ward of the EU, but neither will living standards plunge as they would if Greece tried to go it alone without access to global funding markets. In the latter scenario, the only alternative would be for Greece to severely devalue the new drachma. Under the first scenario, Greece would likely go into a protracted, albeit more gradual period of decline; begging for scraps from core-Europe’s table. But at least the Greek people would have a common enemy — greater-Europe and perhaps Germany more specifically — to unite against, which just might be enough to hold a government together.

I imagine though, that the best and brightest of Greece won’t wait around to see how it all plays out. They’ll take their money, their talent and the future of Greece with them as they flee.

The decline in the euro buoyed the dollar, which in turn weighed on stocks, commodities and pushed gold deeper into its range. Gold not participating — at least initially — in this global flight to safety seems counter-intuitive, but I think our very own Michael J Kosares did a pretty good job of explaining the mechanics of the inverse gold/risk correlation that has emerged in recent years. When paper gold drives the price down in deleveraging scenarios, it may be prudent to view physical gold as being ‘on sale’.

14-May (NASDAQ) — Commodity prices are trading broadly lower in European hours as Greece-linked jitters continue to weigh on risk sentiment trends. Growth-sensitive crude oil and copper prices following stocks lower while safe-haven flow buoy the US Dollar , applying de-facto downward pressure on gold and silver .

Lawmakers in Athens once again failed to come to terms on the structure of a ruling coalition at a meeting over the weekend. Markets are becoming increasingly concerned that a lingering impasse will push Athens to fall short of its obligations under the terms of the EU/IMF bailout, paving the way for Greece’s ejection from the Eurozone and possibly even the overall EU. This would be an unprecedented development with effectively unpredictable practical implications for financial markets, fueling a broadly defensive tone

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