The European Central Bank Acts to add Liquidity to European Banks

Posted by PITHOCRATES - January 7th, 2012

Week in Review

The European Central Bank (ECB) offers up some cheap loans to add some liquidity to the Eurozone economy.  A liquidity problem caused by the Eurozone debt crisis.  Which was caused by excessive government deficit spending.  So the ECB’s solution to this problem is to throw more cheap money into the economy.  Problem solved (see Europe banks gobble up cheap loans offered by Central Bank by Henry Chu posted 12/21/2011 on The Los Angeles Times).

Faced with the threat of another regional recession, the European Central Bank said Wednesday that it was doling out more than half a trillion dollars in special long-term loans to hundreds of financial institutions in a bid to keep credit flowing…

The money, lent at the low interest rate of 1%, proved attractive to many financial institutions that are highly exposed to government debt and that have therefore found it hard to borrow commercially.

“It provides some stability to the funding of banks which have more or less completely lost market access,” said Sony Kapoor of the think tank Re-Define.

But the record response to the ECB’s offer is a sign of how dire the situation has become, Kapoor said. He warned that the new loans failed to address the heart of the euro crisis: the loss of faith in Europe’s banks and in the heavily indebted governments that stand behind them, especially in peripheral countries of the Eurozone…

Meanwhile, European government bond yields rose on fear that banks might back away from buying more sovereign debt amid pressure to reduce risk on their balance sheets.

Perhaps not.

This is why there is no easy solution to the Eurozone debt crisis.  European banks aren’t buying sovereign debt.  Because their balance sheets are full of risky sovereign debt.  So much that these banks have lost market access.  They can’t borrow because they are now risky, too.  Much like the countries of the Eurozone who are having trouble selling bonds.

All of this bad debt has resulted in a liquidity crisis.  And weakened European banks.  So the European Central Bank stepped in to relieve this liquidity crisis.  By providing low interest loans.  In hopes that these banks will use that cheap money to buy more of that risky sovereign debt.  That has caused the liquidity crisis.  And weakened European banks.

So either the banks will sit on that money to improve their balance sheets.  Or they will further weaken their balance sheets by buying more of that risky sovereign debt.  Neither which will fix the underlying problem.  Too much debt.  These countries with too much debt need more austerity.  To reduce their borrowing needs.  Before the European banks start failing.

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The Big Economies are Increasing their Debt and Heating up the Competition for Buyers

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Keynesian economists don’t see a problem for governments to run deficits.  They’ll look at the current bond rates, do some calculations and note that the additional interest expense for the government is negligible in the grand scheme of things.  But interest costs are not the only problem governments will have.  They also have to first find someone to buy their debt (see Biggest Economies Face $7.6 Trillion Bond Tab by Keith Jenkins and Anchalee Worrachate posted 1/3/2012 on Bloomberg).

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg…

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show…

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

So even in the Keynesian world there is a limit on deficit financing.  When there is more debt than buyers some debt will go un-purchased.  And to make sure that isn’t your debt you’ll have to entice those few buyers to buy your debt.  By the only way you can.  With higher interest rates.  Which makes your original problem worse.  By increasing your overall debt.

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China and India Economic Performance Still Strong While Europe is Weighed down by their Debt

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Asia is besting Europe in economic performance.  But is the growth real?  Or is somewhat artificial with monetary policy inflating their economies?  Time will tell.  But in the mean time, their manufacturing is showing resilience (see India, China Economies Show Asia Resilient as Europe Falters by Unni Krishnan posted 1/3/2012 on Bloomberg Businessweek).

Manufacturing in India and China improved in December, a sign the world’s fastest-growing major economies are withstanding Europe’s debt crisis…

In another positive sign, a Chinese index for non- manufacturing industries rose today. Europe’s crisis may still cap demand for goods from Asia with an index for Chinese export orders indicating a third month of contraction in December. India’s economic growth will be constrained by higher borrowing costs and global economic weakness, HSBC and Markit said.

High debt is a problem for Europe.  And India.  For they, too, have high borrowing costs.  Something the Chinese don’t have a problem with at the present moment.  But they do share something else with India.

In China, the “festival effects” of western and Chinese New Year celebrations helped to boost the manufacturing PMI, said the logistics federation, which releases the data with the statistics bureau. China has also unwound some tightening measures to spur growth, cutting banks’ reserve requirements in November for the first time since 2008.

The Shanghai Composite Index tumbled 22 percent last year, the most since 2008, on concern that monetary tightening and efforts to rein in property prices in big cities will limit growth.

The Chinese were battling inflation pressures.  Hence the monetary tightening last year.  Now they’re lowered the reserve requirements for their banks.  In the world of fractional reserve banking that means inflationary growth.  By pumping more money into the economy.  By letting the banks lend out more of their deposits.  And now that thing they have in common with India.

India’s benchmark wholesale-price inflation slowed to a one-year low of 9.11 percent in November from 9.73 percent in October.

Inflation.  Nearly double digit at the wholesale level.  So the Indians have economic growth.  But they’re paying a pretty high price for it.  Or will.  Because the way the market fixes high inflation is with nasty recessions.  To adjust prices to reflect real demand.  Not the inflated one created by easy monetary policy.

So China and India are currently outperforming Europe.  But so did Japan once upon a time.  But their bubble burst.  As bubbles are wont to do.  And if China and India are just blowing bubbles, they, too, will burst.  Because that’s what bubbles do.

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Iran Flexes Military Might in Gulf to Warn Against any Action Against their Nuclear Program

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Iran says they need nuclear power to make electricity.  They say this as they sit atop some of the largest crude oil reserves in the world (see Iran test-fires missiles in Gulf exercise by Ramin Mostafavi, Reuters, posted 1/2/2012 on Yahoo! News).

Iran said on Monday it had successfully test-fired what it described as two long-range missiles, flexing its military muscle in the face of mounting Western pressure over its nuclear program.

The announcement came at the climax of 10 days of naval exercises in the Gulf, during which Tehran has warned it could shut the Strait of Hormuz, through which 40 percent of world oil is shipped, if sanctions were imposed on its crude exports.

Analysts say Iran’s increasingly strident rhetoric, which has pushed oil prices higher, is aimed at sending a message to the West that it should think twice about the economic cost of putting further pressure on Tehran…

Tehran denies Western accusations that it is trying to build atomic bombs, saying it needs nuclear technology to generate electricity…

[Iran is the] the world’s fourth biggest producer [of crude oil].

Yeah, with being only the world’s fourth biggest producer of crude oil of course they need nuclear power to make electricity.  I mean, how much electricity can they make with all of that crude oil?

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The New Egypt may not Recognize Israel

Posted by PITHOCRATES - January 7th, 2012

Week in Review

So how’s that democracy thing going over in the Middle East?  All right.  As long as you’re not a Christian.  Or Jew (see Muslim Brotherhood vows not to recognize Israel by JPOST.COM STAFF AND REUTERS posted 1/1/2012 on The Jerusalem Post).

Egypt’s Muslim Brotherhood will not recognize Israel “under any circumstance,” the party’s deputy leader Dr. Rashad Bayoumi told Arabic daily al-Hayat in an interview published on Sunday.

In recent Egyptian elections the Brotherhood’s Freedom and Justice Party (FJP) won 36.3 percent of the list vote, while the ultra-conservative Salafi al-Nour Party took 28.8%.

Arab Spring.  Israeli winter.  Tomáto.  Tomàto.

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Britain Shutting Down Coal and Nuclear Power and Raising Taxes for Green Energy

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Let’s take a ride.  In a time machine.  Let’s go into the future.  And see where America will be in the green energy future (see Double whammy from green taxes: Families will have to pay more for fuel and flights by Sean Poulter and Kirsty Walker posted 1/3/2012 on Mail Online).

Britain’s existing nuclear power plants are due to close within a few years.

As a result, the country’s nuclear capacity will fall by  75 per cent.

A number of coal-fired plants are also set to shut, as the Government strives to meet EU targets for reducing carbon emissions.

Wind farms – funded by green taxes on homes and businesses – will not be able to cover the resulting energy shortfall, Mr Lodge warns.

They’re shutting down coal and nuclear power.  And raising taxes to pay for green energy.  Which is erratic at best.  Sometimes the wind just doesn’t blow.  Which is the reason steamships replaced sailing ships.  Because man-made steam was more reliable than wind.  Far more reliable.  Which means Britain’s energy will be as reliable as the wind.  And as they suffer brownouts and blackouts there will be a scramble back to those more reliable sources.  Coal and nuclear.

Government plans to penalise power firms that use coal to generate electricity – by imposing minimum prices – will effectively make it uneconomic to continue mining in the UK.

This ‘will result in over one billion tonnes of economically recoverable UK coal reserves becoming stranded’, Mr Lodge says.

As if the brownouts and blackouts won’t be bad enough.  They’re going to shut down the mining industry.  And eliminate a lot of union jobs.  During which I doubt the unions will be whistling a happy tune.  Yeah, that’s right.  Green energy is anti-union.  I mean, you don’t have to mine wind or sun, do you?

It warns: ‘Britain risks becoming yet more dependent on foreign gas and unmanageable renewable energy to generate electricity.

‘Consequently, Britain’s 26million households, who spend around £20billion a year on energy, will face higher bills at a time of falling household income.’

Lost jobs and higher bills.  Gee, it just keeps getting better and better.

The Civitas report, also released today, focuses on the EU Emissions Trading System, which is designed to curb carbon dioxide emissions from aircraft engines. The directive came into force on January 1.

The think-tank found that related charges will cost airlines £1billion a year – most of which will be passed on to businesses and consumers through higher prices.

Airlines are now required to buy a ‘permit to pollute’ to cover the cost of their carbon emissions – with extra fees for those who exceed their emissions limit.

But in a damning assessment, Civitas  researcher David Merlin-Jones says  the scheme will line the pockets of energy bosses and banks while doing little to help the environment.

So as British families become impoverished for this green energy nonsense others will be getting rich off of these permits to pollute.  This from the nation that gave us the Industrial Revolution.  Representative government.  Agricultural advances.  And a lot of other things that brought the world into the modern age.  My God, what has happened to Britannia?

How is it that the nation that did more than most for the common people is taking such a large crap on the common people?  Figuratively, of course.  But the worse thing is that there are some in America that want to follow them.  And if the whole Western world gives in to this green energy nonsense there will no longer be a Western world.

Sad.  Because the UK is better than this.  As is America.  At least when they were conservative.

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