Fed reopens forex swap lines with Europe...AGAIN!!!

For a third time in two years the Fed is opening up its forex swap lines with the ECB to offer dollar liquidity to European banks and institutions that are caught in a dollar squeeze. If this did not happen the dollar could potentially soar as these institutions--and perhaps the ECB itself--would have to enter the Forex markets and buy dollars.

A strong dollar would be good for American consumers, right? It would be good for the Administration, which could point to a rebounding greenback and take political credit for that, right? But no! They're totally clueless as they sit by and allow this to happen without even taking notice.

What are these forex swaps anyway? Very simple: the Fed gives dollars to the ECB in exchange for euros--an unsecured transaction that leaves the Fed with potentially huge forex losses.

The real question is, where is Ron Paul? Peter Schiff? Jim Rogers? And all the other Fed critics? Here's a situation where they really have something to sink their teeth into (the U.S. government is bailing out European financial institutions while Americans go jobless and hungry) and they say nothing. It's really outrageous!!!

First Chevy Volt PHEV Delivered to Retail Customer

This past week marked what may turn out to be an historic event. The video below documents the delivery of the first GM Volt to a dealership customer. This I believe is the first retail delivery of a production Plug-in Hybrid Electric Vehicle (HEV) in the US.

The Plug-in HEV is different from previously sold HEVs (Toyota/Ford/GM/Honda models) in that it presents the opportunity to drive a car virtually without using any petroleum at all for short range trips (GM says <40 miles), and also allows a fall-back to the use of petroleum gasoline if your trip exceeds this limited range for that day. I see this platform as ideal for an urban commuter who commutes to work each day (20 miles each way), and then perhaps may take a weekend trip that would exceed the 40 mile range of the electric mode. This vehicle can fill both roles.

Toyota has near term plans to deliver Plug-in versions of their current HEVs soon.

The mainstream media of course can't say it on their television channels so I'll say it for them here: UP YOURS OPEC!

Is the Fed's QE2 Leading Bond Prices Down?

Mike made an interesting comment to his previous post on the Fed's implementation of QE2 that may detail the trading relationships between the Fed's bond purchases in QE2 and trading in the bond markets:

The Fed is buying "scale down" and in effect, causing the selloff. They're doing this because they're fixated on quantity ($600 bln) as opposed to price (interest rate). I remember when I was a floor trader. I had clients in the oil business--big firms--who would sometimes want to protect a certain price. They'd give me an order that would be, "Buy 100 (crude), 'worst.'" That meant buy it up...aggressively. When Japan used to actively intervene in FX markets, they wouldn't scale down their dollar buying (or sell yen scale up), they'd buy dollars aggressively to put the USD/JPY exchange rate to a certain level. The Fed is not doing this. By signaling to the market that they will buy scale down, they are actually creating this selloff as nervous longs look to sell before the largest buyer lowers its bid again and as speculative shorts compete for a better price.

If this is not an accurate depiction of the Fed's operations here in QE2 since November 12th, I would request that they then detail what the heck they are really doing. How are they arriving at the price at which to buy the bonds? These would be some good questions for Rep. Ron Paul to ask if he ever gets his "audit the Fed" train rolling. I hope Rep. Paul has the sense to call Mike before any hearings!

Ireland passes bailout package despite opposition

Story at Yahoo!. It seems the Ireland national government has gone against popular opinion and approved the "bailout" deal struck between the Ireland government/banking system and the ECB. Now things should really start to heat up in Ireland. Excerpt:

Finance Minister Brian Lenihan pushed through the 85 billion euros package with the support of independent MPs and told the center-right Fine Gael party that its proposals to lean on senior bondholders would fail because of opposition from the European Central Bank. "Those who think we can unilaterally renege on senior bondholders against the wishes of the ECB are living in fantasy land", he said.

Well it looks like the political opposition at least has a handle on the nature of this screwdeal:

"You have the obscene situation now where the poorest of the poor in Ireland, through their taxes and welfare cuts, are being asked to guarantee the speculation of investors in hedge funds," Michael Noonan, Fine Gael's finance spokesman, and a possible future finance minister, said.

It is interesting that the political "right" in Ireland is in opposition to this unjust policy that strictly favors the banking sector and it's patrons. So at least this opposition party may get to reverse this decision but it not until another government can be established. It looks like this is far from a settled matter.

Fed's poor leadership leaves bond market open to speculative attack!

Back in November when the Fed announced its intention to unleash QE2, they said they would purchase an additional $600 bln of longer term securities. There was no mention of why or how they came up with that number. It almost seems completely arbitrary.

In reading the minutes of that meeting you could surmise that they had two reasons for the move. First, they thought they needed to take action to "promote a stronger pace of economic growth." But where were the guarantees that said buying an additional $600 bln in longer term maturities promoted stronger growth?

There were none.

The second reason given was that they wanted to keep the face value of the securities in their portfolio constant. Apparently they were worried that principal payments on existing agency and MBS securities would lower the overall amount of securities on their balance sheet. So what? Did they believe that would cause interest rates to rise? If they did, there was no explicit mention of that.

Nowhere in the minutes of that meeting was there any discussion of wanting to target a desired interest on longer-term maturities. NOWHERE! It never came up. Instead, the committee members just pulled some seemingly arbitrary number out of a hat--$600 bln--and assumed that's all they needed to do. Pardon my generalization, but it had all the look and feel of throwing something up on a wall and hoping that sticks.

Truth be told, if the FOMC had simply said that it wanted 10-year Treasury yields to be at 2% and that the Fed was going to buy those maturities until it reached that desired interest target, then that's what they would have gotten, with probably far less than $600 billion.

However, by focusing on quantity ($600 bln) instead of price (say, 2%), they left the bond market wide open to speculation. That's what's going on now, speculation. Thnk about it...10-yr Treasury note futures trade a notional amount of about $80 bln per day! Multiply that times 30 days in a month and that's $2.4T notional! That's 30 times more than the $75 bln per month the Fed said it was going to buy. Speculators can easily push bond prices down and yields up in response to the Fed's tepid and ill-thought-out buying program. That's exactly what they are doing.

It's an astonishing thing to say, but the people on the Board of Governors totally lack an understanding of the one thing that the Fed has absolute control over--interest rates. This is truly mindboggling. The members of the FOMC have left the bond market open to speculative attack as a result of their ignorance. And to make matters worse, there will be plenty of negative fallout from this because the commentary that will swirl about--people will be saying that inflation is surging, that the Chinese are selling our debt, that the national debt is skyrocketing, that the dollar is the cause, etc--will completely distort the truth and make policy more ineffective than ever. That means the outcomes will be even more disruptive. The FOMC has 12 members. None of them understood this???? Sadly, that's a correct statement.

The outrageous and misguided views that people buy into

Certain commentators are running around saying things like, “The US economy (GDP) is a ‘phony’ economy because all we really measure is what we consume.”

That’s right; GDP measures what we consume; but everything that is consumed is also produced. Therefore, consumption and production are one in the same, just as is income and consumption or, income and product.

However, if you said that to those commentators they’d say, “Yes but, the United States doesm't produce anything.”

Another completely ridiculous statement.

When GDP is calculated imports are SUBTRACTED OUT OF THE TOTAL because we are measuring gross DOMESTIC product! And even with imports subtracted the number that is left is $14.8 Trillion! That’s not only a very big number, it's also everything that is consumed (AND PRODUCED) domestically, as in Gross DOMESTIC Product or.

The people who make these crazy statements are people who aren’t interested in the truth. They are people who don’t want YOU to know the truth either. They only want to continue spewing their misguided ideology and dogma.

My comments on RT America

Obama Unveils Broad Accord To Extend All Bush Tax Cuts

UPDATE: False alarm, it looks like status quo for fiscal policy, see comments.

CNBC reports this evening; this could be close to what many here have been looking for, excerpt:

"President Obama announced a broad "framework" agreement with Republicans that would extend all Bush-era tax cuts for two years, keep the dividend and capital gains tax at 15 percent and temporarily cut payroll and Social Security taxes."

New to this package is the cuts in payroll and Social Security taxes, and this could be significant. Not much detail provided so far. If anyone sees any details on the package with respect to these two items please post a comment.

Wall Street's the reason why there's no job creation!

Yesterday I decided to do some Christmas shopping so I went to Macy’s Herald Square on 34th Street here in NYC. The place was mobbed as you can imagine. I mean, I could barely get through the front door and once inside just moving around was a feat unto itself. I wanted to buy some clothes for my kids.

After walking around and sifting through piles of clothes unorganized racks (I couldn’t find anyone to help me) I ended up with a few items. When I went to pay I was confronted with a huge checkout line where there was only one person manning the register. There had to be at least six cash registers, but only one person on the job. After standing in line for 25 minutes I got fed up and threw everything down and walked out.

Then I went across the street to Old Navy where I found a bunch of other stuff, similarly selected from chaotic piles and racks and guess what happened when I went to pay? Same thing! This time, however, there were three people working a bank of 10 registers.

Then it dawned on me why we’re having a jobs crisis in this country. Companies are being forced to become miserly when it comes to their work staff so they can keep labor costs down and report bigger and bigger profits every quarter to please Wall Street analysts and fickle investors. If not, the Street will punish their stock and their executives will be out of a job. The result of this maniacal drive for profits is a horrible shopping experience for consumers, many of whom can’t find work, but could be gainfully employed were it not for the fact that we let Wall Street dictate everything we do!

Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone

Interesting article on the structure of the loan arranged last week by the international community to the current government of Ireland, written by a former IMF economist now in academia. Hat tip Tom Hickey.

Excerpt:

"This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB, and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor."

This may hit at about the same time as the US Tea Party Congress is shutting down the US government due to the national debt limit being hit. 2011 looks like it will be an "interesting" year.

The key here may be whether the citizens of Ireland will really understand what they have been committed to pay, and then whether they will vote, via a new government, to reject it, consequences be damned. I don't know much about the economic understanding of the citizens of Ireland, but here in the USA, I believe the politicians could easily dupe the voters into accepting this type of thing by claiming we "all have to sacrifice", or "we can't leave this to our grandchildren", or some type of similar nonsense theme.

I read another report that had this loan package at fully 50% of Ireland GDP. When Iceland obtained a referendum vote on a similar package for their government due to their bust banks, they rejected it with 93% of voters voting "no", and that package for them was a bit less than 50% of their Iceland GDP. But of course Iceland is not part of the European Monetary System.

The Back of the Rack: Norman on the "Free Market"

Here's an MP3 of Mike from back in February of 2009.  Here, in audio format, he addresses some of the issues related to our "belief" in the "free markets" and whether these beliefs are true, and if they are in fact preventing us from achieving better economic outcomes.

If this is capitalism, who needs it!

Capitalism is best? For whom?

In this country we hear the constant cheering for capitalism, even by people who, amazingly, have lost their jobs or are struggling. Yet, if some of them just simply took a break from all that cheering and focused in on what has really been going on I wonder if they'd be so enthusiastic about picking up the pom poms.

Here's a snapshot of capitalistic America without the blinders of ideological rhetoric.

After tax corporate profits are currently at an all-time record high above $1.4T. In the past two years alone, profis have zoomed up by $800 bln.

Yet the nation's economy is limping along at barely 2.0% growth--well below our capabilies--and unemployment is at 9.6%, up from 5.0% just two years ago even though profits have grown by the better part of $1 trillion.

The stock market is 14% below its 2008 peak and 20% below its all-time high so stock investors have not been rewarded by this capitalist explosion.
Dividends are down by $150 billion in that time, meaning that yet again, investors have not been rewarded.

Real earnings of workers are lower now than they were in 2008 and still below the level they were in 1968 on an inflation adjusted basis!

In the past 10 years corporate profits have increased by 174% and the unemployment rate has INCREASED by 144%

So, where's all the money going? To salaries and bonuses for a small percentage of people at the top.

That's capitalism. Nice system, huh?