90 seconds at 9 am: Fed divided

90 seconds at 9 am: US Federal Reserve divided on whether to launch QE III; Dow and NZ$ fall on disappointment over few QE III signs; Riots hit Madrid as Spain hikes GST to 21% in new austerity push

12th Jul 12, 9:01am by Bernard Hickey

Here's my summary of the key news overnight in 90 seconds at 9 am, including news the US Federal Reserve released minutes from its last monetary policy committee meeting showing the central bank of the world's largest economy divided over whether to print more money to stimulate the economy.

Minutes from the last FOMC (Federal Open Markets Committee) show a few members in favour of a third round of quantitative easing (QE III) or money printing to buy long term bonds to lower long term interest rates, but that others thought it was risky and possibly ineffective. The sense of division and uncertainty within the US Federal Reserve disappointed investors hoping for extra stimulus to restart growth in the global economy. See more here at Bloomberg.

The Dow fell 0.4% in late trade as investors took risk off the table. Gold prices fell and interest rates on US bonds fell to record low levels. The New Zealand dollar, which tends to rise and fall with appetites for riskier assets on global markets, fell against the US dollar to 79.3 USc this morning, having earlier touched 80 USc in overnight trade. A lack of fresh US$ money printing also strengthens the US dollar.

Meanwhile, the pain is getting worse in Spain. Tens of thousands of protestors and miners clashed with baton-wielding police clashed in Madrid as the Spanish Prime Minister Mariano Rajoy announced a fourth austerity plan in 6 months to cut Spain's spiralling budget deficit by 65 billion euros. The new plan includes cuts in unemployment payments, public sector job losses and an increase in Spain's GST rate to 21% from 18%.

Rajoy said the new plan was necessary for Spain to avoid having to ask Europe for a bailout. See more here at Reuters.

The problem for Spain and other economies on the periphery of the Euro zone is that more government spending and taxation austerity is simply driving their economies deeper into recession, thus increasing the weight of the debt they're trying to get away from.

Meanwhile, Spain also announced that Mum and Dad investors who bought preference shares and subordinated bonds in Spanish savings banks will have to take haircuts along with other professional investors. This may add to the social and political pain hammering Spain's government. See more here at FT.com.

All this worry about the euro zone and a lack of QE III saw the euro weaken to a 2 year low of US$1.22. The New Zealand dollar also strengthened to a fresh record high of over 65.2 euro cents.

No chart with that title exists.

http://www.youtube.com/watch?v=AEDalp3fvck

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

28 Comments

by steven | 12th Jul 12, 11:12am 1342048363

Talk about a biased piece of cwap(TM).

Quality of life, texas scored 35 btw....

regards

by steven | 12th Jul 12, 10:20am 1342045236

why is this even here?

by powerdownkiwi | 12th Jul 12, 10:23am 1342045392

Trolls ride piggy-back.

Don't worry, BBGG will be along anytime now

by steven | 12th Jul 12, 10:21am 1342045300

Riots in spain? yet when you look at a philips curve the effect of austerity is it multiplies un-employment....so a 4% cut in spending makes a far bigger impact on unemployment, so the riots are going to get worse me thinks.

http://krugman.blogs.nytimes.com/2012/07/11/pointless-pain-in-spain/

Also GST hikes are regressive, so the poor and un-employed cop it.....oh this is so intelligent....not

regards

by powerdownkiwi | 12th Jul 12, 10:25am 1342045537

And their neighbours to the north are going for growth. Sacre bleu.

by steven | 12th Jul 12, 10:25am 1342045557

"The problem for Spain and other economies on the periphery of the Euro zone is that more government spending and taxation austerity is simply driving their economies deeper into recession, thus increasing the weight of the debt they're trying to get away from."

Correct...without its own currency there is no other way to become competitive but wage drops. Wage drops dont happen (as they are "sticky") unless you change jobs, ie get made un-employed...and get a new job paying less....

So what we are looking at is doubling the present un-employment rate? maybe more and probably businesses going bankrupt.....and ppl think the EU will survive this?

Cant see it.

regards

by David George | 12th Jul 12, 10:41am 1342046461

Can't see it either Steven, but what is Krugman proposing as a solution? The Government borrows throw money around the economy? No one will lend to them at other than punitive interest rates so forget that idea.

Paul Krugman would have some credability if he once called for debt reduction in the good years, As it is he is a complete fool that thinks more debt is the answer to everything.

Spain should just let their dodgy banks go under.

by steven | 12th Jul 12, 10:56am 1342047380

Try reading PK as, "Paul Krugman would have some credability if he once called for debt reduction in the good years"

He indeed does, as does/did Keynes. Thats the medium term outlook....

The point as Ive said before is have a rainy day fund, so in the boom times, raise taxes to control it rather than interest rates...the money goes into a fund that isnt touched....as we then head into a recession the tax rates are dropped, and that fund makes up the shortfall....

regards

by David George | 12th Jul 12, 11:34am 1342049645

Sorry Steven can't find any referance to PK making such a call. Any clues as to when he did so?

He did call for another bubble (housing) to replace the dot com bubble. Brilliant!

by steven | 12th Jul 12, 12:42pm 1342053762

Took some looking I admit, mainly there seem to be so many mis-quotes, out of context and lies on what he's actually said that is hard to find what he actually said..doh. Its in his blog in a few spots but its almost a foot note so Im having problems in finding it, anyway,

(Reuters) - Paul Krugman has a simple message for U.S. policymakers: Forget about the country's huge budget deficit. It can be fixed over the next decade. Focus instead on the much more immediate problem of mass unemployment.

http://www.reuters.com/article/2012/05/08/us-usa-economy-krugman-idUSBR…

"So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way."

http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-de…

"America does have a long-run fiscal problem, driven by the combination of rising health costs, an aging population, and the unwillingness to raise taxes to pay for the programs we already have. If we don’t come to grips with that problem, bad things will happen. But what happens to the deficit in the medium term is almost irrelevant to the question of whether our long-run finances will get under control."

http://krugman.blogs.nytimes.com/2011/08/06/the-arithmetic-of-near-term…

Now I do worry that PK and indeed the US will find that when the worry on the deficit starts there wont be time to fix it "gently"....and also while the USA seems to be immune to this issue (for now), obviously many countries dont have that luxury aka Greece and Ireland, and that includes NZ. Problem is for NZ that no one (Political party) is willing to step out and raise taxes now. This has to be done long before (hopefully) we are seen as having problems....All the Piigs etc did the same thing, do nothing until its too late...

regard

by steven | 12th Jul 12, 10:58am 1342047525

Also US 10 year bonds are 1.7%, in effect after inflation negative returns in real terms....so borrowing to build say a national grid while private companies are not spending is classic one off capex spending...its not inflationary and you get to build it interest free.

regards

by David George | 12th Jul 12, 11:30am 1342049441

Fair enough for the US, Steven, but Spain? They are in a very serious predicament NOW. All down to the European banks faciliating debt creation well in excess of the Spanish economies capacity. The Spanish people are now being crushed to save the banks and their mountain of unpayable debt. The banks, their shareholders and depositors should, at the very least, share the pain through a debt write-off. Transferring the debt to the state solves absolutely nothing as the Spanish people are about to find out. What have they done now? Just increased the GST by 16.66% (18% to 21%)

Regards.

by steven | 12th Jul 12, 1:06pm 1342055173

Oh I agree, I think the EU and indeed the World is screwed....do note however that Spain and Ireland were OK in terms of deficits etc until the housing boom went pop.....then it turned bad real fast. Interesting thing is iceland....fairing much better.

In terms of "the spanish ppl", remind me again who took out all the mortgages? ditto Ireland.....and oh bugger NZ?

"share the pain through a debt write-off" yes, Iceland should be seen as the model to follow, so yes I think transferring it solves nothing...

Note however that NZ isnt in a bad way yet.....one thing I see is NZ Pollies refuse to take fairly minor actions like raising taxes now in the blindly stupid hope that things will come magically right while they wait, it wont IMHO.

regards

by steven | 12th Jul 12, 10:52am 1342047123

Vodafone buys Clear

http://www.stuff.co.nz/business/industries/7266613/TelstraClear-sold-to…

regards

by SimonP | 12th Jul 12, 11:02am 1342047767

That will reduce competition in the market-place, lets see what the Commerce Commission says. You would think that Vodafone would be reasonably confident of getting approval prior to formally announcing this?

by steven | 12th Jul 12, 11:06am 1342047965

The next thing is, Telsra eats Telecom...

regards

by ruru | 12th Jul 12, 11:12am 1342048379

Do we get customer service with those fries?

by steven | 12th Jul 12, 11:23am 1342049033

Interesting thing is since the Govn announced 100meg fibre, Clear's interest in its customers seems to have shown a marked improvement, well anything above "f*** off" is sort of better.

The service is still pretty crappy mind, I get threatened with the costs of them coming out if they cant find a fault, I can see its bad in smokeping (monitoring software). I cant wait for fibre in my street, bye bye losers....900ms to the US makes internet games impossible....sure I can download 1.5gb in 15mins now....but games suck when lag is above 200ms....

regards

by ruru | 12th Jul 12, 10:57am 1342047435

This should stall Christchurch residential property sales:

"Canterbury's two biggest insurance companies say they will not pay for damaged houses to be rebuilt or pay accommodation and some other costs for owners of homes sold since the earthquakes.

The rule so far applies to customers of IAG, which owns the State, NZI, AMI and Lantern brands, and Vero, and both say they will now pay no more than indemnity settlements to new owners."

http://www.stuff.co.nz/the-press/news/christchurch-earthquake-2011/7264134/Insurers-new-rules-for-homeowners-unfair

Thankfully we decided not to buy last week; would've been done like a dog's dinner.

by steven | 12th Jul 12, 11:26am 1342049209

yes....and it will go down hill some more yet....I wonder how long it will be before the Govn announces that the EQ will take the total risk on....6months? 12?

regards

by ruru | 12th Jul 12, 11:42am 1342050131

I doubt it very much. The government is hoping they can keep the discontent here damped down -- hence the rebuild the cathedral diversion that is sucking so much time and energy from people who should know better. No wonder the likes of Hugh P are pumping the cause.

The deal done with the insurers (and reinsurers) seems to allow carte blanche for the insurers in return for some cover, with the screws tightening each month. The last thing the government wants is to have more insurance liability in an uncertain seismic landscape.

by steven | 12th Jul 12, 1:12pm 1342055527

Which neatly sums up the private companies problem (more insurance liability in an uncertain seismic landscape). The Govn's problem is the private re-insurance industry can just walk away....indeed even the OZ branches of the retail arms here in NZ, really they are OZ subsidaries so they can close their doors as well. Whats left cant cover the risk....it then is un-insurable.

If that happens no one can get a mortgage, which signals the collapse of the NZ property bubble ne economy...at that point the EQC would have to step up to the plate or NZ goes bye bye.

regards

by waymad | 12th Jul 12, 12:15pm 1342052110

Re the Chch insurance stuff, y'all are fergetting that IAG bought the 'good-bank' part of the old AMI, and their pronouncements don't applyto the 'bad-bank' part (Southern Response Earthquake Services Limited) which is a Crown company owned by you, me, and other broad-shouldered taxpayers. SRES' liabilities are for the events to 5 April 2012, and this specifically removes said liability from IAG.

Devil's in the details, and if'n yer inclined to break out the tar and feathers, it pays to get the right perp on the rail.....

by ruru | 12th Jul 12, 2:12pm 1342059125

IAG had a fairly large slice of the Chch market that they are liable for though. You're right, the Devil's in the details, this Stuff piece appears to say that the policy is in relation to rebuilds, not repairs. So God knows what that means. We were looking at a geotech report, a stuctural engineer's report, a sub-floor specialist's report, a lawyer, moving costs etc etc for the target house; I reckon we'd be lucky to get away with under $20,000 cost to move. Bugger it, we'll sit tight and build a sleepout for more space and see what shakes (well, you know what I mean).

by Chris_J | 12th Jul 12, 6:03pm 1342073038

The Government needs to shake up the insurers.

It is simply not acceptable to have claims outstanding potentially for decades without payments being made. (It's nearly 2 years and only a small fraction of claims are settled).

Financial penalties should be mandatory for insurers who fail to settle a claim within say 6 months.

There is NO CHANCE of IAG packing up and leaving as they make $1b a year from NZ.

Perhaps a new SOE, perhaps Kiwisure? Could create a little competition...

by Boatman | 12th Jul 12, 2:20pm 1342059635

Wow , 21% GST in Spain , Those Southern Europeans are notorius Tax evaders , now there's a real incentive to evade tax and do "Cashies" if ever I saw one

by Gibber | 12th Jul 12, 2:59pm 1342061991

Yah.

Though I'm sure the DA's in NZ Govt / Treasury will look to pushing GST up to and beyond 21%....

by Christov | 12th Jul 12, 3:19pm 1342063177

Ab...so...bloody...lutely, Gibber, well I mean it's a beautiful model to follow isn't it.......minnimal mayhem due to the Euro Cup win..(how sick is that timing)...eermm...uh.. we may have to win something to distract potential rioting sheep......or maybe better yet just get the Commies to bless it before it's enacted......because that's where our future is you know.