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Gold101.com - Fiscal Limits Can Help Put U.S. on Sustainable Budget Path

Federal Reserve Chairman Ben S. Bernanke said adopting rules that limit federal spending or debt can help put the U.S. on a more sustainable fiscal path, urging lawmakers to consider their enactment.

“Well-designed rules can help promote improved fiscal performance,” Bernanke said yesterday in a speech in Providence, Rhode Island. A rule “could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence,” he said.

Bernanke provided one of his most detailed prescriptions yet for reducing the record federal budget deficit. He said in congressional testimony in June that unless the U.S. makes a “strong commitment to fiscal responsibility,” the country in the long run will have neither economic growth nor fiscal stability.

“It is crucially important that we put U.S. fiscal policy on a sustainable path,” Bernanke said at the Rhode Island Public Expenditure Council’s annual dinner, where he was invited to speak by Senator Jack Reed, a Democrat from Rhode Island and member of the banking committee.
“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Bernanke said.

Bernanke cited Switzerland, Sweden, Finland, the Netherlands, Canada and Chile as countries that improved their budgetary performance by using fiscal rules. He didn’t elaborate on what kinds of spending, deficit or debt limits would be best.

Presenting Plan

The White House Office of Management and Budget in July projected the deficit for fiscal 2010, which ended Sept. 30, at $1.47 trillion and the gap for fiscal 2011 at $1.42 trillion. President Barack Obama formed a commission in February charged with presenting a plan by Dec. 1 on how to reduce deficits over the next decade.

The U.S. budget gap has “stabilized” and should narrow relative to national income in the next few years, Bernanke said.

“Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk.” The situation is “quite different” in the longer term, he said.

The Fed chief didn’t elaborate on the near-term outlook for the economy and monetary policy, and he didn’t take audience questions.

Tax Cuts

In July, Bernanke told lawmakers that extending at least some of the tax cuts set to expire this year would help strengthen a U.S. economy still in need of stimulus and urged offsetting the move with increased revenue or lower spending. He didn’t discuss the tax cuts in yesterday’s speech.

“It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy,” Bernanke said. “What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policy makers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.”

Separately, in a forum with college students yesterday in Providence, Bernanke said the central bank’s first round of large-scale asset purchases that ended in March improved the economy and that further buying is likely to help more.

More Purchases

“I do think that the additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke told the students.

The Fed chief and other officials have signaled over the past two weeks that the central bank may purchase more Treasuries at its next policy meeting Nov. 2-3 in an effort to boost economic growth and reduce an unemployment rate persisting at 9.5 percent or higher for the past year.
While he hasn’t given a detailed economic outlook since Aug. 27, Bernanke said Sept. 24 that the Fed’s actions haven’t “produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment.” He said Sept. 30 that “we need to do our part to help the economy recover” and ensure job growth in the U.S.

Brian Sack, the New York Fed official in charge of carrying out FOMC decisions, said yesterday that a further expansion of the central bank’s balance sheet would help stimulate an economic recovery that is forecast to be “relatively tepid.” Smaller steps of purchases may be warranted in contrast to the last round, Sack said in Newport Beach, California. 

Source: Bloomberg

Gold101.com - European Economic Confidence Improves

European confidence in the economic outlook unexpectedly improved this month as executives and consumers weathered tougher government budget cuts by countries struggling to convince investors that they won’t need external aid.

An index of executive and consumer sentiment in the 16 euro nations rose to 103.2, the highest since January 2008, from a revised 102.3 in August, the European Commission in Brussels said in an e-mailed statement today. That compares with economists’ forecast for a decline to 101.3, based on the median of 28 estimates in a Bloomberg News survey.

Europe’s recovery may lose some momentum after surging exports and a rebound in investment helped fuel the fastest growth in four years in the second quarter. While business sentiment in Germany also unexpectedly rose this month, the European Commission on Sept. 13 forecast a more “moderate” expansion in the second half of the year as governments from Ireland to Portugal step up spending cuts to push down deficits.

“We expect sentiment to top out in the period ahead and then trend down into 2011,” said Ken Wattret, an economist at BNP Paribas in London. “Industrial sentiment in particular is vulnerable to a correction.”

The euro rose as much as 0.2 percent against the dollar after the report was published and traded at $1.3600 as of 11:19 a.m. in London. Bonds were little changed, with the yield on the 10-year German bund at 2.25 percent.

Debt Worries

 A gauge of sentiment among manufacturers rose to minus 2 in September from minus 3, while services confidence gained to 8 from 7. The index of consumers’ confidence remained at minus 11, while retailers’ grew more optimistic, with that measure rising to minus 1 from minus 3.
The increase in confidence comes as fiscal concerns continue to weigh on Irish and Portuguese bonds. The decline has increased the extra yield investors charge to hold the 10-year debt of those nations rather than German bunds. The Irish yield premium was at 452 basis points today, compared with 353 a month ago, while for Portugal, it was at 431 basis points, up from 332.

Former European Central Bank Vice President Lucas Papademos said in an interview in Brussels on Sept. 27 that he’s “confident” governments will take the “appropriate actions” to push down budget deficits and help restore investor confidence. Uncertainty “is always a factor that tends to lead to excessive reactions on markets,” he said.

‘Alarmist’

“Market tensions will stiffen resolve and the adjustment process will continue,” Paul Mortimer-Lee, head of market economics at BNP Paribas in London, said in a Sept. 27 report. “In respect of spreads, the chronic problems and the risk of external shocks are likely to lead to periodic tensions, though we warn against becoming alarmist.”

Some data indicate the euro-area recovery is already cooling. Growth in services and manufacturing industries slowed this month, while in Germany, Europe’s largest economy, investor confidence dropped to a 19-month low. Pernod Ricard SA, the maker of Chivas Regal whiskey and Absolut vodka based in Paris, on Sept. 2 said it is seeing “persistent difficulties” in Western Europe.

The commission’s gauges measuring manufacturers’ confidence in their export orders and total order books both rose to minus 16 in September from minus 18 in August, today’s report showed. An index of employment expectations increased to minus 4 from minus 6. Among services executives, a gauge of demand expectations for the next three months gained to 10 from 8.
Policy Measures

ECB President Jean-Claude Trichet said on Sept. 27 that there is “continuing uncertainty” about the outlook. ECB officials will hold their next policy meeting on Oct. 9 after last month extending emergency measures for banks into 2011. Signs that the global recovery is flagging has also prompted reaction from the Federal Reserve, which said on Sept. 21 it’s prepared to ease policy further if needed. In the U.K., Bank of England official Adam Posen said yesterday that “further easing should be undertaken.”

“We know the second half of the year is going to be worse than the first half of the year because of the tailwinds to growth from the fiscal stimulus” turning into austerity, New York University Professor Nouriel Roubini said on Sept. 27. “The main scenario is an anemic recovery.” 

 

Source: Bloomberg

Superior Gold Group - US stocks little changed on mixed data

The Dow and the S&P 500 indexes were flat on Thursday on a mixed reading on the economy from weaker jobs and improving home sales. Weekly claims for jobless insurance jumped unexpectedly, highlighting continued weakness in the labor market. Data later showed existing home sales rose in August, bouncing from severely depressed levels.

"The market is going to grasp whatever it can for a tidbit of good news," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore. The Nasdaq rose as pharmaceuticals and technology stocks listed on the index led gains. The Dow Jones industrial average was down 11.05 points, or 0.10 percent, at 10,728.26. The Standard & Poor's 500 Index was down 1.70 points, or 0.15 percent, at 1,132.58. The Nasdaq Composite Index was up 7.62 points, or 0.33 percent, at 2,342.17.

Bionovo Inc shares soared 67 percent to $2.04 after the U.S. health regulators accepted the chemistry, manufacturing and controls plan for its lead drug candidate, Menerba, an experimental treatment for hot flashes related to menopause. Stocks have traded above major technical lines this week, but with persistently low trading volume at levels about 20 percent less compared to last year's average, investors have been doubtful of the sustainability of the recent rally. "Equities have been behaving as if the economy was moving stronger, which is not happening. I think we are in a trading range, but short term, the markets are going to shed this belief of a stronger recovery," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

"Equities probably will pull back a little bit here. The S&P 500 is well above 1,100, and a few weeks ago it was close to 1,050, and I think there's room for that kind of pullback." Red Hat Inc rose after it reported a second-quarter profit above Wall Street forecasts as sales of its software rose sharply. The stock climbed 11.7 percent to $41.04. Bed Bath & Beyond Inc also reported results that beat quarterly profit and sales estimates. It boosted its full-year forecast, sending the stock up 4.1 percent at $43.75. Video rental chain Blockbuster Inc filed for bankruptcy protection on Thursday after years of struggling to compete with online and mail-order movie services. It said a majority of senior noteholders agreed to support its recapitalization, cutting debt to about $100 million from nearly $1 billion. U.S. stocks slipped on Wednesday, ending the Dow's five-day winning streak after the Federal Reserve spoke cautiously about the economy and hinted at the possibility of further quantitative easing to spur economic activity.