Leaders in Europe and the United States were both busy yesterday, addressing pressing monetary and fiscal issues. In Brussels the bankers added some more capital to the ECB. This bank has been active purchasing some of the sovereign debt of dubious quality, debt rejected by the free market despite attractive rates. It is reported that most of this debt will be carried until maturity, so there is no need to 'mark to market' this inventory of sub-prime debt.
The addition of additional capital to the ECB, even €10B or so, is a thoughtful symbolic gesture, but certainly not the panacea needed to cure the euro debt contagion. In a Reuters interview,the head of the IMF voiced his concerns. The head of the International Monetary Fund said on Thursday he was worried that EU leaders' piecemeal approach to Europe's debt crisis was encouraging markets to pick off weak countries one by one.
Dominique Strauss-Kahn appeared to endorse the idea of common euro bonds, saying they could be a useful tool, but added the political will to give power to the center of Europe was the main hurdle to their creation.
"I am worried, and that's why I am urging the Europeans ... to provide a comprehensive solution because this piecemeal approach ... obviously doesn't work," Strauss-Kahn told Reuters. "The markets are just waiting for what's next."
Last week in my article "Time to Sell the Euro" I summarized the comments of Helmut Schmidt who questions weather the current European leaders were strong enough to address and resolve, for the future of the single currency, the current debt problems. The lack of attention to the immediate problems, but concern about the format for a debt crises in 2013 is truly a disjointed and underwhelming response. With the euro currently trading near the week's low at 1.3160, the market does not disagree with this assessment.
In Washington yesterday, there were meetings taking place on the Senate floor concerning issues of pervasive fiscal importance. Quoting Kimberly Strassel in the WSJ:
"This week Democrats unveiled a $1.2 trillion omnibus, legislation as pure an insult to the electorate as it gets. It was a 1,924-page monstrosity that nobody had time to read. It took 11 spending bills that Democrats couldn't be bothered to pass individually and crammed them into one oozing ball of pork and bad policy, going beyond even the obscene budget of 2010."
This plan, defeated by the Senate Republicans, will be replaced by a continuing resolution which will keep the government running, but will defer specific spending plans until the new Congress convenes. The Democrat funding plan had authorized $1B for 159 new entities created by ObamaCare, including funds to enforce the new mandatory insurance laws.
It is the responsibility of the House of Representatives to initial spending bills. The current Congress, under the dysfunctional leadership of Nancy Pelosi, failed to debate and pass any budgets. This was left to the Democrat members, where they assembled the $1.2T omnibus spending bill rejected by the full Senate. Truly ironic, Pelosi and her followers went to the wall to pass the unpopular health care law, a factor in the loss of the House to the Republicans, and then she failed to fund the law. The result, as Strassel continues:
"Everyone in Washington understands that the most powerful tool that Republicans gained in this election was control over spending bills. The GOP cannot repeal ObamaCare, but it can starve it to death. This is why incoming Speaker John Boehner has been fixated on spending-process reforms that will maximize the GOP's ability to influence administration programs. It's why incoming Budget Committee Chairman Paul Ryan has spent months gearing up for this battle."
Continuation of the lower Bush tax rates, and removal of the immediate impact of ObamaCare on small business should give entrepreneurs the encouragement to expand. They are the job creators that can gradually help increase the employment ranks, and make the economy grow.
The fact some US problems have been addressed, and the euro debt issues are still unresolved should continue to favor the USD, though in thin holiday markets anything can happen. Psychologically, there appears to be a more optimistic view of the US economic prospects. We are even hearing some 'whisper' numbers about better 4thQ GDP numbers.....maybe 4% or higher. Yes, problems remain, and a few bad numbers can change things in a hurry, so best to stay alert.
No charts or trades today. Have a great weekend.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.