Europe Slams Obama's Stimulus Plan; History Shows Obama's Plan is Ass Backwards; Yuan Falls Most Since December 2008

President Obama is hanging out to dry all by himself as ECB president Jean-Claude Trichet, German Chancellor Angela Merkel, and British Prime Minister David Cameron are all wisely going ahead with austerity measures instead of the stimulus measures that Obama and his Keynesian clown advisors want.

Trichet Tells Obama To Shove It

The New York Times reports Despite Obama’s Plea, European Bank Renews Call for Austerity

European countries need to keep a sharper eye on one another’s finances, and sanctions against fiscal rule-breakers should kick in automatically, the European Central Bank president, Jean-Claude Trichet, said on Monday.

The remarks, to members of the European Parliament’s Economic and Monetary Affairs Committee, meeting in Brussels, showed that Mr. Trichet continued to take a hard line on government spending despite a call by President Obama for Europe not to withdraw economic stimulus too hastily.

Mr. Trichet stuck to the argument he has made in recent weeks that fiscal prudence is the best medicine for the European economy. Unless Europeans believe that governments can get control of their budgets, “then households are going to be frightened, they will not spend,” he said. “Companies will not prepare for the future.”

Without mentioning Obama's name directly, Trichet's comments amount to one of the biggest "take your stimulus and shove it" calls you will ever see.

Cameron Bets on Prosperity from Austerity

Inquiring minds note British Prime Minister Cameron Betting on Prosperity From Austerity while Obama Delays

World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right.

Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.

“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid.

Such a strategy in the past has also “resulted in significant bond and equity-market outperformance,” according to an April 14 Goldman Sachs report.

Some investors are cool to the idea so far, and even President Barack Obama is pressing for more stimulus, not less, in the U.S. as he prepares to meet Cameron, Kan and other Group of 20 counterparts at a summit in Toronto June 26-27.

“We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past, when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession,” Obama wrote in a June 16 letter to G-20 leaders.

The key is an emphasis on cutting spending rather than raising taxes, said Goldman Sachs economists Broadbent and Daly in London. Lower spending means consumers and companies don’t fear higher taxes, so demand accelerates. A smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses.

In a study of 44 large fiscal adjustments in 24 advanced economies since 1975, Broadbent and Daly discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point.

Advanced economies need to retrench because issuing more debt will “crowd out” private-sector activity and threaten their credit ratings and long-term health, Thomas Byrne, a senior vice president at Moody’s Investors Service in Singapore, said in an interview.

Obama's Plan is Ass Backwards

It is rare that I have praise for anyone at Moody's but Thomas Byrne has it correct.

Reckless government spending takes money from the private sector while adding to the national debt and thus digging a deeper hole.

Obama is raising taxes and wants to add to the debt pile although the problem is debt. Instead he should be cutting taxes and reducing government spending.

Krugman Wrong Too

Obama is not the only one who has it wrong, Krugman is right at the top of the list. Repeating a snip from the Bloomberg article ...

Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.

“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,”Alesina said in an interview.

Krugman needs to read that study, or better yet display an ounce of common sense, but history suggests Krugman is terminally infected with the Fiscal Insanity Virus.

For more on Krugman's affliction, please see Krugman vs. Greenspan on "That ’30s Feeling"; Calculated Risk Sides with Krugman, I Side with Greenspan

Yuan Falls Most Since December 2008

One day after writing Yuan Climbs Most in 20 Months - a "Whopping" .37 Percent; Are we Supposed to be Impressed? I find myself rolling in laughter over Yuan Falls Most Since December 2008 on Signs PBOC to Curb Gains

China’s yuan declined the most since December 2008 on speculation the central bank will intervene to limit gains after dropping its two-year peg to the dollar.

The yuan weakened 0.17 percent to 6.8095 per dollar as of 12:40 p.m. in Shanghai, according to the China Foreign Exchange Trade system. The 12-month non-deliverable forward climbed 0.1 percent to 6.6349, after the central bank set the reference rate 0.43 percent stronger, reflecting appreciation yesterday.

Yuan moves won't be a one-way street

MarketWatch has this one correct: Yuan moves won't be a one-way street

The Chinese yuan declined against the U.S. dollar Tuesday to reverse some of its strong gains from the previous day, highlighting that the China unit's moves won't be all in one direction following the loosening of its de-facto peg to the greenback.

Expectations of rapid and consistent gains in the yuan were belied on Tuesday, as the U.S. dollar rose to 6.809 yuan, up from 6.7906 yuan the previous day. The greenback's gain came even as China lowered the dollar's central parity rate for the day to 6.7980 yuan, from 6.8275 yuan on Monday.

Speculation of a rapid rise in the yuan had been rife, even as the People's Bank of China said over the weekend that, although it desired greater exchange rate flexibility, it would "maintain the [yuan] exchange rate basically stable at an adaptive and equilibrium level."

Tariffs a Huge Mistake

If the Yuan does not rapidly appreciate (please note that the Yuan might even sink if freely floated), Congress may opt for horrendous tariffs, a policy that Krugman supports.

Without a doubt, the Smoot-Hawley tariffs magnified problems during the great depression.

Thus, if Congress does resort to tariff legislation and the economy sinks, Krugman will sing the "I told you so" song when the economy tanks.

Actually, it is nearly certain Krugman will be singing "I told you so", because regardless of what Congress does or does not do, there will never be enough stimulus for Krugman.

Indeed, it is mathematically impossible to stimulate the economy out of this mess because stimulus (debt) is the problem and it is logically impossible for problem and the solution to be the same.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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