The Organization for Economic Cooperation and Development (OECD) believes that eurozone banks still have much work to do to strengthen their capital. They warn that many of the entities currently are still below a capital ratio of 5% of total assets, a ratio the OECD believes ensures the strength of the financial system. To reach this threshold, banks in total need about 400 billion euros.

As we face another brutal fight over the federal debt ceiling at a time when the economy still remains fragile, the stock market is oddly complacent. Even if the debt ceiling crisis is resolved, the result would be some combination of spending cuts and tax increases that would weaken the economy in 2013. A settlement, however, is far from a done deal as both sides remain far apart and determined to defend their positions. Far worse, if the debt limit is not raised or eliminated, the effect on the economy and markets could be disastrous.

The November US trade deficit widened sharply and this will likely prompt economists to cut estimates of Q4 GDP. The first estimate is to be released at the end of the month. The pace of growth had appeared to be about half the pace of the 3.1% rate seen in Q3. Today’s report risks even slower growth. The real deficit, which adjusts for prices, widened to almost $52 bln from $46 bln.

Last year, I started my weekly newsletter out with Ten Surprises for 2012. The goal was to give you a list of things that investors only assigned one in three odds of occuring that I believed had a fifty percent or better chance of occurring. So if I was right, then I should get 5 out of ten predictions correct, while 3 to 4 out of ten should have been expected by investors. Let’s see how I did.

The unemployment rate in the euro zone hit 11.8% in November according to the numbers released by the EU this morning. That is a record. The EU-27-wide unemployment rate was 10.7%. This contrasts very unfavourably to the unemployment levels in other large advanced economies: 7.8% in the United States and the United Kingdom, 4.1% in Japan, and 3.1% in Switzerland.

I just wanted to follow up on Randy Wray’s last post to look at this Trillion Dollar Coin idea from an investing perspective. I believe the coin would be bullish for Treasuries because it lowers average Treasury duration and alters private portfolio preferences in a manner similar to quantitative easing. Otherwise, it has no real economy effects.

The Platinum coin has been all over the blogosphere as well as the media. Some have been arguing it will cause hyperinflation. How can issuing a coin to be held at the Fed to allow the Treasury to spend up to budgeted amount lead to hyperinflation? It’s technically a viable solution to the debt ceiling. Proof that when you look at the mechanics of our Monetary System you discover that the Fed ALWAYS ‘monetizes’ the deficit. QE is just a duration trade.

The rise of nationalism does not bode well for Japan’s participation in the Trans-Pacific Partnership, an attempt to build a free-trade area covering both sides of the Pacific. Although it was somewhat controversial for the DPJ, it had seemed to be moving in a supportive direction. The LDP (and the interests it represents) seem more hostile.

Thus far, there seems to be little push back against thrust of the LDP’s monetary and fiscal policies. The purposeful depreciation of the yen has not spurred protests by other countries, but we suspect that a continued sharp decline will antagonize Japan’s competitors, including South Korea and China.

Let’s talk about deficits for a second. The term deficit has some pretty serious negative connotations. So when we use that word, usually the implication is that the deficit is bad. Here’s the thing though; as I have written here a number of times, any economic agent’s net deficit is offset by another economic agent’s net surplus. So in the context of trade, current account or budget deficits, these all net to zero. This is accounting 101.

Last year I was complaining about people not getting this. But we have shown this to you for the US (more than once), for Italy, for Ireland and France, for the Eurozone (more than once). So by now, I imagine you understand the concept.

Here’s Japan’s version of the same chart.

I got the following spam email yesterday. It was sent from an email address with the sender name BEN BERNANKE

The explosive market rally following the fiscal cliff agreement was based more on what didn’t happen than what did. What didn’t happen was the implementation of automatic tax increases and spending cuts that would have shaved about 5% off GDP and cause a recession. What did happen was an agreement that would still reduce GDP by about 1.5%, an amount that still looms as significant in light of an economy that is only slogging along at a growth rate of about 2%. Even more important is the potential mess that lies ahead. The Treasury Department’s extraordinary measures to extend the debt ceiling runs out at the end of February or the beginning of March. The sequester requiring automatic across-the-board spending cuts of $110 billion for 2013 goes into effect on March 1st. The federal government’s spending authority for the current budget expires on March 27th.

Here’s a very good video on MMT with Stephanie Kelton, the chair of the Economics department at the University of Missouri at Kansas City talking to Lauren Lyster of RT’s Capital Account. As you know, despite my Austrian bias and my remaining allegiance to what Marshall Auerback calls “deficit terrorism”, I think MMT’s descriptive framework is compelling in many regards. [...]