The Center of the Universe

St Croix, United States Virgin Islands

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

PMC donation information

Posted by WARREN MOSLER on August 14th, 2014

I am now also emailing my posts directly to my PMC donors at the same time they are emailed for posting on this website.

If you wish to be on the list, please make a donation here.

Posted in Uncategorized | No Comments »

follow up on today’s releases

Posted by WARREN MOSLER on September 12th, 2014

Consumer Sentiment up but stuck at historically low levels:

Full size image

The chart shows how, over time, technology allows inventories to be lower than otherwise. The latest ‘counter trend’ drift to somewhat higher inventories have been ‘inflating’ GDP- adding over 1.5% to GDP in Q2- and could indicate inventories are getting excessive:

Posted in Uncategorized | No Comments »

Retail Sales, Univ of MIch consumer sentiment

Posted by WARREN MOSLER on September 12th, 2014

Seems 16 states had sales tax holidays in August that might have caused August sales to be up a bit and perhaps ‘borrow’ from September:

Tax Holidays

Note the area circled in orange shows a steady decline in the monthly growth rate, with a small uptick in August. We’ll see if that holds through September:

Retail Sales

The consumer sector appears to be stronger than indicated by employment data. The consumer is out spending. Retail sales jumped 0.6 percent in August after a rise of 0.3 percent the month before. Analysts projected 0.6 percent for August. The July upward revision was significant-previous estimate of zero.

Excluding autos, sales gained 0.3 percent in both August and July, matching expectations. Excluding both autos and gasoline sales were quite healthy, increasing 0.5 percent, following a rise of 0.3 percent in July. Expectations were for 0.4 percent.

By detail, not surprisingly, motor vehicles increased 1.5 percent. Next, building materials & garden equipment gained 1.4 percent-suggesting some improvement in housing. Food services & drinking places sales were up 0.6 percent, showing healthy improvement in discretionary spending. This is a good sign for the consumer sector.

Weakness was led by a 0.8 percent decline in gasoline sales. Also, general merchandise dipped 0.1 percent.

Overall, August retail sales were healthy and point to moderately strong third quarter GDP growth. Economic news has oscillated in recent months but consumer spending may be suggesting that the economy is stronger than suggested by labor market numbers.

Full size image

Posted in Uncategorized | No Comments »

Goldman revising Q2 GDP estimate up to 4.7%

Posted by WARREN MOSLER on September 11th, 2014

This would be a stronger ‘bounce back’ from -2.1 in Q1, but that still leaves the total for the first half of 2014 at only about +1.3%, And over 1.5% of the Q2 gain was from inventory accumulation.

Goldman Sachs Revises Q2 GDP estimate to 4.7%

Posted in GDP | No Comments »

Wholesale Sales

Posted by WARREN MOSLER on September 10th, 2014

This came out today and was up some from last month, and touted as a show of strength.

Nothing to write home about best I can see:

Posted in Uncategorized | No Comments »

Saudis cut price- target could be $75?

Posted by WARREN MOSLER on September 10th, 2014

I missed this when it first came out a few days ago.

This could be serious, as the plan could be to cut price low enough to put the higher priced producers out of business, which they can easily do. This includes all the shale and tar sands producers, for example.

And once that happens, with $trillions(?) of lost investments, it will be that much more difficult to raise capital to restart that production after the Saudis subsequently raise prices to the $150 level?

This article on the price cuts misses the above point entirely:

Saudi Arabia cuts October crude prices

By By Anjli Raval, Oil and Gas Correspondent

Sept 5 (FT) — Saudi Arabia cut October selling prices this week to customers in Asia, Europe and the US, in a sign that Opec’s largest producer is unlikely to curb production even amid an excess of crude oil supply.

The state-owned oil company Aramco reduced prices for its main oil export grade – Arab Light – to Asia by $1.70 a barrel in October from September, to a discount of 5 cents a barrel to the Oman-Dubai benchmark.

Prices to the Mediterranean fell by 95 cents a barrel, to a discount of $3.20 against the Brent benchmark. The same grade going to the US and northwest Europe declined by 40 and 70 cents respectively to the Argus Sour Crude Index and Brent benchmarks.

All four regions saw prices reach levels last seen in November 2010. Heavier grades also posted decreases.

“While the cuts were widely expected, the magnitude took a few in the market by surprise,” said Amrita Sen, at London-based consultancy Energy Aspects.

“For the Saudis, market share has really become an issue over the last year, so this is a signal that they are not just going to cut production because they have done so in the last few years,” she added.

Saudi Arabia has lost significant market share – particularly in Asia and the Mediterranean – to Iraq and Iran, both of which have been heavily discounting their crude. It is also increasingly competing with Kuwait and the UAE.

Although some analysts have said the lowering of prices for the US has been in response to growing shale oil production, others believe it is rather to do with low cost Opec producers seeking to expand their footing in the region.

“The overall reductions indicate they [Saudi Arabia] see a slack market and weak refining margins, meaning they have to discount more – particularly in Asia – to ensure their crude is taken,” said Gareth Lewis-Davies at BNP Paribas.

ICE October Brent, which hit $115 a barrel in mid-June, fell close to the $100 a barrel mark this week amid an oil glut.

Geopolitical tensions, from Libya to Iraq, have failed to disrupt production meaningfully. Moreover, excess supplies in the Atlantic Basin and North Sea, amid weak European demand, have only compounded the effect of North American production increases.

Market participants believe Saudi Arabia will cut production, influence prices and balance the market in times of oversupply, particularly since signalling its preferred price range of about $100 a barrel.

Production stands at close to 10m barrels a day, with 7m-8m b/d allocated for export.

As yet unhindered global production, combined with Saudi Arabia’s reluctance to cut output, bar seasonal fluctuations, could mean the price of oil falls further.

However, Abhishek Deshpande, analyst at Natixis, said the country was too reliant on oil revenues not to step in. “A greater number of exports at lower and lower prices doesn’t make sense.”

Even so, Mr Lewis-Davies added that when Saudi Arabia had sought to cut production in the past, regaining market share without disturbing the price had been problematic. There are also questions as to how much of the Gulf nation will be willing to lower output, especially if other Opec members do not follow suit.

Posted in Comodities, Oil | No Comments »

Mtg apps down again, cash buyers fading as well

Posted by WARREN MOSLER on September 10th, 2014

So if mortgage purchase apps are down and there are fewer cash buyers seems sales are staying down?

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 7.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 5, 2014. This week’s results included an adjustment for the Labor Day holiday. …

The Refinance Index decreased 11 percent from the previous week, to the lowest level since November 2008. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier, to the lowest level since February 2014. …

According to the MBA, the unadjusted purchase index is down about 12% from a year ago.

Full size image

Las Vegas Real Estate in August: YoY Non-contingent Inventory up 39%, Distressed Sales and Cash Buying down YoY

Posted in Housing | No Comments »


Posted by WARREN MOSLER on September 9th, 2014

Nothing happening here.

Note from the chart that it’s still near the lows of prior cycles.

From the National Federation of Independent Business (NFIB): NFIB SBET Sees Slight Bump in August

August’s Optimism Index rose 0.4 points to 96.1 making it the second highest reading since October, 2007. …

NFIB owners increased employment by an average of 0.02 workers per firm in August (seasonally adjusted), the eleventh positive month in a row but basically a “zero” net gain. emphasis added

Hiring plans decreased to 10.

Full size image

Posted in Uncategorized | No Comments »

Consumer credit up some due to 7 year car loans

Posted by WARREN MOSLER on September 8th, 2014

Consumer Credit

Retail sales may have been soft in July but consumers were definitely drawing on credit lines including a rare and very strong rise in credit card usage. Consumer credit jumped an outsized $26.0 billion in July on top of an upward revised $18.8 billion jump in June. But it’s revolving credit, the component where credit cards are tracked, that especially stands out in the report, up $5.4 billion vs a $1.8 billion gain in June. This component has been stubbornly flat throughout the recovery and further gains in future reports would mark a long-awaited upturn in consumer spirits.

The non-revolving component, as usual, is very strong, up $20.6 billion in July vs a $17.0 billion gain in June. But July’s gain, unlike prior gains, is centered entirely in vehicle financing, not the government’s acquisition of student loans from private lenders which contracted in the month.

This report offers a very strong positive signal for the consumer sector, a sector that has not been at the forefront of the economy. The Dow is moving slightly higher following today’s report.

Note how debt to income ratios jumped immediately after the FICA hike that kicked in Jan 2014:

And note how the growth rate is creeping up just like it did prior to the last recession, as the smaller deficit puts the squeeze on struggling consumers:

Student loan growth:

Posted in Credit | No Comments »

Fed’s consumer survey, employment slips as suspected

Posted by WARREN MOSLER on September 5th, 2014

This implies we need a larger deficit than otherwise to close the output gap/sustain full employment, has higher income earners tend to generate more unspent income/more savings than lower income earners.

Looks to me like the “1.2 million who lost benefits at year and took menial jobs” narrative has run its course, and consequently H2 employment gains will be that much weaker than H1, as suggested earlier…

Posted in Employment | No Comments »

ADP, productivity, trade, PMI services, Toll Bros. report

Posted by WARREN MOSLER on September 5th, 2014

Maybe some evidence the 1.2 million who lost benefits at year end and took menial jobs phenomenon has run its course, and H2 will show substantially lower employment growth than H1?

When it was going up it was ‘accelerating’, so now it must be ‘decelerating’, right?


Mark Zandi, chief economist of Moody’s Analytics, said, “Steady as she goes in the job market. Businesses continue to hire at a solid pace. Job gains are broad based across industries and company sizes. At the current pace of job growth the economy will return to full employment by the end of 2016.”

Productivity and unit labor cost also figure into employment.

Higher unit labor costs and lower productivity can be a sign sales are falling and headcount is too high:

The current account continues to modestly narrow as a % of GDP, which supports GDP some but not a lot.

Not withstanding that it represents a reduction in real terms of trade/standard of living, of course.

International Trade

The trade deficit in July shrank marginally to $40.5 billion from $40.8 billion in June,

Exports rose 0.9 percent in July after no change the month before. Imports gained 0.7 percent, following a 1.1 percent drop in June.

ISM Non-Mfg Index

The ISM’s non-manufacturing sample is reporting extending acceleration in composite activity with the index rising 0.9 points to 59.6 from an already very strong 58.7 in July. The August reading is near the top end of the Econoday consensus.

The gain is led by the business index which rose 2.6 points to 65.0 in a reading that indicates exceptionally strong output. Employment is also a big plus, up 1.1 points to 57.1. This gain may offset to a small degree this morning’s weakness in ADP’s estimate for Friday’s jobs report.

One reading is not so positive and that’s new orders. Though coming in at 63.8, the rate of growth is down 1.1 points from July’s 64.9. Other readings include a slowing for supplier deliveries which is in line with the general rise in activity. Pressures on input prices slowed 3.2 points to 57.7 which is moderate for this reading.

Full size image

And this housing report:

Lawler on Toll Brothers: Net Home Orders Down, Price Gains Slow; Some “Lessening” in Pricing Power

From housing economist Tom Lawler: Toll Brothers: Net Home Orders Down, Price Gains on Orders Slows; Some “Lessening” in Pricing Power but No “Need” to Increase Incentives Much — Yet

Toll Brothers, the self-described “nation’s leading builder of luxury homes,” reported that net home orders in the quarter ended July 31, 2014 totaled 1,324, down 5.8% from the comparable quarter of 2013. Net orders per community last quarter were down 15.9% from the comparable quarter of 2013. The company average net order price last quarter was $717,000, up 1.4% from a year ago. Toll’s sales cancellation rate, expressed as a % of gross orders, was 6.6% last quarter, up from 4.6% in the comparable quarter of 2013. Home deliveries last quarter totaled 1,364, up 36.8% from the comparable quarter of 2013, at an average sales price of $732,000, up 12.4% from a year ago. The company’s order backlog at the end of July was 4,204, up 5.1% from last July, at an average order price of $737,300, up 4.1% from a year ago. The company controlled 49,037 home sites at the end of July, up 3.9% from last July and up 25.1% from two years ago.

For its “traditional” home building business (i.e., ex city living), net home orders totaled 1,281 last quarter, down 5.0% from the comparable quarter of 2014, at an average net order price of $700,500, up 3.4% from a year ago.

Posted in Uncategorized | No Comments »

September govt rush to spend

Posted by WARREN MOSLER on September 5th, 2014

I got this emailed to me. Makes sense.

Did US Macro Just Jump The Shark?

As in past years, this spike in activity is extrapolated by the smartest people in the room, leaving the reality to miss expectations for the rest of the year. A glance at the chart above might suggest, we just jumped the shark once more in US macro data for 2014…

* * *

As we concluded previously,

This begs the question: is the only reason why the economy tends to pick up momentum dramatically as the summer ends just a function of a surge in government spending permeating the broader economy as agencies scramble to spend all the money they have before the end of the September 30 Fiscal Year End (just so they get allocated the same or greater budget in the coming fiscal year), which subsequently plunges or is outright halted as the case may be right now?

If so, it would explain so much, and certainly why year after year, the US economy seems to pick up in the mid-to-late Q3 period, only to dramatically fade away in the coming months, as government spending goes from a waterfall to a trickle.

It would also put the government’s role in generating transitory periodic spikes in economic output under a microscope, especially since it is so clearly staggered to recur every September as one after another government agency spends like a drunken sailor. And if that is the case, how long until the BLS or some other agency (upon reopening of course) is taken to task to normalize not only for hedonic indicators and climate-related seasonal factors, but also for what is now clearly an annual aberration of economic output trends?

Posted in Uncategorized | No Comments »

Car sales strong! Beige book soft

Posted by WARREN MOSLER on September 4th, 2014

U.S. Light Vehicle Sales increase to 17.45 million annual rate in August, Highest since Jan 2006

By Bill McBride

Based on an WardsAuto estimate, light vehicle sales were at a 17.45 million SAAR in August. That is up 10% from August 2013, and up 6.4% from the 16.4 million annual sales rate last month.

This was well above the consensus forecast of 16.5 million SAAR (seasonally adjusted annual rate).

Full size image

Fed’s Beige book soft:

Fed’s Beige Book: Economic Activity Expanded, No “distinct shift in the overall pace of growth”

Posted in Fed | No Comments »

Today’s factory order charts

Posted by WARREN MOSLER on September 4th, 2014

This doesn’t look like much of a recovery?

The export game is getting tougher as well:

Tech not so hot either:

Here’s the report:

Skewed by Boeing orders at the Farnborough Airshow, factory orders surged 10.5 percent in July. Excluding transportation equipment, which includes both aircraft and vehicles, factory orders actually slipped, down 0.8 percent in the month.

But there are important positives in the report including a sharp 1.2 percent rise for shipments and a 1.4 percent rise for shipments of nondefense capital goods excluding aircraft. Unfilled orders show an unusually outsized gain of 5.4 percent while inventories, up only 0.1 percent, will need to be refilled. Another positive is an upward revision to June orders, now at a very strong 1.5 percent vs a prior reading of plus 1.1 percent.

Aircraft orders are the standout star of the July report and mustn’t be dismissed. These orders are long term but will eventually boost factory shipments and employment. Though orders outside aircraft were soft in July, the trend is still positive. Today’s report, together with yesterday’s exceptionally strong ISM report for August, point to third-quarter strength for the manufacturing sector.

Posted in Uncategorized | No Comments »

Construction, gasoline prices, manufacturing, state and local contribution to gdp, restaurant performance index, saudi output, sun spots

Posted by WARREN MOSLER on September 3rd, 2014

Headlines sound a lot better than the charts look.

Absolute levels and growth rates continue to fall short of prior cycles:

Construction Spending

Construction outlays saw a broad-based gain in July. Construction spending rebounded 1.8 percent after a 0.9 percent dip in June. While all broad categories advanced, July’s increase was led by the public sector-up 3.0 percent, following a 1.8 percent decrease in June. Private nonresidential spending rebounded 2.1 percent in July after slipping 0.8 percent the month before. Private residential outlays gained 0.7 percent, following a 0.4 percent dip in June.

On a year-ago basis, total outlays were up 8.2 percent in July, compared to 7.0 percent the month before.

Overall, the latest construction data add to third quarter momentum. Third quarter GDP estimates will likely be nudged up. There is a lot of recent volatility in construction data but the residential gain is encouraging.

Unadjusted Construction Spending – Three Month Rolling Average Compared to the Rolling Average One Year Ago

Full size image

Full size image

Full size image

This helps consumers some and also puts downward pressure on ‘inflation’:

Full size image

Manufacturing continues to do reasonably well, chugging along about the way it always does until the cycle ends:

Full size image

Don’t be misled by the talk of state and local govt contributing to GDP. The spending side is only half the story- they also tax. So you need to look at state and local govt deficits to get an idea of their net contribution:

This is the spending side:

Full size image

It’s a bit tricky as you don’t want to double count federal $ spent by the states:

Sure enough, tax receipts which tend to be highly cyclical, going up when the economy does better, seem to have stalled, and state and local deficits have gone up. So is that an indicator of growth?

And it looks like state and local deficits did go up a tad, but not a lot:

And this just came out:

Full size image

The call on Saudi oil shows no signs of diminishing which they remain as ‘swing producer/price setter’, setting price and letting quantity adjust with demand:

Full size image

And this:

Full size image

Posted in Deficit, GDP, Government Spending, Housing | No Comments »

today’s observations

Posted by WARREN MOSLER on September 2nd, 2014

Not much sign of any move towards higher deficits today. Just talk of more bank liquidity, which doesn’t matter, and more to weaken the euro, which doesn’t work either.

Hard to say why the euro has been going down, but it’s not ECB policy per se which, while meant to weaken the euro, instead continues to be ‘strong euro’ biased. So must be portfolios selling euro, maybe in response to Russia’s actions.

“French Prime Minister Manuel Valls called for more action from the ECB to lower the value of the euro.Mr Valls said: “the monetary policy has started to change”. While he called the ECB’s package of measures taken in June a “strong signal,” he also said that “one will have to go even further.”

German Finance Minister Mr Schaeuble said deficit-fueled growth leads to economic decline, signalling discord with Italy and France as euro-area policy makers seek ways to avoid deflation and spur growth. Euro-area countries that pursued austerity policies in return for sovereign bailouts are “doing much better than all the others in Europe,” Schaeuble.

ECB’s Coeure says ready to adjust monetary policy if needed: In an article published in Greek daily Ta Nea, ECB’s Coeure said that ECB’s measures so far, have contributed to stability in the euro zone while its recent decisions have ensured a particularly accommodative direction in monetary policy in the single-currency bloc. “The ECB will provide additional liquidity to banks on the condition that they increase credit directed to the real economy, and it is ready to further adjust the direction of its monetary policy, if needed,” Coeure said (Ta Nea, Reuters) ”

Posted in Banking, Currencies, EU | No Comments »

Charts and data from the last few days

Posted by WARREN MOSLER on August 28th, 2014

Down for the cold winter then back up some, and a very weak first half of the year, and Q3 fading from Q2:


The second estimate for second quarter GDP growth came in a little stronger than expected, rising 4.2 percent annualized versus a 4.0 percent forecast and coming off a 2.1 percent weather related drop in the first quarter. With this second estimate for the second quarter, the general picture of economic growth remains the same; the increase in nonresidential fixed investment was larger than previously estimated, while the increase in private inventory investment was smaller than previously estimated.

Real final sales of domestic product-GDP less change in private inventories-increased 2.8 percent in the second quarter, in contrast to a decrease of 1.0 percent in the first. Real final sales to domestic purchasers gained 3.1 percent versus 0.7 in the first quarter.

Chain-weighted prices gained 2.1 percent annualized, compared to the consensus for 2.0 percent and the first quarter number of 1.3 percent.

Overall, the weather-related rebound in the second quarter was stronger than expected. Personal spending made a comeback and inventories were rebuilt. The economy is gradually regaining momentum-emphasis on gradually.

Corporate Profits

Again, for growth this year to exceed last year, all the components on average have to grow more than they did last year:

NAR: Pending Home Sales Index increased 3.3% in July, down 2.1% year-over-year

By Bill McBride

From the NAR: Pending Home Sales Pick Up in July

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 3.3 percent to 105.9 in July from 102.5 in June, but is still 2.1 percent below July 2013 (108.2). The index is at its highest level since August 2013 (107.1) and is above 100 – considered an average level of contract activity – for the third consecutive month.

With purchase apps down 11% year over year and cash purchases down it’s hard to see how total sales can grow?

MBA Purchase Applications

Demand for purchase applications picked up in the August 22 week, rising 3.0 percent. But the trend remains stubbornly flat, down 11.0 percent year-on-year. The index for refinancing applications also rose 3.0 percent in the week. Mortgage rates were little changed in the week with the average for conforming loans ($417,000 or less) down 1 basis point to 4.28 percent.

Falling home prices are not a good sign:

S&P Case-Shiller HPI

Home price appreciation continues to unwind as S&P Case-Shiller 20-city adjusted data show a 0.2 percent decline in June following a 0.3 percent in May. Year-on-year, the adjusted rate is plus 8.1 percent vs 9.3 percent in May. Monthly declines swept 13 of the 20 cities with Minneapolis, Detroit, Atlanta and Chicago showing special weakness.

Unadjusted data, which are followed in this report, show a monthly gain of 1.0 percent that reflects the relative strength of summer months for sales. But the year-on-year rate, where this effect is offset, tells exactly the same story as the adjusted data, at 8.1 percent vs 9.3 percent in the prior month.

Home prices are weakening, based not only on this report but also on FHFA data, also released this morning, and on yesterday’s new home sales report as well as last week’s existing home sales report. Easing home prices are a plus for sales but a negative of course for homeowner wealth.

Durable Goods Orders

Durables orders soared in July due aircraft orders but otherwise came off a moderately strong core number in June. New factory orders for durables soared a monthly 22.6 percent in July, following a 2.7 percent boost in June. Econoday’s consensus called for a 5.1 percent gain in July. The high end of forecasts was 24.5 percent.

Excluding transportation, durables orders slipped 0.8 percent, following a 3.0 boost in June. Analysts forecast a 0.4 percent rise for July. But June earlier had been estimated to be up “only” 1.9 percent from the full factory orders report.

Transportation spiked a monthly 74.2 percent after rising 2.1 percent in June. Nondefense aircraft (Boeing) surged 318.0 percent (that is not a typo) after gaining 11.1 percent in June. Another but more moderate positive was motor vehicle orders which gained 10.2 percent, following a 1.3 percent dip in June. Defense aircraft fell 28.8 percent in July, following a rise of 9.2 percent the month before.

Outside of transportation, gains were limited with “other” gaining. Other categories slipped but followed upward revisions to June.

Orders for equipment investment edged down in July but followed a strong June. Nondefense capital goods orders excluding aircraft declined 0.5 percent, following a spike of 5.4 percent the month before. Shipments of this series, however, were positive, gaining 1.5 percent in July, following an increase of 0.9 percent in June. The latest shipments numbers suggest a favorable number for business equipment in third quarter GDP.

The Boeing order gets filled over approximately the next 10 years:

Posted in GDP, Government Spending, Housing | No Comments »

Comments on Professor John Cochrane’s – A Few Things the Fed Has Done Right

Posted by WARREN MOSLER on August 28th, 2014

A Few Things the Fed Has Done Right

The Fed’s plan to maintain a large balance sheet and pay interest on bank reserves is good for financial stability.

By John H. Cochrane

Aug 21 (WSJ) — As Federal Reserve officials lay the groundwork for raising interest rates, they are doing a few things right. They need a little cheering, and a bit more courage of their convictions.

The Fed now has a huge balance sheet. It owns about $4 trillion of Treasury bonds and mortgage-backed securities. It owes about $2.7 trillion of reserves (accounts banks have at the Fed), and $1.3 trillion of currency. When it is time to raise interest rates, the Fed will simply raise the interest it pays on reserves. It does not need to soak up those trillions of dollars of reserves by selling trillions of dollars of assets.


The Fed’s plan to maintain a large balance sheet and pay interest on bank reserves, begun under former Chairman Ben Bernanke and continued under current Chair Janet Yellen, is highly desirable for a number of reasons—the most important of which is financial stability. Short version: Banks holding lots of reserves don’t go under.

Not true.
Confusing reserves with capital to some extent.
Banks can fail via losses that wipe out capital even with plenty of liquidity.

This policy is new and controversial. However, many arguments against it are based on fallacies. People forget that when the Fed creates a dollar of reserves, it buys a dollar of Treasurys or government-guaranteed mortgage-backed securities. A bank gives the Fed a $1 Treasury, the Fed flips a switch and increases the bank’s reserve account by $1. From this simple fact, it follows that:

• Reserves that pay market interest are not inflationary. Period. Now that banks have trillions more reserves than they need to satisfy regulations or service their deposits, banks don’t care if they hold another dollar of interest-paying reserves or another dollar of Treasurys. They are perfect substitutes at the margin. Exchanging red M&Ms for green M&Ms does not help your diet. Commenters have seen the astonishing rise in reserves—from $50 billion in 2007 to $2.7 trillion today—and warned of hyperinflation to come. This is simply wrong as long as reserves pay market interest.

Yes and no.

Yes, the mix of Fed liabilities per se isn’t inflationary.

No, even if they didn’t pay interest it wouldn’t be inflationary. In fact, it would mean a reduction in govt interest payments which is a contractionary bias.

And his point is best stated by stating that both reserves and tsy secs are simply dollar denominated ‘bank accounts’ at the Fed, the difference being the duration and rates, directly or indirectly selected by ‘govt’.

• Large reserves also aren’t deflationary. Reserves are not “soaking up money that could be lent.” The Fed is not “paying banks not to lend out the money” and therefore “starving the economy of investment.”


Every dollar invested in reserves is a dollar that used to be invested in a Treasury bill.

Wrong statement of support. He should state that the causation goes from loans to deposits. ‘Loanable funds’ applies to fixed fx, not floating fx.

A large Fed balance sheet has no effect on funds available for investment.

True, they are infinite in any case. Bank lending is constrained only in the short term by capital, as there is always infinite capital available with time at a price that gets reflected in lending charges.

• The Fed is not “subsidizing banks” by paying interest on reserves.

It is to the extent that paying interest is subsidizing the economy in general, as govt is a net payer of interest.

The interest that the Fed will pay on reserves will come from the interest it receives on its Treasury securities.

Sort of. Better said that the interest received on the tsy’s will equal/exceed/etc. the interest paid on reserves. ‘Come from’ is a poor choice of words.

If the Fed sold its government securities to banks, those banks would be getting the same interest directly from the Treasury.


The Fed has started a “reverse repurchase” program that will allow nonbank financial institutions effectively to have interest-paying reserves. This program was instituted to allow higher interest rates to spread more quickly through the economy.


Again, I see a larger benefit in financial stability. The demand for safe, interest-paying money expressed so far in overnight repurchase agreements, short-term commercial paper, auction-rate securities and other vehicles that exploded in the financial crisis can all be met by interest-paying reserves.

Sort of. The term structure of rates constantly adjusts to indifference levels is how I’d say it.

Encouraging this switch is the keystone to avoiding another crisis. The Treasury should also offer fixed-value floating-rate electronically transferable debt.

Why??? Indexed to what? The one’s they are doing indexed to T bills make no logical sense at all.

This Fed reverse-repo program spawns many unfounded fears, even at the Fed. The July minutes of the Federal Open Market Committee revealed participants worried that “in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations.”

This fear forgets basic accounting.


The Fed controls the quantity of reserves. Reserves can only expand if the Fed chooses to buy assets—which is exactly what the Fed does in financial crises.

Furthermore, this fear forgets that investors who want the safety of Treasurys can buy them directly. Or they can put money in banks that in turn can hold reserves. The existence of the Fed’s program has minuscule effects on investors’ options in a crisis. Interest-paying reserves are just a money-market fund 100% invested in Treasurys with a great electronic payment mechanism.

Available to banks.

That’s exactly what we should encourage for financial stability.

The Open Market Committee minutes also said that, “Participants noted that a relatively large [repurchase] facility had the potential to expand the Federal Reserve’s role in financial intermediation and reshape the financial industry.”

Not really.

It always has been about offsetting operating factors one functionally identical way or another.

Yes, and that’s a feature not a bug. The financial industry failed and the Fed is reshaping it under the 2010 Dodd-Frank financial-reform law. Allowing money previously invested in run-prone shadow banking to be invested in 100%-safe reserves is the best thing the Fed could do to reshape the industry.

They can only do that if they reduce the institutional additions to the bank’s cost of funds/lower risk restrictions to make the banks more competitive with non bank lenders.

Temptations remain. For example, with trillions of reserves in excess of regulatory reserve requirements, the Fed loses what was left of its control over bank lending and deposit creation. The Fed will be tempted to use direct regulation and capital ratios to try to micromanage lending.

That’s all it ever had. Lending was never reserve constrained.

It should not. The big balance sheet is a temptation for the Fed to buy all sorts of assets other than short-term Treasurys, and to meddle in many markets, as it is already supporting the mortgage market. It should not.

I see precious little difference apart from option vol considerations.

The Fed is making no promises about the stability of these arrangements—a large balance sheet and market interest on reserves available to non-banks. It should. In particular, it should clarify whether it will allow its balance sheet to shrink as long-term assets run off, or reinvest the proceeds as I would prefer.

It doesn’t matter for what he’s talking about.

Most of the financial stability benefits only occur if these arrangements are permanent and market participants know it. We can debate whether interest rate policy should follow rules or discretion, be predictable or adapt to each day’s Fed desire. But the basic structures and institutions of monetary policy should be firm rules.

The remaining short-term question is when to raise rates. Ms. Yellen has already made an important decision: The Fed will not, for now, use interest-rate policy for “macroprudential” tinkering. This too is wise. We learned in the last crisis that the Fed is only composed of smart human beings. They are not clairvoyant and cannot tell a “bubble” from a boom in real time any better than the banks and hedge funds betting their own money on the difference. Manipulating interest rates to stabilize inflation is hard enough. Stabilizing inflation and unemployment is harder still.

Especially when they have it backwards.

Additionally chasing will-o-wisp “bubbles,” “imbalances” and “crowded trades” will only lead to greater macroeconomic and financial instability.

Here too a firm commitment would help. Otherwise market participants will be constantly looking over their shoulders for the Fed to start meddling in home and asset prices.

Plenty of uncertainties, challenges and temptations remain. Tomorrow, we can go back to investigating, arguing and complaining. Today let’s cheer a few big things done right.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.

Doesn’t mention/forgets that the Fed buying secs is functionally identical to the tsy not selling them in the first place, etc.

Posted in Banking, Fed | No Comments »

new home sales bad

Posted by WARREN MOSLER on August 25th, 2014

And it’s no longer about prices, which fell, and inventories, which are now plenty high:

New Home Sales

Upward revisions offset a lower-than-expected 412,000 annual sales rate for new home sales in July with the two prior months revised higher by a total of 28,000. July’s gain is centered entirely in the South which rose 8.1 percent in the month. The South is by far the largest region for new home sales, outdistancing all other regions combined.

Lack of new homes on the market has been constraining sales but perhaps less so now. Supply on the market rose to 205,000 vs 197,000 in June, pulling up the monthly supply to 6.0 months at the current sales rate vs 5.6 in June.

High prices have also been constraining sales but, again here too, perhaps no more. The median price fell 3.7 percent in the month to $269,800. Year-on-year, the median price is up only 2.9 percent which is well below the year-on-year sales gain of 12.3 percent.

The Dow is moving to opening highs following today’s report, a key report that, despite the soft headline and concentrated gain in the South, adds to the building evidence of renewed vigor in the housing sector.

Posted in Housing | No Comments »

ECB relying export driven growth through euro depreciation

Posted by WARREN MOSLER on August 23rd, 2014

Note below that he states it’s the fx channel that the ECB is relying on to support aggregate demand.

Good luck to them, it doesn’t work that way!!!

From the speech by Mario Draghi, President of the ECB, Annual central bank symposium in Jackson Hole, 22 August 2014:

Boosting aggregate demand

On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time. I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further.

We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the US and the euro area (Figure 7). We will launch our first Targeted Long-Term Refinancing Operation in September, which has so far garnered significant interest from banks. And our preparation for outright purchases in asset-backed security (ABS) markets is fast moving forward and we expect that it should contribute to further credit easing. Indeed, such outright purchases would meaningfully contribute to diversifying the channels for us to generate liquidity.

Posted in Currencies, ECB, trade | No Comments »

Charts on labor force participation rates- not good!

Posted by WARREN MOSLER on August 23rd, 2014

Hard to believe there isn’t a lot of slack indicated here.

Note that it’s always gone up during an expansion, until now:

Full size image

And isolating the ‘prime working age’ removes the ‘aging factor’

Full size image

Full size image

In fact, the chart for ‘over 55′ shows the overall drop in participation didn’t come from this group, and, seems, their participation would have gone up in a ‘normal’ recovery:

Full size image

And who would have thought a weak demand would hurt these groups first/hardest…
Certainly not in America…

Full size image

And, while down dramatically, look how high this has been and still is:

Full size image

Full size image

But maybe the clue to why the subject is getting all the attention this time around lies here?

Just saying…

Full size image

For all men the rate’s been falling for a long time, with the recent drop less noticeable.

And it used to be over 85%!

Full size image

Add this and you have the appearance that (lower cost?) women have been replacing (higher cost?) men for a long time now?

Full size image

Enough to make the point.

Unlike all prior recoveries, this recovery continues to fail to keep up with population and productivity growth

Which is the evidence that the federal budget deficit is far to low for current financial condition.

That is, the output gap remains extreme and, if anything, is growing, as out government continues to fail its electorate.

Posted in Employment | No Comments »