Cut mania spreading!

U.K. Economists Call for Immediate Rate Cut, TelegraphReports

(Bloomberg)U.K. economists urged the Bank of England to cut interest rates as a matter of urgency after the sterling inter-bank market’s fastest decline in modern times, the Daily Telegraph reported. The volume of market loans in the banking system fell from640 bln pounds ($1.3 trillion) at the start of the credit crisis to249 bln pounds by the end of September, the newspaper said.

seems these were absorbed by the banking system, much like in the US?

Tim Congdon, a professor at the London School of Economics, called for a half-point rate cut, to 5.25 %, when the central bank’s Monetary Policy Committee meets on Dec. 5, commenting that a market that’s taken 30 years to build “has completely imploded in a matter of months,” the Telegraph said. Patrick Minford, a professor at Cardiff University, wants a three-quarter-point cut, saying the committee has been “standing idly by” as three-month London Inter-Bank Offered Rate spreads shot up by 75 basis points; he described the central bank’s behavior as “highly irresponsible, neglecting a century of monetary teaching,” the newspaper said.

There was no such market a century ago, as above. What the advantage of market loans verses non market loans is to the real economy is never discussed.

If there is a real problem, it would be real borrowers no longer able to obtain credit. That’s never discussed as a reason to cut.

Peter Warburton, of Economic Perspectives, called for a half-point cut at once and a further easing in the new year, the Telegraph added.


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Chairman Bernanke on Food and Energy Prices

Letter to Editor of the Wall Street Journal that was never published.

From Mr Warren Mosler.

Dear Sir,

Chairman Bernanke has recently stated the following before Congress:

“…and futures quotes suggest that investors saw food and energy prices coming off their recent peaks next year.”

– Testimony, Chairman Ben S. Bernanke,
“The Economic Outlook” Before the Joint Economic Committee, U.S. Congress, November 8, 2007

It appears from this and previous similar statements that the Chairman is using the “futures market” prices of crude oil as a forecast of what prices are likely to be in the future. This is incorrect.

When a ‘non-perishable’ commodity like oil is in short supply, this condition is expressed by the spot price trading higher than prices for future delivery. When, instead, inventories are plentiful, prices for delivery in the future are higher than spot prices.

Clearly a commodity in short supply is not necessarily less apt to appreciate than a commodity where inventories are plentiful. Yet that is exactly how the Fed model appears to be programmed: the current backwardation in crude oil is viewed as indicative of lower prices over
time, rather than indicative of a product in very short supply, where spot prices can at least as easily go up as down.

Yours faithfully,

Warren Mosler
Senior Associate Fellow,
Cambridge Centre for Economic and Public Policy,
University of Cambridge,
Chairman,
Valance Co. 5000 Estate Southgate
Christiansted, St. Croix, USVI 00820
Office phone: 340 692 7710
E-Mail: warren.mosler@gmail.com

Professor James K. Galbraith
Lloyd M. Bentsen, Jr. Chair in Government/Business Relations
LBJ School of Public Affairs
The University of Texas at Austin
Austin TX 78713-8925

Posted in Fed

2007-12-03 US Economic Releases

ISM was the big number – not a lot of new US numbers today.

Unch; but employment component down 4.2pts to below 50 and anecdotes not very comforting

and prices paid up, see below.

What Respondents are Saying..

  • “Continued concerns regarding high oil prices, weak dollar and weak housing sector.” (Chemical Products)
  • “Erratic market causing more difficulty in forecasting customer demand.” (Computer & Electronic Products)
  • “Heavy truck market has not started recovering yet.” (Fabricated Metal Products)
  • “Business is off by almost 50 percent over last year in the building products industry.” (Nonmetallic Mineral Products)
  • “More inquiries from international customers than domestic.” (Machinery)

The building products industry has been down for quite a while and exports are picking up the slack.

ISM Manufacturing (Nov)

Survey 50.8
Actual 50.8
Prior 50.9
Revised n/a

ISM Prices Paid (Nov)

Survey 65.5
Actual 67.5
Prior 63.0
Revised n/a

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Saudis are Necessarily in Position of Price-Setter

Published November 16, 2007 in the Financial Times

From Mr Warren Mosler.

Sir, Adrian Binks’ letter “Oil price conspiracy theories get in the way of facts”(November 14) is precisely the response indicated in my letter (November 12); in this case from an energy information service. While Mr Binks’ statements are indeed factual, the institutional structure outlined, which the Saudis initiated, leaves more than sufficient room for the Saudis effectively to set prices and meet the demand at that price.

Note that their current production level of about 8.5m barrels per day is down about 2m bpd from just a few years ago. If they were simply producing based on capacity and selling the resulting output at “market” prices, their output would be higher and the price of crude much lower.

Furthermore, if they were not acting as swing producer, it would be far more difficult to organize general Opec production levels.

Regarding Russia, Mr Binks’ statement that “the Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being”, is indicative that President Vladimir Putin is well aware that Russia is indeed a “price-setter”, and I suggest that it is an error to underestimate his progress in this direction.

To address Mr Binks’ conclusion: this is not a “conspiracy theory” and not precisely a “price-setting cartel”. It is, rather, a point of logic describing a case of “imperfect competition” where (at least in the short run) a given supplier’s output is sufficiently large and flexible, and demand sufficiently constant, that the supplier is necessarily in the position of “price-setter”.

Warren Mosler,
Chairman,
Valance & Co,
St Croix,
USVI 00820

Copyright The Financial Times Limited 2007


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Oil Price Conspiracy Theories Get in the Way of Facts

Published November 14, 2007 in the Financial Times

From Mr Adrian Binks.

Sir, Warren Mosler (Letters, November 12), reveals the level of hysteria that affects even intelligent western economists when it comes to oil prices.

First, economists need to understand the facts. Saudi Arabian crude oil is sold at prices directly linked to market values. Sales to Asia are linked to the price of Oman and Dubai crude, with exports to Europe based on ICE Brent futures prices, and sales to the US ultimately linked to West Texas Intermediate crude price levels. The Saudis set monthly differentials to these benchmark market prices that reflect the different quality of their crude, taking into account their customers’ refinery configurations.

Mr Mosler is equally confused when he writes that President Vladimir Putin “seems to have gained control over pricing of Russian oil”. Most Russian crude oil is sold at market-related prices. In the case of the second largest private-sector Russian producer, TNK-BP, next year’s sales will be based on the average of market assessments by Argus and Platts, two international specialist reporting agencies.

The trend within Russia is to greater market-related pricing, not less. The Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being.

Rather than producer price setting, the cause of the upsurge in oil prices is new demand in China and India, coupled with the inability of western oil companies to invest in new low-cost reserves because of state control of crude oil extraction in key exporters. This is nothing new. Saudi oil production has been closed to western oil companies since the 1970s.

What is new is the drive for cleaner-burning transport fuels that require massive investment by the oil industry in more sophisticated refining. At the same time, there is a huge increase in product demand in markets to which western companies have little access.

These are the facts that economists in western countries should be focused on, and not conspiracy theories about price-setting cartels.

Adrian Binks,
Chief Executive,
Argus Media,
London EC1V 4LW

Copyright The Financial Times Limited 2007

Saudis Do Set World Oil Prices – Despite Bold Denials

Published November 12, 2007 in the Financial Times

From Mr Warren Mosler.

Sir, As crude oil prices continue to rise, the media continue to assume that competitive market forces are behind the increase, including political tensions, weather, supply disruptions and demand pressures. Completely overlooked, however, is the fact that the Saudis post their offered prices for the oil they sell to their refiners, and let the quantity they deliver vary with demand. It is a simple case of monopoly price-setting. The Saudis are acting as “swing producer” and setting the world price.

As a point of logic, the Saudis have no choice but to set the price of oil. At the margin, they are in fact the sole supplier of about 8.5m barrels of crude that the world currently needs from them every day. As all economics students are taught, any sole supplier is necessarily a “price-setter”.
Of course, the Saudis boldly deny that they set prices. However, they do say they do not sell in the spot markets, but that they do (publicly) post their desired prices to the refiners who buy their oil.

The Saudis will continue as price-setter until net world supply increases sufficiently to cause Saudi sales to fall and production to drop to unsustainably low levels. This is what happened in the early 1980s and persisted until the last several years when a decrease in net available world supply put the Saudis back in the driver’s seat.

Additionally, President Vladimir Putin seems to have gained control over pricing of Russian oil, making him a world “price-setter” as well. This means that either the Saudis or the Russians can raise prices at will, and the rest of the market automatically follows.

The bottom line is that the price of oil will rise to the higher of any price Russia or the Saudis desire, with no relief unless there is a drop in net world demand that reduces the demand for both Saudi and Russian output to unsustainably low levels.

Warren Mosler,
Chairman,
Valance,
St Croix, USVI 00820
(Senior Associate Fellow, Cambridge Centre for Economic and Public Policy, University of Cambridge, UK)

Copyright The Financial Times Limited 2007

Feds’ budget tricks hide trillions in debt

Feds’ Budget Tricks Hide Trillions in Debt

-Scott Burns
Every year, tens or even hundreds of billions of dollars are quietly added to the national debt — on top of the deficits that we hear about. What’s going on here?

Burns doesn’t get it.

When it comes to financial magic, the government of the United States takes the prize. Sleights of hand and clever distractions by purveyors of line-of-credit mortgages, living-benefit variable annuities and equity-indexed life insurance are clumsy parlor tricks compared with the Big Magic of American politicians.Consider the proud trumpeting that came from Washington at the close of fiscal 2007. The deficit for the unified budget was, politicians crowed, down to a mere $162.8 billion.

In fact, our government is overspending at a far greater rate. The total federal debt actually increased by $497.1 billion over the same period.

But politicians of both parties use happy numbers to distract us. Democrats routinely criticize the Republican administration for crippling deficits, but they politely use the least-damaging figure, the $162.8 billion. Why? Because references to more-realistic accounting would reveal vastly greater numbers and implicate both parties.

No, because they are right and Burns is wrong.

You can understand how this is done by taking a close look at a single statement on federal finance from the president’s Council of Economic Advisers. The September statement shows that the “on-budget” numbers produced a deficit of $344.3 billion in fiscal 2007. The “off-budget”> numbers had a surplus of $181.5 billion. (The off-budget figures are dominated by Social Security, Medicare and other programs with trust funds.)

Correct. Net government spending in the non government sectors is what ‘counts’. Intergovernment transfers of anything are of no economic consequence to the rest of us. They have no current year impact on aggregate demand.

Combine those two figures and you get the unified budget, that $162.8 billion. In the past eight years we’ve had two years of reported surpluses and six years of reported deficits. Altogether, the total reported deficit has run $1.3 trillion.But if you examine another figure, the gross federal debt, you’ll see something strange. First, the debt has increased in each of the past eight years, even in the two years when surpluses were reported. Second, the gross federal debt, which includes the obligations held by the Social Security and Medicare trust funds, has increased much faster than the deficits — about $3.3 trillion over the same eight years.

They are correct, as above, by not including transfers of securities from one government agency to another.

That’s $2 trillion more than the reported $1.3 trillion in deficits over the period. Can you spell “Enron”?

Pass on the comebacks and go on to the text.

In other words, while our reported deficits averaged $164 billion over the past eight years, government debt increased an average of $418 billion a year. That’s a lot more than twice as much. How could this happen?

How can a responsible new sight publish this nonsense???

Easy. The Treasury Department simply credits the Social Security, Medicare and other trust funds with interest payments in the form of new Treasury obligations. No cash is actually paid.

Why should it be???

The trust funds magically increase in value with a bookkeeping entry.

That’s all the $ is in any case – a bookkeeping entry. Get over it!

It represents money the government owes itself.

Right, which has no current year effect on the real economy. It changes buys or sells of real goods and services.

So what happens if we take out the funny money?

What does ‘take out’ mean? Simply transferring from one account at the the fed to another. More entries. Can’t be anything more. That’s all the $ is.

When the imaginary interest payments are included, Social Security and Medicare are running at a tranquilizing surplus (that $181.5 billion mentioned earlier). But measure actual cash, and the surplus disappears.

What is ‘actual cash’???

In 2005, for instance, the Social Security Disability Income program started to run at a cash loss. 2007 is the first year that Medicare Part A (the hospital insurance program) benefits exceeded income.

The same thing will happen to the Social Security retirement-income program in six to nine years, depending on which of the trustees’ estimates you use. During the same period, the expenses of Medicare Part B and Part D, which are paid out of general tax revenue, will rise rapidly.

Point???

Despite this, the Social Security Administration writes workers every year advising them that the program will have a problem 34 years from now, not six or nine years. In fact, the real problem is already here. It will be a big-time problem in less than a decade.

Define ‘big time’. Government going to bounce checks? If the government runs deficits in the out year that are ‘too large’ the evidence will be inflation, not solvency. If he thinks there’s a potential inflation issue, fine, but he doesn’t or he would have said it.

Count on it.

Count on more of this nonsense.


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