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

Archive for February, 2009

Galbraith/Wray/Mosler submission for February 25

Posted by WARREN MOSLER on 20th February 2009

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This is the paper being presented next week in DC.

Please distribute.

Comments welcome!

This is how it begins:

Comments on the FASB Exposure Drafts relating to “Comprehensive Long-term Projections for the U.S. Government (ED 1)” and to “Accounting for Social Insurance. (ED 2)”

Testimony Submitted by:

James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, Austin
TX 78712 and Senior Scholar, Levy Economics Institute.

L. Randall Wray, Professor of Economics, the University of Missouri-Kansas City, and Senior Scholar, Levy Economics Institute.

Warren Mosler, Senior Associate Fellow, Cambridge Center for Economic and
Public Policy, Department of Land Economy, University of Cambridge, and Valance Co., St Croix, USVI.

Date: February 25, 2009

In this testimony we supplement our earlier letter, which responded to specific questions on the first exposure draft. Here we set out general principles of federal budget accounting, and then we offer specific comments on the proposed reporting procedures in both of the exposure drafts.

General Principles of Federal Budget Accounting

Even though some principles of accounting are universal, federal budget accounting has never followed and should not follow the exact procedures adopted by households or business firms. There are several reasons why this is true.

First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books.

Second, the government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.

While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood.

The federal government spends by cutting checks – or, what is functionally the same thing, by directly crediting private bank accounts. This is a matter of typing numbers into a machine. That is all federal spending is. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants.

Tax receipts debit bank accounts. So does borrowing from the public. These are operationally distinct from spending. There is no operational procedure through which federal government “uses” tax receipts or borrowings for its spending. If, perchance, one chooses to pay taxes in cash, the Treasury simply issues a receipt and shreds the cash. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.

As we discuss below, federal government spending has exceeded tax revenues, with only brief exceptions, since the founding. There is no evidence, nor any economic theory, behind the proposition that federal government spending ever needs to match federal government tax receipts—over any period, short or long. The deficit per unit time is the difference between taxing and spending over that time. To repeat, the taxing on the one hand and the spending on the other are operationally independent. Any reasonable observer should conclude that federal government spending is not, and need not be, dependent on, constrained by (or even related to) tax revenues in the way that the spending of households or firms is related to their incomes.

The difference between microeconomic and macroeconomic accounting is also pertinent. An individual household or firm has a balance sheet that consists of its assets and liabilities. The spending of that household or firm is constrained, in a fairly concrete sense, by its income and by its balance sheet— by its ability to sell assets or to borrow against them. It is meaningful to say that its ability to deficit-spend is constrained: a household must get the approval of a bank before spending can exceed income, and therefore its borrowing is subject to banking norms. But if we take households or firms as a whole, the situation is different. The private sector’s ability to deficit-spend, to spend more than its income, depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus. This surplus is called saving – claims against the deficit sector. In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.


Posted in Video | 39 Comments »

German January tax revenue increases 3.4 percent

Posted by WARREN MOSLER on 20th February 2009

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This kind of fiscal drag is highly counterproductive.

German January Tax Revenue Increases 3.4 Percent, Ministry Says

by Rainer Buergin

Feb 20 (Bloomberg) — German tax revenue rose 3.4 percent in January to 39.1 billion euros ($49.6 billion), led by flows to Finance Minister Peer Steinbrueck’s federal coffers, the Finance Ministry said in its monthly report.

Intake at federal level increased 8.5 percent to 15.9 billion euros while the country’s 16 states reaped 18.5 billion euros, 2.1 percent more than a year earlier, the report showed. Germany’s budget plans call for a tax revenue increase of 2.1 percent for the year as a whole, compared with 2008.

“The cooling world economy has by now fully impacted on Germany’s domestic economy,” the ministry said. “The worsening of the situation and the outlook for the manufacturing industry” suggest that “the recession will continue.”

Forward-looking economic indicators suggest the German economy will shrink in the first quarter after contracting 2.1 percent in the final three months of last year, a drop that was bigger than expected, the ministry said.


Posted in Articles, Germany | No Comments »

Chery Unveils Plug-in Hybrid, Trumps GM Volt’s Range

Posted by WARREN MOSLER on 20th February 2009

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Good news for cutting crude consumption some day, bad news for GM.

Chery Unveils Plug-in Hybrid, Trumps GM Volt’s Range

by Tian Ying

Feb 20 (Bloomberg) — Chery Automobile Co., China’s largest maker of own-brand cars, unveiled its first plug-in hybrid, touting a range more than twice as far as General Motors Corp.’s planned Volt.

The S18 can travel as much as 150 kilometers (93 miles) using just its batteries, Chery said in a statement posted on its Web site yesterday. GM’s Volt, due to go on sale next year, has a range of 64 kilometers. Chery has no timetable as yet on when the S18 will go on sale, spokesman Jin Yibo said in an interview by phone today.

China has encouraged domestic automakers to develop alternative-energy vehicles to curb oil imports and pollution, as well as to help the local industry challenge GM and Toyota Motor Corp. overseas. BYD Co., the Chinese automaker backed by billionaire Warren Buffett, started selling the world’s first mass-produced plug-in hybrid in December.

The Chinese government plans to support domestic automakers’ research into alternative-energy vehicles in a bid to have 60,000 on the roads of 10 cities by 2012, Science Minister Wan Gang said in November.

Automobiles account for about half of the total oil consumption in China, the world’s largest vehicle market behind the U.S. That may rise to 60 percent by 2020, according to the Development Research Center of the State Council.

Plug-in cars can be recharged from standard household powerpoints. The S18 can be fully charged in as little as four hours and be 80 percent powered via a quick charge at a specialist station in 30 minutes, Chery said.


BYD’s F3 DM can run for 100 kilometers using only batteries. It takes as little as seven hours to fully charge and can be 50 percent powered via a quick charge at a specialist station in 10 minutes.

To help support the development of alternative-energy technologies, the Chinese government plans to give out subsidies of as much as 600,000 yuan ($88,000) per vehicle to public- transport operators and government agencies to help fund purchases of electric, hybrid and fuel-cell automobiles.

Chrysler LLC, the third-largest U.S. automaker, is forecasting sales of battery-powered cars exceeding 100,000 a year by 2013 and GM is counting on selling 60,000 of its first such model in the year after it goes on sale in 2010.

Gasoline-electric hybrids and other electric vehicles made up 2.2 percent of the U.S. market in 2007, according to J.D. Power & Associates, which expects that share to expand to 7 percent by 2015.


Posted in Articles | 2 Comments »

Richard Koo on fiscal policy and interest rates

Posted by WARREN MOSLER on 20th February 2009

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Met Richard years ago. Seems he’s still confused on fiscal policy:

Bond issues to fund capital injections will not lead to higher interest rates

Right! The CB sets rates. Too bad he didn’t stop here rather than try to explain the process.

Japan’s second round of capital injections was four times the size of the first, and some question the ability of US capital markets to absorb such a large emission of government debt. However, the 1989 S&L crisis demonstrated that funds raised for the purpose of rescuing the financial sector will not lead to higher interest rates.


This is because, unlike fiscal outlays for public works, money spent to rescue the financial system does not reduce the amount of investment funds available in the financial markets.


Assume, for example, that the government issues $100 of Treasury bonds to recapitalize a troubled bank.

And then makes a payment to the bank.

The bank receiving the capital injection would credit its capital account by $100 and then invest that $100. In effect, there will be $100 in the market to be invested regardless of whether the government issues debt to rescue the bank.

The $100 gets credited to the banks account at the CB. The bank can leave it there or look for alternatives.

Purchases of alternatives in the private sector cause the banks $100 to be ‘wire transferred’ to another bank.

That means the bank’s account at the CB is reduced by $100 and another bank’s account at the CB is increased by $100.

Because the $100 represents capital, the bank’s investment should be liquid and easily convertible into cash. The asset that best fills this bill is government securities


If the bank decides to buy government debt with the money, the government will have another $100 to fund a capital injection.

I assume he means new government debt as he started with the government issuing $100 of bonds and recapitalizing the bank.

Two rubs.


The government would only issue additional bonds if it wanted to (deficit) spend additional funds.

And it if wanted to issue bonds and (deficit) spend new funds, it would do so whether this particular bank wanted to buy the bonds or not. That is, the bank wanting to buy bonds is not the enabling force for (deficit) spending.


The sale of the original $100 of bonds reduced total bank reserves by $100 and the payment of the $100 to the bank added $100 to total bank reserves. So the initial bond issue and the recapitalization left bank reserves offset each other leaving total bank reserves unchanged. Institutionally, issuing new bonds starts a new series of transactions, and, again, that particular bank is not the enabling force.

If, on the other hand, the government uses that $100 to build bridges or roads, that money will leave the capital markets and be spent on wages or construction materials, producing a corresponding decrease in the amount of investment funds available.

I don’t follow this distinction at all.

In this case, as before, the Treasury borrowing $100 reduces bank balances at the CB by $100, and the Treasury spending $100 as above adds $100 to bank balances at the CB, leaving total bank balances (reserves) unchanged.

In short, money spent on public works projects leads to higher interest rates because it does not find its way back to the capital markets.

Not the case, interest rates go to where the CB sets them, one way or another.


Posted in Government Spending | 5 Comments »

2009-02-20 USER

Posted by WARREN MOSLER on 20th February 2009

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Consumer Price Index MoM (Jan)

Survey 0.3%
Actual 0.3%
Prior -0.7%
Revised -0.8%

Karim writes:

CPI boosted by OER and tobacco.

  • m/m .282% headline and .177% core; y/y 0.0% headline and 1.7% core
  • Mthly data boosted by OER (up 0.3%)-likely reflects decline in fuel/utility prices in recent months (which boosts ‘owners equivalent rent’)
  • Mirroring PPI yesterday, tobacco prices up 0.8%
  • Core PCE, which has less weight in housing, has been negative for 3mths in a row. On y/y basis, core inflation likely headed to 1% by mid-year (headline inflation may decline by -1% y/y by mid-year before converging to core in H2).


CPI Ex Food and Energy MoM (Jan)

Survey 0.1%
Actual 0.2%
Prior 0.0%
Revised n/a


Consumer Price Index YoY (Jan)

Survey -0.1%
Actual 0.0%
Prior 0.1%
Revised n/a


CPI Ex Food and Energy YoY (Jan)

Survey 1.5%
Actual 1.7%
Prior 1.8%
Revised n/a


Consumer Price Index NSA (Jan)

Survey 211.081
Actual 211.143
Prior 210.228
Revised n/a


CPI Core Index SA (Jan)

Survey n/a
Actual 217.265
Prior 216.816
Revised 216.882


Consumer Price Index TABLE 1 (Jan)


Consumer Price Index TABLE 2 (Jan)


Consumer Price Index TABLE 3 (Jan)


Posted in Daily | No Comments »

Deficit spending for dummies

Posted by WARREN MOSLER on 19th February 2009

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The media is screaming that deficit spending simply takes money from borrowers and gives it to someone else, so it doesn’t work.

This is NOT the case. In fact, deficit spending ADDS to our total savings of financial assets.

Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:

  1. The Treasury sells $100 billion of treasury securities.
  2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.
  3. And our holdings of treasury securities increase by $100 billion.
  4. Quick recap-

    We buy treasury securities from the government which means we have $100 billion more treasury securities.

    We pay for them which means we have $100 billion less in our bank accounts.

    So far all we have done is exchange bank balances at the Fed for treasury securities, which also held at the Fed.

    So far nothing of economic consequence has changed, apart from now we could be earning more interest on our treasury securities than we had been earning on our Fed balances.

  5. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.
  6. This increases member bank balances at the Fed by $100 billion.

Final recap:

  • Bank balances are back where they started from.
  • Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.

Conclusion and proof:

Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.

Please distribute as widely as possible as a matter of further public purpose!!!


Posted in Government Spending | 78 Comments »

2009-02-19 USER

Posted by WARREN MOSLER on 19th February 2009

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Producer Price Index MoM (Jan)

Survey 0.3%
Actual 0.8%
Prior -1.9%
Revised n/a

Karim writes:

  • PPI up 0.8% and 0.4% core; core boosted by some annual one-offs (prescriptions at 1.1% and tobacco at 0.6%)
  • Pipeline pressures continue to decline; intermediate -0.7% and core intermediate -1.1%; crude -2.9% and core crude 0.1%


PPI Ex Food and Energy MoM (Jan)

Survey 0.1%
Actual 0.4%
Prior 0.2%
Revised n/a


Producer Price Index YoY (Jan)

Survey -2.4%
Actual -1.0%
Prior -0.9%
Revised n/a


PPI Ex Food and Energy YoY (Jan)

Survey 3.8%
Actual 4.2%
Prior 4.3%
Revised n/a


Initial Jobless Claims (Feb 14)

Survey 620K
Actual 627K
Prior 623K
Revised 627K

Karim writes:

  • Initial claims remain unch at 627k (prior week revised up 4k)
  • Continuing claims up 170k to new cycle high


Continuing Claims (Feb 7)

Survey 4830K
Actual 4987K
Prior 4810K
Revised 4817K


Jobless Claims ALLX (Feb 14)


Leading Indicators (Jan)

Survey 0.1%
Actual 0.4%
Prior 0.3%
Revised 0.2%


Leading Indicators ALLX (Jan)


Philadelphia Fed (Feb)

Survey -25.0
Actual -41.3
Prior -24.3
Revised n/a

Karim writes:

  • Philly Fed confirms Empire survey earlier this week that rate of decline in manufacturing is accelerating.
  • Headline activity, orders, shipments, and employment all fall sharply

Feb 2009 Jan 2009 Dec 2008 Nov 2008 Oct 2008 Sept 2008 Aug 2008 6 month avg
General Business Activity -41.3 -24.3 -36.1 -39.8 -38.7 1.9 -20.1 -29.7
Prices Paid -13.7 -27.0 -25.5 -26.6 10.2 32.5 53.0 -8.4
Prices Received -27.8 -26.2 -32.8 -11.3 5.0 15.1 25.1 -13.0
New Orders -30.3 -22.3 -28.2 -29.3 -30.6 3.8 -15.2 -22.8
Shipments -32.4 -16.7 -29.7 -19.3 -17.6 -1.3 -6.1 -19.5
# of Employees -45.8 -39.0 -28.6 -23.8 -19.2 -3.2 -4.6 -26.6


Philadelphia Fed TABLE 1 (Feb)


Philadelphia Fed TABLE 2 (Feb)


Posted in Daily | No Comments »

Mosler housing proposal

Posted by WARREN MOSLER on 18th February 2009

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My housing proposal:

  1. The government does not interfere with the lawful foreclosure process.
  2. If the former owner wants to remain in the house, the government buys the house during the foreclosure sale period from the bank at the lower of fair market value or the remaining mortgage balance.
  3. The government rents the house to the former owner at a fair market rent.
  4. After 2 years the house is offered for sale and the former owner/renter has the right of first refusal to buy it.

While this requires a lot of direct government involvement and expense, and while there is room for dishonesty at many levels, it is far superior to any of the proposed plans regarding public purpose, including:

  1. Keeping people in their homes via affordable rents
  2. Not interfering with existing contract law for mortgage contracts
  3. Minimizing government disruption of outcomes for mortgage backed securities holders
  4. Minimizing the moral hazard issue
    • foreclosure was allowed to function normally
    • renting at fair market rent is not a subsidy
    • repurchasing option at market price is not a subsidy


Posted in Housing, Proposal | 23 Comments »

2008 swap line advances as a % of GDP

Posted by WARREN MOSLER on 18th February 2009

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Swap lines as % of GDP by CB, year end 2008 (a bit dated now in Feb but anyway FYI).

Swap lines as % of GDP

ECB (16) 2.42%
Swiss 5.11%
BOE 1.07%
BOJ 2.53%
Aussie 2.13%
Sweden 4.87%
Denmark 4.06%
Norway 1.71%
Korea 1.09%


Source Federal Reserve Statistical Summary:
“At end-December 2008 swaps outstanding were $553.728 billion: $291.352 billion with the European Central Bank, $25.175 billion with the Swiss National Bank, $33.08 billion with the Bank of England, $122.716 billion with the Bank of Japan, $22.830 billion with the Reserve Bank of Australia, $25 billion with the Bank of Sweden, $15 billion with the National Bank of Denmark, $8.225 billion with the Bank of Norway and $10.350 with the Bank of Korea.”


Posted in Articles | 8 Comments »

Obama sends 17,000 troops to Afghanistan

Posted by WARREN MOSLER on 18th February 2009

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One more thing his anti war supports told me was just pre-election talk that’s actually happening.

Feels more like the Carter administration every day.

Obama Sends 17,000 Additional Soldiers to Afghanistan

by Edwin Chen and Roger Runningen

Feb 17 (Bloomberg) — President Barack Obama signed an order boosting U.S. troop strength in Afghanistan by 17,000 combat and support personnel.

Obama said in a statement that he approved a request for the additional soldiers and Marines made by Defense Secretary Robert Gates and military commanders.

“This increase is necessary to stabilize a deteriorating situation in Afghanistan, which has not received the strategic attention, direction and resources it urgently requires,” Obama said in the statement released by the White House.

Pentagon officials were informed of the decision yesterday, White House press secretary Robert Gibbs said in Denver, where Obama signed legislation providing $787 billion in tax cuts and spending to stimulate the economy.

The announcement marks the new president’s first significant decision on defense as he seeks to fulfill his campaign promise to shift the focus away from Iraq to Afghanistan as the central front on the battle against terrorists.


Posted in Obama | 7 Comments »

2009-02-18 USER

Posted by WARREN MOSLER on 18th February 2009

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ICSC UBS Store Sales WoW (Feb 10)

Survey n/a
Actual 0.90%
Prior 0.00%
Revised n/a


ICSC UBS Store Sales YoY (Feb 10)

Survey n/a
Actual -0.90%
Prior -1.80%
Revised n/a


Redbook Store Sales Weekly YoY (Feb 10)

Survey n/a
Actual -1.40%
Prior -1.70%
Revised n/a


Redbook Store Sales MoM (Feb 10)

Survey n/a
Actual 0.90%
Prior 0.70%
Revised n/a


ICSC UBS Redbook Comparison TABLE (Feb 10)


MBA Mortgage Applications (Feb 13)

Survey n/a
Actual 45.7%
Prior -24.5%
Revised n/a


MBA Purchasing Applications (Feb 13)

Survey n/a
Actual 257.30
Prior 235.90
Revised n/a


MBA Refinancing Applications (Feb 13)

Survey n/a
Actual 4472.90
Prior 2722.70
Revised n/a


Import Price Index MoM (Jan)

Survey -1.2%
Actual -1.1%
Prior -4.2%
Revised -5.0%

Karim writes:

  • Import prices -1.1% m/m and -12.5% y/y; -0.8% m/m ex-petroleum; imports from China -0.7% m/m (-0.5% and -0.7% prior 2mths)
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    Import Price Index YoY (Jan)

    Survey -11.2%
    Actual -12.5%
    Prior -9.3%
    Revised -10.3%


    Import Price Index ALLX 1 (Jan)


    Import Price Index ALLX 2 (Jan)


    Housing Starts (Jan)

    Survey 529K
    Actual 466K
    Prior 550K
    Revised 560K

    Karim writes:

    Housing starts and building permits fall to all-time lows.

    • Starts -16.8% m/m (all 4 regions down) and -56.2% y/y; 3rd consecutive double digit m/m decline
    • Permits -4.8% m/m (all 4 regions down)
    • When adding the supply of vacant homes (over 1mm) to starts, excess supply (relative to new household formation and obsolesence) still exists and in turn downward pressure on home prices


    Building Permits (Jan)

    Survey 525K
    Actual 521K
    Prior 549K
    Revised 547K


    Industrial Production MoM (Jan)

    Survey -1.5%
    Actual -1.8%
    Prior -2.0%
    Revised -2.4%


    Industrial Production YoY (Jan)

    Survey n/a
    Actual -10.0%
    Prior -8.2%
    Revised n/a


    Capacity Utilization (Jan)

    Survey 72.4%
    Actual 72.0%
    Prior 73.6%
    Revised 73.3%


    Capacity Utilization TABLE 1 (Jan)


    Capacity Utilization TABLE 2 (Jan)


    Capacity Utilization TABLE 3 (Jan)


    Posted in Daily | No Comments »

    Clinton in Japan

    Posted by WARREN MOSLER on 17th February 2009

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    Isn’t this sweet???

    Clinton, in Japan, talks of ‘harmony’ in US policy

    by Arshad Mohammed

    Feb 17 (Reuters) — U.S. Secretary of State Hillary Clinton spoke on Tuesday of promoting “balance and harmony” in U.S. foreign policy as she visited Japan, drawing an implicit contrast to the administration of former President George W. Bush.

    Clinton began her first full day in Asia with a visit to Tokyo’s Meiji shrine, where she took part in a purification ceremony at the Shinto shrine dedicated to Emperor Meiji, considered the father of modern Japan.

    Yes, a US democrat honoring emperors and royalty.

    Making her first trip as secretary of state, Clinton plans to consult Japanese officials on how to deal with the global financial crisis,

    If she has any ideas why hasn’t she told us?

    North Korea’s nuclear programs and the war in Afghanistan, a legacy of the Bush administration.

    “I started this morning at the Meiji shrine and was talking to the head priest there who told me about the importance of balance and harmony,” Clinton told about 200 U.S. diplomats and their families at the U.S. embassy.

    “It’s not only a good concept for religious shrines, it’s a good concept for America’s role in the world,” she added, without citing Bush by name or the U.S.-led invasion of Iraq, which polarized global opinion. “We need to be looking to create more balance, more harmony.”

    Reads like she’s broadening her religious beliefs???

    “We’re going to be listening but we’re also going to be asking for more partnerships to come together to try to work with us to handle the problems that none of us can handle alone,” Clinton added, referring partly to the global financial crisis.

    Partnerships to do what? No secrets, please!

    Japan has been especially hit hard by the economic slowdown. Its economy shrank in the final quarter of 2008 at the fastest rate since the first oil crisis in 1974, and economists bet on another big contraction in January-March.

    “These are hard times economically for the Japanese people, just as it is in many places around the world,” Clinton said. “I am absolutely confident we will navigate our way through these difficulties.”

    The blind leading the blind, but this time holding hands?

    China next…


    Posted in Articles, Japan | 1 Comment »

    The euro falls again

    Posted by WARREN MOSLER on 17th February 2009

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    Each time the euro falls like it has done over the last several days suspicions arise that ‘this is it’ and it’s on the way towards 0, with a wholesale exit by individuals and institutional investors afraid of everything from inflation to a total breakup of the currency union.

    The cross currents are enormous, and the range of predicted outcomes wide.

    What’s sure as always is in the end someone will have had the right forecast, but it will be because of ‘statistics’- the forecasts cover all possibilities- or maybe inside information, but not greater wisdom.

    Partial list of cross currents:

    Euro positive:

    • The eurozone has relatively tight fiscal policy, with no proactive fiscal package of consequence. This keeps the euro strong, and promotes deflationary domestic conditions as the economy tries to export to gain needed financial assets.
    • Fed swap lines tend to support the euro vs the dollar, as institutions that otherwise would need to sell euros and buy dollars to cover dollar losses can instead buy time and borrow them cheaply via the swap line arrangement. This kept the region from collapse in the fall.

    Euro negative:

    • The dollar losses don’t go away with the swap lines, unless dollar asset prices and credit quality improve, which has not been the case. So any euro strength tends to see sellers of euro vs dollars to cover some of the losses.
    • In a breakup of the eurozone there is a risk euro securities get redenominated to the new national currencies which may be subject to high levels of deficit spending to support domestic demand and promote high inflation, high interest rates, and falling currencies as in the past.
    • Euro governments could default and payments be suspended indefinitely.
    • Bank deposits could be frozen indefinitely with major bank failures too large for any national govt. to politically or even operationally write the check.
    • The low price of crude supports the dollar by keeping dollars ‘hard to get’ for the foreign sector.

    The exit from the euro includes those who buy gold, which has been driving gold to extremes vs other commodities even though you can’t eat it and it doesn’t pay interest, and it’s been a very long time since it was what you needed to pay taxes.

    This is a major bubble in progress that ends in a very sharp collapse when the buying has run its course, and as those owning gold need it for payment purposes and begin to sell.

    Along with the real buyers who are exiting the euro (and other currencies) are the usual specs and trend followers who exacerbate every trend on the way up and the way down.

    And the fact remains that all the ‘money’ in the world is nothing more than spread sheet entries of what is needed to pay taxes.

    And there aren’t a lot of practical alternatives to storing ‘wealth’ apart from inherently worthless gold, and various forms of ‘property’ that can all be taxed and therefore demands currency for payment.

    Ironically, it is a spreadsheet crisis- there is no shortage of real resources- and therefore readily ‘fixed’ by the right data entry by governments on their own spreadsheets.

    For the US that means something like:

    1. A full payroll tax holiday where the treasury makes all payments for employers and employees- why are we taking $1 trillion per year from workers and business struggling to make their payments?
    2. $300 billion to the states on a per capita basis with no strings attached- the per capita distribution concept removes the need for specific federal oversight.

    Those two spreadsheet entries would end the ‘crisis’ in very short order.

    And a government funded $8/hour job for anyone willing and able to work begins to replace the current unemployed labor buffer stock with an employed labor buffer stock, which is both a superior price anchor and potentially a source of increased useful output and reduction of the high real social costs of our current system.

    But deficit myths are likely to remain the obstacle to making the spread sheet entries readily available to restore output and employment.

    The latest ridiculous bit of non sense is that government borrowing takes ‘money’ from one place and puts it in another.

    Government deficit spending adds exactly that many NEW ‘bank balances’ to non government financial assets, and government borrowing subsequently offers those NEW, ADDITIONAL bank balances CREATED BY DEFICIT SPENDING alternative financial assets called Treasury securities.

    At the end of the day there are NEW financial assets called Treasury securities added to the existing stock of financial assets in the non govt sectors by federal deficit spending.

    Spread the word!


    Posted in EU, Government Spending | No Comments »

    Hong Kong currency board reserves at risk

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    Hong Kong’s currency board arrangement requires net exports to fund domestic net financial assets (‘money supply’) needs that other nations get ‘free’ from their deficit spending.

    Net Hong Kong dollars can be had only by buying them from the monetary authority with USD, etc.

    With exports markets collapsing, the direct result for Hong Kong is a deflation of costs of exports that doesn’t stop until exports resume at levels sufficient to fund the domestic need for net financial assets.

    Bank deposits can not be insured by the monetary authority without threatening the solvency of the monetary authority as bank deposits necessarily exceed monetary authority reserves.

    So, the move to guarantee deposits is only a temporary fix limited by the reserves of the monetary authority.

    A currency board advocate would oppose insuring bank deposits and would let the currency board arrangement work itself out via the deflation route.

    While theoretically correct, the deflation process is politically unacceptable as it drives real wages towards zero in a process that ends only when exports resume.

    Hong Kong’s attachment to its currency board system that makes it fully dependent on net exports just to fund itself means it will continue to be hit particularly hard by the collapse in export markets.

    Best I can tell the currency board arrangement was designed by England to force net exports from its colonies.

    Bank of East Asia Posts First Loss in Four Decades

    by Kelvin Wong

    Feb 17 (Bloomberg) — Bank of East Asia Ltd., the Hong Kong lender that suffered a run on deposits in September, had its first loss in at least four decades after writing down the value of credit-market investments.

    The HK$855 million ($110 million) deficit for the six months ended Dec. 31, derived by subtracting first-half earnings from full-year numbers reported by the company today, compares with profit of HK$2.26 billion a year earlier.

    Chairman David Li said he’ll “fast track” measures to cut costs after expenses rose 23 percent last year and bad-loan charges more than doubled. Bank of East Asia’s shares tumbled 61 percent in the past year, and the September run on the lender spurred Hong Kong’s central bank to guarantee all bank deposits.


    Posted in Articles, Hong Kong | No Comments »

    Re: The pressure increases on the eurozone

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    These types of articles have gotten respectable and are getting more strident by the hour.

    I do think a banking crisis where the national government can’t or won’t write the check freezes the entire payments system, as no one will want to keep any funds in a eurozone bank, nor will they have anywhere to go other than actual cash.

    Gold had been benefiting by all this, but looks to me like a major bubble that breaks when the eurozone resolves itself one way or another.

    >   On Mon, Feb 16, 2009 at 5:27 PM, wrote:
    >   Even the euro enthusiasts are now starting to contemplate the break-up
    >   of the European Monetary Union, which basically would finish the euro.
    >   This problem is becoming evident to more people in the euro zone, but
    >   not reflected yet in policy:

    Narrow-minded leadership hurts Europe

    by Wolfgang Münchau

    Feb 15 (Financial Times) — “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory … is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

    This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

    To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

    For the bank bail-out programmes, the EU managed to set a minimum level of competition rules, but these programmes, too, were national and not co-ordinated. So how does the combined effect of these two unco-ordinated responses lead to protectionism?

    If stimulus money is dispersed at national level, governments naturally try to make sure that the money stays inside their countries. The prospect that consumers might spend the money on imported goods was one of the reasons why eurozone governments were reluctant to cut taxes. Because of EU competition rules, the same logic also applies to government purchases. Under those rules, governments had to open public projects to EU-wide tenders. If you play by the rules, keeping the cash in your country is not easy.

    Governments have since relaxed those rules. In other words, if you want to make sure that these programmes function in their warped way, you have to dismantle the single market. The same logic applies to the bank rescue packages. If the European Commission tried to block each uncompetitive bank rescue, it would be blamed for causing a financial collapse. Governments have found a way to circumvent the EU, by breaking so many rules at once, that the Commission cannot even begin to react effectively.

    Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

    Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

    Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

    I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.

    When European leaders meet for their anti-protectionism summit on March 1, they will produce warm words to reaffirm their commitment to the single market. I suspect they will continue to misdiagnose the crisis. Protectionism is not the root of the problem. The protectionism we are experiencing now is caused by co-ordination failure. It is neither sudden, nor surprising.

    The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.


    Posted in Articles, ECB | 4 Comments »

    Crude oil prices

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    I believe the Saudi guy:

    Qatar energy official: OPEC willing to cut output

    by Adam Schreck

    Feb 15 (AP) — A senior Qatari energy official said Sunday that OPEC is watching the oil market closely and stands ready to cut output further when it meets next month.

    Mohammed Saleh al-Sada, Qatar’s minister of state for energy and industry affairs, told reporters on the sidelines of a conference in Doha that the Organization of Petroleum Exporting Countries “will respond appropriately” to the rapid drop in oil prices.

    “If there is a need, actually, to go down, they will not be hesitant to reduce it further,” he said, without saying by how much.

    The oil-producing group, he said, was facing difficulties in setting output because of the “unusual situation” of extreme fluctuation in prices. “The volatility is huge,” said al-Sada.

    Al-Sada said a “reasonable price” for oil would be $70 a barrel -well above the $37.51 benchmark light, sweet crude settled Friday.

    In Kuwait, however, a senior oil official said crude prices are unlikely to rise above $40 per barrel, even if OPEC decides to cut as much as 2 million barrels per day at its meeting next month.

    Moussa Marafi, a member of the Supreme Petroleum Council, Kuwait’s highest oil policy-making body, told Annahar newspaper in comments published Sunday that oil prices are being pressured by surging U.S. crude inventories and a lack of compliance to quotas by some OPEC members.

    The comments come a day after the oil minister of Venezuela, a traditional price hawk, said it would support new production cuts. Oil Minister Rafael Ramirez said the group is worried because commercial inventories are still «very high.

    OPEC members have agreed to slash production by 4.2 million barrels from September levels in an effort to put a floor beneath prices that have tumbled by nearly three-quarters from the record highs they hit over the summer.

    The group, which produces about 40 percent of the world’s oil, said last week it has completed about 80 percent of those previously agreed cutbacks.


    Posted in Articles, Oil | 8 Comments »

    Obama on the auto industry

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    How about restoring aggregate demand and car sales with a full payroll tax holiday and $300 billion for the states on a per capita basis?

    What good will financial support for the autos do if car sales keep falling due to overly tight fiscal policy???

    Obama to appoint panel for auto recovery

    by Ken Thomas and Tom Krisher

    Feb 15 (AP) — President Barack Obama will form a government task force for restructuring the struggling U.S. auto industry instead of naming a “car czar” with sweeping powers, a senior administration official said.


    Posted in Articles, Obama | No Comments »

    Clinton trying to get Asians to increase demand

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    A once in a lifetime opportunity to increase the US standard of living squandered.

    Increasing domestic demand unilaterally and letting the rest of the world grow via net exports to the US is in our best interest.

    Clinton begins Asia trip, calls for Global Economic Cooperation

    by Indira A.R. Lakshmanan

    Feb 16 (Bloomberg) — Secretary of State Hillary Clinton kicked off the start of a weeklong trip to East Asia by calling for more cooperation from the region in alleviating the worldwide recession.


    Posted in Articles, Asia | No Comments »

    Re: Proposals for the eurozone

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    (email exchange)

    For Europe:

    1. The European Parliament or ECB has to be given fiscal authority and give the national governments a check for maybe 1,000 euro per capita to be used for general purposes.
    2. This new fiscal authority would also provide deposit insurance for all the euro banks and lend to member banks on an unsecured basis.
    3. It would also regulate and supervise the banks.
    4. I would have the new fiscal authority fund jobs for anyone willing and able to work at a fixed wage, which, via market forces, would become the minimum wage.

    >   On Mon, Feb 16, 2009 at 8:12 AM, Morris wrote:
    >   What would you do for Europe? US I hear your solution


    Posted in Email | No Comments »

    Deficit myths are the problem

    Posted by WARREN MOSLER on 17th February 2009

    [Skip to the end]

    Yes, that’s the problem, output and employment can be restored relatively quickly with the right fiscal adjustment, but deficit myths are in the way.

    A full payroll tax holiday and $300 billion to the states on a per capita basis with no strings attached would very quickly restore demand, including retail sales and home sales, which would be quickly followed by continuing employment and output gains.

    No Ordinary Recession

    by Axel Leijonhufvud

    Feb 13 (Voxeu) — “Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.”


    Posted in Articles | No Comments »