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Archive for March 8th, 2009

Valance Chart Book review Mar 7, 2009

Posted by Sada Mosler on 8th March 2009

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Valance Chartbook update Mar 7, 2009- The Automatic Stabilizers are Quietly doing their Job

Q2 08 was the last up quarter (real growth up 2.8% annually), supported by the $170 billion fiscal adjustment.

Looks like all the last Congress had to do was keep doing a fiscal adjustment each quarter as needed to sustain positive output and employment growth.
Doesn’t seem like a lot to ask of them- spend more or cut taxes?

The subsequent declines could have easily been avoided.

Interesting the auto execs didn’t blame Congress for the falling car sales and the financial crisis.

Almost all of the indicators look like this. Demand that had been slowly weakening for a long time fell apart sometime in July 2008.

Like all recession’s I’ve seen, this one seems to have been characterized by inventory liquidation. Inventories now look to be very low.

The bulge in existing home sales was from the supply from foreclosures, which is also part of the inventory liquidation process.

In addition to crude oil, the entire commodity basket was subject to the Great Mike Masters Inventory Liquidation. The charts seem to indicate that liquidation had run its course by late December 2008.

The Saudis and OPEC had to let the inventory liquidation run its course before regaining control of price late in Dec 08. Price is now going back to wherever they want it to be, as they set price to their liking and let output adjust. And with the latest data showing US gasoline consumption up 2% year over year it looks like demand for Saudi output may actually climb even as prices rise.

These commodity currencies have also gone sideways.

Coincident with the precipitous inventory liquidation and economic weakness, the automatic stabilizers kick in just as hard, increasing federal deficit spending via falling tax revenue and rising transfer payments.

This adds to private sector ‘savings’ of financial assets to the penny-

The accounting identity is government deficit = non-government ‘surplus’ of financial assets. (non-government includes residents and non-residents)

Less debt is mathematically the same as more savings.

Think of it this way. At the macro level, government deficit up= non-government net debt down.

Meanwhile, the government deficit spending works to sustain personal income which works to support spending.

That’s how the automatic stabilizers work to keep recessions from turning into depressions.

There is some evidence beginning to surface, in addition to the above income and spending data, that maybe suggesting we are starting to move sideways rather than down.

While unemployment will most likely continue to grow, as it takes at least maybe 2% real GDP growth for total hours worked to increase, there is some evidence at the margin that the rate of decline has peaked after a post year end spike from businesses that didn’t want to cut staff before the year-end holidays.

There is also some marginal evidence that the worst of the housing setback is behind us.

While the deflationary forces remain elevated by excess capacity in general, there is some evidence prices are selectively firming.

With low inventories prices get supported by replacement cost, which include costs of raw materials and unit labor costs, as well as productivity gains.

The new fiscal package isn’t my first choice, to be polite, but it isn’t ‘nothing’ either, and will further act to support demand and end this down cycle.

But it does nothing for near term energy consumption, and therefore risks rising commodity prices and rising CPI, even as unemployment remains unacceptably elevated.

This can put us back to where we started from- some growth but both weakness and inflation, this time with a backdrop of a much larger output gap, along with policy makers who don’t understand monetary operations and reserve accounting.


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Re: “The 7 Deadly Innocent Frauds” DRAFT comments

Posted by Sada Mosler on 8th March 2009

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(email exchange)

>   Here are some comments — this was interesting reading, and I do think it
>   makes sense on strictly a macro level (which is obviously what he’s going for).


>   #1 explanation is interesting, especially regarding the example of parents and
>   children with coupons. I do feel, however, that the author doesn’t give much
>   consideration to the inflationary results of the ‘govt check don’t bounce’ thesis
>   (I’m referencing the debate the author describes at the Australia conference).
>   While it’s probably true, I do think inflation has a material impact (at least at
>   the micro level, which I suppose isn’t really the point of this article).

Right, the point is inflation is the issue, not solvency or sustainability. But critics of deficit spending never even attempt to quantify the inflationary aspect.

Instead, they seem to focus on ‘money supply’ for their inflation forecasting and ‘inflation expectation’ issues, both of which are not causal, but that’s another story.

>   Under #2, I think the rhetoric about do we have to send goods and services back
>   in time to pay for historical debt is a red herring and not applicable (and I’m not
>   surprised the Senator couldn’t really say much about it off-hand while his wife ‘got
>   it’). It’s the debt servicing that people worry about, and that is in current terms
>   (no time machine required). However, the thesis of gov’t checks not bouncing
>   speaks to how the debt can be serviced.

yes, and that distribution is entirely in the hands of the living who are in no case ruled from the grave.

>   Paying off China — to book a Treasury Note sale, the gov’t on its own books would
>   debit cash (for the receipt)

yes, and the Tsy’s account at the Fed is debited. right now we have a self imposed constraint that says the tsy’s balance at the fed can’t be negative.

but that is not an operational constraint, just a self imposed constraint

>   and credit the liability (to book the obligation).

again, via the Fed.

>   The buyer’s accounts mentioned wouldn’t really be booked by the gov’t I don’t think,
>   but I get the point.

the buyer’s funds go to the fed where they are ‘accounted for’ as owning the securities.

>   #3 and #7 go together in what is really being discussed is the use of leverage
>   (spending more than what you have). As long as the discussion stays at the macro
>   level, that’s fine as the gov’t can just keep printing money (again, ignoring any effects
>   of inflation).

and by printing you mean simply ‘spending’ as that’s all there is- changing numbers on bank accounts. using the word ‘printing’ rather than ‘spending’ is used by the mainstream to color thinking in a fixed fx direction that no longer is applicable.

>   But, it is quite a slippery slope to intertwine micro-level examples such as a hybrid car
>   factory and such as once you leave the gov’t level, leverage can have catastrophic
>   results (see the current deleveraging in the economy and how that’s affecting people on
>   a micro level). All this is fine as long as you have no monetary constraints, but for anyone
>   with no access to a US$ printing machine, it falls apart.

Included with my 3 current proposals to reverse the current situation is the govt funding an $8 hr job for anyone willing able to work.

The other two are a full payroll tax holiday and $300 billion to the states on a per capita basis with no strings attached. Together they restore demand, output, and employment.


Posted in 7DIF, Email | 3 Comments »

Obama and the teleprompter

Posted by Sada Mosler on 8th March 2009

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Obama’s safety net: the teleprompter

by Carol E. Lee

March 5 (Politico)


Posted in Articles, Obama | 2 Comments »