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Archive for July, 2009

cash for clunkers may cost govt. up to $45,354 per vehicle

Posted by WARREN MOSLER on 31st July 2009

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(short version)

“Cash for Clunkers” Program May Cost $45,354 per vehicle

By Avery Goodman

(Seeking Alpha) — The “Cash for Clunkers” program has been a “great success”, at least according to the government, and the auto industry. Within days of its kickoff, all $1 billion allocated to the program has been used up by Americans who have eagerly lined up to trade their clunkers for new vehicles.

Some refreshingly honest reporting has come from, a car buying site that is telling the truth, in spite of benefiting from an increase in business and site traffic, due to the program. According to Edmunds, about 200,000 old low mileage cars would normally traded in, every 3 months, in exchange for more efficient higher mileage cars, without this program.

The highest rebate is $4,500, and the lowest is $3,500. If everyone qualified for $4,500 per vehicle, about 222,000 vehicles would have just taken advantage of the government’s money. At $3,500, 286,000 vehicles will have been sold.

I assume that, given all the raving, the government will eventually get around to assigning more money. It will take at least 2 or 3 months for the legislation to work its way through Congress. Meanwhile, if all buyers have qualified for the higher $4,500 rebate, the “cash for clunkers” program will mean a marginal increase in car sales of 22,000 this quarter. $1 billion divided by 22,000 means a net cost to the government of $45,354 per car.

If all buyers only qualify for the $3,500 rebate, it means a marginal increase in sales of about 86,000, or a net cost to the taxpayers of $11,628 per vehicle. In all likelihood, however, there will probably be a mix of vehicles qualifying for various rebates between $3,500 and $4,500. Based upon that assumption, estimates that the average cost to the taxpayer will be about $20,000 per vehicle.

Even most of the marginally extra sales really represent people who were going to buy a new car eventually anyway. They are just buying a bit sooner than they expected. Old clunkers don’t last forever, and they are almost all eventually replaced. The government is shifting tomorrow’s demand to today, stealing from tomorrow to pay for today, but at great cost to the taxpayer.


Posted in Government Spending | 8 Comments »


Posted by WARREN MOSLER on 31st July 2009

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Karim writes:

Most important info in the report is the benchmark revisions: The first year of the recession (Q4 2007-Q3 2008) was revised from -0.8% to -1.9%. This adds a full percentage point to the Fed’s output gap measure. Also, Q2 2009 negative print marks first time U.S. economy has had four consecutive quarters of negative growth since 1947.

Q4 2008 was revised from -6.4% to -5.5%; Q1 2009 from -5.4% to -6.3%

The weaker Q1 number (especially inventories) led to the Q2 inventory drag being less than expected (-0.8%) and hence Q2 being less negative than expected at -1%.

The other components of GDP were either in line or weaker than expected. All numbers below are annualized rate of change:

  • Private consumption: -1.2% vs 0.6%
  • Non-residential fixed investment: -8.9% vs -43.6%
  • Residential fixed-investment (housing): -29.3% vs -38.2%
  • Exports: -7% vs -29.9%
  • Govt: 5.6% vs -2.6%

ECI posts second lowest advance on record at 0.4% (after 0.3% prior quarter).


Posted in GDP | No Comments »

SZ News: Leading Indicators Rise, Signaling Slump Is Abating

Posted by WARREN MOSLER on 31st July 2009

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Yes, seems to be world wide.

The combined global fiscal measures both pro active and ‘automatic’ seemed to have halted the slide.

Depressions are highly improbable with non convertible currency and floating fx policies.

Swiss Leading Indicators Rise, Signaling Slump Is Abating

By Klaus Wille
July 31 (Bloomberg) — Switzerland’s leading economic
indicators rose more than economists forecast in July, adding to
signs the worst economic slump in three decades is bottoming

The KOF’s monthly aggregate of indicators that aims to
predict the economy’s direction about six months ahead increased
to minus 0.99 points from a revised minus 1.49 in June, the
Zurich-based research institute said today. Economists had
forecast that the index would rise to minus 1.45 from an
initially reported minus 1.65, based on the median of 13
estimates in a Bloomberg News survey.

Switzerland’s economy is moving toward a recovery after a
0.8 percent contraction in the first quarter, reports this month
showed. The UBS consumption indicator increased for the first
time in three months in June and the slump in manufacturing
eased. In the euro area, the biggest buyer of Swiss exports,
confidence in the economic outlook rose to an eight-month high.

“This figure is still low, meaning that Swiss gross
domestic product is likely to continue declining significantly
over the coming months relative to the previous year,” KOF said
in the statement. “However, the current barometer trend
indicates that the GDP growth rate should bottom out soon.”

The Swiss National Bank forecasts that the Alpine country’s
economy will shrink as much as 3 percent this year, which would
be the steepest decline since 1975.


Posted in Deficit, Government Spending | No Comments »

NY FED – Shadow Financial Market

Posted by WARREN MOSLER on 31st July 2009

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The findings add support to my proposal to ban banks from all secondary markets

Federal Reserve Bank of New York
Staff Reports
The Shadow Banking System:
Implications for Financial Regulation
Tobias Adrian
Hyun Song Shin
Staff Report no. 382
July 2009

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

The Shadow Banking System: Implications for Financial Regulation
Tobias Adrian and Hyun Song Shin
Federal Reserve Bank of New York Staff Reports, no. 382
July 2009
JEL classification: G28, G18, K20

The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.


Posted in Banking, Fed | 11 Comments »

TIPS 5 year 5 years fwd

Posted by WARREN MOSLER on 31st July 2009

This used to be one of the Fed’s major concerns as they are steeped in inflation expectations theory.

It could still signal a need to keep a modestly positive ‘real rate’ though the large ‘output gap’ is telling them otherwise.

History says they’ll put most of the weight on the output gap, though a negative real rate is problematic for most FOMC members.

Should core inflation measures go negative, they will be a lot more comfortable with the current zero rate policy.

Interesting that the employment cost was just reported up 1.8% which shows how little it went down even in the face of
a massive rise in unemployment.

Posted in Fed, Trading, TREASURY | No Comments »

JN Daily | Jobless Rate Moves Higher, CPI drops, HHold Spending Misses Expectations

Posted by WARREN MOSLER on 31st July 2009

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Looks like China is starting to stabilize Japan, which means it is probably helping the eurozone some as well.

  • Shipments Up Across Industries In June As Production Recovers
  • Cost Cuts Help Electronics Firms Reduce Losses In April-June
  • Jobless Rate Hits 6-Year High Of 5.4% In June
  • Household Spending Rises 0.2% In June
  • June CPI Falls At Record Pace
  • Housing Starts Fall 32.4% In June
  • June Const Orders Fall 8th Straight Month
  • LDP Aims For Steady Growth, Hints At Sales Tax Hike In Platform
  • Forex: Dollar Trades In Y95 Range Ahead Of U.S. GDP Data
  • Stocks: End Up, Set New ’09 High As Earnings Shine
  • Bonds: End Lower On Nikkei Rise, Pre-Tender Hedge


Posted in China, Japan | No Comments »

Excellent NY Fed staff report on qantitative easing

Posted by WARREN MOSLER on 30th July 2009

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This should be more than enough to dismiss concerns of reserves influencing lending, apart from price.

Hope they do a full public relations effort on this.

A touch weak on fully dismissing the ‘money multiplier’ but certainly 99% ‘there:’

NY Fed Staff report:

“The general idea here should be clear: while an individual bank may be able to decrease the level of reserves it holds by lending to firms and/or households, the same is not true of the banking system as a whole. No matter how many times the funds are lent out by the banks, used for purchases, etc., total reserves in the banking system do not change. The quantity of reserves is determined almost entirely by the central bank’s actions, and in no way reflect the lending behavior of banks.”


Posted in CBs, Fed | 1 Comment »

NY Fed’s Dudley tees off on reserve-driven inflation view

Posted by WARREN MOSLER on 30th July 2009

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Dudley almost has it.

NY Fed’s Dudley tees off on reserve-driven inflation view

As Dudley notes, the fears of higher inflation expressed in that survey are likely being influenced by the Fed’s balance sheet expansion, which has of necessity increased excess reserves.

The argument that large amounts of excess reserves will fuel credit expansion and eventually inflation goes back to Karl Brunner’s formulation of the money multiplier hypothesis. According to this schema, holding excess reserves – which historically earned zero interest – would entail lost returns relative to holding earning assets. To avoid this cost, banks would seek to lend out excess reserves, thereby increasing credit, economic activity, and price pressures. As Dudley notes, this logic breaks down when reserves become earning assets, as they have since last fall when the Fed began paying interest on reserves.

He is wrong on that part. It does not matter if they are earning assets or not. In no case does reserve availability have anything to do with lending. It is about price, not quantity.

This counter-argument doesn’t excuse the Fed from responsibility for controlling inflation. The Fed still needs to set interest on excess reserves (IOER) rate consistent with a cost of capital that will promote price stability and sustainable growth. As Dudley points out, the IOER rate is effectively the same as the funds rate.

Just my theory, but seems to me they have this part backwards. The way I read it, it is lower interest rates that promote price stability.

In addition to the foregoing argument, Dudley also makes a novel and clever point


about the argument that excess reserves on bank balance sheets are ‘dry tinder:’ “Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of ‘dry tinder’ in the form of excess reserves to do so. That is because the Federal Reserves has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not.”

Got that part right, except the Fed has no choice but to allow that to happen.

While the meat of Dudley’s talk centered on conceptual issues regarding bank reserves, he also made some remarks on the economy and policy. On the economy, Dudley sees recovery driven by three forces – fiscal stimulus, an inventory swing, and a rebound in housing and auto sales – but remaining subdued by historical standards for four reasons – a waning of support to personal incomes, ongoing adjustment to lower household wealth, weak structures investment, and a response to monetary policy easing that should be more constrained than in the past. Because the recovery is expected to be subdued, Dudley remarked that concern about when the Fed exits its very accommodative policy stance is “very premature.”

Here he still implies there are grounds for concern when in fact it is a non event.

Just as Dudley gave little indication that policy would be tightened anytime soon, he also reinforced the perception that an expansion of asset purchases is highly unlikely. He did so by noting that there are three costs to purchasing assets: a misperception of the intent of asset purchases that could increase inflation expectations,

He is still in the inflation expectations camp.

a reduction in bank leverage ratios from higher reserve balances which could slow credit growth,

Yes, as I have previously stated, quantitative easing is best understood as a bank tax.
Glad to see that aspect here.

and added interest rate risk on the Fed balance sheet.

Like I said above, he’s almost got it.


Posted in CBs, Government Spending, Inflation, Interest Rates | 12 Comments »

EU Daily | ECB sees ‘turning point’ in lending conditions

Posted by WARREN MOSLER on 30th July 2009

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Yes, central banks have finally managed to restore a degree of ‘market functioning’ after full year or more of ‘extraordinary measures’ which mainly served to demonstrate a lack of understanding of basic monetary operations.

Note that only after automatic stabilizers began to reverse the slide at year end did the lending environment begin to recover as well.

  • ECB sees ‘turning point’ in lending conditions
  • European Retail Sales Fall for 14th Straight Month, PMI Shows 2009
  • German Unemployment Total Rose in July as Job Cuts Continued
  • German July Retail Sales Decline at Slowest Pace in 14 Months
  • Ifo Sees More Jobs Lost Among German Machinery Makers, FTD Says
  • French Retail Sales Post Sharpest Drop in Four Months, PMI Says
  • Italy’s Retail Sales Fall as Job Cuts, Recession Curb Spending
  • Italian Banks Agree on One-Year Loan Moratorium, MF Reports
  • Spanish Consumer Prices Dropped by Record 1.4 Percent in July
  • Spain’s Recession Eased in Second Quarter, Central Bank Says
  • German Bonds Decline as Stocks Advance, Italy Auctions Debt


Posted in CBs, ECB | No Comments »

Geithner Pledges Smaller Deficit as China Talks Start

Posted by WARREN MOSLER on 28th July 2009

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Geithner Pledges Smaller Deficit as China Talks Start

By Rebecca Christie and Rob Delaney

July 27 (Bloomberg) — Treasury Secretary Timothy Geithner pledged the U.S. will shrink its budget deficit over the next four years and boost national savings,

Ah, ‘national savings,’ that gold standard measure that’s inapplicable with our non convertible dollar and floating fx policy.

Today it’s nothing more than another term for our trade balance.

‘National savings’ falls when the federal deficit rises and those funds thus created are held by non residents.
On a gold standard (or other fixed fx regime) that represented a gold outflow, as non residents were holding US currency that was convertible into gold on demand. And the gold supply was the national savings.

Anyone who uses that term in the context of non convertible currency is either ignorant or deliberately misleading.

and he called on China to maintain efforts to ease the impact of the global recession. “We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,” Geithner said in opening remarks for Strategic and Economic Dialogue meetings with Chinese officials in Washington.

Since total non government savings of financial assets equals federal deficit spending to the penny (it’s an accounting identity) cutting the deficit and increasing domestic savings can only be done by simultaneously reducing our trade deficit by exactly that much. That would likely mean importing a lot less from china.

So what his words are telling them is that the US is committed to buying less from them. That should give them a lot of comfort?

Geithner’s comments reinforced his efforts to reassure China, the largest foreign holder of American government debt, that this year’s record U.S. budget gap won’t pose a long-term danger. The shortfall is on course to reach $1.8 trillion in the year through September.

Geithner and Secretary of State Hillary Clinton are hosting Vice Premier Wang Qishan and Dai Bingguo, a state councilor, at the meetings today and tomorrow, the first such gathering since President Barack Obama took office.

Obama called for the two nations to deepen cooperation and work together to help the global economy. “As Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation,” Obama said in his remarks. “Just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.”

Wonderful, we work and produce goods and services for them to consume. That is called diminished real terms of trade and a reduced standard of living for the us.

Outside Investment

U.S. officials said last week they plan to raise concern
about China’s resistance to foreign investment at the talks,

China’s growing dollar reserves result mainly from foreign investment, where foreigners buy yuan with dollars so they spend the yuan in China on real investment (and maybe a bit of speculation).

while Chinese officials this year have highlighted their own worries about the value of their American investments.

Yes, and the play us for complete fools.

Geithner fielded a bevy of questions about the deficit during his June visit to Beijing. China’s holdings of U.S. Treasuries reached $801.5 billion in May, recording about a 100 percent increase on the level at the beginning of 2007, according to U.S. government figures.

“Recognizing that close cooperation between the United States and China is critical to the health of the global economy, we need to design a new framework to ensure sustainable and balanced global growth.”

No hint of what that ‘framework’ might actually be.

After seeing the ‘framework’ they’ve come up with for the US financial structure the odds of anything functionally constructive seem slim.

The Obama administration will take steps to put the U.S. on course for economic health, he said.

Like reducing the federal budget deficit when current steps have fallen far short of restoring aggregate demand?

Obama’s Goals

“The president also is committed to making the investments in clean energy, education and health care that will make our nation more productive and prosperous,” Geithner said. “Together these investments will ensure robust U.S. growth and a sustainable current account balance.”

Non look to add to aggregate demand in any meaningful way, especially with the associated tax increases.

And investement per se reduces standards of living. It’s only when that investment results in increased productivity for consumer goods and services is there an increase in our standard of living.

Geithner also repeated his call for China, which has posted record trade surpluses in recent years, to increase demand at home.

“China’s success in shifting the structure of the economy towards domestic-led growth, including a greater role for spending by China’s citizens, will be a huge contribution to more rapid, balanced, and sustained global growth,” Geithner said.

Just what we need, a billion non residents increasing their real consumption and competing with us for real resources.

In the talks today and tomorrow in Washington, U.S. officials said they plan to tell the Chinese the American rebound from a recession won’t be led as much by consumers as past recoveries.

That means our standard of living won’t be recovering even though GDP is recovering.

The American side also will urge China to rely more on household spending and less on exports for growth, an official told reporters in a July 23 press briefing in Washington.

Clearly the obama administration does not understand the monetary system and is working against actual public purpose.

The U.S. is concerned that there’s been a hardening of attitudes regarding China’s treatment of foreign investment, the official also said last week. China’s exchange-rate policy is another topic for discussion, the official said.

Total confusion on that front as well.

We push for a weak dollar/strong yuan policy so prices for China’s products at our department stores rise to the point we can’t afford to buy them.

Then we try to get them not to sell their dollar reserves because it might make the dollar go down.

From Mauer:

Hey, why don’t we all move to Latvia, where they do all of the stuff that Geithner advocates:

Latvia, which pegs its currency to the euro, now has a “strong”, stable currency. Good for them. They are sustaining this strong currency by crushing demand. Exports are down 28pc, but imports are down even more. The result of this Stone Age policy is economic contraction of 18pc this year, and 4pc in 2010.

But hey, you’ve got a “healthy” currency and a country which is pursuing a “sensible” fiscal policy with lots of belt tightening. And supposedly “building up national savings” as a consequence of these wonderful policies.

Where do we find these people?


Posted in Asia, Bonds, China, Currencies, Emerging Markets, GDP, Government Spending | 5 Comments »

earning season adjustment

Posted by WARREN MOSLER on 28th July 2009

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Looks to me like the earnings season adjustment I wrote about a few weeks ago is now priced in.


Posted in Equities | No Comments »

Bernanke Feared a Second Great Depression –

Posted by WARREN MOSLER on 27th July 2009

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The great depression was the last US gold standard depression.

A gold standard is fixed exchange rate policy characterized by a continuous constraint on the supply side of the currency.

Interest rates are endogenous, and even the treasury must first borrow before it can deficit spend, and in doing so compete with other borrowers for funds from potential lenders who have the option to convert their currency into gold. Therefore interest rates always represent indifference rates between holding securities and holding the gold.

With non convertible currency the central bank is left to set interest rates as holders of the currency no longer have the option to convert the currency into gold. Without conversion rights, there are no supply side constraints on credit expansion, and government can therefore offer the credible deposit insurance necessary to sustain the functioning of the payments system.
Bernanke failed to recognize this and therefore saw systemic risks that weren’t there, and also failed to act in line with the tools available to the Fed that would not have been available under the previous gold standard. The most obvious is unsecured lending to member banks, as I have been proposing for a number of years.

With today’s non convertible currency and floating exchange rate policy the fiscal ‘automatic stabilizers’ functioned as they always have during previous recessions, and as the deficit got above 5% of GDP at year end it was enough to reverse the downward spiral and turn things around.

This could not have happened under a gold standard. Before the deficit got anywhere near that large it would have driven up interest rates at an accelerating pace and the gold while the national gold reserves were being rapidly depleted.

We’ve seen this happen most recently with Argentina in 2001 and Russia in 1998 where similar fixed exchange rate regimes had similar outcomes.

We’ve also seen failures of logic regarding how the FDIC handled banking system stresses. The FDIC can simply ‘take over’ any bank it deems insolvent, and then decide whether to continue operations, sell off the assets, replace management, etc. This can be done and has been done in an orderly manner without ‘business interruption.’

The alternative in this cycle- having the treasury ‘add capital’- in my opinion was a major error for a variety of reasons.

When a bank loses capital, there is then less private capital left to lose before the FDIC starts taking losses. When the treasury buys capital in the banks, the amount of private capital remains the same. All that changes is that should subsequent losses exceed the remaining private capital, the treasury rather than the FDIC takes the loss. For all practical purposes both are government agencies, so for all practical purposes this changes nothing regarding risk to government. The FDIC could have just as easily accomplished the same thing by allowing the banks in question to continue to operate but under the same terms and conditions set by the treasury (not that those would have been my terms and conditions).

Instead, substantial political capital was burned and numerous accounting issues and interagency issues confused and distorted including ‘adding to the federal deficit’ when there was nothing that altered aggregate demand.

We have paid a high price for financial leaders being completely out of paradigm and in this way over their heads.

Bernanke Feared a Second Great Depression

By Sudeep Reddy

July 27 (WSJ) — Federal Reserve Chairman Ben Bernanke on Sunday said he engineered the central bank’s controversial actions over the past year because “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

Speaking directly to Americans in a forum to be shown on public television this week, Mr. Bernanke pushed back against Kansas City area residents who suggested he and other government officials were too eager to help big financial institutions before small businesses and common Americans.

“Why don’t we just let the behemoths lay down and then make room for the small businesses?” asked Janelle Sjue, who identified herself as a Kansas City mother.

“It wasn’t to help the big firms that we intervened,” Mr. Bernanke said, diving into a discourse on the damage to the overall economy that can result when financial firms that are “too big to fail” collapse.

“When the elephant falls down, all the grass gets crushed as well,” Mr. Bernanke said. He described himself as “disgusted” with the circumstances that led him to rescue a couple of large firms, and called for new laws that would allow financial firms other than banks to fail without going into bankruptcy.

Mr. Bernanke appeared stoic at times as he sought to explain his actions during the financial crisis at the town-hall-style meeting with 190 people at the Federal Reserve Bank of Kansas City hosted by the NewsHour’s Jim Lehrer. But he also joked with the crowd, saying “economic forecasting makes weather forecasting look like physics.” He quipped that he could face malpractice charges if he offered investment advice — although he then recommended that a questioner practice diversification and avoid trying to time the stock market.

The hourlong session was the latest unusual forum where the Fed chairman has explained his actions in recent months, including bailouts and massive lending. Mr. Bernanke appeared before the National Press Club in February, agreed to an interview with CBS’s “60 Minutes” in March and took questions on camera from Morehouse College students in April.

Sunday’s setting offered the former Princeton economics professor a chance to speak outside of congressional testimony and speeches to economists, as his tenure leading the central bank faces increasing scrutiny. With just six months left in his term as chairman, Mr. Bernanke will learn in the coming months whether President Barack Obama will reappoint him to another four-year term or replace him.

Mr. Bernanke repeatedly used the frustrations voiced by people in the room to show his limited options during the crisis and reiterate the need for a regulatory overhaul.

David Huston, who called himself a third-generation small-business owner, said he was “very frustrated” to see “billions and billions of dollars” sent to large financial firms and called the government approach “too big to fail, too small to save.”

“Small businesses represent the lifeblood of small cities, large cities and our American economy,” he said, and they are “getting shortchanged by the Federal Reserve, the Treasury Department and Congress.”

Mr. Bernanke responded that “nothing made me more frustrated, more angry, than having to intervene” when firms were “taking wild bets that had forced these companies close to bankruptcy.”

More than 20 people asked questions of the Fed chairman, on topics ranging from bailouts to mortgage-regulation practices to the Fed’s independence, a topic that drew the most forceful tone from the Fed chairman. Mr. Bernanke suggested that a movement by lawmakers to open the Fed’s monetary-policy operations to audits by the Government Accountability Office is misunderstood by the public.

Congress already can look at the Fed’s books and loans that could be at risk for taxpayers, he said. Under the proposed law, the GAO would also be able to subpoena information from Fed officials and make judgments about interest-rate decisions based on requests from Congress.

“I don’t think that’s consistent with independence,” he said. “I don’t think people want Congress making monetary policy.”

After appearing before lawmakers three times last week, Mr. Bernanke broke little new ground in explaining the state of the economy. He said the Fed’s expected economic growth rate of 1% in the second half of the year would fall short of what is needed to bring down unemployment, which he sees peaking sometime next year.

“The Federal Reserve has been putting the pedal to the metal,” he says. “We hope that’s going to get us going next year sometime.”


Posted in CBs, Fed, GDP, Government Spending | 33 Comments »

The stupidity of this statement: “Huge supply coming…”

Posted by WARREN MOSLER on 27th July 2009

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Mike Norman Economics

The stupidity of this comment: “Bond market facing huge supply.”

Week after week after week, you hear these TV commentators or other “know-nothing” economists and analysts talk about the “huge supply” of new Treasuries that is coming and how that is going to cause interest rates to spike up.

One quick glance at the Treasury’s Daily Statement will show you that so far this fiscal year…the Treasury has sold
$7.4 Trillion

of securities and interest rates are

We’re talking nine months, here, and nearly $8 trillion worth of sales and rates have done nothing but go down. And by the way…that’s on top of the
$5.6 trillion they sold last year!

And…you guessed it…rates
have come down!!

When will these ninnies wake up???

The money to buy Treasuries comes from government spending itself and the monetary operations of the Fed! The added reserve balances that come about as a result of government spending or the Fed buying securities (to reduce interest rates) are merely swapped for an interest bearing account of the U.S. Government known as a Treasury. And the government pays interest on those Treasuries the same way it pays for everything else…by crediting bank accounts.

Please pass this along!


Posted in Government Spending, TREASURY | 4 Comments »

Grayson on Fed swap lines

Posted by WARREN MOSLER on 27th July 2009

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Grayson has this completely wrong. There was credit risk only for the unsecured lending.

There was no currency risk.

The swap lines are nothing more than unsecured dollar loans to the foreign CB’s.

Congress seems not capable of informed criticism.

And judging from the movement of the dollar since the swaps began, Grayson said, it looks like the U.S. could have taken a $100 billion dollar loss because the value of the foreign currency held by the U.S. depreciated in value by roughly one-fifth. Bernanke told Grayson that it was a “coincidence” that the dollar appreciated substantially after the half-trillion dollar swap project got underway in September. The Fed website maintains that the transactions are without risk because the exchange rates are locked in.



Posted in CBs, ECB, Fed | 1 Comment »

Fed swap lines continue to fall

Posted by WARREN MOSLER on 27th July 2009

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Central bank liquidity swaps (13) 89,864 – 21,914


Posted in CBs, Fed | No Comments »

Gasoline demand

Posted by WARREN MOSLER on 24th July 2009

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Looks like we are leveling off around unchanged year over year.

Consumption started falling off after GDP went negative in the second half of 08 so the year over year comps should show higher consumption for the second half of 09.


Posted in Comodities, Oil | No Comments »

Saudi production

Posted by WARREN MOSLER on 24th July 2009

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Looks like demand is steady at current prices which seem to be where they currently want prices to be.


Posted in Comodities, Oil | No Comments »

Quantitative easing

Posted by WARREN MOSLER on 24th July 2009

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Monetary policy in a period of financial chaos:

The political economy of the Bank of Canada in extraordinary times

Presented at the Political Economy of Central Banking conference,

Toronto, May 2009

Marc Lavoie and Mario Seccareccia

Department of Economics

University of Ottawa

July 2009

“Although quantitative easing is now referred to as an unconventional monetary policy tool, the purchase of government securities is, in fact, the conventional textbook approach to monetary policy…. In practice, most central banks have chosen to conduct monetary policy by targeting the price of liquidity because the relationship between the amount of liquidity provided by the central bank and monetary aggregates on the one hand, and between monetary aggregates and aggregate demand and inflation on the other, are not very stable.” (Bank of Canada, 2009b, p. 26).

The Bank of Canada thus feels compelled to recall that monetary aggregates are very badly correlated with price inflation, and that base money is also very badly correlated with the money supply. To provide excess bank reserves, as recommended by Monetarists, central banks must decline to sterilize its liquidity creating financial operations or it must conduct open market operations by purchasing assets. As pointed out by Deputy Governor John Murray (2009), “All quantitative easing is, by definition, ‘unsterilized’. Although this is correctly viewed as unconventional, it closely resembles the way monetary policy is described in most undergraduate textbooks, and is broadly similar to how it was conducted in the heyday of monetarism”. Murray misleadingly insinuates that such a technique has been implemented before, namely during the 1975-1982 monetarist experiment in Canada. What can really be said is that quantitative easing is an attempt to put in practice what academics have been preaching in their textbooks for decades from their ivory towers. It is merely monetarism but in reverse gear. While monetarist policy of the 1970s was implemented to reduce the rate of inflation, current monetarist quantitative easing is being applied to generate an increase in the rate of inflation.

As a result, the claims of quantitative easing are just as misleading as the claims of monetarism of the 1970s and early 1980s. Bank of Canada officials claim that “The expansion of the amount of settlement balances available to [banks] would encourage them to acquire assets or increase the supply of credit to households and businesses. This would increase the supply of deposits” (Bank of Canada, 2009b, p. 26), adding that quantitative easing injects “additional central bank reserves into the financial system, which deposit-taking institutions can use to generate additional loans” (Murray, 2009). In our opinion, these statements are misleading and indeed completely wrong. They rely on the monetarist causation, endorsed in all neoclassical textbooks, which goes from reserves to credit and monetary aggregates. It implies that banks wait to get reserves before granting new loans. This has been demonstrated to be completely false in the world of no compulsory reserves in which we live since 1994. In any event, even before 1994, as argued by a former official at the Bank of Canada, the task of central banks is precisely to provide the amount of base money that banks require (Clinton, 1991). Banks do not wait for new reserves to grant credit. What they are looking for are creditworthy borrowers.

Quantitative easing is an essentially useless channel. It assumes that credit is supply-constrained. It assumes that banks will grant more loans because they have more settlement balances. Both of these assumptions are likely to be false, at least in Canada. With the possible exception of its impact on the term structure of interest rates, the only effect of quantitative easing might be to lower interest rates on some assets relative to the target overnight rate, as these assets are being purchased by the central bank through its open market operations. It is doubtful that the amplitude of these interest rate changes will have any impact on private borrowing or on the exchange rate. Indeed, in Japan, which has had experience with zero interest rates for many years, quantitative easing was pursued relentlessly between 2001 and 2004, but with no effect, as “the expansion of reserves has not been associated with an expansion of bank lending” (MacLean, 2006, p. 96). Indeed, officials at the Bank of Japan did not themselves believe that quantitative easing could on its own be of any help, but they tried it anyway as a result of the pressure and advice of international experts. As Ito (2004, p. 27) notes in relation to the Bank of Japan, “Given that the interest rate is zero, no policy measures are available to lift the inflation rate to positive territory… The Bank did not have the tools to achieve it”.


Posted in CBs, Government Spending | 8 Comments »

New Deal 2.0

Posted by WARREN MOSLER on 24th July 2009

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By Mario Seccareccia
Professor of Economics, Ottawa University
Editor, International Journal of Political Economy

July 23 —
Over the last couple of months, especially as there have been some signs of economic “green shoots,” there have also been growing pressures coming from conservative policy analysts that the Obama administration ought to be planning its “exit strategy,” that is, a plan that would eliminate the deficit over the medium term.

These pressures are based on fears that the large federal deficit, standing at 13.1 percent of GDP, together with the huge reserves that are sitting within the banking system as a result of the Fed’s monetary policy of quantitative easing, will soon metamorphosize into runaway inflation. Just recently, Fed Chairman Ben Bernanke added his voice to the chorus of those who are calling for an exit strategy.

Politically, all of this talk of exit strategy has served to weaken the Obama administration’s capacity to get important legislation passed. For instance, these fears of the deficit bogey have recently prompted the president to commit himself not to sign on to legislation that will add to federal deficits over the longer term.

Such stark commitments will only tie his hands politically and give credibility to a conservative policy view on the negative consequences of deficits that has been completely disproved by the facts. For instance, under the Bush administration, when unemployment rates were much lower than they are presently, we saw a rate of inflation that sat steadily at low levels, despite growing deficits. Moreover, Chairman Bernanke knows fully well that there is no positive relation between the volume of excess reserves in the banking system and credit expansion. The latter is driven by demand from creditworthy borrowers and not by the volume of excess reserves sitting in the banking system. Hence, the real fear should not be inflation but growing unemployment and wage deflation.

All of this talk of exit strategy has served to divert attention from the really important problem of rising unemployment whose official rate may well surpass the double digit threshold soon. Fortunately, there are some connected with the administration who are leery of this talk of exit strategy. For instance, in an article last month, Cristina Romer, chairwomen of the Council of Economic Advisers and scholar of the 1930s Great Depression, recounts how a similar debate over fears of inflation under the FDR administration led to both restrictive monetary and fiscal policies that engineered a second severe slump in 1937-1938 almost a decade after the 1929 crash. Romer cautions that such errors should not be repeated.

It is hoped that clearer heads will prevail in the current administration and that policy will remained focused on combating unemployment. What is needed is not an exit strategy but a full employment strategy. An exit strategy could abort a recovery and could mean that those green shoots will quickly dry up. As Paul Krugman so correctly pointed out in a recent op-ed: “government deficits … are the only thing that has saved us from a second Great Depression.”

Roosevelt Braintruster Mario Seccareccia is editor of the International Journal of Political Economy.


Posted in Employment, Government Spending | 1 Comment »

South Korea’s Economy Grows at Fastest Pace in Almost Six Years

Posted by WARREN MOSLER on 24th July 2009

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So far it is just a rebound but part of a pattern of generally better than expected data and supports the notion that removing fiscal drag does restore domestic demand.

South Korea’s Economy Grows at Fastest Pace in Almost Six Years

By Seyoon Kim

July 24 (Bloomberg) — South Korea’s economy expanded at
the fastest pace in almost six years last quarter as exports and
household spending jumped.

Gross domestic product rose 2.3 percent from the first
quarter, when the nation skirted a recession by growing 0.1
percent, the Bank of Korea said today in Seoul. That was better
than the 2.2 percent growth estimated by economists.

Samsung Electronics Co. today joined exporters Hyundai
Motor Co. and LG Electronics Inc. in reporting profit surged
last quarter, helped by a weaker currency and demand fed by $2.2
trillion in stimulus worldwide. Consumer spending climbed 3.3
percent from the first quarter, the most in seven years, fueled
by interest rates at a record-low 2 percent.

“Exports have improved more than expected while domestic
demand got a big boost from the fiscal and monetary policy
steps,” said Lee Sang Jae, economist at Hyundai Securities Co.
in Seoul. “I expect Korea to remain on a recovery path” even
after the boost from the stimulus measures wanes, he said.

The Kospi stock index rose 0.4 percent today in Seoul,
taking the year’s gains to 34 percent after a 41 percent drop in
2008. The won rose 0.2 percent to 1,249.55 per dollar.

Last quarter’s expansion was the fastest since the economy
grew 2.6 percent in the last three months of 2003. Exports
gained 14.7 percent, also the biggest advance in almost six
years. From a year earlier, GDP shrank 2.5 percent.


Posted in Emerging Markets, GDP, Government Spending | 2 Comments »