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Archive for September, 2009

Inequality? nothing to worry about, according to Summers & Geithner

Posted by WARREN MOSLER on 30th September 2009

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Right, as anticipated from the actions of the administration.

We are witnessing the largest transfer of real wealth from the bottom to the top in the history of the world.

U.S. Income Inequality Is Frightening–And Much Worse Than We Thought

By Bruce Judson

Sept. 30 (Business Insider) — The newest economic inequality numbers, which ran counter to the expectations of almost all experts, are frightening.

The Associated Press released an article titled, US income gap widens as poor take hit in recession. The opening paragraph of the article, based on recent census data, reads:

  The recession has hit middle-income and poor families hardest, widening the
  economic gap between the richest and poorest Americans as rippling job
  layoffs ravaged household budgets.

The article, which then discussed the Census statistics that led to this conclusion, failed to mention that the Census Bureau considered the differences between 2007 and 2008, with regard to economic inequality, statistically insignificant.

But, whether the Census Data shows a meaningful increase, or not. is irrelevant. The Census Data reports that, contrary to the almost universal expectations of economists, economic inequality most likely did not decrease in 2008. Experts had anticipated that the declines in income of the rich would lead to a reversal in this groups ever–widening share of our national income. Instead, the Census reported that the 2008 income losses by the top 10% of Americans were offset by larger losses among middle class and poorer Americans.

MIT economist Simon Johnston appears to have been one notable exception to this expectation of a shrinking income gap.

Let’s review what we know about the measurement of income inequality before discussing the disturbing implications of this newest government report.

About two weeks ago, I critiqued a Sept 10, 2009 front page story in the Wall Street Journal titled, Income Gap Shrinks in Slump at the Expense of the Wealthy. My critique had three central points:

First, economists have, with few exceptions, agreed that Census Data is inappropriate for measuring income inequality because it consistently understates the income of the wealthiest families. To protect the privacy of reporting individuals, the Census “top-codes” income, which means that no one is ever recorded as making more than about $1.1 million in a single year. So, oil traders, hedge fund executives and anyone else at the super-high end of the income strata who might earn $100, $50 or $5 million in a single year, always earn $1.1 million or less in this Census Data. In addition, the Census Data does not include capital gains income, which is typically a large source of income for the wealthiest Americans.

Two economists, Professors Emmanuel Saez and Thomas Piketty, developed a method for measuring income inequality using IRS data, which avoided the problems inherent in using Census Data. This data was recently updated in response to the IRS release of 2007 information, and found that: Economic inequality in 2006 was, by some measures at the highest levels, ever found in the data available for the past 95 years. In 2007, these same measure showed a further jump further bringing America to it it’s highest levels of economic inequality in recorded history.

As a consequence of Census top-coding and the lack of capital gains data, the Saez-Piketty methodology has consistently shown that the Census substantially understates the extent of economic inequality in the nation. This means that, there is a real possibility that the the new Census Data understated the extent to which income inequality grew in 2008, and that the relative losses of the wealthiest families, versus less fortunate Americans, will be more than statistically insignificant.

It is possible that losses in reported capital income by the wealthiest Americans, if captured by the Saez-Piketty methodology, will be larger than the the incomes above $1.1 million that were not reported and offset the Census findings, leading as economists anticipated to a decline in the share of income going to the rich. However, I view this as unlikely. In considering this possibility, its important to remember that the IRS works on reported income gains, not gains which were never captured as taxable income. For income reporting purposes, the question is not whether the market value of capital assets declined but whether they were sold at an actual loss from their purchase price.

We will not know the answer to this question until July or August 2010, but in weighing the available evidence my working hypothesis is that as demonstrated by this new Census Report, income inequality did not decrease from 2008 to 2007.

Second, the original Journal article expressed a strong expectation that, as a result of the Great Recession, the ongoing growth of income inequality would decline substantially through 201o. My critique indicated that this was “far from clear.” The conventional economic wisdom, based on historical data, is that income inequality decreases, at least temporarily, as the richest Americans lose income faster than less-well-off Americans during a downturn. In contrast, this new data suggests that the dangerous cycle toward increasing income at the top of America has become even more self-reinforcing than previously recognized. We are now at the point where the pure market forces, which many economists told us would eliminate this issue, are no longer effective.

Third, the Journal article implied that the decrease in economic inequality it incorrectly predicted might be the start of a long-term trend. Instead, I demonstrated that, even if income inequality did decline in 2008 and 2009, it would almost certainly be “temporary.” The historical evidence shows that economic inequality frequently declines in a downturn, in the absence of strong government action, but that it will almost inevitably rebound and continue its march forward.

Now, let’s return to our main point:

Early next week, my new book It Could Happen Here will be released by HarperCollins. The book is an in-depth look , based on a historical analysis, of the implications of our historically high levels of economic inequality for the nation’s ultimate, long-term political stability. As economic inequality grows, nations invariably become increasingly politically unstable: Should we complacently believe that America will be different?

A central conclusion of the book is that once economic inequality reaches a self-reinforcing cycle it is halted only by inevitably controversial, hard-fought, bitterly opposed government action. Senator Jim Webb encapsulated this idea, when he wrote in his book, A Time to Fight: Reclaiming A Fair and Just America:

   “No aristocracy in history has decided to give up any portion of its power

In 1928, economic inequality was near today’s levels. Franklin Roosevelt succeeded in reversing the trend toward the continuing concentration of wealth, but it was a turbulent battle. In 1936, while campaigning for his second term and speaking at Madison Square Garden, FDR told the crowd:

  â€œNever before in all our history have these forces [Organized Money] been
  so united against one candidate as they stand today. They are unanimous in
  their hate for me and I   welcome their hatred.

  I should like to have it said of my first Administration that in it the forces of
  selfishness and of lust for power met their match. I should like to have it
  said, wait a minute, I should like to have it said of my second Administration
  that in it these forces met their master.”

In FDR’s era and in our own, money brings power: both explicitly and implicitly, in hundreds of different ways, both large and small. Today, the wealthiest Americans, together with a number of financial and corporate interests that act on their behalf, protect their ever-increasing influence through activities that include, among others, lobbying, supplying expertise to the councils of government, casual conversation at dinner parties, the potential for jobs after government service, the power to run media advertisements that influence public opinion. Indeed, MIT economist Simon Johnston, writing in The Atlantic asserted that the U.S. is now run by an oligarchy:

  The great wealth that the financial sector created and concentrated [from
  1983 to 2007] gave bankers enormous political weight–a weight not seen
  in the U.S. since the era of J.P. Morgan (the man) … Of course, the U.S. is
  unique. And just as we have the world’s most advanced economy, military,
  and technology, we also have its most advanced oligarchy.

The new inequality data suggests that the potential problems for the nation associated with the concentration of wealth and power are even more severe than previously recognized. Two weeks ago, I wrote that “Once income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces.” This mechanism is now in full swing. The market forces associated with the Great Recession, which many economist had expected to stem the growing, corrosive gap between the rich and the poor, appear to have become ineffective.

The great strength of American democracy has always been its capacity for self-correction. However, Robert Dahl, the eminent political scientist, recognized that political power fueled by wealth may ultimately neutralize this central aspect of our democracy. In his 2006 book, On Political Equality, Dahl wrote:

  As numerous studies have shown, inequalities in income and wealth are
  likely to produce other inequalities..

  The unequal accumulation of political resources points to an ominous
  possibility: political inequalities may be ratcheted up, so to speak, to
  a level from which they cannot be ratcheted down. The cumulative
  advantages in power, influence, and authority of the more privileged
  strata may become so great that even if less privileged Americans
  compose a majority of citizens they are simply unable, and perhaps
  even unwilling, to make the effort it would require to overcome the
  forces of inequality arrayed against them.

In the chapter following this quote, Dahl notes “that we should not assume this future is inevitable.” He’s right. But, was clearly concerned. Three years late, we should be even more concerned.

Many current Executive Branch initiatives deserve our support and praise: However, nothing proposed to date will effectively halt growing economic inequality, and its corrosive impact on our economy and the long-term future of the nation. (In a future post, I will explicitly discuss the proposed regulatory reform of the financial sector.)

My analysis in It Could Happen Here concludes that without a vibrant middle class, the the American democracy as we know it, is not sustainable. Before the Great Recession, the middle class was in far worse shape than was generally acknowledged. In an economy with a record number of job seekers for every available job, the potential for nearly one-half of all home mortgages to be underwater, and increasing foreclosures, the collapse of the middle class will accelerate. With each job loss and each foreclosure, another family becomes a member of the former middle class.

America has never been a society sharply divided between have’s and have not’s. Unfortunately, this new data says to me we continue to head in that direction. Economists assumed that the Great Recession would be a circuit breaker that would halt this advance, at least temporarily. It did not.

With no new legislation, it appears we are potentially on course for 13 million foreclosures, almost one in every four mortgages in the nation, from the end of 2008 through 2014. Do we really believe that we can turn such huge numbers of Americans out of their homes with no consequences for the health of our system of governance? Could our democracy survive a transformation into a nation composed principally of a privileged upper class and an underclass which struggles from paycheck to paycheck and lacks basic economic security?

We will only stop the growth of economic inequality if the President and the Congress are ready to fight in the style of Franklin Roosevelt. FDR was a divider not a conciliator. Before World War II, he fought an all-out war at home. Today, “There’s class warfare, all right,” as Warren Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

I fervently hoped that we have not passed the point of no return, described by Professor Dahl. The recent news shows we are one step further on this road. If we continue down it, our nation may be on the path to becoming a House divided against itself, which ultimately cannot stand.


Posted in Obama, Political | 6 Comments »

Tea party address

Posted by WARREN MOSLER on 29th September 2009

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Warren Mosler speaks in Quincy, Part I


Warren Mosler speaks in Quincy, Part II


Posted in Banking, CBs, China, Congress, Deficit, GDP, Government Spending, Mosler 2012, Speech | 10 Comments »

Conference Board/C-S

Posted by WARREN MOSLER on 29th September 2009

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Karim writes:

Conference Board survey weaker than expected

  • Falls back from 54.5 to 53.1 with both current conditions and future expex declining
  • Labor differential (Jobs plentiful less Jobs hard to get) falls from -40 to -43.6, near lows for year
  • Cash for clunkers runs its course as plans to buy an auto in next 6mths falls from 5.3 to 4.4, lowest since March
  • Plans to buy a home in next 6mths falls from 3.0 to 2.3

Case-Shiller rises 1.6% in July, 3rd monthly advance in a row.

  • Of note is the 3mth period through July 2008 were the best 3mths for home prices last year, so seasonals may be suspect
  • Also, foreclosures about to ramp up again, creating additional supply-link below has some good data/charts



Posted in Employment, Housing | No Comments »

Krugman in NYT Blog

Posted by WARREN MOSLER on 29th September 2009

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>   (email exchange)
>   On Tue, Sep 29, 2009 at 11:20 AM, Joshua Davis wrote:
>   moving in the right direction for sure, but for partly
>   the wrong reason…he still misses the point that we’re
>   not on a gold standard…

Yes, very much so. Does not seem like it would take much to set him straight.

If anyone on this list knows him, please email him a copy of ‘the 7 deadly frauds’ thanks!

The true fiscal cost of stimulus

By Paul Krugman

Sept. 29 (NYT Blog) — As I get ready for the CAP and EPI events, I’ve been thinking more about the issue of crowding in. (See also Mark Thoma.) And I’m coming more and more to the conclusion that the public debate over fiscal stimulus, which views it as an agonizing tradeoff between possible benefits now and certain costs later, is wildly off base.

Just to be clear, we’re talking about fiscal stimulus in a liquidity trap — that is, under conditions in which conventional monetary policy has lost traction, in which the Fed would set interest rates much lower if it could. Under more normal conditions the conventional view of stimulus is more or less right. But we’re in liquidity-trap conditions now, and will be for a long time if official projections are at all right. So what does that imply?

First of all, as I and others have pointed out, fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.

And yes, there’s some evidence to that effect beyond the procyclical behavior of investment. The new IMF analysis of medium-term effects of financial crisis finds that

    the evidence suggests that economies that apply countercyclical
    fiscal and monetary stimulus in the short run to cushion the
    downturn after a crisis tend to have smaller output losses over
    the medium run.

So fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.

But that’s not the whole story. Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.

I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.) What I am suggesting is that fiscal stimulus under current conditions, where theFed funds rate “ought” to be around -5 percent, does much, much less to hurt that long-run position than the headline number would suggest.

And that, in turn, means that penny-pinching on stimulus is deeply, destructively foolish.


Posted in Deficit, Government Spending | No Comments »

FDIC fee proposal

Posted by WARREN MOSLER on 29th September 2009

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Regarding FDIC fees, the smaller the better, so nice to seem them sort of moving in that direction.

All they do is raise rates as they raise the common cost of funds for banks, and Fed policy is to lower rates.

Be nice to have leadership that understands banking and the monetary system!


Details on the proposal still rolling in. Two immediate takeaways:
less acute quarter-end dislocations, and definitional problems in LIBOR
likely to remain. There will be no more special assessments– those
assessments were based off of quarter end levels of assets, so banks had
a very strong incentive to squeeze quarter end balance sheets. Regular
fees are based off of quarterly average levels of insured deposits, so
you won’t get the same degree of quarter end window dressing (which
means smaller market dislocations).

In addition, they are talking about relatively moderate increases in
future FDIC fees– a 3bp increase in 2011. Fees will be lower than the
23bps hit after the S&L crisis. That means there will be less of a
shift toward uninsured deposits (overseas deposits) in order to avoid
that fee. Which means activity in eurodollar deposits remains light, so
there is no good benchmark for LIBOR (banks are likely to continue to
look at CP/CD rates when submitting their settings).

There will be a near-term increase in bank financing needs, as banks
need to come up with $45bn to prepay fees. This may create a small
hiccup in the downward trend in CP, as well as some additional bank
issuance in the 2yr to 3yr sector.

Also, a small decline in bill supply over year end– the FDIC will take
the $45bn and buy “nonmarketable treasuries” with it (the same IOUs that
are in the social security trust fund). The Tsy will take the $45bn of
cash and spend it, so they dont need to issue quite as many bills as
they otherwise would have. Note that the payments are due Dec 30.


Posted in Banking, Interest Rates | No Comments »

M and A

Posted by WARREN MOSLER on 28th September 2009

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As anticipated, this will be larger than ever as the only way to be protected as a shareholder is to buy the whole company.

And the general risks to being a minority shareholder will keep prices lower than otherwise.

M&A Is Back—And May Bring Big Opportunities for Investors

By Jeff Cox

Sept. 25 (Bloomberg) — After missing in action for much of this year’s stock rally, mergers and acquisitions are making a big comeback.


Posted in Banking | 1 Comment »

billy blog

Posted by WARREN MOSLER on 28th September 2009

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Bill’s done an excellent job on the workings of monetary system.
Click on when you have an extra 15 or 20 minutes to go through it.

billy blog


Posted in Inflation | 3 Comments »

Value added tax

Posted by WARREN MOSLER on 28th September 2009

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Yet another regressive proposal that punishes lower income earners disproportionately, as the Obama administration seemingly continues to pursue policies that shift real wealth from the bottom to the top, as Europe has done for decades. It’s also highly contractionary as it reduces aggregate demand, and the higher prices add to headline inflation and get passed through to CPI indexed contracts:

Podesta Says Value-Added Tax ‘More Plausible’ as Deficits Grow

By Heidi Przybyla

Sept. 25 (Bloomberg) — John Podesta compared the nation’s current budget crisis to the situation former President Bill Clinton faced in 1993 and said some form of a value-added tax is “more plausible today than it ever has been.”

“There’s going to have to be revenue in this budget,” said Podesta, Clinton’s former chief of staff and co-chairman of President Barack Obama’s transition team, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing today.

A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” said Podesta. Value- added taxes in Europe and Japan encourage savings by taxing consumption.

Podesta said such a tax may be regressive, but can be balanced by exempting some products and using “the money to support low-wage workers.”


>   (email exchange)
>   On Sun, Sep 27, 2009 at 10:20 PM, Wells wrote:
>   I am totally with you on this Warren. This VAT is a truly regressive tax.


>   People like Forbes pushed for this a new years ago but it went nowhere.
>   After studying it I was left feeling that it hides the true cost of
>   government by burying it in the many stages of production with the end
>   product being just the tip of the tax iceberg. No doubt it probably does
>   encourage savings, as if savings are the be all, end all.

Reducing consumption also reduces ‘savings’- the old paradox of thrift.

The only way it could increase savings is if it threw people out of work and the federal deficit went up, as savings of net financial assets of the non govt sectors can only come from govt. deficit spending.

It’s also a transaction tax, which serves to make transactions more expensive and thereby reduce them. This reduces our real standard of living as it discourages specialization of labor and economies of scale as people tend to do more things themselves rather than do them for each other.


Posted in Inflation, Obama | 1 Comment »

Geithner- at best a case of innocent subversion.

Posted by WARREN MOSLER on 25th September 2009

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Appreciate it if anyone can get me a meeting with him.
This policy is a major threat to our standard of living, and he apparently doesn’t know it:

Geithner Sees G-20 Consensus, Supports Dollar’s Reserve Role

By Rebecca Christie

September 25 (Bloomberg) – Treasury Secretary Timothy Geithner said he sees a “strong consensus” among Group of 20 nations to reduce reliance on exports for growth and defended the dollar’s role as the world’s reserve currency.

“A strong dollar is very important in the United States,” Geithner said in response to a question at a press conference yesterday in Pittsburgh, where G-20 leaders began two days of talks.

Geithner predicted agreement on an Obama administration proposal to foster a global recovery that avoids lopsided flows of trade and investment. He said a higher U.S. savings rate this year is an “encouraging sign,” and he indicated that government support for markets will be withdrawn gradually.


Posted in Currencies | 7 Comments »

Julian Robertson chimes in

Posted by WARREN MOSLER on 25th September 2009

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No comment

US May Face ‘Armageddon’ If China, Japan Don’t Buy Debt

By: JeeYeon Park

Spetember 24 (News Associate) – The US is too dependent on Japan and China buying up the country’s debt and could face severe economic problems if that stops, Tiger Management founder and chairman Julian Robertson told CNBC.

“It’s almost Armageddon if the Japanese and Chinese don’t buy our debt,” Robertson said in an interview. “I don’t know where we could get the money. I think we’ve let ourselves get in a terrible situation and I think we ought to try and get out of it.”


Posted in Deficit, Government Spending | 2 Comments »

Mike Norman: The Greatest Wealth Transfer

Posted by WARREN MOSLER on 25th September 2009

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Mike Norman Economics

The Greatest Wealth Transfer…

Citigroup to scale back U.S. footprint; limit lending to wealthy

There is perhaps no greater trend emerging from the Obama Administration than the trend of wealth flowing to the top.

For a president that promised change and more equity for working people, this development is truly astonishing.

From Tarp to the forced bankruptcy of U.S. automakers to tariffs on tire imports from China to the Public Private Partnership initiative and above all…the complete absence of any middle class tax cut, this Administration has, either deliberately or unwittingly, engineered one of the greatest wealth transfers from the lower classes to the most wealthy.

This Citigroup story is just another example. The beleagured bank is being forced to pare back its mighty U.S. presence, where it served tens of millions of everyday Americans, including many small businesses, and now focus on lending money to the only ones who have any left: the wealthy.

Because the Administration, including the Federal Reserve, failed to understand the very nature of our own banking system–that commerical banks are already public/private partnerships and quasi-agents of the goverment–they were given support with huge strings attached when there shouldn’t have been any. Moreover, because the government has failed in its obligation to sustain employment and output (yes…OBLIGATION!) banks have no choice but to go where the money is.

This is a terrible, terrible, abrogation of government’s responsibility and worse, a weak and cowardly act by the president by going back on his promise to help working people.

There is plenty of history to show that large doses of government spending–broad and actual spending–are necessary to avoid economic collapse and, indeed, to sow the seeds for future long-term economic growth. A real leader would have overridden the wrong-headed advice of his political advisors and done what was necessary to restore jobs, incomes and a decent standard of living for all Americans, as promised, and not just the 1% at the top.


Posted in Fed, Obama | 1 Comment »

The Fed, interest rates, deficit spending, and loan growth

Posted by WARREN MOSLER on 22nd September 2009

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Loan growth is also to some degree a function of interest rates. Lower rates = lower loan growth due to the reduced compounding of interest for many borrowers.

Additionally the increased federal deficit spending is restoring income and savings of financial assets, reducing the nedd to borrow to sustain spending.

Fed Effort to Stoke Growth May Be Undermined by ‘Tight’ Credit

By Scott Lanman

Sept. 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

A Fed report released last week shows banks had $6.85 trillion of loans and leases outstanding to businesses and households as of Sept. 9, down for a fifth straight week and below the record $7.32 trillion in October 2008. Real estate loans, the biggest portion, stood at $3.79 trillion, up $7.5 billion from the prior week while down from a peak of $3.9 trillion.


Posted in Fed, Interest Rates | 6 Comments »

Ireland asset purchase proposal

Posted by WARREN MOSLER on 21st September 2009

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On Mon, Sep 21, 2009 at 7:38 AM, Greg wrote:

Hi Warren

What are your thoughts regarding the scheme in Ireland announced this past week whereby the government takes real estate assets from the big banks in return for bonds (at a discount implying some sort of bank subsidy) and whereby said banks can in turn repo those bonds at the ECB for cash?

Of course the devil will be in the details but it seems to me this will require all of us to rethink garlic belt sov. risk, the Euro, and the ECB if it comes to fruition.

Haven’t seen the details but reads to me like the govt is simply purchasing real estate assets?

That leads to the usual questions of pricing, etc. the proved unworkable in the US and probably a lot of other places.

Banks are already public/private partnerships with govt guaranteeing the deposits.

So there are several other things the govt might do to get to the same end.

For example, allow the banks to put the designated assets in segregated accounts with specified capital set aside for those assets, wherein losses that exceed that capital specified for the seg account are covered by the govt and not the rest of the banks capital.

That way the govt still functionally owns the assets it’s trying buy but doesn’t have the servicing and accounting and brokerage issues associated with an actual purchase by the cb. and the banks are fully regulated and supervised.

The US govt could have done same with the mbs it has bought for itself and saved itself the accounting nightmare and expense and substantial fees to brokers from buying those secs directly.

And, as you say, in the Eurozone this adds a risk to the national govt itself. So far it seems markets aren’t disposed to challenge their liquidity, and the Fed rescued them last year with the unlimited dollar swap lines (unsecured loans) to the ECB that totalled maybe 600 billion globally.


Posted in Uncategorized | No Comments »

Data Review

Posted by WARREN MOSLER on 17th September 2009

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Karim writes:



  • Initial down 12k to 545k
  • Continuing + Emergency + Extended up 161k


  • Starts up 0.2% in August with single family down 3%, first drop in this sector since Feb
  • Permits up 2.7% with single family down 0.2%, first drop in this sector since March

Philly Fed

  • Headline improves 10pts to 14.1, but details on the weak side (headline not a weighted avg of components)
  • Prices Paid less Prices Received, new orders, and number of employees all worsen. Improvement most notable in current shipments.


Posted in Daily, Employment, Fed, Housing | 1 Comment »

quick macro update

Posted by WARREN MOSLER on 16th September 2009

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Market functioning has finally returned, helped by the Fed slowly getting around to where it should have been even before all this started- lending unsecured to its banks, setting its target rate and letting quantity adjust to demand. It’s not technically lending unsecured, but instead went through a process of accepting more and varied collateral from the banks until the result was much the same as lending unsecured.

A couple of years back (has it been that long?) when CPI and inflation expectations were rising, the Fed said it was going to restore market function first, and then work on inflation. It’s taken them this long to restore market functioning (eventually implementing in some form the proposals I put forth back then regarding market functioning) and with the inflation threat subdued by the wide output gap it looks like they are on hold for a while, though they would probably like to move to a ‘more normal’ stance when it feels safe to do so. That would mean a smaller portfolio (not that it actually matters) and a modest ‘real rate of interest’ as a fed funds target is also based on their notion of how things work.

It is more obvious now that the automatic fiscal stabilizers did turn the tide around year end, as the great Mike Masters inventory liquidation came to an end, and the Obamaboom began. The ‘stimulus package’ wasn’t much, and wasn’t optimal for public purpose, but it wasn’t ‘nothing,’ and has been helping aggregate demand some as well, and will continue to do so. It has restored non govt incomes and savings of financial assets to at least ‘muddle through’ levels of modest GDP growth, and we are now also in the early stages of a housing recovery, but not enough to keep productivity gains from continuing to keep unemployment and excess capacity at elevated levels.

This also happens to be a good equity environment- enough demand for some top line growth, bottom line growth helped by downward pressures on compensation, and interest rates helping valuations as well. There will probably be ups and downs from here, but not the downs of last year.

There also doesn’t seem to be much public outrage over the unemployment rate, with GDP heading into positive territory. Expectations of what government can do are apparently low enough such that jobs being lost at a slower rate has been sufficient to increase public support of government policies.

The largest macro risk remains a government that doesn’t understand the monetary system and is therefore unlikely to make the appropriate fiscal adjustments should aggregate demand suddenly head south for any reason.

And here’s a new one, just when I thought I’d heard it all:

‘Black Swan’ Author Taleb Wants His Vote for Barack Obama Back

By Joe Schneider

Sept. 16 (Bloomberg)— U.S. PresidentBarack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems,Nassim Taleb, author of “The Black Swan,” told a group of business people in Toronto.

“I want my vote back,” Taleb, who said he voted for Obama, told the group.

The U.S. has three times the debt, relative to the country’s economic output, or gross domestic product, as it had in the 1980s, Taleb said. He blamed rising overconfidence around the world. U.S. Federal Reserve Chairman Ben Bernanke, who was appointed to a second term last month by Obama, contributed to that misperception, Taleb said.

“Bernanke thought the system was getting stable,” Taleb said, when it was on the verge of collapse last year.

Debt is a direct measure of overconfidence, he said. The national debt, according to the U.S. Debt Clock Web site, is at $11.8 trillion.

The nation must reduce its debt level and avoid “the moral sin” of converting private debt to public debt, he said.

“This is what I’m worried about,” Taleb said. “But no one has the guts to say let’s bite the bullet.”

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.


Posted in Deficit, Employment, Fed, GDP, Government Spending, Inflation | 6 Comments »

Proposals for the Banking System, Treasury, Fed, and FDIC (draft)

Posted by WARREN MOSLER on 16th September 2009

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Proposals for the Banking
System, Treasury, Fed, and FDIC (draft)


Posted in Banking, Fed, Government Spending, Mosler 2012, TREASURY, USA | 53 Comments »

Employment Chart

Posted by WARREN MOSLER on 15th September 2009

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Excellent presentation:

Job Voyager


Posted in Employment | 2 Comments »

King Comments on rate paid Bank Reserves

Posted by WARREN MOSLER on 15th September 2009

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Might be secretly worried about the relatively strong currency.

Many of them still think rates matter for the level of their currency even though the BOE research says they don’t matter.

>   (email exchange)
>   On Tue, Sep 15, 2009 at 5:34 AM, Dave wrote:
>   BOE King states that BoE will look at reducing deposit rate on reserves
>   Front end rallies, 1*1 at 2.565% currently, had traded as high as 2.68%
>   prior to announcement



Posted in CBs | No Comments »

NPR discussion

Posted by WARREN MOSLER on 15th September 2009

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>   (email exchange)
>   On Mon, Sep 14, 2009 at 10:45 AM, wrote:
>   By the way, you didn’t hear NPR this morning, but there was the usual hagiography
>   about how the Fed averted a Great Depression last year because it “created”
>   trillions of dollar to support the banking system.
>   But my understanding is that ONLY the Treasury creates money and the Fed simply
>   tries not very successful) to determine a price for the money that is created by
>   TSY.
>   When you look at it this way, the narrative changes considerably.


The Fed did loan to banks and act as broker of last resort between banks who had Fed funds and banks who needed them, but that should always be done in the normal course of business.

So I do give them credit for figuring out how to do what they were charged to do from inception in 1913, since Bernanke et al had to play the cards they were dealt.

But even now they haven’t figured out they should just trade Fed funds in unlimited quantities with member banks, at their target rate, and instead use an alphabet soup of programs to get that done indirectly.


Posted in CBs, Fed | 1 Comment »

Your thoughts on wall street remaining intact

Posted by WARREN MOSLER on 15th September 2009

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A Year Later, Little Change on Wall St.

As previously suggested, wealth is flowing to the top from the bottom as gdp grows some, unemployment climbs, and wages languish:

Despite the predictions last year about pay cuts, those bonuses appear secure. Kian Abouhossein, an analyst at J.P. Morgan in London, predicted this week that eight major American and European banks would pay the 141,000 employees in their investment banking units $77 billion in 2011 — about $543,000 per worker, not far from the 2007 peak — even after minor regulatory changes are adopted.

>    Can the mortgage fraud environment return?

Lenders/investors will be smarter for a while, best guess. But always ripe for the next fraud.


Posted in Banking, Credit | 3 Comments »