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>   
>   (email exchange)
>   
>   On Sun, Nov 15, 2009 at 12:12 AM, Roger > wrote:
>   
>   One can almost imagine the Rubin camp is trying to head off a
>   possible move to follow logic – by baffling people with bull.
>   Coming from the NYFed, this paper makes little sense. Could they really have a
>   manipulative agenda?
>   

No, not at all. This just somehow slipped through. They rejected full Ricardian equivalence years ago.

Ricardian equivalence states that a tax cut won’t get spent because people will ‘know’ it just means higher taxes later as they ‘know’ the federal budget ultimately has to be balanced, and therefore they will simply set aside any payroll tax holiday money in a savings account and not spend it.

This means, for example, that if you are behind on your mtg payment and your take home pay goes up due to a tax cut you will put that extra pay in a savings account and not bring your mtg up to date.

As I said, the Fed rejected all this many years ago.

I do agree the first take home pay increases received from a payroll tax holiday would largely be used to make mtg payments to avoid foreclosures, etc., and pay off other outstanding obligations, all of which is called ‘adding to savings’ which is what we need to happen in many cases before consumption can resume. And it also ‘fixes’ the banking system by stemming delinquencies and defaults.

And the longer we wait the deeper the hole we need to get out of.

>   
>   How does one call the Fed economists on such bull?
>   

It would take a letter from a recognized scholar precisely pointing out the errors.

Meanwhile, unfortunately, it’s delaying consideration of what’s needed to restore output and employment.

One last thing-

In the neo classic (math) model, which doesn’t recognize the currency itself as a public monopoly, prices and wages instantly adjust such that there is never any unemployment.

The ‘New Keynesian’ school of thought pretty much agrees, except that they believe we get unemployment like what we have now because prices (and wages) are slow to adjust. So even they believe that we will gradually ‘automatically’ return to full employment.

Keynes, however, argued that if elevated ‘savings desires’ persist low aggregate demand and high levels high unemployment can persist even if prices and wages continue to fall, and it all can only be reversed by deficit spending to restore demand.

In this administration the ‘New Keynesians’ and neo classics are clearly winning, as they are seeing forecasts of slow, gradual, long term improvement in output and employment which fit with their understanding that this is a how the adjustment works, and that prices and wages will slowly adjust and automatically return us to full employment. The reason it takes so long is that prices and wages are ‘sticky’ and slow to adjust.

They are not willing to use the likes of a payroll tax holiday to restore aggregate demand because the believe that would be ‘borrowing from china and leaving our children that debt to pay’ and all that gold standard nonsense. Further to that point, they believe we’ve already done too much of that, though probably a necessary evil due to the circumstances, and we are rising falling into the ‘debt trap’ and all the rest of that type of fiscal nonsense.

Hence the recent pronouncements from the Obama administration proposing 5% across the board cuts in federal spending for next year.

As well as pronouncements that he wants less consumption, more savings, and more exports, which means lower standards of living in the face of the greatest and rapidly growing abundance of real goods and services in history.

>   
>   Assume, assume, assume – they obviously assume too much, which is no
>   way to direct national policy.
>   

They are relatively intelligent people who happen to be wrong in their basic assumptions, and they have near universal academic support. The few academics who do understand the monetary system (less then 30) are called ‘heterodox’ vs ‘orthodox’ and not taken seriously.

I call it a massive case of what Galbraith called ‘innocent fraud.’

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Just read through it quickly.

Assumptions:

First, they use a full Ricardian assumption- lower taxes now ‘price in’ the higher taxes later to keep the budget balanced long term

Second, because real rates go up as nominal rates hit zero expectations are for lower prices and therefore spending goes down.

Third, as real wages go up with payroll tax cuts, the desire to work is assumed to go higher, putting downward pressure on wages and costs, reducing prices on the supply side, also raising real rates as the nominal rate can’t go any lower.

Without the Ricardian assumption it all comes apart, best i can tell so far.

And most economists reject that assumption as it means you could cut taxes all you want with no effect as people don’t spend in anticipation of higher taxes later. So that argues for cutting taxes to 0, since it won’t change spending.

So what they do is break the world into Ricardian and non Ricardian agents, and then try to determine effects of deficit changes, etc.

It gets very silly. Especially when recognizing there is no ‘natural force’ that balances the budget over time, while there are ‘natural forces’ (further influenced by institutional structure) that promote the accumulation of net financial assets in the non govt sectors which can only be supplied by govt deficit spending.

It comes from not understanding the currency itself is a (simple) public monopoly, and not just a numeraire in a relative value new Keynesian model.

A new analytical low for the cycle and a black mark for the NY Fed:

Link

Federal Reserve Bank of New York
Staff Reports
What Fiscal Policy Is Effective at Zero Interest Rates?
Gauti B. Eggertsson

Staff Report no. 402
November 2009

Abstract
Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.

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The possibility of announcing an exit from Afghanistan with the funds saved to pay down the deficit would be extremely popular short term and contribute to lower GDP and higher levels of unemployment over the medium term.

Those shorting dollars are selling them to foreign central banks who want their currencies weaker vs the dollar. This means it is unlikely they ever sell their dollars.

Float to lower crude prices and modestly declining us gasoline consumption would threaten the viability of the dollar shorts.

Much of this has been a reaction to the fed building its portfolio, which many presume to be an inflationary act of ‘printing money’ which it is, in fact, not.

Dollar Overwhelms Central Banks From Brazil to Korea

By Oliver Biggadike and Matthew Brown

Nov. 12 (Bloomberg) — Brazil, South Korea and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive as the demand for their financial assets, driven by the slumping dollar, is proving more than central banks can handle.

South Korea Deputy Finance Minister Shin Je Yoon said yesterday the country will leave the level of its currency to market forces after adding about $63 billion to its foreign exchange reserves this year to slow the appreciation of the won. Chile Finance Minister Andres Velasco said the same day that lawmakers approved an increase in local debt sales to finance spending, a move that will allow the government to keep more of its dollar-based savings overseas and slow the peso’s rally.

Governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback’s slide and keep their currencies from appreciating too fast and making their exports too expensive. Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.

“It looked for a while like the Bank of Korea was trying to defend 1,200, but it looks like they’ve given up and are just trying to slow the advance,” said Collin Crownover, head of currency management in London at State Street Global Advisors, which has $1.7 trillion under management.

The won, after falling 44 percent against the dollar in March 2009 from its 10-year high of 899.69 to the dollar in October 2007, is now headed for its biggest annual rally since a 15 percent gain in 2004. It traded today at 1,160.32, up 8.6 percent since the end of December.

‘Suffered Tremendously’

Brazil’s real is up 1.6 percent this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

“We have to be careful that our exchange rate doesn’t appreciate too much as to deindustrialize the country,” Marcos Verissimo, chief of staff at Brazil’s state development bank known as BNDES, said yesterday at a conference in Sao Paulo. “The capital goods industry has suffered tremendously.”

Russia’s Bank Rossii increased its foreign reserves by 15 percent since March 13 as it sold rubles in an attempt to cap the currency’s gain. Even so, the surge in commodities prices this year means Russia’s steps to fight a stronger ruble may “not be productive,” the International Monetary Fund said yesterday. Energy, including oil and natural gas, accounted for 69.5 percent of exports to countries outside the former Soviet Union and the Baltic states in the first nine months, according the Federal Customs Service.

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It’s like having the job of driving the bus and fixing it when it breaks, and much of the election was about who can fix the broken bus and how they are going to do it.

This bus can be immediately fixed by anyone who knows how it actually works and what it needs to get rolling again.

We suffer from a lack of demand which is easily remedied by an immediate fiscal response.

Quantitative easing, for example, is at best like installing a second battery to give the car more power. It completely misses the point.

He didn’t just show up for the job-

He volunteered for the job insisting he could fix the economy.

He pushed the TARP (as a Senator and a candidate) not recognizing giving capital to banks was nothing more than regulator forbearance and instead believed it was deficit spending.

His stimulus package came after the automatic stabilizers hiked the deficit to muddle through levels and has proven far too small to keep millions from losing their jobs and their homes.

And now the talk has turned to deficit reduction after proclaiming on multiple occasions “the US government is out of money”

which is like moving forward with the engine at idle speed not understanding that his foot on the brake is keeping the bus from getting up to cruising speed.

Obama and his administration is in this way over their heads.

Unfortunately, the mainstream opposition is probably worse.

Risking overstatement, McCain’s proposal was to not have a bus driver.

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Keeps getting worse, as we think we need them and continue to kowtow to their demands:

Obama Meets Asian Bankers Who May Call His Loan: William Pesek

By Deborah Solomon and Jonathan Weisman

Nov. 12 (Bloomberg) — Global recession. Free trade. Security. Climate change. Afghanistan. Iraq. North Korea.

Barack Obama sure has lots to discuss on his maiden voyage to Asia as U.S. president. Yet all this is just conversation compared with the real issue on Asia’s mind: a wobbly dollar that’s putting the region’s money at risk.

Think of this trip as a visit to America’s banker, and an unpleasant one. Asia wants assurances that the U.S. can repay its fast-mounting debt and prevent a dollar crash. The reality dawning on Asia is that Obama can’t offer them such a pledge — not with U.S. borrowing so out of control.

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Analogy-

You own a house with a mtg on it.
You sell your house and give the money to the bank at the closing.
The bank officers have a meeting and decide to use that money to pay off the mtg.

Brilliant!!!!!!!!!!!!!!!!!!!!!!!!!!

White House Aims to Cut Deficit With TARP Cash

By Deborah Solomon and Jonathan Weisman

Nov. 12 (Bloomberg) — The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal
responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter.

The funds do not add to the deficit until after they are spent

This is total accounting nonsense.

A remake of the Clinton plan to have a trust fund for the deficit, which never made it past the empty rhetoric stage.

It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

A $210 billion surplus in TARP funding could be used to reduced the U.S.’s towering national deficit. WSJ’s Deborah Solomon says the move follows criticism of the Obama administration’s approach to debt. The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation’s mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

The White House is in the early stages of considering what bigger moves it might make for next year’s budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President’s Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the “tax and spend” label that has bedeviled Democrats, according to administration and congressional officials.

The possibility of announcing an exit from Afghanistan with the funds saved to pay down the deficit would be extremely popular short term and contribute to lower GDP and higher levels of unemployment over the medium term.

The administration is constrained in tackling the mounting deficit, since raising taxes or slashing spending could stunt economic growth. Administration officials say the Obama economic team is especially concerned that rapid deficit reduction could hurt the economy.

On the $700 billion Troubled Asset Relief Program, the administration is considering a change that may appear to improve the fiscal situation. Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued.

This is true, but TARP ‘spending’ on bank capital is regulatory forbearance and not ‘spending’ so it shouldn’t be ‘counted’ as deficit spending in any case.

The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits.

The Treasury Department said about $210 billion in TARP funds remains unspent, including about $70 billion returned from financial institutions. A further $50 billion is expected to be repaid in the next 12 to 18 months.

Budget experts said committing some TARP funds toward debt reduction could help calm concerns about the size and intent of the program. “I don’t necessarily want them to pull back in a huge way, because there’s a lot of uncertainty, but right now what we’ve got could turn into a $700 billion slush fund” for Congress, said Douglas Elliott, a fellow with the Brookings Institution, a liberal think tank.

The move could buy the Treasury Department time before it hits the so-called debt ceiling, which limits the amount of money the U.S. can borrow. Already, some members of Congress have said they won’t approve an increase in the $12.1 trillion debt cap unless efforts to reduce the deficit are included.

Senate Budget Committee Chairman Kent Conrad, the North Dakota Democrat who is proposing a bipartisan commission, along with Sen. Judd Gregg(R., N.H.), to examine taxes, said he won’t vote for raising the debt limit unless Congress and the administration start talking about cutting spending and increasing taxes.

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He may be right, but for the wrong reason.
Central Banks buying securities and growing their portfolios of financial assets, aka ‘quantitative easing, has nothing to do with inflation or aggregate demand.

However, direct Central Bank purchase of gold do amount to what I call ‘off balance sheet deficit spending’ which does support the price of whatever they buy and can go on indefinitely as a function of political will:

Gold Price Won’t Drop Below $1,000 an Ounce Again, Faber Says

By Zijing Wu

Nov. 11 (Bloomberg) — Gold won’t fall below $1,000 an ounce again after rising 27 percent this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.

The precious metal rose to all-time highs in New York and London today as the dollar weakened. The Dollar Index, a gauge of value against six other currencies, has declined 7.9 percent this year and today fell to a 15-month low. News last week of bullion purchases by the Indian and Sri Lankan governments raised speculation that other countries would follow suit.

“We will not see less than the $1,000 level again,” Faber said at a conference today in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

China will keep buying resources including gold, he said.

“Its demand for commodities will go up and up and up,” he added. “Emerging economies will grow at the fastest pace.”

In contrast, Western countries will be lucky to avoid economic contraction, while the Federal Reserve will maintain interest rates near zero percent, he said.

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It is the hangover from the budget surpluses of the late 90′s that drove us to use private sector credit to support demand, first by the dot.com phase of funding impossible business plans, and, after the 2003 proactive deficit policies, the sub prime fraud kicked in with a last burst of private sector credit expansion that pushed it well beyond the limits of the underlying incomes to support it.

The tragedy is how easy it would have been to avoid the entire rise in unemployment, and how easy it is to fix it now:

Payroll tax holiday
Per capita revenue distribution for the states
$8/hr job for anyone willing and able to work

On Wed, Nov 11, 2009 at 12:48 PM, Russell Huntley wrote:

Rosenberg piece … appears he is using Soss’s analysis.

There are serious structural issues undermining the U.S. labour market as
companies continue to adjust their order books, production schedules and
staffing requirements to a semi-permanently impaired credit backdrop. The
bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market that need to be discussed:

• For the first time in at least six decades, private sector employment is
negative on a 10-year basis (first turned negative in August). Hence, the
changes are not merely cyclical or short-term in nature. Many of the jobs
created between the 2001 and 2008 recessions were related either directly
or indirectly to the parabolic extension of credit.

• During this two-year recession, employment has declined a record 8 million.
Even in percent terms, this is a record in the post-WWII experience.

• Looking at the split, there were 11 million full-time jobs lost (usually we see
three million in a garden-variety recession), of which three million were shifted
into part-time work.

• There are now a record 9.3 million Americans working part-time because they
have no choice. In past recessions, that number rarely got much above six
million.

• The workweek was sliced this cycle from 33.8 hours to a record low 33.0
hours — the labour input equivalent is another 2.4 million jobs lost. So when
you count in hours, it’s as if we lost over 10 million jobs this cycle.
Remarkable.

• The number of permanent job losses this cycle (unemployed but not for
temporary purposes) increased by a record 6.2 million. In fact, well over half
of the total unemployment pool of 15.7 million was generated just in this past
recession alone. A record 5.6 million people have been unemployed for at
least six months (this number rarely gets above two million in a normal
downturn) which is nearly a 36% share of the jobless ranks (again, this rarely
gets above 20%). Both the median (18.7 weeks) and average (26.9 weeks)
duration of unemployment have risen to all-time highs.

• The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labour demand does begin to pick up. Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.

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Interview Link

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I agree, and the deficit of consequence isn’t that high as I think that figure includes the TARP funds
which were a form of regulatory forbearance and not spending.

Unfortunately, elsewhere he falls short in explaining why deficit spending doesn’t have the downside risks the mainstream attributes to it.

Send him a copy of the 7 deadly innocent frauds draft for comment? (attached)

Richard Koo: a personal view of the macroeconomy

US a mirror image of Japan 15 years ago

In the last two weeks, I made my annual fact-finding mission to
Washington and also spent time in Boston and San Francisco. What I
witnessed was very reminiscent of the situation in Japan 15 years ago:
people were latching on to isolated fragments of good economic news as
evidence of recovery while ignoring the steady deterioration in the real
economy.

In addition to meetings with officials from the Federal Reserve and the
White House, I had the opportunity to talk with various groups at the
Hill including two Congresspersons over lunch.

Although there have been signs of improvement in the real economy,
particularly in production, the problems in the jobs picture are
underscored by the unemployment rate’s rise into double digits.

And on a personal level, the San Francisco bank that my parents
patronized for many years was shut down by the FDIC last Friday. To
prevent panic, the bank opened for business as usual on Saturday under
the name of another lender. This event added a personal dimension to the
crisis for me.

Budget deficit concerns make new fiscal stimulus all but impossible

One issue of particular concern on this trip was that people seem to be
paying little attention to the economic impact of the Obama
administration’s fiscal stimulus and instead are focusing entirely on
the size of the resulting budget deficit.

With the government running a deficit equal to 10% of nominal GDP, more
people are looking at the continued weakness in the economy:
particularly in employment: and drawing the conclusion that the
administration’s policies are ineffective and should be discontinued as
soon as possible. This view is so strong that additional fiscal stimulus
is seen as being almost impossible to implement today.

This pattern mirrors events in Japan 15 years ago. The more the
government draws on fiscal stimulus to avert a crisis, the more
criticism it receives.

People are giving no thought to the economic consequences if the
government had not responded to the $10trn loss in national wealth (in
the form of housing and stock portfolios) with fiscal stimulus. Instead,
they focus entirely on the fact that the economy has yet to improve
despite $787bn in expenditures.

In Japan, fiscal spending succeeded in keeping GDP above bubble-peak
levels despite the loss of Y1,500trn in national wealth, or three years
of GDP, from real estate and stocks alone. But because disaster was
averted, people forgot they were in the midst of a crisis and rushed to
criticize the size of the resulting fiscal deficits.

Their criticism prevented the Japanese government from providing a
steady stream of stimulus. Instead, it was forced to adopt a stop-and-go
policy of intermittent stimulus: each time a spending package expired,
the economy would weaken, forcing the government to quickly implement
the next round of stimulus. That is the main reason why the recession
lasted 15 years. And the mood in Washington today is very similar.

R. Koo

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A modest rise in consumption for next year means the Saudis/OPEC remain firmly in control of price.

Global oil consumption is likely to average 86.1 million barrels a day in 2010, the IEA said in an Oct. 9 monthly report, raising next year’s forecast for a third consecutive month. The agency expects demand of 84.6 million barrels a day this year. The IEA’s next monthly report will be issued on Nov. 12.

It will be up to members of the Organization of Petroleum Exporting Countries to satisfy the bulk of the world’s increasing need for oil as conventional production in countries outside the group peaks next year, the IEA said.

“Most of the increase in output would need to come from OPEC countries, which hold the bulk of remaining recoverable conventional oil resources,” the agency said in the report.

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Interesting turn of events.

China to Re-Export Copper as Stockpiles Mount, Xi’an Maike Says

Nov. 10 (Bloomberg) — China, the top copper user, holds as much as 350,000 metric tons in duty-free warehouses and the metal may be re-exported as supplies outpace demand, according to Xi’an Maike MetalInternational Group.

“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The
company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.

   
Copper, used in pipes and wires, has more than doubled in London this year as China’s 4 trillion yuan ($586 billion) stimulus spending,
increased state stockpiling and a lack of scrap material boosted imports to a record. That’s helped to drive Chinese prices below London’s sinceat least July.

Xi’an Maike has had to re-route some bonded copper to London Metal Exchange warehouses in South Korea because the company was unable to find buyers in China, said Luo, who spoke yesterday in Shanghai. The effect of the stimulus package was wearing off and local scrap supply was improving, he said.

   
Luo’s estimate of the bonded-zone stockpiles compares with 60,000 tons by Macquarie Group Ltd.  in July. It’s also more than triple the
inventory in Shanghai Futures Exchange warehouses, which stood at 104,275 tons as of the week of Nov. 2. A bonded zone holds imported goods before duty has been paid.

                     Copper’s Rally

Three-month copper in London traded today at $6,548 a ton compared with $3,070 at the end of last year. Futures in Shanghai have also more than doubled this year to a high of 51,580 yuan ($7,554) a ton today.

   
Still, buying the metal from overseas to sell in the Chinese market has not been profitable since at least July, according to Bloomberg
calculations. Prices in Shanghai were more than 1,300 yuan a ton lower than London yesterday, after accounting for China’s 17 percent value
added tax.

In addition to the bonded-zone stockpiles, China may also hold 150,000 tons in the Shanghai area, including in exchange- monitored
warehouses; 235,000 tons at the State Reserve Bureau, which maintains government holdings; and 200,000 tons with fabricators and private
investors, Luo said.

Refined-copper exports by China were 10,705 tons in September, 70 percent more than a month ago and the highest this year, according to data by the Beijing-based customs office. Refined-copper imports in the first nine months were 2.58 million tons, 165 percent more than a year ago.

Xi’an Maike’s inbound shipments of refined copper may total about 400,000 tons this year, ranking among the top three importers by volume, according to Luo. The country’s imports of refined copper may halve to 1.6 million tons in 2010 from an estimated 3 million tons this year, he said.

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Headlines all negative today.  

Soft prices indicate soft demand.

Weakness and calls for deficit cuts heightens stresses on vulnerable national govt finances.

The eurozone remains the one part of the world with systemic risk built into its institutional structure.  

Highlights:
German October Consumer Prices Unexpectedly Decline
German Investor Confidence Drops in November on Weaker Outlook
Germany to Observe EU Call for Deficit Cuts, Schaeuble Says
French Economic Recovery Probably Strengthened in Third Quarter
Italian Industrial Output Fell More Than Forecast in September
EU to Give Spain Extra Year to Trim Budget Deficit, ABC Reports

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Translation:  China threatens to liquidate it’s dollars to keep the dollar weak so China can peg to it and increase global exports??? 

China hopes U.S. keeps deficit to appropriate size

(Reuters) – China hopes that the United States will keep its deficit to an appropriate size to ensure basic stability in the U.S. dollar exchange rate, Chinese Premier Wen Jiabao said on Sunday.

“We have seen some signs of recovery in the U.S. economy … I hope that as the largest economy in the world and an issuing country of a major reserve currency, the United States will effectively discharge its responsibilities,” Wen told a news conference in Egypt.

“Most importantly, we hope the United States will keep an appropriate size to its deficit so that there will be basic stability in the exchange rate, and that is conducive to stability and the recovery of the global economy,” he added.

The premier had expressed concern in March that massive U.S. deficit spending and near-zero interest rates would erode the value of China’s huge U.S. bond holdings.

China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its more than $2 trillion stockpile of foreign exchange reserves, the world’s largest, in dollar assets.

“I follow very closely Chinese holdings of U.S. assets because that constitutes a very important part of our national wealth. Our consistent principle when it comes to foreign exchange reserves is to ensure the safety, liquidity and good value of the reserves,” Wen said.

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Looks like it all comes down to whether Goldman violated the law by not disclosing what it was obligated to disclose.

There is no question the institutional structure that leads to this type of activity is flawed in that it doesn’t work for public purpose.
In fact, large elements of the financial sector do not serve public purpose.

Much of the financial sector is set up, by law to function as a casino, where each bet necessarily has a long and a short, presumably towards so further public purpose to allow public/private partnerships including banks, pension funds, and insurance companies to participate.

Unfortunately it’s never discussed at this fundamental level in the public debate, which is one of the reasons I’m running for President- to bring that debate back to public purpose- the fundamental behind government and the institutional structure:

How Goldman secretly bet on the U.S. housing crash

By Greg Gordon

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

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Karim writes:

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I proposed this when the crisis first hit. Too late for millions of people in thousands of neighborhoods:

“Fannie Mae, the country’s largest mortgage holder, announced today that it is adopting a version of a “right to rent” policy under which foreclosed homeowners will be allowed to stay in their home paying the market rent. Under Fannie Mae’s Deed for Lease Program, foreclosed homeowners will be offered a lease of up to one year, in exchange for turning over the deed to their home. The lease will be at the prevailing market rent.”

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Lower labor costs for the same sales (top lines were relatively flat) mean revenue is being shifted from compensation to profits, which carry a much lower propensity to consume than wages.

This reduces aggregate demand, which is a good thing, as it means, for example, we can cut taxes to sustain incomes, sales, output, and employment.

Unfortunately, our leaders don’t understand the monetary system and take no constructive action in the name of ‘fiscal responsibility,’ while the main stream forecasts project unemployment to linger around the 10% level for an extended period of time:

The Labor Department said non-farm productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003. Productivity grew at a 6.9 percent pace in the April-June period.

Hours worked fell at a 5 percent rate in the third quarter, the Labor Department said. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell 5.2 percent after declining 6.1 percent in the second quarter. Analysts had expected unit labor costs to fall 4 percent in the third quarter. Compensation per hour rose at a 3.8 percent pace and, adjusted for inflation, was up 0.2 percent.

Compared with the July-September quarter of 2008, non-farm productivity rose at a 4.3 percent rate. Unit labor costs fell 3.6 percent year-on-year.

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A bit like the today’s economic policy drama

Except that at the end, the Greeks come to a constructive policy solution. We’re more like the Germans.

Didn’t Archimedes jump out of the tub and invent the vacuum cleaner?

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He’s correct in a world that doesn’t know how to use fiscal adjustments to sustain demand.

If we had had a full payroll tax holiday and per capita revenue sharing for the states introduced immediately after the real economy started experiencing the drop in demand associated with the Lehman failure and the Masters commodity liquidation, and all along had fed funded $8/hr jobs for anyone willing and able to work, the real economy would likely not have sustained anywhere near the damage it did. Unemployment may have risen a percent or so, and the economy would have quickly recovered.

And no one outside of investors caught with bad investments would have much cared about the financial crisis.

As long as the real economy is sustained, any financial crisis is far less of a concern- 1987, 1998, Enron, etc.

Narrow banking is not the answer

By Charles Goodhart

The proponents of narrow banking focus, almost entirely, on the liability side of banks’ balance sheets, and their concern relates to the need to protect retail depositors and the payments system. While this concern is entirely valid, it has been notable in the recent crisis that virtually no retail depositors lost anything, and the payment systems continued at all times to work perfectly. The crisis was not much about that, and policies served to protect these key elements satisfactorily.

The key problem that developed, and to some large extent remains, is that the fragility was experienced in the availability of credit to the real economy, companies and households. The modern economy cannot do without credit, and the need to maintain credit flows has been uppermost in the minds of the authorities.

Credit can be replace by income, and with income restored and sustained, credit quickly follows. Unfortunately, modern governments lack the understanding of their monetary systems to adjust incomes through counter cyclical fiscal policy.

The narrow banking proposal would shift virtually all such credit flows out of narrow banking into those parts of the financial system outside the narrow banking boundary, because the narrow banks would be required to invest in safe assets. So had a narrow banking system been in place, the crisis would have been even worse, with a virtually complete cessation of credit flows to the real economy.

Banks are public private partnerships implemented presumably to serve public purpose

‘Narrow banking’ can include bank lending for home mortgages, automobiles, credit cards, and any other assets deemed to suit public purpose to help isolate those sectors from lender related issues.

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