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

Archive for January, 2010

Richard Blumenthal on Obama’s speech

Posted by WARREN MOSLER on 29th January 2010


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I respectfully do not agree with his prescription to ‘protect our economic future.’

“I welcome the President’s acknowledgement of the economic pain felt widely and deeply and look forward to reviewing his plans to help middle class Americans, who are still hurting economically. We must enable Americans to find and keep good jobs with fair pay. And, to protect our economic future, we need vigorous, sustained fiscal discipline that enables deficit cutting.”


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Posted in Government Spending, Political | 2 Comments »

Inflation in China?

Posted by WARREN MOSLER on 29th January 2010


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The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.

And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.

An early warning might be a shrinking of the size of the premium in the currency forwards.

It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.


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Posted in China, Inflation | 3 Comments »

the President’s speech and markets

Posted by WARREN MOSLER on 29th January 2010


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The speech made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road. The spending freeze will pay half of it over time, and the rest from less specified sources that included tax increases for people making over 250,000, banks, etc. The health care plan is also supposed to reduce the deficit and paygo may be back.

And no additional fiscal relaxation of consequence apart from the current jobs bill working its way through congress.

The jobs initiatives mentioned were minor.

And rather than come up with a way for congressman inherently uncooperative due to the current institutional structure, there was simply a call for them to somehow act in the public interest.

So it looks like the economy is on its own for the most part, with an agonizingly slow and irregular recovery, and neither side coming up with substantially better ideas.

This isn’t a bad environment for stocks, as there’s nothing to suggest negative earnings shocks, and productivity gains can keep supporting at least modest earnings growth, and high unemployment helps keep down costs, and helps keep interest rates low which helps valuations.

The announced export push would be a negative for our standard of living and real terms of trade, but pretty good for stocks as well.

And clearly there’s nothing more the Fed can do, as it’s becoming increasingly clear the moves they have already made have had no positive impact on aggregate demand. They have only restored ‘market functioning.’

Removing some of their liquidity measures does mean there’s again a chance the pressures will appear in libor settings if something starts shaking the tree.

Like Greece, or Iran, or something like that.

Each time the President speaks I’m hoping for some meaningful new ideas but have yet to hear any.

But, again, not a bad environment for stocks, and interest rate forwards continue to look reasonably cheap as well, particularly as concerns about QE and 0 rates as causes of inflation subside.


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Posted in Banking, Economic Releases, Employment, Government Spending | 5 Comments »

Tea Party Plan for Dems- Cut to the Front with Tax Cuts

Posted by WARREN MOSLER on 28th January 2010


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Tea Party Plan for Democrats — Cut to the Front with Tax Cuts

At Saturday’s Tea Party conference in Dallas I’ll be outlining how Tea Party Democrats can run against Obama administration policies that are counter to both Tea Party and traditional Democratic values. It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. And who’s benefiting? Not the millions who voted Democratic who are losing their jobs and their homes. And with GDP now moving higher while unemployment rises, all that additional wealth is flowing up to the top. This Democratic President and Congress was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. Unfortunately, the so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works, and their limited vision has limited the range of policy choice. The result has been a monumental economic and social disaster caused by an obvious shortage of aggregate demand. The spending power needed to make mortgage payments, car payments, and do a bit of shopping- all of which would fix the economy and end the financial crisis- just isn’t there.

The answer is a full payroll tax holiday, where the US Treasury would make all FICA payments for both employees and employers that regressively remove 15% of every pay check from dollar one up to $106,800 of income. The take home pay of a husband and wife with a combined income of $100,000 per year would increase by over $650 a month, and quickly restore output and employment. Rather than funding the banks from the top down with an improbable trickle down theory that would have made Reagan blush, this tax cut restores the incomes necessary to support all economic activity from the bottom up. Instead of funding the financial sector with $trillions, the payroll tax holiday instead simply stops taking $trillions away from people working for a living.

Unfortunately, the Democratic elite has been not only against this kind of tax cut, even though it is a tax so regressive that no self respecting Democrat should tolerate for a single moment, because they think the Federal Government has to actually get revenue to be able to spend. However, that anachronistic gold standard reality has long been replace by our current, non convertible currency regime and floating exchange rate policy. Chairman Bernanke told Congressman Pelley exactly how the Federal Government spends today last May:

(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Our govt has only one way to spend- they ‘mark up’ numbers in bank accounts. The funds don’t ‘come from’ anywhere any more than the 6 points for a touchdown posted on scoreboard at a football game ‘come from’ anywhere. Nor does govt. get anything when it taxes- the IRS just changes numbers down in our bank accounts.

The fact is, the US Government never has nor doesn’t have dollars. It’s the scorekeeper for the dollar. It just changes numbers in bank accounts.

So why tax? To regulate aggregate demand. Taxation is the thermostat. When the economy is too hot, raise taxes to cool it down. When it’s too cold, like it surely is today, a payroll tax holiday will warm it back up to operating temperature.

The Democratic elite have it wrong and their wrongheaded ways are doing serious damage to the US economy and the people struggling under their failed economic agenda. And their latest moves towards what they call ‘fiscal responsibility’ will only cut demand further and make things worse.

Tea Party Democrats can lead the way towards true fiscal responsibility, which means setting taxes at the right level needed to sustain output and employment. And today that means a full payroll tax holiday.


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Posted in Banking, Deficit, Employment, GDP, Government Spending, Obama, Political | 38 Comments »

China bank halts roll-over of some loans

Posted by WARREN MOSLER on 27th January 2010


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Lending expansion often follows inflation, as higher asset prices and higher incomes support larger loan balances.

Cutting lending as this article implies can set off downward spirals and rising unemployment if domestic demand isn’t somehow supported by
enhancing consumer incomes.

3-Top China bank ICBC halts roll-over of some loans

ICBC says lending pace has slowed at end of January

* Latest signal of tightening that may rein in growth

* Official newspaper says some banks have recalled loans

* Chinese regulator renews demand for even pace of lending


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Posted in Banking, China | 4 Comments »

Fed transparency

Posted by WARREN MOSLER on 27th January 2010


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Zaid Reply:
January 27th, 2010 at 4:08 am

Hi Tom,

I had a different read on this whole transparency issue. If Bernanke is taking a lesson from the 1930s, one event that made the the whole banking system shut down was the publication of the names of banks that had received loans from the Reconstruction Finance Corporation. That happened in January 1933. In the weeks following the publication, there were many bank runs on the banks that were perceived as being weak by the public. In March, the whole banking system was shut down by Executive Order… and well, the rest is history.

I don’t mean to imply that Bernanke’s worries are warranted. They shouldn’t be if the Fed lends in unlimited quantities to meet withdrawals by the public, but then again, we already know how much he really knows about how the system really operates under a non-convertible floating exchange rate regime.


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Posted in Fed | 1 Comment »

Goldman Sachs trying to broker Greek bonds to China

Posted by WARREN MOSLER on 27th January 2010


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I went to high school with Chris Powell where he was a good friend of mine, then lost touch.
We’ve had a few emails discussing GATA. Seems their beef is that the Fed is conspiring to keep the price of gold down, which wrongly hurts the GATA supporters.
Didn’t make a lot of sense to me, but whatever.

Regarding China and the euro-

Note China already owns some Greek bonds, highlighted below?

I was discussing this a while back when China was ‘diversifying reserves’ in that one of the problems with the buying the euro is you have to take national govt credit risk, as there is nothing equivalent to the ‘federal’ securities of the other nations of the world with non convertible currencies where the issuer of the currency is your counter party.

Also, when the likes of China stops buying, say, the $US or the yen, it’s not a credit event for the US like it is when they stop buying the euro, where the national govt’s solvency is a function of their ability to sell their securities.

So the lack of euro buying by sovereigns who were willing to take national govt credit risk puts the entire eurozone at risk of a liquidity crisis beginning with its ‘weakest link.’ Hence the Greek ‘road trips’ to China, which do make sense, in contrast to the Obama/Clinton/Geithner road trips to China which reinforce the notion that they don’t understand the monetary system.

I’ve also passed along the idea that if Greek bonds were to have default provisions that allowed them to be used to pay Greek taxes in the event of default it should lower their interest rates. Don’t know if that got anywhere- no way for me to check.

Goldman Sachs trying to broker Greek bonds to China

Athens Invites Beijing to Buy Bonds

By Kerin Hope and Jamil Anderlini

Link

Greece is wooing China to buy up to E25 billion of government bonds, a move that underlines Beijing’s growing financial power, as Athens struggles to fund soaring public debt.

Goldman Sachs, the US investment bank, has been promoting a Greek bond sale to Beijing and the State Administration of Foreign Exchange (SAFE), which manages China’s $2,400 billion foreign exchange reserves, said people familiar with the issue.

Gary Cohn, Goldman Sachs chief operating officer, has made two trips to Athens — last November and this month — to meet George Papandreou, prime minister, and senior officials.

Beijing has not agreed to such a purchase. Meanwhile, Athens has rejected a suggestion that a Chinese bank should acquire a strategic stake in National Bank of Greece, the country’s flagship commercial lender, according to officials contacted by the Financial Times.

But a more modest deal of about E5 billion-E10 billion ($7 billion-$14 billion) appeared possible after Mr Cohn’s second trip to Athens, officials said on Tuesday.

George Papaconstantinou, finance minister, told the FT he would visit China on a road show next month, but “no target is set” for a debt placement.

China’s foreign exchange reserves grew $130 billion in the last quarter of 2009 alone. But people close to Safe said China already held a “significant amount” of Greek debt and was wary of adding to that.

A senior Greek finance ministry official said Athens would welcome Chinese buyers of its bonds. The official declined to specify an amount, though a figure of E20 billion-E25 billion was raised in talks with Goldman Sachs.

A E5 billion syndicated loan issue by Greece this week attracted bids worth more than E20 billion, but Greece continues to face pressure in financial markets.

Goldman Sachs mooted the sale of equity in NBG to Bank of China, the country’s third-largest commercial lender by assets, and made a similar proposal to China Investment Corp., China’s sovereign wealth fund, according to officials.

Chinese officials said CIC was not interested and that regulators would not let BoC make such a risky investment. Goldman Sachs and CIC declined to comment. A Bank of China spokesman said: “I haven’t heard anything about it.”


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Posted in Bonds | 1 Comment »

What losses?

Posted by WARREN MOSLER on 26th January 2010


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From MS:

The table below from CBO office shows the banks have already repaid TARP in full plus interest…

Even AIG has accounts for only 10% of the total TARP “loss” outstanding.

According to the table, the government has a net profit on it’s investment in the banks.

The majority of losses are stemming from Auto industry loans of -47bln and Home Affordability Mtg Program -20bln…

Yet the government wants to impose a tax to “get their money back” from the banks for 90-120bln???

Hmm… seems to be another agenda at foot here.

CBO’s Baseline Estimates of Federal Funding for the TARP (As of mid-December 2009)(Billions of dollars)

And the funds to the banks necessarily never even went anywhere. They just sat on the fed’s books as excess reserves. The govt can’t ‘spend money’ on bank capital, it’s been and can only be thinly disguised regulatory forbearance.

Seems no one up there has a grasp on simple monetary operations. They still get QE wrong continuously at all levels.


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Posted in Fed, Government Spending | 26 Comments »

giving up on the Fed

Posted by WARREN MOSLER on 26th January 2010


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We’re getting closer to the point discussed a few weeks ago about markets giving up on the Fed.

At the time the 10 year was maybe 3.75-3.80, gold had gone about 1,200, the dollar was near the lows, crude was back over 80, stocks were up, all based on the belief the Fed had the power to ‘reflate’ and was ‘printing money’ through trillions of ‘quantitative easing’ which was, sooner or later, hyper inflationary, along with 0 interest rates and ‘record deficits’ which would drive up interest rates, risk default and a sudden breakdown of the $US, all contributing to the same inflationary collapse.

Now that the bets have been placed, and none of that is happening, it’s all starting to erode. Crude is back below 75 (the Saudis’ actual target/range?), gold is selling off, the dollar is edging higher, the 10 year just traded at 3.57, stocks are selling off, etc.

The next step is for first markets and then policy makers to realize the Fed has no tools to inflate. That 0 rates and qe don’t cut it. Nor are deficits large enough to reflate. Bernanke was asked by Time magazine late last year if he had any tools left. He said yes. When asked what they were, he had no specific answer. Well, if he does have more tools, with 10% unemployment and weak prices and a dual mandate for full employment and price stability, what’s he waiting for?

Should market psychology turn to the notion that the Fed has no tools to inflate, and we have a Congress dead set against larger deficits, it can all get very ugly very quickly in the race to the exit from the inflation plays (including steepeners) currently on the books.


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Posted in Comodities, Fed, Political | 8 Comments »

JAPAN’S OUTLOOK `NEGATIVE’ S&P SAYS

Posted by WARREN MOSLER on 26th January 2010


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The blind leading the blind.

I thought S&P knew better.

Sadly, they remain deficit terrorists and part of the problem and not part of the answer for a world suffering from an acute shortage of aggregate demand.

*JAPAN’S OUTLOOK `NEGATIVE’ S&P SAYS
*S&P SAYS JAPAN FISCAL FLEXIBILITY HAS DIMINISHED

5y JAPAN SOV CDS moves from 85 mids to 87 / 90 market at the
moment

USDJPY spiked from 89.60 to 90.15 but has since recovered back to 89.70

JGB futures traded down -11c from the 3pm close after the announcement
but are only 3 cents weaker currently


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Posted in Deficit, Japan | No Comments »

high cost of groceries

Posted by WARREN MOSLER on 25th January 2010


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>   
>   (email exchange)
>   
>   On Mon, Jan 25, 2010 at 1:25 AM, Roger wrote:
>   
>   birds eye view: my son’s 1st weekend back at Google hq in Mountain
>   View after a visit home (he only buys food for weekends)
>   
>   can only get worse this year;
>   
>   the “costs” of financial policy, health burdens & healthcare all run
>   together yet few recognize one of Shewhart’s maxims about the statistics
>   of ANY complex system: “Tune the system, not the components!”
>   
>   we’ve apparently gone from LBJ’s “War on Poverty” to a war on poor people;
>   

I went to the store to buy two meals worth of food for myself. I don’t habitually look at prices when I buy food, I figure that’s the one place where I ought not to cut corners so I focus on the ingredients instead. I get to the counter, and the bill is $31.34 to my great surprise.

Broken down:

parmesan cheese 4.99
tortellini 4.69
tomato sauce 4.69
ravioli 5.49
salami 7.49
blackberries 3.99

That’s going to be supplemented with milk, juice and tea I already have at home, adding slightly to the cost.

Maybe I’m buying fancy stuff, but it doesn’t feel like it. In contrast, I can get a comparably complete meal with way more food than I need at a restaurant for less than $10 even now. Something is really out of whack with the cost of food. The only way to eat more cheaply at home is to buy less nutritious stuff. I didn’t check the price of other produce, but I’ll bet even vegetables are pricey. In even greater contrast, the last meal I ate at work must have cost a ton. Sushi, italian sausage, green salad with 3 kinds of greens and 5 kinds of nuts, lima beans, soybean sprouts, pomegranate kernels, carrots and beets, etc, etc.

If economic conditions are forcing people to eat more cheaply, I predict they’ll eat more McDonalds and wonder bread, while the wealthy will live well. Not good.

Yes, that’s what an export economy looks like you have a job and produce, but you only earn enough to eat and buy gas to get to work as your output gets exported.

We aren’t there yet, but on the way.


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Posted in Exports | 7 Comments »

Obama speech

Posted by WARREN MOSLER on 24th January 2010


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Obama: Bank Regulators May Have Gotten Too Tough

Jan. 22 (AP) —President Barack Obama said on Friday that regulatory oversight of the country’s banks might now be erring too much on the side of caution, potentially hindering the flow of credit to small businesses.

This is definitely the case. It’s called regulatory overreach, as previously discussed on my website.

“The banks feel as if regulators are looking over their shoulder, discouraging them from lending,” Obama told a town-hall style meeting in Elyira, Ohio during a trip to promote his jobs and health care policies.

Obama said it was not his intention to interfere with bank supervision. But he had told Treasury Secretary Timothy Geithner to make sure that the country has not “seen the pendulum swing too far”, with regulators now being too tough after being too slack in the past.

Including the risk weight rules that require non senior impaired securities to functionally be marked at 0.

On other issues, it was a combative Obama that exhorted Congress to pass a new job-creation bill, taking a populist appeal to America’s recession-racked Rust Belt in an effort to recapture the excitement of his campaign.

Obama weaved us-against-them rhetoric into his appearances, telling a town hall audience that he “will never stop fighting” for an economy that works for the hard-working, not just those already well off.

He said a jobs bill emerging in Congress must include tax breaks for small business hiring and for people trying to make their homes more energy efficient — two proposals he wasn’t able to get into a bill the House passed last month.

He also pitched fiscal responsibility and deficit reduction. Not sure how he proposes to do both, as below.

And he used the word “fight” or some variation of it over a dozen times. The House-passed $174 billion stimulus package faces a stern test in the Senate, in part because it is financed with deficit spending.

He strongly defended unpopular actions he has taken to bail out banks and insurers and to rescue automakers from collapse. Such measures have not gone over well in many quarters, and have been derided as moves that expanded government intervention and swelled the deficit.

The measures were seen as a helping hand for Wall Street while many on Main Street walked the unemployment lines.

Obama said that propping up the financial industry was as much about regular Americans as wealthy bankers. “If the financial system had gone down, it would have taken the entire economy and millions more families and businesses with it,” he argued.

As before, he states his belief in a top down solution.

Similarly, allowing GM and Chrysler to go under might have satisfied calls to force businesses to reap the consequences of bad decisions.

Cleaning up Chrysler to hand it over to Fiat to import Fiats to compete with GM seems a confused strategy to me.

But he also said, “Hundreds of thousands of Americans would have been hurt, not just at those companies themselves, but at other auto companies and at their suppliers and dealers, here in Ohio, up in Michigan, and all across this country.”

Missing the macro benefits by seeing only the very micro results in sub optimal solutions.

“He’s done a lot, but they are all negative things,” said Ray Angell, 65, of Twinsburg, Ohio, a conservative active in the anti-tax Tea Party movement, mentioning the stimulus package and climate change proposals.


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Posted in Banking, Obama, Tea Party | 2 Comments »

Geithner Headlines

Posted by WARREN MOSLER on 22nd January 2010


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Not exactly a unified front for the team.

TREASURY SECRETARY GEITHNER HAS EXPRESSED RESERVATIONS ABOUT PROPOSED U.S.
BIG BANK LIMITS ANNOUNCED ON TUESDAY–FINANCIAL INDUSTRY SOURCES

GEITHNER HAS CONCERNS LIMITS DO NOT NECESSARILY GET AT PROBLEMS THAT FUELED
FINANCIAL CRISIS–SOURCES

GEITHNER HAS CONCERNS THAT POLITICS INFLUENCING REFORMS–SOURCES


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Posted in Fed, Obama, TREASURY | 9 Comments »

blog comments

Posted by WARREN MOSLER on 21st January 2010


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Tom Hickey Says:
January 21st, 2010 at 2:29 pm

Same thing happened to me, although I was a progressive (radical, actually) and knew that something was wrong with neoliberalism from Chomsky’s Politics and Neoliberalism andHegemony and Survival. But I hadn’t seen through the veil and was still under the spell of the Wizard and the gold brick road. (Did you know that The Wizard of Oz was an allegory against the gold standard?)

I happened to read a comment by Ramanan on a blog, although I no longer remember which one. It sounded a bit far-fetched but he provided references and I checked them out. This led to my reading Randy Wray’s Understand Modern Money, and the scales fell from my eyes. I realized that I had just discovered the holy grail of economics! Then everything began to fall into place. Reading the blogs of Warren, Bill Mitchell, Randy, Scott Fulwiler, Winterspeak, Marhall, etc., and going through the comments carefully, especially those of JKH, I began to get how everything fits together with MMT as the foundation. Eureka. Thank you all.

America, wake up before it is too late.

Jason Says:
January 21st, 2010 at 4:42 pm

It’s true that’s it’s a paradigm shift that changes everything, because there is so much of what we hear from political parties (including up here in Canada) and on the media that is just whacky once these pieces start to fall together. I’m like Tom above, very progressive and i’m the guy that before would have said tax business and that cutting the GST (again in Canada) is stupid because it will be harder to get to a surplus situation…etc etc..and one year later I have had to abandon so many ideas I believed. But it’s very liberating. I make many more comments now in online print media and have many more discussions about economics and try to point people to this site. I think there are many phases of outreach about this that need to occur to the general public, but certainly one that comes to mind is economic textbooks need to be challenged. I happen to have my old 1993 intro economics textbook open. Central banks borrow for deficits. Central banks control inflation by changing the money supply. Velocity of circulation theory. Tax as a source of revenue for federal govt. it’s all here and now all seemingly wrong.


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Posted in Government Spending, Mosler 2012 | 3 Comments »

A comment on Auerback’s recent post

Posted by WARREN MOSLER on 21st January 2010


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I am undeniably disappointed in Obama, though I recognize that he has had some very difficult stuff to deal with.

At the time I voted for him, I was a deficit hawk and pretty neo-liberal in outlook. Initially I was even highly skeptical of the stimulus! After Obama was elected, I realized that as an ordinary citizen, I did not understand economics at all. So I have been trying to actually learn about it, and read Keynes, Friedman (for balance, I guess), and Minsky, along with every economics blog I could find (left, right, and center). The result (so far) is that I end up going through an “everything you know is wrong” revelation with MMT. The tipping point for me was Warren Mosler asking where the points come from on a scoreboard and saying that when you pay taxes, the government destroys your money, because it does not need it to spend, via your “Should America Kowtow to China?” post. Then it just hit me like a ton of bricks – everything you know about macroeconomics is wrong. It’s hard to sufficiently emphasize how hard I was suddenly hit by it. So at least from my perspective, much of the disappointment arises from me actually changing my opinions, less from disappointment in him.

Another, larger, better targeted fiscal stimulus is needed. But with his current economic advisers, not to mention the political mood, there is no way that will actually happen. People don’t understand why it is needed because people do not understand the macro-economy. People are scared by the banal gold-standard conventional wisdom that “our children will have to re-pay the national debt,” and that “the government is going to go bankrupt.” As long as (normal but reasonably educated) people think that way, it would be suicide for any politician to actually do what is needed to fix the economy, even if that politician actually understood why it was necessary, which of course none of them do.

Well, at least Obama’s better than McCain. We would probably have lunacy like a spending freeze with him in charge.


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Posted in China, Government Spending, McCain, Obama | 9 Comments »

U.K. Debt Ratio

Posted by WARREN MOSLER on 21st January 2010


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And a lot of the deficit spending was proactive, in addition to the automatic stabilizers.

They should continue to do relatively well, unless they take meaningful deficit reduction measures.

And as issuer of their own currency with no liquidity risk, it makes no sense, of course, that their CDS should be substantially higher than Germany or France, who are users of the euro, and subject to liquidity risks.


U.K. Has Worst Debt Ratio Damage of G-7: Chart of Day

U.K. Posts Largest December Budget Deficit on Record

U.K. Mortgage Approvals Stay Close to One-Year High

U.K. CBI January Factory Order Index Rises to Highest Since 2008

London Office Rents May Have Bottomed Out, RICS Survey Shows

Former U.K. Minister Hewitt Joins Barclays as Adviser


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Posted in Government Spending, UK | No Comments »

Obama to Propose New Limits on Banks

Posted by WARREN MOSLER on 21st January 2010


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Out of the frying pan and into the fire…

Proposal Set to Curb Bank Giants

By Damian Paletta and Jonathan Weisman

Jan. 21 (WSJ) — President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.

The past decade saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.

Mr. Obama’s proposal is expected to include new scale restrictions on the size of the country’s largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn’t be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.

Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place “firewalls” between different divisions of financial companies to ensure banks don’t indirectly subsidize “speculative” trading through other subsidiaries that hold federally insured deposits.

The proposal could have the biggest effect on Bank of America Corp., Wells Fargo & Co., and J.P. Morgan Chase & Co., which control a large amount of U.S. deposits, as well as Goldman Sachs, Morgan Stanley and Citigroup Inc., which have a large presence on Wall Street.

If the proposal took effect, big banks could be forced to wall off certain activities in their investing banking units—which trade and underwrite securities and make their own bets on markets—from their traditional businesses, which make loans and take deposits.

The investing banking units have grown dramatically in recent years, were far more profitable than the banking operations and were at the heart of the financial crisis.

The industry has undergone a major consolidation during the financial crisis, leaving the top four banks with an unprecedented market share in businesses such as deposit taking, credit cards and mortgages.

The rules could also keep banks out of the business of running hedge funds, investing in real estate or private equity, all businesses that have become important, profitable parts of these banks. The collapse of two highly leveraged hedge funds began the process that led to the collapse of Bear Stearns.

If investors believe the new rules could take effect, they could sell off the shares of most of the big financial stocks in the belief these companies would be facing years of turmoil and potentially lower profits.

Messrs. Obama and Volcker are scheduled to meet tomorrow in advance of the White House announcement.

The White House’s proposal, one aide said, wouldn’t resurrect the exact limits put in place by the Depression-era Glass Steagall Act, which essentially walled off commercial banks from investment banks and was repealed in 1999. Instead, the White House proposal would seek to return the “spirit of Glass Steagall,” meant to limit large banks from becoming too big and complex that create enormous risk.


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Posted in Banking, Political | 3 Comments »

China

Posted by WARREN MOSLER on 20th January 2010


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Looks like the kids who came how with western degrees may have gotten their way.
That’s the last thing the world needs right now.

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

The problem for China is that the entire economy depends on extremely loose lending policies, and when credit slows, companies in the critical manufacturing and trade sectors get squeezed. A great many Chinese companies rely on external consumers for their profits, but while exports showed growth for the first time in December, they face the usually slow months of January and February; only when spring comes around will it really be clear whether global demand has recovered sufficiently to support China’s exporters. Thus, exports are no refuge yet, and since Beijing has no intention of knocking the legs out of growth, it will continue shoving credit into the system.


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Posted in Banking, BRIC, China | 2 Comments »

Mosler on Reuters

Posted by WARREN MOSLER on 20th January 2010


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Round two. Constructive comments as well!

Mosler: The wrong standard

Reader Note: This is the second entry from Warren Mosler in a debate with Jim Rickards about how to fix the economy. More on the authors here. This is a response to Rickards first piece. Mosler’s first piece is here.

by Warren Mosler

Jim’s recommendations are “sound money, lower taxes, and light regulation.”

We do agree on lower taxes. My proposals include a full payroll tax holiday to support demand. And while Jim suggests a return to Glass-Steagall, my banking proposals are even more narrow and dramatically reduce the need for regulation. I also support price stability.

We also agree that the Monetarist concept of “velocity” is flawed, but our reasons differ. Jim’s derive from the long-dead gold standard where velocity is a calculation of how many times the given amount of money (gold) is used to buy and sell goods and services. Today, however, monetary expansion has nothing to do with money supply like it used to under the gold standard. The reason banks aren’t lending isn’t because they don’t have money to lend. Lending is constrained only by bank capital and the creditworthiness of willing borrowers, not by gold or any other concept of bank reserves. That’s why quantitative easing – i.e. the Fed printing money to buy securities – has no effect on bank lending.

Interest rate cuts transfer income from savers to banks, reducing overall spending. So while interest on savings dropped from over 5% to near 0%, borrower’s rates fell little if any. The wide yield spread means banks’ profit margins widened.

New Keynesian thought is also flawed, because it too presumes gold standard constraints. Today government never actually has nor doesn’t have dollars, and spends, taxes, and borrows simply by changing numbers in bank accounts at the Fed.

When it comes to the dollar, the US government is the scorekeeper. Unlike the gold standard days, the government can’t run out of money. Nor is it dependent on China to fund spending.

Under the old gold standard, taxes and borrowing did fund spending. Today taxes function only to regulate aggregate demand and to control prices. The federal deficit is merely the difference between the numbers changed upward when the government spends, and the numbers changed downward when it taxes. Taxes therefore function to regulate aggregate demand, not to raise revenue, per se. Tax cuts increase our spending power, tax hikes lower it. This is indisputable operational fact, not theory or philosophy.

Jim’s general warning is that too much spending or monetary stimulus might lead us to cross a “critical threshold where diverse actors reject dollars in a cascading collapse.” But this only applies to fixed exchange rate regimes such as the gold standard, where a weak currency results in gold outflows.

Today the dollar is a non-convertible currency. The exchange rate continually adjusts, always representing indifference levels with no gain or loss of gold reserves. I would note too that the U.S. is actively seeking to weaken the dollar vis-à-vis the Chinese yuan. Would Jim want the reverse?

Jim’s arguments are as good as gold. However, we are not on a gold standard, so they don’t apply. Today’s monetary arrangements call for my solutions to restore output, employment, and price stability.


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Posted in Currencies, Government Spending | 11 Comments »

China inflation

Posted by WARREN MOSLER on 19th January 2010


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At some point the FDI isn’t enough to hold up the currency and it depreciates as costs of production for exports rise.

Time to cage inflation tiger, say experts

China Regulator Pledges to Control Illegal Inflows

China Property Sales Rise 75.5% to 4.4 Trillion Yuan

China Reserve Ratio Increase Not a Tightening Sign, Xinhua Says

Time to cage inflation tiger, say experts

By Wang Xiaotian and Xin Zhiming

Jan. 19 (China Daily) — Economy chugs along at good pace, but some red lights ahead

Even as China is set to achieve its targeted goal of 8 percent growth in gross domestic product (GDP) for 2009, economists have stressed that tackling high inflation should be the top priority for policymakers this year.

Inflation is likely to accelerate to more than 5 percent before the middle of this year and reach 8 percent in the second half, Erwin Sanft, head of mainland and Hong Kong equities research at BNP Paribas, was quoted by Bloomberg as saying yesterday.

China’s GDP will surpass the 8 percent year-on-year growth in 2009 and continue to surge in 2010, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday. That confirms the consensus forecast by economists, although none of them are willing to estimate the actual growth figures.

The statistics bureau is scheduled to release the economic data for 2009 on Thursday, but the growth trend has become entrenched since the third quarter of 2009, when GDP expanded by an impressive 8.9 percent year-on-year.

“There are no doubts about robust economic growth this year,” said Zhou Qiren, an economics professor at Peking University. Consumption and exports will continue to strengthen as the global economy gets back to near-normal growth, he said.

The country initiated a massive $586 billion stimulus package in late 2008 and launched a series of industry-friendly policies along with a loose monetary policy to pump prime the economy during the global financial crisis.

The strong surge in new bank lending, however, may have sowed seeds for inflation and other problems, such as asset bubbles. China’s new bank lending in 2009 nearly doubled to 9.59 trillion yuan ($1.40 trillion) over the previous year.

BNP Paribas said China’s inflation rate could touch 8 percent this year. That forecast exceeds most other estimates. Most Chinese economists feel that China would be able to rein in inflation to below 4 percent on average this year.

Li Yining, a senior economist at Peking University, said if inflation soars above 4 percent, the authorities would have to impose tighter measures to stem the growth. “It should be the warning line,” he said.

China’s central bank last week unexpectedly raised the proportion of deposits that commercial lenders must set aside as the country’s credit boom threatens to worsen inflation, which rose by 0.6 percent in November, the first year-on-year growth since last January.

The consumer price index (CPI), the main gauge of inflation, may rise 1.4 percent in December, according to economists surveyed by Bloomberg, intensifying worries that high inflation is coming back as the economy picks up.

Apart from raising banks’ reserve requirement ratio, the People’s Bank of China, the central bank, raised the three-month central bank bill issuing rate for the first time since August 2009 on Jan 7. Analysts see this as a prelude to a series of tightening monetary policies, including interest rate hikes.

“The central bank is likely to increase interest rates twice by 27 basis points this year after April,” said Dong Xian’an, chief macroeconomics analyst with Industrial Securities.

“Gone are the days when we can have economies with high growth rates and inflation as low as 2-3 percent,” he said. top


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Posted in BRIC, China, Comodities, Inflation | 3 Comments »