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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 February 25th, 2010

david walker okays deficits???!!!

Posted by WARREN MOSLER on 25th February 2010

>   (email exchange)
>   On Thu, Feb 25, 2010 at 12:54 PM, Roger wrote:
>   am I reading this right?
>   he seems to be admitting the difference between “structural” and nominal deficits, but
>   is still fixated on debt/GDP ratios, not to mention national “revenue”
>   nevertheless, some progress is better than none, and ANY sign of movement is a
>   step in the right direction


Looks like a serious chink in the armor of what used to be deficit terrorist #1???!!!

Address jobs now and deficits later


Feb. 24 (Politico) — President Barack Obama is in a difficult position when it comes to deficits. Today’s high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What’s a president to do?

The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead.

The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t.

But this is rarely accurate. The fact that the two of us, who have philosophical differences on the proper role of government, find much to agree on about deficits is a testament to the importance of dropping this useless dichotomy and finally talking about deficits in a reasonable way.

As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.

Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy, like the recovery package passed last February, can also increase short-term deficits.

Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.

With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.

In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.

That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years.

Funding key investment and infrastructure projects to promote economic growth and offering a job creation tax credit are among the policy ideas that meet all these standards. In addition, temporarily renewing extended unemployment benefits can lead to more jobs throughout the economy.
But these problems, and the resulting short-term deficits they cause, should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls.

Specifically, the deficit could approach an already unsustainable 6 percent of gross domestic product 10 years from now, and will continue to rise thereafter.

While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits.

The Congressional Budget Office projects that after the economy has returned to full employment, spending will still substantially outstrip revenues. Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs’ costs tend to mirror overall cost increases for health care, which have risen much faster than overall economic growth for decades, but also because of demographic changes.

Our nation’s fiscal picture will darken further with the passage of time, especially if interest rates increase.

These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues.

In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.

We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter.

People should be able to count on government benefits they are promised. It is, therefore, critical that federal benefit and funding levels be reconciled.

None of this will be easy — not the policy or the politics. It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases.

Getting the deficit under control cannot be accomplished by simply ending “waste, fraud and abuse,” stopping all foreign aid or exiting Iraq and Afghanistan. Substantial progress could be made though by ending the tax cuts of 2001 and 2003, or paying for their extension through spending reductions. In the end, Congress must step up to the plate, not just with hearings, but with votes.

For all the disagreement in Washington, we both know that, like us, there are many who see the critical importance of addressing these challenges. We must accept higher deficits in the short-term in order to put people back to work.

At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead.

In a town of division, this is one area where we need a real consensus now.

Posted in Employment, Government Spending, Inflation, Interest Rates | 69 Comments »


Posted by WARREN MOSLER on 25th February 2010

Markets are getting closer to the idea that:

Interest rates don’t/won’t help
QE doesn’t/won’t help

With the larger point being coming to terms with the possibility the Fed can’t inflate, or do much of anything that actually matters for the real economy, except maybe fund zombie entities to keep them from failing.

So bonds are throwing in the inflation towel and yields are coming down.
The dollar is going up with miles to go before ppp is reached.
Gold is well off the highs and being held up probably by europeans running from the euro to dollars and a bit of gold.

(***Bernanke just again testified that a contango in futures prices is a reasonable forecast of higher prices down the road. So much for the credibility of their inflation forecast)

Meanwhile the eurozone is continuing it’s methodical implosion with no credible response in sight.
And the realization that all eurozone bank deposits are only insured by the national govts has yet to hit the headlines.

The Obama administration believes the US Treasury is ‘out of money’ and we have to borrow from China to spend and leave that for our children to pay back.
So any kind of meaningful US fiscal response seems off the table.

The American economy works best when people working for a living make enough to be able to one way or another buy their own output, and business competes for their dollars. It’s not happening.

We are grossly overtaxed for current circumstances with no meaningful relief in sight.

Lots of reasons to stay on the sidelines.

Posted in China, EU, Government Spending, Interest Rates, Obama, Political, Trading | 5 Comments »

Warren presenting May 5 in Manila

Posted by WARREN MOSLER on 25th February 2010

Forum on “A Fresh Perspective on Critical Development Issues”

Posted in Emerging Markets, Government Spending, Inflation, Political | No Comments »

China Commerce Ministry comments

Posted by WARREN MOSLER on 25th February 2010

Looking ugly.

And a trade deficit and FDI not profitable due to higher costs can weaken the currency as well.





Posted in China | No Comments »

Japan at Tipping Point as Debt Approaches Assets

Posted by WARREN MOSLER on 25th February 2010

The tipping point is the point where the deficit spending finally is sufficient to create enough aggregate demand to restore output and employment.

Probably not quite there yet. And moves towards ‘fiscal responsibility’ further delay the restoration of output and employment.

And note that even the bearish rate forecast, below, is hardly the stuff of a liquidity crisis, nor will it ever be under current institutional arrangements, which are very different from Greece, also mentioned below.

Japan at Tipping Point as Debt Approaches Assets: Chart of Day

By Minh Bui and Aki Ito

Feb. 25 (Bloomberg) — Japan’s total public debt is nearing the value of household wealth, a sign the government bond market is approaching a “tipping point,” according to Mizuho Securities Co.

The CHART OF THE DAY shows net assets of Japanese households and total government debt. Net assets dropped to 1,065 trillion yen ($11.8 trillion) as of September and the Finance Ministry projects public borrowings will reach a record 973.2 trillion yen by March 2011. Japan’s population, which is shrinking, is also tracked.

“There’s a lot of nervousness in the markets that these two numbers are converging,” said Hajime Takata, Tokyo-based chief strategist at Mizuho. “Looking at the deficit, household assets and limited room the government has for issuing new debt, people think we’re getting closer to a tipping point.”

The yield on 10-year bonds could rise to as high as 1.6 percent this year as investors demand higher premiums for the country’s debt, he said. Benchmark bond yields were at 1.32 percent yesterday in Tokyo.

The narrowing gap is especially alarming for Japan, where more than 90 percent of public debt is held by domestic investors. Bank of Japan Governor Masaaki Shirakawa urged the government to shore up finances, particularly as investors scrutinize sovereign accounts more closely because of Greece’s financial woes. Mizuho’s Takata says he doesn’t expect public liabilities to exceed household wealth for at least two years.

Prime Minister Yukio Hatoyama said he will unveil in June a plan to contain debt after Standard and Poor’s lowered the outlook on Japan’s AA sovereign rating last month. Kaoru Yosano, a former finance minister, warned on Jan. 22 the country could face an “uncontrollable rise” in bond yields if debt exceeds household wealth.

Posted in Currencies, Government Spending, Japan | No Comments »