Payroll taxes and value of the currency

>   
>   (email exchange)
>   
>   On Tue, Feb 16, 2010 at 9:18 AM, wrote:
>   
>   A payroll tax holiday would be tantamount to a currency devaluation, no? As Warren’s
>   rightfully described the current US dollar as being merely a tax credit at the end
>   of the day, a reduction in tax burdens will reduce the demand for dollars, all else
>   equal.
>   

Valuation with a floating fx currency is what it can buy, aka the price level. (different with fixed fx/gold standard, etc.)

Anything that is inflationary is ‘devaluing’

Increased demand may or may not be inflationary or even deflationary as the payroll tax holiday reduces costs for business which, in competitive markets, reduces prices.

EU Daily | German Investor Confidence Falls for a Fifth Month

Yes, ‘incentives’ are running out and will be nearly impossible to reinstate with their fiscal policies now being market constrained, as per what’s happening with Greece and Portugal.

The US, Japan, UK, etc. will never be market constrained. And while their misguided political constraints are capable of doing much the same damage they don’t have the funding risk of the eurozone.


Highlights

ECB Says Loans Harder to Get for Small Firms in Second Half

European bond tensions hurt lending

European exporters see boost from weak euro

European Car-Market Growth Slows as Incentives Are Phased Out

German Investor Confidence Falls for a Fifth Month

German Economic Recovery Remains on Track, Ministry Says

German Companies Plan to Take on More Staff

Eurozone tells Greece to ready new cuts, taxes

Eurostat to Look Into Greece’s Debt Swaps

Spanish government struggles with crisis message

Spanish unions protest austerity

Question for Mr. Mosler re US debt to China

Dear Mr. Mosler:

If the US debt with China is merely numbers on a “Reserve Account” at the Federal Reserve Bank,

China’s funds are either in a reserve account or in a securities account at the fed.

could China close its account at the Federal Reserve

The dollars exist only as entries on the Fed’s computer, and actual cash, which is the same data written on a piece of paper

or move its account from the Federal Reserve Bank to the Central Bank of China?

The central bank of China has a reserve account and a securities account at the Fed dollars can’t be anywhere else.

It could loan the dollars to someone else and hold their liability. And that loan transaction debiting China’s fed account and crediting the borrower’s Fed account

And if it did, what would the mechanics of such a move be and what would be the consequence of such a move?

Don’t see any of interest.

I hear news reports that China would like to replace the dollar as the international currency. Would this be the same as “closing” its account at the Federal Reserve Bank?

No, I’m not sure what it would mean. I don’t use those words, and when I ask others who do they don’t know either.

Thank you for your anticipated response. David DePasquale

thanks for your interest!

low wage workers hit hardest by the recession

Fits annecdotally with the macro statistics that showed real GDP up 5.7% in Q4 while unemployment also went up.

Nothing that a full payroll tax holiday in Q3 08 wouldn’t have prevented.

This is not what the administration was hoping for, but it is the result of their policies.

‘No Labor Market Recession For America’s Affluent,’ Low-Wage Workers Hit Hardest: STUDY

By Ryan McCarthy

Feb. 10 (Huffington Post) —It’s truly been a tale of two unemployment crises.

Though the national unemployment rate dipped slightly in January to 9.7 percent, a new study suggests that not only have low-income workers been the hardest hit by the jobs crisis — but, shockingly, there has been “no labor market recession for America’s affluent.”

The study from Andrew Sum, Ishwar Khatiwada and Sheila Palma at Northeastern University’s Center for Labor Market Studies suggests that the unemployment problem is largely a problem for low-wage workers (hat tip to the Curious Capitalist).

From the study:

At the end of calendar year 2009, as the national economy was recovering from the recession of 2007-2009, workers in different segments of the income distribution clearly found themselves in radically different labor market conditions. A true labor market depression faced those in the bottom two deciles of the income distribution, a deep labor market recession prevailed among those in the middle of the distribution, and close to a full employment environment prevailed at the top. There was no labor market recession for America’s affluent.

At the New York Times, Bob Herbert delved into the study and noted, “The point here is that those in the lower-income groups are in a much, much deeper hole than the general commentary on the recession would lead people to believe.” Here’s more from Herbert:

The highest group, with household incomes of $150,000 or more, had an unemployment rate during that quarter of 3.2 percent. The next highest, with incomes of $100,000 to 149,999, had an unemployment rate of 4 percent.

Contrast those figures with the unemployment rate of the lowest group, which had annual household incomes of $12,499 or less. The unemployment rate of that group during the fourth quarter of last year was a staggering 30.8 percent. That’s more than five points higher than the overall jobless rate at the height of the Depression.

According to the study, approximately 50 percent of households in the bottom decile of American income distribution are underemployed; in the second lowest decile, 37 percent of households can’t find enough work. The authors write: “These extraordinarily high rates of labor underutilization among these two income groups would have to be classified as symbolic of a True Great Depression.”

Germany Said to Consider Greek Aid Beyond Loan


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They have to be very careful as all the national govts are subject to a liquidity crisis.

If all the national govts had started with zero debt when they formed the union, the markets never would have let them get beyond maybe 20% debt to GDP.

(Note that Lux never did have its own currency and never did get that high.)

Instead they came in at the 60-100+ debt to GDP ratios they got to when they had their own currencies when it didn’t matter for liquidity/funding purposes, as with their own currencies liquidity and solvency wasn’t an issue, and whether they knew it or not their deficits were simply offsetting the economys’ nominal savings desires at the then current exchange rates.

So all (except Lux) came into the new single currency with highly problematic debt ratios, and a ‘promise’ of bringing them down. This promise had enough credibility to get them through, but markets are telling us the recession has cast serious doubts on the current institutional structure being able to bring its debts down and get itself out of ponzi.

Germany lending to Greece does not reduce the overall debt to GDP of the Eurozone. In fact arguably the introduction of ‘moral hazard’ issues make it worse as there’s a reasonable chance with this kind of implied umbrella Greece and others will feel they’ve called the union’s bluff and not adjust their finances accordingly. And, worse yet, markets are coming to understand that fiscal austerity can backfire and cause deficits to increase as it causes the economies weaken further, making it a lose-lose scenario.

So yes, the announcement of aid beyond loans will buy some time, but without sufficient real growth driven either by exports or domestic credit expansion (which is also not sustainable longer term) all the same issues will probably return.

And one of the reasons for the weak euro has been that their deficits have gotten large enough to make euro financial assets sufficiently ‘more plentiful’ to weaken the currency. This kind of help doesn’t change that.

And it could be that one of their goals is a policy that weakens the euro in an attempt to improve exports, while at the same time not triggering a liquidity crisis. Seems like an impossible tightrope to try to walk.

The easiest/safest way to do that is for the ECB to buy fx, but their ideology doesn’t allow that.

>   
>   (email exchange)
>   
>   On Wed, Feb 10, 2010 at 6:14 AM, Dave wrote:
>   
>   Bunds off almost a point on this story
>   Curve bear steepening
>   
>   DV
>   

Germany Said to Consider Greek Aid Beyond Loan Guarantees
2010-02-10 10:10:02.560 GMT

By Brian Parkin

Feb. 10 (Bloomberg) — German Finance Minister Wolfgang Schaeuble told lawmakers that options for helping Greece extended beyond loan guarantees, said an official who attended a briefing today at the Parliament in Berlin.

Officials were told that European Union rules on aid were more flexible than the government originally thought, according to the lawmaker who spoke on the condition of anonymity because the discussions were confidential.

Lawmakers were briefed on the legal aspects of an EU member state providing financial help for another and were told to digest the information quickly, the lawmaker said. The German parliament must back any move to help Greece, he said.


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Germany Considers Loan Guarantees for Greece, Other Euro Partners


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Looks like another trial balloon.

Might mean German CDS gets hit.

All the national govs are subject to liquidity risk.

Just like the US States

Except the eurozone debt ratios are over 10 times worse.

If the world economy is improving at a fast enough rate all they probably need to do is buy some time.

No visibility on how this gets resolved.

Germany is considering a plan with its European Union partners to offer Greece and other troubled euro zone members loan guarantees in an effort to calm market fears of a default, according to people familiar with the matter.

The proposed plan would be done within the EU framework but led by Germany. German Finance Minister Wolfgang Schaeuble has discussed the idea in recent days with European Central Bank President Jean-Claude Trichet. Greece is the hardest hit of several countries, including Spain, Portugal and Ireland, that have recently seen their bonds come under pressure amid concerns that they will have difficulty repaying their debts.


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my euro ‘solution’ is on DeLong’s blog today


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Got on DeLong’s blog today:

Ten Mostly Economics Pieces Worth Reading: February 9, 2010 …
By Brad DeLong

4) Felix Salmon: Helicopter-Firehose Trichet:

Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.

The interesting thing is that given recent weakness in the euro, something along these lines — if not quite as explicit — seems to be already priced in, to some degree. I don’t think anybody in Europe is particularly worried about inflation right now; if anything, deflation is more of a problem, especially in the PIIGS. The big question, of course, is whether and how anybody at the ECB would ever let something like this happen, given its much-vaunted independence. Deflation worries might have to pick up quite a lot before it happens, and even then it’ll be a very tough sell among the European central-banking crowd.


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Issing Says IMF Better Suited Than EU to Greek Rescue


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Except Greece probably doesn’t qualify under normal IMF standards, and the IMF would have to get short euro to make the payment.

And ideologically it means ceding control of EU macro policy to an external international institution with strong US influence.

Nor does the macro work, as the ‘strict enough conditions’ imposed will further weaken demand in Greece and the rest of the EU.

Also, the rapidly expanding deficit of Greece has benefited the entire EU and a sudden reversal will reverse those forces.

Likewise, leaving the EU would be contractionary/deflationary for the EU.

But if they all believe the IMF is the way to go there’s a good chance it happens.

Meanwhile, Greece and the rest of the eurozone is being revealed as necessarily being in a continual state of ponzi that demands institutional resolution
of some sort to be sustainable.

Issing Says IMF Better Suited Than EU to Greek Rescue, NYT Says

By John Fraher

Feb. 8 (Bloomberg) — Former European Central Bank Chief Economist Otmar Issing said the International Monetary Fund may be better suited to rescuing Greece than the European Union, the New York Times said, citing an interview.

“I don’t think that the EU can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” the newspaper cited Issing as saying in an article published Feb. 6. “A better way is for Greece to approach the IMF. It is the only institution that can impose strict enough conditions.”

Issing said he doesn’t see support “in Germany or elsewhere” for a bailout that would involve “a more or less disguised transfer of taxpayer money,” the paper said.

Issing said leaving the euro region would be “economic suicide” for Greece, though he dismissed the idea that it would hurt the euro region as “misguided,” the paper said.


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