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Archive for March, 2010

OPEC March Crude Output Down 30,000 Bbl/Day to 29.205 Mln

Posted by WARREN MOSLER on 31st March 2010

With supply following demand, as with any monopolistic arena, it looks like the world crude oil balance remains very much neutral leaving the Saudis in full control as swing producer where they set prices and let quantity adjust to market demand.

Stable crude prices with 0 interest rates, high excess capacity and low aggregate demand should keep inflation at bay indefinitely, with productivity increases making deflation the greater risk.

Posted in Comodities, Oil | 7 Comments »

EU Daily

Posted by WARREN MOSLER on 31st March 2010

The institutional structure puts the Eurozone in a very awkward position.

The higher deficits desired by the economy to restore non govt net financial assets at the same cause a deterioration in the credit worthiness of the member nations running the deficits, which seems to limit the process as these to two forces collide in a counterproductive, unstable and turbulent manner.

The higher member nation deficits also are a force that moves the euro lower which can continue until exports somehow resume via the foreign sector reducing its net financial euro assets as evidenced by a pickup in net euro zone exports. That process can be drawn out and problematic as well in a world where global politics is driven by export desires from all governments.

EU Headlines:

Trichet Expects Investors to ‘Recognize’ Greek Moves

Italian Consumer Prices Rose in March on Energy Costs

Europe Inflation Jumps More Than Economists Forecast

Euro Area Needs to Substantially Improve Governance, EU Says

German Unemployment Unexpectedly Declined in March

German Machine Orders Jumped 26% in February on Foreign Demand

France’s 2009 deficit hits record high 7.5 percent of GDP

Posted in ECB, Inflation | 5 Comments »

Japan 3/31/10 year end

Posted by WARREN MOSLER on 31st March 2010

The adjustments beginning April 1 could be substantial after this year’s year end adjustments in Japan added to the usual month end and quarter end global adjustments.

I’d guess this was the time for a lot of clean up adjustments in Japan from prior years due to more favorable valuations and a return of market functioning.

Today (3/31) is a fiscal year end in Japan and most of the financial institutions are happy with their results as equity is much higher than a year ago (NKY: 11,089 vs 8,109 last year) and JGB yields are almost the same level (10yr JGB: 1.40% vs 1.35% last year)

Posted in Japan | No Comments »

Tax Receipts Rebound as 15 Biggest States See Gain

Posted by WARREN MOSLER on 30th March 2010

>   (email exchange)
>   On Tue, Mar 30, 2010 at 2:27 PM, Jason wrote:
>   State tax receipts are reportedly up…

Yes, federal looking like they’ve bottomed as well.

Definitely looks like activity has bottomed.

And still feels like we are going the way of Japan, but too early to tell.

>   Granted we are still well below 2008 peak revenue levels
>   and the budget crisis is far from over.
>   But Muni CDS remains near the wide end of the range when compared with
>   Corporate IG:
>   Still looks like a great trade to me…

Tax Receipts Rebound as 15 Biggest States See Gain

By Dunstan McNichol

March 30 (Bloomberg) — The two-year slide in tax

collections that opened a $196 billion gap in U.S. state budgets

has stopped, easing pressure on credit ratings and giving leeway

to lawmakers as they craft spending plans for next year.

The 15 largest states by population forecast a 3.9 percent

gain in tax revenue in fiscal 2011, budget documents show. The

50 states on average may increase collections by about 3.5

percent, the first time in two years the figure is expected to

grow, said Mark Zandi, chief economist at Moody’s,

California took in 3.9 percent more since December than

projected in January, Controller John Chiang said this month.

New York got $129 million above forecasts in its budget year

through February, according to a report from Comptroller Thomas

DiNapoli. In New Jersey, the second-wealthiest state per capita,

January sales-tax collections were 1.9 percent higher than a

year earlier, the first annual increase in 19 months,

forecasters said in a report last month.

“This time last year, we were sliding down a mountain,”

said David Rosen, chief budget officer for the New Jersey

Legislature. “I don’t think we are now; it’s stabilized.”

States collected about $79 billion less in sales, income

and corporate taxes in 2009 than in 2008, the U.S. Census Bureau

said today in a report, as the economy struggled through its

deepest slump since the Great Depression. Emergency spending

cuts and tax increases became routine during the recession that

began in December 2007.

‘Panic Mode’

The end of the collections crash will ease fiscal strains

that led New York-based Moody’s Investors Service to lower the

ratings of five states last year, after no downgrades in 2008.

It will also enable governors and legislators to draw up budgets

for fiscal 2011, which starts July 1 for most states, with more

confidence that money they plan to spend will arrive.

“As long as revenues were sliding, budgeters were in a

panic mode,” said Zandi, whose West Chester, Pennsylvania-based

company provides economic analysis to businesses, government and

investors. “It’s not as scary when revenues are rising.”

States’ combined budget gaps will still total $180 billion

in fiscal 2011 and $120 billion in fiscal 2012, the Washington-

based Center on Budget and Policy Priorities estimates.

Economic Growth

This fiscal year, the 15 largest states expect to collect

11 percent less taxes than in fiscal 2008, budget proposals

show. It won’t be until 2013 that revenue returns to 2008

levels, said New Jersey’s Rosen and Barry Boardman, the North

Carolina General Assembly’s chief economist.

Collections of personal income and sales taxes, the two

largest components of state revenue, fell by 17 percent and 7

percent, respectively, last year compared with 2008, according

to the Census Bureau. Declines were less steep in the fourth

quarter than earlier in the year, with income taxes dropping by

4.7 percent to $59.9 billion and sales taxes sliding by 2.8

percent to $71.7 billion.

Corporate taxes increased 3.4 percent to $9.1 billion in

the fourth quarter, the Census Bureau said, after declining in

seven of the previous nine quarters.

Combined state and local tax collections climbed to $360.1

billion during the final three months of 2009, the first year-

over-year gain in five quarters and an almost 1 percent boost

from the same period in 2008, according to the agency.

State coffers are beginning to get a boost from an economy

that expanded at a 5.6 percent annual rate in the fourth quarter

of 2009, the most in six years. That’s stopped the drop in sales

tax collections, which generated $23 billion less last year than

in 2008, according to the Census Bureau.

Predictability a ‘Positive’

Arizona, which sold state buildings and canceled health

insurance for 47,000 children as collections this fiscal year

fell 34 percent below 2007 levels, said its January revenue was

$14.2 million above projections, the first time since March 2007

that collections exceeded forecasts.

Virginia recorded a 31.6 percent increase in corporate

taxes through February, it said on March 11. Governor Robert

McDonnell, a Republican who took office in January, increased

this year’s revenue projections by $82.5 million last month.

Improved revenues may help states replenish reserves, curb

borrowing for expenses and strengthen their debt ratings, said

Robin Prunty, credit analyst for Standard & Poor’s in New York.

“Just having predictability is a positive from a credit

standpoint,” Prunty said.

“We’ve seen the worst,” said Philip Condon, who oversees

about $9.4 billion in municipal bonds for DWS Investments in

Boston. “While it may not be great, it’s getting better.”

California Sale

DWS was among the buyers of last week’s $3.4 billion

issuance of taxable California bonds, its first such sale since

November. A scarcity of municipal debt, coupled with indications

that California’s revenue decline may have reached bottom,

attracted investors and drove down bond yields, Condon said.

“The recent uptick in revenue collections certainly didn’t

hurt us,” said Tom Dresslar, a spokesman for Treasurer Bill

Lockyer in Sacramento.

Forty-five states reduced outlays for health care, the

elderly and disabled and primary and higher education in 2008

and 2009, the Center on Budget and Policy Priorities said.

Lawmakers now may be able to restore spending or avoid

further reductions. California’s Chiang this month scrapped a

plan to delay tax refunds after revenue exceeded projections for

three months. In January, an impasse over the state’s $20

billion budget imbalance led S&P to cut its credit rating to A-,

the lowest of any state.

“The fact that revenues are performing better I think is

certainly the first bit of good news we’ve heard in a long

time,” said Amy Doppelt, a San Francisco-based managing

director at Fitch Ratings who follows California. Fitch last

year downgraded more than 200 municipal issuers, the most ever,

according to a March 25 report from the rating company.

Negative Outlook

S&P lowered its rating on California, Illinois and Arizona

last year and has a negative outlook on those and four other

states. Moody’s cut those three plus Nevada and Ohio, its first

state downgrades since Michigan in 2007. It’s negative on 15,

including five of the 10 largest: Florida, Illinois,

Pennsylvania, Ohio and Michigan.

Jobless rates in 18 states including Florida and Rhode

Island exceeded the national average of 9.7 percent in February.

Unemployment in most states is about double pre-recession

levels, according to the Labor Department.

Michigan, with the nation’s highest unemployment rate at

14.1 percent in February, is in its 10th year of job losses and

expects to end fiscal 2011 with the fewest jobs in 24 years.

“As the employment situation continues to be weak, income

tax revenues will continue to lag,” the Center on Budget and

Policy Priorities said in a Feb. 25 report.

Pension Expenses

As workers lose income, states face rising expenses for

Medicaid and other social services. Through March, they had

borrowed $37 billion from the federal government to cover

unemployment benefits, the Treasury Department said.

States face a $1 trillion gap between assets in public

pension plans and their obligations to retirees, a Feb. 18 study

by the Washington-based Pew Center on the States said. Illinois

borrowed $3.5 billion in January to finance its pension

contribution, which led Moody’s and S&P to cut their ratings to

the second-lowest of any state.

More Jobs

“You can’t exclude the expense side,” said Howard Cure,

New York-based director of municipal research for Evercore

Wealth Management LLC, which oversees $1.7 billion, half in

fixed-income municipals. “What really would alleviate that

situation is more jobs.”

States also have to prepare for the June 2011 end of help

from the American Recovery and Reinvestment Act, which will

provide them with about $140 billion of aid since its inception

in February 2009.

“States may have reached the end of the beginning of a

multiyear fiscal crisis,” the Nelson A. Rockefeller Institute

of Government in Albany, said in a January report. “The best to

be hoped for in 2010 may be the beginning of the end.”

Posted in GDP, States, Uncategorized | 1 Comment »

ECB rate hike discussion will compound funding issues

Posted by WARREN MOSLER on 29th March 2010

ECB’s Liikanen Says Interest Rates Won’t Stay Low

By Diana ben-Aaron

March 29 (Bloomberg) — European Central Bank Governing Council member Erkki Liikanen said interest rates won’t stay at the current level indefinitely, Maaseudun Tulevaisuus reported, citing an interview.

While low rates have eased the economic slowdown, households and businesses shouldn’t count on them forever, Liikanen was quoted as saying by the Helsinki-based newspaper. He declined to say when or by how much rates would increase.

“We decide the key central bank rate in the ECB council according to the requirements of the economic situation,” Liikanen said.

Posted in ECB, EU, Interest Rates | No Comments »

Rasmussen polls

Posted by WARREN MOSLER on 29th March 2010

65% Now Hold Populist, or Mainstream, Views

55% Favor Repeal of Health Care Bill

I find his polls as good as any. He shows 54% favor repeal of the new health care law, with 70% of seniors against the Medicare cuts.

The lack of understanding of the monetary system is taking an increasing both economically, politically and socially.

With almost 20% of the workforce unable to find full time work, and near record low capacity utilization in general, our leaders saw fit to raise taxes and cut spending which will lower demand and undermine their political careers to ‘pay for’ a very modest spending increase of about $100 billion a year, and with delays, of the perhaps additional $1 trillion of fiscal adjustment needed to get us back to full employment in a reasonable time frame.

Also, part of the rise in costs goes to insurance reserves which are a demand leakage.

The politics get uglier by the day, and from watching the news over the weekend the loudest health care protest seems to be over the expense and how it will add to the size of the deficit. Seems this means more ‘fiscal responsibility’ is on the way, including letting the tax cuts expire next year and maybe even a VAT which is an absurdity under any circumstances, apart from a desire to cut consumption.

Add to that the reality of the eurozone actually offering Greece nothing of value, opening the way for wider credit spreads spreading to the entire eurozone.
It also looks like their combined deficits are now large enough for the added non govt financial assets to now be driving down the euro independent of the credit issues. This continues until exports increase sufficiently for the automatic stabilizers to tighten fiscal balances. They aren’t anywhere near there yet.
Additionally, the dollar index chart is beginning to pick up a bid from commodities traders as well.

Posted in ECB, Employment, EU, Government Spending | 31 Comments »

US Taxes

Posted by WARREN MOSLER on 26th March 2010

From the articles of Confederation, March 1st, 1781.
We had the right tax, but the wrong way to implement it:


All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion to the value of all land within each State, granted or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the United States in Congress assembled, shall from time to time direct and appoint.

The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled.

Posted in Deficit | 17 Comments »

Text of Greek Deal

Posted by WARREN MOSLER on 26th March 2010

As before, this is in fact another statement that indicates no checks are to be written.

The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt.

It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity.

This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available. In other words, it’s a statement that says Greece is on its own, and that they will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.

“In this context, Euro area member states reaffirm their
willingness to take determined and coordinated action, if
to safeguard financial stability in the euro area as a
whole, as decided the 11th of February.

As part of a package involving substantial International
Monetary Fund financing and a majority of European financing,
Euro area member states, are ready to contribute to coordinated
bilateral loans.

This mechanism, complementing International Monetary Fund
financing, has to be considered ultima ratio, meaning in
particular that market financing is insufficient.
disbursement on the bilateral loans would be decided by the euro
area member states by unanimity subject to strong conditionality
and based on an assessment by the European Commission and the
European Central Bank. We expect Euro-Member states to
participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide
financing at average euro area interest rates, but to set
incentives to return to market financing as soon as possible by
risk adequate pricing. Interest rates will be non-concessional,
i.e. not contain any subsidy element. Decisions under this
mechanism will be taken in full consistency with the Treaty
framework and national laws.”

Posted in ECB, EU, Germany | 5 Comments »

Claims/Bernanke on asset sales

Posted by WARREN MOSLER on 25th March 2010

Karim writes:

Initial claims fall 14k to 442k; with downward revisions to past few weeks allowing 4wk avg of initial claims to move to 453.8k; the lowest since 9/08.

This is the part that Bernanke omitted in today’s testimony that was included in his Feb 10 testimony.

“I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. ”

Now just has sequencing more open-ended:

“In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price stability.”

Posted in Employment | 1 Comment »

DGO/Home Sales

Posted by WARREN MOSLER on 24th March 2010

Karim writes:

Durables data was firm.

  • Shipments ex-aircraft and defense (proxy for current qtr business capex) up 0.8%; stands 2.2% above Q4 avg; implication is real capex up 5-6% in q1 after 13.3% gain in q4
  • Orders ex-aircraft and defense (proxy for future capex) up 1.1%

New home sales down 2.2% (prior mth revised to -8.7% from -11.2%); level of new home sales of 308k (annualized) makes new all-time low for 2nd straight month. As a % of the overall economy, hard to see housing go much lower!

Posted in Housing | 1 Comment »

yet more on greece

Posted by WARREN MOSLER on 24th March 2010

Gets stranger by the day:

Broke? Buy a few warships, France tells Greece

March 23 (Economic Times) — In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to
cut public spending and curb its deficit.

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Greece spends more of its gross domestic product on the military than any other European Union country, largely due to long-standing tension with its neighbour, historic rival and NATO ally, Turkey.

“The Germans and the French have them over a barrel now,” said Nick Witney, a former head of the European Defense Agency.

“If you are trying to repair Greek public finances, it’s a ludicrous way to go about things.”

France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft.

Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis.


The Greeks were so sensitive to Sarkozy’s concerns that they announced on the day Papandreou went to Paris that they would go ahead with buying six Fremm frigates worth 2.5 billion euros ($3.38 billion), despite their budget woes.

The ships are made by the state-controlled shipyard DCNS, which is a quarter owned by defense electronics group Thales and may have to lay workers off in the downturn.

Greece is also in talks buy 15 French Super Puma search-and-rescue helicopters made by aerospace giant EADS for an estimated 400 million euros.

The Rafale, made by Dassault Aviation, is a more distant and vastly dearer prospect. There is no published price, but each costs over $100 million, plus weapons.

Germany is meanwhile pressing Athens to pay for a diesel-electric submarine from ThyssenKrupp, of which it refused to take delivery in 2006 because the craft listed during sea trials following a disputed refurbishment in Kiel.

Payment would clear the way for ThyssenKrupp to sell its loss-making Greek unit Hellenic Shipyards, the biggest shipbuilder in the eastern Mediterranean, to Abu Dhabi MAR, industry sources said.

ThyssenKrupp Marine Systems last year canceled a Greek order for four other submarines over the dispute, in which it said Athens’ arrears exceeded 520 million euros.

Witney, now at the European Council on Foreign Relations, said German officials were embittered by Greek behavior in the long-running dispute, as well as previous payment problems over the purchase of German Leopard II tanks.

Greek Deputy Defense Minister Panos Beglitis told Reuters the dispute was on the brink of settlement but denied the timing had anything to do with Athens’ bid to clinch German backing this week for a financial safety net for Greek debt.

“(The submarine) Papanicolis has been carefully inspected by German and Greek experts. It has been greatly improved and declared seaworthy. We will take it, sell it and make a profit,” he said in an interview.

“We are paying 300 million (euros) and we will sell it for 350 million,” Beglitis said. Witney questioned Greece’s chances of turning a profit on a second-hand submarine.


Asked whether big European suppliers were using the crisis to press arms sales on Athens, he said: “This has always been the case with these countries. It is not because of the crisis, there is no link.”

Beglitis said this year’s defense budget was set at 2.8 per cent of GDP, down from 3.1 per cent in 2009. Non-government sources say the real level of military spending may be higher.

“Our strategy is continuously and steadily to reduce spending. This is also in line with the Greek stability and growth program,” Beglitis said. The program, submitted to the EU, pledges to reduce the budget deficit from 12.9 per cent last year to below 3 per cent by the end of 2012.

Western officials and economists have advocated a radical reduction of the armed forces as a long-term way of reducing structural spending, but Greek officials say that would require a real improvement in relations with Turkey.

Despite warmer ties, the two countries remain in dispute over Cyprus and maritime boundaries and have sporadic aerial incidents over the Aegean Sea.

French economist Jacques Delpla said Greece could reap big savings if it moved jointly with Turkey and Cyprus to settle disputes in the Aegean and Eastern Mediterranean and engaged in mutual disarmament.

“Unlike Portugal or Ireland, Greece could benefit from significant peace dividends to reduce its titanic fiscal deficits,” he said.

Posted in ECB | 18 Comments »

Posted by WARREN MOSLER on 22nd March 2010

>   On Mon, Mar 22, 2010 at 10:18 AM, wrote:
>   Warren, don’t know if you saw this analysis from David Kelly.


My current take is very similar:

Looks to me like this is about health care insurance and not health care per se.

Most all that seems to have happened is that government is now helping/funding up to 30 million more people to purchase private health insurance.

It’s a health care insurance bill, not a health care bill. It uses taxes and medicare cuts to ‘pay for’ private sector insurance company premiums.

So most of the funding goes to insurance companies, a portion of which will then be paid to providers and pharma.

The underlying health care system, with all it’s problems, remains largely unchanged.

It requires insurance companies to accept high risks, extend coverages, etc. and therefore raises costs for the insurance companies. This would raise premiums, however there are some controls on that, which would narrow margins.

This is a very odd mixture- using public funds to subsidize private sector insurance premiums.

After reviewing the timing of expenses and taxes and cuts I agree it doesn’t look like there’s much of an immediate macro issue. Maybe a very small negative bias upfront if some expenses go up.

The Investment Implications of Health Care Reform

By David Kelly

This morning, after almost a year of heated debate, the President has achieved his goal of a major reform to the health care system. Yesterday, the House voted to approve the 2409 page Senate Bill passed in December along with 153 pages worth of amendments, on the understanding that the Democratic majority in the Senate would accept these amendments without alteration. Presuming that Senate Democrats do not renege on their pledge, the combined bills will shortly become law.

So what does all of this mean for investors?

First, we need to recognize that in discussing this issue, like any other issue in investing, it is critical to leave politics and emotion to one side. People have very strong opinions on all sides of the health care debate – they are entitled to those opinions. These comments are solely focused on the investment implications of the combined bills.

So passing over the generally recognized positive of expanding coverage to roughly 30 million of the 50 million U.S. residents who don’t currently have insurance, what does it all mean for the economy and markets?

Taxes: The most obvious quantifiable impact of the bill is an increase in taxes for upper income Americans, particularly on investment income. Starting in 2013, the Medicare tax rate on households with income over $250,000 will be increased from 1.45% to 2.35%. In addition, a new 3.8% Medicare tax will be introduced for the same group on investment income.

Currently, the tax rate on dividends and long-term capital gains is 15%. In 2011, those rates are expected to rise to 20% for households earning over $250,000 and with the new Medicare tax, these rates will rise to 23.8% for the same group. Under current tax law, investors get to keep 85% of the income stream from taxable stock market investments. Under this new law this will be cut by 8.8% to 76.2%, reducing the value of the income stream by 10.4% (that is 8.8% of 85%). This is obviously a significant number. However, it is worth noting three things about this:

* First, roughly half of U.S. stocks are owned by households with income under $250,000 and roughly half are held in non-taxable accounts. Thus, using a number of broad assumptions, the value of the average stock should be reduced by one quarter of 10.4% or 2.6% – not good obviously, but also not an overwhelming reason to avoid stocks after 12 month period in which they rose by over 70% and still appear undervalued.

* Second, this bill does not put stocks at a further disadvantage relative to fixed income. The maximum federal tax rate on bonds and cash accounts is currently 35% and with tax changes coming in 2011 combined with these changes, that maximum rate will rise to 43.4% for households with income over $250,000 in 2013.

* And, third, it’s not like we haven’t been here before. On average over the past 40 years the maximum federal tax on capital gains was 24.7% and the maximum tax rate on dividends was 44.6%.

For the Medical Care Industry, this bill will expand demand without much effort to reign in costs. A combination of federal subsidies and mandates will increase the pool of insured, and while there many constraints preventing insurance companies from limiting coverage there are few which limit how much they can charge for it.

The pharmaceutical industry will benefit for this as well as a plan to remove the donut hole from the Medicare prescription drug benefit program by 2020. Early in the debate on health care, the White House negotiated deals with pharmaceutical, insurance and medical device companies to dissuade them from fighting the reform effort. Under these deals, they appear to retain autonomy on price setting. However, they will pay cumulative taxes of $107 billion between 2011 and 2019. To the extent that they are able to pass these costs on to consumers they may all do OK in this reform, although they may still be a target for future reform efforts.

The American Medical Association and American Hospital Association have both endorsed the health reform effort with a number of reservations. For the most part, the legislation does not interfere with patient-doctor relationships and, by expanding the pool of the insured, will reduce the number of hours which doctors are forced to devote to charity cases. Most doctors are naturally happy to see patients not lose their coverage due to pre-existing conditions clauses, annual caps or non-renewal of existing insurance due to illnesses.

For the Federal Deficit: According to the Congressional Budget Office, the passage of this legislation would reduce federal deficits by a cumulative $143 billion between 2010 and 2019 and by greater amounts in the following decade. However, these estimates should be taken with more than a grain of salt. It is obviously very hard to estimate what total federal health care spending will be over the next decade. However, whatever else is said about this bill there is nothing in it to suggest a reduction in either the quantity or prices of health care services consumed.

* There is no meaningful malpractice reform.
* There is no reduction in drug patent lives.
* There is no compulsion to force insurance companies to compete across state lines.
* There is no effort to limit health care procedures in the last year of life.
* There is no movement in the direction of forcing consumers to confront the cost of services at the point of purchase, and,
* There are no meaningful incentives to force the insured to take better care of their own health.

In fact, for the most part this bill moves away from, rather than towards, the principles of market economics. In 2007, the U.S. devoted 16% of its GDP to health care spending compared to 11% in the country with the second highest spending which was France. Despite this it ranks 38th in the world in life expectancy at birth. Sadly, this bill isn’t likely to change either of these numbers for the better.

For the economy: Despite dire predictions, it’s not clear that health care reform will really slow economic growth that much. Most of the tax provisions don’t kick in until 2013 and the mandates on businesses and individuals don’t kick in in a big way until 2016. Between now and then, the economy is quite capable of staging a full cyclical recovery. It may be that businesses will, in the end, be forced to pay more for the health care of their workers – however, overall, American business is quite capable of limiting wage increases to add to benefit costs. It may be that America as a society ends up spending more on health care. However, if we spend more on health care and less on housing or education or hamburgers, that is our choice. The jobs created in the health care field are American jobs and still some the highest skilled and best paid jobs out there. It should be noted, however, that to the extent that the government incurs more debt to pay for higher health care costs, it probably does mean higher long-term interest rates.

Finally, for politics: The passage of health care reform is a huge victory for the President and it may ultimately work out better for him politically than many Republicans had hoped or Democrats had feared. The economy is improving, and if it continues to do so, many may feel that their fears about health care reform were unfounded. The reality is more complicated. Health care reform wasn’t about to stop the economy in its tracks anyway and the President will be the beneficiary of a cyclical bounce-back which, on its face, appears to owe much more to pent-up demand than government stimulus. Either way the Democrats will lose seats in the mid-term election. However, the end-game for health care reform may well mean less of a swing to the Republicans in November than many had thought.

All in all, a lot to consider but also, more importantly, a lot to keep in proper perspective.

Posted in Political | 31 Comments »

backsliding on Greece

Posted by WARREN MOSLER on 21st March 2010

Merkel says aid for Greece not issue at EU summit

March. 21 (CNBC) —German Chancellor Angela Merkel says Greece does not need any financial help and that EU leaders should not make aid for the indebted country an issue at their summit in Brussels next week

Doesn’t get any clearer than that.

The moral hazard test is on.

If the eurozone uses uses its banks to buy each other’s debt behind the scenes or makes some other arrangements where financing ceases to be an issue, it may trigger a race to the bottom with regards to deficits and the euro, as the game will be ‘the national govt with the largest deficit wins.’ This is not a desired outcome.

But if they don’t move to ease financing imbalances, defaults will have the opposite, deflationary effects, and probably cause a freeze in the entire payments system.

Posted in CBs, EU | No Comments »

In paradigm Health Care criticism from the left

Posted by WARREN MOSLER on 21st March 2010

This Is Not The Way To Do Healthcare Reform: Democrats Propose Windfall For Insurance Industry

By L. Randall Wray

It is beginning to look like Congress is going to vote to pass health care legislation on Sunday. According to the NYTimes, Democrats are practically celebrating already. here
It is interesting, however, that no one is talking about providing benefits to the currently underserved.
Rather, the “good news” is that the bill is supposed to be “the largest deficit reduction of any bill we have adopted in Congress since 1993,” according to House Democratic leader, Rep.Steny H. Hoyer of Maryland. “We are absolutely giddy over the great news,” said the House’s number three Democrat, Rep. James Clyburn of South Carolina. (Of course, deficit hysteria is nothing new. See here

Who would have thought that health care “reform” would morph into deficit cutting?

As Marshall Auerback and I argue in a new policy brief here
, the proposed legislation is not “reform” and it will not reduce US health care costs. I will not repeat the arguments there. But very briefly, the most significant outcome of this legislation is the windfall gain for insurance companies—who will be able to tap the wages of the huge pool of nearly 50 million Americans who currently do not purchase health insurance. Since many of these are too poor to afford the premiums, the government will kick in hundreds of billions of dollars to line the pockets of health insurers. This legislation has nothing to do with improving health services for the currently underserved—it is all about increasing the insurance sector’s share of the economy.

You might wonder how Democrats can call this a deficit reduction deal? Elementary, dear Watson. They will slash Medicare spending. No wonder—it stands as an alternative to the US’s massively inefficient private insurance system, hence, needs to be downsized in favor of an upsized private system.

There is nothing in the deal that will significantly reduce health care costs. At best, it will simply shift more costs to employers and employees—higher premiums, higher deductibles, higher co-pays, and more exclusions forcing higher out-of-pocket expenses and personal bankruptcies. As we show in our paper, the US’s high health care costs (at 17% of GDP, double or triple the per capita costs in other similarly wealthy nations) are due to three factors. As many commentators have argued (especially those who advocate single-payer) part of the difference is due to the costs of operating a complex payment system that relies on private insurers—resulting in paperwork and overhead costs, plus high profits and executive compensation for insurance executives. This adds about 25% to our health care system costs. Obviously, the proposed legislation is “business as usual”, actually adding more insurance costs to our system.

In addition, Americans spend more for medical supplies and drugs. Since the Democrats ruled out any attempt to constrain Big Pharma through, for example, negotiating lower prices for drugs, there will not be any savings there.

Finally, and most importantly, the biggest contributor to higher US health care costs is our American “lifestyle”: too little exercise, too much bad food, and too much risky behavior (such as smoking). here
This is why we spend far more on outpatient costs for chronic diseases such as diabetes—40% of healthcare spending and rising rapidly. Ending the subsidies to Big Agriculture that produces the products that make us sick would not only do more to improve US health outcomes than will the proposed legislation, but it would also reduce health care spending—while reducing government spending at the same time. That would be real healthcare reform! But, of course, no one talks about this.

Interestingly, according to the NYTimes article, President Obama likened the legislation to fixing the financial system or passing the economic recovery act. “I knew these things might not be popular, but I was absolutely positive that it was the right thing to do,” he said. That is an apt and scary comparison. This legislation will do as much to “fix” the US healthcare system as the Obama administration has done to “fix” the financial sector and to put the economy on the road to recovery?

Of course, we have not done anything to “fix” the financial sector, or to put Mainstreet on the road to recovery.

I think the President’s comparison is uncannily accurate. So far the main thing his administration has done is to funnel trillions of dollars to the FIRE sector in an attempt to restore money manager capitalism. The current legislation will simply continue that policy—the trillions spent so far to bail-out Wall Street have not been nearly enough. Hence, the effort to funnel billions more to the insurance industry.

But what is the connection between Wall Street and health insurers? As Marshall and I argue in our brief, they are “two peas in a pod” since the deregulation of financial institutions. We threw out the Glass-Steagall Act that separated commercial banking from investment banking and insurance with the Gramm-Leach-Bliley Act of 1999 that let Wall Street form Bank Holding Companies that integrate the full range of “financial services”, that sell toxic waste mortgage securities to your pension funds, that create commodity futures indexes for university endowments to drive up the price of your petrol, and that take bets on the deaths of firms, countries, and your loved ones. See also here

Hence, extension of healthcare insurance represents yet another unwelcome intrusion of finance into every part of our economy and our lives. In other words, the “reforms” envisioned would simply complete the financialization of healthcare that is already sucking money and resources into the same black hole that swallowed residential real estate. here

Just as the bail-out of Wall Street was sold on the argument that we need to save the big banks so that they will increase lending to Main Street, health care “reform” was initially promoted as a way to improve provision of healthcare to the underserved. What we got instead is a bail-out for insurers and cuts to Medicare. Funny how that happens.

Posted in Government Spending | 9 Comments »

Health care

Posted by WARREN MOSLER on 19th March 2010

Looks like bad macro- various taxes kick in right away while increased expenses start a few years later.

It’s completely backwards for this point in the business cycle.

Health-Care Bill Would Increase Taxes On Wages, Investments

March 19 (Bloomberg) — High-income families would be hit with a tax increase on wages and a new levy on investments under President Barack Obama’s health care overhaul bill.

Posted in Uncategorized | No Comments »


Posted by WARREN MOSLER on 18th March 2010

Interesting how years of 0 rate policies don’t seem to generate inflation.

Karim writes:

Data in past week (retail sales, Empire survey, claims, PPI, CPI) continues to show best of both worlds—economy improving and inflation very low.

Initial claims drop another 5k to 457k.

  • CPI unch on headline basis and +0.053% on core.
  • Core now 1.3% y/y and has a couple more mths of favorable base effects that should allow it to fall below 1%.
  • Core inflation running 0.1% on a 3mth annualized basis!
  • OER (unch) continues to hold down the series with apparel (-0.7%) the only notable outlier this month.

Posted in Employment, Inflation | No Comments »

Saudi Oil Minister Sees No Need to Alter OPEC Production Now

Posted by WARREN MOSLER on 17th March 2010

The Saudis continue to set price and let quantity adjust, and output levels are ‘comfortable’ with substantial room to go higher or lower to support their target price. If they do leave it ‘in the 70-80 range’ there should be no inflation in the US and most other nations. The US has never had a serious ‘inflation problem’ that wasn’t oil driven.

Saudi’s Naimi Sees No Need to Alter OPEC Production

By Ayesha Daya and Grant Smith

March 16 (Bloomberg) — Saudi Arabia, the biggest and most influential member of the Organization of Petroleum Exporting Countries, said oil prices are in the right range and there’s no need to change production policy.

“We are extremely happy with the market, the economy is doing well, it will do better down the road, so I don’t see any reason to disturb this happy situation,” Saudi Oil Minister Ali Al-Naimi said late yesterday in Vienna, where OPEC meets tomorrow. “The price has stayed very well in the range of $70 to $80. It is in a very happy situation.”

Posted in Comodities, Currencies, Inflation | No Comments »


Posted by WARREN MOSLER on 15th March 2010

Not a good idea to get short crude with this kind of tail risk….

Final destination Iran?

By Rob Edwards

Published on 14 Mar 2010

Hundreds of powerful US “bunker-buster” bombs are being shipped from California to the British island of Diego Garcia in the Indian Ocean in preparation for a possible attack on Iran.

The Sunday Herald can reveal that the US government signed a contract in January to transport 10 ammunition containers to the island. According to a cargo manifest from the US navy, this included 387 “Blu” bombs used for blasting hardened or underground structures.

Experts say that they are being put in place for an assault on Iran’s controversial nuclear facilities. There has long been speculation that the US military is preparing for such an attack, should diplomacy fail to persuade Iran not to make nuclear weapons.

Although Diego Garcia is part of the British Indian Ocean Territory, it is used by the US as a military base under an agreement made in 1971. The agreement led to 2,000 native islanders being forcibly evicted to the Seychelles and Mauritius.

The Sunday Herald reported in 2007 that stealth bomber hangers on the island were being equipped to take bunker-buster bombs.

Although the story was not confirmed at the time, the new evidence suggests that it was accurate.

Contract details for the shipment to Diego Garcia were posted on an international tenders’ website by the US navy.

A shipping company based in Florida, Superior Maritime Services, will be paid $699,500 to carry many thousands of military items from Concord, California, to Diego Garcia.

Crucially, the cargo includes 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs.

“They are gearing up totally for the destruction of Iran,” said Dan Plesch, director of the Centre for International Studies and Diplomacy at the University of London, co-author of a recent study on US preparations for an attack on Iran. “US bombers are ready today to destroy 10,000 targets in Iran in a few hours,” he added.

The preparations were being made by the US military, but it would be up to President Obama to make the final decision. He may decide that it would be better for the US to act instead of Israel, Plesch argued.

“The US is not publicising the scale of these preparations to deter Iran, tending to make confrontation more likely,” he added. “The US … is using its forces as part of an overall strategy of shaping Iran’s actions.”

According to Ian Davis, director of the new independent thinktank, Nato Watch, the shipment to Diego Garcia is a major concern. “We would urge the US to clarify its intentions for these weapons, and the Foreign Office to clarify its attitude to the use of Diego Garcia for an attack on Iran,” he said.

For Alan Mackinnon, chair of Scottish CND, the revelation was “extremely worrying”. He stated: “It is clear that the US government continues to beat the drums of war over Iran, most recently in the statements of Secretary of State, Hillary Clinton.

“It is depressingly similar to the rhetoric we heard prior to the war in Iraq in 2003.”

The British Ministry of Defence has said in the past that the US government would need permission to use Diego Garcia for offensive action. It has already been used for strikes against Iraq during the 1991 and 2003 Gulf wars.

About 50 British military staff are stationed on the island, with more than 3,200 US personnel. Part of the Chagos Archipelago, it lies about 1,000 miles from the southern coasts of India and Sri Lanka, well placed for missions to Iran.

The US Department of Defence did not respond to a request for a comment.

Posted in Comodities | 4 Comments »

Euro finance ministers to agree on Greek aid: source

Posted by WARREN MOSLER on 15th March 2010

Without an interest rate and a credible quantity pledged, the agreement is grossly deficient.

The way Greece obtains funding is by offering ever higher rates until there is a taker.

So let’s say they offer securities at 5%, then 6, then 7, then 10, then 15, then 20 with no takers. How high do they go before they tell the EU group they have failed to obtain funding?
And then what rate does the EU charge them if they agree?

The process makes no sense.

The way to do it is for the EU group to offer funding at some rate, giving Greece some amount of time to try to find a better rate.

Euro finance ministers to agree on Greek aid: source

By Jan Strupczewski

March 13 (Reuters) — Euro zone finance ministers are likely to agree on Monday on a mechanism for aiding Greece financially, if it is required, but will leave out any sums until Athens asks for them, an EU source said on Saturday.

Policymakers have been debating possible financial support for the heavily-indebted European Union member state for more than a month, but have provided only words of support. Germany, key to any deal, has resisted appeals to promise aid.

British newspaper The Guardian on Saturday quoted sources as saying Monday’s meeting of the currency zone’s 16 finance ministers would agree to make aid of up to 25 billion euros available.

But a senior EU source with knowledge of preparations for Monday’s meeting told Reuters no numbers were likely at this stage.

“I think we should be able to agree on principles of a euro area facility for coordinated assistance. The European Commission and the Eurogroup task force would have the mandate to finalize the work,” the source said.

“It would be the principles and parameters of a facility or mechanism, which then could be activated if needed and requested.

He said no figure had been agreed.

“You would have a framework mechanism and you would have blank spaces for the numbers because there has been no request (from Greece) yet,” the source said.

Greece has announced steps to reduce its budget deficit this year to 8.7 percent of GDP from 12.7 percent in 2009, triggering street protests and strikes but also reducing market concern over whether the country would be able to service its debt.

That helped Athens sell its bonds with ease on debt markets earlier this month, but policymakers are still searching for ways of making its cost of borrowing — still far above that of other Europeans — more sustainable.

They are also concerned that the problems in Greece could undermine confidence in the euro and spread to other heavily indebted eurozone countries such as Portugal or Spain.


The EU source said that among the instruments considered to help Greece were both bilateral loans and loan guarantees.

“The preparations have been done under the Eurogroup by member states and the Commission. The Commission has done much of the technical work,” the source said.

“The aim of the exercise so far has been to do the technical preparations, so that the political decision could be possible on Monday. Germany holds the key at the moment.”

Polls show that public opinion in Europe’s biggest economy Germany is strongly opposed to bailing out Greece, which has for years provided unreliable statistics about the true size of its deficit and debt, breaking EU budget rules.

In a move that is likely to alleviate German concerns about spending money on Greece, the Commission has said it would soon make a proposal for stronger economic cooperation between euro zone countries and tighter surveillance of their performance.

French Economy Minister Christine Lagarde told the Wall Street Journal she believed Greece’s austerity moves were behind the improvement in its situation on markets and negated the need for a bailout.

“”There is no such thing as a bailout plan which would have been approved, agreed or otherwise, because there is no need for such a thing,” she said.

But she added that “technical experts” at the EU have been working on a contingency plan, so that if the need arose “all we would have to do is press the button.”

The Guardian quoted a senior official at the European, the EU executive, official as saying the euro zone members had agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees if Athens was unable to refinance its debts and called on the EU for help.

The agreement has been tailored to avoid breaking the rules governing the operation of the euro currency which bar a bailout for a country on the brink of bankruptcy, and to avoid a challenge by Germany’s supreme court, the official said.

A German ministry spokesman said he could not believe the newspaper’s report on the bailout plan was correct.

“We are not aware that this is being planned,” he said, adding that Greece had not requested any aid. “Greece is implementing its (savings) program and we expect that it will manage it alone.”

(Additional reporting by Tim Pearce in London, Pete Harrison in Brussels and Volker Warkentin in Berlin, Writing by Sarah Marsh and Jan Strupczewski; Editing by Patrick Graham)

Posted in Currencies, ECB, EU, Germany | 24 Comments »

The Eurozone Solution For Greece Is A Very “Clever Bluff”?

Posted by WARREN MOSLER on 15th March 2010

The Eurozone Solution For Greece Is A Very “Clever Bluff”?

The Guardian is today reporting that, after weeks of crisis, the Eurozone has agreed to what appears to be a multibillion-euro assistance package for Greece that will be finalized on Monday. Member states have apparently agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees to Greece, but only if Athens finds that it is unable to refinance its soaring debt and asks for help. Other sources said the aid could total €25bn (£22.6bn) to meet funding needs estimated in European capitals that Greece could need up to €55bn by the end of this year.

Once again, however, since funding is a function of interest rates, this proposal has the appearance of a very “clever bluff”. It says nothing about how high interest rates for Greece would have to go before the Greek government is somehow declared unable to refinance, and asks for additional help. The member nations probably structured the loan package and terms this way hoping to try to draw in lenders who would rely on this member nation as a back stop when making their investment decisions. However, if this ploy fails, Greek rates will go sky high in an attempt to refinance, and as Greece asks for more help, the spike in rates will make it all the more difficult for the entire Eurozone monetary system to function. Additionally, the prerequisite austerity measures will subtract aggregate demand in Greece and the rest of the Eurozone, and, to some extent, the rest of the world as well.

I have a very different proposal. It is designed to be fair to all, and not a relief package for any one member nation. It is also designed to not add nor subtract from aggregate demand, and also provide an effective enforcement tool for any measures the Eurozone wishes to introduce.

My proposal is for the ECB to distribute 1 trillion euro annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. This distribution would immediately adjust national government debt ratios downward which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

The 1 trillion euro distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non compliance, which have proven themselves unenforceable as a practical matter.

There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. I see no reason why any would object, as this proposal serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.

Posted in Credit, Currencies, ECB, EU, Germany, Government Spending | 2 Comments »