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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 April, 2010

Chatter About the Fed/ECB CCY Swap Line

Posted by WARREN MOSLER on 30th April 2010

This one’s for the bloggers-

Dollar swap lines are functionally unsecured loans to foreign govts. that the Fed can do unilaterally. Congress only finds out well after the fact. Last time around they did $600 billion, including lending (unsecured) to nations Congress never would have approved.

The problem is the Fed Chairman insists they are secured because we get local currency deposits at the foreign central bank as collateral.

That’s like putting up your watch as collateral for a loan but you still wear it.

Chatter About the Fed/ECB CCY Swap Line
If reinstituted, it is a basic spot/forward FX trading line.

What this does is to give the ECB the power to lend USD in Europe. It
has 2 potential benefits:

1.Not all banks in Europe who require USD funding has access to the Fed
or the FF market

2.They don’t have to wait until NY opens if panic breaks out in Europe
over USD funding.

There is a third benefit. Politics. It let’s the market know that the
central banks are on the case, and the Fed doesn’t want to see the
FRA-OIS spread spin out of control.

Posted in CBs, ECB | 5 Comments »

what is gong on with swap spreads this am?

Posted by WARREN MOSLER on 30th April 2010

Fed also re opening swap lines to ECB – looks ready to do more unsecured dollar lending to them and maybe others.

They look to be doing what they did last time around to keep libor down – lend unsecured to bad credits. High risk but it does get rates down.

On Fri, Apr 30, 2010 at 12:23 PM, Jason wrote:

Confluence of events..

Month end bid for treasuries
Goldman stock down 14 and financial CDS wider creating some fears for financial sector
Greece flight to quality concerns going into the weekend

Fed to begin expanding the Term deposit facility which will remove excess cash and remove downward pressure on term LIBOR

LIBOR quoted for Monday as 35.375 / 35.5 +1

1y OIS-LIBOR 5 day chart:


2y spreads leading the way wider +5 to 23.5

Still cheap though

Press Release
Release Date: April 30, 2010

For immediate release
The Federal Reserve Board has approved amendments to Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. These amendments incorporate public comments on the proposed amendments to Regulation D that were announced on December 28, 2009.

Term deposits, which are deposits with specified maturity dates that are held by eligible institutions at Reserve Banks, will be offered through a Term Deposit Facility (TDF). Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.

The amendments approved by the Board are a necessary step in the implementation of the TDF. As noted in the attached Federal Register notice, the Federal Reserve anticipates that it will conduct small-value offerings of term deposits under the TDF in coming months to ensure the effective operation of the TDF and to help eligible institutions to become familiar with the term-deposit program. More detailed information about the structure and operation of the TDF, including information on the steps necessary for eligible institutions to participate in the program, will be provided later.

The amendments will be effective 30 days after publication in the Federal Register, which is expected shortly.

Posted in CBs, ECB, EU, Fed, Interest Rates | 1 Comment »

OPEC April Crude Output Up 25,000 Bbl/Day to 29.19 Mln

Posted by WARREN MOSLER on 30th April 2010

No sign the price hikes are coming from demand pressures.

It’s just the saudis hiking price, thinly masked by the news headlines and passive commodity buyers they use for ‘cover’ so no fingers get pointed in their direction

— Original Sender: NLRT ALERT, BLOOMBERG/ 731 LEXIN —

—– Original Message —–
At: 4/30 2:21:45

OPEC April Crude Output Up 25,000 Bbl/Day to 29.19 Mln

The attached story matches the criteria for the News Alert named “OPCR”. Type {97 } to view the story on wire BN (BLOOMBERG News).

Your keyword(s) were found in the story’s headline.
OPEC April CRUDE OUTPUT Up 25,000 Bbl/Day to 29.19 Mln

Posted in Comodities | No Comments »

It’s not too late for Greece

Posted by WARREN MOSLER on 30th April 2010

It remains my contention that Greece can dramatically upgrade its new securities simply by putting a provision in the default section that states that in the case of default the bearer, on demand, can use the securities at maturity value plus accrued interest to pay Greek government taxes. This makes the debt ‘money good’ for as long as there is a Greek government that levies taxes.

This would allow Greece to fund itself a low interest rates. It would also be an example for the rest of the euro zone and thereby ease the funding pressures on the entire region.

However, it would also introduce a new ‘moral hazard’ issue as this newly found funding freedom, if abused, could be highly inflationary and further weaken the euro.

Spread the word!

Posted in ECB, EU, Government Spending | 12 Comments »

Tea Party Protest Sign

Posted by WARREN MOSLER on 30th April 2010

Posted in Exports, Government Spending | 63 Comments »

Moody’s likely to downgrade Greece and Brazil buying more $

Posted by WARREN MOSLER on 29th April 2010

Seems no one wants a strong currency anymore, but instead wants to keep their real wages down.

So fears of a dollar crash seem again to be overblown.

Nor is there any immediate risk of inflation from excess demand.

The cost push risk from the Saudis hiking prices remains, and so price is unpredictable with demand relatively flat

The situation in Greece seems to be binary, based on political decisions.

Also markets are already discounting maybe a third of what happens if they get it wrong.
So betting one way or the other has a lower risk/reward than a few weeks ago.

US economy looking internally ok with risks remaining external- greece, china, etc.

On Thu, Apr 29, 2010 at 3:09 PM, EDWARD wrote:
‘ Moody’s said it has previously indicated that a “multi-
notch downgrade” is likely and the specific lowering “will
depend on the level of ambition of the multi-year economic and
fiscal program.”’


It appears that the sovereign fund will be used as a mechanism to affect the BRL and thus policy tool of the government from these headlines (which seems a little odd for sovereign wealth fund whose assets were acquired by foreign exchange policy implementation, unless they are talking about investing in USD assets along with USD buying). More details/clarification to follow.

Posted in Currencies | 3 Comments »

Claims/Eur Gwth Surprise?

Posted by WARREN MOSLER on 29th April 2010

Karim writes:
Initial claims fell 11k to 448k, lowest level in 1mth.
Anecdotes supporting further declines ahead:

  • Caterpillar CEO: “We enjoy hiring people and growing our business, and we’re delighted to see that opportunity coming back”

EU Sentiment and Manufacturing surveys for April out today and quite strong (except for Greece)

  • Of note is stock of inventories at all-time low while new orders and production are rising
  • Wouldn’t be surprised to see 5-6% GDP growth in Q2 for Europe; of course may not be sustainable due to fiscal issues,etc, but should still be a surprise

Yes, if the ECB, for example, simply guaranteed the national govt debt it would work reasonably well. The automatic stabilizers would get the deficits to as high as needed to restore growth and employment.

But that would introduce the moral hazard issue, as whoever ran the largest deficit would be the winner in real terms, in an inflationary race to the bottom.

So they don’t want to remove the ‘market discipline’ aspect even though a nation can become insolvent before the deficit has a chance to get high enough to turn things around.

Posted in Employment, EU | 3 Comments »

US housing

Posted by WARREN MOSLER on 29th April 2010

yes, thanks!

On Thu, Apr 29, 2010 at 7:46 AM, wrote:

—–Original Message—–

Great chart on US housing…got this earlier in the week but
the world been moving far too quickly since…shows the
momentum in the LoanPermance Index vs CaseSchiller house
prices…chart speaks for itself as to the risks?

Posted in Housing | No Comments »

Re: Run on European Banks?

Posted by WARREN MOSLER on 29th April 2010

>   (email exchange)
>   On Wed, Apr 28, 2010 at 8:23 AM, wrote:
>   Given this view warren, do you think Natl Bk of Greece goes to zero here?
>   Or do you think Europe will do a “shock an awe” 100b package that makes
>   greek banks a buying opportunity?

Wish I knew!

They might like to, but they still don’t have an answer to the moral hazard issue or popular support for a ‘bailout’

What’ they’d like to do is figure out a way to isolate Greece, hence the presumed proposals from yesterday, but those aren’t satisfying either.

And any major package weakens the others who have to fund it in the market place.

Nor do they have a way to enforce their austerity demands and keep them from being reversed once it’s known they’ve taken the position that it’s too risky to let any one nation fail.

They are still in a bind, and their austerity measures mean they don’t keep up with a world recovery

Also, a Greek restructure that reduces outstanding debt is a force that strengthens the euro as it reduces outstanding euro financial assets.

The negative is that it further reduces euro ‘savings desires’ and drives more portfolios to shift away from euro.

And domestic taxes are still payable in euro, so there is that fundamental support .

Again, could go either way from here.

Sometimes that’s how it is!

Posted in Banking, ECB, EU | 1 Comment »

gold priced in euro

Posted by WARREN MOSLER on 27th April 2010

Scares any central banker:

Gold in euro’s:

Full year:

Posted in Comodities, ECB | 2 Comments »

Run on the European banks?

Posted by WARREN MOSLER on 27th April 2010

When/if word gets out that depositors can lose, that contagion spreads across the euro zone with a general run on the banking system to actual cash, gold, and other currencies, which doesn’t create a cash shortage but drives the euro down further, and further weakens the credit worthiness of all the national govts.

As previously suggested, the endgame is a shut down of the payments system and a reorganization of the entire system with credible deposit insurance and central funding.

My proposal still seems the only one I’ve seen that makes any sense at all, and it’s still not even a consideration.

Europe-wide carnage we saw today.

This is not just about sovereign debt. This is about a concern about the banking system.

The word from S&P is that Greek debt holders will take a major haircut on their holdings, and that means serious problems for banks. (See the full list of victims here)

The surging CDS of Portuguese and Spanish banks is a major red flag.

From CMA Datavision:

Posted in Banking, Bonds, ECB, EU | 28 Comments »

The Day Ahead in DC

Posted by WARREN MOSLER on 27th April 2010

A true day of infamy!

Financial reform and fiscal policy…

9:45 am – President Obama speaks on fiscal policy. At the opening of the inaugural meeting of the National Commission on Fiscal Responsibility and Reform.

10:00 am – Permanent Subcommittee on Investigations hearing on the financial crisis. The hearing should run through mid-afternoon.

10:00 am – Fed Chairman Bernanke and OMB Director Orzsag testify on fiscal matters. At the first meeting of the president’s fiscal commission.

12:30 pm – Senate party conference meetings. Following last night’s Senate vote on financial reform, in which Democratic leaders failed to invoke cloture (i.e., close debate) on the question of whether to proceed with debating the bill, both parties must now decide how to proceed. Most observers expect that although Republicans opposed the bill last night unanimously, that unity may not last very long, as many members have a desire to eventually vote for some form of financial reform legislation. Republicans on the Senate Banking Committee and their staffs have been writing an alternative proposal to offer on the Senate floor, though when and even if that comes at this point is unclear. Senate Democratic unity was set back yesterday by one member, Sen. Nelson of Nebraska, voting yesterday with Republicans against moving forward. The ongoing discussions today, and partiuclarly the conference lunches at mid-day, will set the tone for the next steps in the process.

Afternoon – Vote on financial reform? Most observers expect Majority Leader Reid (D-NV) to call for another vote moving forward with Senator Dodd’s financial reform bill as soon as later today, potentially followed by yet another vote tomorrow if today’s vote does not hit the 60 votes required. Following the first cloture vote yesterday, subsequent reconsideration of that vote can be called for at any time.

Posted in Government Spending, Obama, Political | 1 Comment »

Bank Regulation and LIBOR

Posted by WARREN MOSLER on 27th April 2010

Too big to fail should not mean restricted liquidity.

Hopefully they don’t use the liability side of banking for market discipline.

But as they don’t even know what a bank is and are in this way over their heads they might!

>   (email exchange)
>   On Tue, Apr 27, 2010 at 8:09 AM, Jason wrote:
>   Possibly if the legislation succeeds in removing risk for those determining the setting…
>   But one of the primary goals is to remove the lending subsidy provided by the TBTF
>   moniker
>   If they firmly establish banks as no longer too big to fail, their short term credit ratings
>   could fall as far as tier 2 in some cases.
>   Thus the average LIBOR setting may move higher just as their CP rates move higher.
>   Also if they lose their ability to lend at lowest rates some of their businesses fall into
>   jeopardy (bank letters of credit, liquidity facilities for VRDNs etc)

Posted in Banking, Interest Rates | 4 Comments »

BIS getting there (yet not fully)

Posted by WARREN MOSLER on 25th April 2010

Yes, his causation is off on the less important point of the central bank eliminating opportunity costs when in fact market forces eliminate opportunity cost as they express indifference levels to central bank rate policies.

But apart from that it’s very well stated and what we’ve been saying all along, thanks!!! The highlighted part is especially on message and hopefully becomes common knowledge.

Jaime Caruana, General Manager of the BIS says ‘unconventional
measures’ do not increase lending, nor are inflationary:

In fact, bank lending is determined by banks’ willingness to grant
loans, based on perceived risk-return trade-offs, and by the demand
for those loans. An expansion of reserves over and above the level
demanded for precautionary purposes, and/or to satisfy any reserve
requirement, need not give banks more resources to expand lending.
Financing the change in the asset side of the central bank balance
sheet through reserves rather than some other short-term instrument
like central bank or Treasury bills only alters the composition of the
liquid assets of the banking system. As noted, the two are very close
substitutes. As a result, the impact of variations in this composition
on bank behaviour may not be substantial.

This can be seen another way. Recall that in order to finance balance
sheet policy through an expansion of reserves the central bank has to
eliminate the opportunity cost of holding them. In other words, it
must either pay interest on reserves at the positive overnight rate
that it wishes to target, or the overnight rate must fall to the
deposit facility floor (or zero). In effect, the central bank has to
make bank reserves sufficiently attractive compared with other liquid
assets. This makes them almost perfect substitutes, in particular for
other short-term government paper. Reserves become just another type
of liquid asset among many. And because they earn the market return,
reserves represent resources that are no more idle than holdings of
Treasury bills.

(…) What about the concern that large expansions in bank reserves
will lead to inflation – the second issue? No doubt more accommodative
financial conditions resulting from central bank lending and asset
purchases, insofar as they stimulate aggregate demand, can generate
inflationary pressures. But the point I would like to make here is
that there is no additional inflationary effect coming from an
increase in reserves per se. When bank reserves are expanded as part
of balance sheet policies, they should be viewed as simply another
form of liquid asset that is comparable to short-term government
paper. Thus funding balance sheet policies with reserves should be no
more inflationary than, for instance, the issuance of short-term
central bank bills.

(…) Ultimately, any inflationary concerns associated with
monetisation should be mainly attributed to the monetary authorities’
accommodating fiscal deficits by refraining from raising rates. In
other words, it is not so much the financing of government spending
per se – be it in the form of bank reserves or short-term sovereign
paper – that is inflationary, but its accommodation at inappropriately
low interest rates for too long a time. Critically, these two aspects
are generally lumped together in policy debates because the prevailing
paradigm has failed to distinguish changes in interest rate from
changes in the amount of bank reserves in the system. One is seen as
the dual of the other: more reserves imply lower interest rates. As I
explained earlier, this is not the case. While both the central bank’s
balance sheet size and the level of reserves will reflect an
accommodating policy, neither serves as a summary measure of the
stance of policy.

Posted in Banking, CBs, Fed, Interest Rates | 2 Comments »

Fed on social value of interbank market

Posted by WARREN MOSLER on 25th April 2010

Excellent! About 6 months ago I handed out my ‘proposals,’ and we have made the below point on many occasions. Looks like real progress!

>   (email exchange)
>   On Sun, Apr 25, 2010 at 5:43 AM, Andrea wrote:
>   It seems that Fed tries hard to see value in the interbank market but
>   they are close to admit it has none?

For example, market participants must monitor the
creditworthiness of borrowers. If the overnight market were
substantially less active, such monitoring may not take place on
a regular basis; this in turn could make borrowing even harder
for a bank that finds itself short of funds. Such monitoring may
also play a socially valuable role in exposing banks to market
discipline. It is important to bear in mind, however, that the
market for overnight loans of reserves differs from other
markets in fundamental ways. As we discussed, reserves are not
a commodity that is physically scarce; they can be costlessly
produced by the central bank from other risk-free assets.
Moreover, there is no role for socially useful price discovery
in this market, because the central bank’s objective is to set a
particular price. Weighing the costs and benefits of a reduction
in market activity is therefore a nontrivial task and an
important area for future research.

Posted in CBs, Fed | No Comments »

Starving the beast

Posted by WARREN MOSLER on 25th April 2010

How to fight back against Wall Street

Much like we killed the buffalo to defeat the American Indians, we can work to tame Wall Street by working to reduce its food supply. And a large part of that food supply is the US pension system. Created and sustained by the innocent fraud that savings funds investment in a ‘loans create deposits’ world, the powerful attraction of being able to accumulate ‘savings’ on a pre-tax basis has generated nearly $20 trillion in US pension assets in thousands of scattered plans, from the giant State retirement funds to the small corporate pension funds, to the various smaller individual retirement funds.

Before I get to the way we can eliminate these bloated whales being eaten alive by the sharks, let me first suggest a few ways to whales from becoming shark food. The first is to get back to ‘narrow investing’ and public purpose by creating a list of investments deemed legal for any government supported pension funds. And ‘government supported’ would include any funds that are in any way tax advantaged. Legal investments would be investments that are in line with further public purpose. Not a lot comes to mind. If the public purpose is safety for the investors government securities would be appropriate, as government securities are functionally government guaranteed annuities. New issue equities might make sense if portfolio managers were required to be sufficiently educated and tested to make sure they are up for the responsibility of deciding where new real investment is best directed. But that’s a major and impractical undertaking. And there is no public purpose in simply trading new issues for relatively short term gain with no longer term stake in the merits of the underlying business. Nor is there any public purpose to investing in the secondary equity markets. In fact, with the rules and corporate governance stacked against shareholders, there is public purpose to not investing in those markets. Nor are these my first choice for the institutions I’d want investing in corporate bonds. It makes more sense to utilize the 8,000 regulated and supervised Fed member banks, all of which already specialize in credit analysis. If there is public purpose to buying corporate bonds, better the banks perform that function and not the pension funds.

So it looks like the only investments that make sense are government securities. The problem there, however, is I’m also advocating the government stop issuing securities. So that would mean the only investments for pension funds that make sense from a public purpose point of view are insured, overnight bank deposits. And that would go a long way towards taking away Wall Street’s food supply, thereby greatly reducing the troubling kinds of activities that we’ve been witnessing. This drastic reduction in financial sector activity would make regulation and supervision of what’s left a lot less complex and far more effective, and at the same time work to stabilize the financial aspects of the real economy.

Longer term, with the recognition that we don’t need savings to have money for investment, we can change the tax laws that are fostering these problematic pools of savings, and let them wind down over time.

Racing to the bottom

Government is about public infrastructure for further public purpose. That includes the usual suspects such as the military and the legal system, but Federal public infrastructure also includes regulation to stop what are called ‘races to the bottom,’ which usually involve what are known as ‘fallacies of composition.’ The textbook example is the football game, where if one person stands up he can see better, but if all stand up not only is nothing is gained, and no one gets to sit and watch. Allowing anyone to stand to see better is what creates that race to the bottom, where all become worse off. A ‘no standing’ rule would be a regulation that supports the public purpose of preventing this race to the bottom.

Another example is pollution control. With no Federal regulation, the States find themselves in a race to the bottom where the State that allows the most pollution gets the most business. The need to attract business drives all the States to continuously lower their pollution standards resulting in minimal regulation and unthinkable national pollution. Again, Federal regulation that sets national minimum standards is what it takes to prevent this race to the bottom.

Insurance regulation has been at the State level, which was deemed too lax only after the failure of AIG, which was the end result of a race to the bottom the Federal Government should have addressed long ago. Discussion has now begun regarding national insurance regulatory standards.

Posted in Banking, Bonds, Deficit, Government Spending | 11 Comments »

Price of oil in euro

Posted by WARREN MOSLER on 23rd April 2010

Cost push inflation coming in via the fx window?

Posted in Comodities, Currencies, EU, Inflation, Oil | 12 Comments »

April 28 DC event

Posted by WARREN MOSLER on 23rd April 2010

Bloggers out in force:

Time to Sweep the Vampire Squid Off Our Faces and Make Room for the Real Change

April 22nd, 2010 by selise

Warning: At the end of this diary, I’m going to be asking for your support. Your financial support. Please consider making a donation today.


I remember the fall of 2008 not as the time of an historic election but as a time of astonishment at the massive amounts of money our government, a Republican administration and a Democratic Congress, was willing to throw at the financial elites while demonstrating, for the most part, their utter cluelessness about why the money was needed or what would be done with it. At first is was $700 billion, then $850 billion and then trillions. All within the space of a few weeks.

Chris Floyd captured the moment perfectly (from Oct, 13, 2008 via x-post):

Perhaps the most striking fact revealed by the global financial crash — or rather, by the reaction to it — is the staggering, astonishing, gargantuan amount of money that the governments of the world have at their command. In just a matter of days, we have seen literally trillions of dollars offered to the financial services sector by national treasuries and central banks across the globe.

The effectiveness of this unprecedented transfer of wealth from ordinary citizens to the top tiers of the business world remains to be seen. It will certainly insulate the very rich from the consequences of their own greed and folly and fraud; but it is not at all clear how much these measures will shield the vast majority of people from the catastrophe that has been visited upon them by the elite.

But putting aside for a moment the actual intent, details and results of the global bailout offers, it is their very extent that shocks, and shows — in a stark, harsh, all-revealing light — the brutal disdain with which the national governments of the world’s “leading democracies” have treated their own citizens for decades.

Year after year, the ordinary citizens were told by their governments: we have no money to spend on your needs, on your communities, on your infrastructure, on your health, on your children, on your environment, on your quality of life. We can’t do those kinds of things any more.

Of course, when talking amongst themselves, or with the believers in the think tanks, boardrooms — and editorial offices — the cultists would speak more plainly: we don’t do those things anymore because we shouldn’t do them, we don’t want to do them, they are wrong, they are evil, they are outside the faith. But for the hoi polloi, the line was usually something like this: Budgets are tight, we must balance them (for a “balanced budget” is a core doctrine of the cult), we just can’t afford all these luxuries.

But now, as the emptiness and falsity of the Chicago cargo cult stands nakedly revealed, even to some of its most faithful and fanatical adherents, we can see that this 30-year mantra by our governments has been a deliberate and outright lie. The money was there — billions and billions and billions of dollars of it, trillions of dollars of it. We can see it before our very eyes today — being whisked away from our public treasuries and showered upon the banks and the brokerages.

Let’s say it again: The money was there all along.

A deliberate and outright lie. The money was there all along.

And now, just a year and a half later, the deficit hawks at the Peterson Foundation are at it again: attacking Social Security and Medicare, this time with a “National Fiscal Summit” including such notable “experts” as Robert Rubin and Alan Greenspan, among others “to Discuss Nation’s Rising Deficits and Debt.”

We have a massive need for a counter-narrative to their lies: that Federal deficit spending is bad, that it is a burden to the next generation, that deficit spending risks insolvency — basically that the Federal Government Budget is some how analogous to a household budget when, in fact, it is no such thing.

The Fiscal Sustainability Teach-In Counter-Conference on April 28th, 2010 in Washington, DC (At the George Washington University’s Marvin Center, Room 310, The Elliot Room, venue info here.) — the same day as the Peterson Foundation’s “Fiscal Summit” — aims to do just that. Here’s what Jamie Galbraith said about the Teach-In:


“The Fiscal Sustainability Teach-In Counter Conference will be the important event in Washington on April 28. Unlike the other meeting, this one will feature important work by honest scholars. It deserves at least equal attention, and very much more respect.”

— James K. Galbraith, The University of Texas at Austin. [April 19, 2010 via email with permission]


We can move beyond the false economic orthodoxy that got us into the current economic mess and that now is being promoted to attack Social Security and Medicare — and harming our Nation and its People in so many ways. But our help is needed (I warned you this was coming) to raise the money needed for speaker travel, venue, and other related expenses. No money is going to the organizers or to anything other than the conference. The Teach-In is being organized, at the last minute, with no charge for attendance and on a shoe-string budget, because the people involved believe in what they are doing.

Here is the program (see here and here in case of updates).

Time Period Topic Team Leaders
8:00–8:15 AM Welcoming Remarks
8:15–9:45 AM What Is Fiscal Sustainability? Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog
9:45–10:00 AM BREAK
10:00 AM–11:15 Are There Spending Constraints on Governments Sovereign in their Currency? Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri – Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives
11:15–11:30 BREAK
11:30–12:45 The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy Warren Mosler, International Consulting Economist and blogger at
12:45–1:00 PM BREAK
1:00–2:15 PM Inflation and Hyper-inflation Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives;
Mat Forstater, Professor of Economics, Director of CFEPS, Department of Economics, University of Missouri — Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economic Perspectives
2:15–2:30 PM BREAK
2:30–4:00 PM Policy Proposals for Fiscal Sustainability L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri – Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College;
Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives

Please help by contributing to the cost of the Teach-In today. Donate Here. Every little bit helps.

Some other things you can do:

  1. Ask your friends to donate too
  2. Attend the Teach-In
  3. Spread the word — write a blog post, tell your family, friends, neighbors and co-workers
  4. Educate yourself — some great introductory resources are:

Finally, here is a bit of inspiration from Rob Parenteau, who also gave me the title of this post (both via email and used with permission):

Of course, there is a need to reconstruct the way economics is taught in academia. But this is not the highest priority at the moment. We have many average people and citizens walking around looking for answers. We need to learn to speak to them and persuade the entrepreneurs, the unionists, the teachers, the housewives, the priests, the cab drivers, etc. They are hungry for answers and vulnerable to demagogues.

We have demonstrated some capacity to finally forge our way through the last mile problem on MMT, functional finance, and the financial balance approach in the blog world and elsewhere. Some like Marshall, Bill Black, and Jamie are even able to get the message across through more mainstream media channels. The tenured academics will surely be the last to follow, and of course, that is their perogative. We should let Rob Johnson and INET continue to work on that contigent while we take our case to the misinformed and extremely frustrated public. They are desperate to make sense of what has happened and to figure out how to find a plausible way forward to a more sensible and satisfying world. We can do that. We can completely engage them, and get the ball rolling.

Marshall and I have dialogued with pure blooded Austrian Schoolers on blog sites and actually gotten some traction with them. It is possible to help people find new perspectives or at least question and possibly move beyond limited old ones. I unfortunately cannot attend this one because I have other commitments I cannot break that day, but I have a funny feeling it will not be the last one either and I wish you all the greatest success and effectiveness with this inaugural teach-in. I am certain you will be making history. Feel the power of this moment and wield it wisely.

Posted in Government Spending | 8 Comments »

SOVS Update

Posted by WARREN MOSLER on 22nd April 2010

It’s all moving very quickly now.

The US 10 year is down over 25 bp from the highs, US stocks are leveling off as the dollar is looking up, hurting foreign earning translations as are rising risks of more serious trouble in the euro zone.

It’s also becoming more apparent that the austerity measures do not ‘fix’ anything but instead slow growth and cause the automatic stabilizers to keep the national gov. deficits high and growing, causing further credit deterioration.

While higher deficits are the answer for growth, at the same time they reduce already deteriorating creditworthiness.

The question is now whether the deficits get large enough to support the needed GDP growth that might restore credit worthiness before the loss of credit worthiness causes widespread defaults.

On Thu, Apr 22, 2010 at 6:35 AM, wrote:
EU release of budget deficit estimates for 2009 which were revised higher hurting the peripherals

Ref Entity 5y$ COD 5y/10y Coupon

Germany 35-39 1.5 4/5 25x
France 59-64 4 3/5 25x
Netherland 37-41 2 3/5 25x
Finland 26-30 1.5 3/5 25x
Norway 17-20 0.5 2/4 25x
Denmark 35-40 1.5 3/5 25x

Belgium 68-73 4.5 2/4 100x
Austria 66-70 4.5 2/4 100x
Sweden 36-40 2 3/5 100x

Greece 545-585 85 -120/-85 100x
Portugal 268-278 45.5 -22/-15 100x
Spain 178-188 23 -8/-3 100x
Italy 148-153 17.5 -1/3 100x
Ireland 175-180 24.5 -3/3 100x

USA €’s 38-41 0 2/4 25x
Switzerland 45-55 0 2/5 25x
UK 73-76 2 1/3 100x

Posted in ECB, EU | 36 Comments »

Altman is back

Posted by WARREN MOSLER on 21st April 2010

America’s disastrous debt is Obama’s biggest test

By Roger Altman

April 21 (FT) — The global financial system is again transfixed by sovereign debt risks. This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina, Russia and Mexico.

Yes, all fixed FX blowups.

But the real issue is not whether Greece or another small country might fail. Instead, it is whether the credit standing and currency stability of the world’s biggest borrower, the US, will be jeopardised by its disastrous outlook on deficits and debt.

This comp completely misses the fundamental difference between the two. The Fed is an arm of the US govt, while the ECB is not an arm of greece.

America’s fiscal picture is even worse than it looks. The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product – nearly equal to Italy’s.

Another apples/oranges comp. This is less than poor analysis.

Global capital markets are unlikely to accept that credit erosion. If they revolt, as in 1979,

There was no ‘revolt’ in regards to the US in 1979.

ugly changes in fiscal and monetary policy will be imposed on Washington. More than Afghanistan or unemployment, this is President Barack Obama’s greatest vulnerability.

His greatest vulnerability is listening to this nonsense, and not recognizing that taxes function to regulate aggregate demand, and not to raise revenue.

The unemployment rate is all the evidence needed, screaming there is a severe shortage of aggregate demand, and a payroll tax holiday would restore private sector sales by which employment immediately returns.

Instead, the admin is listening to this nonsense and working to take measures to tighten fiscal policy which will work to reduce aggregate demand.

How bad is the outlook? The size of the federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20,000bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792.

Point? Govt deficit spending adds back the demand lost because of ‘non govt’ savings desires for dollar financial assets.

The cumulative govt ‘debt’ equals and is the net financial equity- monetary savings- of the rest of us.

You could change the name on the deficit clock in nyc to the savings clock and use the same numbers.

It is so rapid that, by 2020, the Treasury may borrow about $5,000bn per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defence budget. Unfortunately, the healthcare bill has little positive budget impact in this period.

That just means our net savings is rising and the interest payments are helping our savings rise.

In fact, treasury securities are nothing more than dollar savings accounts at the fed. Savers include us residents and non residents like the foreign countries that save in dollars.

Why is this outlook dangerous?

Because it leads to backwards policies by people who don’t get it.

Because dollar interest rates would be so high as to choke private investment and global growth.

There is no such thing.

First, rates are set by the fed.

Second, there is no imperative for the tsy to issue longer term securities or any securities at all.

Third, there is no econometric evidence high interest rates do that. In fact, because the nation is a net saver of the trillions called the national debt, higher rates increase interest income faster than the higher loan rates reduce it (bernanke, sacks, reinhart, 2004 fed paper).

It is Mr Obama’s misfortune to preside over this.

It’s his misfortune to be surrounded by people who don’t understand monetary operations. Otherwise we’d have been at full employment long ago.

The severe 2009-10 fiscal decline reflects a continuation of the Bush deficits and the lower revenue and countercyclical spending triggered by the recession. His own initiatives are responsible for only 15 per cent of the deterioration. Nonetheless, it is the Obama crisis now.

It’s the obama crisis because taxes remain far too high for the current level of govt spending and saving desires.

Now, the economy is too weak to withstand the contractionary impact of deficit reduction. Even the deficit hawks agree on that.

It’s too weak because the deficit is too small. And yes, making it smaller makes things worse.

In addition, Mr Obama has appointed a budget commission with a December deadline. Expectations for it are low and no moves can be made before 2011.

Yes, and then to cut social security and medicare!!!!

Yet, everyone already knows the big elements of a solution. The deficit/GDP ratio must be reduced by at least 2 per cent, or about $300bn in annual spending. It must include spending cuts, such as to entitlements,

Here you go!!!!!!!!!!!!!!

and new revenue. The revenues must come from higher taxes on income, capital gains and dividends or a new tax, such as a progressive value added tax.

Yes, all working to cut aggregate demand and weaken the economy.

It will be political and financial factors that determine which of three budget paths America now follows.

Yes, the backwards understanding by our leaders.

The first is the ideal. Next year, leaders adopt the necessary spending and tax changes, together with budget rules to enforce them, to reach, for example, a truly balanced budget by 2020. President Bill Clinton achieved a comparable legislative outcome in his first term. But America is more polarised today, especially over taxes.

Clinton was ‘saved’ by the unprecedented increase in private sector debt chasing impossible balance sheets of the dot com boom, which was expanding at 7% of GDP, driving the expansion even as fiscal was allowed to go into a 2% surplus, which drained that much financial equity, and ending in a crash when incomes weren’t able to keep up.

The second possible course is the opposite: government paralysis and 10 years of fiscal erosion. Debt reaches 90 per cent of GDP. Interest rates go much higher, but the world’s capital markets finance these needs without serious instability.

Japan is well over 200% (counting inter govt holdings) with the 10 year JGB at 1.35%. Interest rates are primarily a function of expectations of future fed rate settings, along with a few technicals.

History suggests a third outcome is the likely one: one imposed by global markets.

There is no history that suggests that, just misreadings of history.

Yes, there may be calm in currency and credit markets over the next year or two. But the chances that they would accept such a long-term fiscal slide are low. Here, the 1979 dollar crash is instructive.

A dollar crash, whatever that means, is a different matter from the funding issues he previously implied.

The Iranian oil embargo, stagflation and a weakening dollar were roiling markets. Amid this nervousness, President Jimmy Carter submitted his budget, incorporating a larger than expected deficit. This triggered a further, panicky fall in the dollar that destabilised markets. This forced Mr Carter to resubmit a tighter budget and the Fed to raise interest rates. Both actions harmed the economy and severely injured his presidency.

The problem was the policy response to the ‘dollar crash.’ rates went up because the fed raised them with a vote. Market forces aren’t a factor in the level of rates per se. They are part of the Fed’s reaction function, which is an entirely different matter.

America’s addiction to debt poses a similar threat now. To avoid an imposed and ugly solution, Mr Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.

So it’s all about avoiding a dollar crash?

So why are we pressing china to revalue their currency upward which means reducing the value of the dollar? Can’t have it both ways?

Altman was in the Clinton admin confirms they were in the ‘better lucky than good’ category.

Feel free to distribute, thanks.

Posted in CBs, Deficit, Financial Times, Government Spending, Inflation | 28 Comments »