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Archive for May, 2010

CH News | Euro Swings Won’t Stop China Reserves Shift, Yu Says

Posted by WARREN MOSLER on 28th May 2010

Euro Swings Won’t Stop China Reserves Shift, Yu Says

Right, they want to stay ‘competitive’ in the euro zone

China Property Stocks to Rebound End-Year, Xia Says
China’s Inflation Target of 3% This year ‘Difficult’ to Meet

Even with the yen rising with the dollar.
Not a good sign.
Inflation per se isn’t ‘bad’ for an economy, it’s that people don’t like inflation and fighting inflation can be very bad for an economy.

Posted in China, EU, Inflation | 27 Comments »

just when you thought it couldn’t get any more inane

Posted by WARREN MOSLER on 28th May 2010

Getting worse by the minute.

>   (email exchange)
>   On Thu, May 27, 2010 at 7:51 PM, wrote:
>   Does anyone know of some way to talk to her?
>   This is embarrassing.

Clinton spotlights US debt as diplomatic threat

Clinton says debt, deficit threaten U.S int’l position

U.S. committed to tough political steps on budget

Clinton urges new “national security” budget (Adds quotes, updates throughout)

By Andrew Quinn

May 27 (Reuters) — The United States’ huge national debt — now topping $13 trillion — is becoming a major threat to U.S. security and leadership in the world, Secretary of State Hillary Clinton said on Thursday.

“The United States must be strong at home in order to be strong abroad,” Clinton said in remarks on the Obama administration’s new national security doctrine, which was made public on Thursday.

“We cannot sustain this level of deficit financing and debt without losing our influence, without being constrained in the tough decisions we have to make,” Clinton said, adding that it was time to “make the national security case about reducing the deficit and getting the debt under control.”

The new Obama security strategy joins diplomatic engagement with economic discipline and military power to boost America’s standing, and pledges expanded partnerships with rising powers like India and China to share the global burden.

Clinton emphasized controlling the budget deficit, saying it was “personally painful” for her to see the yawning U.S. spending gap after her husband, former President Bill Clinton, ended his second term in 2001 with budget surpluses.

“That was not just an exercise in budgeteering. It was linked to a very clear understanding of what the United States needed to do to get positioned to lead for the foreseeable future, far into the 21st century,” she said.

Clinton said that as a Democratic U.S. senator from New York during the administration of former President George W. Bush, she had voted against “tax cuts that were never sustainable, wars that were never paid for” — but without success.

“Now we’re paying the piper,” she said.

Clinton in February blamed “outrageous” advice from Former Federal Reserve Chairman Alan Greenspan in part for the grim U.S. deficit picture.


President Barack Obama, who pushed through his own huge stimulus spending plan last year amid the global financial crisis, was committed to taking the politically difficult steps needed to put government finances back in order, Clinton said.

“We are in a much stronger economic position than we were. And that matters. That matters when we go to China. That matters when we try to influence Russia. That matters when we talk to our allies in Europe,” Clinton said.

Obama has formed an 18-member bipartisan commission to study ways to reduce the U.S. deficit projected at about $1.5 trillion this year and bring long-term debt to manageable levels. It aims to find $229 billion in savings in 2015 to bring the deficit down to 3 percent of the overall economy from about 10 percent now.

The U.S. debt this week topped $13 trillion, according to, a website that tracks real-time growth in U.S. debt. That amounts to about 90 percent of annual gross domestic product, a level that could start impacting the economy.

Big budget deficits and rising U.S. debt are becoming major issues in the run-up to November’s congressional elections, and the European debt crisis that has unnerved financial markets has fueled these voter concerns.

While arguing for tighter overall economic discipline, Clinton said it was no time for the United States to roll back spending on international diplomatic and development programs, particularly as civilian agencies take up more of the work in Iraq and Afghanistan formerly done by the military.

“In order for us to meet the obligations that are now being asked of our civilian personnel, it costs money,” Clinton said, adding that it was time to look at an overall “national security budget” that would encompass funding for diplomatic, development and military operations.

“You cannot look at a defense budget, a State Department budget and a USAID (U.S. Agency for International Development) budget without defense overwhelming the combined efforts of the other two and without us falling back into the old stovepipes that I think are no longer relevant for the challenges of today,” Clinton said.

Posted in Uncategorized | 8 Comments »

Madness continues

Posted by WARREN MOSLER on 28th May 2010

>   (email exchange)
>   On Thu, May 27, 2010 at 6:48 PM, Marshall wrote:

UNEMPLOYMENT EXTENSION HUNG UP – Even after Democratic leadership scaled back its bill to reauthorize several domestic aid programs, reducing its impact on the federal budget deficit by $50 billion, conservative rank-and-file Democrats remain in their perpetual state of unhappiness. House leadership met shortly before press time to find a way forward, but all paths have major obstacles. Primarily, this one: Senate Finance Committee Chair Max Baucus tells HuffPost that he’s working out an agreement on what amendments could be offered by Republicans. But it comes at a high cost. The House had been planning to pass its bill and head out of town for the Memorial Day break. If any changes are made to the bill, it could languish over the break as programs and benefits expire. “We’re ready. Soon as the House sends it over. We will pass it,” Baucus said. “Gotta work out an agreement with the Republicans on votes. We’re going to have to work out some accommodation on amendments.”

Asked if the House would vote tonight, a brusque Steny Hoyer, leaving the leadership meeting for a floor vote, said: “We are STILL talking!” Chris Van Hollen said they were discussing possible changes with their members and could finish up before the break — but he didn’t say they’d vote tonight. Sandy Levin’s been working on Blue Dogs. Pelosi worked on Jared Polis, who’s been unhappy with the hedge fund loophole fix. The House is antsy to leave town. “Let’s go!” two separate members of Congress shouted on the floor, at least one of them a Democrat. “People are really tired,” one Dem told HuffPost. “What you’re seeing is the success of stubbornness.”


And, of course, ironically cutting the benefits only adds to unemployment as it removes demand.

Instead, they should be suspending fica taxes to restore sales and paid work.

Posted in Employment | No Comments »

M3 falling works for me

Posted by WARREN MOSLER on 27th May 2010

With sufficient deficit spending private credit isn’t needed at all to sustain growth and employment, so the shift from private sector credit growth (falling M3) to 3% growth sustained by deficits of 10% of gdp is perfectly sustainable.

In fact, I’d prefer, for a given size govt, lower taxes rather than higher private sector credit growth. And a larger trade deficit means we can have taxes that much lower still. And cut out much the military expenditures for Afghanistan and cut taxes that much more, thanks! etc!

Unfortunately 3% growth doesn’t close the output gap, but that’s another (very ugly) story, but with the same answer. Agg demand is about a trillion a year short of potential right now, hence my proposal for a full payroll tax (FICA) holiday to restore private sector sales, output, and employment.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

By Ambrose Evans-Pritchard

May 26 (Telegraph) — The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip,” he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.

Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, “failure begets failure” in fiscal policy as the logic of compound interest does its worst.

However, Mr Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.

Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown “Friedmanite” monetary stimulus.

“Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty,” he said.

Mr Congdon said the dominant voices in US policy-making – Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke – are all Keynesians of different stripes who “despise traditional monetary theory and have a religious aversion to any mention of the quantity of money”. The great opus by Milton Friedman and Anna Schwartz – The Monetary History of the United States – has been left to gather dust.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 – just as the Fed talked of raising rates – gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called “creditism” has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. “Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched,” he said.

However, Mr Ashworth warned against a mechanical interpretation of money supply figures. “You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets,” he said.

Events may soon tell us whether this is benign or malign. It is certainly remarkable.

On Thu, May 27, 2010 at 12:04 PM, Marshall wrote:

Yes! For some odd reason there is a myth about the Great Depression that could not be more removed from the reality of the time. Most people believe the economy crashed between 1929 and 1932 and then remained depressed until the Second World War which finally mobilized the economy’s idle resources and brought about a full recovery. That’s complete bunk if you calculate the unemployment data correctly. Even leaving aside that fact, it is true that, once the Great Depression hit bottom in early 1933, it embarked on four years of economic expansion that constituted the biggest cyclical boom in U.S. economic history. For four years real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 CAUSED BY RENEWED FISCAL TIGHTENING. It was this second depression that has led to the misconception that the central bank was pushing on a string throughout all of the 1930s until the giant fiscal stimulus of the war time effort finally brought the economy up from depression. The financial dynamics of that huge economic recovery between 1933 and 1937 are extremely striking. Despite their insistence that changes in the stock of money were behind all the cyclical ups and downs in U.S. economic history, even Freidman and Schwartz in their “Monetary History of the United States” conceded that the money aggregates did not lead the U.S. economy out of the depression in 1932-1933. More striking, private credit seemingly had nothing to do with the take off of that economy. Industrial production off the 1932 low doubled by 1935. By contrast, bank credit to the private sector fell until the middle of 1935. Because of the collapse in nominal income during the depression, the U.S. private sector was more indebted than ever on the depression lows. Yet, somehow it took off and sustained its takeoff with no growth in private credit whatsoever. The 14% average annual increase in nominal GDP from early 1932 to 1935 resulted in huge private deleveraging because nominal income outran lagging private.

Fiscal policy is going to undergo a complete reversal as the $850 billion fiscal stimulus package wanes and the scheduled tax increases at the Federal level come into play early next year. It may be much worse if financially strapped state and local governments have to cut expenditures and raise taxes over the same time period – which is highly likely, especially as we get to the states’ budget year end which is mainly to June 30th. By then, if they haven’t got to their mandated balanced budgets, they’ll cut more staff off the payroll as that will temporarily get them to balance (from an accounting perspective). That will exacerbate the double dip, which is coming straight on schedule, as Randy predicted last year in his piece with Eric.

Posted in Credit, Fed | 44 Comments »

China Says Reports on Euro Holdings Review Groundless

Posted by WARREN MOSLER on 27th May 2010

Just an ‘excuse’ for an oversold market that wanted to go up anyway.
Yes, China doesn’t want a weak euro for trade purposes.
But they don’t want to own the euro bonds either.

The fiscal tightening in the euro zone will do the work for them and strengthen the euro, even as it keeps growth and employment down, at least until the next funding crisis which could be a few weeks down the road or more.

No way to tell. My best guess is upside and downside of 10% or more for equities depending on which way the eurozone tips, with risk from a China slowdown remaining as well, and oil recovering in any case as it’s ultimately under (thinly disguised) Saudi control who do a pretty good job of making it look like market forces always move the price.

China Says Reports on Euro Holdings Review Groundless

May 27 (Bloomberg) — China said that a report that it’s reviewing foreign-exchange holdings of euro assets is “groundless” and the nation’s sovereign wealth fund said it’s maintaining its European investments.

“Europe has been, and will be one of the major markets for investing China’s exchange reserves,” the State Administration of Foreign Exchange said in a statement on its website today. The official Xinhua News Agency reported China Investment Corp. President Gao Xiqing said yesterday Europe’s turmoil “hasn’t had too big of an impact” on CIC’s investment decisions.

Posted in China, EU | No Comments »

US Home Refinancing Jumps While Purchasing Slumps

Posted by WARREN MOSLER on 26th May 2010

Looks like a better functioning refi market with new construction and prices remaining relatively low as the tax credit ends.

No sign of credit growth coming from this sector any time soon.

US Home Refinancing Jumps While Purchasing Slumps

By Julie Haviv

May 26 (Reuters) — U.S. mortgage applications to refinance home loans jumped to a seven-month high last week as rates neared record lows, but purchase demand remained stuck at a 13-year low.

Interest rates on 30-year fixed-rate mortgages, the most widely used loan, reached their lowest level since late-November 2009, the Mortgage Bankers Association said on Wednesday.

Low mortgage rates may prove to be the saving grace for the housing market as it copes with the expiration of popular home buyer tax credits.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 21, increased 11.3 percent.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.4 percent.

“Refinance application volume jumped last week as continuing financial market turmoil related to the budget crises in Europe extended the opportunity for homeowners to lock in at historically low mortgage rates,” Michael Fratantoni, MBA’s Vice President of Research and Economics, said in a statement.

Posted in Credit, Housing, Interest Rates | 2 Comments »

Lawrence Summers on the economy

Posted by WARREN MOSLER on 25th May 2010

>   (email exchange)
>   On Mon, May 24, 2010 at 6:50 PM, wrote:

SUMMERS: “FOR MILLIONS OF AMERICANS, THE ECONOMIC EMERGENCY GRINDS ON” – WH adviser Larry Summers spoke to the Johns Hopkins School of Advanced International Studies today: “[T]he observation that the economy is again ascending does not mean that we are out of a very deep valley. Far from it when we are nearly 8 million jobs short of normal employment and about $1 trillion – or $10,000 per family – short of the economy’s potential output and income and when recent events in Europe have introduced uncertainty into the prospects for global growth. Shortfalls in output and employment stunt the economy’s future potential as investment projects are put off and as the skills and work habits of the unemployed atrophy. This last point is especially important when for the first time since the Second World War the typical unemployed worker has already been out of work for more than six months. And behind these statistics lie millions of stories of Americans who have seen the basic foundations of their economic security erode. Beyond the economic projections and equations we economists make lie the struggles of communities devastated by the impact of this recession.Whatever the judgments of groups of economists about the official parameters of the recession and the growing signs of recovery, for millions of Americans the economic emergency grinds on.”

>   So why doesn’t he damn well do something about it?

Because we’ve run out of money.

Posted in Employment | 39 Comments »


Posted by WARREN MOSLER on 24th May 2010

>   (email exchange)
>   Two quotes from a compilation of Einstein’s writings and speeches
>   that I thought you’d enjoy:

1) “The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.” (1934)

2) “If we could somehow manage to prevent the purchasing-power of the masses, measured in terms of goods, from sinking below a certain minimum, stoppages in the industrial cycle such as we are experiencing today would be rendered impossible.” (1934)

Posted in Comodities | 6 Comments »

US Plays Down European Crisis but China Worried

Posted by WARREN MOSLER on 24th May 2010

Yes, China is worried- they own the national govt paper a part of their currency reserves

US Plays Down European Crisis but China Worried

The United States suggested Europe’s debt crisis would have minimal impact on global growth, but China took a more pessimistic view, warning it would impact demand for its exports and other regions would suffer too.

Posted in China, Currencies, EU | 1 Comment »

Spanish banking issues

Posted by WARREN MOSLER on 24th May 2010

The end game is unfortunately unfolding as Spanish bank losses become Spanish govt losses.

Deposit insurance is only credible at the ‘Federal’ level, not the ‘State’ level.

If the ECB had to write the check the issue would be inflation, but not solvency.

The euro govts can no more fund bank losses than the US States could cover bank losses.

And the euro zone response of spending cuts and tax increases only makes matters worse.

From inception, the euro system has been exactly this kind of accident waiting to happen.

CajaSur Seizure Marks Change for Spain’s Ailing Banks

Posted in Banking, ECB, EU | 2 Comments »

BP issues

Posted by WARREN MOSLER on 24th May 2010

bp issues

I now fear something far worse.

BP appears to have delayed measures to plug the well and stop the damage.

Instead it appears they have taken measures to salvage revenues.

They inserted a siphon tube that initially allowed them to load a portion of the escaping crude onto surface ships, presumably to be sold.

Instead of inserting a siphon tube, could BP have deposited aggregate (rocks) or other materials (steel rods, etc.) to start filling the hole with something ‘heavy’ that could obstruct the outward flow?

In fact, would not something as simple as an armada of barges filled with aggregate dumping their fill over the open pipe have built a mound over it that, when it got high enough, would completely stop the leaking crude?

Right from the beginning, could there not have been an emergency call to action for the US Navy and Coast Guard, as well as privately owned ships, to begin the parade of barges needed to continually dump aggregate over the site?

There has been no discussion that I have seen along these lines. Instead, public trust, as low as it may poll, remains high enough for it to be unthinkable that BP could have made the decision to attempt to siphon some crude rather than immediately take measures to plug the well based on narrow corporate cost/benefit analysis that showed the clean up costs of leakage that could have been stopped to be less than the present value of the well if it could be salvaged.

Warren Mosler

Posted in Comodities | 1 Comment »

mosler on the economy

Posted by WARREN MOSLER on 23rd May 2010

Posted in Deficit, Fed, Political, Proposal | 9 Comments »

Krugman has it right

Posted by WARREN MOSLER on 21st May 2010

Lost Decade Looming?

By Paul Krugman

May 20 (NYT) —Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

As we discussed, could not agree more!

Let’s talk first about those interest rates. On several occasions over the past year, we’ve been told, after some modest rise in rates, that the bond vigilantes had arrived, that America had better slash its deficit right away or else. Each time, rates soon slid back down. Most recently, in March, there was much ado about the interest rate on U.S. 10-year bonds, which had risen from 3.6 percent to almost 4 percent. “Debt fears send rates up” was the headline at The Wall Street Journal, although there wasn’t actually any evidence that debt fears were responsible.

Correct, it was fears that growth would cause the fed to hike rates to something more ‘normal’

Since then, however, rates have retraced that rise and then some. As of Thursday, the 10-year rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

Yes, though I would say pessimism that slow growth and negative CPI cause markets to discount ‘low for a lot longer’ rates from the Fed. It’s all about the Fed’s reaction function. Long rates are the sum of short rates, plus or minus a few ‘supply technicals.’

What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move.

The euro govt debt is highly problematic as they are all set up like US States and will bounce checks if they don’t have sufficient funds in their accounts. Unlike the US, Japan, UK, etc. the credit risk in the euro zone is real, just like the US States. And that forces them to act pro cyclically, cutting back and tightening up in slowdowns, again like the US States.

But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

Banks, too, are necessarily pro cyclical, making matters worse in down turns. Only the Federal government can be counter cyclical, however, unfortunately, our Federal government thinks it’s ‘run out of money’ and ‘dependent on foreign borrowing that our children will have to pay back.’ Complete nonsense, but they believe it, as does the mainstream media and academic community.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.


It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

Agreed, and because they don’t have a sufficient grasp of monetary operations to support the case for a fiscal adjustment large enough to close the output gap and get us back to full employment.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Completely agree! See my ’7 Deadly Frauds of Economic Policy’

Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping. But hope is not a plan.

They seem complacent with the forecast 5 year glide path to 5% unemployment.

Posted in Japan | 54 Comments »

senator kohl on SS “solvency”

Posted by WARREN MOSLER on 20th May 2010

Press Release of AGING – NON Committee


Aging Committee Report Delivered to Members of the Fiscal Commission
Contact: Ashley Glacel (202) 224-5364
Tuesday, May 18, 2010
WASHINGTON, D.C. – Today U.S. Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, released an official Committee report on Social Security. The report outlines the challenges currently facing America’s retirement program and highlights options for addressing program solvency,

There is no solvency issue. The premise for the changes is a mistake.

benefit adequacy, and retirement income security for economically-vulnerable groups. Emphasizing that a majority of America’s seniors rely on Social Security as their primary source of income, the report calls on Congress to enact modest changes to Social Security in the near future to bring its long-term financing into balance and improve benefits for those who need them most.

“This report shows that, contrary to popular belief, the sky is absolutely not falling for Social Security. By implementing one or more of these modest changes, we can ensure solvency and even strengthen benefits for those who count on their monthly check the most,” said Chairman Kohl.

The sky is not falling even with the ‘modest changes’

Copies of the report were delivered to all eighteen members of President Obama’s National Commission on Fiscal Responsibility and Reform. Many of the Commission’s members have publicly mentioned their interest in addressing Social Security as part of their work to reduce the federal deficit.

Deficit reduction also stems from an incorrect premise

“Social Security has never been responsible for one penny of the federal deficit, and by law is barred from doing so. In fact, it has been in surplus every year since its inception. If the Commission chooses to take a look at the program, it is my hope that they find our Aging Committee report of use,” Kohl said.

Whether it is in surplus or deficit alters aggregate demand, not solvency. Solvency is not the issue.

The report points out that the nation’s demographics have changed significantly since the Social Security program began in 1935. Americans are living longer, women’s participation in the labor force has significantly increased, and with a rise in the divorce rate, household composition has changed. The labor force is also growing more slowly and with fewer companies offering pensions, the nature of work and compensation has altered in ways that affect workers’ ability to save for retirement. Therefore, in addition to improving solvency,

Solvency is not an issue

any future reforms to the program should take into account America’s evolving demographics in order to ensure that benefits are adequate and equitable for generations to come.

Those are the only relevant criteria.

The report includes an important disclaimer that the options laid out represent a range of commonly-considered proposals, and that none of them should be construed as having been endorsed by the Committee or its members. In the foreword, Chairman Kohl asserts: “Many members of the Committee, including myself, do not support and actively oppose many of the options. However, a full and informed debate begins with the collection of research and information, and it is our hope that this report will serve as a resource to Congress and policymakers as they discuss ways to ensure that Social Security will remain strong for another 75 years.”

Posted in Government Spending | No Comments »

Germany Seeks ‘Orderly’ Insolvency Option for Euro Members

Posted by WARREN MOSLER on 20th May 2010

Germany Seeks ‘Orderly’ Insolvency Option for Euro Members

(Bloomberg) Germany is proposing that the European Union create the option of an “orderly state insolvency” for countries using the euro, according to a Finance Ministry document. That would set incentives for governments to follow “solid” fiscal policies and for “responsible” behavior by investors, the document said.

This is a very critical issue. Germany doesn’t want to have to write the check for other euro member’s debt.
An ‘orderly state insolvency’ would mean the lenders would lose their investment rather than get bailed out.

The main problem with this is that by making insolvency a viable option, euro members become subject to increased liquidity risk. And, in the case of actual insolvency and legal debt write downs, euro bank assets are written down as well, subjecting them to increased liquidity risk as well.

Posted in ECB, Government Spending | 2 Comments »


Posted by WARREN MOSLER on 19th May 2010

Can’t resist the temptation to repeat my suspicions that zero interest rate policy is deflationary from the supply and the demand side.


Karim writes:

Great number for low for long camp; gives Fed ample cover to stay on hold.
Y/Y Core now at 34yr low of 0.9%; but likely to bottom around these levels as base comparisons begin to get a bit tougher.

Headline CPI -.07% m/m; Core +.05%
Trend variables stay on trend; volatile components offsetting

  • OER unch; medical 0.2%; education 0.2%
  • Apparel -0.7%; Lodging away from home +1.4%

Posted in Inflation, Interest Rates, Karim | 38 Comments »

China Daily – Shanghai Home Sales Fell to 5-Year Low

Posted by WARREN MOSLER on 18th May 2010

Commodities looking weak as well.

Always been a question as to whether the central bank’s tools can gradually deflate a property bubble or just facilitate a crash.

Shanghai Home Sales Fell to 5-Year Low Last Week on Tightening
China CPI to be around 3% in May, June: NDRC
China to Sell Five-Year Government Debt at 2.4%, Survey Shows
China’s Smaller Stocks Face ‘Major Correction’: Chart of Day

Posted in China, Comodities, Inflation | 1 Comment »

EU Daily | Trichet remains confident in ECB plan

Posted by WARREN MOSLER on 18th May 2010

The euro zone is standing on the deflation pedal hard enough to turn the euro northward when the portfolio adjustments have run their course, which could be relatively soon.

And the indications of growing exports are more evidence the currency could bottom and start to appreciate.

Like Japan, when relative prices get to where exports pick up it causes the foreign sector to get short (net borrowed) in that currency, which tends to cause the currency to appreciate to the point exports fall off.

The ‘answer’ is to buy dollars as Japan did for many years, and China continues to do. And note how strong the yen got after Japan stopped buying dollars- strong enough to keep a lid on exports. But the euro zone ideology won’t allow the ECB to buy dollars should the euro start to appreciate, as that would give the appearance of the euro backing the dollar.

So right now a euro strong enough to slow exports would be highly problematic for a continent already in the midst of a deflationary spiral with its fiscal authority, the ECB, forbidden to offer the needed fundamental support.

The price of gold in euro could be the indicator of this turn of events. The portfolio shifting has driven up that gold price, and a downturn could be the indication that the portfolio shifting is getting played out.

But for you traders out there- I wouldn’t be early or try to call the precise bottom of the euro.

There’s no telling how much more portfolio shifting lies ahead.

Trichet remains confident in ECB plan
Trichet Says Greek Situation Resembled Lehman Collapse
Trichet: economy in deepest crisis since WWII
Stark Says ECB Measures ‘Only Bought Time’
Weber Says Crisis Response Must ‘Respect’ Policy Divisions
Stark Shares Weber’s View on ECB Bond Purchases, FAS Reports
ECB’s Nowotny Says Euro’s Drop of ‘No Specific Concern’
Lagarde Says Greek Debt Restructuring Isn’t an Option, FAZ Says
Berlin calls for eurozone budget laws
Schaeuble Has Plan to Stabilize Euro
Papandreou Says Greece Is a Good Investment, Handelsblatt Says
Spain puts labour reform on agenda
Italy to Make Extraordinaray Spending Cuts, Minister Says
April EU car sales fall as cash-for-clunkers fades

Posted in Currencies, ECB, EU, Japan | 3 Comments »

Krugman: We’re Not Greece

Posted by WARREN MOSLER on 17th May 2010

We’re Not Greece

By Paul Krugman

It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.

True. I just finished a week in dc fighting back against the bipartisan move to cut social security.

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P.

That has nothing to do with it. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example.

True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war.

Not true. With us govt spending not operational revenue constrained the way greece is, we are always able to spend (or cut taxes) however much we want to. It’s a political decision without external constraints.

But we still entered the crisis in much better shape than the Greeks.

Yes, because we are the issuer of the dollar and greece is not the issuer of the euro. Greece is like a us state in that regard.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

For the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece is.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus

Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided.

and expansionary policies by the Federal Reserve.

I don’t agree with this but that’s another story.

I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.

True, however the output gap is finally stable at best as it remains tragically wide.

Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds that. Not my first choice in mending what ails us.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation.

Should have been said this way-

‘If Greece had its own currency and was running its deficits in local currency market forces would have caused the currency to depreciate.’

But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

True. And worse. The proactive cuts and tax hikes can slow the economy to the point the deficit doesn’t come down, and might even increase, making matters even worse.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

It is all the difference.

Hard to see why that isn’t obvious. US, UK, Japan, etc. Etc. With one’s own non convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, not by markets.

And govt securities function to support interest rates and not to fund expenditures

And note the uk economy is on the mend. Even housing has found a bid, with the main risk being a govt that doesn’t get it and tries to balance the budget.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

Wrong reason- we are the issuer of our own currency, the dollar, while Greece is the user of the euro and not the issuer.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

Wasn’t my first choice of which tax to cut to support the private sector. I’d have cut fica taxes and i continue to propose that.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

And liberals have artificially constrained themselves with the misguided notion that spending is operationally constrained by revenues, and fail to understand the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing:

An understanding of national income account and monetary operations shows deficits are driven by ‘savings desires’ and any proactive attempt to increase deficits beyond savings desires results in inflation.

the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

Wrong causation. What he calls our ‘fiscal future’ is the size of future deficits and they will always reflect future ‘savings desires.’ if we proactively get them smaller than that the evidence will always be unemployment.

So while cutting health care costs may be a ‘good thing,’ when the time comes, future deficits need to reflect future savings desires to keep us fully employed.

So here’s the reality:

The mistaken, political reality.

America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem,

Unfortunately, this kind of talk makes him part of the problem, not part of the answer.

which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.

Wonderful, with screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over heating economy, but to reduce non govt savings of financial assets.

(govt deficit = non govt savings of financial assets to the penny as a matter of national income accounting, etc)

But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

This is one of the current iteration of the ‘deficit dove’ position.

It does not cut it.

It is part of the problem, not part of the answer.

Doing the best i can to get the word out.

Please distribute to the max!

Posted in ECB, EU, Exports, Government Spending | 10 Comments »

re: Trichet statement

Posted by WARREN MOSLER on 17th May 2010

The old german model was tight fiscal to keep domestic demand down, costs down, to help exporters. this made the mark strong so they sold marks vs dollars to keep it weak at the expense of the macro economy but to the benefit of the exporters.

The euro zone is trying same but can’t buy dollars for ideological reasons- it would look like the dollar is backing the euro as a reserve currency, etc.

So the euro gets strong to the point where the export strategy is thwarted. Hence it went up to 160 to the dollar before it all broke down and ‘automatic’ counter cyclical deficits kicked in which weakened the euro, which they are now trying to reverse with austerity. But going broke trying, etc.

From Pragmatic Capitalist:

Posted in ECB, EU | 5 Comments »