Link:

The Definitive Case Against Privatizing Social Security

I agree the guilty need to be identified and punished, but that doesn’t stop with those responsible at BP, their suppliers and contractors, or the regulators who failed us. It runs much deeper, extending to our failed political process.

The financial crisis is analogous. The criminals need to be tracked down and prosecuted, as Bill Black did in after the savings and loan crisis. But the financial architecture/institutional structure that set it all up is at least equally at fault, as is the political process that created that institutional structure, as per my response to Roger.

I do think costs and losses should be paid for by BP, even if that means insolvency proceedings and 100% losses to shareholders and creditors.

I consider this a no bailout zone.

And any drop in aggregate demand/increase in unemployment should be ‘offset’ with whatever size tax cut and/or revenue sharing is necessary to sustain full employment.

And adding to Rogers idea again, my proposal for an $8/hr job for anyone willing and able to work should include those jobs for anyone wanting to join in the clean up efforts. (Not to say that clean up efforts should be limited to those workers.)

Punish BP or . . . ?

By Rodger Malcolm Mitchell

Those rotten scoundrels have ruined our oceans and our shores. They should pay not only for the cleanup, not only for the jobs lost because of the pollution, not only for the damage, but they even should pay for jobs lost because of President Obama’s decision to stop deep-water drilling. BP should pay, pay, pay until they bleed, then pay some more. These people must be held accountable.

Phew! Now I feel better.

But, wait. What is BP? It’s a legal description, nothing more than words on a piece of paper. It has no physical existence. You can’t punish BP any more than you can punish a law or a page of sheet music. BP, as a legal entity, neither caused, nor can cure, the oil spill. That disaster was caused by people, and it is people, not a piece of paper, who must be held accountable.

So the question becomes, which people should be punished? BP has a huge number of employees, the vast majority of whom had nothing to do with the oil spill. It has a huge number of innocent shareholders, a huge number of innocent suppliers, a huge number of innocent oil users. In some ways, you and I are part of BP, because as users of oil and oil-related products (i.e. all products) we are affected by what its employees do.

Which of those people should be “held accountable”? What if holding all of BP “accountable” means thousands of innocent people will be fired, or innocent suppliers will be put out of business, or all of us will have to pay more for our oil and gas, or all of us who hold BP stock, either directly or as part of a fund, will lose? What if punishing BP has an adverse effect on the whole economy. Is that wise?

Somewhere between vengeance and economic reality lies the answer. Punishing BP, as a company, punishes all of us who already are suffering from the gusher. And though widespread vengeance may feel good, there is a “cut-nose-spite-face” aspect to be considered. So, what can be done to help prevent a repeat?

First, let’s identify the people specifically responsible. Certain BP employees. Certain employees of BP suppliers. The guys who mixed and poured the rotten cement that didn’t hold.

And, with all the focus on BP, let’s not forget those government employees who failed equally. I’m talking about the people who, after having been bribed with nice gifts, so readily approved all of BP’s actions.

Yes, we should fine, fire, even jail all the responsible individuals. That would help prevent future problems. Of course, that doesn’t pay for all the efforts to cure the situation nor for all the losses. Who should pay the billions for that?

If you really care about the economy, and are not just flailing out in retribution, you would agree the economically wise approach would be for the federal government to pay. That way, the guilty would be punished, the innocent spared and the economy stimulated.

Government pays = people benefit. BP pays = people pay.

So what’s your choice: Vengeance or money in your pocket?

warren mosler says:
June 15, 2010 at 7:15 am

Well stated!

And we do know we all are responsible.

Our government regulators failed us much the same way they failed us in the financial crisis.

We have failed to create the alternative transportation (including user friendly public transportation, alternative fuels, incentives to reduce our travel needs, etc.) that could cut our use of crude oil by 50% or more, removing the need and incentives for what we know is dangerous offshore drilling.

We should know that the strategy of rushing to use up our domestic oil as soon as we discover it, rather than saving it for later when the rest of the world has used up theirs, is not in the best long term interest of our children and grand children.

We have elected representatives at all levels based on most everything but the wisdom of proposed agendas, often due to incentives we allow to remain in place regarding campaign finance, the power of special interests, and the incentives in place for our two party system to deliver candidates on criteria unrelated to their capabilities to provide the leadership on these critical issues.

Don’t get me started!

Thanks!

The same forces are at work that have limited net exports via a stronger euro over the last 10 years.

Europe Industrial Output Rises More Than Forecast

ECB’s Nowotny Says Euro Volatility Is ’Completely Unproblematic’

German Tax Income Rises as Euro Aids Exports, Handelsblatt Says

Goodhart Says He Doesn’t See Inflation Danger in Eurozone

French and Germans Most Exposed in Euro Debt Crisis

EU Says No Financial Aid Plan Being Prepared for Spain

EU President Says Euro Hid ‘Underlying Problems,’ FT Reports

Nowotny Says ECB to Buy Government Bonds Until Market Calms

ECB’s Orphanides Doesn’t View High Inflation as Concern, DJ Says

Spain Considers Raising Top Rate of Income Tax, Gaceta Says
Greece’s Economic Figures Under Inspection by IMF, EU

Europe Industrial Output Rises More Than Forecast

By Simone Meier

June 14 (Bloomberg) — European industrial production increased more than economists forecast in April, led by demand
for intermediate goods such as steel and car engines.

Output in the economy of the 16 nations using the euro rose 0.8 percent from March, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 0.5 percent, the median of 33 estimates in a Bloomberg survey showed. From a year earlier, April production jumped 9.5 percent, the biggest gain since the data started in 1991.

Reviving exports are helping to fuel the euro-area economy’s expansion as consumers curb spending. Continental AG, Europe’s second-largest car-parts maker, on June 10 raised its full-year sales forecast. Still, European manufacturing growth slowed in May and European Central Bank President Jean-Claude Trichet said last week that the euro region may expand at an “uneven pace” this year.

“The recovery in the export-sensitive industrial sector has been little affected so far by the region’s fiscal woes,” said Martin van Vliet, an economist at ING Group in Amsterdam. “Euro-zone industry should continue to benefit from the recovery in global demand, helped by the recent weakening of the euro.”

The 16-nation currency has fallen 15 percent against the dollar this year on concern governments’ measures to tackle swollen budget deficits may hamper economic growth in the region. The euro was little changed after the output data, trading at $1.2238 at 10:26 a.m. in London, up 1 percent.

Do we have enemies that are using our misunderstanding of our monetary system to undermine our actual national defense?

Could they be playing on our deficit phobia that’s taken hold to subdue us?

Or is it all just innocent fraud?

While there is certainly spending on waste and fraud in the military that should be addressed, weakening our actual defense capabilities we would otherwise elect to support is an entirely different matter.

What was a serious problem has just taken on a new dimension.

The deficit terrorists are now a force that’s subverting our real defense needs.

On Mon, Jun 14, 2010 at 5:37 AM, Project on Defense Alternatives wrote:

Dear Warren Mosler: I am pleased to announce publication of “Debt, Deficits, and Defense: A Way Forward” by the Sustainable Defense Task Force (members listed below). The report, which is now publically accessible, identifies options for $100 billion annual savings in the US defense budget for consideration by the recently appointed deficit reduction commission.


You can access the report on the home page of the Project on Defense Alternatives here: http://www.comw.org/pda


You will also find there a video of the briefing the Task Force held on 11 June in the US Capitol with over 100 congressional staffers, NGO leaders, and journalists in attendance.

The report concludes that, in order to find significant savings and put defense on a sustainable path, we must change how we produce military power and the ways in which we put it to use. It sees recent official reform efforts as a first step, but concludes that “they fall far short of what is possible and what is needed to put defense spending and defense strategy back in check.” The report offers suggestions for strengthening current reforms and argues that, in addition, we must rethink our military commitments and our defense strategy.


You can follow discussion of the report and other debates on US Defense Policy on the PDA Defense Strategy Review page, here http://www.comw.org/wordpress/dsr/


Thanks, Carl Conetta and Charles Knight – best contact: pda@comw.org

Sustainable Defense Task Force

– Carl Conetta, Project on Defense Alternatives
– Benjamin H Friedman, Cato Institute
– William D Hartung, New America Foundation
– Christopher Hellman, National Priorities Project
– Heather Hurlburt, National Security Network
– Charles Knight, Project on Defense Alternatives
– Lawrence J Korb, Center for American Progress
– Paul Kawika Martin, Peace Action
– Laicie Olson, Center for Arms Control and Non-Proliferation
– Miriam Pemberton, Institute for Policy Studies
– Laura Peterson, Taxpayers for Common Sense
– Prasannan Parthasarathi, Boston College
– Christopher Preble, Cato Institute
– Winslow Wheeler, Center for Defense Information

This is the portfolio shifting aspect.

It’s like if the corn crop dies and consumption remains the same, which would drive up the price.

But someone with a huge warehouse full of corn decides to sell it.

The price can go down until that warehouse selling winds down, and then the crop failure aspect takes over.

TOKYO (Nikkei)–Japanese retail investors fled euro-denominated assets in May as Europe’s fiscal troubles dragged on.

The balance of publicly offered euro-denominated investment trusts plunged to 3.92 trillion yen in May, down 14.3% on the month, according to data released Friday by the Investment Trusts Association, Japan. With the decline, euro funds became the third-most favorable type of foreign-currency investment trust — being passed for the first time ever by Australian dollar funds, whose balance slid 9.9% to 4.9 trillion yen.

U.S. dollar funds remained the most popular, with 9.76 trillion yen in assets.

Assets in foreign currencies as a whole fell 8.2% to 27.52 trillion yen.

The balance of all publicly offered investment trusts came to 60.5 trillion yen, down 7.5%.

The steep decrease in the value of euro-denominated assets prompted investors to keep taking their money out of such funds. Investment trusts that mainly target European stocks and those invested in bonds denominated in European currencies marked their 33rd and 20th straight months of fund outflows in May, according to the Nomura Research Institute.

Not my first choice of topic, but what they wanted me to discuss.

Currency movements are nearly impossible to accurately forecast due to continuous cross currents.

The overly flattering intro was a pleasant surprise that caught me out for a moment.
And I’ll shamelessly use it selectively to advance the cause.

>   
>   (email exchange)
>   
>   On Sat, Jun 12, 2010 at 10:09 AM, wrote:
>   
>   great…every exposure counts…….question on Euro call to 1.5-1.6 area
>   

Remember this is not ‘trading advice.’ In fact, the charts still look terrible so the portfolio shifting may be further from over than I suspect. It is a statement that the forces that brought the euro to those levels not long ago are still in place, though recently overpowered by the portfolio shifting.

>   
>   my understanding of what you’ve said previously is that the deflationary
>   measures to be followed by Greece, Spain, Portugal, Italy and Ireland would
>   bring about even lower growth in euro block and result in increasing strains
>   on the political union with the possibility of the euro group breaking apart
>   in some fashion with a continuing decline of the currency. Is this correct?
>   

yes.

>   
>   What are you saying now?..thanks
>   

Those same deflationary forces that scare some people out of the currency also make the currency more valuable.

Note that Japan hasn’t done particularly well yet the yen is a very strong currency.

Also, sometimes a nation growing rapidly has ‘automatic stabilizers’ in place that automatically increase tax collections and reduce transfer payments as growing private sector credit expansion fuels the growth. That can firm up a currency as well, as it also attracts equity type portfolio managers due to the growth environment.

Always lots of cross currents!

The eurozone deficits had seemed to have gotten maybe high enough to stabilize growth just as market forces shut down any thoughts of continued fiscal relaxation.

Those higher deficits softened the currency some and then fear took over with the default risk pushing the euro down further and gold up as well, also out of pure fear.

The euro then went low enough to apparently firm up exports, which also tends to firm up the currency.

Tightening up fiscally now puts a lid on growth and even threatens negative growth. The fledgling export recovery will work to shut itself down via euro appreciation with dollar buying-off balance sheet deficit spending and what would at least ‘make the numbers work’- prohibited ideologically.

And with their current monetary arrangements there isn’t much they can do except sit there and suffer the consequences of those arrangements.

The only bright sign is that the ECB may be sneaking towards interest rate targeting for the member nations outstanding debt, which can go a long way towards alleviating fears of credit risk for the national govts. But to do that the ECB has to be buying without notional limits, so it’s too soon to say that’s what’s happening.

govt deficits = ‘non govt’ savings:

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

>   
>   (email exchange)
>   
>   On Fri, Jun 11, 2010 at 3:57 AM, wrote:
>   
>   What’s interesting about this to me is Slovakia. The Capital, Bratislava,
>   is 45 minutes from Vienna by car, and they’re third on the list! Ever
>   hear bad things about Slovakia? FLAT TAX of 19 percent for several years
>   now and more and more industry growing there. Great restaurants, clubs,
>   and more so quality of life has greatly increased. Magna has several
>   facilities there as do VW etc etc.
>   

Yes, it’s a ‘race to the bottom’ with whoever has the lowest taxes winning business from other EU nations, eventually forcing them to do same.

This is what’s happened to US States, with the States with the lowest tax rates and benefits getting businesses from other States. The problem is that means that States have to spend the least on education and public services to win business, in a race to the bottom.

It’s a fallacy of composition in action. If you stand up at a football game you see better, but soon everyone is standing up so nothing’s gained and no one can sit down (in the case of the football game at least until the front row sits down).

One of the public purposes of the federal govt is to set min standards that prevent races to the bottom

World’s Millionaires Increase by 14%, Boston Consulting Reports

By Alexis Leondis

June 10 (Bloomberg) —The global millionaires’ club expanded by about 14 percent in 2009 with Singapore leading the way, The Boston Consulting Group said.

The number of millionaire households increased to 11.2 million, according to the study released yesterday by the Boston-based firm. Singapore posted a 35 percent gain, followed by Malaysia, Slovakia and China. In 2008, the number of millionaire households fell about 14 percent to 9.8 million.

“Given the severity and magnitude of the crisis, I’m surprised at how fast global wealth has come back,” Bruce Holley, a senior partner in the firm’s New York office and topic expert for wealth management and private banking for the U.S., said in a telephone interview before the report was released.

Global wealth rose by 11.5 percent after falling 10 percent in 2008, as assets under management increased to $111.5 trillion, close to the annual study’s record $111.6 trillion in 2007. North America, defined as the U.S. and Canada, had the greatest gain in assets at $4.6 trillion to $35.1 trillion. The U.S. also had the most millionaire households at 4.72 million, the survey said, while Europe remained the wealthiest region, with $37.1 trillion.

Current numbers may differ from those in last year’s report because of currency fluctuations and newer available data, said Peter Damisch, a BCG partner and a co-author of the report. The study looked at 62 countries representing more than 98 percent of global gross domestic product.

Wealth Recovery

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

Global wealth dropped in 2008 for the first time since the survey’s 2001 inception as the credit crisis sent stock indexes tumbling and slashed the value of real-estate holdings, hedge- fund and private-equity investments.

Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, exclusive of real estate and property such as art. Wealth became more concentrated with millionaire households controlling 38 percent of the world’s assets compared with 36 percent a year earlier, the study said.

Singapore also had the highest proportion of millionaire households at 11.4 percent, followed by Hong Kong and Switzerland. The fourth, fifth and sixth spots were in the Middle East — Kuwait, Qatar and the United Arab Emirates. The U.S. was seventh-highest at 4.1 percent.

Growth Rate

The amount of offshore wealth, defined as assets housed in a country other than the investor’s legal residence, increased to $7.4 trillion after declining to $6.8 trillion in 2008 as global regulators pressured countries such as Switzerland to cut down on bank secrecy. Switzerland remained the largest offshore center, with about 27 percent, or $2 trillion, of assets, the report said.

Global wealth will increase at an average annual rate of almost 6 percent from yearend 2009 through 2014, which is higher than the 4.8 percent annual growth rate from yearend 2004 through 2009, the study said. Wealth in the Asia-Pacific region, excluding Japan, is expected to rise almost double the global rate. Last year’s survey said total wealth wouldn’t return to pre-recession levels until 2013.

‘Still Feel Burned’

The report’s authors also looked at the performance of 114 wealth management firms worldwide and found revenue declined by an average of 7.3 percent as assets under management increased an average of 14.3 percent. Reasons for decreased revenue include fewer transactions, tougher price negotiations and a shift to lower-risk asset classes and investments that are liquid and simple, the study said.

Investors feel frustrated and distrustful following the market events beginning in 2008, despite the increase in wealth, Holley said.

“People still feel burned,” said Holley. “I think the numbers in the report suggest a much rosier experience than how people actually feel.”

An Open Letter to President Obama

By Joe Firestone

Overcoming the Debt Trap

By Dean Baker

The deficit hawk gang is again trying to take our children hostage with new threats of enormous debt burdens. As in the past, most of what they claim is very misleading, if not outright false.

Agreed.

First and foremost, the basis of the bulk of their horror story has nothing to do with spending being out of control, but rather a broken private health care system. If per person health care costs were comparable to the costs in any other wealthy country, we would be looking at long-term budget surpluses, not gigantic deficits. This would lead honest people to focus their energies on fixing the US health care system, but not the deficit hawk gang.

I’d guess the deficit would be much the same as it grew counter cyclically with the automatic stabilizers kicking in as the economy weakened to the point the deficit got large enough to where it provided the income and net financial assets needed to stabilize output and employment. Not that there isn’t much to be done to fix the US health care system.

But there is another part of their story that contains some truth. The government is borrowing large amounts of money right now to sustain demand in the wake of the collapse of private sector spending following the deflation of the housing bubble.

Yes, the government is spending large amounts to sustain demand, but that spending is not dependent on borrowing, though it is associated with borrowing.

If the deficit continues on the projected path, the country will substantially increase its debt burden over the course of the decade.

Yes, the deficit could go higher but ‘burden’ isn’t the right term. The national debt is the dollar savings of the ‘non government’ sectors, and as such lightens the financial burden of those sectors.

A higher debt burden will imply much larger transfers from taxpayers to bondholders in future years. This will require either higher taxes or cuts in other spending.

Not necessarily. Taxes function to regulate aggregate demand. So tax increases and/or spending cuts would be in order only should aggregate demand be deemed too high, evidenced by unemployment being too low. In that case, taxes increases and/or spending cuts would serve to cool demand, not to make payments on the debt. Also, the interest on the debt only alters demand if it gets spent, which does not necessarily happen. Japan has never spent a penny of their interest income, for example.

Alternatively, the government could run larger deficits.

The informed approach is, for a given amount of spending, to adjust taxes to the level that corresponds to desired levels of employment, whatever size deficit that might mean.

However, in a decade or so, if the economy is again near full employment, higher deficits will either lead to higher inflation if the Fed opts to accommodate the deficits, or higher interest rates if it targets a low rate of inflation. The latter could crimp investment and long-run growth.

Should the informed approach be taken, and taxes lowered and the deficit thereby increased to the level that coincides with full employment, yes, the government could then go too far and keep taxes too low and sustain excess demand that drives up prices. This would be the case whether the Fed ‘accommodated the deficits’ or not. And if the Fed did elect to implement policy to raise rates to slow inflation, the point would be to slow nominal spending without slowing real spending. And in any case there is no such thing as crowding out investment, as investment is a function of consumption, with demand driving prices to a level where investment is funded.

For these reasons, it is desirable to prevent the debt from reaching the levels now projected, even if the outcome may not be the disaster promised by the deficit hawks.

Nor is the outcome that promised by the deficit doves. US deficits incurred as a by product of fiscal balance that sustains full employment do not have negative side effects if managed by an informed government.

There is a simple way to avoid a sharp rise in the interest burden associated with a higher debt. The Federal Reserve Board can buy and hold the debt that is currently being issued by the Treasury to finance the deficit.

The Fed buying the debt is functionally the same as the Treasury not issuing it. And I have supported the Treasury not issuing anything longer than 3 month T bills for a long time, etc. More on that below.

The logic of this is straightforward. If the Fed holds the debt, then the interest on the debt is paid to the Fed. The Fed then returns the interest to the Treasury each year, meaning the net cost to the government is zero.

Not exactly. What that policy would do is add the deficit spending to bank reserve balances held at the Fed, which currently pay what for all practical purposes is the overnight rate of interest targeted by the Fed. The Fed controls the fed funds rate by offering and paying interest on the overnight balances held at the Fed. This rate is currently .25%. Interestingly, 3 month Treasury bills are purchased to yield only .14% for technical reasons. I do support the policy of the Treasury not issuing securities longer than 3 months, which will produce similar results. But in either case, should the Fed decide to hike rates the balances created by federal deficit spending will earn those rates under current institutional arrangements. One way to avoid all interest payments on deficit spending would be to increase required reserves for the banking system and not pay interest on them. That, however, becomes a ‘bank tax’ that is passed through to all borrowers, passing the interest rate burden on to them.

This is not slight of hand. The point is that the economy has a huge amount of idle resources in the form of unemployed workers and excess capacity. In this situation, the increased demand created by government spending does not have to come at the expense of existing demand. The economy can simply expand to fill the additional demand created by larger deficits.

This is 100% true and I fully support the policy of adjusting the fiscal balance to that which coincides with full employment, without consideration of the interest paid on balances created by deficit spending, as above.

While that may not be true in five or ten years, assuming the economy is again near full employment, right now deficits need not lead to either higher interest rates or higher inflation.

Again, fully agreed with the conclusion.

In fact, the financial markets and the “bond market vigilantes” should even support the decision to have the Fed purchase and hold the government debt being issued now to finance the deficit. This practice will lessen the future interest burden on the Treasury. In fact, interest should be seen as an entitlement like Social Security and Medicare since it is paid each year without new authorization by Congress. If the deficit hawks had any integrity they would be insisting that we should require the Fed to hold the government debt issued during this downturn. It is a sure fire way to substantially reduce entitlement spending.

Again, the Fed buying Tsy securities is functionally identical to and nothing more than the Treasury not issuing it in the first place. Nothing more.

Of course, no one ever accused deficit hawks of being consistent. Not only do they not advocate having the Fed buy and hold the debt, they don’t even want this policy discussed in their “everything is on the table” sessions. Keeping this simple solution off the table makes good sense if your concern is not deficit reduction, but rather cutting Social Security, Medicare and other important social programs.

Fortunately, the rest of us don’t have to be bound by the deficit hawks’ agenda. If Social Security and Medicare are on the table, then having the Fed hold the debt better be on the table; otherwise, this exercise is just a charade to cut the country’s most important social programs.

Social Security has no business being on the table even under current policy of issuing longer term Treasury securities, no matter how large the deficit might be, if there is excess capacity/unemployment. How could it possibly make sense to cut aggregate demand in the current environment? It’s not like our seniors are consuming scarce real resources and creating shortages for the rest of us.

This will be a great lie detector test. We will soon know whether the deficit hawks care about the interest burden on our children or just want to destroy the social safety net.

The doves are on the right side of this argument, but if they don’t get their act together on monetary operations and reserve accounting it looks like they will continue to go down to defeat with what are inherently winning hands, with all of us the losers.

The Swiss have been buying euro all along to support their exporters (at the expense of the macro economy but that’s another story).

No doubt other nations are/will do same, also to protect exporters, and do the best they can managing risk of their euro denominated financial asset portfolios.

Over the last two years or so the ‘automatic stabilizers’ in the euro zone added to deficits and weakened the currency, helping to support domestic demand and exports, but threatening solvency as the national govts are credit constrained.

The credit constraint aspect blocked further fiscal easing, and caused a proactive move toward fiscal tightening.

If the easing phase was sufficient to cause them to ‘turn the corner’ with regards to GDP, which appears to be the case, it is possible GDP growth can remain near 0 with the austerity measures, while the firming currency works to slowly cut into exports.

In other words, the euro zone may, in its own way, also be going the way of Japan, but with the extreme downside risk that the austerity measure cut too deep and the deflationary forces get out of hand, as they are flying without a fiscal safety net.

Switzerland’s Gerber Sees ‘Hope’ of SNB Countering Franc Gains

By Simone Meier

June 4 (Bloomberg) — Jean-Daniel Gerber, the Swiss
government’s head of economic affairs, said he’s counting on the
central bank to counter any “excessive” gains of the franc to
protect the country’s export-led recovery.

“I’m of course concerned” about franc gains, Gerber, who
heads the State Secretariat for Economic Affairs, told Cash in
an interview published on the newspaper’s website today. “But
there’s hope that the SNB will be able to keep its promise of
countering an excessive appreciation of the franc.”

The Swiss currency has been pushed higher on concerns that
a Greek debt crisis will spread across the 16-member euro region
and hurt an economic recovery. The Swiss National Bank has
countered franc gains by purchasing billions of euros at an
unprecedented pace to protect exports and fight deflation risks.

The franc today breached 1.40 per euro for the first time
since the single currency was introduced in 1999. It
strengthened to as much as 1.3867 against the euro, trading at
1.3942 at 3:29 p.m. in Zurich.

Gerber said that while it’s “up to the central bank” to
decide on the extent of currency purchases, the SNB’s ability to
counter franc gains is “theoretically unlimited.”

“You can always counter an appreciation if you want to,
you just have to inject money into the market, purchase euros,
and that’s how you’re able to stabilize the value of the franc
versus the euro more or less,” he said. “But of course it
could have considerable negative side effects, namely of larger
liquidity sparking inflation if it isn’t re-absorbed.”

Tax Hikes and the 2011 Economic Collapse

By Arthur Laffer

June 7 (WSJ) —People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it’s also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, “high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.”

Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn’t rocket surgery, as the Ivy League professor said.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush’s tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what’s going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

Yes, those are very strong forces, especially for the second half.

They will also cause tax collections to go up this year, reducing non gov net financial assets which means we go into next year’s slow down that much weaker financially.

The thing that can reverse it is an acceleration of borrowing to spend in the domestic private sectors. That’s usually from housing, cars, maybe cap ex, commercial construction, etc. But those traditional areas of credit growth aren’t showing any signs of being able to take up the slack, at least yet. while the employment picture is modestly improving (see Karim’s work on total hours worked) seems to me it has a long way to go before it generates robust credit growth.

And, of course, the external risks remain.

G20 Says Expansionary Fiscal Policy Not Sustainable

The G20 has dropped its support for fiscal expansion. The deficit hawks are prevailing. But why is that? We all either know or should know that operationally Federal spending is not constrained by revenues, as Chairman Bernanke stated last year, when asked on ’60 Minutes’ by Scott Pelley where the funds given to the banks came from :

“…we simply use the computer to mark up the size of the account that they have with the Fed.”

We know that when the Fed spends on behalf of the Treasury it simply credits a member bank or foreign government’s reserve account at the Fed.

We know that a US Treasury security is a credit balance in a securities account, also at the Fed.

We know that buying a Treasury security means US dollars (numbers on the Fed’s spreadsheet) shift from a Fed reserve account to a Fed securities account, which adds to the ‘national debt.’

We know that government deficits = ‘non government’ saving (net dollar financial assets) to the penny, as a matter of national income accounting.

And we know paying off the Treasury securities happens continuously when Treasury securities mature and the Fed simply shifts those US dollars from the securities account back to a Fed reserve account (including the interest).

So why should we care if US dollars are in a Fed reserve account or a Fed securities account?

We should not, yet most still do.

There are two featured sides to the argument, pro and con, deficit hawks and deficit doves. The deficit hawks aren’t the problem. They have no argument that makes any sense as a point of simple monetary operations. There is no such thing as the Federal Government running out of money, being dependent on foreigners or anyone else for funding to be able to spend, and the US is not the next Greece.

The problem is the deficit doves featured by the media don’t understand actual monetary operations and reserve accounting, and so they take the same ‘fundamentally wrong’ positions as the deficit hawks. The difference is nothing more than timing and degree. In effect, the media is showing only one side of the argument.

To be a credible media deficit dove, you agree deficits are ‘bad’ but in the long term, arguing that in the short term we need tax cuts or spending increases now, and deficit reduction later. You agree that deficits can be too high, but argue they have been higher, particularly in World War II, so current levels should be easily manageable, further agreeing there is a level that could not be manageable. You agree markets could be ‘unfriendly’ and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that currently they do have confidence in the US and they are eager to fund current deficits. You agree that ‘bang for the buck’ matters and support tax cuts and spending increases based on higher ‘multipliers.’

The two ‘sides of the story’ are in fact on the same side, just with differing degrees. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration’s ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred of them, including many senior economics professors. The nagging question is why this professional, highly educated, highly experienced collection of true doves, who happen to be correct and could get us back to full employment and prosperity in reasonably short order, does not get a fair hearing.

The answer may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn’t cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn’t helped either. Seems billionaires get celebrity status and airtime for just about anything they want to say.

The same is true of the Economics professors who’ve got it right. Without being from and at the usual ‘top tier’ schools none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as ‘deficits = savings’ or ‘loans create deposits’ or ‘Federal spending is not constrained by revenues’ is immediately labeled ‘heterodox’ and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled ‘unorthodox’ because his mathematical models featured the deficits = savings accounting identity.

The breakthrough could happen at any time, in addition to economists at the ‘right schools’ or right financial sector firms, there are government officials with sufficient credentials to lead the breakthrough, including the head of the CBO and OMB, the Treasury Secretary and Fed Chairman, as well as former Fed officials, particularly from monetary operations.

Unfortunately Treasury Secretary Geithner, a potential hero due to the celebrity of his office, and the rest of the G20 are acting out the deficit hawk position, acting as if they do indeed believe the US has run out of money, is dependent on its creditors, and could be the next Greece. They speak as if they have no idea that the euro nations operate within a unique institutional structure that puts them in a ‘revenue constrained’ financial position similar to the US States, but with nothing equivalent to the US Treasury to run the countercyclical deficits for them. They speak as if they have no idea that the US, UK, Japan, and others with ‘normal’ central governments taxes function to regulate aggregate demand, and not to raise revenue per se. They act as if they don’t realize they can immediately make the fiscal adjustments- cut taxes and/or increase government spending- that will restore aggregate demand, employment, and output. In short, they act as if they were all still on the gold standard, an institutional arrangement where indeed government spending was constrained by revenues, and, as a consequence, the world witnessed repetitive, devastating deflationary depressions, far worse than what we’ve seen so far in this cycle.

The results of unnecessarily allowing a universal lack of aggregate demand to persist are already tragic, and if policy continues along the line of this weekend’s G20 results no relief is in sight, and it could all get a whole lot worse.

Euro May Rise to $1.60 Due to Austerity: Economist

“a group of logistics officers at the Industrial College of the Armed Forces developed a national security strategy as a class exercise. Their No. 1 recommendation for maintaining U.S. global leadership was “restore fiscal responsibility.”

Sec. of Defense Gates also got involved. All of them seriously misinformed, and think “fiscal responsibility” equals strangling a growing economy with a fixed currency supply. It’s a crisis of misinformation. Logistics training obviously doesn’t prepare one for sound systems, operations, ecology or macroeconomics analysis. You have to wonder if they’ve all adopted the “Scorched Economy” security model from Peter-the-Not-so-Great.

New Obama security strategy hardens economic resolve

“If you owe all this money you become less independent in the broader sense because you have to worry about where you are going to raise the next loan,” he said

Thanks,

It was an hour interview and to some degree taken out of context.

I would not buy euro here- chart looks terrible!!!

But I would look to see it show signs of turning with an eye to getting long, probably vs the yen.

The problem with the euro zone has been a tendency for the currency to continually adjust to levels where the trade balance can’t go into surplus in a meaningful way, like China, Japan, and Germany before the euro.

To run a trade surplus generally requires tight fiscal to keep domestic demand down, but then a policy of buying fx (off balance sheet deficit spending) to keep the currency ‘competitive’ to support exporters at the expense of the macro economy.

Euro May Rise to $1.60 Due to Austerity: Economist

By Antonia Oprita

June 4 (CNBC) — Austerity measures imposed by the euro zone will likely push the euro back towards $1.50 or even $1.60 but the European currency is unlikely to achieve the status of reserve currency, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com Friday.

The euro has fallen sharply versus the dollar since the euro zone’s sovereign debt worries began, with many analysts predicting it will slide to parity with the greenback or even below.

But Mosler thinks the recent plunge has been caused by portfolio adjustments – investors shifting assets from euros to gold or dollars – and that this trend is nearly over.

Rising taxes and spending cuts, pledged by governments in the single European currency area to cut debt, are “like a crop failure” because they will decrease the amount of euros available, he said.

“Everything they do in the euro zone is highly deflationary,” Mosler told CNBC.com in a telephone interview.

“I think there’s a very good chance the euro would be stronger because of the austerity measures; this can very easily get it back to $1.50-$1.60,” he added.

To keep the euro down, the ECB would have to buy dollars but “ideologically, that would mean they’re accumulating dollar reserves,” which the European Union does not want, Mosler said.

The euro is unlikely to become a global reserve currency because the EU’s economic policy is geared towards growth based on exports and the euro zone is running a surplus, he explained.

“The only way the rest of the world will hold your currency is if you run a trade deficit,” he said. “Economics is the opposite of religion, it’s better to receive than to give.”

The ECB Could End the Debt Crisis

The European Central Bank could easily appease the fears of default which have plagued markets regarding by creating money and giving it to its members, Mosler said.

The ECB, “if it wants to credit any nation, it can,” he added. “The ECB could make a distribution of, say, 10 percent of GDP to each member. The ECB can just credit the accounts of the member nations based on how many people they have. That would reduce all debt ratios this year by 10 percent.”

The measure would not contradict EU anti-bailout rules, since the money would be distributed equally among members and if the cash is used to cover the deficit would not be inflationary, Mosler added.

“My proposal is to put the ECB in a position where governments become dependent of checks from the ECB,” he said. “Operationally, it’s very simple to do, you just credit their accounts. The Finance Ministers would direct the money.”

The central bank could make this an annual distribution, and attach financial discipline conditions to it, such as respecting the EU’s Stability and Growth Pact.

The country that does not respect the pact does not get the money, making it a more powerful enforcement mechanism and helping fight speculators at the same time, he explained.

See below what our govt. is directing at our children.

Truly depressing.

All donations to my campaign are added to what I’m spending anyway to try to get the word out.

Many thanks to all of you who have already donated, no matter how small!!!
It all goes into the pot to sustain the effort.

Also many thanks to all of you who continue to try to organize meetings and speaking events for me- much appreciated!

CBO’s Director’s Blog: Letter to a Seventh Grader

A short time ago, I received an interesting letter from a young man in Michigan asking about federal budget deficits. I thought that perhaps other students would be interested in the kinds of questions he asked and how I answered him, so I’ve decided to share my letter to him with all of you. Here’s what I wrote:

1. What are the primary causes of the current federal budget deficits?

The current large deficits are the result of a combination of factors. These include an imbalance between tax revenues and the government’s spending that began before the recent economic recession and turmoil in the financial markets, sharply lower revenues and higher spending related to current economic conditions, and the budgetary costs of policies put in place by the government to respond to those conditions.

2. How will budget deficits affect people under the age of 18?

The government runs a budget deficit when it spends more on its programs and activities than it collects in taxes and other revenues. The government needs to borrow to make up the difference. When the federal government borrows large amounts of money, it pushes interest rates higher, and people and businesses generally need to pay more to borrow money for themselves. As a result, they invest less in factories, office buildings, and equipment, and people in the future—including your generation—will have less income than they otherwise would.

Also, the government needs to pay interest on the money it borrows, which means there will be less money available for other things that the government will spend money on in the future. Squeezing other spending affects different people in different ways, depending on their individual situations. For example, many young people benefit from government programs that provide money to families in need of food or medical care or to people who have lost their job, or from the financial support the federal government provides to local schools, or from the grants or loans the government offers to help pay for college education.

3. How is the U.S. government working to reduce budget deficits?

The President created a National Commission on Fiscal Responsibility and Reform to draw up plans to address the deficit problem. Most of the people on the commission are Members of Congress.

The commission will consider ways to reduce the budget deficit by 2015 as well as ways to improve the long-term budget outlook. Under current government policies, the gap between the government’s spending and revenues in coming years will be large. Therefore, balancing the budget would require significant changes in spending, taxes, or both. On CBO’s Web site, you can find information about the budget outlook during the next 10 years and over the long term.

More information about the commission can be found on its Web site: http://www.fiscalcommission.gov.

Congress also has enacted a new law (called “Pay-As-You-Go”) that typically requires legislation that increases spending or lowers tax revenues to include other measures to offset the costs of those changes.

4. What can people, and especially school-aged children, do to help curb budget deficits?
The most important thing that school-aged children can do to help reduce future deficits is to study hard and acquire the best possible education. This will help you and your classmates get better jobs when you grow up, which will help the economy grow. In turn, a stronger economy will produce higher tax receipts for the government, which will lower the deficit.

When young people get jobs, they should be sure to save some of the money they earn. Through a fun and important bit of math called compounding, savings of small amounts can grow over time into significant amounts. For the economy as a whole, the more people save, the more money is available for businesses to invest in factories, office buildings, and equipment. For individuals and families, more savings provide a financial cushion in times of economic difficulty. In particular, more savings can help people pay large medical expenses or save their home in case they lose their job or become ill, thus helping them avoid needing government assistance.

People of all ages can also help to reduce the deficit by learning how the government spends money and from whom the government collects money. Understanding the current budget is essential for choosing intelligently among different ways to change programs and policies in order to reduce deficits.

5. If I am to convey one key message to my school regarding the federal budget deficit, what would it be?

The prospect of budget deficits for many years in the future is a serious problem for our country. Ultimately, people in the United States will have to bring into balance the amount of services they expect the government to provide, particularly in the form of benefits for older Americans, and the amount of taxes they are willing to send to the government to finance those services. Because it takes a long time to implement major policy changes, deciding what those changes will be is an urgent task for our citizens and for our policymakers.

Thank you for taking the time to write to us about these difficult issues.

Best wishes,

Doug Elmendorf