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Archive for August 27th, 2010

NPR explains where govt spending comes from

Posted by WARREN MOSLER on 27th August 2010

How To Spend $1.25 Trillion

By David Kestenbaum and Chana Joffe-Walt

Aug 26 (NPR) — In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy.

It was a huge departure from ordinary policy — such an extraordinary departure, in fact, that it was easy to forget that somebody had to actually go out and buy all those mortgages.

This week, we visited the New York Fed to learn the story of how the central bank spent so much money, so fast.

In late 2008, Julie Remache got a call from her former employer, the New York Fed. She was working in the private sector, and the call came while she was at the office. She recognized the extension, and knew someone from the Fed was calling her. So she took the call in a conference room.

The guy on the other end of the phone was Richard Dzina, a senior VP at the New York Fed. His offer: Your job, should you choose to accept it, is to spend hundreds of billions of dollars and try to save the economy

“How could I say no?” Remache says.

The New York Fed is a big, fancy place — lots of marble, a vault full of gold in the basement. But Remache and her team worked in a plain room with four small cubicles. There were no marble floors or oak tables. Just a Nerf football net, a table-tennis trophy, and two yoga balls.

The team spent six weeks coming up with a plan of attack, and 15 months actually buying mortgage-backed bonds, all of which came with a government guarantee that they’d be paid back even if the borrowers defaulted.

The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market.

“It’s possible I was buying the mortgage on my own house,” says Nathaniel Wuerffel. “Very possible.”

In the end, they came very, very close to their target: They told us they were just 61 cents short. (In other words, they bought $1,249,999,999,999.39 worth of mortgage-backed bonds.)

The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So, Dzina explains, the mortgage team would decide to buy a bond, they’d push a button on the computer — “and voila, money is created.”

The thing about bonds, of course, is that people pay them back. So that $1.25 trillion in mortgage bonds will shrink over time, as they get repaid. Earlier this month, the Fed announced that it will use the proceeds from the mortgage bonds to buy Treasury bonds — essentially keeping all that newly created money in circulation.

The decision was a sign that the Fed thinks the economy still needs to be propped up with extraordinary measures. More clues about what the Fed may do next could come Friday, when Ben Bernanke is scheduled to address a big annual meeting of central bankers in Jackson Hole.

Posted in Deficit, Government Spending | 97 Comments »

U.K. Economy Grows Most Since 2001 on Construction

Posted by WARREN MOSLER on 27th August 2010

Right, how can it not with a 12% type deficit?

U.K. Economy Grows Most Since 2001 on Construction

By Scott Hamilton

Aug. 27 (Bloomberg) — The U.K. economy expanded faster
than previously estimated in the second quarter in the biggest
growth spurt since 2001 as companies rebuilt stocks and
construction work surged.
Gross domestic product rose 1.2 percent from the previous
three months, the Office for National Statistics said today in
London. That was higher than the 1.1 percent initial estimate,
which was the median forecast of 25 economists in a Bloomberg
News survey. On the year, the economy expanded 1.7 percent.
Britain’s growth pickup may deepen the divide among policy
makers as the Bank of England considers whether the economy
faces a greater threat from inflation or needs more stimulus to
avert a further recession. The pound declined after the report,
which showed slower services growth than previously estimated
and a drop in fixed investment.
“The third quarter looks like it’s started pretty well,”
James Knightley, an economist at ING Financial Markets, said in
a telephone interview. “Momentum can be continued into the next
few months,” though “we should be looking at growth being
subdued over the coming years and that could raise the prospect
of further stimulus rather than a withdrawal.”
The pound fell more than 0.2 percent against the dollar
after the data were published. The currency traded at $1.5504 as
of 9:47 a.m. in London. The yield on the benchmark two-year
government bond was down 2 basis points today at 0.618 percent.

Budget Squeeze

The U.K. faces the biggest budget squeeze since World War
II, which has undermined consumer confidence. Ed Balls, a
candidate for the leadership of the U.K.’s opposition Labour
Party, said today that the government’s plans to cut the budget
deficit immediately risk pushing Britain back into recession.
At the same time, a debt crisis threatens the recovery in
the euro region, the U.K.’s largest trading partner, and there
are signs the global recovery is cooling.
The U.S. economy probably grew at a 1.4 percent annualized
pace in the second quarter, slower than the 2.4 percent rate
projected last month, according to the median forecast of 81
economists surveyed by Bloomberg. That would be the slowest
growth since the second quarter of 2009 when the economy was
still contracting. That data will be released later today.

Construction Surge

The U.K. GDP figure was revised up after construction
expanded faster than previously estimated, rising 8.5 percent on
the quarter, the most since 1982. Inventories rose by 983
million pounds ($1.5 billion) in the first evidence of stock-
building by companies for seven quarters, the statistics
office’s report showed.
Consumer spending rose 0.7 percent and government
expenditure increased by 0.3 percent, the statistics office
said. That offset a 2.4 percent drop in fixed investment.
Growth in services, which account for about three quarters
of the economy, was revised down to 0.7 percent from 0.9
percent, the statistics office said. Faster expansion in
business services was outweighed by a drop in air transport
during a quarter when European airspace was disrupted by an ash
cloud caused by volcanic activity in Iceland.
The “breakdown of GDP shows that the recovery is built on
very fragile foundations,” said Samuel Tombs, an economist at
Capital Economics Ltd. in London. “Household and government
spending did both post solid rises, but both sectors are very
unlikely to maintain such growth rates as the fiscal squeeze
kicks in over the coming quarters.”
In a separate report, the statistics office said that
business investment fell by 1.6 percent from the previous
quarter. On the year, it increased by 1.9 percent.

Posted in Deficit, Government Spending, UK | 1 Comment »

S&P Says US Should Act to Protect AAA-Rating: Report

Posted by WARREN MOSLER on 27th August 2010

David,

Please do the world a favor and spill the beans.

Please make it clear to the news media ability to pay is not in question, no matter how large the numbers may get.

The US, as issuer of its currency, is not the next Greece, Ireland, or California.

Please tell them ‘funding the debt’ consists of nothing more than debiting a Fed reserve account and crediting a Fed securities account.
And paying down debt, as happens with every maturity, is nothing more than debiting a Fed securities account and crediting a Fed reserve account.

Willingness to pay is an entirely different issue.
Congress can default by not extending the debt ceiling, for example. But that’s an entirely different matter.

Krugman finally came around a few weeks ago conceding ability to pay was not the question.

So now that a Nobel Prize winner is saying it, it’s safe for you all to go public with it?

Let the President know the US has not run out of money, and that there is no such thing.

We have enough real problems in the world without adding this nonsense.

Best,
Warren

S&P Says US Should Act to Protect AAA-Rating: Report

Aug 26 (Reuters) — The United States government needs to take steps to preserve its top AAA-rating, a Standard & Poor’s Ratings (S&P) official told Dow Jones newswire in an interview published on Thursday.

The measures taken in response to recommendations President Barack Obama’s commission on fiscal responsibility would be crucial in the view S&P takes on the U.S. credit rating, he said.

“It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes,” John Chambers, chairman of S&P’s sovereign rating committee, was quoted as saying.

“It is very important for Congress to take the required steps.”

S&P maintains the United States’ top AAA rating with a stable outlook, meaning there is not a significant chance of a change in the near future.

However, it has repeatedly warned about the gigantic deficit and the debt burden in the world’s biggest economy, calling it a challenge for the government.

David Beers, S&P’s global head of sovereign ratings said in a July report the U.S. does not have unlimited fiscal flexibility and the best-case scenario for the U.S. would be for its debt-GDP ratio to peak at around 80 percent, although there was a chance it could exceed 100 percent.

“So we don’t think these political decisions on tackling the public finances can be put off forever,” Beers said in the report.

Chambers also disagreed with Ireland’s criticism of its downgrade in the Dow Jones interview.

Chambers said S&P does not consider the bad loans the government’s asset management agency is buying from banks as liquid assets in the near term, but added further rating action was unlikely in the near term.

On Tuesday, S&P cut Ireland’s long-term rating by one notch to ‘AA-’, the fourth highest investment grade, and assigned the country a negative outlook saying the cost to the government of supporting the financial sector had increased significantly.

That drew criticism from the National Treasury Management Agency which said it disagreed with S&P’s view that Ireland faced substantially higher costs to bail out its ailing banking sector.

“In terms of the specific analysis by S&P, this is largely predicated upon an extreme estimate of bank recapitalization costs of up to 50 billion euros,” the NTMA said. “We believe this approach is flawed.”

Posted in Bonds, USA | 12 Comments »