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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

next week….

Posted by WARREN MOSLER on October 31st, 2010

Getting really bad feelings for the next week or so:

QE believed to be inflationary money printing but doesn’t actually do anything

Gridlock presumed good but is actually bad as it could mean taxes rise at year end

Republican fiscal conservatives deemed ‘good’ but in fact bad with their spending cuts and budget balancing bias.

So three big ‘buy the rumor sell the news’ things coming together?

Could be a reversal of risk on, or even a confused reshuffle of what’s risk on and what isn’t.

For example, could be lower 10 year tsy yields as it will all be perceived to keep the Fed on hold that much longer, as well as gold and commodities and commodity currencies selling off due to the realization that the fed can’t reflate even if it wants to.

That means crude could be selling off and the dollar getting stronger, even with rates lower.

Not a good time to have any risk on, in my humble opinion.

14 Responses to “next week….”

  1. JKH Says:

    Mosler versus Biggs:

    http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a6WHkgeT5vPw

    Reply

    WARREN MOSLER Reply:

    i just plain don’t know what’s going to happen here near term!

    Reply

    JKH Reply:

    I’ve learned never to predict, only to re-balance.

    But if my head were in a vice, I’d sputter out something like a few days of Biggs followed by a few months of Mosler.

    Reply

  2. LetsGetItDone Says:

    When the election’s over, we’ve got to begin a powerful and unremitting attack on the Catfood Commission. We’ve got to beat them and the Petersons over the next month, and it’s important that bwe beat them by spreading MMT, not deficit dovism. Otherwise they might refrain from cutting Social Security, but end up doing something else that’s equally stupid.

    Reply

  3. Dave Begotka Says:

    My bad feeling started as soon as I learned how the monetary system really works…

    Reply

  4. Winslow R. Says:

    I tend to be bullish because the government matters when it wants to.

    Perhaps this is best viewed as a balance. At times the government matters, at times the market matters.

    Currently Bill Gross et. al. are making money knowing what the government is going to do. We have a clue what the markets would have done on their own. Crash.

    Bernanke is sending the signal that the government matters. If the stock market crashes and interest rates skyrocket without an increase in economic activity, it would hardly help his case. Bernanke has the tools to matter. Bernanke plans to use them. Bill Gross seems to think he will use them.

    Perhaps we need to worry for how long government will be blatantly driving markets? Or will higher wallstreet markets mean a better mainstreet economy?

    Remember, Obama said “now is the time to buy stocks”, in March 2009. Bernanke said QE1 would end in the Spring of 2010. Bernanke says QE2 will begin in the Fall of 2010. My portfolio has tracked these events to a tee. I don’t recall Obama saying, “now is the time to sell stocks” or Bernanke saying QE2 will be ending.

    The economy is still on government life-support even though those financial obligation ratio’s are flashing greenish yellow. Still too much asset price deflation on main and wall street.

    Reply

    WARREN MOSLER Reply:

    pimco makes its $ on marketing and maint. fees from sales etc. Not performance. it’s all about image to bring in the $ under management. and they are very good at it!

    the problem now is bernanke still thinks qe is a tool for the macro economy, however he is having serious doubts. in fact he has no tools for restoring aggregate demand.

    by mar 09 the federal deficit was plenty large to turn things around, and then helped some by the stimulus. it still should be enough to muddle through without a double dip of any substance.

    but these markets are illiquid and subject to violent moves as players move from risk on to risk off, much of it based on misreading the fed’s tools etc.

    Reply

    Winslow R. Reply:

    “the problem now is bernanke still thinks qe is a tool for the macro economy, however he is having serious doubts. in fact he has no tools for restoring aggregate demand.”

    —no legal tools?

    Since Bernanke controls the printing press, he can theoretically create really cool tools that affect all kinds of things including aggregate demand, until congress takes it away.

    So let’s say he creates a near invisible tool…..

    Example—
    Unregulated offshore hedge fund created by Goldman Sachs, funded by huge profits generated from front running Fed moves.

    Reply

    WARREN MOSLER Reply:

    just shifts demand, and doesn’t create any net financial assets

    :)

    Winslow R. Reply:

    “just shifts demand”

    Agreed. Fed would need to target the propensity to spend. My guess they would target profits from bondholders? towards holders of S&P500 given the many ‘progressive’ economists that seem enamored with the idea.

    “and doesn’t create any net financial assets”

    Agreed the invisible tool would not net any new financial assets.
    A visible tool could include direct Fed purchases of S&P 500 which would increase net financial assets. Hopefully congress would act to stop it.

    WARREN MOSLER Reply:

    s and p’s are financial assets
    :)

    Winslow R. Reply:

    s and p’s are financial assets

    Agreed. Scott and I had this conversation over 4th of July in 2006? on your mosler.org site He convinced me!

    The visible tool would have the Fed purchasing S&P 500 with newly minted dollars (or computer markups to Fed accounts). The result would be new financial assets of the Federal Reserve Note kind (Federal reserve fiscal spending -that’s why congress should stop it). Also BOD’s of the companies that formed the S&P500 (after a vote) would likely start printing stock and self-allocating to take advantage of the Fed largess. This also would create new financial assets.

    BNS Reply:

    Another data point to consider, the rally stalled in April when Obama declared we were going to Mars.

    Reply

  5. Winslow R. Says:

    So what is the market’s reaction?

    http://finance.yahoo.com/echarts?s=%5EDJI+Interactive#chart1:symbol=^dji;range=1d;indicator=dividend+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    My take

    2:15 70 pt sudden rise at annoucement (how did anyone but GS and Fed read annoucement so fast?) – conclusion spike was Fed/GS intervention
    2:20 110 pt sudden fall – market reaction (takes 5 minutes for normal people to read, digest and trade) causes prices to collapse on measly purchase amount.
    2:30 – 3:15 120 pt gradual rise – Fed and GS intervention to keep Fed’s move from looking bad. If market was in control, stock market would close down 100 pts.

    Reply

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