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

Archive for January 7th, 2011

Debt ceiling dynamics

Posted by WARREN MOSLER on 7th January 2011

My best guess is there will be little or no fight over the debt ceiling extension.

I think the President will agree to pretty much whatever the Republicans want, and get more than enough Democrats to join him.

Best I can tell, the entire Congress agrees the deficit is a long term problem that absolutely must be addressed. The only arguments against ‘fiscal consolidation’ that I’ve see are the ‘bleeding heart’ arguments which don’t cut it when they all believe Greek type insolvency looms.

Also, the ball is in the Republican’s court, as they can’t just be against raising the debt ceiling.

So it will be up to them to take the lead and offer terms and conditions for their votes, after which enough Democrats will pretty much agree to it all, including cuts in Social Security and Medicare expenses, of one type or another, current and future.

All of which dooms the US economy to suffer from a severe lack of aggregate demand for the foreseeable future.

The one very faint glimmers hope are the Senators from CT- Joe Lieberman and Richard Blumenthal, only because they alone know better.

Both have read my book, the 7 Deadly Innocent Frauds of Economic Policy, and have engaged me in thorough discussion, and both know as a fact of monetary operations that:

1. The federal govt can’t run out of money.

2. Paying off China is nothing more than debiting their Fed securities account and crediting their Fed reserve account, with no grand children writing any checks.

3. The Social Security issue, therefore, can’t be about solvency, only potential inflation.

4. For a given size of the federal govt there is always a level of taxation that corresponds to full employment

5. The trade deficit is an enormous benefit, and we can set taxes at a level where we have enough spending power to support both domestic full employment and the purchase of anything the rest of the world wants to sell us.

However, it is highly unlikely they will even attempt to be heard, because, based on their history, they don’t act with specific regard to public purpose. They are more micro oriented, acting solely for political gain from their immediate constituents. So on this issue they will likely play along with what think is their voter’s understanding of these issues, and make no effort to educate them for the public good.

The words that come to mind when that happens are ‘intellectually dishonest.’

But I do hope I’m wrong and that at least one of them comes through for all of us.

There are also others outside of Congress who could come through and save the day. Current and senior Fed officials in the Department of Monetary Affairs are more than well versed in monetary operations, and know for a fact that operationally, federal spending is in no case revenue dependent. And much of the CBO, including former heads, know as a fact of accounting federal deficit spending equals and is in fact the only source of net savings of financial assets for the rest of us. But it’s highly doubtful any of them will come forth to save the day.

Bottom line- believing we could be the next Greece continues to keep us on the path of becoming the next Japan.

(Feel free to republish and otherwise distribute)

Posted in Government Spending | 117 Comments »

TRICHET SAYS ECB BOND PURCHASES ARE `ONGOING PROGRAM’

Posted by WARREN MOSLER on 7th January 2011

TRICHET SAYS ECB BOND PURCHASES ARE `ONGOING PROGRAM’

>   
>   (email exchange)
>   
>    On Fri, Jan 7, 2011 at 7:09 AM, Dave wrote:
>   
>   In response to German govt comments earlier
>   
>   Also ECB is in buying small amounts of Greece and Portugal in today’s
>   weak market
>   

They probably only see two choices-

Keep muddling through by doing what they are doing.

Or stop doing it, which means it all quickly grinds to a halt, most likely with none of the member nations being able to fund themselves.

At least for now, there doesn’t seem to be any political progress towards any other institutional structure.

Meanwhile, the ECB’s highly deflationary terms and conditions exacted in exchange for the funding (aka austerity measures) are slowly working to cut aggregate demand in reverse the current modest expansion.

Posted in ECB | 2 Comments »

Bernanke Excerpts

Posted by WARREN MOSLER on 7th January 2011


Karim writes:

Doesn’t seem like someone looking to tighten for a while….but things change and some probability of a hike for later this year or early next needs to be priced in…

Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully.

FOMC participants also projected inflation to be at historically low levels for some time. Very low rates of inflation raise several concerns: First, very low inflation increases the risk that new adverse shocks could push the economy into deflation, that is, a situation involving ongoing declines in prices. Experience shows that deflation induced by economic slack can lead to extended periods of poor economic performance; indeed, even a significant perceived risk of deflation may lead firms to be more cautious about investment and hiring.

I agree that their belief that very low inflation poses the risk of deflation will keep the Bernanke Fed from hiking at least until their inflation forecast picks up, and especially with unemployment north of 8%.

And I don’t see reported inflation picking up without crude oil rising enough and remaining high long enough to drag up core inflation.

Nor do I see any move towards fiscal expansion. Quite the contrary, Congress and the President are in consolidation mode, including cutting Social Security and Medicare expenditures, one way or another.

Nor do I see a burst of domestic credit driven buying anywhere on the horizon.

So still looks to me that fear of being the next Greece continues to work to cause us to be the next Japan.

Posted in Employment, Fed, Housing, Inflation, Japan | 18 Comments »

China’s Central Bank Says Inflation a Priority, Gold Output May Be More Than 340 Tons

Posted by WARREN MOSLER on 7th January 2011

China Headlines:
China’s Central Bank Says Inflation a Priority

Never yet seen anyone ‘cure’ inflation without increasing their output gap (recession)

China 2010 Gold Output May Be More Than 340 Tons

And at current prices, I’d guess it isn’t safe to walk the streets with gold in your teeth.

The way markets work is that price increases continuously adjust the market cap (total available gold x the price) to indifference levels.

If we’ve reached those indifference levels and the higher prices are brining out new supply (with a lag) the result is a downward adjustment.

And at least part of that demand came from misguided notions of qe2 which are gradually reversing.

China Expanded About 10% in 2010, Vice Premier Says

A deceleration that hasn’t yet cured their (political) inflation problem.

China’s Money Rate Poised for Biggest Weekly Drop Since 2007
China to Crack Down on ‘Hot Money’ Inflows, SAFE Says

And they remain torn between the desire of their exporters for a weaker and low domestic wages, and the political necessity for lower ‘inflation’ which they think might come from a stronger currency.

In any case the domestic inflation works to weaken the currency longer term, so it may prove moot.

Posted in CBs, China, Inflation | 3 Comments »