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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 20th, 2011

Joe Firestone post on sidestepping the debt ceiling issue with Coin Seigniorage

Posted by WARREN MOSLER on 20th January 2011

Joe Firestone has a new post on Coin Seigniorage, where he gives credit to our own Beowolf’s comment on this website.

As far as I’ve been able to determine, it does work operationally. It seems the US Treasury is already legally empowered to simply mint it’s own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.

This process doesn’t change actual govt spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non govt sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).

What issuing these coins does do is remove the legal need for the debt ceiling to be raised, and also reduce the amount of outstanding Treasury securities, which is what is called govt debt. So while both reserves and Treasury securities are, functionally, govt liabilities and differ in name (and sometimes duration) only, the headline rhetoric does make that distinction. So technically, this process eliminates the ‘national debt’ and removes any (misguided) notion of solvency risk:

Links to the post on various websites:



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Posted in Fed, TREASURY | 255 Comments »

macro currency update

Posted by WARREN MOSLER on 20th January 2011

So it looks to me like all the major currencies have somewhat strong fundamentals.

That is, policy is working to make them ‘harder to get.’

EU and UK austerity policies are proactively cutting net govt spending from where it was.

And the EU has figured out that the ECB can fund at will entirely without ‘finance’ concerns, gradually removing the perceived chances of catastrophic defaults and the break up of the currency union with each succeeding intervention.

While higher crude prices are making the $US a bit easier to get offshore, interest rate policy, including QE2, is removing dollars from the non govt sectors that would have otherwise been paid out by the US govt, and domestic credit expansion remains anemic, particularly with regards to housing, the traditional source of ‘borrowing to spend.’ And the international stampede out of the dollar due to unwarranted fears of QE2 is still in the process of getting reversed. This flight took a variety of forms, from selling the dollar vs other currencies to buying gold, silver, and other commodities in general.

China is tightening up on state sponsored lending which makes yuan harder to get as they ramp up their politically motivated struggle to fight inflation.

And there are at least some noises that even India and Brazil seem to be at least leaning towards less inflationary policy, though sometimes misguided.

And while Japan has done a bit of fiscal expansion, and a bit of dollar buying, markets are telling us it hasn’t done enough, at least not yet, as the yen remains firm even after more than a decade of a near 0 rate policy.

All the currencies getting strong at the same time with only minor shifts in relative value is also evidenced by a general deflationary bias in the market place.

And, as previously discussed, this is coming after rising commodity prices have had a chance to bring on higher levels of supply.

Low interest rates have also added their positive supply side effects, as inventory is cheap to hold and capacity cheap to bring on line and keep in reserve.

Historically, private sector credit expansion has kicked in as economies recover, replacing the aggregate demand from government deficit spending, as the automatic fiscal stabilizers work to increase tax payments and reduce fiscal transfers for the likes of unemployment compensation.

This time, however, it seems to be different, with govts. taking proactive measures to contain and reduce deficits rather than continuing the govt. deficit spending until the hand off to private sector credit expansion takes over and the automatic fiscal stabilizers kick in.

In other words, for the size govt we have, we remain grossly over taxed as evidenced by the still massive output gap.

Posted in Uncategorized | 6 Comments »

Gross misrepresentations

Posted by WARREN MOSLER on 20th January 2011

My comments following Bill Gross’s comments:

I don’t know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation.

He fails to see the function of federal taxes is to regulate aggregate demand, and not to raise revenue per se.

We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings.

Apart from the possibility that he’s wrong, and that there will be no accelerating deflation, inflation per se does not make a nation poorer, and does not necessarily reduce real wages and earnings. In fact, real wages could very well be made to increase during an inflationary period. It’s all about policy responses and institutional structure. And as for investors, some will do well and some will do poorly, which most don’t consider an injustice.

We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential.

Maybe and maybe not on both scores.

The dollar may not depreciate.

And lower levels of public debt and higher growth potential do not necessarily mean a currency will appreciate.

For example, Japan has had perhaps the least growth potential and one of the strongest currencies for quite a while, and China has had a policy of keeping its currency weak which has been credited with fostering high growth, etc.

And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default.

No, it’s a policy option.

A default is a promise broken.

And there is no national promise by any nation to provide a real return to savers at the short end of the curve.

Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

That’s a serious and groundless accusation of motivation of the Fed.
Robbing implies dishonesty and involuntary confiscation.

However no one is forced by the Fed or anyone else to hold dollars in money market accounts, investors buy securities with known nominal interest rates, and for all practical purposes investors know much the same information regarding inflation as the Fed does.

So when William Gross uses the word ‘rob’ he’s implying the Fed is deliberately publishing false inflation forecasts to trick investors into buying US govt securities at rates lower than if they knew the Fed’s actual inflation forecasts.

I suggest an immediate apology is in order for this groundless, inappropriate, and insulting remark.

Posted in CBs, Currencies, Deficit, Fed, Inflation, Interest Rates, Japan | 41 Comments »

China agrees to purchase billions in US goods

Posted by WARREN MOSLER on 20th January 2011

So President Obama declares victory because we get to build planes and send them to China.

And why?

To get our dollars back, of all things, as if there’s any public purpose to that.

And so because we continue to believe we could be the next Greece, we continue to turn ourselves into the next Japan.

Which includes being an exporter, just like Japan.

China agrees to purchase billions in US goods

January 19 (CNBC) — The Obama administration, trying to build ties with an economic rival, said Wednesday that China would buy $25 billion in U.S. goods and had given final approval to a long-negotiated $19 billion deal for 200 Boeing planes.

The announcement came as Chinese President Hu Jintao arrived at the White House for a state visit with President Barack Obama.

Posted in China, trade | 11 Comments »