Gross misrepresentations
Posted by WARREN MOSLER on January 20th, 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.
January 20th, 2011 at 9:48 am
Gross just gets cluelesser and cluelesser.
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Tom Hickey Reply:
January 20th, 2011 at 1:33 pm
Or deeper and deeper into his own book. :)
He is sounding more and more concerned.
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January 20th, 2011 at 10:54 am
There is always a degree of book talking whenever Gross goes on these rants. It feels like he is ‘talking up’ an inflation scare. I’m sure, he is positioned accordingly.
Oddly enough, Gross and Pimco were one of the biggest beneficiary’s of all the goodies the US government handed out during bailout season. Talk about biting the hand that feeds you.
Warren – any chance you get the 7 Deadly Frauds in Kindle format?
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Joe Reply:
January 20th, 2011 at 4:54 pm
Check out Mobipocket Creator: http://www.mobipocket.com/en/downloadSoft/ProductDetailsCreator.asp
the program allows you to rip pdf, word, txt, and other docs into kindle/ebook format. you can rip the 7 deadly frauds into kindle format then simply click and drag the file into the content folder of your kindle. it’s too easy.
I bought the kindle for the express purpose of using it as a viewer for books and papers I have on random pdf, word files. I’ve bought maybe one or two kindle books on amazon since I got it.
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WARREN MOSLER Reply:
January 20th, 2011 at 10:24 pm
michael is working on the kindle version
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January 20th, 2011 at 11:09 am
great conversation Warren. I’m going to post this link on my FB account b/c I just know far too many people that say stuff like this. THANK YOU for saying it like it is!
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WARREN MOSLER Reply:
January 20th, 2011 at 10:36 pm
thanks!
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January 20th, 2011 at 11:31 am
“However no one is forced by the Fed or anyone else to hold dollars in money market accounts…”
That’s a bit misleading. At the individual level you are correct, but on aggregate, those who choose low risk short duration assets (who may not be in a position to hold riskier assets) have to live with the government’s “policy choice” of a wealth tax as implied by negative real interest rates. Whether that’s the best policy is a separate topic, so that wasn’t my focus. It may be a bit regressive, given its impact on the retired or close-to-retired with modest nest-egg portfolios (who therefore cannot risk as high a percentage of their capital in more volatile assets as richer folks can). Yes I do realize that’s just one demographic within the population so whether this sort of wealth tax is regressive at the macro level (taking into account young folks, debtors, etc) I’m just not sure. And either way it is as you say just a policy choice, not a default.
I agree with all your other criticisms of Gross!
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ESM Reply:
January 20th, 2011 at 12:13 pm
Agreed, HBL.
@Warren:
“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.”
Look, I think Bill Gross is as wrong as can be (although for the record, I think he is simply dishonest, not clueless), but he is not implying that the Fed is tricking people into buying securities with negative real yields. Rather, he is implying the Fed is forcing people to buy securities with negative real yields. There are no other options for people who need to save, but believe that other asset classes are either too risky or too expensive.
I don’t think the Fed is trying to “rob” savers intentionally, but their clueless, ineffective policies (QE, QEII, etc) are depriving savers of a non-negative real return on their savings. Most people would agree that savers should be rewarded for deferring consumption with non-negative real returns. There’s certainly no moral basis for such an entitlement, but it is no doubt a natural expectation.
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Neil Wilson Reply:
January 20th, 2011 at 12:39 pm
It’s not that they have no other choice. They have another choice – leave the reserves on deposit.
However that is at a lower interest rate than Treasuries – so they swap the reserves for Tsys.
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WARREN MOSLER Reply:
January 20th, 2011 at 10:39 pm
no one is forced to hold low risk short duration assets.
And if they do obtain these via a voluntary transaction of any kind (usually selling something), they know what they are getting for what they sold.
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hbl Reply:
January 23rd, 2011 at 8:59 pm
Warren said: “no one is forced to hold low risk short duration assets.”
At first glance your statement seems false based on a fallacy of composition, since at the macro level someone has to hold them (i.e., those bank deposits, etc). Which means it’s just a question of which segment of the population will buy risk assets, and which segment will settle for the negative real yield because they believe other assets have been bid to too high a price already (and yes there is also a third segment that just needs the liquidity of those short duration assets). This is the core of why so many people in the mainstream blame central banks’ negative real interest rate policies for adding fuel to asset bubbles.
Considered more carefully, I do realize most people overlook just how strong the concept and reality of the endogenous money supply is (i.e., its size being determined by preferences of non-government).
But do you really believe that our financial institutions are SO flexible that if literally no one wanted to hold bank deposits (or money market deposits), then the asset/liability structures across the economy would completely evolve into a form in which all liabilities were longer duration, with for example banks funded exclusively via bonds rather than deposits? I have considered this before and it seems partially plausible but I’m not sure how far you can take it in practice…
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WARREN MOSLER Reply:
January 24th, 2011 at 9:16 am
the decision to sell real goods and services for a given price and then hold financial assets includes the interest rates paid on short term govt. liabilities
hbl Reply:
January 24th, 2011 at 10:46 am
I can read that in either of two ways (possibly neither was your intent):
(a) The “given price” asked for real goods and services adjusts to take into account the interest rate of the short term govt liabilities used as payments. If that was your point, I find it hard to entirely agree given limited pricing power of labor especially when the economy is weak.
(b) You could be saying that earning the dollars is also a choice, and if you don’t like the interest rate on what you’re paid with, don’t choose to earn the dollars. But of course most people need to earn to live, and again this is a focus on the individual level and not the macro inevitability some portion of the population holding the dollars.
January 20th, 2011 at 12:12 pm
I love it when primary dealers bite the hand that feeds them.
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January 20th, 2011 at 12:43 pm
Taxes regulate demand? So you want to lower taxes so we get more demand, but all your fantasies are smashed when the rubber meets the road in the real world.
All that tax lowering you do in one place, someone else raises in another place, offsetting all that “god’s work” you are trying to do. As I said, there are so many government/companies who have more tricks than david copperfield in ways to make my wallet smaller.
http://www.businessinsider.com/illinois-tax-hike-ruins-tax-break-2011-1
It’s like I keep saying, you may give me a payroll tax holiday, but the local city has installed a shortened yellow light with a camera to take all that money away and even an MT900 wouldn’t be fast enough to get you through that yellow light in time.
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ESM Reply:
January 20th, 2011 at 12:56 pm
Straw,
Outside of the federal government, the money just goes around in a circle. Raising state and local taxes probably stimulates aggregate demand on net because state and local governments spend everything they get (i.e. they don’t save).
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WARREN MOSLER Reply:
January 20th, 2011 at 10:40 pm
true
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Ivan Reply:
January 21st, 2011 at 11:59 am
That’s a great idea ESM. Let’s go to 100% tax rates at the state and local level to really maximize aggregate demand! Are you guys kidding me????
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ESM Reply:
January 21st, 2011 at 1:16 pm
I wasn’t recommending higher state and local taxes as a policy prescription. I was just pointing out that it wouldn’t counteract tax decreases by the federal government.
Now if you want to discuss policy vis a vis the municipalities, I can give you my quick thoughts on that:
The federal government should not subsidize borrowing by the states in any form. Hence the federal tax exemption for interest on municipal bonds should be abolished going forward.
This would probably cause state and local taxes to rise, which is a good thing because it makes the citizens directly feel the effects of spending decisions by their governments.
ESM Reply:
January 20th, 2011 at 1:02 pm
Also, the Illinois income tax hike is going to stimulate housing demand in Florida and business for moving companies. My father is seriously considering moving from Chicago to warmer and cheaper climes.
The retroactive tax hike in New Jersey in 2004 stimulated my move to Massachusetts the following year. That really says something about the sorry state of NJ by the way, when MA looks like a tax haven by comparison.
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strawberry picker Reply:
January 20th, 2011 at 1:36 pm
I live in Florida, we don’t need anymore broke old people clogging the ateries down here, but I fear you may be right :( Too many Mr. Magoo’s around here now making my insurance rates skyrocket, so the more that come, the more my insurance goes up – I lose again :(
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ESM Reply:
January 20th, 2011 at 1:48 pm
I hear you. Old people driving who shouldn’t be is probably the single biggest problem facing humanity, while chicken littles like Tom H. are worried about nuclear war, global warming or economic collapse.
I propose an amendment to the Social Security program where any senior who voluntarily and irrevocably gives up his drivers’ license gets an extra $2500 per year for life.
Tom Hickey Reply:
January 20th, 2011 at 2:19 pm
Excuse me, ESM, it’s people like you who are afraid to cut the over-bloated “defense” budget down to size, claiming it would put the US at risk, that are operating out of fear.
Economic collapse? And wasn’t it Chairman Greenspan telling us we had nothing to fear about a bubble forming and bursting? It was just a little “froth” in regional markets that would naturally dissipate.
Even granting that global warming is a hoax, do you want your children and grandchildren increasing poisoned by pollution because we can’t afford to deal with it now.
strawberry picker Reply:
January 20th, 2011 at 7:48 pm
Mr. Magoo, mish says what we are seeing in illinois *taxes going up – is about to come to many other places, the inability to rebuke the unions. I just saw
http://www.businessinsider.com/blackstone-byron-wein-pensions-statement-2011-1
where even blackstone is puckering up to the unions and bowing down and am listening to NPR now about the big mob busts that just happened and how the MOB is corrupting and controlling all these unions. So if we connect the dots, some of these municipalities are gonna kill any benefit from a payroll tax holiday because the mob, through the unions, are calling the shots and apparently are more powerful than the voting booth that the taxpayers/citizens use, how is that for conspiracy tin foil hat theory dude?
“children and grandchildren increasing poisoned by pollution”
There are so many chemicals/molecules in our body that are artificial and unhealthy. My doc says all the estrogen enhancers and testosterone blockers from the food I have eaten have hormonally turned me into a 90 year old :( and I can’t afford the hormone treatments that would help correct this. So because this society can’t afford to fix the problems for me, I guess you all get to suffer my hormonal imbalances here as I pontificate on MMT memes. My doc says if I would get those hormone/testosterone treatments that I wouldn’t sit in the library on the computer so much but maybe would go outside and play football more.
WARREN MOSLER Reply:
January 20th, 2011 at 10:39 pm
you’re mixing metaphors
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January 20th, 2011 at 12:58 pm
Hi Strawberry Picker – if you do not understand the difference between the role of federal and state taxes, but you do not have much of a chance to understand what Mr. Mosler is discussing when he says ‘taxes regulate demand’. This is not fantasy, it’s accounting.
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strawberry picker Reply:
January 20th, 2011 at 7:27 pm
Fantasy accounting? Is that what you said Steve B? The house next door is foreclosed, the crackheads have stripped out all the wiring to sell at the scrap metal place and ruined the walls and ceiling doing so. I went to bank of america for this derelict property they hold and said dudes, this house is falling apart, sell it to me for cheap, they said NO SIREE! That GAAP gives them special mark to model fantasy accounting and if they sold it to me at the market price I am willing to pay (which is higher than anyone else because I want to control my neighbors) that the whole house of cards fantasy accounting would begin to fall. I am glad you and I are on the same page about accounting and fantasies dude. It’s time to take off da rosy colored glasses, eject the fleetwood mac 8 track and start living back in the real world away from the winged unicorns.
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January 20th, 2011 at 2:12 pm
Warren you are into the medical IT business right? And you always say we just need to figure out what we gonna do with those old Mr. Magoos. (sigh) Things don’t look well for USA old people.
The report says that med tech innovators are increasingly going outside the U.S. “to seek clinical data, new-product registration and first revenue,” and that U.S. consumers “could eventually be last in line” to benefit from med tech advances. And, it says developing nations are becoming “the leading markets for smaller, faster, more affordable devices that enable delivery of care anywhere and help bend the healthcare cost curve downward.”
http://blogs.wsj.com/health/2011/01/18/will-medical-technology-innovation-shift-to-emerging-markets/
LAST IN LINE? THe world’s only superpower LAST IN LINE, that is freaking pathetic dude if it comes to pass.
On another note, Canada is going on a debt diet
Canada tightens mortgage rules again…
Flaherty details new mortgage rules
Bill Curry, The Globe and Mail
7:20 AM, E.T. | January 17, 2011
Canadian, Economy, Real Estate
Concern over rising consumer debt levels is prompting Ottawa to make three new changes to Canada’s mortgage rules.
Finance Minister Jim Flaherty announced Monday that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 percent.
Secondly, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 percent from 90 percent of the value of their homes.
Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.
At a news conference in Ottawa, Flaherty said the measures will encourage Canadians to save more through home ownership. He said they will also reduce the exposure of Canadians to financial risks.
Observers have been speculating that Finance Minister Jim Flaherty would take steps to tighten mortgage credit in the next federal budget. The timing of the move suggests concerns are growing in government circles about household debt and its impact on the economy.
CIBC chief economist Avery Shenfeld referred to the mortgage changes as part of a larger move by the government to “force Canadians on a debt diet” as household debt levels sit at record levels.
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January 21st, 2011 at 9:31 am
Warren:
First, you’re being way too literal with respect to his comments. He doesn’t owe anyone an apology. I’m no Bill Gross fan but suggesting he needs to apologize is ridiculous.
Second…the government manipulates every piece of economic data they release. With respect to inflation, the biggest distortion is in “owners equivalent rent” which makes up about 20% of core CPI. The OER calculation assumes that the landlords pay the utility bills, a lie in a large percentage of rental properties. So, when oil prices move higher, net rental income decline per the flawed calculation. Thus, higher energy prices equates to lower core inflation. As the Fed’s focus is on Core CPI (and thus lending credibility to the measure), a significant problem emerges. When the Fed cites a lie to justify policy, they become complicit in the lie. You’re going to defend the fed and demand an apology from Bill Gross? Come on Warren!
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WARREN MOSLER Reply:
January 23rd, 2011 at 8:33 am
So you are saying that you agree with Bill Gross that the Fed’s engaging in a policy with the further purpose of robbing people with dollar balances?
Whatever- you’re entitled to your opinion
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Ivan Reply:
January 23rd, 2011 at 2:43 pm
I’m saying 1) you’re being too literal, 2) the government manipulates the inflation data to the detriment of its citizens, and 3) the fed is complicit in the manipulation of data by the BLS by referencing it as credible.
1 is an opinion. 2 is a fact. 3 is an opinion.
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WARREN MOSLER Reply:
January 23rd, 2011 at 3:26 pm
ultimately congress decides what’s included in CPI
January 22nd, 2011 at 6:21 am
Mr. Strawberry Picker: Since you have the body of a 90 year old, have you given up your license? Just asking.
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January 24th, 2011 at 9:08 am
And if the Fed knows the data is wrong and still references it, they’re exempt because congress authorized the BLS to calculate inflation? Seems to me that this is something you’d be interested in. Understating inflation is done to reduce payments to Social Security beneficiaries and all other beneficiaries of government programs that are tied to inflation. This is all done to keep spending down and the deficit in check. I don’t understand why you’d want to hammer Bill Gross when our own government is really the source of the problem. And yes..that includes the Fed.
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WARREN MOSLER Reply:
January 24th, 2011 at 9:21 am
the data isn’t ‘wrong.’
sources and methodology are fully disclosed.
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Ivan Reply:
January 24th, 2011 at 9:43 am
Really? Check the calculation of OER. I had to get a senior level person at the BLS on the phone to admit that yes…higher energy prices contribute to lower core CPI. Providing accurate and reasonable data is critical. When the government manipulates that data for political gain, there’s a real problem. When the Clinton administration eliminated discouraged workers from the unemployment rate, that was done strictly for political gain. Why the sudden interest in supporting the lousy data coming from the BLS?
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WARREN MOSLER Reply:
January 24th, 2011 at 10:00 am
we’ve always known how oer is calculated, and that the staffers make an effort to separate rent from utility bills in a good faith effort to avoid double counting.
you’re barking up the wrong tree here. i’ve got lots of problems with govt. data but this isn’t one of them
January 24th, 2011 at 11:02 am
A good faith effort? That’s amusing. They switched to OER when housing prices (and the cost of housing) were rising too fast. This was done to keep cost of living adjustments on government payments down. Now, with housing prices having fallen, I’m surprised they haven’t switched back. Double counting was not the issue. Since the BLS assumes that the landlord pays utilities across the board which is a flawed premise, they eliminate rising utility prices to get to what they consider to be pure rent. Inflation is a nominal calculation. If my utility prices fall, my rent doesn’t go up. If utility prices go up, my rent doesn’t go down. The correct way to do this calculation is to measure rent and utilities separately and not to have an OER calculation at all. On another note, the entire premise behind stripping out food and energy is that those are two highly volatile indexes. When they do nothing but go up, it is silly to discount the credibility of the top line CPI number. Unfortunately, the Fed continues to only focus on core.
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WARREN MOSLER Reply:
January 24th, 2011 at 11:18 am
Yes, it was changed publicly for further political/public purpose back then.
It wasn’t about honesty or even actual cost of living. It’s an index used for calculating govt payouts, as determined by the representative govt at the time.
It is about double counting in that utility prices are already in cpi elsewhere.
The purpose of stripping out food and energy is to give the Fed that additional information, also for further public purpose of attempting to determine ‘trend’ and ‘underlying’ forces.
And you’re implying ‘inflation’ and CPI are interchangeable.
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Ivan Reply:
January 24th, 2011 at 11:38 am
From the BLS website:
The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation’s economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.
As to double counting, you are correct that is is reflected elsewhere. Because rental prices don’t change with utility prices, there is no double counting. The BLS is only trying to calculate “Pure rent”. I’m going to rent some properties and when my utility prices go up, I’m going to decrease my payment to the landlord so he can receive pure rent. Think that will work? Come on Warren….this is a no brainer!
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