Monthly Archives: February 2011

MMT on MarketWatch

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MMT breaking through???

Deficit hysteria grips Washington

By Darrell Delamaide

February 16 (MarketWatch) — Deficit hysteria is rising to fever pitch in Washington as the political jockeying over the budget begins in earnest.

“Fiscal nightmare,” “buried under a mountain of debt,” “awash in red ink” – these are some of the colorful phrases being bandied about by politicians, pundits and even journalists ostensibly reporting facts. Most of them are winging it on a single undergraduate course in economics, if that, but they know they’re right because everybody agrees.

Yet, if you look out the window, you don’t see any red ink or mountains of debt. The only nightmare is unemployment continuing near 10% and ongoing waves of foreclosures – neither of which is attributable to the federal deficit and neither of which will be fixed by budget cuts.

There is no visible harm from current deficits. Yields on U.S. Treasurys are up a tick but still near historic lows. Core inflation in the U.S. is still so far below the 2% annual rate deemed desirable by the Federal Reserve that deflation continues to be more worrying. There is no crowding out of private borrowers in the debt markets.

Just you wait, cry the deficit hawks, it will be a nightmare by 2016 or 2020 or 2050. Well, let’s wait and see. If we put those 15 million people back to work and get the economy growing at a steady clip, tax revenues will rise and cheat all those bloodthirsty hawks of their fiscal Armageddon.

Worried? Confused? Alarmed at the slow-motion train wreck in Washington?

There is cause for alarm. There is the possibility that the government, held under the sway of misguided and obsolete economic theories and driven by a not-so-hidden corporate agenda, will make genuinely harmful cuts in both discretionary spending and entitlement programs – cuts that will cause real and needless misery to millions.

The overwrought hysteria of the deficit hawks – one economist calls them deficit terrorists – has already sabotaged government stimulus that could have rebooted the economy much more quickly and alleviated unemployment to a greater extent.

It’s certainly useful to comb through the budget and reexamine programs for possible cuts. Military spending can certainly be cut back. Some recalibration of entitlements is also necessary.

But the helter-skelter axing of programs to meet a target pulled out of thin air – what’s so magic about $100 billion in spending cuts this year? – risks causing much unnecessary harm.

Before you succumb to the deficit hysteria, think about the disconnect between the dire language and the observable facts. Be careful about false comparisons – such as the U.S. going the way of Greece.

The U.S. is not Greece. The U.S. has full monetary sovereignty – that is, it has complete control over its own currency. Greece, as a member of the euro, does not, which is why it has constraints on its borrowing.

When the U.S. was bound by the gold standard, it also faced constraints. Most of the thinking and language about budgets and deficits actually goes back to this time, when the U.S. genuinely had to “finance” its deficit.

Since abandonment of the gold standard and the de facto adoption of a fiat currency, however, these constraints no longer apply. The U.S. is free to print as much money as it likes; the U.S. government is free to spend money without financing it.

How crazy, you say. What about inflation? Inflation occurs when there is more demand than supply and this simply isn’t going to happen when there is 8-10% unemployment. Treasury and the Fed have ample tools – selling debt securities and raising interest rates – to deal with inflation when it does threaten.

Modern monetary theory – which is espoused by a growing number of economists and investment managers because it explains the observable facts better than the obsolete theories driving most of the public discussion – deals with the world as it is without a gold standard.

A better comparison for the U.S. than Greece is Japan, which also enjoys full monetary sovereignty. Japan has a public debt approaching 200% of GDP. This compares to the U.S. at 60% in 2010 and on its way up.

Deficit terrorists have decided arbitrarily that 60% is the maximum limit. They have been predicting the imminent collapse of Japan – for the past 20 years. And yet Japan continues to finance its deficit with rock-bottom interest rates.

The federal government is also not comparable to a household. It does not have a checkbook to balance or a credit card to max out, even though our folksy politicians like to use these metaphors. It does not have to “live within its means” like a family or individual. Our grandchildren will never have to repay all that debt. No one will, ever. It will continue to grow as our economy grows.

All this flies in the face of all the groupthink going on in Congress, in the press and on cable TV. So if you want to reject modern monetary theory as hogwash and cling to theories that worked a century ago, you’re in good company. But think about it, look around you, and decide for yourself what best describes the world you live in.

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Obama mortgage reform proposal

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If this is actually the jist of the proposals they make no sense to me.
For me the starting point is the question,
‘Is there public purpose supporting home ownership for lower income earners?’

Under current institutional arrangements, I’d say yes, and come up with an entirely different set of proposals, as I did
a while back for my website.

As is, looks to me like an obstacle to higher levels of output and employment.

Mortgage Costs to Rise As Government Lessens Role

February 11 (AP) — The Obama administration laid out three broad options Friday for reducing the government’s role in the mortgage market. All three would almost certainly lead to higher interest rates and costs for borrowers.

The administration said in a report that the government should withdraw its support for the mortgage market slowly, over five years or more. The report describes a path for winding down the troubled mortgage giants Fannie Mae and Freddie Mac.

But rather than making a single recommendation, the administration offered Congress three scenarios and will let lawmakers shape the final policy.

The options are:

— No government role, except for existing agencies like the Federal Housing Administration.

— A government guarantee of private mortgages triggered only when the market is in trouble.

— Government insurance for a targeted range of mortgage investments that already are guaranteed by private insurers. The government guarantee would kick in only if those private companies couldn’t pay.

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New Drilling Method Opens Vast Oil Fields in US

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Might need to delay ‘peak oil’ a bit.

More interesting, I’d estimate it would take about a 5 million barrel a day ‘shift’ in net demand to dislodge the Saudis as swing producer, as they can only cut production by less than that much to sustain price should that happen.

In other words, a combination of increased non opec supply and reduced world demand of 5 million bpd would force a cut in production of that much for the Saudis to be able to continue to set price, from their current production level of about 8.5 million bpd.

And along with these ‘new drilling methods’ Iraq is looking to add over 5 million bpd in capacity over the next several years.

The question is what will happen with demand, and looks to me the US and Europe are starting to go the other way and reduce gasoline demand via conservation (higher mpg’s in vehicles) and shifting to alternative fuels, directly and indirectly.

So what’s the Saudi’s best move here?
Keep prices high a long as possible and get all the wealth they can before prices collapse?
Or cut price in an attempt to discourage the forces at work that are threatening their pricing power?

New Drilling Method Opens Vast Oil Fields in US

February 9 (AP) — A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day—more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

“That’s a significant contribution to energy security,” says Ed Morse, head of commodities research at Credit Suisse .

Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical. But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too,” says Aubrey McClendon, chief executive of Chesapeake Energy, which is using the technique.

Petroleum engineers first used the method in 2007 to unlock oil from a 25,000-square-mile formation under North Dakota and Montana known as the Bakken. Production there rose 50 percent in just the past year, to 458,000 barrels a day, according to Bentek Energy, an energy analysis firm.

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Mortgage apps down

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Still no sign of private sector credit expansion from housing.

US Home Loan Demand Drops, Rates at 10-Month High

February 9 (Reuters) — Applications for U.S. home mortgages dropped last week as the highest interest rates in 10 months sapped demand for home loan refinancing, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.5 percent in the week ended Feb. 4.

The MBA’s seasonally adjusted index of refinancing applications fell 7.7 percent last week.

The gauge of loan requests for home purchases was down 1.4 percent.

Fixed 30-year mortgage rates averaged 5.13 percent in the week, up 32 basis points from 4.81 percent the prior week.

It was the highest rate since the week ended April 9, 2010.

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U.K. Retail Sales Advance at Fastest Pace in 10 Months, BRC Says

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The deficit is still plenty large enough for a decent expansion, so the year end weather setbacks could be reversed and then some before sufficient austerity sets in and works to reverse it all.

Hard to figure the timing for the cross currents.

Also, opening the borders to wealthy foreigners, as they recently announced they were doing, is a clever move to firm the currency and support the economy and asset prices.

UK Headlines

U.K. Retail Sales Advance at Fastest Pace in 10 Months, BRC Says
U.K. Housing-Price Gauge Increased in January on Supply Shortage
Osborne Says U.K. Bank Levy Increase to Raise 800 Million Pounds

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Fiscal panel co-chair blasts critics as “jerks”

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History will not be kind to either Simpson or the equally out of paradigm headline critics who are equally responsible for losing this battle.

Fiscal panel co-chair blasts critics as “jerks”

February 6 (Reuters) — Any fiscal plan that fails to tackle military spending, Medicare, Medicaid and Social Security is “a sparrow’s belch in the midst of a typhoon,” a chairman of a presidential deficit-reduction commission said in an interview aired on Sunday.

Former Senator Alan Simpson, Republican co-chair of the National Commission on Fiscal Responsibility and Reform, also trashed certain critics as “jerks” and compared the United States to “a milk cow with 300 million teats.”

“If you have a career politician get up and say, ‘I know we can get this done; we’re going to get rid of all earmarks, all waste, fraud, and abuse, all foreign aid, Air Force one, all congressional pensions,’ that’s a sparrow’s belch in the midst of a typhoon,” Simpson told CNN’s “State of the Union.”

President Barack Obama created the bipartisan, 18-member commission to address fiscal challenges centered around a deficit of more than $1.3 trillion, the highest since World War Two, and a record federal debt now topping $14 trillion.

A bold budget-balancing plan floated by Simpson — long noted for earthy, sometimes off-color remarks — and his fellow co-chairman, Erskine Bowles, fell short in December of the support needed from panel members to trigger congressional action.

“So I’m waiting for the politician to get up and say, there’s only one way to do this, you dig into the big four: Medicare, Medicaid, Social Security, and defense,” Simpson said. “And anybody giving you anything different than that, you want to walk out the door, stick your finger down your throat and give them the green weenie.”

Simpson and Bowles recommended Social Security benefit cuts via a higher retirement age, lower annual cost-of-living adjustments and a change in the way benefits are calculated.

“We’re not talking about privatization,” he said on CNN. “These jerks who keep dragging that up are lying. We never suggested that.”

Simpson served from 1979 to 1997 as a Senator from Wyoming. He had apologized in August for comparing Social Security to “a milk cow with 310 million teats.”

But in the interview he said he had merely misspoken.

“I meant to say that America was a milk cow with 300 million teats, and not just Social Security.”

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