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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 June 16th, 2011

Greece on the slippery slope

Posted by WARREN MOSLER on 16th June 2011

First, I think there isn’t enough political or popular support to leave the euro and go back to the drachma.

As previously discussed, it’s not obvious to the population or the political leadership that there is anything wrong with the euro itself.

Instead, it probably seems obvious the problem is the result of irresponsible leadership, and now they are all paying the price.

So staying with the euro, Greece has two immediate choices:

1. Negotiate the best austerity terms and conditions they can, and continue to muddle through.

2. Don’t accept them and default

Accepting the terms of the austerity package offered means some combination of spending cuts, tax hikes, assets sales, etc. that still leaves a sizable deficit for the next few years, with a glide path to some presumably sustainable level of deficit spending.

Defaulting means no more borrowing at all for most likely a considerable period of time, which means at least for a while they will only be able to spend the actual tax revenue they take in, which means immediately going to a 0 deficit.

What matters to Greece, on a practical level, is how large a deficit they are allowed to run. This makes default a lot more painful than any austerity package that allows for the funding of at least some size deficit.

Therefore it’s makes the most sense for Greece to accept the best package they can negotiate, rather than to refuse and default.

Additionally, the funding Greece will need to keep going is probably funding to pay for goods and services from Germany and some of the other euro member nations.

In other words, if Germany wants to get paid for its stream of exports to Greece it must approve some kind of funding package.

Reminds me of a an old story Woody Allen popularized a while back:

Doctor: So what’s the problem?

Patient: It’s my brother. He thinks he’s a chicken.

Doctor: Have you tried to talk to him about it?

Patient: No

Doctor: Why not?

Patient: Well, we need the eggs

Likewise the euro zone needs the eggs, and so the most likely path continues to be some manner of ECB funding of the banking system and the national govt’s, as needed, last minute, kicking and screaming about how they need an exit strategy, etc. etc. etc. And the unspoken pressure relief valve is inflation, with a falling euro leading the march. It’s unspoken because the ECB has a single mandate of price stability, which is not compatible with a continuously falling euro, and because a strong euro is an important part of the union’s ideology. But a weak euro that adjusts the price level, as a practical matter, is nonetheless the only pressure relief valve they have for their debt issues in general. And, also as previously discussed, it looks like market forces may be conspiring to move it all in that direction.

Posted in Bonds, Currencies, Deficit, ECB, EU, Germany, Government Spending, Inflation | 32 Comments »

Euro trade data

Posted by WARREN MOSLER on 16th June 2011

So looks to me that China shifted to buying more euro just as the trade flows were turning the other way and might have otherwise been weakening the euro.

This means that when they stop buying there could be serious gap down until it gets to where it would have gotten had China not been buying. (Kind of like taking your finger out of the hole in the dam.)

Which is maybe what happened when it peaked a few weeks ago at the time of Bernanke’s first strong dollar speech?

And the rising euro zone debt to GDP ratio (which is only through 2010 on the below chart) though falling some this year with austerity, may now be rising again due to new weakness created by that same austerity.

It’s all starting to look a lot like the beginnings of the traditional banana republic model- high unemployment, high ‘bad’ deficits from weak economies, and a falling currency that keeps debt to gdp ratios capped as ‘inflation’ floods in through the fx window.

Posted in China, Currencies, EU, Government Spending | 3 Comments »

CNBC mention

Posted by WARREN MOSLER on 16th June 2011

Just got this email in comments section of my blog:

You just got quoted by Steve Leisman on CNBC:

Leisman: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’. ”

But I think based on other things he said he (Leisman) is still a bit out of paradigm… I’ll try to post up the link to the video hit later.. Resp,

Link to video.

Posted in Deficit, Government Spending, Japan | 10 Comments »

WSJ on China buying Tsy secs

Posted by WARREN MOSLER on 16th June 2011

A bit of support in the Wall Street Journal for my suspicions about an understanding being reached between China and the Fed, and Fed Chairman Bernanke’s timing on his strong dollar speeches:

“A report this week showed foreigners were net buyers of long-term U.S. financial assets in April. China bought U.S. Treasuries after five straight months of net selling, and remained the top holder of those government securities.”

Posted in China, Fed | 1 Comment »

Obama on deficit reduction and jobs

Posted by WARREN MOSLER on 16th June 2011

He has to tax where there is negative propensity to spend and cut where there is negative propensity to save.

>   (email exchange)
>   On Thu, Jun 16, 2011 at 8:15 AM, Stephanie wrote:

Obama’s White House Press Secretary says, ”Obama approaches the deficit talks with a “singular concern, which is that the outcome of the deficit reduction talks produce a result that significantly reduces the deficit while doing no damage to the economic recovery and no damage to our progress in creating jobs.”

Posted in Deficit, Obama, Political | 20 Comments »

thoughts on the euro

Posted by WARREN MOSLER on 16th June 2011

So my story has been that while most thought QE was a bumper crop for the dollar- Fed printing money and flooding the system with liquidity and all that-

It was in fact a crop failure for the dollar, as evidenced by the Fed turning over $79 billion in QE profits (that would have otherwise gone to the economy) to the Tsy.

And because everyone thought it was a bumper crop, they all sold the heck out of dollars in all kinds of theaters and iterations, from outright selling of dollars, to buying of commodities and stocks and in general making all kinds of dollar ‘inflation bets.’

And then a few weeks ago Chairman Bernanke comes on tv and starts talking about how his policies are strong dollar policies, just as the dollar index hit its lows and within a day or so headed north.

At the time it seemed strange to me that he’d suddenly, out of nowhere, break silence on the dollar and make those kinds of strong dollar statements previously left to Treasury. Unless he had a pretty good idea the dollar would start going up.

And only a few days ago he again spoke about how his policies were strong dollar policies, and the dollar traded around a bit, but remained above the lows and then headed back up. Especially vs the euro.

And shortly after that we find out China had let maybe $200 billion in T bills run off since QE2 started, and while their dollar holdings didn’t fall, their reserve growth was allocated elsewhere, and, from market action, there were substantial allocations to the euro. This hunch was further supported by their earlier announcement that they would be buying Spanish bonds to ‘help them out’ as a Trojan horse to buy euro to support their exports to the euro zone.

So my story is maybe the T bill runoff thing was a shot across the Fed’s bow? China was in the news objecting to QE and demanding what they considered ‘sound money’ policy. So it would make sense, to let the Fed know they were serious, to do something like let their T bills run off and alter fx allocation ratios away from the dollar and toward the euro, all of which caused the dollar to sell off for several months. And with the implication, and maybe also in private conversation, that any more QE would mean outright selling of dollar reserves. And the Fed Chairman taking this to heart and with other FOMC members also objecting to more QE, and maybe even knowing that QE doesn’t do anything anyway apart from scaring global portfolio managers, including those in China and Russia, etc. out of dollars, maybe somehow reached an understanding with China, where China would return to ‘normal’ fx allocations and there would be no QE3? And the subsequent strong dollar speeches that followed had the knowledge behind them that China had returned to dollar financial asset accumulation, which would likely end the dollar slide and reverse it?

This also means the euro has lost this ‘extra’ support it’s ‘enjoyed’ for the prior several months, which means it’s all a lot worse for the euro than it is good for the dollar, as they have bigger fish to get deep fried than just the level of the currency. Seems the last thing they need now is for a major buyer of euro denominated debt to switch allocations to dollars.

And it also could be that this ‘extra’ euro debt buying has been delaying the euro crisis for the last several months as well. This means it’s all been propped up while getting worse down deep, which means if that support has now been pulled, it falls that much harder.

A lower euro also works to ‘inflate away’ euro zone national govt debt ratios, and currency depreciation in general as a market induced path to debt relief is a well known phenomena, though one the ECB is likely to fight to comply with its low inflation mandate. And fighting inflation means hiking interest rates, which, while initially helping some, actually work to increase national govt deficits and hurt their credit ratings, as well as further depress the euro.

Posted in China, Currencies, Emerging Markets, EU, Fed | 14 Comments »