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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.

Global indicators not so good this am

Posted by WARREN MOSLER on June 29th, 2011

The hope is that the entire soft spot is a temporary consequence of the earthquake, and that China holds together, and that global austerity isn’t sufficient to slow overall growth:

Headlines:

Bank of England warns against quick fix to crisis (AP)
U.K. Services Drop Most Since January 2010 on Extra Holiday (Bloomberg)
U.K. Mortgage Approvals Increased Less Than Forecast in May (Bloomberg)
Bank of England Split on Interest Rate Policy as Consumers Struggle (Telegraph)
PBOC Adviser Sees China ‘Chronic’ Inflation Lasting Decade
Why China’s Heading for a Hard Landing, Part 3: A. Gary Shilling
Sweden: Slowdown After Strong Growth
Europe June Economic Confidence Drops to Lowest in 8 Months
Trichet Urges New Vision of Europe as Greeks Protest Austerity
Up to 15 EU banks to fail stress test
ECB’s Stark Rejects Brady-Bond Solution for Greece, Zeit Reports
French Greek Rollover Plan Depends on No Default Rating
French Output Grew Less Than Estimated on Consumer Spending
Growth of German retail sales maintained in June
French Jobless Claims Increase for First Time in Five Months
Spanish premier proposes new economic measures
Portugal plans tougher austerity measures
Spanish Existing Home Prices Decline 1.8% in Second Quarter
Mortgage Applications Dipped Last Week

32 Responses to “Global indicators not so good this am”

  1. Crake Says:

    I am confused about equities as this storm appears on the horizon. Sentiment is bearish; there have been money outflows from funds; weekly and monthly charts of major US indices look like decent support is forming. These contrarian indicators and charts seem fairly bullish to me. Yet you have a macroeconomic storm which should trump all of that. Market sentiment usually always gets it wrong. Is it going to be right this time?

    Reply

  2. Tom Says:

    Not sure where to pose this….but I’m still fuzzy on horizontal money. Can someone better versed explain why horizontal money always nets to zero….consider the example below.

    If I deposit $1,000 in a bank that has to have a 10% fractional reserve, then it is able to loan out a total of $10,000 off of that. After that, there is $11,000 dollars in the economy where there had only been $1,000 before.
    The presence of the liability doesn’t change the existence of the money. If everything works according to plan, they get paid back the money they loaned out. Assuming 0% interest just to keep the math nice and simple, that means that at the end of the payment returns, the bank owns $10,000, holds $1,000 for me, and the people who were lent money have no net gain/loss of money. The fact remains that money was created, right?

    Reply

    WARREN MOSLER Reply:

    wrong. the bank just makes the loan and enters the proceeds into your bank account.
    it now has a 10,000 loan and a 10,000 deposit.
    it also has an ‘overdraft’ of 1,000 in its reserve account.

    if it does nothing, the fed books the overdraft as a discount loan

    Reply

    Tom Reply:

    @WARREN MOSLER,

    im still a bit confused, sorry, im still learning a lot not coming from any sort of financial background :)

    so youre saying that they make the loan anyway, even before i show up and deposit my $1000? so they dont really make loans based on deposits then?

    So is that what you mean when you say that the banks basically dont pay attention to reserve requirements and reserves when making loans but rather to the cost of the loan? they worry about meeting reserve requirements later?

    because they know that the fed in some way or another is going to lend them the reserves necessary to meet the requirement

    Reply

    WARREN MOSLER Reply:

    correct. in fact banks make loans based on their marginal cost of funds in the wholesale market.

    while smaller banks tend to not rely on wholesale funding, the larger banks approve their large loans based on the cost of then funding those loans

    and yes, they don’t worry at all about reserve requirements, because simply incurring a reserve requirement is ‘already’ a loan from the fed, and all that’s left is the fed pricing that loan.

    PJ Pierre Reply:

    @Tom,

    @Warren Mosler,

    “and yes, they don’t worry at all about reserve requirements, because simply incurring a reserve requirement is ‘already’ a loan from the fed, and all that’s left is the fed pricing that loan.”

    This may be the best way that I have this stated to date. Great wording.

    WARREN MOSLER Reply:

    :)

  3. selise Says:

    from obama press conference transcript:

    “Of course, one of the most important and urgent things we can do for the economy is something that both parties are working on right now –- and that’s reducing our nation’s deficit. Over the last few weeks, the Vice President has been leading negotiations with Democrats and Republicans on this issue, and they’ve made some real progress in narrowing down the differences. As of last week, both parties had identified more than $1 trillion worth of spending cuts already.

    But everyone also knows that we’ll need to do more to close the deficit. We can’t get to the $4 trillion in savings that we need by just cutting the 12 percent of the budget that pays for things like medical research and education funding and food inspectors and the weather service. And we can’t just do it by making seniors pay more for Medicare. So we’re going to need to look at the whole budget, as I said several months ago. And we’ve got to eliminate waste wherever we find it and make some tough decisions about worthy priorities.”

    http://blogs.wsj.com/washwire/2011/06/29/transcript-of-obama-news-conference/

    Reply

    rvm Reply:

    Disgusting, feel sick in my stomach.

    Reply

    selise Reply:

    @rvm,

    hold on, there’s more:

    “Senators Joe Lieberman (I-CT) and Tom Coburn (R-OK) revealed their bipartisan proposal to save Medicare and reduce the debt.

    “We can’t balance our budget without dealing with mandatory spending programs like Medicare. We can’t save Medicare as we know it. We can only save Medicare if we change it. And that’s what the Medicare Reform Plan Tom Coburn and I are proposing will do,” said Senator Lieberman.

    http://coburn.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=ae711529-741a-4f52-89eb-4e6ef1c861a7

    Reply

  4. UNSW_kid Says:

    @ Tom

    Yes the money multiplier is jibber jabber.

    They make the loan if the risk to lending to you is outweighed by the profit from your interest/principal repayments less the cost of funding the reserve requirement- which as mentioned can simply be the feds discount loan (though this is generally not the cheapest, and the bank will look for alternative funding later).

    Reply

  5. KD Says:

    Is this a hopeful sign or just a ‘stopped clock’ effect?

    http://www.boston.com/news/nation/articles/2011/06/29/in_nh_visit_bachmann_praises_moratorium_on_us_income_tax/

    At least somebody who’s powered by the Tea Party crowd is saying something like this.

    Reply

    WARREN MOSLER Reply:

    she’s about as anti populist as it gets

    Reply

    Art Reply:

    @WARREN MOSLER,

    She sure is entertaining though. “That I knew that I knew that I knew…”

    http://www.youtube.com/watch?v=cm16dBXn5u0&feature=related

    http://www.youtube.com/watch?v=h-DQANalAe0

    http://www.youtube.com/watch?v=Zc0sFEL4p8I&feature=related

    http://jezebel.com/5814870/when-kathy-griffin-met-michele-bachmann

    http://www.youtube.com/watch?v=l0rUBomKvY0&feature=related

    That last one has me wondering if she always takes God’s call, or if she sometimes lets him go to voice mail. I mean, it sounds like she’s really after his son (and that sweet holy laser beam!).

    Reply

    Art Reply:

    @KD,

    Pretty telling that Gohmert, of the party that is fond of claiming that “only x% of income earners pay yy% of [income] taxes” (they usually conveniently leave “income” out) would argue for an income tax rather than a payroll tax holiday. The GOP talks more BS today than they ever have.

    Reply

    Art Reply:

    Sorry, unfair to Gohmert. His bill was a two month payroll and income tax holiday ‘funded’ with surplus TARP money. Gorman’s proposal is the telling one, and he’s Libertarian Party.

    Reply

    Tom Hickey Reply:

    @KD,

    At the same time, she rails at the debt and deficit. Seems like she has a deficit in numeracy, if she thinks she can have a moratorium on the income tax for an entire year without raising the deficit and adding to the debt. Oh, I forgot, in conservative arithmetic tax cuts don’t affect the deficit and debt because they pay for themselves immediately, while spending increases only add to the deficit and debt.

    Reply

    Art Reply:

    @Tom Hickey,

    “Deficits don’t matter.” – Richard Cheney, 2000

    ;)

    Reply

    Dollar Monopoly Reply:

    @Art,

    “Deficits don’t matter” is a great way to market MMT because we are associating ourself with a phrase that all of us have heard. It doesn’t mean MMT subscribes to the notion but does can offer us a platform to build a dialogue upon.

    Art Reply:

    @Dollar Monopoly,

    Disagree. Deficits clearly do matter, just not in the way that most people are conditioned to believe. Cheney’s assertion seems like a surefire way to lose all credibility.

    Tom Hickey Reply:

    Seems that the right is caught in a dilemma of “deficits don’t matter” and “out of control” deficits and debt are economic death for the US. When it comes to tax cuts and military spending increasing the deficit and adding to the debt, no problem. Social spending? No way; it’s completely different, even though the numbers are the same, because cutting taxes “increases investment” and social spending “decreases investment.” No empirical proof offered or any counter to contradictory data.

    It’s obviously disingenuous.

    Dollar Monopoly Reply:

    @Art,

    i’m speaking strictly from a marketing perspective. We should own that phrase. Why would we want to own it sense deficits clearly do matter? Because it gives us an “in” to open a dialoge. if your marketing MMT you want any and all related phrases associated with debt, deficits, etc to lead traffic to your website where then you can capture the reader – ie. sell them on MMT.

    Tom Reply:

    @Art,

    I always wondered why Cheney said that. He never seemed to be in the camp that would believe that.

    Crake Reply:

    @Art,

    Tom,

    I have searched for the source of VP Cheney’s comment many times. From what I can gather, it was either a wise-crack comment or taken out of context. Although I have seen some reports indicating he made it in reference to the Reagan years and he was sincere but in that context, I think he meant if spending and tax cuts were targeted to where “his side” wanted them, then deficit did not matter – in other words, it is situational to other goals.

    Tom Hickey Reply:

    He [Treasury Secretary Paul O'Neill] recalls [in The Price of Loyalty] speaking to vice-president Dick Cheney about his concerns over the ever-swelling American budget deficit.

    “You know, Paul,” said Mr Cheney, “Ronald Reagan showed that deficits don’t matter.”
    So he did, and it seems they still don’t. The US deficit is now $500bn a year – a figure Mr O’Neill would probably have thought impossible. But the two unpleasant consequences which should flow – higher long-term interest rates and higher inflation – have not occurred.

    source

    Crake Reply:

    @KD,

    If only they would make a jump to understanding that fundamentally cutting taxes = spending increases and vice versus, then we might have something good.

    Reply

  6. wh10 Says:

    Dollar Monopoly-

    You will lose any serious interest in MMT if that’s how you market it. Everyone already automatically assumes MMT says deficits don’t matter- then they dismiss it as quackery. And you see people like Scott Fullwiler and Cullen Roche coming to MMT’s rescue all the time trying to convince people that is not what MMT says.

    I don’t think MMT should be treated as your typical viral marketing campaign. At the end of the day, if you want the economic paradigm in this country to change, you have to convince the academics and the policy advisers. I would even argue that if they don’t buy into MMT, that puts a meaningful ceiling on the number of “average joes” you can convince. And in any case, a bunch of burger flippers espousing a theory they won’t even completely understand is not going to do it for MMT, and it’s only going to hurt MMT’s credibility.

    It’s my belief discourse needs to be opened up in the academic and professional community. Target your efforts to people in meaningful professional positions and to universities. Some “average joe” internet presence may help bring visibility, but you also run a very serious risk of leading to misrepresentations of MMT and diminishing its credibility.

    Reply

  7. Dollar Monopoly Says:

    good points. I agree with your concerns and that deficits do matter. Calling a peanut a pistachio isn’t accurate but can be used introduce someone to pistachios – thats all i’m saying. everything in life comes down to execution and if something is causing more confusion than clarity then it should be tossed aside.

    btw i would love your feedback on the site i’m putting together (DollarMonopoly.com) to explain MMT for the laymen. you can comment here, or there, or though the contact form on the site if you like. i’ve been bouncing ideas off tom hickey to get some initial feedback. i sent warren an email this weekend and his initial response was that he liked what he saw and would provide specific comments when he gets and extra 20 min.

    Reply

    wh10 Reply:

    @Dollar Monopoly,

    Hey Dollar,

    I did! See http://www.blogger.com/comment.g?blogID=2761684730989137546&postID=8816787713290922817 . Like I said overall- beautiful site and great graphics. My constructive criticism is along the same lines as what I said here- obviously it is my opinion, but I am pretty anti- cheapening MMT for the mainstream using typical mainstream marketing practices. Good, clear explanations are great and needed; I think you are doing that. BUT I would want to avoid the ad hominem attacks and non-academic, mass-appeal rhetoric.

    Reply

    Dollar Monopoly Reply:

    @wh10,

    Thanks for the feedback. I completely agree with you about toning down the rhetoric. I’ve noticed as i continue to refine things that the rhetoric dissipates. I still haven’t found my writing voice or whatever you want to call it. I’m not a writer by any stretch of the imagination. My gosh you should of seen my first draft – I was brutal. Thanks for the links. I’ll check them out.

    Reply

    Calgacus Reply:

    @Dollar Monopoly, I think it is a good idea to broach the matter with people as a question: How do deficits matter? The only sane answer is the MMT answer, which this socratic method might yield with a reasonable respondent.

    One could also talk about public deficits vs. private deficits (net creation of new bank money). The only conceivable risk of the first is inflation. The second carries the risk of default, bankruptcies and deflation.

    Dollar Monopoly Reply:

    @Calgacus,

    I agree finding the right opener is important to spark interest? The one I am using now is:

    The mainstream economic profession needs help. Most economists don’t recognize the fact that government debt of a currency issuer is not remotely analogous to household debt. Why? Well, for starters, no one in a household is the “monopoly producer of money”.

    I’ve changed it up quite a bit since getting comments from warren.

    http://dollarmonopoly.blogspot.com/p/kickstarter-project.html

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