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Archive for July, 2011

MMT to Congress: You are the scorekeepers for the US dollar, not a player!

Posted by WARREN MOSLER on 30th July 2011

Imagine a card game, where every entity in the economy is one of the players,
and you, Congress, are the scorekeeper.

The message here is the difference between being the scorekeeper and being a player.

The problem is, you are acting like one of the players when, in fact, you are the scorekeeper.

And you support your mistake with false analogies that presume you are one of the players,
when, in fact, you are the scorekeeper for the dollar.

That correct analogy is between scorekeepers in card games and your role as scorekeeper for the US dollar.

As scorekeeper in a card game, you keep track of how many points everyone has.
You award points to players with winning hands.
You subtract points from players with losing hands.

So as the scorekeeper, let me ask you:

How many points do you have?

Can the scorekeeper run out of points?

When you award points to players with winning hands,
where do those points come from?

When the scorekeeper subtracts points from players with losing hands,
does he have more points?

Do you understand the difference between being the scorekeeper and being the players?

You are the scorekeep for the US dollar.

You spend by marking up numbers in bank accounts at your Fed,
just like your Fed Chairman Bernanke has testified before you.

When you tax, the Fed marks numbers down in bank accounts.
Yes, the Fed accounts for what it does, but doesn’t actually get anything,

Just like the scorekeeper of a card game doesn’t get any points himself
when he subtracts points from the players.

When Congress spends more than it taxes,
it’s just like the scorekeeper of the card game awarding more points to the players’ scores than he subtracts from their scores.

What happens to the players total score when that happens?
It goes up by exactly that amount.
To the point.

What happens to dollar savings in the economy when Congress spends more than it taxes?
It goes up by exactly that amount.
To the penny.

The score keeper in a the card game keeps track of everyone’s score.
The players’ scores are accounted for by the scorekeeper.
The score keeper keeps the books.

Likewise, the Fed accounts for what it does.
The Fed keeps accounts for all the dollars all its member banks and participating governments hold in their accounts at the Fed.

That’s what accounts are- record keeping entries.

So when China sells us goods and services and gets paid in dollars,
the Fed- the scorekeeper for the dollar-
marks up (credits) the number in their reserve account at the Fed.

And when China buys US Treasury securities,
the Fed marks down (debits) the number in their reserve account.
And markes up (credits) the number in China’s securities account at the Fed.

That is what ‘government borrowing’ and ‘government debt’ is-
the shifting of dollars from reserve accounts to securities accounts at the Fed.

Yes, there are some $14 trillion in securities accounts at the Fed.
This represents the dollars the economy has left after the Fed added to our accounts when the Treasury spent, and subtracted from our accounts when the IRS taxed.

And it also happens to be the economy’s total net savings of dollars.

And paying back the debt is the reverse. It happens this way:
The Fed, the scorekeeper, shifts dollars from securities accounts to reserve accounts
Again, all on it’s own books.

This done for billions of dollars every month.
There are no grandchildren involved.

The Fed, the scorekeeper, can’t ‘run out of money’ as you’ve all presumed

The Fed, the scorekeeper, spends by marking up numbers in accounts with its computer.
This operation has nothing to with either

‘debt management’ which oversees the shifting of dollars between reserve accounts and securities accounts,

or the internal revenue service which oversees the subtraction of balances from bank reserve accounts.

And so yes, your deficits of recent years have added that many dollars to global dollar income and savings, to the penny.

Just ask anyone at the CBO.

It is no coincidence that savings goes up every time the deficit goes up-

It’s the same dollars that you deficit spend that necessarily become our dollar savings.

To the penny.

A word about Greece.

Greece is not the scorekeeper for the euro,
any more than the US states are scorekeepers for the dollar.
The European Central Bank is the scorekeeper for the euro.
Greece and the other euro member nations,
like the US states,
are players,
and players can run out of points and default,
and look to the scorekeeper for a bailout.

What does this mean?

There is no financial crisis for the US Government, the scorekeeper for the US dollar.
It can’t run out of dollars, and it is not dependent on taxing or borrowing to be able to spend.
That sky is not falling.

Let me conclude that the risk of under taxing and/or overspending is inflation, not insolvency.

And monetary inflation comes from trying to buy more than there is for sale,
which drives up prices.

But, as they say, to get out of a hole first you have to stop digging.

(I don’t think you, or anyone else, believes acceptable price stability requires 16% unemployment?)

Someday there may be excess demand from people with dollars to spend for labor, housing, and all the other goods and services that are desperately looking for buyers with dollars to spend.

But today excess capacity rules.

And an informed Congress
That recognizes it’s role of scorekeeper,
And recognizes the desperate shortage of consumer dollars for business to compete for,

Would be debating a compromise combination of tax cuts and spending increases.

presuming itself to be a player rather than scorekeeper,

Congress continues to act as if we could become the next Greece,

as it continues to repress the economy and turn us into the next Japan.

***comments welcome, feel free to repost, etc.

Posted in Deficit | 232 Comments »

GDP and corporate earnings

Posted by WARREN MOSLER on 30th July 2011

As previously discussed, stocks don’t need a lot of GDP growth to do moderately well.
Even with weak GDP numbers, high unemployment, a week consumer, weak housing, higher crude prices, moderating export markets, near 0 rates, QE, and a major earthquake in Japan, earnings for the first half of 2011, corporate earnings on average were pretty good.

So if govt. isn’t forced to go cold turkey to a balanced budget which could cause stocks to fall out of control, stocks could do well.

Risks remain, however, including the very real possibilities of trouble in the euro zone and China.

Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan

Posted in Economic Releases | 10 Comments »

What I think I would have done…

Posted by WARREN MOSLER on 30th July 2011

Voting to not raise the debt ceiling to authorize the deficit spending to pay for bills already authorized by Congress, to the best of my knowledge, falls under the definition of subversive.

Representatives are well aware of the non subversive channels to work through to alter prior spending decisions.

Therefore, I would have had the Dems in the Senate put a clean debt limit extension up for a vote,
with the understanding that anyone who voted against this measure to allow the US Govt. to pay
for the expenses that it had already authorized would be considered subversive and treated accordingly.

That would mean risking being removed from the Senate as per the Constitution.

After it passed the Senate it would have gone to the House for a vote with the same understanding.

Posted in Deficit | 39 Comments »

The Fed can prevent default

Posted by WARREN MOSLER on 29th July 2011

QE 0: The Fed offers to buy all Treasury securities and coupons at par at maturity

Posted in Fed | 73 Comments »

The elders of Jonestown contemplating the Kool-Aid mix

Posted by WARREN MOSLER on 29th July 2011

The actual problem with the US economy is the federal deficit is way too small given current credit and global demand.

That should be a good thing.

Congress should be arguing over whether we need tax cuts and/or spending increases.

But instead they all have the misguided idea that we are at immediate risk of some kind of unknown financial crisis
that would cause us to suddenly be unable to fund ourselves, much like Greece, and be faced with the choice of default or hyperinflation.

It’s all inapplicable nonsense. There is no such thing as the issuer of a currency running out of money, or being dependent on foreigners or anyone else for finance. And inflation from over spending comes from trying to buy more than there is for sale, which is hardly the case right now. But the President and members of Congress believe what they believe, however misguided, as do the majority of the voters, and are acting accordingly as they attempt to pass measures to make the federal deficit smaller.

And doing nothing makes the federal deficit smaller still, making the economy that much worse, as doing nothing means the debt ceiling is not raised and the Treasury goes cold turkey to balance.

So the actual best case for the US economy is that they get a bill to the President that he signs, and the deficit reduction and economic harm will at least be less than the catastrophic deficit reduction from doing nothing.

But for too many in power, the best case is doing nothing.

It’s all like drilling holes in the bottom of a sinking ship to let the water out.
The more you drill, the worse it gets.
Unfortunately, it’s now drill, baby, drill!

Posted in Deficit | 57 Comments »

Spain Placed by Moody’s on Review for Possible Downgrade

Posted by WARREN MOSLER on 29th July 2011

They all quickly go to junk if the US goes cold turkey to a balanced budget

> Spain Placed by Moody’s on Review for Possible Downgrade
> 2011-07-29 05:20:32.543 GMT
> By Maria Ermakova
> July 29 (Bloomberg) — Spain’s Aa2 ratings were placed by
> Moody’s Investors Service on review for possible downgrade.
> The country’s Prime-1 short-term ratings are unaffected by
> today’s action, Moody’s said.

Posted in Deficit, EU | No Comments »

The danger is from the spending cuts, not the potential downgrade

Posted by WARREN MOSLER on 28th July 2011

The headlines are all about the risks of default or a too small deficit reduction package causing a downgrade of US debt.

And while markets react to those issues, they all miss the point.

The consequences of a downgrade to US govt debt are minor at best.
Note that when Japan was downgraded below Botswana,
with a debt/GDP ratio nearly triple that of the US,
interest rates remained the lowest in the world

The real risk comes from the spending cuts.

No debt ceiling extension is the worst case-
Government spending falls by some $150 billion/month as expenses can’t exceed revenues
Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%
And that’s just the first order effect, as a falling economy means falling tax revenues,
Which means further reductions in Treasury spending in a pro cyclical nightmare.

And if they do extend the debt ceiling it will be with prescribed spending cuts.
This too adds drag to the economy.
The more the cuts are meaningful and immediate, the more the drag on the economy increases.

Because the markets don’t yet understand this,
the feedback they are giving is misleading policy makers,
and encouraging them to make deeper, more meaningful cuts.

Posted in Deficit, GDP, Government Spending | 72 Comments »

Kelton responds to the Progressive Caucus Co-chair

Posted by WARREN MOSLER on 28th July 2011

Maddening! The Clinton surpluses were driven by the bubble and unsustainable private sector deficits. When the bubble burts, stocks crashed, the economy went into recession, and the surplus quickly reversed itself. It was only AFTER the government’s budget moved sharply into deficit that the private sector was able to get out of the red. All of this would happened even without 9/11, the wars in Iraq and Afghanistan, the subprime crisis, etc. We cannot keep relying on asset bubbles (stocks, housing, whatever) to drive economic growth.

The simple fact is this: A GOVERNMENT SURPLUS IMPLIES A DEFICIT IN THE PRIVATE SECTOR. And the private sector, unlike the public sector, cannot survive when it’s running a deficit. Anyone who does not recognize this simple fact (intuitively or empirically) should not offer commentary on matters of such significance.

Government Deficits allow the private sector to net save financial assets. Balance the budget, and the private sector loses financial assets. Run a government surplus, and you drive the private sector into deficit.

Someone in Washington better figure this out pretty damn quick, or our children and grandchildren are going to be burdened like never before.

The Ph.D. Economists who blog here understand:

This Is Our Moment

By Rep. Keith Ellison

July 28 — America has an historic opportunity. We have the chance to address our budget deficit in a manner not seen since President Bill Clinton created a budget surplus in 1999. And if we do it right, we could pave the way for a vibrant American economy based not on gimmicks like giveaways for special interests, but on job creation for working Americans. As co-chair of the Congressional Progressive Caucus, I urge us to avoid a default on the faith and credit of the United States while protecting Medicare, Medicaid and Social Security.

At every step of the way, Republicans in Washington have blocked a fair plan. The American people are demanding that our government resolves deficits while maintaining our promises to the middle class. Yet, an uncompromising political faction is stonewalling and ignoring the clarion call of this historic moment.

The Congressional Progressive Caucus stands with the American people. Long before Republicans took our economy hostage, we introduced the People’s Budget, the most fiscally responsible deficit plan introduced this year. The People’s Budget would eliminate the deficit in 10 years. Economists across the political spectrum have called it courageous and responsible. Introducing this budget was one of my proudest moments as a Member of Congress, because it shows the power of Progressive policies and values. Creating an economy that reduces deficits and creates jobs is a progressive value, not just a slogan as it is for the Tea Party.

As the People’s Budget has proposed, and the president has affirmed, our solution must reflect the same values that have motivated us historically. We believe in a fiscally healthy America because it leads to an economically healthy America. A balanced budget is critical precisely because it allows us to maintain the services that the middle class depends on. Any deficit deal that takes money away from seniors and American workers who rely on Social Security, Medicare, or Medicaid undermines the original goal of deficit reduction. Any deficit deal that cuts food stamps but pampers the wealthy is not only bad for the most vulnerable Americans, but damages our fiscal health.

Progressive economic policies lead to a sustainable economy. Americans understand this and history confirms it. Progressive policies implemented since the early 1900s launched America into the modern age and created a vibrant, middle class. Yet, for 10 years, Republicans have given more money to special interests, while the middle class has footed the bill. They passed the biggest tax cut ever for millionaires and billionaires, without paying for a dime of it. They passed a giveaway to the pharmaceutical lobbyists that will cost $1 trillion over 10 years. And it was George W. Bush, not President Obama, who ran roughshod into two unfunded wars, which alone are estimated to have cost us $4 trillion, more than 20% of the deficit.

The stakes are too high now. Republicans have taken us to the brink of default, and it is already hurting our economy. If we do default, the pain our middle class feels would be even worse. Retirement investments would be threatened by plummeting stock prices; higher interest rates would make it more expensive for Americans to pay off credit bills; and the unemployment rate would skyrocket in the face of decreased consumer spending. House Speaker John Boehner’s proposal is less a good-faith effort to avoid a default than an appeal to a narrow sliver of his political base. As Robert Greenstein, president of the Center on Budget and Policy Priorities wrote yesterday, “[Boehner's plan] could well produce the greatest increase in poverty and hardship produced by any law in modern US history.” Most worrisome of all, it wastes our opportunity for a long-term solution and stalls progress for another six months. Credit agencies have already hinted Boehner’s plan would not convince them that America is able to pay its bills.

Progressives know this is America’s moment to lead. The deadline is upon us – but so is the opportunity.

Posted in Congress, Deficit, Government Spending | 15 Comments »

More on Jobless Claims

Posted by WARREN MOSLER on 28th July 2011

From Goldman, this talk is making the rounds:

More on Jobless Claims

Some commentators are attributing the improvement in weekly claims to the fact that this year, the retooling of Auto plants have occurred over one week as opposed as the usual two weeks. This will imply a number in the region of 430,000 for next week.

Posted in Employment | 5 Comments »

DeMint and Erickson to Boehner : HOLD THE LINE

Posted by WARREN MOSLER on 28th July 2011

Says it all:

Boehner-Reid Debt Plan

By Sen. Jim DeMint

July 26 — I have troubling news. I’m very careful about criticizing my party’s leaders, but what is happening in Washington right now cannot be ignored.

House Speaker John Boehner (R-OH) has abandoned the Cut-Cap-Balance Act and is now pushing a new plan that is nearly identical to the one proposed by Senate Majority Leader Harry Reid (D-NV).

The Boehner-Reid plan gives the President an immediate increase in the debt limit and only promises to cut spending in the future. It violates all three principles of the Cut-Cap-Balance Pledge because it does not substantially cut current spending, it does not truly cap future spending, and it does not require the passage of a strong Balanced Budget Amendment before raising the debt limit.

In short, I oppose the Boehner-Reid plan because it won’t balance the budget and stop the debt that is destroying our country.

The Boehner-Reid Plan

You will hear many claims about this plan over the next few days as it is pushed through the House and Senate. Some of these claims will be true, but many will be false. Here are the facts. The Boehner-Reid plan:

Provides two increases in the debt limit — $900 billion and $1.6 trillion — totaling $2.5 trillion. It gives the President an immediate $900 billion increase given that Congress does not vote to disapprove it. It gives the President another $1.6 trillion increase next year if a bill written by a new Super Committee passes both houses and becomes law.

Reduces spending by only $1.2 trillion over the next ten years. This amount won’t even come close to balancing the budget, as the debt is expected to grow by as much as $10 trillion over the next decade. The plan also reduces spending by only $6 billion in 2012. Considering that our government currently spends $10 billion a day, $6 billion is far too little to cut over the first year of the plan.

Calls for a vote on the Balanced Budget Amendment but does not require its passage. Without passage of a strong Balanced Budget Amendment, Congress will never break its addiction to spending.

Makes it virtually impossible to stop the debt limit from going up. The debt ceiling increases can only be stopped if Congress passes a resolution of disapproval and then votes to override the President’s veto with two-thirds support in the House and Senate.

Creates a new, 12-member Super Committee to write another “grand bargain” to reduce the deficit by at least $1.6 trillion. It does not, however, prohibit the Super Committee from writing a bill to raise taxes and destroy jobs. The bill can then be fast-tracked through the House and Senate with no amendments.

Why It Should Be Rejected

After reviewing the details of Boehner-Reid plan, I cannot support it.

It won’t balance the budget and stop the debt. Even if the cuts called for in the plan were real, the debt will still increase by $7 trillion over the next ten years.

It won’t protect our AAA bond rating. According to financial reports, this plan will not reduce long-term spending by enough to prevent a downgrade. If we lose our AAA rating, it will create higher interest rates and cause our debt to grow even faster.

It will likely result in higher taxes that will destroy even more jobs. The unemployment rate is over 9 percent. We cannot afford to lose more jobs when so many Americans are struggling to find work.

There are some in my party who think I should ignore the flaws of the Boehner-Reid plan, bite my tongue, and support my party’s leaders. If I thought this were a political game, that might make sense. But the future of our country is at stake, I don’t believe this plan will save it, and I have a moral obligation to say so.

The Way Forward

Fortunately, there is a much better solution.

The Cut-Cap-Balance Act would balance the budget, stop the debt, and protect our AAA bond rating. This legislation passed the House with bipartisan support but was blocked by Democrats in the Senate.

The votes in the Senate for Cut-Cap-Balance are there if Republicans stand firm. 23 Democrats in the Senate have expressed support for the Balanced Budget Amendment at some point in their careers. They’re blocking it now because they believe Republicans will blink and agree to something much less.

And that’s exactly what will happen if the Boehner-Reid plan is passed. It gives the big spenders in Washington everything they wanted — an increase in the debt limit, phony spending cuts, and a mechanism to pass tax increases.

Please call your senators today and urge them to oppose the Boehner-Reid plan and to demand passage of the Cut, Cap, Balance Act.


Jim DeMint
United States Senator
Chairman, Senate Conservatives Fund

In Defense of Holding the Line

By Erick Erickson

July 26 — I’m getting beat to hell and back by conservatives for insisting the GOP hold the line on Cut, Cap, and Balance. Even here at RedState, I’m getting accused of “ideological intransigence.” Yeah, here at RedState. There’s a first time for everything.

People want a deal. People want John Boehner’s deal. People are upset with me for not liking John Boehner’s deal. People are telling me, “They only have one house, Erick. You can’t expect them to not compromise. They control nothing.”

I’ve said all along I expect a deal and a compromise. Here’s the problem and I need you to understand this from perspective, whether you agree with me or not.

See, I worked to send people to Washington, DC to solve problems, to make things right, to fix the things that were broken, and to send power back to the states. They are not doing that.

We all saw Democrats go to Washington in 2008 and take the whole thing. They controlled everything and they made everything worse. They passed a stimulus bill that killed or ruined hundreds of thousands of jobs in the private sector while growing the government. They increased dependency on the federal government. And then they passed Obamacare and socialized American healthcare. But it doesn’t fully take effect until 2014. We saw Democrats willing to lose their positions to lurch the nation left.

So we sent to Washington an army of conservatives to Washington to defund Obamacare and stop the White House. And now they’ve gotten there and have refused to fight. They promised and put in writing that they’d cut $100 billion from the federal government budget in 2011 and they ultimately cut only $38 billion. The Congressional Budget Office, when it was done scoring it, said they really were only cutting about $500 million and it would cost more money that it was worth it to actually cut those dollars.

So they said, “But we”ll stand firm on the debt ceiling. We’ll hold the line.” Everybody gave them a pass and said, “Okay, hold the line on the debt ceiling.”

Now here we are the week before the deadline. John Boehner laments they should have done it sooner, but he refused to do it sooner. The Speaker has prevented the Republicans from submitting legislation to ensure we would not default so that he would have leverage over his own members to force them to take a deal. And now they are dealing.

What is their deal?

Their deal creates another committee to look at spending — the 18th in the past 30 years. These 18 committees have never done anything except raise taxes. Their spending cuts are put off a decade and future congresses ignore them.

Boehner’s spending caps are easily waived as they’ll be rules, not laws. And they punt.

A lot of you are emailing and getting on twitter saying to take the deal. Take the compromise. Why should we compromise? That’s what we always do. Even when in the majority we compromise. The Democrats didn’t compromise on healthcare. But you people want to compromise. Republicans, whether in the majority or minority, are always compromising in favor of bigger government and imaginary spending cuts.

To make matters worse, why the hell are the Republicans the ones coming up with the plans if they only control one house of one branch of the federal government? Why are they doing it? We’re on the third damn plan. They aren’t even compromising with the Democrats. They are compromising with themselves.

The Democrats are holding their line. The GOP is splitting conservatives. The Democrats are saying “Raise the debt ceiling. Don’t cut anything.” And Boehner is saying okay and putting in cuts that take affect in year eight of ten so none of them will be around to be held accountable. Why?

The GOP came up with Paul Ryan’s plan. They passed it. They took bullets. The GOP put him in a witness protection program and dropped it like a hot potato.

So then the GOP passed Cut, Cap, and Balance and the Democrats beat them up and again accused the GOP of killing grandma. The leadership was lukewarm to it and never fought for it. And immediately after voting for it, the leadership said, “Now, let’s move on to the third plan.”

Are these all just symbolic votes? If so, I’d rather some substance. This symbolism is getting the GOP killed with nothing to show for it.

Why the hell are we on our third plan when the Democrats haven’t even come up with one plan? They haven’t even passed a budget in over 800 days. We’re in this mess because Harry Reid, in December of 2010, refused the raise the debt ceiling so the GOP could own the problem. The GOP fell into the trap with eyes wide open.

And the Republicans are falling for it yet again.

And now I’m being accused of thinking this is all a game even by long time RedState readers. I do not think this is all a game.

I know the credit rating is going to be downgraded and I don’t want it to happen. You people who want the deal are so worked up in emotion that you are ignoring all the facts. Here are the facts:

1. S&P says we need a deal of at least $4 trillion in cuts to avoid a credit rating drop.

2. Neither Boehner nor Reid get us there.

3. The only plan that gets us there is Cut, Cap, and Balance and the GOP is running away from it as fast as they can. The GOP already passed it and it just four votes shy of a majority in the Senate.

No one wants to fight. “No, we’ve already had that vote. It can’t pass the Senate,” they say.

There will be no default on August 2nd. We know it will not happen. How do we know? Because we have more money coming in each month than is needed to pay principle and interest on our national debt. And we have had multiple prior occasions where we have gone passed the deadline and the world did not suddenly end. It is all political rhetoric. Shame on you for succumbing to fear.

Barack Obama does not want to be remembered as the President on whose watch the nation defaulted. His leverage goes away on August 3rd and the GOP holds all the cards. We won’t default. We can improve our negotiating position.

The GOP could hold the line. And because they won’t hold the line, they are tanking our credit behind a bunch of smoke and mirrors. If the Democrats blame the GOP when the credit rating drops, the GOP will damn well deserve the blame if they stick with Boehner’s plan.

They could at least fight to turn the tide. They could at least hold the line.

Posted in Deficit, Government Spending, Obama, Political, TREASURY, USA | 18 Comments »

Insurance Cost Against US Default Hits Record

Posted by WARREN MOSLER on 28th July 2011

Somewhat misleading headline.

It reflects the odds of being able to deliver a specific treasury bond to the insurer at par.

Insurance cost?against US default hits record

By Michael Mackenzie and Nicole Bullock

May 25 (FT) —Insurance Cost Against US Default Hits Record
Published: Wednesday, 27 Jul 2011 | 10:14 PM ETText Size
By: Michael Mackenzie and Nicole Bullock in New York

The cost of buying insurance against a default by the U.S. rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders.

In a CDS, a buyer of protection is compensated by the seller should there be a default or missed payment, known as a “credit event”. Premiums for one-year U.S. sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009.

In the event of a U.S. credit event, the buyers of CDS would locate the February 2039 Treasury bond, currently priced at less than $88, and deliver that to the writers of insurance and receive $100 back, or par.

Posted in TREASURY, USA | 1 Comment »

Agents already anticipating lost income from looming spending cuts

Posted by WARREN MOSLER on 27th July 2011

MBA Mortgage applications decreased last week: The Market Composite Index decreased 5.0%, The Refinance Index decreased 5.5%, and the Purchase Index decreased 3.8%. The refinance share decreased to 69.6% from 70.1, and the ARM share increased to 6.1% from 5.8%. The average 30-year rate increased to 4.57% from 4.54% and the average 15-year rate increased to 3.67% from 3.66%.

Durable Good Orders decreased 2.1% in June to a seasonally adjusted $191.98 billion, led by a 8.5% decrease in transportation equipment. Orders excluding volatile transportation equipment increased 0.1% after a 0.7% gain.
Federal Reserve Bank of Chicago Manufacturing Index was down 0.1% in June to 84.0 from May as higher steel and machinery production partially countered a decline among auto makers.

Posted in Economic Releases | 32 Comments »

Why there is a deficit

Posted by WARREN MOSLER on 26th July 2011

The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve.

All of these financial assets, which compound continuously, represent unspent income.

And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.

And also realize this is an accounting identity, beyond dispute.
Like 1+1=2.
Like how your checkbook must balance or you made an arithmetic mistake.

It works like this:

People work to produce and sell goods and services and someone get the dollars from all those sales.
Those dollars that came from the sales are exactly the amount needed to buy those things in the first place.
If anyone doesn’t spend the dollars he gets from the sales, there isn’t enough spending for the sales to happen in the first place.

So when a large chunk of our dollars that we get paid from wages and profits go into pension funds,
and don’t get spent,
all the things for sale can’t get sold unless someone spends that much more than his income.

And if we (both residents and non residents) don’t want to- or can’t- spend more dollars than our dollar incomes by borrowing dollars to spend,
sales fall short,
so income and jobs are lost in a downward spiral,
that doesn’t end until someone finally fills that spending gap by spending more than his income
to replace the spending power lost when earned dollars go into pension funds.

That’s where the government comes in.
When those dollars piling up in pension funds cause spending to fall short,
government can spend more than its income to make up for that lost spending power, fill the spending gap, and keep everyone working and producing and selling real goods and services.

So right now the high unemployment and low sales tell us there is still a big spending gap to fill.
In the past, this spending gap might have been filled by people borrowing to spend on houses and cars and all that.
But this time around people aren’t willing or able to fill the spending gap.
The current level of government spending that exceeds taxes (deficit spending) is only partially filling the current spending gap.
It’s a big economy and pension funds and corporate reserves are huge and growing,
which means the spending gap is huge and growing
which means the amount government spends that’s more than it taxes (government deficit spending)
is still too small to fill the spending gap.

the answer is quite simple- cut taxes and/or increase government spending until output and employment is restored and the spending gap is filled.

Unfortunately our fearless leaders have a large gap between their ears, and have it all backwards, and we’re all paying the price.

And it will get a lot worse if they keep cutting the government deficit and make the spending gap wider instead of narrower.

(as always, feel free to distribute and re post)

Posted in Deficit | 128 Comments »

“Sometimes nothing is a real cool hand”

Posted by WARREN MOSLER on 26th July 2011

Perhaps the chilling reason no bill is even beginning to emerge from Congress is raising its ugly head. Could it be that members of Congress and the President, deep down, want to see the US government go cold turkey to a balanced budget? Like taking away the drugs from an addict, might they all believe it’s for our own good and our children’s future to take away the government’s credit card now, before it’s too late?

We know they all believe that because of the deficit we are on the verge of a Greek like financial crisis. We know they all believe we need deficit reduction to prevent catastrophe. We know they all believe the government has been borrowing from China to spend like a drunken sailor, leaving the debt to our grandchildren. We know they all believe we either make the tough choices now, or soon face the undeniable consequences. And we know they all believe that even the most aggressive packages under consideration won’t be sufficient to solve the problem.

So what’s a patriotic politician to do? What solves the problem and, while there will be near term pain, minimizes the total long term pain? Yes, running out the clock and doing nothing, which is exactly what’s happening. And all the while trying to make sure your opposition gets the blame for the initial pain, while positioning yourself to take credit for the good that will surely follow. Is that not what’s happening?

They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere. With the automatic fiscal stabilizers disabled (Treasury spending can’t increase in a slowdown, and in fact is forced to decrease as revenues fall) the downward acceleration of the economy from the sudden cut in government spending will be far more severe than anyone has begun to imagine. The lack of general concern for what might happen is directly evidenced by the current market complacency, allowing those properly alarmed to get their hedges in place at very attractive prices.

What happens in the do nothing scenario?
Stocks go down globally, the US dollar goes up, commodities go down, US Treasury rates fall, credit sensitive interest rates rise, sales and GDP fall, unemployment rises, all in the context of a general global deflationary spiral.

So continue to hope for the best while being prepared for the worst.

Posted in Congress | 25 Comments »

Profits and wages

Posted by WARREN MOSLER on 26th July 2011

Couple of things.

First, corporations currently have low propensities to spend their income, so this means we need a deficit that much larger than otherwise.

Second, this goes back to the ‘labor market’ not being what’s called a ‘fair game’.
That’s because people have to work to eat, while business only hires if it can make a desired rate of profit. So game theory tells us that real wages will stagnate without some form of external support:

Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.
The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007- 2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.

Posted in Economic Releases | 6 Comments »

Pelosi joins tea party

Posted by WARREN MOSLER on 26th July 2011

Pelosi Statement on Proposals to Reduce the Deficit, Avoid Default

Washington, D.C. – Democratic Leader Nancy Pelosi released the following statement on proposals announced today to reduce the deficit and avoid default:

“It is clear we must enter an era of austerity; to reduce the deficit through shared sacrifice.

“The President has called for a ‘grand bargain,’ which provides long-term deficit reduction based on shared values and sends a message of confidence to the markets.

“The latest proposal from the House Republicans is a short-term plan that burdens the middle class and seniors, and continues this debate about whether we will default in a few months from now.

“Senator Reid has put forward a responsible plan to reduce the deficit that protects the middle class, and Medicare, Social Security and Medicare beneficiaries. It also includes many proposals already supported by Republicans.

“We must come together for an agreement because our economy and middle class will suffer from a default.”

Posted in Tea Party | 3 Comments »

White House Threatens to Veto Speaker Boehner’s Deficit Plan

Posted by WARREN MOSLER on 26th July 2011

First, I don’t think the President would veto any bill actually sent to his desk.

But if he does, it’s because he wants the US to go cold turkey to a balanced budget.

As per the Bard, our fate is being epoxied by both houses.

Posted in Deficit | 16 Comments »

Treasury default requires reprogramming

Posted by WARREN MOSLER on 26th July 2011

In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”

Posted in TREASURY | 54 Comments »

Double trouble for the euro zone

Posted by WARREN MOSLER on 25th July 2011

When Europe opens down big due to the US deficit issues, it will send a chill though the investment community and euro zone leaders.

This is the last thing they need while struggling with their domestic financial issues.
With export markets threatened, and impossible domestic debt loads given the current levels of growth,
markets could force (via deteriorating financial conditions) an ECB takeover of all national govt. funding.

Kind of like breaking your leg and getting hit by a car while trying to limp home.

Posted in EU | 13 Comments »

SCENARIOS-Options for raising the U.S. debt limit

Posted by WARREN MOSLER on 25th July 2011

And this and $20 will get you a cup of coffee.
I still see no sign of agreement.

Nor have I read anyone discussing the downward acceleration in GDP triggered when the spending limits are reached.
As previously discussed, GDP will accelerate as it falls, as the automatic stabilizers will be disabled.

So spending is further cut, sales go down more, more jobs are lost, and tax revenues fall more,
When the $150 billion/moth in govt spending stops in 2 weeks, sales fall, jobs are lost, and tax revenues fall, so spending is further cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working.

(And it’s really bad for stocks, by the way, when no one buys anything.)

So seems they are underestimating the odds of no bill reaching the President’s desk.

And they are radically underestimating the speed and extent of the subsequent damage.

The problem is that most, probably including the President, believe the US takes dollars out of the economy when it borrows.
And therefore when it stops borrowing to spend the economy will have those dollars to replace the lost federal spending.
And so after the initial fall, it all come back that much stronger.

Except they are dead wrong.
And therefore we are all dead ducks.

Ever hear anyone ever say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’?
Of course not.
Tsy borrowing gives dollars people have already decided to save a place to go.
Dollars that came from deficit spending- dollars spent but not taxed.
If they were spent and taxed, they’d be gone, not saved.

Tsy bonds provide a resting place for voluntary savings.
They are bought voluntarily.
They don’t ‘take’ anything away from anyone.

For example, imaging two people, each with $1 million.

One pays a $1 million tax

The other doesn’t get taxed and decides to buy $1 million in tsy bonds.

Pretty obvious who’s better off, and who’s still solvent and consuming.

Someone tell the Democrats and the Republicans, thanks.

They are about to cut $150 billion/month in spending because they think it crowds out the private sector.
They really think the dollars the govt. pays out cause business to lay people off.
They don’t know that it’s that deficit spending that we get first as income that adds to our savings of govt. bonds.

And, of course, they also think they have no choice, as they all believe the US could become the next Greece, and face a similar financial crisis.

It’s completely inapplicable- Greece is like a US state, not the federal government- but they don’t know that.
No mainstream economist has pointed this out.
No one in the media has pointed this out.
So who can blame them?

I’ve never seen this kind of systemic risk looming in my 40 years in the financial markets.

So hope for the best,
and prepare for the very worst.

SCENARIOS-Options for raising the U.S. debt limit
(Reuters) – Democrats and Republicans in Congress, unable to compromise on how to cut budget deficits and raise U.S. borrowing authority, are now working on their own, competing bills.

With nine days’ left until the United States runs out of money to pay all its bills after Aug. 2, the two parties were rushing to get their respective bills moving through Congress this week. [ID:nN1E76M0B0]

Here are some scenarios for raising the debt limit by the early August deadline to avoid a potentially crippling government default:

This is the path being pursued by Senate Majority Leader Harry Reid, a Democrat.

Since tax increases that Democrats had been seeking were the major sticking point in negotiations with Republicans, Reid is simply removing the problem from the formula altogether.

Instead, he’s writing a bill that would achieve about $2.7 trillion in spending cuts over a decade while raising the $14.3 trillion U.S. debt limit by an identical amount.

If this streamlined plan were to pass Congress, there would be no need to revisit the divisive debt limit fight until 2013, after the presidential and congressional elections. Democrats would be glad to see no benefit cuts to popular Medicare, Medicaid and Social Security programs.

Financial markets would be happy that government borrowing authority is ensured through 2012.

Some of the savings could be squishy, such as counting money not spent in the future on wars as the United States withdraws from Iraq andAfghanistan.

Also, overall deficit reduction is short of the $3 trillion to $4 trillion many had hoped for, including financial markets.

And there likely would not be anything in the plan to force future reforms of the cumbersome U.S. tax code and major benefit programs for the poor and elderly that will increasingly weigh on the federal budget.

The result could be that conservatives won’t go along.

And it’s unclear how U.S. credit ratings agencies would view the legislation.

House of Representatives Speaker John Boehner, the top U.S. Republican, is going ahead with a two-stage program to achieve some spending cuts and a stopgap debt limit increase with plans to do another installment of both next year. He’d start with about a $1 trillion debt limit hike by Aug. 2, with a similar or greater amount of spending cuts.

Then, over the next six or seven months, Congress and Obama would fight over large additional savings — maybe from expensive benefit programs and by reforming the tax code — in order to get a second installment of the debt limit increase.

Boehner also might attached language requiring passage in Congress of a balanced budget amendment to the U.S. Constitution.

Tea Party conservatives who are important to Boehner’s political future have been pushing for such an ambitious plan and especially like the fact that it includes no tax hikes.

It is complicated, and sets up another difficult fight over the debt limit next year that could rattle financial markets. It could cause credit ratings agencies to downgrade the U.S. prized Triple-A rating.

If the Senate were to pass the Reid plan and the House were to pass the Boehner plan, could the two be married?

Possibly. There could be a debt limit increase that carries through 2012 with no tax hikes, coupled with mechanisms to try to achieve more savings than Reid’s $2.7 trillion.

But leaders would have to work hard to find a “sweet spot” with just enough adjustments to get the necessary majorities for passage in Congress. And they’d be under an almost impossibly tight deadline.

A backup “fail-safe” plan first proposed by Mitch McConnell, the top Senate Republican, could be dusted off if it appeared the two sides could not reach a compromise on their competing bills.

Through a complex back-and-forth between the White House and Congress, it would allow Obama to raise the debt limit by $2.4 trillion in three installments through November 2012, when Obama and most lawmakers are up for re-election.

Under the McConnell plan, Republicans would not have to vote to raise the debt limit.

Obama has said that “at a minimum” the debt limit has to be raised and that he will take responsibility for that if the McConnell plan passes Congress.

House Republicans hate the plan, saying it would be a missed opportunity to get the big spending cuts they demand.

It’s getting late to launch yet another round of negotiations, but at some point, leaders from both parties are going to have to work out either a brand new deal or one that accepts elements of their respective bills.

This seems to be the most unlikely scenario.

Some have argued that Obama could ignore Congress if it fails to raise the debt limit and order continued borrowing by relying on the 14th Amendment of the U.S. Constitution.

The fourth section of the 14th Amendment states that the United States’ public debt “shall not be questioned.”

Obama has said White House lawyers had explored the option and they are “not persuaded” that it is a winning argument. But he did not rule it out.

Posted in Deficit | 43 Comments »