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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.

“Sometimes nothing is a real cool hand”

Posted by WARREN MOSLER on July 26th, 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.

25 Responses to ““Sometimes nothing is a real cool hand””

  1. zanon Says:

    So what do you think, Warren?

    Sell all equities now and hold cash (or the Gold?)

    On NPR today there was idiot economics professor saying that not raising debt ceiling would have interest rate go up a little, but not a big deal

    It is the insanity

    Reply

    WARREN MOSLER Reply:

    tsy rates probably go down. others up

    gold could fall in the general deflation. hard to say. not a ‘first order’ trade

    yes, stocks already going down. negative top line growth is bad for stocks

    Reply

  2. Curious Says:

    “…US Treasury rates fall…”

    Why?

    Reply

    Peter D Reply:

    @Curious,

    Safe haven. The US continues to pays on its bonds, but cuts domestic spending. As I understand it.

    Reply

    WARREN MOSLER Reply:

    odds of fed rate hikes fall

    Reply

  3. Nick R Says:

    Amen Warren!

    Since the US has allowed itself to go to the brink of default, then do we all need to reconsider the concept of an “unconstrained nation”? Is such a pure beast really out there? What are the philosophical and financial implications of jettisoning this essential notion?

    your post-MMT friend,

    Nick R.
    Kyoto

    Reply

    WARREN MOSLER Reply:

    we need to be reminded about human nature.

    Reply

  4. Links 7/27/11 | Jackpot Investor Says:

    [...] so he could gut Medicare and Social Security. He disabled the brakes before he got in the car.“Sometimes nothing is a real cool hand” Warren Mosler (hat tip reader bob)US money market funds build liquidity Financial TimesSix [...]

  5. Walter Says:

    Hi Warren,

    I totally agree with the ratio of your reasoning.
    However: the mkt can stay longer irrational than you solvent.
    For the moment we see USD weakening etc and it looks like the usd will get hit further in case of some form of default. Maybe this will be short term and sentiment driven, but anyway.
    So, how do you see this from timing point of view, how fast this deflationary spiral will develop?

    And then there is the possibilty that deficit spending will resume at a later stage when they anyway will get to some compomise.

    Reply

    WARREN MOSLER Reply:

    yes, the crisis has frightened portfolio managers into selling dollars, even as the expansion of the supply of dollar net financial assets is about to take a breather.

    i think the general deflationary spiral may have already started as agents cut back spending ahead of the ‘deadline’

    Reply

    Mario Reply:

    @WARREN MOSLER,

    It seems to me that the US dollar is now the latest and greatest go-to carry trade contender. I think the US dollar is taking the place of the yen and our currency is going to range possibly even between 65 and 85 (or lower perhaps even) while our actual economy dives into a deflationary spiral until our sectoral balances shift appropriately. I don’t see a strong US dollar like Warren does, although I agree with every other of Warren’s forecasts.

    In other words, the money players want a new easy carry trade so that means we need a terrible US economy. Look at the AU dollar…just broke higher…they are selling US dollars and buying AUD. Fed will stay at 0% for a long, long time b/c of deflation and Ben’s basically said this as clear as he can already. All b/c of some need for austerity mixed somehow with people thinking money supply is through the roof. And Ben seems to be supporting that thinking even. It’s criminal man. Criminal.

    Reply

  6. Geoff Says:

    I’ve made a couple of attempts to establish a long DXY futures position recently, but keep getting stopped out. Catching falling knives is my specialty. Falling pianos not so much.

    Reply

    WARREN MOSLER Reply:

    sorry to hear it.

    looking better today.

    Reply

  7. BarbaraNH Says:

    As a retiree trying to understand the basics of MMT these past six months since I linked through to Bill Mitchell’s blog from somewhere and couldn’t believe what I was reading, I’ve kept reading and now I lurk on sites like this all the time. The scales have fallen from my eyes. Thanks, Warren, for your book. Very generous of you to put it up.

    The point of this post is, I’m afraid, self-serving: A lot of my retirement savings is in Treasury Inflation-Protected Bonds. If what seems to be happening in Washington does actually happen, am I going to go broke?

    Reply

    WARREN MOSLER Reply:

    just my opinion, but you’re fine

    Reply

    BarbaraNH Reply:

    @BarbaraNH,

    Thank you very much for answering.

    Reply

  8. Paul Palmer Says:

    Warren,

    It seems to me one of the issues western nations are dealing with is the trade deficit with China and other developing nations. They have this huge demand for dollar and euro denominated savings. The relatively unconstrained trade environment has allowed companies to move production to China and other asian nations quickly, but governmental policy is way behind and doesn’t see the connection and necessity to run bigger deficits to supply the currency those savers demand.

    Perhaps one outcome of this mess is a drop in demand for dollar and euro denominated savings? We’re not putting enough subway tokens in circulation to encourage subway riding, so maybe they will stay home? This hurts our standard of living, but could employ more domestically, could it not? Still hard to avoid the crash scenario here.

    Reply

    WARREN MOSLER Reply:

    they may decide to not buy our dollars and stop exporting to us, in which case our output and employment rises but our standard of living/real terms of trade get hurt.

    Reply

    Paul Palmer Reply:

    @WARREN MOSLER,
    Maybe that’s a favorable trade, compared to what we’re doing instead

    Reply

  9. jown Says:

    (I may regret this) I’m a big dummy and this is naive and unfounded but …

    assuming that Wall Street really has effectively “captured” the US government and has enough power to push, confuse or send enough mixed signals or explicitly direct the US government officials it “owns” to default (or get to crisis), isn’t that really their best play here?

    If I was just bailed out and had a great couple years on top of that and had a fat stack of money sitting around I’d want to buy some stuff. But, I’d want good deals, really good deals, cause that’s what I get when I decide to spend my money. How do I use my position to get a good deal on a really splendid shopping spree then?

    Talk to my peeps in Washington, right?

    Therefore, big pools of money are not going to blink, they are going to leverage and pounce, right?

    So, they won’t be selling now, will they? They will borrow even more money on the cheap on top of their massive dough hoard to go on a mammoth shopping spree after everything tanks enough (assets, stocks, etc.)

    … and the game goes on …

    (hope that wasn’t too conspiratorial; I don’t like that; and no, I’m not angry; this course would unfortunately be within that human nature spectrum; we’ve seen it before; this is just another hand)

    Reply

    WARREN MOSLER Reply:

    wall st wants 5+% growth to max out corp finance fees in the boom

    Reply

    jown Reply:

    @WARREN MOSLER,
    (Whoops) Thank you Warren!

    Reply

    Tom Hickey Reply:

    @jown,

    There is no doubt that Wall Street in “conspiratorial” in the sense that different classes coordinate to maximize advantage. For example, there is a strong business lobby to gain political advantage not only by legislation that is directly favorable but also through legislation that inhibits workers from coordinating against business, e.g., by forming unions. But Wall Street is now coordinating against default since it threatens global growth and will damage their interests. It is true, however, that in a deflation, while everyone takes a hit for a while, its the deep pockets that are able to turn the situation to advantage since they have the wherewithal to buy at the bottom for pennies on the dollar when everyone else is selling out of either necessity or fear.

    Reply

    jown Reply:

    @Tom Hickey,
    Awesome info. Thank you Tom.

    Reply

  10. Ebipere Says:

    R.I.P. Soft Currency
    1971 – 2011(?)

    No significant gold discoveries; no significant increases in dollar ‘money’. LOL!
    Welcome to the (new) Gold Standard

    Reply

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