Karim writes:
Not sure how they pull this off:
“If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion. To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending.”
Classic!
Bottom line- they sign Grover Norquist pledges because it gets them elected
First, I’d guess the President will sign anything Congress passes, including short term measures.
But he might not.
And yes, there are options that allow the executive branch to continue to deficit spend if it wanted to, ranging from issuing a multi trillion dollar platinum coin to spending under cover of the 14th amendment.
However, there’s a real possibility Congress won’t pass anything for the President to sign, or that the President vetos what they do pass, and that the Treasury honora the current debt ceiling and limits spending to tax revenue.
Should that be the case, the US govt, as widely discussed, immediately goes to a ‘balanced budget’ mode, prioritizing interest payments, so there is no default by the US Treasury.
That means a lot of other bills won’t get paid.
Chairman Bernanke said that this could cut 6% off of GDP and send the US into a recession with GDP going from positive to negative.
However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.
It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.
In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.
And as difficult as it might be for the US, the euro member nations may be looking at something even more catastrophic.
The drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.
This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.
While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.
Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.
As previously suspected, the soft patch looks to be continuing, making things all the more vulnerable to a govt spending interruption in August.
Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.
Business doesn’t create jobs – consumers do!
It is an article of faith by all parties involved that businesses are the job creators, particularly small businesses, and hence their every move is predicated on helping businesses create jobs.
Mercy! Can’t they get anything right?
Businesses hire to service consumers. A restaurant that’s full doesn’t layoff anyone, no matter how much he hates the government, and the same goes for department stores, engineering firms, etc.
And when stores are empty, there’s no way they will or should hire. It’s a waste of human endeavor. In fact, business serves public purpose best by producing and selling its output with as few employees as possible. That’s called productivity, which is what makes us rich in real terms.
Labor is inherently a scarce resource. There are only so many of us to get all the work done. We lost eight million jobs in 2008. Why? Because eight million people all of a sudden decided they’d rather go on the dole than work?
No. It’s because sales collapsed. In a heartbeat, car sales went from near 17 million/yr to just over 9 million/yr. And why did sales collapse? Because we all lost our credit cards.
How do we get back sales and all the lost jobs, and then some? How about we stop taking FICA (Social Security and Medicare taxes) out of the paychecks of people who work for a living, so sales can resume from income rather than from consumer debt? What’s wrong with that?
And how about suspending FICA for businesses as well, to lower their costs and help keep consumer prices from rising. That would also be a good thing.
So why don’t our fearless leaders just do it? Because they think they need those taxed dollars for Social Security and Medicare.
Can’t they get anything right?
Federal taxes regulate demand (our spending), they don’t ‘bring in’ anything. The federal government ‘collects taxes’ simply by lowering the balance in our bank account. No gold coin drops into some government bucket. It’s just data entry, just the Federal Reserve changing numbers on their spreadsheets.
Chairman Bernanke has told us repeatedly how the federal government actually spends, including Social Security and Medicare spending: they just use their computer to mark up the numbers in our bank accounts. They don’t call China for a loan and they don’t check with the IRS to see how collections are going.
Federal government spending doesn’t ‘come from’ anywhere. Everyone inside the Federal Reserve knows it, and has always known it. They know that suspending FICA taxes does not alter their ability to make Social Security and Medicare payments. They all laugh off the idea that FICA actually funds anything – a ‘useful fiction’ as it’s been called since the program began in the 1930’s.
That ‘useful fiction’ is no longer seems very useful, unless you’re trying to destroy the US economy.
Even with sky-high unemployment we can easily afford to both suspend FICA and truly strengthen Social Security and Medicare by increasing the minimum benefits and closing the donut holes.
This is not ‘adding stimulus’. It’s removing drag by removing massively regressive and punishing taxes. And it allows consumers to drive sales until they’ve created all the private sector jobs we need.
And I see no harm, along the way, in sustaining the public infrastructure that serves public purpose, and tossing the states a per capita payment to make up for what the federal government did to them in 2008. And, as should go without saying, there should be an $8/hr federally funded transition job for anyone willing and able to work, to facilitate the transition from unemployment to private sector employment.
But that’s not what’s going to happen.
It looks to me like there are too many members of Congress who can’t vote for any package, due to prior pledges: Democrats who can’t vote for cuts in Social Security benefits or eligibility, Republicans pledged not to ever vote to raise taxes, and some pledged to never vote to raise the debt ceiling for any reason. The compromise packages lose votes from both sides from those who are pledged to never compromise.
This means a partial federal shutdown is a high probability, with a sudden cut in spending cutting into sales and therefore jobs, as just described.
Treasury rates will stay low and probably fall further, with the Fed rates presumed to stay low for a lot longer. Energy and commodities will deflate, the dollar will get stronger, stocks will fall as top line growth forecasts fall, Europe and Asian stocks will fall as their largest export market becomes at-risk. And, as sales fall and unemployment rises, the US deficit will rise via the automatic stabilizers of falling tax revenues and increased transfer payments – if the government pays them…
And if, alternatively, a compromise package is reached, the deficit reduction plan will cause the same things to happen, only not as severely, and it’s back to death by a thousand cuts.
Comments welcome, and feel free to repost:
MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings
SO PLEASE DON’T TAKE AWAY OUR SAVINGS!
Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.
The Federal debt IS the world’s dollars savings- to the penny!
The US deficit clock is also the world dollar savings clock- to the penny!
And therefore, deficit reduction takes away our savings.
SO PLEASE DON’T TAKE AWAY OUR SAVINGS!
Furthermore:
There is NO SUCH THING as a long term Federal deficit problem.
The US Government CAN’T run out of dollars.
US Government spending is NOT dependent on foreign lenders.
The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.
US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.
The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.
Therefore, given our sky high unemployment, and depressed economy,
An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.
Right, core is giving Bernanke ‘cover’ to not do any more QE.
I think he now realizes QE doesn’t actually do anything positive for the economy, as all his staff studies show. Yes, it can lower term rates a tad, but it also removes interest income as he himself seemed to have recognized in his own 2004 research paper.
But he also recognizes that it does scare the living daylight out of the likes of China and other portfolio managers who don’t understand monetary operations.
So he’s in a bit of a bind, as his tone of voice showed while responding to live questions.
If he says QE doesn’t do anything, he destroys what he now considers the useful fiction that the Fed has more tools in its toolbox, as markets would realize they are now flying without a net vs the belief in a ‘Bernanke put.’
And so he assures China there will be no more QE, while explaining to Congress that higher core inflation makes QE inappropriate at this time. And while this could be called intellectually dishonest, it’s also required under ‘expectations theory’ that says managing expectations is critical to price stability and optimal output.
As previously discussed, they all believe in the Confidence Fairy, and that economic performance is in no small way a function of expectations.
Also, while outlooks were positive, below, they were less positive than before.
And Michigan just came in lower than expected as well. The jury is still out on when the economic soft spot might end.
And Aug 3 looks to remove US and therefore world aggregate demand, one way or another.
Karim writes:
CPI
Empire Survey: Modest gains in current conditions and strong gains in 6mth Outlook
| Current | July | June |
| Business Conditions | -3.76 | -7.79 |
| Prices Paid | 43.33 | 56.12 |
| New Orders | -5.45 | -3.61 |
| Shipments | 2.22 | -8.02 |
| Delivery Times | 1.11 | -3.06 |
| Inventories | -5.56 | 1.02 |
| Employees | 1.11 | 10.20 |
| Workweek | -15.56 | -2.04 |
| 6MTH Outlook | July | June |
| Business Conditions | 32.22 | 22.45 |
| Prices Paid | 51.11 | 55.10 |
| Prices Received | 30.00 | 19.39 |
| New Orders | 25.56 | 15.31 |
| Shipments | 30.00 | 17.35 |
| Delivery Times | 6.67 | 2.04 |
| Inventories | 1.11 | -9.18 |
| Unfilled Orders | 5.56 | -9.18 |
| Employees | 17.78 | 6.12 |
| Workweek | 2.22 | -2.04 |
| Capital Expenditures | 22.22 | 26.53 |
| Technology Spending | 12.22 | 14.29 |
More evidence of the suspected understanding with China- they resumed buying US Tsy secs in return for no more QE:
The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.
Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries.
Bernanke: No Plans to Add New Stimulus Measures Now
July 14 (Reuters) — Federal Reserve Chairman Ben Bernanke backed away slightly from promising a third round of stimulus measures, telling a Senate panel Thursday that the central bank “is not prepared at this point to take further action.
The comments during his second day of congressional testimony sent the US dollar higher and caused stock to pare their gains.
On Wednesday, Bernanke suggested to a House panel that the Fed was ready to take further steps to boost the flagging US economy. That sent stocks soaring and pushed the dollar lower.
But on Thursday, Bernanke seemed to back away a bit from that plan.
“The situation is more complex,” he told the Senate Banking Committee. “Inflation is higher…We are uncertain about the near-term developments in the economy. We would live to see if the economy does pick up. We are not prepared at this point to take further action.”
He also said a third round of stimulus may not be that effective.
Bernanke also repeated his warning that a U.S. debt default would be devastating for the U.S. and the global economy.
>
> (email exchange)
>
> On Thu, Jul 14, 2011 at 9:55 AM, wrote:
>
> I see Bernanke is speaking your language now…
>
Yes, a bit, but but as corrected below:
“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?
BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
Not exactly, as all govt spending is done by adding reserves to member bank reserve accounts. Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.
What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts.
But yes, spending is in no case operationally constrained by revenues.
DUFFY: Does it come from tax dollars, though, to buy those assets?
BERNANKE: It does not.
Operationally he is correct, and in this case, to the extent QE does not add to aggregate demand, he is further correct. In fact, to the extent that QE removes interest income from the economy, it actually acts as a tax on the economy, and not as a govt expenditure.
However, and ironically, I submit he believes that QE adds to aggregate demand, and therefore ‘uses up’ some of the aggregate demand created by taxation, and therefore, in that sense, it would be taxpayer dollars that he’s spending.
DUFFY: Are you basically printing money to buy those assets?
BERNANKE: We’re not printing money. We’re creating reserves in the banking system.
Technically correct in that he’s not printing pieces of paper.
But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’
All govt spending can be thought of as printing dollars, taxing unprinting dollars, and borrowing shifting dollars from reserve accounts to securities accounts.
DUFFY: In your testimony — I only have 20 seconds left — you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3? Or is that something that you’re considering?
BERNANKE: I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where we’re like, you know, the economy — recovery is faltering and — and we’re looking at inflation dropping down toward zero or something, you know, where inflation issues are not relevant, then, you know, we have to look at all the options.
DUFFY: And QE3 is one of those?
BERNANKE: Yes.
Very hesitant, as it still looks to me like there’s an tacit understanding with China that there won’t be any more QE, as per China’s statement earlier today.
PAUL: I hate to interrupt, but my time is about up. I would like to suggest that you say it’s not spending money. Well, it’s money out of thin air. You put it into the market. You hold assets and assets aren’t — you know, they are diminishing in value when you buy up bad assets.
But very quickly, if you could answer another question because I’m curious about this. You know, the price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?
BERNANKE: Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think people are — the reason people hold gold is as a protection against what we call “tail risk” — really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.
PAUL: Do you think gold is money?
BERNANKE: No. It’s not money.
(CROSSTALK)
PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?
BERNANKE: Well, you know, it’s an asset. I mean, it’s the same — would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset.
Right answer would have been gold used to be demanded/accepted as payment of taxes, which caused it to circulate as money.
Today the US dollar is what’s demanded for payment of US taxes, so it circulates as money.
In fact, if you try to spend a gold coin today, in most parts of the world you have to accept a discount to spot market prices to get anyone to take it.
PAUL: Well, why do — why do central banks hold it?
BERNANKE: Well, it’s a form of reserves.
Yes, much like govt land, the strategic petroleum reserve, etc.
PAUL: Why don’t they hold diamonds?
Some probably do.
BERNANKE: Well, it’s tradition, long-term tradition.
PAUL: Well, some people still think it’s money.”
“CLAY: Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling?
BERNANKE: Yes, we’ve — of course, we’ve looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That’s what it means to have a deficit.
So immediately, there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.
So this is a matter of arithmetic. Fairly soon after that date, there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.
If in fact we ended up defaulting on the debt, or even if we didn’t, I think, you know, it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse.
But clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It’s the foundation for most of our financial — for much of our financial system. And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.
And higher interest rates would also impact the individual American consumer. Is that correct?
BERNANKE: Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates and all other types of consumer rates.”
“BERNANKE: A second problem is the housing market. Clearly, that’s an area that should get some more attention because that’s been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the tax code needs a look to try to improve its efficiency and to promote economic growth as well.”
While housing isn’t growing as in the past, housing or anything else is only a source of drag if it’s shrinking.
It’s not that case that if housing were never to grow we could not be at levels of aggregate demand high enough to sustain full employment levels of sales and output.
We’d just be doing other things than in past cycles.
G. MILLER: Well, the problem I had with the Fannie-Freddie hybrid concept was the taxpayers were at risk and private sector made all the profits.
BERNANKE: That’s right.
That’s the same with banking in general with today’s insured deposits, a necessary condition for banking. Taxpayers are protected by regulation of assets. The liability side is not the place for market discipline, as has been learned the hard way over the course of history.
G. MILLER: That — that’s unacceptable. What do you see the barriers to private capital entering mortgage lending (inaudible) market for home loans would be?
BERNANKE: Well, currently, there’s not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect, though, that, you know, when the housing market begins to show signs of life, that there will be expanded interest.
I think another reason — and go back what Mr. Hensarling was saying — is that the regulatory structure under which securitization, et cetera, will be taking place has not been tied down yet. So there’s a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market securitization, et cetera, going forward.”
As above, bank lending is still a public/private partnership, presumably operating for public purpose.
See my Proposals for the Banking System, Treasury, Fed, and FDIC (draft)
And there’s no reason securitization has to play any role. Housing starts peaked in 1972 at 2.6 million units with a population of only 200 million, with only simple savings and loans staffed by officers earning very reasonable salaries and no securitization.
“CARSON: However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our nation’s small businesses and the American public in general?
And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time. Are the Fed’s actions meaningless unless banks are willing to lend?
CARSON: And, lastly, what are your thoughts on requiring a 20 percent down for a payment? And do you believe that this will impact homeowners significantly or — or not at all?
BERNANKE: Well, banks — first of all, they have stopped tightening their lending standards, according to our surveys, and have begun to ease them, particularly for commercial and industrial loans and some other types of loans.
Small-business lending is still constrained, both because of bank reluctance but also because of lack of demand because they don’t have customers or inventories to finance or because they’re in weakened financial condition, which means they’re harder to qualify for the loan.
Right, sales drive most everything, including employment
“PETERS: Do you see some parallels between what happened in the late ’30s?
BERNANKE: Well, it’s true that most historians ascribe the ’37- ’38 recession to premature tightening of both fiscal and monetary policy, so that part is correct.
Also, Social Security was initiated, and accounted for ‘off budget’, and, with benefit payments initially near 0, the fica taxes far outstripped the benefits adding a sudden negative fiscal shock.
The accountants realized their mistake and Social Security was put on budget where it remains and belongs.
I think every episode is different. We have to look, you know, at what’s going on in the economy today. I think with 9.2 percent unemployment, the economy still requires a good deal of support. The Federal Reserve is doing what we can to provide monetary policy accommodation.
But as we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays well controlled.
>
> (email exchange)
>
> On Jul 14, 2011, at 2:58 AM, wrote:
>
> Interesting article on Chinese being concerned on Bernankes speech hinting on more stimulus.
> Seems like they are very wary.
>
Agreed!
To the point he’s probably given assurances in no uncertain terms that it won’t happen.
Researcher: China worried about US economy
By Joe McDonald
July 14 (AP) — China is watching whether the Federal Reserve launches a new stimulus that might hurt China by pushing up commodity prices, a Cabinet researcher said Thursday.
The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.
“The prospects of the U.S. economy are worrying,” Yu said at a government-organized briefing. Beijing uses such briefings to explain official views, though the researchers do not act as government spokespeople.
Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries. Most commodities are traded in dollars.
The Fed bought $600 billion in bonds late last year and early this year to keep interest rates low and support prices of assets such as stocks. On Wednesday, Chairman Ben Bernanke said the Fed was ready to take action if the U.S. economy weakens and said a third round of purchases was a possible option.
“We are following closely whether the United States will introduce QE3, because we believe it will have a major impact on China’s economy,” said Yu, director-general of the Development Research Center’s Department of Macroeconomic Research.
“The drastic rise in commodity prices caused by the devaluation of the U.S. dollar will have a major impact on inflation, on economic growth and on Chinese people’s daily lives.”
Yu warned that such a move also would affect the “long-term trajectory of the U.S. economy.”
“Therefore, I believe the United States should be careful,” he said.
China held some $1.15 trillion in U.S. Treasury debt as of the end of April, according to the latest U.S. government data. Chinese leaders have repeatedly appealed to Washington to avoid taking steps in response to U.S. economic weakness that might erode the value of the dollar and Beijing’s holdings.
“As the largest buyer and holder of U.S. Treasury bonds, we need to seriously assess the risks,” Yu said.
Yu said Beijing could reduce risks by restructuring its portfolio of foreign reserves and assets, though he gave no details. And he said that in the long run, Beijing has to keep a reasonable level of foreign reserves.
Moody’s Investors Service on Wednesday said it was reviewing the U.S. bond rating for a possible downgrade, saying there is a small but rising risk that the government will default.
Asked by a reporter if China was concerned about the issue, Foreign Ministry spokesman Hong Lei said: “We hope that the U.S. government adopts a responsible policy to ensure the interests of the investors.”
Also Thursday, a Chinese rating agency said it was putting U.S. sovereign debt on watch for a possible downgrade.
“Factors influencing the U.S. government’s ability to repay its debt are steadily worsening,” said the Dagong Global Credit Rating Co. “If there is no substantive improvement in its repayment ability or willingness during the observation period, Dagong will appropriately downgrade the national rating of the United States.”
Dagong, founded in 1994, is little-known outside China but says it hopes to compete with global ratings agencies Moody’s, Standard & Poor’s and Fitch.
In its first sovereign debt report in July 2010, Dagong gave Washington a credit rating below China, Singapore and some other governments. That was a break with the global agencies, which say U.S. debt is among the world’s safest.
In November, Dagong downgraded the United States from AA to A-plus, citing what it said was deteriorating U.S. ability and willingness to repay debt.
Buying US Debt ‘Mind-Boggling’: Marc Faber
It’s just a reserve drain, Marcie, get over it!
The term structure of rates simply/largely anticipates future fed rate
settings.