Consumer credit up, Friday update
Posted by WARREN MOSLER on August 5th, 2011
It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.
The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.
After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.
And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.
Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.
This is the reverse of what happened in the recent run up of gasoline prices.
Japan should be doing better as well as they recover from the shock of the earthquake.
Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.
A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.
A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.
A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.
The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.
So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.
So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.
Consumer borrowing up in June by most in 4 years
By Martin Crutsinger
May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.
The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.
The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.
Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.
August 5th, 2011 at 6:38 pm
very well put.
What exactly can the Fed do to help with UE? As far as I can see the answer is absolutely nothing. Am I missing something?
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WARREN MOSLER Reply:
August 6th, 2011 at 3:35 am
The fed can tell congress they can’t run out of dollars, they aren’t dependent on foreigners and aren’t leaving anything to their grand children, there is no short term or long term solvency problem and that the deficit is way too small
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Mario Reply:
August 7th, 2011 at 7:40 pm
@WARREN MOSLER,
okay so basically they can be a consultant to Congress/Pres and possibly assist in drafting proposals for spending and such. Fair enough I guess. But we do have economic advises and such already for that so I assumed the politicians could understand how their own economy works on their own! LOL Plus once they knew how it worked, the Fed’s role in that regard is essentially over.
I still think the Fed can only shoot blanks when it comes to fixing UE.
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August 5th, 2011 at 6:56 pm
“the ECB has offered to write the check which, operationally, they can do without limit as needed”
sounds unconstrained; what’s the difference again between the Euro and dollar from an MMT perspective?
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Mario Reply:
August 5th, 2011 at 7:59 pm
@anon,
don’t know for certain but I think it’s multiple governments versus just one government. The check goes out the same from the CB to the receiving party…it’s just there’s more parties in the euro versus the dollar. I think that’s accurate.
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anon Reply:
August 6th, 2011 at 8:15 am
@Mario,
That’s definitely a fundamental point about structure. But I see that as a “constraint specification” rather than a binary difference on the issue of constraints itself. The “self-imposed” nature of the constraint is a sovereign that allows certain rules for its central bank (US gov, Fed) versus a group of sovereigns that collectively allows certain rules its central bank (Eurozone, ECB). It is obviously arguable that the second situation is more difficult in terms of escaping such a constraint, but both are cases in which governments allow themselves to be captured by central banking restrictions. And the ECB operationally is capable of anything that the Fed is capable of – including “writing the cheque” on behalf of any, some, or all of the sovereigns in its sphere. The Mosler trillion Euro proposal is (just) one example of how that could be done.
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Ramanan Reply:
August 6th, 2011 at 2:42 am
@anon,
“Write the cheque” any idea what that means ? They are obviously not providing overdrafts!
Also, probably S&P found out that the US Treasury does not have overdraft facilities before downgrading from AAA ?
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anon Reply:
August 6th, 2011 at 8:22 am
@Ramanan,
Writing the cheque in this case is OMO more or less, rather than direct spending. But Warren’s trillion Euro proposal (for debt retirement) is just as operationally feasible.
BTW, Warren’s proposal for the EZ is just the platinum coin proposal without the platinum :)
The S&P fiasco is outrageous. In this case, I’m looking forward to the iconic MMT post on why it is so. My guess is that the bond market reaction will end up being pretty compatible with the standard MMT interpretation of interest rates and the monetary system. And the market by now should be factoring in CLR (coin of last resort) :)
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Ramanan Reply:
August 6th, 2011 at 10:05 am
@anon,
yeah intervention in the bond markets.
I don’t know what operationally feasible means because the MMT folks when pushed argue, its just a political problem as if Economics is independent of politics.
Ramanan Reply:
August 6th, 2011 at 10:10 am
@anon,
“Again, this is why you have to pay attention to politics. Straight economics is necessary, but won’t get you to the full reality.”
http://krugman.blogs.nytimes.com/2011/08/05/anti-stimulus-politics/
anon Reply:
August 6th, 2011 at 8:28 am
@Ramanan,
or, if you like, BFM
(Beowulf’s force majeure)
:)
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Ramanan Reply:
August 6th, 2011 at 9:59 am
@anon,
Btw, someone linked to Johnsville’s blog (?) – it seems Ellen Brown (not sure who she is) had been arguing the coin thing for a while (since 2008).
Maybe BBFM ?
anon Reply:
August 6th, 2011 at 10:49 am
took a quick look at that and it appeared she was lost on the multiplier
its always something
WARREN MOSLER Reply:
August 6th, 2011 at 3:37 am
Not much Just some different self imposed constraints and priorities
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anon Reply:
August 6th, 2011 at 8:22 am
@WARREN MOSLER,
ah, that’s what I wanted to hear :)
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anon Reply:
August 6th, 2011 at 8:43 am
interesting comment from KD at pragmatic:
“In fact, I think that what Cullen is missing is what S&P wrote in their downgrade report about WILLINGNESS to pay. There is no doubt that we can afford to pay our debts, but if our Congress is so Partisan/stupid/stubborn as to choose not to, then we can default.”
question:
S&P may understand the difference between ability and willingness in the case of the debt ceiling impasse, but do they understand the difference in the case of reserves versus bonds?
I really doubt it.
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Ramanan Reply:
August 6th, 2011 at 10:07 am
@anon,
Yes, I the terminologies ability and willingness are their own.
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anon Reply:
August 6th, 2011 at 10:53 am
Fed/FDIC:
“For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government- sponsored enterprises will not change,” the regulators said.”
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WARREN MOSLER Reply:
August 6th, 2011 at 3:13 pm
Beers has read soft currency economics
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August 5th, 2011 at 8:51 pm
Ok, now that the S&P downgraded the US what do you think the crazies on the right will do now?
Here comes the BBA.
Dan
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Mario Reply:
August 5th, 2011 at 9:09 pm
@Dan Furlano,
S&P are a-holes and idiots and total fools (corrupt to the core).
Apparently the O admin is “contesting” the claims saying they are “inaccurate.”
What’s the BBA btw?
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Danf Reply:
August 5th, 2011 at 9:17 pm
@Mario,
balanced
budget
amendment
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Mario Reply:
August 5th, 2011 at 10:02 pm
@Danf,
oh no :(
Clonal Antibody Reply:
August 5th, 2011 at 11:11 pm
@Mario,
The easiest thing for the US to do is to retire the National Debt — use the Platinum Coin and offer to exchange Tsy’s for cash. As Scott Fullwiller has shown, that this exchange will not cause any inflation. People still willing to hold tsy’s may continue to do so (in other words, those not involved in defaults.)
My fear is that the contracts as written, will cause counterparties to be in default, and left up the creek with no paddle.
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Clonal Antibody Reply:
August 5th, 2011 at 11:31 pm
@Clonal Antibody,Of Course, if this is done, the S&P will immediately downgrade the dollar to junk status, as the world watches the dollar sky rocket! ;)
Unforgiven Reply:
August 6th, 2011 at 12:23 am
@Clonal Antibody,
Yep. Let’s have a Burn the Bonds Amendment. Pay all debts, lift the FDIC cap, pay interest on reserves.
Then, let’s buy S&P and turn them into a taco truck.
Clonal Antibody Reply:
August 6th, 2011 at 12:32 am
@Unforgiven,
I think S&P just forced the FED to implement QE3
Mario Reply:
August 6th, 2011 at 2:06 am
@Unforgiven,
sounds kick ass to me!!! Me gusta tacos!!! LOL
Mario Reply:
August 6th, 2011 at 2:08 am
@Clonal Antibody,
yes this could be a possibility (another one) for MMT’s goals to make some headway.
The thing is that the downgrade is only going to “fool” investors and politicians into thinking categorically false notions about our own economy. And THAT will cause waves of speculation and reaction surely.
But if the coin idea could get to CNN maybe other ideas of MMT could too (like Fed/Treasury merging)….here’s hoping!
WARREN MOSLER Reply:
August 6th, 2011 at 3:46 am
Better to just stop publishing it
WARREN MOSLER Reply:
August 6th, 2011 at 3:40 am
Agreed
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August 5th, 2011 at 9:17 pm
Warren, with the S&P downgrade of the US, I am wondering:
Do you know if anyone/group has researched if there would be counterparty collateral problems (exposed counterparty holding treasuries pledged by the other party) in financial contracts from a downgrade like this? Example, the exposed counterparty might have the right to return the treasuries and demand cash for collateral because the treasuries are no longer AAA – a situation which multiplied across billions to trillions in exposure in financial contracts could create a very bad liquidity crisis?
Your thoughts?
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Crake Reply:
August 5th, 2011 at 9:30 pm
On an ISDA site, I found this:
For European counterparties, the way that collateral types are grouped should also help
streamline the Capital Adequacy Directive (“CAD”) reporting functions. CAD stipulates
that collateral assets be broken down into four different qualifying categories: cash
collateral (100% qualifying); AAA rated government bonds (100% qualifying); 80%
qualifying securities; and other securities that do not qualify.
So AAA for 100% collateral status might be standard in other ISDA contracts too. So eitehr Treasuries will only get 80% value or maybe not qualify at all.
This is either going to be no noticeable problem or a very big one.
Thoughts?
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Mario Reply:
August 5th, 2011 at 10:15 pm
@Crake,
that would mean a 20% variance at worst then based on those figures then? And like you said at a tune of billions/trillions and considering the already fragile state of things…I wonder what would happen there.
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Crake Reply:
August 6th, 2011 at 9:06 am
@Mario,
Actually the need for an additional 20% in margin where treasuries were used would be best case (depending on the specific provisions – worst case would be 100% if they no longer qualified as collateral – highly doubtful scenario but it is worst case.) And this “margin increase” will be spread across all ISDA contracts.
I think the questions that will determine if those will be a market problem are: 1) How many of the 10s of trillion in dollars of derivatives trades are contracted under ISDAs (simple derivatives like options are on exchanges and futures contracts also, so I guess you can scratch those – but private swap deals and credit default swaps are likely mostly, if not exclusively, under ISDAs.)
2) How much margin is posted in treasuries (I have no idea on this at all) and
3) “If” exposed counterparties will enforce the credit provision requiring treasuries be valued at 80% if less than AAA (since in split ratings – Moodys and S&P giving different ratings – you take the lower, and since most large players have strict risk management policy, I would assume most exposed counterparties will have to enforce that requirement where treasuries are the posted margin.)
Depending on the answers to those questions, the risk, as I see it, is that the downgrade could result in a large increase in margin on all kinds of financial contracts, which would likely add selling prices to all kinds of assets as margin posting counterparties have to quickly come up with cash to post the increase. Then if that causes contracts to move against them, more margin, more sales, etc. etc.
WARREN MOSLER Reply:
August 6th, 2011 at 3:42 am
My guess is no big deal
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Mario Reply:
August 5th, 2011 at 10:01 pm
@Crake,
that’s a good question! As I understand it most pension funds and such are “mandated” to carry high grade securities like treasuries. This could possibly (though unlikely?) knock large parts of their portfolios out of own their fund’s guidelines.
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WARREN MOSLER Reply:
August 6th, 2011 at 3:44 am
Possible but not likely
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Crake Reply:
August 6th, 2011 at 9:15 am
@Mario,
Good point (I forgot about pension internal requirements for certain assets held as investments) and it comes down to their risk policy. Their internal risk policy will likely dictate they get rid of those assets if their by-laws prohibit less than AAA in certain investment categories and Sarbanes Oxley requires a company to follow its policies – therefore, it would be illegal to ignore such policy if it exists. So if in policy, companies might very well have to sell those assets in pension funds etc.
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John Zelnicker Reply:
August 6th, 2011 at 12:23 pm
@Mario,
In many pension funds, mutual funds, trusts, etc. Treasuries are not really considered in the rating system. They would commonly reference Treasuries, other securities issued by agencies of the gov’t or other bonds rated in the top 3 or 4 ratings (rarely is AAA the only one allowed) as allowable investments.
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WARREN MOSLER Reply:
August 6th, 2011 at 3:41 am
Not much of substance will happen
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Crake Reply:
August 6th, 2011 at 9:18 am
@WARREN MOSLER,
I agree – likely nothing. But what bothers me about this risk is that it is the kind of risk that no one considers until a timid risk officer points it out after the fact and then lawyers confirm it and then all hell breaks loose because no contingency plans existed for it. In other words, it is an unlikely scenario but if it hits, it hits to the core of everything from out of no where.
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August 5th, 2011 at 9:19 pm
“as labor participation rates” fall, for how long can GDP, bonds and stocks all be allowed to just limp along?
If labor participation rates don’t increase, won’t either “deficits” keep rising faster than GOP/DEM comprehension rates, or both that and our aggregate demand plus our std of living will fall even faster.
Aren’t both we and exporting nations still in a race for time? With little to spare?
Shouldn’t something give, soon, and shouldn’t it be both our labor participation rate and “deficit” spending levels? Right now our politicians won’t let us spend our way out of a wet paper bag.
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August 6th, 2011 at 9:21 am
Functional Finance vs. Dysfunctional Finance – this is getting serious… Let me plant a few memes in the MMT’s walled garden.
The mouthpiece of the Chinese Communist Party is demanding that the US should commit an economic and military suicide – they want to blackmail the American government stating that the reserve status of USD is in jeopardy if they don’t stop deficit spending ASAP. It is hardly surprising that the propaganda line initially used by the extreme Republican saboteurs and libertarian anarchists to weaken the current US administration (Houston! We have a public debt problem!) has been so creatively hijacked by the real ideological enemy.
This is what they are saying:
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” the Xinhua commentary said.
It urged the United States to cut military and social welfare expenditure. It also said further credit downgrades would very likely undermine the world economic recovery and trigger new rounds of financial turmoil.
“International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” Xinhua said.
http://www.nytimes.com/2011/08/07/business/global/china-a-big-creditor-says-us-has-only-itself-to-blame.html
It all hinges on the erroneous assumption that the Treasury has to borrow from China prior to spending. Can someone tell the people who peddle these lies in the US to stop?
They are not only fighting the “liberals”, Obama or dismantling the public health care system with the threats to balance the budget. This is the very moment when the security of the US as a state is endangered because the Chinese have started demanding real political and military concessions. The British Government has already started cutting down the military expenditures (“because they ran out of money”) with very bad results seen in Libya.
In fact the Chinese can throttle the export of rare earth metals to hurt Japan and the West in the race to commercialise the energy-efficient technologies but they cannot enforce anything in regards to the American fiscal policy – dumping their USD reserves would obviously lead to a real mess on the commodity markets (and even greater losses incurred by the Chinese) but the US can quickly recover as there would be no current account deficit sapping the aggregate demand and the productive economy still has formidable real capacities despite years of de-industrialisation (due to losing the competition with China, of course).
I am no sure whether everyone in the Congress understands this. If the US yields now to the blackmail it will mean the end of the US as the global superpower – even if the reserve status of USD lasts for a bit longer. But these who are coming next to the table deserve their privileged status even less.
I really enjoyed reading a book about the Chinese Communist Party written by Richard McGregor. He also published some comments on the Internet:
http://www.foreignpolicy.com/articles/2011/01/02/5_myths_about_the_chinese_communist_party
“China Is Communist in Name Only.”
Wrong. If Vladimir Lenin were reincarnated in 21st-century Beijing and managed to avert his eyes from the city’s glittering skyscrapers and conspicuous consumption, he would instantly recognize in the ruling Chinese Communist Party a replica of the system he designed nearly a century ago for the victors of the Bolshevik Revolution. One need only look at the party’s structure to see how communist — and Leninist — China’s political system remains.
Sure, China long ago dumped the core of the communist economic system, replacing rigid central planning with commercially minded state enterprises that coexist with a vigorous private sector. Yet for all their liberalization of the economy, Chinese leaders have been careful to keep control of the commanding heights of politics through the party’s grip on the “three Ps”: personnel, propaganda, and the People’s Liberation Army.
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Tom Hickey Reply:
August 6th, 2011 at 10:42 am
@Adam (ak),
Well, we’ve been saying that the deficit terrorists are traitors. There’s the proof.
New MMT mantra, “Whose side are you on anyway.”
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August 6th, 2011 at 9:48 am
Does Warren Buffet get MMT? From FOX Business:
Berkshire Hathaway Chairman and CEO Warren Buffett told the FOX Business Network that S&P’s downgrade of the United States’ triple-A credit rating “doesn’t make sense.”
“Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”
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Tom Hickey Reply:
August 6th, 2011 at 10:47 am
@markg,
Of course the people at the top get it. Warren has explained it to a lot of them, they have agreed, and then carried on with what they see expedient for them. They only use it for their own purposes, and regard it dangerous that the people should ever find out about it, since they would demand that the purse strings be opened and the system be reformed, eliminating economic rent, which is not only parasitical but also unnecessary in a fiat regime. For this reason, it’s unlikely that change is going to be from the top down. The top has done all it can to hobble the operational reality of a fiat regime for their own purposes, which is funneling money to the top. That is the essence of the neoliberal agenda.
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John Zelnicker Reply:
August 6th, 2011 at 12:40 pm
@Tom Hickey,
Hold on, Tom. How is this the agenda of the neoliberals? Maybe I don’t understand what a neoliberal is these days, but funneling money to the top is the goal of the conservative agenda as followed by the Republicans (yes, and a lot of Democrats, too). I agree that it is the agenda of the wealthy at the top of the totem pole. Maintaining the whole debt ceiling/borrowing our own $’s foolishness can be seen, I think, as facilitating a massive transfer of wealth from the middle class to the wealthy.
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Tom Hickey Reply:
August 6th, 2011 at 3:07 pm
@John Zelnicker,
Neoliberalism is essentially deregulation and privatization of the global economy under the hegemony of finance capital behind the façade of “free markets, free trade, and free flow of capital” economically, and “small government, low taxes, and strong military” politically. This is the road to serfdom of debt peonage, as Michael Hudson, for instance, has documented in his work. It is based on rent-seeking and economic rent flows to the rentiers.
Wikipedia_Neoliberalism
Noam Chomsky, Profit Over People: Neoliberalism & Global Order