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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.

Jackson Hole- comments tomorrow’s speech by Fed Chairman Bernanke

Posted by WARREN MOSLER on August 25th, 2011

First, I see no public purpose in burning any crude oil to fly the Chairman and his entourage to make any speech.

He could just as easily deliver this one from the steps of the Fed in DC.
Congress should demand a statement of public purpose before endorsing any travel by its agents.

Next is what I expect from the speech.
The short answer is not much.

I don’t see more QE as the purpose of QE is to bring long rates down, and they are already down substantially. And the Fed now has sufficient evidence to confirm that long rates are mainly a function of expectations of future FOMC votes on rate settings.

To that point, when the Fed announced QE, and market participants believed it would spur growth, and therefore FOMC rate hikes somewhere down the road, long rates worked their way higher. And when the Fed ended QE, and market participants believed the economy would be slower to recover, long rates worked their way lower. Not to mention China hates QE and it still looks to me there’s an understanding in place where China allocates reserves to $US as long as the Fed doesn’t do any QE.

The Fed could cut it’s target Fed funds rate, the cost of funds for the banking system, down to 0 and lower that cost of funds by a few basis points. But those few basis points can hardly be expected to have much effect on anything.

It’s not the Fed has run out of bullets, it’s that the Fed has never had any bullets of any consequence.
And with the few it’s fired, it hasn’t realized the odds are the gun has been pointed backwards.
For example, it still looks to me lower rates, if anything, reduce aggregate demand via the interest income channels.

And QE isn’t much other than a tax on the economy, that also removes interest income.

So look for a forecast of modest GDP growth with downside risks, core inflation remaining reasonably firm even as unemployment remains far too high, all of which support continued Fed ‘accommodation’ at current levels.

34 Responses to “Jackson Hole- comments tomorrow’s speech by Fed Chairman Bernanke”

  1. Mario Says:

    very well stated.

    Couldn’t agree more about the public purpose travel. A president’s vacation for 10 days I can justifiable stomach. But jackson hole every year?!?! WTF I mean seriously. It’s a vacation there’s not other way around it!!! There’s not even a Fed building in Wyoming let alone any state touching Wyoming. Come on!!

    Reply

  2. jim Says:

    For example, it still looks to me lower rates, if anything, reduce aggregate demand via the interest income channels.

    ***************************************************

    Doesn’t private sector borrowing work to increase aggregate demand. I think the hope was that low interest would produce more loans. One can assume it has (just not as much as hoped). It has allowed some people to refinance at lower rates so that has increased disposable income for spending.
    One can assume interest would be low anyway, given the very low demand for funds

    Reply

    WARREN MOSLER Reply:

    Yes, but it lowers savers incomes by more than that as the economy is a net saver

    Refinancing merely shifts income as well

    So for the economy, rates are lower, but income is down.

    Reply

    F. Reply:

    @WARREN MOSLER,

    But is aggregate demand down? More income in the economy though flowing to lower marginal propensity people versus less income but more free cashflow for the higher marginal propensity to consume?

    Reply

    WARREN MOSLER Reply:

    yes, lots of that, but aggregate demand still muddling through as per the gdp statistics

    Adam2 Reply:

    @WARREN MOSLER, If there was no qe2 wouldn’t interest rates be lower thus negating the tax.

    Income from higher interest rates minus fed profit “tax” = income from lower interest rates without the fed “tax”

    I haven’t done the math yet but couldn’t this be true?

    Reply

    WARREN MOSLER Reply:

    lower rates means the tsy pays that much less interest and the private sector gets that much less.

    note that i favor low rate, but that i also advocate a fiscal adjustment to sustain aggregate demand, and that
    fiscal adjustment probably needs to be higher than otherwise due to low rates.

    bernanke agrees in his 2004 paper, by the way, on the fed website

    jim Reply:

    @WARREN MOSLER,

    Yes, but it lowers savers incomes by more than that as the economy is a net saver
    Refinancing merely shifts income as well
    So for the economy, rates are lower, but income is down.

    *************************************************

    I question whether rates for US Tsy’s would be any different without QE. I assume you expect the net increase in income to the economy to come from interest on the federal debt.

    As far as refinancing the question as far as affecting demand is will that shift in income be spent or saved?

    But the more important aspect of refinancing is that so many credit arrangements were in danger of default and refinancing has worked to alleviate that problem some. That means it has prevented some loss of income and prevented further asset price deflation.

    It is asset price deflation (or the expectation thereof) that is driving the desire to save which in turn is driving the low aggregate demand.

    -jim

    Reply

    WARREN MOSLER Reply:

    yes, the propensities to consume matter a lot.

    and default is a transfer from lender to borrower

  3. Save America Says:

    Very high Praise for you Warren from one of the top GOLD BUG bloggers on the internet.

    http://jessescrossroadscafe.blogspot.com/2011/08/bennys-next-move-bust-cap-in-your-curve.html

    To their credit, the Modern Monetary Theorists understand it very well, except for the downside of excessive money creation in a co-dependent world, even if one does enjoy the exorbitant privilege of the world’s reserve currency.

    Various interests have been seeking to restrain the Fed, ranging from large creditors such as China, and the domestic monied interests who have already received their bonuses and bailouts, and who do not wish to see their dollar wealth erode. One is richer if all around them are made relatively poorer, or so some lines of thinking go. And of course there are the prudent savers, who have been fleeing the dollar to the relative safety of some foreign currencies and hard assets like gold and silver.

    I would hope that by now that any reader here would know that, at least in my judgement, deflation through hard money and austerity, or inflation through stimulus and money printing, are both unable to achieve a sustainable economic recovery because the system is caught in a credibility trap in which the governance of the country is unable to act justly and reform the system without implicating themselves in the compliant corruption that caused the unbridled credit expansion, massive frauds, and financial collapse in the first place.

    Reply

    Chewitup Reply:

    @Save America,
    An Austrian version of Bill Black. There is an awful lot of agreement among those that disagree.

    Note that Dick Cheney has a place in Jackson Hole. Coincidence?

    Reply

    Save America Reply:

    @Chewitup, http://www.businessinsider.com/feds-hoenig-says-fed-cant-do-it-all-no-reason-for-operation-twist-to-work-2011-8

    Hoenig says a modern day “operation twist” perhaps won’t do much. I think Warren has summed things up nicely, too many people worried about clicking buttons back and forth on a trading terminal is a HUGE WASTE of human brain cycles. As he says 99.9% of the financial sector needs to go BOOM. We can’t build space elevators and cancer cures and life extension bio nano tech while we are all competing against the HFT alogirithms. Keynes predicted the same thing with his memes on the “liquidity fetish” being the most evil anti-social problem we have, trading/investing on abstractions 5 or 8 levels out. Chewitup, Unplug, Disconnect, turn off, and tune out, that is the fix. Warren, you, me, all the rest of the folks here have wasted too much of our lives already analyzing and investing on abstractions and financial bullsht. I stopped coming here for many months and stopped lots of other financial stuff to and actually got real sht done with my time and life. You do the same. Financial porn is addictive, but maybe you can break yourself off the drug….

    Reply

  4. jaymaster Says:

    Amen! This could all be done through video conference (or audio even), like we in the private sector have been doing for years now.

    But then the bureaucrats wouldn’t get to live the high life on other people’s dime, and feel good hobnobbing with other so-called elites for a few days….

    Reply

    Save America Reply:

    @jaymaster, go to corporationwiki and check out warren’s holdings, he has a jet company, I bet he is just mad they didn’t charter his jet company and instead got someone else ;) Warren I have told you before many times, you got a MARKETING problem, it affected your campaign, and now it is costing you clients for your jet chartering :)

    Reply

    WARREN MOSLER Reply:

    I don’t have a et chartering company. i did loan a friend some dollars to start one but it never got off the ground, and he got killed in a non related plane crash, all but one jet has been sold or dismantled, and i’m getting sued by a relative of the crash victim for something i had nothing to do with.

    Reply

    Save America Reply:

    @WARREN MOSLER, Jesus Warren, how silly and frivolous, you are scaring me to never invest or start up a company again, it just doesn’t pay anymore in this litigous society. What is congress made up of, 90% lawyers? :( I wish we had more innovative businessmen in Congress like you instead of lawyers, I know you tried. If Comedian Al Franken can be a senator, why can’t you? The society gets the government it deserves I suppose. I guess Al Franken doesn’t get sued because he isn’t Rich, best to do like the bible says and give all your wealth away right now so you won’t be a target by greedy lawyers anymore. I remember watching this movie “usual suspects” and kaiser soze didn’t just kill his enemies, but the people they lent money too as well, but that was in Hungary, didn’t think that would ever get back to a nice guy like you in the USA :(

    jason m Reply:

    @jaymaster, Most ‘bureaucrats’ don’t get sht, except for constant public scorn for, ironically, choosing to serve the public. Please don’t sweep us all in one dustbin.

    Reply

  5. Matt Franko Says:

    This type of unnecessary junket is evidence of why Congress would want to try to restrain dealings between the Fed and Treasury in the buying and selling of US govt bonds in their conduct of Monetary Policy.

    As I believe the Fed’s operating funds are taken out of their so-called “profits”, if the Fed and Treasury colluded in the buying and selling of US gov securities in private transactions, the Fed could end up with huge “profits” that the Fed could plow back into bureaucratic boondogles like this Jackson Hole BS and other forms of un-appropriated bureaucratic payouts to the academe and economic research concerns, etc…. with no accountability.

    Accordingly, to shed the light of day on the Fed’s transactions, Congress would put this language in the FRA:

    “Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.”

    This is the reason that I see for Congress to use this language “open market”. It reads like textbook legalese written by a lawyer who was trying to require full disclosure and objective dealings between the Fed and Treasury.

    Somehow, economic orthodoxy has construed the use of the term “open market” here as a legal requirement to appease the Monetarists/Quantity Theory people and this is simply bizarre and a Monetarist dogma. It does not even make logical sense; as it is in the FRA which is the establishing legislation for the Fed itself which is tasked with a triune mandate among which is stable prices (which one could interpret as “inflation prevention”); why would you put in an “anti-inflation” requirement in the establishing legislation for a Central Bank that you are establishing to “prevent inflation”…. so this orthodox interpretation of Congress’ use of “open market” here in the FRA is absurd from top to bottom…

    Without the requirement for “open” transactions, there would be nothing to prevent the Fed and Treasury from doing inside transactions at contrived prices that the Fed could “profit” from and then we would be reading about their meeting in Monte Carlo or some other outrageously opulent locale among other abuses. Resp,

    Reply

  6. Ralph Musgrave Says:

    Further reasons for the uselessness of interest rate adjustments are thus.

    1. There is no relationship between central bank base rates the rates charged by credit card operators See: http://uk.creditcards.com/credit-card-news/credit-card-interest-rates-bank-rates-1360.php

    2. Interest rate adjustments are distortionary: they work only via entities that are significantly reliant on loan finance rather than equity finance. I.e. given the need for stimulus, there is no good reason to stimulate one set of private sector entities rather than another.

    3. During a recession, there is a SURPLUS of capital equipment. Thus cutting interest rates so as to encourage investment is daft.

    4. With the exception of low IQ NINJA mortgage applicants, no one wanting to borrow or lend for the long term (i.e. for mortgages or capital equipment investment) is going to be fooled by low central bank base rates: those rates may easily rise in two or three years.

    5. There is not much of a relationship between base rates and the actual availability of credit: witness the current low rates combined with banks’ reluctance to lend.

    Conclusion No 1: Astrology and tea leaf reading make more sense than in interest rate adjustments. Conclusion No 2: the MMT method of bringing stimulus makes far more sense than interest rate adjustments, i.e. for stimulus purposes just have the government / central bank machine create money and spend it – and/or cut taxes.

    Reply

    Philip Pilkington Reply:

    @Ralph Musgrave,

    “During a recession, there is a SURPLUS of capital equipment. Thus cutting interest rates so as to encourage investment is daft.”

    Oh, I think that’s giving far too much credit to the intentions of those easing monetary policy. I think they really hope to push households out of saving/deleveraging and back into debt. I think there was an announcement on this from the UK government some time ago that Bill Mitchell analysed.

    THAT’S their plan. Pretty crap if you ask me.

    Reply

    Ivan Reply:

    Persistent low interest rates allows the banks to recapitalize as well. Seems to be part of the plan.

    Reply

  7. Ivan Says:

    Unrelated question. How would MMT have dealt with the economy in 1980? How did inflation drop so precipitously as GDP and deficits increased? Many use this period to “prove” that Keynes was wrong. There was an editorial in the WSJ today stating just that.

    Reply

    WARREN MOSLER Reply:

    mmt doesn’t ‘deal with economies’

    mmt explains how they work and what options are available

    and i’ve explained many times how the dereg of nat gas in 1978 was what broke the inflation

    Reply

    Ivan Reply:

    I guess the better question would be “what would someone (you) with knowledge of MMT in a weak economy with high inflation recommend as appropriate policy if the goal was to both grow the economy and bring inflation down”?

    Reply

    Unforgiven Reply:

    @Ivan,

    It probably depends on the source of inflation. As I understand it, foreign oil price increases act to drain money from the domestic private sector (for one). That can be controlled by substitution (Natural Gas, other domestic resources), conservation, etc. To the degree that we fail to substitute, etc, I guess the price of doing business simply goes up and the domestic private sector will require more money to compensate. At some point, that drain will stop increasing. It’s rather different than inflation caused by “too many dollars chasing too few goods”.

    So, when you realize that the problem isn’t solvency, it’s inflation, then you have to look at the many faces of inflation.

    WARREN MOSLER Reply:

    right, and again, that’s a relative value shift that now falls under the ‘popular’ definition of ‘inflation’

    Mario Reply:

    @Unforgiven,

    agreed completely. Funnily enough I just wrote a comment here on the blog saying that exact same thing. LOL

    WARREN MOSLER Reply:

    first, always sustain full employment policy as proposed on this website.

    then it depends on the ‘inflation’ which is usually not a monetary inflation from excess aggregate demand
    if it’s from tobacco tax hikes, let it go, for example.

    beowulf Reply:

    @Ivan,
    Move C Corps to pass-through taxation (like REITs w/ 90%+ dividend payouts to avoid “unrealized gains” issues) and then establish a Tax-based Incomes Policy by imposing a Lerner Index tax on above-average (by industry sector) gross margins, to be paid in conjunction with quarterly payroll tax filings.
    http://en.wikipedia.org/wiki/Lerner_index

    This would drive down supply-push inflation while increasing aggregate supply (you’d hit your earnings number by lowering the price and selling more volume). You wouldn’t lose much efficiency exempting SBA-defined small businesses, if they had monopoly pricing power they wouldn’t stay small for long.
    The IRS already requires a North American Industry Classification System (NAICS) code listed on every tax ID application, and the Census tracks annually tracks the average gross margins for each NAICS (the IRS also tracks this from tax filings but the Census numbers are public). So, for example, auto dealers (NAICS 4413) have an average gross margin of 12.3%. If a dealer’s gross margin on a (trailing 4 quarter basis) is 15.3%, they’d pay a tax of, say, 50% on the 3 point overage.
    http://webcache.googleusercontent.com/search?q=cache:_OH2lMiB2mIJ:www2.census.gov/retail/releases/current/arts/gmper.xls

    If inflation is running above target by let’s say 2%. Tsy could be pre-authorized to adjust entire NAICS schedule down each quarter by that percentage. So shoe stores (4482) with their 46.1% margins would then pay Lerner Index tax on anything over 45.18%.
    Congress could also use this as a form of antitrust regulation by marking down NAICS targets (or hiking tax rate) on highly concentrated sectors per Herfindahl Index, though I don’t believe Census or IRS tracks this by NAICS presently.
    Hrhttp://en.wikipedia.org/wiki/Herfindahl_index

    Reply

  8. Ivan Says:

    The journal article, however, indicated that this was a defining moment repudiating Keynes. In repudiating Keynes, they would argue that MMT or policies relating to MMT would not work in a stagflationary environment. As higher interest rates can be defined as pro-cyclical, the Volker spike in rates along with the Reagan tax cuts should have further spurred inflation. Perhaps it would be a good idea to have an MMT paper addressing this period.

    Reply

    Tom Hickey Reply:

    @Ivan,

    Perhaps it would be a good idea to have an MMT paper addressing this period.

    Not just a good idea. It’s essential.

    Reply

    WARREN MOSLER Reply:

    good project for you!

    Reply

  9. Ivan Says:

    Elites are abandoning Keynes…this time Pimco.

    http://biggovernment.com/cstreet/2011/09/01/elites-are-abandoning-keynesianism-for-self-preservation/#more-322504

    Reply

    Tom Hickey Reply:

    @Ivan,

    Here’s the linkto the article at Pimco.

    Reply

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