The Center of the Universe

St Croix, United States Virgin Islands

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for September, 2011

Deficit Reduction Super Committee Fighting the Battle of New Orleans

Posted by WARREN MOSLER on 30th September 2011

I realize it’s not a perfect analogy,
but, due to poor communications,
the battle of New Orleans was fought
well after the War of 1812 had ended.

Likewise, the Congressional super committee is fighting the battle for deficit reduction
long after the vaporization of the primary reason driving that move towards deficit.

The main difference is the stakes are much higher this time,
with the real cost of the lost output from the excessive, ongoing,
global output gap far exceeding
all the real losses of all the wars in history combined.

The headline reason for deficit reduction was
the rhetoric about the immediate danger of the US
suddenly becoming the next Greece,
with the US govt being cut off from credit,
interest rates spiking,
and visions of the US Treasury Secretary
on his knees, hat in hand,
begging the IMF for funding and mercy.

And the looming flash point was the threat of a US downgrade if
a credible deficit reduction package wasn’t passed before the Aug 2 deadline,
when the Congressionally self-imposed US borrowing authority was to expire.

After a prolonged Congressional process that was
even uglier than the healthcare process,
with already dismal Congression approval ratings moving even lower,
the debt ceiling was extended with a measure that contained some deficit reduction,
and also set up the current super committee to ensure further deficit reduction.

Soon after, however, Standard and Poor’s decided it all wasn’t enough,
and the dreaded downgrade was announced.

And then the unexpected happened.
Rather than spike up as widely feared,
market forces drove US Treasury interest rates down, substantially.

What was happening? Where had the mainstream gone wrong?
Former Fed Chairman Greenspan and celebrity investor Warren Buffet
both immediately had the answer.
S&P was wrong.
The US is not Greece.
The US govt prints its own money, while Greece does not.
The US always has the ability to pay any amount of dollars,
that markets can’t take away.

And everyone agreed.

And the driving force behind deficit reduction was suddenly not there,
and the rhetoric of becoming the next Greece vanished from the national TV screens.

And, unfortunately, just like the news that the War of 1812 had ended
didn’t get to New Orleans in time to prevent thousands from
losing their lives in that bloody battle that would otherwise not have been fought,

the news that the US isn’t Greece apparently hasn’t gotten through
to the Congressional members of the super committee
now fighting the current battle over deficit reduction.

What was learned after the downgrade was that
there is no such thing as a solvency problem for the US govt.
Short term or long term.

True, excessive deficit spending may indeed someday cause unwelcome inflation,
but the US government is never in any danger of not being able
to make any payment (in dollars) that it wants to.

And yes, the discussion could be shifted to a discussion
as to whether current long term deficits forecasts
translate into unwelcome inflation in the future
that may demand action today.

However no specific research has been done along those lines.
And, in fact, inflation forecasts,
which all assume our current fiscal trajectory,
don’t show any signs of an inflation problem.
Nor are the long term US Treasury inflation indexed bonds flashing any inflation warnings.
In fact, the Fed and most other forecasters remain more concerned over the risk of deflation.
And Japan, with a debt to GDP ratio about triple that of the US,
has been fighting its battle against deflation for nearly two decades.

So, clearly, shooting from the hip on this issue,
by suddenly declaring long term deficits
must be immediately addressed
with cuts to Social Security,
and with tax hikes,
to prevent a looming inflation problem,
(now that the prior errant reason, that the US could be the next Greece, has been dismissed)
could only be considered
highly irresponsible behavior
on the part of the super committee.

An informed Congress might recognize
the reason for the urgent action to reduce the federal deficit
and the reason for the super committee
is no longer there.
And, therefore, in informed Congress might suspend the super committee,
and regroup and reconsider before taking action.

It is widely agreed the current problem is a massive lack of aggregate demand.
It is widely agreed that a combination of tax cuts and/or spending increases
will restore sales, output and employment.

But instead of a compromise where the Republicans get some of their tax cuts
and the Democrats some of their spending increases, and the economy booms,
both sides are instead going the other way and pushing proposals to reduce aggregate demand,
even though they no longer have good reason to do so.

The battle of New Orleans was fought after the reason for fighting it had ended,
And, likewise, long after the reason for deficit reduction vaporized,
this battle continues to be fought
with both parties continuing acting counter agenda.

(feel free to distribute)

Posted in Congress, Deficit, Government Spending | 182 Comments »

Valance Weekly Report 9.28.2011

Posted by WARREN MOSLER on 28th September 2011

Valance Weekly Report

(To download PDF, right click link and select save link as)

Highlights
US – Political battles on both sides of the Atlantic overshadowing data
EU – Markets slightly more optimistic resolution will be reached
JN – Light week of data
UK – The IMF lowered its 2011 growth projections
CA – Retail Sales worse than expected
NZ – Economy nearly stalled in Q2

Posted in Valance | 30 Comments »

Mosler Bonds for the ECB, and reasons why Greece will not be allowed to default

Posted by WARREN MOSLER on 28th September 2011

First, The ECB should turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.

The ECB holding Mosler bonds will shift the default option from the issuer to the ECB, as in the case of non payment,
the ECB would have the option to make it’s holdings available for sale to tax payers of that nation to offset their taxes.

Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national govt debt are ‘money good’ without regard to external credit ratings, and give the ECB control over the default process.

Second, I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.

Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.

The purchases are not inflationary because they are directly tied to reduced Greek spending and increased Greek taxes, which are both deflationary forces for the euro zone.

Funding Greece facilitates the purchase of German exports to Greece.

Funding Greece does not reward Greek bad behavior.
Instead, it exacts a price from Greece for its bad behavior.

With the ECB prospectively owning the majority of Greek debt, and, potentially, Greek Mosler bonds, Greece will be paying interest primarily to the ECB.

The funding of Greece by the ECB carries with it austerity measures that will bring the Greek budget into primary balance.

That means Greek taxes will be approximately equal to Greek govt expenditures, not including interest, which will then be largely payments to the ECB.

So if default is not allowed, the Greek govt spending will be limited to what it taxes, and additional tax revenues will be required as well to pay interest primarily to the ECB.

But if default is facilitated, Greece will still be required to spend only from tax revenues, but the debt forgiveness will mean substantially lower interest payments to the ECB than otherwise.

And while without default, it can be said that the holders of Greek bonds have been bailed out, the euro zone will be considering the following:

The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.

The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.

In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.

Therefore, I see the main reason Greece will not be allowed to default is that not allowing default serves the further purpose of Germany and the EU by every measure I can think of.

It sustains the transfer of control of fiscal policy to the ECB.
It’s deflationary which helps support the value of the currency.
It provides for an ongoing income stream from Greece to the ECB.

Note, however, that not long ago it was not widely recognized as it now is that the ECB can write the check without nominal limit.

Before the EU leaders recognized that fundamental of monetary operations, Greek default was serious consideration for financial reasons as it was believed the funding of Greece and subsequently the rest of the ‘weaker’ euro zone nations would threaten the entire euro zone’s ability to fund itself.

It is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose.

(as always, feel free to distribute, repost, etc.)

Posted in Deficit, EU, Government Spending, Greece, Inflation, Political | 35 Comments »

Japan- Government, DPJ Agree On Third Extra Budget

Posted by WARREN MOSLER on 28th September 2011

This spending does add net financial yen denominated assets to the private sector:

Japan DPJ Policy Chief Maehara: Government, DPJ Agree On Third Extra Budget

By Kosaku Narioka

September 27 (Dow Jones) — The Japanese government and the ruling Democratic Party of Japan agreed on the third extra budget, totaling about Y12 trillion, for the fiscal year ending March 2012, the DPJ policy chief Seiji Maehara said Tuesday.

Under the plan, non-tax revenue amounts to Y7 trillion, he said. The government is going to sell all Japan Tobacco Inc. (2914.TO) shares it owns to generate part of the revenue, he said.
The government is planning to issue reconstruction bonds and is going pay them off in 10 years or longer, he said.

Posted in Japan | 1 Comment »

DGO

Posted by WARREN MOSLER on 28th September 2011


Karim writes:

Hard to believe we are still getting August data, but durables came in better than expected:

  • Headline -0.1%, but core +1.1% and prior month revised from -1.5% to -0.2%
  • Core shipments up 2.8%
  • Shipments number likely reflects some impact from global supply chain resumption early in Q3
  • Q3 still looks about 2% growth

Yes, seems again this year markets fail to recognize the support for aggregate demand that comes from an 8.5% US federal deficit.

Q3 earnings should also be strong, as GDP has been increasing sequentially all year as well.

And with lower gasoline prices, Q4 could be up from Q3, though as Karim suggested, Q3 may have started higher and ended on a weak note.

Posted in GDP | 5 Comments »

Greek Parliament Approves Unpopular Property Tax

Posted by WARREN MOSLER on 27th September 2011

No compliance issues here- if the tax isn’t paid the property gets sold.

Don’t even have to know the owner.

Greek Parliament Approves Unpopular Property Tax

September 27 (Reuters) — Greek lawmakers approved an unpopular property tax law on Tuesday that is crucial to a new austerity campaign the government has proposed so it can meet the terms of its international bailout and continue receiving aid funds.

All 154 of the ruling Socialist PASOK party’s deputies voted in favor of the measure, winning a majority in the 300-seat parliament.

The vote is the first test of the government’s capacity to win backing for a new wave of belt-tightening measures announced last week to convince the International Monetary Fund and European Union that Greece is worthy of an 8-billion euro ($11 billion) loan that Athens needs to avoid bankruptcy next month.

Having grown increasingly impatient at the slow pace of reforms, an EU/IMF team abruptly quit Greece in early September following disagreements over what was needed for Athens to plug fiscal slippage this year and next.

Finance Minister Evangelos Venizelos met representatives from the lenders in Washington over the weekend and Greek officials said the inspectors had asked Athens for written assurances it will implement the measures announced before they return.

“We are at the moment of truth for Greece,” European Commission spokesman for economic affairs Amadeu Altafaj said on Monday. “This is the last chance to avoid the collapse of the Greek economy. The criteria must be fully met in order to allocate the funds.”

The IMF and EU team has rapped Athens for dragging its feet on cutting the size of the bloated public sector because it has made little progress on a pledge to cut the 730,000 public workforce by a fifth, eliminate dozens of inefficient state entities and sell off loss-making state firms.

The government has failed to end rampant tax evasion, while the third year of economic contraction has undermined budget revenues and put Greece off-track for its goal of cutting the budget deficit to 7.6 percent of annual output this year.

Analysts say the property tax is a short-term measure that will not forestall a default most economists see as inevitable.

Activists have pledged to step up demonstrations in Athens’ central Syntagma square, where Greek riot police clashed with anti-austerity protesters on Sunday, firing tear gas in the first such unrest after a summer lull.

When lawmakers voted on an earlier austerity package at the end of June, more than 100 people were injured in two days of clashes with police at the square in front of parliament.

Prime Minister George Papandreou was in Germany for a meeting with Chancellor Angela Merkel during the vote on the tax bill.

He will discuss reforms ahead of another key parliamentary vote in Germany on Thursday meant to give more powers to the EU’s EFSF bailout fund.

Some 92 percent of Greeks believe the austerity measures are unfair and 72 percent believe they will not work, according to a GPO poll published by Mega TV on Monday. But only 23 percent said they would not pay the new taxes.

The poll also showed 77.8 percent of Greeks think the country should stay in the single currency zone while 54.8 percent saw a risk that Greece would default on its 340 billion euro debt pile in the next couple of months.

Greece has vowed to do what it takes to get the next tranche and announced on Monday it may close concession deals as part of its 50-billion euro privatization plan, another key condition for bailout aid.

The property tax is meant to help plug a gap of about 2 billion euros in this year’s budget to try and meet EU/IMF fiscal targets.

Posted in EU | 7 Comments »

China’s Squeeze on Property Market Nearing ‘Tipping Point’

Posted by WARREN MOSLER on 26th September 2011

If China gets by this we should be ok.
If not, could be a serious setback for a few days,
but ultimately the lower commodity prices are a plus for the US.
And even more of a plus if we knew how to sustain aggregate demand at full employment levels.

China’s Squeeze on Property Market Nearing ‘Tipping Point’
By Bloomberg News

Sept. 23 (Bloomberg) — The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.
 
Land transactions in 133 cities tracked by Soufun Holdings Ltd., the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data.
 
Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on developers risks a “domino effect” as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday.
 
“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.
 
The People’s Bank of China has raised interest rates five times over the past year, curbed lending to property developers and raised down payments on home loans as part of Premier Wen Jiabao’s campaign to rein in surging consumer and property prices. The government has also limited purchases of housing in cities where gains have been deemed excessive.
 
Loan Approval Withdrawn
 
Real-estate development accounted for a fifth of China’s urban fixed-asset investment last year, government data show.
 
Shanghai-based Shui On Land Ltd. had a loan approval from a Chinese bank withdrawn after the lender changed its policy, Vincent Lo, the company’s billionaire chairman, said in a Sept. 13 interview. Cancellations by that bank, which he wouldn’t name, are “happening quite frequently” to other developers, he said, adding that the credit squeeze may slow property development.
 
The price of land in Beijing slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun. Land auction failures surged 242 percent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported Aug. 3.
 
Debt Servicing Difficulties
 
The decline may make it more difficult for some of the thousands of companies set up by local governments to service debts taken on to fund infrastructure investment. China Real Estate Information Corp., a Shanghai-based property information and consulting firm, estimates 40 percent of overall local government revenue came from land sales last year.
 
In a sign financing vehicles in some provinces are struggling, the auditor of northeast Liaoning province estimated in July that about 85 percent of such companies in the region had insufficient income last year to cover all their debt servicing payments.
 
Some developers have turned to trust firms for financing, usually in the form of loans that are repackaged into investment products and sold to retail investors. The debt is typically funded by banks or investors themselves, according to Samsung Securities Asia Ltd.
 
Many real-estate companies have received about half of their new financing from trust firms over the past year, according to Jinsong Du, an analyst with Credit Suisse in Hong Kong. New bank lending to property developers in the second quarter of this year sank to 42 billion yuan from 169 billion yuan in the first quarter, he said, citing central bank data.
 
Stocks Drop
 
Shares in China property companies slumped yesterday on concern tightened access to loans will force them to cut prices. Greentown China Holdings Ltd. plunged 16 percent in Hong Kong, the most in almost three years, and was 6.5 percent lower at HK$4.20 at 3:34 p.m. today.
 
Greentown, the largest builder in the eastern province of Zhejiang, yesterday denied media reports the banking regulator ordered trust companies to provide details of their business dealings with the company and its units.
 
The China Banking Regulatory Commission is looking into financing of developers through trust companies as part of a broader evaluation of real-estate lending, a person familiar with the matter said today. The inquiries are part of regular monitoring and aren’t targeting any particular company, said the person, who declined to be identified because the regulator’s queries were meant to be private.
 
The “possibility of developers defaulting on debt has definitely increased and towards the end of the year that’s pretty likely,” Du said in a telephone interview yesterday.
 
‘Tip of the Iceberg’
 
Developer Dalian Rightway Real Estate entered preliminary restructuring talks with lenders after missing a loan repayment, the Hong Kong-based South China Morning Post newspaper reported Sept. 9, citing three unidentified people involved in the situation.
 
Funding problems are just “the tip of the iceberg” and “sharp declines in property sales and prices are likely in the next two to three months,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.
 
Premier Wen reiterated this month that stabilizing consumer prices remains the government’s top priority and that the direction of government policies won’t change. The slowdown in economic growth is “within expectations,” he said.
 
Too Complacent
 
Consumer-price increases in August slowed to 6.2 percent from a year earlier, down from a three-year high of 6.5 percent the previous month. Economists at Citigroup, Mizuho Securities Asia Ltd. and Macquarie Securities Ltd. say inflation probably peaked in July.
 
Policy makers may be too complacent about the economy’s performance, Mizuho’s Shen said, pointing to the deteriorating outlook for exports as Europe’s debt crisis deepens and the U.S. risks slipping back into recession.
 
The International Monetary Fund this week cut its forecasts for global expansion this year and next and said downside risks to growth are rising.
 
In signs China’s economy is cooling, a preliminary index of purchasing managers released yesterday by HSBC Holdings Plc and Markit Economics showed manufacturing may shrink for a third month in September, the longest contraction since 2009, as measures of export orders and output decline.
 
“The risk of China replaying the hard landing of 2008 is increasing as the property sector cools and exports weaken,” Shen said. “ I fear that once the real economy deteriorates and officials do loosen policies, it will already be too late.”

Posted in China | 15 Comments »

Update from prior email

Posted by WARREN MOSLER on 26th September 2011

As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.

However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.

***SORRY, MISSED THE BOTTOM BY A FEW HOURS.

;)

Posted in Fed | 14 Comments »

Half of Germans oppose Greek bankruptcy

Posted by WARREN MOSLER on 26th September 2011

makes sense.

The ECB funds Greece which facilitates the purchase of German goods and services, including military,
at ‘no cost to the German taxpayer.’

Germany gets to control/impose austerity on Greece,
which keeps the euro strong, interest rates low, and punishes Greece for past sins.

Half of Germans oppose Greek bankruptcy (AP)

 
A poll finds that half of Germans oppose letting Greece go bust and a majority believe a Greek bankruptcy would be bad for their own economy. The ZDF television poll published Friday showed that 50 percent of respondents wouldn’t favor the European Union letting Greece go bankrupt, while 41 percent would. It says 68 percent believe such a bankruptcy would be economically bad for Germany and only 15 percent expect positive effects. Athens is working to persuade international debt inspectors to authorize the next batch of bailout cash. Without the euro8 billion, Greece has said it would run out of money next month. The poll of 1,229 people was conducted from Tuesday to Thursday and has a margin of error of plus or minus 3 points.

Posted in Germany | 5 Comments »

The euro zone is operationally sustainable as is

Posted by WARREN MOSLER on 24th September 2011

While the way the euro zone is currently function would not be my first choice for public policy, it is operationally sustainable.

The ECB is writing the check, and can continue to do so indefinitely.

For example,
as long as the ECB buys sufficient quantities of Greek bonds in the secondary markets,
Greece will be able to fund itself.

The ECB debt purchases merely shift net financial assets held by the ‘economy’ from Greek govt. liabilities
to ECB liabilities in the form of clearing balances at the ECB, which does not alter any ‘flows’ in the real economy.

So as long as the ECB imposes austeric terms and conditions, their bond buying will not be inflationary.
Inflation from this channel comes from spending,
and in this case the ECB support comes only with reduced spending.

For the ECB this also means they accrue substantial net interest margins on their portfolio of Greek debt.
And as long as they keep funding Greece in any manner, Greece need not default.

This means the ECB books profits from their portfolio that adds to their stated capital.
While this is of no operational consequence,
it does help satisfy political concerns over ECB capital adequacy.

Nor is this ‘Ponzi’ in any sense,
as the ECB is not dependent on external funding
to make payments in euro.

Additionally, the ECB no officially has stated it will provide unlimited euro liquidity to its banks.
This too is not inflationary or expansionary, as bank assets remain constrained by regulation
including capital adequacy and asset eligibility which is required for them to receive ECB support.

So while politics is and will always be a factor in government in general, the current state of affairs can be operationally sustained.

The problem then shifts to political sustainability which is necessarily less certain.

The near universally accepted austerity theme is likely to result in continually elevated unemployment,
and a large output gap in general characterized by a lagging standard of living and high personal stress in general.

With ECB continuing to fund, this can, operationally be readily adjusted via a loosening of the Growth and Stability Pact budget constraints, but politically this possibility remains remote without a substantial increase in popular opposition.

Posted in ECB, EU | 29 Comments »

TRICHET: WE STAND READY TO SUPPLY UNLIMITED LIQUIDITY

Posted by WARREN MOSLER on 23rd September 2011

He’s got this part right, and it would nice if the Fed took notice and acted likewise for it’s banking system.

The way I say it is the liability side of banking is not the place for market discipline.

Also note, banks don’t need capital to function.
In fact, up until not that long ago most euro banking was by ‘national’ banks
which means they have no private capital.

Directly or indirectly,
regulators shut banks down, not markets.

See my banking proposals at:

http://www.moslereconomics.com/?p=8968

Posted in ECB | 8 Comments »

Senator Warner, Democrat, announces bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction

Posted by WARREN MOSLER on 22nd September 2011

posting..

Senator Warner announces formation of bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction
~ Warner leads new Senate coalition of 19 Republicans, 18 Democrats & 1 Independent ~
Senator Warner today announced that he has organized a bipartisan coalition representing more than one-third of the members of the U.S. Senate to encourage the members of the congressional “super committee” to seek the broadest possible bipartisan agreement to address the nation’s deficits and debt. This group of 38 Senators — 19 Republicans, 18 Democrats and one Independent — builds upon Sen. Warner’s yearlong efforts, along with Sen. Saxby Chambliss (R-GA), to craft a deficit and debt framework as the two co-founders of the Senate’s bipartisan “Gang of Six.”

Posted in Deficit | 9 Comments »

econ recap- Fed driven sell off

Posted by WARREN MOSLER on 22nd September 2011

As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.

However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.

q3 still looking up from q2 which was up from q1.

And gasoline prices now moving lower help the consumer a bit more,
so q4 should be up more than q3.

With GDP sequentially better all year, makes sense to me that earnings in general will continue to grow.

Employment not doing much as there is still some underlying productivity growth
which also helps keep unit labor costs in check.

This means stocks still be in their ugly trading range, with the lower bound somewhere around current levels.

Though potential external shocks remain.

With the ECB again writing the check today by buying Italian and Spanish bonds
the current situation is in fact operationally sustainable, and I suspect what we are seeing
is the resolution. The ECB buys as needed in conjunction with imposing austerity,
and the euro zone muddles through with flat to modestly negative growth and deficits higher than they’d like.
Note too, that the ECB buys bonds are relatively high yields, and pays relative low rates of interest on the clearing balances it creates
to make the purchases. This results in a profit for the ECB that adds to their stated capital and their stated capacities.
So as long as they keep buying there’s no default and not only no losses, but rising ECB profits.
And there’s no inflationary consequences because none of this increases actual spending by the national govts.
All it does is allow them to fund their austerity budgets as dictated by the ECB.

China continues to decelerate and so far avoid reporting a hard landing,
and while the jury is still out on that score, trade and demand growth is slowing.
They know how to increase demand but are holding back due to concerns of inflation.

Commodities are finally selling off and heading towards their marginal costs of production,
just as the textbooks describe, as global tight fiscal keeps demand in check.

And with seemingly no one in any position of responsibility understanding how their monetary systems work,
and instead carrying on as if they were all operating under some sort of fixed exchange rate constraint,
the odds of an acceleration in aggregate demand any time soon remain remote.

Initial jobless claims dropped by 9,000 to 423,000 the week ended Sept. 17, as expected. Continuing claims fell by 28,000 to 3,727,000 in the week ended Sept. 10. The four-week moving average of new claims, a more reliable indicator of the labor market’s recent performance, rose by 500 to 421,000

 
FHFA House Price Index Up 0.8 Percent in July

 
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in August to 116.2 (2004 = 100), following a 0.6 percent increase in July and a 0.3 percent increase in June.

Posted in Fed, USA | 9 Comments »

Proposal for the Fed- start a euro depository account for member banks

Posted by WARREN MOSLER on 22nd September 2011

The Fed has an account at the ECB.

And while banks can have accounts at the ECB, they are not currently segregated from the bank’s balance sheets.
In other words, if you have a euro deposit with a US bank, and the bank fails, you become a general creditor and could lose all of your euro.

This proposal would work as follows:

The Fed would act as agent for its member banks,
allowing them to open euro accounts at the Fed,
with the Fed keeping those euro in its euro account at the ECB.

These accounts would be segregated from the member bank’s balance sheet, so that any bank insolvencies
would not be a factor with regard to these segregated euro deposits.

The member bank must deposit all of these client euro deposits at the Fed.

Functionally, it would be as if the bank’s euro depositors had direct access to the Fed’s euro account at the ECB.

Therefore there need be no capital requirements associated with these accounts.

These accounts would allow global investors access to ‘risk free’ euro deposits.

Currently they must hold deposits in euro banks, national govt. debt, corporate debt, or actual euro cash.

This will help stabilize the euro financial structure and provide a bit of income from service fees for US member banks.

Posted in ECB, EU, Fed | 7 Comments »

my Dec 30 2010 post revisited

Posted by WARREN MOSLER on 22nd September 2011

COMMENTS ON MYSELF IN CAPS:

Karim on Jobless Claims Data and Year End Comments

Posted by WARREN MOSLER on 30th December 2010

Agreed with Karim, the relatively modest recovery remains on track.

Left alone, I see GDP in the 3.5%-5.5% range for next year, and possibly more.

***WRONG ON THAT! THOUGH FOR REASONS SUBSEQUENTLY DISCUSSED IN THE SAME POST.

AND THE SURPRISE EARTHQUAKE NOT HELPING MATTERS AFTER WHAT TURNED OUT TO BE A MUCH WEAKER FIRST QUARTER

Though they didn’t add much, the latest tax adjustments did take away the down side risk of taxes going up at year end.

***TRUE, AND ON A LOOK BACK THE REMOVAL OF ‘WORK FOR PAY’ MAY HAVE BEEN A FAR STRONGER NEGATIVE THAN THE POSITIVE OF THE PARTIAL CUT IN FICA

I do, however, see several negatives with maybe up to 25% possibilities each, meaning collectively the odds of any one of them happening are a lot higher than that.

The new Congress is serious about deficit reduction. The risk is they will be successful, and it seems they even have the votes to get a balanced budget amendment passed.

***THOUGH NOT A LOT OF ACTUAL TIGHTENING YET, THIS HAS BEEN A STRONG INFLUENCE.

China could get it wrong in their fight against inflation and cause a pretty severe slump. In fact, I can’t recall any nation that didn’t cause a widening of their output gap in their various fights against inflation.

***THIS IS HAPPENING AS WELL.

LAST NIGHT’S NEGATIVE MANUFACTURING NUMBER CONTINUES THE PATTERN OF WEAKNESS

The ECB’s imposed austerity in return for funding at some point reverses the current modest growth of that region. Not to mention the small but real risk the ECB decides to not buy any more member nation debt in the secondary markets.

***THIS HAS ALSO TURNED OUT TO BE THE CASE WITH AUSTERITY NOW TAKING OVERALL GDP GROWTH TO NEAR 0, AND THE ECB COMING IN ONLY AS COLLAPSE IS THREATENED.

While a less important economy for the world, the UK austerity looks ill timed as well.

***ALSO CAUSING SERIOUS DOMESTIC WEAKNESS.

The Saudis could continue to hike their posted prices which could reduce US demand for domestic output. The spike to the 150 level in 08 was a significant contributor to the severity of the financial collapse that followed.

***THIS DIDN’T HAPPEN, AS THE SAUDIS INSTEAD ANNOUNCED A RANGE OF $80-90 WHICH WAS ACHIEVED FOR WEST TEXAS DUE TO LOCAL SUPPLY ISSUES, BUT WITH BRENT AND THE REST OF THE WORLD HOVERING AROUND THE $110-115/BARREL RANGE THAT PRICE IS A HIGHER TAX ON GLOBAL CONSUMERS.

There are also several lesser factors I’ve been listing the last few weeks that could cause aggregate demand to disappoint.

*INTERESTINGLY, MOST QUARTERLY FORECASTS FOR 2011 STARTED OUT AT AROUND 4%, ONLY TO BE REVISED DOWN UNTIL THE ACTUAL RESULTS CAME IN ABOUT HALF THAT.

THEN, IN LATE JULY IF I RECALL CORRECTLY, THE GOVT. REVISED DOWN THE ALREADY REVISED DOWN RESULTS SUBSTANTIALLY FURTHER, WITH Q1 NOW REPORTED AT ONLY .5%, Q2 1%, AND Q3 NOW FORECAST FOR ABOUT 1-1.5%.

On the positive side is always the possibility of a private sector credit expansion taking hold.

***SO FAR ONLY A MODEST INCREASE IN CONSUMER CREDIT EXPANSION.

Traditionally that would be borrowing to spend on housing and cars.

***CAR SALES WERE GROWING REASONABLY WELL UNTIL THE EARTHQUAKE SET THEM BACK, AND THEN POLICY RESPONSE TO THE EARTHQUAKE WAS TOO WEAK TO SUSTAIN AGGREGATE DEMAND.

Federal deficit spending has done its job of restoring incomes and monetary savings, and will continue to do so.
Financial burdens ratios are down, car sales are showing some modest growth, and housing looks to have at least bottomed. And both are at low enough levels where there could be a lot of growth and they’d still be very low, especially housing.

*FEDERAL DEFICIT SPENDING DOES CONTINUE TO BE SUFFICIENT TO KEEP GROWTH MODESTLY ABOVE 0, AND UNEMPLOYMENT, THOUGH FAR TOO HIGH, HAS AT LEAST STOPPED RISING.

I don’t see inflation as a risk (unless crude spikes a lot higher), nor deflation (unless one of the above shocks kicks in).

And I do see the ‘because we think we could be the next Greece we’re turning ourselves into the next Japan’ theme continuing, as it seems highly unlikely to me we will get back to, say, the 4% unemployment level for a very long time, if ever, until there’s a paradigm change regarding fiscal policy.

*THE TERM STRUCTURE OF RATES IS FALLING IN A JAPAN LIKE WAY, REAL ESTATE CONTINUE TO BEHAVE VERY JAPAN LIKE, AND STOCKS SEEM TO BE IN AN UGLY, JAPAN LIKE TYPE OF TRADING RANGE.

The full employment budget deficit might be up to 4% of GDP or higher, and our current tax structure probably still delivers a cycle ending surplus at full employment.

*THOUGH AT THIS RATE IT WILL BE A LONG TIME BEFORE THAT GETS TESTED.

BUT, MORE IMPORTANT, IT MEANS A FULL FICA SUSPENSION WOULD BE LIKELY TO BE PERMANENT.

In other words, with our current tax structure and size of govt, full employment remains unsustainable.

Lastly, my feel is that there’s about a better than even chance of an equity and commodity sell off. Stocks as well as commodities look like they are pretty much pricing in all the good economic news, some of which is bogus, like QE being inflationary, as previously discussed. There could also be dollar strength which would contribute to equity and commodity weakness. And the stock and commodity weakness would also work to bring the term structure of rates lower as well, particularly as rates seem to have gone higher recently more due to supply factors during a holiday week and maybe year end selling than anything else. The forwards ED forwards don’t look to me to be at all low with respect to mainstream expectations of future fed rate settings. And it also looks like the annual portfolio rebalancing will be that of selling stocks which went up last year and buying bonds which went down, to get all the portfolio ratios back in line with marching orders from higher ups.

*THIS WAS ALSO DISCUSSED IN MY POST ON THE QE BUBBLE, WHERE I SUGGESTED ALL THAT MOVED BASED ON QE HAD DONE SO OUT BY ‘MISTAKE’ AS MARKET PARTICIPANTS BELIEVED QE ACTUALLY WORKS TO INFLATE, ETC, WHEN IN REALITY QE IS AT BEST A DEFLATIONARY TAX.

THAT ‘UNWIND’ CONTINUES TO PLAY OUT WITH GOLD PERHAPS BEING THE LAST OBJECT OF INVESTORS HEDGING AGAINST ‘INFLATION’ TURNING SOUTH SOON AFTER IT WAS REALIZED THAT CHAVEZ’S GOLD DID EXIST AND WAS BEING SHIPPED BACK TO HIM.

DEFLATIONARY FISCAL POLICIES TEND TO TAKE AWAY SPENDING POWER TO THE POINT WHERE SPECULATION IN GENERAL LOSES ITS FUNDING AND ECONOMIC FORCES OF SUPPLY AND DEMAND TEND TO DRIVE PRICES TO AND BELOW MARGINAL COSTS OF PRODUCTION IN A VERY TEXT BOOK LIKE MANNER.

Posted in Economic Releases | No Comments »

Fed

Posted by WARREN MOSLER on 21st September 2011

I thought the path of least resistance was for the Fed to not do anything,
on the grounds the economy was improving sequentially,
core was still up a bit, etc.
and thereby support positive expectations for modest growth

And that if they did anything to try to help they’d be signaling the economy needed help
which would cause concern that the economy was bad enough
for the Fed to try to do something to help.

So that’s what happened.
The Fed made a positive gesture,
indicating it was trying to help,
which signaled they think the economy needs the help.
So stocks sold off and bonds went down in yield.

But also as previously suggested,
it will soon wear off and be forgotten,
with the only lingering memory being their isn’t much the Fed can actually do to help.

Posted in Fed | 37 Comments »

Addition: It’s being reported that Siemens now owns its own bank

Posted by WARREN MOSLER on 21st September 2011

Pretty good indication that having access to an ECB account has substantial value in the current environment.

The ECB may even encourage this to help support the euro

Posted in ECB | 8 Comments »

ECB allowing corporate accounts threatens Germany

Posted by WARREN MOSLER on 21st September 2011

First, I don’t have confirmation this is happening the way it’s being reported.

But if it is, it opens the door for German rates to rise with credit concerns.

Without direct ECB accounts, holders of euro balances have only credit sensitive options as depositories for their funds.
These include euro banks, where deposit insurance is only via their national govt., corporate liabilities including debt and equities, and national govt. debt.

With nowhere else to go, and Germany perceived as the safest of the lot, and therefore German yields have plunged relative to other debt instruments as risk perceptions have escalated.

However, if private companies can bank directly at the ECB, Germany can quickly lose it’s TINA (there is no alternative) status, and instead be valued as an alternative to an actual ‘risk free’ depository- the ECB itself- putting Germany in the same boat with the other member nations.

Additionally, the time seems right for a new (private sector) euro member bank to emerge that’s a pure ‘depository bank’ with its assets limited to deposits at the ECB, charging its depositors a fee for this service, much like a money market fund. This, too, would have the same effect on Germany.

So while Germany is the strongest of the euro member nations, it is none the less not the issuer of the euro, and has debt ratios that are far higher than what markets would ordinarily fund for non issuers of a currency. However, as long as it continues as the ‘investment of last resort’ for holders of euro rates can remain far lower than otherwise.

Siemens Shelters Up to $8 Billion at ECB
Published: Tuesday, 20 Sep 2011 | 12:46 AM ET

 
Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

 
The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

 
In total, Siemens has parked between 4 billion euros ($5.4 billion) and 6 billion euros at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

 
Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

 
It was not clear from which bank Siemens withdrew its deposits. A person familiar with BNP Paribas said, however, that it was not the bank involved.

 
Siemens and the ECB declined to comment.

 
The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

 
In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB.

 
“In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank,” Mr Châlons-Browne said at the time.

 
Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank.

 
The ECB paid an average interest rate last week of 1.01 percent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds.

 
That compares with an average overnight interest rate paid by eurozone banks of 0.95 percent.

Posted in Currencies, Germany | 17 Comments »

GOP Leaders Warn Bernanke About Further Fed Action

Posted by WARREN MOSLER on 20th September 2011

“The food was terrible and the portions were small”
Comment from the post war Catskill resorts

So now the Fed’s being warned about shooting more blanks:

GOP Leaders Warn Bernanke About Further Fed Action
Published: Tuesday, 20 Sep 2011 | 6:13 PM ET

 
Top Congressional Republicans Tuesday took the unusual step of telling the Federal Reserve to refrain from further “intervention” in the economy on the eve of a policy decision by the U.S. central bank.

 
The group, which included the top two Republicans in both houses of Congress, said the Fed’s policies have been ineffective at supporting economic expansion and boosting employment.

 
“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate,” the group said in a letter to Fed Chairman Ben Bernanke.

 
The letter was signed by House Speaker John Boehner, Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl.

 
With economic prospects fading dramatically after a damaging U.S. debt downgrade in August and an escalation of European financial turmoil, the Fedhas made clear it is intent on taking further steps to lift growth.

 
Although officials at the central bank differ on how best to address the economy’s woes, analysts expect Bernanke to muster a consensus behind a plan to rebalance the Fed’s portfolio to push down longer-term interest rates.

 
Officials hope that by weighting the central bank’s bond holdings more heavily toward longer-term debt they can spur mortgage refinancings and push investors into stocks or corporate bonds and away from safe-haven Treasurys.

 
The Fed is expected to announce its decision at about 2:15 p.m. on Wednesday.

Posted in Fed | 57 Comments »

HuffPost Blog Post – The UMKC Buckaroo: A Currency Model for World Prosperity

Posted by WARREN MOSLER on 20th September 2011

http://www.huffingtonpost.com/warren-mosler/the-umkc-buckaroo-a-curre_b_970447.html

Posted in Currencies | 3 Comments »