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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.

Fed

Posted by WARREN MOSLER on September 21st, 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.

37 Responses to “Fed”

  1. Mario Says:

    Warren,

    is there any reason to be concerned about long-term rates rising in the first place? It seems to me that rates further out on the curve have been doing nothing but falling anyway…so why does the Fed feel they need to buy long-term tsys at all?

    Does operation twist even do anything in a ZIRP environment anyway? I mean wouldn’t long-term rates naturally head lower on their own accord? Perhaps in the gold standard days of ’61 that would be different?

    Reply

    WARREN MOSLER Reply:

    agreed!

    Reply

  2. mike norman Says:

    Wear off? How? As in stocks bounce back? Not going to happen. This is the first time the Fed engaged in monetary policy that does not entail increasing its balance sheet. Although Plosser, Fisher and Kocherlakota descented, it’s what they’ve been wanting: an end to the expansion of the Fed’s balance sheet.

    More ominous is the fact that we are up against the debt ceiling again, which will create another “mini recession” just like the one created from the mid-May to Aug 2, debt limit spending constraint.

    Debt ceiling hit.

    Reply

    WARREN MOSLER Reply:

    seems earnings will continue to grow as the 8.5% budget deficit continues to support modest aggregate demand growth?

    yes, deficit reduction can set us back, but at least so far it’s all talk?

    Reply

    mike norman Reply:

    @WARREN MOSLER,

    It’s not all talk. Total outlays this year are about $200 bln below last year. That’s about 1.5% of GDP. And it’s going to get cut further if unemployment insurance/payroll tax not extended, debt ceiling payment contraints, possible gov’t shutdown after Sept 30. The House killed a measure to keep the gov’t funded after 9/30. Earnings recession.

    Reply

    Matt Franko Reply:

    @mike norman, This is a can of worms. Here’s a link to the actual bill that Obama signed to raise the debt ceiling August 2nd, it was only raised $400B (that’s already gone in <60 days).

    http://www.govtrack.us/congress/billtext.xpd?bill=s112-365

    @Beowulf, can you make sense of this? I'm getting a headache. It looks like there are some conditions on Treasury's ability to "borrow" more than the addl $400B, based on certain other things:

    Excerpt:
    "ADDITIONAL AMOUNT-
    ‘(A) CERTIFICATION- If, after the debt limit is increased by $900,000,000,000 under paragraph (1), the President submits a written certification to Congress that the President has determined that the debt subject to limit is within $100,000,000,000 of the limit in section 3101(b) and that further borrowing is required to meet existing commitments, the Secretary of the Treasury may, subject to the enactment of a joint resolution of disapproval enacted pursuant to this section, exercise authority to borrow an additional amount equal to–
    ‘(i) $1,200,000,000,000, unless clause (ii) or (iii) applies;
    ‘(ii) $1,500,000,000,000 if the Archivist of the United States has submitted to the States for their ratification a proposed amendment to the Constitution of the United States pursuant to a joint resolution entitled ‘Joint resolution proposing a balanced budget amendment to the Constitution of the United States’; or
    ‘(iii) if a joint committee bill to achieve an amount greater than $1,200,000,000,000 in deficit reduction as provided in section 401(b)(3)(B)(i)(II) of the Budget Control Act of 2011 is enacted, an amount equal to the amount of that deficit reduction, but not greater than $1,500,000,000,000, unless clause (ii) applies.”

    Here we go again!? Resp,

    Mario Reply:

    @mike norman,

    @Matt Franko

    I’m no Beowulf but it appears to say that the Treasury can authorize another 1,200,000,000,000 if the US needs it to meet commitments beyond the already agreed upon limit UNLESS clause ii or iii are implemented. That is to say that if anyone puts up a BBA or a “joint committee” (perhaps a super committee??) proposes cuts greater than 1,200,000,000,000.

    like I said, I’m not B so it’ll be neat to see what he says.

    It sort of sounds like to me that this language is sort of lobbing up an opportunity for someone to draft a BBA or take a good hack at the deficit.

    Matt Franko Reply:

    @Mario, but before that it sez this:

    “Sec. 3101A. Presidential modification of the debt ceiling
    ‘(a) In General-
    ‘(1) $900 BILLION-
    ‘(A) CERTIFICATION- If, not later than December 31, 2011, the President submits a written certification to Congress that the President has determined that the debt subject to limit is within $100,000,000,000 of the limit in section 3101(b) and that further borrowing is required to meet existing commitments, the Secretary of the Treasury may exercise authority to borrow an additional $900,000,000,000, subject to the enactment of a joint resolution of disapproval enacted pursuant to this section. Upon submission of such certification, the limit on debt provided in section 3101(b) (referred to in this section as the ‘debt limit’) is increased by $400,000,000,000 (ME: THEY GOT THIS $400B BUT WHAT ABOUT THE OTHER $500B OF THE TOTAL $900B? DOES GEITHNER HAVE TO PROVIDE SOME SORT OF CERTIFICATION BEFORE TREASURY CAN TAP THE OTHER $500B?).

    ‘(B) RESOLUTION OF DISAPPROVAL- Congress may consider a joint resolution of disapproval of the authority under subparagraph (A) as provided in subsections (b) through (f). The joint resolution of disapproval considered under this section shall contain only the language provided in subsection (b)(2). If the time for disapproval has lapsed without enactment of a joint resolution of disapproval under this section, the debt limit is increased by an additional $500,000,000,000.”

    Right now the Daily Treasury Statement is carrying the ‘Debt Limit’ at 14,694B and before Aug 2 is was at 14,294B so Treasury is carrying/acknowledging the addl $400B, that is all… I cant figure it out… the Lamestream Media reported the increase at $2.4T back in August…

    beowulf Reply:

    @Matt Franko,
    “THEY GOT THIS $400B BUT WHAT ABOUT THE OTHER $500B OF THE TOTAL $900B? DOES GEITHNER HAVE TO PROVIDE SOME SORT OF CERTIFICATION BEFORE TREASURY CAN TAP THE OTHER $500B?).”

    Yup, that’s the immediate question. Basically, President shoot up a flare (to indicate there’s less than a $100B cushion) and starts counting… when he gets to 50 days, Tsy can borrow an additional $500 Billion.

    ‘(1) IN GENERAL- Except for the $400,000,000,000 increase in the debt limit provided by subsection (a)(1)(A), the debt limit may not be raised under this section if, within 50 calendar days after the date on which Congress receives a certification described in subsection (a)(1) or within 15 calendar days after Congress receives the certification described in subsection (a)(2) (regardless of whether Congress is in session), there is enacted into law a joint resolution disapproving the President’s exercise of authority with respect to such additional amount.

    beowulf Reply:

    @Matt Franko,

    Wait, if Tsy already has the the first $400B that means he already sent the certification to Congress. Once the 50 day clock runs down (any day now presumably) Tsy can borrow another $500B.

    Mario Reply:

    @mike norman,

    @Beowulf

    Wait, if Tsy already has the the first $400B that means he already sent the certification to Congress

    so really then this just proves even further that the whole debt ceiling “crisis” was just made up b/c they wanted to cause a stir. They’ve already agreed to raise the debt ceiling then. Is this the definition of evil? I really am beginning to wonder. At least its deception at its height…and I would think such antics could be considered illegal somehow. I don’t know though.

    beowulf Reply:

    @mario,
    so really then this just proves even further that the whole debt ceiling “crisis” was just made up b/c they wanted to cause a stir.
    Oh that goes without saying. As Bill Clinton publicly commented, if he were still President he would keep on selling Treasuries confident that the Constitution was on his side if it ever went to court. And of course, we– and I mean the people commenting on this website– hashed out for months some ways for Tsy to sidestep the debt ceiling (which received no small attention in the press and even a few movie ideas).
    a bumbling assistant Treasury Secretary played by Jack Black accidentally picks up the trillion dollar coin and spends it on a Mountain Dew, sending the entire government into a mad scramble for the coin before the world economy collapses.
    http://www.tnr.com/blog/jonathan-chait/92867/the-coin-will-save-the-world
    Ultimately, the Administration is in the mess because it wants to be in this mess. They will be handcuffed by the debt ceiling until the day they decide to focus on real problems. At which point, they will take off the handcuffs and get to work.

    WARREN MOSLER Reply:

    understood. about that much more private sector credit expansion and change in net imports to make up for it?

    Matt Franko Reply:

    @mike norman, If you look at the Fed’s H.8, Tot Loans and Leases were flat at about $6.7T earlier this year, then during May/June/July (Fiscal drag during the 1st Debt Ceiling Debacle) they stepped up about $100B to 6.8T and seem to be holding there as fiscal flows have resumed due to $400B increase in debt ceiling. Now we seem to have hit another hard stop on the Debt ceiling as we speak, perhaps look for another small increase in TL&Ls if the ceiling is not raised soon…

    http://federalreserve.gov/releases/h8/current/default.htm

    ESM Reply:

    @mike norman,

    @Beowulf:

    “As Bill Clinton publicly commented, if he were still President he would keep on selling Treasuries confident that the Constitution was on his side if it ever went to court.”

    Further on this point, the courts wouldn’t even get involved in a dispute like this between Congress and the President. And if they did, who cares?

    There is one and only one Constitutional option for Congress to restrain what they consider to be a “rogue” President – impeachment in the House and conviction in the Senate. And ultimately, that will be a political decision. Clinton knows as well as anybody that an impeachable offense is that which the public (and especially the media) perceive as an impeachable offense. Selling Treasuries to keep the government operating doesn’t even come close to the level of acting like a frat boy in the oval office and then lying about it in the most egregious way possible.

    Mario Reply:

    @mike norman,

    @Beowulf

    They will be handcuffed by the debt ceiling until the day they decide to focus on real problems. At which point, they will take off the handcuffs and get to work.

    makes me think of the chains of Urizen in the William Blake poem “The Book of Urizen.” Blake did amazing prints right in the flow of the text. There is a print of Urize bound by his own chains.

    “The Immortal endur’d his chains,
    Tho’ bound in a deadly sleep.”

    check out page 15 here to see a photo of that plate: http://www.rarebookroom.org/Control/blkurz/index.html

    Mario Reply:

    @mike norman,

    I’d even be willing to bet that we may not even hear about a debt ceiling debacle at all. They may just choose not to worry about it this time and just pass it through and let it go by with less of a problem. If the media doesn’t pick up on it, then the politicians can easily move through it w/o much “exposure.”

    The only goal of the debt ceiling debate before was to dash to pieces any and all hopes of Obama doing anything that would actually help the economy that way the repubs could have a better chance of winning in ’12. That has been very effectively accomplish imho. Another debt ceiling round would be political death to everyone so it’s possible seems to me that it might not even get air-time. just another thought anyway

    Reply

    mike norman Reply:

    @Mario,
    Even if it comes and goes without the headlines, the fact is, the Treasury will be constrained in some fashion in making payments. We saw this in the mid-May to July period and economic activity suffered. It caused a “mini recession.”

    Reply

  3. al vinjamur Says:

    Is there a turn here by the Fed where they realize that the real economy cannot be propped up by the financial economy anymore? is there a realization that having a weak dollar (causing commodity inflation) is not conducive to growth as they had originally thought? sp500 eps would have to come down dramatically now since they’re selling the short end and buying the long end of the curve? probably the first real help to housing in a while. bye-bye bank earnings…..

    Reply

  4. Ken Says:

    Warren, I have a dumb question.

    You say the Fed can’t do much to help. In regards to QE2 or “Operation Twist” I would have to agree.

    However, in a recent blog about China you said “state lending is functionally very close to state deficit spending”.

    Isn’t “state lending” essentially what the Fed was engaged in earlier with the TALF program? I know that’s not a program you liked, but do your China comments imply that FED can have a real effect if it does stuff like TALF?

    Ken

    Reply

    WARREN MOSLER Reply:

    the fed was only providing liquidity to banks, for the most part. yes, when they bought commercial paper and supported the autos, etc. they were moving towards china like state lending, assuming the US gov didn’t much care about getting repaid.

    it’s about the functional difference between a payment and a loan. in china it can be, for the most part, all the same thing

    and, of course, china spends/lends over 20% of gdp annually

    Reply

  5. macrosam Says:

    The Fed thinks it still has a few bullets left. IOER may be a September item, and how likely or unlikely is it that the Fed eventually considers purchasing equities? Also, will the Treasury, as indicated in a recent TBAC, revisit 50-year or 100-year Treasuries for the natural long-end players such as pensions, particularly if Dodd-Frank leaves swaps less cost beneficial?

    Reply

  6. Barton Says:

    Well I don’t know where to post this, but Dennis Kucinich has apparently proposed a jobs plan, if it isn’t a spoof.
    Pls look
    http://kucinich.house.gov/News/DocumentSingle.aspx?DocumentID=261081

    Reply

    beowulf Reply:

    @Barton,
    Thank for posting. Its not actually (or rather, primarily) a jobs plan. Its really a bill to nationalize the banking sector, which Kucinich only alludes to in the last sentence of the presser.
    The proposal would also establish fiscal integrity, reassert Congressional sovereignty and regain control of monetary policy from private banks.

    What’s irritating is that a few years ago, Kucinich co-sponsored an excellent infrastructure funding bill with GOP congressman Steve LaTourette to allow states to borrow cheap via Tsy’s Federal Financing Bank to fund public works (and kept off-budget at federal level to minimize deficit hysteria).
    http://www.house.gov/list/press/oh14_latourette/bank.html
    Instead of focusing his energies on blowing up the banking sector, Kucinich should go back to the well with his infrastructure bill, its certainly a much cleaner plan than Obama’s “public-private partnership” infrastructure bank. Obama’s bill should have pre-funded the hiring of new FBI agents needed to unwind the “public-private graft” it will inevitably generate.

    Reply

    Mario Reply:

    @beowulf,

    exactly B. WTF is Obama?!?!?!

    Reply

    beowulf Reply:

    @Mario,
    An unmistakeable point of Ron Suskind’s new book Confidence Men is that President Obama is a fairly terrible manager (first time out can rough for any new manager, I guess).
    So much of Obama’s troubles stem from the decision point immediately after his election; he had a choice between hiring Paul Volcker and his deep bench of Tsy/Fed contacts to clean out Wall Street, or hiring Tim Geithner and Larry Summers to bail out Wall Street. We all know how that one turned out.
    Here’s a cool Volcker quote from the book (p. 290),
    “The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is shitty bridges and a shitty financial system!”

    WARREN MOSLER Reply:

    the current main trouble is they don’t understand mmt. without that it’s hopeless

    ESM Reply:

    @Mario,

    @Beowulf:

    “he had a choice between hiring Paul Volcker and his deep bench of Tsy/Fed contacts to clean out Wall Street, or hiring Tim Geithner and Larry Summers to bail out Wall Street. We all know how that one turned out.”

    I don’t think Volcker understands any of this stuff either.

    Tom Hickey Reply:

    @Mario,

    I suspect that Obama saw that he had to chose between Volcker, who understood that the TBTF’s had to be reformed, and Summers-Geithner, who disagreed with that position. I think it likely that O did not want to go after the banks for political reasons and selected his team accordingly.

  7. Mario Says:

    People, we’ve had it all wrong!!!

    In the national accounting equation:

    Y = C + I + G + X – M

    G really stands for G-SPOT!!!! LOL

    P.S. – And America is a desperate housewife!!! LOL

    Reply

  8. Mario Says:

    also doesn’t this twist squeeze lenders’ profit margins and rate spreads on loans (particularly longer term loans like mortgages)? Is the Fed actually doing something that would HURT lenders and in some weird wacky way attempt to help new home buyers?

    Reply

    WARREN MOSLER Reply:

    yes

    Reply

  9. walid M Says:

    I dont dont know how good warren is at calling the stockmarket but i am more inclined to agree with Mike’s comments ..

    Reply

    WARREN MOSLER Reply:

    I’ve been wrong more than once for sure, but pretty good by most standards

    Reply

  10. Winslow R. Says:

    2nd quarter 2011 deficit at 826 billion annual rate

    http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

    14.8 trillion GDP 2011 given growth rate of 1%

    http://en.wikipedia.org/wiki/US_GDP

    Implies deficit is 5.6% of GDP which is about half of what it was in 2010.

    Also government trying to recoup $50 billion by selling GM stock to keep from going over debt ceiling, isn’t helping.

    “That leaves the months of June, August and September as the prime targets for an offering”
    http://online.wsj.com/article/SB10001424052748703916004576271382418887092.html

    Reply

    WARREN MOSLER Reply:

    seasonally adjusted?

    Reply

    Winslow r. Reply:

    @WARREN MOSLER,

    Yes, seasonally adjusted.

    Reply

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