News recap comments
Posted by WARREN MOSLER on November 7th, 2011
The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.
On the negative side -
· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.
On the positive side -
· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.
Too bad what they call ‘easing’ at best has been shown to do nothing.
· The Fed’s significant downside risk language remained intact.
Downside risks sound like bad news to me.
· In the press conference Ben teed up QE3 in MBS space.
Which at best have been shown to do little or nothing for the macro economy.
· US payrolls, claims, vehicle sales and productivity came in better than expected.
And the real output gap if anything widened.
· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.
Reinforces the notion that it’s a good for stocks, bad for people economy.
· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.
And savers holding those securities saw their incomes cut faster than expected.
· The ECB cut 25bps and indicated a dovish forward looking stance.
Which reduced euro interest income for the non govt sectors
· CME Margins were reduced.
Just means volatility was down some.
· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.
Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.
· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.
When this makes a list of ‘positives’ you know the positives are pretty sorry
· The Aussies cut rates 25bps
Cutting net interest income for the economy.
November 7th, 2011 at 11:45 am
Draghi “predicted” a recession?
best comedy heard all week;
that’s as good as seeing the license plate while the truck is still on top of you; not bad
You have to wonder what his qualifications were to win responsibility for leading his troupe to camp in the middle of the road. So they can be first to feel the truck coming?
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November 7th, 2011 at 12:33 pm
The nonsense here came 13 years AFTER abandoning the gold std, and adopting the common sense of Marriner Eccles.
Income Tax Propaganda Cartoon
http://www.youtube.com/watch?v=gJ69X1qt4sQ
And not long before Beardley Ruml gave his now-ignored speech.
“taxes for revenue are obsolete”
Things have been stupidly confused ever since.
Taxes in a fully fiat currency system COULD logically be to regulate Aggregate Demand. In practice, they’re fought over as a blindly narrow weapon of class & clan struggle for dominance & influence. Anthropologists could tell you that the insane returns on coordination will last only as long as absolutely necessary – and will rapidly regress to narrow divisions.
The kinetics of achieving “a more perfect union” are proportional to any available confluence of discernment and adaptive pressure.
Fastest way forward is likely for all MMT adherents to migrate to be citizens & advisors to a small nation state where superior practices could be demonstrated rather than only discussed.
Forget Singapore. How about a country or Free Trade Zone, with it’s own currency, called Optionapore? Fiatapore? Operatapore?
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Dan Jiddish Reply:
November 7th, 2011 at 2:28 pm
@Roger Erickson,
I’d be really interested in seeing a sales tax that would be based upon a market set rate and updated daily, removing Congress from the equation entirely.
While I know Warren isn’t a fan of sales taxes, this particular tax could be priced in a way so that it could turn negative and offer a rebate, and it could be layered on top of a general Federal property tax. The goal would be to fine tune AD as opposed to creating a demand for the currency.
I certainly believe we have the technology now to implement a system like this; unfortunately, it’ll never see the light of day.
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Art Reply:
November 7th, 2011 at 3:03 pm
@Dan Jiddish,
“I’d be really interested in seeing a sales tax that would be based upon a market set rate and updated daily”
How? What kind of market, and who participates?
“removing Congress from the equation entirely.”
I agree Congress can be problematic, but removing them entirely seems unconstitutional, doesn’t it?
“While I know Warren isn’t a fan of sales taxes, this particular tax could be priced in a way so that it could turn negative and offer a rebate”
How so? At the register? Or would people have to file for periodic returns of past sales tax pmts?
“and it could be layered on top of a general Federal property tax.”
A Georgist or Hong-Kong type of approach? Has some merits (why not just try to tax economic rents?), but as you note at the end of your post, good luck…
“The goal would be to fine tune AD as opposed to creating a demand for the currency.”
Can top-down fine tuning succeed??
“I certainly believe we have the technology now to implement a system like this”
For fine tuning, or for setting sales tax rates dynamically? If the latter, why not just an annual or quarterly referendum on a target $ deficit level for the federal budget (for example)? Perhaps along with general, high-level % allocation preferences for the federal budget? [Granted, this could be unconstitutional too, as our federal system is designed to weight political interests in more than one way, e.g., Senate vs House.]
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Dan Jiddish Reply:
November 7th, 2011 at 3:21 pm
@Art,
To start, this was just a half baked idea I pondered in the shower.
Re: Market Participation – No specific instrument came to my mind, but I’m sure a group of smart financiers could create a derivative of governmental tax flows. And if there was a negative rate, the Treasury could step in and offer a replacement of tax dollars to investors.
Re: Unconstitutional – Very likely so. Can Congress levy a tax, but then have the rate determined by a separate entity?
Re: Registers and Technology – yes, we’d have to allow our registers to connect to the internet to calculate the current rate. While I don’t find this that difficult (Govt could pay for the technology a la the analog TV conversion), I tend to always be connected to the internet. The technology argument was in favor of both fine tuning and a dynamic sales tax, and there’d be no extra paper work required.
(Do states agree to their sales taxes once a year? That seems so old fashion!)
Re: Top down fine tuning – this would be intended to replace or enhance fed monetary policy and congressional indecision. I would think that the idea of having market participants determine a rate would remove the “top down” aspect of it, if I’m understanding your point.
Aren’t we pretty much currently facing issues with annual and quarterly budget targets in Congress? I was trying to remove the politics from the equation. If we could rationally agree to targets, that’d be great.
Art Reply:
November 7th, 2011 at 4:01 pm
@Dan Jiddish,
“I’m sure a group of smart financiers…”
George Carlin is spinning in his grave. :)
“could create a derivative of governmental tax flows. And if there was a negative rate, the Treasury could step in and offer a replacement of tax dollars to investors.”
I think (1) I think you’d get better information and a more socially just framework by using referendum (LIBOR, e.g., would be deemed a criminal activity in other industries) and (2) this kind of arrangement would seriously amplify the anger toward Wall Street and owners of financial capital, undermine economic efficiency, etc (most sophisticated derivatives are legally off-limits to the general electorate, even if they could afford to take positions in them). Also think the technical details need some work…do investors pay gains to Treasury? What about the folks on the other side of the trade?
“Can Congress levy a tax, but then have the rate determined by a separate entity?”
Referendum might be safer here too, i.e., if it’s We the People going over Congress’ heads.
“Re: Registers and Technology – yes, we’d have to allow our registers to connect to the internet to calculate the current rate…”
This sounds a bit like the classical gold standard, in which a long-term fixed target produced crazy short-term volatility. Think thru all of the adjustments private sector actors would have to make on a trade-by-trade, purchase-by-purchase basis. And how the hell would you audit them? This approach is one thing for mortgages and other loans, but quite another for every consumer transaction.
“Re: Top down fine tuning – this would be intended to replace or enhance fed monetary policy and congressional indecision.”
No problem with enhancement, but not sure either of those institutions currently tries to fine tune anything.
“I would think that the idea of having market participants determine a rate would remove the “top down” aspect of it, if I’m understanding your point.”
OK. But there’s LIBOR-type bottom-up, and then there’s actual bottom up, which is why I think referendum is the best meme for these kinds of proposals.
WARREN MOSLER Reply:
November 7th, 2011 at 5:45 pm
transactions taxes tend to reduce transactions, so only tax undesired transactions
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PG Reply:
November 7th, 2011 at 3:10 pm
@roger erickson,
The CIA Factbook estimates for 2010 GDP growth
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html
appear “inversely correlated” with countries being developed.
People in most developed countries are too busy with inter-class and general ignorance fighting for the following important things to be done: MMT based currency management, democracy developing, lowering energy content of GDP, developing alternative energy sources, replacing depleting materials with organic compounds / nanotech engineered etc.
Yet, in my view, there should exist possibilities for MMT gaining acceptance and being put in practice in some developing countries – especially those where class warfare is at low levels.
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November 7th, 2011 at 12:55 pm
Thought provoking commentary on the Euro’s current issues. Thank you!
Interestingly, FOFOA, who has a different take on the Euro, just came out with a long-winded post with some commentary on MMT to elucidate some ideas about the Euro project. http://fofoa.blogspot.com/2011/11/moneyness.html
Its long but on the first run thru he seems to give things a fair shake, what do you think?
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November 7th, 2011 at 1:49 pm
Taxes in a fully fiat currency system COULD logically be to regulate Aggregate Demand.
Also, if chartalist thinking is correct, taxes are necessary to sustain the demand for the currency. People are willing to accept the currency in exchange for goods and services because they need the currency to extinguish their tax liabilities.
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November 7th, 2011 at 1:51 pm
Thanks for the summary Warren! Like you said, so much is happening it is hard to wrap one’s head around it.
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Art Reply:
November 7th, 2011 at 1:56 pm
@Dan Kervick,
Don’t think those words or the recap were Warren’s. Not sure whose they were. The critiques were his.
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ESM Reply:
November 7th, 2011 at 2:31 pm
@Art,
They’re from David Zervos at Jefferies, who is pretty smart. I think Zervos understands MMT intuitively although he’s probably never thought about it consciously.
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WARREN MOSLER Reply:
November 7th, 2011 at 5:47 pm
he’s very smart, ex fed, street smart, spent a week here, and still believes in the monetary policy fairy,
making me feel like a total failure…
;)
November 7th, 2011 at 2:56 pm
Payrolls did not come in better than expected.
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Art Reply:
November 7th, 2011 at 3:05 pm
@mike norman,
He might have been including revisions to prior months?
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November 7th, 2011 at 3:57 pm
@MMTers
What happens to Government Debt held by the Central Bank once it expires? If it is not extinguished, then the Treasury has to issue an amount of debt with an expiry value greater than current debt due, given that interest rates > 0%. Consequently, a given parcel of debt held permanently by the central bank will grow exponentially, through an infinite number of ‘roll-overs’.
Thanks.
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WARREN MOSLER Reply:
November 7th, 2011 at 5:53 pm
at maturity the fed debits the tsy’s account for the balance due
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Art Reply:
November 7th, 2011 at 6:29 pm
@Shaun Hingston,
“If it is not extinguished, then the Treasury has to issue an amount of debt with an expiry value greater than current debt due, given that interest rates > 0%.”
It is extinguished, but if it weren’t, this would essentially be an explicit and ongoing promise that the govt will expand the stock of net financial assets by a certain amount every year. Similar to a central bank paying interest on reserves, except that it’s a financial instrument instead of a policy decision.
“Consequently, a given parcel of debt held permanently by the central bank will grow exponentially, through an infinite number of ‘roll-overs’.”
Again, that doesn’t technically happen, but so what if it did? What negative effects of an “exponential” expansion of net financial assets concerns you specifically?
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Shaun Hingston Reply:
November 8th, 2011 at 3:43 am
@Art,
Again, that doesn’t technically happen, but so what if it did? What negative effects of an “exponential” expansion of net financial assets concerns you specifically?
The concern I have relates to educating people about how intra-governmental balances work. IMO it would be more cognitively challenging to ‘accept’ that bonds held by the FED would grow exponentially, which doesn’t make sense, because the idea of the Government Sector owing money to itself is absurd. It is simpler to say, “any debt held by the FED, does not have to be payed back by the Treasury when it expires”.
Operationally it makes no difference if the bonds are extinguished or not, either case has no effect upon the ‘economy’.
But given that they are extinguished, then Q.E 2 will have the effect of reducing the American National Debt over time?
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Shaun Hingston Reply:
November 8th, 2011 at 4:04 am
So Q.E 2 lead to the outright purchase of National Debt, which actually means an equal amount of deficit spending in the near future, and thus economic growth.
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WARREN MOSLER Reply:
November 8th, 2011 at 7:43 am
qe doesn’t change the tsy’s plans to spend more than it taxes.
it just shifts dollars from securities accounts at the fed to reserve accounts at the fed
Shaun Hingston Reply:
November 8th, 2011 at 8:00 am
@Warren
So does the amount in the reserve account count towards the Debt Limit?
WARREN MOSLER Reply:
November 8th, 2011 at 12:41 pm
no, just the outstanding tsy secs, including those held by the Fed
November 7th, 2011 at 5:07 pm
Actually it depends on if you whether or not your believe American should be run by a financial ponzi scheme or through a productive free market capitalist economy:
On the POSITIVE side [Europeans are starting to understand that soveriegn debt is not backed by collatoral and so there is not legal need to pay back a single penny. Send the ponzi bankers and bondholers to zero and get back to a real economy making pasta, wine, and cheese. As Iceland has already proven]
· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.
On the NEGATIVE side – [The banking cartel is desperate to keep the ponzi pyramid going by printing massive $$$ to re-capitlize the banks - a ponzi pyramid constantly need new $$ in to lift up the bad, each time the amount at the bottom of the pyramid needs to increase - not of this easing will go into the productive economy but to those at the top of the pyramid scheme]
· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.
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WARREN MOSLER Reply:
November 7th, 2011 at 5:57 pm
the ‘banking cartel’ doesn’t ‘print massive $$$ to recapitalize itself’
in fact, there’s been very little capital raising in general. US banks pretty much all have excess equity capital right now and are looking for credit worthy borrowers to put it to work.
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Art Reply:
November 7th, 2011 at 6:36 pm
@Alex,
A sovereign govt issuer can’t be a ponzi unit. And a growing economy is not a “Ponzi pyramid.”
Agreed that EMU govt debt is not technically collateralized (afaik), but a non-sovereign issuer may have to liquidate collateral (‘state asset sales’) to avoid default or as a workout condition. And again, default will have very real/negative consequences for the people in Greece, until they are able to reimplement a drachma-based system.
As an aside, your claims that Argentina, Iceland etc felt no pain is simply wrong. Look at the data. Debt default economies contract by ~50%+. That’s real pain felt by a lot of people. But because you believe in the ‘ponzi pyramid’ fairy, you’re willing to advocate it for millions of strangers?
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