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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.

the Fed and the dollar

Posted by WARREN MOSLER on January 9th, 2012

Imagine being on the FOMC and in the mainstream paradigm

In 2008 you moved quickly to make sure the US would not become the next Japan

You cut rates to 0, even faster than Japan did.

You provided unlimited liquidity to the dollar money markets,
both home and abroad.

You did trillions of QE, sooner than Japan did.

You announced you expected rates to stay down for two years.

etc. etc. etc.

And what do you have to show for it, 3 years later?

GDP marginally positive, much like Japan
Inflation working its way lower to Japan-like levels, especially housing and wages.
Employment stagnant a la Japan.

And now, after 3 years of 0 rates, and trillions of QE, the dollar is going up, much like the yen did.
After the Fed has done all it could think of to reinflate, and then some.

And all just like MMT suspected.
And for what should be obvious reasons.

18 Responses to “the Fed and the dollar”

  1. Gary Says:

    Bernanke did say on a few occasions that Congress should do more (although he did include cutting long term Federal deficits in the “to do” list). Federal deficit is the main thing that is helping at this point, isn’t it?

    Reply

    WARREN MOSLER Reply:

    yes. but the way i say it, is taxes function to create fiscal drag/reduce aggregate demand/create unemployment, etc, for the further purpose of transferring real resources from private to public domain via federal spending

    Reply

    Gary Reply:

    @WARREN MOSLER,

    yes, that is the more complicated MMT way of saying it :)
    So that MMT would appear to be strictly technical.

    In the end it is either:
    reducing taxes and keeping government spending the same
    OR
    keeping taxes the same and increasing government spending

    So it is all about the size of budget deficit.

    Reply

  2. Peter Says:

    Sorry, this is a bit ot: Germany sells bonds at negative yields: how is that possible for a risky bond? When US sold theirs at neg. yields we took it as a confirmation of the sovereign status, how come Germans can do the same?

    http://www.bbc.co.uk/news/business-16470494

    Reply

    WARREN MOSLER Reply:

    good question. has to be technical- the institutional structure has created a ‘need’ for that kind of collateral, and the choice for those institutions is German or some other, etc.

    Reply

    jaymaster Reply:

    @WARREN MOSLER,

    Some of the more “enlightened” European commentators have been harping for some time about a shortage of high quality/low risk assets in the Eurozone.

    See this post from a month ago.

    http://ftalphaville.ft.com/blog/2011/12/05/778301/the-decline-of-safe-assets

    Reply

    ESM Reply:

    @Peter,

    I have argued before here that Germany’s status as the most creditworthy of the Euro countries essentially makes it equivalent to a fiat currency issuer. A credit against 1 Euro of German taxes would actually have more buying power than a Euro if Germany were to leave the Eurozone. Hence, in the most plausible worst case scenario of a Euro blow-up, an owner of German government liabilities would probably make money.

    Yes, there is a risk that Germany’s finances could deteriorate to the point that it is no longer the strongest Euro country, in which case there would be tangible credit risk (as well as before since the chance of that happening is non-zero), but that risk is offset by the potential upside of Germany exiting at the top.

    Reply

    Max Reply:

    The risk is that Eurobonds will be created. In that case the Eurobonds will become the new ‘risk free’ and German bonds will trade at a spread.

    I believe this was the reason for the hiccup in the German bond market a while back – because of Eurobond rumors.

    Reply

    Talvez... Reply:

    @Peter,
    Richard Koo’s paper might explain it. The periphery of the eurozone is in crisis, people save into German bonds, thus increasing yields for periphery bonds and lowering German ones. The more the crisis spreads, the lower they will be, until they reach the core itself.

    Side note: Germany also has a scheme to manipulate interest rates on bunds. Bill Mitchell had a post on that a while ago.

    Reply

    walter Reply:

    @Peter, Germany is no currency issuer, but has kind of TINA status. “There Is No Alternative”, better than that.

    Reply

  3. Rodger Malcolm Mitchell Says:

    Monetary non-sovereign nations cannot indefinitely create currency, so long term, they require currency to come in from outside their borders, i.e to be net exporters.

    http://rodgermmitchell.wordpress.com/2011/09/12/the-end-of-the-euro-as-we-know-it-greece-ireland-portugal-italy-spain-too/

    There is no complex lending scheme that will cure the situation. Get rid of all the double talk, and you come to a very simple situation: The health of a monetarily non-sovereign nation is directly related to net imports of money.

    Germany is a massive net euro importer. But, mathematically not all euro nations can be net euro importers, unless the euro nations somehow can convince the Monetarily Sovereign nations –which do have the unlimited ability to create their sovereign currency — to send them all currency, there always will be some really sick euro nations, teetering on the edge of bankruptcy.

    Or, the EU will have to give (not lend) euros to the 17 euro nations — a quasi or real United States of Europe.

    It’s entertaining, but sad, to watch the EU come up with ever more intricate lending schemes, none of which solves the basic monetary non-sovereignty problem. Mentally, they are stuck in a pre-1971 world.

    Reply

    walter Reply:

    @Rodger Malcolm Mitchell,
    Most logical would be that Southern Europe would have a trade surplus with Northern Europe and that the North European countries then would run a trade surplus with the Rest of the World that would more than off set the trade deficit they run with South European countries. The current picture within the eurozone is exactly the opposite.

    This desire of the EZ as a whole to be net exporter however conflicts with the wish that the euro will become a global reserve currency. For the euro to become a global reserve currency the EZ as a whole will need to run a trade deficit. The EZ then needs to be a need importer, i.e. net exporter of euros.

    Reply

    pebird Reply:

    @Rodger Malcolm Mitchell, Well, it may be also be related to the degree of cooperation between the banking sector and the government. Doesn’t hurt to have most of the Bundesbank staff now working at the ECB.

    Reply

    WARREN MOSLER Reply:

    it hurts to have them working anywhere other than a jg job…
    ;)

    Reply

  4. jaymaster Says:

    @Colin,

    If you’re not the sovereign issuer of floating fx flutes, your comments won’t generate much interest.

    But if the flute was gold plated, some anti-MMT commentors might at least enjoy seeing photos, if you got ‘em.

    Reply

  5. Mark Walters Says:

    Argentina is a good example of your policies. it could have been different with QE. In 2001 the IMF made the Arg Government take a tight fiscal policy to meet its debt. It couldnt meet it debt, and it took the courage of the then econmist minister Roberto Lavagna to default. He agrued that the bond holders had factored this in with the high interest they were recieveing….growth soon came….hello Greece?

    Reply

  6. Art Says:

    If the natural rate of interest is zero when interest-rate targeting is the primary policy tool…

    …isn’t mainstream macro’s “liquidity trap” also inevitable (at least once demographic, financial, and other factors positively correlated with non-sovereign credit creation start to recede)?

    http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

    Reply

    WARREN MOSLER Reply:

    the natural rate is 0 with floating fx policy/non convertible currency.

    liquidity trap means interest rate adjustments aren’t effective, with 0 not ‘low enough’ etc.
    fact is output, employment, inflation, aren’t a function of rates the way the mainstream thinks they are in any case, so the liquidity trap thing is moot

    Reply

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