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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.

Archive for February, 2012

Japan Not Immune To Debt Crisis, BOJ Kamezaki Says

Posted by WARREN MOSLER on 29th February 2012

Not to be outdone by the rest of the world’s central bankers:

Japan Not Immune To Debt Crisis, BOJ Kamezaki Says

By Tatsuo Ito

February 28 (DJ) — A Bank of Japan policy board member said Wednesday that Japan is not immune to a Europe-style debt crisis as confidence in the country’s government bonds could quickly weaken if concerns over its fiscal state mount.

The European crisis “is not a fire on the other side of the river,” Hidetoshi Kamezaki told business leaders in Fukuoka, western Japan, using an phrase frequently employed by Japanese policy makers over the last few months to warn that a Europe-style crisis could spread to Japanese shores.

“It’s not appropriate to assume there won’t be concerns about JGBs,” in the future just because the bonds continue to be smoothly bought in the market, Kamezaki said, adding that confidence in government debt can change unexpectedly.

Japan’s fiscal conditions are the worst among developed nations, with a gross public debt of around 200% of its annual economic output, but the country has so far avoided a Greece-style crisis as domestic investors hold almost all of its debt.

An ample and steady flow of funds from overseas in the form of a surplus in its current account — which includes trade — has financed the debt, but recent data suggest that could be changing.

Japan recorded a trade deficit for all of last year, meaning that if the trend were to continue, the country may need to rely on foreign capital to finance its debt, like many of the European countries being hit by the debt crisis.

Kamezaki played down the possibility of Japan’s current account moving into the red, saying flows of income stemming from the country’s external assets worth Y250 trillion could be maintained.

“The trend of Japan’s current account surplus will not change for a while unless the trade deficit grows rapidly,” Kamezaki said.

At around 0030 GMT, the benchmark 10-year government bond yield was at 0.965%.

Kamezaki also said the central bank should keep actively implementing policies to ensure the Japanese economy can overcome deflation and achieve sustainable growth with price stability.

“The BOJ should continue to pro-actively implement policies needed to achieve these purposes,” Kamezaki said.

The BOJ on Feb. 14 surprised the markets by boosting the size of its asset purchase program–the main tool for credit easing amid near zero interest rates–to Y65 trillion from Y55 trillion by increasing purchases of Japanese government bonds. It also clarified a near-term inflation goal for overcoming deflation.

The financial markets have reacted positively to the BOJ’s actions, with the dollar briefly hitting a nine-month high of Y81.66 on Monday and the stock market rallying.

Posted in Bonds, Deficit, Government Spending, Japan | 14 Comments »

Today’s Data/Bernanke

Posted by WARREN MOSLER on 28th February 2012


Karim writes:

Bernanke gives his latest Congressional testimony and takes Q&A at 10am tomorrow.
He’s unlikely to diverge much from the recent narrative and I expect him to focus more on the changes they made at the last FOMC meeting (easing via extending conditional commitment and new set of forecasts) than highlight more policy changes (QE3 or Twist 2). March/April a more likely time frame for next set of policy changes.

Today’s data backs up the view stated by the Fed in January and recent speeches:

  • House prices continue to fall. Case-Shiller HPI -1.1% in December and -4% y/y.
  • Core durable goods orders -4.5%. Even adjusted for new year effect (expiration of accelerated depreciation in December), still weak, with the 3m annual rate of change now -3.7% vs +1.7%.
  • Conference Board survey rises from 61.5 to 70.8, a 12mth high, with notable improvement in Labor Differential (Jobs Plentiful Less Jobs Hard To Get). But, Plans to Buy a Home in next 6mths drops 0.2, to lowest level since August 2011.

Fits in with the following from their last Statement (where they eased):

While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.

Posted in Fed, Housing | 1 Comment »

Are Japanese Banks Bailing Out Europe?- John Carney reposts my article

Posted by WARREN MOSLER on 28th February 2012

Are Japanese Banks Bailing Out Europe?

Posted in ECB, EU | 2 Comments »

MMT conference in Italy with 2,000 attending

Posted by WARREN MOSLER on 28th February 2012

Click here for larger version

Posted in Uncategorized | 15 Comments »

GE to 3M Pension Pain Mounts as Rates Boost Liabilities

Posted by WARREN MOSLER on 28th February 2012

Feel free to forward to your local Fed President, to remind them that rate cuts do remove income from savers and from the economy in general, as the economy is a net saver to the tune of the cumulative govt debt (to the penny). (And not to forget the $80 billion or so per year of lost income due to QE.)

Lower rates remove income from ‘savers,’ with everyone who works for a living and contributes to any kind of retirement plan a ‘saver.’

Yes, with most major corporations, the additional contributions come from earnings, which reduces shareholder incomes rather than employee earnings.

But in any case, contributions to retirement funds are ‘demand leakages’ that directly or indirectly reduce income and, to some degree, reduce spending.

The obvious fiscal response should be along the lines of a FICA suspension to sustain sales, output, and employment…

GE to 3M Pension Pain Mounts as Rates Boost Liabilities

By Thomas Black

February 28 (Bloomberg) — General Electric Co. (GE), Boeing Co. (BA) and 3M Co. (MMM) will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies’ liabilities.

Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts.

“It’s been called the wall of contributions,” said Alan Glickstein, a senior retirement consultant at Towers Watson & Co. (TW) in New York. “All of a sudden this thing jumps up and stays there for a few years. That’s what it looks like — a wall.”

Companies from defense contractor Lockheed Martin Corp. (LMT) to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.

“They’re going to have to kick money in,” said John Ehrhardt, a consulting actuary at Seattle-based Milliman. “We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”

That’s money that won’t go back to shareholders through dividends or buybacks, or toward expansion, said Kevin McLaughlin, a pension risk management specialist with consultant Mercer in New York.

Seven Years

Under the federal Pension Protection Act, which was passed in 2006 and mostly took effect in 2008, tighter accounting rules gave employers seven years to fully fund their retirement plans and required them to use a specified, market-based rate of return to compute liabilities instead of a company estimate.

Those liabilities are calculated by projecting future payments and discounting to the present based on interest rates pegged to a basket of corporate bonds. Liabilities rise when rates fall — and the Fed has held its discount rate at 0.75 percent since February 2010, down from as high as 6.25 percent in June 2007. The Fed said Jan. 25 it expected rates to stay at current levels until 2014.

3M’s pension plan in the U.S., which started 2011 with assets of $11.6 billion, shows the challenge for employers.

Assets rose to $12.1 billion by year’s end because of investments and contributions, even after payments of $680 million, according to a Feb. 16 filing. At the same time, the funding shortfall more than tripled, to $2.4 billion, because projected benefit obligations rose 18 percent to $14.5 billion.

‘Liabilities Did Increase’

“With the declining interest rates here in 2011, our liabilities did increase,” 3M Chief Financial Officer David Meline said Feb. 23 at a Barclays Plc industrial conference.

While 401(k) savings accounts are more common at younger companies, traditional manufacturers such are among the employers most affected by the pension pinch because they’re still making payments under defined-benefit plans. St. Paul, Minnesota-based 3M’s 2012 pension contribution will almost double to as much as $1 billion.

Pension expense is “a variable that we consider among many when we look at a company and what it could mean to their profitability,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion. “If that were something that we said we wouldn’t want to own, we’d probably have a fairly limited universe of companies we could buy.”

S&P Industrials

The Standard & Poor’s 500 Industrials Index (S5INDU), whose 61 companies include manufacturers such as Boeing with defined- benefit programs, climbed 10 percent this year through yesterday, topping the S&P 500’s 8.7 percent gain.

Boeing’s pension cost will jump to $2.6 billion, 63 percent more than a year earlier, the company said in January. GE told investors in December it plans to add $1 billion, the first contribution since 1987, and expects to add about $2.1 billion in 2013. The Fairfield, Connecticut-based company closed its U.S. defined-benefits pension plan to all new hires this year.

Honeywell (HON) probably will make a contribution of as much as $1 billion, after low interest rates dashed a goal of full funding in four years, CFO Dave Anderson said. The plan was 83 percent funded at the end of 2011.

‘Little Bit Longer’

“I’d hoped to be there by 2015 to have more of a full resolution of that issue, but it’s going to take a little bit longer probably,” Anderson said in an interview. “Interest rates are at historic low levels and there’s no change in sight for that.”

Pension sponsors usually average rates over 24 months, so 2012 may be the peak year for companies’ pension contributions, said Glickstein of Towers Watson.

“We have a very unusual governmental intervention in the wake of a financial crisis,” he said. “Whatever other merits it may have, it’s clearly distorting the measures of pension obligations and putting a lot of extra pressure on plan sponsors.”

Lockheed Martin anticipated the rise in liabilities by pumping $6 billion into its plan over the last three years, curbing the projected 2012 contribution to $1.1 billion, according to a company filing.

Many pension plans, including GE’s, were overfunded before the December 2007 onset of the worst recession since World War II. Then pension assets began shriveling as stocks slumped, and lower interest rates increased liabilities.

Funding Levels

For the 100 largest defined-benefit plans, average funding levels sank to 74 percent in January from 105 percent in 2007, according to Milliman. Some companies may need to funnel cash to their pension plans for years.

Pension plan assets at Atlanta-based Delta Air Lines Inc. (DAL) covered only about 40 percent of obligations at the end of 2011, down from 47 percent the previous year, according to the carrier’s latest annual report. The funding shortfall widened to $11.5 billion from $9.3 billion in 2010, the filing showed.

Even after Delta ended pilots’ pensions before its 2007 bankruptcy exit and closed other plans to new hires, CFO Hank Halter said Jan. 25 that the airline still expects to contribute as much as $675 million in 2012. Defined-benefit programs taking new employees fell 26 percent in six years to 20,381 in 2009, according to the latest U.S. Pension Benefit Guaranty Corp. figures for plans with 25 or more workers.

The threat of future contributions is driving many sponsors of defined-benefit plans to seek ways to blunt risk, said Jeffrey Saef, chief of Bank of New York Mellon Corp. (BK)’s investment strategy and solutions group in Boston. That often means using more fixed-income investments to help match pension assets more closely to liabilities, he said in an interview.

Clients struggling with the cash drain from pensions have a universal query, Saef said: “‘When will it go away?’”

With Fed Chairman Ben S. Bernanke’s thumb on interest rates, that won’t be any time soon, said McLaughlin, the Mercer consultant.

“Right now, everybody is hoping for the best, which is equity markets performing and interest rates not falling any lower,” he said.

Posted in Fed, Interest Rates, Pension | 9 Comments »

ECB reports Spanish and Italian banks’ Dec and Jan bond buying

Posted by WARREN MOSLER on 28th February 2012

Looks like the drop in Spanish and Italian bond yields was at least partially driven by Spanish and Italian bank buying of their govt’s debt. While the LTRO did provide floating rate ECB term funding, funding has generally been available in any case, and the bond buying did add risk and ‘use up’ bank capital. So I suspect there is still more to it than has so far been disclosed.

ECB figures published on Monday showed that Spanish banks increased their government debt holdings by more than €23bn in January while Italian banks bought nearly €21bn – both record monthly increases. Over December and January, Italian and Spanish banks increased their holdings by 13 and 29 per cent to €280bn and €230bn respectively.

Posted in Banking, Bonds, ECB | No Comments »

appointment

Posted by WARREN MOSLER on 27th February 2012

Click here for larger version

Posted in Uncategorized | 50 Comments »

LTRO birdie telling me maybe the BOJ gave the nod to its banks

Posted by WARREN MOSLER on 27th February 2012

Just a hunch now, but Italian, Spanish, and related bond yields began falling coincident with the first ECB LTRO. The question is why, as I saw no operative channel of consequence from ECB liquidity provision of 3 year funds on a floating rate basis to the term structure of rates.

So it seemed to me that also coincident to the LTRO was some entity giving the nod to its banks to buy those bonds, or some reason sellers of those bonds backed off.

I’m now thinking it may have been the BOJ giving the nod to its member banks to buy euro member debt denominated in euro and keep the fx risk on their books, with the assurance govt policy would keep the yen weak and guarantee the banks an fx profit.

We learned after the fact that Japan had been selling yen well before they announced their new weak yen stance. And having their banks buy euro member euro denominated debt directly weakens the yen vs the euro.

The timing of the events- the LTRO/yen sell off/yen policy change- is close enough to get my attention.

So Japan managed to weaken the yen and firm euro member debt prices all under the cover of the ECB LTRO operation which they gladly allowed to take the credit.

In any case, I don’t expect any more from this next LTRO than I expected from the last, but I am keeping a close eye on the yen.

oil

Posted in Banking, CBs, ECB | 16 Comments »

GEI article is up

Posted by WARREN MOSLER on 27th February 2012

Eurozone: How to Drive an Economy in Reverse

By Warren Mosler

February 27 — The situation in Greece brings me back to the conclusion that merely resolving solvency issues in the Eurozone doesn’t fix the economy. Solvency must not be an issue, but if there is negative growth, solvency math simply doesn’t work for any of the Euro members.

Without growth in the Eurozone the resolution (for now) of the Greek crisis will simply result in the focus moving on to one of the next weaker sisters. As this happens the risk remains that other countries in trouble will ask for haircuts on their debt (similar to Greece) as part of their rescue. And that could trigger a general, global, catastrophic financial meltdown.

Follow up:
Monetary and Fiscal Expansion are Needed

My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.

Alternatively, the ECB could simply guarantee all national government debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.

And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.

Strong Euro First

However, all policies seem to be ‘strong euro’ first. And the ‘success’ of the euro continues to be gauged by its ‘strength’.

The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.

Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.

Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations of euro denominated financial assets, along with all the unspent interest and earnings compounding.

Offsetting all of that unspent income (private savings) is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.

Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than zero, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.

All of this serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.

Three Reverse Thrusters in Use

This works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations – and that continues the negative feedback loop.

Given the demand leakages of the institutional structure, as a point of logic, prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.

And right now it looks like they are still going backwards on all three. And with the transmission in reverse, pressing the accelerator harder only makes you go backwards that much faster.

Posted in Bonds, CBs, Currencies, EU, Government Spending, Greece | 11 Comments »

Someone is still worried about the US becoming the next Greece

Posted by WARREN MOSLER on 27th February 2012

Sorry to see this happen.

Whatever.

First, it’s not a debt burden.
Debt management is just shifting $ between Fed reserve accounts to Fed securities accounts.

Second, the trick is for a given size govt to keep taxes at the right level.

Yes, some day circumstances could possibly warrant much higher taxes, though in my 40 years of experience I’ve never seen excess demand. But yes, anything is possible. And a bit of forecasting of demand leakages along with deficits might be at least somewhat enlightening, and if history is any guide, probably show future deficits still aren’t large enough for full employment.

But even if you know you have to make a turn 20 miles down the road- that is, even if you do know that 20 years from now aggregate demand could be too high- you don’t turn the wheel now.

Can America Become the Next Greece?

By John Carney

February 27 (CNBC) — When conservatives worry about the size of the federal government’s budget deficits and the national debt, liberals tend to point out that “America is not Greece.”

This is certainly true. The U.S. economy is far healthier than the economy of Greece. We aren’t locked into a currency union that deprives us of monetary flexibility. Our government can never run out of money to service its debt because the debt is denominated in currency the government creates.

The most important difference between the U.S. and Greece, however, is not where we are in our economic cycle or our monetary system.

It’s the gap between the productivity of the American economy and the Greek economy.

The core reason why Greece is unable to service its debt without aid from its neighbors is that its economy does not generate enough wealth. Even if Greece somehow put an end to the habitual tax-avoidance of its people, it could not service its debt without truly impoverishing its citizens through unsustainable wealth confiscation.

The dearth of productivity and competitiveness explains, ironically, why Greece’s debts got so large to begin with. It’s people and government wanted to live beyond their means, to spend more than they produced. This is only possible if someone is willing to lend you the money to buy the excess goods and services.

Most Greeks never really realized how unproductive their economy had become. In some sense, access to debt had concealed their long-running economic slump. It seemed that things were humming along just fine.

This is one of the reasons Greeks are so shocked by what is being required by their creditors. It feels as if they are being looted, bossed around, sent orders from German and French bureaucrats. The Greeks just never internalized how dependent their economy had become on the capacity and willingness of more productive economies to lend to them.

The productivity gap, of course, is not the result of nature or the wrath of some angry gods. It is the result of years of policies that made investing in productivity — both through capital investment and increases in skills — irrational. The generosity of the Greek government and the regulatory burdens placed on businesses made the relative rewards from business investment meager.

This is important to keep in mind when considering the proposition that “America is not Greece.” It tells us we must zealously guard our productivity, protect our culture of competition and enshrine market processes almost as if they were the gifts of benevolent gods.

America is not Greece. But if our productivity is sapped by too much regulation, by misbegotten monetary policy, by taxes that undermine incentives to earn, or by government spending that rewards business meeting political rather than market demand, we can become Greece.

America can never be forced to default for lack of money. But our debt burden can become unsustainable — requiring either inflation or voluntary default — if our productivity does not improve as our debt grows.

Posted in Bonds, Greece | 42 Comments »

Fed’s Williams slips in a plug for a fiscal response

Posted by WARREN MOSLER on 24th February 2012

So look what slipped into a Fed statement:

*DJ Fed’s Williams: Current Economic Conditions Call For Strong Fed Response
*DJ Williams: Weak Total Demand Calls Supports Fed Policy Action
*DJ Williams: Sees Value In Targeted Stimulus Actions
*DJ Williams: Mortgage Bond Buying Has Helped Housing Market
*DJ Williams: Fiscal Actions May Also Help Revive Housing, Aid Economy
*DJ Williams: Fiscal Stimulus May Be More Potent Than Monetary Policy Now
*DJ Williams: Housing Has Hurt Economy, Not Sole Cause Of Slow Recovery

Posted in Fed, Government Spending | 9 Comments »

output gap still wide…

Posted by WARREN MOSLER on 24th February 2012

Willing To Work, Not Looking

By Sean Higgens

(Investor’s Business Daily)

A Record 2.81 Million Including this group, jobless rate is 9.9% vs. the official 8.3% figure

The official unemployment rate has improved, but the number of jobless Americans at the fringe of the workforce has never been greater. The gap between headline and alternative joblessness is the highest on record, according to an IBD analysis of Labor Department data.

The jobless rate is 8.3%, still high but down from 9.1% last August and 9.9% in April 2010. But many don’t think that gives an accurate picture. The official number excludes a record 2.81 million discouraged or other “marginally attached” people out of work that aren’t currently looking but are willing and able.

Factoring these people in, unemployment is a much higher 9.9%, 1.6 percentage points above the official rate. That’s the widest gap on record going back to 1994. It never rose above 1.1 points during the Bush administration.

That means the official rate has been falling in part because an unprecedented number of people are taking a break from searching for work.

“The labor market has weakened so much you’ve just had more and more people falling into that group,” said Heidi Shierholz, labor market economist with the liberal Economic Policy Institute.

Some lawmakers say it is time that the government started paying more attention to them.

Rep. Duncan Hunter, R-Calif., plans to introduce a bill soon that would force the Labor Department to include the marginally attached in the official number.

“Guys like me want a way to know what the unemployment rate really is. It is that simple. The unemployment rate is not really the 8.3% figure,” Hunter, a member of the Education and Workforce Committee, told IBD.

Labor already tracks at least half a dozen variations in the jobless rate publicly released each month.

‘Marginal’ Workers Left Out

The official rate is called the “U-3” number. The one including the marginally attached is the “U-5.” That one also includes: “discouraged workers, plus all other persons marginally attached to the labor force.”

The “marginally attached” are defined as those that want to work and have sought employment within the prior year but are not currently looking.

Hunter’s bill would just make U-5 the official number. “I don’t think most people even know there is an alternate way of calculating unemployment,” he said.

Economists of all stripes agree that it is arbitrary for U-3 to be the official rate. A sound case could be made for any of the others, though most argued that no one figure should be spotlighted.

GOP lawmakers may have political motives to cast President Obama’s economic record in the worst possible light.

But Wayne Vroman, senior fellow at the Urban Institute, notes that the idea of changing the statistic to the U-5 number has a bipartisan pedigree.

“A lot of advocates from the left side of the political spectrum also would want to give (the higher statistic) more prominence because it shows distress among a group that doesn’t get as much attention,” Vroman said.

Surprisingly little is known about the marginally attached. With less than two decades of data, few economists can say much except that the group is very diverse, with many reasons as to why they drop out. Some may have other means or a working spouse, or are retiring early.

Many have quit looking after months or years out of work. Average duration of unemployment was 40.1 weeks in January, just below November’s record 40.9 weeks.

The labor force participation rate has fallen to multi-decade lows even as hiring has slowly improved in recent months.

That may reflect baby-boomer retirements in part, says James Sherk, a labor economist with the conservative Heritage Foundation. But even taking that into account, “the labor force participation rate has fallen even more than you would expect.”

oil

Posted in Employment, GDP | 8 Comments »

WikiLeaks: Saudis often warned U.S. about oil speculators in 2008

Posted by WARREN MOSLER on 23rd February 2012

Right, they can’t ‘put crude out on the market’ but they can lower the price, a point he cleverly avoids.

WikiLeaks: Saudis often warned U.S. about oil speculators

By Kevin G. Hall

Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,

“Saudi Arabia can’t just put crude out on the market,” the cable quotes Naimi as saying. Instead, Naimi suggested, “speculators bore significant responsibility for the sharp increase in oil prices in the last few years,” according to the cable.

What role Wall Street investors play in the high cost of oil is a hotly debated topic in Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.

Posted in Comodities | 78 Comments »

More on Greece and the euro

Posted by WARREN MOSLER on 23rd February 2012

As previously discussed, all policies seem to be ‘strong euro’ first.

And the ‘success’ of the euro continues to be gauged by its ‘strength’.

The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.

Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.

Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations euro denominated financial assets, along with all the unspent interest and earnings compounding.

Offsetting all of that unspent income is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.

Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than 0, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.

All of which serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.

And all of which works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations that continues the negative feedback loop.

Given the demand leakages of the institutional structure, as a point of logic prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.

And right now it looks like they are still going backwards on all three.

Posted in Credit, Currencies, Deficit, ECB, EU, Exports, GDP, Greece | 21 Comments »

Greece

Posted by WARREN MOSLER on 22nd February 2012

Comes back to the idea that resolving solvency issues in the euro zone doesn’t fix the economy.

And with negative growth the solvency math doesn’t work for any of the euro members.

And what’s with the ECB threatening to back away on liquidity support for the banking system?

So looks to me like the Greek resolution is not the end of the solvency issues, but that the focus simply moves on to the next weaker sister.

And, as previously discussed, the risk remains elevated that if Greece gets to haircut its obligations and gets funding, others will ask for the same, triggering a general, global, catastrophic financial meltdown.

My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.

Alternatively, the ECB could simply guarantee all national govt debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.

And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.

Meanwhile, elsewhere in today’s world news:

The likes of Ford adding to pension funds makes the point of the increasing and ongoing demand leakages putting a damper on GDP.

And oil prices have now crept up enough to materially cut into aggregate demand as well.

Nor are banks adding to capital to meet expanding demand for credit, which remains anemic.

Headlines:

Data Suggests Euro Zone May Slide Back Into Recession
German Manufacturing Slows as New Export Orders Fall
China’s Factory Activity Shrinks for Fourth Month
ECB Preparing to Close Liquidity Floodgates
Ford Pours $3.8 Billion Into Pension Plan
Oil Could Turn to Headwind as Dow Flirts With 13,000
UBS to Issue More Loss-Absorbing Capital
Iran ‘Winning’ on Oil Sanctions: Top Trader
Greek Bailout Puts Focus Back on Credit Default Swaps
Iran Fuels Oil-Price Rally—And Prices Could Keep Rising

Posted in Bonds, Currencies, Deficit, ECB, Employment, GDP, Germany, Government Spending, Greece, Political, Proposal | 12 Comments »

Marshall Auerback video

Posted by WARREN MOSLER on 22nd February 2012

Marshall Auerback video

Posted in Bonds, ECB, EU, Greece | 7 Comments »

The Challenge to Status Quo Economics Everybody is Talking About

Posted by WARREN MOSLER on 22nd February 2012

The Challenge to Status Quo Economics Everybody is Talking About

By Lynn Parramore

February 22 — Over the last week, an important approach to economics that has spent years on the sidelines went mainstream: Modern Monetary Theory. This is good news for anyone who wants to see the neoliberal paradigm challenged, and a positive sign to heterodox economists who have difficulty getting a hearing in a field still gripped by outmoded models.

The theory, which provides unusual perspectives on issues including currency, debt, and government spending, kicked off in the mid-90s and has since grown into a movement. Its roster of proponents includes James K. Galbraith; Australian economist Bill Mitchel; Randall Wray and Stephanie Kelton of the University of Missouri-Kansas City; Rob Parenteau; Scott Fullwilier; Warren Mosler; and blogger Marshall Auerback. Their insights have been particularly valuable in countering the deficit hysteria which reached a fever pitch in the U.S. during the summer of 2011, and still darkens policy debates worldwide.

I worked with several MMTers after the financial crisis, especially Auerback, and met with plenty of scoffs, despite the fact that the renowned Galbraith was a key adherent. When I published a piece on the deficit in the Huffington Post which featured the insights of several MMTers, I received more mail than I’ve ever gotten on a single article — most of it hostile (See: The Deficit: Nine Myths We Can’t Afford). The majority of the liberals and ‘progressives’ I spoke to about MMT could not begin to consider an approach than upturned so much of what they knew to be "true" about the economy — despite the fact that much of that "truth" had been handed to them by neoliberals.

Establishment types told me the theory was "too out there" and "too controversial." But to me, "out there" and "controversial" was just what we needed to shake up a field that was mired in dangerous mythology and flawed thinking. Gradually, MMTers became part of a vibrant economic conversation on the websites bold enough to publish their work (New Deal 2.0, a blog I founded in 2009, was at one time such a venue). Recently, I’ve been proud to introduce Auerback to a new and receptive audience at AlterNet. Coming soon: economist Stephanie Kelton of UMKC will be explaining the theory in a feature article for AlterNet.

In the mean time, here’s a look at what people are saying.

From the Washington Post:

In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.

The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong.

From the Financial TimesAlphaville blog:

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

From CNBC’s John Carney:

It was obvious to me way back before I had ever heard of MMT that government’s should probably never run a budget surplus—or should do so only in dire emergencies. When the government runs a surplus, that means it is taking more money out of the economy than it is spending back into the economy. It is making us poorer.

Anyone who worries about wasteful government spending should be all the more concerned about government surpluses. When corporations accumulate too much cash, investors rightly worry that management will lose discipline and engage in wasteful acquisitions or expansions. Better to pay it out in a dividend.

Posted in Government Spending | 4 Comments »

Armo trader post

Posted by WARREN MOSLER on 22nd February 2012

Interview link here

Posted in Government Spending, Trading | 12 Comments »

ny fed paper-austerity makes deficit bigger

Posted by WARREN MOSLER on 21st February 2012

From the NY Fed:

Deficits, Public Debt Dynamics, and Tax and Spending Multipliers

Cutting government spending on goods and services increases the budget deficit if the nominal interest rate is close to zero. This is the message of a simple but standard New Keynesian DSGE model calibrated with Bayesian methods. The cut in spending reduces output and thus—holding rates for labor and sales taxes constant—reduces revenues by even more than what is saved by the spending cut. Similarly, increasing sales taxes can increase the budget deficit rather than reduce it. Both results suggest limitations of “austerity measures” in low interest rate economies to cut budget deficits. Running budget deficits can by itself be either expansionary or contractionary for output, depending on how deficits interact with expectations about the long run in the model. If deficits trigger expectations of i) lower long-run government spending, ii) higher long-run sales taxes, or iii) higher future inflation, they are expansionary. If deficits trigger expectations of higher long-run labor taxes or lower long-run productivity, they are contractionary.

Posted in CBs, Fed, Government Spending | 16 Comments »

Mainstream economics and Modern Monetary Theory: A family tree – The Washington Post

Posted by WARREN MOSLER on 21st February 2012

Not causal but progress!

MMT: A family tree

Posted in Uncategorized | 16 Comments »