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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.

Global themes

Posted by WARREN MOSLER on March 27th, 2012

  • Austerity everywhere keeps domestic demand in check and export channels muted
  • Non govt credit expansion pretty much stone cold dead in the US and Europe
  • Rising oil energy prices subduing global aggregate demand
  • US federal deficit just about enough to muddle through with modest GDP growth
  • Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
  • Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
  • All good for stocks and shareholders, not good for most people trying to work for a living
  • Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

37 Responses to “Global themes”

  1. Neil Wilson Says:

    UK official forecasts requires a > 10% y-o-y increase in ‘dwelling investment’ and 6% growing to 10% increase in ‘business investment’.

    Only 3% y-o-y is going to come from domestic consumption.

    UK private sector debt is already massive at over 450% of GDP (just short of 100% for households).

    And these are the people running the country.

    Reply

    mikeh Reply:

    @Neil Wilson, Neil I’ve read this kind of statement about how our private sector is massively in debt but also on Bill Mitchell’s site that the private sector is massively paying down debt, one more reason why aggregate demand is down. Are both happening at the same time, just to different types of household/business? Maybe the paying down of debt stage happened immediately after the crisis started?

    Fairly recent interest in MMT so its another thing that doesn’t make sense to newbies, what am I missing?

    Cheers, Mike.

    Reply

    Neil Wilson Reply:

    @mikeh,

    The picture.

    The debt levels and sector balances are here: http://www.3spoken.co.uk/2011/12/uk-sectoral-balances-and-private-debt.html

    You’ll see that although the private debt levels have come off their peak they are still massive. Deleveraging is going to be a slow process.

    I hope to update those for Q4 2011 today once the figures are released.

    Reply

  2. Unforgiven Says:

    Warren -

    Is there a certain threshold to the rate of credit expansion (assuming balanced expansion) beyond which we’re likely to run in to trouble? Perhaps we’d be better served by keeping an eye out for credit bubbles?

    Of course, I would imagine if Gov’t cuts spending inappropriately, it’s rather like creating a credit bubble by threatening existing loans.

    Reply

    WARREN MOSLER Reply:

    yes, private sector credit expansion is constrained by income, so watch the fed’s financial obligations ratios.

    right now they are back down, indicating the private sector has room to expand its borrowing to spend.
    but just because it has room doesn’t mean it will.

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    Constrained by (I assume) income or “financial products” designed to get wage earners to pre-commit their earnings before some other “product” does. Designer Loans, as it were. Here we encounter the bottom-feeders; those who feed on expansion of the sub prime market.

    Take the Buy Here, Pay Here auto market:

    http://articles.latimes.com/2011/oct/30/business/la-fi-buy-here-pay-here-part1-storyb

    There’s a good lad, milk those that can keep up and rape the rest. That’s how they can bundle their loans and sell them off to investors.

    The dark side of pro cyclical, to be sure. Still, not an expansion of borrowing overall.

    [soapbox mode/off]

    Reply

  3. Colin Says:

    Basic question: how do zero-rate central bank policies keep aggregate demand down? I thought it was good for both shareholders AND people trying to work for a living… ? You say that it’s good for shareholders and investors but NOT good for most people trying to work for a living.

    Reply

    Unforgiven Reply:

    @Colin,

    I believe it depends on how much interest income is getting spent into the economy vs. that which simply goes to purchase more bonds.

    Reply

    WARREN MOSLER Reply:

    many people trying to work for a living are getting hurt by stagnant real wages and worse, with no hope of betterment with unemployment so high.

    the 0 rate policy keeps interest income down, transfers savings to bank net interest margins, and makes investment cheap which helps keep prices down from the cost side. it’s a good thing as it allows for lower taxes (for any given size govt) except we don’t know it so it’s a disaster

    Reply

    Colin Reply:

    Warren– I’m an underemployed Helicopter Flight Instructor and just started driving a taxi. Having gone to Milton Academy and then Bates College, Economics, I thought I was “in touch” with the bottom tax bracket because I listened to NPR and knew statistics about employment, prison populations, and read The Economist. Physically driving people around, often to and from bars, I can say I was very “out of touch.” Anyway, we’re screwed. The vast majority of Americans are completely retarded due to our broken education system, and when you have idiots voting you get our currently broken political system.

    I think we are past a point of no return and at this point I think the best course of action is to go to business school so I can afford to live in a gated community in 15 years, when the USA is further along in its transformation into a banana republic.

    Also, the stereotypes about black people are true. I’m very sorry to report. This is bad. Warren perhaps you should just run for President after Obama’s second term. I can’t stress enough how screwed we are. Japanese people are polite and don’t litter. If we turn into the next Japan, it’ll be worse because people in the US are morons.

    Reply

  4. thearmotrader Says:

    Warren, can you expand on this more or link me to a blog post? Not are how I understand why ZIRP/QE is keeping AD down.

    ” Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards”

    Reply

    jason m Reply:

    @thearmotrader, economy is ‘net saver’ …lower interest rates mean less net interest income into economy, mean less AG. cheers

    Reply

    TheArmoTrader Reply:

    @jason m,
    I get that, but doesn’t Warren advocate permanent 0% interest rates?
    http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

    Reply

    WARREN MOSLER Reply:

    yes! means or a given size govt taxes can be that much lower!

    better than higher rates and higher taxes!

    Ed Rombach Reply:

    @WARREN MOSLER,

    Warren – Not sure why 0% interest rates relative to a given size of government necessarily means that taxes can be that much lower, and/or that higher % rates rates must necessarily be coupled with and higher taxes?

    Is it because higher % rates adds that much more income to the private sector via the interest channel, which in turn requires higher taxes to regulate aggregate demand???

    WARREN MOSLER Reply:

    that’s my best guess

    Adam1 Reply:

    @thearmotrader,@Thearmotrader,

    I believe the key to Warren’s comment is, “…monetary authorities continue to get that causation backwards”. ZERP and QE are based upon the assumption that providing reserves to banks will allow them to lend more driving a credit induced expansion. But the reality is that all banks need are credit worthy customers demanding loans to do that (and sufficient capital to take on the lending risk). Any demand for reserves by the banks will occur after the lending and will be naturally accommodated by normal FED open market operations (and or discount window lending). Since the actual lending induced demand comes from prior lending the FED and world CB’s have the reserve demand causation backwards. That all said, reduced rates, ZERP and QE end up reducing net income/aggregate demand for the economy instead of increasing aggregate demand via credit expansion in the face of little or no consumer demand for credit.

    Reply

    WARREN MOSLER Reply:

    yes

    Reply

    WARREN MOSLER Reply:

    interest income channels and cost/investment channels

    Reply

  5. Tyler Says:

    If President Obama had any courage (it doesn’t take courage to send Navy Seals in to kill Osama Bin Laden), he would propose a middle-class tax cut. This would back the GOP into a corner. He could say in a public address, “Are the Republicans going to oppose a tax cut for over 100 million hardworking Americans?”

    Reply

    SteveK9 Reply:

    @Tyler, Actually Obama has done that in other ways … the ‘jobs’ bill, etc., but NOTHING phases the GOP today.

    Cutting taxes might be the best solution, but the problem now in America is, how would you ever raise taxes again? MMT subscribes (I think) to the need to raise and lower the deficit. Warren has expressed reluctance in the 7DIF raise government spending, when we need a bigger deficit … i.e. ratcheting up the size of government, but it seems that taxes are even more ‘sticky’ these days … they can only go down (at the Federal level), never up. I actually think it is easier to raise and lower government spending … although that’s not easy either.

    Reply

    Ed Rombach Reply:

    @SteveK9,

    Making taxes low enough to make it problematic to subsequently raise them again, seems like a desirable problem.

    Reply

    Unforgiven Reply:

    @Tyler,

    I think that once people know how their currency works, adjusting taxes, duties, excises, etc. won’t be as much of a problem. You may even get a sympathetic effect from an informed populace, closing their wallets and waiting for lower prices.

    That’s if you run in to general “demand-pull” inflation to begin with. Our problems have been from “cost-push” (oil prices) inflation and credit bubbles. The former we fix with energy diversification and the latter with regulations.

    Reply

    hamish Reply:

    @Unforgiven,
    Do you think those credit bubbles are partially a result of interest rates being too low?

    That is, rather than parking your money in a savings account where the interest is too low to keep up with inflation, people are almost forced into seeking higher returns in other assets, like real estate, creating asset bubbles.

    Reply

    WARREN MOSLER Reply:

    hasn’t happened in japan? or the US in the last 4 years. and rates were pretty high during the s and l expansion phase in the 1980′s

  6. JBH Says:

    I see inflation everywhere except housing and the govts fudged numbers…

    Reply

    WARREN MOSLER Reply:

    and pretty much everything I own.
    ;(

    Reply

    Tyler Reply:

    @WARREN MOSLER,

    We’re experiencing inflation even with 13 million Americans unemployed. That’s depressing.

    Reply

    Unforgiven Reply:

    @Tyler,

    But what is the source of the inflation? For one, I don’t think subsidies are figured in to CPI, but when they get cut…

    WARREN MOSLER Reply:

    right, foreign monopolists via the input cost channel

  7. chris Says:

    With all other issues aside, who do you guys think is the better presidental candidate for the economy? Obama or Romney? The argument that will be made on the street is that things fell apart on Bush’s watch while things have been slightly improving under the Obama administration. Will the official MMT answer be none of the above? Seems to me that neither BHO or Romney are onboard with MMT and future economic results will be arbitrarily bearish.

    Reply

    Yuu Kim Reply:

    @chris,

    doesn’t matter who’s president, b/c the president’s not in charge of monetary or fiscal policy.

    Reply

  8. Jacob Goense Says:

    @Warren •Rising oil energy prices subduing global aggregate demand.

    Demand for oil being part of global aggregate demand and money spent on oil not vanishing in a black hole this theme makes my head spin. Is this dynamic explained somewhere?

    Reply

    WARREN MOSLER Reply:

    it’s about the propensity of the oil producers to spend not being nearly as high as those buying gasoline at the pump

    Reply

  9. John Wilkins Says:

    But FRED shows US commercial and industrial loans grew at a 15.6% clip the past three months.

    Reply

    WARREN MOSLER Reply:

    a bit of inventory rebuilding last quarter after the quake
    a bit of corporate borrowing but not much in the scheme of things yet.
    and maybe replacing other kinds of liabilities, like stock buy backs

    this quarter gdp forecasts back under 2%

    Reply

    Unforgiven Reply:

    @John Wilkins,

    Looks like about 200B. Maybe sweeping the mothballs out of some plants?

    Reply

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