The Concord Coalition Honors Rep. Schwartz’s Leadership on Fiscal Issues

On Sep 22, 2012 8:31 AM, “Art Patten” wrote:

Dear Congresswoman,

As always, we appreciate your hard work and everything you do for your constituents. But I can’t bring myself to congratulate you on the award from the Concord Coalition, an organization that unwittingly works to undermine public purpose.

Like so many organizations, economists, politicians, and citizens, the Coalition fails to recognize that, as one writer recently put it, ‘Everything changed in 1973 [when President Nixon ended the Bretton Woods monetary system], except the economic textbooks.’

We are no longer on the gold standard. The U.S. government doesn’t ‘owe’ anybody, inside or outside the country, anything but U.S. dollars, which it is the monopoly supplier of.

In our current monetary system, the relevance of the federal deficit is its role in supporting aggregate demand. Whether the deficit is large enough is reflected in GDP growth and the unemployment rate. Inflation, although terribly difficult to measure with accuracy (and probably chronically overstated, in my view), indicates when fiscal deficits are too large.

The Coalition and many other groups witness the large budget deficits of recent years and imagine that the federal government faces the same constraints as any household, business, or state or municipal government. But that simply isn’t the case. The monopoly supplier of U.S. dollars can run deficits indefinitely. And if those other sectors of the economy want dollars to save, invest, or spend (and if other countries want to sell us stuff), they all need the U.S. government to run optimally sized deficits.

Unfortunately, the imaginary concept of a real budget constraint is reflected in harmful economic myths such as the inevitability of ‘crowding out’ and higher interest rates, and the inter-temporal government budget constraint; myths that both parties have elevated to high policy dogma. As a result, the Coalition and others urge us to gnash teeth and rend garments in response to large federal deficits, due to the draconian fiscal future we are supposedly imposing on our children and grandchildren. Many very smart people believe in this narrative. However, in our current monetary system, it is nothing more than the collective imagination run wild.

The real burden we are imposing on future generations (and today’s lower and middle classes) is not some future date with the fiscal pied piper, but long-term and completely unnecessary opportunity costs, due in large part to the myth that we must reduce and limit federal deficits. Millions of households are earning less than their combined talents are truly worth as underemployment remains mired at 1930s levels. Our public infrastructure continues to deteriorate. There’s still much more we can do for veterans and the needy. The list goes on. And by any of those metrics, the current federal deficit remains too small. That means either federal tax revenue is too high or spending too low, and the Coalition and other groups like them are misguidedly placing the highest priority on what should be among our least important concerns today.

Sincerely,
Art Patten
Jenkintown, PA

P.S. I’m attaching “Seven Deadly Innocent Frauds” by Warren Mosler. You can also find it online here. It is a quick but powerful read, and one that you could get through in a single train trip to Washington. As a member of a household that has been periodically underemployed since at least 2008, (and overtaxed when we’re fully employed! :)) I implore you to give it a look. Warren is running for Congress in the USVI this fall. He’s a wonderful guy, and if all goes well, perhaps you two can sit down and talk about this stuff next year. Best regards.

QE follow up

It’s been about a week, and the initial reactions are already wearing off and markets settling in.

The lasting effects are those of the income lost to the economy as the Fed earns the interest on the securities it buys instead of the economy. This reduces the federal deficit and is a ‘contractionary’ force. At the same time the Fed removes securities/duration/convexity/vol from the economy which tends to lower the term structure of risk free rates some and further reduce volatility as well.

Initially the long end sold off on the presumption that QE works to lower the output gap/restore growth and employment, which means the Fed would, down the road, be hiking rates in response to the improving economy.

However, as the reality that QE doesn’t work to support aggregate demand sinks in, long end yields can come down on the anticipation that future growth prospects are not good, increasing the odds that the Fed will be keeping rates low that much longer.

Likewise, it’s a mixed bag for stocks, though overall modestly supportive. QE doesn’t improve earnings prospects, and serves to keep growth down, but the lower interest rates help valuations, and high unemployment along with productivity increases work to keep unit labor costs down.

Europe has solved the solvency issue, but it’s all conditional on bringing deficits down, and so far it looks like they are all working to keep doing exactly that, and with no prospects for material private sector credit expansion or export growth,
GDP can continue to be negative.

Then there’s the US fiscal cliff. Everyone agrees deficit reduction slows things down, which is why they say we shouldn’t do it now. But they also therefore know it will slow down things whenever they do it in the future. So how hard should it be to come to recognize that slowing things down is actually the point of deficit reduction, and is appropriate only for that reason? Apparently it’s impossible. And the fiscal cliff is already taking its toll as anticipated contracts for next year along with purchases are being delayed.

So without some kind of fiscal paradigm shift I don’t see much good happening, and even the muddle through scenario is now at risk.

Mafin 2012 Genova, Italy presentation

Very good!
One suggestion, in caps:

In reality, BECAUSE AN OVERDRAFT AT A CENTRAL BANK *IS* A LOAN FROM THAT CENTRAL BANK, central banks have no option other than supplying the amount of reserves banks require to settle payments through standard operations, bilateral lending, or intra-day overdrafts.

Yet, it can unilaterally set the interest rate on reserves borrowing and reserves holding.

Revising the quantity theory of money in a financial balance approach

JPM Household wealth report

The unemployment line is the evidence the federal deficit is too small given conditions.
This at least partially explains why the full employment deficit is much larger this time around:

From JP Morgan:

Executive Summary

Households lost $16 trillion worth of wealth during the crisis from late 2007 to early 2009, but they have recovered 70% of the loss since then.

However, the recovery has been uneven across wealth groups. The wealth of the top 10% has fallen back to 2004 levels, but median wealth has fallen back to 1992 levels, in real terms.

As a result wealth inequality has increased sharply after the crisis, which may have some effect on the upcoming elections.

Across age groups, the 25- to 44-year old group has experienced the most significant wealth losses after the crisis. This has been primarily due to house price declines, as younger households are more leveraged in housing.


House prices are not expected to revert back to pre crisis levels in real terms for a very long time. If younger households decide to rebuild their lost housing wealth, this will have long term growth implications.

We estimate that the 25- to 44-year old group has lost $2 trillion housing wealth and rebuilding this lost wealth over 10 years implies that GDP growth will be 1.3 %-pt less than it otherwise would be.

This may explain the slow demand growth we have experienced following the crisis.

Crude price update

It’s about what price the Saudis want.

No telling what they are thinking, but the demand for their output remains high at about 10 million bpd.

Note that WTI supply tightened, indicating the Seaway pipeline is working down the oversupply in Cushing.

And refiners are coming back online after the storm shutdowns:

“While total U.S. crude stockpiles gained, inventories at Cushing, Oklahoma, the delivery point for the West Texas contract traded on Nymex, declined for a second week by 274,000 barrels to 43.8 million, the lowest level since April. Stockpiles of gasoline and of distillate fuel, a category that includes heating oil and diesel, declined. Refinery operating rates rose to 88.9 percent from the previous week’s 84.7 percent as plants resumed units idled when Hurricane Isaac made landfall on Aug. 28.”

ECB’s Weidmann Says Unlimited Money Creation Risks Inflation

Only with fixed fx, where ‘money creation’ is better described as ‘deficit spending’.

Shame shame shame.

ECB’s Weidmann Says Unlimited Money Creation Risks Inflation

By Jeff Black and Jana Randow

September 18 (Bloomberg) — Bundesbank President Jens Weidmann said central banks that promise to create unlimited amounts of money risk fueling inflation and losing their credibility.

In a ceremonial speech in Frankfurt today, Weidmann, who opposes the European Central Bank’s plan to spend unlimited amounts on government bonds, spoke of the responsibilities that central banks have to preserve the value of money.

“If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” he asked. “Is there not a big temptation to misuse this instrument to create short-term room to maneuver even when long-term damage is very likely? Yes, this temptation is very real, and many in the history of money have succumbed to it.”

While Weidmann didn’t directly address ECB policy, he is the only central bank governor from the 17 euro nations to publicly oppose ECB President Mario Draghi’s plan to help curb the borrowing costs of member states engulfed by the region’s debt crisis. Weidmann, who has warned the bond-buying policy is tantamount to financing governments, said today that central banks were given independence to ensure the power to create money couldn’t be abused by politicians.

“If one looks back in history, central banks were often created precisely to give the monarch the freest possible access to seemingly unlimited financial means,” Weidmann said. “The connection between states’ great financial needs and a government controlling the central bank often led to an excessive expansion of the money supply, and the result was devaluation of money through inflation.”

‘Extraordinary Privilege’

The independence of central banks is an “extraordinary privilege” and not an end in itself, he said.

“The independence serves much more to establish with credibility that monetary policy can concentrate without hindrance on keeping the value of money stable,” Weidmann said. “The best protection against the temptations inherent in monetary policy is an enlightened and stability-oriented society.”

Weidmann’s speech forms part of a series of events in Frankfurt on the theme of money in the works of Johann Wolfgang von Goethe.