See here for Rome presentation.

Comments welcome!

(Mario Draghi may be on the panel with me)

World’s Largest Oil Trader Skirting Iran Sanctions

Sept 26 (Reuters)

Will be doing this Tuesday September 25:

MODERN MONEY AND PUBLIC PURPOSE

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.

Yet no funding crisis…

U.K. Deficit to Exceed Greece’s Next Year, Sunday Times Says

Sept 23 (Bloomberg) — U.K. deficit will be £126b ($204b), or 7.8% of GDP, in 2013-14, Times says, citing Morgan Stanley analysis.

Greece’s deficit to be 6.3%, Italy’s 1.7%, Spain’s 5.8%:

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.

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

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.

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.”

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.

Not a bad indicator. Might be we’re already starting to go over the fiscal cliff. Probably a lot of contracts delayed pending congressional approval. And the anticipation of higher taxes and lower demand doesn’t help either.

Fortunately for Obama, Romney’s moved the debate away from the economy.

Good news down here is our highly informal polling shows me at 50%+ in my Congressional race! Looking forward to straightening them all out in DC!
;)

FedEx Says Economy Is Worsening, Cuts Outlook

September 18 (Reuters) — FedEx lowered its fiscal 2013 profit target on Tuesday, saying earnings could slide as much as 6 percent for the year, as a weakening world economy prompts customers to shift toward lower-priced and slower shipping options.

The world’s second-largest package delivery company said it now expects profit for its fiscal year, which ends in May, to come to $6.20 to $6.60 per share, below its prior forecast of $6.90 to $7.40 a share.

Wall Street had expected a full-year profit of $7.03 per share.

FedEx’s shares fell 2 percent in premarket trading from Monday’s close on the New York Stock Exchange.

“Weak global economic conditions dampened revenue growth (and) drove a shift by our customers to our deferred services,” Chief Financial Officer Alan Graf said in a statement.

Not even a hint that the federal deficit added that much income and net financial assets/savings to the other sectors, to the penny:

Shrinking household debt is good sign for 2013 economy

By Tim Mullaney

September 1 (USA Today) — Consumers’ out-of-control debt loads helped spark the recession, but households are rapidly getting their balance sheets back into shape.

Overall consumer borrowing could return to its long-term norms by late next year — and that could help spark a late-2013 rebound in consumer spending, economists say.

Of course, it depends on consumers, who have been hurt by falling incomes and house prices, being willing to spend money once they’re in better fiscal shape.

The combination of falling debt loads, a rising housing market and improving job market could boost consumer spending growth to 3.5% by late next year — double what the economy saw in this year’s second quarter, said Moody’s Analytics economist Scott Hoyt.

Even more modest growth of about 2.7% could push job gains back to the 200,000-plus monthly pace seen early this year, said Richard Moody, chief economist at Regions Financial.

“Things will start to look better in 2013,” if Congress and the president resolve the so-called fiscal cliff without causing a recession, Moody said.

“The housing market is healing, and the drag from falling state and local government spending should be moderating.”

Consumers went into the recession carrying debt of nearly double the nation’s gross domestic product. That’s down to below 85% now, and on pace to approach 75% by late next year, Moody predicts.

Harvard economist Kenneth Rogoff said consumer debt is now headed in the right direction, but cautioned it might not translate quickly into more economic growth.

“The thing everybody grapples with is, ‘How much (debt) is normal?’ ” Rogoff said. “There will be a long memory of this crisis. It may be the biggest question mark in terms of trying to time this recovery.”

Revolving debt, mostly credit cards, has fallen 19% since 2007. Revolving balances dropped at a 6.8% seasonally adjusted annual pace in July, after falling 4.5% in June, the Fed said last week. Non-revolving debt has risen, mostly because of student loans.

If consumer spending doesn’t come back strongly, it might be because incomes are still well below where they were before the recession, and that households lost about $7 trillion of home equity as housing prices plummeted. That could make them keep the brakes on spending for a while longer, Hoyt said.

On the plus side, low interest rates have pushed the ratio of consumers’ monthly rent and debt payments to their income to the lowest level since 1984, American Bankers Association chief economist Jim Chessen said. That’s a function of slightly lower debt and much lower rates, he said.

“There’s a lot of pent-up demand,” Chessen said.

The Federal Reserve is still worried enough that it launched a third round of bond purchases last week, vowing to pump $40 billion a month into the economy until the 8.1% unemployment rate falls.

Fed Chairman Ben Bernanke said the move could encourage consumer spending, in part by bolstering housing values.

At the same time, members of the Fed’s interest rate-setting committee raised their economic forecasts for next year. Committee members think the economy will grow between 2.5% and 3% next year, up from earlier forecasts of 2.2% to 2.8%.

QE in the US has again done what it’s always done- frighten investors and portfolio managers ‘out of the dollar’ and into the likes of gold and other commodities.

And because sufficient market participants believe it works to increase aggregate demand, it’s also boosted stocks and caused bonds to sell off, as markets discount a higher probability of higher growth, lower unemployment, and therefore fed rate hikes down the road.

But, of course, QE in fact does nothing for the economy apart from removing more interest income from the economy, particularly as the Fed adds relatively high yielding agency mortgages to its portfolio.

As ever, QE is a ‘crop failure’ for the dollar. It works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.

But the QE myth runs deep, and in the past had taken a while for the initial responses to reverse, taking many months the first time, as fears ran as deep as headline news in China causing individuals to take action, and China itself reportedly letting its entire US T bill run off.

But with each successive QE initiative, the initial ‘sugar high’ is likely to wear off sooner. How soon this time, I can’t say.

Global austerity continues to restrict global aggregate demand, particularly in Europe where funding continues to be conditional on tight fiscal. Yes, their deficits are probably high enough for stability- if they’d leave them alone- but that’s about all.

And as the US continues towards the fiscal cliff the automatic spending cuts are already cutting corporate order books.

And oil prices are rising, and are now at the point cutting into aggregate demand in a meaningful way.

Yes, the US housing market is looking a tad better, and, if left alone, probably on a cyclical upturn. And modest top line growth, high unemployment keeping wages in check, and low discounts rates remains good for stocks, and bad for people working for a living.

Too many cross currents today for me to make any bets- maybe next week…

True, particularly as we continue to act as if we have a solvency problem.

Germany Says ‘Great Uncertainty’ About US Debt

German Finance Minister Wolfgang Schaeuble said on Tuesday there was great uncertainty about how the United States would deal with its high levels of state debt.

Email from Scott Fullwiler:

Check this out . . .

“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets”

Somehow they then go on to say that there can be crowding out if the US is not dependent on credit markets. Doh!

I haven’t been posting them but still lots of hints that deficits are now high enough in the euro zone to stabilize GDP for Q3.

Headlines:
German Industrial Production Unexpectedly Increased in July
French Industrial Production Climbs on Refineries, Car Factories
French Industrial Confidence Climbs for First Time Since March

Did Michael Woodford Endorse NGDP Targeting? Hell, No.

Karim writes:
September FOMC Preview

Because he doesn’t want to pick a fight with China again, as per my May 2011 post.

Cons

Yes, he knows it’s about rates, not quantities, and that policy has caused the term structure of rates to be where it is. However, the channel that remains elusive is how low rates are transmitted to aggregate demand, claims of creating 3 million jobs not withstanding.

Odds of an IOER cut are low just because Bernanke did not mention it at all at Jackson Hole.

About three months ago I suggested the fiscal cliff was too far away for markets to care.
But now it’s a lot closer, and close enough for those to be affected directly by govt spending cuts to be acting accordingly.

But that also means that at least some of that cliff is already being discounted which means:

It won’t be as bad as expected if it happens.
If it’s avoided there will be a boost to the economy not in current forecasts.

Looks like potentially a good MMT proponent if anyone knows him?

What Obama Has Wrought

By Glen Ford

September 5 (BAR) — The meticulously scripted spectacles of the two corporate party conventions are very poor backdrops for clear thinking – but luckily, the ordeals are almost over. What remains after the tents are folded, are the crimes of this administration and its predecessor: both horrifically evil in their own ways. History will mark Obama as the more effective evil, mainly because of the lack of opposition.

Most people don’t want to be a perceived as party-poopers – which is why the principled folks that have protested the evil antics of the corporate, imperial parties, in Tampa and Charlotte, are so much to be admired. Frankly, who wants to be the one to point out, in the middle of the festivities, that Michelle Obama was just a Chicago Daley machine hack lawyer who was rewarded with a quarter million dollar a year job of neutralizing community complaints against the omnivorous University of Chicago Hospitals? She resigned from her $50,000 seat on the board of directors of Tree-House Foods, a major Wal-Mart supplier, early in her husband’s presidential campaign. But, once in the White House, the First Lady quickly returned to flaking for Wal-Mart, praising the anti-union “death star” behemoth’s inner city groceries offensive as part of her White House healthy foods booster duties.

She also serves on the board of the Chicago Council on Global Affairs, the corporate foreign policy outfit to which her husband dutifully reported, each year, in his pucker-up to the presidency. The Obamas are a global capital-loving couple, two cynical lawyers on hire to the wealthiest and the ghastliest. They are no nicer or nastier than the Romneys and the Ryans, although the man of the house bombs babies and keeps a kill list. Yet, former “green jobs” czar Van Jones, a convention night chatterer on CNN who was fired by Obama for no good reason, chokes up when he speaks of the Black family that fronts for America – a huge act of national camouflage.

It is as useless to anchor a serious political discussion to this year’s Democratic and Republican convention speeches, as to plan the liberation of humanity during Mardi Gras. Truth is no more welcome at the former than sobriety is at the latter. So, forget the conventions and their multi-layered lies. Here are a few highlights of what Barack Obama has inflicted on the nation and the world:

Preventive Detention

George Bush could not have pulled off such an evisceration of the Bill of Rights, if only because the Democrats and an aroused street would not have allowed it. Bush knew better than to mount a full-court legislative assault on habeas corpus, and instead simply asserted that preventive detention is inherent in the powers of the presidency during times of war. It was left to Obama to pass actual legislation nullifying domestic rule of law – with no serious Democratic opposition.

Redefining War

Obama “led from behind” a 7-month Euro-American air and proxy ground war against the sovereign nation of Libya, culminating in the murder, after many attempts, of the nation’s leader. The president informed Congress that the military operation was not subject to the War Powers Act, because it had not been a “war” at all, since no Americans were known to have been killed. The doctrine was thus established – again, with little Democratic opposition – that wars are defined by the extent of U.S. casualties, no matter how many thousands of foreigners are slaughtered.

War Without Borders

Obama’s drone war policies, greatly expanded from that inherited from Bush, have vastly undermined accepted standards of international law. This president reserves the right to strike against non-state targets anywhere in the world, with whatever technical means at his disposal, without regard to the imminence of threat to the United States. The doctrine constitutes an ongoing war against peace – the highest of all crimes, now an everyday practice of the U.S.

The Merger of Banks and State

The Obama administration, with the Federal Reserve functioning as a component of the executive branch, has funneled at least $16 trillion to domestic and international banking institutions, much of it through a virtually “free money” policy that could well become permanent. This ongoing “rescue” of finance capital is unprecedented in sheer scope and in the blurring of lines between Wall Street and the State. The routine transfer of multi-billions in securities and debts and assets of all kinds between the U.S. Treasury, the Federal Reserve and corporate accounts, has created de facto structures of governance that may be described as institutional forms of fascism.

These are world-shaking works of Obama-ism. Even Obama’s “lesser” crimes are astounding: his early calls for austerity and entitlement-axing (two weeks before his inauguration) and determined pursuit of a Grand Accommodation with the GOP (a $4 trillion deal that the Republicans rejected, in the summer of 2011) reveal a politician intent on ushering in a smoother, more rational corporate hegemony over a thoroughly pacified civil society. Part and parcel of that pacification is the de-professionalization of teaching – an ambition far beyond de-unionization.

Of course, Obama begins with the delegitimization of Black struggle, as in his 2004 Democratic Convention speech (”…there is no Black America…only the United States of America.”) To the extent that the nation’s most progressive, anti-war constituency can be neutralized, all of Obama’s corporate and military goals become more doable. The key to understanding America has always been race. With Obama, the corporate rulers have found the key that fits their needs at a time of (terminal) crisis. He is the more effective evil.

Serious lack of aggregate demand.
Full FICA suspension still makes sense:

Labor force participation rate: