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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 December, 2012

prison chart

Posted by WARREN MOSLER on 31st December 2012

Posted in Uncategorized | 53 Comments »

Japan- Foreign countries have no right to lecture us

Posted by WARREN MOSLER on 31st December 2012

This confirming much of what’s been previous discussed.

The remaining question whether there already has been direct intervention, as evidenced by rising fx reserves.

Interestingly, with floating fx it’s operationally easy for Central Banks to offset each other’s intervention. For example, if the BOJ buys dollars the Fed could simply buy the yen. Each CB would have a deposit on the other’s books and the (global) economy wouldn’t know the difference.

Also interestingly, all governments currently miss the point that exports are real (real vs nominal) costs and imports are real benefits.

So the CB that weakens its currency is in fact gifting the world superior real terms of trade via lower export prices via lower domestic real wages, etc. as it reduces its own real terms of trade.

Japan Rebuke to G-20 Nations May Signal More Moves to Weaken Yen

By Eunkyung Seo and Masaki Kondo

December 31 (Bloomberg) — Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners’ rights to criticize its currency policies.

“Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan’s new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe’s Liberal Democratic Party secured a landslide victory in this month’s lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool.

“The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. and China.”

The yen was at 86.08 per dollar as of 7:30 a.m. in London after touching 86.64 on Dec. 28, the weakest since August 2010. It traded at 113.53 per euro.

Currency Promises

The currency has dropped more than 10 percent versus the greenback since the end of 2011, set to complete the biggest annual slump since 2005. At the same time, the yen remains about 30 percent higher than it was five years ago.

In his Dec. 28 comments, Aso, a former prime minister, said that Japan and other countries made “a promise not to resort to competitive currency devaluations” at a G-20 meeting in 2009. “How many countries have kept the promise? The U.S. should have a stronger dollar. What about the euro?” he asked. “Foreign countries have no right to lecture us” as Japan is the only major economy to keep the pledge, Aso said.

The U.S. criticized Japan for undertaking unilateral sales of the yen in August and October last year, after Group of Seven economies earlier jointly intervened to weaken the currency in the aftermath of an earthquake and tsunami.

“Rather than reacting to domestic ‘strong yen’ concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy,” the Treasury Department said in a report in December last year.

Shrinking Economy

The Liberal Democratic Party faces the task of reviving growth after the economy contracted for the past two quarters, meeting the textbook definition of a recession. The nation’s industrial output tumbled more than forecast in November to the lowest level since the aftermath of last year’s record quake.

At the same time, stock prices are climbing, with Toyota Motor Corp. at a more than two-year high, as a weaker yen and prospects for central-bank easing brighten the outlook for exporters. Such improvements may cause concern for some of Japan’s Asian neighbors.

“South Korea is one of the countries most vulnerable to the weak yen policy as many export items are in direct competition, such as cars and electronic goods,” said Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co. “Japan will try whatever it can to stop the deflation and to weaken the yen for export growth.”

Shirakawa’s Caution

After a Dec. 28 call with U.S. Treasury Secretary Timothy F. Geithner, Aso said he had told Geithner that the yen was making some corrections from one-sided moves and Aso would keep monitoring changes in the currency.

Bank of Japan (8301) Governor Masaaki Shirakawa, whose five-year term ends in April, has rejected suggestions that the bank buy foreign bonds and called for respect for the BOJ’s independence. Such a policy would amount to currency intervention, which is the responsibility of the finance minister, he says.

At the same time, the Nikkei newspaper on Dec. 29 cited Shirakawa as saying that central bank and government must work together to overcome deflation. Abe is pressing for the Bank of Japan to adopt a 2 percent inflation target, compared with a current goal of 1 percent. Consumer prices excluding fresh food fell 0.1 percent in November from a year earlier, showing the central bank is struggling to fulfil even the lesser ambition.

The LDP proposed in its campaign manifesto establishing a joint BOJ, Ministry of Finance and private sector fund to buy foreign bonds. Takatoshi Ito, a former finance ministry official and a possible contender to become central-bank governor, said in a Dec. 6 interview that the BOJ “can and should buy foreign bonds,” adding that such a move is possible if the finance minister publicly declares support for it.

In a note this month, Australia and New Zealand Banking Group Ltd. said that foreign bond purchases are contrary to the legislation governing the BOJ. At the same time, it’s possible that the government may cajole the central bank into putting money into a proposed private-public vehicle for investment in foreign asssets, the lender said.

Posted in Currencies, Japan | 44 Comments »

mike again

Posted by WARREN MOSLER on 31st December 2012

One adding mis speak but otherwise good stuff!

Posted in Deficit, Government Spending | 14 Comments »

WTI vs Brent

Posted by WARREN MOSLER on 28th December 2012

The days are numbered before WTI converges up to Brent.
The discount is now less than $20.

$110 WTI will take away competitive advantages of those now able to use Cushing oil, etc.

Enterprise to expand Seaway pipeline to 850,000 bpd

December 17 (Reuters) — Enterprise Products Partners LP and partner Enbridge Inc plan to expand the Seaway pipeline to transport 850,000 barrels a day of crude between Oklahoma and southern Texas during the first quarter of 2014, an Enterprise spokesman said on Monday.

Seaway, a 150,000 barrel per day line that was reversed earlier this year to ship crude 500 miles southward from Cushing, Oklahoma, to Houston, Texas, will be expanded to run 400,000 barrels per day as of next month, according to a recent filing by Enterprise to the U.S. Federal Energy Regulatory Commission. The plans detailed in the filing were confirmed by Enterprise spokesman Rick Rainey.

A further expansion to 850,000 barrels per day is scheduled to take place in the first quarter of 2014, after a new twin line with capacity of 450,000 bpd is built parallel to the existing Seaway line, Rainey said.

Posted in Comodities, Oil | 35 Comments »

China Budget Deficit Said Set to Expand 50% to $192 Billion

Posted by WARREN MOSLER on 27th December 2012

Ancient Chinese secret:

China Budget Gap Said Set to Widen 50% to $192 Billion

December 27 (Bloomberg) China plans to increase the budget deficit by 50 percent to 1.2 trillion yuan ($192 billion) in 2013, including the sale of 350 billion yuan of bonds to fund local governments, a person familiar with the matter said.

The central government deficit is budgeted at 850 billion yuan, according to the person, who asked not to be identified as the deliberations are not public. The nations leaders target about 8 percent trade growth, down from this years 10 percent goal, the person said.

A bigger fiscal deficit may give Chinas new leadership under Xi Jinping more room for tax cuts and measures to boost urbanization and consumer demand. The 1.2 trillion-yuan total compares with an 800 billion-yuan target this year, which included a 550 billion-yuan central government deficit and 250 billion yuan in local government bond sales.

The year 2013 is the first year for the new Chinese leadership, and urbanization will receive a big push, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. Financial support, including an expanded fiscal deficit in the budget, is needed for that.

Apart from a trial program launched in late 2011, local governments are barred from selling bonds directly and cant run deficits. China Business News reported the 1.2 trillion yuan figure today and Economic Information Daily reported an 8 percent trade target.

China News Service reported a 10 percent growth target for industrial production in 2013.

The government usually reveals specific goals at the legislatures annual meeting in March.

Posted in China, Deficit | 15 Comments »

Fed QE extracts record interest income from the economy

Posted by WARREN MOSLER on 27th December 2012

And they call this ‘easing’…

Stone & McCarthy (Princeton)–According to our estimates the Fed will earn nearly $90 bln in calendar year 2012. Of this amount about $87.5 bln will be repatriated to the Treasury, which represents a new record high. Probably about $1.6 bln will be used to pay dividends to member banks, and another $1 or so is likely to have been paid in surplus.

Posted in Fed | 17 Comments »

quick look ahead for the euro zone

Posted by WARREN MOSLER on 27th December 2012

After describing since inception how the euro zone was going to get to where it is, here’s my guess on what’s coming next.  

First, to recap, it took them long enough and it got bad enough before they did it, but they did decide to ‘do what it takes’ to end the solvency issues and, after the Greek PSI thing, make sure the markets stopped discounting defaults as subsequently evidenced by falling interest rates for member nation debt.

But it’s solvency with conditionality, and so while they solved the solvency and interest rate issue, the ongoing austerity requirements have served to make sure the output gap stays politically too wide.  The deficits are high enough, however, for an uneasy ‘equilibrium’ of
near/just below 0% overall GDP growth and about 11% unemployment.

However, all of this is very strong euro stuff, where the euro appreciates at least until the (small) trade surplus turns to deficit.  This could easily mean 1.50+ vs the dollar (and worse vs the yen) for example. This process at the same time further weakens domestic demand which supports a need for higher member govt deficits just to keep GDP near 0.

So at some point next year I can see deficits that refuse to fall resulting in more demands for austerity, while the strong euro results in demands for ‘monetary easing’ from the ECB.  Of course with what they think is monetary easing actually being monetary tightening (lower rates, bond buying, everything except direct dollar buying, etc.) the fiscal and monetary just works to further support the too strong euro stronger.  

All this gets me back to the idea that the path towards deficit reduction in this hopelessly out of paradigm region keep coming back to the unmentionable PSI/bond tax.  Seems to me we are relentlessly approaching the point where further taxing a decimated population or cutting what remains of public services becomes a whole lot less attractive than taxing the bond holders.  And the process of getting to that point, as in the case of Greece, works to cause all to agree there’s no alternative.  With the far more attractive alternative of proactive increases in deficits that would restore output and employment not even making it into polite discussion, I see the walls closing in around the bond holders, along with the argument over whether the ECB writes down it’s positions back on page 1. And just the mention of PSI in polite company throws a massive wrench (spanner) into the gears.  For example, if bonds go to a discount, they’ll look towards ECB supported buy backs to reduce debt, again, Greek like.  And if prices don’t fall sufficiently, they’ll talk about a forced restructure of one kind or another, all the while arguing about what constitutes default, etc.

The caveats can change the numbers, but seems will just make matters worse.  

The US going full cliff is highly dollar friendly, much like austerity supports the euro.  In fact, the expiration of my FICA cut- the only bipartisan thing Obama has done- which apparently both sides have agreed to let happen, will alone add quite a bit of fiscal drag.  This means less euro appreciation, but also lower US demand for euro zone exports.  So the cliff does nothing good for the euro zone output gap.  

And Japan seems to be targeting the euro zone for exports with it’s euro and dollar buying weakening the yen, as evidenced by Japan’s growing fx reserves (where else can they come from?).

The price of oil could spike, which also makes matters worse.

In general, I don’t see anything good coming out of the current global political leadership.

Please let me know if I’m missing anything!

Posted in Currencies, Deficit, ECB, Employment, EU, Exports, Government Spending | 28 Comments »

yen tailspin?

Posted by WARREN MOSLER on 26th December 2012

When the nukes shut down Japan started imported a lot more oil etc. And their trade surplus started fading and yen became ‘easier to get’ internationally.

Meanwhile, conditional funding in the euro zone worked to take away the euro evaporation risk, while the austerity continued to make the euro ‘harder to get’.

And the US cliff is making the dollar ‘harder to get’ and about to get more so.

And Japan’s fx reserves keep marching higher indicating that somehow yen are being exchanged for dollars that Japan keeps at the Fed, and probably same with euro, as the euro zone has been encouraging foreign buying of euro. All making euro and dollars ‘harder to get’

The Fed’s growing portfolio continues to remove interest income from the global economy, making the dollar ‘harder to get’.

So if nothing else changes the yen goes down until net exports rise sufficiently.

Just like the euro goes up until that trade surplus goes away (or the euro zone goes away, which ever comes first, but that’s another story), and the dollar keeps fundamentally firming until fiscal relaxes.

Regarding the yen, however, a falling yen doesn’t necessarily cause trade to reverse. In fact, initially, the rising price of oil, for example, exacerbates the fall, as the quantity purchased doesn’t immediately fall. Nor does the drop in real wages immediately cause exports to rise.
This was called the J curve when I was in school back in the last century.

And not to forget Japan thinks a falling yen is a good thing.

So given all that, the J part could go a lot further than markets currently are discounting.

Posted in Currencies, Japan, trade | 14 Comments »

Imports are a benefit, exports are a cost. Is it clear now?

Posted by WARREN MOSLER on 24th December 2012

remember this?

Imports are a benefit, exports are a cost. Is it clear now?

By Stephen Gordon

Posted in trade | 65 Comments »

Quite the italian fan club on twitter ;)

Posted by WARREN MOSLER on 24th December 2012

Alberto Bagnai here

Posted in Uncategorized | 3 Comments »

1944 Fed Chairman Marriner S. Eccles book

Posted by WARREN MOSLER on 23rd December 2012

Curbing inflation through taxation

By Marriner S. Eccles, 1944

Posted in Inflation | 9 Comments »

Professor Stephanie Kelton in the LA Times!!!

Posted by WARREN MOSLER on 21st December 2012

Forget the ‘fiscal cliff’

By Stephanie Kelton

Dec 21 (LA Times) — Look, up in the sky! It’s a “fiscal cliff.” It’s a slope. It’s an obstacle course.

The truth is, it doesn’t really matter what we call it. It only matters what it is: a lamebrained package of economic depressants bearing down on a lame-duck Congress.

This hastily concocted mix of across-the-board spending cuts and tax increases for all was supposed to force Congress to get serious about dealing with our nation’s debt and deficit. The question everyone’s asking is this: On whose backs should we balance the federal budget? One side wants higher taxes; the other wants spending cuts. And while that debate rages, the right question is being ignored: Why are we worried about balancing the federal budget at all?

You read that right. We may strive to balance our work and leisure time and to eat a balanced diet. Our Constitution enshrines the principle of balance among our three branches of government. And when it comes to our personal finances, we know that the family checkbook must balance.

So when we hear that the federal government hasn’t balanced its books in more than a decade, it seems sensible to demand a return to that kind of balance in Washington as well. But that would actually be a huge mistake.

History tells the tale. The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929.

Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

Why does something that sounds like good economics balancing the budget and paying down debt end up harming the economy? The answers may surprise you.

Spending is the lifeblood of our economy. Without it, there would be no sales, and without sales, no profits and no reason for any private firm to produce anything for the marketplace. We tend to forget that one person’s spending becomes another person’s income. At its most basic level, macroeconomics teaches that spending creates income, income creates sales and sales create jobs.

And creating jobs is what we need to do. Until the fiscal cliff distracted us, we all understood that. Today, we have roughly 3.4 people competing for every available job in America. The unemployment rate is like a macroeconomic thermometer when it registers a high rate, it’s an indication that the deficit is too small.

So in our current circumstance a growing but fragile economy policymakers are wrong to focus on the fact that there is a deficit. It’s just a symptom. Instituting tax increases and spending cuts will pull the rug out from under consumers, thereby disrupting the income-sales-jobs relationship. Slashing trillions from the deficit will only depress spending for year to come, worsening unemployment and setting back economic growth.

Conveying this is an uphill battle. The public has been badly misinformed. We do not have a debt crisis, and our deficit is not a national disgrace. We are not at the mercy of the Chinese, and we’re in no danger of becoming Greece. That’s because the U.S. government is not like a household, or a private business, or a municipality, or a country in the Eurozone. Those entities are all users of currency; the U.S. government is an issuer of currency. It can never run out of its own money or face the kinds of problems we face when our books don’t balance.

The effort to balance the books that’s at the heart of the fiscal cliff is simply misguided. Instead of butting heads over whose taxes to raise and which programs to cut, lawmakers should be haggling over how to use the tool of a federal deficit to boost incomes, employment and growth. That’s the balancing act we need.

Stephanie Kelton is an associate professor of economics at the University of Missouri-Kansas City and the founder and editor of New Economic Perspectives. @deficitowl

Posted in Employment, Government Spending | 48 Comments »

Berlusconi comments

Posted by WARREN MOSLER on 20th December 2012

As if their problems end with lower borrowing costs.
No mention of needing to run much larger deficits:
Yesterday Berlusconi put it plainly and simply:

Berlusconi says Italy may be forced to leave the euro zone

Silvio Berlusconi said that Italy would be forced to leave the euro zone unless the ECB gets more powers to ensure lower borrowing costs. Berlusconi, who will again lead his People of Freedom party (PDL) in a national election, said that the ECB should become a lender of last resort for the currency bloc. “If Germany doesn’t accept that the ECB must be a real central bank, if interest rates don’t come down, we will be forced to leave the euro and return to our own currency in order to be competitive,” Berlusconi said.Berlusconi is already campaigning hard for the election with a spate of television interviews in an attempt to close the wide gap with the center-left Democratic Party which is polling at above 30 percent, some 14 points above the PDL.

Posted in ECB, EU | 58 Comments »

The Economics of Japan’s Lost Decades

Posted by WARREN MOSLER on 18th December 2012

The Economics of Japans Lost Decades

By: Tanweer Akram, PhD

Posted in Japan | 51 Comments »

Gas Prices Plunge to New 2012 Low

Posted by WARREN MOSLER on 18th December 2012

This has been helping the US economy some vs the cliff thing

Gas Prices Plunge to New 2012 Low

Posted in Comodities | 18 Comments »

Euro-Area Exports Decline

Posted by WARREN MOSLER on 17th December 2012

As previously discussed, the euro has a history of firming when a trade surplus develops, which works to contain net exports. Export friendly policy includes tight fiscal. And for all practical purposes a ‘sustainable’ trade surplus requires fx buying.

Japan is a recent example. When their dollar buying stopped a few years back the yen appreciated to the point where their trade surplus has faded. They are now looking at resuming (or may already have resumed?) fx purchases to reverse this effect.

Euro-Area Exports Decline for a Second Month Amid Recession

By Stefan Riecher

Dec 17 (Bloomberg) — Euro-area exports fell for a second month in October as the economy struggled to pull out of its second recession in four years.

Exports from the 17-nation currency bloc declined a seasonally adjusted 1.4 percent from September, when they fell 1.3 percent, the European Unions statistics office in Luxembourg said today. Imports rose 0.6 percent in October and the trade surplus narrowed to 7.9 billion euros ($10.4 billion) from a revised 11 billion euros in the previous month. Labor- cost growth accelerated to 2 percent in the third quarter from 1.9 percent in the prior three months, a separate report showed.

Posted in Currencies, trade | 17 Comments »

New High: 73% Say Government Should Cut Spending to Help Economy

Posted by WARREN MOSLER on 17th December 2012

Good grief…

New High: 73% Say Government Should Cut Spending to Help Economy

Half of all Americans want more government action to deal with the economy. But the action they are looking for is to cut government spending.

Posted in Government Spending | 38 Comments »

Koo on reserves time bomb – 500% inflation

Posted by WARREN MOSLER on 13th December 2012

So much for yet another legacy.
:(

From Richard Koo’s latest report:

But nightmare scenario awaits when private loan demand recovers. The problem is what happens when private loan demand recovers. Loan books could grow more than tenfold in the US and five fold in Japan and Europe if bank reserves remain at current levels, triggering inflation rates of 500% to over 1,000%.

To avoid this outcome, central banks will have to mop up excessive reserves by raising the statutory reserve ratio, raising the interest rate paid on reserves, and selling government bonds. All of these measures will serve to lift interest rates, sending bond yields sharply higher and triggering a possible crash in the bond markets.

A sharp increase in government bond yields could lead to fiscal collapse in countries with a large national debt. For Japan, where the national debt amounts to 240% of GDP, the results would be catastrophic.

Expanding quantitative easing because it appears to be doing no harm is grievous error. Mr. Abe and his advisors may believe that all they have to do once their anti-deflationary policies succeed and JGB yields start to rise is have the BOJ buy more bonds. However, bank reserves under quantitative easing have risen to a level capable of fueling a 500% inflation rate, in which case the BOJ would have to sell, not buy, JGBs.

Nomura | JPN

BOJ purchases of JGBs in that situation could cause the potential inflation rate to rise from 500% to 600% to 700% and trigger an economic collapse.

I do not know whether the German finance official who was opposed to reckless quantitative easing based his view on this kind of scenario. Nevertheless, it is extremely dangerous to assume that since quantitative easing does no harm in a balance sheet recession, it can be continuously expanded without concern. The real danger posed by this policy will become apparent only after private-sector balance sheets are repaired, and then it will happen suddenly.

BOJs excess reserves could become a time bomb. I would now like to bring some actual numbers into the discussion so that readers may appreciate the implications of this scenario.

Only 7.7 trillion in bank reserves are required to maintain Japans money supply. With the Japanese government now running annual fiscal deficits in excess of 40 trillion, BOJ financing of the entire deficit would require the Bank to supply reserves equal to more than five times the amount needed to maintain the money supply. Over a two-year period, it would have to supply reserves equal to more than ten times the required amount.

In other words, the purchase of one years worth of newly issued government debt by the BOJ has the potential to generate a 500% inflation rate. I suspect few Japanese are willing to accept such a trade-off.

Moreover, the BOJ has already engaged in substantial quantitative easing under heavy pressure from politicians, pushing excess reserves to 29.8 trillion. In my view this represents a time bomb.

Posted in EU, Inflation, Japan | 155 Comments »

Saudi production

Posted by WARREN MOSLER on 13th December 2012

A modest drop in demand for Saudi crude, which means they sell a bit less at their posted prices.

Not sure what, if anything, makes them change price at this point.

Supply shocks that could cause demand for their output to fall further include a resumption of output from Iran, an increase from Iraq where development was going full tilt last I checked, and a bit from continued output increases and falling consumption in the US.

On the other hand, if Iran shuts down completely the call on Saudi output could spike beyond their ability to increase production and they’d lose control of prices on the upside.

Posted in Comodities | 8 Comments »

Fed policy

Posted by WARREN MOSLER on 13th December 2012

I wrote this (published) paper on 0 rates 15 years ago.

The trimmed Fed forecasts are confirming the ‘tax’ aspect of QE?

The $80+ billion the fed turns over to the tsy each year would have otherwise been earned by the economy.

It’s all confirming my suspicions that the Fed has been stepping on the brake when it thinks its stepping on the gas.

And when it ‘doesn’t work’ they just step on it that much harder.

Tragically, after all these years and with all the hard evidence in our face we continue to have both fiscal and monetary policy backwards.

Posted in CBs, Fed | 22 Comments »