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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.

Cliff notes

Posted by WARREN MOSLER on December 6th, 2012

Jobless Claims Fell More Than Expected, Down by 25,000 to 370,000

I haven’t written much this week because I haven’t seen much to write about.

Still looks like both the economy and the markets are discounting the cliff. And still looks to me like ex cliff GDP would be growing at about 4% this quarter, with the Sandy-cliff related cutbacks keeping that down to maybe 2.5%. And going over the full cliff is taking off maybe 2% more, leaving GDP modestly positive.

Which is what stocks and bonds seem to be fully discounting.

As previously discussed, the housing cycle seems to have turned up, which looks to be an extended, multi year upturn with a massive ‘housing output gap’ to be filled. And employment is modestly improving as well, also with a large output gap to fill. Car sales are back over 15 million, and also with a large output gap to fill.

The way I see the politics unfolding, the full cliff will be avoided, if not in advance shortly afterwards, as fully discussed to a fault by the media. That means GDP growth head back towards 4% (and maybe more)

Nor do I see anything catastrophic happening in the euro zone. They continue to ‘do what it takes’ to keep everyone funded and away from default. And conditionality means continued weakness. Q3 GDP was down .1%, a modest improvement from down .2% in Q2, and a flat Q4 wouldn’t surprise me. The rising deficits from ‘automatic fiscal stabilizers’ (rising transfer payments and falling revenues) have increased deficits to the point where they can sustain what’s left of demand. And the recent report of German exports to the euro zone rising at 3.5% maybe indicating that the overall support for GDP will continue to come disproportionately from Germany. And rising net exports from the euro zone will continue to cause the euro to firm to the point of ‘rebalance’ which should mean a much firmer euro. And as part of that story, Japan may be buying euro to support it’s exports to the euro zone, as per the prior ‘Trojan Horse’ discussions, and as evidenced by the yen weakening vs the euro, also as previously discussed.

And you’d think with every forecaster telling the politicians that tax hikes and spending cuts- deficit reduction- causing GDP to be revised down and unemployment up, and the reverse- tax cuts and spending hikes causing upward GDP revisions and lower unemployment- they’d finally figure this thing out and act accordingly?

Probably not…

21 Responses to “Cliff notes”

  1. Mcwop Says:

    But, aside from various Euro area bonds not defaulting, how long can there be 25%+ unemployment in various countries before we see a serious social problem erupt?

    Reply

    WARREN MOSLER Reply:

    good question!

    Reply

  2. Neil Wilson Says:

    How long before increases in private debt overwhelms the system again though?

    Reply

    jerry Reply:

    @Neil Wilson, Not until our government decides it wants to seriously cut down the deficit for one moronic reason or another?

    Seems like underwriting standards for mortgages have been significantly improved.. the vampire squids will need to find some other avenue for debt peonage.

    Reply

    Mcwop Reply:

    @jerry,

    The negative is that people cannot refinance freeing up money that could go toward consumption. So now the vampires can earn high rates on their old mortgages that people are locked into.

    Reply

    ESM Reply:

    @Mcwop,

    Tighter underwriting standards actually hurt borrowers and help the vampire squids? Gosh, who would have thunk that?

    WARREN MOSLER Reply:

    probably many years. watch the debt service ratios, for example.

    Reply

    Neil Wilson Reply:

    @WARREN MOSLER,

    So we’ve got another few cycles to go then before they really can’t lower interest rates enough to recover from a bust

    :(

    Reply

    WARREN MOSLER Reply:

    as the barber said, no matter how much i cut off it’s still too short

  3. jerry Says:

    So what’s good for an everyday stock/bond investor like myself? How about one of those 2x Dow30 ETF’s?

    I thought one of the problems with Eurozone is that – besides Germany – they don’t have the luxury of automatic fiscal stabilizers.. be interested to hear your response to the questions above.

    Reply

    WARREN MOSLER Reply:

    they do have auto stabilizers

    i have a few s and p futures for the duration

    Reply

    jcmccutcheon Reply:

    @WARREN MOSLER, Me too. Obama Boom II is on.

    On curiosity. Seems like the more ‘progressive’ MMT’ers are not so sanguine on the macro picture.

    Reply

    WARREN MOSLER Reply:

    ;)

    Ben Johannson Reply:

    @jcmccutcheon, I’m more pessimistic about future performance. While employment has recovered somewhat, enormous numbers of the newly re-employed are making due with lower wages and part-time work. Student loan delinquencies are rising, and it’s only a matter of time until gas prices surge again. I’m thunking Q4 will come in under 2% growth.

    Ed Rombach Reply:

    @jerry,

    Hedge funds have done rather well recently being long Greek sovereign debt.

    Reply

  4. Potomac Oracle Says:

    Warren,

    Here’s the latest from CBO.

    “Large budget deficits would reduce national saving, thereby curtailing investment in productive capital and diminishing future output and income. Interest payments on the debt would consume a growing share of the federal budget, eventually requiring either higher taxes or a reduction in government benefits and services.”

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf

    We are all doomed when our “leaders” wring their hands and make hasty decisions because of stuff like this.

    Reply

    WARREN MOSLER Reply:

    Technically true and deliberately misleading.

    It’s how the define ‘national savings’
    It’s an old gold standard term which was equal to the trade gap.
    it goes like this:
    The govt. balance plus the domestic balance= foreign balance = ‘national savings’

    what’s completely wrong is their ‘thereby’ conclusion.

    i agree with your conclusion
    :(

    Reply

    Nihat Reply:

    Warren, sorry if this is too lazy of a question, but does that old equation in essence mean that you as a nation have to net export to build gold=currency reserves, which is called ‘national savings’? (That is assuming you can’t mine gold, I suppose…)

    Reply

    WARREN MOSLER Reply:

    yes, dollars held by non residents were ‘calls’ on our gold supply

  5. Tom Says:

    Your last sentence I basically said word for word yesterday to my dad. Cant believe they are so dumb.

    If spending cuts/tax hikes cause GDP to move lower, then shouldnt the inverse cause GDP to rise? Seems simple to me.

    But the ignorant fear that we’re going to run out of the pieces of paper we alone can create is enough to blind the fools.

    Reply

  6. Winslow R. Says:

    Currently I’m refinancing, finding it taking near 3 months and the conditions are ridiculous. Dudley’s speech made me realize Fannie and Freddie don’t want to refinance your loan. They don’t want to pass on the effects of lower interest rates to borrowers. They are skimming the spread between MBS investors and homeowners. GSE’s, rather than taking a bailout from congress (more deficit spending) are taking their ‘bailout’ from borrowers who are current on their loans.

    “The difference between yields on Fannie Mae mortgage bonds lenders typically use to package new loans for sale and 30-year new-loan rates is more than 1.2 percentage point, about the same as when the Fed announced additional buying in September, according to data compiled by Bloomberg and Bankrate.com. That’s up from about 0.8 percentage point in March and compares with a median of about 0.4 percentage point during the last decade.”

    Read more: http://www.sfgate.com/business/bloomberg/article/Dudley-Says-Fed-Policy-Impeded-by-MBS-Home-Loan-4088030.php#ixzz2ENvycKvT

    Personally, I still see the stock market increasing, not so sure about the real economy.

    “Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.”

    http://www.nytimes.com/2012/12/07/business/developers-of-new-housing-aim-for-renters-not-buyers.html?pagewanted=1&_r=0&ref=business

    Reply

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