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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 February, 2013

Warren on WRKO

Posted by WARREN MOSLER on 28th February 2013

Warren Mosler on Ben Bernanke’s comments from yesterday

Posted in Fed | No Comments »

Submissions for Free Kindle Books

Posted by WARREN MOSLER on 28th February 2013

The Seven Deadly Innocent Frauds of Economic Policy will be free on Kindle this weekend.

Posted in Uncategorized | No Comments »

Saudi production down to 9 million bpd

Posted by WARREN MOSLER on 28th February 2013

Demand for their output is falling, but still plenty high to be ‘price setter’

Posted in Uncategorized | No Comments »

Brits May Have to Work Until 75, Thanks to China

Posted by WARREN MOSLER on 28th February 2013

Stupid taken to new heights.

Retirement is about no longer producing real goods and services and instead living off of the real output of others, incuding China’s exports to you.

The only way this could make any sense is if China somehow was going to force the UK to net export at some time in the future, sort of like war reparations.

Not that the UK might not lose a war to China and be forced to export, but if history is any guide, China and the rest will still be pressing on with net export strategies, like Japan has done for the last 65 years and going strong.

And, of course, keeping millions who want to work from working (unemployment) is entirely counterproductive with regards to real output as well.

Brits May Have to Work Until 75, Thanks to China

By Katie Holliday

Feb 27 (CNBC) — A colossal savings glut in China, the world’s second largest economy, means British workers in their twenties will only be able to retire at 75, a report by the Center for Economic and Business Research (Cebr) showed on Thursday.

According to the report, excessive savings in emerging economies, especially in China, and the country’s growing share of the global economy will keep yields and interest rates down for many years. This will leave pension funds underfunded keeping annuity rates low.

“To retire at close to the standard of living that they (U.K. workers) have previously enjoyed, they will have to extend their working life and cut their number of years of retirement by working till they are much older than the present retirement age,” said Douglas McWilliams, executive chairman of economics consultancy Cebr.

The state pension age in the U.K. is 65 for men and 60 for women currently, but it is set to steadily rise to 66 for both by 2020, as set by the government’s Pensions Bill in October 2012.

McWilliams pinpointed China’s savings glut as a key driver behind this trend.

China’s population holds a staggering 25 percent of the world’s savings, the report found, rising from $153 billion in 1990 to a likely $4.5 trillion this year – a figure Cebr expects to grow further.


Weak state finances following austerity measures will also make it difficult for British workers to retire before the age of 75, the report said.

The U.K. economy was stripped of its Triple-A rating by credit ratings agency Moody’s this week on concerns over its subdued growth prospects and rising debt burden.

The British government is currently undergoing vigorous austerity, but the cuts have come at the expense of growth. The economy emerged from a nine-month recession in the third quarter of last year with 0.9 percent growth, however , it then contracted more than expected by 0.3 percent in the final quarter of last year.

According to Cebr, the long-term cost of the austerity measures will outweigh the cost of bailing out banks during the financial crisis.

It estimates that the cost of bailing out the banks will have cost the British taxpayer about 120 billion pounds ($181 billion) eventually, while the problems of excess deficits built up since 2000 will have cost the economy 1.5 trillion pounds by 2025.

“It will be well in the late 2020s at the earliest before austerity policies can be eased up,” said McWilliams.

Interest rates in the U.K. meanwhile are likely to stay low for at least 20 years, the report from Cebr said.

“Even the [U.K.] Pensions Regulator admits that most pension schemes are underfunded and many will never be able to be fully funded while low yields persist without bankrupting their guarantors,” McWilliams said.

“And for those on direct contribution pension schemes, the annuity yields that they are able to buy are unlikely to rise much from today’s very depressed levels. Workers could save more. But they are unlikely to do so and if they did so around the world, they would only add to the glut of savings that is a fundamental cause of the problem,’ he added.

Direct contribution pension schemes are retirement plans where an employer matches its employee’s contribution of his or her earnings each year.

Time to Learn Mandarin?

The tendency towards saving in China means the Chinese will eventually own a quarter of the world’s assets, as they invest heavily abroad to use up their savings, said Cebr.

“So far the Chinese have invested heavily in areas like Africa and South America which the West has neglected as well as in U.S. Treasury bonds. But they will have to turn increasingly to other assets like companies and properties in the West including U.K. companies,” he said.

“Better start learning Mandarin – your next boss may be Chinese,” said McWilliams.

Posted in China, Employment, UK | No Comments »

Efficiency of China’s economy ‘sliding’

Posted by WARREN MOSLER on 28th February 2013

More evidence the Chicago educated offspring have taken charge. Good luck to them…

Efficiency of China’s economy ‘sliding’

Feb 28 — The efficiency of China’s economy is slipping, with money flowing much slower betweendifferent sectors than in the past, according to analysts.

They said this is despite the fact that the nation has a considerable amount of social financing— an approach to managing money that delivers a social dividend and an economic return.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, agovernment think tank, said although financing activities in the country appear to be rampant,most of the newly borrowed money is used to repay debts instead of forming revenue amongcompanies.

“We can see that the ratio of money to gross domestic product has been increasing, whichmeans the economy needs increasing capital to promote than previously.”

Last year, social financing, which included bank and non-bank loans, bond issuance and stocksales, set a record high of nearly 16 trillion yuan ($2.54 trillion). The ratio of M2, a broadmeasure of money supply, against GDP stood at a record high of 188 percent at the end of lastyear.

The proportion of the increase in enterprises’ one-year deposits to total social financingdropped to 20 percent in 2012 from 40 to 50 percent seven years earlier, Liu said.

“Accumulation of debts is pushing up the leverage ratio among companies, with the wholeeconomy more difficult to shore up.”

He said that by adding loans extended to local governments through financing vehicles, theproblem becomes more severe.

Liu estimated local government debt in the financial system at somewhere between 13 trillionyuan and 14 trillion yuan, with interest rates to be paid each year standing at 700 billion yuanto 800 billion yuan.

Rolling over loans has become a widely adopted measure among Chinese banks since lastyear as lending extended during the financial crisis to stimulate economic growth graduallybecame due but could not be paid back on time.

According to a survey released by the China Banking Association at the end of last year, morethan half of the 850 bankers surveyed said they support the practice of rolling over matureloans, saying this offers a way to ensure projects have good cash flow and that the loans willeventually be repaid following a grace period.

Many banks would rather maintain the lending as long as interest rates could be paid, insteadof classifying the loans as non-performing assets, Liu said.

China’s M2 growth accelerated substantially to a 22-month high of 15.9 percent year-on-year inJanuary from 13.8 percent in December.

In January, commercial banks extended more than 1 trillion yuan in new loans, and bank off-balance-sheet and non-bank channels offered another 1.5 trillion yuan of new credit to theeconomy, according to data from the People’s Bank of China, the central bank.

Social financing reached 2.54 trillion yuan last month, up 1.56 trillion yuan year-on-year.

The increase in enterprises’ deposits in January, which stood at 117.9 billion yuan, was muchlower than that of individuals’ savings, which stood at 749.9 billion yuan.

Stephen Green, chief China economist at Standard Chartered Bank, warned last year that foran economy with an already high leverage level, “re-leveraging up” increases overall macrorisk, as many financial crises are foreshadowed by an increase in leverage.

Zhao Xijun, deputy dean of the school of finance at Renmin University of China in Beijing, saidthe current monetary condition basically matches well with the economy, judging by thefluctuation of consumer goods and asset prices.

“It’s very difficult to measure the impact after the central bank issued money, and controlswhere the capital flows into. Price levels could be a fair and final criteria to draw a conclusion.”

He said the declining proportion of companies’ deposits to total financing could also betranslated into their increasing involvement in asset transactions as the financial marketdevelops.

Formation of social capital contributed to more than 50 percent of GDP growth last year,maintaining a strong engine for the economy, although probably much of the money went intoasset transactions, Zhao said.

Posted in China | No Comments »

Euro-Area Inflation

Posted by WARREN MOSLER on 28th February 2013

I wonder if any of the early models had this much ‘inflation’ with this large of an output gap…

Euro-Area Inflation Rate Declined in January on Energy, Services

By Angeline Benoit

February 28 (Bloomberg) — The euro-area inflation rate fell in January, led by slower price growth for energy and services.

Annual consumer-price growth slowed to 2 percent from 2.2 percent in December, in line with an initial estimate on Feb. 1, the European Union’s statistics office in Luxembourg said today. In the month, prices fell 1 percent.

The European Central Bank will probably maintain its benchmark interest rate at 0.75 percent next week, according to a Bloomberg News survey of economists. The ECB will update its December economic forecasts after the euro area’s recession deepened in the fourth quarter. The European Commission sees inflation at 1.8 percent this year and 1.5 percent in 2014.

The annual core inflation rate, excluding volatile costs such as energy, alcohol and tobacco, fell to 1.3 percent in January from 1.5 percent a month earlier, today’s report showed. The cost of energy rose 3.9 percent after a 5.2 percent annual gain in December, while services-price growth slowed to 1.6 percent from 1.8 percent. Food, alcohol and tobacco costs rose 3.2 percent.

European Union car sales last month fell to the lowest level for a month of January since the data series began in 1990. Manufacturers in the region have announced 30,000 job cuts and five plant shutdowns since July, with Renault (RNO) and Peugeot outlining domestic workforce reductions of 17 percent.

Posted in EU, Inflation | No Comments »

Comments on the Italian election results

Posted by WARREN MOSLER on 27th February 2013

With austerity now well understood to increase deficits, only PSI remains to decrease deficits. With strong political support surfacing, as per Grillo’s positions on repudiating debt.

So there is the deflationary impact of PSI. The flight to maybe actual cash even at the institutional level to avoid PSI. Portfolio shifts out of the euro, no bid for anything but bunds until they too threaten PSI which would be down the road as German exports to other members fade and their deficit rises as well.

The answer is ECB guaranteed funding and deficit limits hiked to at least 8% of GDP for all members. The problem is there is no political channel to get from here to there?

Exports, domestic credit expansion, and fiscal policy are all going the wrong way.

The remaining question is how much the population can take before it snaps?

All the talk about shorting US Treasury securities and JGB’s looks to have been a bit premature…

Posted in ECB | No Comments »

OpenEurope: What Happens Next in Italy?

Posted by WARREN MOSLER on 27th February 2013

The Grillo factor

Beppe Grillos Five Star Movement received over 25% of the vote exceeding all expectations. Though Berlusconi and Grillo are both populist and anti-austerity, in many ways, theyre also each others antithesis one representing the old sclerotic system, the other a new, impulsive anti-establishment future. Grillo is clearly a new breed in Italian politics. He has been very critical of Italys euro membership, and wants a referendum to decide whether the country should leave the single currency. Hes also suggested that Italy should consider refusing to pay back at least part of its huge public debt.

As previously discussed, the PSI has irresistible political appeal?

Posted in EU | No Comments »

China Needs Tighter Monetary Policy, State Research Agency Says

Posted by WARREN MOSLER on 27th February 2013

The narratives of the last few months leave me not expecting a lot from China. Not long ago 7.5% growth was described as a ‘hard landing’ and it probably still means same.

The out of paradigm western educated kids are probably now well entrenched and we all know what that means.

China Headlines:

China Needs Tighter Monetary Policy, State Research Agency Says

Tells me they have serious inflation/corruption issues.

More Chinese cities ready for property tax pilots

Property taxes, functionally, are price increases, so while they keep headline prices and credit expansion in check, they don’t help affordability.

PBOC continues to drain liquidity from banks

Just offsetting operating factors to sustain rate targets.

China to tighten shadow banking rules

Worried about consumer fraud, corruption, and maybe inflation.

Posted in China | No Comments »

Mortgage Bankers purchase applications

Posted by WARREN MOSLER on 27th February 2013

Been generally improving from highly depressed levels. And may be faltering with fica hike, sequester, etc.

While there is some question of whether mtg bankers are losing market share, it still tells me it’s all nowhere near triggering a Fed hike any time soon.

Posted in Housing | No Comments »

New special course at Franklin College, Switzerland

Posted by WARREN MOSLER on 26th February 2013

Link: Special course on the monopoly theory of public currency
No password or username required, just login as guest.

Posted in Currencies, Government Spending | No Comments »

Fed governor Jerome H. Powell

Posted by WARREN MOSLER on 24th February 2013

And it all still goes unchallenged by the media.

I received this from an associate:

Discussion of “Crunch Time: Fiscal Crises and the Role of Monetary Policy”

“Three important propositions underlie the authors’ argument on this issue:

The federal government’s fiscal path is unsustainable under current policies.

If the market concludes that a government either cannot or will not service its debt, the central bank may be forced to choose ultimately between monetization leading to inflation or standing by as the government defaults–the threat of “fiscal dominance.”

The Federal Reserve’s balance sheet is currently very large by historical standards and still growing. The process of normalizing the size and composition of the balance sheet poses significant uncertainties and challenges for monetary policymakers.

I believe all of these statements to be true. They are also widely, if not universally, accepted.”

>   Powell cites this one which is really bad (perhaps not surprisingly, it was edited by an
>   economist from the German Finance Ministry)

Posted in Government Spending | No Comments »

the sequester

Posted by WARREN MOSLER on 24th February 2013

Change ‘stipulated’ to ‘stupulated’…

If they only knew ‘the debt’ was just a reserve drain…

The sequester is a group of cuts to federal spending set to take effect March 1, barring further congressional action.

President Obama signs the Budget Control Act into law. (Pete Souza/White House)

The sequester was originally passed as part of the Budget Control Act of 2011 (BCA), better known as the debt ceiling compromise.

It was intended to serve as incentive for the Joint Select Committee on Deficit Reduction (aka the “Supercommittee”) to come to a deal to cut $1.5 trillion over 10 years. If the committee had done so, and Congress had passed it by Dec. 23, 2011, then the sequester would have been averted.

Obviously, that didn’t happen.

A deal was reached to avert the cliff, in which the sequester was delayed to March 1.

The cuts are evenly split between domestic and defense programs, with half affecting defense discretionary spending (weapons purchases, base operations, construction work, etc.) and the rest affecting both mandatory (which generally means regular payouts like Social Security or Medicaid) and discretionary domestic spending. Only a few mandatory programs, like the unemployment trust fund and, most notably, Medicare (more specifically its provider payments) are affected. The bulk of cuts are borne by discretionary spending for either defense or domestic functions.

Food stamps are exempt from the sequester. (For The Washington Post)

Most mandatory programs, like Medicaid and Social Security, and in particular low-income programs like Temporary Assistance for Needy Families (TANF, or welfare) and the Supplemental Nutritional Assistance Program (SNAP, or food stamps) were exempt from the sequester.

The 2013 sequester includes:

  • $42.7 billion in defense cuts (a 7.9 percent cut).
  • $28.7 billion in domestic discretionary cuts (a 5.3 percent cut).
  • $9.9 billion in Medicare cuts (a 2 percent cut).
  • $4 billion in other mandatory cuts (a 5.8 percent cut to nondefense programs, and a 7.8 percent cut to mandatory defense programs).

That makes for a total of $85.4 billion in cuts. Note: numbers here updated to latest CBO figures; thanks to Center for Budget and Policy Priorities for noting the difference from initial OMB numbers.

More will be cut in 2014 and later; from 2014 to 2021, the sequester will cut $87 to $92 billion from the discretionary budget every year, and $109 billion total.

The sequester cuts discretionary spending across-the-board by 9.4 percent for defense and 8.2 percent for everything else. But no programs are actually eliminated. The effect is to reduce the scale and scope of existing programs rather than to zero out any of them.

The National Institutes of Health will see budget cuts in the billions if the sequester goes through. (J. Scott Applewhite/Associated Press)

Here are just a few. Update: Note that these are rough estimates based on numbers put out by OMB before the fiscal cliff deal:

  • Aircraft purchases by the Air Force and Navy are cut by $3.5 billion.
  • Military operations across the services are cut by about $13.5 billion.
  • Military research is cut by $6.3 billion.
  • The National Institutes of Health get cut by $1.6 billion.
  • The Centers for Disease Control and Prevention are cut by about $323 million.
  • Border security is cut by about $581 million.
  • Immigration enforcement is cut by about $323 million.
  • Airport security is cut by about $323 million.
  • Head Start gets cut by $406 million, kicking 70,000 kids out of the program.
  • FEMA’s disaster relief budget is cut by $375 million.
  • Public housing support is cut by about $1.94 billion.
  • The FDA is cut by $206 million.
  • NASA gets cut by $970 million.
  • Special education is cut by $840 million.
  • The Energy Department’s program for securing our nukes is cut by $650 million.
  • The National Science Foundation gets cut by about $388 million.
  • The FBI gets cut by $480 million.
  • The federal prison system gets cut by $355 million.
  • State Department diplomatic functions are cut by $650 million.
  • Global health programs are cut by $433 million; the Millenium Challenge Corp. sees a $46 million cut, and USAID a cut of about $291 million.
  • The Nuclear Regulatory Commission is cut by $55 million.
  • The SEC is cut by $75.6 million.
  • The United States Holocaust Memorial Museum is cut by $2.6 million.
  • The Library of Congress is cut by $31 million.
  • The Patent and Trademark office is cut by $156 million.

While military salaries are exempt from the sequester, benefits like tuition assistance and the TRICARE program (which provides health care to personnel and their families, among others) are not.

The Congressional Research Service has written that a sequester may not “reduce or have the effect of reducing the rate of pay an employee is entitled to” under their federal pay scale. However, the sequester is likely to cause furloughs, which amount to unpaid time off, or, basically, a pay cut.

Stephen Fuller, an economist at the libertarian-minded George Mason University, puts the number at 2.14 million jobs lost. That includes the direct loss of 325,693 jobs from defense cuts (including 48,147 civilian employees at the DoD) and 420,529 jobs from non-defense cuts (including 229,116 federal workers — the rest, by and large, are contractors). The rest of the jobs losses are indirect, resulting in a 1.5 point increase in the unemployment rate. However, Fuller’s estimates predate the delay in the sequester passed in December, and other analysts are more measured. Macroeconomic Advisers estimates the sequester will add only 0.25 points to the unemployment rate, a sixth of the impact Fuller predicts.

The CBO estimates that the combined federal fiscal tightening taking place in 2013 is knocking 1.5 points off GDP growth for the year. Of that, about 5/8 of a percent (or 0.565%) is due to the sequester. Macroeconomic Advisers similarly estimates that the sequester will shave off 0.6 points from the year’s growth rate. George Mason economist Stephen Fuller’s estimates are more dramatic, putting the loss of 2013 GDP at $215 billion, reducing the growth rate of GDP by two thirds. However, Fuller’s estimates precede the shrinking of the sequester.

President Obama has been vague on how he’d replace the sequester. (Pablo Martinez Monsivais/AP)

President Obama has been less specific than his colleagues in Congress on how he wants to see the sequester replaced, but he has suggested that, in lieu of a bigger deficit reduction deal, he wants to see the 2013 sequester replaced with a package of tax increases (including loophole closures and increases on the wealthy) and spending cuts.

Sens. Patty Murray (seated, left) released Senate Democrats’ sequester plan. (Mike Theiler/Reuters)

House Democrats, led by Budget Committee ranking member Chris Van Hollen, proposed replacing the $85 billion in 2013 sequester cuts with a mix of tax increases — including a “Buffett rule”-style minimum tax on income above $1 million and repeal of tax subsidies for oil companies — and spending cuts, notably including a reduction in farm subsidy payments to farmers and an increase in flood insurance premiums.

Most of these policies would be spread over a decade rather than falling entirely in 2013.

Senate Democrats, led by Budget Committee Chairwoman Patty Murray, introduced the American Family Economic Protection Act, which replaces the 2013 sequester with $110 billion in spending cuts and tax increases, spread out over the course of a decade. Like the House plan, these policies include a “Buffett rule,” the closure of tax loopholes for oil companies and cuts to farm subsidies. Additionally, the Senate bill cuts military spending in excess of the sequester’s cuts.

Both the Senate and House Democrats’ plans allow the sequester to take effect at the beginning of 2014.

House Speaker John Boehner, right, has laid out the Republican position on replacing the sequester. (Joshua Roberts/Bloomberg)

As part of John Boehner’s “plan B” approach to avoiding the fiscal cliff (embarked upon after initial talks with the White House broke down), the House on Dec. 20, 2012, passed the Spending Reduction Act of 2012. The plan would have replaced the 2013 defense sequester with a variety of spending cuts, including cuts to food stamps, the Affordable Care Act and Dodd-Frank (including eliminating the “orderly liquidation authority” at the center of the legislation). It would have reduced the size of the domestic sequester in proportion to the $19 billion in discretionary savings included in the bill.

Republicans have conceded that they won’t be able to pass the bill again, even in the House, but it provides a model for what Republicans want in a temporary replacement: no tax increases, no defense cuts and considerable domestic spending reductions.

The AARP (whose activists are pictured here) is among many groups resisting the sequester’s domestic cuts. (Melina Mara/The Washington Post)

Just about every interest group wants to stop the sequester and just about none wants to see it take effect. Aerospace and defense companies, along with universities reliant on defense research funding, have launched Second to None, a coalition battling the defense cuts. A group of almost three thousand organizations, including the NAACP, AARP, Children’s Defense Fund, the Wilderness Society, Greenpeace, Human Rights Campaign, the Innocence Project, and many, many more, have warned about the impact of the non-defense discretionary cuts in the sequester. Physicians and medical research organizations, including the American Medical Association, the American Pediatrics Association and many others, are resisting the discretionary cuts to medical research, and in particular the National Institutes of Health. Liberal groups like MoveOn and the Working Families Party are also getting in on the action.

The Tea Party-affiliated FreedomWorks has put out a letter calling for ObamaCare to be defunded so as to match the expected post-sequester spending level without letting the sequester take effect.

Posted in Employment, Government Spending | No Comments »

ECB earns €555m on Greek bond holdings

Posted by WARREN MOSLER on 24th February 2013

ECB earns €555m on Greek bond holdings

By Michael Steen in Frankfurt

(FT) —The European Central Bank said it earned €555m last year on its holdings of Greek sovereign bonds that were bought during the crisis in an attempt to calm financial market fears of a break-up of the eurozone.

The bank also revealed for the first time that nearly half of its holdings in the so-called Securities Markets Programme are of Italian debt. At the end of 2012 it held €99bn in Italian sovereign bonds, €30.8bn in Greek debt, €43.7bn in Spanish paper, €21.6bn in Portuguese debt and €13.6bn in Irish bonds.

Remember this?

Core Europe Sitting Pretty in their PIIGS Drawn Chariot

By Marshall Auerback and Warren Mosler

October 3, 2011 — The refusal to countenance a Greek default is now said to be dragging the euro zone toward even greater crisis. Implicit in this view, of course, is the idea that the current “bailout” proposals are operationally unsustainable and will lead to a broader contagion which will ultimately afflict the pristine credit ratings of core countries such as Germany and France.

Well, we see a very different view emerging: The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB — the only entity that can create new net financial euro denominated assets — which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating.

Despite public protestations to the contrary, it is beginning to look like the elders of the euro zone have begun to embrace the reality that, when push comes to shove, it is the ECB that must write the check, and that it can continue to do so indefinitely.

That means, for example, the ECB can buy sufficient quantities of Greek bonds in the secondary markets to allow Greece to fund itself in the short term markets at reasonable interest rates. And it gets even better than that for the ECB, as the ECB also substantially enhances its profitability by continuing to buy deeply discounted Greek bonds and using Greece’s income stream to build the ECB’s stated capital. As long as it continues to buy Greek debt, Greece remains solvent, and the ECB continues to increase its accrual of profits that flow to capital.

The logical conclusion of all of this is ECB ownership of most of Greece’s debt, with austerity measures imposed by the ECB steering the Greek budget to a primary surplus, along with sufficient taxation to keep the ECB’s capital on the rise, and help fund the ECB’s operating budget as well. Now add to that similar arrangements with Ireland, Portugal, Spain and Italy and it’s Mission Accomplished!

Mission Accomplished? Are we daring to suggest that the Fathers of the euro zone had exactly this in mind when they signed the Treaty of Maastricht?

Or, put it another way: it’s all so obvious, so how could they not have this mind?

So let’s take a quick look at the central bank accounting to see if this seemingly outrageous thesis has merit.

Here is what is actually happening. By design from inception, when the ECB undertakes its bond buying operation, the ECB debt purchases merely shift net financial assets held by the ‘economy’ from Greek government liabilities to ECB liabilities in the form of clearing balances at the ECB. While the Greek government liabilities shift from ‘the economy’ to the ECB. Note: this process does not alter any ‘flows’ or ‘net stocks of euros’ in the real economy.

And so as long as the ECB imposes austerian terms and conditions, their bond buying will not be inflationary. Inflation from this channel comes from spending. However, in this case the ECB support comes only with reduced spending via its imposition of fiscal austerity. And reduced spending means reduced aggregate demand, which therefore means reduced inflation and a stronger currency. All stated objectives of the ECB.

We would stress that this is NOT our PROPOSED solution to the euro zone crisis (see here and here for our proposals), but it is clearly operationally sustainable, it addresses the solvency issues, and puts the PIIGS before the cart, which at least has the appearance of putting them right where the core nations of the euro zone want them to be.

Additionally, the ECB now officially has stated it will provide unlimited euro liquidity to its banks. This, too, is now widely recognized as non-inflationary. Nor is it expansionary, as bank assets remain constrained by regulation including capital adequacy and asset eligibility, which is required for them to receive ECB support in the first place.

To reiterate, it is becoming increasingly clear, crisis by crisis, that with ECB support, the current state of affairs can be operationally sustained.

The problem, then, shifts to political sustainability, which is a horse of a different color. And here is where the Greeks (and the other PIIGS) paradoxically have the whip hand. So long as the Greeks continue to accept the austerity, they wind up being burdened by virtue of their funding of the ECB. The ECB takes in their income payments from the bonds, and the ECB alone ensures that Greece remains solvent. It’s a great deal for the ECB and the core countries, such as Germany, France and the Netherlands, as it costs the core’s national taxpayers nothing. And, as least so far, Greece thinks the ECB is doing them a favor by keeping them out of default. The question remains as to whether the Greeks will continue to suffer from this odd variant of Stockholm (Berlin?) Syndrome.

Perhaps not if some of the more recent proposals make headway. As an example of what might be in store for Greece, consider the “Eureca Project”, publicly mooted in the French press last week. In essence, it aims to reduce “Greek debt from 145% to 88% of GDP in one step” without default (so protecting all northern European banks); reduce ECB exposure to Greek debt (that is, force Greece to pay the ECB for the bonds it has purchased in secondary bond markets) and it claims that it will “kick-start the Greek economy and revive growth and job creation” and promote “structural reform.”

So how is it going to do all of that? Simple: engage in the biggest asset strip in history. The proposal in essence calls for a non-sovereign entity to take all the public assets – hand them over to a holding company funded by the EU which pays Greece who then pay off all it debtors. End of process – except that if it is implemented, the Greeks could well say “Stuff it. Let’s default and take our chances. At least we get to keep our national assets.” That’s the risk that is being run if the ECB and the economic moralists in Germany take this too far. If this proposal were accepted, the eurocrats would in fact have a failed nation state on their hands in 3 months time — in the eurozone, not the Mideast or Africa.

By contrast, the current arrangements seem tame in comparison. They obviate the solvency issue, but even here one wonders how much more can be inflicted on countries such as Greece. We stress that the current arrangements have OPERATIONAL sustainability, not necessarily POLITICAL sustainability. The near universally accepted austerity theme is likely to result in continuously elevated unemployment, and a large output gap in general characterized by a lagging standard of living and high personal stress in general. This creates huge systemic risk insofar as it might well make sense for Greece (and others) ultimately to reject this harsh imposition of austerity. But, so far so good for the core nations, as there appears to be no movement in that directions (except on the streets of Athens, rather than in the Greek Parliament).

By the ECB continuing to fund Greece, and not allowing Greece to default, but instead to continue to service its debt, the whole dynamic has changed from doing Greece a favor by not allowing Athens to default to disciplining Greece by not allowing the country to default. And while that’s what the Germans SEEMINGLY haven’t yet figured out, if one is to judge from the current debate, particularly in Germany itself, at the same time they have approved the latest package and are quickly moving in the direction we are suggesting. Note that Angela Merkel has been most adamant on the particular question of allowing Greece to default or allowing an “orderly restructuring.” It’s also worth noting that when the ECB funds Greece, that funding facilitates Greek purchases of German goods and services, including military, at no cost to the German taxpayer. In fact, Germany gets to run larger trade surpluses, which means by accounting identity it is able to run lower government budget deficits, which allows it to feel virtuous and continue its incessant economic moralizing.

So what’s in it for Germany? That should be obvious by now: Germany gets to export to Greece, and to control/impose austerity on Greece, which keeps the euro strong, interest rates in Germany low, and FUNDS the ECB. All in the name of punishing the Greeks for past sins. It doesn’t get any better than that for the core nations. It’s time for the Germans to stop pushing their luck. Rather, they should embrace the genius of one of the so-called southern profligates, Italy, as they have surely created an operationally sustainable doomsday machine of which Machiavelli himself would be proud. How could this not be the Founding Fathers’ dream come true?

The earnings on the Greek debt are particularly significant as there has been a political agreement to pay back profits made from holding the bonds to the Greek government. Because the bonds still pay interest and were bought at depressed prices, they yield a lot of interest.

The €555m compares with income of €654m in 2011 on Greek debt – also published on Thursday – but only represents the ECB’s share of the earnings, which is a combination of interest paid on the bond and a paper profit derived from amortising its value over time.

The Eurosystem as a whole, which comprises all 17 national central banks that work with the ECB, would have made a significantly larger amount on the Greek bond holdings.

The ECB, which declared a net profit of €998m for 2012, up from €728m the year before, pays its profits to the other Eurosystem central banks, which then declare their own profits before passing money to national governments. Only then can any declared profits on Greek bond holdings be returned to Athens.

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Former Fed economist on the QE tax

Posted by WARREN MOSLER on 21st February 2013

The fallacy of Fed ‘profits’ (and ‘losses’)

But for Bob Eisenbeis, a former Atlanta Fed economist now at Cumberland Advisors, any discussion about Fed “profits” is inherently deceptive. He explains in a research note:

That Fed remittances are considered profits is a total misrepresentation and a fiction. The Fed is part of the government and is not a private-sector, profit-making entity. (The Federal Reserve Banks are quasi-public, but the Board of Governors is a government agency, and the system’s debts are guaranteed by the government.)

The Fed purchases Treasury debt from the public, paying for that debt with deposits it creates by a stroke of the pen. Looking at the Fed’s portfolio of securities from the perspective of the nation’s consolidated balance sheet, we see that one form of government debt (Treasury debt) is taken out of circulation and replaced with another form of government debt (Federal Reserve liabilities).

In effect, Treasury debt is taken out of circulation and is now owned by the government. It just happens to be the debt is on the books of the Fed and not the Treasury, but that is simply an accounting artifact and effectively the debt has been retired. The Treasury pays the Fed interest, which is an intra-governmental transfer of funds. From the funds received from Treasury, the Fed extracts both its operating expenses and contributions to capital, makes the required 6% dividend payment to member banks, and remits the remainder back to the Treasury.

Posted in Deficit, Fed | No Comments »

Thaler’s Corner 19th Februaryy 2013: Positive Currency Wars!

Posted by WARREN MOSLER on 20th February 2013

The usual excellent post!

Positive Currency Wars!

19 February 2013

Financial markets are today being buffeted about by a slew of highly complex and changing influences. As readers may recall, at end-January (Thaler’s Corner 31/01: Too Cloudy), we advised people to favor Risk Off positions (references 2725 Euro Stoxx and 141.85 Bund), but this morning we returned to a neutralization of asset allocation biases (references 2635 and 142.85).

Not only do European markets seem to have lagged too far behind their American and Japanese peers, but, above all, I consider the current jitters about currency wars to be completely off the wall!

That said, there are still dark clouds hovering over Europe, mainly the eurozone, which is why we have yet to join the clan of the optimists.

Let us examine the macroeconomic situation area-by-area.

United States

The Fed is pursuing its easy money policies, the target QE, and I do not see them ending these policies any time soon. Despite the prevailing conventional wisdom, these policies are not boosting inflation at all, quite the contrary!

By continuously removing treasuries and MBS from the private sector via its QE asset-purchasing program and by replacing them with base money reserves, the Fed is in reality absorbing the interest that the private sector would have received on these bonds, as base money does not pay a coupon! The best illustration of the absorption carried out by the government is the amount of profits earned and transferred to the Treasury, a total of €335 billion since 2009!

This QE program functions like a tax, or more specifically, a savings tax somewhat like the French ISF or wealth tax (except that it is not at all progressive). It is nonetheless “progressive” in that it has helped the federal government, among others.

The 0% interest rate policy is certainly supposed to help reignite the American economy by making its easier for investment projects to achieve profitability, but at a time when the private sector feels overloaded with debt (deleveraging), its “inflationist” aspect is limited to the value of financial assets.

As long as US government budget policy remains frankly expansionist, with cumulative deficits totaling over $5 trillion since 2009, this deflationist aspect of the QE has little importance. However, not only have US budget deficits been trending downwards since 2009 (at a record high of $1.415 trillion), falling from 10.4% to 6.7% of GDP, but the latest budget measures raise concerns that the trend will accelerate.

In the first place, the hike in the payroll tax has had a direct impact on the American consumer. This 2% decrease in take-home income, for which employees were hardly prepared, led Wal-Mart Vice President Jerry Murray to declare February sales figures to be a “total disaster”:

“In case you haven’t seen a sales report these days, February MTD (month-to-date) sales are a total disaster. The worst start to a month I have seen in my seven years with the company. Where are all the customers? And where’s their money?”

Moreover, if sequester negotiations between Congress and the White House do not lead to a deal by the beginning of March, the ensuing decline in spending would represent about 1% of GDP and thus a new tightening of budget policy.

In contrast, the real estate market continues to give encouraging signs of a rebound. I will provide you the stats fresh February 22nd publication date.

The yen’s decline (currency wars) is a positive factor, which I will examine in the conclusion.


The eurozone is the world’s weakest economic zone, with the economic outlook as desperate as ever. The zone is suffering from an unfortunate mix of pro-cyclical budgetary policies and monetary policy, which refuses to use all the means available to counter recessive austerity.

Aside from their crazy devotion to Ricardian theories, supporters of “expansionist austerity” do not seem to take into account that the rare examples of such policies being successful are with very open small economies who, boasting their own currency, devalue their money and cut interest rates while defaulting on or restructuring foreign debt!

As for the distressed eurozone countries, which mainly trade with their neighbors, they not only lack their own currency and thus the possibility of devaluation, but also, in addition, suffer from a euro that remains high compared to the currencies of its trading partners!

And that’s leaving aside monetary policy and how its non-transmission to peripheral countries is making their economies even worse.

In addition, there are the problems specific to the zone, as exemplified by the Cypriot turmoil, the Italian elections, the protest movements in Spain and Portugal and the painful establishment of a common banking solution, etc.

But a ray of hope may be on the horizon, with the restructuring plan of the Promissory Notes just established by Ireland. Without going into the highly technical details, you can believe me when I say that this is the closest thing to fiscal financing ever carried out by a central bank on the eurozone or even in a developed country!

Quite simply, the Irish state has issued very long-term bonds, at very low interest rates, directly into the capital of the restructured bank, which then refinances it with the Irish central bank. The state thus skirts appealing to markets; this is monetary financing, albeit indirectly so. In any case, it would have had a hard time raising capital on such good terms with the public.

And Mario Draghi’s apparent nod to this operation, limiting himself to stating the ECB board had unanimous taken note of the deal, augurs well! We will not be surprized to hear the screams of alarm from Mr Weidmann and the Bundesbank, but they seem to have definitely lost control.

In short, while the euro’s rise is a drag on European exporters in the short term, reflecting more far more restrictive monetary and budgetary policies than those of our trading partners, this is also a case of the tree hiding the forest, as I will explain in the case of the Land of the Rising Sun.


This is where things are really going to play out!

The latest comments by Japanese government officials suggest that the next BoJ President will not only be a lot more dovish than his predecessors but that he will also work much more closely with the government.

Such coordination is absolutely necessary in times of deflation when the country has been faced with 0 Lower Bound for so many years. Check out the excellent paper written by Paul McCulley and Zoltan Pozsar on this topic in MG.

If a country in the midst of severe deflation/recession, like Japan, whose trade balance has deteriorated so abruptly since 2011, does not have the right to use all the tools at its disposal to pull itself out of this quagmire, who does?

I would farther than the prevailing discourse, with its focus on Japanese-style quantitative easing, and say flat out that the country should electronically print money!

Screams of a Weimer situation aside, such an approach would technically change little, since it would amount to injecting the budget deficit into the economy in the form of Monetary Financing instead of JGBs (Bonds Financing), which are nearly identical to cash (floor rate and possibility of going through the repo market).

In contrast, one thing is for sure: the fears generated by such an announcement would be enough to send the yen back to 110 vis-à-vis the dollar, which is in no way catastrophic. Bear in mind that this parity averaged 118.40 between the two shocks of 1987 and 2008!

These jitters would also fuel inflationist expectations, which is precisely the goal of a country in which the latest statistics show the economy stuck in deflation.

But the main reason I say that such a monetary and budgetary turnabout by Japan would be good for the rest of the world is that one of its main goals is to reignite domestic consumption, a natural corollary of easier monetary conditions and higher inflationist expectations.

And that would also benefit its foreign trading partners!

We are not witnessing so much a race to competitive devaluation (currency wars) as a race to more accommodative monetary policies, under the impulsion of the Fed and the BoJ, not to mention the BoE and the SNB, among others.

And all this will end up influencing the ECB, which, if it does not change its policies, will end up with a euro climbing toward 140 against the yen and 1.45 against the dollar. Let’s not forget that in 2007-2008, the euro was trading at 170 against the yen and 1.60 against the dollar, mainly due to the ECB’s intransigence, with the results we all know.

As Mr Draghi has declared that he will take the euro’s level into consideration, not as a target, but as a variable in monetary policy, we can only hope that it will continue to appreciate and thus force our central banks to carry out its own Copernican revolution and enter into concertation with the world’s central banks managing modern currencies.

In conclusion, thanks to these monetary hopes stemming from the Japanese initiatives, I have decided to put between parentheses the still heavy clouds, cited above, and advise clients this morning to abandon the Risk Off bias to capture profits offered by the last market shifts and to, at minimum, put ourselves in a position of maximum reactivity.

Posted in CBs, Currencies, Deficit, ECB, Fed, GDP, Germany, Government Spending, Japan | No Comments »

Japan Trade Deficit Hits Record as Yen Inflates Imports

Posted by WARREN MOSLER on 20th February 2013

The old J curve as previously discussed.

Japan Trade Deficit Hits Record as Yen Inflates Imports: Economy

By James Mayger and Andy Sharp

Feb 20 (Bloomberg) — (Bloomberg) Japan’s trade deficit swelled to a record 1.63 trillion yen ($17.4 billion) on energy imports and a weaker yen, highlighting one cost of Prime Minister Shinzo Abe’s policies that are driving down the currency.

Exports climbed 6.4 percent in January from a year earlier, the first rise in eight months, exceeding the median 5.6 percent estimate in a Bloomberg News survey of 24 economists. Imports increased 7.3 percent, the Finance Ministry said in Tokyo today.

Posted in Currencies, Japan, trade | No Comments »

Warren Mosler on how countries manipulate their currency

Posted by WARREN MOSLER on 18th February 2013

Warren Mosler on how countries manipulate their currency

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Draghi on sector balances

Posted by WARREN MOSLER on 18th February 2013

The euro declined against the dollar on Monday after the European Central Bank President Mario Draghi said economic indicators signaled further weakness in the euro zone.

“Available indicators signal further weakness at the beginning of 2013, with domestic demand remaining dampened. This is due to weak consumer and investor sentiment and to the necessary balance sheet adjustments in both the public and private sectors. Foreign demand also remains subdued,” Draghi said in a statement before the European Parliament’s Committee on Economic and Monetary Affairs in Brussels.

Public and private sectors to continue to deleverage?

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tandem sailboat prototype

Posted by WARREN MOSLER on 18th February 2013

Posted in Uncategorized | No Comments »