Hearing at the conference here in Manila that China’s elders are not happy with the results of what their western educated kids have been doing.

Wen Warns of Bank Risks, Pledges Property Crackdown

Hong Kong’s Economy Overtaken by Shanghai in 2009

Yuan Options Most Expensive as China Pledges No Rise

China Will Cautiously Scrutinize Property Loans

ICBC adjusts this year’s lending

China to maintain ’stable’ yuan exchange rate

China sets 8% target for 2010 economic growth

China plans ‘proper, sufficient’ supply of money, credit in 2010

China budgets 1.05t yuan of fiscal deficit for 2010

China’s power consumption grows 40% in Jan

I arrived in Connecticut to begin a ‘listening tour’ before making the decision to run in the Democratic primary for United States Senate. Tonight I listened carefully to the Democratic candidates as they put forth their agendas for restoring the US economy and both fell far short of the mark. Neither had a credible economic agenda, and what they did propose- tax increases- would only make matters worse.

Making sure that people working for a living are paid enough to be able to buy the goods and services they produce has long been a core economic value of the Democratic party. And what drives the lion’s share of business, both large and small, is the competition to attract the consumer’s dollars by producing the goods and services working people want. Unfortunately, the current situation is clearly one where people working for a living are not taking home enough money to buy what business is desperately trying to sell. Consequently, business has been contracting and laying people off, which makes matters even worse.

The Republican response has traditionally been to give tax cuts and other monetary incentives to business rather than to the people doing the work. That does not result in new hires for the businesses, as business only hire when orders and sales pick up. Instead, it results in higher profits with the hope that those profiting will hire more domestic help and more gardeners, and produce a few jobs that way, which is known as trickle-down economics.

So while, in addition to tax hikes, both Democratic candidates for US Senate proposed tax relief, it was for small businesses- the traditional Republican approach, and indeed, the approach of the Obama administration. Note that last week’s jobs bill featured a $5,000 payroll tax reduction for businesses, and not for employees. In contrast, I have long been proposing a full ‘payroll tax holiday’ where a couple earning a combined $100,000 per year would see their take home pay rise by over $650 per month. That would be enough to fix the economy as people could then make their mortgage payments and car payments, and even do a little shopping. This is the Democratic approach which also gives businesses what they really need- people with enough money to spend to buy their products. It’s people with money to spend that creates the backlog of orders which then quickly results in the millions of new jobs we need to restore our economy to full employment levels and prosperity. The payroll tax holiday also reduces costs for business. In a competitive environment this translates into a combination of both lower prices and better cash flow for business that can be used for the new investment the recession has long delayed.

The reason the Democrats don’t propose this kind of tax cut is because they can’t answer the question of ‘how are you to replace the lost revenues.’ And, in fact the Obama administration has currently put Medicare and social security cuts on the table to ‘pay for’ what they’ve already spent. What both Democratic candidates are displaying is a failure to understand the difference between the function of Federal taxation and State and local government taxation. I grew up on the money desk at Banker’s Trust on Wall St. in the 1970’s, ran my own investment funds and securities dealer for 15 years, currently own a small Florida bank, and visit the Fed (Federal Reserve Bank) regularly to discuss monetary policy and monetary operations. I know how the payment system works, as does the Fed’s operations staff.

What we all know is that when Federal taxes are paid, all the Fed does is change the numbers down in our bank accounts. For example, if you have $5,000 in your bank account, and you pay a Federal tax of $1,000, all the Fed does is change the 5 on your bank statement to a 4, so you then have only $4,000 in your account. With online banking you can watch exactly that happen on your computer screen. The Fed doesn’t ‘get’ anything. It just changes the numbers in your account. And when the Federal government spends, it just changes numbers up in our bank accounts. It doesn’t ‘use up’ anything. In fact, the Federal government (unlike State and local governments and the rest of us who do need money in our accounts to be able to spend) never has nor doesn’t have dollars. Think if it as the score keeper for the dollar. When a touchdown is scored and 6 points go up on the scoreboard, does anyone ask where he stadium got those 6 points? Can the stadium run out of points to post on the score board? Of course not!

So why then does the Federal government tax, when it doesn’t get actual revenue (it just changes numbers down in our accounts) and it does not use up anything when it spends (it just changes numbers up in our accounts)? The fact is, taxes function to regulate the economy by controlling our take home pay. If taxes are too low, the result is excessive spending and the strong upward pressure on prices we call inflation. If we are over taxed, as we are today, and the Federal government is taking too much out of our paychecks, the result is a drop off in sales by businesses, and rising unemployment. Federal taxes are like the thermostat. If the economy is too hot (something I have never seen in my 37 years in the financial markets), they can be raised to cool it down. And when the economy goes ice cold, like it is now, my full payroll tax holiday is in order. The Federal government’s job is to keep the economy just right by keeping taxes low enough so people working for a living can afford to buy the goods and services they are capable of producing.

That’s what fiscal responsibility is all about. But until our politicians understand the difference between State finances and Federal finances, the will continue to fail to make sure our take home pay is high enough to sustain the high levels of output and employment that are the hallmarks of American prosperity.

Let me conclude with a word about China. It was stated in the Democratic debates and not disputed that the US was borrowing $4 billion from China to pay for the war in Afghanistan. However, close examination of monetary operations shows this is not at all as it seems. China has what amounts to a checking account at the Federal Reserve Bank. China gets its dollars by selling goods and services to the US, and those dollars are paid into that checking account at the Fed. And US Treasury securities are nothing more than fancy names for savings accounts at the Fed. So when China buys US Treasury securities, all the Fed does is shift China’s dollars from its checking account at the Fed to a savings account at the Fed. And when those Treasury securities become due and payable, all the Fed does is shift the dollars in the savings accounts (plus interest) back to China’s checking account at the Fed. That’s it. Debt paid. And it happens exactly this way every week as billions of Treasury securities are purchased and mature. And this process has no connection to Federal government spending for the war or anything else. Spending is always nothing more than the Fed changing numbers up in people’s bank accounts, no matter what China might be doing with their Fed accounts. That’s why the ‘national debt,’ which is nothing more than dollars in savings accounts at the Fed, has never created a financial problem, and never will, either for us or for our children. Yet the administration, the media, and the two Democratic candidates for US Senate from Connecticut have the story completely wrong as well, which results in proposals which are bad for Connecticut and bad for America.

America is grossly overtaxed and needs a full payroll tax holiday NOW to stop the bleeding and restore the American dream. The only thing standing in the way of economic prosperity is a lack of understanding of our monetary system.

Sincerely,
Warren Mosler

Markets are getting closer to the idea that:

Interest rates don’t/won’t help
QE doesn’t/won’t help

With the larger point being coming to terms with the possibility the Fed can’t inflate, or do much of anything that actually matters for the real economy, except maybe fund zombie entities to keep them from failing.

So bonds are throwing in the inflation towel and yields are coming down.
The dollar is going up with miles to go before ppp is reached.
Gold is well off the highs and being held up probably by europeans running from the euro to dollars and a bit of gold.

(***Bernanke just again testified that a contango in futures prices is a reasonable forecast of higher prices down the road. So much for the credibility of their inflation forecast)

Meanwhile the eurozone is continuing it’s methodical implosion with no credible response in sight.
And the realization that all eurozone bank deposits are only insured by the national govts has yet to hit the headlines.

The Obama administration believes the US Treasury is ‘out of money’ and we have to borrow from China to spend and leave that for our children to pay back.
So any kind of meaningful US fiscal response seems off the table.

The American economy works best when people working for a living make enough to be able to one way or another buy their own output, and business competes for their dollars. It’s not happening.

We are grossly overtaxed for current circumstances with no meaningful relief in sight.

Lots of reasons to stay on the sidelines.

Looking ugly.

And a trade deficit and FDI not profitable due to higher costs can weaken the currency as well.

25Feb10 RTRS-CHINA COMMERCE MINISTRY SEE NO CLEAR EXTERNAL DEMAND REBOUND -SPOKESMAN

25Feb10 RTRS-CHINA COMMERCE MINISTRY SAYS WILL TAKE TWO-THREE YEATS TO REGAIN EXPORT MOMENTUM

25Feb10 RTRS-CHINA COMMERCE MINISTRY SAYS CANNOT RULE OUT POSSIBLE TRADE DEFICIT WITHIN SEVERAL MONTHS

25Feb10 RTRS-CHINA TO KEEP STABLE YUAN A PRIORITY -COMMERCE MINISTRY

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Dear Mr. Mosler:

If the US debt with China is merely numbers on a “Reserve Account” at the Federal Reserve Bank,

China’s funds are either in a reserve account or in a securities account at the fed.

could China close its account at the Federal Reserve

The dollars exist only as entries on the Fed’s computer, and actual cash, which is the same data written on a piece of paper

or move its account from the Federal Reserve Bank to the Central Bank of China?

The central bank of China has a reserve account and a securities account at the Fed dollars can’t be anywhere else.

It could loan the dollars to someone else and hold their liability. And that loan transaction debiting China’s fed account and crediting the borrower’s Fed account

And if it did, what would the mechanics of such a move be and what would be the consequence of such a move?

Don’t see any of interest.

I hear news reports that China would like to replace the dollar as the international currency. Would this be the same as “closing” its account at the Federal Reserve Bank?

No, I’m not sure what it would mean. I don’t use those words, and when I ask others who do they don’t know either.

Thank you for your anticipated response. David DePasquale

thanks for your interest!

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>   
>   (email exchange)
>   
>   On Sun, Feb 7, 2010 at 8:45 AM, Seth wrote:
>   
>   scott brown was on TV this week saying we had to stop spending money we don’t have
>   and are borrowing from the Chinese-that 40% of obama’s budget will have to be
>   borrowed from Chinese and paid back by our children hopefully he is reading your stuff
>   

Yes, hope to put that to rest Thursday, assuming that’s what CNBC wants me to discuss.

Hope to definitively dismiss the entire line of thought.

1. Taxation serves to regulate aggregate demand, not to collect revenue per se.
  Govt doesn’t ever have or not have dollars- it’s the score keeper
  It taxes by changing numbers down in our accounts, and doesn’t ‘get’ anything
  It spends by changing numbers up in our accounts, and doesn’t ‘have less’ of anything.
  China is not involved in this process.
  There is no operational connection between taxing and spending.

2. China gets dollars by voluntarily selling things to us, presumably because they’d rather
  have the dollars than what they sold.
  Those dollars go into their ‘checking account’ at the Fed called a ‘reserve account.’
  Treasury securities are functionally nothing more than a ’savings account’ at the Fed
  When China buys tsy securities to earn more interest the Fed debits their reserve account
  and credits their securities account.
  The $13 trillion of US debt is best thought of as the $13 billion held in savings accounts at
  the Fed.
  When China’s or anyone else’s tsy secs mature the Fed debits their securities account and
  credits their reserve account.
  That’s all.
  Debt paid.
  This is operationally unrelated to spending and taxing.

3. The issues of concern include ‘inflation,’ but not dependence on foreign ‘investors’ and
  not solvency nor funding issues.
  All we owe China is a bank statement.

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This is the text of the address I gave at Dallas.

Will be repeating it in a northern Va meeting next weekend.

Still waiting for the video.

Feel free to distribute.

How tea party democrats can run successfully in the primaries

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

I am here to discuss how I believe Tea Party Democrats can win in upcoming Democratic primaries. The answer is to emulate and extend the success of the Tea Party movement by getting back to basics. The Democratic party is the party of Jefferson and Jackson. The founders believed that the public voice should be heard. They believed in limited government. And they never kowtowed to special interests or cowered before purveyors of the conventional wisdom. This means Tea Party Democrats should be running against the Obama administration’s policies which are counter to both traditional Democratic values and Tea Party values.

It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. For example, with unemployment rising, real wage growth falling, and GDP now growing at over 5%, who’s getting all that increase in real goods and services?

Not the millions who voted Democratic who are losing their jobs and their homes, and watching wages fall even as their cost of living goes up. All that real wealth being created is instead rising to the top, due to impossible trickle down policies that would have made even Reagan blush.

The large majority of Americans that elected this administration did not do so to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening as even a blind man can see. And all because they don’t understand the monetary system, how and why government spends and taxes, and why we don’t owe China anything more than a bank statement.

I will devote most of the rest of my time talking about the economy. In part, that is because it is my area of expertise, given that I have spent most of my adult life in financial markets. But the most important reason is it is in that arena that the Washington elite have failed us the most. The so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works. Their limited vision has limited the range of policy choice. And the result has been a monumental economic disaster and human tragedy.

My first proposal for the economy encompasses both the Tea Party and traditional Democratic values of limited government, fiscal responsibility, and reliance on competitive markets. Working through the logic of this proposal will show both how this straightforward government policy can work, and how convoluted is the elite’s understanding of finance.

I believe that the surest engine for full economic recovery is a full payroll tax holiday. Payroll taxes take away over 15% of everyone’s paycheck, from the very first dollar earned. This is big money- about $1 trillion per year. Half comes from the employee and half from the employer. A payroll tax holiday does not give anyone anything. What it does is stop taking away $1 trillion a year from working people struggling to make their payments and stay in their homes, and businesses struggling to survive. A full payroll tax holiday means a husband and wife earning $50,000 a year each will see their combined take home pay go up by over $650 a month, so they can make their mortgage payments and their car payments and maybe even do a little shopping.

This fixes the banks and fixes the economy, from what I call the bottom up. It fixes the banks without giving them anything more than people who can afford to make their payments. That’s all they need to remain viable.

And what all businesses need most to expand output and employment is people with spending money who can buy their products. Without people to buy goods and services, nothing happens. The payroll tax holiday also means there is also a big reduction in expenses for business. With competitive markets this means lower prices, which also helps consumers, helps keep inflation down, helps businesses compete domestically and in world markets to help optimize our real terms of trade, and helps keep the currency stable as the dollar is ultimately worth what it can buy. So with the payroll tax holiday we get a dramatic increase in economic activity, rising employment in good jobs, and better prices. And we’ll see millions of new jobs, because, again, what business needs most is people with money to buy their products. Then they hire and expand.

What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year. It’s an utter disgrace to the Democratic party. It should be immediately eliminated. Yet, instead, the Washington Democratic elite are actually discussing increasing it.

Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down, before the real economy can improve. This is completely upside down. But the elites believe it, so that’s what they have done to us.

So starting with President Bush, and supported by both Senators McCain and Obama, they funded the financial sector with trillions, while they kept taking away trillions from people working for a living who couldn’t make their payments.

How does that help anyone make their payments, apart from a few bankers? It doesn’t.

What happened for the next year and a half? The banks muddled through, profits and bonuses returned, but unemployment skyrocketed and is still going up, loan delinquencies and defaults and foreclosures skyrocketed and are still going up, and millions of Americans still can’t make their payments and are losing their homes. And a lot of the money the banks are making on federal support is being drained by continuing loan losses. We are getting nowhere as tens of millions of lives are being destroyed by policy makers who simply don’t understand how the monetary system works.

This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living. The government doesn’t even have to give us anything, just stop taking away the trillion dollars a year of payroll taxes with a full payroll tax holiday.

But then there’s the nagging question of ‘how are we going to pay for it? Aren’t we just going to have to borrow more money from China and leave it for our children to pay back? And if it doesn’t work, then where are we, another trillion in debt with nothing to show for it?’
And, in fact the failure to understand that question of ‘how are you going to pay for it’ is exactly what has set the Democratic party, and the nation, on the current path of economic ruin. Therefore, to run successfully against the Democrats who support current policy it is critical you understand what I’m going to say next. This understanding is the basis for achieving our core values of limited government and lower taxes. And what I’m about to tell you is pure, undisputable fact, and not theory or philosophy.

So let me start by examining exactly how government spends at what’s called the operational level. In other words, exactly how does government spend? And this is for the federal government, not the State and local government, who are in much the same position as you and I are. Well, when the federal government spends, it simply changes numbers up in bank accounts. Last May Fed Chairman Bernanke answered Congressman Pelley’s question about where the money comes from that the banks are getting. Bernanke told him the banks have accounts at the Fed and the Fed simply ‘marks them up’- changes the numbers in their bank accounts.

• (PELLEY) Is that tax money that the Fed is spending?
• (BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

The Chairman is exactly right. All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping. And that’s exactly how government actually pays for anything.

All it ever does, and ever can do when it spends, is mark up numbers in bank accounts, as the Fed Chairman told us. And with online banking you can actually watch it happen. When a government payment hits your account you can actually watch as the numbers change upward on your computer screen. And notice I’ve never mentioned China or anyone else in this spending process. They are simply not involved. Spending is done by changing numbers higher in our bank accounts. What China does or doesn’t do has nothing to do with this process. Again, this is not some theory or philosophy. It’s simply how it actually works. I’ve been there, I’ve seen it. I grew up on the money desk at Banker’s Trust on Wall St. in the 70’s, and I visit the Fed regularly and discuss monetary operations. I know exactly how it all works.

Now let’s look at how government taxes. And keep in mind what any Congressman will tell you- we have to get money from taxing or borrowing to be able to spend it.
Well, with modern on line banking you can watch what happens when a tax is paid. Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’ like our President has repeated many times. There isn’t anything to run out of. It’s just data entry, it’s score keeping. And it has nothing to do with China, which I’ll get to shortly.

So why then does the government tax at all? To control our spending power, which economists call aggregate demand. If the government didn’t tax us at all and let us spend all the money we earn, and government spent all the money it wanted to spend, the result would be a lot of inflation, caused by more spending then there are real goods and services for sale. Too much spending power chasing too few goods and services is a sure way to drive up prices. So the purpose of taxes is to regulate the economy. If the economy is too hot, taxes can be raised to cool it down. If the economy is too cold, as it obviously is today, taxes should be cut to warm it up back to operating temperature.

Taxes are like the thermostat. When it gets too hot or too cold you adjust it. It’s not about collecting revenues, there is no such thing, government never has nor doesn’t have any dollars, it just changes numbers up and down in our bank accounts. It’s all about looking at the economy and deciding whether it’s too hot or too cold, and then making an adjustment.

So, given all this, just what does ‘fiscal responsibility’ mean?
Fiscal responsibility means not overtaxing us to the point we are at today with record unemployment. And Fiscal Responsibility means not spending so much or taxing so little that the economy ‘overheats’ and inflation becomes a problem. That’s what fiscal responsibility means. That’s all it means. The government is responsible for getting the economy right, and the monetary system, including taxation, is a tool for that job.
Taxation is a tool to get the economy right.

So where does China and borrowing come into the picture? To be a successful Tea Party Democrat you will have to understand this and be able to explain it.
So first, how does China get its dollars? It sells things to us and gets paid for them.

And where does China keep its dollars? In a bank account at the Federal Reserve Bank which they call a reserve account. It’s nothing more than a checking account with a fancy name. And why does China buy Treasury securities? To earn a bit more interest.

And what is a Treasury security? It is nothing more than a savings account at the Federal Reserve Bank with a fancy name. And just like any other savings account at any other bank, with a Treasury security you give the Federal Reserve Bank money, and you get it back plus interest. So when China buys a Treasury security, what happens? The Fed moves their funds- the money they earned from selling things to us- from their checking account at the Fed to their savings account at the Fed.

And what happens when those Treasury securities- savings accounts- come due? How do we pay off China? The Fed just moves the funds from China’s savings account at the Fed back to their checking account at the Fed, and makes the number a little higher to include the interest. That’s it. Debt paid. And our children will continue to do this just like our fathers did before us. None of this involves what we call government spending. When government spends to buy something or pay someone else, it just ‘marks up’- as Chairman Bernanke put it- numbers in bank accounts. China’s bank accounts at the Fed are not involved. So why is this administration kowtowing to China on everything from Korea to human rights? And why do we go over there, thinking they are our government’s bankers, worried about getting their money to spend on everything from health care to Afghanistan, when there is no such thing as the US government getting money to spend? Why? There is only one reason. This administration does not understand the monetary system. They reason the Democrats are against a payroll tax holiday is because they think they need those actual revenues to support their spending.

So yes, we are grossly overtaxed and that’s what’s causing the sky high unemployment and the failed economy, as well as the ongoing banking crisis. And fiscal responsibility means setting taxes at the right level to sustain our spending power- not to hot and not too cold, but just right for optimal output and employment and price stability, and a return to prosperity.

And this brings up the next question, which is how to determine the right size of government. First, tax revenues don’t tell us anything about that. Taxing is just changing numbers down. It doesn’t give us anything to spend. Spending is changing numbers up; there is no numerical limit to spending.

So how do we decide how much government we want if the money doesn’t tell us anything? We do it on a very practical level. For example, when it comes to the military we need to ask ourselves, how many soldiers do we need to defend ourselves? How many planes, boats, tanks, and missiles do we need? The more we need, the more people we take who could be in the private sector producing real private sector goods and services, including doctors and nurses, teachers and teaching assistants, scientists and engineers, etc. etc. The military also uses up real resources like oil and steel. That’s the real cost of the military- how many people and resources it takes away from productive private sector activity.

What is the right size for the legal system? That depends on how long you want to wait for a court date, or for a decision. If the process is too slow, we may need more people working there, or we may need better technology. And again, the more people in government, the fewer there are to work in the private sector.

Once we have decided on the ‘right size’ of government, and pay for it by changing numbers up in people’s bank accounts when government spends, we have to decide the right amount to tax to keep the economy not too hot and not too cold, but just right. My educated guess would be, in a normal economy, to start with taxes that are less then spending by about 5% of GDP, if history is any guide. If I’m wrong taxes can either be lowered or raised to get it right. And when government spends more than it taxes- when it changes numbers up more than it changes down- we call that difference the budget deficit.

And when government changes more numbers changed up than down, the economy has exactly that many more dollars in it, which adds exactly that much to the savings of the economy. In fact, in US National Income Accounting, as taught in economics 101, the government deficit equals the total savings of financial assets in the rest of the economy, to the penny. Yes, deficits add to our monetary savings, to the penny. And everyone I’ve talked to in the Congressional Budget Office knows it. And it’s just common sense as well that if government changes numbers up in our bank accounts more than it changes them down, we have exactly that many more dollars.

Let me add one more thing about the size of government. It makes no sense to me to grow the size of the government just because the economy is too cold, if we already have the right sized government. And if we don’t have the right sized government we should immediately get it right, and then adjust taxes if the economy is too hot or too cold.
With this grasp of the fundamentals of taxing, spending, and the size of government, a Tea Party Democrat is well armed to take on the Democratic establishment that’s overtaxing us, driving up unemployment to today’s record levels, destroying our economy and standard of living, and arbitrarily growing government as well.

Conclusions:

Tea Party Democrats have a unique opportunity to be a part of history and overturn the ideas the current administration is employing that are, at best, regressive, elitist, and destructive to our quality of life.

With unemployment rising, real wage growth falling, and GDP now growing at about 4%, who’s getting that increased GDP? Not the millions who voted Democratic who are losing their jobs and their homes, and watching their wages fall. That real wealth being created is instead rising to the top, due to the Obama administration’s impossible trickle down policies. This administration was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening, and all because they don’t understand the monetary system, the don’t understand how and why government spends and taxes, and the don’t understand why we don’t owe China anything more than a bank statement.

The door is wide open for an enlightened, populist Democrat to lead the way to a new era of unsurpassed national prosperity.

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Thanks, this is what might be scaring the western educated kids who came home steeped in inflation expectations theory.

And the same kids of course believe in export led growth and want to continue to be the world’s slaves as they continue to fight our efforts to assume that position.

>   
>   On Tue, Feb 2, 2010 at 9:23 AM, Evelyn wrote:
>   

HIGHLIGHTS

Experts say CPI may grow 1.8% in Jan

MOC: US protectionism endangers trade ties

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The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.

And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.

An early warning might be a shrinking of the size of the premium in the currency forwards.

It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.

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Lending expansion often follows inflation, as higher asset prices and higher incomes support larger loan balances.

Cutting lending as this article implies can set off downward spirals and rising unemployment if domestic demand isn’t somehow supported by
enhancing consumer incomes.

3-Top China bank ICBC halts roll-over of some loans

ICBC says lending pace has slowed at end of January

* Latest signal of tightening that may rein in growth

* Official newspaper says some banks have recalled loans

* Chinese regulator renews demand for even pace of lending

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I am undeniably disappointed in Obama, though I recognize that he has had some very difficult stuff to deal with.

At the time I voted for him, I was a deficit hawk and pretty neo-liberal in outlook. Initially I was even highly skeptical of the stimulus! After Obama was elected, I realized that as an ordinary citizen, I did not understand economics at all. So I have been trying to actually learn about it, and read Keynes, Friedman (for balance, I guess), and Minsky, along with every economics blog I could find (left, right, and center). The result (so far) is that I end up going through an “everything you know is wrong” revelation with MMT. The tipping point for me was Warren Mosler asking where the points come from on a scoreboard and saying that when you pay taxes, the government destroys your money, because it does not need it to spend, via your “Should America Kowtow to China?” post. Then it just hit me like a ton of bricks - everything you know about macroeconomics is wrong. It’s hard to sufficiently emphasize how hard I was suddenly hit by it. So at least from my perspective, much of the disappointment arises from me actually changing my opinions, less from disappointment in him.

Another, larger, better targeted fiscal stimulus is needed. But with his current economic advisers, not to mention the political mood, there is no way that will actually happen. People don’t understand why it is needed because people do not understand the macro-economy. People are scared by the banal gold-standard conventional wisdom that “our children will have to re-pay the national debt,” and that “the government is going to go bankrupt.” As long as (normal but reasonably educated) people think that way, it would be suicide for any politician to actually do what is needed to fix the economy, even if that politician actually understood why it was necessary, which of course none of them do.

Well, at least Obama’s better than McCain. We would probably have lunacy like a spending freeze with him in charge.

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Looks like the kids who came how with western degrees may have gotten their way.
That’s the last thing the world needs right now.

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

The problem for China is that the entire economy depends on extremely loose lending policies, and when credit slows, companies in the critical manufacturing and trade sectors get squeezed. A great many Chinese companies rely on external consumers for their profits, but while exports showed growth for the first time in December, they face the usually slow months of January and February; only when spring comes around will it really be clear whether global demand has recovered sufficiently to support China’s exporters. Thus, exports are no refuge yet, and since Beijing has no intention of knocking the legs out of growth, it will continue shoving credit into the system.

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At some point the FDI isn’t enough to hold up the currency and it depreciates as costs of production for exports rise.

Time to cage inflation tiger, say experts

China Regulator Pledges to Control Illegal Inflows

China Property Sales Rise 75.5% to 4.4 Trillion Yuan

China Reserve Ratio Increase Not a Tightening Sign, Xinhua Says

Time to cage inflation tiger, say experts

By Wang Xiaotian and Xin Zhiming

Jan. 19 (China Daily) — Economy chugs along at good pace, but some red lights ahead

Even as China is set to achieve its targeted goal of 8 percent growth in gross domestic product (GDP) for 2009, economists have stressed that tackling high inflation should be the top priority for policymakers this year.

Inflation is likely to accelerate to more than 5 percent before the middle of this year and reach 8 percent in the second half, Erwin Sanft, head of mainland and Hong Kong equities research at BNP Paribas, was quoted by Bloomberg as saying yesterday.

China’s GDP will surpass the 8 percent year-on-year growth in 2009 and continue to surge in 2010, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday. That confirms the consensus forecast by economists, although none of them are willing to estimate the actual growth figures.

The statistics bureau is scheduled to release the economic data for 2009 on Thursday, but the growth trend has become entrenched since the third quarter of 2009, when GDP expanded by an impressive 8.9 percent year-on-year.

“There are no doubts about robust economic growth this year,” said Zhou Qiren, an economics professor at Peking University. Consumption and exports will continue to strengthen as the global economy gets back to near-normal growth, he said.

The country initiated a massive $586 billion stimulus package in late 2008 and launched a series of industry-friendly policies along with a loose monetary policy to pump prime the economy during the global financial crisis.

The strong surge in new bank lending, however, may have sowed seeds for inflation and other problems, such as asset bubbles. China’s new bank lending in 2009 nearly doubled to 9.59 trillion yuan ($1.40 trillion) over the previous year.

BNP Paribas said China’s inflation rate could touch 8 percent this year. That forecast exceeds most other estimates. Most Chinese economists feel that China would be able to rein in inflation to below 4 percent on average this year.

Li Yining, a senior economist at Peking University, said if inflation soars above 4 percent, the authorities would have to impose tighter measures to stem the growth. “It should be the warning line,” he said.

China’s central bank last week unexpectedly raised the proportion of deposits that commercial lenders must set aside as the country’s credit boom threatens to worsen inflation, which rose by 0.6 percent in November, the first year-on-year growth since last January.

The consumer price index (CPI), the main gauge of inflation, may rise 1.4 percent in December, according to economists surveyed by Bloomberg, intensifying worries that high inflation is coming back as the economy picks up.

Apart from raising banks’ reserve requirement ratio, the People’s Bank of China, the central bank, raised the three-month central bank bill issuing rate for the first time since August 2009 on Jan 7. Analysts see this as a prelude to a series of tightening monetary policies, including interest rate hikes.

“The central bank is likely to increase interest rates twice by 27 basis points this year after April,” said Dong Xian’an, chief macroeconomics analyst with Industrial Securities.

“Gone are the days when we can have economies with high growth rates and inflation as low as 2-3 percent,” he said. top

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Seems everyone has this wrong? All reserve requirements do is raise the cost of funds for the banks, not the quantity of funds they can loan.

Stephen Green’s thoughts on China:

CHINA RAISES BANKS’ RESERVE REQUIREMENT RATIO 50bps: This is a significant move. Rrr hikes require state council to sign off so this signals that sc is on board with mild tightening earlier than most (incl us) had factored in. This move now is significant too as its a first shot across the banks bows in a very aggresive loan month, esp as excess reserves in the system are are at relatively low levels (around 2pc we believe). Banks need 1-2pc for settlement needs so that means this move will bite. Pboc also probably calculated that they had to move now before we get into second half jan, early feb, before the chinese new year, when pboc has to inject liquidity (since firms and households withdarw cash for presents etc). Markets will be in a bit of shock with this move. The next move is another rrr hike in march as they withdraw post hoiliday liqudity and then we believe 2 rates hikes.

Tina Zhang

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I recall the last couple of years lending was front loaded into the first half.

If that pattern repeats no reason nominal growth won’t be fully restored

Rumors that December bank loans will be 600 bb vs expectations of 300bb - adding to the bullish sentiment today. Shanghai equities +3% at the open.

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I would expect the higher rates to support aggregate demand through the interest earned channels in the nations that hike rates.

Also, much of China’s lending by state owned/sponsored banks may be thinly disguised fiscal transfers that support demand. Cutting back by raising lending standards would then reduce demand. They apparently have a lot of excess capacity. The question is whether they increase demand to use it up, or slow down investment.

China Guides Bill Yields Higher, Seeking to Curb Record Lending

By Bloomberg News

Jan. 7 (Bloomberg) — China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

Stocks fell across Asia and oil declined on concern growth will slow in China, the engine of the world economy’s recovery from its worst recession since World War II. The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement.

“It’s definitely a signal that the central bank is tightening liquidity,” said Jiang Chao, a fixed-income analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The rising yield is used to prevent excessive growth in bank lending.”

Premier Wen Jiabao said on Dec. 27 that last year’s doubling in new loans had caused property prices to rise “too quickly,” while surging commodity costs were increasing inflationary pressure. Guiding market rates higher may be a prelude to raising reserve requirements or benchmark interest rates, said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the nation’s third-largest lender.

The MSCI Asia Pacific Index of regional stocks fell 0.5 percent and oil for February delivery slid 0.7 percent after 10 days of gains. Copper for three-month delivery dropped 0.7 percent. The Shanghai Composite Index fell 1.9 percent, led by Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.

Tightening in Asia

“We expect some tightening of monetary policy in Asia in the first half,” said Norman Villamin, Singapore-based head of investment analysis for Asia Pacific at Citigroup Private Bank. “Markets will struggle to go higher.”

Australia’s central bank raised borrowing costs by a quarter percentage point on Dec. 1 to 3.75 percent after similar moves in November and October. The Bank of Korea, which meets tomorrow, will probably raise its benchmark rate one percentage point to 3 percent by end-2010, according to a Bloomberg survey of economists. By contrast, the Federal Reserve target rate is close to zero and policy makers last month discussed increasing asset purchases should the economy weaken.

Policy makers will seek “moderate” loan growth while managing inflation expectations, the People’s Bank said yesterday in a report on its annual work meeting. The government has told lenders to pace lending, while tightening mortgage rules for second-home purchases. Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge” in the economy.

Bill Sales

Guotai Junan’s Jiang said the yield on benchmark one-year bills will climb in open-market operations next week. The central bank resumed sales of those bills on July 9 after an eight-month suspension to help drain cash from banks.

The central bank is set to withdraw 137 billion yuan from the financial market this week, the biggest since the week ended on Oct. 23, according to data compiled by Bloomberg News.

China’s one-year interest-rate swap, the cost of receiving a floating rate for 12 months, rose 10.5 basis points to 2.24 percent. A basis point is 0.01 percentage point.

The central bank kept the benchmark one-year lending rate at a five-year low of 5.31 percent last year after five reductions in the last four months of 2008. It may rise to 5.85 by the end of 2010, according to a Bloomberg News survey of 29 economists in November.

Lending Boom

“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong.

Qu estimates new loans will be limited to 7 trillion yuan in 2010. Banks extended an unprecedented 9.21 trillion yuan of loans in the first 11 months of 2009, compared with 4.15 trillion yuan a year earlier.

The People’s Bank said it would curb volatility in lending and monitor the property market, while reaffirming a “moderately loose” monetary policy. The statement contrasted with the start of 2009, when the central bank targeted “appropriate” increases in lending and said monetary policy would play “a more active role in promoting economic growth.”

Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of declines. The central bank is on alert for inflation after economic growth accelerated to 8.9 percent in the third quarter of 2009, the fastest in a year.

Property Prices

Housing Minister Jiang Weixin said yesterday that the nation will limit credit for some home purchases to reduce property-market speculation. Prices across 70 cities rose at the fastest pace in 16 months in November, gaining 5.7 percent from a year earlier, led by Shenzhen, Wenzhou and Jinhua.

The central bank didn’t state a 2010 target for growth in M2, the broad measure of money supply, after overshooting a 17 percent goal last year. The actual rate was more than 25 percent for most of 2009, rising to a record 29.7 percent in November.

“Growth will probably slow this year as tight credit will dampen the demand side,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “That will dash investors’ hopes of another year of fast growth.”

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There is no operational support for this scenario. Comments below:

Global bear rally will deflate as Japan leads world in sovereign bond crisis

By Ambrose Evans-Pritchard

Jan. 5 (Telegraph) —

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

With non convertible currency this makes no sense. If deficit spending does generate excess demand and inflation short rates will rise if markets anticipate BOJ rate hikes as a BOJ reaction function to inflation.

Once the dam breaks, debt service costs will tear the budget to pieces.

That statement has no operational meaning. All payments in yen, dollars, sterling, etc. Are met in one way only- changing numbers upward in member bank reserve accounts. Operationally there is no ‘financial stress’ associated with this process.

Yes, excess deficit spending can cause the currency to fall and inflation, but to get out of a hole first you have to stop digging, and right now the currency is strong and deflation continues as the main concern.

The Bank of Japan will pull the emergency lever on QE.

A non event, apart from somewhat lower term rates.

The country will flip from deflation to incipient hyperinflation.

Not from QE. There is no channel from QE to the real economy, lending, or anything of consequence apart from (modestly) lower term rates.

The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom.

Yes, excess deficit spending can cause the yen to fall and inflation to increase via the import/export channels.

By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

China will also reach political limits only when inflation becomes a political problem.

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Yes, China is very large and in many ways ‘untouched’ and will most likely continue to find its own resources, rather than cause world wide shortages.

China says it may have 10bln tonnes of iron ore reserves in Hebei

Dec 26 (Reuters) — The eastern region of China’s northern Hebei Province may hold iron ore reserves of more than 10 billion tonnes according to exploration work done in the area, reported the official Xinhua news agency on Saturday.

The China Metallurgical Geology Bureau said a total of 3.44 billion tonnes of iron ore has been verified in five mines in the province.

The discovery of the deposits would ease the shortfall in China’s domestic iron ore supplies and contribute to the sustainable development of China’s steel industry, Yan Xueyi, director with the bureau, was quoted as saying.

Spot iron ore prices have recently fallen from three-month highs struck in late November, and some analysts said China, the world’s biggest iron ore consumer, may seek to put pressure on prices to win more favourable terms in annual talks with global miners.

China reported on Friday that iron ore production in November rose 3.5 percent from October even as total crude steel output dropped 8.7 percent. China’s iron ore imports in November rose 12.3 percent from October.

(Reporting by Melanie Lee)

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HIGHLIGHTS

China Won’t ‘Explicitly’ Exit Stimulus Next Year
More residents upset over prices: PBOC survey

People don’t like inflation.

China grants zero-tariff to 90% of ASEAN imports

China trying to reduce costs to fight inflation, rather than support domestic jobs.

Must be a serious inflation problem?

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