The Center of the Universe

St Croix, United States Virgin Islands

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 the 'Comodities' Category

saudi oil output

Posted by WARREN MOSLER on 1st April 2014

Still strong net demand for Saudi crude so prices don’t go down unless they decide to lower them, etc.


Full size image

Posted in Comodities, Oil | No Comments »

nat gas prices

Posted by WARREN MOSLER on 8th December 2013

If the price of natural gas happens to go back towards $10, the US’s ‘energy advantage’ pretty much goes away. And it’s becoming increasingly legal to export it to hurry that day…

So let’s hope for the best!

Posted in Comodities | No Comments »

Comments on research report

Posted by WARREN MOSLER on 30th August 2013

From DB,
Comments below:

Commentary for friday: the second print on Q2 GDP growth showed a significant upward revision to +2.5% from +1.7% as previously reported. Recall that growth was only +1.1% in Q1.

After the 3rd downward revision

Given that the deflator was revised a tenth higher (0.8% vs. 0.7% as previously reported), the magnitude of the overall revision is even more impressive. Personal consumption was unrevised at +1.8% in Q2,

Down from 2.3% in Q1 if I recall correctly

While business fixed investment was only modestly softer (+4.4% vs. +4.6%). Residential investment was also reduced slightly (+12.9% vs. +13.4%). The big changes to Q2 growth were in inventories and international trade. Inventory accumulation was lifted to $62.6b from $56.7b as first reported, thereby adding 0.6 ppt to growth compared to 0.4 ppt previously.

The question is voluntary to restock from a Q1 dip or sales growth forecast, or involuntary due to lower than expected sales.

In terms of trade, firmer exports and softer imports drove net exports to improve; as a result, the original -0.8 ppt drag from trade was revised up to zero.

Question is whether exports can be sustained through Q3 as the dollar spike vs Japan and then the EM’s hurts ‘competitiveness’

The government drag on Q2 was revised to become slightly larger (-0.2 ppt vs. -0.1 ppt as first reported). Nonetheless, the federal government drag on economic activity has diminished significantly compared to the impact in Q1 (-0.7 ppt) and Q4 2012 (-1.2 ppt). A diminished drag from the public sector should enable overall GDP growth, which was +1.6% year-on-year in Q2, to close the gap with private sector growth, which was +2.5% over the same period.

I see it this way- the govt deficit spending is a net add of spending/income. So with the deficit dropping from 7% of GDP last year to maybe 3% currently, with maybe 2% of the drop from proactive fiscal initiatives, some other agent has to be spending more than his income to sustain sales/incomes etc. If not, output goes unsold/rising inventories and then unproduced. The needed spending to ‘fill the spending gap’ left by govt cutbacks can come from either domestic credit expansion or increased net exports (no resident credit expansion/savings reductions. I don’t detect the domestic credit expansion and net export growth/trade deficit reduction seems likely given the dollar spike and oil price spike?

If we achieve +3.0% growth in the current quarter and +3.5% in Q4, this will push the year-on-year rate to +1.7% in Q3 and +2.5% by yearend. (this is in line with the Fed’s central tendency forecasts, which are due to be updated at the september FOMC meeting.)

In order for our growth forecast to come to fruition, we will need to see a pickup in consumer spending,

Hard to fathom, as personal consumption has been slipping from 2.3 in Q1 to 1.8 in Q2, and walmart and the like sure aren’t seeing any material uptick in sales? Car sales are ok, but further gains from the June high rate seems doubtful as July has already posted a slower annual rate.

homebuilding and business investment relative to first half performance. The first two series are likely to be boosted by sturdier employment gains, and hence faster household income growth.

Seems early Q3 reports show falling mtg purchase applications, home sales falling month to month, and lots of anecdotals showing the spike in mtg rates has slowed things down. So growth from Q2 seems unlikely at this point?

We are confident that the pace of hiring will pick up in the relatively near term, because jobless claims continue to hold near cyclical lows.

New jobs dropped to 160,000 in july, and claims measure people losing their jobs, not new hires. Also, top line growth, the ultimate driver of employment, remains low, so assuming actual productivity hasn’t gone negative a spike in jobs is unlikely?

Given the usefulness of jobless claims as a payroll forecasting tool, it should come as little surprise that they are also significantly correlated with wage and salary growth. In fact, over the past 25 years, the current level of jobless claims has typically coincided with private wage and salary growth above 6% compared to 3.8% in Q2.

As above, claims may have correlated with all that in the past, but the causation isn’t there. Looks to me like claims are more associated with ‘time from the bottom’ as with time after the economy bottoms firings tend to slow, regardless of hiring?

Meanwhile, the third growth driver noted above—business investment—will largely depend on the corporate profit trend. Yesterday’s second print on GDP provided the first look at economy-wide corporate profits, which rose +3.9% in Q2 vs. -1.3% in Q1. Many analysts fretted the decline in profits in Q1, because they tend to drive business investment and hiring plans. We dismissed the Q1 weakness as a temporary development which occurred in lagged response to the growth slowdown in Q4 2012 and Q1 2013. The fact that profits are reaccelerating (+5.0% year-on-year versus +2.1% in Q1) is an encouraging development in this regard.

Profits also are a function of sales, which are a function of ‘deficit spending’ from either govt or other sectors, as previously discussed. And, again, i see no signs of ‘leaping ahead’ in any of those sectors.

Faster GDP growth through yearend should result in even stronger corporate profit growth.

Agreed! But didn’t he just say that the GDP growth would come from business investment that’s a function of profits (and in turn a function of sales/GDP)?

To be sure, the additional growth momentum now evident in the Q2 GDP results makes our 3% target for current quarter growth more easily attainable. –CR

I don’t see how inventory growth is ‘momentum’ and seems there are severe headwinds to Q3 net exports as drivers of growth?

And govt is there with a deficit of only 3% of GDP to help offset the relentless ‘unspent income’/demand leakages inherent in the global institutional structure.

Posted in Comodities, Currencies, Economic Releases, Employment, Fed, GDP, Government Spending, Oil | No Comments »

Oil vaults on refinery shutdown, US oil settles above $106

Posted by WARREN MOSLER on 25th August 2013

Yet another stupid headline, seems.
Refiners are buyers of crude…

Oil vaults on refinery shutdown, US oil settles above $106

Posted in Comodities, Oil | No Comments »

Brent-WTI

Posted by WARREN MOSLER on 10th July 2013

>   
>   (email exchange)
>   
>   On Wed, Jul 10, 2013 at 7:42 AM, Michael wrote:
>   
>   Your Brent-WTI convergence call at the opening of the Seaway pipeline was one of the
>   best calls I ever saw you make. The timing was beautiful. I never even heard one
>   industry person make that call either. The spread is down to practically nothing now.
>   

Yes, thanks, just before its capacity doubled around year end, if I recall correctly.

I also saw it as a risk, as it would mean WTI up over 100 and gasoline up some, although it was largely priced off of brent. It’s also good for the producers but bad for the refiners who had access to the WTI.

Posted in Comodities | No Comments »

Saudis still firmly in control of price

Posted by WARREN MOSLER on 1st July 2013


Full size image

Posted in Comodities, Oil | No Comments »

gold: not enough qe…

Posted by WARREN MOSLER on 26th June 2013

Wonder when they stop calling it money printing…


Full size image

Posted in Comodities, Fed | No Comments »

Saudi production

Posted by WARREN MOSLER on 6th June 2013

Saudi output graph

Posted in Comodities | No Comments »

Obama administration approved wider exports of liquefied natural gas

Posted by WARREN MOSLER on 20th May 2013

Interesting!

US Energy Revolution Gathers Pace

By Ed Crooks, Jonathan Soble and Guy Chazan

May 18 (FT) — The growing role of the U.S. in world energy markets was underlined on Friday as the Obama administration approved wider exports of liquefied natural gas and international companies committed billions of dollars for new infrastructure.

The developments were both consequences of the shale revolution in the U.S., in which improvements in the techniques of horizontal drilling and hydraulic fracturing, or “fracking,” have unlocked new supplies of oil and gas, and raised the prospect that the US will be an increasingly important supplier of energy to the rest of the world.

The Department of Energy on Friday authorized the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of the EU. It was the first such approval to be granted for two years and only the second ever.

President Barack Obama had been expected to approve worldwide sales from the Freeport project, as the administration sees rising energy exports as providing economic benefits and strengthening the global influence of the U.S.

However, a vocal lobby of companies in industries such as chemicals and steel has urged restrictions on gas exports to ensure U.S. manufacturers continue to derive a competitive advantage from cheap energy.

Freeport has signed deals to sell its gas to Osaka Gas and Chubu Electric of Japan, and BP of the U.K. The export project is owned by a consortium including Osaka Gas and Michael Smith, Freeport’s founder and chief executive.

Separately, Japanese and European companies said they would invest billions of dollars in another proposed gas export project, the $10 billion Cameron LNG plant in Louisiana.

Posted in Comodities, Energy | No Comments »

gasoline and nat gas prices

Posted by WARREN MOSLER on 6th May 2013

Falling gas prices were helping some after hurting some, but now they’re just steadying around Q4 type levels:


Full size image

Meanwhile, take a look at nat gas prices. And allowing exports can cause them to climb to double digit world prices:


Full size image

Posted in Comodities | No Comments »

Saudi output

Posted by WARREN MOSLER on 1st May 2013

Saudi’s remain comfortably in control of price:


Full size image

Posted in Comodities | No Comments »

Overall view of the economy

Posted by WARREN MOSLER on 29th April 2013

This is my overall view of the economy.

The US was on the move by Q4 last year. A housing and cars (and student loans) driven expansion was happening, with slowing transfer payments and rising tax revenues bringing the deficit down as the automatic stabilizers were doing their countercyclical thing that would eventually reverse the growth. But that could take years. Look at it this way. Someone making 50,000 per year borrowed 150,000 to buy a house. The loan created the deposit that paid for the house. The seller of the house got that much new income, with a bit going to pay taxes and the rest there to be spent. Maybe a bit of furniture etc. was bought on credit as well, again adding income and (gross) financial assets to the recipients of the borrowers spending. And increasing sales added employment as well as output, albeit not enough to keep up with population growth etc.

I was very hopeful. Back in November, after the ‘Obama is a socialist’ sell off, I wrote that it was time to buy stocks and go play golf for three years, as, left alone, the credit accelerator in progress could go on for a long time.

But it wasn’t left along. Only a few weeks later the cliff drama began to intensify, with lots of fear of going over the ‘full cliff’. While that didn’t happen, we did go over about 1/3 cliff when both sides let the FICA reduction expire, thus removing some $170 billion from 2013, along with strong prospects of an $85 billion (annualized) sequester at quarter end. This moved me ‘to the sidelines’. Seemed to me taking that many dollars out of the economy was a serious enough negative for me to get out of the way.

But the Jan and then Feb numbers showed I was wrong, and that the consumer had continued to grow his spending as before via housing and cars, etc. Even the cliff constrained -.1 GDP of Q4 was soon revised up to .4. Stocks kept moving up and bonds moved higher in yield, even as the sequester kicked in, with the market view being the FICA hike fears were bogus and same for the sequester fears. Balancing the budget and getting the govt out of the way does indeed work to support the private sector. The UK, Eurozone, and Japan were exceptions. Austerity inherently does work. And markets were discounting all that, as it’s what market participants believed and the data supported.

Then, it all changed. April releases of March numbers showed not only suddenly weak March numbers, but Jan and Feb numbers revised lower as well. The slope of things post FICA hike went from positive to negative all at once. The FICA hike did seem to have an effect after all. And with the sequesters kicking in April 1, the prospects for Q2 were/are looking worse by the day.

My fear is that the FICA hikes and sequesters didn’t just take 1.5% of GDP ‘off the top’ as forecasters suggest, leaving future gains from the domestic credit expansion there to add to GDP as they had been. That is, the mainstream forecasts are saying when someone’s paycheck goes down by $100 per month from the FICA hike, or loses his job from the sequester, he slows his spending, but he still borrows to buy a car and/or a house as if nothing bad had happened, and so GDP is reduced by approximately the amount of the tax hikes and spending cuts, with a bit of adjustment for the ‘savings multipliers’. I say he may not borrow to buy the house or the car. Which both removes general spending and also slows the credit accelerator, shifting the always pro cyclical private sector from forward to reverse. And the ‘new’ negative data slopes have me concerned it’s already happening. Before the sequesters kicked in.

Looking at Japan, theory and evidence tells me the lesson is that lower interest rates require higher govt deficits for the same level of output and employment. More specifically, it looks to me like 0 rates may require 7-8% or even higher deficits for desired levels of output and employment vs maybe 3-4% deficits when the central bank sets rates at maybe 5% or so, etc. And US history could now be telling much the same.

And another lesson from Japan we should have learned long ago is that QE is a tax that does nothing good for output or employment and is, if anything, ‘deflationary’ via the same interest income channels we have here. Note that the $90 billion of profits the Fed turned over to the tsy would have been earned in the economy if the Fed hadn’t purchased any securities. So, as always in the past, watch for Japan’s QE to again ‘fail’ to add to output, employment, or inflation. However, their increased deficit spending, if and when it materialize, will support output, employment, and prices as it’s done in the past.

Oil and gasoline prices are down some, which is dollar friendly and consumer friendly, but only back to sort of ‘neutral’ levels from elevated ‘problematic’ levels And there is risk that the Saudis decide to cut price for long enough to put the kibosh on the likes of North Dakota’s and other higher priced crude, wiping out the value of that investment and ending the output and employment and currency support from those sources. No way to tell what they may be up to.

So my overall view is negative, with serious deflationary risks looming.

And the solution is still fiscal- a tax cut and/or spending increase.
However, that seems further away then ever, as the President is now moving towards an additional 1.8 trillion of deficit reduction.

:(

Posted in CBs, Comodities, Credit, Employment, Fed, GDP, Government Spending, Japan, Political | No Comments »

Gold

Posted by WARREN MOSLER on 15th April 2013

When Central Banks buy it, the price tends to go up, and when they sell it, the price tends to go back towards marginal cost of production.

Talk of Cypress being forced to sell stokes fears of Greece doing same, and of course when EU policy turns biased towards selling its doubtful any of the member banks would buy?


Full size image

Posted in Comodities | No Comments »

thatcher & oil

Posted by WARREN MOSLER on 15th April 2013

Well worth a read!

>   
>   (email exchange)
>   
>   On Wed, Apr 10, 2013 at 7:02 PM, James wrote:
>   
>   Paper attached, I cleaned it up some and added a few lines on shale oil that I had intended
>   to write. Its not what I would consider a finished product, but its so old now that I dont
>   see much point in improving it. Use it as you see fit.
>   

The Institutions of the Oil Industry: A Proposal for Adjustment

Posted in Comodities | No Comments »

comments on a line from a confidential report from Karim

Posted by WARREN MOSLER on 15th April 2013

Comments and ramblings:

“Strong multiplier effects from construction jobs to broader economy.”

Good report!!!

I used to call this the ‘get a job, buy a car, get a job buy a house’ accelerator. And yes, it has happened in past business cycles and been a strong driver. But going back to the last Bush up leg, turns out it was supported to a reasonably large degree by the ‘subprime fraud’ dynamic of ‘make 30k/year, buy a 300k house’ with fraudulent appraisals and fraudulent income statements. And the Clinton up leg was supported by the funding of impossible .com business plans and y2k fear driven investment, and the Reagan years by the S&L up leg that resulted in 1T in bad loans, back when that was a lot of money. Japan, on the other hand, has carefully avoided, lets say, a credit boom based on something they would have regretted in hindsight, as was the case in the US.

The point is it takes a lot of deficit spending to overcome the demand leakages, and with the govt down to less than 6% of GDP this year, yes, ‘legit’ housing can add quite a bit, but can it add more than it did in Japan, for example? And, to the point of this report, will it be enough to move the Fed?

Also, looks to me like, at the macro level, credit is driven by/limited by income (real or imagined), and the proactive deficit reduction measures like the FICA hikes and the sequesters have directly removed income, as had QE and the rate cuts in general. So yes, debt is down as a % of income, but the level of income is being suppressed (call it income repression policy?) through pro active fiscal and the low number of people working and getting paid for it.

Domestic energy production adds another interesting dimension. It means dollar income is being earned by firms operating domestically that would have been earned by overseas agents. The question here is whether that adds to incomes that gets spent domestically. That is, did the dollars go to foreigners who spent it all on fighter jets, or did they just let them sit in financial assets vs the domestic oil company? Does it spend more of its dollar earnings domestically than the foreign agent did, or just build cash, etc? And either way its dollar friendly, which also means more non oil imports, particularly with portfolio managers ‘subsidizing’ exports from Japan with their currency shifting. That should be a ‘good thing’ for us, as it means taxes can be that much lower for a given size govt, but of course the politicians don’t have enough sense to do that. It all comes back to the question of whether the deficit is too small.

As for banking and lending, anecdotally , my direct experience with regulators is that they are ‘bad’ and vindictive people, much like many IRS agents I’ve come across, and right now they are engaging in what the Fed calls ‘regulatory over reach’, particularly at the small bank level, but also at the large bank level. This makes a bank supported credit boom highly problematic. And without bank support, the non bank sector is limited as well.

Lastly, there’s a difference between deficits coming down via automatic stabilizers and via proactive deficit reduction. The automatic stabilizers bring the deficit down when non govt credit growth is ‘already’ strong enough to bring it down, while proactive deficit reduction, aka ‘austerity’ does it ‘ahead of’ non govt credit growth, which means austerity can/does keep non govt credit growth from materializing (via income/savings reduction).

Conclusion- the Fed is correct in being concerned about our domestic dynamics. And they are right about being concerned about the rest of the global economy. Europe is still going backwards, as is China where they are cutting back on the growth of debt by local govts and state banks, all of which ‘counts’ as part of the deficit spending that drove prior levels of growth. And softer resource prices hit the resource exporters who growth is leveraged to the higher prices. I wrote a while back about what happens when the longer term commodity cycle peaks, supply tends to catch up and prices tend to fall back to marginal costs of production, etc.

And the Fed has to suspect, at least, the QE isn’t going to do anything for output and employment in Japan, any more than it’s actually done for the US.

Posted in Banking, Comodities, Currencies, Fed, Government Spending, trade | No Comments »

Global growth and US oil and product imports

Posted by WARREN MOSLER on 12th April 2013

A while back I’d written about how the global economy had become leveraged to net exports to the US, which has turned out to be the case. And now with US imports of crude and products falling, another leg of this process seems to be underway, and in a world where no one runs high enough deficits to sustain domestic demand at reasonable levels.

A rough guess is 15x leverage? A US trade deficit of $500 billion is sustaining about $7.5 trillion in global ‘equity value’? More?

Posted in Comodities, Deficit, GDP, trade, USA | No Comments »

My story of the Thatcher era

Posted by WARREN MOSLER on 10th April 2013

Here’s how I remember it all.
I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?
It was the blind leading the blind then and it’s the same now.
And that’s how I remember it/her.
And i care a whole lot more about what happens next than about what happened then.

:(

Posted in CBs, Comodities, Employment, Fed, UK, USA | No Comments »

saudis remain comfortably in control of price

Posted by WARREN MOSLER on 8th April 2013

Posted in Comodities | No Comments »

The Stockman’s big swinging whip

Posted by WARREN MOSLER on 1st April 2013

The Man from Snowy River

By Banjo Paterson

So Clancy rode to wheel them — he was racing on the wing
Where the best and boldest riders take their place,
And he raced his stock-horse past them, and he made the ranges ring
With the stockwhip, as he met them face to face.
Then they halted for a moment, while he swung the dreaded lash,
But they saw their well-loved mountain full in view,
And they charged beneath the stockwhip with a sharp and sudden dash,
And off into the mountain scrub they flew.

Unemployment is everywhere and always a monetary phenomenon, and necessarily a government imposed crime against humanity. The currency is a simple public monopoly.

The dollars to pay taxes, ultimately come from government spending or lending (or counterfeiting…)

Unemployment can only happen when a govt fails to spend enough to cover the tax liabilities it imposed, and any residual desire to save financial assets that are created by the tax and by other govt policy.

Said another way, for any given size government, unemployment is the evidence of over taxation.

Motivation not withstanding, David Stockman has long been aggressively promoting policy that creates and sustains unemployment.

Comments below:

State-Wrecked: The Corruption of Capitalism in America

By David Stockman

March 30 (NYT) — The Dow Jones and Standard & Poors 500 indexes reached record highs on Thursday, having completely erased the losses since the stock markets last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later within a few years, I predict this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Phony money? What else are $US other than credit balances at the Fed or actual cash in circulation? Of course he fails to realize US treasury securities, also known as ‘securities accounts’ by Fed insiders, are likewise nothing more than dollar balances at the Fed, and that QE merely shifts dollar balances at the Fed from securities accounts to reserve accounts. It’s ‘money printing’ only under a narrow enough definition of ‘money’ to not include treasury securities as ‘money’. Additionally, of course, QE removes interest income from the economy, but that’s another story…

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion).

And also debited/reduced/removed an equal amount of $US from Fed securities accounts. The net ‘dollar printing’ is 0.

Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the bottom 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

Yes, and anyone who understood monetary operations knows exactly why QE did not add to sales/output/employment, as explained above.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants,

‘Paying off the debt’ is simply a matter of debiting securities accounts at the Fed and crediting reserve accounts at the Fed. There are no grandchildren or taxpayers involved, except maybe a few to program the computers and polish the floors and do the accounting, etc.

unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nations bills.

The nations bills are paid via the Fed crediting member bank accounts on its books. Today’s excess capacity and unemployment means that for the size govt we have we are grossly over taxed, not under taxed.

By default, the Fed has resorted to a radical, uncharted spree of money printing.

As above, ‘money printing’ only under a narrow definition of ‘money’.

But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

With floating exchange rates, bank liquidity, for all practical purposes, is always unlimited. Banks are constrained by capital and asset regulation, not liquidity.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008.

There is nothing to ‘burst’ as for all practical purposes liquidity is never a constraint.

Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even todays feeble remnants of economic growth.

This dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, weve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

The currency itself is a simply public monopoly, and the restriction of supply by a monopolist as previously described, is, in this case the cause of unemployment and excess capacity in general.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (clean energy, biotechnology) and, above all, bailing out Wall Street they have now succumbed to overload, overreach and outside capture by powerful interests.

He may have something there!

The modern Keynesian state is broke,

Not applicable. Congress spends simply by having its agent, the tsy, instruct the Fed to credit a member bank’s reserve account.

paralyzed and mired in empty ritual incantations about stimulating demand, even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

Some truth there as well!

The culprits are bipartisan, though youd never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry.

Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed.

Actually it was the Texas railroad commission pretty much fixing the price of oil at about $3 that did the trick, until the early 1970′s when domestic capacity fell short, and pricing power shifted to the saudis who had other ideas about ‘public purpose’ as they jacked the price up to $40 by 1980.

Then came Lyndon B. Johnsons guns and butter excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nations debt obligations by finally ending the convertibility of gold to the dollar. That one act arguably a sin graver than Watergate meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

It also happens to equal the ‘savings’ of financial assets of the global economy, with the approximately $16 trillion of treasury securities- $US in ‘savings accounts’ at the Fed- constituting the net savings of $US financial assets of the global economy. And the current low levels of output and high unemployment tell us the ‘debt’ is far below our actual desire to save these financial assets. In other words, for the size government we have, we are grossly over taxed. The deficit needs to be larger, not smaller. We need to either increase spending and/or cut taxes, depending on one’s politics.

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply.

And the never ending expansion of $US global savings desires, including trillions of accumulations in pension funds, IRA’s, etc. Where there are tax advantages to save, as well as trillions in corporate reserves, foreign central bank reserves, etc. etc.

As everyone at the CBO knows, the US govt deficit = global $US net savings of financial assets, to the penny.

The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

It was the Saudis hiking price, not the Fed. Note that similar ‘inflation’ hit every nation in the world, regardless of ‘monetary policy’. And it ended a few years after president Carter deregulated natural gas in 1978, which resulted in electric utilities switching out of oil to natural gas, and even OPEC’s cutting of 15 million barrels per day of production failing to stop the collapse of oil prices.

Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedmans penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the Greenspan put the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash was reinforced by the Feds unforgivable 1998 bailout of the hedge fund Long-Term Capital Management.

The Fed didn’t bail out LTCM. They hosted a meeting of creditors who took over the positions at prices that generated 25% types of annual returns for themselves.

That Mr. Greenspans loose monetary policies didnt set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia.

No, because oil prices didn’t go up due to the glut from the deregulation of natural gas .

By offshoring Americas tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspans pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust.

No, it wasn’t about Greenspan, it was about the private sector and banking necessarily being pro cyclical. And the severity of the bust was a consequence of the Clinton budget surpluses ‘draining’ net financial assets from the economy, thereby removing the equity that supports the macro credit structure.

Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They China and Japan above all accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. Weve been living on borrowed time and spending Asians borrowed dimes.

Yes, the trade deficit is a benefit that allows us to consume more than we produce for as long as the rest of the world continues to desire to net export to us.

This dynamic reinforced the Reaganite shibboleth that deficits dont matter and the fact that nearly $5 trillion of the nations $12 trillion in publicly held debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan one reason I resigned as his budget chief in 1985

I wonder if he’ll ever discover how wrong he’s been, and for a very long time.

was the greatest of his many dramatic acts. It created a template for the Republicans utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation

Hadn’t heard about an US bankruptcy filing? Am I missing something?

through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism for the wealthy.

He’s almost convinced me deep down he’s a populist…

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable hot money soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Can’t argue with that!

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Streets gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.

The shameful part was not making a fiscal adjustment when it all started falling apart. I was calling for a full ‘payroll tax holiday’ back then, for example.

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding.

While the actual policies implemented were far from my first choice, they did keep it from getting a lot worse. Yes, it would have ‘burned out’ as it always has, but via the automatic fiscal stabilizers working to get the deficit high enough to catch the fall. I would argue it would have gotten a lot worse by doing nothing. And, of course, a full payroll tax holiday early on would likely have sustained sales/output/employment as the near ‘normal’ levels of the year before. In other words, Wall Street didn’t have to spill over to Main Street. Wall Street Investors could have taken their lumps without causing main street unemployment to rise.

Instead, the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around particularly to the aging, electorally vital Rust Belt rather than saving them. The green energy component of Mr. Obamas stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent.

Some good points there. But misses the point that capitalism is about business competing for consumer dollars, with consumer choice deciding who wins and who loses. ‘Creative destruction’ is not about a collapse in aggregate demand that causes sales in general to collapse, with survival going to those with enough capital to survive, as happened in 2008 when even Toyota, who had the most desired cars, losing billions when 8 million people lost their jobs all at once and sales in general collapsed.

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster.

Ok, apart from the ‘borrowed money’ part. Congressional spending is via the Fed crediting a member bank reserve account. They call it borrowing when they shift those funds from reserve accounts at the Fed to security accounts at the Fed. The word ‘borrowed’ is highly misleading, at best.

But even Mr. Obamas hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour.

And ‘unprinted’ securities accounts/treasury securities at exactly the same pace, to the penny.

Fast-money speculators have been purchasing giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets.

Probably true, though quite a few ‘headline’ fund managers and speculators have apparently been going short…

If and when the Fed which now promises to get unemployment below 6.5 percent as long as inflation doesnt exceed 2.5 percent even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs profits. Notwithstanding Mr. Bernankes assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.

It’s about setting a policy rate. The notion of prison isn’t applicable.

While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the 10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget Offices estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme examples of Washingtons delusions.

And with no long term inflation problem forecast by anyone, the savings desires over that time period are at least that high.

Even a supposedly bold measure linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index would save just $200 billion over a decade, amounting to hardly 1 percent of the problem.

Thank goodness, as the problem is the deficit is too low, as evidenced by unemployment.

Mr. Ryans latest budget shamelessly gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net Medicaid, food stamps and the earned-income tax credit is another front in the G.O.P.s war against the 99 percent.

Never seen him play the class warfare card like this?

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today.

Not that it will, but if it does and inflation remains low it just means savings desires are that high.

Since our constitutional stasis rules out any prospect of a grand bargain, the nations fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

No description of what ‘fiscal collapse’ might look like. Because there is no such thing.

The future is bleak. The greatest construction boom in recorded history Chinas money dump on infrastructure over the last 15 years is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand.

Agreed.

The American machinery of monetary and fiscal stimulus has reached its limits.

Do not agree. In fact, there are no numerical limits.

Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too.

The state-wreck ahead is a far cry from the Great Moderation proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown seems likely to be contained. Instead of moderation, whats at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices a form of inflation that the Fed fecklessly disregards in calculating inflation.

It’s not at all disregarded. And the Fed has only done ‘pretend money printing’ since they ‘unprint’ treasury securities as they ‘print’ reserve balances.

These policies have brought America to an end-stage metastasis. The way out would be so radical it cant happen.

How about a full payroll tax holiday? Too radical to happen???

It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

These are the conclusions of his way out of paradigm conceptualizing.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

Whatever…

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

I happen to fully agree with narrow banking, as per my proposals.

It would require, finally, benching the Feds central planners, and restoring the central banks original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

Rhetoric that shows his total lack of understanding of monetary operations.

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market recovery, artificially propped up by the Feds interest-rate repression.

No govt policy necessarily supports rates. Without the issuance of treasury securities, paying interest on reserves, and other ‘interest rate support’ policy rates fall to 0%. He’s got the repression thing backwards.

The United States is broke fiscally, morally, intellectually and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse.

How about a full payroll tax holiday???

If this sounds like advice to get out of the markets and hide out in cash, it is.

I tend to agree but for the opposite reason.

The deficit may have gotten too small with the latest tax hikes and spending cuts.

(feel free to distribute)

Posted in Banking, Bonds, CBs, China, Comodities, Currencies, Deficit, Employment, Exports, Fed, Government Spending, Greece, Inflation, Interest Rates, Oil, Political, Recession, trade | No Comments »

a bit of a drag on consumption

Posted by WARREN MOSLER on 3rd February 2013

Posted in Comodities | No Comments »