Posted by WARREN MOSLER on 9th December 2013
Says its backed by taxes and men with guns…
Posted by WARREN MOSLER on 9th December 2013
Says its backed by taxes and men with guns…
Posted by WARREN MOSLER on 29th October 2013
Do you think they know austerity causes loans to go bad?
Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.
Do you think they know higher rates support higher inflation and weaken the currency?
India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inﬂation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.
Posted by WARREN MOSLER on 18th October 2013
The last thing they want is the euro to get strong and eat into their fledgling trade surplus and, in general, do its deflationary thing.
But what can they do? Discourage Japan and the rest from buying their member nation’s debt? Not.
Buy $, yen, etc? No- ideologically impossible. Gives the appearance that fx reserves are backing the euro, etc.
That leaves ‘monetary easing’ of some sort that doesn’t directly work, but hopes to scare investors out of euro.
Posted by WARREN MOSLER on 2nd October 2013
October 2 (Dow Jones) — A Bank of Japan survey showed Wednesday that consumer sentiment worsened for the first time in three quarters as a rise in energy prices amid a lack of major wage increases negatively affected their views on the economy. The central bank’s survey of the general public showed that the diffusion index measuring the current state of the economy fell to minus 8.3 from minus 4.8. Of the poll of 2,252 consumers, 83% of respondents said they expect the prices of goods and services to rise over the coming year. That’s higher than 80.2% in the previous June survey. The survey also showed that 16.2% of the respondents see the economy improving in coming year, down from the previous 24.3%.
Posted by WARREN MOSLER on 1st October 2013
Here’s my take on the Volcker article
My comments in below:
By Paul Volcker
I have been struck by parallels between the challenges facing the Federal Reserve today and those when I first entered the Federal Reserve System as a neophyte economist in 1949.
Most striking then, as now, was the commitment of the Federal Reserve, which was and is a formally independent body, to maintaining a pattern of very low interest rates, ranging from near zero to 2.5 percent or less for Treasury bonds. If you feel a bit impatient about the prevailing rates, quite understandably so, recall that the earlier episode lasted fifteen years.
The initial steps taken in the midst of the depression of the 1930s to support the economy by keeping interest rates low were made at the Fed’s initiative. The pattern was held through World War II in explicit agreement with the Treasury. Then it persisted right in the face of double-digit inflation after the war, increasingly under Treasury and presidential pressure to keep rates low.
Yes, and this was done after conversion to gold was suspended which made it possible. And they fixed long rates as well/
The growing restiveness of the Federal Reserve was reflected in testimony by Marriner Eccles in 1948:
Under the circumstances that now exist the Federal Reserve System is the greatest potential agent of inflation that man could possibly contrive.
This was pretty strong language by a sitting Fed governor and a long-serving board chairman. But it was then a fact that there were many doubts about whether the formality of the independent legal status of the central bank—guaranteed since it was created in 1913—could or should be sustained against Treasury and presidential importuning. At the time, the influential Hoover Commission on government reorganization itself expressed strong doubts about the Fed’s independence. In these years calls for freeing the market and letting the Fed’s interest rates rise met strong resistance from the government.
Not freeing the ‘market’ but letting the Fed chair have his way. Rates would be set ‘politically’ either way. Just a matter of who.
Treasury debt had enormously increased during World War II, exceeding 100 percent of the GDP, so there was concern about an intolerable impact on the budget if interest rates rose strongly. Moreover, if the Fed permitted higher interest rates this might lead to panicky and speculative reactions. Declines in bond prices, which would fall as interest rates rose, would drain bank capital. Main-line economists, and the Fed itself, worried that a sudden rise in interest rates could put the economy back in recession.
All of those concerns are in play today, some sixty years later, even if few now take the extreme view of the first report of the then new Council of Economic Advisers in 1948: “low interest rates at all times and under all conditions, even during inflation,” it said, would be desirable to promote investment and economic progress. Not exactly a robust defense of the Federal Reserve and independent monetary policy.
But in my humble opinion a true statement!
Eventually, the Federal Reserve did get restless, and finally in 1951 it rejected overt presidential pressure to maintain a ceiling on long-term Treasury rates. In the event, the ending of that ceiling, called the “peg,” was not dramatic. Interest rates did rise over time, but with markets habituated for years to a low interest rate, the price of long-term bonds remained at moderate levels. Monetary policy, free to act against incipient inflationary tendencies, contributed to fifteen years of stability in prices, accompanied by strong economic growth and high employment. The recessions were short and mild.
I agreed with John Kenneth Galbraith in that inflation was not a function of rates, at least not in the direction they believed, due to interest income channels. However, the rate caps on bank deposits, etc. Did mean that rate hikes had the potential to disrupt those financial institutions and cut into lending, until those caps were removed.
In general, however, the ‘business cycle’ issues are better traced to fiscal balance.
No doubt, the challenge today of orderly withdrawal from the Fed’s broader regime of “quantitative easing”—a regime aimed at stimulating the economy by large-scale buying of government and other securities on the market—is far more complicated. The still-growing size and composition of the Fed’s balance sheet imply the need for, at the least, an extended period of “disengagement,” i.e., less active purchasing of bonds so as to keep interest rates artificially low.
Artificially? vs what ‘market signals’? Rates are ‘naturally’ market determined with fixed fx policies, not today’s floating fx.
In fact, without govt ‘interference’ such as interest on reserves and tsy secs, the ‘natural’ rate is 0 as long as there are net reserve balances from deficit spending.
Nor is there any technical or operational reason for unwinding QE. Functionally, the Fed buying securities is identical to the tsy not issuing them and instead letting its net spending remain as reserve balances. Either way deficit spending results in balances in reserve accounts rather than balances in securities accounts. And in any case both are just dollar balances in Fed accounts.
Moreover, the extraordinary commitment of Federal Reserve resources,
‘Resources’? What does that mean? Crediting an account on its own books is somehow ‘using up a resource’? It’s just accounting information!
alongside other instruments of government intervention, is now dominating the largest sector of our capital markets, that for residential mortgages. Indeed, it is not an exaggeration to note that the Federal Reserve, with assets of $3.5 trillion and growing, is, in effect, acting as the world’s largest financial intermediator. It is acquiring long-term obligations in the form of bonds and financing those purchases by short-term deposits. It is aided and abetted in doing so by its unique privilege to create its own liabilities.
The Fed creates govt liabilities, aka making payments. That’s its function. And, for example, the treasury securities are the initial intervention. They are paid for by the Fed debiting reserve accounts and crediting securities accounts. All QE does is reverse that as the Fed debits the securities accounts and ‘recredits’ the reserve accounts. So it can be said that all QE does is neutralize prior govt intervention.
The beneficial effects of the actual and potential monetizing of public and private debt, which is the essence of the quantitative easing program, appear limited and diminishing over time. The old “pushing on a string” analogy is relevant. The risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention.
Right, with the primary fundamental effect being the removal of interest income from the economy. The Fed turned over some $100billion to the tsy that the economy would have otherwise earned. QE is a tax on the economy.
All of this has given rise to debate within the Federal Reserve itself. In that debate, I trust that sight is not lost of the merits—economic and political—of an ultimate return to a more orthodox central banking approach. Concerning possible changes in Fed policy, it is worth quoting from Fed Chairman Ben Bernanke’s remarks on June 19:
Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time.
If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of [asset] purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.
In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.
I would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed.
Indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.
Implying QE works to do that.
I do not doubt the ability and understanding of Chairman Bernanke and his colleagues. They have a considerable range of instruments available to them to manage the transition, including the novel approach of paying interest on banks’ excess reserves, potentially sterilizing their monetary impact.
Reserves can be thought of as ‘one day treasury securities’ and the idea that paying interest sterilizing anything is a throwback to fixed fx policy, not applicable to floating fx.
What is at issue—what is always at issue—is a matter of good judgment, leadership, and institutional backbone. A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’s DNA.
A good working knowledge of monetary operations would be a refreshing change as well!
Those are not qualities that can be learned from textbooks. Abstract economic modeling and the endless regression analyses of econometricians will be of little help. The new approach of “behavioral” economics itself is recognition of the limitations of mathematical approaches, but that new “science” is in its infancy.
Monetary operations can be learned from money and banking texts.
A reading of history may be more relevant. Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often, the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.
Those who know monetary operations read history very differently from those who have it wrong.
There is something else that is at stake beyond the necessary mechanics and timely action. The credibility of the Federal Reserve, its commitment to maintaining price stability, and its ability to stand up against partisan political pressures are critical. Independence can’t just be a slogan. Nor does the language of the Federal Reserve Act itself assure protection, as was demonstrated in the period after World War II. Then, the law and its protections seemed clear, but it was the Treasury that for a long time called the tune.
And didn’t do a worse job.
In the last analysis, independence rests on perceptions of high competence, of unquestioned integrity, of broad experience, of nonconflicted judgment and the will to act. Clear lines of accountability to Congress and the public will need to be honored.
And a good working knowledge of monetary operations.
Moreover, maintenance of independence in a democratic society ultimately depends on something beyond those institutional qualities. The Federal Reserve—any central bank—should not be asked to do too much, to undertake responsibilities that it cannot reasonably meet with the appropriately limited powers provided.
I know that it is fashionable to talk about a “dual mandate”—the claim that the Fed’s policy should be directed toward the two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory. It is operationally confusing in breeding incessant debate in the Fed and the markets about which way policy should lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic. It is illusory in the sense that it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience.
The Federal Reserve, after all, has only one basic instrument so far as economic management is concerned—managing the supply of money and liquidity.
Completely wrong. With floating fx, it can only set rates. It’s always about price, not quantity.
Asked to do too much—for example, to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth, and full employment—it will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter that is within its range of influence, then those other goals will be beyond reach.
Back in the 1950s, after the Federal Reserve finally regained its operational independence, it also decided to confine its open market operations almost entirely to the short-term money markets—the so-called “Bills Only Doctrine.” A period of remarkable economic success ensued, with fiscal and monetary policies reasonably in sync, contributing to a combination of relatively low interest rates, strong growth, and price stability.
Yes, and the price of oil was fixed by the Texas railroad commission at about $3 where it remained until the excess capacity in the US was gone and the Saudis took over that price setting role in the early 70′s.
That success faded as the Vietnam War intensified, and as monetary and fiscal restraints were imposed too late and too little. The absence of enough monetary discipline in the face of the overt inflationary pressures of the war left us with a distasteful combination of both price and economic instability right through the 1970s—a combination not inconsequentially complicated further by recurrent weakness in the dollar.
No mention of a foreign ‘monopolist’ hiking crude prices from 3 to 40?
Or of Carter’s deregulation of nat gas in 78 causing OPEC to drown in excess capacity in the early 80′s?
Or the non sensical targeting of borrowed reserves that worked only to shift rate control from the FOMC to the NY fed desk, and prolonged the inflation even as oil prices collapsed?
We cannot “go home again,” not to the simpler days of the 1950s and 1960s. Markets and institutions are much larger, far more complex. They have also proved to be more fragile, potentially subject to large destabilizing swings in behavior. There is the rise of “shadow banking”—the nonbank intermediaries such as investment banks, hedge funds, and other institutions overlapping commercial banking activities.
Not to mention restaurants letting people eat before they pay for their meals. This completely misses the mark.
Partly as a result, there is the relative decline of regulated commercial banks, and the rapid innovation of new instruments such as derivatives. All these have challenged both central banks and other regulatory authorities around the developed world. But the simple logic remains; and it is, in fact, reinforced by these developments. The basic responsibility of a central bank is to maintain reasonable price stability—and by extension to concern itself with the stability of financial markets generally.
In my judgment, those functions are complementary and should be doable.
They are, but it all requires an understanding of the underlying monetary operations.
I happen to believe it is neither necessary nor desirable to try to pin down the objective of price stability by setting out a single highly specific target or target zone for a particular measure of prices. After all, some fluctuations in prices, even as reflected in broad indices, are part of a well-functioning market economy. The point is that no single index can fully capture reality, and the natural process of recurrent growth and slowdowns in the economy will usually be reflected in price movements.
With or without a numerical target, broad responsibility for price stability over time does not imply an inability to conduct ordinary countercyclical policies. Indeed, in my judgment, confidence in the ability and commitment of the Federal Reserve (or any central bank) to maintain price stability over time is precisely what makes it possible to act aggressively in supplying liquidity in recessions or when the economy is in a prolonged period of growth but well below its potential.
With floating fx bank liquidity is always infinite. That’s what deposit insurance is all about.
Again, this makes central banking about price and not quantity.
Feel free to distribute.
Posted by WARREN MOSLER on 4th September 2013
Smart not to intervene and use reserves.
And even the 19% isn’t as much as Japan’s recent approx. 25% drop, so they all remain stronger vs the yen. So the US now loses ‘competitiveness’ vs a whole mob of exporters cutting ‘real’ wages vs US, Canada, UK, and the Eurozone etc. As the ongoing global race to the bottom for real wages continues…
And maybe some day they’ll figure out that cutting rates supports a currency as it cuts interest paid by govt, making the currency ‘harder to get’.
And that exports are real costs and imports real benefits.
And that real standards of living are optimized by sustaining domestic full employment with fiscal adjustments.
By Jeanette Rodrigues, Ye Xie and Robert Brand
September 4 (Bloomberg) — Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level — investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.
The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group Inc., wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”
Putnam said “aggressive” short-term interest rate increases that “dramatically” raise the costs of going short a currency can work to stem an exchange-rate slide.
The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Governor Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.
The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.
The Indian currency rose 1.1 percent 67.0025 per dollar as of 1:46 p.m. in Mumbai today, while its Indonesian counterpart gained 0.3 percent to 11,409 versus the greenback. South Africa’s rand appreciated 0.8 percent to 10.2549 per dollar, while the Turkish lira strengthened 0.4 percent to 2.0505.
Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.
Posted by WARREN MOSLER on 3rd September 2013
By Yasemin Congar
August 27 (Al Monitor) — Emerging markets will soon find themselves operating in a new world order. Few people are as painfully aware of this as Turkey’s Deputy Premier Ali Babacan.
A soft-spoken politician whose key positions in three successive Justice and Development Party (AKP) governments included a two-year stint as foreign minister, Babacan is currently the highest-ranking cabinet member responsible for the economy.
Needless to say, he was all ears when US Federal Reserve Chairman Ben Bernanke suggested on May 22 before the US Congress that it could begin to downsize its $85 billion-per-month bond-buying program.
Babacan had seen that coming. He warned Turkey repeatedly against overspending in 2012 — even at the risk of displeasing Prime Minister Recep Tayyip Erdogan — because he knew cheap loans would soon grow scarce.
Loans in lira are at whatever the CB wants them to be.
Indeed, the United States is getting ready to curtail the stimulus that has injected cash into emerging markets for the last four years.
QE isn’t about cash going anywhere, including not going to EM.
What they got was portfolio shifting that caused indifference rates to change.
Stocks plummeted at the news and national currencies fell against the dollar, with India, Brazil and Turkey all registering substantial losses.
Again, portfolio shifts reversing causing indifference levels to reverse.
Still, answering questions on live television on May 23, Babacan was as cool-headed as ever. First, he reminded the viewers that the European Central Bank and Bank of Japan would follow suit, thus making the impact of the Fed’s exit even stronger on Turkey. Then he said, “If they carry out these operations in an orderly and coordinated fashion, we will ride it out.”
Hope so. They need to focus on domestic full employment.
As Babacan would surely have known, that is a big if. Despite a recent call for coordination by the International Monetary Fund’s managing director, Christine Lagarde, sell-offs in emerging markets do not seem to be a major concern for the architects of the taper plan.
“We only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg TV. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”
In fact, adjustment is not a question of choice here. Emerging economies will have to find a way to continue funding growth and paying off debt without the liquidity infusion. It won’t be easy.
Can’t be easier. Lira liquidity for their banking system is always infinite.
It’s just a matter of the CB pricing it. I’d suggest a Japan like 0% policy and a fiscal deficit large enough to allow for full employment.
The looming exodus of cash and higher borrowing costs have already caused permanent damage in Turkey. The lira weakened dramatically on Aug. 23, with the dollar surpassing two liras for the first time in history.
That was not what caused the decline.
The decline was from portfolio managers changing their indifference levels between the lira and the dollar or euro, for example.
Turkey’s Central Bank dipped into its reserves, but a $350 million sale of foreign exchange reserves failed to calm the market.
A mistake. No reason to buy their own currency with $ reserves, which should only be used for ‘emergency imports’, such as during wartime. All the intervention did was support monied interests shifting portfolios.
Babacan, for his part, has been referring to Bernanke’s May 22 speech as a turning point. The global economic crisis has entered a new phase since that day, he said. “We’ll all see the spillover effects and new faces of the crisis in the coming months.”
What they will mostly see is the effects of their policy responses if they keep doing what they’ve been doing.
He did not stop there. In his signature straight-shooting manner, he also signaled a downward revision. “It should not be surprising for Turkey to revise its growth rate below 4%. … We set our annual exports target at $158 million, but it looks difficult to reach this target as well.”
Which opens the door for a tax cut/spending increase/fiscal adjustment to sustain output and employment.
A politician who seldom walks and talks like a politician, Babacan has been a maverick of sorts in the government. He entered politics in 2001 when he joined Erdogan and others to found the AKP. At the time, he was a 34-year-old with a degree from the Kellogg School of Management and work experience as a financial consultant in Chicago. In 2002, he was appointed the state minister for economy and became the youngest member of the cabinet.
Today, Babacan still has the boyish looks that earned him the nickname “baby face,” and he still exhibits a distaste for populism.
Guess he doesn’t support high levels of employment. In that case they are doing the right thing.
The most significant feature of Turkey’s recent economic success is fiscal discipline, and no one in the government has been a stronger supporter of that than Babacan.
Yikes! Kellogg school turns out flakes… :(
Around this time last year, when a fellow cabinet member, Economy Minister Zafer Caglayan — equally hardworking, yet keener on instant gratification — criticized the Central Bank’s tight monetary policy, Babacan slammed him.
“We do not have the luxury of pressing the brakes,” Caglayan had said. Babacan’s response: “In foggy weather, the driver should not listen to those telling him to press the gas pedal.”
The weather is clear, the driver is blind.
In what came to be known as the “gas-break dispute,” Erdogan threw his weight behind Caglayan and criticized the statutorily independent Central Bank for keeping interest rates too high.
Last week, the Central Bank hiked its overnight lending rate for the second month in a row by 50 basis points to 7.75%. Erdogan and Caglayan watched quietly this time, hoping the raise would help prevent the lira from sliding further. It did not.
Of course not. It makes it weaker via the govt spewing out more in lira interest payments to the economy.
As Babacan’s proverbial fog is slowly lifting to reveal a slippery slope, I can’t help but wonder if he feels vindicated by the turn of events. Probably not, since the risk that awaits Turkey now is worse than a taper tantrum, and Babacan must know just how bad it can get.
The Fed’s decision exposed Turkey’s vulnerability.
Described by economist Erinc Yeldan as “a gradually deflating balloon, subject to erratic and irregular whims of the markets,” Turkey’s speculative growth over the last four years has been financed by running a large current account deficit, which in turn was funded with hot money that is no longer readily available.
As Standard Bank analyst Timothy Ash pointed out last week, “It is a bit hard to recommend [buying the lira or entering] bond positions while inflation remains elevated, and the current account is still supersized at $55-60 billion, with that huge external financing requirement.”
Or, it’s hard selling the dollar or euro with their intense deflationary/contractionary policies…
Estimated at $205 billion, or a quarter of Turkey’s gross domestic product (GDP), the external financing requirement is huge, indeed.
There is no such thing.
“A more extreme measure of vulnerability would add the $140 billion of foreign-held bonds and shares,” Hugo Dixon wrote in his Reuters blog. “If this tries to flee, the lira could plunge.”
Babacan admits that “Turkey might feel the negative effects of the Fed’s policy shift a bit higher than others … due to our already higher current account deficit.”
Turkey’s reliance on hot money to turn over its short-term external debt, which has been increasing more rapidly than the national income, is only the tip of the iceberg. What makes Turkey’s robust growth rates of 9% in 2010 and 8.5% in 2011 unrepeatable might be the disappearance of cheap loans. However, the real reason behind the unsustainability of such growth is structural.
Growth can be readily sustained with lira budget deficits and a 0 rate policy would help with price stability as well.
From insufficient capital accumulation and a low savings ratio to poor labor efficiency, the Turkish economy suffers chronic ills that can only be cured through radical reforms, including a major overhaul of the education system.
Education is good, but unemployment is the evidence the deficit is too small.
Again, Babacan knows it. Earlier this year, he commented on the government’s plan to increase the GDP per capita to $25,000 in 2023 by pointing out an anomaly:
“No other country in the world with an average education of only 6.5 years has a per capita income of $10,500. And no country with such an education level ever had an average income of $25,000. Without solving our education problem, our 2023 targets will remain a dream.”
Some say ignorance is bliss. Listening to Babacan makes me think they may be right. After 11 years, being part of a government that failed to do what you know should have been done cannot be much fun.
Posted by WARREN MOSLER on 30th August 2013
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 by WARREN MOSLER on 26th August 2013
Taken from ‘Soft Currency Economics’, 1993
That was 20 years ago and the same error persists!!!
How the Government Spends and Borrows as Much as it Does Without Causing Hyperinflation
Most people are accustomed to viewing savings from their own individual point of view. It can be difficult to think of savings on the national level. Putting
part of one’s salary into a savings account means only that an individual has not spent all of his income. The effect of not spending as such is to reduce the demand for consumption below what would have been if the income which is saved had been spent. The act of saving will reduce effective demand for current production without necessarily bringing about any compensating increase in the demand for investment. In fact, a decrease in effective demand most likely reduces employment and income. Attempts to increase individual savings may actually cause a decrease in national income, a reduction in investment, and a decrease in total national savings. One person’s savings can become another’s pay cut. Savings equals investment. If investment doesn’t change, one person’s savings will necessarily be matched by another’s’ dissaving’s. Every credit has an offsetting debit.
As one firm’s expenses are another person’s income, spending equal to a firm’s expenses is necessary to purchase its output. A shortfall of consumption results in an increase of unsold inventories. When business inventories accumulate because of poor sales: 1) businesses may lower their production and employment and 2) business may invest in less new capital. Businesses often invest in order to increase their productive capacity and meet greater demand for their goods. Chronically low demand for consumer goods and services may depress investment and leaves businesses with over capacity and reduce investment expenditures. Low spending can put the economy in the doldrums: low sales, low income, low investment, and low savings. When demand is strong and sales are high businesses normally respond by increasing output. They may also invest in additional capital equipment. Investment in new capacity is automatically an increase in savings. Savings rises because workers are paid to produce capital goods they cannot buy and consume. The only other choice left is for individuals to “invest” in capital goods, either directly or through an intermediary. An increase in investment for whatever reason is an increase in savings; a decrease in individual spending, however, does not cause an increase in overall investment. Savings equals investment, but the act of investment must occur to have real savings.
The structural situation in the U. S. is one in which individuals are given powerful incentives not to spend. This has allowed the government, in a sense, to spend people’s money for them. The reason that government deficit spending has not resulted in more inflation is that it has offset a structurally reduced rate of private spending. A large portion of personal income consists of IRA contributions, Keoghs, life insurance reserves, pension fund income, and other money that compounds continuously and is not spent. Similarly, a significant portion of business income is also low velocity; it accumulates in corporate savings accounts of various types. Dollars earned by foreign central banks are also not likely to be spent.
The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money. Once we recognize that savings does not cause investment it follows that the solution to high unemployment and low capacity utilization is not necessarily to encourage more savings. In fact, taxed advantaged savings has probably caused the private sector to desire to be a NET saver. This condition requires the public sector to run a deficit, or face deflation.
Posted by WARREN MOSLER on 26th June 2013
With floating fx, it’s necessarily about price (interest rate) and not quantity.
That includes China’s ‘dirty float’, a currency not convertible on demand at the CB, but with periodic CB market intervention.
Loans necessarily create deposits at lending institutions, and they also create any required reserves as a reserve requirement is functionally, in the first instance, an overdraft at the CB, which *is* a loan from the CB.
So from inception the assets and liabilities are necessarily ‘there’ for the CB to price.
Liquidity is needed to shift liabilities from one agent to another.
For example, if a depositor wants to shift his funds to another bank, the first bank must somehow ‘replace’ that liability by borrowing from some other agent, even as total liabilities in the system remain unchanged.
That ‘shifting around’ of liabilities is called ‘liquidity’
But in any case at any point in time assets and liabilities are ‘in balance.’
It’s when an agent can’t honor the demand of a liability holder to shift his liability to another agent that liquidity matters.
And if a bank fails to honor a depositor’s request to shift his deposit to another institution, the deposit remains where it is. Yes, the bank may be in violation of its agreements, but it is ‘fully funded.’
The problem is that to honor its agreements to allow depositors to shift their deposits to other banks, the bank will attempt to replace the liability by borrowing elsewhere, which may entail driving up rates.
Likewise, banks will attempt to borrow elsewhere, which can drive up rates, to avoid overdrafts at the CB when the CB makes it clear they don’t want the banks to sustain overdrafts.
The problem is that only the CB can alter the total reserve balances in the banking system, as those are merely balances on the CB’s own spread sheet. Banks can shift balances from one to another, but not change the total.
So when the total quantity of reserve balances on a CB’s spreadsheet increases via overdraft, that overdraft can only shift from bank to bank, unless the CB acts to add the ‘needed’ reserves.
Or when one bank has excess reserves which forces another into overdraft, and the surplus bank won’t lend to the deficit bank.
This is all routinely addressed by the CB purchasing securities either outright or via repurchase agreements. It’s called ‘offsetting operating factors’, which also include other ‘adds and leakages’ including changes in tsy balances at the fed, float, cash demands, etc.
And when the CB does this they also, directly or indirectly, set the interest rate as they do, directly or indirectly, what I call ‘pricing the overdraft.’
So to restate, one way or another the CB sets the interest rate, while quantity remains as it is.
And those spikes you are seeing in China are from the CB setting rates indirectly.
The evidence from China is telling me that the western educated new kids on the block flat out don’t get it, probably because they were never told the fixed fx ‘monetarism’ they learned in school isn’t applicable to non convertible currency???
In any case the CB is the monopoly supplier of net reserves to its banking system and therefore ‘price setter’ and not ‘price taker’, and surely they learned about monopoly in school, but apparently/unfortunately have yet to recognize their currency itself is a simple public monopoly?
Thinking back, this is exactly the blunder of tall Paul back some 33 years ago. He made the same rookie mistake, for which he got credit for saving the US, and the world, from the great inflation of his day.
However, the fact that he made it worse, vs curing anything is of no consequence.
What matters is how the western elite institutions of higher learning spin it all…
Posted by WARREN MOSLER on 10th May 2013
By Gary Carmell
Posted by WARREN MOSLER on 10th May 2013
Seems like subversive propoganda to me.
They deliberately ignore the obvious fixed vs floating fx distinction, for example.
A few comments below:
May 10 (Fitch) — Fitch Ratings says in a newly-published report that the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth. They can and do.
Local currency defaults in the recent era include: Venezuela (1998), Russia (1998), Ukraine (1998), Ecuador (1999), Argentina (2001) and Jamaica (2010 and 2013). Nonetheless, we recognise that local currency defaults are less frequent than foreign currency defaults and are unlikely for countries with debt mainly denominated in local currency at long maturity.
Russia and Argentina, for example, had headline, well publicized fixed exchange rate policies, where they fixed the value of their currency to the $US. Failing to recognize that in this report is intellectually dishonest.
To assess the capacity which sovereigns have to inflate away their debt, this report uses our debt dynamics model to illustrate how much surprise inflation might be required for three hypothetical scenarios. For a country with a large primary budget deficit, gains to the debt to GDP ratio from even quite high inflation would be short-lived. While for a country with a debt to GDP ratio of 100%, primary deficit of 1%, real growth equal to the real interest rate and a 10-year average debt maturity, it would take a jump to 30% inflation (from our 2% baseline) for three years and 10% thereafter to bring the debt ratio below the 60% Maastricht threshold.
There is no such thing as ‘inflate away their debt’ as govt debt represents the global net savings of financial assets of that currency. So all that can be said in this context is that ‘savings desires’ are, for all practical purposes, always going to be there as some % of GDP.
Undoubtedly, higher inflation can be used to raise seigniorage (the difference between the value of money and the cost to print it)
This is nonsensical with floating exchange rate policy ( non convertible currency) as, for example, all US govt spending can be called ‘printing’ as it’s just a matter of the Fed crediting a member bank account. Likewise, taxing is ‘unprinting’ as it’s just a matter of debiting a member bank account. With fixed fx policy, it’s the ratio of convertible currency outstanding vs the actual fx reserves at the CB, a very different matter.
and remittance of central bank profits to the government, up to a point. Nevertheless, in the long run, the ratio of government debt/GDP will rise if the government is running a primary budget deficit (excluding interest payments and including seigniorage), assuming the real growth rate does not exceed the real interest rate, irrespective of the inflation rate.
An unanticipated burst of inflation can reduce the real value of government debt as long as the debt is not of short maturity (as higher inflation is quickly reflected in the marginal cost of funding), index linked or denominated in foreign currency (as the exchange rate would depreciate). Thus countries with such characteristics – which give them ‘monetary sovereignty’ – do have some capacity to inflate away their debt.
Linking govt payments to an index is a form of fixed exchange rate policy and yes, govts can and do default on these types of fixed exchange rate ‘promises.’
Inflation is economically and politically costly.
Politically costly, yes, but economically, there are no studies that show real costs to the economy from inflation.
Thus, even if a sovereign has a capacity to inflate away its debt, it might choose not to. It is also far from clear how much money would need to be printed to deliver the ‘right’ inflation rate, as the current debate over quantitative easing highlights. Instead a sovereign might view a Distressed Debt Exchange (DDE) as a less bad policy option. Fitch classifies a DDE as a default.
This is a confused rhetoric and a display of total ignorance of actual monetary operations.
The myth that sovereigns that can print money cannot default on debt in their own currency has also fed the proposition that such local currency ratings are irrelevant.
Fitch is again refusing to distinguish convertible and non convertible currency policy.
Fitch disagrees that default is inconceivable or impossible. The agency agrees that countries with strong monetary sovereignty and financing flexibility are unlikely to default and these are important factors in Fitch’s sovereign rating methodology that affect both local and foreign currency ratings.
A sovereign’s local currency rating is closely linked to its foreign currency rating. It is typically one or two notches higher, owing to the sovereign’s somewhat greater capacity to pay debt in local currency, as taxes are usually paid in local currency and it may have better access to a stable domestic capital market, as well as some capacity to print money. It may also be more willing to service local currency debt if more of it is held by local banks and other residents.
Posted by WARREN MOSLER on 8th May 2013
Commentary: Warren Mosler has a plan but no takers
By Darrell Delamaide
May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.
The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path.
The European slow-motion train wreck will continue until theres recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.
Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.
The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.
The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.
Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.
In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.
Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.
Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.
And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.
In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.
Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.
The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.
Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.
And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.
The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.
In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.
These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).
Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.
So remain optimistic if you like, but youve been warned.
Posted by WARREN MOSLER on 2nd May 2013
Good to see Ken, who I’ve never met, and Carmen who I do know, no doubt assisted by her husband Vince, beginning to come clean with this response. While not complete, it’s the beginning of an encouraging, epic reversal and a first step in the right direction!
My comments added below:
By Kenneth Rogoff and Carmen Reinhart
May 1 (FT) — The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is),
They could add here ‘though likely via the reaction functions of govts and not the high debt per se.’
then high debt is not a problem. Looking beyond the recent public debate about the literature on debt we have already discussed our results on debt and growth in that context the debate needs to be reconnected to the facts.
Let us start with one: the ratios of debt to gross domestic product are at historically high levels in many countries, many rising above previous wartime peaks. This is before adding in concerns over contingent liabilities on private sector balance sheets and underfunded old-age security and pension programmes. In the case of Germany, there is also the likely need to further cushion the debt loads of eurozone partners.
Adding here ‘as they are ‘users’ of the euro the way US states are ‘users’ of the dollar, and not the actual issuer of the currency like the ECB, the Fed, the BOE, the BOJ, and the rest of the world’s central banks.’
Some say not to worry, pointing to bursts of growth after the world wars. But todays debts,
Add ‘while they pose no solvency risk for the issuer of the currency.’
will not be dealt with by boosts to supply from postwar demobilisation and to demand from the lifting of wartime controls.
To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched if there remains a choice, that is.
BRAVO!!!! And add ‘as is always the case for the issuer of the currency.’
Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives.
Add ‘as is the case for ‘users’ of a currency in general, including the US states, for example’.
Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand
and low interest rates,
Add ‘which are confirmation by the CB policy makers who set the rates low that they too believe demand is weak’.
where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.
BRAVO! And add ‘additionally, weak demand can be addressed by tax reductions, recognizing that counter cyclical fiscal policy of currency users, like the euro zone members, requires funding support from the issuer of the currency, which in this case is the ECB.’
Ultra-Keynesians would go further and abandon any pretense of concern about longer-term debt reduction.
Add ‘without a credible long term inflation concern, as for the issuer of the currency inflation is the only risk from excess demand.’
This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt
Add ‘with regards to solvency, as is necessarily the case for the issuer of the currency.’
and, to quote Star Trek, pushes governments to go where no man has gone before
Add ‘apart from war time, when the importance of maximum output and employment takes center stage.’
The basic rationale
Add ‘of the mainstream deficit doves (not the ultra Keynesian MMT school of thought)’
is that low interest rates make borrowing a free lunch.
Add ‘the mainstream believes’
ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast,
Add ‘apart from the Central Bankers who voted to lower them this far and this fast, and in some cases provide guarantees to other borrowers.’
and therefore no one can be sure for how long their current low level will be sustained.
Add ‘as it’s a matter of second guessing those central bankers.’
John Maynard Keynes himself wrote How to Pay for the War in 1940 precisely because he was not blas about large deficits even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot and in general should not be brought down too quickly. But interest rates can change rapidly.
Add ‘all it takes is a vote by central bankers.’
True, research has identified factors that might combine to explain the sharp decline in rates.
Add ‘in fact, all you have to do is research the votes at the central bank meetings.’
Add ‘by central bankers’
over potentially devastating future events such as fresh financial meltdowns may be depressing rates. Similarly, the negative correlation between returns on stocks and long-term bonds, while admittedly quite unstable, also makes bonds a better hedge. Emerging Asias central banks have been great customers for advanced economy debt, and now perhaps the Japanese will be once more. But can these same factors be relied on to keep yields low indefinitely?
Add ‘In the end, it’s all a matter of the central bank’s reaction function.’
Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade
Add ‘due to inflation concerns’
might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause.
Add ‘if he does not see the merits of leaving risk free rates near 0 in any case, as there is no convincing central bank research that shows rate hikes reduce inflation rates, and even credible theory and evidence to be concerned that rate hikes instead exacerbate inflation.’
What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.
First and foremost,
Add ‘who fail to recognize that these are merely matters of accounting that don’t themselves alter output and employment’
must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US.
For Europe, in particular, any reasonable endgame will require a large transfer
Add ‘of public goods production’
from Germany to the periphery.
Add ‘which in fact would be a real economic benefit for Germany.’
The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.
There are other tools. So-called financial repression, a non-transparent form of tax (primarily on savers), may be coming to an institution near you. In its simplest form, governments cram debt into domestic pension funds, insurance companies and banks
By removing governmental support of higher rates from their net issuance of debt instruments, particularly treasury securities.
Europe is there already and it has been there before, several times. How to Pay for the War was, in part, about creating captive audiences for government debt. Read the real Keynes, not rote Keynes, to understand our future.
One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate.
It is therefore imperative for the central bankers to make it clear to the politicians that there is no solvency risk, and that central bankers, and not markets, are necessarily in control of the entire term structure of risk free rates, and that their research shows that rate hikes are not the appropriate way to bring down inflation, should the question arise’
Structural reform always has to be part of the mix. In the US, for example, the bipartisan blueprint of the Simpson-Bowles commission had some very promising ideas for simplifying the tax codes.
There is a scholarly debate about the risks of high debt. We remain confident in the prevailing view in this field that high debt is associated with lower growth
Add ‘but must add that the risk is that of misguided policy response, and not the level of debt per se.’
Certainly, lets not fall into the trap of concluding that todays high debts are a non-issue.
Add ‘as we must be ever mindful of the possibility of excess demand using up our productive capacity’
Keynes was not dismissive of debt. Why should we be?
The writers are professors at Harvard University. They have written further on carmenreinhart.com
Posted by WARREN MOSLER on 1st May 2013
Not that Krugman is right, but that ‘de Niall is wrong here. Comments in below:
By Morgan Korn
April 30 (Daily Ticker) — Niall Ferguson has two words for Paul Krugman: youre wrong.
The Harvard University history professor and author of Civilization: The West and the Rest says Krugmans pro-government spending thesis not only fails to address the core problems facing the U.S. and Europe today but also has dire consequences for individuals living in these economies.
You cant borrow trillions of dollars a year for the rest of time, Ferguson says in an interview with The Daily Ticker at the Milken Institute Global Conference 2013.
Operationally there is no numerical limit to US govt deficit spending. Nominal restrictions are political only. Yes, the currency might go down, there might be inflation, you might lose your job, but US Treasury checks won’t bounce unless congress decides to bounce them.
Once a government gets to a very very high level of debt, the risk is very small increases in borrowing costs which create a vast ocean of red ink. So that risk is not negligible.
So what happens as that ‘debt’ grows larger? Nothing if it isn’t spent. And if it’s spent, the risk is the risk of too much spending in the economy. Overspending would mean unemployment got ‘too low’ and the ‘excess spending’ was simply driving up prices. Comes back to the only risk of ‘too much’ deficit being inflation. So what’s his long term inflation forecast? He probably doesn’t even have one!!!
Very large debts do not simply disappear by magic.”
Correct, they remain as balances in either securities accounts (aka Treasury securities) at the Fed, or in reserve accounts at the Fed, or as actual cash, to the penny. And they constitute the $US net financial assets of the global economy that supports the global $US credit structure. To the penny.
Ferguson argues that Carmen Reinharts and Ken Rogoffs conclusions about the relationship between high debt and low growth are still true. The two Harvard economists had to defend their seminal book This Time is Different: Eight Centuries of Financial Folly after three University of Massachusetts academics correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II, according to Reinhart and Rogoff. (Lawmakers across the world cited their work as justification to institute austerity policies; they argued that economic growth slowed after a country’s public debt equaled 90 percent of its GDP).
The headlines have done a disservice to Ken Rogoff and Carmen Reinhart, Ferguson notes. Its extremely implausible that governments with already high debt can improve their situation by making their debt even larger. High debt scenarios often end with inflation or default. They dont end with a rapid increase in the growth rate. A minor error in the Rogoff and Reinhart paper does not refute the case that governments with excessively large public debt have to bring them under control.”
Presenting data doesn’t ever show causation.
But regardless of the level of cumulative deficit spending for a currency issuing govt, with a proposed tax cut and/or spending increase every economist paid to be right will revise his GDP forecast up.
Moreover, Ferguson compares government accounting of public debt to one of the most famous and hated public companies that ever existed.
If companies behaved like governments, they would essentially be Enron, he says. There is a fundamental problem with government accounting.
There are likely govt accounting problems, but not solvency problems for the issuer of the currency.
Posted by WARREN MOSLER on 29th April 2013
Seems like this ‘quasi’ govt type of thing is often later shown to be behind ‘difficult to explain’ ‘liquidity driven’ equity moves.
By Richard Milne in Oslo
April 29 (FT) — Norway’s oil fund has reduced its bond holdings to their lowest ever level as the worlds largest sovereign wealth fund signals its discomfort with the effects of western central banks money printing.
The fund held just 36.7 per cent of its $726bn assets in bonds at the end of the first quarter, the lowest proportion since it first received money in 1996. Its equity holdings were close to a record high, accounting for 62.4 per cent of the total.
Yngve Slyngstad, the funds chief executive, told the Financial Times there had been a significant change in rhetoric away from its previous comments that it was comfortable with a high level of equity holdings.
Now it is that we are not so comfortable with the low returns in the bond portfolio. It is not enthusiasm for the equity market but a lack of enthusiasm for the bond market, he said.
The worlds biggest sovereign wealth fund by some distance, Norways oil fund has for some time been concerned about the low level of government bond yields and what that will mean for fixed income return.
But Norges Bank Investment Management, as it is also known, is reluctant to comment about money printing, known as quantitative easing, by the US Federal Reserve, Bank of England or Bank of Japan as the fund is part of the Norwegian central bank.
Still, Mr Slyngstad said unconventional actions were riskier than normal measures, signalling his unease. Unconventional in this context means untried. Things that are untried have a different risk profile than things that have been tried, he added.
The fund has been shifting both its bond and equity holdings away from dollar, yen, euro and sterling assets to those of emerging markets . But the fund is noticeably more positive on US Treasuries than other western government bonds with Mr Slyngstad saying they serve [a] double purpose of being a haven and highly liquid.
Mr Slyngstad said the fund could take several courses of action to reduce the risk of a sharp fall in bond prices, including buying real assets such as property and diversifying into new currencies. It has also reduced the average duration of its bond holdings from about six to five years.
His comments came as the fund delivered its biggest ever quarterly increase in its market value of NKr366bn. It posted a 5.4 per cent overall return with equities gaining 8.3 per cent and fixed income just 1.1 per cent. Apple, Santander and BHP Billiton were its worst-performing investments while BlackRock, Nestl and Novartis were the best. The oil fund also formally unveiled its plans to become a more active investor , as first revealed by the Financial Times. Mr Slyngstad has joined the nomination committee of Swedish truckmaker Volvo , the first time the fund has formally participated in the selection of board directors.
Posted by WARREN MOSLER on 22nd April 2013
Conclusion: The financial repressionists have it all backwards
So the idea is the govt is ‘pushing rates down’ through QE and the like, thereby keeping rates below the rate of inflation, and that without this active ‘financial repression’ rates would otherwise be higher and not ‘repressed’.
That is, the govt is interfering with the ‘free market’ by said pushing of rates down, and this ‘distortion’ adversely affects all kinds of things, as happens with any interference in said ‘free markets’.
Well, to begin with, interest rates are subject to market forces with fixed exchange rate regimes, like a gold standard, currency board arrangement, or other such ‘peg’ where the govt by law exchanges the currency to some ‘reserve’ thing at a fixed rate. So today this would, at best, apply to HK, for example.
However, it does not apply to floating fx regimes, where the currency has no conversion features at the govt of issue, like the $US, yen, pound, euro, etc. etc. etc. contrary to the claims of the repressionists.
Either way, the currency is a public monopoly, with taxation a coercive, non market ‘interference’.
And, of course, monopolists are ‘price setters’ rather than ‘price takers’.
With a gold standard, for example, the govt sets the price of gold and in theory allows all other price to express relative value as they continuously gravitate towards floating indifference levels.
This includes interest rates (the ‘own rate’ for the currency) which then fluctuate based on ‘storage costs’ of the object of conversion which includes govt default risk with regard to conversion. The same holds for other fixed exchange rate arrangements.
With floating exchange rate policy, without govt interference, the ‘risk free rate’ is permanently at 0%, as there is no conversion option, and therefore no conversion default risk.
In this case, the only way rates can be supported at higher levels is by ‘govt interference’. This includes paying interest on reserve balances at the Fed, issuing Treasury Securities, and open market operations where the Fed buys and sells Treasury securities directly or via repurchase agreements and other such arrangements. All of these function as ‘interest rate support’ to keep rates higher than otherwise.
So once again, and another ‘who would have thought’, it seems the mainstream has it entirely backwards. Yes, govt is ‘interfering’ in the interest rate markets, but rather than engaging in ‘repression’ via ‘pushing rates down’ it’s instead engaging in ‘rentier support’ by pushing rates up.
So if these ‘free market types’ want to make the case that govt isn’t sufficiently interfering to push rates up to adequately support holders of various financial assets, fine. Bring it on! But more likely the realization of what they’ve actually be purporting should be embarrassing enough to cause them to back off for at least 3 or 4 minutes, don’t you think?
(Feel free to distribute)
Posted by WARREN MOSLER on 15th April 2013
Comments and ramblings:
“Strong multiplier effects from construction jobs to broader economy.”
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 by WARREN MOSLER on 15th April 2013
So does the US have a strong dollar policy, a weak dollar policy, or an ‘unchanged’ dollar policy?
In any case, President Obama and Congress still fail to recognize that imports are real benefits and exports real costs. And that net imports mean taxes can be lower and/or spending higher to sustain full employment levels of demand.
So what would you rather have?
1. A strong dollar, rising net imports, and lower taxes, or
2. A weak dollar, falling net imports, and higher taxes?
How hard is this???
As for Japan, the BOJ hasn’t actually done anything to weaken the yen. Nor has fiscal policy, at least yet, though if the announced deficit hike goes through it could be a modestly weakening influence. The trade flows going into deficit from surplus have hurt the yen, as gas and oil replaced the nukes that were shut down, though they are in the process of relighting them. And portfolio shifting has probably weakened the yen the most, with life insurance companies, pensions, etc. reportedly adding risk to their portfolios by shifting from yen assets to dollar and euro assets. Yes, this is a ‘one time’ adjustment, but it can be sizable and take years, or it could have already run its course. I personally have no way of knowing, but no doubt ‘insiders’ are fully aware of how this will play out.
Furthermore, the US is going the other way with tax hikes and spending cuts a firming influence on the dollar, which is at least part of the yen/dollar weakness.
Too many cross currents for me to bet on one way or another. If you have to trade it go by the charts and don’t watch the news…
By Thomas Catan and Ian Talley
April 12 (WSJ) — The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.
In its semiannual report on global exchange rates, the U.S. Treasury on Friday also criticized China for resuming “large-scale” market interventions to hold down the value of its currency, calling it a troubling development. The U.S. stopped short of naming China a currency manipulator, avoiding a designation that could disrupt relations between the world powers.
The Chinese Embassy didn’t immediately respond to a request for comment. A Japanese government official reached early Saturday in Tokyo declined to comment directly on the Treasury report, but said, “We will continue to abide by” recent commitments by global financial policy makers to avoid intentional currency devaluation”as we have done until now.”
The Treasury report appears to be part of a broader strategy by the Obama administration in response to a sharp shift in economic policy in Japan under new Prime Minister Shinzo Abe.
Hours before the currency warning, the White House said it had accepted Mr. Abe’s request to join negotiations to create an ambitious pan-Pacific free trade zone, despite objections from the American auto industry and other domestic sectors worried about new competition from Japan. The U.S. government is welcoming economic reforms in Japan while trying to discourage Tokyo from reverting to prior tactics of trade manipulation.
The Bank of Japan kicked off the latest drop in the yen by shocking markets last week by announcing plans for a massive increase in money supply, pledging a sharp increase in purchases of government bonds and other assets. The dollar has risen nearly 7% against the yen since then, and is up 15% since Mr. Abe came into power on Dec. 26.
Policy makers in Japan sensitive to currency complaints and warnings have repeatedly insisted in recent days that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.
“We have no intention to conduct monetary policy targeting the exchange rate,” Haruhiko Kuroda, the new Bank of Japan governor whose policies have helped push down the yen, said in a Tokyo speech Friday. The BOJ’s policies, he added, were aimed at pulling Japan out of its long slump and that “achieving this goal will eventually provide the global economy with favorable effects.”
Amid sluggish global growth, governments face the temptation to lower the value of their currencies to juice exports. Those pressures are aggravated as central banks in the U.S., Europe and Japan seek to spur their economies by pushing cash into the systempolicies that have the effect of weakening their currencies. Seeking higher returns, investors are putting their money into emerging markets, putting upward pressure on those countries’ currencies and making their exports more expensive abroad.
The U.S. said it would “closely monitor” Japan’s economic policies to ensure they are aimed at boosting growth, not weakening the value of the currency. The yen is now hovering near a four-year low against the dollar, in response to Mr. Abe’s policies.
“We will continue to press Japanto refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the Treasury report said.
The yen quickly strengthened following the report, pulling the dollar to as low as 98.08, its lowest level this week, in a thin Friday afternoon market. The yen later gave back some of those gains, as investors came to see the comments less as criticism than as a statement of fact.
American officials have been walking a tightrope in recent months. While worried about a deliberate currency devaluation, they have also tried to encourage Japan’s attempts to jump-start growth, after years of frustration in Washington that Tokyo wasn’t doing enough to fix its economy.
“The wording does make it clear that the U.S. Treasury is watching extremely closely” to ensure that Japan lives up to promises not to purposely weaken its currency, said Alan Ruskin, a currency strategist at Deutsche Bank in New York. But, he added, “the report does not infer that Japan is breaking any agreement.”
The Treasury report, required by Congress and closely followed by markets, highlighted the need for more exchange-rate flexibility in many Asian countries, most notably China.
The Treasury used tougher-than-usual language on China, saying Beijing’s “recent resumption of intervention on a large scale is troubling.” While it noted that China had allowed the yuan to appreciate by about 10% against the dollar since June 2010or 16% including inflationthe report said the Chinese currency remained significantly undervalued and “further appreciation” was warranted.
The Treasury in recent years under both Republican and Democratic administrations has declined to formally label China as a currency manipulator, with officials suggesting publicly and privately that such a step would hurt efforts to encourage Beijing to let the yuan rise.
Still, the question of China’s currency has become shorthand in Washington for the broader debate over the economic relationship between the two countries. It was a frequent topic on the campaign trail for both President Barack Obama and GOP challenger Mitt Romney last year, as Mr. Romney pledged that if elected, he would label China a currency manipulator.
On Friday, some U.S. manufacturers criticized the Obama administration for its reluctance to call China a currency manipulator. “The Treasury Department’s latest refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness, and to the U.S. economy’s return to genuine health,” said the U.S. Business and Industry Council, an industry lobby group.
The Treasury report also took South Korea to task for seeking to keep a lid on the won as foreign investors flood the economy with cash. “Korean authorities should limit foreign-exchange intervention to the exceptional circumstances of disorderly market conditions,” and capital controls should only be used to prevent financial instability, not reduce upward pressure on the exchange rate, Treasury said.
Posted by WARREN MOSLER on 10th April 2013
Wall of shame:
April 9 — Countries that let their debt loads get high risk losing control of their own fiscal sustainability, through an adverse feedback loop in which doubts by lenders lead to higher government bond rates, which in turn make debt problems more severe.