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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for the 'Currencies' Category

today’s observations

Posted by WARREN MOSLER on 2nd September 2014

Not much sign of any move towards higher deficits today. Just talk of more bank liquidity, which doesn’t matter, and more to weaken the euro, which doesn’t work either.

Hard to say why the euro has been going down, but it’s not ECB policy per se which, while meant to weaken the euro, instead continues to be ‘strong euro’ biased. So must be portfolios selling euro, maybe in response to Russia’s actions.

“French Prime Minister Manuel Valls called for more action from the ECB to lower the value of the euro.Mr Valls said: “the monetary policy has started to change”. While he called the ECB’s package of measures taken in June a “strong signal,” he also said that “one will have to go even further.”

German Finance Minister Mr Schaeuble said deficit-fueled growth leads to economic decline, signalling discord with Italy and France as euro-area policy makers seek ways to avoid deflation and spur growth. Euro-area countries that pursued austerity policies in return for sovereign bailouts are “doing much better than all the others in Europe,” Schaeuble.

ECB’s Coeure says ready to adjust monetary policy if needed: In an article published in Greek daily Ta Nea, ECB’s Coeure said that ECB’s measures so far, have contributed to stability in the euro zone while its recent decisions have ensured a particularly accommodative direction in monetary policy in the single-currency bloc. “The ECB will provide additional liquidity to banks on the condition that they increase credit directed to the real economy, and it is ready to further adjust the direction of its monetary policy, if needed,” Coeure said (Ta Nea, Reuters) ”

Posted in Banking, Currencies, EU | No Comments »

ECB relying export driven growth through euro depreciation

Posted by WARREN MOSLER on 23rd August 2014

Note below that he states it’s the fx channel that the ECB is relying on to support aggregate demand.

Good luck to them, it doesn’t work that way!!!

From the speech by Mario Draghi, President of the ECB, Annual central bank symposium in Jackson Hole, 22 August 2014:

Boosting aggregate demand

On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time. I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further.

We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the US and the euro area (Figure 7). We will launch our first Targeted Long-Term Refinancing Operation in September, which has so far garnered significant interest from banks. And our preparation for outright purchases in asset-backed security (ABS) markets is fast moving forward and we expect that it should contribute to further credit easing. Indeed, such outright purchases would meaningfully contribute to diversifying the channels for us to generate liquidity.

Posted in Currencies, ECB, trade | No Comments »

Japan- currency depreciation policy ‘bad’ inflation for households, good for exporters

Posted by WARREN MOSLER on 29th July 2014

Japan’s household spending falls 3.0% in June

July 29 (Kyodo) — Average Japanese monthly household spending fell a price-adjusted 3.0 percent in June from a year earlier to 272,791 yen. The average monthly income of salaried households came to 710,375 yen, down 6.6 percent in real terms. Household spending rose 1.5 percent in June from the previous month in seasonally adjusted terms, reversing the contractions seen in April and May. Retail sales fell 0.6 percent in June from a year ago, faster than a 0.4 percent decline in the year to May. The pace of decline was slower compared with 1997 when the sales tax was last raised, the trade ministry said.

Posted in Currencies, Japan | No Comments »

Time to say goodbye? Schauble Calls on Italy to Pursue Structural Reform

Posted by WARREN MOSLER on 18th July 2014

Schäuble Calls on Italy to Pursue Structural Reform

By Andrea Thomas

July 16 (WSJ) — German Finance Minister Wolfgang Schäuble called on Italy to pursue its ambitious structural reform efforts if it wants to boost its economic-growth prospects. “Especially since growth forecasts for Italy have been reduced recently, it’s important to reform and cut the debt level convincingly,” he said. Italian Prime Minister Matteo Renzi has presented ambitious and broad-based reforms, he added. “The Stability and Growth Pact is the foundation for politico-economic cohesion in Europe,” said Mr. Schäuble. “The Stability and Growth Pact provides sufficient flexibility. It’s doesn’t stand in the way of structural reforms; quite the opposite, it promotes them.”

This is a direct response to Prime Minister Renzi who asked for what can be described as a minuscule amount flexibility with the deficit rules. (Note that Schauble didn’t even say said reforms would boost growth, only ‘growth prospects’, whatever that means.)

The problem is that for any given level of govt spending (a political decision) tax liabilities are too high to allow ‘savings desires’ to be accommodated. And ‘the debt level’ is best thought of as the ‘money supply’ (deposits at the CB) that’s the euro ‘savings’/net financial assets of the non govt sectors.

Said another way, the currency itself is the EU’s public monopoly, and the mass unemployment is necessarily the evidence that the monopolist is restricting the ‘supply’ of net financial assets demanded by the economy.

Said another way, for all practical purposes said reforms don’t increase aggregate demand. At best they address what I call distributional issues.

My proposal is for Italy to deliver an ultimatum to the EU giving them 30 days to relax the 3% deficit limit and eliminate the 60% debt/GDP limit.

If the EU refuses, Italy has two choices:

1. Do nothing as the destruction of their civilization continues,

2. Begin taxing and spending in ‘new lira’ with fiscal policy that promotes output and employment.

And note that if they do go to ‘new lira’ and retain their now constitutionally mandated balanced budget requirement, it will all get even worse.

Posted in Currencies, EU, MMT, Proposal | No Comments »

Comments on Martin Wolf’s banking article

Posted by WARREN MOSLER on 25th April 2014

Strip private banks of their power to create money

By: Martin Wolf
The giant hole at the heart of our market economies needs to be plugged

Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.

It is perfectly legal to create private liabilities. He has not yet defined ‘money’ for purposes of this analysis

I explained how this works two weeks ago. Banks create deposits as a byproduct of their lending.

Yes, the loan is the bank’s asset and the deposit the bank’s liability.

In the UK, such deposits make up about 97 per cent of the money supply.

Yes, with ‘money supply’ specifically defined largely as said bank deposits.

Some people object that deposits are not money but only transferable private debts.

Why does it matter how they are labeled? They remain bank deposits in any case.

Yet the public views the banks’ imitation money as electronic cash: a safe source of purchasing power.

OK, so?

Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network.

This is highly confused. ‘Public goods’ in any case aren’t ‘normal market activity’. Nor is a ‘payments network’ per se ‘normal market activity’ unless it’s a matter of competing payments networks, etc. And all assets can and do ‘provide’ liabilities.

On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe.

Largely because of federal deposit insurance in the case of the us, for example. Uninsured liabilities of all types carry ‘risk premiums’.

This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections.

All that matters for public safety of deposits is the deposit insurance. ‘Equity injections’ are for regulatory compliance, and ‘lender of last resort’ is an accounting matter.

It is also why banking is heavily regulated.

With deposit insurance the liability side of banking is not a source of ‘market discipline’ which compels regulation and supervision as a simple point of logic.

Yet credit cycles are still hugely destabilising.

Hugely destabilizing to the real economy only when the govt fails to adjust fiscal policy to sustain aggregate demand.

What is to be done?

How about aggressive fiscal adjustments to sustain aggregate demand as needed?

A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.

Yes, a 100% capital requirement, for example, would effectively limit lending. But, given the rest of today’s institutional structure, that would also dramatically reduce aggregate demand -spending/sales/output/employment, etc.- which is already far too low to sustain anywhere near full employment levels of output.

A maximum response would be to give the state a monopoly on money creation.

Again, ‘money’ as defined by implication above, I’ll presume. The state is already the single supplier/monopolist of that which it demands for payment of taxes.

One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher.

Yes, a fixed fx/gold standard proposal.

Its core was the requirement for 100 per cent reserves against deposits.

Reserves back then were ‘real’ gold certificates.

The floating fx equiv would be 100% capital requirement.

Fisher argued that this would greatly reduce business cycles,

And greatly reduce aggregate demand with the idea of driving net exports to increase gold/fx reserves, or, alternatively, run larger fiscal deficit which, on the gold standard, put the nation’s gold supply at risk

end bank runs

Yes, banks would only be lending their equity, so there is nothing to ‘run’

and drastically reduce public debt.

If you wanted a vicious deflationary spiral to lower ‘real wages’ and drive net exports

A 2012 study by International Monetary Fund staff suggests this plan could work well.

No comment…

Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.

None of which have any kind of grasp on actual monetary operations.

Here is the outline of the latter system.

First, the state, not banks, would create all transactions money, just as it creates cash today.

Today, state spending is a matter of the CB crediting a member bank reserve account, generally for further credit to the person getting the corresponding bank deposit. The member bank has an asset, the funds credited by the CB in its reserve account, and a liability, the deposit of the person who ultimately got the funds.

If the bank depositor wants cash, his bank gets the cash from the CB, and the CB debits the bank’s reserve account. So the person who got paid holds the cash and his bank has no deposit at the CB and the person has no bank deposit.

So in this case the entire ‘money supply’ would consist of dollars spent by the govt. But not yet taxed. That’s called the deficit/national debt. That is, the govt’s deficit would = the (net) ‘money supply’ of the economy, which is exactly the way it is today.

Customers would own the money in transaction accounts,

They already do

and would pay the banks a fee for managing them.

:(

Second, banks could offer investment accounts, which would provide loans. But they could only loan money actually invested by customers.

So anyone who got paid by govt (directly or indirectly) could invest in an account so those same funds could be lent to someone else. Again, by design, this is to limit lending. And with ‘loanable funds’ limited in this way, the interest rate would reflect supply and demand for borrowing those funds, much like and fixed exchange rate regime.

So imagine a car company with a dip in sales and a bit of extra unsold inventory, that has to borrow to finance that inventory. It has to compete with the rest of the economy to borrow a limited amount of available funds (limited by the ‘national debt’). In a general slowdown it means rates will skyrocket to the point where companies are indifferent between paying the going interest rate and/or immediately liquidating inventory. This is called a fixed fx deflationary collapse.

They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are. Holdings in such accounts could not be reassigned as a means of payment. Holders of investment accounts would be vulnerable to losses. Regulators might impose equity requirements and other prudential rules against such accounts.

As above.

Third, the central bank would create new money as needed to promote non-inflationary growth. Decisions on money creation would, as now, be taken by a committee independent of government.

What does ‘create new money’ mean in this context? If they spend it, that’s fiscal. If they lend it, how would that work? In a deflationary collapse there are no ‘credit worthy borrowers’ as they system is in technical default due to ‘unspent income’ issues. Would they somehow simply lend to support a target rate of interest? Which brings us back to what we have today, apart from deciding who to lend to at that rate, the way today’s banks decide who to lend to? And it becomes a matter of ‘public bank’ vs ‘private bank’, but otherwise the same?

Finally, the new money would be injected into the economy in four possible ways: to finance government spending,

That’s deficit spending, as above, and no distinction regards to current policy

in place of taxes or borrowing;

Same as above. For all practical purposes, all govt spending is via crediting a member bank account.

to make direct payments to citizens;

Same thing- net fiscal expenditure

to redeem outstanding debts, public or private;

Same

or to make new loans through banks or other intermediaries.

As above, that’s just a shift from private banking to public banking, and nothing more.

All such mechanisms could (and should) be made as transparent as one might wish.

The transition to a system in which money creation is separated from financial intermediation would be feasible, albeit complex.

No, it’s quite simple actually, as above.

But it would bring huge advantages. It would be possible to increase the money supply without encouraging people to borrow to the hilt.

Deficit spending does that.

It would end “too big to fail” in banking.

That’s just a matter of shareholders losing when things go bad which is already the case.

It would also transfer seignorage – the benefits from creating money – to the public.

That’s just a bunch of inapplicable empty rhetoric with today’s floating fx regimes.

In 2013, for example, sterling M1 (transactions money) was 80 per cent of gross domestic product. If the central bank decided this could grow at 5 per cent a year, the government could run a fiscal deficit of 4 per cent of GDP without borrowing or taxing.

In any case spending in excess of taxing adds to bank reserve accounts, and if govt doesn’t pay interest on those accounts or offer interest bearing alternatives, generally called securities accounts, the consequence is a 0% rate policy. So seems this is a proposal for a permanent zero rate policy, which I support!!! But that doesn’t require any of the above institutional change, just an announcement by the cb that zero rates are permanent.

The right might decide to cut taxes, the left to raise spending. The choice would be political, as it should be.

And exactly as it is today in any case

Opponents will argue that the economy would die for lack of credit.

Not if the deficit spending is allowed to ‘shift’ from private to public.

I was once sympathetic to that argument. But only about 10 per cent of UK bank lending has financed business investment in sectors other than commercial property. We could find other ways of funding this.

Govt deficit spending or net exports are the only two alternatives.

Our financial system is so unstable because the state first allowed it to create almost all the money in the economy

The process is already strictly limited by regulation and supervision

and was then forced to insure it when performing that function.

The liability side of banking isn’t the place for market discipline, hence deposit insurance.

This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.

The funds to pay taxes already come only from the state.

The problem is that leadership doesn’t understand monetary operations.

This will not happen now. But remember the possibility. When the next crisis comes – and it surely will – we need to be ready.

Agreed!!!!!

Posted in Banking, CBs, Currencies, Fed | No Comments »

Draghi on the euro

Posted by WARREN MOSLER on 14th April 2014

Draghi says a stronger euro would trigger looser ECB policy (Reuters)

Except by my calculations he has it backwards, as lower rates make a currency like the euro stronger, not weaker, via the interest income channels, etc.

ECB President Mario Draghi said that euro appreciation over the last year was an important factor in bringing euro zone inflation down to its current low levels, accounting for 0.4-0.5 percentage point of decline in the annual rate, which stood at 0.5 percent year-on-year in March. “I have always said that the exchange rate is not a policy target, but it is important for price stability and growth. And now, what has happened over the last few months is that is has become more and more important for price stability,” Draghi said at a news conference. “So the strengthening of the exchange rate would require further monetary policy accommodation.

As above.

If you want policy to remain accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he said.

I agree, except I’d propose leaving rates at 0 fiscal relaxation to the point of domestic full employment, etc.

Furthermore, their policy of depressing domestic demand to drive exports/competitiveness has successfully resulted in growing net exports. However, unless combined with buying fx reserves of the targeted market areas, the euro appreciates until the net exports reverse, regardless of ‘monetary policy.’

Posted in CBs, Currencies, ECB, trade | No Comments »

More traction

Posted by WARREN MOSLER on 28th March 2014

Posted in Currencies, MMT | No Comments »

Winning!

Posted by WARREN MOSLER on 26th March 2014


Full size image

Posted in Currencies, Government Spending | No Comments »

The BoEs sharp shock to monetary illusions

Posted by WARREN MOSLER on 21st March 2014

The BoEs sharp shock to monetary illusions

Posted in Banking, CBs, Currencies | No Comments »

The Old Lady (of Threadneedle Street) fails to get an A

Posted by WARREN MOSLER on 21st March 2014

The Old Lady (of Threadneedle Street) fails to get an A

Posted in Banking, CBs, Currencies | No Comments »

Comments on Stanlely Fisher’s ‘Lessons from Crises, 1985-2014′

Posted by WARREN MOSLER on 18th March 2014

Lessons from Crises, 1985-2014

Stanley Fischer[1]


It is both an honor and a pleasure to receive this years SIEPR Prize. Let me list the reasons. First, the prize, awarded for lifetime contributions to economic policy, was started by George Shultz. I got my start in serious policy work in 1984-85, as a member of the advisory group on the Israeli economy to George Shultz, then Secretary of State. I learned a great deal from that experience, particularly from Secretary Shultz and from Herb Stein, the senior member of the two-person advisory group (I was the other member). Second, it is an honor to have been selected for this prize by a selection committee consisting of George Shultz, Ken Arrow, Gary Becker, Jim Poterba and John Shoven. Third, it is an honor to receive this prize after the first two prizes, for 2010 and for 2012 respectively, were awarded to Paul Volcker and Marty Feldstein. And fourth, it is a pleasure to receive the award itself.

When John Shoven first spoke to me about the prize, he must have expected that I would speak on the economic issues of the day and I would have been delighted to oblige. However, since then I have been nominated by President Obama but not so far confirmed by the Senate for the position of Vice-Chair of the Federal Reserve Board. Accordingly I shall not speak on current events, but rather on lessons from economic crises I have seen up close during the last three decades and about which I have written in the past starting with the Israeli stabilization of 1985, continuing with the financial crises of the 1990s, during which I was the number two at the IMF, and culminating (I hope) in the Great Recession, which I observed and with which I had to deal as Governor of the Bank of Israel between 2005 and 2013.

This is scheduled to be an after-dinner speech at the end of a fine dinner and after an intensive conference that started at 8 a.m. and ran through 6 p.m. Under the circumstances I shall try to be brief. I shall start with a list of ten lessons from the last twenty years, including the crises of Mexico in 1994-95, Asia in 1997-98, Russia in 1998, Brazil in 1999-2000, Argentina in 2000-2001, and the Great Recession. I will conclude with one or two-sentence pieces of advice I have received over the years from people with whom I had the honor of working on economic policy. The last piece of advice is contained in a story from 1985, from a conversation with George Shultz.


I. Ten lessons from the last two decades.[2]


Lesson 1: Fiscal policy also matters macroeconomically. It has always been accepted that fiscal policy, in the sense of the structure of the tax system and the composition of government spending, matters for the behavior of the economy. At times in the past there has been less agreement about whether the macroeconomic aspects of fiscal policy, frequently summarized by the full employment budget deficit, have a significant impact on the level of GDP. As a result of the experience of the last two decades, it is once again accepted that cutting government spending and raising taxes in a recession to reduce the budget deficit is generally recessionary. This was clear from experience in Asia in the 1990s.[3] The same conclusion has been reached following the Great Recession.

Who would have thought?…

At the same time, it needs to be emphasized that there are circumstances in which a fiscal contraction can be expansionary particularly for a country running an unsustainable budget deficit.

Unsustainable?
He doesn’t distinguish between floating and fixed fx policy. At best this applies to fixed fx policy, where fx reserves would be exhausted supporting the peg/conversion. And as a point of logic, with floating fx this can only mean an unsustainable inflation, whatever that means.

More important, small budget deficits and smaller rather than larger national debts are preferable in normal times in part to ensure that it will be possible to run an expansionary fiscal policy should that be needed in a recession.

Again, this applies only to fixed fx regimes where a nation might need fx reserves to support conversion at the peg. With floating fx nominal spending is in no case revenue constrained.

Lesson 2: Reaching the zero interest lower bound is not the end of expansionary monetary policy. The macroeconomics I learned a long time ago, and even the macroeconomics taught in the textbooks of the 1980s and early 1990s, proclaimed that more expansionary monetary policy becomes either impossible or ineffective when the central bank interest rate reaches zero, and the economy finds itself in a liquidity trap. In that situation, it was said, fiscal policy is the only available expansionary tool of macroeconomic policy.

Now the textbooks should say that even with a zero central bank interest rate, there are at least two other available monetary policy tools. The first consists of quantitative easing operations up and down the yield curve, in particular central bank market purchases of longer term assets, with the intention of reducing the longer term interest rates that are more relevant than the shortest term interest rate to investment decisions.

Both are about altering the term structure of rates. How about the lesson that the data seems to indicate the interest income channels matter to the point where the effect is the reverse of what the mainstream believes?

That is, with the govt a net payer of interest, lower rates lower the deficit, reducing income and net financial assets credited to the economy. For example, QE resulted in some $90 billion of annual Fed profits returned to the tsy that otherwise would have been credited to the economy. That, with a positive yield curve, QE functions first as a tax.

The second consists of central bank interventions in particular markets whose operation has become significantly impaired by the crisis. Here one thinks for instance of the Feds intervening in the commercial paper market early in the crisis, through its Commercial Paper Funding Facility, to restore the functioning of that market, an important source of finance to the business sector. In these operations, the central bank operates as market maker of last resort when the operation of a particular market is severely impaired.

The most questionable and subsequently overlooked ‘bailout’- the Fed buying, for example, GE commercial paper when it couldn’t fund itself otherwise, with no ‘terms and conditions’ as were applied to select liquidity provisioning to member banks, AIG, etc. And perhaps worse, it was the failure of the Fed to provide liquidity (not equity, which is another story/lesson) to its banking system on a timely basis (it took months to get it right) that was the immediate cause of the related liquidity issues.

However, and perhaps the most bizarre of what’s called unconventional monetary policy, the Fed did provide unlimited $US liquidity to foreign banking systems with its ‘swap lines’ where were, functionally, unsecured loans to foreign central banks for the further purpose of bringing down Libor settings by lowering the marginal cost of funds to foreign banks that otherwise paid higher rates.

Lesson 3: The critical importance of having a strong and robust financial system. This is a lesson that we all thought we understood especially since the financial crises of the 1990s but whose central importance has been driven home, closer to home, by the Great Recession. The Great Recession was far worse in many of the advanced countries than it was in the leading emerging market countries. This was not what happened in the crises of the 1990s, and it was not a situation that I thought would ever happen. Reinhart and Rogoff in their important book, This Time is Different,[4] document the fact that recessions accompanied by a financial crisis tend to be deeper and longer than those in which the financial system remains operative. The reason is simple: the mechanisms that typically end a recession, among them monetary and fiscal policies, are less effective if households and corporations cannot obtain financing on terms appropriate to the state of the economy.

The lesson should have been that the private sector is necessarily pro cyclical, and that a collapse in aggregate demand that reduces the collateral value of bank assets and reduces the income required to support the credit structure triggers a downward spiral that can only be reversed with counter cyclical fiscal policy.

In the last few years, a great deal of work and effort has been devoted to understanding what went wrong and what needs to be done to maintain a strong and robust financial system. Some of the answers are to be found in the recommendations made by the Basel Committee on Bank Supervision and the Financial Stability Board (FSB). In particular, the recommendations relate to tougher and higher capital requirements for banks, a binding liquidity ratio, the use of countercyclical capital buffers, better risk management, more appropriate remuneration schemes, more effective corporate governance, and improved and usable resolution mechanisms of which more shortly. They also include recommendations for dealing with the clearing of derivative transactions, and with the shadow banking system. In the United States, many of these recommendations are included or enabled in the Dodd-Frank Act, and progress has been made on many of them.

Everything except the recognition of the need for immediate and aggressive counter cyclical fiscal policy, assuming you don’t want to wait for the automatic fiscal stabilizers to eventually turn things around.

Instead, what they’ve done with all of the above is mute the credit expansion mechanism, but without muting the ‘demand leakages’/'savings desires’ that cause income to go unspent, and output to go unsold, leaving, for all practical purposes (the export channel isn’t a practical option for the heaving lifting), only increased deficit spending to sustain high levels of output and employment.

Lesson 4: The strategy of going fast on bank restructuring and corporate debt restructuring is much better than regulatory forbearance. Some governments faced with the problem of failed financial institutions in a recession appear to believe that regulatory forbearance giving institutions time to try to restore solvency by rebuilding capital will heal their ills. Because recovery of the economy depends on having a healthy financial system, and recovery of the financial system depends on having a healthy economy, this strategy rarely works.

The ‘problem’ is bank lending to offset the demand leakages when the will to use fiscal policy isn’t there.

And today, it’s hard to make the case that us lending is being constrained by lack of bank capital, with the better case being a lack of credit worthy, qualifying borrowers, and regulatory restrictions- called ‘regulatory overreach’ on some types of lending as well. But again, this largely comes back to the understanding that the private sector is necessarily pro cyclical, with the lesson being an immediate and aggressive tax cut and/or spending increase is the way go.

This lesson was evident during the emerging market crises of the 1990s. The lesson was reinforced during the Great Recession, by the contrast between the response of the U.S. economy and that of the Eurozone economy to the low interest rate policies each implemented. One important reason that the U.S. economy recovered more rapidly than the Eurozone is that the U.S. moved very quickly, using stress tests for diagnosis and the TARP for financing, to restore bank capital levels, whereas banks in the Eurozone are still awaiting the rigorous examination of the value of their assets that needs to be the first step on the road to restoring the health of the banking system.

The lesson remaining unlearned is that with a weaker banking structure the euro zone can implement larger fiscal adjustments- larger tax cuts and/or larger increases in public goods and services.

Lesson 5: It is critical to develop now the tools needed to deal with potential future crises without injecting public funds.

Yes, it seems the value of immediate and aggressive fiscal adjustments remains unlearned.

This problem arose during both the crises of the 1990s and the Great Recession but in different forms. In the international financial crises of the 1990s, as the size of IMF packages grew, the pressure to bail in private sector lenders to countries in trouble mounted both because that would reduce the need for official financing, and because of moral hazard issues. In the 1980s and to a somewhat lesser extent in the 1990s, the bulk of international lending was by the large globally active banks. My successor as First Deputy Managing Director of the IMF, Anne Krueger, who took office in 2001, mounted a major effort to persuade the IMF that is to say, the governments of member countries of the IMF to develop and implement an SDRM (Sovereign Debt Restructuring Mechanism). The SDRM would have set out conditions under which a government could legally restructure its foreign debts, without the restructuring being regarded as a default.

The lesson is that foreign currency debt is to be avoided, and that legal recourse in the case of default should be limited.

Recent efforts to end too big to fail in the aftermath of the Great Recession are driven by similar concerns by the view that we should never again be in a situation in which the public sector has to inject public money into failing financial institutions in order to mitigate a financial crisis. In most cases in which banks have failed, shareholders lost their claims on the banks, but bond holders frequently did not. Based in part on aspects of the Dodd-Frank Act, real progress has been made in putting in place measures to deal with the too big to fail problem. Among them are: the significant increase in capital requirements, especially for SIFIs (Systemically Important Financial Institutions) and the introduction of counter-cyclical capital buffers for banks; the requirement that banks hold a cushion of bail-in-able bonds; and the sophisticated use of stress tests.

The lesson is that the entire capital structure should be explicitly at full risk and priced accordingly.

Just one more observation: whenever the IMF finds something good to say about a countrys economy, it balances the praise with the warning Complacency must be avoided. That is always true about economic policy and about life. In the case of financial sector reforms, there are two main concerns that the statement about significant progress raises: first, in designing a system to deal with crises, one can never know for sure how well the system will work when a crisis situation occurs which means that we will have to keep on subjecting the financial system to tough stress tests and to frequent re-examination of its resiliency; and second, there is the problem of generals who prepare for the last war the financial system and the economy keep evolving, and we need always to be asking ourselves not only about whether we could have done better last time, but whether we will do better next time and one thing is for sure, next time will be different.

And in any case an immediate and aggressive fiscal adjustment can always sustain output and employment. There is no public purpose in letting a financial crisis spill over to the real economy.

Lesson 6: The need for macroprudential supervision. Supervisors in different countries are well aware of the need for macroprudential supervision, where the term involves two elements: first, that the supervision relates to the financial system as a whole, and not just to the soundness of each individual institution; and second, that it involves systemic interactions. The Lehman failure touched off a massive global financial crisis, a reflection of the interconnectedness of the financial system, and a classic example of systemic interactions. Thus we are talking about regulation at a very broad level, and also the need for cooperation among regulators of different aspects of the financial system.

The lesson are that whoever insures the deposits should do the regulation, and that independent fiscal adjustments can be immediately and aggressively employed to sustain output and employment in any economy.

In practice, macroprudential policy has come to mean the deployment of non-monetary and non-traditional instruments of policy to deal with potential problems in financial institutions or a part of the financial system. For instance, in Israel, as in other countries whose financial system survived the Great Recession without serious damage, the low interest rate environment led to uncomfortably rapid rates of increase of housing prices. Rather than raise the interest rate, which would have affected the broader economy, the Bank of Israel in which bank supervision is located undertook measures whose effect was to make mortgages more expensive. These measures are called macroprudential, although their effect is mainly on the housing sector, and not directly on interactions within the financial system. But they nonetheless deserve being called macroprudential, because the real estate sector is often the source of financial crises, and deploying these measures should reduce the probability of a real estate bubble and its subsequent bursting, which would likely have macroeconomic effects.

And real effects- there would have been more houses built. The political decision is the desire for real housing construction.

The need for surveillance of the financial system as a whole has in some countries led to the establishment of a coordinating committee of regulators. In the United States, that group is the FSOC (Financial Stability Oversight Council), which is chaired by the Secretary of the Treasury. In the United Kingdom, a Financial Policy Committee, charged with the responsibility for oversight of the financial system, has been set up and placed in the Bank of England. It operates under the chairmanship of the Governor of the Bank of England, with a structure similar but not identical to the Bank of Englands Monetary Policy Committee.

Lesson 7: The best time to deal with moral hazard is in designing the system, not in the midst of a crisis.

Agreed!
Moral hazard is about the future course of events.

At the start of the Korean crisis at the end of 1997, critics including friends of mine told the IMF that it would be a mistake to enter a program with Korea, since this would increase moral hazard. I was not convinced by their argument, which at its simplest could be expressed as You should force Korea into a greater economic crisis than is necessary, in order to teach them a lesson. The issue is Who is them? It was probably not the 46 million people living in South Korea at the time. It probably was the policy-makers in Korea, and it certainly was the bankers and others who had invested in South Korea. The calculus of adding to the woes of a country already going through a traumatic experience, in order to teach policymakers, bankers and investors a lesson, did not convince the IMF, rightly so to my mind.

Agreed!
Nor did they need an IMF program!

But the question then arises: Can you ever deal with moral hazard? The answer is yes, by building a system that will as far as possible enable policymakers to deal with crises in a way that does not create moral hazard in future crisis situations. That is the goal of financial sector reforms now underway to create mechanisms and institutions that will put an end to too big to fail.

There was no too big to fail moral hazard issue. The US banks did fail when shareholders lost their capital. Failure means the owners lose and are financially punished, and new owners with new capital have a go at it.

Lesson 8: Dont overestimate the benefits of waiting for the situation to clarify.


Early in my term as Governor of the Bank of Israel, when the interest rate decision was made by the Governor alone, I faced a very difficult decision on the interest rate. I told the advisory group with whom I was sitting that my decision was to keep the interest rate unchanged and wait for the next monthly decision, when the situation would have clarified. The then Deputy Governor, Dr. Meir Sokoler, commented: It is never clear next time; it is just unclear in a different way. I cannot help but think of this as the Tolstoy rule, from the first sentence of Anna Karenina, every unhappy family is unhappy in its own way.

It is not literally true that all interest rate decisions are equally difficult, but it is true that we tend to underestimate the lags in receiving information and the lags with which policy decisions affect the economy. Those lags led me to try to make decisions as early as possible, even if that meant that there was more uncertainty about the correctness of the decision than would have been appropriate had the lags been absent.

The lesson is to be aggressive with fiscal adjustments when unemployment/the output gap starts to rise as the costs of waiting- massive quantities of lost output and negative externalities, particularly with regard to the lives of those punished by the government allowing aggregate demand to decline- are far higher than, worst case, a period of ‘excess demand’ that can also readily be addressed with fiscal policy.

Lesson 9: Never forget the eternal verities lessons from the IMF. A country that manages itself well in normal times is likely to be better equipped to deal with the consequences of a crisis, and likely to emerge from it at lower cost.

Thus, we should continue to believe in the good housekeeping rules that the IMF has tirelessly promoted. In normal times countries should maintain fiscal discipline and monetary and financial stability. At all times they should take into account the need to follow sustainable growth-promoting macro- and structural policies. And they need to have a decent regard for the welfare of all segments of society.

Yes, at all times they should sustain full employment policy as the real losses from anything less far exceed any other possible benefits.

The list is easy to make. It is more difficult to fill in the details, to decide what policies to
follow in practice. And it may be very difficult to implement such measures, particularly when times are good and when populist pressures are likely to be strong. But a country that does not do so is likely to pay a very high price.

Lesson 10.

In a crisis, central bankers will often find themselves deciding to implement policy actions they never thought they would have to undertake and these are frequently policy actions that they would have preferred not to have to undertake. Hence, a few final words of advice to central bankers (and to others):

Lesson for all bankers:
Proposals for the Banking System, Treasury, Fed, and FDIC

Never say never


II. The Wisdom of My Teachers

:(

Feel free to distribute, thanks.

Over the years, I have found myself remembering and repeating words of advice that I first heard from my teachers, both academics and policymakers. Herewith a selection:


1. Paul Samuelson on econometric models: I would rather have Bob Solow than an econometric model, but Id rather have Bob Solow with an econometric model than Bob Solow without one.

2. Herb Stein: (a) After listening to my long description of what was happening in the Israeli economy in 1985: Yes, but what do we want them to do?”

(b) The difference between a growth rate of 2% and a growth rate of 3% is 50%.

(c) If something cannot go on forever, it will stop.
3. Michel Camdessus (former head of the IMF):

(a) At 7 a.m., in his office, on the morning that the U.S. government turned to the IMF to raise $20 billion by 9:30 a.m: Gentlemen, this is a crisis, and in a crisis you do not panic

(b) When the IMF was under attack from politicians or the media, in response to my asking Michel, what should we do?, his inevitable answer was We must do our job.

(c) His response when I told him (his official title was Managing Director of the IMF) that life would be much easier for all of us if he would only get himself a cell phone: Cell phones are for deputy managing directors.

(d) On delegation: In August, when he was in France and I was acting head of the IMF in Washington, and had called him to explain a particularly knotty problem and ask him for a decision, You have more information than me, you decide.

4. George Shultz: This event happened in May 1985, just before Herb Stein and I were due to leave for Israel to negotiate an economic program which the United States would support with a grant of $1.5 billion. I was a professor at MIT, and living in the Boston area. Herb and I spoke on the phone about the fact that we had no authorization to impose any conditions on the receipt of the money. Herb, who lived in Washington, volunteered to talk to the Secretary of State to ask him for authorization to impose conditions. He called me after his meeting and said that the Secretary of State was not willing to impose any conditions on the aid.

We agreed this was a problem and he said to me, Why dont you try. A meeting was hastily arranged and next morning I arrived at the Secretary of States office, all ready to deliver a convincing speech to him about the necessity of conditionality. He didnt give me a chance to say a word. You want me to impose conditions on Israel? I said yes. He said I wont. I asked why not. He said Because the Congress will give them the money even if they dont carry out the program and I do not make threats that I cannot carry out.

This was convincing, and an extraordinarily important lesson. But it left the negotiating team with a problem. So I said, That is very awkward. Were going to say To stabilize the economy you need to do the following list of things. And they will be asking themselves, and if we dont? Is there anything we can say to them?

The Secretary of State thought for a while and said: You can tell them that if they do not carry out the program, I will be very disappointed.

We used that line repeatedly. The program was carried out and the program succeeded.

Thank you all very much.

[1] Council on Foreign Relations. These remarks were prepared for presentation on receipt of the SIEPR (Stanford Institute for Economic Policy Research) Prize at Stanford University on March 14, 2014. The Prize is awarded for lifetime contributions to economic policy. I am grateful to Dinah Walker of the Council on Foreign Relations for her assistance.

[2] I draw here on two papers I wrote based on my experience in the IMF: Ten Tentative Conclusions from the Past Three Years, presented at the annual meeting of the Trilateral Commission in 1999, in Washington, DC; and the Robbins Lectures, The International Financial System: Crises and Reform Several other policy-related papers from that period appear in my book: IMF Essays from a Time of Crisis (MIT Press, Cambridge, MA, 2004). For the period of the Great Recession, I draw on Central bank lessons from the global crisis, which I presented at a conference on Lessons of the Global Crisis at the Bank of Israel in 2011.

[3] This point was made in my 1999 statement Ten Tentative Conclusions referred to above, and has of course received a great deal of focus in analyses of the Great Recession.

[4] Carmen Reinhart and Kenneth Rogoff, This Time is Different, Princeton University Press, Princeton, NJ, 2009.

Posted in Banking, Bonds, CBs, Credit, Currencies, Deficit, ECB, Employment, Government Spending, Housing, Interest Rates | No Comments »

concern over euro strength

Posted by WARREN MOSLER on 13th March 2014

As previously discussed, the ‘missing piece’ from the standard export model is buying the currency of your target market, as Germany used to do, and as the EU can’t do for ideological reasons- they don’t want to give the appearance that dollar reserves back the euro, and they want the euro to be the reserve currency. And they want to net export… whatever!

Spanish Central Bank Joins Chorus of Concern Over Euro’s Strength

By Paul Hannon

March 12 (WSJ) — In a news conference Thursday after the ECB’s decision to leave its policy unchanged, the bank’s president Mario Draghi said the euro’s 9% appreciation against the U.S. dollar since mid-2012 had been “a factor that is affecting in a significant way” the inflation rate, likely responsible for lowering it by almost half a percentage point. SpeakingMonday, Bank of France Governor Christian Noyer—who also sits on the ECB’s governing council—said that a strong euro lowers the inflation rate. “We are clearly not very happy at the moment,” he said.On Wednesday, Bank of Spain Governor Luis Maria Linde joined the chorus, making an explicit connection between the currency’s gains and possible future action by the ECB. “A stronger euro may lead to an easier policy, or a drop in inflation,” said Mr. Linde said. “We would like to have a little bit more inflation in the euro zone.”

Posted in Currencies, EU | No Comments »

A few comments on overnight news

Posted by WARREN MOSLER on 27th February 2014

The threshold may be high but there is one somewhere up there:

Fed should be ‘very patient’ in cutting stimulus: Rosengren (Reuters) The high number of part-time workers who would rather work full-time, the still-high unemployment rate, and very low inflation suggest significant “slack” in labor markets and “call for a very patient approach to removing monetary policy accommodation, particularly given the softness in recent economic data,” Boston Federal Reserve Bank President Eric Rosengren said. Rosengren said that it has been difficult for economists to determine whether weak employment reports for the past two months have been influenced bad weather or if they reflect an economic slowdown, and predicted that harsh winter weather will make the February jobs report similarly difficult to interpret. “In my view, this uncertainty provides an additional strong rationale for taking a patient approach to removing the monetary policy accommodation that the Federal Reserve has been deploying.”

These are closings from contracts signed months earlier:

New home sales hit five-and-a-half year high in January (Reuters) Sales of new U.S. single-family homes jumped 9.6 percent to a seasonally adjusted annual rate of 468,000 units. December’s sales were revised up to a 427,000-unit pace from the previously reported 414,000-unit rate. Sales in the Northeast soared 73.7 percent to a seven-month high, while the South recorded a 10.4 percent rise in transactions to a more than five-year high. Sales tumbled 17.2 percent in the Midwest last month, while rising 11 percent in the West. New home sales rose 2.2 percent compared with January 2013. For all of 2013. Last month, the supply of new houses on the market was unchanged at 184,000 units. The median price of a new home last month rose 3.4 percent to $260,100 from January 2013. At January’s sales pace it would take 4.7 months to clear the supply of houses on the market.

I still suspect some of the q4 activity was ahead of expiring tax credits:

Hope on Horizon for Home-Supply Crunch: Builder Borrowing Picks Up (WSJ) Data released Wednesday by the Federal Deposit Insurance Corp. show that the outstanding balance on loans for land acquisition, development and construction rose in the fourth quarter to $209.9 billion, compared with $206 billion in the third quarter. Last year, the average price of a new U.S. home was $322,100, up 10.2% from 2012. The latest increase in construction lending “is an encouraging signal,” said David Crowe, chief economist for the National Association of Home Builders. But lending remains far from peak, as outstanding land and construction loans topped out at $631.8 billion in the first quarter of 2008. According to the FDIC, outstanding loans solely for construction of homesexcluding development, land acquisition and commercial projectsincreased to $43.7 billion in the fourth quarter, up from a recent low of $40.7 billion in last year’s first quarter.

This helps support prices but doesn’t directly add much to GDP apart from commissions etc. unless it’s new construction:

Foreign appetite for US properties remains strong (FT) Last year the US maintained its position as the top destination for direct commercial property investment by foreigners with $38.7bn pouring into the country, according to a report from brokerage Jones Lang LaSalle. The total was up 44 per cent on 2012. Canadian, Chinese and Australian investors led the charge, with investors targeting top-tier areas such as Manhattan, Los Angeles and Chicago as well as secondary markets including Houston, Dallas and Seattle. Almost half all investments were in office buildings, 16 per cent in apartment blocks, 15 per cent in retail, while hotels, industrial properties and land development made up the rest. Foreign money comprises about 10 per cent of all capital for commercial property investment in the US, which JLL has said could accelerate if international investors expand beyond core assets to riskier deals that deliver higher returns.

The lack of domestic credit expansion and only very modest export growth leaves only govt. to spend more than its income and they keep pressing the wrong way on that as well:

Euro zone lending contraction compounds ECB headache (Reuters) Loans to the private sector fell by 2.2 percent in January from the same month a year earlier, ECB data released on Thursday showed. That compared to a contraction of 2.3 percent in December. Euro zone M3 money supply grew at an annual pace of 1.2 percent, picking up slightly from 1.0 percent in December. The ECB has set out two scenarios that could trigger fresh policy action: a deterioration in the medium-term inflation outlook and an “unwarranted” tightening of short-term money markets. Before the ECB gets to quantitative easing a cut in interest rates is one option for dealing with low euro zone inflation, or tight money markets. Another option the ECB has discussed is to suspend operations to soak up the money it spent buying sovereign bonds under its now-terminated Securities Markets Programme (SMP) during the euro zone’s debt crisis.

6.8% unemployment considered a successful economy?
whatever…

Lowest number of Germans out of work in Feb since Sept 2012 (Reuters) The number of people out of work in Europe’s largest economy decreased by 14,000 to 2.914 million, data from the Labour Office showed. That meant there were fewer unemployed people in Germany than at any time since September 2012. It was the third consecutive monthly drop in joblessness. Separate data from the Federal Statistics Office on Thursday showed employment climbing to a record high of almost 42 million. Berlin expects private consumption, which boosted growth in 2013, to increase by 1.4 percent as workers benefit from an increase in employment to an expected record of 42.1 million this year and a nominal 2.7 percent jump in earnings. The jobless rate held steady at 6.8 percent, its lowest level since German reunification more than two decades ago.

Germany’s wealth distribution most unequal in euro zone (Reuters) Private wealth is more unevenly distributed in Germany than in any other euro zone state. While the richest one percent of people in Germany have personal wealth of at least 800,000 euros ($1.09 million), over a quarter of adults have either no wealth or negative wealth because of debt, the study by Germany’s DIW think tank showed. According to the study, Germany’s Gini coefficient, a measure of income inequality, was 0.78 in 2012. That compared with 0.68 in France, 0.61 in Italy and 0.45 in Slovakia. A score of 0 indicates minimal inequality and 1.0 maximal inequality. Germans have total net assets worth 6.3 trillion euros, with land and real estate accounting for 5.1 trillion euros, and the average German adult has net assets worth around 83,000 euros, according to DIW. In the study, private wealth includes owned real estate, financial assets, valuables and debt.

French jobless total rises to record in January (Reuters) The number of people out of work in France rose by 8,900 in January to reach a record, as President Francois Hollande’s goal of taming unemployment eluded him yet again. Labour Ministry data showed on Wednesday that the number of people registered as out of work reached 3,316,200 in mainland France, up 0.3 percent over a month and 4.4 percent over a year. Hollande’s popularity has plummeted to record lows. He struggled and ultimately failed to live up to a pledge to get unemployment falling by the end of last year. With that promise in tatters despite at least 2 billion euros ($2.73 billion) spent on subsidized jobs, Labour Minister Michel Sapin said earlier on Wednesday that the jobless total should fall this year. Hollande offered last month to phase out 30 billion euros in payroll charges that companies have to pay, in exchange for committing to targets to create jobs.

Spanish Economic Growth Slower Than Expected (WSJ) Gross domestic product grew by 0.2% in the fourth quarter compared with the third, the country’s national statistics institute INE said Thursday. The figure was lower than the INE’s and the government’s preliminary reading, which had pegged quarterly growth at 0.3%. Public spending fell 3.9% compared with the third quarter. Household consumption was up 0.5% in the same period. Strong export growth helped Spain’s economy emerge from a nine-quarter recession in the second half of 2013, but the recovery has so far been anemic, because households remain highly indebted, unemployment still stands around 26% and the government can’t raise public spending because it is struggling to lower its budget deficit. According to the INE, economic output shrunk by 0.2% in the fourth quarter of 2013 compared with the fourth quarter of a year earlier.

Private rental surge hits benefits bill (FT) Englands housing market is seeing a seismic shift towards private rented property and away from home ownership. Figures from the official English housing survey published on Wednesday show the number of households living in the private rented sector overtook those in social housing for the first time last year. Almost 4m households now live in privately rented homes, and a quarter of the tenants are now subsidised by housing benefit, according to the annual survey. Private renting is now the second-largest tenure in England, behind home ownership. Under two-thirds of households now own their own home down from 71 per cent a decade ago. The number of households in the private rented sector receiving the benefit has risen by two-thirds in the past five years, with 390,000 more households in this category beginning to claim, the English housing survey found.

Does China want their currency to adjust to the yen the way other EM currencies have done?

China dismisses concern over sudden renminbi fall (FT) The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies, the State Administration of Foreign Exchange, an agency under the central bank, said. It added that the currencys movement was nothing unusual: The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to over-interpret it. China faced immense capital inflows at the start of this year, according to data published on Tuesday by the central bank. Banks bought a net $73bn of foreign currency in the onshore market from their clients who wanted renminbi in January, the biggest monthly amount on record. Inflows have been accelerating since the middle of last year when Chinas mountain of foreign exchange reserves grew $500bn to $3.8tn.

China’s Central Bank Engineered Yuan’s Decline (WSJ) China’s central bank engineered the recent decline in the country’s currency to shake out speculators as it prepares to allow a wider trading range for the tightly tethered yuan, according to people familiar with the central bank’s thinking. In the past week, the People’s Bank of China has been guiding the yuan lower against the dollar. It has done so by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars, according to traders. China’s central bank and commercial banks purchased nearly $45 billion worth of foreign exchange in December, the fifth consecutive month of net purchases. The PBOC decided to tamp down expectations for one-way appreciation in the yuan and curb speculative trading during two-day currency-policy meeting that ended on Feb. 18, the people said.

Posted in Currencies, Economic Releases, Emerging Markets, Employment, EU, Housing | No Comments »

EM currencies look more stable vs yen

Posted by WARREN MOSLER on 27th January 2014


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Emerging market currencies

Posted by WARREN MOSLER on 24th January 2014

Seems no one is pointing out how this is all looking a lot like ‘catch up’ vs last year’s yen move?

As previously discussed, the proactive yen move from under 80 to over 100 vs the dollar- a 30% or so pay cut for domestic workers in terms of prices of imports- was an internationally deflationary impulse.

It’s called ‘currency wars’ with the exporters pushing hard on their govts to do whatever it takes to keep them ‘competitive’. And all, at least to me, shamelessly thinly disguised as anything but. And, in fact, it’s not ‘wrong’ to call it ‘dollar appreciation’ rather than EM currency depreciation given the deflationary bias of US (and EU) fiscal and monetary (rate cuts/QE reduce interest income for the economy) policy.

This is a highly deflationary force for the US (and EU) via import prices and lost export pricing power, also hurting earnings translations and, in general weakening US domestic demand, as increased domestic oil output doesn’t reduce net imports as much as would otherwise be the case.

And while I’m not saying energy independence is a ‘bad thing’ note that the UK has been largely ‘energy independent’ for quite a while, so there’s obviously more to it.

The optimal policy move for the US is fiscal relaxation- like my proposed FICA suspension- to get us back to full employment and optimize our real terms of trade. (and not to forget the federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the economy booms).

But unfortunately Congress is going the other way and making it all that much worse.

Emerging market currencies take a battering

By Katrina Bishop

January 24 (CNBC) — Emerging market currencies continued to take a beating on Friday — with Turkey’s lira hitting a new record low against the dollar yet again — amid growing concerns about the U.S. Federal Reserve’s monetary guidance.

On Friday, the dollar strengthened to 2.3084 against Turkey’s currency. Investors also piled out of the South African rand and Argentina’s peso, and both the Indian rupee and the Indonesian rupiah fell to two-week lows against the dollar. Meanwhile, the Australian dollar fell to $0.8681 – its lowest level in three-and-a-half years.

“The market is in panic mode. We have huge psychological fear that is going to emerging markets, despite a global environment that hasn’t changed that much,” Benoit Anne, head of global emerging market strategy at Societe Generale, told CNBC.

“My bias at this stage — although it’s a bold one — is that this is all about the credibility of the Fed with respect to its forward guidance. This fear that the Fed is going to tighten quicker than expected is translating into emerging markets.”

The U.S. central bank has promised that it will not raise interest rates until unemployment hits 6.5 percent – but some analysts are concerned that rate hikes could come sooner than expected.

U.S. monetary policy has always had a significant on emerging markets, and the Fed’s bond-buying program boosted risk sentiment, causing investors to turn their back on so-called “safe havens” and pile into assets seen as riskier – such as emerging market currencies.

Speculation of Fed tapering in 2013 hit emerging markets hard, with currencies including India, Turkey, Russia and Brazil coming under intense pressure in 2013.
But Anne added these recent moves were likely to be more temporary.

“It’s a matter of weeks rather than the whole year 2014 as a total write off for emerging markets,” he said. “Although it will take the Fed re-establishing its credibility towards forward guidance before we see respite in emerging markets.”

Posted in Currencies, Deficit, Employment, Fed | No Comments »

Sat presentation

Posted by WARREN MOSLER on 9th January 2014

Link:

Chianciano Presentation

Posted in Banking, Currencies, MMT | No Comments »

Krugman on fiat money

Posted by WARREN MOSLER on 9th December 2013

Says its backed by taxes and men with guns…
;)

PAUL KRUGMAN: Bitcoin’s Value Is Driven By The Fact That It Sounds Impressive

Posted in Currencies | No Comments »

comments on euro zone and india

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 in Currencies, EU, Government Spending | No Comments »

Euro up to 137 vs $

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 in Currencies | No Comments »

Currency depreciation not necessarily the silver bullet

Posted by WARREN MOSLER on 2nd October 2013

BOJ Survey Shows Consumer Sentiment Worsen As Energy Prices Rise

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 in Currencies, Japan | No Comments »