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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.

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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.

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.

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.

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 »

proactive fiscal tightening damages income growth

Posted by WARREN MOSLER on 10th March 2014

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Mind the gap:

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This is below prior recession levels!

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This is year over year growth in consumption of domestic product, which is GDP less capex less exports.

It shows how much ‘the consumer’ is spending on domestically produced goods and services:

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The underlying narrative is that proactive austerity damages income growth and thereafter requires a ‘jump’ in ‘borrowing to spend’/reduction in savings’ to sustain the prior levels of growth.

When growth itself brings the govt deficit down via the auto fiscal stabilizers, the needed credit growth/savings drop to replace the lost govt deficit spending is ‘already there proactively’ as it’s what drove the growth in the first place. So while the credit expansion/savings reduction needs to continue to grow to support GDP growth, the credit expansion/savings reduction doesn’t need to ‘spike up’ proactively as it does when the fiscal tightening is proactive.

So note that q3′s higher GDP growth included over 1% from additions to inventories. That represents a reduction in corporate savings from what it would have been if they had not net added to inventories. That is, consumers didn’t ‘jump the gap’ created by the ongoing increase in FICA vs the prior year, and the sequester cuts, that together proactively reduced govt deficit spending by over 1.5% of GDP (with the FICA hike adding to the automatic stabilizers as well). And Q4′s consumer spending on domestic product grew at a lower rate even as capex was higher. Also note that while capex growth for 2014 is forecast at about the same 5% as 2013, even with the high levels of energy investments, ultimately it’s largely a function of top line sales.

The reduction in net imports is a reduction in the growth of foreign savings of $ denominated financial assets, which does ‘make up’ for the reduction in govt deficit spending, depending on foreign demand. But it’s been ongoing and doesn’t look to be ‘jumping the spending gap.’

And note too that the running US deficit of about 3% of GDP is about the same as the euro zone’s and the Maastricht limit. So for me the question is whether this will make our economies converge as US income growth continues to decline?

And, as previously discussed, the 0 rate policy has worked to directly bring down personal income. Also note that personal income growth has slowed coincidentally with the approx 200,000/mo additions to total employment.

So seems that the income added by that much new employment isn’t enough to keep overall (after tax) personal income growth positive.

Posted in Deficit, Fed, Government Spending, Inflation | No Comments »

Lew bragging about the lower deficit

Posted by WARREN MOSLER on 2nd March 2014

With friends like these who needs enemies…

“Thanks to the tenacity of the American people and the determination of the private sector we are moving in the right direction,” Treasury Secretary Jacob J. Lew said in the report. “The United States has recovered faster than any other advanced economy, and our deficit today is less than half of what it was when President Obama first took office.”

Posted in Deficit, Government Spending | No Comments »

The austerity narrative

Posted by WARREN MOSLER on 19th February 2014

Early in 2013 my narrative was the tax hikes as well as the subsequent sequesters were likely to cause growth to slow to maybe a 2% rate from what might have otherwise been a 4% rate, with downside risk from there.

Take a look at the charts below and notice how these key elements of the economy seemed to ‘go sideways’ during 2013.

And, unfortunately, real disposable personal income took a hit as well and doesn’t look to me like it can support any kind of ‘bounce back’:

(the last yoy print is ‘exaggerated’ by the ‘outlier’ a year earlier, but the trend is clear to me)

[note from poster: apologize for format- should be amended shortly]

Real disposable income

Architecure billings index

Housing starts

MBA purchase applications

Vehicle sales

Retail Sales

Posted in Deficit, Employment, Government Spending, Housing | No Comments »

tv interview

Posted by WARREN MOSLER on 17th February 2014

Posted in Deficit, Economic Releases, Employment, GDP | No Comments »

The unconscious liberal

Posted by WARREN MOSLER on 3rd February 2014

Macroeconomic Populism Returns

By Paul Krugman

February 1 (NYT) — Matthew Yglesias says what needs to be said about Argentina: theres no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances.

Yes, unemployment- source of the greatest economic loss as well as a social tragedy and a crime against humanity, is always the evidence deficit spending is too low. There is no exception as a simple point of logic. The currency is a simple public monopoly, and the excess capacity we call unemployment- people looking to sell their labor in exchange for units of that currency- is necessarily a consequence of the monopolist restricting the supply of net financial assets.

I would add that we know what those circumstances are! Running deficits and printing lots of money are inflationary

Why the undefined ambiguous empty rhetoric?

and bad

What does ‘bad’ mean here? For example, there is no evidence that inflation rates at least up to 40% hurt real growth, and more likely help it. Politically, however, it may be ‘very bad’. But those are two different things.

in economies that are constrained by limited supply;

Limited supply of what? Labor? Hardly! In fact, full employment is even more critical, if that’s possible, when there are limited supplies of other resources. Wasn’t Rome built without electricity, oil, bulldozers, the IMF, etc. etc.? OK, it took more than a day, but it was built. There is always more to do than people to do it. Economically, unemployment is never appropriate policy.

they are good things when the problem is persistently inadequate demand.

Unemployment is the evidence of this ‘inadequate demand’ which is necessarily created by taxation, the ultimate source of all demand for a given currency. In fact, taxation functions first to create unemployment- people looking for work paid in that currency. That’s how govt provisions itself- it creates people looking for jobs with its taxation, then hires those unemployed its tax created. What sense does it make for govt to create more unemployed than it wants to hire??? Either hire the unemployed thus created, or lower the tax!!!!!!!!!!!!

Similarly, unemployment benefits probably lead to lower employment in a supply-constrained economy; they increase employment in a demand-constrained economy; and so on.

With more that needs to be done than there are people to do it, the economy isn’t supply constrained until full employment. And nominal unemployment benefits are about the level of prices, wages, and the distribution of income rather than the level of potential employment, etc.

So sometimes the relationship and money looks like this, from the best economics principles textbook:

This is more about ‘inflation’ causing ‘money’ as defined.

But sometimes it looks like this:

This is more about partially defining ‘money’ as reserve account balances at the Fed but not securities account balances (tsy secs) at the Fed.

And just to repeat a point Ive made many times, those of us who understood IS-LM predicted in advance that the actions of the Bernanke Fed wouldnt be inflationary, while the other side of the debate was screaming debasement.

It’s not about ISLM, which is fixed fx analysis. It’s about recognizing that there is always precious little difference between balances in reserve accounts at the Fed and securities accounts at the Fed.

There’s something else to be said about Argentina and, it seems, Turkey namely, that were seeing a mini-revival of what Rudi Dornbusch and Sebastian Edwards long ago called macroeconomic populism. This involves, you might say, making the symmetrical error to that of people who think that running deficits and printing money always turns you into Zimbabwe; its the belief that the orthodox rules never apply. And its an equally severe mistake.

Unfortunately most of the ‘orthodox rules’ apply to the fixed fx policies in place when they were first stated, and not to today’s floating fx.

Its not a common mistake these days; a few years ago one would have said that only Venezuela was making the old mistakes, and even now its just a handful of countries. But it is a mistake, and we need to say so.

Yes, mistakes are being made by all of the headline economists and the global economy is paying the price.

Posted in Deficit, Emerging Markets, Employment, Fed, Government Spending | No Comments »

What a good economy should look like

Posted by WARREN MOSLER on 28th January 2014

What a good economy should look like

Warren Mosler, from a talk in Chianciano, Italy, on January 11, 2014 entitled Oltre L’Euro: La Sinistra. La Crisi. L’Alternativa.

What a good economy should look like

I just want to say a quick word about what a good economy is because it’s been so long since we’ve had a good economy. You’ve got to be at least as old as I am to remember it. In a good economy business competes for people. There is a shortage of people to work for business. Everybody wants to hire you. They’ll train you, whatever it takes. They hire students before they get out of school. You can change jobs if you want to because other companies are always trying to hire you. That’s the way the economy is supposed to be but that’s all turned around. For one reason, which I’ll keep coming back to, the budget deficit is too small. As soon as they started tightening up on budget deficits many years ago, we transformed from a good economy where the people were the most important thing to what I call this ‘crime against humanity’ that we have today……

So what you do is you target full employment, because that’s the kind of economy everybody wants to live in. And the right size deficit is whatever deficit corresponds to full employment…

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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.”

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Capex growth to slow

Posted by WARREN MOSLER on 24th January 2014

For the economy to grow faster, seems all the pieces, ‘on average’ have to grow faster?

Hopefully it picks up as most forecast, but seems to me the deficit maybe has gotten too small for the demand leakages, and all that follows from that…

US capex to grow at slowest rate in four years

(FT) Total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, according to Factset, a market data company that compiles a consensus of analysts’ forecasts. In aggregate, analysts’ forecasts indicated the slowest growth in capital spending by the largest US companies since it declined in 2010, in the aftermath of the recession of 2007-09. The total net debt of non-financial companies in the S&P 500 has dropped from seven times earnings before interest, tax, depreciation and amortisation at the end of 2007 to just three times by last October, according to Factset. Spending by companies in the S&P 1200 global index increased by 15 per cent in 2011 and 11.3 per cent in 2012, but it was unchanged in the first six months of 2013 compared to the equivalent period of the previous year, according to S&P Capital IQ.

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last comment of the year on fiscal drag

Posted by WARREN MOSLER on 31st December 2013

Back in November my forecast for 2013 was 4%, which at the time was by far the highest around. The govt was spending more than its income by about 6% of GDP, which was about $900 billion if I recall correctly. But then it cut back, first with the year end FICA hike along with other expiring tax cuts, and then with the sequesters that began in April.

Consequently, the govt spent only about $680 billion more than its income, which lowered growth by maybe 2%. And today mainstream economists are saying much the same- growth would have been maybe 2% higher without the ‘fiscal drag’ of the tax hikes and spending cuts.

So far our narratives are the same.

But here’s where they begin to differ.

They say the GDP/private sector would have grown by 4% if the fiscal drag hadn’t taken away 2%, and so without the govt again taking away 2%, the private sector will resume its ‘underlying’ 4% rate of growth.

I say the GDP/private sector would have grown by 4% that included the 6%/$900 billion net spending contribution by govt, if govt hadn’t cut back that contribution to $600 billion.

That is, they say the govt ‘took away’ from the ‘underlying’ 4% growth rate, and I say the govt ‘failed to add’ to the ‘underlying’ 2% growth rate that still included a 4% contribution by net govt spending.

And, in fact, I say that if the govt had cut its deficit another 4% to 0, GDP growth might have been -2% (multipliers aside for purposes of this discussion), which is the actual ‘underlying’ private sector growth rate. And that’s due to the ‘unspent income’ of some agents not being sufficiently offset by other agents ‘spending more than their income’.

Furthermore, I say that unless the ‘borrowing to spend’ of the ‘non govt’ sectors steps up to the plate to ‘replace’ the reduced govt contribution, the output won’t get sold, as evidenced by unsold inventory and declining sales in general, throwing GDP growth into reverse, etc.

So because we have different narratives, we read the same data differently.

They see the 1.7% Q3 inventory build as anticipation of future sales, while I see it as evidence of a lack of demand.

They see the Chicago PMI’s large spike followed by 2 months of decline as a strong 3 month period, while I see it as a sharp fall off after the inventory build.

They see the fall off in mortgage purchase apps as a temporary pause, while I see it as a disturbing fall off in the critical ‘borrowing to spend’ growth maths.

They see October’s shut down limited 15.2 million rate of car sales followed by November’s spike to 16.4 million as a return of growth, while I see the two month average a sign that growth has flattened in this critical ‘borrowing to spend’ dynamic.

And likewise with the weakness in the Pending Home Sales, Credit Manager’s Index, Architectural billings, down then up durable goods releases, new home sales, the slowing rate of growth of corporate profits, personal income, etc. etc.

And they see positive survey responses as signs of improvement, while I see them as signs they all believe the mainstream forecasts.


And not to forget they see the increase in jobs as evidence of solid growth given the rapidly growing % of sloths, and I see it flat as a % of the population.


Happy New Year/ La Shona Tova to all!!!

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Another look at Q3 GDP

Posted by WARREN MOSLER on 23rd December 2013

Third-Quarter Growth in U.S. Revised Higher on Services

By Victoria Stilwell

Decmeber 20 (Bloomberg) — The economy expanded in the third quarter at the fastest rate in almost two years as Americans stepped up spending on services such as health care and companies invested more in software.

Jump in healthcare??? And the software gain was the new ‘intellectual’ category.

Gross domestic product climbed at a revised 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent, Commerce Department data showed today in Washington. The gain exceeded the most optimistic projection in a Bloomberg survey.

Inventories accounted for a third of the increase in GDP in the third quarter, showing companies were confident about the prospects for demand. Stronger retail sales in October and November underscore the Federal Reserves view that the worlds largest economy is improving.

Right, a boom in unsold inventories. Especially cars, where the inventory was on the high side even for the November spike in sales to 16.4 million (annual rate) from a shutdown depressed 15.2 million for October. And it looks like December total vehicle sales are back down below the two month average, which means the inventory to sales ratio is even worse. No surprise Jan auto production cutbacks have already been announced.

You have equity markets supporting household net worth, rising home values and also payroll gains and falling unemployment, so we do really look for consumption to start picking up, said Robert Rosener, associate economist at Credit Agricole CIB in New York, whose forecast for growth of 3.8 percent was the highest in the Bloomberg survey. This is a very good sign for momentum going into the fourth quarter.

The median forecast of 72 economists surveyed by Bloomberg projected a 3.6 percent gain in GDP, the value of all goods and services produced in the U.S. Forecasts ranged from 3.3 percent to 3.8 percent. Stocks rose after the figures, with the Standard & Poors 500 Index advancing 0.6 percent to 1,820.78 at 11:46 a.m. in New York.

Services Spending

Consumer purchases, which account for almost 70 percent of the economy, increased 2 percent, more than the previously reported 1.4 percent, the revised data showed.

Better but still weak year over year, and, again, healthcare spending of some sort accounted for much of the upward revision.

Spending on services contributed 0.32 percentage point to third-quarter growth, up from a previously reported 0.02 percentage point. In addition to the pickup in outlays for health care, Americans spent more on recreational services.

Outlays for non-durable goods climbed at a 2.9 percent rate in the third quarter, led by more spending on gasoline.

Inventories increased at a $115.7 billion annualized pace in the third quarter, the most in three years, after a previously reported $116.5 billion annualized rate. In the second quarter, they rose at a $56.6 billion pace.

Stockpiles added 1.67 percentage points to GDP last quarter, little changed from the 1.68 percentage-point contribution in the previous reading.

More Optimistic

While economists grew more optimistic about demand in the fourth quarter, GDP will nonetheless be restrained as the pace of inventory growth cools.

JPMorgan Chase & Co. economists project the economy will grow 2 percent from October through December, up from the 1.5 percent rate they had penciled in prior to the Commerce Departments Dec. 12 retail sales report. Barclays Plc has raised its fourth-quarter tracking estimate to 2.3 percent from 2 percent before the retail figures.

Domestic final sales, which exclude inventories, increased 2.5 percent in the third quarter compared with a previously reported 1.9 percent increase.

Corporate spending on equipment rose 0.2 percent, compared with a previous reading of no change. Business investment in intellectual property was revised up to a 5.8 percent increase from 1.7 percent, reflecting more spending on software.

Further investment will depend on how much confidence companies have that the economy will accelerate.

Capital Spending

Honeywell International Inc., whose products range from cockpit controls to thermostats, expects capital expenditures in the range of $1.2 billion or more in 2014, up about 30 percent from this year.

Were very disciplined in terms of cap-ex, Chief Financial Officer David Anderson said on the companys 2014 guidance call on Dec. 17, referring to capital expenditures. We really have to see the whites of the eyes of the economic return characteristics to really commit.

Economic indicators are pointing to just a continued resilience, not exuberance, but resilience and expansion in the U.S. economy, Anderson added.

Todays report also included corporate profits. Before-tax earnings rose at a 1.9 percent rate after climbing at a 3.3 percent pace in the prior period. They increased 5.7 percent from the same time last year.

Profit growth continues to slow, even with the higher GDP.

Residential real estate is underpinning the economy, as rising prices boost household wealth and growing demand helps the industry overcome rising mortgage rates.

Home Construction

Home construction increased at a 10.3 percent annualized rate in the third quarter. While slower than the 13 percent pace previously reported, the figure primarily reflected revisions to brokers commissions and other ownership transfer costs, todays report showed.

Data from the Commerce Department this week showed that housing starts jumped 22.7 percent to a 1.09 million annualized rate, the most since February 2008, while permits for future projects also held near a five-year high, indicating that the pickup will be sustained into next year.

Slower growth in home construction and most homebuilders reporting flattish sales, especially after mortgage rates went up, and mortgage purchase apps continue to be down about 10% from last year as well. Let me suggest that 22% jump of the initial release of November housing starts seems suspect as there are no reports of a leap higher in home sales or construction from the housing companies or mortgage originators. And permits were in fact down.

Other signs show that fiscal drag, which weighed on growth during 2013, will start to ease. U.S. lawmakers this week passed the first bipartisan federal budget produced by a divided Congress in 27 years, easing $63 billion in automatic spending cuts and averting another government shutdown.

Yes, it could have been worse, but a variety of tax cuts do expire at year end, as do extended unemployment benefits. But the bottom line is the federal deficit (the ‘allowance’ the economy gets from Uncle Sam) is likely to fall to under $500 billion in 2014, after falling from just under $1 trillion in 2012 to just over 600 billion in 2013. And worse, the automatic stabilizers are extremely aggressive this time around, where 2% growth cuts the deficit maybe by as much as 4% growth cut it in past cycles.

Government outlays increased 0.4 percent in the third quarter, led by a 1.7 percent gain in state and local spending that was the same as the previous reading. Federal spending decreased 1.5 percent.

They fail to mention that state and local tax receipts also rose, so overall the closing of the state and local budget deficits from the recession means there is less fiscal support from the states.

Tighter fiscal policy has made stimulating the U.S. economy even more of an uphill battle for the Fed. The central bank this week announced it would scale back its bond-purchase program by $10 billion, to $75 billion a month, after seeing an improved outlook for the labor market.

This has been done in the face of a very tight, unusually tight fiscal policy for a recovery period, Chairman Ben S. Bernanke said Dec. 18 during a press conference at the conclusion of a meeting of the Federal Open Market Committee.

I’m hoping for a good economy as well, but with housing and cars- the main engines of domestic credit growth- coming off the boil, and Uncle Sam’s allowance payments to the economy (deficit spending) down to less than $50 billion/mo (3% of GDP%) and falling from closer to $80 billion/mo not long ago, seems to me the jury is still out.

A few of last week’s charts:

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Corporate profits

Posted by WARREN MOSLER on 20th December 2013

Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis increased 5.6 percent versus 5.3 percent in the second quarter.

They also show close correlation with the size of the Federal deficit.

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Budget Deficit in U.S. Narrows

Posted by WARREN MOSLER on 12th December 2013

Budget Deficit in U.S. Narrows as Job Gains Bolster Revenue

By Kasia Klimasinska

December 11 (Bloomberg) — The budget deficit in the U.S. last month narrowed more than economists forecast as rising employment and a rallying stock market boosted revenue to a November record.

Spending exceeded revenue by $135.2 billion, compared with $172.1 billion in November 2012, the Treasury Department said today in Washington. The median estimate in a Bloomberg survey of 17 economists was for a $140 billion gap. Receipts rose 12.8 percent to the highest ever for the month, while spending fell 4.8 percent.

Declining unemployment has helped reduce the countrys deficit as a share of gross domestic product by more than half in the past four years to $680.3 billion in fiscal year ended Sept. 30 from a record $1.42 trillion in 2009. The Congressional Budget Office has projected the shortfall will shrink further this year and next as stronger economic growth lifts individual and corporate taxes.

Weve seen spending come down and tax receipts outperforming, based off of a little bit better economic growth, said Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. As long as we maintain a pace of job growth that is consistent with what weve seen over the last couple of months, that trend of increase in revenue should continue.

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WSJ July 1999

Posted by WARREN MOSLER on 10th December 2013

Classic from 1999-

Congrats on the budget surplus on the left, and warning that savings is too low on the right!

WSJ July 1999

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Budget deal includes 1.2% gov. payroll tax hike

Posted by WARREN MOSLER on 10th December 2013

Pension contributions function as taxes:

Increased pension contributions

On Monday, a senior Senate Democratic aide said that workers would not have to increase their own contributions toward their pensions as much as previously thought.

The Congressional Budget Office had previously estimated that if each employee contributed an additional 1.2 percent of their salaries to get the same retirement annuities, it would save the government $19 billion over 10 years.

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Bundle of Tax Breaks Again Set to Lapse

Posted by WARREN MOSLER on 9th December 2013

A bit more austerity on the way, seems:

Bundle of Tax Breaks Again Set to Lapse

(WSJ) Congress appears almost certain to allow a batch of temporary tax breaks to lapse at the end of 2013. The breaks range from broad provisions such as research credits for businesses and a sales-tax deduction for individuals, to narrower ones such as a credit for buying electric motorcycles. The number of temporary tax breaks has snowballed from a handful in the 1980s to more than 50 now, and some lawmakers are beginning to think the package might have become excessive. While extending them for a year or two at a time has helped mask their price tag, the Congressional Budget Office said that if the existing temporary breaks were extended over the next decade, they would cost the U.S. government almost $1 trillion. To keep the package intact, lawmakers rely on a tactic known as logrolling, supporting each other’s priorities in order to preserve their own breaks.

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Deficit maths redux- Faulty logic in 2014 GDP forecasts?

Posted by WARREN MOSLER on 8th December 2013

Pretty much all forecasters expect improvement in 2014 largely from what they call a reduction in fiscal drag. Their logic goes something like this (with the actual numbers varying a bit with different analysts):

Without the deficit reduction in 2013 that subtracted 2% from growth, growth would have been 4%. Therefore, when the fiscal drag ends, growth will return to the underlying 4% pace.

I’m suggest their logic is faulty.

The difference is that of ‘adding less’ vs ‘subtracting’

It’s not like the private sector alone was expanding at a 4% clip, and then govt came along and took away 2%.

It’s that by my count the private sector was growing at -2%, and govt was going to add 6% to that for 2013, but proactively reduced its support to only 4% in 2013 by cutting spending and raising taxes, resulting in 2% GDP growth rather than 4%. And for 2014 that ‘lost support’ will not be added back.


Assume, for example, GDP started 2013 at 100, and was forecast to go to 104 as stated above. Assuming nominal growth about 1.5% over real growth, let me push that up to 105.5.

That assumption included, say, federal deficit spending of 6% of GDP (starting at maybe a 7% rate and ending at maybe a 5% rate).

That is govt was forecast to make a net positive 6% contribution to spending by spending that much more than its income, aka ‘credit expansion’. Or, said another way, the total government spending contribution was over 20% of GDP, with all but 6% of that ‘offset’ by taxation that reduced incomes elsewhere.

Also note that the economy is currently ‘demand constrained’ as there is an output gap. In other words GDP could be higher, as a matter of accounting, simply by, for example,
govt hiring more people who are currently not working for pay, via the govt spending that much more than its income (adding to the deficit). Or GDP could be lower simply by govt cutting back, which is what actually happened, as recognized by the analysts.

That is, net govt spending was proactively reduced by about 2% due to tax increases and sequesters.

And federal deficit spending averaged perhaps 4% of GDP rather than 6% of GDP, thereby reducing said GDP..

That is, government contributed that much less to GDP. And that lost contribution will not be restored, as, if anything, there will be further deficit reduction forthcoming from Congress in 2014.

So my point is the 4% forecast for 2013 was not that much private sector growth that was then reduced by the deficit reduction measures. Instead, the growth forecast included the federal deficit contributing 6% to GDP, which was subsequently reduced by Congress to only 4%.

In fact, without the remaining 4% contribution of that net federal spending, nominal GDP might have been -.5% and real -2%.

And 2014 is starting out with federal deficit spending forecast to add only about $600 billion, which is less than 4% of GDP.

So to recap, the original forecast for 4% growth included the full 6% contribution from govt. And when that contribution was proactively reduced to 4%, growth forecasts were correctly cut to 2%.

And my point is that the assumed ‘underlying growth rate’ of 4% in fact presumed the then 6% contribution from govt which was subsequently reduced, thereby lowering ‘the underlying growth rate’ for 2013 to 2%.

It’s not that the private sector was responsible for 4% growth and that the govt took away 2% of that with the tax increases and sequesters.

In fact, it was more that the private sector was -2% on its own due to ‘demand leakages’/unspent incomes/savings desires including non residents) and govt support that was to boost that to +4% was cut back, resulting in a 2% rate of GDP growth for 2013.

I am not saying that GDP growth can’t pick up in 2014.

I am saying that the logic behind the widespread forecasts for a pick up in growth is universally faulty.

And that if growth does pick up it will be from an increase in non govt ‘spending more than incomes’, aka an increase non govt credit expansion.

While this is certainly possible, traditionally it comes from housing, which currently isn’t generating any credit expansion, and cars which are no longer generating meaningful increases.

Worse, in prior cycles we got the private sector credit expansion need to support relatively low output gaps only from expansion we never would have let happen if we had been aware of the consequences. These included the Bush sub prime expansion, the Clinton .com/y2k credit expansion, the Reagan S and L credit expansion, and the earlier Wriston emerging markets credit expansion. And I don’t see anything like that happening currently.

And so without the prerequisite acceleration of non govt credit expansion, the maths tell me 2014 GDP growth will remain at best at approximately the 2% level of 2013. And, with so little support from federal deficit spending, I see serious downside risks should private sector credit expansion falter for any reason.

And note too that the continuation of 2% GDP growth closes the output gap only by reducing estimates of potential output, primarily by assuming the drop in the participation rate is structural.

And even the modest employment gains we’ve seen are at risk. The growth rate of employment has been almost identical to the underlying rate of real growth, which improbably implies no productivity growth. So if there is any positive underlying productivity growth, and real growth remains the same, employment growth will decline accordingly.

Lastly, the ‘automatic fiscal stabilizers’ are continuously at work. So when private sector credit expansion does contribute to growth, the govt ‘automatically’ cuts back its support via reduced transfer payments and increased tax receipts, thereby tempering the positive effect of the private credit expansion, and making it that much more difficult for the growth to continue.

This means that even the current 2% growth rate will at some point get ground down by our current institutional structure. With growing risks that this could be very much sooner rather than later.

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Bank lending and state deficits

Posted by WARREN MOSLER on 4th November 2013

Loans negative and states borrowing less, thanks!

Top link is the change in total credit levels y/y in the commercial banking system using monthly data points through sept 2013. The numbers are seasonally adjusted. Trend going negative (looks to have last topped off in December 2012) in conjunction with federal deficit reduction and state & local deficit reductions. The bottom link has 3 series you can click on one for state & local and one for federal and one for consolidated gvt net borrowing or lending (looking at the federal or consolidated numbers they move flat 4q 2012 to 1q 2013 but spike upwards 1q 2013 moving forward. almost at the same exact time the credit levels started going negative).

Bank credit

State borrowing

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July payrolls revised down to 89,000

Posted by WARREN MOSLER on 22nd October 2013

July was first initially released at up 162,000 which, while lower than expected, I noted was still inconsistent with low top line growth. That is, without top line growth there aren’t any new private sector jobs unless productivity is negative. And causation runs from sales to employment.

So there’s no reason to expect job growth without top line growth that exceeds underlying productivity increases.

Also, the conventional wisdom all year has been that when govt ‘gets out of the way’ the ‘underlying private sector strength’ will come through and growth will resume. It was noted that reduced job totals were lowered by govt cutbacks while private jobs remained high. I suggested govt employment cutbacks would reduce private sector job growth, as that many fewer govt employees meant that much less spending/sales/employment for the private sector.

With fiscal support down to less than 3% of GDP from around 7% about a year ago, and at least 1.5% of that from the recent proactive tax hikes and spending cuts, and the automatic fiscal stabilizers as aggressive as they are, and with ‘financial conditions’ as they are, I don’t see any signs of the domestic credit expansion needed to support anything more than
very modest levels of real growth. And I also continue to see substantial risk of negative growth should the housing softness persist, auto sales revert back to the 15 million level, student loan growth continue to decelerate, business investment not accelerate, and net imports not do a lot.

Lower fuel prices are a plus but not yet nearly enough overcome the fiscal hurdles.

(feel free to distribute)

Employment Situation
Released On 10/22/2013 8:30:00 AM For Sep, 2013

The payroll data and household numbers were mixed in September at the headline level but soft in detail. Markets were looking over their collective shoulder at the Fed. Total payroll jobs in September advanced 148,000, following a revised increase of 193,000 for August (originally up 169,000) and after a revised gain of 89,000 for July (previous estimate was 104,000). The consensus forecast was for a 184,000 gain for the latest month. The net revisions for July and August were up 9,000.

The unemployment rate slipped to 7.2 percent after dipping to 7.3 percent in August. Analysts expected a 7.3 percent unemployment rate. But the improvement was largely related to a decline in the pool of available workers, affecting the number of unemployed.

Turning back to payroll data, growth in recent months has been on a slowing trend. Private payrolls gained 126,000, following an increase of 161,000 in August (originally 152,000). The median forecast was for a 184,000 rise.

Wage growth eased in September, rising only 0.1 percent for average hourly earnings, following 0.2 percent the month before. Expectations were for a 0.2 percent gain. The average workweek held steady at 34.5 hours, matching the consensus projection


Full size image

Private NFP:

Full size image

Y/Y growth in household labor force survey:

Full size image

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pension assets and fed debt

Posted by WARREN MOSLER on 20th September 2013

Deficit sort of = savings?

FRED Graph

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