Circled are the credit expansion from the ‘regrettable’ S and L expansion (over $1 trillion back when that was a lot of money), the ‘regrettable’ .com/Y2K credit expansion (private sector debt expanding at 7% of GDP funding ‘impossible’ business plans), and most recently the ‘regrettable’ credit expansion phase of the sub prime fiasco.

All were credit expansions that helped GDP etc. but on a look back would not likely have been allowed to happen knowing the outcomes.

So the question is whether we can get a similar credit expansion this time around to keep things going/offset the compounding demand leakages that constrain spending/income/growth.

Japan, for example, has been very careful not to allow a ‘regrettable’ private sector credit expansion since the last one came apart in 1991…

So yes, debt ratios look low, but without some kind of ‘regrettable’/fraudulent/etc. impetus this is about all we can expect given the demand leakages, etc?

And not to forget this an average of higher and lower income earners, with income being skewed upwards to those with lower propensities to spend. I had suspected the consumer would make a move, somewhat as in past cycles, but then FICA and sequesters took away a large chunk of the income/ammo needed to support it, while the demand leakages continued.

Federal government current tax receipts: Personal current taxes

Federal government current receipts: Contributions for government social insurance

The automatic fiscal stabilizers got some help from the FICA hike to cut net govt spending and throw a wet blanket over growth and maybe take a year or two off the duration of this cycle.

Lots of indicators looking very late cycle to me now.

This year’s deficit is now running less than 3% of GDP- about the same as the EU.
:(

And remains ‘part of the problem’ vs ‘part of the solution’

Reuters noted comments from IMF chief Christine Lagarde, who said that global economic activity should strengthen in the second half of the year and accelerate through 2015, although momentum could be weaker than expected.

She said that central banks’ accommodative policies may only have limited impact on demand and that countries should boost growth by investing in infrastructure, education and health, provided their debt is sustainable.

She highlighted that the IMF’s update of its global economic outlook, expected later this month, will be “very slightly different” from the forecasts published in April. In addition, she noted that the US economy was rebounding after a disappointing first quarter, while it did not anticipate a brutal slowdown in China but rather a slight slowdown in output.

looks like late cycle action?

This could be technical or a sign of trouble for the macro economy:

Size of income tax drop surprises U.S. states

June 12 (Reuters) — Personal income tax revenues in April were 15.8 percent, or $7.9 billion, below the same month in 2013, according to preliminary estimates from Rockefeller, a public policy research group at the State University of New York. From January through April income tax collections fell 7.1 percent from the same period in 2013, Rockefeller found. Out of the 38 states for which data is available 33 registered declines. Altogether 41 states collect personal income taxes. “While many states tried to be cautious in their forecasts, early figures indicate that income tax collections are below the forecasts in many states,” Rockefeller found.

So my narrative is:

The Federal budget deficit is too small to support growth given the current ‘credit environment’- maybe $400b less net spending in 2014. The automatic fiscal stabilizers are ‘aggressive’, as they materially and continually reduce the deficit it all turns south. The demand leakages are relentless, including expanding pension type assets, corporate/insurance accumulations, foreign CB $ accumulation, etc. etc.

The Jan 2013 FICA hike and subsequent sequesters took maybe 2% off of GDP as they flattened the prior growth rates of housing, cars, retail sales, etc. etc. Q3/Q4 GDP was suspect due to inventory building, a net export ‘surge’, and a ‘surge’ in year end construction spending/cap ex etc. I suspected these would ‘revert’ in H1 2014. It was a very cold winter that slowed things down, followed by a ‘make up’ period. The question now is where it all goes from there. For every component growing slower than last year, another has to be growing faster for the total to increase.

The monthly growth rate of durable goods orders fell off during the cold snaps and the worked it’s way back up, though still not all the way back yet, and the ‘ex transportation’ growth rate was bit lower:

And of note:

Investment in equipment eased after a robust March. Nondefense capital goods orders excluding aircraft dipped 1.2 percent, following a 4.7 percent jump in March. Shipments for this series slipped 0.4 percent after gaining 2.1 percent the prior month.

In general the manufacturing surveys were firm.

Mortgage purchase applications continued to come in substantially below last year, even with the expanded, more representative survey:

According to the MBA, the unadjusted purchase index is down about 15% from a year ago.

MBA Mortgage Applications

Highlights
Mortgage applications for home purchases remain flat, down 1.0 percent in the May 23 week to signal weakness for underlying home sales. Refinancing applications, which had been showing life in prior weeks tied to the dip underway in mortgage rates, also slipped 1.0 percent in the week. Mortgage rates continue to edge lower, down 2 basis points for 30-year conforming loans ($417,000 or less) to 4.31 percent and the lowest average since June last year.

And then there was the Q1 revised GDP release:

What drove it negative was a decline in inventories, net exports, and construction/cap ex:

The largest revisions to the headline number were from inventories (revised downward by -1.05%) and imports (down -0.36%), and although exports improved somewhat from the prior report, they still subtracted -0.83% from the headline. Fixed investments in both equipment and residential construction continued to contract.

PCE growth was revised up to +3.1% (adding 2.09% to GDP) but seems over 1% of that came from ACA (Obamacare) related and other non discretionary expenditures like heating expenses, etc. The question then is whether the increases will continue at that rate and whether the increased ACA related expenses will eat into other, discretionary expenditures.

The contribution made by consumer services spending remained essentially the same at 1.93% (up 0.36% from the 1.57% in the prior quarter). As mentioned last month, the increased spending was primarily for non-discretionary healthcare, housing, utilities and financial services – i.e., increased expenses that stress households without providing any perceived improvement to their quality of life.

And seems this Chart is consistent with my narrative:

And not that it matters, but just an interesting observation:

And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.28%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -1.52% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been a staggering -3.64%.

And looks like this will be limiting the next quarter:

Real per-capita annual disposable income grew by $95 during the quarter (a 1.03% annualized rate). But that number is down a material -$227 per year from the fourth quarter of 2012 (before the FICA rates normalized) and it is up only about 1% in total ($359 per year) since the second quarter of 2008 – some 23 quarters ago.

And remember this?

So the question is, how strong will the Q2 recovery be, and where does it go from there?

Again, looks to me like the deficit is having trouble keeping up with the demand leakages, and it keeps getting harder with time?

Jobless claims continue to work their way lower, but they are a bit of a lagging indicator and even with 0 claims there aren’t necessarily any new hires, either, for example.

And there’s another couple of issues at work here.

First, 1.2 million people lost benefits at year end, and it’s expected up to half of them will find ‘menial’ jobs during H1. However, corporations don’t add to head count just because unskilled workers lose benefits, so the employment numbers may thus be ‘front loaded’ with higher numbers of hires in H1, followed by fewer hires in H2.

Second, seems the new jobs don’t pay a whole lot, and a lot of higher paying jobs continue to be lost, so the increased employment isn’t associated with the kind of subsequent growth multipliers of past cycles.

Corporate profits were down over 10% in the Q1 GDP report, and mainly in the smaller companies as the S&P earnings saw a modest increase. Hence the small caps under performing, for example? Not mention earnings also tend to up and down with the Federal deficit:

This year over year pending home sales chart speaks for itself:

Another series following the pattern- down for the winter weather, then back up some, and this time then backing off some:

Highlights
Personal income & spending, up 0.3 percent and down 0.1 percent, fell back in April following especially strong gains in March. Wages & salaries slowed to plus 0.2 percent vs a 0.6 percent surge in March while spending on durables, reflecting a pause in auto sales, fell 0.5 percent vs gains of 3.6 and 1.3 percent in the prior two months. Spending on services, however, also fell, down 0.2 percent on a decline in utilities and healthcare after a 0.5 percent rise in March. In real terms, spending fell 0.3 percent following the prior month’s 0.8 percent surge. Price data remain muted, up 0.2 percent overall and up 0.2 percent ex-food and energy. Year-on-year price rates are at plus 1.6 percent and 1.4 percent for the core.

And again, the ACA and other non discretionaries added about 1% in Q1. So, again, it’s down for the winter, then up and this time back down to begin Q2 (with the growth of healthcare expenses backing off some):

French Prime Minister Manuel Valls Outlines Spending Cuts

(WSJ) French Prime Minister Manuel Valls unveiled some details as to how the government aims to extract €50 billion ($69 billion) in savings between 2015 and 2017.

Almost reads like he knows savings comes from deficit spending!
;)

Mr. Valls indicated for the first time that the government is prepared to take aim at politically sensitive areas of France’s welfare state to achieve the savings, including freezing benefit and pension payments at current levels for the next year. He also said a freeze in the basic pay of civil servants would continue.

Since the price level is ultimately a function of prices paid by govt, this type of thing is a highly disinflationary force.

“I am obliged to tell the truth to French people. Our public spending represents 57% of our national wealth. We can’t live beyond our means,” Mr. Valls said.

Which is true under their current institutional arrangements. So seemes no move to ‘change the rules’

Mr. Valls said the central state would account for €18 billion of the savings; local authorities €11 billion; health care €10 billion; and social security €11 billion.

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.

Mind the gap:

This is below prior recession levels!

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:

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.

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.”

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

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.

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…

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.”

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.

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!!!

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:

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.