Posted by WARREN MOSLER on 30th November 2013
Archive for the 'Employment' Category
Posted by WARREN MOSLER on 27th November 2013
Posted by WARREN MOSLER on 19th November 2013
Seems there’s new full court press on for full employment by the headline left. And they lifted it directly out of what I’ve been posting and publishing at least since ‘Soft Currency Economics’ written in 1993, with editorial assistance by Art Laffer and Mark McNary. And even earlier Professor Bill Mitchell had been independently writing about and urging what he then called buffer stock employment, which he has continued to promote on his widely read blog as the Job Guarantee. In fact, throughout the later 1990′s we co authored and published numerous times on exactly this topic.
In 1996 with the urging and intellectual support of Professor Paul Davidson, I wrote ‘Full Employment and Price Stability’ that was published in the Journal of Post Keynesian Economics and gives a full outline of the current Baker/Bernstein proposal in full detail, including the debits and credits at the Fed that support it. And, at the same time, a supporting math model was published by Professor Pavlina Tcherneva.
In 1998 Professor Randall Wray, a student of Hyman Minsky and one of our original ‘MMT family’, published ‘Understanding Modern Money’ which again outlined the same proposal, which he called ‘the employer of last resort’ (ELR), a term believed to be first used by Professor Minsky.
In 2010, I published ‘The 7 Deadly Innocent Frauds of Economic Policy’ that again promotes an employed labor buffer stock policy, vs today’s policy of using an unemployed labor buffer stock. By that time I had begun framing it as a ‘transition job’ policy, to facilitate the transition from unemployment to private sector employment, recognizing that employers prefer to hire people already working. And directly to the point of this post, a few years ago I met with Dean Baker for at least two hours in his office, after he had read my book, discussing the fine points of the various proposals. Not to mention the continuous stream of research and publications on full employment and the transition job concept by UMKC Professors Mat Forstater and Stephanie Kelton, Professor Scott Fullwiler, and all the UMCK PhD alumni now teaching and publishing globally. Additionally, Professor Jan Kregel published a similar proposal for the euro zone.
I apologize in advance to everyone I’ve inadvertently omitted who have also worked to advance this proposal over the last 20 years.
So with this context please note the following from the new Baker/Bernstein book:
” The second policy idea is to launch a system of publicly funded jobs that can ramp up and down, expand and contract, as needed, in tandem with the business cycle. Under such a system the federal government, working through local intermediaries, would supply funds to subsidize hiring in the private sector as well as in important community services like education, child care, and recreation.”
“Thus, a transitional jobs program, which could offer extra services to hard to employ populations or simply provide a temporary public or subsidized private job to a long term unemployed person, would be a useful component of a strategy of publicly funded jobs. For the long term unemployed, it will be easier to find a permanent job if theyve already got a temporary one”
The promotional page can be found here.
The full book can be found here.
But don’t bother to read the text. It’s highly flawed and ‘out of paradigm’ throughout, and wouldn’t get anywhere near a passing grade in any UMKC classroom.
The only interesting part and the point of this post is the shameless lack of any attribution whatsoever to any of the above mentioned MMT economists for ideas and language ‘copied and pasted’, so to speak.
I recall the critical outcry when MLK was found out to have plagiarized some paper when he was in school and suspect in this case we’ll see the old double standard at work leaving this stone unturned.
Posted by WARREN MOSLER on 19th November 2013
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)
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
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Y/Y growth in household labor force survey:
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Posted by WARREN MOSLER on 1st October 2013
Here’s my take on the Volcker article
My comments in below:
By Paul Volcker
I have been struck by parallels between the challenges facing the Federal Reserve today and those when I first entered the Federal Reserve System as a neophyte economist in 1949.
Most striking then, as now, was the commitment of the Federal Reserve, which was and is a formally independent body, to maintaining a pattern of very low interest rates, ranging from near zero to 2.5 percent or less for Treasury bonds. If you feel a bit impatient about the prevailing rates, quite understandably so, recall that the earlier episode lasted fifteen years.
The initial steps taken in the midst of the depression of the 1930s to support the economy by keeping interest rates low were made at the Fed’s initiative. The pattern was held through World War II in explicit agreement with the Treasury. Then it persisted right in the face of double-digit inflation after the war, increasingly under Treasury and presidential pressure to keep rates low.
Yes, and this was done after conversion to gold was suspended which made it possible. And they fixed long rates as well/
The growing restiveness of the Federal Reserve was reflected in testimony by Marriner Eccles in 1948:
Under the circumstances that now exist the Federal Reserve System is the greatest potential agent of inflation that man could possibly contrive.
This was pretty strong language by a sitting Fed governor and a long-serving board chairman. But it was then a fact that there were many doubts about whether the formality of the independent legal status of the central bank—guaranteed since it was created in 1913—could or should be sustained against Treasury and presidential importuning. At the time, the influential Hoover Commission on government reorganization itself expressed strong doubts about the Fed’s independence. In these years calls for freeing the market and letting the Fed’s interest rates rise met strong resistance from the government.
Not freeing the ‘market’ but letting the Fed chair have his way. Rates would be set ‘politically’ either way. Just a matter of who.
Treasury debt had enormously increased during World War II, exceeding 100 percent of the GDP, so there was concern about an intolerable impact on the budget if interest rates rose strongly. Moreover, if the Fed permitted higher interest rates this might lead to panicky and speculative reactions. Declines in bond prices, which would fall as interest rates rose, would drain bank capital. Main-line economists, and the Fed itself, worried that a sudden rise in interest rates could put the economy back in recession.
All of those concerns are in play today, some sixty years later, even if few now take the extreme view of the first report of the then new Council of Economic Advisers in 1948: “low interest rates at all times and under all conditions, even during inflation,” it said, would be desirable to promote investment and economic progress. Not exactly a robust defense of the Federal Reserve and independent monetary policy.
But in my humble opinion a true statement!
Eventually, the Federal Reserve did get restless, and finally in 1951 it rejected overt presidential pressure to maintain a ceiling on long-term Treasury rates. In the event, the ending of that ceiling, called the “peg,” was not dramatic. Interest rates did rise over time, but with markets habituated for years to a low interest rate, the price of long-term bonds remained at moderate levels. Monetary policy, free to act against incipient inflationary tendencies, contributed to fifteen years of stability in prices, accompanied by strong economic growth and high employment. The recessions were short and mild.
I agreed with John Kenneth Galbraith in that inflation was not a function of rates, at least not in the direction they believed, due to interest income channels. However, the rate caps on bank deposits, etc. Did mean that rate hikes had the potential to disrupt those financial institutions and cut into lending, until those caps were removed.
In general, however, the ‘business cycle’ issues are better traced to fiscal balance.
No doubt, the challenge today of orderly withdrawal from the Fed’s broader regime of “quantitative easing”—a regime aimed at stimulating the economy by large-scale buying of government and other securities on the market—is far more complicated. The still-growing size and composition of the Fed’s balance sheet imply the need for, at the least, an extended period of “disengagement,” i.e., less active purchasing of bonds so as to keep interest rates artificially low.
Artificially? vs what ‘market signals’? Rates are ‘naturally’ market determined with fixed fx policies, not today’s floating fx.
In fact, without govt ‘interference’ such as interest on reserves and tsy secs, the ‘natural’ rate is 0 as long as there are net reserve balances from deficit spending.
Nor is there any technical or operational reason for unwinding QE. Functionally, the Fed buying securities is identical to the tsy not issuing them and instead letting its net spending remain as reserve balances. Either way deficit spending results in balances in reserve accounts rather than balances in securities accounts. And in any case both are just dollar balances in Fed accounts.
Moreover, the extraordinary commitment of Federal Reserve resources,
‘Resources’? What does that mean? Crediting an account on its own books is somehow ‘using up a resource’? It’s just accounting information!
alongside other instruments of government intervention, is now dominating the largest sector of our capital markets, that for residential mortgages. Indeed, it is not an exaggeration to note that the Federal Reserve, with assets of $3.5 trillion and growing, is, in effect, acting as the world’s largest financial intermediator. It is acquiring long-term obligations in the form of bonds and financing those purchases by short-term deposits. It is aided and abetted in doing so by its unique privilege to create its own liabilities.
The Fed creates govt liabilities, aka making payments. That’s its function. And, for example, the treasury securities are the initial intervention. They are paid for by the Fed debiting reserve accounts and crediting securities accounts. All QE does is reverse that as the Fed debits the securities accounts and ‘recredits’ the reserve accounts. So it can be said that all QE does is neutralize prior govt intervention.
The beneficial effects of the actual and potential monetizing of public and private debt, which is the essence of the quantitative easing program, appear limited and diminishing over time. The old “pushing on a string” analogy is relevant. The risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention.
Right, with the primary fundamental effect being the removal of interest income from the economy. The Fed turned over some $100billion to the tsy that the economy would have otherwise earned. QE is a tax on the economy.
All of this has given rise to debate within the Federal Reserve itself. In that debate, I trust that sight is not lost of the merits—economic and political—of an ultimate return to a more orthodox central banking approach. Concerning possible changes in Fed policy, it is worth quoting from Fed Chairman Ben Bernanke’s remarks on June 19:
Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time.
If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of [asset] purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.
In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.
I would like to emphasize once more the point that our policy is in no way predetermined and will depend on the incoming data and the evolution of the outlook as well as on the cumulative progress toward our objectives. If conditions improve faster than expected, the pace of asset purchases could be reduced somewhat more quickly. If the outlook becomes less favorable, on the other hand, or if financial conditions are judged to be inconsistent with further progress in the labor markets, reductions in the pace of purchases could be delayed.
Indeed, should it be needed, the Committee would be prepared to employ all of its tools, including an increase in the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.
Implying QE works to do that.
I do not doubt the ability and understanding of Chairman Bernanke and his colleagues. They have a considerable range of instruments available to them to manage the transition, including the novel approach of paying interest on banks’ excess reserves, potentially sterilizing their monetary impact.
Reserves can be thought of as ‘one day treasury securities’ and the idea that paying interest sterilizing anything is a throwback to fixed fx policy, not applicable to floating fx.
What is at issue—what is always at issue—is a matter of good judgment, leadership, and institutional backbone. A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’s DNA.
A good working knowledge of monetary operations would be a refreshing change as well!
Those are not qualities that can be learned from textbooks. Abstract economic modeling and the endless regression analyses of econometricians will be of little help. The new approach of “behavioral” economics itself is recognition of the limitations of mathematical approaches, but that new “science” is in its infancy.
Monetary operations can be learned from money and banking texts.
A reading of history may be more relevant. Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often, the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.
Those who know monetary operations read history very differently from those who have it wrong.
There is something else that is at stake beyond the necessary mechanics and timely action. The credibility of the Federal Reserve, its commitment to maintaining price stability, and its ability to stand up against partisan political pressures are critical. Independence can’t just be a slogan. Nor does the language of the Federal Reserve Act itself assure protection, as was demonstrated in the period after World War II. Then, the law and its protections seemed clear, but it was the Treasury that for a long time called the tune.
And didn’t do a worse job.
In the last analysis, independence rests on perceptions of high competence, of unquestioned integrity, of broad experience, of nonconflicted judgment and the will to act. Clear lines of accountability to Congress and the public will need to be honored.
And a good working knowledge of monetary operations.
Moreover, maintenance of independence in a democratic society ultimately depends on something beyond those institutional qualities. The Federal Reserve—any central bank—should not be asked to do too much, to undertake responsibilities that it cannot reasonably meet with the appropriately limited powers provided.
I know that it is fashionable to talk about a “dual mandate”—the claim that the Fed’s policy should be directed toward the two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory. It is operationally confusing in breeding incessant debate in the Fed and the markets about which way policy should lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic. It is illusory in the sense that it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience.
The Federal Reserve, after all, has only one basic instrument so far as economic management is concerned—managing the supply of money and liquidity.
Completely wrong. With floating fx, it can only set rates. It’s always about price, not quantity.
Asked to do too much—for example, to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth, and full employment—it will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter that is within its range of influence, then those other goals will be beyond reach.
Back in the 1950s, after the Federal Reserve finally regained its operational independence, it also decided to confine its open market operations almost entirely to the short-term money markets—the so-called “Bills Only Doctrine.” A period of remarkable economic success ensued, with fiscal and monetary policies reasonably in sync, contributing to a combination of relatively low interest rates, strong growth, and price stability.
Yes, and the price of oil was fixed by the Texas railroad commission at about $3 where it remained until the excess capacity in the US was gone and the Saudis took over that price setting role in the early 70′s.
That success faded as the Vietnam War intensified, and as monetary and fiscal restraints were imposed too late and too little. The absence of enough monetary discipline in the face of the overt inflationary pressures of the war left us with a distasteful combination of both price and economic instability right through the 1970s—a combination not inconsequentially complicated further by recurrent weakness in the dollar.
No mention of a foreign ‘monopolist’ hiking crude prices from 3 to 40?
Or of Carter’s deregulation of nat gas in 78 causing OPEC to drown in excess capacity in the early 80′s?
Or the non sensical targeting of borrowed reserves that worked only to shift rate control from the FOMC to the NY fed desk, and prolonged the inflation even as oil prices collapsed?
We cannot “go home again,” not to the simpler days of the 1950s and 1960s. Markets and institutions are much larger, far more complex. They have also proved to be more fragile, potentially subject to large destabilizing swings in behavior. There is the rise of “shadow banking”—the nonbank intermediaries such as investment banks, hedge funds, and other institutions overlapping commercial banking activities.
Not to mention restaurants letting people eat before they pay for their meals. This completely misses the mark.
Partly as a result, there is the relative decline of regulated commercial banks, and the rapid innovation of new instruments such as derivatives. All these have challenged both central banks and other regulatory authorities around the developed world. But the simple logic remains; and it is, in fact, reinforced by these developments. The basic responsibility of a central bank is to maintain reasonable price stability—and by extension to concern itself with the stability of financial markets generally.
In my judgment, those functions are complementary and should be doable.
They are, but it all requires an understanding of the underlying monetary operations.
I happen to believe it is neither necessary nor desirable to try to pin down the objective of price stability by setting out a single highly specific target or target zone for a particular measure of prices. After all, some fluctuations in prices, even as reflected in broad indices, are part of a well-functioning market economy. The point is that no single index can fully capture reality, and the natural process of recurrent growth and slowdowns in the economy will usually be reflected in price movements.
With or without a numerical target, broad responsibility for price stability over time does not imply an inability to conduct ordinary countercyclical policies. Indeed, in my judgment, confidence in the ability and commitment of the Federal Reserve (or any central bank) to maintain price stability over time is precisely what makes it possible to act aggressively in supplying liquidity in recessions or when the economy is in a prolonged period of growth but well below its potential.
With floating fx bank liquidity is always infinite. That’s what deposit insurance is all about.
Again, this makes central banking about price and not quantity.
Feel free to distribute.
Posted by WARREN MOSLER on 30th September 2013
Why not start by making it voluntary?
That is, just offer a job to anyone willing and able to work and see what happens.
By Katrina Bishop
September 30 (CNBC) — U.K. Treasury Chief George Osborne unveiled plans to overhaul unemployment benefits on Monday, as he attempts to boost his party’s standing in the polls.
Speaking at the Conservative Party Conference in Manchester, Osborne said that those who have been out of work for three years will have to take part in a new government scheme – or risk losing their welfare benefits.
Posted by WARREN MOSLER on 25th September 2013
So we know QE is about signaling.
And the Fed knew that tapering was a signal they were ok with the higher rates, including the already higher mortgage rates.
And they decided they didn’t want to send that signal, so they delayed the taper. They also revised down their growth forecasts, which meant the economy was performing at less than expected levels, which further pushed back against the higher rates.
And they expressed risk of continued ‘fiscal drag’ as well. It’s all about signaling their current reaction function to control the term structure of rates. And in fact the rates in question have subsequently come down, indicating tactical success. And, at least for now, the dollar is down a touch as well.
A few interesting things are not part of the discussion:
The Fed can directly set the term structure of their risk free rates by simply making a locked market on any part of the curve.
The Fed buying tsy secs is functionally the same as the tsy not issuing them in the first place.
The consequences of QE/tapering are largely the same as the issuance/non issuance of tsy secs.
Interest rate tools, operationally, also include the tsy issuing only at pre determined rates and maturities, as well as buy backs and maturity swaps.
And why is the paradox of thrift, a mainstream standard for maybe 200 years, never discussed?
By identity, if govt cuts back on its net spending, that output only gets sold if some other agent increases its net spending.
Meanwhile, the demand leakages continue to grow relentlessly. It’s all implicit in every mainstream model, but none the less left out of every public discussion.
And there’s another issue that’s internally conflicted. The Fed believes inflation is about monetary policy and the Fed, and not fiscal policy and the treasury. Hike rates until the ‘real rate’ is high enough and inflation goes down, because it makes borrowing expensive and slows the economy as well.
And lower the real rate enough and inflation goes up, though unfortunately that pesky 0 bound limits that tool, resulting in a hand off to QE and forward guidance and expanding the types of assets the Fed buys and the like.
Not to mention the key is the inflation expectations channel, which rules all, of course.
Let me conclude that today most mainstream elites have recognized there is no solvency risk for the US govt. Simplistically, ‘they can always print the money’ which is good enough for the point at hand. So with no solvency risk, the risk of too high deficits comes down to inflation, and there are no credible long term inflation forecasts flashing red.
Additionally, the Fed believes inflation is a monetary and not fiscal phenomenon. So the Fed can’t even argue against deficits on inflationary grounds, leaving it with, for all practical purposes, no argument for deficit reduction.
So as we enter the fray over deficit reduction and the risk of catastrophic systemic failure, there is no intellectual leadership coming from the Fed, and an intellectually dishonest silence from the mainstream academic and media elite.
Good luck to us!
(feel free to distribute)
Posted by WARREN MOSLER on 24th September 2013
Interesting chart- inventory of existing homes for sale vs the labor force participation rate…
new home sales track closely as well…
As we used to say, sometimes it’s all one piece…
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Posted by WARREN MOSLER on 19th September 2013
Looks something like the labor force participation rate…
Real GDP, income, and consumption per capita no great shakes either.
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Posted by WARREN MOSLER on 12th September 2013
So I have this theory that claims have more to do with time since the peak than with the ‘robustness’ of the recovery.
Claims come from separations, so after economies stop getting worse they ‘quiet down’ over time with regards to jobs lost, even though there may or may not be a lot of ‘new hires’ and expansion, etc.
The chart isn’t adjusted for population, or the size of the labor force, as I’m mainly interested in ‘shape’.
And this can at least partially explain why claims have come down nicely and continue to fall some even as new hires aren’t doing all that well.
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Posted by WARREN MOSLER on 12th September 2013
It’s good to be China’s coal mine, except China is now cutting it’s coal consumption.
And fear not, the new ‘conservative’ govt pledged to get the budget back in surplus.
They wouldn’t want to be left out of the global race to the bottom…
And note the participation rate is falling there as well…
September 12 (Reuters) — Australia suffered a surprising drop in employment in August that pushed the jobless rate up to a four-year high of 5.8 per cent, a disappointingly soft report that revived the chance of a cut in interest rates and knocked the local dollar lower.
The currency skidded by almost one US cent as Thursday’s data from the Australian Bureau of Statistics showed employers shed a net 10,800 workers in August, well below forecasts of a 10,000 increase and a second straight month of losses.
The jobless rate was the highest since August 2009, when the economy was weathering the global financial crisis, and would have been even higher if not for an unexpected drop in the participation rate.
The local dollar was plucked off a six-month high of $0.9355 and unceremoniously dumped to $0.9260 following the data. Investors began to wager on another cut in interest rates, having almost abandoned thoughts of a move given recent better economic news from China and much of the developed world.
“It’s a bit of tempering of that optimism that emerged about the economic outlook in the last few weeks,” said Michael Blythe chief economist at Commonwealth Bank.
“It’s the old story that as long as the unemployment rate is trending up, as it is at the moment, then the RBA will still be thinking about interest rates each month and whether they need to cut them again.”
Posted by WARREN MOSLER on 9th September 2013
Posted by WARREN MOSLER on 6th September 2013
FYI, from Merrill:
Cliff notes Forgotten, but not over The sequester may be forgotten, but it’s not over. Contrary to popular belief, it appears that most of the impact on growth comes in 3Q, not 2Q. This is one reason our tracking model is pegging growth this quarter at just 1.6%. The Federal workforce is shrinking Federal payrolls have been shrinking since the first half of 2011, but the pace has picked up since the beginning of this year. This reflects some layoffs, but mainly hiring freezes, natural attrition and presumably some workers balking at accepting the shift to part-time employment. Thus, the sequester simply is accelerating a drop that was already in progress. Government wages are falling Aggregate income of government workers has been falling since the end of last year. This reflects not just the drop in employment, but recently reduced hours from the furloughs. In particular, the Department of Defense began furloughing 640k employees on July 8. Doing the math, cutting work by two days a month would cause income to drop by $6.5 bn at an annual rate. That alone could explain the 0.5% drop in government wages and salaries July, which was the biggest mom decline since February 1993. Sequester’s impact is not evenly spread Surveys suggest that most Americans feel unaffected by the sequester. However, regions with heavy concentrations of federal workers or government contractors are feeling the pain. Even as the national unemployment rate continues to drop, there has been a notable pick-up in unemployment in Maryland and Virginia since hitting cyclical lows in April. Anecdotal evidence suggests more pain is on the way The latest Fed Beige Book suggests more pain in the pipeline. In the September 4 edition, there were nine references to sequester or sequestration versus only one reference in the July release. Defense firms in the Kansas City and San Francisco districts reported “that the effects of the sequestration have already been passed through to actual reductions in production.” Meanwhile, defense firms in the Boston region were concerned “about the prospect of larger effects in the fourth quarter.”
Posted by WARREN MOSLER on 6th September 2013
NFP Key Takeaways
- Several sub-texts, mainly that the softer news was in prior months and that the better news was in the most recent month (August).
Yes, though August is subject to revision, and the underlying ‘private payroll’ growth, which lags fiscal adjustments, is now looking like it’s been hurt by the year end tax hikes and subsequent sequesters.
- Net payroll revisions of -74k definitely the soft side of this report; with a 169k gain for August close to expectations.
- The Income proxy at +0.7% for August (jobs x hours x wages) definitely the strong side of this report.
Yes, though Friday’s +.1 for personal income is more ‘macro’
- The rise in the diffusion index from 55 to 59 also good news as job gains are more broad based.
Ok, fewer jobs but more spread out.
- The U6 measure fell from 14% to 13.7%, and most other measures of underemployment also fell.
- The Unemployment rate fell from 7.4% to 7.3% as the 312k drop in the labor force offset the 115k drop in the household survey
- The Part rate is now at its lowest since 1978-which will most certainly fuel the structural vs cyclical debate
Yes, as it looks like un and under employed are transitioning to ‘out of the labor force’, and participation rates are falling for younger people as well and if you say half the drop in participation is cyclical you can add about 4% to the un and under employment rates.
- This outcome shouldn’t effect tapering at the September FOMC meeting and if anything, may accelerate the pace of tapering given how close we are to the 7% unemployment rate level that Bernanke identified in June as being consistent with the end of QE.
Agreed. The Fed is heck bent on tapering. They don’t like QE as a tool. And Jackson Hole had presentations showing it doesn’t work with regards to output, employment, CPI, etc.
- Its highly doubtful the part rate will influence the tapering decision as Bernanke knew full well in June that the part rate was on a long-term decline when he set the 7% level (the same as when the Fed set the 6.5% threshold last December). I expect a more nuanced discussion of the part rate in speeches and the minutes.
- Recall, payrolls were averaging 90k/mth when the Fed set out on QE3.
And the term structure of rates was lower, questioning what QE actually accomplishes in that regard, as it’s still going full force at the moment.
- Any decision not to taper or to draw out the taper next year would be more due to the signaling qualities of QE (they wont be hiking as long as they are buying).
A few observers have also pointed out that August payrolls have had upward revisions in 11 of the past 13 years. This is possibly due to the earlier start of the school year over time, which may also have had an impact on the labor force dynamics. Chart below from SMR.
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New Fed Chair
- Its increasingly expected that the nomination of the new Fed Chair will take place between the Sep 18 FOMC meeting and the Annual IMF/WB Meeting in DC on October 11-12.
- I’d put the odds on Summers around 75%.
Confirmation is another story, of course. But seems his odds of confirmation should be better than, say, Jamie Dimon… ;)
Posted by WARREN MOSLER on 6th September 2013
This chart is private sector jobs as per the nfp payrolls report. Decide for yourself whether the govt. ‘getting out of the way’ is altering the ‘underlying strength’ of the private sector, thanks!
As for 2014, if we get there with positive growth from here, that implies credit expansion will be sufficient to generate that growth and feed the automatic stabilizers, will bring the deficit down further as a ‘price’ of that growth, which then requires that much more credit growth to sustain growth, until growth and the fiscal stabilizers do reverse, as they always do.
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Posted by WARREN MOSLER on 6th September 2013
I still don’t see the non govt credit expansion stepping up to offset the proactive deficit reduction measures.
Job growth doesn’t jibe with relatively flat top line growth if there’s any productivity improvement.
Posted by WARREN MOSLER on 4th September 2013
Smart not to intervene and use reserves.
And even the 19% isn’t as much as Japan’s recent approx. 25% drop, so they all remain stronger vs the yen. So the US now loses ‘competitiveness’ vs a whole mob of exporters cutting ‘real’ wages vs US, Canada, UK, and the Eurozone etc. As the ongoing global race to the bottom for real wages continues…
And maybe some day they’ll figure out that cutting rates supports a currency as it cuts interest paid by govt, making the currency ‘harder to get’.
And that exports are real costs and imports real benefits.
And that real standards of living are optimized by sustaining domestic full employment with fiscal adjustments.
By Jeanette Rodrigues, Ye Xie and Robert Brand
September 4 (Bloomberg) — Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level — investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.
The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group Inc., wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”
Putnam said “aggressive” short-term interest rate increases that “dramatically” raise the costs of going short a currency can work to stem an exchange-rate slide.
The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Governor Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.
The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.
The Indian currency rose 1.1 percent 67.0025 per dollar as of 1:46 p.m. in Mumbai today, while its Indonesian counterpart gained 0.3 percent to 11,409 versus the greenback. South Africa’s rand appreciated 0.8 percent to 10.2549 per dollar, while the Turkish lira strengthened 0.4 percent to 2.0505.
Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.
Posted by WARREN MOSLER on 3rd September 2013
By Yasemin Congar
August 27 (Al Monitor) — Emerging markets will soon find themselves operating in a new world order. Few people are as painfully aware of this as Turkey’s Deputy Premier Ali Babacan.
A soft-spoken politician whose key positions in three successive Justice and Development Party (AKP) governments included a two-year stint as foreign minister, Babacan is currently the highest-ranking cabinet member responsible for the economy.
Needless to say, he was all ears when US Federal Reserve Chairman Ben Bernanke suggested on May 22 before the US Congress that it could begin to downsize its $85 billion-per-month bond-buying program.
Babacan had seen that coming. He warned Turkey repeatedly against overspending in 2012 — even at the risk of displeasing Prime Minister Recep Tayyip Erdogan — because he knew cheap loans would soon grow scarce.
Loans in lira are at whatever the CB wants them to be.
Indeed, the United States is getting ready to curtail the stimulus that has injected cash into emerging markets for the last four years.
QE isn’t about cash going anywhere, including not going to EM.
What they got was portfolio shifting that caused indifference rates to change.
Stocks plummeted at the news and national currencies fell against the dollar, with India, Brazil and Turkey all registering substantial losses.
Again, portfolio shifts reversing causing indifference levels to reverse.
Still, answering questions on live television on May 23, Babacan was as cool-headed as ever. First, he reminded the viewers that the European Central Bank and Bank of Japan would follow suit, thus making the impact of the Fed’s exit even stronger on Turkey. Then he said, “If they carry out these operations in an orderly and coordinated fashion, we will ride it out.”
Hope so. They need to focus on domestic full employment.
As Babacan would surely have known, that is a big if. Despite a recent call for coordination by the International Monetary Fund’s managing director, Christine Lagarde, sell-offs in emerging markets do not seem to be a major concern for the architects of the taper plan.
“We only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg TV. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”
In fact, adjustment is not a question of choice here. Emerging economies will have to find a way to continue funding growth and paying off debt without the liquidity infusion. It won’t be easy.
Can’t be easier. Lira liquidity for their banking system is always infinite.
It’s just a matter of the CB pricing it. I’d suggest a Japan like 0% policy and a fiscal deficit large enough to allow for full employment.
The looming exodus of cash and higher borrowing costs have already caused permanent damage in Turkey. The lira weakened dramatically on Aug. 23, with the dollar surpassing two liras for the first time in history.
That was not what caused the decline.
The decline was from portfolio managers changing their indifference levels between the lira and the dollar or euro, for example.
Turkey’s Central Bank dipped into its reserves, but a $350 million sale of foreign exchange reserves failed to calm the market.
A mistake. No reason to buy their own currency with $ reserves, which should only be used for ‘emergency imports’, such as during wartime. All the intervention did was support monied interests shifting portfolios.
Babacan, for his part, has been referring to Bernanke’s May 22 speech as a turning point. The global economic crisis has entered a new phase since that day, he said. “We’ll all see the spillover effects and new faces of the crisis in the coming months.”
What they will mostly see is the effects of their policy responses if they keep doing what they’ve been doing.
He did not stop there. In his signature straight-shooting manner, he also signaled a downward revision. “It should not be surprising for Turkey to revise its growth rate below 4%. … We set our annual exports target at $158 million, but it looks difficult to reach this target as well.”
Which opens the door for a tax cut/spending increase/fiscal adjustment to sustain output and employment.
A politician who seldom walks and talks like a politician, Babacan has been a maverick of sorts in the government. He entered politics in 2001 when he joined Erdogan and others to found the AKP. At the time, he was a 34-year-old with a degree from the Kellogg School of Management and work experience as a financial consultant in Chicago. In 2002, he was appointed the state minister for economy and became the youngest member of the cabinet.
Today, Babacan still has the boyish looks that earned him the nickname “baby face,” and he still exhibits a distaste for populism.
Guess he doesn’t support high levels of employment. In that case they are doing the right thing.
The most significant feature of Turkey’s recent economic success is fiscal discipline, and no one in the government has been a stronger supporter of that than Babacan.
Yikes! Kellogg school turns out flakes… :(
Around this time last year, when a fellow cabinet member, Economy Minister Zafer Caglayan — equally hardworking, yet keener on instant gratification — criticized the Central Bank’s tight monetary policy, Babacan slammed him.
“We do not have the luxury of pressing the brakes,” Caglayan had said. Babacan’s response: “In foggy weather, the driver should not listen to those telling him to press the gas pedal.”
The weather is clear, the driver is blind.
In what came to be known as the “gas-break dispute,” Erdogan threw his weight behind Caglayan and criticized the statutorily independent Central Bank for keeping interest rates too high.
Last week, the Central Bank hiked its overnight lending rate for the second month in a row by 50 basis points to 7.75%. Erdogan and Caglayan watched quietly this time, hoping the raise would help prevent the lira from sliding further. It did not.
Of course not. It makes it weaker via the govt spewing out more in lira interest payments to the economy.
As Babacan’s proverbial fog is slowly lifting to reveal a slippery slope, I can’t help but wonder if he feels vindicated by the turn of events. Probably not, since the risk that awaits Turkey now is worse than a taper tantrum, and Babacan must know just how bad it can get.
The Fed’s decision exposed Turkey’s vulnerability.
Described by economist Erinc Yeldan as “a gradually deflating balloon, subject to erratic and irregular whims of the markets,” Turkey’s speculative growth over the last four years has been financed by running a large current account deficit, which in turn was funded with hot money that is no longer readily available.
As Standard Bank analyst Timothy Ash pointed out last week, “It is a bit hard to recommend [buying the lira or entering] bond positions while inflation remains elevated, and the current account is still supersized at $55-60 billion, with that huge external financing requirement.”
Or, it’s hard selling the dollar or euro with their intense deflationary/contractionary policies…
Estimated at $205 billion, or a quarter of Turkey’s gross domestic product (GDP), the external financing requirement is huge, indeed.
There is no such thing.
“A more extreme measure of vulnerability would add the $140 billion of foreign-held bonds and shares,” Hugo Dixon wrote in his Reuters blog. “If this tries to flee, the lira could plunge.”
Babacan admits that “Turkey might feel the negative effects of the Fed’s policy shift a bit higher than others … due to our already higher current account deficit.”
Turkey’s reliance on hot money to turn over its short-term external debt, which has been increasing more rapidly than the national income, is only the tip of the iceberg. What makes Turkey’s robust growth rates of 9% in 2010 and 8.5% in 2011 unrepeatable might be the disappearance of cheap loans. However, the real reason behind the unsustainability of such growth is structural.
Growth can be readily sustained with lira budget deficits and a 0 rate policy would help with price stability as well.
From insufficient capital accumulation and a low savings ratio to poor labor efficiency, the Turkish economy suffers chronic ills that can only be cured through radical reforms, including a major overhaul of the education system.
Education is good, but unemployment is the evidence the deficit is too small.
Again, Babacan knows it. Earlier this year, he commented on the government’s plan to increase the GDP per capita to $25,000 in 2023 by pointing out an anomaly:
“No other country in the world with an average education of only 6.5 years has a per capita income of $10,500. And no country with such an education level ever had an average income of $25,000. Without solving our education problem, our 2023 targets will remain a dream.”
Some say ignorance is bliss. Listening to Babacan makes me think they may be right. After 11 years, being part of a government that failed to do what you know should have been done cannot be much fun.
Posted by WARREN MOSLER on 30th August 2013
Commentary for friday: the second print on Q2 GDP growth showed a significant upward revision to +2.5% from +1.7% as previously reported. Recall that growth was only +1.1% in Q1.
After the 3rd downward revision
Given that the deflator was revised a tenth higher (0.8% vs. 0.7% as previously reported), the magnitude of the overall revision is even more impressive. Personal consumption was unrevised at +1.8% in Q2,
Down from 2.3% in Q1 if I recall correctly
While business fixed investment was only modestly softer (+4.4% vs. +4.6%). Residential investment was also reduced slightly (+12.9% vs. +13.4%). The big changes to Q2 growth were in inventories and international trade. Inventory accumulation was lifted to $62.6b from $56.7b as first reported, thereby adding 0.6 ppt to growth compared to 0.4 ppt previously.
The question is voluntary to restock from a Q1 dip or sales growth forecast, or involuntary due to lower than expected sales.
In terms of trade, firmer exports and softer imports drove net exports to improve; as a result, the original -0.8 ppt drag from trade was revised up to zero.
Question is whether exports can be sustained through Q3 as the dollar spike vs Japan and then the EM’s hurts ‘competitiveness’
The government drag on Q2 was revised to become slightly larger (-0.2 ppt vs. -0.1 ppt as first reported). Nonetheless, the federal government drag on economic activity has diminished significantly compared to the impact in Q1 (-0.7 ppt) and Q4 2012 (-1.2 ppt). A diminished drag from the public sector should enable overall GDP growth, which was +1.6% year-on-year in Q2, to close the gap with private sector growth, which was +2.5% over the same period.
I see it this way- the govt deficit spending is a net add of spending/income. So with the deficit dropping from 7% of GDP last year to maybe 3% currently, with maybe 2% of the drop from proactive fiscal initiatives, some other agent has to be spending more than his income to sustain sales/incomes etc. If not, output goes unsold/rising inventories and then unproduced. The needed spending to ‘fill the spending gap’ left by govt cutbacks can come from either domestic credit expansion or increased net exports (no resident credit expansion/savings reductions. I don’t detect the domestic credit expansion and net export growth/trade deficit reduction seems likely given the dollar spike and oil price spike?
If we achieve +3.0% growth in the current quarter and +3.5% in Q4, this will push the year-on-year rate to +1.7% in Q3 and +2.5% by yearend. (this is in line with the Fed’s central tendency forecasts, which are due to be updated at the september FOMC meeting.)
In order for our growth forecast to come to fruition, we will need to see a pickup in consumer spending,
Hard to fathom, as personal consumption has been slipping from 2.3 in Q1 to 1.8 in Q2, and walmart and the like sure aren’t seeing any material uptick in sales? Car sales are ok, but further gains from the June high rate seems doubtful as July has already posted a slower annual rate.
homebuilding and business investment relative to first half performance. The first two series are likely to be boosted by sturdier employment gains, and hence faster household income growth.
Seems early Q3 reports show falling mtg purchase applications, home sales falling month to month, and lots of anecdotals showing the spike in mtg rates has slowed things down. So growth from Q2 seems unlikely at this point?
We are confident that the pace of hiring will pick up in the relatively near term, because jobless claims continue to hold near cyclical lows.
New jobs dropped to 160,000 in july, and claims measure people losing their jobs, not new hires. Also, top line growth, the ultimate driver of employment, remains low, so assuming actual productivity hasn’t gone negative a spike in jobs is unlikely?
Given the usefulness of jobless claims as a payroll forecasting tool, it should come as little surprise that they are also significantly correlated with wage and salary growth. In fact, over the past 25 years, the current level of jobless claims has typically coincided with private wage and salary growth above 6% compared to 3.8% in Q2.
As above, claims may have correlated with all that in the past, but the causation isn’t there. Looks to me like claims are more associated with ‘time from the bottom’ as with time after the economy bottoms firings tend to slow, regardless of hiring?
Meanwhile, the third growth driver noted above—business investment—will largely depend on the corporate profit trend. Yesterday’s second print on GDP provided the first look at economy-wide corporate profits, which rose +3.9% in Q2 vs. -1.3% in Q1. Many analysts fretted the decline in profits in Q1, because they tend to drive business investment and hiring plans. We dismissed the Q1 weakness as a temporary development which occurred in lagged response to the growth slowdown in Q4 2012 and Q1 2013. The fact that profits are reaccelerating (+5.0% year-on-year versus +2.1% in Q1) is an encouraging development in this regard.
Profits also are a function of sales, which are a function of ‘deficit spending’ from either govt or other sectors, as previously discussed. And, again, i see no signs of ‘leaping ahead’ in any of those sectors.
Faster GDP growth through yearend should result in even stronger corporate profit growth.
Agreed! But didn’t he just say that the GDP growth would come from business investment that’s a function of profits (and in turn a function of sales/GDP)?
To be sure, the additional growth momentum now evident in the Q2 GDP results makes our 3% target for current quarter growth more easily attainable. –CR
I don’t see how inventory growth is ‘momentum’ and seems there are severe headwinds to Q3 net exports as drivers of growth?
And govt is there with a deficit of only 3% of GDP to help offset the relentless ‘unspent income’/demand leakages inherent in the global institutional structure.