Karim writes:

Yes, contrary to my opinion. This about managing expectations. With falling inflation and unemployment this high it makes no sense that they would be holding back something that could make a material difference.

Agreed.

Again, if they did have anything that would substantially increase agg demand they’d have done it.

Yes, and, again, it’s doubtful lower credit spreads will do much for the macro economy but would shift a lot of credit risks to the Fed for very little gain.

FRB: Bernanke, The Economic Outlook and Monetary Policy

At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily.

That is not correct. Fiscal adjustment can sustain demand at any politically desired level.

For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.

Agreed that hand off is slowly materializing and private sector debt expansion will then drive additional growth. But sustained expansion could come immediately from a fiscal adjustment as well.

However,although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.

Agreed.

Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought–averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed.

Non govt net savings of financial assets = govt deficit spending by identity, and with foreign sector savings relatively constant, the majority of the increase is in the domestic economy, either businesses or households.

That means in general household savings goes up with the deficit regardless of the level of consumer spending.

However, when household savings does start to fall, it’s due to household credit expansion, at which time, if the deficit is unchanged, the savings of financial assets is shifted to either the business or the foreign sector.

And, as growth accelerates, the automatic fiscal stabilizers- increased federal revenues and falling transfer payments- reduce the deficit and therefore reduce the growth in the total net savings of the other sectors.

So the hand off process is usually characterized by the federal deficit falling as private sector debt expands to ‘replace it.’

This continues until the private sector again necessarily gets over leveraged, ending the expansion.

3 On the one hand, this finding suggests that households, collectively, are even more cautious about the economic outlook and their own prospects than we previously believed.

At best his means that he thinks with this much savings households would start leveraging more.

But on the other hand, the upward revision to the saving rate also implies greater progress in the repair of household balance sheets. Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.

Yes, as I explained. He seems to understand the sequence of the data but doesn’t seem to be quite there on the causation.

Going forward, improved affordability–the result of lower house prices and record-low mortgage rates–should boost the demand for housing. However, the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet

Yes, which is a traditional source of private sector credit expansion, along with cars, that drives the process.

Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. For these firms, willingness to expand–and, in particular, to add permanent employees–depends primarily on expected increases in demand for their products, not on financing costs.

I couldn’t agree more!
Employment is primarily a function of sales as discussed in prior posts.

Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses. For example, through the provision of specific guidance and extensive examiner training, we are working to help banks strike a good balance between appropriate prudence and reasonable willingness to make loans to creditworthy borrowers. We have also engaged in extensive outreach efforts to banks and small businesses. There is some hopeful news on this front: For the most part, bank lending terms and conditions appear to be stabilizing and are even beginning to ease in some cases, and banks reportedly have become more proactive in seeking out creditworthy borrowers.

Another problem is that the regulators are forcing small banks to reduce what’s called ‘non core funding’ in a confused strategy to enhance small bank ‘deposit stability.’ Unfortunately, at the local level the regulators have interpreted the rules to mean, for example, it’s better for a small bank’s financial stability to fund, for example, a 3 year business loan with 1 year local deposits, vs funding it with a 5 year advance from the Federal Home loan bank. It’s also a fallacy of composition, as at the macro level there aren’t enough core deposits to fund local small businesses, as many larger corporations and individuals use money center banks and leave their deposits with them. The regulatory insistence on small banks using ‘core deposits’ rather than ‘wholesale funding’ recycled from the larger banks causes a shortage of local deposits and forces the small banks to pay substantially higher rates as they compete with each other for funding artificially limited by regulation.

In lieu of adding permanent workers, some firms have increased labor input by increasing workweeks, offering full-time work to part-time workers, and making extensive use of temporary workers.

Yes, and when you include this growth in employment the economy is doing better than most analysts seem to think.

Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters.

Also, part of the hand off will be US consumers going into debt (reducing savings) to buy foreign goods and services, which increases foreign sector savings of financial assets.

Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated. Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.

Agreed.

Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.

Agreed.

Monetary policy remains very accommodative,

Yes, for many borrowers, but the lower rates have also net reduced incomes. QE alone resulted in some $50 billion of ‘profits’ transfered to the Treasury from the Fed that would have been private sector income, for example.

and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there.

Agreed.

Banks are improving their balance sheets and appear more willing to lend.

Agreed, though via a reduction in interest earned by savers that’s gone to increased net interest margins for banks.

Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms.

Yes, ‘funded’ by the federal deficit spending.

Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.

Yes, and that basis is credit expansion.

On the fiscal front, state and local governments continue to be under pressure; but with tax receipts showing signs of recovery, their spending should decline less rapidly than it has in the past few years. Federal fiscal stimulus seems set to continue to fade but likely not so quickly as to derail growth in coming quarters.

Yes, and traditionally matched or exceeded by private sector credit expansion as above.

Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run. With inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly toward levels more consistent with the Committee’s objectives. At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.

The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate.

With the debate subsiding as more FOMC participants, but far from all of them, seem to be coming to understand the quantity of the reserves per se has no consequences.

I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve’s purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed’s strategy relies on the presumption that different financial assets are not perfect substitutes in investors’ portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

This is evidence Bernanke himself has come around to the understanding that the quantity of reserves at the Fed per se is of no further economic consequence.

We decided to reinvest in Treasury securities rather than agency securities because the Federal Reserve already owns a very large share of available agency securities, suggesting that reinvestment in Treasury securities might be more effective in reducing longer-term interest rates and improving financial conditions with less chance of adverse effects on market functioning.

Again, it shows the understanding that QE channel is price (interest rates) and not quantities.
This is a very constructive move from understanding indicated in prior statements.

Also, as I already noted, reinvestment in Treasury securities is more consistent with the Committee’s longer-term objective of a portfolio made up principally of Treasury securities. We do not rule out changing the reinvestment strategy if circumstances warrant, however.

In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.

Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals.

In my humble opinion those tools carry no risk and provide no reward to the macro economy.

MMT interview:

Defining the Modern Monetary Theory

>   
>   (email exchange)
>   
>   On Tue, Aug 24, 2010 at 8:32 AM, Seth wrote:
>   
>   stocks look bad
>   looks like another panic
>   

It doesn’t look good technically.

Must be coming out of europe with gold up/euro down dynamic, etc.

Insiders there must be bailing.

Maybe they know something we don’t, or maybe they are wrong.

History is no help as in the past it’s been both.

Austerity is trimming growth there a bit around the edges, but deficits remain reasonably high, so GDP’s are probably at least muddling through, with overall growth probably positive.

The ECB keeps the short term funding channels open for the member nations, but that may not be fully appreciated yet.

On a mark to market basis bank capital is probably below requirements, and they may not realize that doesn’t have to matter to the real economy for as long as the ECB continues to fund them.

Lower crude oil prices support consumption of other things. With US crude oil product consumption up and Saudi output rising, demand must be ok. Maybe Saudis are worried and want lower prices to help world growth as well. Hard to ever say what they are actually up to. They may see the Iraqi production coming on stream and are trying to engineer an increase in demand. Again, no way to tell what they are up to.

The lower 10 year rates reflects expectations of ‘low for longer’ from the Fed due to high unemployment and falling rates of inflation as measured by the Fed. And the possibility of more QE that could flatten the curve further.

There is also the notion that there’s nothing left that the Fed can do of any consequence regarding aggregate demand, and Congress thinks it’s run out of money, which means flying without a net. That increases the weight of the downside in the balance of risks.

If markets and Congress knew that fiscal policy had no nominal limit and deficit spending was not dependent on being able to borrow from the likes of China to be paid by our grandchildren, the balance of risks would be viewed very differently. But they don’t know that.

With the elections coming and California reverting to vouchers again, the time is right for my per capita revenue sharing. But it’s not even a consideration.

Q3 and Q4 GDP estimates are looking more like 1.5%, and Q2 looks to be revised down toward 1% Friday. Not a double dip but no drop in unemployment either as productivity might be at least that high. That’s worse politically than it is for equities, and adds support for a ’second stimulus’ type of reaction. But that’s way down the road. More likely it causes most of the expiring tax cuts to be extended.

Thursday’s claims can make a big difference as well. The jump to 500,000 last week added an element of fear internationally.

Also, in thin summer markets technicals often cause exaggerated moves. Volume is very low, and a given size buying or selling causes larger moves to find someone willing to take the other side, and momentum type traders can easily overwhelm investors.

SMR pushing the erroneous measurement of claims story; attached is a chart showing gap between challenger layoffs and initial claims at a 12yr wide.

The claims data does look peculiar.

Karim and I agree that even if claims level off in the 475-500,000 range it’s probably not a double dip scenario.

Forget a Double Dip. We’re Still in One Long Big Dipper.

By Robert Reich

August 14 — It’s nonsense to think of the economy heading downward again into a double dip when most Americans never emerged from the first dip. We’re still in one long Big Dipper.

More people are out of work today than they were last year, counting everyone too discouraged even to look for work. The number of workers filing new claims for jobless benefits rose last week to highest level since February. Not counting temporary census workers, a total of only 12,000 net new private and public jobs were created in July — when 125,000 are needed each month just to keep up with growth in the population of people who want and need to work.

Not since the government began to measure the ups and downs of the busines cycle has such a deep recession been followed by such anemic job growth. Jobs came back at a faster pace even in March 1933 after the economy started to “recover” from the depths of the Great Depression. Of course, that job growth didn’t last long. That recovery wasn’t really a recovery at all. The Great Depression continued. And that’s exactly my point. The Great Recession continues.

Even investors are beginning to see reality. Starting in February the stock market rallied because corporate profits were rising briskly. Investors didn’t mind that profits were coming from payroll cuts, foreign sales, and gimmicks like share buy-backs — none of which could be sustained over the long term. But the rally died in April when investors began to see how paper-thin these profits actually were. And now the stock market is back to where it was at the start of the year.

What to do? First, don’t listen to Wall Street and the right.

Forget the Neo-Hoover deficit hawks who day we have to cut government spending and trim upcoming deficits. We didn’t get into this mess and aren’t remaining in it because of budget deficits. In fact, the only way to reduce long-term deficits is to restore jobs and growth so government revenues rise and expenses like unemployment insurance drop.

There you go, Bob, reinforcing the myth that getting long term deficits down has value.
That makes you part of the problem, and not part of the answer.

Ignore the government haters who say we have to void or delay upcoming regulations of Wall Street and big business. We got here because Wall Street went bonkers, the housing bubble burst, and the middle class couldn’t continue to spend becuase their health-care bills were soaring and their pay was stagnating. New regulations of Wall Street and big business are necessary to avoid a repeat.

And don’t believe the supply-siders who say we have to extend the Bush tax cuts for the wealthy. Because the wealthy save rather than spend most of their incomes,

If you believe this, and understand taxing functions to regulate aggregate demand, why would you care if their taxes went up or not? Just like getting them angry?

extending their tax cut won’t do squat. And restoring their marginal tax rate to what it was under Bill Clinton won’t harm the economy. The Clinton years had the best sustained economy in American history.

The central problem is lack of demand — and that’s what has to be tackled.

Right! Which will eventually come back. The deficits are high enough for that. But there’s nothing to be gained by waiting around with maybe 20% real unemployment for private credit expansion to kick in like it did in the 90’s.

Three of the four sources of demand have stopped working. (1) Consumers can’t and won’t buy because they’re still under a huge debt load, can’t get more credit, are afraid of losing their jobs (or already have), depend on two wage earners at least one of whom is working part-time and pulling in less, or have to save. (2) Businesses won’t invest and spend on creating more jobs if they don’t see consumers willing to buy more.

Agreed on those two!

(3) Exports are stalled because the dollar is so high they cost too much, much of the rest of the world is still struggling with recession, and American firms can make things for sale abroad more cheaply abroad.

That’s a good thing- means we can have even lower taxes to sustain domestic demand and be able to buy all we can produce at full employment plus whatever the world wants to net sell to us.

That leaves only one remaining source of demand — government. We need a giant jobs program to hire people and put money in their pockets that they’ll spend and thereby create more jobs. Put ideology aside and recognize this fact. If it makes you more comfortable call it the National Defense Jobs Act. Call it the WPA. Call it Chopped Liver. Whatever, we have to get the great army of the unemployed and underemployed working again.

How about my $8/hr transition job proposal?

Also: Put more money in consumer’s wallets by eliminating payroll taxes on the first $20K of income (and make it up by applying payroll taxes to incomes over $250K.)

Why not just suspend FICA taxes entirely?

What are you afraid of?

The federal deficit?

Also: Get more hiring by giving the states and locales interest-free loans — so they can rehire all the teachers, fire fighters, police officers, and sanitation workers they’ve fired — to be repaid when their state employment rates hit 5 percent or below.

Why not simple federal revenue distributions on a per capita basis to make it fair?

What are you afraid of?

The federal deficit?

Also: Get more credit by having the Fed return to “quantitative easing” — expanding the money supply by purchasing mortgage-backed and other types of securities.

And you don’t have a clue on how monetary operations and reserve accounting work.
Otherwise you’d know this does nothing of macro consequence except take more interest income out of the private sector and shift a bit of interest from savers to borrowers.

If we let the deficit hawks and government haters dominate this debate, as they have, the Big Dipper will continue for years. The Great Depression lasted twelve.

If you’d get up to speed on monetary operations and stop supporting the deficit hawks, the true doves might have a fighting chance.

If any of you have Bob’s email address please forward this to him, thanks!

Negative headline for a slight miss, and 3.8% top line growth and double digit earnings growth year over year.

And that is in Q2 where GDP growth was probably only 1% or so, and still looking a bit higher for Q3, supported by ongoing 8%+ federal budget deficits.

Not a good economy for sure, as shockingly high unemployment continues and the federal govt does nothing to further support aggregate demand, because they all believe the myth that the federal govt has run out of money and in order to spend have to borrow from the likes of China and leave the debts for our children to pay back.

Lowe’s results miss estimates

August 16th (Reuters) — Home improvement chain Lowe’s Cos missed quarterly profit and sales estimates as benefits from the homebuyer tax credit and cash for appliances programs waned.

Net income rose to $832 million, or 58 cents a share, in the second quarter ended July 30 from $759 million, or 51 cents a share, a year earlier.

Analysts on average were expecting 59 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 3.8 percent to $14.36 billion, but missed the average estimate of $14.52 billion.

Link:

Valance Chart Review (PDF)

Karim writes:

Yes, Q2 GDP to be revised down, but it’s been down. Q2 is history. Corporate earnings were based on the actual numbers- sales, costs, profits.

In other words, we know what the S&P were able to earn even with very modest headline GDP growth.

The higher final demand is also at least sustainable.
The relatively large and ongoing fiscal deficit that added that much income and savings to the non govt sectors allowed for the higher final demand AND higher savings.

While the QE from the Fed does nothing beyond causing term rates to be marginally lower than other wise, it does add some support for asset prices via implied discount rates.

As discussed earlier this year, markets are figuring out that the economy is flying without a net. All the Fed can do is alter interest rates which, with each passing day since the recession began, has been shown to not be able to support output and employment, or even prices and lending. (Just like Japan has shown for going on 20 years.)

And a Congress and Administration that thinks it’s run out of money and is dependent on borrowing and leaving the bill to our grand children to be able to spend is unlikely to provide meaningful fiscal adjustments to support aggregate demand.

So we muddle through with unthinkably high levels of unemployment and modest GDP growth waiting for an increase in private sector demand to kick in via credit expansion from the usual channels- cars and housing.

The risk to growth is now primarily proactive fiscal consolidation- spending cuts and/or tax hikes- in advance of private sector credit expansion. So far I haven’t seen anything meaningful enough to be of consequence. But the anti deficit rhetoric is certainly there, counterbalanced to some degree by the call for jobs.

So it remains a pretty good equity environment but a very ugly political environment.

Karim writes:

Yes, which means it remains a good market for stocks.

High unemployment is good for cost control and helps keep the Fed on hold. And 0 rates remain a deflationary influence as well.

Top line growth is modestly positive growing by productivity increases plus some hours and employment gains.

Earnings trend remains positive with productivity gains, some top line growth, and a loose labor market.

All supported by a federal deficit that still exceeds 8% of gdp.

Tough political environment with most of the real wealth going to the top as unemployment remains near the highs.

Four Deformations of the Apocalypse

By David Stockman

July 31 (NYT) — If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

Yet another ‘expert’ with fear mongering with ‘the US is the next Greece’ nonsense. So much for whatever positives may be left of his legacy.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

At least they are practical enough to add to aggregate demand when needed.
Does anyone think there is an excess of demand that calls for a tax hike?
Any call for a tax hike on ‘fairness’ should be ‘paid for’ with at least an offsetting tax cut somewhere.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one. The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

That’s been adding to our real terms of trade and standard of living on an epic scale, and, ironically, the rest of the world is fighting to continue it while we are pressing to end it. Go figure!

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

He was right. It continuously self corrects to reflect rest of world savings desires of $US financial assets.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

Yes, to our advantage!

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure.

Leave it to Dave to promote a cure for prosperity.

When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

It’s not from the Fed, Dave, it’s from the Treasury deficit spending and private deficit spending.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

Public sector deficits = non govt savings of those financial assets. And the unemployment rate and inflation rate are telling us federal deficits are too small to provide the savings demanded by the rest of us.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine. Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

And over the next 10 years inflation came down from over 12% to 3%, even with all the deficit spending because savings desires were even higher, and continue to grow geometrically due to tax advantaged pension contributions, etc.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation,

Volcker did not crush inflation. If anything, his high rates added to business costs and unearned income long after inflation turned down due to positive supply shocks in the energy markets, helped by the dereg of natural gas in 1978 that did the lion’s share of cutting the demand for crude for electricity generation.

enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts. By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

Not my first choice for Federal spending, but certainly did the trick of turning the economy in 2003.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

The real problem with the financial sector is that it preys on the real economy with both a massive brain drain and a drain of other real resources as well.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

They didn’t get free money to cover their bad debts. All losses were deducted from shareholder value. Some banks lost all shareholder funds and were liquidated or sold (with the FDIC realizing losses after the shareholders were wiped out)
Functionally, tarp was regulatory forbearance, not a federal expenditure.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

Not true. The trade deficit is an enormous benefit. For a given size govt, it allows for lower taxes/higher deficits so Americans can have enough spending power to buy both all we can produce at full employment plus whatever the rest of the world wants to sell us. In 1999/2000, unemployment fell below 3.8%, even as the trade deficit soared to $380 billion.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

Agreed!!! However this has nothing to do with the rest of what he’s been droning on about. In fact, higher deficits are usually result in stronger economies which are associated with lower income inequality.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

No, we need a full payroll tax holiday, $500 per capita revenue sharing for the states, and an $8 transition job for anyone willing and able to work.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

Warren Mosler Applauds the Senate for Passing Urgently Needed State
Funding and Urges the House to do Same

Independent candidate for Christopher Dodd’s CT Senate seat and economist specializing in monetary operations urges swift passage of aid to avoid job losses and fiscal distress

Waterbury, CT – August 5, 2010 – Warren Mosler, Independent candidate for Christopher Dodd’s Connecticut Senate seat and economist specializing in monetary operations today applauded members of the U.S. Senate for moving critical State Funding forward and urges members of the House to support this effort to alleviate the strain on state budgets when they reconvene next week. The Senate’s plan would allocate $16.1 billion for Medicaid and an additional $10 billion to help avert teacher layoffs. One of Mosler’s proposals to fix the economy is an unrestricted Federal distribution of $500 per capita to each state government to help them cope with the shortfalls created by the recession. “While this bill falls substantially short of my proposal, it is a step forward. That the U.S. Senate had previously failed to pass such a critical bill because it would add to the deficit only makes it clear that many lawmakers do not know how the U.S. monetary system works,” Mosler asserted. “Destroying even more jobs by forcing states to lay off teachers and raise taxes is the last thing they should be doing in this economy. Unfortunately, Congress acts as if we were still hamstrung by the gold standard.”

Warren Mosler, based upon his 37 years of successful banking and finance experience and with the support of many highly regarded economists, states that it is an operational fact (not theory) that today’s Federal spending is not constrained by revenue and, therefore, “pay as you go” is unnecessary and completely misses the point. Any government with its own non-convertible currency with a floating exchange rate that spends and borrows strictly in its own currency cannot become insolvent. “Everyone in Fed operations knows that Congress and the administration have it wrong. As Chairman Bernanke publicly stated, all Federal spending is done simply by marking up numbers in bank accounts with its computer” As Mosler explains, “The government can’t run out of money. It doesn’t get anything real when it taxes and doesn’t give anything real when it spends. There is no gold coin that goes into a bucket at the Fed when you are taxed and the government doesn’t hammer a gold coin into its computer when it spends. The US can’t possibly be the next Greece, because that nation no longer issues its own currency while the U.S. still does.” The people of Connecticut and the people of the United States deserve to have a voice of true knowledge and experience shaping the debate about our economic future, not the ill-informed voices of partisan, ideological bickering that have gotten us to where we are today. Warren’s in-depth knowledge of even the most minute aspects of the economy and monetary system make him uniquely qualified to provide the guidance and leadership needed to fix the economy so that it again creates well paid private sector jobs for anyone willing and able to work.

About Warren Mosler
Warren is running as an Independent. His populist economic message calls for a full payroll tax (FICA) holiday so that people working for a living can afford to buy the goods and services they produce, limiting government to the provision of public infrastructure, utilizing competitive market forces to achieve economic objectives, and restoring constitutional government and personal responsibility. He has also pledged never to vote for cuts in Social Security payments or benefits. Warren was born and raised in Manchester, Conn., where his father worked in a small insurance office and his mother as a night-shift nurse. He graduated from the University of Connecticut in 1971 with a degree in economics and, after years of hard work, started his own investment firm in 1982. For the last twenty years, Warren has also been deeply involved in the academic community, publishing numerous articles in economic journals, newspapers and periodicals, and giving presentations at conferences around the globe. Mosler’s new book “The 7 Deadly Innocent Frauds of Economic Policy” lays out a clear guide in, layman’s terms, to how the monetary system really works and exposes some of the most commonly held misconceptions. He is also the founder of Mosler Automotive, which builds the Mosler MT900, the world’s top performance car that also gets 30 mpg at legal highway speeds.

Learn more at www.moslerforsenate.com.


National Media Contact:
Will Thompson
(267) 221-6056
will@hedgefundpr.net

Connecticut Media Contact:
Erin Bronner
(818) 992-4353
ebronner@jmprpublicrelations.com

With modest GDP growth and a 1.4 trillion deficit downside to equities can only come from an external shock.

High unemployment keeps the Fed on hold and the 0 rate policy keeps costs of production down and keeps personal income gains modest.

At least for now, the combo of 0 rates and an 8%+ budget deficit continues to be supportive of only modest aggregate demand growth and only very modest employment growth.

Again, good for stocks, where a bit of top line growth and productivity gains keep earnings growth positive.

Karim writes:

I tend to agree with Karim and Fed Chairman Bernanke.
Modestly improving GDP growth with unemployment coming down very gradually until a consumer credit expansion takes hold.

Good for stocks, not so good for most of the people still struggling to survive, as the Obama administration continues to preside over what might be the largest transfer of wealth from bottom to top in the history of the world.

And no credible energy policy. We are completely at the mercy of the Saudis who can unilaterally hike prices any time they feel like it.

Karim writes:

• “Business in July was strong, the best month since October 2008.” (Fabricated Metal Products)
• “Slow economy has killed sales for new equipment orders.” (Machinery)
• “Quoting activity and sales are slow, and backlog is dropping.” (Computer & Electronic Products)
• “Business continues to be sluggish and has fallen slightly as the economic ills continue.” (Nonmetallic Mineral Products)
• “Retailers are still unwilling to gamble on inventory.” (Printing & Related Support Activities)

Bernanke

While the support to economic activity from stimulative fiscal policies and firms’ restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

To be sure, notable restraints on the recovery persist. The housing market has remained weak, with the overhang of vacant or foreclosed houses weighing on home prices and new construction. Similarly, poor economic fundamentals and tight credit are holding back investment in nonresidential structures, such as office buildings, hotels, and shopping malls.

This is another sign of growth creeping in.

The States will be fine with a bit more GDP growth, and if they maintain their equity allocations their pension funds will all recover when equity prices double over the next few years.

With strong productivity growth throughout the recession, there is a lot of catch up down the road as the ongoing 8%+ deficits fill the spending gaps and restore the financial equity that will also support a subsequent credit boom that begins with the ‘get a job buy a car’ accelerator.

Unfortunately we still haven’t addressed our energy consumption issues, and we remain highly vulnerable to arbitrary Saudi price hiking.

Nor have we taken sufficient measures to be able to grow GDP without a substantial corresponding increase in energy consumption in general.

But that’s another story, at least for the near term.

Tax Revenue Creeps Up, but Can’t Fill State Budget Gaps

July 27 (Reuters) – State tax revenue is improving, but only slightly, and may not be enough to end steep spending cuts or replace the loss of assistance from the federal stimulus plan that expires in December, according to a report Tuesday.

The National Conference of State Legislatures said states faced a collective budget gap of $83.9 billion when creating their budgets for fiscal 2011, which for most began on July 1.

Officials surveyed by the group, which represents state lawmakers, said revenue was beginning to pick up or at least slow its rate of decline. Nearly every state expects tax collections this fiscal year to surpass last year’s.

“For the first time in a long time we’re seeing some slight improvement in the state revenue situation,” Corina Eckl, the NCSL’s fiscal program director, said in a statement accompanying the report. “But glimmers of improvement are tarnished by looming problems.”

Makes perfect sense to me that payrolls would be a function of sales.

Very well done by Mike Norman who’s on this email list.

This video makes it all the more obvious that Fox is on a propaganda mission, at best to support ratings, at worst to be subversive, rather than engaging with Mike on the facts.

You tube link:

Mike Norman on Fox

Still feels like modest GDP growth, positive but not enough to make much of a dent in unemployment, until the ‘hand off’ to growth from credit expansion from some other sector, which could be a while.

Risks remain external.

China has been a strong first half weak second half story for a while, and a weak second half after an only ok first half this year can be a problem.

Fiscal tightening around the world can also keep a lid on things.

And I still have that nagging feeling that a 0 rate policy requires higher budget deficits to sustain full employment than a policy of higher rates. That should be a good thing- means taxes can be that much lower- but with a govt that doesn’t understand its own monetary system and keeps fiscal too tight it’s a bad thing.

All seems to point to more of an L shaped, Japan like recovery than a V.

Karim writes:

G20 Says Expansionary Fiscal Policy Not Sustainable

The G20 has dropped its support for fiscal expansion. The deficit hawks are prevailing. But why is that? We all either know or should know that operationally Federal spending is not constrained by revenues, as Chairman Bernanke stated last year, when asked on ’60 Minutes’ by Scott Pelley where the funds given to the banks came from :

“…we simply use the computer to mark up the size of the account that they have with the Fed.”

We know that when the Fed spends on behalf of the Treasury it simply credits a member bank or foreign government’s reserve account at the Fed.

We know that a US Treasury security is a credit balance in a securities account, also at the Fed.

We know that buying a Treasury security means US dollars (numbers on the Fed’s spreadsheet) shift from a Fed reserve account to a Fed securities account, which adds to the ‘national debt.’

We know that government deficits = ‘non government’ saving (net dollar financial assets) to the penny, as a matter of national income accounting.

And we know paying off the Treasury securities happens continuously when Treasury securities mature and the Fed simply shifts those US dollars from the securities account back to a Fed reserve account (including the interest).

So why should we care if US dollars are in a Fed reserve account or a Fed securities account?

We should not, yet most still do.

There are two featured sides to the argument, pro and con, deficit hawks and deficit doves. The deficit hawks aren’t the problem. They have no argument that makes any sense as a point of simple monetary operations. There is no such thing as the Federal Government running out of money, being dependent on foreigners or anyone else for funding to be able to spend, and the US is not the next Greece.

The problem is the deficit doves featured by the media don’t understand actual monetary operations and reserve accounting, and so they take the same ‘fundamentally wrong’ positions as the deficit hawks. The difference is nothing more than timing and degree. In effect, the media is showing only one side of the argument.

To be a credible media deficit dove, you agree deficits are ‘bad’ but in the long term, arguing that in the short term we need tax cuts or spending increases now, and deficit reduction later. You agree that deficits can be too high, but argue they have been higher, particularly in World War II, so current levels should be easily manageable, further agreeing there is a level that could not be manageable. You agree markets could be ‘unfriendly’ and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that currently they do have confidence in the US and they are eager to fund current deficits. You agree that ‘bang for the buck’ matters and support tax cuts and spending increases based on higher ‘multipliers.’

The two ‘sides of the story’ are in fact on the same side, just with differing degrees. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration’s ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred of them, including many senior economics professors. The nagging question is why this professional, highly educated, highly experienced collection of true doves, who happen to be correct and could get us back to full employment and prosperity in reasonably short order, does not get a fair hearing.

The answer may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn’t cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn’t helped either. Seems billionaires get celebrity status and airtime for just about anything they want to say.

The same is true of the Economics professors who’ve got it right. Without being from and at the usual ‘top tier’ schools none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as ‘deficits = savings’ or ‘loans create deposits’ or ‘Federal spending is not constrained by revenues’ is immediately labeled ‘heterodox’ and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled ‘unorthodox’ because his mathematical models featured the deficits = savings accounting identity.

The breakthrough could happen at any time, in addition to economists at the ‘right schools’ or right financial sector firms, there are government officials with sufficient credentials to lead the breakthrough, including the head of the CBO and OMB, the Treasury Secretary and Fed Chairman, as well as former Fed officials, particularly from monetary operations.

Unfortunately Treasury Secretary Geithner, a potential hero due to the celebrity of his office, and the rest of the G20 are acting out the deficit hawk position, acting as if they do indeed believe the US has run out of money, is dependent on its creditors, and could be the next Greece. They speak as if they have no idea that the euro nations operate within a unique institutional structure that puts them in a ‘revenue constrained’ financial position similar to the US States, but with nothing equivalent to the US Treasury to run the countercyclical deficits for them. They speak as if they have no idea that the US, UK, Japan, and others with ‘normal’ central governments taxes function to regulate aggregate demand, and not to raise revenue per se. They act as if they don’t realize they can immediately make the fiscal adjustments- cut taxes and/or increase government spending- that will restore aggregate demand, employment, and output. In short, they act as if they were all still on the gold standard, an institutional arrangement where indeed government spending was constrained by revenues, and, as a consequence, the world witnessed repetitive, devastating deflationary depressions, far worse than what we’ve seen so far in this cycle.

The results of unnecessarily allowing a universal lack of aggregate demand to persist are already tragic, and if policy continues along the line of this weekend’s G20 results no relief is in sight, and it could all get a whole lot worse.

Karim writes:

Yes, looking like we’re modestly improving domestically with the risks mainly external including spillover weakness form China and the euro zone.

Export growth down a touch but not serious to this point.

The JOBS candidate Warren Mosler announces his
Million Dollar Challenge to Senate CANDIDATES

Middletown, Conn. (June 2, 2010) – Warren Mosler, Independent candidate for US Senate, knows for a fact that, operationally, there is no such thing as the US government running out of dollars, being dependent on foreign borrowing, or potentially facing a solvency crisis like Greece, and he has pledged $1 million of his own money to any of his Senate opponents on the ballot who can prove him wrong.

“Those concerns are due to pure fear mongering from supposed experts. They have no factual basis, and they have become the true obstacles to the return of full employment and prosperity” said Mosler, who added “and there is absolutely no financial reason to cut Social Security or Medicare benefits.”

Many have also argued that the nation’s growing debt rules out further tax reductions, but Mosler says those assertions are blatantly untrue, proposing a full payroll tax (FICA) holiday for employees and employers that will add over $300/mo to the take home pay of someone earning $50,000 a year. This plan and similar initiatives will reintroduce the capital the economy needs to prosper and grow.

“We lost over 8 million private sector jobs primarily for one reason- sales collapsed,” said Mosler. “My full payroll tax (FICA) holiday for employees and employers boosts take home pay and helps lower prices to quickly restore those lost sales which brings back the lost jobs, fixing the economy the right way, the American way, from the bottom up.”

In the midst of our social and economic calamity, with the Republican and Democratic candidates offering no viable plans to restore full employment, Mosler, an expert in monetary operations, is uniquely qualified to quickly move America back to full employment and prosperity. He knows the American economy works best when people working for a living have enough take home pay to buy the goods and services they produce, with business competing for those consumer dollars.

Mosler congratulated candidates McMahon and Blumenthal on their convention victories, and looks forward to public debate on the urgent economic issues facing our nation and the world.

“We have seen Republicans and Democrats overseeing the devastatingly tragic loss of over 8 million jobs. And while lower income people working for a living struggle to survive, elites who contributed to our problems rake in billions from bailouts,” said Mosler. “It’s time the government focuses on getting its hand out of the pocket of the hard working Americans who make this country great.”

See www.moslerforsenate.com for details of Mosler’s ‘Right on the Money’ proposals and his $1 Million Challenge.