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Archive for the 'Fed' Category

Connecting the Fed’s dots

Posted by WARREN MOSLER on 22nd September 2014

Hiking in March?

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Credit growth still flattening

Posted by WARREN MOSLER on 22nd September 2014

So much for all the talk about the Fed needing to hike rates because credit growth was accelerating and all that.

(Not to mention hiking rates would in fact speed it up, but that’s another story…)

Posted in Credit, Fed | No Comments »

Fed preview

Posted by WARREN MOSLER on 22nd September 2014

The Fed’s mandates are full employment, price stability, and low long term rates. And along with who knows what, he has to be seeing these charts:

New jobs down for the winter, up some, then back down for several months:

Not forget purchase mortgage applications are down 12% vs last year, and now cash purchases are down as well, as housing contributes less than half of what’s it’s contributed in prior cycles.

And the rest of the world economy is decelerating as well.

Posted in Credit, Employment, Fed | No Comments »

Car sales strong! Beige book soft

Posted by WARREN MOSLER on 4th September 2014

U.S. Light Vehicle Sales increase to 17.45 million annual rate in August, Highest since Jan 2006

By Bill McBride

Based on an WardsAuto estimate, light vehicle sales were at a 17.45 million SAAR in August. That is up 10% from August 2013, and up 6.4% from the 16.4 million annual sales rate last month.

This was well above the consensus forecast of 16.5 million SAAR (seasonally adjusted annual rate).

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Fed’s Beige book soft:

Fed’s Beige Book: Economic Activity Expanded, No “distinct shift in the overall pace of growth”

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Comments on Professor John Cochrane’s – A Few Things the Fed Has Done Right

Posted by WARREN MOSLER on 28th August 2014

A Few Things the Fed Has Done Right

The Fed’s plan to maintain a large balance sheet and pay interest on bank reserves is good for financial stability.

By John H. Cochrane

Aug 21 (WSJ) — As Federal Reserve officials lay the groundwork for raising interest rates, they are doing a few things right. They need a little cheering, and a bit more courage of their convictions.

The Fed now has a huge balance sheet. It owns about $4 trillion of Treasury bonds and mortgage-backed securities. It owes about $2.7 trillion of reserves (accounts banks have at the Fed), and $1.3 trillion of currency. When it is time to raise interest rates, the Fed will simply raise the interest it pays on reserves. It does not need to soak up those trillions of dollars of reserves by selling trillions of dollars of assets.


The Fed’s plan to maintain a large balance sheet and pay interest on bank reserves, begun under former Chairman Ben Bernanke and continued under current Chair Janet Yellen, is highly desirable for a number of reasons—the most important of which is financial stability. Short version: Banks holding lots of reserves don’t go under.

Not true.
Confusing reserves with capital to some extent.
Banks can fail via losses that wipe out capital even with plenty of liquidity.

This policy is new and controversial. However, many arguments against it are based on fallacies. People forget that when the Fed creates a dollar of reserves, it buys a dollar of Treasurys or government-guaranteed mortgage-backed securities. A bank gives the Fed a $1 Treasury, the Fed flips a switch and increases the bank’s reserve account by $1. From this simple fact, it follows that:

• Reserves that pay market interest are not inflationary. Period. Now that banks have trillions more reserves than they need to satisfy regulations or service their deposits, banks don’t care if they hold another dollar of interest-paying reserves or another dollar of Treasurys. They are perfect substitutes at the margin. Exchanging red M&Ms for green M&Ms does not help your diet. Commenters have seen the astonishing rise in reserves—from $50 billion in 2007 to $2.7 trillion today—and warned of hyperinflation to come. This is simply wrong as long as reserves pay market interest.

Yes and no.

Yes, the mix of Fed liabilities per se isn’t inflationary.

No, even if they didn’t pay interest it wouldn’t be inflationary. In fact, it would mean a reduction in govt interest payments which is a contractionary bias.

And his point is best stated by stating that both reserves and tsy secs are simply dollar denominated ‘bank accounts’ at the Fed, the difference being the duration and rates, directly or indirectly selected by ‘govt’.

• Large reserves also aren’t deflationary. Reserves are not “soaking up money that could be lent.” The Fed is not “paying banks not to lend out the money” and therefore “starving the economy of investment.”


Every dollar invested in reserves is a dollar that used to be invested in a Treasury bill.

Wrong statement of support. He should state that the causation goes from loans to deposits. ‘Loanable funds’ applies to fixed fx, not floating fx.

A large Fed balance sheet has no effect on funds available for investment.

True, they are infinite in any case. Bank lending is constrained only in the short term by capital, as there is always infinite capital available with time at a price that gets reflected in lending charges.

• The Fed is not “subsidizing banks” by paying interest on reserves.

It is to the extent that paying interest is subsidizing the economy in general, as govt is a net payer of interest.

The interest that the Fed will pay on reserves will come from the interest it receives on its Treasury securities.

Sort of. Better said that the interest received on the tsy’s will equal/exceed/etc. the interest paid on reserves. ‘Come from’ is a poor choice of words.

If the Fed sold its government securities to banks, those banks would be getting the same interest directly from the Treasury.


The Fed has started a “reverse repurchase” program that will allow nonbank financial institutions effectively to have interest-paying reserves. This program was instituted to allow higher interest rates to spread more quickly through the economy.


Again, I see a larger benefit in financial stability. The demand for safe, interest-paying money expressed so far in overnight repurchase agreements, short-term commercial paper, auction-rate securities and other vehicles that exploded in the financial crisis can all be met by interest-paying reserves.

Sort of. The term structure of rates constantly adjusts to indifference levels is how I’d say it.

Encouraging this switch is the keystone to avoiding another crisis. The Treasury should also offer fixed-value floating-rate electronically transferable debt.

Why??? Indexed to what? The one’s they are doing indexed to T bills make no logical sense at all.

This Fed reverse-repo program spawns many unfounded fears, even at the Fed. The July minutes of the Federal Open Market Committee revealed participants worried that “in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations.”

This fear forgets basic accounting.


The Fed controls the quantity of reserves. Reserves can only expand if the Fed chooses to buy assets—which is exactly what the Fed does in financial crises.

Furthermore, this fear forgets that investors who want the safety of Treasurys can buy them directly. Or they can put money in banks that in turn can hold reserves. The existence of the Fed’s program has minuscule effects on investors’ options in a crisis. Interest-paying reserves are just a money-market fund 100% invested in Treasurys with a great electronic payment mechanism.

Available to banks.

That’s exactly what we should encourage for financial stability.

The Open Market Committee minutes also said that, “Participants noted that a relatively large [repurchase] facility had the potential to expand the Federal Reserve’s role in financial intermediation and reshape the financial industry.”

Not really.

It always has been about offsetting operating factors one functionally identical way or another.

Yes, and that’s a feature not a bug. The financial industry failed and the Fed is reshaping it under the 2010 Dodd-Frank financial-reform law. Allowing money previously invested in run-prone shadow banking to be invested in 100%-safe reserves is the best thing the Fed could do to reshape the industry.

They can only do that if they reduce the institutional additions to the bank’s cost of funds/lower risk restrictions to make the banks more competitive with non bank lenders.

Temptations remain. For example, with trillions of reserves in excess of regulatory reserve requirements, the Fed loses what was left of its control over bank lending and deposit creation. The Fed will be tempted to use direct regulation and capital ratios to try to micromanage lending.

That’s all it ever had. Lending was never reserve constrained.

It should not. The big balance sheet is a temptation for the Fed to buy all sorts of assets other than short-term Treasurys, and to meddle in many markets, as it is already supporting the mortgage market. It should not.

I see precious little difference apart from option vol considerations.

The Fed is making no promises about the stability of these arrangements—a large balance sheet and market interest on reserves available to non-banks. It should. In particular, it should clarify whether it will allow its balance sheet to shrink as long-term assets run off, or reinvest the proceeds as I would prefer.

It doesn’t matter for what he’s talking about.

Most of the financial stability benefits only occur if these arrangements are permanent and market participants know it. We can debate whether interest rate policy should follow rules or discretion, be predictable or adapt to each day’s Fed desire. But the basic structures and institutions of monetary policy should be firm rules.

The remaining short-term question is when to raise rates. Ms. Yellen has already made an important decision: The Fed will not, for now, use interest-rate policy for “macroprudential” tinkering. This too is wise. We learned in the last crisis that the Fed is only composed of smart human beings. They are not clairvoyant and cannot tell a “bubble” from a boom in real time any better than the banks and hedge funds betting their own money on the difference. Manipulating interest rates to stabilize inflation is hard enough. Stabilizing inflation and unemployment is harder still.

Especially when they have it backwards.

Additionally chasing will-o-wisp “bubbles,” “imbalances” and “crowded trades” will only lead to greater macroeconomic and financial instability.

Here too a firm commitment would help. Otherwise market participants will be constantly looking over their shoulders for the Fed to start meddling in home and asset prices.

Plenty of uncertainties, challenges and temptations remain. Tomorrow, we can go back to investigating, arguing and complaining. Today let’s cheer a few big things done right.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.

Doesn’t mention/forgets that the Fed buying secs is functionally identical to the tsy not selling them in the first place, etc.

Posted in Banking, Fed | No Comments »

Fed policy comment

Posted by WARREN MOSLER on 18th August 2014

So the theme is ‘the Fed is getting behind the curve’

That is, Yellen keeps rates ‘too low’ causing the economy to overheat.

Complete nonsense, of course, but it drives markets until it doesn’t.

Much like QE.

The 0 rate policy, including QE, remains no way supportive of growth and employment, but instead deflationary and contractionary, as evidenced by the anemic private sector credit expansion, low income growth, and ‘low inflation’. And the gaping output gap…

Posted in Fed, Interest Rates | No Comments »

Consumer spending, personal income, PCE prices

Posted by WARREN MOSLER on 26th June 2014

The Commerce Department said consumer spending increased 0.2 percent after being flat in April. Spending, which accounts for more than two-thirds of U.S. economic activity, had been forecast rising 0.4 percent after a previously reported 0.1 percent dip in April.

When adjusted for inflation, consumer spending fell for a second straight month, suggesting spending this quarter could struggle to regain momentum after growing at its slowest pace in nearly five years in the first quarter.

Spending in May was probably constrained by weak healthcare spending as outlays on services barely rose for a second month.

While reports ranging from employment to manufacturing and the services industries suggest the economy has rebounded after sinking in the January-March period, the consumer spending data indicated that growth would probably fall short of the 4.0 percent annual pace that some economists are expecting in the second quarter.

Personal Income and Outlays

From Calculated Risk

Real PCE — PCE adjusted to remove price changes — decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April. … The price index for PCE increased 0.2 percent in May, the same increase as in April. The PCE price index, excluding food and energy, increased 0.2 percent in May, the same increase as in April. … The May price index for PCE increased 1.8 percent from May a year ago. The May PCE price index, excluding food and energy, increased 1.5 percent from May a year ago.

Note: Usually the two-month and mid-month methods can be used to estimate PCE growth for the quarter (using the first two months and mid-month of the quarter). However this isn’t very effective if there was an “event”, and in Q1 PCE was especially weak in January and February – and then surged in March.

Still, using the two-month method to estimate Q2 PCE growth, PCE was increasing at a 2.3% annual rate in Q2 2014 (using the mid-month method, PCE was increasing less than 1.5%). Since the comparison to March will be difficult, it appears PCE growth will be below 2% in Q2 (another weak quarter).

Note the now familiar down into winter, up some, and then settling down again pattern:

Posted in Fed, Uncategorized | No Comments »

charts and comments GDP, durables, mtg apps, etc.

Posted by WARREN MOSLER on 25th June 2014

>   On Wed, Jun 25, 2014 at 8:52 AM, Sheraz wrote:
>   Very weak US numbers

And not one ‘nice call’ email!!!

And yesterday’s stock market action suggests a possible data leak???

US 1Q GDP has been revised lower by far than expected. After having initially been reported as a 0.1% rise, then a 1% contraction, the third release shows that GDP growth is now reported as -2.9 QoQ% annualised, which leaves annual growth at just 1.5%YoY.

The consensus expectation was for a -1.8% reading. The damage was largely done through the private consumption component, which is now reported as rising just 1% versus 3.1% previously.

Also ‘smoothing’ from numbers that looked high to me in H2 and an adjustment to ACA related healthcare expenses previously booked as PCE:

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Gross private investment remained an 11.7% contraction

Maybe after a Q4 surge due to expiring tax credits?

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while government consumption was left at -0.8%. However, exports were revised down and imports revised up meaning that the contribution from net trade is to subtract 1.5% from GDP growth rather than 0.95% as previously announced.

Reversing a similar, prior blip up, as previously discussed:

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Nonetheless, reaction should be fairly muted given widespread expectations of a sharp bounceback in 2Q14 and the fact that the weather had such a damaging impact on 1Q activity. Indeed, we suspect that we could see GDP rise by more than 5% annualised in 2Q.

And if so, H1 would be +1% :(

High frequency numbers for the quarter have looked good while inventories should also make a significantly positive contribution after having been run down sharply.

After having been run up in H2. We’ll see where they go from here.

And, as previously discussed after the jump up in Q3, inventory accumulation seldom leads a boom:

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Mortgage purchase apps still dismal:

According to the MBA, the unadjusted purchase index is down about 18% from a year ago.

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And May durables not so good either:

Durables orders were much weaker than expected for May. Durables orders fell 1.0 percent in May after rising 0.8 percent in April. Analysts forecast 0.4 percent. Excluding transportation, orders slipped 0.1 percent, following a 0.4 percent gain in April. Market expectations were for 0.3 percent.

Transportation fell 3.0 percent after a 1.7 percent rise in April. The latest dip was from weakness in nondefense aircraft. Motor vehicles and defense aircraft orders rose.

Outside of transportation, gains were seen in primary metals, fabricated metals, and “other.” Declines were posted for machinery, computers & electronics, and electrical equipment.

On a positive note, there was improvement in equipment investment. Nondefense capital goods orders excluding aircraft rebounded 0.7 percent in May after decreasing 1.1 percent the month before. Shipments of this series rebounded 0.4 percent after a 0.4 percent dip in April.

The good news is this series is muddling along ok:

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The latest durables report is in contrast to recently positive regional manufacturing surveys and also the sharp jump in manufacturing production worker hours of 0.8 percent for May. But durables data are very volatile and we likely need a couple of more months of data before taking a negative tone on this sector.

The next leg to fall may be employment, as the 1.2 million people who lost long term benefits at year end may have been taking menial jobs at the rate of maybe 75,000/month or more for 6 months or so, which may have front loaded the monthly jobs numbers. If so, monthly job gains may fall into the 100,000 range soon.

So in general it was down for the winter, back up some, and we’ll see what happens next.

The ‘survey’ numbers and professional forecasts look promising, however it still looks to me like we are under the macro constraint of a too low govt deficit that’s struggling to keep up with the unspent income/demand leakages, with scant evidence of help from growth in private credit expansion.

And I tend to agree with Fed Chair Yellen here, which would tend to keep rates lower/longer if she gets her way. However I don’t agree that low rates somehow support aggregate demand, so I don’t see the likelihood of any call from the Fed or other forecasters for the fiscal relaxation I’ve been proposing.

Yellen may be poised to rewrite Fed’s rule book on wages, inflation

June 25 (Reuters) — “My own expectation is that, as the labor market begins to tighten, we will see wage growth pick up some to the point where … nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take home pay,” Federal Reserve Chair Janet Yellen said last week, adding: “If we were to fail to see that, frankly, I would worry about downside risk to consumer spending.” Over the last year Fed staff changed their main model for forecasting wage and price inflation to reflect evidence that companies were adjusting prices more slowly than in prior years.

My immediate proposals remain 1) A full FICA suspension, which raises take home pay by 7.6%, and, for businesses that are competitive, lowers prices as well, restoring sales/output/employment in short order 2) A $10/hr federally funded transition job for anyone willing and able to work to promote the transition from unemployment to private sector employment 3) A permanent 0 rate policy with Tsy issuance limited to 3 mo bills. 4) Unrestricted campaign contributions, however, say, 40% of any contribution goes to the opposition…

Posted in Employment, Fed, GDP, Government Spending, Political | No Comments »

May business borrowing and confidence drops, and other charts from recent releases

Posted by WARREN MOSLER on 24th June 2014

U.S. business borrowing for equipment falls 8 percent in May: ELFA

By Abinaya Vijayaraghavan

June 23 (Reuters) — U.S. companies’ borrowing to spend on capital investment fell in May, the Equipment Leasing and Finance Association (ELFA) said.

Companies signed up for $6.9 billion in new loans, leases and lines of credit last month, down 8 percent from a year earlier. Their borrowing fell 14 percent from April.

“The small decline in new business volume makes the case for a slow recovery in certain sectors of the economy in which equipment financing plays an important role,” ELFA Chief Executive William Sutton said in a statement.

Washington-based ELFA, a trade association that reports economic activity for the $827 billion equipment finance sector, said credit approvals totaled 76.1 percent in May, down from 77.4 percent in April.

ELFA’s leasing and finance index measures the volume of commercial equipment financed in the United States. It is designed to complement the U.S. Commerce Department’s durable goods orders report, which it typically precedes by a day.

ELFA’s index is based on a survey of 25 members that include Bank of America Corp(BAC.N), BB&T Corp (BBT.N), CIT Group Inc (CIT.N) and the financing affiliates or subsidiaries of Caterpillar Inc (CAT.N), Deere & Co (DE.N), Verizon Communications Inc(VZ.N), Siemens AG (SIEGn.DE), Canon Inc (7751.T) and Volvo AB (VOLVb.ST).

The Equipment Leasing & Finance Foundation, ELFA’s non-profit affiliate, said its confidence index fell to 61.4 in June from 65.4 in May.

A reading of above 50 indicates a positive outlook.

More evidence home price increases have slowed, as ‘liquidation supply shock’ that began in 2009 winds down:

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Also this morning the Census Bureau reported that new home sales were at a seasonally adjusted annual rate (SAAR) of 504 thousand in May. That is the highest level since May 2008. As usual, I don’t read too much into any one report. In fact, through May this year, sales were 196,000, Not seasonally adjusted (NSA) – only up 2% compared to the same period in 2013 – not much of an increase.

Richmond Fed Manufacturing Index

Activity may be slowing this month in the Richmond Fed’s manufacturing district but not new orders. The headline index slowed 4 points to a reading of 3 with shipments and employment both slowing significantly. But the pace of new orders actually improved slightly, up 1 point to 4. The Richmond Fed has been showing less of a post-winter bounce than other regional reports, especially Empire State and Philly Fed.

New home sales up more than expected, but the 3 month average looks tame and in any case if they continue to drift higher at this the pace of the last couple of years it will only take another 15 or 20 years or so to get back to prior cycle levels. When we had a lot fewer people. And, like last month, revised down, it will be revised next month:

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Redbook Sales monthly Y/Y:

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Posted in Fed, Housing | No Comments »

radio interview on fed

Posted by WARREN MOSLER on 20th June 2014

Warren Mosler on the Fed

Posted in Fed, Radio | No Comments »

QE is a Tax

Posted by WARREN MOSLER on 2nd May 2014

QE is a Tax

By Chris Mayer

May 2 — QE is a tax.

That’s an odd thing to say about the Fed’s bond-buying stimulus program, known as quantitative easing, or QE. But the reality of QE is different than what most people think…

To talk about this, I sought out Warren Mosler, a former hedge fund manager and now trailblazing economist. (I first introduced Mosler to you in your February letter, No. 120. See “How Fiat Money Works.”) So on one Sunday afternoon, with Mosler in Italy and me in Gaithersburg, Md., we chatted on Skype about the Fed and its doings.

Mosler was also a successful banker, and he talks about this stuff with the ease that comes from deep familiarity with the plumbing of the system. The U.S. system, importantly, is one of floating exchange rates and a nonconvertible currency. Meaning the government does not fix the price of the dollar against anything (contra what is done in Hong Kong, where they peg their currency to the dollar). And it is not convertible into anything except itself. (You can’t present your dollars to the Fed and demand gold, for instance.)

With those parameters, we started with a simple question: What would the natural rate of interest be if the government didn’t try to interfere in the interest rate market? (“Natural rate” in this context means the risk-free, nominal rate of interest.)

“In some sense, QE is undoing what the Treasury has done.”

Well, before we can answer that, think about the ways the government interferes in the interest rate market. There are two ways, Mosler points out. The first is that the government pays interest on bank reserves, which are essentially checking accounts held at the Fed. Currently, that rate is 25 basis points, or 0.25%.

The second is to offer “alternative accounts at the Fed called Treasury securities.” These are essentially savings accounts and pay higher interest than the checking accounts (or reserve accounts).

“If we eliminated these things, there would no interest paid on reserves, and there would be no securities,” Mosler says. “So the natural rate of interest would be zero.” Like in Japan for 20 years.

Note this doesn’t mean there would be no interest rates. It means absent these interventions, the market would determine interest rates based on credit risk, etc. But there would be no floor — no risk-free rate, no natural rate — put in place by the government.

“Not that you should do it that way,” Mosler says, “but that’s the way to look at it. The base case is zero. Then the Treasury comes in and offers $17 trillion in securities. And that’s a distortion, to some degree. If the Fed did QE and bought them all back, it would put you back to where you started. In some sense, QE is undoing what the Treasury has done.” When the Fed buys securities, it is as if the Treasury never issued them in the first place.

Or as Mosler puts it in a tidy, eight-page paper (more on that in a bit):

It can be argued that asset pricing under a zero interest rate policy is the “base case” and that any move away from a zero interest rate policy constitutes a (politically implemented) shift from this “base case.”

In other words, the government doesn’t have to pay 3% on a 10-year note, as it does today. It doesn’t have to issue bonds at all. It creates dollar deposits (money) in member bank reserve accounts when it spends. By issuing securities/offering alternative interest-bearing accounts, the government pays a lot of interest to the economy.

“So in that sense,” Mosler says, “issuing securities means paying higher rates than the overnight rate. It is a spending increase and has an inflationary bias by adding net financial assets to the system.”

The mainstream view says that when the government sells Treasury securities, it is taking money out of the system, that it’s a deflationary thing to do and it offsets the inflationary effect of deficit spending. “Not true at all,” Mosler says. “Selling Treasuries does not take money out.” What’s happening is akin to a shuffle between checking accounts and savings accounts.

Let’s turn back to the case of QE, where the Fed buys securities. In this case, the economy loses the interest income from those securities.

“QE takes money out of the economy,” Mosler says, “which is what a tax does.” Hence, as noted above, QE is a tax.

“The whole point of QE is to bring rates down,” Mosler says. “If it does bring rates down, that means the rest of the securities the Treasury sells pay less interest too. So it lowers government interest expense even more. Because the government is a net payer of interest, lower rates mean it pays less interest.”

But does it help the economy? Hard to see how it does. Mosler has an interesting take here. I’ll paraphrase as best I can.

Let’s say people ask why the Fed is buying securities. Well, to help the economy. So now people have to think about whether that policy will work or not. If it’s going to work, that means the Fed’s going to be raising rates, because the economy will be getting stronger. The only time QE will bring rates down is if investors think the policy won’t work. It’s a policy that works through expectations, and it works only if investors think it won’t work.

“It’s a disgrace,” he says.

“On top of that, most investors don’t understand it,” Mosler says. “You’ve got the Chinese reading about how the Fed is printing money. And they go and buy gold. There are knock-on effects all over the world, and portfolios are shifting based on perceptions.”

QE, then, because it costs the private sector interest income and doesn’t add money to the economy, is not inflationary. “The evidence is that it is not inflationary,” Mosler says.

Let’s look at it another way. The bank of Japan has been trying to create inflation for 20 years. The Fed’s been trying to create inflation as hard as it can. The European Central Bank too. “It is not so easy for a central bank to create inflation,” he says, “or you’d think one of these guys would’ve succeeded.

“People act like you have to be careful because one false move on inflation expectations and, bang, you have hyperinflation,” Mosler chuckles. “If you know what that false move is, tell Janet Yellen [the current Fed chief], because she’s trying to find it.”

Though he no longer runs a hedge fund, Mosler is still involved in financial markets. He has a portfolio he runs for himself and for other people. I asked him if he fears interest rates going up.

“It could happen,” he says. “It’s a political decision where rates go.”

And that’s a good place to leave it. Because it brings us back to the beginning. Without the government wading into the interest rate market, the base rate would be zero. And everybody would be working off that. But instead, we have the Fed trying to find monetary nirvana.

As Mosler says, it’s a disgrace.

These are challenging ideas, I know. If you want to read more, look up “The Natural Rate of Interest is Zero,” a tightly reasoned, accessible eight-page paper by Mathew Forstater and Warren Mosler. You can find it free online.

Posted in Fed | No Comments »

Comments on Martin Wolf’s banking article

Posted by WARREN MOSLER on 25th April 2014

Strip private banks of their power to create money

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

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

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

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

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

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

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

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

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

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

OK, so?

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

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

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

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

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

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

It is also why banking is heavily regulated.

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

Yet credit cycles are still hugely destabilising.

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

What is to be done?

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

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

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

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

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

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

Yes, a fixed fx/gold standard proposal.

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

Reserves back then were ‘real’ gold certificates.

The floating fx equiv would be 100% capital requirement.

Fisher argued that this would greatly reduce business cycles,

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

end bank runs

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

and drastically reduce public debt.

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

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

No comment…

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

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

Here is the outline of the latter system.

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

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

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

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

Customers would own the money in transaction accounts,

They already do

and would pay the banks a fee for managing them.


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

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

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

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

As above.

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

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

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

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

in place of taxes or borrowing;

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

to make direct payments to citizens;

Same thing- net fiscal expenditure

to redeem outstanding debts, public or private;


or to make new loans through banks or other intermediaries.

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

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

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

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

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

Deficit spending does that.

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

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

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

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

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

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

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

And exactly as it is today in any case

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

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

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

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

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

The process is already strictly limited by regulation and supervision

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

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

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

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

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

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


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

Existing home sales

Posted by WARREN MOSLER on 22nd April 2014

Recalls my suspicion of the Bernanke legacy- “just as the recovery was gaining traction he let mtg rates rise and cratered the housing market, etc.”

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Existing Home Sales

Sales of existing homes have yet to recover from the Federal Reserve’s decision, way back last year, to begin withdrawing stimulus. For the seventh time in eight month, sales of existing homes contracted, at minus -0.2 percent in March to a slightly lower-than-expected annual rate of 4.59 million. Year-on-year, sales are down 7.5 percent which is the steepest rate of contraction since May 2011.

Unattractive mortgage rates are only one reason for the sales weakness. Another is high prices which, in stark contrast to the contraction in sales, are up, not down, 7.9 percent year-on-year. The median price soared in March, up 5.4 percent to $198,000.

Low supply is another reason for the sales trouble, though the weakness in sales during March did lift supply relative to sales slightly, at 5.2 months vs 5.0 months in February.

Regional data show March weakness in the South and West and monthly strength in the Northeast and Midwest. Year-on-year, all four regions show declines.

The housing sector remains the weak link in the economy and the weather isn’t to blame, at least not in March. The Dow is showing little initial reaction to today’s results.

Posted in Fed, Housing | No Comments »

Empire State Manufacturing Survey

Posted by WARREN MOSLER on 15th April 2014

Another non bounce, this time an April survey:

Empire State Mfg Survey

The first look at the manufacturing sector this month is flat with the Empire State index barely over zero, at 1.29 vs 5.61 in March and 4.48 in February. New orders, the most important of all readings, is in the negative column at minus 2.77. Shipments show some growth, at plus 3.15, while employment shows better growth, at 8.16 vs March’s 5.88. On the negative side are unfilled orders, at minus 13.27. Inventories show a draw while price data do show some upward pressure. A positive is a more than 5 point uptick in the 6-month outlook to a very solid 38.23. This report, held back by the dip in new orders, is no better than mixed suggesting that the beginning of the spring, at least in the New York manufacturing economy, didn’t make for much of a bounce.

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Posted in Employment, Fed | No Comments »

Yellen on wages

Posted by WARREN MOSLER on 20th March 2014

When asked about the growth in hourly wages:

Most measures of wage increases are running at very low levels. Wage inflation closer to 3% or 4% would be expected given some measures, such as productivity growth. But right now it is certainly not flashing. An increase in it might signal some tightening or meaningful increase over time. I would say were not seeing that.

It’s well publicized that real wages have been lagging for maybe 40 years, as profits hit an all time high of about 11% of GDP. So as a point of logic the only way wages can stop the slide is if they grow faster than GDP grows, which leads to the ‘where the productivity growth has been going’ discussion, etc. Furthermore, in today’s economy the distribution is largely and necessarily a result of an impossibly ‘complex’, global, institutional structure rather than ‘free market forces’.

Add to that the Fed only has ‘one lever’ which is interest rates, and they all believe that lowering rates is ‘easing’, and that GDP growth promotes wage grow. So it could be that hourly wage growth of 2% that looks like it’s heading to prior highs of around 4% per se might not be all that strong a factor for quite a while in their reaction function?

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Posted in Fed | No Comments »

proactive fiscal tightening damages income growth

Posted by WARREN MOSLER on 10th March 2014

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Mind the gap:

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This is below prior recession levels!

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

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

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

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

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

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

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

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

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

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

Personal interest income

Posted by WARREN MOSLER on 7th March 2014

Net personal interest income not yet growing as during prior cycles.

Doesn’t happen until after the Fed hikes…

Interest income

Personal interest payments

Posted in Fed | No Comments »

Fed Adopts Foreign-Bank Capital Rules as World Finance Fragments

Posted by WARREN MOSLER on 24th February 2014

Beats me why the Fed should care if foreign banks have any capital if the Fed isn’t insuring their deposits or other liabilities?

Seems if they want to lend their money to people who can’t pay it back it’s their problem???

Fed Adopts Foreign-Bank Rule as World Finance Fragments

By Yalman Onaran

November 1 (Bloomberg) — The Federal Reserve approved new standards for foreign banks that will require the biggest to hold more capital in the U.S., joining other countries in erecting walls around domestic financial systems.

Banks with $50 billion of assets in the U.S. will have to meet the standard under a revised rule approved yesterday, which raised the threshold from $10 billion proposed in 2012. The central bank left out two controversial elements of the original proposal, saying those were still being developed.

Walling off U.S. units of foreign banks, designed to protect taxpayers from having to bail them out in a crisis, may increase borrowing costs for those companies and hurt their profitability. The firms say it will also raise borrowing rates for governments and consumers.

Posted in Banking, Fed | No Comments »

existing home sales chart, real final sales chart (pre weather)

Posted by WARREN MOSLER on 21st February 2014

Yes, the Fed doesn’t like QE and wants to taper, but seems to me they don’t want mortgage rates this high either. They know the only way the market will ‘bring down rates’ is if the economic weakness persists. And they suspect it very well may persist unless rates come down.

Their remaining option is TIRT (term interest rate targeting) which has yet to be discussed.

Existing Home Sales

It’s more than just weather that’s clobbering the housing market. High prices and tight inventory aren’t helping either as existing home sales fell 5.1 percent in January to a 4.620 million annual rate. The year-on-year rate is also at minus 5.1 percent, a sharp contrast to the year-on-year median price which is up 10.7 percent.

Supply of homes relative to sales did rise to 4.9 months from 4.6 months but the improvement is tied mostly to the drop in sales. Prices did come down in the month but from already high levels with the median price down 4.5 percent to $188,900.

Weather was especially cold in January and no doubt contributed to the sales weakness, especially in the Midwest, where sales fell 7.1 percent in the month, and also the Northeast where the decline was 3.1 percent. But weather in California wasn’t a problem, yet sales in the West fell 7.3 percent which the National Association of Realtors points to as evidence of non-weather constraints.

Unattractive mortgage rates are another factor holding down sales. All cash buyers continue to hold up the market, accounting for 33 percent of all sales vs 32 percent in December. In contrast, first-time buyers, who are especially sensitive to the soft jobs market, continue to account for less sales, at 26 percent vs December’s 27 percent.

This is the 5th decline in the last 6 months for this series and lack of improvement in the jobs market, not to mention this month’s severe bout of heavy weather, point to more trouble for February. For the economy, the housing market needs to snap back sharply this spring. The Dow is showing little initial reaction to today’s report.

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Not exactly gang busters even before the weather reduced incomes.

And the bad weather it’s like hurricane sandy but without the insurance spending and federal relief spending.

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Posted in Fed, GDP, Housing, Interest Rates | No Comments »

Fed: “Why Is the Job-Finding Rate Still Low?”

Posted by WARREN MOSLER on 20th February 2014

Fed: “Why Is the Job-Finding Rate Still Low?”

We conclude that while matching efficiency has declined and remained low in virtually all industries, the most important factor in the low job-finding rate is the persistently low level of vacancies per unemployed.

Posted in Employment, Fed | No Comments »