Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

Barry Armstrong Show

Bank liquidity is something like wheels on a car.
Without wheels the car won’t function, but neither are wheels alone enough to make it go.

Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.

In the US the unlimited liquidity provision comes mainly via FDIC insured deposits, supplemented by funding from the Fed. The Fed is the liquidity provider of last resort for its member banks, while at the same time it uses the banking system’s cost of funds as its instrument of monetary policy.

The euro zone hasn’t figured this out yet.
The liquidity provider of last resort is the ECB, as it’s the ‘issuer of the currency’, and as such not itself liquidity constrained. The member nations are like the US states, and are necessarily liquidity constrained, and therefore not ‘empowered’ to be liquidity providers of last resort to their member banks.

So in that sense, as the bank funding by the ECB grows, it’s all gravitating towards what all other nations have in place. The problem is the euro zone leaders don’t understand that aspect of banking, as evidenced by the way they are resisting the shift to ECB funding, and, in fact, working towards moving banks away from ECB funding.

Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

By Jana Randow and Simone Meier

Jan 28 (Bloomberg) — “Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” ECB President Mario Draghi told Davos. “There is a lag. We will have to see.” “We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.” “If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros, which is exactly the amount of bank bonds that were to come due in this period of time,” he said.

Why Won’t The Fed Tell Congress the Truth About Our Debt?

By Warren Mosler

But with operation twist, the Fed actually buys the longer term securities vs just talking about them, as it also lightens up on the shorter term securities.

So after the current knee jerk reaction to tweet I’m looking at the ramifications of twist to dominate.

The Fed Is Misleading Congress About Europe – US Business News Blog – CNBC

By Warren Mosler

The Fed is Starving Economy of Interest Income

By Warren Mosler

He left out the part about needing a fiscal adjustment to compensate but this is part one of a three part presentation of something I wrote.

Preface. I generally subscribe to the view that in free currencies, deficits are mostly self-funding, and ‘enormous’ deficits needn’t be accompanied by higher yields. Government builds a bridge, pays the bridgebuilder, who pays the grocer, who eventually either buys the Treasury or deposits in a bank whose reserves are fungible vs T-bills via the intermediating Fed. Government dissavings and private sector savings are equal and offsetting, as long as the Central Bank has a working spreadsheet and an interest rate target. Yields are just a function of duration needs of savers vs borrowers, but the AMOUNTS always match up. Likewise, I don’t believe that the creation of bank reserves is inflationary or hyper-inflationary; bank lending is capital – not reserve – constrained. Loan officers don’t check the vaults. There is always enough. I continue to marvel at the armies of deficit vigilantes who take aim at Treasuries and JGBs, armed with Gold Standard thinking or even the latest Reinhart/Rogoff, only to retreat 2-3 year later. It didn’t work shorting US Treasuries in 2009-2010 for the ‘money supply’ or ‘deficit spike,’ and that roadside is stacked with corpses. Even the Home Run deficit vigilante hitters who nailed Europe this year (and Europe is, for now, operating as a quasi-Gold standard and an entirely different set of risks) offset those gains with losses betting the other way on the US, UK, and Japan. It’s evident in the returns.

Central Banks ‘Printing Money Like Gangbusters’: Gross

By Margo D. Beller

Jan 11 (CNBC) — The world’s central banks are “printing money like gangbusters,” which could revive the threat of inflation , Pimco founder Bill Gross told CNBC Wednesday.

By putting “hundreds of billions” in currency in circulation, the central banks “can produce reflation—that’s why we’re seeing the pop in oil, gold” and other commodities, he said in a live interview.

At the same time, “there’s the potential for deflation if the private credit markets can’t produce some sort of confidence and solvency going forward,” Gross said. “So we’re at great risk here, not only in the U.S. but on a global basis.”

Gross has previously predicted a “paranormal” market in 2012 characterized by “credit and zero-bound interest rate risk” and fewer incentives for lenders to extend credit.

He said stock and bond investors must lower their expectations when it comes to returns, with 2 percent to 5 percent as good as they get this year.

He also told CNBC he expects the Federal Reserve will keep interest rates “exactly where it is at 25 basis points for the next three to four years.”

Gross’s Total Return Fund, the world’s largest bond fund, had over $10 billion in outflows in 2011, but Gross stressed the fund “started 2011 at $240 billion and ended it at $244 billion.”

He said he will run the Pimco Total Return Fund ETF , which starts March 1, the same way he runs the bond Total Return Fund, adding, “They’re twins.”