Seems to me it must be a nation of counterfeiters for the UK govt from inception to get its funds from the people…

Not that the author isn’t also confused by the ‘money creation dynamics.’

It’s Official: There Is a Money Tree

“…Cameron echoed his predecessor Margaret Thatcher, who in October, 1983 told the Conservative Party conference that:

“the state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.

There is no such thing as public money. There is only taxpayers’ money”.

This idea that “there is no such thing as public money” was later foolishly echoed by Labour’s Treasury spokesperson, Liam Byrne. He left a note for his successor upon leaving the Treasury in 2010 which said: “I’m afraid there’s no money left.”

With friends like these who needs enemies…

“Thanks to the tenacity of the American people and the determination of the private sector we are moving in the right direction,” Treasury Secretary Jacob J. Lew said in the report. “The United States has recovered faster than any other advanced economy, and our deficit today is less than half of what it was when President Obama first took office.”

truly insulting!

The euro zone is at risk of snatching defeat from the jaws of victory by abandoning efforts to cut budget deficits and fix long-standing economic problems.

The growing perception that austerity has been futile is incorrect.

Fiscal consolidation is producing results, the pain is producing results

Euro-zone policy makers need to do a better job of communicating their successes to a weary population.

Early in 2013 my narrative was the tax hikes as well as the subsequent sequesters were likely to cause growth to slow to maybe a 2% rate from what might have otherwise been a 4% rate, with downside risk from there.

Take a look at the charts below and notice how these key elements of the economy seemed to ‘go sideways’ during 2013.

And, unfortunately, real disposable personal income took a hit as well and doesn’t look to me like it can support any kind of ‘bounce back’:

(the last yoy print is ‘exaggerated’ by the ‘outlier’ a year earlier, but the trend is clear to me)

[note from poster: apologize for format- should be amended shortly]

Real disposable income

Architecure billings index

Housing starts

MBA purchase applications

Vehicle sales

Retail Sales

It used to grow pre-Lehman at 810% a year, but now it only grows at 34%. Part of that growth is due to the government itself with recent deficit spending. A deficit of one trillion dollars in 20092010 equaled a 2% growth rate of credit by itself. But despite that, other borrowers such as households/businesses/local and foreign governments/financial institutions have been less than eager to pick up the slack. With the deficit now down to $600 billion or so, the Treasury is fading as a source of credit growth. Many consider that as a good thing but short term, the ability of the economy to expand and P/Es to grow is actually negatively impacted, unless the private sector steps up to the plate to borrow/invest/buy new houses, etc. Credit over the past 12 months has grown at a snails 3.5% pace, barely enough to sustain nominal GDP growth of the same amount.

Full text

Macroeconomic Populism Returns

By Paul Krugman

February 1 (NYT) — Matthew Yglesias says what needs to be said about Argentina: theres no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances.

Yes, unemployment- source of the greatest economic loss as well as a social tragedy and a crime against humanity, is always the evidence deficit spending is too low. There is no exception as a simple point of logic. The currency is a simple public monopoly, and the excess capacity we call unemployment- people looking to sell their labor in exchange for units of that currency- is necessarily a consequence of the monopolist restricting the supply of net financial assets.

I would add that we know what those circumstances are! Running deficits and printing lots of money are inflationary

Why the undefined ambiguous empty rhetoric?

and bad

What does ‘bad’ mean here? For example, there is no evidence that inflation rates at least up to 40% hurt real growth, and more likely help it. Politically, however, it may be ‘very bad’. But those are two different things.

in economies that are constrained by limited supply;

Limited supply of what? Labor? Hardly! In fact, full employment is even more critical, if that’s possible, when there are limited supplies of other resources. Wasn’t Rome built without electricity, oil, bulldozers, the IMF, etc. etc.? OK, it took more than a day, but it was built. There is always more to do than people to do it. Economically, unemployment is never appropriate policy.

they are good things when the problem is persistently inadequate demand.

Unemployment is the evidence of this ‘inadequate demand’ which is necessarily created by taxation, the ultimate source of all demand for a given currency. In fact, taxation functions first to create unemployment- people looking for work paid in that currency. That’s how govt provisions itself- it creates people looking for jobs with its taxation, then hires those unemployed its tax created. What sense does it make for govt to create more unemployed than it wants to hire??? Either hire the unemployed thus created, or lower the tax!!!!!!!!!!!!

Similarly, unemployment benefits probably lead to lower employment in a supply-constrained economy; they increase employment in a demand-constrained economy; and so on.

With more that needs to be done than there are people to do it, the economy isn’t supply constrained until full employment. And nominal unemployment benefits are about the level of prices, wages, and the distribution of income rather than the level of potential employment, etc.

So sometimes the relationship and money looks like this, from the best economics principles textbook:

This is more about ‘inflation’ causing ‘money’ as defined.

But sometimes it looks like this:

This is more about partially defining ‘money’ as reserve account balances at the Fed but not securities account balances (tsy secs) at the Fed.

And just to repeat a point Ive made many times, those of us who understood IS-LM predicted in advance that the actions of the Bernanke Fed wouldnt be inflationary, while the other side of the debate was screaming debasement.

It’s not about ISLM, which is fixed fx analysis. It’s about recognizing that there is always precious little difference between balances in reserve accounts at the Fed and securities accounts at the Fed.

There’s something else to be said about Argentina and, it seems, Turkey namely, that were seeing a mini-revival of what Rudi Dornbusch and Sebastian Edwards long ago called macroeconomic populism. This involves, you might say, making the symmetrical error to that of people who think that running deficits and printing money always turns you into Zimbabwe; its the belief that the orthodox rules never apply. And its an equally severe mistake.

Unfortunately most of the ‘orthodox rules’ apply to the fixed fx policies in place when they were first stated, and not to today’s floating fx.

Its not a common mistake these days; a few years ago one would have said that only Venezuela was making the old mistakes, and even now its just a handful of countries. But it is a mistake, and we need to say so.

Yes, mistakes are being made by all of the headline economists and the global economy is paying the price.

What a good economy should look like

Warren Mosler, from a talk in Chianciano, Italy, on January 11, 2014 entitled Oltre L’Euro: La Sinistra. La Crisi. L’Alternativa.

What a good economy should look like

I just want to say a quick word about what a good economy is because it’s been so long since we’ve had a good economy. You’ve got to be at least as old as I am to remember it. In a good economy business competes for people. There is a shortage of people to work for business. Everybody wants to hire you. They’ll train you, whatever it takes. They hire students before they get out of school. You can change jobs if you want to because other companies are always trying to hire you. That’s the way the economy is supposed to be but that’s all turned around. For one reason, which I’ll keep coming back to, the budget deficit is too small. As soon as they started tightening up on budget deficits many years ago, we transformed from a good economy where the people were the most important thing to what I call this ‘crime against humanity’ that we have today……

So what you do is you target full employment, because that’s the kind of economy everybody wants to live in. And the right size deficit is whatever deficit corresponds to full employment…

Just like any other agent, when they spend more than their income they are adding that much to growth, and as their deficits fall the are net adding that much less.

States Weigh New Plans for Revenue Windfalls

By Mark Peters

January 26 (WSJ) — Governors across the U.S. are proposing tax cuts, increases in school spending and college-tuition freezes. The strengthening in tax revenue started in late 2012 as higher-income residents in many states took increased capital gains among other steps to avoid rising federal tax rates on certain income. Those tax payments spilled over into 2013, and further fuel for collections came from a record stock market and improving economy. State tax revenue nationally climbed 6.7% in the fiscal year ended June 30, 2013, Moody’s Analytics says. Still, state spending last year remained below peak levels in 2008 when adjusted for inflation, while state reserves hit their highest level since the recession, reaching a total of $67 billion nationally, or 9.6% of state spending, according to a report last month from the National Association of State Budget Officers.

Back in November my forecast for 2013 was 4%, which at the time was by far the highest around. The govt was spending more than its income by about 6% of GDP, which was about $900 billion if I recall correctly. But then it cut back, first with the year end FICA hike along with other expiring tax cuts, and then with the sequesters that began in April.

Consequently, the govt spent only about $680 billion more than its income, which lowered growth by maybe 2%. And today mainstream economists are saying much the same- growth would have been maybe 2% higher without the ‘fiscal drag’ of the tax hikes and spending cuts.

So far our narratives are the same.

But here’s where they begin to differ.

They say the GDP/private sector would have grown by 4% if the fiscal drag hadn’t taken away 2%, and so without the govt again taking away 2%, the private sector will resume its ‘underlying’ 4% rate of growth.

I say the GDP/private sector would have grown by 4% that included the 6%/$900 billion net spending contribution by govt, if govt hadn’t cut back that contribution to $600 billion.

That is, they say the govt ‘took away’ from the ‘underlying’ 4% growth rate, and I say the govt ‘failed to add’ to the ‘underlying’ 2% growth rate that still included a 4% contribution by net govt spending.

And, in fact, I say that if the govt had cut its deficit another 4% to 0, GDP growth might have been -2% (multipliers aside for purposes of this discussion), which is the actual ‘underlying’ private sector growth rate. And that’s due to the ‘unspent income’ of some agents not being sufficiently offset by other agents ‘spending more than their income’.

Furthermore, I say that unless the ‘borrowing to spend’ of the ‘non govt’ sectors steps up to the plate to ‘replace’ the reduced govt contribution, the output won’t get sold, as evidenced by unsold inventory and declining sales in general, throwing GDP growth into reverse, etc.

So because we have different narratives, we read the same data differently.

They see the 1.7% Q3 inventory build as anticipation of future sales, while I see it as evidence of a lack of demand.

They see the Chicago PMI’s large spike followed by 2 months of decline as a strong 3 month period, while I see it as a sharp fall off after the inventory build.

They see the fall off in mortgage purchase apps as a temporary pause, while I see it as a disturbing fall off in the critical ‘borrowing to spend’ growth maths.

They see October’s shut down limited 15.2 million rate of car sales followed by November’s spike to 16.4 million as a return of growth, while I see the two month average a sign that growth has flattened in this critical ‘borrowing to spend’ dynamic.

And likewise with the weakness in the Pending Home Sales, Credit Manager’s Index, Architectural billings, down then up durable goods releases, new home sales, the slowing rate of growth of corporate profits, personal income, etc. etc.

And they see positive survey responses as signs of improvement, while I see them as signs they all believe the mainstream forecasts.

;)

And not to forget they see the increase in jobs as evidence of solid growth given the rapidly growing % of sloths, and I see it flat as a % of the population.

;)

Happy New Year/ La Shona Tova to all!!!

Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis increased 5.6 percent versus 5.3 percent in the second quarter.

They also show close correlation with the size of the Federal deficit.

The automatic fiscal stabilizers are far too aggressive as they do their thing to abort this recovery.

>   
>   (email exchange)
>   
>   Nice data on shrinking deficit due to private sector growth and not “cuts” in governments
>   spending.
>   

Smallest budget deficit in 5 years is great news

Classic from 1999-

Congrats on the budget surplus on the left, and warning that savings is too low on the right!

WSJ July 1999

Pretty much all forecasters expect improvement in 2014 largely from what they call a reduction in fiscal drag. Their logic goes something like this (with the actual numbers varying a bit with different analysts):

Without the deficit reduction in 2013 that subtracted 2% from growth, growth would have been 4%. Therefore, when the fiscal drag ends, growth will return to the underlying 4% pace.

I’m suggest their logic is faulty.

The difference is that of ‘adding less’ vs ‘subtracting’

It’s not like the private sector alone was expanding at a 4% clip, and then govt came along and took away 2%.

It’s that by my count the private sector was growing at -2%, and govt was going to add 6% to that for 2013, but proactively reduced its support to only 4% in 2013 by cutting spending and raising taxes, resulting in 2% GDP growth rather than 4%. And for 2014 that ‘lost support’ will not be added back.

Expanding:

Assume, for example, GDP started 2013 at 100, and was forecast to go to 104 as stated above. Assuming nominal growth about 1.5% over real growth, let me push that up to 105.5.

That assumption included, say, federal deficit spending of 6% of GDP (starting at maybe a 7% rate and ending at maybe a 5% rate).

That is govt was forecast to make a net positive 6% contribution to spending by spending that much more than its income, aka ‘credit expansion’. Or, said another way, the total government spending contribution was over 20% of GDP, with all but 6% of that ‘offset’ by taxation that reduced incomes elsewhere.

Also note that the economy is currently ‘demand constrained’ as there is an output gap. In other words GDP could be higher, as a matter of accounting, simply by, for example,
govt hiring more people who are currently not working for pay, via the govt spending that much more than its income (adding to the deficit). Or GDP could be lower simply by govt cutting back, which is what actually happened, as recognized by the analysts.

That is, net govt spending was proactively reduced by about 2% due to tax increases and sequesters.

And federal deficit spending averaged perhaps 4% of GDP rather than 6% of GDP, thereby reducing said GDP..

That is, government contributed that much less to GDP. And that lost contribution will not be restored, as, if anything, there will be further deficit reduction forthcoming from Congress in 2014.

So my point is the 4% forecast for 2013 was not that much private sector growth that was then reduced by the deficit reduction measures. Instead, the growth forecast included the federal deficit contributing 6% to GDP, which was subsequently reduced by Congress to only 4%.

In fact, without the remaining 4% contribution of that net federal spending, nominal GDP might have been -.5% and real -2%.

And 2014 is starting out with federal deficit spending forecast to add only about $600 billion, which is less than 4% of GDP.

So to recap, the original forecast for 4% growth included the full 6% contribution from govt. And when that contribution was proactively reduced to 4%, growth forecasts were correctly cut to 2%.

And my point is that the assumed ‘underlying growth rate’ of 4% in fact presumed the then 6% contribution from govt which was subsequently reduced, thereby lowering ‘the underlying growth rate’ for 2013 to 2%.

It’s not that the private sector was responsible for 4% growth and that the govt took away 2% of that with the tax increases and sequesters.

In fact, it was more that the private sector was -2% on its own due to ‘demand leakages’/unspent incomes/savings desires including non residents) and govt support that was to boost that to +4% was cut back, resulting in a 2% rate of GDP growth for 2013.

I am not saying that GDP growth can’t pick up in 2014.

I am saying that the logic behind the widespread forecasts for a pick up in growth is universally faulty.

And that if growth does pick up it will be from an increase in non govt ‘spending more than incomes’, aka an increase non govt credit expansion.

While this is certainly possible, traditionally it comes from housing, which currently isn’t generating any credit expansion, and cars which are no longer generating meaningful increases.

Worse, in prior cycles we got the private sector credit expansion need to support relatively low output gaps only from expansion we never would have let happen if we had been aware of the consequences. These included the Bush sub prime expansion, the Clinton .com/y2k credit expansion, the Reagan S and L credit expansion, and the earlier Wriston emerging markets credit expansion. And I don’t see anything like that happening currently.

And so without the prerequisite acceleration of non govt credit expansion, the maths tell me 2014 GDP growth will remain at best at approximately the 2% level of 2013. And, with so little support from federal deficit spending, I see serious downside risks should private sector credit expansion falter for any reason.

And note too that the continuation of 2% GDP growth closes the output gap only by reducing estimates of potential output, primarily by assuming the drop in the participation rate is structural.

And even the modest employment gains we’ve seen are at risk. The growth rate of employment has been almost identical to the underlying rate of real growth, which improbably implies no productivity growth. So if there is any positive underlying productivity growth, and real growth remains the same, employment growth will decline accordingly.

Lastly, the ‘automatic fiscal stabilizers’ are continuously at work. So when private sector credit expansion does contribute to growth, the govt ‘automatically’ cuts back its support via reduced transfer payments and increased tax receipts, thereby tempering the positive effect of the private credit expansion, and making it that much more difficult for the growth to continue.

This means that even the current 2% growth rate will at some point get ground down by our current institutional structure. With growing risks that this could be very much sooner rather than later.

And that much closer to the end of this cycle, absent a big fat credit bubble

CBO: Federal Deficit declined Sharply in October and November compared to last year

Federal Reserve Interest Rates Should Be Near Zero Forever

By Warren Mosler

The fiscal role of the KfW

By Bill Mitchell

What’s new here is somehow Hussman has picked on the idea that corporate profits fall as the federal deficit falls. He stops short of suggesting we need a higher federal deficit, of course.

After all his endless inane out of paradigm raving against federal deficits it might take him a few months to reverse course. ;)

Nor does he mention the well known Levy Profit Equation from maybe 75 years ago that shows same, or Wynne Godley’s work or any of the MMT sources that he no doubt perused regarding sector balances.

An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities

By John Hussman

No talk yet of waiving the sequesters?

McConnell: Stand Firm on Spending

November 19 (WSJ) — With budget negotiations stalled, Senate Minority Leader Mitch McConnell is pushing his GOP colleagues to resist efforts to ease across-the-board spending cuts due to take effect in mid-January. Mr. McConnell has argued it is better to let the cuts take effect than to agree to a budget deal that would allow overall spending to increase or revenues to rise. House Budget Committee Chairman Paul Ryan, also speaking at the Journal event, said he would continue negotiating with Democrats to reach an agreement but didn’t express optimism. Mr. Ryan, who chairs the conference, said if necessary Republicans would pass a bill to keep the government open and allow the sequester’s new spending cuts to take effect.

Fiscal consolidations and spillovers in the Euro area periphery and core

Do you think they know austerity causes loans to go bad?

Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

Do you think they know higher rates support higher inflation and weaken the currency?

India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inflation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.