Ed researched this issue after discussing with Warren August 2011.
Ed Rombach on US vs Japan
Category Archives: Interest Rates
People who reject free lunches are fools: Liquidity trap – part II
Fiscal and monetary policy in a liquidity trap – part II
By Martin Wolf
Output is produced by work.
Work is a cost, not a benefit.
It is in that sense that there is no free lunch.
Might fiscal expansion be a free lunch? This is the question addressed in a thought-provoking paper “Fiscal Policy in a Depressed Economy”, March 2012, by Brad DeLong and Larry Summers, the most important conclusion of which is obvious, but largely ignored: the impact of fiscal expansion depends on the context. *
In normal times, with resources close to being fully utilised, the multiplier will end up very close to zero; in unusual times, such as the present, it could be large enough and the economic benefits of such expansion significant enough to pay for itself.
‘Paying for itself’ implies there is some real benefit to a lower deficit outcome vs a higher deficit outcome. With the govt deficit equal to the net financial assets of the non govt sectors, ‘Paying for itself’ implies there is a real benefit to the non govt sectors have fewer net financial assets.
In a liquidity trap fiscal retrenchment is penny wise, pound foolish.
I would say it’s penny foolish as well, as it directly reduces net financial assets of the non govt sectors with no economic or financial benefit to either the govt sector or the non govt sectors.
Indeed, relying on monetary policy alone is the foolish policy: if it worked, which it probably will not, it does so largely by expanding stretched private balance sheets even further.
Agreed.
As the authors note: “This paper examines the impact of fiscal policy in the context of a protracted period of high unemployment and output short of potential like that suffered by the United States and many other countries in recent years. We argue that, while the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times, discretionary fiscal policy where there is room to pursue it has a major role.”
There are three reasons for this.
1. First, the absence of supply constraints means that the multiplier is likely to be large.
Why is a large multiplier beneficial?
A smaller multiplier means the fiscal adjustment can be that much larger.
That is, the tax cuts and/or spending increases (depending on political preference) can be that much larger with smaller multipliers.
It is likely to be made even bigger by the fact that fiscal expansion may well raise expected inflation and so lower the real rate of interest, when the nominal rate is close to zero.
However the ‘real rate of interest’ is defined. Most would think CPI, which means the likes of tobacco taxes move the needle quite a bit.
And with the MMT understanding that the currency itself is in fact a simple public monopoly, and that any monopolist is necessarily ‘price setter’, the ‘real rate of interest’ concept doesn’t have a lot of relevance.
2. Second, even moderate hysteresis effects of such fiscal expansion, via increases in the likely level of future output, have big effects on the future debt burden.
Back to the errant notion of a public sector debt in its currency of issue being a ‘burden’.
3. Finally, today’s ultra-low real interest rates at both the short and long end of the curve, suggest that monetary policy is relatively ineffective, on its own.
Most central bank studies show monetary policy is always relatively ineffective.
The argument is set out in a simple example. “Imagine a demand-constrained economy where the fiscal multiplier is 1.5, and the real interest rate on long-term government debt is 1 per cent. Finally, assume that a $1 increase in GDP increased tax revenues and reduces spending by $0.33. Assume that the government is able to undertake a transitory increase in government spending, and then service the resulting debt in perpetuity, without any impact on risk-premia.
“Then the impact effect of an incremental $1.00 of spending is to raise the debt stock by $0.50. The annual debt service needed on this $0.50 to keep the real debt constant is $0.005. If reducing the size of the current downturn in production by $1.50 avoids a 1 per cent as large fall in future potential output – avoids a fall in future potential output of $0.0015 – then the incremental $1.00 of spending now augments future tax-period revenues by $0.005. And the fiscal expansion is self-financing.”
This is a very powerful result.
Yes, it tells you that the ‘automatic fiscal stabilizers’ must be minded lest the expansion reduce the govt deficit and, by identity, reduce the net financial assets of the non govt sectors to the point of aborting the economic recovery. Which, in fact, is how most expansion cycles end.
For the non govt sectors, net financial assets are the equity that supports the credit structure.
So when a recovery driven by a private sector credit expansion (which is how most are driven), causes tax liabilities to increase and transfer payments to decrease (aka automatic fiscal stabilizers)- reducing the govt deficit and by identity reducing the growth of private sector net financial assets- private sector/non govt leverage increases to the point where it’s unsustainable and it all goes bad again.
It rests on the three features of the present situation: high multipliers; low real interest rates; and the plausibility of hysteresis effects.
A table in the paper (Table 2.2) shows that at anything close to current real interest rates fiscal expansion is certain to pay for itself even with zero multiplier and hysteresis effects: it is a “no-brainer”.
And, if allowed to play out as I just described, the falling govt deficit will also abort the expansion.
Why is this? It is because the long-term real interest rate paid by the government is below even the most pessimistic view of the future growth rate of the economy. As I have argued on previous occasions, the US (and UK) bond markets are screaming: borrow.
The bond markets are screaming ‘the govt. Will never get its act together and cause the conditions for the central bank to raise rates.’
Of course, that is not an argument for infinite borrowing, since that would certainly raise the real interest rate substantially!
Infinite borrowing implies infinite govt spending.
Govt spending is a political decision involving the political choice of the ‘right amount’ of real goods and services to be moved from private to public domain.
Yet, more surprisingly, the expansion would continue to pay for itself even if the real interest rate were to rise far above the prospective growth rate, provided there were significantly positive multiplier and hysteresis effects.
I’d say it this way:
Providing increasing private sector leverage and credit expansion continues to offset declines in govt deficit spending.
Let us take an example: suppose the multiplier were one and the hysteresis effect were 0.1 – that is to say, the permanent loss of output were to be one tenth of the loss of output today. Then the real interest rate at which the government could obtain positive effects on its finances from additional stimulus would be as high as 7.4 per cent.
Thus, state the authors, “in a depressed economy with a moderate multiplier, small hysteresis effects, and interest rates in the historical range, temporary fiscal expansion does not materially affect the overall long-run budget picture.” Investors should not worry about it. Indeed, they should worry far more about the fiscal impact of prolonged recessions.
They shouldn’t worry about the fiscal impact in any case. The public sector deficit/debt is nothing more than the net financial assets of the non govt sectors. And these net financial assets necessarily sit as balances in the central bank, as either clearing balances (reserves) or as balances in securities accounts (treasury securities). And ‘debt management’ is nothing more than the shifting of balances between these accounts.
(and there are no grandchildren involved!)
(and all assuming floating exchange rate policy)
Are such numbers implausible? The answer is: not at all.
Multipliers above one are quite plausible in a depressed economy, though not in normal circumstances. This is particularly true when real interest rates are more likely to fall, than rise, as a result of expansion.
The ‘multipliers’ are nothing more than the flip side of the aggregate ‘savings desires’ of the non govt sectors. And the largest determinant of these savings desires is the degree of credit expansion/leverage.
Similarly, we know that recessions cause long-term economic costs. They lower investment dramatically: in the US, the investment rate fell by about 4 per cent of gross domestic product in the wake of the crisis. Businesses are unwilling to invest, not because of some mystical loss of confidence, but because there is no demand.
Again, we know that high unemployment has a permanent impact on workers, both young and old. The US, in particular, seems to have slipped into European levels of separation from the labour force: that is to say, the unemployment rate is quite low, given the sharp fall in the rate of employment. Workers have given up. This is a social catastrophe in a country in which work is effectively the only form of welfare for people of working age.
Not to mention the lost real output which over the last decade has to be far higher than the total combined real losses from all the wars in history.
Indeed, we can see hysteresis effects at work in the way in which forecasters, including official forecasters, mark down potential output in line with actual output: a self-fulfilling prophecy if ever there was one. This procedure has been particularly marked in the UK, where the Office for Budget Responsibility has more or less eliminated the notion that the UK is in a recession. Yet such effects are not God-given; they are man-chosen. They are the product of fundamentally misguided policies.
This is an important paper. It challenges complacent “do-nothingism” of policymakers, let alone the “austerians” who dominate policy almost everywhere. Policy-makers have allowed a huge financial crisis to impose a permanent blight on economies, with devastating social effects. It makes one wonder why the Obama administration, in which prof Summers was an influential adviser, did not do more, or at least argue for more, as many outsiders argued.
The private sector needs to deleverage.
It’s no coincidence that with a relatively constant trade deficit, private sector net savings, as measured by net financial $ assets, has increased by about the amount of the US budget deficit.
In other words, the $trillion+ federal deficits have added that much to domestic income and savings, thereby reducing private sector leverage.
However, as evidenced by the gaping output gap, for today’s credit conditions, it’s been not nearly enough.
The government can help by holding up the economy. It should do so. People who reject free lunches are fools.
Fiscal and monetary policy in a liquidity trap
Not bad, but let’s take it up to the next level.
Comments below:
Fiscal and monetary policy in a liquidity trap
By Martin Wolf
With floating fx, it’s always a ‘liquidity trap’ in that adding liquidity to a system necessarily not liquidity constrained is moot.
Part 1
What is the correct approach to fiscal and monetary policy when an economy is depressed and the central bank’s rate of interest is close to zero? Does the independence of the central bank make it more difficult to reach the right decisions? These are two enormously important questions raised by current circumstances in the US, the eurozone, Japan and the UK.
With floating fx, it’s always about a fiscal adjustment, directly or indirectly.
Broadly speaking, I can identify three macroeconomic viewpoints on these questions:
1. The first is the pre-1930 belief in balanced budgets and the gold standard (or some other form of a-political money).
Yes, actual fixed fx policy, where the monetary system is continuously liquidity constrained by design.
2. The second is the religion of balanced budgets and managed money, with Milton Friedman’s monetarism at the rules-governed end of the spectrum and independent inflation-targeting central banks at the discretionary end.
Yes, the application of fixed fx logic to a floating fx regime.
3. The third demands a return to Keynesian ways of thinking, with “modern monetary theory” (in which monetary policy and central banks are permanently subservient to fiscal policy) at one end of the policy spectrum, and temporary resort to active fiscal policy at the other.
MMT recognizes the difference in monetary dynamics between fixed and floating fx regimes.
In this note, I do not intend to address the first view, though I recognise that it has substantial influence, particularly in the Republican Party. I also do not intend to address Friedman’s monetarism, which has lost purchase on contemporary policy-makers, largely because of the views that the demand for money is unstable and the nature of money ill-defined. Finally, I intend to ignore “modern monetary theory” which would require a lengthy analysis of its own.
This leaves us with the respectable contemporary view that the best way to respond to contemporary conditions is via fiscal consolidation and aggressive monetary policy, and the somewhat less respectable view that aggressive fiscal policy is essential when official interest rates are close to zero.
Two new papers bring light from the second of these perspectives. One is co-authored by Paul McCulley, former managing director of Pimco and inventor of the terms “Minsky moment” and “shadow banking”, and Zoltan Pozsar, formerly at the Federal Reserve Bank of New York and now a visiting scholar at the International Monetary Fund.* The other is co-authored by J. Bradford DeLong of the university of California at Berkeley, and Lawrence Summers, former US treasury secretary and currently at Harvard university. **
Unfortunately, and fully understood, is the imperative for you to select from ‘celebrity’ writers regardless of the quality of the content.
The paper co-authored by Mr McCulley and Mr Pozsar puts the case for aggressive fiscal policy. The US, they argue, is in a “liquidity trap”: even with official interest rates near zero, the incentive for extra borrowing, lending and spending in the private sector is inadequate.
An output gap is the evidence that total spending- public plus private- is inadequate. And yes, that can be remedied by an increase in private sector borrowing to spend, and/or a fiscal adjustment by the public sector towards a larger deficit via either an increase in spending and/or tax cut, depending on one’s politics.
The explanation for this exceptional state of affairs is that during the credit boom and asset-price bubble that preceded the crisis, large swathes of the private sector became over-indebted. Once asset prices fell, erstwhile borrowers were forced to reduce their debts. Financial institutions were also unwilling to lend. They needed to strengthen their balance sheets. But they also confronted a shortage of willing and creditworthy borrowers.
Yes, for any reason if private sector spending falls short of full employment levels, a fiscal adjustment can do the trick.
This raises an interesting question:
Is it ‘better’, for example, to facilitate the increase in spending through a private sector credit expansion, or through a tax cut that allows private sector spending to increase via increased income, or through a government spending increase?
The answer is entirely political. The output gap can be closed with any/some/all of those options.
In such circumstances, negative real interest rates are necessary, but contractionary economic conditions rule that out.
I see negative nominal rates as a tax that will reduce income and net financial assets of the non govt sectors, even as it may increase some private sector credit expansion. And the reduction of income and net financial assets works to reduce the credit worthiness of the non govt sectors reducing their ability to borrow to spend.
Instead, there is a danger of what the great American economist, Irving Fisher called “debt deflation”: falling prices raise the real burden of debt, making the economic contraction worse.
Yes, though he wrote in the context of fixed fx policy, where that tends to happen as well, though under somewhat different circumstances and different sets of forces.
A less extreme (and so more general) version of the idea is “balance-sheet recession”, coined by Richard Koo of Nomura. That is what Japan had to manage in the 1990s.
With floating fx they are all balance sheet recessions. There is no other type of recession.
This is how the McCulley-Pozsar paper makes the point: “deleveraging is a beast of burden that capitalism cannot bear alone. At the macroeconomic level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction . . . by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.
Correct, in the context of today’s floating fx. With fixed fx that option carries the risk of rising rates for the govt and default/devaluation.
“Fiscal austerity does not work in a liquidity trap and makes as much sense as putting an anorexic on a diet. Yet ‘diets’ are the very prescriptions that fiscal ‘austerians’ have imposed (or plan to impose) in the US, UK and eurozone. Austerians fail to realise, however, that everyone cannot save at the same time and that, in liquidity traps, the paradox of thrift and depression are fellow travellers that are functionally intertwined.”
Agreed for floating fx. Fixed fx is another story, where forced deflation via austerity does make the maths work, though most often at an impossible social cost.
Confronted by this line of argument, austerians (a term coined by Rob Parenteau, a research associate at the Levy Economics Institute of Bard College), make three arguments:
1. additional borrowing will add heavily to future debt and so be an unreasonable burden on future generations;
2. increased borrowing will crowd out private borrowing;
3. bond investors will stop buying and push yields up.
Which does happen with fixed fx policy.
In a liquidity trap, none of these arguments hold.
With floating fx, none of these hold in any scenario.
Experience over the last four years (not to mention Japan’s experience over the past 20 years) has demonstrated that governments operating with a (floating) currency do not suffer a constraint on their borrowing. The reason is that the private sector does not wish to borrow, but wants to cut its debt, instead. There is no crowding out.
Right, because floating fx regimes are by design not liquidity constrained.
Moreover, adjustment falls on the currency, not on the long-term rate of interest.
Right, and again, unlike fixed fx.
In the case of the US, foreigners also want to lend, partly in support of their mercantilist economic policies.
Actually, they want to accumulate dollar denominated financial assets, which we call lending.
Note that both reserve balances at the Fed and securities account balances at the Fed (treasury securities) are simply dollar deposits at the Fed.
Alas, argue Mr McCulley and Mr Pozsar, “held back by concerns borne out of these orthodoxies, . . . governments are not spending with passionate purpose. They are victims of intellectual paralysis borne out of inertia of dogma . . . As a result, their acting responsibly, relative to orthodoxy, and going forth with austerity may drag economies down the vortex of deflation and depression.”
Right. Orthodoxy happens to be acting as if one was operating under a fixed fx regime even though it’s in fact a floating fx regime.
Finally, they note, “the importance of fiscal expansion and the impotence of conventional monetary policy measures in a liquidity trap have profound implications for the conduct of central banks. This is because in a liquidity trap, the fat-tail risk of inflation is replaced by the fat-tail risk of deflation.”
The risk of excess aggregate demand is replaced by the risk of inadequate aggregate demand.
And the case can be made that lower rates reduce aggregate demand via the interest income channels, as the govt is a net payer of interest.
In this situation, we do not need independent central banks that offset – and so punish – fiscally irresponsible governments. We need central banks that finance – and so encourage – economically responsible (though “fiscally irresponsible”) governments.
Not the way I would say it but understood.
When private sector credit growth is constrained, monetisation of public debt is not inflationary.
While I understand the point, note that ‘monetisation’ is a fixed fx term not directly applicable to floating fx in this context.
Indeed, it would be rather good if it were inflationary, since that would mean a stronger recovery, which would demand swift reversal of the unorthodox policy mix.
The conclusion of the McCulley-Pozsar paper is, in brief, that aggressive fiscal policy does work in the unusual circumstances of a liquidity trap, particularly if combined with monetisation. But conventional wisdom blocks full use of the unorthodox tool kit. Historically, political pressure has destroyed such resistance. Political pressure drove the UK off gold in 1931. But it also brought Hitler to power in Germany in 1933. The eurozone should take note.
Remarkably, in the circumstances of a liquidity trap, enlarged fiscal deficits are likely to reduce future levels of privately held public debt rather than raise them.
As if that aspect matters?
The view that fiscal deficits might provide such a free lunch is the core argument of the paper by DeLong and Summers, to which I will turn in a second post.
Free lunch entirely misses the point.
Why does the size the balances in Fed securities accounts matter as suggested, with floating fx policy?
BOJ’s Shirakawa: Fully Committed To Asset Purchases To Meet 1% Inflation Target
Right, they’ve only been doing it for a couple of decades, monetary policy works with a lag…
BOJ’s Shirakawa: Fully Committed To Asset Purchases To Meet 1% Inflation Target
By Chana R. Schoenbergrand and Stephen L. Bernard
April 18 (Dow Jones) — The Bank of Japan remains determined to purchase more assets to meet its 1% inflation target, the central bank’s governor, Masaaki Shirakawa, said Wednesday night in New York.
“The Bank of Japan is fully committed to continuing powerful monetary easing through various measures, including maintaining the policy interest rate at practically zero and purchasing financial assets, until the current goal of year on year CPI inflation at 1% is deemed to be achievable,” Shirakawa said in his speech to the Foreign Policy Association.
But Shirakawa warned of the potential mismatch between what markets expect and what central banking policies can deliver.
The President’s Fairness Fiction
President Obama’s ‘Fairness’ Vision Would Bankrupt Nation
April 11 (IBD) — Economy: In two recent high-profile policy speeches, President Obama has struggled to make a case for his big-government, high-tax vision for the economy. But his comments reveal just how bankrupt his vision is.
Last I read, he’s actually reduced govt head count for maybe the first time in history, and spending as a % of GDP is up only because of transfer payments due to the recession, with taxes as a % of GDP reaching extremely low levels as well.
It’s ironic that President Obama would make two speeches this week in Florida about “fairness,” sandwiched as they were between $10,000-a-plate fundraising dinners. But that’s the level of hypocrisy coming from the White House these days.
To be polite, most of the comments Obama makes these days about the economy, taxes and, especially, “fairness” stretch all credibility. Hearing the large number of outright falsehoods and partial truths he uses to support his argument, it’s impossible not to believe it’s simply a ploy to get votes from those who envy the rich and the successful.
A full unpacking of Obama’s whoppers would require a much larger space than we have here. Here are just a few examples:
“I believe the free market is the greatest force for economic progress in human history.”
If he believed that, he would not have signed the $787 billion stimulus bill.
That helped the private sector and ‘free markets’ even though I didn’t like the details.
He wouldn’t have imposed onerous new green regulations on businesses.
Without federal pollution regulation the states get into a race to the bottom where whoever allows the most pollution gets the most businesses.
He wouldn’t have taken over the auto and banking industries.
Banking with FDIC deposit insurance makes banking a 90/10 public private partnership. And he didn’t take over banking in any case.
Nor would he seek massive new tax hikes on businesses, or use the frightening power of government — including thousands of new IRS agents to enforce ObamaCare — to pursue his utopian vision of “fairness.”
First, I’m against corporate taxes in general. But even so, he cut payroll taxes for business and the proposed increases were about closing loopholes. And Obamacare took 500 billion out of medicare to give to insurance companies- hardly pro govt/anti business.
If Obama truly believed in the free market,
And remember, there is no ‘free market’ as by definitions markets operate only within institutional structure including contract law and enforcement.
he’d eliminate Fannie Mae, Freddie Mac, the EPA, the Energy Department and many other federal departments and agencies that distort free markets.
All govt and all taxation necessarily distorts markets. All govt works on coercion. Nor are there competitive markets when there is limited competition and monopoly power, which means some form of govt regulation is required.
He would roll back thousands of costly, ineffective regulations that estimates say cost the U.S. $1.8 trillion a year.
I’d have to see the specifics, which the rest of this article makes me doubtful of.
“The gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”
In fact, the top 1% have a lower share of total household income than they did in 1920 — just after World War I.
So maybe 1920 was a particularly high year because of the war? Don’t know his point, except pointing to 1920 is a smokescreen to disguise the fact that the share of income has been rising dramatically for a long time.
Though the top 1% have recently boosted their share, that’s largely due to the tech boom of the 1980s, 1990s and 2000s, which made all Americans richer.
I thought it was the financial sector??? But even so, a tech boom doesn’t necessarily do that to income distribution. It doesn’t explain why the football coach earns $10 million while the professor who cured cancer gets $100,000. It’s all about institutional structure.
Even so, the so-called Gini Coefficient — the federal government’s own measure of income inequality — is today lower than it was during the Clinton era.
“At the beginning of the last decade, the wealthiest Americans got two huge tax cuts, in 2001 and 2003.”
The rich, with everyone else, did get their top tax rates cut. But the actual taxes they paid rose sharply.
Right, because their incomes rose that much more. This is out of context writing throughout, laced with lies of omission.
Don’t believe it? Just before those tax cuts were passed, the top 1% earned 18% of all adjusted gross income and paid 34% of all federal taxes.
Only because they conveniently don’t include FICA when they talk about taxes like this. But they do include it when it’s going up or down- tax cut or tax hike. And it’s something approaching half of all federal income taxes.
By 2009, the last full year for which there are data, the top 1% share of AGI had fallen to 17%, according to IRS data. But they paid 37% of all taxes.
Not including FICA
As for the bottom 50% of income earners: In 2009 they took home 13% of income but paid less than 3% of federal income taxes. And today, nearly half of all Americans don’t pay taxes at all.
Not including FICA which is 7.6% of income from dollar one, with a cap at something like $105,000. Including FICA it could be something like 30% paid by lower income earners.
In short, during the 2000s, top earners took home a smaller share of the income pie but paid a larger share of the taxes. Is that what Obama means by “fairness?”
Does leaving out FICA count as fairness?
As for the so-called Buffett Rule that Obama wants, it would impose a minimum tax of 30% on millionaires to make them pay their “fair share.” It’s premised on investor Warren Buffett’s assertion that he pays a lower tax rate than his secretary.
Nonsense. Those with incomes over $1 million pay about 30% in taxes on average, about twice the average for those with middle incomes, like Buffett’s assistant.
Not counting FICA.
Simply put, this is class warfare. The tax would only raise $47 billion over the next decade — a drop in the bucket compared to the $45 trillion in spending and $9.6 trillion in deficits under Obama’s budget.
And just under $1 trillion per year of FICA taxes
Unfortunately, by raising the capital gains tax from 15% to over 30%, it would kill millions of American jobs and send small business creation into a tailspin.
Any tax hike can reduce aggregate demand. And not having income taxes and cap gains at the same rate merely causes income to shift to the lowest taxed category, and provide massive fees for the accounting firms and financial sector as well.
Who would that help?
“We tried (free market economics) for eight years before I took office. … We were told the same thing we’re being told now — this is going to lead to faster job growth, it’s going to lead to greater prosperity for everybody. Guess what? It didn’t.”
Obama has repeatedly suggested all the economy’s problems are due to President Bush.
But Bush, like Obama, entered office during a recession. Not only did he take over after the biggest stock market crash since the Depression, but the Fed had more than doubled interest rates, killing growth.
The Fed doubled rates from very low levels after the economy started growing from the combo Bush proactively expanding the deficit and from the up leg of the sub prime adventure. It ended with the shrinking of the deficit and the down leg of the sub prime adventure.
Worse, within eight months of entering office, the U.S. was hit with the 9/11 terrorist attacks — the first on the American homeland since World War II. Within the space of just 90 days, a million jobs were lost.
Jobs were lost because private sector credit expansion ended after being stretched past it’s limits during the late 90’s, with the govt budget surplus draining off hundreds of billions of dollars of net financial assets as well.
Obama’s right. President Bush did cut tax rates. What was the result? We had 52 straight months of job growth, with 8 million new jobs over six years.
Propelled by the larger deficit and the expansion phase of the sub prime adventure.
For Bush’s entire presidency, the unemployment rate averaged 5.3%. Under Obama, it’s not been below 8%.
Yes, because the deficit is too small, and both sides want to make it smaller. Good luck to us…
Real after-tax income per person rose more than 11% under Bush, while real GDP from 2000 to 2007 grew $2.1 trillion, or 17%. In 2007, the deficit fell to $162 billion — roughly 1% of GDP.
Yes, not large enough to support aggregate demand after support from the sub prime expansion phase ended.
Does Obama really want to compare himself to that? Since he’s entered office, we’ve lost 1.7 million jobs, and unemployment has averaged over 8%.
His deficits have averaged $1.4 trillion — about 8% of GDP, a record. On his watch, debt has soared from $10.7 trillion to $16 trillion. America now has more debt than the entire euro zone and Great Britain — combined.
And still not nearly enough to restore aggregate demand.
Under Obama spending has surged. The federal government now accounts for 25% of the economy, vs. the long-term average of 20%.
Due mainly to automatic counter cyclical transfer payments, not expanded regular spending.
Through his big-government policies, Obama took a bad recession and made sure our recovery would be the worst ever — and then blamed it on everyone but himself.
Meanwhile, get ready for “taxmageddon” — the $494 billion tax hike that hits in 2013 as the Bush tax cuts expire, something Obama is doing nothing about.
Wasn’t it the opposition trying to not allow the extension this year?
Our economy, in short, will never regain its old vitality until a new president is elected, and Obama’s top-down, government-centered policies are laid to rest.
I’ve been a harsh critic of Obama’s policies all along, but this is all a pile of intellectually dishonest propaganda.
Japan Must Overhaul Taxes to Avoid Bond Rout, Bank Lobby Says
Translation: Japanese bankers are against growth because it might cause losses from rate hikes?
Japan Must Overhaul Taxes to Avoid Bond Rout, Bank Lobby Says
By Shigeru Sato and Takako Taniguchi
April 1 (Bloomberg) — Japan must avoid delaying an overhaul of the tax system to prevent government borrowing costs from spiraling in the next decade, the new chief of the country’s banking lobby said.
“The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years,” said Yasuhiro Sato, president of Mizuho Financial Group Inc. (8411), whose tenure as chairman of the Japanese Bankers Association began today. “The country’s financial assets are dwindling with the aging population dipping into savings.”
Japanese banks hold a record amount of the nation’s bonds, prompting central bank Governor Masaaki Shirakawa to warn in February that lenders risk incurring trillions of yen in losses if yields rise. Prime Minister Yoshihiko Noda faces opposition to his plan to double the sales tax by 2015 to pay for swelling welfare costs and contain the world’s biggest public debt.
“Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022,” Sato said in an interview last month. “But there are no signs of a JGB price plunge in the near term.”
Japan’s 10-year bonds yielded 0.985 percent late on March 30. The cost to insure Japan’s debt against nonpayment has been falling, with CMA data showing five-year credit default swaps declined to 98.6 basis points on March 29 from a record 154.8 on Oct. 4, indicating perceptions of creditworthiness are improving.
Hoarding Cash
Shirakawa said in February that a 1 percentage-point increase in benchmark yields would cause losses of about 3.5 trillion yen ($43 billion) on notes held by major banks. With households and companies hoarding cash rather than borrowing, lenders have been buying bonds, holding a record 167.8 trillion of sovereign debt in February, according to central bank data.
The International Monetary Fund dispatched a mission to Tokyo last month as part of a regular review it’s conducting this year into the stability of Japan’s financial sector. While the IMF’s Financial Sector Assessment Program contains a stress test for banks, brokerages and insurers, it’s unclear whether it will examine risks from their government bond holdings.
“Japan’s financial system is strong and stable,” Sato said. “It’s hard to imagine that the IMF would make any kinds of requirements for Japan” based on any examination of bonds held by financial institutions, he said.
Bond Profits
The nation’s three biggest lenders — Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Sato’s Mizuho — earned a combined 231 billion yen from trading bonds and other securities in the quarter ended December, almost double from a year earlier, according to Bloomberg calculations based on their latest earnings figures.
Japan’s government bond sales have largely been absorbed by the domestic market, with about 92 percent of the debt owned by investors at home, central bank data show. The capacity of households to fund public spending may decline in coming years as the growing ranks of pensioners withdraw assets.
Households had 1,483 trillion yen of financial assets at the end of December, down 0.3 percent from a year earlier, according to the Bank of Japan. Government borrowings will climb to 1,086 trillion yen in the year ending March 2013, the Finance Ministry forecast in January.
Prime Minister Noda is seeking parliament’s approval of his tax bill in the current Diet session, while opposition Liberal Democratic Party leader Sadakazu Tanigaki has suggested elections should be called first. Noda’s Cabinet on March 30 approved the proposal to raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015.
“Japanese banks conduct their own simulations and assessments of various risks such as those arising from bonds and stocks,” Sato said. “We are now far from the situation where a bomb may explode in the near future.”
Global themes
- Austerity everywhere keeps domestic demand in check and export channels muted
- Non govt credit expansion pretty much stone cold dead in the US and Europe
- Rising oil energy prices subduing global aggregate demand
- US federal deficit just about enough to muddle through with modest GDP growth
- Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
- Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
- All good for stocks and shareholders, not good for most people trying to work for a living
- Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening
So still looking to me like a case of
‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’
The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.
But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.
Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.
New Home Sales Unexpectedly Slip 1.6% in February
Seems low interest rates aren’t all the tool they’re cracked up to be?
But they’ve only been low for a bit over 3 years.
Monetary policy works with a lag and all that.
Much like Japan.
Again like the carpenter said of his piece of wood, no matter how much cut off it’s still too short?
Along the same lines, next thing they’ll be doing is increasing savings incentives to help investment.
And note the slight twist on the same theme, increasing bank capital requirements to support confidence.
It’s about aggregate demand, and how you can’t drain yourself to prosperity.
How hard is that?
New Home Sales Unexpectedly Slip 1.6% in February
March 23 (Reuters) — New U.S. single-family home sales fell in February, but a jump in prices to their highest level in eight months kept hopes alive of a recovery in the housing market.
The Commerce Department said on Friday sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. January’s sales pace was revised down to 318,000 units from the previously reported 321,000 units.
Sales for November and December were revised up a bit.
Economists polled by Reuters had forecast sales at a 325,000-unit rate in February. Compared to February last year, new home sales were up 11.4 percent.
The median price for a new home rose 8.3 percent to $233,700, the highest level since June. Compared to February last year, the median price was up 6.2 percent.
The report, which rounded off a week of mixed housing data, followed a similar pattern seen in the market for used homes. Home resales fell in February, but prices rose from a year earlier. Housing starts slipped, while permits for home building approached a 3-1/2 year high in February.
GE to 3M Pension Pain Mounts as Rates Boost Liabilities
Feel free to forward to your local Fed President, to remind them that rate cuts do remove income from savers and from the economy in general, as the economy is a net saver to the tune of the cumulative govt debt (to the penny). (And not to forget the $80 billion or so per year of lost income due to QE.)
Lower rates remove income from ‘savers,’ with everyone who works for a living and contributes to any kind of retirement plan a ‘saver.’
Yes, with most major corporations, the additional contributions come from earnings, which reduces shareholder incomes rather than employee earnings.
But in any case, contributions to retirement funds are ‘demand leakages’ that directly or indirectly reduce income and, to some degree, reduce spending.
The obvious fiscal response should be along the lines of a FICA suspension to sustain sales, output, and employment…
GE to 3M Pension Pain Mounts as Rates Boost Liabilities
By Thomas Black
February 28 (Bloomberg) — General Electric Co. (GE), Boeing Co. (BA) and 3M Co. (MMM) will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies’ liabilities.
Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts.
“It’s been called the wall of contributions,” said Alan Glickstein, a senior retirement consultant at Towers Watson & Co. (TW) in New York. “All of a sudden this thing jumps up and stays there for a few years. That’s what it looks like — a wall.”
Companies from defense contractor Lockheed Martin Corp. (LMT) to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.
“They’re going to have to kick money in,” said John Ehrhardt, a consulting actuary at Seattle-based Milliman. “We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”
That’s money that won’t go back to shareholders through dividends or buybacks, or toward expansion, said Kevin McLaughlin, a pension risk management specialist with consultant Mercer in New York.
Seven Years
Under the federal Pension Protection Act, which was passed in 2006 and mostly took effect in 2008, tighter accounting rules gave employers seven years to fully fund their retirement plans and required them to use a specified, market-based rate of return to compute liabilities instead of a company estimate.
Those liabilities are calculated by projecting future payments and discounting to the present based on interest rates pegged to a basket of corporate bonds. Liabilities rise when rates fall — and the Fed has held its discount rate at 0.75 percent since February 2010, down from as high as 6.25 percent in June 2007. The Fed said Jan. 25 it expected rates to stay at current levels until 2014.
3M’s pension plan in the U.S., which started 2011 with assets of $11.6 billion, shows the challenge for employers.
Assets rose to $12.1 billion by year’s end because of investments and contributions, even after payments of $680 million, according to a Feb. 16 filing. At the same time, the funding shortfall more than tripled, to $2.4 billion, because projected benefit obligations rose 18 percent to $14.5 billion.
‘Liabilities Did Increase’
“With the declining interest rates here in 2011, our liabilities did increase,” 3M Chief Financial Officer David Meline said Feb. 23 at a Barclays Plc industrial conference.
While 401(k) savings accounts are more common at younger companies, traditional manufacturers such are among the employers most affected by the pension pinch because they’re still making payments under defined-benefit plans. St. Paul, Minnesota-based 3M’s 2012 pension contribution will almost double to as much as $1 billion.
Pension expense is “a variable that we consider among many when we look at a company and what it could mean to their profitability,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion. “If that were something that we said we wouldn’t want to own, we’d probably have a fairly limited universe of companies we could buy.”
S&P Industrials
The Standard & Poor’s 500 Industrials Index (S5INDU), whose 61 companies include manufacturers such as Boeing with defined- benefit programs, climbed 10 percent this year through yesterday, topping the S&P 500’s 8.7 percent gain.
Boeing’s pension cost will jump to $2.6 billion, 63 percent more than a year earlier, the company said in January. GE told investors in December it plans to add $1 billion, the first contribution since 1987, and expects to add about $2.1 billion in 2013. The Fairfield, Connecticut-based company closed its U.S. defined-benefits pension plan to all new hires this year.
Honeywell (HON) probably will make a contribution of as much as $1 billion, after low interest rates dashed a goal of full funding in four years, CFO Dave Anderson said. The plan was 83 percent funded at the end of 2011.
‘Little Bit Longer’
“I’d hoped to be there by 2015 to have more of a full resolution of that issue, but it’s going to take a little bit longer probably,” Anderson said in an interview. “Interest rates are at historic low levels and there’s no change in sight for that.”
Pension sponsors usually average rates over 24 months, so 2012 may be the peak year for companies’ pension contributions, said Glickstein of Towers Watson.
“We have a very unusual governmental intervention in the wake of a financial crisis,” he said. “Whatever other merits it may have, it’s clearly distorting the measures of pension obligations and putting a lot of extra pressure on plan sponsors.”
Lockheed Martin anticipated the rise in liabilities by pumping $6 billion into its plan over the last three years, curbing the projected 2012 contribution to $1.1 billion, according to a company filing.
Many pension plans, including GE’s, were overfunded before the December 2007 onset of the worst recession since World War II. Then pension assets began shriveling as stocks slumped, and lower interest rates increased liabilities.
Funding Levels
For the 100 largest defined-benefit plans, average funding levels sank to 74 percent in January from 105 percent in 2007, according to Milliman. Some companies may need to funnel cash to their pension plans for years.
Pension plan assets at Atlanta-based Delta Air Lines Inc. (DAL) covered only about 40 percent of obligations at the end of 2011, down from 47 percent the previous year, according to the carrier’s latest annual report. The funding shortfall widened to $11.5 billion from $9.3 billion in 2010, the filing showed.
Even after Delta ended pilots’ pensions before its 2007 bankruptcy exit and closed other plans to new hires, CFO Hank Halter said Jan. 25 that the airline still expects to contribute as much as $675 million in 2012. Defined-benefit programs taking new employees fell 26 percent in six years to 20,381 in 2009, according to the latest U.S. Pension Benefit Guaranty Corp. figures for plans with 25 or more workers.
The threat of future contributions is driving many sponsors of defined-benefit plans to seek ways to blunt risk, said Jeffrey Saef, chief of Bank of New York Mellon Corp. (BK)’s investment strategy and solutions group in Boston. That often means using more fixed-income investments to help match pension assets more closely to liabilities, he said in an interview.
Clients struggling with the cash drain from pensions have a universal query, Saef said: “‘When will it go away?’”
With Fed Chairman Ben S. Bernanke’s thumb on interest rates, that won’t be any time soon, said McLaughlin, the Mercer consultant.
“Right now, everybody is hoping for the best, which is equity markets performing and interest rates not falling any lower,” he said.
Another Gross error.
Another Gross error.
Bank’s aren’t allowed to take what’s called ‘interest rate risk’ by borrowing short and lending long.
It’s the first thing the regulators and supervisors look for.
It’s the S in CAMELS ratings- Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to interest rates.
Fed’s Low Rates Killing Credit, Slowing Recovery: Gross
By Jeff Cox
Feb 1 (CNBC) — The Federal Reserve’s zero-interest-rate policy is hampering economic recovery by discouraging bank lending, Pimco bond titan Bill Gross said in an analysis.
For banks, a healthy lending environment exists where they can borrow at low rates in the short term and lend at significantly higher rates over the long term, a situation that creates a profit through a positively sloped yield curve