US Pension research article

This is from modest returns and low rates causing ‘savers’ to have to pony up more to provide future nominal incomes.

And it’s a drag on aggregate demand which should be a good thing, as it means we can have lower taxes for any given size govt.
But instead, of course, we let it keep unemployment high and the output gap wide in general.

Pensions & Investments News Alerts:

Verizon to dial up $1.26 billion for pension plans

Boeing to add $1.5 billion to pension plans in 2012

Raytheon, Lockheed Martin to add billions to pension plans

Ford to roll out $3.5 billion in pension contributions

from a primary dealer

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.

Proposal update, including the JG

My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ’employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

John Carney on MMT and Austrian Economics

Another well stated piece from John Carney on the CNBC website:

Modern Monetary Theory and Austrian Economics

By John Carney

Dec 27 (CNBC) — When I began blogging about Modern Monetary Theory, I knew I risked alienating or at least annoying some of my Austrian Economics friends. The Austrians are a combative lot, used to fighting on the fringes of economic thought for what they see as their overlooked and important insights into the workings of the economy.

Which is one of the things that makes them a lot like the MMT crowd.

There are many other things that Austrian Econ and MMT share. A recent post by Bob Wenzel at Economic Policy Journal, which is presented as a critique of my praise of some aspects of MMT, actually makes this point very well.

The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.

This is not to say that MMTers believe that governments can spend without limit. Governments can overspend in the MMT paradigm and this overspending leads to inflation. Government financial assets may be unlimited but real assets available for purchase—that is, goods and services the economy is capable of producing—are limited. The government can overspend by (a) taking too many goods and services out of the private sector, depriving the private sector of what it needs to satisfy the people, grow the economy and increase productivity or (b) increasing the supply of money in the economy so large that it drives up the prices of goods and services.

As Wenzel points out, Murray Rothbard—one of the most important Austrian Economists the United States has produced—takes exactly the same position. He says that governments take “control of the money supply” when they find that taxation doesn’t produce enough revenue to cover expenditures. In other words, fiat money is how governments escape revenue constraint.

Rothbard considers this counterfeiting, which is a moral judgment that depends on the prior conclusion that fiat money isn’t the moral equivalent of real money. Rothbard is entitled to this view—I probably even share it—but that doesn’t change the fact that in our economy today, this “counterfeiting” is the operational truth of our monetary system. We can decry it—but we might as well also try to understand what it means for us.

Rothbard worries that government control of the money supply will lead to “runaway inflation.” The MMTers tend to be more sanguine about the danger of inflation than Rothbard—although I do not believe they are entitled to this attitude. As I explained in my piece “Monetary Theory, Crony Capitalism and the Tea Party,” the MMTers tend to underestimate the influence of special interests—including government actors and central bankers themselves—on monetary policy. They have monetary policy prescriptions that would avoid runaway inflation but, it seems to me, there is little reason to expect these would ever be followed in the countries that are sovereign currency issuers. I think that on this point, many MMTers confuse analysis of the world as it is with the world as they would like it to be.

In short, the MMTers agree with Rothbard on the purpose and effect of government control of money: it means the government is no longer revenue constrained. They differ about the likelihood of runaway inflation , which is not a difference of principle but a divergence of political prediction.

This point of agreement sets both Austrians and MMTers outside of mainstream economics in precisely the same way. They appreciate that the modern monetary system is very, very different from older, commodity based monetary systems—in a way that many mainstream economists do not.

In MM, CC & TP, I briefly mentioned a few other positions on the economy MMTers tend to share. Wenzel writes that “there is nothing right about these views.”

I don’t think Wenzel actually agrees with himself here. Let’s run through these one by one.

1. The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.

2. The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.

Are we entitled to read “capitalist economies” in this way? I think we are. The MMTers are not, for the most part, attempting to argue with non-existent theoretical economies or describe the epic-era Icelandic political economy. They are dealing with the economy we have, which is usually called “capitalist.” Austrians can argue that this isn’t really capitalism—but this is a terminological quibble. When it comes down to the problem of self-regulation of our so-called capitalist system, the Austrians and MMTers are in agreement.

3. Next up is the MMT view (borrowed from an earlier economic school called “Functional Finance”) that fiscal policy should be judged by its economic effects. Wenzel asks if this means that this “supercedes private property that as long as something is good for the economy, it can be taxed away from the individual?”

Here is a genuine difference between the Austrians—especially those of the Rothbardian stripe—and the MMTers. The MMTers do indeed envision the government using taxes to accomplish what is good for the economy—which, for the most part, means combating inflation. They think that the government may need to use taxation to snuff out inflation at times. Alternatively, the government can also reduce its own spending to extinguish inflation.

Note that we’ve come across a gap between MMTers and Rothbardians that is far smaller than the chasm between either of them and mainstream economics, where taxation of private property and income is regularly seen as justified by the need to fund government operations. MMTers and Austrians both agree that under the current circumstances people in most developed countries are overtaxed.

4. Wenzel actually overlooks the larger gap between Austrians and MMTers, which has to do with the efficacy of government spending. Many MMTers believe that most governments in so-called capitalist economies are not spending enough. Most—if not all—Austrians think that these same government are spending too much.

The Austrian view is based on the idea that government spending tends to distort the economy, in part because—as the MMTers would agree—government spending in our age typically involves monetary expansion. The MMTers, I would argue, have a lot to learn from the Austrians on this point. I think that an MMT effort to more fully engage the Austrians on the topic of the structure of production would be well worth the effort.

5. Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug. We know that an economy that more fully reflects the aspirations and choices of the individuals it encompasses is better than one that does not. We know that high unemployment is worse than low unemployment. All other things being equal, a more productive economy is superior to a less productive economy, a wealthier economy is better than a more impoverished one.

Wenzel’s position amounts to nihilism. I think he is confusing the theory of subjective value with a deeper relativism. Subjectivism is merely the notion that the value of an economic good—that is, an object or a service—is not inherent to the thing but arises from within the individual’s needs and wants. This does not mean that we cannot say that some economic outcome is better or worse or that certain policy prescription are good for the economy and certain are worse.

It would be odd for any Austrian to adopt the nihilism of Wenzel. It’s pretty rare to ever encounter an Austrian who lacks normative views of the economy. These normative views depend on the view that some things are good for economy and some things are bad. I doubt that Wenzel himself really subscribes to the kind of nihilism he seems to advocate in his post.

Wenzel’s final critique of me is that I over-emphasize cronyism and underplay the deeper problems of centralized power. My reply is three-fold. First, cronyism is a more concrete political problem than centralization; tactically, it makes sense to fight cronyism. Second, cronyism is endemic to centralized government decisions, as the public choice economists have shown. They call it special interest rent-seeking, but that’s egg-head talk from cronyism. Third, I totally agree: centralization is a real problem because the “rationalization” involved necessarily downplays the kinds of unarticulated knowledge that are important to everyday life, prosperity and happiness.

At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense. Intellectually, bringing together the descriptive view of modern monetary systems with Austrian views about the structure of production and limitations of economic planning (as well Rothbardian respect for individual property rights) should be a fruitful project.

So, as I said last time, let’s make it happen.

quick look at the 489 billion euro LTRO

When it comes to CB liquidity operations, as previously discussed, it’s about price- interest rates- and not quantities of funds. In other words, the LTRO is an ECB tool that assists in setting the term structure of euro interest rates. It helps the ECB set the term cost of funds for its banking system, with that cost being passed through to the economy on a risk adjusted basis, with the banking system continuing to price risk.

So what does locking in their funds via LTRO do for most banks? Not much. Helps keep interest rate risk off the table, but they’ve always had other ways of doing that. It takes away some liquidity risk, but not much, as the banks haven’t been euro liquidity constrained. And banks still have the same constraints due to capital and associated risks.

To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons.

But while liquidity is a necessary condition for banking and the economy under current institutional arrangements, and while aggregate demand would further retreat if the CB failed to support bank liquidity, liquidity provision per se doesn’t add to aggregate demand.

What’s needed to restore output and employment is an increase in net spending, either public or private. And that choice is more political than economic.

Public sector spending can be increased by simply budgeting and spending. Private sector spending can be supported by cutting taxes to enhance income and/or somehow providing for the expansion of private sector debt.

Unfortunately current euro zone institutional structure is working against both of these channels to increased aggregate demand, as previously discussed.

And even in the US, where both channels are, operationally, wide open, it looks like FICA taxes are going to be allowed to rise at year end and work against aggregate demand, when the ‘right’ answer is to suspend it entirely.

MMT to the ECB- you can’t inflate, even if you wanted to

With the tools currently at their immediate disposal, including providing unlimited member bank liquidity,lowering the interbank rate, and buying euro national govt debt, the ECB has no chance of causing any monetary inflation, no matter how hard it might try. There just are no known channels, direct or indirect, in theory or practice, that connects those policies to the real economy. (Note that this is not to say that removing bank liquidity and national govt credit support wouldn’t be catastrophic. It’s a bit like engine oil. You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

Lower rates sure doesn’t do the trick. Just look to Japan for going on two decades, the US going on 3 years, and the ECB’s low rate policies of recent years. There’s not a hint of monetary inflation/excess aggregate demand or inflationary currency weakness from low rates. If anything, seems to me the depressing effect on savers indicates low rates from the CB might even, ironically, promote deflation through the interest income channels, as the non govt sector is necessarily a net receiver of interest income when the govt is a net payer. (See Bernanke, Reinhart, and Sacks 2004 Fed paper on the fiscal effect of changes in interest rates.)

And if what’s called quantitative easing was inflationary, Japan would be hyperinflating by now, with the US not far behind. Nor is there any sign that the ECB’s buying of euro govt bonds has resulted in any kind of monetary inflation, as nothing but deflationary pressures continue to mount in that ongoing debt implosion. The reason there is no inflation from the ECB bond buying is because all it does is shift investor holdings from national govt debt to ECB balances, which changes nothing in the real economy.

Nor does bank liquidity provision have anything to do with monetary inflation, currency depreciation, or bank lending. As all monetary insiders know, bank lending is never reserve constrained. Constraints on banking come from regulation, including capital requirements and lending standards, and, of course credit worthy entities looking to borrow. With the ECB providing unlimited liquidity for the last several years, wouldn’t you think if there was going to be some kind of monetary problem it would have happened by now?

So the grand irony of the day is, that while there’s nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national govt solvency risk but not halt the deflationary monetary forces currently in place.

So where does monetary inflation come from? Fiscal policy. The Weimar inflation was caused by deficit spending on the order of something like 50% of GDP to buy the foreign currencies demanded for war reparations. It was no surprise that selling that many German marks for foreign currencies in the market place drove the mark down as it did. In fact, when that policy finally ended, so did the inflation. And there was nothing the central bank could do with interest rates or buying and selling securities or anything else to stop the inflation caused by the massive deficit spending, just like today there is nothing the ECB can do to reverse the deflationary forces in place from the austerity measures.

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national govt solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

Post script:

The only way the ECB could inflate would be to buy dollars or other fx outright, which it doesn’t do even when it might want a weaker euro, as ideologically they want the euro to be the reserve currency, and not themselves build fx reserves that give the appearance of the euro being backed by fx.

CNBC’s John Carney on Krugman and MMT

>   
>   (email exchange)
>   
>   On Sat, Nov 12, 2011 at 2:19 PM, Stephanie wrote:
>   
>   John Carney loving on us again

Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

News recap comments

The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.