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Archive for the 'TREASURY' Category

Lew says receipts slowing?

Posted by WARREN MOSLER on 25th September 2013

Not a good sign for the economy?

“Lew had previously said the government would have around $50 billion then. He said on Tuesday revenues have come in a little slower than expected in recent weeks.”

Posted in TREASURY | No Comments »

tsy tax collections

Posted by WARREN MOSLER on 12th June 2013

It gapped up with the fica increase more than with employment

>   (email exchange)
>   On Jun 12, 2013 4:40 PM, wrote:
>   It looks like a good indicator of labor and it is daily.
>   It also looks like a leading indicator of the stock market.
>   Tax Data

Posted in TREASURY | No Comments »

Thinking Caps On – Grab a Coffee – Sales/Trading Commentary

Posted by WARREN MOSLER on 20th May 2013

At: May 14 2013 07:41:14

Consider the following thought experiment. These are the scenarios:
A. The Treasury decides that it will fund itself 30% more in Overnight Bills and reduce issuance across the curve.
B. The Fed announces it will increase QE by 30% (it will remit the net income of this activity back to the Treasury like taxes)
C. Congress announces a new tax on all passive income from USTs, to holders both at home and abroad (ie Central Banks), for all new-issue USTs
D. Lew pre-announces that we will ‘selectively default’ and apply a haircut of on all future Treasury coupon payments of new issues.

Here’s what’s funny. Most intelligent market participants will say things like:
A. Stocks down a few percent on fear of downgrade. Economy slightly weaker or unchanged.
B. Stocks up 5-10% and economy grows another 1% for 1-2yrs; monetary stimulus.
C. Stocks down 5-10% on tax hike (like last year) that maybe corrects. Economy slows 1-2% for a year or so because it’s a tax hike (ie fiscal consolidation).
D. Stocks down 80% and we go into a great depression on steroids. All investment dollars flee the US. I can’t tell you what happens next because my Bloomberg account gets shut down. They might even declare an Internet Holiday.

Here’s what’s craziest: THESE ARE ALL THE SAME THING. The name and the process is different, the OPTICS is different, but the net is the same. There’s the government and there’s everyone else. The government either pays more out – in interest payments or transfer payments or vendor payments, or it takes back more in taxes or default or interest ‘savings.’ Everything the government net gets in ‘revenue’ the rest of the world loses in income. Everything the government dissaves (deficits) the rest of the world saves. Equal and opposite.

[You need to further get around the idea that reserves are overnight bills and there's no such thing as 'monetary base' - just interest rates; that lower discount rates are lower no matter how you get there; that rate cuts are taxes are austerity, even considering the benefit to risk assets from 'lower riskfree discount rates'... it's all basically true if you think abt it long and hard].

Here we are, almost 550 rate cuts into this thing, and inflation everywhere with QE is basically falling (see chart), and incomes are falling everywhere but in the top brackets (see page 9 here for a TRULY SOBERING CHART)… let us never forget that the goal is TO IMPROVE PEOPLE’S QUALITY OF LIFE NOT TO JUICE GDP . Thus economics as a whole also has some major shortcomings. Exporting your way to prosperity is the same as turning your entire population into servants to foreign masters. Disinflation due to lower input costs or better goods or technological gains are good things. HOWEVER if suddenly 20-somethings find social currency in free online friend status rather than cars and houses and weddings – if it makes them happy that’s great but it is also a downward shift in the demand curve that if isn’t replaced leads to someone somewhere being unemployed. These are different issues that shouldn’t all be swept under the ‘disinflation’ rug.

But I digress. Where am I going with all this?
Let’s pretend risk is now in the last 6m-18m phase where everything rallies, everyone in the pool, everyone chases any risk premium to sell, and the underlying income trends are irrelevant. Since I also will posit the Fed isn’t hiking in the next 18 months, I now believe the Fed will entirely miss this risk cycle. Which means they are on hold beyond any trading horizon. So what triggers the end of the cycle? Most would argue – the fear that they ‘tighten’ or ‘hike’ or ‘aren’t on hold anymore.’
To that I disagree…the income and earnings just isn’t there and QE is hurting…in fact the reason the consumer is now tracking +3-4% has been due to a decline in the savings rate (1-handle in q1 as tax hikes hit) that is prone to reverse…it’s MUCH more likely is what triggers the end is that the world starts to understand that QE is a lot like a tax (+ some ‘Richfare’) rather than a stimulus…and that lower rates do raise asset prices for the asset rich but lower incomes and the net to the median person is not what it appears…I see progress on this day every front…TBAC is starting to get it…the inflation markets are starting to get it… we’ll get there … low rates forever…buy blues..

Posted in CBs, Equities, Fed, TREASURY | No Comments »

Tsy floaters

Posted by WARREN MOSLER on 3rd May 2013

Yes, the Treasury is in fact selling notes that float off of its own bills.


The Treasury provided a preliminary term sheet for the floating rate note program that will launch sometime in Q4 or Q1. In addition, they said the first auction would have a 2yr maturity, and that the expected pace of issuance would be $10bn to $15bn per month.

  • A 2yr maturity would be eligible to be purchases by money market funds, but the maturity is a bit long for them from a weighted average life (WALA) perspective. Fortunately, we think another investor base will pick up any slack left from the 2a-7 funds.
  • Bills: Watch the seasonality. As expected, the initial FRNs will be linked to the results of 3m T-bill auctions. But in a modest surprise, the rate will only reset quarterly.

Posted in Bonds, TREASURY | No Comments »

Greg Walden to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins

Posted by WARREN MOSLER on 7th January 2013

More of the blind leading the blind. Either way Treasury only spends what’s authorized by Congress. And all the coin does is shift interest expense from the Treasury to the Fed.

Illogic is clearly a adaptive trait for holding office. As they say in Church, it’s another mysteriously rushed contradiction wrapped in an enema…

Greg Walden plans to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins to pay bills and expand debt

U.S. Rep. Greg Walden (R-Ore.) today announced plans to introduce a bill to stop a proposal to mint high-value platinum coins to pay the federal government’s bills.

“Some people are in denial about the need to reduce spending and balance the budget. This scheme to mint trillion dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution. I’m introducing a bill to stop it in its tracks,” Rep. Walden said.

“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt. We must reduce spending and get our fiscal house in order,” Rep. Walden said.

Within the last week, numerous media reports (example here) have suggested that the U.S. Mint could create trillion dollar platinum coins, which would then be deposited into the Federal Reserve to be used to pay the federal government’s bills or avoid hitting the debt ceiling. Rep. Jerrold Nadler, the ranking member of the Judiciary Committee’s Subcommittee on the Constitution, touted the proposal last week (story here). New York Times columnist and Princeton professor Paul Krugman suggested the idea in an article as well (click here). Other leaders in Washington, including House Minority Leader Nancy Pelosi, have urged the President to raise the debt limit unilaterally without permission from Congress.

Representative Walden, a member of the House Republican leadership, represents the Second District of Oregon, which includes 20 counties in the southern, central and eastern regions of the state.

Posted in Government Spending, TREASURY | 91 Comments »

Comments on Senator Sanders article on the Fed

Posted by WARREN MOSLER on 8th November 2011

Dear Senator Sanders,

Thank you for your attention to this matter!
My comments appear below:

The Veil of Secrecy at the Fed Has Been Lifted, Now It’s Time for Change

By Senator Bernie Sanders

November 2 (Huffington Post) — As a result of the greed, recklessness, and illegal behavior on Wall Street, the American people have experienced the worst economic crisis since the Great Depression.

Not to mention the institutional structure that rewarded said behavior, and, more important, the failure of government to respond in a timely manner with policy to ensure the financial crisis didn’t spill over to the real economy.

Millions of Americans, through no fault of their own, have lost their jobs, homes, life savings, and ability to send their kids to college. Small businesses have been unable to get the credit they need to expand their businesses, and credit is still extremely tight. Wages as a share of national income are now at the lowest level since the Great Depression, and the number of Americans living in poverty is at an all-time high.

Yes, it’s all a sad disgrace.

Meanwhile, when small-business owners were being turned down for loans at private banks and millions of Americans were being kicked out of their homes, the Federal Reserve provided the largest taxpayer-financed bailout in the history of the world to Wall Street and too-big-to-fail institutions, with virtually no strings attached.

Only partially true. For the most part the institutions did fail, as shareholder equity was largely lost. Failure means investors lose, and the assets of the failed institution sold or otherwise transferred to others.

But yes, some shareholders and bonds holders (and executives) who should have lost were protected.

Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the terms of this assistance?

Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent.

The American people are finally getting answers to these questions thanks to an amendment I included in the Dodd-Frank financial reform bill which required the Government Accountability Office (GAO) to audit and investigate conflicts of interest at the Fed. Those answers raise grave questions about the Federal Reserve and how it operates — and whose interests it serves.

As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.

Yes, however, while I haven’t seen the detail, that figure likely includes liquidity provision to FDIC insured banks which is an entirely separate matter and not rightly a ‘bailout’.

The US banking system (rightly) works to serve public purpose by insuring deposits and bank liquidity in general. And history continues to ‘prove’ banking in general can work no other way.

And once government has secured the banking system’s ability to fund itself, regulation and supervision is then applied to ensure banks are solvent as defined by the regulations put in place by Congress, and that all of their activities are in compliance with Congressional direction as well.

The regulators are further responsible to appropriately discipline banks that fail to comply with Congressional standards.

Therefore, the issue here is not with the liquidity provision by the Fed, but with the regulators and supervisors who oversee what the banks do with their insured, tax payer supported funding.

In other words, the liability side of banking is not the place for market discipline. Discipline comes from regulation and supervision of bank assets, capital, and management.

The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people “regulating” the banks were the exact same people who were being “regulated.” Talk about the fox guarding the hen house!

Yes, this is a serious matter. On the one hand you want directors with direct banking experience, while on the other you strive to avoid conflicts of interest.

The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were “too big to fail” and were given an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail.

The Fed necessarily sets the cost of funds for the economy through its designated agents, the nations Fed member banks. It was the Fed’s belief that, in general, a lower cost of funds for the banking system, presumably to be passed through to the economy, was in the best interest of ‘ordinary Americans.’ And note that the lower cost of funds from the Fed does not necessarily help bank earnings and profits, as it reduces the interest banks earn on their capital and on excess funds banks have that consumers keep in their checking accounts.

However, there was more that Congress could have done to keep homeowners from failing, beginning with making an appropriate fiscal adjustment in 2008 as the financial crisis intensified, and in passing regulations regarding foreclosure practices.

Additionally, it should also be recognized that the Fed is, functionally, an agent of Congress, subject to immediate Congressional command. That is, the Congress has the power to direct the Fed in real time and is thereby also responsible for failures of Fed policy.

They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed — real change.

I blame this almost entirely on the failure of Congress to make the immediate and appropriate fiscal adjustments in 2008 that would have sustained employment and output even as the financial crisis took its toll on the shareholder equity of the financial sector.

Congress also failed to act with regard to issues surrounding the foreclosure process that have worked against public purpose.

Among the GAO’s key findings is that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the GAO, the Fed actually provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.

For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.

This demands thorough investigation, and in any case the conflict of interest should have been publicly revealed at the time.

Getting this type of disclosure was not easy. Wall Street and the Federal Reserve fought it every step of the way. But, as difficult as it was to lift the veil of secrecy at the Fed, it will be even harder to reform the Fed so that it serves the needs of all Americans, and not just Wall Street. But, that is exactly what we have to do.

Yes, I have always supported full transparency.

To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.

Here are some of the questions that I have asked this advisory committee to explore:

1. How can we structurally reform the Fed to make our nation’s central bank a more democratic institution responsive to the needs of ordinary Americans, end conflicts of interest, and increase transparency? What are the best practices that central banks in other countries have developed that we can learn from? Compared with central banks in Europe, Canada, and Australia, the GAO found that the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other essential elements of transparency.

Yes, full transparency in ‘real time’ would serve public purpose.

2. At a time when 16.5 percent of our people are unemployed or under-employed, how can we strengthen the Federal Reserve’s full-employment mandate and ensure that the Fed conducts monetary policy to achieve maximum employment? When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with the same boldness to combat the unemployment crisis.

Unfortunately employment and output is not a function of what’s called ‘monetary policy’ so what is needed from the Fed is full support of an active fiscal policy focused on employment and price stability.

3. The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than $9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is “too big to fail” be allowed to exist?

Larger size should be permitted only to the extent that it results in lower fees for the consumer. The regulators can require institutions that wish to grow be allowed to do so only in return for lower banking fees.

4. The Federal Reserve has the responsibility to protect the credit rights of consumers. At a time when credit card issuers are charging millions of Americans interest rates between 25 percent or more, should policy options be established to ensure that the Federal Reserve and the Consumer Financial Protection Bureau protect consumers against predatory lending, usury, and exorbitant fees in the financial services industry?

Banks are public/private partnerships chartered by government for the further purpose of supporting a financial infrastructure that serves public purpose.

The banks are government agents and should be addressed accordingly, always keeping in mind the mission is to support public purpose.

In this case, because banks are government agents, the question is that of public purpose served by credit cards and related fees, and not the general ‘right’ of shareholders to make profits.

Once public purpose has been established, the effective use of private capital to price risk in the context of a profit motive should then be addressed.

5. At a time when the dream of homeownership has turned into the nightmare of foreclosure for too many Americans, what role should the Federal Reserve be playing in providing relief to homeowners who are underwater on their mortgages, combating the foreclosure crisis, and making housing more affordable?

Again, it begins with a discussion of public purpose, where Congress must decide what, with regard to housing, best serves public purpose. The will of Congress can then be expressed by the institutional structure of its Federal banking system.

Options available, for example, include the option of ordering that appraisals and income statements not be factors in refinancing loans originated by Federal institutions including banks and the Federal housing agencies. At the time of origination the lenders calculated their returns based on mortgages being refinanced as rates came down, assuming all borrowers would be eligible for refinancing. The financial crisis and subsequent failure of policy to sustain employment and output has given lenders an unexpected ‘bonus’ through a ‘technicality’ that allows them to refuse requests for refinancing at lower rates due to lower appraisals and lower incomes.

6. At a time when the United States has the most inequitable distribution of wealth and income of any major country, and the greatest gap between the very rich and everyone else since 1928, what policies can be established at the Federal Reserve which reduces income and wealth inequality in the U.S?

The root causes begin with Federal policy that has resulted in an unprecedented transfer of wealth to the financial sector at the expense of the real sectors. This can easily and immediately be reversed, which would serve to substantially reverse the trend income distribution.


Warren Mosler

Posted in Articles, Banking, Fed, Political, Recession, TREASURY | 52 Comments »

News recap comments

Posted by WARREN MOSLER on 7th November 2011

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.

Posted in Congress, Deficit, ECB, EU, Fed, Germany, Greece, Inflation, Interest Rates, Political, TREASURY, USA | 27 Comments »

President Obama entering the fray

Posted by WARREN MOSLER on 3rd November 2011

More of the blind leading the blind. The one thing they all agree on, at great expense to global well being, is the budget deficits are all too large and the need for shared sacrifice and all that.

No chance for anything constructive to come out of any of this.

And these masters of their money machines don’t even know how to inflate, as they all desperately try to inflate with their versions of quantitative easing, which, functionally, is just another demand draining tax.

*DJ Merkel, Obama Discussed How To Boost EFSF Firepower Without ECB
*DJ Obama To Merkel: We Are Totally Invested In Your Success – Source
*DJ Geithner, Schaeuble May Meet To Discuss IMF Role In Euro Crisis -Source

Posted in CBs, Deficit, ECB, EU, Fed, Inflation, Interest Rates, Obama, Political, TREASURY | 8 Comments »

US Treasury May Issue Debt With a Floating Interest Rate

Posted by WARREN MOSLER on 24th October 2011

Brilliant. Reminds me of Will Rogers. Think of all he’d have said if he’d understood MMT.

US Treasury May Issue Debt With Floating Interest Rate

By Jeff Cox

October 24 (CNBC) — Dealers and traders have been approached recently with plans to issue a floating-rate note that for investors would provide an opportunity to profit should rates go up and for the government a chance to restructure its debt even further.

Posted in Interest Rates, TREASURY, USA | 18 Comments »

MMT proposals for the 99%

Posted by WARREN MOSLER on 16th October 2011

1. A full FICA suspension to end that highly regressive, punishing tax and restore sales, output, and jobs.
2. $150 billion in federal revenue sharing for the state goverments on a per capita basis to sustain essential services.
3. An $8/hr federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.
4. See my universal health care proposals on this website (Health Care Proposal).
5. See my proposals for narrow banking, the Fed, the Treasury and the FDIC on this website (Banking Proposal).
6. See my proposal’s to take away the financial sector’s ‘food supply’ by banning pension funds from buying equities, banning the Tsy from issuing anything longer than 3 month bills, and many others.
7. Universal Social Security at age 62 at a minimum level of support that makes us proud to be Americans.
8. Fill the Medicare ‘donut hole’ and other inequities.
9. Enact my housing proposals on this website (Housing proposal).
10. Don’t vote for anyone who wants to balance the federal budget!!!!

Posted in Banking, Congress, Deficit, Employment, Fed, Government Spending, Housing, Proposal, TREASURY, USA | 87 Comments »

Treasury to Accommodate Fed on ‘Twist’

Posted by WARREN MOSLER on 14th September 2011

Interesting story, in that I’ve heard indirectly that my book,
The 7 Deadly Innocent Frauds of Economic Policy,
has been making the rounds at the Treasury as well as the Fed and other agencies,
most interesting,
staffers who say they’ve read it asked that their names not be revealed.

Treasury to Accommodate Fed on ‘Twist’
Published: Wednesday, 14 Sep 2011 | 5:47 AM ET

The US Treasury would effectively accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, according to people familiar with the matter.

The Treasury would play a crucial role if the Fed decided to launch “Operation Twist”, where the central bank would buy more longer-term Treasury securities to drive down long-term interest rates by reducing the amount of such debt available to other investors.

Posted in Fed, TREASURY | 83 Comments »

DeMint and Erickson to Boehner : HOLD THE LINE

Posted by WARREN MOSLER on 28th July 2011

Says it all:

Boehner-Reid Debt Plan

By Sen. Jim DeMint

July 26 — I have troubling news. I’m very careful about criticizing my party’s leaders, but what is happening in Washington right now cannot be ignored.

House Speaker John Boehner (R-OH) has abandoned the Cut-Cap-Balance Act and is now pushing a new plan that is nearly identical to the one proposed by Senate Majority Leader Harry Reid (D-NV).

The Boehner-Reid plan gives the President an immediate increase in the debt limit and only promises to cut spending in the future. It violates all three principles of the Cut-Cap-Balance Pledge because it does not substantially cut current spending, it does not truly cap future spending, and it does not require the passage of a strong Balanced Budget Amendment before raising the debt limit.

In short, I oppose the Boehner-Reid plan because it won’t balance the budget and stop the debt that is destroying our country.

The Boehner-Reid Plan

You will hear many claims about this plan over the next few days as it is pushed through the House and Senate. Some of these claims will be true, but many will be false. Here are the facts. The Boehner-Reid plan:

Provides two increases in the debt limit — $900 billion and $1.6 trillion — totaling $2.5 trillion. It gives the President an immediate $900 billion increase given that Congress does not vote to disapprove it. It gives the President another $1.6 trillion increase next year if a bill written by a new Super Committee passes both houses and becomes law.

Reduces spending by only $1.2 trillion over the next ten years. This amount won’t even come close to balancing the budget, as the debt is expected to grow by as much as $10 trillion over the next decade. The plan also reduces spending by only $6 billion in 2012. Considering that our government currently spends $10 billion a day, $6 billion is far too little to cut over the first year of the plan.

Calls for a vote on the Balanced Budget Amendment but does not require its passage. Without passage of a strong Balanced Budget Amendment, Congress will never break its addiction to spending.

Makes it virtually impossible to stop the debt limit from going up. The debt ceiling increases can only be stopped if Congress passes a resolution of disapproval and then votes to override the President’s veto with two-thirds support in the House and Senate.

Creates a new, 12-member Super Committee to write another “grand bargain” to reduce the deficit by at least $1.6 trillion. It does not, however, prohibit the Super Committee from writing a bill to raise taxes and destroy jobs. The bill can then be fast-tracked through the House and Senate with no amendments.

Why It Should Be Rejected

After reviewing the details of Boehner-Reid plan, I cannot support it.

It won’t balance the budget and stop the debt. Even if the cuts called for in the plan were real, the debt will still increase by $7 trillion over the next ten years.

It won’t protect our AAA bond rating. According to financial reports, this plan will not reduce long-term spending by enough to prevent a downgrade. If we lose our AAA rating, it will create higher interest rates and cause our debt to grow even faster.

It will likely result in higher taxes that will destroy even more jobs. The unemployment rate is over 9 percent. We cannot afford to lose more jobs when so many Americans are struggling to find work.

There are some in my party who think I should ignore the flaws of the Boehner-Reid plan, bite my tongue, and support my party’s leaders. If I thought this were a political game, that might make sense. But the future of our country is at stake, I don’t believe this plan will save it, and I have a moral obligation to say so.

The Way Forward

Fortunately, there is a much better solution.

The Cut-Cap-Balance Act would balance the budget, stop the debt, and protect our AAA bond rating. This legislation passed the House with bipartisan support but was blocked by Democrats in the Senate.

The votes in the Senate for Cut-Cap-Balance are there if Republicans stand firm. 23 Democrats in the Senate have expressed support for the Balanced Budget Amendment at some point in their careers. They’re blocking it now because they believe Republicans will blink and agree to something much less.

And that’s exactly what will happen if the Boehner-Reid plan is passed. It gives the big spenders in Washington everything they wanted — an increase in the debt limit, phony spending cuts, and a mechanism to pass tax increases.

Please call your senators today and urge them to oppose the Boehner-Reid plan and to demand passage of the Cut, Cap, Balance Act.


Jim DeMint
United States Senator
Chairman, Senate Conservatives Fund

In Defense of Holding the Line

By Erick Erickson

July 26 — I’m getting beat to hell and back by conservatives for insisting the GOP hold the line on Cut, Cap, and Balance. Even here at RedState, I’m getting accused of “ideological intransigence.” Yeah, here at RedState. There’s a first time for everything.

People want a deal. People want John Boehner’s deal. People are upset with me for not liking John Boehner’s deal. People are telling me, “They only have one house, Erick. You can’t expect them to not compromise. They control nothing.”

I’ve said all along I expect a deal and a compromise. Here’s the problem and I need you to understand this from perspective, whether you agree with me or not.

See, I worked to send people to Washington, DC to solve problems, to make things right, to fix the things that were broken, and to send power back to the states. They are not doing that.

We all saw Democrats go to Washington in 2008 and take the whole thing. They controlled everything and they made everything worse. They passed a stimulus bill that killed or ruined hundreds of thousands of jobs in the private sector while growing the government. They increased dependency on the federal government. And then they passed Obamacare and socialized American healthcare. But it doesn’t fully take effect until 2014. We saw Democrats willing to lose their positions to lurch the nation left.

So we sent to Washington an army of conservatives to Washington to defund Obamacare and stop the White House. And now they’ve gotten there and have refused to fight. They promised and put in writing that they’d cut $100 billion from the federal government budget in 2011 and they ultimately cut only $38 billion. The Congressional Budget Office, when it was done scoring it, said they really were only cutting about $500 million and it would cost more money that it was worth it to actually cut those dollars.

So they said, “But we”ll stand firm on the debt ceiling. We’ll hold the line.” Everybody gave them a pass and said, “Okay, hold the line on the debt ceiling.”

Now here we are the week before the deadline. John Boehner laments they should have done it sooner, but he refused to do it sooner. The Speaker has prevented the Republicans from submitting legislation to ensure we would not default so that he would have leverage over his own members to force them to take a deal. And now they are dealing.

What is their deal?

Their deal creates another committee to look at spending — the 18th in the past 30 years. These 18 committees have never done anything except raise taxes. Their spending cuts are put off a decade and future congresses ignore them.

Boehner’s spending caps are easily waived as they’ll be rules, not laws. And they punt.

A lot of you are emailing and getting on twitter saying to take the deal. Take the compromise. Why should we compromise? That’s what we always do. Even when in the majority we compromise. The Democrats didn’t compromise on healthcare. But you people want to compromise. Republicans, whether in the majority or minority, are always compromising in favor of bigger government and imaginary spending cuts.

To make matters worse, why the hell are the Republicans the ones coming up with the plans if they only control one house of one branch of the federal government? Why are they doing it? We’re on the third damn plan. They aren’t even compromising with the Democrats. They are compromising with themselves.

The Democrats are holding their line. The GOP is splitting conservatives. The Democrats are saying “Raise the debt ceiling. Don’t cut anything.” And Boehner is saying okay and putting in cuts that take affect in year eight of ten so none of them will be around to be held accountable. Why?

The GOP came up with Paul Ryan’s plan. They passed it. They took bullets. The GOP put him in a witness protection program and dropped it like a hot potato.

So then the GOP passed Cut, Cap, and Balance and the Democrats beat them up and again accused the GOP of killing grandma. The leadership was lukewarm to it and never fought for it. And immediately after voting for it, the leadership said, “Now, let’s move on to the third plan.”

Are these all just symbolic votes? If so, I’d rather some substance. This symbolism is getting the GOP killed with nothing to show for it.

Why the hell are we on our third plan when the Democrats haven’t even come up with one plan? They haven’t even passed a budget in over 800 days. We’re in this mess because Harry Reid, in December of 2010, refused the raise the debt ceiling so the GOP could own the problem. The GOP fell into the trap with eyes wide open.

And the Republicans are falling for it yet again.

And now I’m being accused of thinking this is all a game even by long time RedState readers. I do not think this is all a game.

I know the credit rating is going to be downgraded and I don’t want it to happen. You people who want the deal are so worked up in emotion that you are ignoring all the facts. Here are the facts:

1. S&P says we need a deal of at least $4 trillion in cuts to avoid a credit rating drop.

2. Neither Boehner nor Reid get us there.

3. The only plan that gets us there is Cut, Cap, and Balance and the GOP is running away from it as fast as they can. The GOP already passed it and it just four votes shy of a majority in the Senate.

No one wants to fight. “No, we’ve already had that vote. It can’t pass the Senate,” they say.

There will be no default on August 2nd. We know it will not happen. How do we know? Because we have more money coming in each month than is needed to pay principle and interest on our national debt. And we have had multiple prior occasions where we have gone passed the deadline and the world did not suddenly end. It is all political rhetoric. Shame on you for succumbing to fear.

Barack Obama does not want to be remembered as the President on whose watch the nation defaulted. His leverage goes away on August 3rd and the GOP holds all the cards. We won’t default. We can improve our negotiating position.

The GOP could hold the line. And because they won’t hold the line, they are tanking our credit behind a bunch of smoke and mirrors. If the Democrats blame the GOP when the credit rating drops, the GOP will damn well deserve the blame if they stick with Boehner’s plan.

They could at least fight to turn the tide. They could at least hold the line.

Posted in Deficit, Government Spending, Obama, Political, TREASURY, USA | 18 Comments »

Insurance Cost Against US Default Hits Record

Posted by WARREN MOSLER on 28th July 2011

Somewhat misleading headline.

It reflects the odds of being able to deliver a specific treasury bond to the insurer at par.

Insurance cost?against US default hits record

By Michael Mackenzie and Nicole Bullock

May 25 (FT) —Insurance Cost Against US Default Hits Record
Published: Wednesday, 27 Jul 2011 | 10:14 PM ETText Size
By: Michael Mackenzie and Nicole Bullock in New York

The cost of buying insurance against a default by the U.S. rose to a record on Wednesday, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders.

In a CDS, a buyer of protection is compensated by the seller should there be a default or missed payment, known as a “credit event”. Premiums for one-year U.S. sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009.

In the event of a U.S. credit event, the buyers of CDS would locate the February 2039 Treasury bond, currently priced at less than $88, and deliver that to the writers of insurance and receive $100 back, or par.

Posted in TREASURY, USA | 1 Comment »

Treasury default requires reprogramming

Posted by WARREN MOSLER on 26th July 2011

In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”

Posted in TREASURY | 54 Comments »

Comments on Chairman Bernanke’s testimony

Posted by WARREN MOSLER on 14th July 2011

>   (email exchange)
>   On Thu, Jul 14, 2011 at 9:55 AM, wrote:
>   I see Bernanke is speaking your language now…

Yes, a bit, but but as corrected below:

“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?

BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

Not exactly, as all govt spending is done by adding reserves to member bank reserve accounts. Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.

What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts.

But yes, spending is in no case operationally constrained by revenues.

DUFFY: Does it come from tax dollars, though, to buy those assets?

BERNANKE: It does not.

Operationally he is correct, and in this case, to the extent QE does not add to aggregate demand, he is further correct. In fact, to the extent that QE removes interest income from the economy, it actually acts as a tax on the economy, and not as a govt expenditure.

However, and ironically, I submit he believes that QE adds to aggregate demand, and therefore ‘uses up’ some of the aggregate demand created by taxation, and therefore, in that sense, it would be taxpayer dollars that he’s spending.

DUFFY: Are you basically printing money to buy those assets?

BERNANKE: We’re not printing money. We’re creating reserves in the banking system.

Technically correct in that he’s not printing pieces of paper.

But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’

All govt spending can be thought of as printing dollars, taxing unprinting dollars, and borrowing shifting dollars from reserve accounts to securities accounts.

DUFFY: In your testimony — I only have 20 seconds left — you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3? Or is that something that you’re considering?

BERNANKE: I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where we’re like, you know, the economy — recovery is faltering and — and we’re looking at inflation dropping down toward zero or something, you know, where inflation issues are not relevant, then, you know, we have to look at all the options.

DUFFY: And QE3 is one of those?


Very hesitant, as it still looks to me like there’s an tacit understanding with China that there won’t be any more QE, as per China’s statement earlier today.

PAUL: I hate to interrupt, but my time is about up. I would like to suggest that you say it’s not spending money. Well, it’s money out of thin air. You put it into the market. You hold assets and assets aren’t — you know, they are diminishing in value when you buy up bad assets.

But very quickly, if you could answer another question because I’m curious about this. You know, the price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?

BERNANKE: Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think people are — the reason people hold gold is as a protection against what we call “tail risk” — really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.

PAUL: Do you think gold is money?

BERNANKE: No. It’s not money.


PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

BERNANKE: Well, you know, it’s an asset. I mean, it’s the same — would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset.

Right answer would have been gold used to be demanded/accepted as payment of taxes, which caused it to circulate as money.

Today the US dollar is what’s demanded for payment of US taxes, so it circulates as money.

In fact, if you try to spend a gold coin today, in most parts of the world you have to accept a discount to spot market prices to get anyone to take it.

PAUL: Well, why do — why do central banks hold it?

BERNANKE: Well, it’s a form of reserves.

Yes, much like govt land, the strategic petroleum reserve, etc.

PAUL: Why don’t they hold diamonds?

Some probably do.

BERNANKE: Well, it’s tradition, long-term tradition.

PAUL: Well, some people still think it’s money.”

“CLAY: Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling?

BERNANKE: Yes, we’ve — of course, we’ve looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That’s what it means to have a deficit.

So immediately, there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.

So this is a matter of arithmetic. Fairly soon after that date, there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.

If in fact we ended up defaulting on the debt, or even if we didn’t, I think, you know, it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse.

But clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It’s the foundation for most of our financial — for much of our financial system. And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.

And higher interest rates would also impact the individual American consumer. Is that correct?

BERNANKE: Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates and all other types of consumer rates.”

“BERNANKE: A second problem is the housing market. Clearly, that’s an area that should get some more attention because that’s been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the tax code needs a look to try to improve its efficiency and to promote economic growth as well.”

While housing isn’t growing as in the past, housing or anything else is only a source of drag if it’s shrinking.

It’s not that case that if housing were never to grow we could not be at levels of aggregate demand high enough to sustain full employment levels of sales and output.

We’d just be doing other things than in past cycles.

G. MILLER: Well, the problem I had with the Fannie-Freddie hybrid concept was the taxpayers were at risk and private sector made all the profits.

BERNANKE: That’s right.

That’s the same with banking in general with today’s insured deposits, a necessary condition for banking. Taxpayers are protected by regulation of assets. The liability side is not the place for market discipline, as has been learned the hard way over the course of history.

G. MILLER: That — that’s unacceptable. What do you see the barriers to private capital entering mortgage lending (inaudible) market for home loans would be?

BERNANKE: Well, currently, there’s not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect, though, that, you know, when the housing market begins to show signs of life, that there will be expanded interest.

I think another reason — and go back what Mr. Hensarling was saying — is that the regulatory structure under which securitization, et cetera, will be taking place has not been tied down yet. So there’s a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market securitization, et cetera, going forward.”

As above, bank lending is still a public/private partnership, presumably operating for public purpose.

See my Proposals for the Banking System, Treasury, Fed, and FDIC (draft)

And there’s no reason securitization has to play any role. Housing starts peaked in 1972 at 2.6 million units with a population of only 200 million, with only simple savings and loans staffed by officers earning very reasonable salaries and no securitization.

“CARSON: However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our nation’s small businesses and the American public in general?

And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time. Are the Fed’s actions meaningless unless banks are willing to lend?

CARSON: And, lastly, what are your thoughts on requiring a 20 percent down for a payment? And do you believe that this will impact homeowners significantly or — or not at all?

BERNANKE: Well, banks — first of all, they have stopped tightening their lending standards, according to our surveys, and have begun to ease them, particularly for commercial and industrial loans and some other types of loans.

Small-business lending is still constrained, both because of bank reluctance but also because of lack of demand because they don’t have customers or inventories to finance or because they’re in weakened financial condition, which means they’re harder to qualify for the loan.

Right, sales drive most everything, including employment

“PETERS: Do you see some parallels between what happened in the late ’30s?

BERNANKE: Well, it’s true that most historians ascribe the ’37- ’38 recession to premature tightening of both fiscal and monetary policy, so that part is correct.

Also, Social Security was initiated, and accounted for ‘off budget’, and, with benefit payments initially near 0, the fica taxes far outstripped the benefits adding a sudden negative fiscal shock.

The accountants realized their mistake and Social Security was put on budget where it remains and belongs.

I think every episode is different. We have to look, you know, at what’s going on in the economy today. I think with 9.2 percent unemployment, the economy still requires a good deal of support. The Federal Reserve is doing what we can to provide monetary policy accommodation.

But as we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays well controlled.

Posted in Banking, Bonds, Comodities, Currencies, Fed, GDP, Housing, Inflation, TREASURY | 24 Comments »

Geithner- We’re going to try to get the biggest deal possible

Posted by WARREN MOSLER on 10th July 2011

Bill’s blog, below, as always, is well worth a read.

And note today’s news, where, of all things, the Democrats are trying to position themselves as larger deficit cutters than the Republicans:

“We’re going to try to get the biggest deal possible, a deal that’s best for the economy, not just in the short term,” Geithner said on NBC’s “Meet the Press.”

It is a pity that he doesn’t know the answer himself

By Bill Mitchell

We are deep into hard-disk crash trauma at CofFEE today with 2 volumes dying at the same time on Friday and a backup drive going down too. At least it was a sympathetic act on their behalf. Combine that with I lost a HDD on an iMAC after only 2 weeks since it was new a few weeks ago – after finally convincing myself that OS X was the way forward with virtual machines. Further another colleague’s back-up HDD crashed last week. It leaves one wondering what is going on. Backup is now a oft-spoken word around here today. But there is one thing I do know the answer to – Greg Mankiw’s latest Examination Question. It is a pity that he doesn’t know the answer himself. Further, it is a pity that one of the higher profiled “progressives” in the US buys into the same nonsense.

In his latest blog (July 3, 2011) – A Good Exam Question – Mankiw pokes fun at so-called progressive Dean Baker who wrote a column recently in The Republic (July 2, 2011) – Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling Impasse – where as the title suggests he thinks ultra-conservative US Republican politician Ron Paul is onto something good.

The truth is that none of them – Mankiw, Baker, or Paul – understand how the banking system operates.

First, let’s consider what Baker said in detail.

I think Mankiw’s summary of the Baker proposal is valid:

According to Congressman Paul, to deal with the debt-ceiling impasse, we should tell the Federal Reserve to destroy its vast holding of government bonds. Because the Fed might have planned on selling those bonds in open-market operations to drain the banking system of the currently high level of excess reserves, the Fed should (according to Baker) substantially increase reserve requirements.

Mankiw’s reaction is that “(t)his would be a great exam question: What are the effects of this policy? Who wins and who loses if this proposal is adopted?”.

I also agree that it would be an interesting examination question which I suspect all student who had studied macroeconomics using Mankiw’s own textbook would fail to answer correctly.

I will come back to Mankiw’s own answer directly – which suffers the same misgivings as the suggestion by Baker that we listen to Paul and then Baker’s own addendum to the idea.

Baker referred to Paul’s proposal as:

… a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds

He acknowledges that “at first blush this idea may seem crazy” but then claims it is “actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget”.

So we have two ideas here – one to reduce debt as a way of tricking the pesky conservatives who want to close the US government down (or pretend they do for political purposes) by not approving the expansion of the “debt ceiling”. The debt ceiling is this archaic device that conservatives can use to make trouble for an elected government which has not operational validity. After all, doesn’t the US Congress approve the spending and taxation decisions of the US government anyway?

The second idea that Baker leaks into the debate is that by destroying public debt held by the central bank (as a result of their quantitative easing program) it would save them selling it back to the private sector which in turn would save the US government from paying interest on it. And he seems to think that is a good thing. Spare me!

In his own words:

The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself … As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest.

First, note the recognition that the central bank and treasury are just components of the consolidated government sector – a basic premise of Modern Monetary Theory (MMT) and should dispel the myth of the central bank being independent.

Mankiw also agreed with that saying “Since the Fed is really part of the government, the bonds it holds are liabilities the government owes to itself”. Which makes you wonder why he doesn’t tell his students that in his textbook. Further, why do those textbooks make out that the central bank is independent when it clearly is part of the monetary operations of the government? The answer is that it suits their ideological claim that monetary policy is superior to fiscal policy.

Please read my blogs – Central bank independence – another faux agenda and The consolidated government – treasury and central bank – for more discussion on this point.

I will come back to that status presently.

Second, the accounting hoopla by which the treasury gets interest income back from the central bank but lets it keep some funds to pay for its staff etc might be interesting to accountants but is largely meaningless from a monetary operations perspective. It is in the realm of the government lending itself money and paying itself back with some territory.

I agree with Mankiw that Paul’s suggestion which Baker endorses “is just an accounting gimmick”. But then the whole edifice surrounding government spending and bond-issuance is also “just an accounting gimmick”. The mainstream make much of what they call the government budget constraint as if it is an a priori financial constraint when in fact it is just an accounting statement of the monetary operations surrounding government spending and taxation and debt-issuance.

There are political gimmicks too that lead to the US government issuing debt to match their net public spending. These just hide the fact that in terms of the intrinsic characteristics of the monetary system the US government is never revenue constrained because it is the monopoly issuer of the currency. Which makes the whole debt ceiling debate a political and accounting gimmick.

Third, note that Baker then falls into the trap that the mainstream are captured by in thinking that in some way the interest payments made by the government to the non-government sector are a “burden”. A burden is something that carries opportunity costs and is unpleasant with connotations of restricted choices.

From a MMT perspective, one of the “costs” of the quantitative easing has been the lost private income that might have been forthcoming had the central bank left the government bonds in the private sector. Given how little else QE has achieved those costs make it a negative policy intervention.

So the so-called “burden” really falls on the private sector in the form of lost income. Once you accept that there are no financial constraints on the US government (which means that the opportunity costs are all real) then the concept of a burden as it is used by Baker is inapplicable.

And then once we recognise that there is a massive pool of underutilised labour and capital equipment in the US at present contributing nothing productive at all then one’s evaluation of those real opportunity costs should be low. That is, at full employment the interest payments made by government to the non-government sector on outstanding public debt have real resource implications that might require some offsetting policies (lower spending/higher taxation) to defray any inflation risks.

With an unemployment rate of nearly 10 per cent and persistently low capacity utilisation rates overall, every dollar the government can put into the US economy will be beneficial from a real perspective.

But it gets worse.

Baker turns his hand to thinking about the monetary operations involved in the central bank destroying the bonds. He might have saved us the pain. He notes that the reason the Federal Reserve “intends to sell off its bonds in future years” is because they want to:

… reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves.

But as it turns out, there are other mechanisms for restricting lending, most obviously raising the reserve requirements for banks. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves.

Baker falls head long into the mainstream myth that banks lend out reserves.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

I remind you of this piece of analysis by the Bank of International Settlements in – Unconventional monetary policies: an appraisal – it is a very useful way to understanding the implications of the current build-up in bank reserves.

The BIS says:

… we argue that the typical strong emphasis on the role of the expansion of bank reserves in discussions of unconventional monetary policies is misplaced. In our view, the effectiveness of such policies is not much affected by the extent to which they rely on bank reserves as opposed to alternative close substitutes, such as central bank short-term debt. In particular, changes in reserves associated with unconventional monetary policies do not in and of themselves loosen significantly the constraint on bank lending or act as a catalyst for inflation …

In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.

It is obvious why this is the case. Loans create deposits which can then be drawn upon by the borrower. No reserves are needed at that stage. Then, as the BIS paper says, “in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system.”

The loan desk of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks. They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans. In approving a loan they instantly create a deposit (a zero net financial asset transaction).

The only thing that constrains the bank loan desks from expanding credit is a lack of credit-worthy applicants, which can originate from the supply side if banks adopt pessimistic assessments or the demand side if credit-worthy customers are loathe to seek loans.

In answering his own “examination question”, Mankiw gets positively angry and says of the plan to raise reserve requirements that it would be:

… a form of financial repression. Assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing. The initial impact is on those small businesses that rely on banks to raise funds for investment. The policy will therefore impede the financial system’s ability to intermediate between savers and investors. As a result, the economy’s capital stock will be allocated less efficiently. In the long run, there will be lower growth in productivity and real wages.

First, if the central bank didn’t use the bonds to drain reserves (via open market operations) then it would have to pay market rates of interest to the banks who held reserves with them or lose control of its target policy rate. So unless the central bank is going to keep short-term rates at zero for an indefinite period (which I recommend) then we would be unwise to assume they will not be paying a return on the reserves (as they are doing now).

Consistent with MMT, there are two broad ways the central bank can manage bank reserves to maintain control over its target rate. First, central banks can buy or sell government debt to control the quantity of reserves to bring about the desired short-term interest rate.

MMT posits exactly the same explanation for public debt issuance – it is not to finance net government spending (outlays above tax revenue) given that the national government does not need to raise revenue in order to spend. Debt issuance is, in fact, a monetary operation to deal with the banks reserves that deficits add and allow central banks to maintain a target rate.

Try finding this explanation for public sector debt issuance in Mankiw’s macroeconomics text book.

Second, a central bank might, instead, provide a return on excess reserve holdings at the policy rate which means the financial opportunity cost of holding reserves for banks becomes zero. A central bank can then supply as many reserves as it likes at that support rate and the banks will be happy to hold them and not seek to rid themselves of the excess in the interbank market. The important point is that the interest rate level set by the central bank is then “delinked” from the volume of bank reserves in the banking system and so this becomes equivalent to the first case when the central bank drains reserves by issuing public debt.

So the build-up of bank reserves has no implication for interest rates which are clearly set solely by the central bank. All the mainstream claims that budget deficits will drive interest rates up misunderstand their impact on reserves and the central bank’s capacity to manage these bank reserves in a “decoupled” fashion.

Second, Mankiw falls prey to the same error that Baker makes – that banks lend out reserves. As noted this is a mainstream myth. The banks could still lend out whatever they liked as long as there were credit-worthy customers queuing up for loans. So no small businesses would be affected in the way Mankiw claims.

Anyway, as to what the debt-ceiling means, I was asked by several readers about the status of the US government (by which they meant the Treasury) in relation to the central bank (the Federal Reserve).

The legal code in the US essentially recognises that the central bank and treasury are part of the government sector.

If you consult the United States Code which reflects the legislative decisions made by the US Congress you find, for example, the section – TITLE 31 – MONEY AND FINANCE § 5301 – which deals with the Buying obligations of the United States Government

The US law stipulates the following:

31 USC § 5301. Buying obligations of the United States Government

  • (a) The President may direct the Secretary of the Treasury to make an agreement with the Federal reserve banks and the Board of Governors of the Federal Reserve System when the President decides that the foreign commerce of the United States is affected adversely because -
    • (1) the value of coins and currency of a foreign country compared to the present standard value of gold is depreciating;
    • (2) action is necessary to regulate and maintain the parity of United States coins and currency;
    • (3) an economic emergency requires an expansion of credit; or
    • (4) an expansion of credit is necessary so that the United States Government and the governments of other countries can stabilize the value of coins and currencies of a country.
  • (b) Under an agreement under subsection (a) of this section, the Board shall permit the banks (and the Board is authorized to permit the banks notwithstanding another law) to agree that the banks will-
    • (1) conduct through each entire specified period open market operations in obligations of the United States Government or corporations in which the Government is the majority stockholder; and
    • (2) buy directly and hold an additional $3,000,000,000 of obligations of the Government for each agreed period, unless the Secretary consents to the sale of the obligations before the end of the period.
  • (c) With the approval of the Secretary, the Board may require Federal reserve banks to take action the Secretary and Board consider necessary to prevent unreasonable credit expansion.

§ 5301. Buying obligations of the United States Government under Title 31 of the US Code as currently published by the US Government reflects the laws passed by Congress as of February 1, 2010.

So it seems the President can never run out of “money”. Can any constitutional lawyers out there who are expert in the USC please clarify if there are exceptions to this law? The law (including the accompanying notes which I didn’t include here) appears to say that an economic emergency can justify the President commanding the Federal Reserve to hand over credit balances in favour of the US Treasury.


I hope you all answered Mankiw’s examination question correctly.

My attention is now turning to computer hardware!

That is enough for today!

Posted in Deficit, Fed, GDP, Government Spending, TREASURY | 8 Comments »

Major Banks Likely to Get Reprieve on New Capital Rules

Posted by WARREN MOSLER on 11th June 2011

The real problem is if you understand what a bank is, you wouldn’t be trying to use capital ratios to protect taxpayer money.

First, notice that the many of the same people clamoring for higher capital ratios have also supported ‘nationalization’ of banks, which means there is no private capital. So it should be obvious that something other than private capital is employed to protect taxpayer money.

Taxpayer money is protected on the asset side (loans and other investments held by banks) with lending regulations. That includes what type of investments are legal for banks, what kind of lending is legal, including collateral requirements and income requirements. That means if Congress thought the problem in 2008 was lax and misguided lending, to further protect taxpayer money they need to tighten things up on that side. And that would include tightening up on supervision and enforcement as well.

(Of course, they think the current problem is banks are being too cautious, but Congress talking out of both sides of its mouth has never seemed to get in the way before. Just look at the China policy- they want China to strengthen its currency which means they want the dollar to go down vs the yuan, but at the same time they are careful not to employ policy that might cause China to sell their dollars and drive the dollar down vs the yuan.)

So what is the point of bank capital requirements? It’s the pricing of risk.

With an entirely publicly owned bank, risk is priced by government officials which means it’s politicized, with government officials deciding the interest rates that are charged. With private capital in first loss position, risk is priced by employees who are agents for the shareholders, who want the highest possible risk adjusted returns on their investment. This introduces an entirely different set of incentives vs publicly owned institutions. And the choice between the two, and the two alternative outcomes, is a purely political choice.

With our current arrangement of banking being public/private partnerships, the ratio between the two is called the capital ratio. For example, with a 10% capital ratio banks have 10% private capital, and 90% tax payer money (via FDIC deposit insurance). And what changing the capital ratio does is alter the pricing of risk.

Banks lending profits from the spread between the cost of funds and the rates charged to borrowers. And with any given spread, the return on equity falls as capital ratios rise. And looked at from the other perspective, higher capital ratios mean banks have to charge more for loans to make the same return on equity.

Additionally, investors/market forces decide what risk adjusted return on investment is needed to invest in a bank. Higher capital requirements lower returns on investment, but risk goes down as well. But it’s not a ‘straight line’ relationship. It takes a bit of work to sort out all the variables before an informed decision can be made by policy makers when setting required capital ratios.

So where are we?

We have policy makers and everyone else sounding off on the issue who all grossly misunderstand the actual dynamics trying to use capital requirements to protect taxpayer money.

Good luck to us!

For more on this see Proposals for the Banking System, Treasury, Fed, and FDIC

Major Banks Likely to Get Reprieve on New Capital Rules

By Steve Liesman

June 10 (CNBC) — The world’s major banks may get a break from regulators and be forced to set aside only 2 percent-to-2.5 percent more capital rather than the 3 percent reported earlier, officials familiar with the discussions told CNBC.

News of the potential reprieve—which would affect major global banks such as JPMorgan , Citigroup , Bank of America , Wells Fargo , UBS and HSBC —helped stocks pare losses Friday afternoon.

The new rule, which would force the world’s biggest financial institutions to set aside more capital as a cushion against potential losses, is being imposed after the recent credit crisis nearly caused the collapse of the banking system.

The increased capital buffer would be in addition to a seven percent capital increase for all banks, which was negotiated at last year’s Basel III meeting.

The officials, who asked not to be named, made their comments after global banking regulators met this week in Frankfurt. The US has proposed a tougher three percent charge for big banks, but there has been pushback from some European nations, especially France. Negotiations are continuing.

The news comes after JPMorgan Chief Jamie Dimon rose in an Atlanta meeting this week and directly confronted Fed Chairman Ben Bernanke over the numerous new banking regulations, including a new surcharge for the biggest banks.

Officials say there is a more formal meeting in two weeks of regulators in Basel, Switzerland, where the actual percentage should be formalized as a proposal to global leaders.

Sources caution that the situation is still a moving target, with the U.S. apparently holding out for a higher global surcharge if other countries push lower forms of capital, other than common equity, to be used to meet capital requirements.

Earlier this week, U.S. Treasury Department Secretary Tim Geithner suggested that the higher the quality of capital, the lower the surcharge can be.

Posted in Banking, TREASURY | 47 Comments »

Obama Warns Against `Panic’ As Economy Has Ups and Downs

Posted by WARREN MOSLER on 7th June 2011


From Marshall Auerback:

Amazing that Obama is telling people not to panic over the economy. Means to me he is panicking.

Then again, he should be. He’s basically negotiating terms of surrender on Republican terms. And we have the spectacle of his Treasury Secretary and the soon to depart head of the CEA telling us that we’ve just hit a small “bump in the road”, along with trumpeting the idea of how ‘profitable’ the bailouts have turned out to be. This gives the impression that the trillions thrown at the problem are sufficient and therefore, we have to “rein in” fiscal stimulus, or we become the next Greece.

It’s all insane. Obama really doesn’t deserve another term of office, as he’s a complete fraud, but the other party has undergone a bout of Glenn Beck induced insanity and that probably saves the President.

Then again, he’s following the old model: if you’re going to panic, best to panic early.

Posted in Obama, Political, TREASURY | 35 Comments »

Valance Chart Review

Posted by WARREN MOSLER on 31st May 2011

Have we hit a soft spot?

Posted in Deficit, Government Spending, Interest Rates, TREASURY, USA, Valance | 5 Comments »

Thoughts on S+P action re USA

Posted by WARREN MOSLER on 19th April 2011

>   —– Original Message —–
>   From: Hadden, Glenn (FID)
>   Sent: Monday, April 18, 2011 04:45 PM
>   Subject: IMPORTANT – thoughts on S+P action re USA

I would like to address the action taken today by S+P in revising the United
States credit outlook to negative.

Simply, I believe the argument behind S+P’s decision is flawed and displays
a misunderstanding of how the monetary system operates. My view is not
predicated on any political ideology. I am merely attempting to demonstrate
the incorrect logic regarding United States credit quality and solvency.

The first fundamental item that must be understood is how financial balances
relate to government indebtedness. In a closed economy (or an economy with a
perpetually balanced current account), government deficits must equal
private savings. If private savings desires increase, a government’s deficit
must increase by precisely the same amount all things equal. There is no
other way.

In the case of the United States, the budget deficit has grown to 10% of gdp
from approximately 4% of gdp because the savings rate has shifted from
approximately negative 2% to approximately positive 6%. Simply stated, the
federal budget isn’t a function of profligate government spending, its a
function of higher desired private savings causing a shortage of aggregate
demand. This shortage of aggregate demand is putting downward pressure on
tax revenues (lower nominal gdp implies lower tax revenues) and upward
pressures on expenditures owing to automatic stabilizers such as UI.

With this example, it is theoretically possible to have much larger
government deficit and debt levels if savings desires grow commensurately.
If private sector savings desires were to fall, which implies higher
aggregate demand (because the spending of a person in the private sector
simply creates another person’s income), the government deficit would fall
commensurately owing to higher tax revenues and possibly lower expenditures.

Firstly, the most important item to understand is the USA discharges its
debt in $US. So the entire argument of rating agencies behind ‘external
funding pressures’ is moot. Functionally there is no difference between a
holder of UST’s who is domiciled in USA or abroad, as they are both $US
dominated savers. The only difference is the foreign saver has no ‘need’ to
save in $US (where a USA investors needs $US as a means of exchange and to
pay his taxes).
So, what if foreign now dump their ust’s?
Foreign investors own ust’s and $us because they WANT to own them. By
engaging in fx driven trade policies, foreigners ‘pay up’ to get $US which
allows them greater sales into the USA market. If foreigners didn’t want to
save in $US, they would change their fx policy which would result in less
market share in USA economy. Foreigners can’t be both buyers and sellers
simultaneously. If foreigners wanted to own less $US, the result would be a
smaller current account deficit in USA, which again using a financial
balance framework would either result in more private savings, or a smaller
govt deficit. Bottom line – if foreigners want to have fewer savings in $US,
either private savers must increase savings, or the govt deficit must fall.

The same way banks offer savers demand deposits and term deposits (ie
chequing accounts versus savings accounts) the USA economy offers savers the
same in the form of $US (demand assets) or UST (term asset). Foreign savers
can therefore keep their $ at their Fed Reserve account and earn basically
zero (functionally a ‘chequing’ or demand account) or buy UST’s
(functionally a ‘savings’ or term account) and earn a coupon. There is no
other way to save in risk free space. As said above, foreigners who engage
in fx driven trade policies must accumulate $US demoninated assets. The only
choice they have is term vs demand assets. So indeed if foreigners declined
to own ust’s and alternatively kept their savings in $US at the Fed, the
result could be a higher and steeper term structure for USA rates. If the
Treasury decided to sell less ust’s and more tbills, this term structure
rise could be negated. Note foreigners actions are never about SOLVENCY, its
merely a function of liquidity preference.

One must also understand the mechanics of government spending. A government
purchases goods and services from the private sector and then the Federal
Reserve credits the reserve accounts of the commercial banks whom the
sellers of such good and services bank. The Fed then debits the reserve
account of The US Treasury. The Treasury then sells ust’s, where the Fed
then credits the Treasury’s reserve account while debiting the reserve
accounts of the banking system.

So all that has happened is the government has created savings in the
economy by spending (from point 1 above: govt spending = private savings).
So as is illustrated, there is no issue of ‘solvency’ per se. The
government, by spending, is creating the savings to buy the ust’s. The only
issue here is the term gap. Specifically if savers only want demand assets
(ie $us), while the Treasury only wants to sell term assets (ie ust’s), the
resolution will be price and risk premium: ie how much interest rate spread
will a bank or arbitrageur need to intermediate this imbalance. This can all
be negated of course, if the Treasury only issued T-bills.

This is the fundamental flaw of the S+P decision. The basis of their
sovereign rating criteria is as they describe it is: “The capacity and
willingness to pay its debts on time”. As mentioned above, there is
functionally no reason for the USA to ever not pay its debts – the USA’s
debts are and will always be equal to savings desires of the private and
foreign sectors. So ‘CAPACITY’ can never be an issue.

Hence the only reason the USA would ever default was because they ‘wanted’
to default, they never under any circumstance NEED to default so long as the
$US remains a non-convertable currency. The implications for a voluntary
default (again, this is the only kind of default possible by the USA) make
such a default an impossibility. The reason is because the 2nd largest
liability of the federal government is deposit insurance. If the USA decided
it wanted to default to escape its obligations, it would bankrupt its
banking system, who’s holdings of ust’s are greater than system-wide bank
capital of $1.4 Trillion. In fact the contingent liability put the
government has issue via deposit insurance is almost as large as USA debt
held by the public at $6.2 Trillion. So essentially a voluntary default
would actually INCREASE USA indebtedness by almost 100% while
simultaneouslybankrupting its banking system. So if ABILITY to pay is
assured, and a voluntary default actually raises indebtedness while
collapsing the banking system and economy, why would USA ever voluntarily
default? So S+P’s criteria of ‘WILLINGNESS’ to pay is also not applicable.

So as demonstrated, the bottom line is ABILITY to pay can never be an issue
in a non-convertable currency system. The only issue is WILLINGNESS to pay.
So if the argument by S+P relates to “the capacity and willingness to pay
its debts on time” as they described on Monday’s call, then their argument
simply isn’t cogent.

The last point I want to make is it would be incorrect to attempt to draw an
analogy to the placement of the UK on credit watch in mid May 2009 relating
to market performance. Yes indeed gilts sold off shortly after this
announcement. However this was more a function of the unhinging of the USA
MBS market. There existed a perception that the Fed via QE1 was attempting
to cap current coupon mortgage rates at 4%. Once this level was breached and
it became clear in mid/late May that this view was incorrect, a convexity
sell event hit the USA rates market which dragged all global bond yields
higher including Gilts.

To conclude – I view the decision today by S+P as having zero impact on
valuations of USA sovereign debt. We continue to engage in trades that
express the correct view that the solvency of the United States can never be
an issue in nominal terms; specifically we are buyers of 30yr assets swaps
at -25bps.

Posted in Government Spending, TREASURY, USA | 91 Comments »