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Rand Paul – “Cold Turkey Balanced Budget is a Good Thing”

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Deep down, I suspect most of Congress believes what Rand Paul believes.
They believe balancing the budget is the right thing to do for our children and grandchildren.
And, of course, they have widespread popular support for a balanced budget and probably enough votes for a balanced budget amendment to the US constitution as well.

So maybe that’s why both sides are OK painting themselves into a corner.
There is no way out apart from one side completely losing face and credibility.
And when something can’t happen, sometimes it doesn’t happen, and we actually do go cold turkey into a balanced budget.

So what happens when the automatic fiscal stabilizers are disabled?
When the slowdown slows tax revenues, instead of the deficit going up as spending then exceeds revenues, spending is instead cut, which slows things down further, which means more spending cuts, which slows things down further, all the way to 0, as ‘balance’ combined with the fixed ‘demand leakages’ puts the system in ‘default’.

Said another way, the dollars to pay taxes and net save come from govt spending.
(You can’t do a reserve drain without a reserve add.)
With a balanced budget and automatic net savings/demand leakages, govt isn’t allowed to spend enough dollars to cover the tax bill.
And when taxes don’t get paid, spending is further constrained, so additional taxes can’t get paid, further restricting spending, etc. etc. etc.

So given our current institutional structure, the answer is yes, if we balance the budget and leave it that way, the world as we know it is definitely going to end.
(And with a bang, not a whimper.)

And given the policy of going cold turkey to balance probably does ‘sound like a pretty reasonable idea to the American public,’ it’s looking more and more like both sides are setting up to let it happen.

Massive deflationary bias in general
Sales and creditworthiness collapses
Major corps turn into Lehman and Bear Stearns
Bad for stocks
Bad for credit product
Good for the dollar (harder to get)
Good for US tsy secs (Fed low forever)
Blood in streets if allowed to persist

“It really is irresponsible of the president to try to scare the markets,” said Senator Rand Paul, Republican of Kentucky. “If you don’t raise your debt ceiling, all you’re saying is, ‘We’re going to be balancing our budget.’ So if you put it in those terms, all these scary terms of, ‘Oh my goodness, the world’s going to end’ — if we balance the budget, the world’s going to end? Why don’t we spend what comes in?”

“If you propose it that way,” he said of not raising the debt limit, “the American public will say that sounds like a pretty reasonable idea.”

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Worried about the debt ceiling? Republicans aren’t.

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And I’ll bet a lot of Dems aren’t either.
They all think a balanced budget is a good thing.
And they all have been led to believe the year and tax hike and sequesters didn’t hurt the economy as feared. So how can they not suspect it’s all a bluff?

Meanwhile, it’s the going cold turkey to a balanced budget that’s potentially catastrophic, not the risk of higher rates, downgrades, etc, etc.
And no one I’ve read writes about that risk as they all probably think it’s a benefit.
Both sides do agree we have a long term deficit problem and that it would be a good thing to take at least $2 trillion out of the budget over the next 10 years.
They just don’t agree on how to do it.

Good luck to us, mates.
The USS Stupidity is going down…

:(

Worried about the debt ceiling? Republicans aren’t.

By Chris Cillizza and Sean Sullivan

October 8 (The Washington Post) — Treasury Secretary Jack Lew has described Congress as “playing with fire” when it comes to the ongoing debate over whether to raise the debt ceiling. Goldman Sachs warns that not raising the debt limit could result in a “rapid downturn in economic activity if not reversed very quickly.” The vast majority of economists use words like “recession” and “catastrophe” to explain the impact of breaching the debt ceiling later this month.

And yet, a majority — yes, a majority — of self-identified Republicans in a new Pew Research Center poll agreed with the statement that “the country can go past the deadline for raising the debt limit without major economic problems.” Almost two-thirds (64 percent) of Republicans who identify with the tea party expressed that sentiment.

What explains that level of skepticism in the face of such dire warnings?

Some of the Republicans doubt about the true danger of the debt ceiling is based on the fact that, well, lots and lots of people — Republicans, Democrats and independents — don’t really know what it is or does. (Overall, 47 percent of people said that raising the debt ceiling was “essential” to avoiding an economic crisis while 39 percent said the economy would be okay if the debt limit wasn’t increased.) The reflex reaction to warnings about how terrible something you don’t really get might be is to assume people are exaggerating about the consequences.

That doubt goes double — or maybe triple — when you are a Republican who is already distrustful of what a Democratic administration tells you is fact. And, there are several Republican voices in Congress — most prominent among them Michigan Rep. Justin Amash — insisting that the Obama administration is shouting “disaster” when the economic reality is far less catastrophic.

The numbers in the Pew poll may help explain House Speaker John A. Boehner’s comments on the debt ceiling in recent days. Late last week, Boehner (R-Ohio) made news by telling Republican members that he would not let the country go into default and that political realities meant a debt deal would have to be attractive enough to win some Democratic support. Days later, however, Boehner told ABC’s George Stephanopoulos that there weren’t enough votes in the House to pass a “clean” debt-ceiling increase, meaning that Republicans would only be for such a move if it meant concessions from Democrats.

If the Pew numbers explain Boehner’s shift, they also make clear the difficulty of his bargaining position and the real possibility of a debt default.

Boehner — through his actions in the run-up to the government shutdown and his statements since the government went dark — has shown that he understands that the way he keeps his job is to placate cast-iron conservatives. And he wants to keep his job.

But, how far is he willing to go to do that? If a majority of Republicans don’t believe breaching the debt ceiling is such a big deal, how does Boehner make the case to House Republicans of the seriousness of the stakes? And, if he can’t make that case and/or wring concessions out of the White House, does he let a default happen?

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We’re saved! China Harvard educated Liu He on the job!

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Got it-
We’re saved!
China has a Harvard grad on the job!!!

Meet Liu He, Xi Jinping’s Choice to Fix a Faltering Chinese Economy

By Bob Davis and Lingling Wei

October 6 (WSJ) — Liu He, male, is of Han nationality. He was born in 1952, studied at the Renmin University of China, Seton Hall University and Harvard University. Liu He is a famous economist who has focused on macroeconomics, industrial structure, new economic theory and the information industry. Liu has been innovative in his research in these fields since 1987. In recent years, he has published 200 articles, three of which won the National 1st Science Award. One of the three articles was commended by the leaders of the State Council. He has also published 4 monographs, including research on the concepts and practice of Chinese Industry Policy, the rapid increase of the Chinese Economy, enterprise management and developing economic theory. Liu He has participated in several international conferences on behalf of the Chinese Government in the field of economic development, the tendency of macroeconomy, new economy research and enterprise management system research. Currently he is the most influential middle-aged economist in China.

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QE is bad for banks

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The Fed’s quantitative easing policy per se is nothing but bad for banks.

1. QE forces the member banks to have excess reserves as assets on their balance sheet. These balances earn only .25% lowing the banking system’s net interest margin, return on assets, and return on equity.

2. To maintain high enough average net interest margins (that include the holding of excess reserves) to attract capital, banks tend to charge a bit more for loans to business and consumers, which causes more borrowers to go direct to credit markets and private lenders in general. In other words, QE tends to support disintermediation, as those who can avoid the banks do so.

3. QE lowers interest income paid by govt to the economy, as per the $100 billion of Fed profits turned over to treasury last year. Lower interest income makes the economy that much less credit worthy, thereby lowering its ability to borrow and service bank loans.

Bottom line- QE is a tax on the economy.
And QE is functionally the same as the tsy not having issued the securities in the first place.

However I favor, for example, the tsy not issuing anything longer than 3 mo bills, which is functionally ‘QE max’

Yes, it reduces aggregate demand.

But, for example, I’d rather get my aggregate demand, for a given size govt, from lower taxes than from the tsy or Fed paying interest.

But that’s just me.
;)

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AMI report

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AMI keeps hitting new lows:

Prof. Joseph Huber from Martin Luther University in Germany gave an outstanding presentation of the New Currency Theory (NCT) which supports monetary reform, and compared this with his analysis of Modern Money Theory (MMT). Professor Huber found that MMT reflects banking doctrine much more than currency teachings, and concluded that to be supportive of monetary reform, any economic theory must break off the shackles of banking doctrine and adopt the new currency teachings for monetary sovereignty.

One of the highlights of the conference was at the gala dinner when Professor Huber was presented with the AMI Advancement of Monetary Science Award for his work. Professor Huber showed his modesty by being genuinely surprised to be given such an award, even though it is thoroughly deserved. Dr. Michael Kumhof and Prof. Kaoru Yamaguchi are the only other persons who have previously received this award.

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August consumer spending climbs .3% and a lower Sept. Auto sales forecast

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“Spending on durable goods including automobiles increased 0.8 percent after a 0.4 percent gain the prior month. Purchases of non-durable goods including gasoline fell 0.2 percent after a 0.6 percent advance.”

“The figures follow a Commerce Department report yesterday that showed the economy grew at a 2.5 percent annualized rate in the second quarter after expanding 1.1 percent in the first three months of the year. Consumer spending increased at a 1.8 percent pace after 2.3 percent gain in the first quarter.”

Sep car sales appear to be slowing, see below.
(And the import content is relatively high)

Also:

“The saving rate climbed to 4.6 percent from 4.5 percent, while wages and salaries increased 0.4 percent after falling 0.3 percent.”

“U.S. chains are bracing for a tough holiday season, with sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak, a Chicago-based firm.

Wal-Mart cut its annual profit forecast after same-store sales fell 0.3 percent in the second quarter.”

“Conditions in the job market today are still far from what all of us would like to see,” ChairmanBen S. Bernanke said after a two-day meeting of the Federal Open Market Committee. “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”

And this:

September Auto Sales Expected To Dip 2 Percent, According To Kelley Blue Book
Seasonally Adjusted Annual Rate at 15.7 Million
By Kelley Blue Book

New-vehicle sales are expected to decline 1.8 percent in September 2013 to a total of 1.17 million units, according to Kelley Blue Bookwww.kbb.com, the leading provider of new and used car information.

“September 2013 new-vehicle sales represent the first year-over-year drop since May 2011, due to slower retail sales, two fewer sales days in the month, and this year’s Labor Day sales included in August 2013 totals,” said Alec Gutierrez, senior analyst at Kelley Blue Book. “Despite the cool down this month, Kelley Blue Book forecasts sales will remain on track to exceed 15.6 million units in 2013 because of strong product introductions from automakers.”

Key Highlights for Estimated September 2013 Sales Forecast:

  • In September 2013, new light-vehicle sales, including fleet, are expected to hit 1,167,000 units, down 1.8 percent from September 2012 and down 22.2 percent from August 2013.
  • The seasonally adjusted annual rate (SAAR) for September 2013 is estimated to be 15.7 million, up from 14.7 million in September 2012 and down from 16.0 million in August 2013.
  • Retail sales are expected to account for 85 percent in September 2013.
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