Got on DeLong’s blog today:

Ten Mostly Economics Pieces Worth Reading: February 9, 2010 …
By Brad DeLong

4) Felix Salmon: Helicopter-Firehose Trichet:

Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.

The interesting thing is that given recent weakness in the euro, something along these lines — if not quite as explicit — seems to be already priced in, to some degree. I don’t think anybody in Europe is particularly worried about inflation right now; if anything, deflation is more of a problem, especially in the PIIGS. The big question, of course, is whether and how anybody at the ECB would ever let something like this happen, given its much-vaunted independence. Deflation worries might have to pick up quite a lot before it happens, and even then it’ll be a very tough sell among the European central-banking crowd.

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Except Greece probably doesn’t qualify under normal IMF standards, and the IMF would have to get short euro to make the payment.

And ideologically it means ceding control of EU macro policy to an external international institution with strong US influence.

Nor does the macro work, as the ’strict enough conditions’ imposed will further weaken demand in Greece and the rest of the EU.

Also, the rapidly expanding deficit of Greece has benefited the entire EU and a sudden reversal will reverse those forces.

Likewise, leaving the EU would be contractionary/deflationary for the EU.

But if they all believe the IMF is the way to go there’s a good chance it happens.

Meanwhile, Greece and the rest of the eurozone is being revealed as necessarily being in a continual state of ponzi that demands institutional resolution
of some sort to be sustainable.

Issing Says IMF Better Suited Than EU to Greek Rescue, NYT Says

By John Fraher

Feb. 8 (Bloomberg) — Former European Central Bank Chief Economist Otmar Issing said the International Monetary Fund may be better suited to rescuing Greece than the European Union, the New York Times said, citing an interview.

“I don’t think that the EU can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” the newspaper cited Issing as saying in an article published Feb. 6. “A better way is for Greece to approach the IMF. It is the only institution that can impose strict enough conditions.”

Issing said he doesn’t see support “in Germany or elsewhere” for a bailout that would involve “a more or less disguised transfer of taxpayer money,” the paper said.

Issing said leaving the euro region would be “economic suicide” for Greece, though he dismissed the idea that it would hurt the euro region as “misguided,” the paper said.

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>   
>   (email exchange)
>   
>   On Sun, Feb 7, 2010 at 8:45 AM, Seth wrote:
>   
>   scott brown was on TV this week saying we had to stop spending money we don’t have
>   and are borrowing from the Chinese-that 40% of obama’s budget will have to be
>   borrowed from Chinese and paid back by our children hopefully he is reading your stuff
>   

Yes, hope to put that to rest Thursday, assuming that’s what CNBC wants me to discuss.

Hope to definitively dismiss the entire line of thought.

1. Taxation serves to regulate aggregate demand, not to collect revenue per se.
  Govt doesn’t ever have or not have dollars- it’s the score keeper
  It taxes by changing numbers down in our accounts, and doesn’t ‘get’ anything
  It spends by changing numbers up in our accounts, and doesn’t ‘have less’ of anything.
  China is not involved in this process.
  There is no operational connection between taxing and spending.

2. China gets dollars by voluntarily selling things to us, presumably because they’d rather
  have the dollars than what they sold.
  Those dollars go into their ‘checking account’ at the Fed called a ‘reserve account.’
  Treasury securities are functionally nothing more than a ’savings account’ at the Fed
  When China buys tsy securities to earn more interest the Fed debits their reserve account
  and credits their securities account.
  The $13 trillion of US debt is best thought of as the $13 billion held in savings accounts at
  the Fed.
  When China’s or anyone else’s tsy secs mature the Fed debits their securities account and
  credits their reserve account.
  That’s all.
  Debt paid.
  This is operationally unrelated to spending and taxing.

3. The issues of concern include ‘inflation,’ but not dependence on foreign ‘investors’ and
  not solvency nor funding issues.
  All we owe China is a bank statement.

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Or maybe the money fund lobby is in control.

As always, the liability side of banking is not the place for market discipline.

Australia Removes Funding Guarantee Even as Economy Is Fragile

By Shani Raja

Feb. 8 (Bloomberg) — The Australian government is withdrawing a guarantee on large deposits and wholesale funding that helped banks access credit after the global financial crisis, even as the economy overall remains “fragile.”

The program is being withdrawn on March 31 on the advice of the Council of Financial Regulators, Treasurer Wayne Swan said in a news release yesterday. The removal of the guarantees indicates the nation’s banks are recovering from the impact of the credit crunch.

“This is a definite milestone on the road to recovery from the global financial crisis,” said Tim Schroeders, who helps manage $1.1 billion at Pengana Capital Ltd. in Melbourne. “It’s an indication the worst is over and that banks don’t need a government guarantee to legitimize them as deposit-taking entities.” A plan that gives certainty over deposits of up to A$1 million ($870,000) won’t be affected, Swan said.

The bank guarantees were introduced in October 2008 after the collapse of Lehman Brothers Holdings Inc., which roiled financial markets worldwide and helped precipitate a global recession. They enabled Australian banks to raise funds on international markets, helping lenders avoid the sorts of bankruptcies that hampered the U.S. financial system.

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Doesn’t look good!

*PORTUGUESE OPPOSITION PARTIES DEFEAT GOVT AUSTERITY PLAN: AP

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Portugal 5 Year Bond Yield Since August 2009

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Once rates/prices start on a ‘parabolic’ path of credit deterioration it’s often a force stoppable only by a check.

Not sure who/when writes the check, but odds are it will eventually happen one way or the other.

In this case there’s a good chance it happens after a form of default.

I don’t see any risk/reward currently in anything other than the dollar and cash and maybe US Tsy secs.

And I don’t have any idea how it all gets resolved in the eurozone, and I’m pretty sure no one else does either.

My proposal for a per capita distribution of 1 T euro from the ECB with finance ministry agreement will work operationally, economically, legally, and more or less philosophically, but I haven’t seen any indication of that type of discussion

5y default probabilities assuming 40% recovery (as of 2 Feb close)

GREECE 27.3%
PORTUGAL 13.1%
IRELAND 12.4%
SPAIN 10.7%
ITALY 9.8%
AUSTRIA 7.4%
UK 6.7%
BELGIUM 5.2%
SWITZELAND 4.9%
FRANCE 4.4%
SWEDEN 4.1%
GERMANY 3.0%
NETHERLANDS 3.0%

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This is the text of the address I gave at Dallas.

Will be repeating it in a northern Va meeting next weekend.

Still waiting for the video.

Feel free to distribute.

How tea party democrats can run successfully in the primaries

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

I am here to discuss how I believe Tea Party Democrats can win in upcoming Democratic primaries. The answer is to emulate and extend the success of the Tea Party movement by getting back to basics. The Democratic party is the party of Jefferson and Jackson. The founders believed that the public voice should be heard. They believed in limited government. And they never kowtowed to special interests or cowered before purveyors of the conventional wisdom. This means Tea Party Democrats should be running against the Obama administration’s policies which are counter to both traditional Democratic values and Tea Party values.

It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. For example, with unemployment rising, real wage growth falling, and GDP now growing at over 5%, who’s getting all that increase in real goods and services?

Not the millions who voted Democratic who are losing their jobs and their homes, and watching wages fall even as their cost of living goes up. All that real wealth being created is instead rising to the top, due to impossible trickle down policies that would have made even Reagan blush.

The large majority of Americans that elected this administration did not do so to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening as even a blind man can see. And all because they don’t understand the monetary system, how and why government spends and taxes, and why we don’t owe China anything more than a bank statement.

I will devote most of the rest of my time talking about the economy. In part, that is because it is my area of expertise, given that I have spent most of my adult life in financial markets. But the most important reason is it is in that arena that the Washington elite have failed us the most. The so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works. Their limited vision has limited the range of policy choice. And the result has been a monumental economic disaster and human tragedy.

My first proposal for the economy encompasses both the Tea Party and traditional Democratic values of limited government, fiscal responsibility, and reliance on competitive markets. Working through the logic of this proposal will show both how this straightforward government policy can work, and how convoluted is the elite’s understanding of finance.

I believe that the surest engine for full economic recovery is a full payroll tax holiday. Payroll taxes take away over 15% of everyone’s paycheck, from the very first dollar earned. This is big money- about $1 trillion per year. Half comes from the employee and half from the employer. A payroll tax holiday does not give anyone anything. What it does is stop taking away $1 trillion a year from working people struggling to make their payments and stay in their homes, and businesses struggling to survive. A full payroll tax holiday means a husband and wife earning $50,000 a year each will see their combined take home pay go up by over $650 a month, so they can make their mortgage payments and their car payments and maybe even do a little shopping.

This fixes the banks and fixes the economy, from what I call the bottom up. It fixes the banks without giving them anything more than people who can afford to make their payments. That’s all they need to remain viable.

And what all businesses need most to expand output and employment is people with spending money who can buy their products. Without people to buy goods and services, nothing happens. The payroll tax holiday also means there is also a big reduction in expenses for business. With competitive markets this means lower prices, which also helps consumers, helps keep inflation down, helps businesses compete domestically and in world markets to help optimize our real terms of trade, and helps keep the currency stable as the dollar is ultimately worth what it can buy. So with the payroll tax holiday we get a dramatic increase in economic activity, rising employment in good jobs, and better prices. And we’ll see millions of new jobs, because, again, what business needs most is people with money to buy their products. Then they hire and expand.

What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year. It’s an utter disgrace to the Democratic party. It should be immediately eliminated. Yet, instead, the Washington Democratic elite are actually discussing increasing it.

Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down, before the real economy can improve. This is completely upside down. But the elites believe it, so that’s what they have done to us.

So starting with President Bush, and supported by both Senators McCain and Obama, they funded the financial sector with trillions, while they kept taking away trillions from people working for a living who couldn’t make their payments.

How does that help anyone make their payments, apart from a few bankers? It doesn’t.

What happened for the next year and a half? The banks muddled through, profits and bonuses returned, but unemployment skyrocketed and is still going up, loan delinquencies and defaults and foreclosures skyrocketed and are still going up, and millions of Americans still can’t make their payments and are losing their homes. And a lot of the money the banks are making on federal support is being drained by continuing loan losses. We are getting nowhere as tens of millions of lives are being destroyed by policy makers who simply don’t understand how the monetary system works.

This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living. The government doesn’t even have to give us anything, just stop taking away the trillion dollars a year of payroll taxes with a full payroll tax holiday.

But then there’s the nagging question of ‘how are we going to pay for it? Aren’t we just going to have to borrow more money from China and leave it for our children to pay back? And if it doesn’t work, then where are we, another trillion in debt with nothing to show for it?’
And, in fact the failure to understand that question of ‘how are you going to pay for it’ is exactly what has set the Democratic party, and the nation, on the current path of economic ruin. Therefore, to run successfully against the Democrats who support current policy it is critical you understand what I’m going to say next. This understanding is the basis for achieving our core values of limited government and lower taxes. And what I’m about to tell you is pure, undisputable fact, and not theory or philosophy.

So let me start by examining exactly how government spends at what’s called the operational level. In other words, exactly how does government spend? And this is for the federal government, not the State and local government, who are in much the same position as you and I are. Well, when the federal government spends, it simply changes numbers up in bank accounts. Last May Fed Chairman Bernanke answered Congressman Pelley’s question about where the money comes from that the banks are getting. Bernanke told him the banks have accounts at the Fed and the Fed simply ‘marks them up’- changes the numbers in their bank accounts.

• (PELLEY) Is that tax money that the Fed is spending?
• (BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

The Chairman is exactly right. All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping. And that’s exactly how government actually pays for anything.

All it ever does, and ever can do when it spends, is mark up numbers in bank accounts, as the Fed Chairman told us. And with online banking you can actually watch it happen. When a government payment hits your account you can actually watch as the numbers change upward on your computer screen. And notice I’ve never mentioned China or anyone else in this spending process. They are simply not involved. Spending is done by changing numbers higher in our bank accounts. What China does or doesn’t do has nothing to do with this process. Again, this is not some theory or philosophy. It’s simply how it actually works. I’ve been there, I’ve seen it. I grew up on the money desk at Banker’s Trust on Wall St. in the 70’s, and I visit the Fed regularly and discuss monetary operations. I know exactly how it all works.

Now let’s look at how government taxes. And keep in mind what any Congressman will tell you- we have to get money from taxing or borrowing to be able to spend it.
Well, with modern on line banking you can watch what happens when a tax is paid. Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’ like our President has repeated many times. There isn’t anything to run out of. It’s just data entry, it’s score keeping. And it has nothing to do with China, which I’ll get to shortly.

So why then does the government tax at all? To control our spending power, which economists call aggregate demand. If the government didn’t tax us at all and let us spend all the money we earn, and government spent all the money it wanted to spend, the result would be a lot of inflation, caused by more spending then there are real goods and services for sale. Too much spending power chasing too few goods and services is a sure way to drive up prices. So the purpose of taxes is to regulate the economy. If the economy is too hot, taxes can be raised to cool it down. If the economy is too cold, as it obviously is today, taxes should be cut to warm it up back to operating temperature.

Taxes are like the thermostat. When it gets too hot or too cold you adjust it. It’s not about collecting revenues, there is no such thing, government never has nor doesn’t have any dollars, it just changes numbers up and down in our bank accounts. It’s all about looking at the economy and deciding whether it’s too hot or too cold, and then making an adjustment.

So, given all this, just what does ‘fiscal responsibility’ mean?
Fiscal responsibility means not overtaxing us to the point we are at today with record unemployment. And Fiscal Responsibility means not spending so much or taxing so little that the economy ‘overheats’ and inflation becomes a problem. That’s what fiscal responsibility means. That’s all it means. The government is responsible for getting the economy right, and the monetary system, including taxation, is a tool for that job.
Taxation is a tool to get the economy right.

So where does China and borrowing come into the picture? To be a successful Tea Party Democrat you will have to understand this and be able to explain it.
So first, how does China get its dollars? It sells things to us and gets paid for them.

And where does China keep its dollars? In a bank account at the Federal Reserve Bank which they call a reserve account. It’s nothing more than a checking account with a fancy name. And why does China buy Treasury securities? To earn a bit more interest.

And what is a Treasury security? It is nothing more than a savings account at the Federal Reserve Bank with a fancy name. And just like any other savings account at any other bank, with a Treasury security you give the Federal Reserve Bank money, and you get it back plus interest. So when China buys a Treasury security, what happens? The Fed moves their funds- the money they earned from selling things to us- from their checking account at the Fed to their savings account at the Fed.

And what happens when those Treasury securities- savings accounts- come due? How do we pay off China? The Fed just moves the funds from China’s savings account at the Fed back to their checking account at the Fed, and makes the number a little higher to include the interest. That’s it. Debt paid. And our children will continue to do this just like our fathers did before us. None of this involves what we call government spending. When government spends to buy something or pay someone else, it just ‘marks up’- as Chairman Bernanke put it- numbers in bank accounts. China’s bank accounts at the Fed are not involved. So why is this administration kowtowing to China on everything from Korea to human rights? And why do we go over there, thinking they are our government’s bankers, worried about getting their money to spend on everything from health care to Afghanistan, when there is no such thing as the US government getting money to spend? Why? There is only one reason. This administration does not understand the monetary system. They reason the Democrats are against a payroll tax holiday is because they think they need those actual revenues to support their spending.

So yes, we are grossly overtaxed and that’s what’s causing the sky high unemployment and the failed economy, as well as the ongoing banking crisis. And fiscal responsibility means setting taxes at the right level to sustain our spending power- not to hot and not too cold, but just right for optimal output and employment and price stability, and a return to prosperity.

And this brings up the next question, which is how to determine the right size of government. First, tax revenues don’t tell us anything about that. Taxing is just changing numbers down. It doesn’t give us anything to spend. Spending is changing numbers up; there is no numerical limit to spending.

So how do we decide how much government we want if the money doesn’t tell us anything? We do it on a very practical level. For example, when it comes to the military we need to ask ourselves, how many soldiers do we need to defend ourselves? How many planes, boats, tanks, and missiles do we need? The more we need, the more people we take who could be in the private sector producing real private sector goods and services, including doctors and nurses, teachers and teaching assistants, scientists and engineers, etc. etc. The military also uses up real resources like oil and steel. That’s the real cost of the military- how many people and resources it takes away from productive private sector activity.

What is the right size for the legal system? That depends on how long you want to wait for a court date, or for a decision. If the process is too slow, we may need more people working there, or we may need better technology. And again, the more people in government, the fewer there are to work in the private sector.

Once we have decided on the ‘right size’ of government, and pay for it by changing numbers up in people’s bank accounts when government spends, we have to decide the right amount to tax to keep the economy not too hot and not too cold, but just right. My educated guess would be, in a normal economy, to start with taxes that are less then spending by about 5% of GDP, if history is any guide. If I’m wrong taxes can either be lowered or raised to get it right. And when government spends more than it taxes- when it changes numbers up more than it changes down- we call that difference the budget deficit.

And when government changes more numbers changed up than down, the economy has exactly that many more dollars in it, which adds exactly that much to the savings of the economy. In fact, in US National Income Accounting, as taught in economics 101, the government deficit equals the total savings of financial assets in the rest of the economy, to the penny. Yes, deficits add to our monetary savings, to the penny. And everyone I’ve talked to in the Congressional Budget Office knows it. And it’s just common sense as well that if government changes numbers up in our bank accounts more than it changes them down, we have exactly that many more dollars.

Let me add one more thing about the size of government. It makes no sense to me to grow the size of the government just because the economy is too cold, if we already have the right sized government. And if we don’t have the right sized government we should immediately get it right, and then adjust taxes if the economy is too hot or too cold.
With this grasp of the fundamentals of taxing, spending, and the size of government, a Tea Party Democrat is well armed to take on the Democratic establishment that’s overtaxing us, driving up unemployment to today’s record levels, destroying our economy and standard of living, and arbitrarily growing government as well.

Conclusions:

Tea Party Democrats have a unique opportunity to be a part of history and overturn the ideas the current administration is employing that are, at best, regressive, elitist, and destructive to our quality of life.

With unemployment rising, real wage growth falling, and GDP now growing at about 4%, who’s getting that increased GDP? Not the millions who voted Democratic who are losing their jobs and their homes, and watching their wages fall. That real wealth being created is instead rising to the top, due to the Obama administration’s impossible trickle down policies. This administration was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening, and all because they don’t understand the monetary system, the don’t understand how and why government spends and taxes, and the don’t understand why we don’t owe China anything more than a bank statement.

The door is wide open for an enlightened, populist Democrat to lead the way to a new era of unsurpassed national prosperity.

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Looks like nothing is trickling down, at least yet, even with 5.7% real growth. Still going the other way, in fact, for the lowest income groups.

On Wed, Feb 3, 2010 at 9:38 PM, Russell Huntley wrote:

From Jon Prior at HousingWire:

Mortgage Delinquencies Pass 10%: LPS

Home-loan delinquency rates in the US reached 10% in December, up from the record-high 9.97% in November, according to Lender Processing Services … which provides data on mortgage performance.

Accounting for foreclosures in the pipeline, the total non-current rate stands at 13.3% …. When extrapolated for the entire mortgage industry, 7.2m mortgage loans are behind on their payments.

More foreclosures and short sales coming!

Note: the MBA reported the delinquency rate in Q3 was 9.64%; the MBA Q4 delinquency data will be released soon.

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Seems to me they need Eurozone approval of any plan, along with a ‘check.’

Without the check there’s a good chance the curve continues to go vertical.

Good time to be way on the sidelines (US govt secs, USD, etc.)

From: Nielsen, Erik
Sent: Wednesday, February 03, 2010

First of all, apologies for the radio silence last night and this morning ; caused by a “technical” problem. We are back in business:

Last night Greek PM delivered an important speech to prepare for today’s publication of the European Commission’s conditional approval of their 2010 budget. It was marginally positive, but - as always - the devil is in the details, and those we don’t have yet.

There is no time set for the Commission’s statement today, but sometime around noon seems likely. In a nutshell, PM Papandreou delivered something good and something less good:

1. Most importantly, the PM appealed to the opposition for national unity, and he received guarded support from the main opposition leader Samaras. Papandreou also appealed to the social partners to accept the hardship; he didn’t really receive any assurances from that side. Also positively, Papandreou outlined further fiscal measures, aimed at securing the 4% of GDP decline in the deficit this year, even under a more pessimistic (i.e. more realistic) forecast for GDP; now seen to decline by more than 1% this year rather than by 0.3%. The additional measures were not spelled out in detail, but they seem to include further wage restrain for the public sector and indirect tax hikes.

2. On the disappointing side, Papandreou launched into the blame game - while acknowledging policy mistakes in the past, he suggested that the trouble now is also the result of speculators. On this basis, he suggested that this is a Euro-zone problem and that the Euro-zone should issue a joint Euro-bond for the benefit of Greece. This was, of course, ruled out very quickly by other Euro-zone members last night. Also, Papandreou emphasized the government’s focus on taxation of real estate owned by of-shore companies, a meagre EUR200mn revenue line in their original budget, which - in my opinion - is diverting their attention from the big and more fundamental reforms.

Stay tuned for later in the day when we hear from the EU

Erik

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