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Tag Archives: MMT
Warren’s latest presentation
Attached is a copy of a presentation that Warren delivered yesterday in Montreal.
We were extremely well received and Warren was a huge hit, mixing a concoction of high dose monetary economic realities with real life experiences and anecdotes from his long and lustrous career as a market wizard. The presentation was scheduled for 45 minutes but turned into 1hr20 minutes including Q&A.
Presentation link here.
MMT presentation in Ireland
MMT Conference
MMT will inform a number of economic policies to be presented and debated in a conference entitled “Lessons from the Crisis: Money, Taxes and Saving in a Changing World” co-hosted by Smart Taxes, (Fiscal Policy for Sustainability Network) and TASC (Think Tank for Action on Social Change) on the 9th May 2011 at Croke Park, Dublin. There will be a public lecture at 6pm in the Westwood House Hotel in Galway at 6pm on Wednesday 11th May.
Galbraith on federal debt sustainability
Is The Federal Debt Unsustainable?
By Professor James K. Galbraith
Excerpt
A more prosaic problem with the runaway-inflation scenario is that the “nonpartisan, professional” economic forecasters of the Congressional Budget Office (CBO), whose work is often cited as the benchmark proof of an “unsustainable path,” do not expect it to happen. The CBO baseline resolutely asserts that inflation will stay where it is now: around 2 percent. So one can’t logically cite the inflation threat and the CBO baseline at the same time. So far as I know, the CBO does not trouble itself to model the exchange value of the dollar.
What the CBO does warn is that, under their assumptions, the ratio of US federal debt (held by the public) to GDP will rise relentlessly, passing 200 percent by 2035 and 300 percent by midcentury. Correspondingly, net interest payments on that debt would rise to exceed 20 percent of GDP. This certainly seems worrisome, and the CBO warns about “investor confidence” and “crowding out” without actually building these things into their model. Indeed, in their model this remarkable and unprecedented ratio of debt to GDP goes right along with steady growth, full employment, and low inflation, world without end! Why one should care about mere financial ratios if they produce such good—and, according to the CBO model— “sustainable” results is another mystery the CBO does not explain.
The other Warren (Buffet) gets MMT?
Waiting for the day when he adds:
‘There for federal taxes function to regulate aggregate demand, and not to raise revenue per se.’
Warren Buffett: Failure to Raise Debt Limit Would Be ‘Most Asinine Act’ Ever By Congress
By Alex Crippen
April 30 (CNBC) — Warren Buffett says if Congress fails to raise the U.S. debt limit, it would be its “most asinine act” ever. But he told shareholders today there’s “no chance” lawmakers will fail to do so, despite “waste of time” debates on Capitol Hill.
While Buffett doesn’t want the nation to keep increasing its debt relative to GDP, he says there’s shouldn’t be a legislated debt limit to begin with, because circumstances change.
Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.” Inflation resulting from a “printing press” approach, however, is a serious threat.
Charlie Munger’s view: the political parties are competing with each other to see who can be the most stupid, and they keep topping themselves.
If the debt limit is not raised, the government would run out of money, forcing a significant shutdown.
The current $14.3 trillion limit expires on May 16, although the administration has said it will be able to juggle some funds so that a shutdown would not happen immediately.
MBA’s index of loan requests for home purchases tumbled 13.6 percent
This is disturbing, along with still weak housing price indicators, and the ongoing downward revisions to GDP forecasts, as aggregate demand remains under international attack on all fronts.
On the govt side, China is cutting demand to fight inflation, with India and Brazil presumed to be doing same. Austerity measures continue to bite in the UK and the euro zone, and are looming in the US.
On the private credit expansion side, regulatory over reach continues to restrict lending by the US banking system, and particularly with the small banks. This limits both bank and non bank lending, as the non bank lending is most often at least indirectly dependent on bank lending.
Additionally, the rising costs of food and fuel are taking purchasing power from those with the higher propensities to consume and shifting it to those with far lower propensities to consume.
And, of course, ongoing QE continues to remove interest income from the economy, as does the shift of interest income from savers to bank and other lender net interest margins, in a process that has yet to reach the national debate as a point of discussion.
Other commodity prices also continue to rise as hoarding from pension funds and the like via passive commodity strategies continues to expand globally.
This sends price signals that increase supply, which means human beings are being mobilized to produce stockpiles of gold, silver, and other metals and commodities not to ever be used for real consumption, but to forever remain as ‘reserves’ to index financial performance as demanded by current institutional structures. This is a monumental waste of human endeavor as well as the real resources, including energy, that are committed to this process.
So at the macro level we are removing teachers from what have become over crowded classrooms, removing nurses from neglected patients, and removing workers from building, repairing, and maintaining our homes and other infrastructure, to send them to either the unemployment lines or the gold mines.
And because they think at any moment we can suddenly become the next Greece, both sides agree with the necessity and urgency of promoting this policy.
Mortgage Applications Fell Last Week: MBA
April 27 (Reuters) — Applications for U.S. home mortgages fell last week as higher insurance premiums for government-insured loans sapped demand, an industry group said Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.6 percent in the week ended April 22.
“Purchase applications fell last week, driven primarily by a sharp decrease in government purchase applications as new, higher Federal Housing Administration premiums went into effect,” Michael Fratantoni, MBA’s vice president of research and economics, said in a statement.
The decline reverses a recent increase in government purchase applications, which was likely due to borrowers trying to beat the deadline, Fratantoni said.
The MBA’s seasonally adjusted index of loan requests for home purchases tumbled 13.6 percent, while the gauge of refinancing applications slipped 0.6 percent.
Fixed 30-year mortgage rates averaged 4.80 percent in the week, easing from 4.83 percent the week before.
Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers
It’s hard to say from the headlines whether proactive deficit reduction measures are slowing the economies to the point where the slowing is causing their deficits to increase.
However, if that is the case, continuing their deficit reduction efforts will only make things worse, to the point of forcing social upheaval.
And the rising deficits will begin to weaken the euro, as the deficit reduction that initially worked to strengthen the euro reverse.
And higher rates from the ECB will only serve to further increase national government deficits via higher interest payments by those same governments.
This also makes euro ‘easier to get’ and thereby weakens the currency.
Yes, the euro zone is seeing ‘inflation’, as they define it, moving higher, but under current conditions I don’t see any channel from rate hikes to lower ‘inflation’, again as they define it. But I do see how higher rates can instead add to the general price level through income interest and cost channels. All of which would be exacerbated should this policy also cause the euro to depreciate.
With regards to funding, there is nothing operationally to stop the ECB from, for all practical purposes, funding/backstopping the entire banking system as well as the national governments.
The question is the political will, which is not quantifiable.
And the solution remains painfully simple- the ECB can simply announce an annual payment of 10% of the euro zone’s gdp to the national governments on a per capita basis.
This will have no effect on inflation as it won’t get spent. It will only serve to allow all of the national governments to borrow at the ECB’s target rate, which would lower funding costs for the nations currently paying premiums for funding.
This will also give the ECB a lever to control deficits- the threat of suspending a nation’s funding if it is not in compliance.
And by removing the threat of market discipline from funding, the region would be free to set their stability and growth pact deficit targets at levels designed to achieve their macro economic goals for employment, output, and price stability.
Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers
(Bloomberg) Euro-area debt reached a record in 2010. Debt rose in all 16 countries that were using the euro last year, lifting the bloc’s average to 85.1 percent of gross domestic product from 79.3 percent in 2009, the European Union’s statistics office said. Greece’s deficit topped expectations and debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP. Contingent liabilities from guaranteeing the banking system after the 2008 financial panic now amount to 6.5 percent of GDP, down from 8.6 percent in 2009, Eurostat said.
MMT’s Professor L. Randall Wray makes the NY Times!
Ignore the Raters
By L. Randall Wray
April 18 (NYT)
L. Randall Wray is a professor of economics at the University of Missouri-Kansas City and a senior scholar at the Levy Economics Institute of Bard College. He is the author of“Understanding Modern Money,” and blogs at New Economic Perspectives.
In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.
The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S.&P. joining the fray who knows whether the government will continue to pay its bills?
Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”
Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.
Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.
Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.
While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.
World Finance Chiefs Chastise US on Budget Gap
So with the entire world completely wrong,
but nonetheless in charge,
seems a reasonable bet to assume weak demand and a too wide output gap/too high unemployment will continue indefinitely?
That is, fear of looming national solvency crisis (becoming the next Greece)
is causing the world to go, at best, the way of Japan, as the real risk remains deflation.
Not that there won’t be relative value shifts, particularly where there is pricing/monopoly power.
With crude oil the main concern.
The ignorance remains overwhelming, on monetary operation and trade policy, as well as fiscal policy, as highlighted below:
World Finance Chiefs Chastise US on Budget Gap
April 17 (Reuters) — World finance leaders Saturday chastised the United States for not doing enough to shrink its massive overspending and warned that budget strains in rich nations threaten the global recovery.
Finance ministers in Washington for semi-annual talks took sharper aim than in previous years at the United States’ $14 trillion debt.
While most of the criticism came from emerging market economies, some advanced nations joined the chorus.
Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.
“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector,” de Jager told the International Monetary Fund’s steering committee.“Debt dynamics in other advanced economies, including the United States, are of concern.”
The IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation’s economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.
Brazil’s finance minister, Guido Mantega, offered sharp words in a thinly veiled attack on the United States. “Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world,” he said.
The Group of 20 countries agreed on Friday to a plan that could put more pressure on the United States to fix its deficits as well as push other leading economies to address
their own shortcomings.
The IMF’s advisory panel on Saturday said issues of financial stability and sovereign debt stability must be addressed, saying in a communique that “credible actions are needed to accelerate progress.” It emphasized the need for fiscal consolidation in advanced economies while avoiding overheating in emerging economies.
The Obama administration and the U.S. Congress are locked in battle over how best to fix the deficit. Republicans are pushing for deep spending cuts as part of the argument over raising the nation’s $14.3 trillion debt limit, something which is needed to avoid an unprecedented U.S. debt default.
The Republican-led House on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.
President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said Thursday the Republican plan would create “a nation of potholes.” The White House is wary about cutting spending sharply while the economic recovery remains fragile.
Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed. “We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery,” he said.
Geithner was quick to say others whose policies contribute to global imbalances must change too, “especially those whose fundamentals call for greater exchange rate flexibility…”
The United States has repeatedly called for China to relax its limits on the yuan currency.
Yi Gang, a deputy governor of China’s central bank, called for “more rigorous” efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.
Russian Finance Minister Alexei Kudrin, taking aim at the U.S. Federal Reserve, said central banks that buy government debt to keep interest rates low were abetting fiscal profligacy.
The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to nearly $2.3 trillion.
Echoing Republican lawmakers and even some Fed officials, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central
bank’s independence.
“We observe this process with some wonderment, since it amounts to the monetization of those countries’ budget deficits,” Kudrin said.
Sen. John Kerry- read my book and lose the long face
MMT to Senator Kerry-
Read ‘The 7 Deadly Innocent Frauds of Economic Policy’,
Lose the long face, and save us from ourselves.
Taxes function to regulate the economy, not to bring in dollars to spend
The idea that US- the actual issuer of its own currency, can be the next Greece- a user of the currency like a US state, a business, or a household, is entirely inapplicable.
There is no looming US government funding crisis.
There is a massive shortage of aggregate demand.
It’s not silly, it’s tragic.
Sen. Kerry: Budget Deal Makes America Look ‘Silly in a Lot of People’s Minds’
By Nicholas Ballasy
April 12 (CNSNew.com) — Senator John Kerry (D-Mass.) said the budget deal negotiated by House Speaker John Boehner (R-Ohio), Senate Majority Leader Reid (D-Nev.) and President Barack Obama makes America look “silly in a lot of people’s minds.”
“I think it’s no secret that I didn’t like the process,” Kerry said at a Capitol Hill press conference on Tuesday. “I don’t think it served the United States Congress or Senate well to have that fraction of the budget, with 100 percent of the cuts coming from 12 percent of the budget, threaten to hold up the government of the United States to the point of shutdown.”
“I think it did all of us, frankly, I think that process did us all a disservice as Americans,” he said. “I think the country looks silly in a lot of people’s minds when we have so much bigger budget challenges in front of us.”
Kerry appeared with Senator John McCain (R-Ariz.) at the press conference where they announced their legislation, “The Commercial Privacy Bill of Rights Act of 2011,” which they said would protect individuals’ personal information from being sold by companies without their knowledge.
Kerry commented on the budget process at the end of the conference.
“John McCain would agree with me and, as I think so many of our colleagues do now, there’s no way to resolve our budget challenge unless we put everything on the table,” said Kerry. “That means Medicare, Medicaid, fix Social Security without cutting benefits and, obviously, look at the Defense Department spending, procurement and other things. Everything has to be on the budget.”
The budget compromise reached late on Friday (and to be voted on this Thursday) to avoid a government shutdown cuts federal spending by $38.5 billion for the rest of fiscal year 2011.