Monthly Archives: December 2012

yen dynamics

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A while back I wrote about euro strength and yen weakness. this is an update on the yen side. Fundamentally the euro side remains firm as previously discussed.

History:

Japan had a ‘weak yen’ policy to support its exporters. The export model was to keep domestic demand low via relatively tight fiscal policy/large demand leakages/institutionalized ‘savings’. And then dollar buying to keep the currency/real wages in check.

They had accumulated over $1 trillion, back when that was a lot of money, when US politics put an end to it, with Paulsen calling them currency manipulators and outlaws.

Japan takes that kind of thing seriously from the US and stopped buying dollars, with the yen subsequently appreciating from over 100 to something less than 80.

With the politics now changing, so is policy. Japan tested the waters with an announced dollar buying policy a while back with no negative political ramifications from the US. And the euro zone’s financial crisis has caused the EU to welcome foreign buyers of national govt debt, which firms the euro.

Japan has not announced dollar buying but their dollar fx reserves are growing. Those dollars have to come from somewhere?

And there is reason to believe a hopelessly out of paradigm US Treasury Secretary might be welcoming dollar buying our of concern of the US Treasury being able to fund itself, particularly when the Fed stops its purchases.

And Japan’s trade surplus has been going away as well.

So it may be the case that Japan is in the process of resuming it’s traditional dollar and euro buying, which can move the currency to whatever level it desires. Which is probably back to north of 100 to the dollar?

Lastly, there is a record yen short position being reported. While this could mean it’s getting over sold and subject to a rally, it could also mean insiders have been tipped off to this policy shift and will profit immensely.

Caveat: If all the noises around the coming election and weak yen policy result only in an increase in the inflation target and ‘unlimited qe’ involving only yen financial assets, that policy will only serve to make the yen stronger and a wicked short covering scramble will follow.

Nothing short of buying fx, directly or indirectly, will do the trick.

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The MMT Grand Bargain: Raise Social Security Benefits and Suspend FICA!!!

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Fact:

Every serious economic forecaster cuts his GDP and employment estimate
with tax hikes and spending cuts.

(AKA, the looming ‘fiscal cliff’!)

Fact:

Every serious economic forecaster would raise his GDP and employment estimate
with tax cuts and spending increases.

Fact:

All agree there would be no moral hazard or a waste and fraud issue with an increase in Social Security payments.

All agree that FICA is a highly regressive punishing tax on people working for a living, ideologically unacceptable to the ‘left’, and, of course, the ‘right’ is against any tax.

Fact:

Even with the presumed ‘current unsustainable path of future spending’ the Fed’s long term CPI (aka ‘inflation’) forecast remains at 2%, market participants via inflation indexed securities forecast equally low long term CPI increases, and there are no credible forecasts for any kind of ‘inflation’ problem from excess aggregate demand.

Fact:

The August 2011 debt ceiling debacle and downgrade of US credit, at the ‘worst possible time’, demonstrated that because the US ‘prints its own money’ the US government can’t run out of dollars; always has the unlimited ability to make any size dollar payment on a timely basis; is not dependent on and can never be dependent on dollar funding from foreigners, the IMF, or anyone else; pays interest rates based on rates voted on by the Federal Reserve; and is in no way is at any kind of risk whatsoever of becoming ‘Greece’.

Conclusion:

The MMT Grand Bargain for Prosperity:

1. Raise the minimum Social Security payment to $2,000 per month,

AND

2. Suspend FICA taxes

What’s so hard about this?

Feel free to distribute, particularly to your Congressmen!!!

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Bitcoins join global bank network

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Been looking at Bitcoins for a while and seems it’s not a currency but a payments system.

For example, a acquaintance of mine who wanted to buy an item arranged with the seller to do it via Bitcoins to ‘save’ on vat taxes.

Say the Bitcoin happened to be valued at $12, the buyer wanted to pay $120 dollars.(Note that the value per se was of no consequence for this transaction.)

What the buyer of the item did was buy 10 Bitcoins for the $120, while simultaneously the seller sold 10 bit coins for $120.

The buyer then then bought the item by transferring his 10 Bitcoins to the seller via the exchange, who ‘delivered’ them to the exchange for his prearranged $120.

Bitcoins facilitate untaxed and anonymous transactions. The value of a Bitcoin is of no particular consequence to the buyer and seller in the case of transactions like this, and will fluctuate as a function of the policies of the exchange management.

And seems the right to ‘operate as a bank’ now officially sanctions this type of activity.

Virtual cash exchange becomes bank

** Bitcoins join global bank network **

A currency exchange that specialises in the virtual currency known as bitcoins has won the right to operate as a bank.

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My response to a post on an Italian Keynes blog

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Warren Mosler comments on Keynes blog, Italy

warren mosler 8 dicembre 2012 alle 15:33

First, let me remind that MMT was originally ‘Mosler Economics’ which began with ‘Soft Currency Economics’ (1993) which can be found at https://moslereconomics.com. Also, highlights of the ‘history of MMT’ are in ‘The 7 Deadly Innocent Frauds of Economic Policy’ free online also on my website. Note too that ‘Soft Currency Economics’ was a result of my first hand experience after 20 years in banking and monetary operations. I had never read Keynes, or even heard of Lerner, Knapp, or had any knowledge of any ‘post Keynesians’. So while it may be true that MMT can be derived from one school of thought or another, it didn’t happen that way. And, for example, when I put forward my ‘real vs nominal’ discussion of fiscal transfers in a monetary union earlier this year, explaining how the production of public goods and services for the benefit of the entire union is in fact a real cost to the region that receives the funding to produce these public goods and services, that was also ‘original MMT thought’ (fully recognizing the shortcomings of such a statement!).

Second, if there is a ‘fundamental’ contribution of MMT to ‘the literature’ it’s the explicit recognition that a currency like the dollar is in fact a simple public monopoly, and all the rest follows. Along those lines I have lectured on the long standing ‘Keynes vs the Classics’ discussion, where the Classics argued there can be no unemployment without monopoly, and Keynes argues there in fact can be persistent unemployment even without monopoly, due to the effects of unspent income, etc. in the monetary system. My response is they both failed to explicitly recognize the currency itself is a public monopoly. Notional demand is from taxation and from savings desires, and notional supply from state spending and/or state lending. And unemployment is the evidence of a restriction in supply from the monopolist- the failure to spend enough to satisfy the need to pay taxes and the desires to net save in that unit of account. So the classics were right in that unemployment does come from monopoly, but they failed to recognize the applicable monopoly. And Keynes was right, the problem was on the monetary side, but he failed to recognize the currency itself was a simple public monopoly, even though he described it much along those lines. If Keynes had recognized the currency was a monopoly, he surely would have explicitly said so in this discussion, and many other places as well to support many of his contentions. I’ll post this and then go on with additional response to the above blog.

warren mosler 8 dicembre 2012 alle 15:50

With regard to circuit theory, when I first met the Post Canadians ;) in the mid 1990’s who I very much respect, especially the M&M’s (Mario and Marc), and read a bit of circuit theory, it seemed so ‘intuitively obvious’- a case of ‘goes without saying’- I wondered why it was even worth writing about! And my first comment was that while I fully agreed with what they were saying, it didn’t ‘start from the beginning’ in that it began with firms borrowing to pay workers, but never discussed why anyone would work for the currency in the first place. I explained to them that it about the currency being a simply public monopoly, with tax liabilities the ‘driving force’ behind the ‘government circuit’ where, at the macro level, taxation creates sellers of real goods and services, including labor, which is why people work for businesses, etc. Professor Alain Parguez immediately picked up on this and added it to his model in his next paper, only to be severely criticized and isolated by much of the ‘Circuitist’ community for many years! Most came around to accept it over the years, though some continue to fail to do so.

warren mosler 8 dicembre 2012 alle 16:16

Next:

“I think it’s worth remembering that this thesis is a rigorous foundation of the theory of relative prices and distribution in the development of the so-called “theory of production”, which, among others, Leontief and Sraffa have made outstanding contributions above (see Pasinetti 1975; Kurz and Salvadori 1995, cf. Petri also 2004). In particular, in the light of the theory of production and the above-mentioned argument and its implications can be extended to so-called “long term”, and the objections of Krugman (2011) to the MMT can be effectively criticized.”

Relative prices, yes, but MMT reveals the source of absolute nominal prices. And it’s very simple. As everyone knows, a monopolist is ‘price setter’ rather than ‘price taker’.

And a monopolist is price setter for two prices. The first what Marshall called the ‘own rate’ which how his ‘item’ exchanges for itself. With a currency this is the rate of interest, which we know is set by the CB and not ‘the market’ as we know the CB is monopoly supplier of reserves to its banking system, and therefore is price setter as it prices the banking system’s marginal cost of funds. The second is how the monopolist’s ‘item’ exchanges for other goods and services, which we call ‘the general price level’

I say it this way- the price level is necessarily a function of prices paid by the issuer when it spends, and/or collateral demanded when it lends.

warren mosler 8 dicembre 2012 alle 16:28

Next:

“However, as Lavoie has shown, it is derived from a simple accounting convention: some modern monetary theorists analyze the central bank and the state as if they were a single sector consolidation. The mystery is easily solved, then. However, it should also add that this consolidation, in the current political and institutional reality, does not exist.” First, I do very well know, recognize, and account for the institutional realities at all times. As I do know that no matter how you look at it, spending comes first before taxing of borrowing for the issuer of the currency, which includes his designated agents.

Congress is the issuing authority, and has assigned various tasks to the Treasury and Fed to carry out its will.

The Fed operates a spread sheet that contains the accounts of its member banks, as well as an account for the Treasury.

I begin, for purposes of this discussion, at inception, with no balances in any accounts.

Any payment of taxes would require the Fed to debit a member bank account and credit the account of the treasury.

This is impossible with no balances in the member bank accounts, unless they are permitted to have negative balances.

However, negative balances- overdrafts- are functionally loans from the Fed, an agent of Congress. This means paying taxes via overdraft is paying taxes via obtaining a loan from the Fed. That is, in this example, the Fed must lend the dollars that it accounts for as payment of taxes.

The way ‘insiders’ say it, there can’t be a ‘reserve drain’ without a ‘reserve add’

That is, the dollars to pay taxes and to buy treasury securities necessarily ‘come from’ govt. spending and/or lending.

There is no way around it. Any issuer must issuer before he can collect the thing he issues as a simple point of logic.

warren mosler 8 dicembre 2012 alle 16:36

regarding trade, with a floating exchange rate there is ‘continuous balance.’ For example, in the case of the US, with perhaps a $400 billion trade deficit, it can be said that we have the goods and services we imported, and non residents are holding the additional $400 billion of $US financial assets they received in payment, and at this point in time there is that ‘balance’ which has resulted in the current exchange rate martix.

So I see only ‘balance’ at any given point in time, never ‘imbalance’, as a point of logic. Am I missing something? If so, rather than I write about every possible question I can imagine you might raise, can I ask for any of you to give me an example of why this is a ‘problem’ so to speak? Thanks!

warren mosler 8 dicembre 2012 alle 16:45

“In a period in which the theme of the insertion of foreign capital in the ownership and control seems to go beyond the scope of the last strategic assets in public hands and even get to lick the banking system, it would be good to do a lot more clarity on this point .”

Yes, at any time I see public purpose in sourcing matters of strategic purpose domestically. For example, you do not want to outsource the programming of your military software which could render it useless in time of war. And I see public purpose in producing goods and services with strategic military purpose domestically, like the steel that goes into maintaining the military, and domestic sources of energy, food, etc. etc. Again, government is there for public infrastructure that serves public purpose, which includes strategic planning.

On the other hand, I don’t see the public purpose in not allowing non residents to sell us most of what we call ‘consumer goods and services’ where, for example, a cut off in time of war would not alter the outcome of the war.

Along these lines, I see a serious problem with the euro zone’s dependence on Russian energy supplies, even though Russia has ‘promised’ never to cut them off.

That and $20 will get you a cup of coffee in Rome…

I see the euro zone as paying a heavy price in regards to real terms of trade with Russia and others, due to arrangements that I don’t see serving public purpose, though the certainly do serve influential private purpose.

warren mosler 8 dicembre 2012 alle 16:53

Remember, economically speaking, employment is a real cost to the worker. He is selling his time. The real benefit is the output. So I suggest you look at real consumption with regard to the euro members, to see who’s winning and losing economically. But yes, any monetary union needs a system of fiscal transfers to ensure full employment and price stability. And I suggest the reason it doesn’t happen is because it’s not widely understood that if a region is assigned the production of public goods and services, in real terms that process is a real cost to that region, as it’s employed to produce real goods and services that other parts of the union are consuming. Instead, because that region gets funding, it’s assumed that region is benefiting in real terms. In other words, fiscal transfers can be effected to use the areas of higher unemployment to produce goods and services that are exported to the rest of the union. This all comes back to exports being real costs, and imports real benefits, etc.

warren mosler 8 dicembre 2012 alle 17:00

let me conclude today that as a matter of simple game theory labor is not a fair game, and if not supported in some manner real wages will stagnate at very low levels. This is because people must ‘work to eat’ while business hire only if they can make a desired return on investment.

For me it suits public purpose to make sure people actually working for a living and producing real goods and services consumed by the majority are worthy of being supported with high levels of education, health care, and other such publlc services, as well as being fed, housed, and clothed at levels that make feel proud to be members of that society. The proposals on my website are intended to work to that end.

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Cliff notes

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Jobless Claims Fell More Than Expected, Down by 25,000 to 370,000

I haven’t written much this week because I haven’t seen much to write about.

Still looks like both the economy and the markets are discounting the cliff. And still looks to me like ex cliff GDP would be growing at about 4% this quarter, with the Sandy-cliff related cutbacks keeping that down to maybe 2.5%. And going over the full cliff is taking off maybe 2% more, leaving GDP modestly positive.

Which is what stocks and bonds seem to be fully discounting.

As previously discussed, the housing cycle seems to have turned up, which looks to be an extended, multi year upturn with a massive ‘housing output gap’ to be filled. And employment is modestly improving as well, also with a large output gap to fill. Car sales are back over 15 million, and also with a large output gap to fill.

The way I see the politics unfolding, the full cliff will be avoided, if not in advance shortly afterwards, as fully discussed to a fault by the media. That means GDP growth head back towards 4% (and maybe more)

Nor do I see anything catastrophic happening in the euro zone. They continue to ‘do what it takes’ to keep everyone funded and away from default. And conditionality means continued weakness. Q3 GDP was down .1%, a modest improvement from down .2% in Q2, and a flat Q4 wouldn’t surprise me. The rising deficits from ‘automatic fiscal stabilizers’ (rising transfer payments and falling revenues) have increased deficits to the point where they can sustain what’s left of demand. And the recent report of German exports to the euro zone rising at 3.5% maybe indicating that the overall support for GDP will continue to come disproportionately from Germany. And rising net exports from the euro zone will continue to cause the euro to firm to the point of ‘rebalance’ which should mean a much firmer euro. And as part of that story, Japan may be buying euro to support it’s exports to the euro zone, as per the prior ‘Trojan Horse’ discussions, and as evidenced by the yen weakening vs the euro, also as previously discussed.

And you’d think with every forecaster telling the politicians that tax hikes and spending cuts- deficit reduction- causing GDP to be revised down and unemployment up, and the reverse- tax cuts and spending hikes causing upward GDP revisions and lower unemployment- they’d finally figure this thing out and act accordingly?

Probably not…

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UK Future Jobs Fund vindicated

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Helps support the idea that an employed labor buffer stock works a lot better than an unemployed labor buffer stock, much like we’ve been suggesting for the last two decades:

Future Jobs Fund vindicated

By Tanweer Ali

November 27 — Last week the government finally published its impact report on Labour’s Future Jobs Fund. According to the report, two years after starting their jobs with the scheme, participants were 16 per cent less likely to be on benefits than if they had not taken part and 27 per cent more likely to be in unsubsidised employment. The net benefit to society of the scheme was £7,750 per participant, after accounting for a net cost of £3,100 to the Treasury . Not bad for a scheme condemned as a failure by the current government, and certainly better than anything that replaced it.

The Future Jobs Fund was introduced in 2009 to address the problem of long-term youth unemployment. About 100,000 people in the 18-24 age group out of work for a year or more were guaranteed a job for six months. Later the threshold was reduced to six months. An additional 50,000 guaranteed jobs were available for people of all ages in selected unemployment hotspots.

The idea of addressing long-term unemployment through job guarantees is not new. A number of such schemes were created in Depression-era America, putting young people to work in the National Parks, among other places. An economic rationale was provided by the economist Hyman Minsky. Many schemes for the unemployed focus on skills, and making people more employable, but don’t address the lack of demand for labour. Especially in times of recession and economic stagnation, the big problem is that there simply aren’t enough private sector jobs to go around. Minsky’s solution was for the state to act, in his terminology as ‘employer of last resort’, and provide work at the minimum wage (though I’d prefer to see people paid a living wage). This way the state is not competing with the private sector, merely providing a buffer in hard times.

Direct job creation schemes fell out of favour in the 1970s and 1980s, and the focus shifted to other active labour market policies. Poorly designed job creation programmes are beset by a number of serious problems. The FJF was designed after a careful study of the failure of earlier schemes, drawing on best practices from around the world, and ironing out potential faults. The scheme provided real jobs, not workfare, which created real benefits in the community, paid at the national minimum wage, with time off to look for other, unsubsidised jobs. It seems that the current government never understood the idea of transitional jobs. Anyway it was Labour’s idea, so it must have been bad, right?

Job guarantees have big advantages. For building confidence and job-readiness it’s hard to beat – the best way to prepare people for the job market is to give them a job. It is also visibly fair. Rather than leaving people idle, we are deploying our nation’s key resource in carrying out important work, be it caring in the community, working in schools, or preserving the environment. Also, boosting the incomes of people who would otherwise be unemployed constitutes a highly economic effective stimulus, one that, at a relatively low wage level, is unlikely to be inflationary. Finally, such a scheme will be cost-effective. A job guarantee is a more efficient use of money than other, broader stimulus schemes, as it is specifically targeted at a clear objective. The job guarantee is cheap for what it can achieve, far from being unaffordable.

Labour should be proud of the FJF and of its 2010 manifesto pledge to extend it to all adults out of work for two years or more. Now that the FJF has been vindicated, it’s time to reaffirm our commitment to a job guarantee, and make it a central part of a full employment policy. A robust job guarantee, once turned into an enduring institution, may not be a silver bullet for all our problems, but will go some way to addressing the misery and waste of long-term unemployment, in this downturn and in future recessions.

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