Author Archives: WARREN MOSLER

WTI vs Brent

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The days are numbered before WTI converges up to Brent.
The discount is now less than $20.

$110 WTI will take away competitive advantages of those now able to use Cushing oil, etc.

Enterprise to expand Seaway pipeline to 850,000 bpd

December 17 (Reuters) — Enterprise Products Partners LP and partner Enbridge Inc plan to expand the Seaway pipeline to transport 850,000 barrels a day of crude between Oklahoma and southern Texas during the first quarter of 2014, an Enterprise spokesman said on Monday.

Seaway, a 150,000 barrel per day line that was reversed earlier this year to ship crude 500 miles southward from Cushing, Oklahoma, to Houston, Texas, will be expanded to run 400,000 barrels per day as of next month, according to a recent filing by Enterprise to the U.S. Federal Energy Regulatory Commission. The plans detailed in the filing were confirmed by Enterprise spokesman Rick Rainey.

A further expansion to 850,000 barrels per day is scheduled to take place in the first quarter of 2014, after a new twin line with capacity of 450,000 bpd is built parallel to the existing Seaway line, Rainey said.

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China Budget Deficit Said Set to Expand 50% to $192 Billion

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Ancient Chinese secret:

China Budget Gap Said Set to Widen 50% to $192 Billion

December 27 (Bloomberg) China plans to increase the budget deficit by 50 percent to 1.2 trillion yuan ($192 billion) in 2013, including the sale of 350 billion yuan of bonds to fund local governments, a person familiar with the matter said.

The central government deficit is budgeted at 850 billion yuan, according to the person, who asked not to be identified as the deliberations are not public. The nations leaders target about 8 percent trade growth, down from this years 10 percent goal, the person said.

A bigger fiscal deficit may give Chinas new leadership under Xi Jinping more room for tax cuts and measures to boost urbanization and consumer demand. The 1.2 trillion-yuan total compares with an 800 billion-yuan target this year, which included a 550 billion-yuan central government deficit and 250 billion yuan in local government bond sales.

The year 2013 is the first year for the new Chinese leadership, and urbanization will receive a big push, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. Financial support, including an expanded fiscal deficit in the budget, is needed for that.

Apart from a trial program launched in late 2011, local governments are barred from selling bonds directly and cant run deficits. China Business News reported the 1.2 trillion yuan figure today and Economic Information Daily reported an 8 percent trade target.

China News Service reported a 10 percent growth target for industrial production in 2013.

The government usually reveals specific goals at the legislatures annual meeting in March.

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Fed QE extracts record interest income from the economy

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And they call this ‘easing’…

Stone & McCarthy (Princeton)–According to our estimates the Fed will earn nearly $90 bln in calendar year 2012. Of this amount about $87.5 bln will be repatriated to the Treasury, which represents a new record high. Probably about $1.6 bln will be used to pay dividends to member banks, and another $1 or so is likely to have been paid in surplus.

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quick look ahead for the euro zone

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After describing since inception how the euro zone was going to get to where it is, here’s my guess on what’s coming next.  

First, to recap, it took them long enough and it got bad enough before they did it, but they did decide to ‘do what it takes’ to end the solvency issues and, after the Greek PSI thing, make sure the markets stopped discounting defaults as subsequently evidenced by falling interest rates for member nation debt.

But it’s solvency with conditionality, and so while they solved the solvency and interest rate issue, the ongoing austerity requirements have served to make sure the output gap stays politically too wide.  The deficits are high enough, however, for an uneasy ‘equilibrium’ of
near/just below 0% overall GDP growth and about 11% unemployment.

However, all of this is very strong euro stuff, where the euro appreciates at least until the (small) trade surplus turns to deficit.  This could easily mean 1.50+ vs the dollar (and worse vs the yen) for example. This process at the same time further weakens domestic demand which supports a need for higher member govt deficits just to keep GDP near 0.

So at some point next year I can see deficits that refuse to fall resulting in more demands for austerity, while the strong euro results in demands for ‘monetary easing’ from the ECB.  Of course with what they think is monetary easing actually being monetary tightening (lower rates, bond buying, everything except direct dollar buying, etc.) the fiscal and monetary just works to further support the too strong euro stronger.  

All this gets me back to the idea that the path towards deficit reduction in this hopelessly out of paradigm region keep coming back to the unmentionable PSI/bond tax.  Seems to me we are relentlessly approaching the point where further taxing a decimated population or cutting what remains of public services becomes a whole lot less attractive than taxing the bond holders.  And the process of getting to that point, as in the case of Greece, works to cause all to agree there’s no alternative.  With the far more attractive alternative of proactive increases in deficits that would restore output and employment not even making it into polite discussion, I see the walls closing in around the bond holders, along with the argument over whether the ECB writes down it’s positions back on page 1. And just the mention of PSI in polite company throws a massive wrench (spanner) into the gears.  For example, if bonds go to a discount, they’ll look towards ECB supported buy backs to reduce debt, again, Greek like.  And if prices don’t fall sufficiently, they’ll talk about a forced restructure of one kind or another, all the while arguing about what constitutes default, etc.

The caveats can change the numbers, but seems will just make matters worse.  

The US going full cliff is highly dollar friendly, much like austerity supports the euro.  In fact, the expiration of my FICA cut- the only bipartisan thing Obama has done- which apparently both sides have agreed to let happen, will alone add quite a bit of fiscal drag.  This means less euro appreciation, but also lower US demand for euro zone exports.  So the cliff does nothing good for the euro zone output gap.  

And Japan seems to be targeting the euro zone for exports with it’s euro and dollar buying weakening the yen, as evidenced by Japan’s growing fx reserves (where else can they come from?).

The price of oil could spike, which also makes matters worse.

In general, I don’t see anything good coming out of the current global political leadership.

Please let me know if I’m missing anything!

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yen tailspin?

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When the nukes shut down Japan started imported a lot more oil etc. And their trade surplus started fading and yen became ‘easier to get’ internationally.

Meanwhile, conditional funding in the euro zone worked to take away the euro evaporation risk, while the austerity continued to make the euro ‘harder to get’.

And the US cliff is making the dollar ‘harder to get’ and about to get more so.

And Japan’s fx reserves keep marching higher indicating that somehow yen are being exchanged for dollars that Japan keeps at the Fed, and probably same with euro, as the euro zone has been encouraging foreign buying of euro. All making euro and dollars ‘harder to get’

The Fed’s growing portfolio continues to remove interest income from the global economy, making the dollar ‘harder to get’.

So if nothing else changes the yen goes down until net exports rise sufficiently.

Just like the euro goes up until that trade surplus goes away (or the euro zone goes away, which ever comes first, but that’s another story), and the dollar keeps fundamentally firming until fiscal relaxes.

Regarding the yen, however, a falling yen doesn’t necessarily cause trade to reverse. In fact, initially, the rising price of oil, for example, exacerbates the fall, as the quantity purchased doesn’t immediately fall. Nor does the drop in real wages immediately cause exports to rise.
This was called the J curve when I was in school back in the last century.

And not to forget Japan thinks a falling yen is a good thing.

So given all that, the J part could go a lot further than markets currently are discounting.

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Professor Stephanie Kelton in the LA Times!!!

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Forget the ‘fiscal cliff’

By Stephanie Kelton

Dec 21 (LA Times) — Look, up in the sky! It’s a “fiscal cliff.” It’s a slope. It’s an obstacle course.

The truth is, it doesn’t really matter what we call it. It only matters what it is: a lamebrained package of economic depressants bearing down on a lame-duck Congress.

This hastily concocted mix of across-the-board spending cuts and tax increases for all was supposed to force Congress to get serious about dealing with our nation’s debt and deficit. The question everyone’s asking is this: On whose backs should we balance the federal budget? One side wants higher taxes; the other wants spending cuts. And while that debate rages, the right question is being ignored: Why are we worried about balancing the federal budget at all?

You read that right. We may strive to balance our work and leisure time and to eat a balanced diet. Our Constitution enshrines the principle of balance among our three branches of government. And when it comes to our personal finances, we know that the family checkbook must balance.

So when we hear that the federal government hasn’t balanced its books in more than a decade, it seems sensible to demand a return to that kind of balance in Washington as well. But that would actually be a huge mistake.

History tells the tale. The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929.

Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

Why does something that sounds like good economics balancing the budget and paying down debt end up harming the economy? The answers may surprise you.

Spending is the lifeblood of our economy. Without it, there would be no sales, and without sales, no profits and no reason for any private firm to produce anything for the marketplace. We tend to forget that one person’s spending becomes another person’s income. At its most basic level, macroeconomics teaches that spending creates income, income creates sales and sales create jobs.

And creating jobs is what we need to do. Until the fiscal cliff distracted us, we all understood that. Today, we have roughly 3.4 people competing for every available job in America. The unemployment rate is like a macroeconomic thermometer when it registers a high rate, it’s an indication that the deficit is too small.

So in our current circumstance a growing but fragile economy policymakers are wrong to focus on the fact that there is a deficit. It’s just a symptom. Instituting tax increases and spending cuts will pull the rug out from under consumers, thereby disrupting the income-sales-jobs relationship. Slashing trillions from the deficit will only depress spending for year to come, worsening unemployment and setting back economic growth.

Conveying this is an uphill battle. The public has been badly misinformed. We do not have a debt crisis, and our deficit is not a national disgrace. We are not at the mercy of the Chinese, and we’re in no danger of becoming Greece. That’s because the U.S. government is not like a household, or a private business, or a municipality, or a country in the Eurozone. Those entities are all users of currency; the U.S. government is an issuer of currency. It can never run out of its own money or face the kinds of problems we face when our books don’t balance.

The effort to balance the books that’s at the heart of the fiscal cliff is simply misguided. Instead of butting heads over whose taxes to raise and which programs to cut, lawmakers should be haggling over how to use the tool of a federal deficit to boost incomes, employment and growth. That’s the balancing act we need.

Stephanie Kelton is an associate professor of economics at the University of Missouri-Kansas City and the founder and editor of New Economic Perspectives. @deficitowl

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Berlusconi comments

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As if their problems end with lower borrowing costs.
No mention of needing to run much larger deficits:
Yesterday Berlusconi put it plainly and simply:

Berlusconi says Italy may be forced to leave the euro zone

Silvio Berlusconi said that Italy would be forced to leave the euro zone unless the ECB gets more powers to ensure lower borrowing costs. Berlusconi, who will again lead his People of Freedom party (PDL) in a national election, said that the ECB should become a lender of last resort for the currency bloc. “If Germany doesn’t accept that the ECB must be a real central bank, if interest rates don’t come down, we will be forced to leave the euro and return to our own currency in order to be competitive,” Berlusconi said.Berlusconi is already campaigning hard for the election with a spate of television interviews in an attempt to close the wide gap with the center-left Democratic Party which is polling at above 30 percent, some 14 points above the PDL.

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