Author Archives: WARREN MOSLER
2008-04-21 Weekly Credit Graph Packet
Current Proposals
Proposals that Happen to Be
within the Mainstream Paradigm
For the Fed:
- In general, don’t use the liability (deposit) side of banking as a source of market discipline.
- Specifically, eliminate most of the interbank markets by lending directly to US FDIC insured banks vs any/all ‘bank legal’ collateral in any size at the Fed’s target interest rate.
- This would reduce domestic FF/LIBOR type spreads to minimal levels, remove bank funding risks, and eliminate the need for the Fed’s TAF and the lending facility.
- Banks are already permitted to own only what is permissible by the OCC and other banking law, and fund it with FDIC (government) insured deposits. Therefore, unsecured Fed lending to FDIC insured banks does not add any ‘taxpayer risk’ that the government already accepts and directly manages.
For the Tsy:
- Encourage foreign CB’s to re-engage in ‘currency manipulation’ via buying USD to help their exporters.
- Encourage monetary authorities to accumulate their reserves in USD financial assets.
- Open a securities lending facility that offers all Treasury securities through repurchase agreements to the primary dealers in unlimited quantities at Fed Funds less 0.25%.
For Congress:
- Outlaw biofuels – way too dangerous to human life and may already be in the process of killing more humans than WWII.
- Manage the output gap with tax cuts or net spending increases.
- Stop worrying about US solvency (including solvency of social security).
- Use fiscal policy as a tool to meet real economic goals.
- Reduce energy consumption by lowering the national speed limit to 30 mph for private motor vehicle transportation over three years:
- Reduces driving.
- Decreases energy consumption per mile.
- Redirects where people live due to the implied price of travel time.
- Eliminate tax advantages for savings plans including pensions and individual retirement accounts:
- Savings does not function to fund investment.
- There are other viable options to having individual savers and money managers directing real investment.
- Outlaw passive commodity strategies for existing pension and retirement funds.
- Eliminate income taxes and use a national real estate tax to anchor the currency
- I estimate compliance costs at up to 15% of GDP.
- Compliance issues reward, encourage, and promote a culture of cheating that extends to all law.
- The infrastructure is already in place at the local level for a national real estate tax:
- Compliance and legal costs are minimal.
- The tax rates can be progressive based on values, efficiency, and other standards that advance public purpose.
- Use luxury taxes to moderate consumption that is outside of public purpose:
- These taxes function to reduce consumption.
- The success of these taxes is judged by how little they collect and thereby serve to reduce the targeted consumption.
- Eliminate sales taxes and other remaining transactions taxes as these function as internal tariffs:
- Transactions taxes work against internal comparative advantage.
- Transactions taxes work against specialization of labor.
- Legalize all recreational drugs:
- Takes the money out of illegal trafficking.
- Eliminates drug-related violence.
- Moves the social issue from the police to the churches.
- Do not allow healthcare costs to continue as a marginal cost of production (business should not fund healthcare, government should):
- Distorts pricing and optimal resource utilization.
- Workers do not tend to be less healthy than unemployed people.
Proposals that May Be
a Bit Outside of the Mainstream Paradigm
Offer a national service job to anyone willing and able to work which lets the market determine the budget deficit:
- An employed bufferstock is a more effective price anchor than today’s bufferstock of unemployed.
- Adds to useful output.
- Reduces real costs of negative social issues.
- Acts as a countercyclical fiscal ‘stabilizer’.
Drop the Fed Funds rate to zero and leave it there permanently:
- Inflation is not a function of the nominal rate set by the Fed.
- Output and employment is not a function of interest rates.
- Nominal interest rates support the rentier class and thereby reduce real output at the expense of those working.
2008-04-25 Valance Chart Review
Twin themes remain:
- Weakening demand continues from Q2 2006
- Price indexes continue higher as Saudis continue to hike prices and let quantity adjust
Markets are pricing in the end of Fed Funds cuts due to diminished systemic deflationary risk and escalating inflation readings.
Down, but not out.
Most surveys are still trending down but not in collapse.
Actual deliveries still on the low side but exceeding expectations.
Weak but could be worse. Looking more and more like an export economy.
A weak first quarter for payrolls but above previous recession levels.
Weakness, but not all that bad yet, and jobless claims fell again last week.
These kinds of surveys still looking very negative.
Housing may have stopped subtracting from GDP as of Q2.
Applications may be turning up after a slow Q1. Some signs home prices are stabilizing as well.
Low rental vacancies might support rent increases and the OER calculation in CPI.
Low home ownership due to negative sentiment means pent up buying demand.
Households are recharging their debt batteries?
Net Federal spending on the rise this year, with fiscal package kicking in next week.
March government spending was down due to a timing issue – expect a strong increase in the June report.
Revenues muddling through at better than recession levels.
Inflation is ripping, and we will see next week if the Fed finally considers it the greater risk.
Many in the mainstream have thought it the greater risk all along with only the threat of catastrophic systemic deflationary risk due to ‘market functioning’ possibly the greater risk.
With the fear of catastrophic systemic risk fading and the Fed Funds rate below most inflation measures, markets have priced in a higher chance of the Fed not cutting the Fed Funds rate.
Saudi production remains firm at current prices; so, I expect more hikes.
Confidence remains very low, as the realities of an export economy and reduced real terms of trade hurt the lower income groups disproportionately.
Tips are starting to discount higher real rates from the Fed.
The dollar continues under pressure.
Without the support of the CBs and Monetary authorities, it may continue lower until the US trade gap narrows substantially.
2008-04-25 US Economic Releases
U. of Michigan Confidence (Apr F)
Survey | 63.2 |
Actual | 62.6 |
Prior | 63.2 |
Revised | n/a |
From Karim:
Even weaker than expected at 62.6 vs initial estimate of 63.2.
5-10yr inflation expectations move to higher end of recent range from 3.1% to 3.2%
Following changes from March to April:
- Personal finances 93 to 86
- Buying conditions for durable goods 124 to 112
- 12mth economic outlook 46 to 40
Comments below from Survey itself:
- The Expectations Index, a component of the Index of Leading Economic Indicators, fell by 11.3% from March, by 21.7% from
January of 2008, and by 39.2% from its January 2007 peak. While that steep falloff indicated a recession even before the latest
decline, the accelerated pace of the decline points toward a longer and potentially deeper downturn. Although the tax rebate
will boost spending temporarily, the global rise in food and fuel prices, the declines in home values, and changes in credit
conditions are likely to persist for some time and lengthen the period of stagnation in consumption. Coupled with weaker job
and income growth, these factors have the potential to cause deeper cutbacks in consumption than now anticipated.
- Never before in the long history of the surveys have so many consumers reported hearing news of unfavorable economic
development as in the April survey. The most commonly heard news was about job losses, rising prices, and the fallout from
the housing and credit crisis. Nearly nine-in-ten consumers thought that the economy was now in recession. When asked
about prospects for the economy during the year ahead, three-in-four consumers expected bad times financially, the highest
proportion since 1980.
- Long term inflation expectations rose slightly to 3.2% in April from 2.9% in March and 3.1% in April 2007. Unlike the inflationary era of the
1970’s, when nearly all prices posted persistently large increases, the recent increase in inflation has been dominated by fuel
and food prices. It would take significant and prolonged increases in interest rates to quell the impact of the global rise in food
and fuel prices on domestic inflation, increases that may not be either politically possible nor economically justified.
- Uncertainty about future income and job prospects has had a devastating impact on buying plans, with consumers citing these
uncertainties three times as frequently as they did a year ago. Purchase plans for furniture, appliances, home electronics, and
similar goods fell to their lowest level since the early 1980s, with one-third of all consumers specifically mentioning their
uncertainty about jobs and incomes as their primary reason. Vehicle buying plans also fell to their lowest level since the 1990
recession, with one-third of all consumers citing uncertainty about jobs and incomes as well as the future price of gasoline.
Good report, agreed with all.
A few added comments.
This is a revision of a number has already been out for a while, so it should already be mostly discounted by the markets.
Mainstream economics (not me) would argue that while high food and energy prices are external negative supply shocks, and initially ‘relative value stories’ the Fed has to be careful not to ‘accommodate’ them with low interest rates that support demand as that can cause inflation expectations to elevate and turn a relative value story into an inflation story.
Additionally, mainstream economics assets that low inflation is a necessary condition for optimal long term growth and employment. And while the cost of bring down inflation now may be high, the cost of letting inflation expectations elevate and bringing down inflation later is much higher.
In fact, some in the mainstream argue that had the Fed not supported demand with rate cuts beginning back in August, the cost in lost output to bring inflation back down would have been far lower than the cost to bring it down now after inflation expectations have started to elevate.
It remains to be seen where the Fed stands on this. So far they have been willing to let inflation expectations begin to rise as they focused on keeping the US downturn to a minimum in the face of perceived systemic risk.
Markets are now pricing in the end of rate cuts even as weakness persists, in anticipation of the Fed having reached its tolerance for inflation.
2008-04-24 China News Highlights
Interesting statements here. China can’t afford politically to allow growth to slow sufficiently to cut employment growth, inflation not withstanding. This stance ultimately weakens the currency, one way or another:
(Bloomberg) China should stick with its tight monetary policy unless the economy’s expansion slows to below 9 percent, a National Bureau of Statistics official said. “Below 9 percent, it means the tightening is overdone and needs to be loosened,” Zheng Jingping, the bureau’s chief engineer, said at a seminar in Beijing today. The economy expanded by 10.6 percent in the first quarter. Premier Wen Jiabao is balancing the risk of a slump in the world’s fastest-growing major economy against the threat from inflation that is close to an 11-year high. A 1 percentage point slowdown in the U.S. economy will take 5 percentage points off China’s export growth, the Chinese Academy of Social Sciences said in a report today. “A reasonable combination for this year is 4.8 percent inflation and 9.7 percent GDP growth,” said Zheng. Inflation may be between 4.5 percent and 5.5 percent, he added. The government aims to cap price gains at 4.8 percent.
Highlights:
Shanghai Stock Index Surges 9.3%, Most in Six Years, After China Cuts Tax (Bloomberg) |
China Economic Growth Must Stay Above 9 Percent, Statistics Official Says (Bloomberg) |
Yuan Declines as Chinese Export Growth May Slow Further, Dollar Rebounding (Bloomberg) |
China to Expand Oil Refining Capacity by 24% by 2010, Sinopec Group Says (Bloomberg) |
Diversity in action
News Headline:
Credit Suisse Writes Down $5.26 Billion |
Over the last few years, I’ve been saying that with diversity risk is pretty well spread out.
Seems to have been the case – risk seems to have been well diversified.
Losses seem to be spread around more evenly than in the past with no one major US company failing as of yet due to losses per se.
But that also meant that in the adjustment process total losses would build to higher levels before the ‘cycle’ reversed and might be higher than in previous cycles.
2008-04-24 US Economic Releases
- Durable Goods Orders (Released 8:30AM EST)
- Initial Jobless Claims (Released 8:30AM EST)
- Continuing Claims (Released 8:30AM EST)
- Help Wanted Index (Released 10AM EST)
- New Home Sales (Released 10AM EST)
From Karim:
- Initial claims down from 375k (revised from 372k) to 342k
- Continuing claims down from 2999k (revised from 2984k) to 2934k
- DGO ex-aircraft and defense unchanged and down -2% and -1% in Jan/Feb
- Claims have been volatile lately due to seasonals, but if they were to somehow stabilize at these levels, would still be in line with 0 employment growth
- Q1 business capex component of GDP likely to be negative (has never been a recession where business capex did not also contract)
IFO down from 104.8 to 102.4 and retail component down from -0.9 to -10.0
ECB Member Bonello returns fire to Weber:
On the basis of the data we have at hand and the ECB’s rationale for monetary policy strategy it is very difficult to make an argument for higher interest rates.
Durable Goods Orders (Mar)
Survey | 0.1% |
Actual | -0.3% |
Prior | -1.7% |
Revised | -0.9% |
Durable Goods Orders YoY (Mar)
Survey | n/a |
Actual | -4.2% |
Prior | 5.5% |
Revised | n/a |
Durables Ex Transportation (Mar)
Survey | 0.5% |
Actual | 1.5% |
Prior | -2.6% |
Revised | -2.1% |
Durable Goods TABLE
Not all that bad. Two month total above expectations as Feb revised to a smaller drop.
Not at recession levels, yet.
And fiscal package kicking in soon.
Initial Jobless Claims (Apr 19)
Survey | 375K |
Actual | 342K |
Prior | 372K |
Revised | 375K |
As suspected, from the jobless recovery to the full-employment recession.
Labor numbers soft but not all that bad. No where near recession levels, particularly population adjusted.
Continuing Claims (Apr 12)
Survey | 2990K |
Actual | 2934K |
Prior | 2984K |
Revised | 2999K |
A lagging indicator, now following initial claims lower.
Help Wanted Index (Mar)
Survey | 20 |
Actual | 19 |
Prior | 21 |
Revised | n/a |
Still going south, but a lagging indicator.
New Home Sales (Mar)
Survey | 580K |
Actual | 526K |
Prior | 590K |
Revised | 575K |
Sales still heading south.
Might be because production and inventories are down, and also subject to revisions next month.
New Home Sales MoM (Mar)
Survey | -1.7% |
Actual | -8.5% |
Prior | -1.8% |
Revised | -5.3% |
Number of New Homes for Sale (Mar)
Survey | n/a |
Actual | 468K |
Prior | 473K |
Revised | n/a |
Actual inventories are down substantially, and remaining inventory is probably not highly desirable.
Looking for regional shortages in the spring/summer buying season to drive up prices.
New Home Sales Median Price (Mar)
Survey | n/a |
Actual | $227.6K |
Prior | $244.2K |
Revised | n/a |
[comments]
New Home Sales Average Price (Mar)
Survey | n/a |
Actual | $292.2K |
Prior | $302.9K |
Revised | n/a |
[comments]
New Home Sales TABLE
Wed am recap
Mainstream economics says:
Get inflation right and that ‘automatically’ optimizes long-term growth and employment.
Adding to demand with a negative supply shock turns a ‘relative value story’ into an ‘inflation story.’
The ECB is following mainstream theory, while the Fed is not.
why?
The Fed sees looming systemic, deflationary tail risk at the door. At least up to now.
The panic of 1907 and the early 1930s deflationary collapse (both previous examples given by the Fed) were gold standard events.
With a gold standard (and/or other fixed rate regimes) there are direct supply side constraints on the reserve currency. Interest rates are market determined, and during a credit crunch rates spike higher ‘automatically.’ Even the treasury must fund itself and faces the same supply side constraints, thereby limiting fiscal responses. This continues in today’s fixed fx currencies.
With floating fx/non-convertible currency there are inherent no direct supply side constraints on bank lending, deposit creation, and credit in general. Any constraints are on the demand side, including financial capital where constraints are also on the demand side. The CB necessarily directly sets rates, not market forces, and government spending is not constrained by taxing, borrowing, etc., hence fiscal packages are subject only to political choice.
Today’s risks are much the same as previous financial crisis type risks like 1987 and 1998, where the government and its agencies have the open option of ‘writing the check’ as desired, with inflation the price to pay, not government solvency as with fixed fx regimes.
Just like the 1970s, the Saudis are acting the swing producer and setting price and letting quantity they pump adjust. This is also necessarily the case when one is single supplier at the margin with excess capacity. The alternative of pumping flat out and hitting bids in the spot market is not a functional option for any monopolist. Only price setting is.
Russia is also a monopoly supplier at the margin and probably is also acting as a swing producer. So crude prices go to where the higher of the two set them.
Mainstream theory has not yet publicly addressed this kind of negative supply shock.
One option is to match the domestic inflation rates to the price hikes to try to avoid declining real terms of trade.
This is both politically impossible, and it can quickly lead to accelerating inflation.
We have two choices, neither particularly attractive:
- Watch our real terms of trade continue to collapse as crude prices are continuously hiked.
- Try to inflate to moderate the drop in real terms of trade.
Ironically, we will chose the later as we did in the 1970s because inflation is not a function of interest rates in the direction CBs subscribe to.
Increasing nominal rates increases inflation via the cost and demand channels.
Costs of holding inventory and investment rise with rate hikes.
Governments are net payers of interest to the non-government sectors; so, rate hikes also increase government spending on interest to support incomes in the non-government sectors.
Good luck to us!
2008-04-23 US Economic Releases
- MBA Mortgage Applications
MBAVPRCH Index (Apr 18)
Survey | n/a |
Actual | 357.3 |
Prior | 381.6 |
Revised | n/a |
Muddling through in its new, lower range, and banks gaining market share vs mortgage bankers.
MBAVREFI Index (Apr 18)
Survey | n/a |
Actual | 2286.3 |
Prior | 2866.0 |
Revised | n/a |
Reasonable level of refis.