Category Archives: China

Comments on China’s temporary hike of Reserve Requirements

Posted on by

The lesson should be changing reserve requirements for a non convertibility currency, as the yuan is domestically for all practical purposes, doesn’t alter liquidity, but does alter balance sheet composition and pricing necessary to hit return on equity targets.

And looks to me more like their stealth inflation problem hinted at previously hasn’t yet been reigned in to their satisfaction?

  • 50bp hike in RRR for six large banks, valid for two months
  • the unusual temporary move reflects the central bank (PBoC)’s concern over strong lending appetite and hot money inflow
  • the PBoC is likely to follow up with more measures based the effectiveness of current policy
  • a lesson to the developed country on how difficult it is to rein in excessive liquidity

According to Reuters, China has raised reserve requirements by 50 basis points for six large commercial banks to 17.5%. It is reported that the move is only temporary and will be in place for two months. However there is no official statement from the central bank yet.

These six banks account for around 40% of China’s total lending and nearly 50% of the total bank assets. The 50bp hike in reserve requirement ratios will lock up about CNY150 bn of deposits.

We think the unusual temporary measure reflects the PBoC’s concern over excessive liquidity in the domestic economy on the backdrop of a robust growth. The total banking lending from January to August has reached 76% of the full-year target (CNY7.5 trillion), which means the monthly lending needs to be below CNY450 bn. However the domestic credit demand still seems to be very strong. Another possible reason for this move is the mounting evidence that the hot money is flowing back due the increasing pressure on the yuan appreciation.

The PBoC move speaks of the problems in managing a generous liquidity policy and stands as both a warning and a contrast to those other central banks considering a further round of quantitative easing. Once a generous liquidity policy is in place, it becomes difficult to wean dependent companies off the cheap and easy liquidity flow. Whereas the PBoC is not “pushing on a string” and there is genuine demand for this liquidity, the warning to the US federal reserve is clear. Even for economically well-administered economies, the latter stages of generous liquidity policies become very difficult to manage. Zombie (cheap liquidity dependent) companies, potential asset bubbles and the intractability excess liquidity are all legacy issues central banks
considering QE2 must consider.

Except that those are not the result of QE, but of what is functionally fiscal support for zombies, and the only effect zombies have on the real economy is that they waste valuable labor hours. Unfortunately no one seems to know how to keep fiscal drag low enough to sustain full employment so they see political benefit to useless employment.

Share

China sells off Japanese debt

Posted on by

Interesting and unusual headline.

China doesn’t care about exports to Japan and may be ‘helping them’ by selling some of its yen reserves?

They may know Japan is going to get serious about keeping the yen weaker with direct intervention so China is front running them?

China sells off Japanese debt

By Michiyo Nakamoto

October 8 (FT) — China sold a record Y2,000bn ($24.3bn) in short-term Japanese bills in August, suggesting that their hefty buying earlier this year was not aimed at diversification into the yen as some had speculated. Chinese investors had bought a net Y2,300bn in Japanese bills and bonds between January and July. Chinese investors were slight net buyers of medium- to long-term Japanese bonds in August, to the tune of Y10.3bn. Coupled with their record net selling of short-term bills, Chinese investors’ total net buying of Japanese bills and bonds so far in 2010 fell to Y297.6bn. That is still slightly above the annual record for Chinese net buying of Japanese debt, of Y255.7bn, recorded in 2005.

Share

Austerity Will Push Euro to $1.50 by Year End: Economist

Posted on by

This story was abstracted from a long phone interview a couple of days ago and is reasonably well reported.
It was a follow up to my last interview with them when the euro was 119.
At the time all forecasts there were seeing were for it to keep going down.

Unreported was the part of the discussion reviewing that the traditional export model keeps fiscal tight enough to keep domestic demand relatively low, and at the same time buys fx to prevent currency appreciation and keep real costs down to help the exporters. And that the ECB has an ideological constraint against buying US dollars, in that building dollar reserves would give the appearance of the dollar backing the euro, when they want the euro to be a reserve currency.
(And interesting that they kept my name out of the title.)

Austerity Will Push Euro to $1.50 by Year End: Economist

By Antonia Oprita

October 7 (CNBC) — The euro will keep rising and will likely end the year at up to $1.50, as the European Central Bank pursues a highly deflationary policy, despite buying euro-denominated bonds, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com.

Mosler, who predicted that the euro would bounce back towards $1.60 in June, when the single European currency was trading at around $1.19, said there was nothing to stop the euro’s [EUR=X 1.3965 0.0036 (+0.26%) ]appreciation versus the dollar, short of a policy response from the European Central Bank.

“If it (the euro) keeps going at the rate it’s going, it could go to $1.45-$1.50 by the end of the year,” he said.

The ECB started buying government bonds belonging to distressed euro zone members such as Greece, Ireland, Portugal and Spain to ease market concern regarding these countries’ ability to fund themselves and some analysts have said the measure may be inflationary.

But the policy is, if anything, deflationary because it is accompanied by tough austerity conditions, Mosler said.

“They’re causing a shortage of euros by requiring governments to rein in spending. It’s a highly deflationary move and that’s what is driving the euro higher,” he said.

“Right now the ECB and the euro zone are tightening up their supply of euros.”

Billionaire investor George Soros accused Germany earlier this week ofdragging the euro zone in a deflationary spiral by promoting austerity measures.

Many analysts have said that the ECB is promoting policies that go hand in hand with the euro zone’s biggest member’s fears of inflation.

One element of uncertainty is the ECB’s willingness to continue to buy government bonds, Mosler warned.

“No-one knows how long the ECB are going to do it… they could change their mind tomorrow,” he said.

But market speculators, while being able to attack the euro zone’s weakest members, will not be able to speculate against the central bank, which can print money and distribute it among its members at any time, Mosler said.

“The markets cannot punish the ECB. They can’t punish the issuer of the currency,” he said. “When you’re the issuer of a modern currency, you can credit an account and there’s nothing the market can do about it.”

He reiterated his view that the ECB has now de facto shifted to deciding fiscal policy for the countries in the single currency area, since their help by buying bonds comes with conditions regarding cutting debt and budget deficits.

Another factor behind the euro’s appreciation will be China’s announcement that it will buy Greek debt, which was hailed in Europe as proof of confidence in Greece’s ability to pay its debt.

“China would like nothing more than to buy euros – they’re doing it through buying Greek debt. That’s just one more force for a stronger euro,” Mosler said.

Share

Comments on the Blumenthal McMahon Debate

Posted on by

Comments on the Blumenthal McMahon Debate

The debate organizers opted not to include me as the representative of the third largest political party in Connecticut, the Independent Party. I did, however, watch the proceedings on television. We are in an economic emergency, and I’m running for the US Senate strictly as a matter of conscience to offer my knowledge, experience, and proposals to fix our broken economy and create the 20 million new jobs we desperately need. To that end I offer my comments.

But let me first respond to the question on the death penalty. Both candidates proclaimed their unconditional support for it, while I am categorically against it. That fact that more than 100 convicted murderers on death row have been found not guilty and released after DNA testing became available is reason enough for me to ban this unnecessary measure which has likely put to death untold numbers of innocent people.

With regard to jobs and the economy, both candidates recognized that small businesses account for about 70% of private sector jobs, and both candidates proposed a variety of tax measures to help small business. And while both candidates favored not letting middle income tax cuts expire next year, and Mrs. McMahon further supported not raising taxes on anyone, neither of those proposals actually lower taxes from their current levels.

Sadly, the problem is that neither candidate recognizes that it is SALES that create jobs. Consequently, they did not focus on proposals designed to increase sales. Restaurants, department stores, and other small businesses don’t cut staff when sales are good and they are full of paying customers. They cut staff when sales fall. We’ve lost 8 million jobs because sales fell and business in general remains slow. So while Mrs. McMahon stated that entrepreneurial activity is what creates jobs through risk taking, she failed to recognize that they do that only when prospects for actually selling their goods and services are favorable, and, particularly, when they have a backlog of orders.

Thus, while lowering taxes for small business certainly doesn’t hurt, it’s not what creates jobs. My lead proposal to create millions of new jobs is a full payroll tax (FICA) suspension for both employers AND for all employees. This will increase take home pay by about 8% which means a person earning $50,000 a year will see his take home pay go up by over $300 per month, which will boost sales and create jobs the right way, from the bottom up, and not from the failed top down trickle down bailout policies of the last several years. It also lowers costs for all businesses, which helps keep prices down. We have to take strong measures to get sales back up to where they should be.

Next, I want to address one of the more famous sound bytes from this debate. Mrs. McMahon specifically stated that “government doesn’t create jobs, the private sector does” and Mr. Blumenthal did not disagree. What both candidates failed to recognize is the government’s central role in private sector job creation. Government’s role is the creation and maintenance of public infrastructure necessary for the functioning of the private sector. This includes in the general sense the legal system, the monetary system, public safety, and other related and essential support functions. This infrastructure employs real people in real jobs providing real benefits without which there would be no viable private sector. So in that sense government does indeed create real jobs, both directly and indirectly.

In summary, neither candidate showed that they understood that sales create private sector jobs, and neither candidate directly proposed measures such as my payroll tax suspension for employees to increase our spending power to restore sales and create jobs. Instead, they proposed measures that certainly won’t hurt, but will fall far short of what’s needed to put America back to work.

Next, Mr. Blumenthal repeatedly called for policy to force China to end its ‘currency manipulation,’ along with ‘buy America’ proposals and proposals to reverse the flow of American jobs overseas, to the point of criticizing Mrs. McMahon for purchasing imported goods. Mrs. McMahon implicitly agreed with the premise, countering by explaining that US corporate tax policy was to blame for companies moving overseas. Again, unfortunately, both candidates have things fundamentally backwards on this issue as well. I suspect that is because the unions they are undoubtedly catering to also have it backwards and are sadly working against their own best interesets.

The real problem is not the imports, or the jobs going overseas. The problem is that we are grossly over taxed for the size of government we have, and don’t have enough take home pay to buy enough goods and services to keep everyone at home fully employed.

As every Professor of Economics knows, and every first year student is taught, imports are real benefits and exports are real costs. You can think of each nation’s real wealth this way: take the ‘pile’ of goods and services we produce at home, then add to that pile the goods and services the rest of the world sends us, then subtract from that the pile of goods and services we send overseas. What we are left with is our real wealth. As you can see, the problem is not what we buy from overseas. That adds to our pile and makes us richer. The problem is the unemployment here at home, which is best addressed by my payroll tax suspension which gives people working for a living enough spending money to increase sales enough to create the jobs we need here at home. The trick is to get taxes low enough so that we have enough spending money to buy everything we can produce here at home with everyone working, plus everything the rest of the world wants to sell us.

In the debate, both candidates also stressed the importance of deficit reduction, with both concerned about the debt we are leaving our children. The problem is that they have both bought into the deficit mythology that has gotten the U.S. economy to where it is today. In order to restore American prosperity create American jobs it is critical to dispell this mythology, and I am on mission to stomp it out forever.

The fact is that the U.S. government is not ‘out of money’ or ‘about to go broke.’ That talk is pure fear mongering. Unlike state and local governments (which can go broke), the Federal government is the actual issuer and operator of the US dollar. It utilizes its Federal Reserve Bank and the commercial banks (where all of our bank accounts are) to make payments and receive payments. It makes all payments, such as Social Security payments, simply by marking numbers up in our bank accounts. Those numbers don’t come from anywhere, as Fed Chairman Bernanke testified last year and other Fed officials have repeated. There is no gold coin that drops into a bucket at the fed when you pay your taxes and they don’t hammer one into their computers when they pay a Social Security check.

To repeat: There is no such thing as the Federal government running out of money. Government checks don’t ever bounce.

That is not to say that ‘over spending’ can’t drive up prices and eventually result in inflation. It does mean, however, that Social Security is not broken. It can’t be. The checks will never bounce. And I have signed a pledge never to cut Social Security benefits or eligibility. However, unfortunately for all of us, there is a commission on “fiscal responsibility and reform” supported by the Democrats and the Republicans, which, conveniently after the election, will recommend ways to cut Social Security and Medicare. An important part of my mission is to make sure they do not succeed.

Often, when I explain this, people will ask if I am proposing that we just ‘print the money,’ as if today there is a distinction between printing money and some other way of government spending. I tell them that ‘printing money’ is a long outdated gold standard distinction that meant we had printed more paper money than we had gold backing it. Today, you can’t ‘cash in’ your dollars at the Fed for gold. Dollars are just numbers in bank accounts, or actual cash. So all I’m doing is describing the one and only way spending and taxing always takes place with today’s monetary system.

The other question that seems to be on everyone’s mind is how then do we pay off China? The answer is actually quite simple when you understand how it works in its most basic form.

First, one has to understand China doesn’t start out with any dollars. They get them from selling things to us. When China gets paid, those dollars go into its checking account, which is also called a reserve account, at the Fed (Federal Reserve Bank). US Treasury securities including T bills, notes, and bonds are nothing more than savings accounts at the Fed. So when China buys Treasury securities all that happens is their dollars shift from their checking account at the Fed to their savings account at the Fed. That’s called ‘the US going into debt.’ You can call it whatever you want, but it is really just transferring dollars from China’s checking to its savings. The total US debt of about $13 trillion is simply the dollars in savings accounts at the Fed. And how is that repaid by the tens of billions every week as the various Treasury securities mature? All the Fed does is shift those dollars (plus interest) from the savings accounts back to the checking accounts. That’s it, debt paid. And no checks from anyone’s children and grandchildren are involved. But what if China decides not to ‘buy our debt’? This simply means their money stays in their checking account at the Fed and never goes to their savings account. There is no reason for anyone to care in which Fed account China’s dollars are kept. Further, if China doesn’t want dollars at all, their only option is to buy something with them just like anyone else.

All of this causes one to view deficit spending in a very different light. Deficit spending for the Federal government is very different than most people imagine. When the Federal government spends more than it taxes, that extra money spent simply winds up in savings accounts at the Fed. In other words, it adds to the savings of the economy. With this in mind and knowing that, by definition, deficit reduction means either increasing taxes or cutting spending, we can see that both of those actions take money out of our economy – the worst possible thing to do at a time like this. While I strongly favor cutting wasteful and unnecessary Federal spending, I also recognize that with today’s high unemployment any spending cuts must be matched by tax cuts of at least that much to ensure money is not removed from the economy. What actually matters is the real economy, and not the deficit which is nothing more than the savings accounts at the Federal Reserve Bank. Don’t you think that if the debt was really a problem something very bad would have happened long before it got to $13 trillion?

Mrs. McMahon’s nonsensical statement about using unspent stimulus money to pay down the national debt would be like saying you are going to use your remaining line on your credit card to pay off your debt. And Mr. Blumenthal’s failure to respond to such an obvious absurdity likewise shows he too is sorely lacking in his understanding of economics and job creation at this time of economic emergency.

The health insurance issue again highlighted their lack of understanding of markets and economics for all parties concerned. Both candidates missed the point that there is not yet an operational plan to guarantee coverage for those with pre existing conditions. The problem is that if you can’t be turned down for insurance because you are already sick, you don’t need to buy insurance until AFTER you need medical attention. To address that situation, they’ve discussed fining people who don’t buy insurance. But if the fines aren’t at least as high as the insurance premiums, people will just pay the fines. And then insurance companies will only be selling insurance to people already in need of treatment, which means the premiums will be higher than the costs of the needed treatment to cover the insurance company’s costs. Unfortunately, however nobly intended, the entire concept is unworkable under the current structure, and neither candidate indicated any awareness of this.

With regard to TARP funding for banks, again, neither candidate got it right. The fact is TARP was nothing more than regulatory forbearance that allowed the banks to continue to function with reduced levels of private capital, along with terms and conditions regarding operations, compensation, etc. No additional public funds were actually involved. The FDIC was, for all practical purposes, already guaranteeing the depositors from loss should all the private capital of any one bank be lost. Adding TARP money to secure depositors from loss when they were already FDIC guaranteed made no sense at all and added nothing. Nor did ‘paying back the TARP money,’ which necessarily did nothing more than let funds sit in reserve accounts at the Fed, make any difference.

To summarize the economic issues, neither candidate showed that they understood that sales create private sector jobs, and neither candidate directly proposed measures such as my payroll tax suspension for employees to increase our spending power to restore sales and create jobs. Instead, they proposed measures that certainly won’t hurt, but will fall far short of what’s needed to put America back to work. During this time of financial crisis, even with the best of intentions, neither candidate is qualified to represent our best interests and fix our economy.

Mr. Blumenthal has been a tireless public servant and advocate for the people of Connecticut for a very long time, and I have no doubt he’ll continue to do that if elected Senator. Unfortunately, much of his understanding of current issues is completely backwards. For example, his tireless and well-intentioned efforts in regard to foreign trade are far more likely to destroy jobs than create them. And nothing could be more subversive than Mrs. McMahon’s promised vote for a balanced budget amendment, which would take over $1 trillion out of our economy, destroying tens of millions of jobs, and threatening our liberties as well in the ensuing social unrest that.

We are in an economic emergency, and both candidates have put forth proposals that would unknowingly destroy millions of jobs in a terrible depression. I am running for the US Senate solely as a matter of conscience as the candidate uniquely qualified to support the proposals that will create the 20 million jobs we need, and defeat the forces at work that are attempting to slash Social Security and Medicare.

Also, unlike the other candidates, creating jobs has been my life work, and not just election talk. My published writings and proposals have already created millions of jobs around the world, and I have met regularly with Congressmen and Senators from both parties promoting full employment and prosperity, as well as fighting back against the proposed cuts to Social Security and Medicare.

I urge you to please visit www.moslerforsenate.com and read my proposals, my qualifications, and my endorsements.

Share

China to the Rescue! Wen Offers to Buy Greek Bonds

Posted on by

Subtitle:

“Ticker Tape Parade for Trojan Horse”

Ordinarily China’s policy of driving exports to a nation with purchases of their currency is met with resistance. The US, for example,
has been chastising nations buying $US, like Japan and China, calling them currency manipulators, outlaws, etc. But China is getting very clever about it, here coming into the euro zone and buying Greek debt as the savior, and possibly even negotiating informal guarantees of repayment or other forms of support from the ECB, to keep the Greek debt off of the ECB’s balance sheet.

In any case, with Chinese buying, the euro zone is finding support for their funding issues, even as this ‘solution’ further drives up the euro and threatens to put a damper on their exports.

As previously discussed, the euro zone’s export driven model lacks the critical ingredient of being able to buy the currencies of the regions to which they wish to export.

All not to forget that imports are real benefits and exports real costs. So what we are seeing is a battle for export markets between nations who haven’t mastered the elementary art of supporting domestic demand and optimizing real terms of trade.

China to the Rescue! Wen Offers to Buy Greek Bonds

October 3 (Reuters) — China offered on Saturday to buy Greek government bonds in a show of support for the country whose debt burden triggered a crisis for the euro zone and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to the crisis-hit country where he says he expects to expand ties in all areas.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Wen said, speaking through an interpreter.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

Greece needs foreign investment to help it fulfill the terms of a 110 billion euro (US$150 billion) bailout. This rescued it from bankruptcy in May but also imposed strict austerity measures, deepening its recession.

Greece, which has been raising only short-term loans in the debt market, has said it wants to return to markets some time next year to sell longer-term debt, although the EU/IMF package llows it to wait until 2012.

“I am convinced that with my visit to Greece our bilateral relations and cooperation in all spheres will be further developed,” Wen told Greek Prime Minister George Papandreou earlier in the day.

Greece and China pledged to stimulate investment in a memorandum of understanding and private companies signed a dozen deals in areas like shipping, construction and tourism.

“Our two countries, both historical and modern, have to strengthen our relations in all sectors, to move on and overcome present difficulties,” said Wen, speaking through an interpreter in televised comments.

The investment memorandum does not target specific investment volumes, an official close to Investment Minister Harris Pamboukis said ahead of Wen’s visit.

“We want to build this strategic partnership with China,” the investment ministry official said. “The purpose is not a signature on something big.”

China has said it needs to diversify its foreign currency holdings and has bought Spanish government bonds. In January, Greece denied media reports it planned to sell up to 25 billion euros of bonds to China.

Wen will address the Greek parliament on Sunday and leave early on Monday for Brussels, where he will attend an EU-China summit before going on to Germany, Italy and Turkey.

Clinching business deals with countries such as China and Qatar would help boost confidence among Greek consumers and businesses, economic analysts said.

With the global economic crisis and competition with other Balkan countries increasing, foreign direct investment in Greece fell from 6.9 billion euros in 2006 to 4.5 billion in 2009, according to Investment Ministry figures.

Chinese investment represents a very small proportion of this, excluding a 35-year concession deal China’s Cosco signed in 2008 to turn the port of Piraeus into a regional hub for a guaranteed amount of 3.4 billion euros, according to port authority figures.

Wen is also likely to deal with international pressure on China over its currency exchange policies during his tour.

Share

Japan Recap- Prime Minister Says Huge Public Debt Unsustainable

Posted on by

More modest signs of improvement in Japan, with employment and spending improving.

Unfortunately, the Prime Minister seems be about to make the same mistake of past Prime Ministers and take action to reduce the govt’s deficit.

In contrast, China seems to have recognized govt spending spending (and lending by state owned banks that is in fact thinly disguised govt spending) is not operationally dependent on revenue, and that there is no solvency issue nor external constraints on local currency expenditure. China seems to understand the risks are inflation, making adjustments as they see that political threat arise.

See comments below.

Aug Job-To-Applicant Ratio: 0.54% vs 0.54% (expect) / 0.53% (last)

Aug Jobless Rate: 5.1% vs 5.1% (expect) / 5.2% (last)

Aug Household Spending (YoY): 1.7% vs 1.4% (expect) / 1.1% (last)

Sep Tokyo CPI (YoY): -0.6% vs -0.9% (expect) / -1.0% (last)

Sep Tokyo CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Sep Tokyo CPI Ex-Fresh Food & Energy (YoY): -1.3% vs -1.4% (expect) / -1.4% (last)

Aug National CPI (YoY): -0.9% vs -0.9% (expect) / -0.9% (last)

Aug National CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Aug National CPI Ex-Fresh Food & Energy (YoY): -1.5% vs -1.5% (expect) / -1.5% (last)

Japan Prime Minister Says Huge Public Debt Unsustainable

October (Reuters) — Japan’s prime minister warned on Friday that the country’s fiscal situation was unsustainable given its huge public debt, and called for multiparty tax reform talks as he struggles with a fragile economy and a divided parliament.

With perhaps the world’s largest public debt, severe prior downgrades by the ratings agencies, perhaps the strongest currency in the world, mild deflation, and yet ten year JGB’s hovering around 1%, you’d think the historical evidence alone would convince them there is no solvency or funding or ‘sustainability’ issue. But clearly it doesn’t. And while those in monetary operations at the BOJ understand there is no sustainability issue, it is not their place to mention it (much like the US).

Naoto Kan also repeated his resolve to curb a rise in the yen that threatens to derail Japan’s export-led economic recovery, urged the central bank to do more to fight deflation, and expressed hope that opposition parties would join in talks on a extra budget he wants to enact soon.

This seems to indicate he’s pushing for a higher deficit? Or will there be a new tax to ‘pay for it?’ And the only way to weaken the yen vs the dollar is to buy dollars, which is what I call off balance sheet deficit spending. It ‘works’ and there are no operational limits to the amount of fx a CB can buy. But it’s a poor second choice to a domestic tax cut or spending increase.

Japan’s core consumer prices marked their 18th straight month of annual declines in August, as deflation grips an economy struggling with a rising yen, slowing exports and a surprise decline in output. But the jobless rate fell and the availability of jobs improved slightly, data showed on Friday.

Yes, the deficit did go up in the financial crisis slowdown and got large enough to support growth. The question is whether they allow that to continue.

Kan, who took office in June as Japan’s fifth leader in three years, faces a tough time wooing the opposition support that is vital to enact laws since his Democratic Party of Japan (DPJ) and a tiny partner lack a majority in parliament’s upper house.

The government faces the delicate task of reining in debt while keeping the economy going. Japan has built up a huge public debt burden, now nearly twice the size of its $5 trillion economy, during two decades of economic stagnation.

It might help if the media stopped calling it a burden, as it’s clearly not a burden in any sense. particularly with a 0 rate policy (not that it matters for solvency).

“If the current fiscal situation is left alone, it will be unsustainable at some point,” Kan said in a speech at the start of an extra session of parliament.

I doubt he could define ‘unsustainable’ but no one asks as the errant sustainability assumption is pervasive.

He also vowed to achieve Tokyo’s goal of bringing the primary budget balance, which excludes revenue from bond sales and debt-servicing costs, into the black within a decade.

Extra Budget

Kan, whose past calls for debating a hike in the 5 percent sales tax had contributed to a July upper house election defeat, said Japan needs a social welfare system that citizens could trust even if that meants added financial burden on the public.

Multiparty debate on tax reform including the sales tax is thus indispensable, Kan said, reiterating that he would seek a mandate from voters before deciding on the sale tax rise.

The government is crafting an extra budget for the fiscal year to March 31 to stimulate the economy by supporting job seekers and families with children, but has sent mixed signals about the size of the package and how it will fund it.

It does look like they plan on ‘funding it’

Some in the cabinet, such as the economics minister, have said new debt issuance should not be ruled out, but the finance minister is firmly against the idea.

National Strategy Minister Koichiro Gemba has said Japan could fund measures worth around 4.6 trillion yen ($55 billion) by tapping reserves, thereby avoiding new bond issuance.

Functionally this would be the same as deficit spending.

“The biggest task for this parliamentary session is enacting a supplementary budget to finance economic steps. I sincerely hope for constructive debate among ruling and opposition parties,” Kan said in the speech.

Efforts to gain such opposition support will be complicated by a bitter feud with China.

Kan is under fire for appearing to cave in to Beijing’s demands to free a Chinese fishing boat captain detained last month after his trawler collided with Japanese patrol boats near disputed islands in the East China Sea.

The prime minister on Friday reiterated that good ties with China, in the process of replacing Japan as the world’s second-biggest economy, were vital but also expressed concern about Beijing’s military buildup and aggressive maritime activities.

China still has bitter memories of the last war with Japan.

Share

Financial Obligation Ratios

Posted on by

The charts are Fed numbers that show how high debt is compared to incomes. What it shows is that as the govt. deficits increased they added income and savings to the economy which resulted in higher incomes and lower total private debt. In the past the next credit expansion began after the financial obligations ratios came down in this manner.

These are June numbers, and federal deficit spending is what brings them down, so they should be that much lower today.

So while it’s impossible to say exactly how far the ratio of debt to income needs to fall before the next credit expansion will begin, I expect modest growth to continue as it has with very modest job growth and unemployment remaining too high until consumer credit expansion does begin to kick in, which could be anytime now, that the debt ratios are no longer an obstacle.

The right move in August 2008 was a full payroll tax (FICA) holiday which would have sustained demand and prevented the recession and kept unemployment at desired levels.
It was nothing more than policy response that allowed a financial crisis to spill over to the real economy.

The interest rate cuts unfortunately (but predictably) served mainly to reduce spendable interest income as income was transfered from savers to bank net interest margins, and as govt. interest payments to the economy were reduced by the lower rates.

Lowering rates was not ‘wrong,’ as there are positive supply side and distributional effects from lower rates, but what was missed was that lower rates needed to be accompanied by even lower taxes to offset the induced drag of the lower rates.

To date we remain grossly over taxed for the size govt we have and for the current credit conditions, as evidenced by the too large output gap and far too high unemployment rate.

So with China not collapsing as many feared, and the euro zone muddling through with ECB support, my outlook remains positive for the US economy, though from unfortunately high levels of unemployment and true misery due solely to policy blunders.

The Republicans got us into this and the Democrats failed to get us out, and all for the same reason- non of them understand how their own monetary system works.

So thanks in advance for kindly directing everyone you know ‘The 7 Deadly Innocent Frauds of Economic Policy’ here.

Homeowners Financial Obligation Ratio

Financial Obligation Ratio with Rental Payments

Financial Obligation Ratio for Renters

Share

Warren Mosler: Obama’s China Policy Will Destroy U.S. Jobs and Create Inflation

Posted on by


Warren Mosler: Obama’s China Policy Will Destroy
U.S. Jobs and Create Inflation

Noted Economist and Senate Candidate: Forcing The Yuan Up and The Dollar Down Is The Worst Possible Option For Creating U.S. Jobs


Middletown, CT. – September 28, 2010 – Warren Mosler, internationally renowned financial and job creation expert and Connecticut’s Independent Party Candidate for the US Senate lashed out today at the Obama administration’s weak dollar policy in relation to China. “The first thing forcing China to revalue its currency will do is destroy US jobs, not create them,” said Mosler. “When China causes its currency to appreciate against the dollar, thus driving the value of the dollar down, it gives Chinese workers what amounts to a pay raise which will be passed along to U.S. consumers in the form of higher prices – in other words, inflation. These higher prices mean U.S. consumers can buy less, which results in fewer American jobs.”

According to available data, the U.S. lost approximately 8 million jobs two years ago because sales fell. When sales are restored, jobs will be restored. “A restaurant, department store, or any other business doesn’t lay off staff when they are filled with customers. So, giving Chinese workers a pay raise that will kill U.S. sales, cause inflation, and cut Americans’ spending power is not the way to bring this economy back from the brink or create the American jobs we desperately need!” asserted Mosler. In contrast, Mosler’s plan to create good-paying private sector jobs features a full payroll tax (FICA) holiday. That will make sure our consumers have enough spending power to be able to buy both whatever we can produce here at home with full employment, plus whatever the rest of the world wants to sell us, just like a decade ago when unemployment was under 4%, growth was strong, inflation low, and net imports were at record levels. Additionally, Mosler is concerned that Obama’s current inflationary policy can rapidly escalate into a debilitating trade war with China. In fact, in what amounts to a dangerous, high stakes international game of chicken, China has already announced it was placing a tariff on US poultry exports in retaliation for U.S. demands for currency revaluation.

Richard Blumenthal’s lock-step position with the Obama White House on China and Linda McMahon’s conspicuous silence on this critical issue vividly show that they are simply not qualified to create the 20 million new jobs we desperately need. “If you needed heart surgery, you wouldn’t let just anyone do it. In this time of economic emergency, I am the candidate that has the necessary knowledge, experience and in-depth understanding of our economy on a nuts and bolts level to make effective policy,” said Mosler. Quite simply, now is the time to take decisive action and Warren Mosler is the only candidate in this race who is qualified for the job.

About Warren Mosler
Warren Mosler is running as an Independent. His populist economic message features: 1) a full payroll tax (FICA) holiday so that people working for a living can afford to buy the goods and services they produce. 2) $500 per capita Federal revenue distribution for the states 3) An $8/hr federally funded job to anyone willing and able to work to facilitate the transition from unemployment to private sector employment. He has also pledged never to vote for cuts in Social Security payments or benefits. Warren is a native of Manchester, Conn., where his father worked in a small insurance office and his mother was a night-shift nurse. After graduating from the University of Connecticut (BA Economics, 1971), and working on financial trading desks in NYC and Chicago, Warren started his current investment firm in 1982. For the last twenty years, Warren has also been involved in the academic community, publishing numerous journal articles, and giving conference presentations around the globe. Mosler’s new book “The 7 Deadly Innocent Frauds of Economic Policy” is a non technical guide to the actual workings of the monetary system and exposes the most commonly held misconceptions. He also founded Mosler Automotive, which builds the Mosler MT900, the world’s top performance car that also gets 30 mpg at 55 mph.

Share

What Policies for Global Prosperity?

Posted on by

Antonio Foglia and Andrea Terzi interview Warren Mosler, Distinguished Research Associate of the Center for Full Employment and Price Stability, University of Missouri, Kansas City (participating via videoconferencing)

April 20, 2010

*Antonio Foglia* (AF): I have known Warren from his previous life as an investor, where he definitely proved his skills. Now, he is an economist and, as all economists, he thinks he has a recipe to fix the world. He is also becoming a politician, so he now has another reason for having a recipe to fix the world, and we are definitely most interested in learning what his recipes are today, at a very special conjuncture in the world.

Warren, thanks for being connected with us this evening. I know you are in Connecticut now. We are in Switzerland, so I think a more general point of view of the world is probably more of interest to all of us although I understand that you might be more current on how to fix the U.S., as that is where you hope to have an impact soon.

*Andrea Terzi* (AT): Hello from the Franklin Auditorium, Warren. The floor is yours.

*Warren Mosler* (WM): Thank you. Well, the most obvious observation is that unemployment is evidence of a lack of aggregate demand, so what the world is lacking is sufficient aggregate demand.

In the United States, my prescription includes 1) what we call a payroll tax holiday, i.e., a tax reduction, 2) a revenue distribution to the states by the federal government and 3) a federally funded $8.00-per-hour job for anyone willing and able to work. *

For the euro zone, I propose a distribution from the European Central Bank to the national governments of perhaps as much as 20 percent of GDP to be done on a per capita basis so it will be fair to all the member nations*. The interesting thing is that it would not increase spending, or demand, or inflation, because spending is already constrained by the Stability and Growth Pact (SGP), and so nations would still be required to keep spending down to whatever the EU requires, but what it does do is to eliminate the debt and financing issues, and it takes away the credit risk from the euro zone. The other thing it does is it gives the EU a far more powerful tool for enforcing its requirements. What happens is that anyone who does not comply with the EU’s requirements would risk losing this annual payment. Right now, anyone who does not comply gets fined, but, as we know, fines are not easy to enforce.

*AF*: I think that after three hours of Keynesian presentations today I didn’t expect anything else than an extra vote for more aggregate demand stimulation, on one side, and the irrelevance of printing more money, on the other side. Somehow, though, I do personally remain concerned, and don’t fully understand how, in the long run, this will not have side effects as people begin to actually expect the fact that more money is going to be printed, more demand is going to be stimulated in less and less productive ways (because it is basically government spending rather than private spending). If I look at history there is little evidence of how you get out from the sort of Keynesian policy that you are proposing, that is certainly very effective in stopping a depression from developing (and we are grateful that policy makers did that), but I don’t understand how you then stop those policies, and how the exit from those policies can happen in the medium and long term.

*WM*: Okay, so you put up a lot of things there. So I’ll start from the beginning. First of all, for the U.S., I’m talking about restoring income for people working for a living which will raise the sales in the private sector right now, so it’s not a question of government. You talk about stimulus, but I’m not talking about adding stimulus. I’m talking about removing drag. You can’t get something for nothing. If you have somebody running and a plastic bag falls over his head that slows him down you can remove that plastic bag. We are still limited by our productive potential, and what we have now are restrictive policies that are keeping us from achieving it. Restrictive policies are demand leakages. In the U.S., there is a powerful incentive not to spend your income as this goes into a pension fund, and in Europe you have the same types of things that reduce aggregate demand. The only way any sector can successfully “net save” is if another sector goes into deficit, so what the government is doing when it lowers taxes or increases spending, depending on what the case may be, is filling the hole in demand created by the demand leakages.

My proposal for the EU doesn’t increase anyone’s spending. All it does is this: As long as countries are in compliance with spending limits set by the EU, they receive the allocation. As soon as they are not in compliance, they risk losing this payment, in which case the market will severely punish them and cut them off. So, to address your questions, I am not advocating any excess spending stimulus beyond just making up for the drags created by what I call “saving desires” and “demand leakages” which are largely a function of the institutional structure.

Let me just say it in one more way. A government like the U.S. has to determine what the right size of government is. For example: what is the right size for the legal system? You don’t want to have to wait two years to get a court date, but you don’t want to have people calling you up asking you come to court because there are a lot of vacancies, so maybe the right waiting period is, say, 60 days. So you then size your legal system and your legal employees for that kind of public service.

Equally, you have to size the military for what the mission is. You have to size the whole government. *Once you’ve sized your government properly, you then have to determine the correct level of taxes that is needed to sustain the level of private-sector activity that you want, and invariably those taxes are going to be less than the size of the government.* So, even if you want a smaller government, which is fine, you then have to have taxes that are even lower. Why? Because that’s the only way you are going to accommodate your private sector on its savings desires.

*AT*: I know where you are coming from, Warren, and I’m sure you realize that your proposal that the ECB distribute money to European governments makes many people here in Europe jump on their seats for two reasons. One: the ECB is prevented by statute from financing national governments; and two: people fear that this is further additional printing money, creating inflation. Would you mind going back to your proposal and explaining to me and the audience, step by step, what this distribution really means, where this money comes from, and where it is going, in this score-keeping exercise that is the true character of a monetary economy?

*WM*: Right, exactly. So, yes, it would require unanimous approval of EU governments. What I’m saying is that European governments have accounts at the ECB. Under my proposal, the ECB would put a credit balance into government accounts. So what will happen is that the balance in their accounts will go up. *Just because a balance on a national bank account goes up, it does not mean there is any additional spending. It is spending that causes inflation, not just the existence of a credit balance on a central bank computer.* But what would then happen is that in the normal course of spending, borrowing and debt management, this balance would be worked down. Not by an increased volume of spending and not by a change in anything else, but it would just be worked down because, for example, when the Greek bonds would mature, the government would be able to continue its normal spending (this would be limited by compliance with the SGP and other international agencies) without having to refinance its bonds. But once the credit balance is used up, then Greece would continue its normal refinancing, but with a level of debt reduced by about 20 percent GDP the first year.

So again this has no effect on the real economy, no effect on real spending. The only effect is that there would be fewer Greek securities outstanding, and that Greek debt levels would be lower and coming down, which would facilitate their continued funding once the credit balance is used up. So it’s purely, as you stated, an operational consideration and not a real economic consideration, and yes, *people would be afraid of things that they don’t understand*. But anyone who understood central banking from the inside at the operational level would realize that this would have absolutely no effect on inflation, employment, and income in a real economy, other than to facilitate the normal funding of national governments.

*AT*: Are you saying that the effect of such annual distribution would be like the effect of the discovery of a new gold mine every year in a country under the gold standard?

*WM*: Well, no, it’s different, because on a gold standard what we call the money supply is constrained in any case, whereas when you get to a currency it’s the opposite: the currency itself is never constrained. So you have a whole different dynamic.

Let me just expose my point from a slightly different point of view. The reason the EU can’t simply guarantee all the nations, and the ECB can’t simply guarantee all the national governments is because if they did, whoever “deficit spends” the most, wins. You would get a race to the bottom of extreme moral hazard that quickly winds up in impossible inflation. So there has to be some kind of mechanism to control government deficit spending for the member nations*. They did it through the SGP, that sets the 3 percent limit, and there’s no way around that dilemma. It can’t be done through market forces. It has to be done through the SGP. What they did is to leave the national government on a stand-alone basis, so there would be market discipline, but we’ve seen that that does not work either. They’ve got to get back to a situation where they are not subject to the mercy of market forces but at the same time they don’t want the moral hazard of some unlimited fiscal expansion where anybody can run a 5, 10, 20 percent deficit with inflationary effects.

My proposal eliminates the credit risk at the national government level, so they are no longer restrained by the markets in their ability to borrow, but it makes them dependent on annual distributions from the ECB in order to maintain this freedom to fund themselves*.

And because they are dependent on the ECB’s annual check, the ECB has a policy to then be able to remove that check to impose discipline on these countries. *By having this policy tool to withhold payments, rather than implement fines, the EU would be in a much stronger position to enforce the deficit limits they need to prevent the race to the bottom of nations*.

*AT*: Your proposed ECB distribution would have the immediate effect of reducing the interest rate spread between German and Greek bonds. However, if the 3-percent deficit constraint remains in place, there is not much hope of prosperity in Europe. Do you agree?

*WM*: Right. The demand management would be based on the SGP: if they decide a 3-percent deficit is not adequate for the level of aggregate demand they may go up to 4, 5, or 6 percent or whatever level they choose. It’s always a political decision for them, and it’s always going to be a political decision. If they choose something too low, then they’re going to have higher unemployment. If they choose something too high, they’re going to have inflation.

And so it’s going to be a political choice, no matter how you look at. But the thing is, how do you enforce the political choice? Right now they can’t enforce it. Right now, they’ve been enforcing it through the fining of member nations. But it doesn’t work. So they’ve lost their enforcement tool.

The other problem they have is this: because of the credit sensitivity of the national governments, when countercyclical deficits go up like now, which are needed to restore aggregate demand, output and employment, what happens is that the deficits challenge the creditworthiness of the national governments. *This is an impossible situation with national governments risking default because of the insolvency risk. They are in a completely impossible position to accomplish any of their goals. *

Whereas, reversing the situation, i.e., going from “fines as discipline” to “withholding payments as discipline” puts them in a position that is manageable. It still then requires wise management for the correct level of deficits, for the correct level of aggregate demand, but at least it’s possible. Right now, it’s unstable equilibrium, and what I am proposing switches it to a stable equilibrium, as they used to say in engineering class.

*AF*: If I understand correctly, the essence of the policies that you are suggesting, both in the U.S. and in Europe, involve a certain level of deficit spending and debt accumulation. Then one could expect the dollar/euro exchange rate not to move much because people would probably tend to dislike both currencies the same way. How would you see the interaction of these two areas with emerging markets that are in a totally different economic environment and cycle, and whose currencies are actually currently on the rise?

*WM*: Right, if you look at nations like India and even Brazil, they all have high interest rates and high deficits that help them get through. China, as well, maintains an extremely high deficit offsetting its internal savings desires. China may have overdone it, and it has to face an inflation problem, but this is a different story. *I think that the U.S. is in a far better situation than the euro zone right now, because our budget deficits do not represent the sustainability issues or credit issues*.

The EU has put its member nations in the same position as the U.S. states, as if Germany, or Greece, were like Connecticut, or California. They put all their member nations in the same position as state governments but without the federal government spending that the U.S. uses to help them out. This puts the whole burden of sustaining aggregate demand on European member nations. To get an analogy in the U.S., *if the U.S. had to run a trillion and a half million dollar deficit last year at the federal level, and if the only way that could have happened was at the state level, the U.S. would have been in much the same position as the EU, with all our states right on the edge of default.* So because we have our deficit at the federal level, instead of state level, we are in a much stronger position than the EU right now.

You may have already reviewed the mechanics of how nations like the U.S. or the U.K. do their public spending in the conference, but let me do it very quickly. When the United States spends money that it doesn’t tax, it credits the reserve account of whoever gets that money. Now, a reserve account at the central bank is nothing more than a checking account.

Let me now use the example of China so I can combine the problem of external debt with deficit spending at the same time. China gets its dollars by selling goods and services in the United States. When China gets paid, the dollars go into its checking account at the Federal Reserve Bank, and when China buys Treasury securities, all that happens is that the Federal Reserve transfers the funds from their checking account at the Federal Reserve to their securities accounts at the Federal Reserve. U.S. Treasury securities are accounted much like savings accounts at a normal commercial bank. When they do that, it’s called “increasing the national debt”, although when it’s in their checking account it doesn’t count as national debt. The whole point is that the spending of dollars by the federal government is nothing more than the Federal Reserve Bank changing numbers off in someone’s reserve account. The person doing this at the Treasury doesn’t care if funds are in the reserve account at the central bank; it makes no difference at all, operationally. *There is no operational connection between spending, taxing, and debt management.* Operationally, they are completely distinct. And the way any government like the United States or the U.K. or Japan pays off its debt is the same: just transfer funds from someone’s security accounts back to the reserve accounts at your own central bank, that’s it. And this happens every week with hundreds of billions of dollars. None of this acts as an operational constraint on government spending. There is no solvency issue. There is no default condition in the central banks’ computer.

Now, when you get to the EU, it all changes because all this has been moved down to the national government level, and it’s not at some kind of federal level the way it is in the United States. There is no default risk for the U.S., for the U.K., or for Japan where the debt is triple that of the U.S. and double that of Greece. It is all just a matter of transferring funds from one account to another in your own central bank.

*AT*: I’m glad you touched upon the question of China accumulating credits with the U.S., because this is poorly understood. Money that Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms. But there is also another possibility, which sometimes raises concerns in the larger public, and this is what happens if China should choose to get rid of these dollars by selling the U.S. securities they own. While the amount of dollars owned by foreigners doesn’t change, the price of the dollar would in fact decline. If China sells off American debt, dollar depreciation may be substantial.

*WM*: Operationally, it’s not a problem because if they bought euros from the Deutsche Bank, we would move their dollars from their account at the Fed to the Deutsche Bank account at the Fed. The problem might be that the value of the dollar would go down. Well, one thing you’ve got to take note of is that the U.S. administration is trying to get China to revaluate currency upward, and this is no different from selling off dollars, right? So, what you are talking about (selling off dollars) is something the U.S. is trying to force to happen, would you agree with that?

*AT*: Yes!

*WM*: Okay, so we’re saying that we’re trying to force this disastrous scenario—that we must avoid at all costs—to happen. This is a very confused policy. *What would actually happen if China were to sell off dollars? Well, first of all, the real wealth of the U.S. would not change: the real wealth of any country is everything you can produce domestically at full employment plus whatever the rest of the world sends you minus what you have to send them, which we call real terms of trade.* This is something that used to be important in economics and has really gone by the wayside. And the other thing is what happens to distribution. While it doesn’t directly impact the wealth of the U.S., *the falling dollar affects distribution within U.S., distribution between those who profits from exports and those who benefit from imports.* And that can only be adjusted with domestic policy. So, number one, we are trying to make this thing happen that we are afraid of, and number two, if it does happen, it is a demand-distribution problem, and there are domestic policies to just make sure this happens the way we want it to be.

*AT*: Would you like to elaborate on another theme of today’s symposium? How do you see the income distribution effects of the U.S. fiscal package? Is it going in the right direction in your opinion?

*WM*: Well, we had 5 percent growth on the average maybe for the last 2 quarters while unemployment has continued to go up. If GDP is rising and people in the world are getting hurt, and real wages are continuing to fall, then who is getting the real growth? Well, everybody else. And so what we’ve seen from a Democratic administration is perhaps the largest transfer of real wealth from low income to high income groups in the history of the world. Now, I don’t think that was the intention of their policies but it has certainly been a result, and it comes from a government that does not understand monetary operations and a monetary system and how it works.

*AT*: Warren, what would be your first priority, the one action that you would enforce immediately to improve the current situation?

*WM*: The United States has a punishing regressive tax which we call payroll taxes. These take out a fixed percent of our income, 15 percent (7.5 percent paid by employees and 7.5 percent by employers), so it starts from the very first dollar you earn, and the cap is $108,000 a year. *I would immediately declare a payroll tax holiday, suspend the collection of these taxes. This would fix the economy immediately from the bottom up. A person making $50,000 a year would see an extra $325 a month in his pay check, simply by having the government stop subtracting these funds from his or her pay.

Our economy has always worked best if people working for a living have enough take-home pay to be able to buy the goods and services that they produce. Right now, in the United States, people working for a living are so squeezed they can pay for gasoline and for food and that’s about it, maybe a little bit of their insurance payments, and so we’ve had an economic and social disaster. *The cause of the financial crisis has been people unable to make their payments.* The only difference between a Triple-A loan and “toxic assets” is whether people are making their payments or not. And you can fund the banks and restore their capital and do everything else, but it doesn’t help anyone making their payments. We’re two years into this and we’re still seeing delinquencies moving up, although they levelled off a little bit, at unthinkably high levels. Hundreds of thousands of people getting thrown out of their homes—that’s the wrong way for a Democratic administration to address a financial crisis.

To fund a bank, simply stop taking the money away from people working for a living so they can make their payments and fix the financial crisis from the bottom up. *All that businesses and banks need and want at the end of the day is a market for their products; they want people who can afford to make their payments and buy their products.* So my first policy would deliver exactly that, which is what I think we need to take the first big step to reverse what’s going on.

*AT*: The action you proposed, the payroll tax holiday, entails some form of discretionary fiscal policy and this raises two questions. First, discretionary fiscal policy has been discredited. Economists like to model politicians’ behavior in a way that we cannot trust their decisions as they just aim at winning the next elections. So how do we make sure that discretionary fiscal policy would be used correctly to achieve full employment and avoid inflation?

*WM*: My proposal is not talking about discretionary spending. It’s about cutting taxes and restoring incomes for people who are actually working for a living, who are the people that at the end of the day we all depend on for our lifestyle, so it is not an increase in government spending, it is a tax cut on people working for a living. The only reason this hasn’t happened is because of what I call “the innocent fraud” (from my book, *The seven deadly innocent frauds*, available on my website), that the government has run out of money, the government is broke, the federal government has to get funding, has to get revenues from those who pay tax, or it has to borrow from China and leave it to our children to pay back. This is complete myth, and it is the only barrier between us and prosperity. Now, in terms of using excess capacity and create inflation, the theory says yes, it can happen, though I’ve never seen it in my forty years in the financial markets.

As they say, in order to get out of a hole, first you have to stop digging, right? Right now, we’ve got an enormous amount of excess capacity in the United States. Unemployment is at 10% only because they changed the way they define it. Using the old method, we have up to 22% unemployment.

The payroll tax holiday will both increase spending power and lower costs, so we get a little bit of deflationary effect as spending starts. Should there be a time when we see demand starts threatening the price level, then it can come a point where it makes sense to raise taxes, but not to pay for China, not to pay for social security, not to pay for Afghanistan (we just need to change the numbers up in bank accounts) but to cool down demand. We have to understand that taxes function to regulate aggregate demand and not to fund expenditures.

*AT*: Discretionary fiscal policy also includes discretionary changes in taxes, not only discretionary changes in spending, so how do we make sure that the political ruling class will raise taxes when needed?

*WM*: Well, right now they’re raising taxes, so they don’t seem to have much of a reluctance to do that, and they also understand that voters have an intense dislike for inflation. It’s not justified by the economic analysis, it’s just an emotional dislike for inflation. They believe it’s the government robbing people of their savings and they believe it’s morally wrong. And so they are always under intense pressure to make sure that inflation does not get out of control or they are going to lose their jobs. But that’s the checks and balances in a democracy. It’s what the population votes for. And the American population has shown itself to vote against inflation time and time again. The population decides they want more or less inflation, it boils down to whether you believe in democracy or you don’t. And I’m on the side to believe in democracy.

*AT*: In terms of democracy, this choice is not available to Europeans right now. The ECB has been given an institutional mandate of price stability, and the decision of what’s more evil, inflation or unemployment, has been removed from voters’ preferences on the ground that price stability is the premise to growth and full employment!

But I’m afraid our time is over. Warren, thank you very much. Although the volcano in Iceland prevented you from attending today, at least we had this opportunity to discuss via teleconference.

*WM*: Was the volcano a result of the financial crisis over there?

*AF*: It was a way for Iceland to take revenge on the Brits!

Warren, we thank you very much for making this conference possible and thank you for your time. I encourage anybody who is interested to go to your website to get a view of your most recent ideas, and all the best from this side of the Atlantic on your campaign.

*WM*: Thank you. If anyone has more questions just write to my email address warren.mosler@gmail.com and I’ll be happy to correspond with anyone looking for more information.

*AT*: Thank you Warren.

*WM*: Okay, thank you all!

Share

Gold Buying

Posted on by

Looks like govts. are increasingly moving into gold.

Govts. can support prices for at least as long as they increase purchases geometrically, which, operationally they can do without limit. It’s a political decision.

To get all the gold they want, govts. have to out bid the private sector, and then maybe each other as well.

That means when govt buying slows down, if it ever does, prices then fall to the private sector’s bid.

With precious few non hoarding uses for gold it’s all waste of human endeavor and a waste of all the other real resources that go into gold mining and refining, etc. But it’s all a very small % of world expenditure of real resources.

Bottom line, it’s another example of govt. ‘interference’ creating a distortion, but in this case the real resources expended- land, labor, capital, energy- are relatively small as a % of total resource consumption, and since gold can’t be eaten and isn’t used for shelter and clothing (ok, some ornamentation) the high price probably alters too few lives for the worse for a political backlash.

However, central bankers stuck in mythical inflations expectations theory with regards to the cause of inflation could react and cause problems that wouldn’t otherwise be there. I doubt the Fed falls into that category, but it’s not impossible.

Russia Buys 16 percent Of Global Gold Production

According to the Russian Central Bank, Russian gold reserves just hiked 1.1 million ounces in May. Given global mining production is just 6.8 million ounces a month, this represents 16.1% of monthly global mining production.

This is the largest one month purchase of gold by the Russian Central Bank, which has been buying gold at a rate of 250,000 ounces a month for the past three years, and comes just as Putin is pushing for a single world currency and last week revealed the currency’s first proof coin.

At the same time as Russia is quadrupling its gold purchases, Saudi Arabia just announced that it has more than doubled its gold holdings from 143 tonnes in the first quarter of 2008 to 322.9 tonnes. That’s 241,000 ounces a month — eerily similar to Russia’s purchases.

And nobody quite knows what China is doing right now, but they ain’t sellers. Between 2003 and 2009, China’s central bank bought an average of 76 tons of gold a year (185,000 ounces a month). The likelihood of China slowing its purchases is close to nil. and the likelihood of China letting Russia and Saudi Arabia get the better of it is negligible at best. Even if China is purchasing just 250,000 ounces a month, that would mean just thee central banks are sucking up 24% of global gold mine production. In all likelihood, it’s much higher.

If this trend continues, it’s going to have other central banks jumping on the bandwagon to buy gold — just as they jumped on the bandwagon to sell it in the 1990s — and will have a similar impact on the price. But in the opposite direction!

Cheers,

Peter.

Share