Category Archives: China

from Mikenormaneconomics.org

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Mike Norman Economics

Some thoughts

If we ever enact a balanced budget amendment, take yourself and your family and move to Canada or China.

Obama believes the U.S. has “run out of money.” Scary. Our president doesn’t understand our own monetary system. Even George Bush understood this.

Any country that spends in its own currency, where that currency is not backed by gold or bound by some fixed exchange can NEVER run out of money!

We are ceding our position as the world’s largest economy to China because of stupid policies that are based on myth and fallacy.

The demise of GM was not due to putting workers’ interests over the company and shareholders. It was precisely the opposite!

The easiest way to lower “debt” (if that’s what you want to do) is to sustain full output and employment.

If the private sector can’t sustain full output and employment for whatever reason, then gov’t should!

Here in America we mock the Europeans as being, “Socialist.” Did anyone notice that Europe’s economy is larger than ours and adding size?

By definition, those Socialist Europeans are richer than us! And they have free health care, education, 6-weeks paid vacations, new cars, homes, movies, culture and all the consumer items that we have, in abundance. Not bad for a bunch of commies!

Our leadership is destroying America’s real terms of trade because of irrational sensitivity to perceived “imbalances.”

We care more about the Chinese standard of living than our own, apparently!

For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver. This is all definitional. It’s double entry accounting! Did anyone in Obama’s administration take an accounting course? Has any Republican taken one? Has any Democrat taken one?


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China not backing down on the push to export

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This is a few days old but shows all the talk about domestic demand isn’t taking anything away from the desire to export:

China to Take Steps to Boost Exports; Will Keep Currency Stable

May 27 (Bloomberg) — China’s State Council, or Cabinet, said the government will take steps to boost exports while keeping the country’s currency “basically stable,” the state television reported today.

Falling exports are the biggest challenge for the world’s third-largest economy, the council said.

China introduced a 4 trillion-yuan ($586 billion) stimulus package last year as exports slumped and economic growth slowed. Maintaining external demand can create favorable conditions for employment, businesses and domestic consumption, China Central Television said today, citing a council meeting headed by Premier Wen Jiabao.

The nation will keep its currency “basically stable at a reasonable and balanced level,” the council said, without elaborating.

China will take all measures to stabilize overseas demand as shrinking exports are the nation’s biggest challenge, “currently and for some period of time in the future,” the council said.

The government will focus on exports involving intensive labor and advanced technology, according to the report.

The government will arrange $84 billion in short-term export credit insurance for 2009, the council said. The coverage of export credit insurance will also be expanded, it said.

China will allocate additional funds to support exporter guarantees, according to the report. About $10 billion will be set aside as credit for the export industry in 2009, the state television said, without elaborating.


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China policy obamanation

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We do not need China or anyone else to buy our securities and we net benefit enormously from net imports in general.

The profoundly confused China policy comes from an administration that both does not understand the monetary system and does not understand that imports are real benefits and exports real costs:

Policies are being held hostage to Communist China’s demands.

by Adrian Van Eck

May 29 — The communist rulers of China have laid down a threat to the government of the United States of America. They are the largest foreign holders of treasury bonds. They say they fear that the huge Federal deficit this year – four times the record deficit set last year – will bring on inflation of such a magnitude as to threaten the buying power of their treasury holdings. They have said that if Washington does not stop this massive deficit spending (much of it financed with money created by Fed Chairman Ben Bernanke and the Federal Reserve)

All–not some, or most of government spending is a matter of ‘changing numbers in bank accounts at the fed’ (as per Bernanke’s statement last month).
Govt spending adds varying degrees of aggregate demand, government taxing reduces demand, and government borrowing supports interest rates. ‘Financing’ as the word is generally used does not apply to the issuer of a non convertible currency with a floating exchange rate.

they will protect their own interests by dumping all of their holdings of U.S. treasuries on the market for whatever price they can get for them. They say they will do so even if that collapses the U.S. dollar and pulls down not only the American economy but the economy of the entire world.

To date ‘their own interest’ has been that of supporting their export industries by suppressing their real wages.
So this statement would indicate they are threatening to move away from an export led strategy. Possible, but hard to believe and contradicts what follows here.

Apparently Washington has taken this threat seriously. All of a sudden China is being overrun by important officials from the U.S. Government. Speaker of the House Nancy Pelosi is one of the Americans traveling to Beijing. In past years she has been well known in both the U.S, and China as one who dislikes the rulers of Mainland China. A few years ago she barely escaped being arrested by a pack of Party goons as she led a group of Americans protesting China’s policies toward the formerly independent nation of Tibet, which China overran and conquered soon after they won the Chinese Civil War some 60 years ago. A few days ago she was fawning over China’s Government leaders, telling them how we want to cooperate with them in working to protect the environment. (As usual they blamed America for polluting the Earth, ignoring the fact that it is China which is the worst polluter anywhere.) She must have almost gagged on her own sweet words as she talked.

The second important American Government official in China was Secretary of State Hillary Clinton. She has never been thought of as an enemy of China’s communist rulers, so it was easier for her to talk with them. (There were rumors that money from China helped fund her husband’s re-election campaign.) Unfortunately the visit came about as China’s neighbor and close ally – North Korea – exploded a nuclear device reported to be as powerful as the one America dropped on Hiroshima in 1945. They also fired off several rockets. All of this violated the terms of an agreement they signed in 2006 – an agreement that brought them enormous quantities of fuel oil and food. When the nations that negotiated that treaty protested the nuclear explosion, North Korea announced that it was renouncing its agreement to a truce that ended the war in the 1950’s. That again called for Secretary of State Clinton to try and patch up relations without pushing the virtual outlaw nation into crossing the border and attacking South Korea. This made the response to China in threatening America – a definite form of blackmail, as nations such as India and Japan agreed – a secondary issue with Hillary.

That left Treasury Secretary Geithner to absorb the heaviest verbal blows from China’s leaders during his own visit to Beijing. They knew that Geithner, as the president of the independent Federal Reserve Bank of New York, the largest and most important of the privately-owned regional Feds, had himself made threats to China shortly before being confirmed by the Senate to take over the top job at Treasury. He had told the Senate that if China did not stop manipulating the yuan in the foreign exchange market to gain an unfair advantage in its trade he would be in favor of America taking steps on its own to counter this in the foreign exchange market.

What sense does all this make?

China was buying dollars to keep the dollar strong and the yuan weak as part of their strategy to support exports by suppressing domestic costs vs rest of world costs.

Geithner was pushing for a weaker dollar as a way to reduce China’s exports by, in effect, causing prices of goods made in China at Wal-Mart to rise to the point where they wouldn’t sell as well.

Now China is threatening to do the opposite- push the dollar down by selling its USD financial assets, and Geithner is doing the opposite by trying to stop them.

He has since had to swallow those words and now he has to swallow as well threats against America by China.

This administration is in it way over its head and is pursuing a totally confused policy.

We thought it was fascinating that no one in the media mentioned Ben Bernanke or commented on his complete absence from the dialogue with China. So I will take it on myself to make such a comment. Bernanke is, after all, the one man closely tied to the creation of the money that so offends the communists in Beijing and one might have expected him to be involved in current talks with China’s rulers – under normal circumstances. A while back, he went to China as part of a delegation and he was asked to make a speech at a university where China trains many of its economists. Bernanke was brutally candid in his remarks. He pointed out precisely all of the mistakes he felt they were making in their centrally planned economy – and predicted that they were heading for trouble so bad that it might bring the ruling Party and the country down, just as a dozen prior dynasties had come crashing down during China’s long history. The woman who serves as China’s economics minister was livid with rage after his remarks. She took over and screamed insults at him for a half hour. Then she called President Bush and said that Bernanke was “persona non grata,” a diplomatic phrase meaning he would never again be welcomed to China. Months later when a Chinese delegation paid a return visit to Washington, they carefully avoided the Fed’s marble headquarters.

Not a whisper has escaped that anyone knows about from the ideas expressed by Tim Geithner concerning China’s threats if America does not sharply curb its deficit spending.

For China’s export strategy to ‘succeed’ they need high levels of aggregate demand in the US.

Yet it is clear from everything happening in Washington that this Administration has absolutely zero intention of stopping its near reckless abandon of any restraint in Federal spending.

In fact, the deficit spending has not even begun to get high enough to restore aggregate demand to levels where unemployment stops rising, never mind falling.

We need to remove a lot more fiscal drag to restore demand, now the unsustainable (non-government) credit chennels have been capped.

Quite the contrary, as new demands are made they are coming up with more plans to lavish Federal spending on recipients. For example, the latest we are hearing regarding General Motors is that the Federal Government may be willing to hand the company $50 billion on top of the money allocated to them already. But Washington would then want to gain 70% ownership in what critics are calling “Federal Motors.”

The problem here is the administrations looks for public purpose in the ‘input’ side rather than the output side. The public purpose of industry is the output it produces, not how the inputs, particularly labor, get rewarded.

Output is directed by markets working within institutional structure which can be modified to influence output towards public purpose while sustaining full employment at all times. But not with an administration that has it all backwards.

And now we have California’s demand that the Federal Government guarantee $18 billion in State borrowing to fund their own wild deficit spending. Political pressures are building to make this happen. If that does happen, a lot of other states will be lining up at the White House front door to demand the same treatment.

The answer here is to give all states $500 per capita of revenue sharing with no strings attached. California would get about $17 billion.

That way it’s ‘fair’ and there is no ‘moral hazard’ issue.
But, again, this hasn’t even been discussed.

This brings us to a topic that is being brushed aside as being too unlikely to even deserve treatment as a rumor. Thus it is being dismissed out of hand in the national media. Yet it is springing up from several key Washington sources and that makes us suspicious that where there is so much smoke there may be fire. What I am talking about, of course, is the sudden discussion of an American Value Added Tax – another name for a national sales tax. It would apply to goods and services alike. Most nations in the world including China itself now have such a VAT tax. It is called value added because each company is taxed only on the value it adds to raw materials or parts it buys and manufactures or assembles into a product. Trucks and hairdressers and even lawyers would be taxed under a VAT.

Even at a rate as low as 10%, which would be seen as very low in the world, it would raise a ton of money. Some are proposing a rate high enough to allow the income tax to be ended but that idea is being shot down by agents of the Administration. The idea would be sold to conservatives as a way to avoid the huge inflation that China is warning against… and also to make unlikely that America would be forced to go back to pre-Reagan Federal income tax rates of just about double those paid today. And industry would be told that – just as happens in other nations with a VAT – it would be forgiven on any goods or services marked for export. I think these VAT tax rumors are for real and I suggest you keep an eye on this. More next week. Adrian Van Eck.

The VAT is even more regressive than the payroll taxes still on the books.

And with consumption being the entire point of the economics it makes no sense to tax consumption in general.

‘Sin’ and ‘luxury’ taxes are different- the idea is to limit consumption of those items subject to the tax, and not to raise revenue. The success of the tax is then judged by how few dollars are collected, not how many as with the VAT.

Now more than ever the US would benefit from an administration that understood the monetary system and the simple fundamentals regarding imports and exports.

But this is not going to happen, and we will continue to pay the price.


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Geithner’s got it wrong re: China

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This is what happens with an administration that does not understand imports are real benefits and exports real costs.

This is a proactive move that hurts our real terms of trade and real standard of living.

Geithner to Urge China to Boost Demand, Official Says

by Rebecca Christie

May 28 (Bloomberg) — Treasury Secretary Timothy Geithner
will urge China to boost domestic demand and loosen controls on
the yuan in his first trip to the nation since taking office,
while readying a defense on queries about sinking U.S. bonds.

In meetings with Chinese leaders in Beijing June 1-2,
Geithner will encourage China to move toward a more flexible
exchange rate, a U.S. Treasury official told reporters in
Washington. He will also answering any questions the Chinese may
have about the dollar or the U.S. budget deficit, the official
said on condition of anonymity.

While delivering a familiar U.S. message on reducing
China’s reliance on exports, the Treasury chief may meet an
unprecedented level of concern about the outlook for Treasuries.
China is the largest foreign holder of U.S. government debt,
which has handed investors the worst loss since at least 1977
this year as forecasts for federal budget deficits ballooned.

“We’re going to be flooding the world with debt for a
while,” said Tim Adams, a former U.S. Treasury undersecretary
for international affairs who helped lead the Bush
administration’s economic policy with China. “We’ve got to hope
that that the Chinese are willing to keep buying.”

China held about $768 billion in Treasury securities as of
March, according to U.S. government data.

U.S. Commitment

The U.S. is committed to reducing its budget deficit and
maintaining deep and liquid markets for government debt, the
official said in a briefing before Geithner’s May 30 departure.

To spur the U.S. economy, Geithner has said the
administration needs to run deficits in the short term. For the
fiscal year that ends Sept. 30, the deficit is projected to
reach a record $1.75 trillion, according to a Congressional
Budget Office forecast.

The widening gap has contributed to the tumble in
Treasuries, which have lost 5.1 percent, including reinvested
interest, so far this year, according to Merrill Lynch & Co.
index data. The dollar has also been hammered, with the Federal
Reserve’s trade-weighted Major Currency Dollar index sliding 3.2
percent so far this year.

Chinese Premier Wen Jiabao in March expressed concern about
the value of the nation’s U.S. investment. Also in March,
central bank governor Zhou Xiaochuan advocated a “super-
sovereign reserve currency” disconnected from any individual
nation, casting doubt about the long-term role of the dollar.

Wen, Hu Meetings

Geithner is set to meet with Wen during his trip, along
with President Hu Jintao and Vice Premier Wang Qishan. In
addition, Geithner will deliver a speech at Peking University on
U.S.-China economic relations and take part in an economic
development event that features U.S. companies.

The Treasury secretary is confident the U.S. dollar will
keep playing an important role as a reserve currency for a long
time, the official said today.

The Beijing talks will include the importance of open trade
and the need for both the U.S. and China to move toward balanced
long-term growth strategies, including a flexible currency
policy, the official said.

Since mid-2008, when China’s leaders began to take measures
to address an economic slowdown, the yuan has hovered around
6.84 per dollar. That rate was reached after a gradual
appreciation since July 2005 from a level of about 8.3 yuan, a
peg China had maintained since 1995.

So far this month, the yuan is little changed, closing
today at 6.829 per dollar.

‘Manipulating’ Label

Geithner has avoided a showdown over China’s currency
policy, declining to repeat comments he made in written remarks
to lawmakers after his Senate confirmation hearing in January
that China was “manipulating” its currency.

In its first semiannual report on foreign-exchange policies
since Geithner became secretary, the Treasury said April 15 that
while the yuan remains “undervalued,” it didn’t meet the
standard for illegal manipulation in the second half of 2008.

China will need to keep buying dollars if it plans to keep
the yuan tethered to the dollar, said Brad Setser, a former
Treasury official who is now an economist at the Council on
Foreign Relations in New York.

“If China insists on pegging to a now-depreciating dollar,
it isn’t clear that China will be doing anything other than add
to its dollar portfolio,” Setser said. “China’s public
expression of concern about its dollar holdings is somewhat at
odds with its policy of pegging to the dollar quite tightly.”

When notes and bonds of U.S.-backed companies such as
Fannie Mae and Freddie Mac are included, China’s holdings of
U.S. debt come to about $1.55 trillion, according to Setser.
“China will certainly raise its concerns in some form,” he
said.

Geithner, 47, will need to “say all the right things”
about the U.S. fiscal shortfall, said Adams, who accompanied
former Treasury secretaries John Snow and Paul O’Neill on trips
to China. “There’s enormous concern about the size and
intractability of the deficit,” said Adams, who is now a
managing director at the Lindsey Group, an investment consulting
firm in Fairfax, Virginia


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Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone: Gilbert

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Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

by Mark Gilbert

May 21 (Bloomberg) —

The odds on the dollar, Treasury
bonds and the U.S. government’s AAA grade all heading for the
dumpster are shortening.

True, but for the wrong reason. There is no solvency issue, but markets are pricing it in anyway.

While currency forecasting is a mug’s game and bond yields
can’t quite decide whether to dive toward deflation or surge in
anticipation of inflation, every time I think about that credit
rating, I hear what Agent Smith in the “Matrix” movies called
“the sound of inevitability.”

Several policy missteps suggest that investors should stop
trusting — and lending to — the U.S. government. These include
the state’s pressure on Bank of America Corp. to buy Merrill
Lynch & Co.; the priority given to Chrysler LLC’s unions over
the automaker’s secured creditors; and the freedom that some
banks will regain to supersize executive bonuses by giving back
part of the government money bolstering their balance sheets.

When you buy treasury securities the government debits your transaction account and credits your securities account at the Fed.

When those securities mature the government debits your securities account and credits your transaction account. That is all there is too it.

There is no solvency issue at the operational level

Currency markets have been in a weird state of what looks
almost like equilibrium for the past couple of months. What’s
really going on is something akin to an evenly matched tug of
war that fails to move the ribbon tied around the center of the
rope, giving the impression of harmony while powerful forces do
silent battle until someone slips.

“All currencies are being debased dramatically by their
central banks at extraordinary speeds and so in relative terms
it appears there is no currency problem,” Lee Quaintance and
Paul Brodsky of QB Asset Management said in a research note
earlier this month. “In reality, however, paper money is highly
vulnerable to a public catalyst that serves to acknowledge it is
all merely vapor money.”

The ‘value’ is the purchasing power of real goods and services.
The largest and deepest thing for sale is labor.
Seems like currency still buys labor at pretty much the same price as the recent past,
And maybe even a bit more.

In fact, it may buy a bit more of just about everything vs a year ago. Particularly houses and land.

But yes, next year can always bring a different story.

Flesh Wounds

Why pick on the dollar, though? Well, not necessarily
because the U.S. economy is in worse shape than those of the
euro area, the U.K. or Japan. The biggest problem is that
external investors — particularly China — have more skin in
the dollar game than in euros, yen or pounds, which makes the
U.S. currency the most likely candidate to meet the cleaver in a
crisis of confidence about post-crunch government finances.

China owns about $744 billion of U.S. Treasury bonds in its
$2 trillion of foreign-exchange reserves.

Chinese exports, though, are dropping as the global economy
weakens, with overseas shipments declining 23 percent in
April from a year earlier, leaving a nation that has already
expressed concern about its U.S. investments with less to spend
in future.

China doesn’t ‘spend’ it’s dollars on real goods and services which is why they
Have a trade surplus in the first place.

They sold things in exchange for ‘dollar balances’ which are financial assets and
then exchanged some of those balances for alternative USD financial assets as they
accumulated $744 billion of financial assets.

‘Heavy Hand of Government’

Those kinds of concerns are starting to surface in a
steepening of the U.S. yield curve, driven by an increase in 10-
and 30-year U.S. Treasury yields.

True, though there is no economic imperative for the treasury to issue a 30 year security in the first place.

In fact, the treasury issuing securities and the Fed later buying them is functionally identical to the treasury never issuing them in the first place.

(note that Charles Goodhart of the Bank of England has recently been proposing the UK do exactly that- cease issuing long securities rather than issuing them and having the BOE buy them.)

The 10-year note currently
yields 3.23 percent, about 235 basis points more than the two-
year security, which marks a near doubling of the spread since
the end of last year.

Yes, though from very low flight to quality yields at the height of the fear of oblivion.

“When the government parks its tanks on capitalism’s
lawns, that spells trouble for those who invest, add value and
create jobs,” says Tim Price, director of investments at PFP
Wealth Management in London. “Trillion-dollar bailouts do not
only leave massive public-sector deficits in their wake, they
also leave the presence of the heavy hand of government all over
industry and markets, so the outlook for government bonds is
less promising than the economic textbooks on deflation would
have us believe.”

A totally confused chain of logic, though government does often reduce shareholder value when it intervenes. But that’s a different point.

Earlier this month, the U.S. reported the first budget
deficit for April in 26 years, with spending exceeding revenue
by $20.9 billion, even though that’s the month when taxpayers
have to stump up to the Internal Revenue Service and the
government’s coffers should be overflowing. So far this fiscal
year, the U.S. shortfall is $802.3 billion, more than five times
the $153.5 billion gap in the year-earlier period.

Those are the ‘automatic stabilizers’ at work, which, fortunately, are out of the hands of
Congress. While they work the ugly way- falling employment and rising transfer payments- they do work to restore net financial assets to the private, non government sectors and thereby reverse the contraction.

Budget deficits = non govt ‘savings’ of financial assets
To the penny
It’s even an accounting identity. Not theory. Ask anyone at the CBO.

Deathly Deficit

For the fiscal year ending Sept. 30, the Congressional
Budget Office forecasts a record deficit of $1.75 trillion,

That includes the purchase of financial assets which doesn’t add to aggregate demand.

Up until now the fed has always bought the financial assets when government wanted to do that and that hasn’t ‘counted’ as deficit spending for exactly that reason.

This time around the treasury bought financial assets and confused things, much like 1936 when social security first started and was accounted for off budget rather than consolidated as we quickly figured out was the right way to do it and it’s fortunately been done that way ever since.

almost four times the previous year’s $454.8 billion shortfall
and about 13 percent of gross domestic product. Bear in mind
that the target demanded of European nations wanting to join the
euro was a deficit no greater than 3 percent of GDP.

Yes, which is responsible for their poor economic performance as well.

David Walker, a former U.S. comptroller general,

And foremost US deficit terrorist

wrote in
the Financial Times on May 12 that the U.S.’s top credit rating
looks incompatible with “an accumulated negative net worth” of
more than $11 trillion and “additional off-balance-sheet
obligations” of $45 trillion. “One could even argue that our
government does not deserve a triple A credit rating based on
our current financial condition, structural fiscal imbalances
and political stalemate,” he wrote.

As if government payments are operationally constrained by revenues.

They are not, as chairman Bernanke made clear a few weeks ago
when he explained how he makes payments by changing numbers in bank accounts.

That is the only way there is for government to spend in its own currency, which
is nothing more than the process of making spread sheet entries on its own books.

Any constraints on the US ability to make payments in dollars is necessarily self imposed (and
can just as readily be removed by those wanting to spend the money.)

Said another way, government checks don’t bounce unless government decides to bounce its own checks.

If you want to claim govt won’t pay because it will vote not to pay, fine.

But not because ‘deficits can’t be financed’ or any other nonsense like that.

No Default

It is undeniable that the U.S. government’s ability to
finance its borrowing commitments has deteriorated as its
deficit has ballooned.

The ability to deficit spend is the ability to make entries on its own spreadsheets.
Nothing more.
The idea that that can ‘deteriorate’ indicates a fundamental lack of understanding of monetary operations.

Dropping the U.S. from the top rating
grade, though, wouldn’t mean the nation is about to default on
its debt obligations; there’s a subtle distinction between
ability to pay and propensity to fail to pay.

And a less subtle distinction between knowing how it works and not knowing how it works.

There’s also a
compelling argument that no government should be enjoying the
benefits of a top credit grade in the current financial climate.

There’s nothing to ‘enjoy’ or even care about.

Note Japan was heavily downgraded with a debt to GDP ratio triple the US,
With no ill effects as three month rates remained near 0 for the last
15 years and 10 year Japanese govt bonds fluctuated between .5 and 1.5%

Using the definitions outlined by Standard & Poor’s, a one-
step cut into the AA rated category would nudge the U.S.’s
creditworthiness into a “very strong” capacity to fulfill its
commitments, just weaker than the “extremely strong”
capabilities demanded of AAA rated borrowers.

S&P cannot change the actual creditworthiness of the US, or any other
issuer of its own currency. There can be no solvency issue no matter what they do.

That seems an
appropriately nuanced sanction — albeit one that the rating
companies might turn out to be too cowardly to impose.

(Mark Gilbert is a Bloomberg News columnist. The opinions
expressed are his own.)


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Dallas Fed interview

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Don’t Monetize the Debt

by Mary Anastasia O’Grady

May 23 (WSJ) — From his perch high atop the palatial Dallas Federal Reserve Bank, overlooking what he calls “the most modern, efficient city in America,” Richard Fisher says he is always on the lookout for rising prices. But that’s not what’s worrying the bank’s president right now.

His bigger concern these days would seem to be what he calls “the perception of risk” that has been created by the Fed’s purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper.

Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be “the handmaiden” to fiscal profligacy. “I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.”

If he actually understood it I would expect him to say the concept is inapplicable with a non convertible currency and floating exchange rate regime.

Richard Fisher.

The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he’s not the only one worrying about it. He has just returned from a trip to China, where “senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature.” He adds, “I must have been asked about that a hundred times in China.”

Without knowing the right answer which is that lending is in no case reserve constrianed.
Causation runs from loans to deposits and reserves, and not from reserves to loans.

A native of Los Angeles who grew up in Mexico, Mr. Fisher was educated at Harvard, Oxford and Stanford.

Must have skipped the classes in reserve accounting.

He spent his earliest days in government at Jimmy Carter’s Treasury. He says that taught him a life-long lesson about inflation. It was “inflation that destroyed that presidency,” he says. He adds that he learned a lot from then Fed Chairman Paul Volcker, who had to “break [inflation’s] back.”

Deregulating natural gas in 1978 is what broke the back of inflation as utilities switched from crude to natural gas and even cuts of 15 million barrels per day by OPEC were not enough to keep control of prices.

Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee’s (FOMC) lead inflation worrywart. In September he told a New York audience that “rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior” that brought about the economic troubles we are now living through. He also warned that the Treasury’s $700 billion plan to buy toxic assets from financial institutions would be “one more straw on the back of the frightfully encumbered camel that is the federal government ledger.”

In a speech at the Kennedy School of Government in February, he wrung his hands about “the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations” that “we at the Dallas Fed believe total over $99 trillion.”

Hopefully he is worried about possible inflation and not solvency.

In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds. So with long-term Treasury yields moving up sharply despite Fed intentions to bring down mortgage rates, I’ve flown to Dallas to see what he’s thinking now.

Hopefully he is concerned with the purchases possibly lowering interest rates too much for his liking and not about the size of the fed’s balance sheet.

Regarding what caused the credit bubble, he repeats his assertion about the Fed’s role: “It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns.” (Later, he adds that this is not to cast aspersions on former Fed Chairman Alan Greenspan and reminds me that these decisions are made by the FOMC.)

“The second thing is that the regulators didn’t do their job, including the Federal Reserve.” To this he adds what he calls unusual circumstances, including “the fruits and tailwinds of globalization, billions of people added to the labor supply, new factories and productivity coming from places it had never come from before.” And finally, he says, there was the ‘mathematization’ of risk.” Institutions were “building risk models” and relying heavily on “quant jocks” when “in the end there can be no substitute for good judgment.”

Never does mention the role of fiscal policy. Like the massive 2003 retro tax cuts and spending increases that drove the next few years, including housing. Helped of course by the lender fraud.

What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn’t mince words. “I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.” He says he also saw this “inherent conflict of interest” as a fund manager. “I never paid attention to the rating agencies. If you relied on them you got . . . you know,” he says, sparing me the gory details. “You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That’s why we never relied on them.” That’s a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.

Agreed. Can’t have it both ways. And now they are threatening to downgrade the US government as well

I wonder whether the same bubble-producing Fed errors aren’t being repeated now as Washington scrambles to avoid a sustained economic downturn.

He surprises me by siding with the deflation hawks. “I don’t think that’s the risk right now.” Why? One factor influencing his view is the Dallas Fed’s “trim mean calculation,” which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that “the price increases are less and less. Ex-energy, ex-food, ex-tobacco you’ve got some mild deflation here and no inflation in the [broader] headline index.”

Mr. Fisher says he also has a group of about 50 CEOs around the U.S. and the world that he calls on, all off the record, before almost every FOMC meeting. “I don’t impart any information, I just listen carefully to what they are seeing through their own eyes. And that gives me a sense of what’s happening on the ground, you might say on Main Street as opposed to Wall Street.”

It’s good to know that a guy so obsessed with price stability doesn’t see inflation on the horizon. But inflation and bubble trouble almost always get going before they are recognized. Moreover, the Fed has to pay attention to the 1978 Full Employment and Balanced Growth Act — a.k.a. Humphrey-Hawkins — and employment is a lagging indicator of economic activity. This could create a Fed bias in favor of inflating. So I push him again.

“I want to make sure that your readers understand that I don’t know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation.” The committee knows very well, he assures me, that “you cannot have sustainable employment growth without price stability. And by price stability I mean that we cannot tolerate deflation or the ravages of inflation.”

Mr. Fisher defends the Fed’s actions that were designed to “stabilize the financial system as it literally fell apart and prevent the economy from imploding.” Yet he admits that there is unfinished work. Policy makers have to be “always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [about the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys.”

Yes, seems the Fed is worried about perceptions they know not to be true, but struggles to come with a way to communicate the operational realities.

He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. “I wasn’t asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about.”

As I listen I am reminded that it’s not just the Asians who have expressed concern. In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue “ad nauseam” and doesn’t apologize. “Throughout history,” he says, “what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen. That’s when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can’t run away from it.”

Does not sound like he understands, operationally, what that is currently all about, but instead still uses gold standard rhetoric.

Voices like Mr. Fisher’s can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that?

This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. “The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street.

Yes, there is a power struggle going on in the Fed

“Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it,” he says with a defiant Texas twang that I had not previously detected. “I don’t think that it’d be the best signal to send to the market right now that you want to totally politicize the process.”

Speaking of which, Texas bankers don’t have much good to say about the Troubled Asset Relief Program (TARP), according to Mr. Fisher. “Its been complicated by the politics because you have a special investigator, special prosecutor, and all I can tell you is that in my district here most of the people who wanted in on the TARP no longer want in on the TARP.”

At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. “You know that I am a big believer in Schumpeter’s creative destruction,” he says referring to the term coined by the late Austrian economist. “The destructive part is always painful, politically messy, it hurts like hell but you hopefully will allow the adjustments to be made so that the creative part can take place.” Texas went through that process in the 1980s, he says, and came back stronger.

This is doubtless why, with Washington taking on a larger role in the American economy every day, the worries linger. On the wall behind his desk is a 1907 gouache painting by Antonio De Simone of the American steam sailing vessel Varuna plowing through stormy seas. Just like most everything else on the walls, bookshelves and table tops around his office — and even the dollar-sign cuff links he wears to work — it represents something.

He says that he has had this painting behind his desk for the past 30 years as a reminder of the importance of purpose and duty in rough seas. “The ship,” he explains, “has to maintain its integrity.” What is more, “no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel.” He adds: “On monetary policy it’s the Federal Reserve.”

Ms. O’Grady writes the Journal’s Americas column.


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Singh May Set Record in India Asset Sales After Election Victory

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>   On Fri, May 22, 2009 at 8:52 AM, Michael Pede wrote:

>   
>   Singh May Set Record in India Asset Sales After Election Victory
>   

Asset sales are deflationary.

>   
>   Taiwan’s Unemployment Rate Climbs to Record 5.77%
>   
>   Vietnam’s Central Bank Keeps Key Rate Unchanged at 7%
>   
>   Philippines Can Meet 2009 GDP Growth Target, Central Bank Says
>   
>   Indonesia Says Recovery in India, China to Add to GDP Growth
>   


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Roubini on Chinese Reserve Currency

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(email exchange)

>   On Fri, May 15, 2009 at 9:22 AM, wrote:

>   Hi Warren. Roubini (the contemporary Dr. Doom) is suggesting this morning that
>   the Chinese currency should be the new global reserve currency.
>   
>   Don’t you need a country that runs an external payments deficit (or at least not a
>   surplus)?

Helps a lot! Unless someone out there wants to get short your currency so everyone else can get long!

>   that also has deep and unrestricted capital markets?

At least not restricted to the point no one else can hold financial assets denominated in your currency.

The other big thing that helps is that they all want to export to you.

The word ‘reserve currency’ has come to mean others use it as their fx reserves?

If so, they first must want to have fx reserves, and the usual reason for that is to support their exporters to the region of the ‘reserve currency.’

So he’s saying China is scheming to be a major net importer? Doubt it, though that’s what I would do if I were them.


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Obama Again Sides with the Deficit Terrorists

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It’s for real – Obama’s in the deficit terrorist camp, using the communication skills he learned in his rhetoric 101 class.

Obama Says U.S. Long-Term Debt Load ‘Unsustainable’

by Roger Runningen and Hans Nichols

May 14 (Bloomberg) — President Barack Obama, calling current deficitspending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

  1. It’s domestic budget surpluses that are unsustainable- they remove savings.
     
  2. Interest rates are set by the Fed, not the market or the deficit. Japan’s deficits have been triple ours and their rates lower for decades, for just one (unnecessary) example.
     
  3. The US government is not dependent on borrowing from other countries in order to spend.
     

    4. “We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

    That’s a load of inapplicable rhetoric for the purpose of terrorizing uninformed Americans.

    Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

    Interest rates are set by the Fed, not by those who elect to buy Treasury securities.

    The president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare and said he was confident that the House and Senate would pass health-care overhaul bills by August.

    “Most of what is driving us into debt is health care, so we have to drive down costs,” he said.

    Whatever costs he’s got in mind (insurance, drug company markups, etc.) should be minimized in any case.

    It’s not about the ‘debt’.

    The biggest risk to our economy is the risk of Obama succeeding in enacting measures to reduce the deficit.


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America’s Triple A Rating at Risk

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He’s public enemy #1 and senior spokesman for all the deficit terrorists.

He’s also an intellectually dishonest, paid propagandist.

I’ve got the recording posted on my website from the Mike Norman show where he agrees government solvency is not a risk.

If anyone has his email address feel free to email this to him.

The ratings agencies, however, don’t understand the monetary system, and it is indeed possible they will downgrade the US much like they have downgraded Japan.

While this did no harm to Japan and won’t hurt the US, it could be damaging for eurozone nations who are institutionally dependent on funding. However, even in Europe, the ECB has already stretched the limits of the Treaty and would likely go further as needed (though that is not a certainty.)

America’s Triple A Rating is at Risk

by David Walker

May 12 (FT) — Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moodys focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we are in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funneled into the financial system will hopefully rescue it and stimulate our economy.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?

He knows as per the recording on my website that the US government spending in USD is not constrained by revenues, and that any default would be due to a political decision not to pay, and not financial circumstances per se.

James Galbraith and I recently testified at the gao/fasb hearings on sustainability immediately following Walker.

Our presentation is on my website.

The panel agreed with us and reportedly has changed their report, including the elimination of the concern over intergenerational transfers.

I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.

Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.

First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation’s fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

David Walker is chief executive of the Peter G. Peterson Foundation and former comptroller general of the US


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