Category Archives: Congress

Fed Testimony

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Semiannual Monetary Policy Report to the Congress

By Janet Yellen

Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly. Low oil prices

Still seems to leave out the fact that a dollar saved by the buyer of oil is a dollar lost by the seller.

And ongoing employment gains should continue to bolster consumer spending, financial conditions generally remain supportive of growth,

Yes, but the growth rate of lending has only been relatively modest and stable

And the highly accommodative monetary policies abroad should work to strengthen global growth.

Low and negative rates and quantitative easing now have a very long history of not resulting in increased aggregate demand.

In addition, some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effect of lower oil prices on capital spending, should diminish over time.

Yes, but the question is what will replace the lost capital spending? Without that incremental capital expenditure, growth, at best, stagnates and likely goes negative as the ‘demand leakages’ continue to grow.

Also, the weakness in U.S. exports is partially the consequence of lower oil prices as reduced U.S. expense for imported oil = reduced income available to non residents to import U.S. goods and services. And the decline in global oil capital expenditures works against global growth and U.S. exports as well.

As a result, the FOMC expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually. As always, however, there are some uncertainties in the economic outlook. Foreign developments, in particular, pose some risks to U.S. growth. Most notably, although the recovery in the Euro area appears to have gained a firmer footing,

That’s due to the weak Euro helping their exports. You can’t have it both ways- if the dollar becomes less of a headwind for the U.S., the Euro will become less of a tailwind for the EU.

The situation in Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions. But economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity.

This again assumes lower rates and quantitative easing are accommodative, particularly in the EU and China

The U.S. economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively.

Again, still assumes lower oil prices are a net positive.

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Proposal update, including the JG

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My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ’employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

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Michael Bloomberg: Best Economic Stimulus is Now Fiscal Responsibility

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So much for his legacy…

Mayor Bloomberg Outlines Specific Actions For Super Committee

By Michael Bloomberg

November 8 (Moment of Truth Project) — Mayor: Best Economic Stimulus is Now Fiscal Responsibility – Super Committee Must Break Partisan Deadlock and Take Bold Action.

The following are Mayor Michael R. Bloomberg’s remarks as prepared for delivery today at a forum hosted by the Center for American Progress and the American Action Forum at the Center for American Progress’ headquarters in Washington, DC. Please check against delivery.

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News recap comments

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The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

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MMT proposals for the 99%

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1. A full FICA suspension to end that highly regressive, punishing tax and restore sales, output, and jobs.
2. $150 billion in federal revenue sharing for the state goverments on a per capita basis to sustain essential services.
3. An $8/hr federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.
4. See my universal health care proposals on this website (Health Care Proposal).
5. See my proposals for narrow banking, the Fed, the Treasury and the FDIC on this website (Banking Proposal).
6. See my proposal’s to take away the financial sector’s ‘food supply’ by banning pension funds from buying equities, banning the Tsy from issuing anything longer than 3 month bills, and many others.
7. Universal Social Security at age 62 at a minimum level of support that makes us proud to be Americans.
8. Fill the Medicare ‘donut hole’ and other inequities.
9. Enact my housing proposals on this website (Housing proposal).
10. Don’t vote for anyone who wants to balance the federal budget!!!!

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In case you thought President Clinton knew how the monetary system worked

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Falls under ‘even a fish wouldn’t get into trouble if he kept his mouth shut’ ???

Bill Clinton: How to fix the economy

October 7 (CNN) — How to fix the economy and create jobs

First, Congress and President Obama can adopt strategies designed to unleash the massive amount of capital that is accumulated but not being invested. There’s some $2.2 trillion in cash in American banks that is not committed to loans. A couple hundred billion has to be held back for bad mortgages, but there’s about $2 trillion that could be used in cash reserves for up to $20 trillion in loans. So, in theory, that would take the world out of recession. And U.S. corporations have about $2 trillion more that they have decided not to invest.

SORRY, MR. PRESIDENT, LENDING DOES NOT ‘USE’ OR ‘USE UP’ RESERVES WITH TODAY’S NON CONVERTIBLE CURRENCY/FLOATING EXCHANGE RATE REGIME. THE WAY YOU SAID IT APPLIES WITH A GOLD STANDARD OR OTHER FIXED EXCHANGE RATE POLICIES.

IN OUR BANKING SYSTEM, THE CAUSATION RUNS FROM LOANS TO DEPOSITS. IF THE BANKS MADE $2 TRILLION IN LOANS TODAY, $2 TRILLION IN NEW DEPOSITS WOULD BE CREATED IN THE BANKING SYSTEM, AND RESERVES WOULD REMAIN UNCHANGED.

The second thing is to accelerate the resolution of the home mortgage crisis, which would make businesses more eager to borrow, expand and consumers more willing to spend. These kinds of financial crises typically take about five years to get over. What we’re really trying to do is beat the historical trend by getting over it more quickly. We can’t do that unless we do on a larger scale what we did in the S&L crisis, which is to flush the debt quicker.

OK, BUT REMEMBER THE S AND L CRISIS LED TO THE CRASH OF 87, WITH THE HIGH LEVEL OF DEFICIT SPENDING SUPPORTING OUTPUT AND EMPLOYMENT.

The third category includes things that will strengthen our position today and tomorrow. We need to bring back manufacturing. We need to focus on exports. We need to focus on green technologies. There are dozens of things we could do that would create jobs.

MR. PRESIDENT, DON’T FORGET THAT EXPORTS ARE REAL COSTS, AND IMPORTS REAL BENEFITS. ECONOMICS IS THE OPPOSITE OF RELIGION. WITH ECONOMICS IT’S BETTER TO RECEIVE THAN TO GIVE. REAL TERMS OF TRADE AND STANDARDS OF LIVING ARE OPTIMIZED BY IMPORTING AS MUCH AS POSSIBLE IN EXCHANGE FOR AS FEW EXPORTS AS POSSIBLE. AND THE DOMESTIC ECONOMY CAN ALWAYS BE KEPT FULLY EMPLOYED BY APPROPRIATE FISCAL BALANCE.

AND DON’T FORGET THAT GLOBALLY, WITH INCREASING PRODUCTIVITY, MANUFACTURING EMPLOYMENT IS FALLING EVEN AS OUTPUT GROWS. MUCH LIKE AGRICULTURE, MANUFACTURING WILL CONTINUE TO DECLINE IN RELATIVE IMPORTANCE WITH REGARDS TO EMPLOYMENT WITH TIME.

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Deficit Reduction Super Committee Fighting the Battle of New Orleans

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I realize it’s not a perfect analogy,
but, due to poor communications,
the battle of New Orleans was fought
well after the War of 1812 had ended.

Likewise, the Congressional super committee is fighting the battle for deficit reduction
long after the vaporization of the primary reason driving that move towards deficit.

The main difference is the stakes are much higher this time,
with the real cost of the lost output from the excessive, ongoing,
global output gap far exceeding
all the real losses of all the wars in history combined.

The headline reason for deficit reduction was
the rhetoric about the immediate danger of the US
suddenly becoming the next Greece,
with the US govt being cut off from credit,
interest rates spiking,
and visions of the US Treasury Secretary
on his knees, hat in hand,
begging the IMF for funding and mercy.

And the looming flash point was the threat of a US downgrade if
a credible deficit reduction package wasn’t passed before the Aug 2 deadline,
when the Congressionally self-imposed US borrowing authority was to expire.

After a prolonged Congressional process that was
even uglier than the healthcare process,
with already dismal Congression approval ratings moving even lower,
the debt ceiling was extended with a measure that contained some deficit reduction,
and also set up the current super committee to ensure further deficit reduction.

Soon after, however, Standard and Poor’s decided it all wasn’t enough,
and the dreaded downgrade was announced.

And then the unexpected happened.
Rather than spike up as widely feared,
market forces drove US Treasury interest rates down, substantially.

What was happening? Where had the mainstream gone wrong?
Former Fed Chairman Greenspan and celebrity investor Warren Buffet
both immediately had the answer.
S&P was wrong.
The US is not Greece.
The US govt prints its own money, while Greece does not.
The US always has the ability to pay any amount of dollars,
that markets can’t take away.

And everyone agreed.

And the driving force behind deficit reduction was suddenly not there,
and the rhetoric of becoming the next Greece vanished from the national TV screens.

And, unfortunately, just like the news that the War of 1812 had ended
didn’t get to New Orleans in time to prevent thousands from
losing their lives in that bloody battle that would otherwise not have been fought,

the news that the US isn’t Greece apparently hasn’t gotten through
to the Congressional members of the super committee
now fighting the current battle over deficit reduction.

What was learned after the downgrade was that
there is no such thing as a solvency problem for the US govt.
Short term or long term.

True, excessive deficit spending may indeed someday cause unwelcome inflation,
but the US government is never in any danger of not being able
to make any payment (in dollars) that it wants to.

And yes, the discussion could be shifted to a discussion
as to whether current long term deficits forecasts
translate into unwelcome inflation in the future
that may demand action today.

However no specific research has been done along those lines.
And, in fact, inflation forecasts,
which all assume our current fiscal trajectory,
don’t show any signs of an inflation problem.
Nor are the long term US Treasury inflation indexed bonds flashing any inflation warnings.
In fact, the Fed and most other forecasters remain more concerned over the risk of deflation.
And Japan, with a debt to GDP ratio about triple that of the US,
has been fighting its battle against deflation for nearly two decades.

So, clearly, shooting from the hip on this issue,
by suddenly declaring long term deficits
must be immediately addressed
with cuts to Social Security,
and with tax hikes,
to prevent a looming inflation problem,
(now that the prior errant reason, that the US could be the next Greece, has been dismissed)
could only be considered
highly irresponsible behavior
on the part of the super committee.

An informed Congress might recognize
the reason for the urgent action to reduce the federal deficit
and the reason for the super committee
is no longer there.
And, therefore, in informed Congress might suspend the super committee,
and regroup and reconsider before taking action.

It is widely agreed the current problem is a massive lack of aggregate demand.
It is widely agreed that a combination of tax cuts and/or spending increases
will restore sales, output and employment.

But instead of a compromise where the Republicans get some of their tax cuts
and the Democrats some of their spending increases, and the economy booms,
both sides are instead going the other way and pushing proposals to reduce aggregate demand,
even though they no longer have good reason to do so.

The battle of New Orleans was fought after the reason for fighting it had ended,
And, likewise, long after the reason for deficit reduction vaporized,
this battle continues to be fought
with both parties continuing acting counter agenda.

(feel free to distribute)

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