Category Archives: Deficit

Cliff notes

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Jobless Claims Fell More Than Expected, Down by 25,000 to 370,000

I haven’t written much this week because I haven’t seen much to write about.

Still looks like both the economy and the markets are discounting the cliff. And still looks to me like ex cliff GDP would be growing at about 4% this quarter, with the Sandy-cliff related cutbacks keeping that down to maybe 2.5%. And going over the full cliff is taking off maybe 2% more, leaving GDP modestly positive.

Which is what stocks and bonds seem to be fully discounting.

As previously discussed, the housing cycle seems to have turned up, which looks to be an extended, multi year upturn with a massive ‘housing output gap’ to be filled. And employment is modestly improving as well, also with a large output gap to fill. Car sales are back over 15 million, and also with a large output gap to fill.

The way I see the politics unfolding, the full cliff will be avoided, if not in advance shortly afterwards, as fully discussed to a fault by the media. That means GDP growth head back towards 4% (and maybe more)

Nor do I see anything catastrophic happening in the euro zone. They continue to ‘do what it takes’ to keep everyone funded and away from default. And conditionality means continued weakness. Q3 GDP was down .1%, a modest improvement from down .2% in Q2, and a flat Q4 wouldn’t surprise me. The rising deficits from ‘automatic fiscal stabilizers’ (rising transfer payments and falling revenues) have increased deficits to the point where they can sustain what’s left of demand. And the recent report of German exports to the euro zone rising at 3.5% maybe indicating that the overall support for GDP will continue to come disproportionately from Germany. And rising net exports from the euro zone will continue to cause the euro to firm to the point of ‘rebalance’ which should mean a much firmer euro. And as part of that story, Japan may be buying euro to support it’s exports to the euro zone, as per the prior ‘Trojan Horse’ discussions, and as evidenced by the yen weakening vs the euro, also as previously discussed.

And you’d think with every forecaster telling the politicians that tax hikes and spending cuts- deficit reduction- causing GDP to be revised down and unemployment up, and the reverse- tax cuts and spending hikes causing upward GDP revisions and lower unemployment- they’d finally figure this thing out and act accordingly?

Probably not…

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more on the cliff

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Stocks down again yesterday but interestingly bond yields up a tad, dollar down a tad, oil and metals up, and even long BMA ratios holding steady, etc.

The cliff isn’t nearly as large and threatening as the debt ceiling cliff would have been in 2011 if that thing hadn’t been extended, and we’d gone cold turkey into an immediate and forced balanced budget. But that event is the stock market’s ‘recent memory’ of stock market reaction functions.

And this time GDP is being supported by a private sector credit expansion/housing expansion, with private debt service ratios substantially lower due to cumulative federal deficits adding to nominal ‘savings’. And the federal deficit remains well above 5% of GDP, which historically has been more than enough to reverse a recession.

And then there’s the election factor. Post election I’m hearing (anecdotally) distraught Romney supporters thoroughly convinced the President is a ‘socialist’ bent on destroying capitalism, taxing the rich ‘job creators’ and giving it to what Romney called ‘the 47%’ dependent class, etc. etc. etc. Merits of this ‘belief’ aside, it looks to me it’s driving portfolios to shift out of equities. However, if not supported by an actual decline in earnings, which is how I see it, it’s all a case of ‘pushing on a spring’.

Yes, the euro zone is a problem, with Q3 GDP just reported at -.1%. But that’s an ‘improvement’ from q2’s -.2% as larger deficits are acting counter cyclically to cushion the austerity driven decline. And Rehn was just quoted on Spain favoring not adding to austerity measures, perhaps indicating a move to ‘let it be’ for a while, which will allow GDP to stabilize at modestly positive levels.

And China is no longer going backwards, so that negative has been reversed as well.

Back to the cliff, in fact letting tax rates go up for high income earners should have little effect on GDP, as the marginally propensity to spend for that segment is reasonably low. (of course that means there’s no point in taxing that income in the first place, but that’s another story). Nor does it mean investment or employment will suffer since investment is driven by sales prospects. And with higher tax rates, and business expense tax deductible, the after tax cost of investment goes down with higher tax rates. For example, in the 70’s, when my tax rate was around 70%, I clearly recall making very high risk investments figuring it was better than giving 70% to the govt. Point is, taxing income and savings that isn’t going to be spent is about social engineering, and not ‘funding the deficit’ or altering aggregate demand, and is intellectually honestly framed as such. So point here is, I score the effect of raising the highest tax rates at 0 regarding aggregate demand.

This all supports my take that the stock market has over discounted the cliff, partly for ideological reasons, partly due to the recent memory of what stocks did during the debt ceiling debacle, and partly from fear of what’s going on in the rest of the world.

So as we get through it all with modest top line and earnings growth continuing, I’m looking for valuations to quickly return to at least where they were before the election.

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The 10th plague brought an end to solvency issues, but not yet output issues

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Interesting how Germany gravitating to negative growth came at about the same time Draghi announced the ECB will ‘do whatever it takes’

With the ECB now taking national govt insolvency off the table, and member nation rates coming down accordingly, the reason for deficit reduction- solvency- has fallen by the wayside.

So now the EU is free to adjust deficits for optimal output without the former solvency concerns.

With austerity, every professional forecaster revises his GDP estimate down and unemployment up.

With a proactive increase in the deficit, whether via tax cuts or spending increases, every professional forecaster revises his GDP estimate up and unemployment down.

And so relaxing the stability and growth pact to maybe a 7% deficit limit from the current 3% limit would result in forecasts for rapidly rising GDP and rapidly falling unemployment. And with the output gap as large as it is the increased economies of scale with expanding output will likely further promote price stability.

Yet it’s not even a passing thought.

So with deficits now likely high enough to support growth from current levels, if they’d only leave them alone, instead, continuing efforts to proactively reduce deficits = continued widening pressure on the output gap.

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U.K. Economy Surges 1% as Britain Exits Double-Dip Recession

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Deficit finally large enough for a bit of stability and growth?

U.K. Economy Surges 1% as Britain Exits Double-Dip Recession

By Scott Hamilton and Jennifer Ryan

October 25 (Bloomberg) — Britain exited a double-dip recession in the third quarter with the strongest growth in five years as Olympic ticket sales and a surge in services helped boost the rebound.

Gross domestic product rose 1 percent from the three months through June, the fastest growth since 2007, the Office for National Statistics said in London today. That exceeded the highest estimate in a Bloomberg News survey for growth of 0.8 percent. The median forecast of 33 economists was 0.6 percent. The pound rose after the data were published.

The growth surge reflects a boost from the Olympics and a rebound from the second quarter, when GDP was affected by an extra public holiday. While the data may give some short-term relief to Prime Minister David Cameron’s struggling government, Bank of England Governor Mervyn King said this week that the recovery is “slow and uncertain.” That suggests the figures mask underlying weakness that could warrant further stimulus from the central bank.

“We’re still concerned the U.K. economy is going to be pretty much flat throughout next year,” James Shugg, an economist at Westpac Banking Corp. (WBC) in London, said on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It all depends how rigidly determined the government is to stick to its deficit reduction plan.”

Ticket Sales

Services, which make up about three quarters of GDP, surged 1.3 percent in the third quarter from the previous three months, the most in five years, the ONS said. Olympic ticket sales are estimated to have added 0.2 percentage points to GDP. Production rose 1.1 percent, the most in more than two years, while manufacturing increased 1 percent. Construction output fell 2.5 percent, a third straight quarterly decline.

The pound extended its gain against the dollar after the report and was trading at $1.6134 as of 10:52 a.m. in London, up 0.6 percent on the day. Bonds declined, pushing the yield on the 10-year government bond up 8 basis points to 1.93 percent.

From a year earlier, GDP was unchanged in the third quarter, the ONS said. That compared with a decline of 0.5 percent forecast by economists in a separate Bloomberg survey.

While today’s data confirm Britain exited its first double- dip recession since 1975, GDP is still 3.1 percent below its peak in the first quarter of 2008. The report also showed that the economy has grown 0.6 percent since the third quarter of 2010, just after Cameron’s coalition government came to power.

Economy ‘Healing’

Cameron urged caution on the GDP data, saying there is “still much to do.” The opposition Labour Party has accused his government of exacerbating the economic slump by sticking to its fiscal squeeze. Ed Balls, Labour’s finance spokesman, said today the economy “remains weak” and “is only just back to the size it was a year ago.”

“There are always one-off figures in all of these announcements but they do show an underlying picture of good and positive growth,” Cameron said. “We’ve got to stick with the program.”

The data today are an initial estimate and the figures are subject to revision when the ONS gets more information. In the second quarter, the decline in GDP was revised up to 0.4 percent from an initially reported 0.7 percent.

Britain is the first of the Group of Seven nations to report GDP data for the third quarter. U.S. growth probably accelerated to a 1.9 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to a Bloomberg survey before a Commerce Department report tomorrow. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

Deficit Reduction

The U.K. data come two weeks before the Bank of England’s Monetary Policy Committee must decide whether to end its stimulus program or extend it beyond 375 billion pounds ($605 billion). Governor Mervyn King said this week that a “zig-zag” pattern of recovery is likely to persist.

Debenhams Plc (DEB), Britain’s second-largest department-store chain, said today that the U.K. experienced “challenging trading conditions during 2012.” Whitbread Plc (WTB) Chief Executive Officer Andy Harrison said the consumer market is “pretty flat” and generating any growth is “jolly difficult.”

Stripping out one-time distortions, the National Institute of Economic and Social Research said on Oct. 9 that third- quarter growth was closer to between 0.2 percent and 0.3 percent.

Inflation Cools

Still, recent data have shown pressure on consumers easing. Inflation cooled to the slowest in almost three years in September, while retail sales increased more than forecast. Payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9 percent from 8.1 percent.

“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said on Oct. 23. “The MPC will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready.”

Elsewhere in Europe, Sweden’s Riksbank kept benchmark interest rates unchanged at their lowest level since early 2011 and said further easing has become more probable as growth slows in the largest Nordic economy.

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CEOs Call for Deficit Action

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So much for the legacy of corporate America:

CEOs Call for Deficit Action

By David Wessel

October 25 (WSJ) — Chief executives of more than 80 big-name U.S. corporations, from AetnaInc. to Weyerhaeuser Co., are banding together to pressure Congress to reduce the federal deficit with tax-revenue increases as well as spending cuts.

The CEOs, in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

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Forbes article: No, the US will not go into a debt crisis, not now, not ever

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>   
>   (email exchange)
>   
>   On Fri, Oct 19, 2012 at 1:09 PM, wrote:
>   
>   Author is self-described conservative.
>   

No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever

By Pascal-Emmanuel Gobry

October 19 (Forbes) — If there’s one article of faith in Washington (and elsewhere), it’s the idea that the United States might get into a debt crisis if it doesn’t get its fiscal house in order.

This is not true.

The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars– something that the United States government can produce infinitely and at no cost.

That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”. (Here’s a more detailed analysis by my former colleague Joe Weisenthal at Business Insider.)

Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn’t sovereign with regard to its currency since it had to maintain its currency’s peg. It wasn’t Argentina’s debt that caused it to default, it was its currency peg.

What about Greece? Same thing. Greece hasn’t used its own currency for ten years. Of course it’s going bankrupt.

Does it seem that strange that governments can’t run out of money?

You don’t have to take my word for it. How about Alan Greenspan? He said (PDF): ”[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”

But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won’t that create inflation?

Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.

Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.

And even if it did–well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now. (Hyperinflation, meanwhile, is even less of a danger, since in recorded history it only happens in cases of not just reckless money printing, but also extremely serious exogenous shocks such as war, regime change, etc.)

Why am I writing this?

After all it’s already common knowledge among economists, Fed officials, and an increasing number of sophisticated investors.

Maybe so, but it’s still not common knowledge among politicians and among the general public. A lot of people still think that the US is under some risk of one day becoming like Greece, and it’s distorting our public debate.

It’s especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals–certainly no Democratic elected officials that I’m aware of, certainly not the President and the Vice President–are disputing the premise that the US is in any danger of a debt crisis.

In future posts, I will try to look at what the conservative movement can do to move past the idea of the debt crisis, and what it means.

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Mosler for Congress update

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I sent the following to my international audience looking to a return to prosperity
for all of us, which I now send along to you here in the USVI to keep you well informed!

(note that ‘closing the output gap’ means ‘eliminating unemployment’)

They have known me for a very long time and have been most supportive:

First let me thank all of you who have contributed, and have become part of what could quickly become much more than just another seat in Congress!!!

Donations have exceeded $25,000 and at only $25/minute for radio and TV adds the incremental spending has indeed made a difference- thanks again!

There are three weeks to go an any additional contributions will immediately be used to add to the advertising and promotional efforts.

When I ask our volunteers ‘out of ever 10 people they speak to in their neighborhoods, how many say they are voting for me’ they all say more than half!

Friday in St. Thomas while walking to a UVI event I heard a loud ‘Mosler!’ and looked over to see a patrol car with the window down and the officer looking at me. As soon as I turned his way he said ‘Everyone’s voting for you this time, you’re going to win you know!’

I’ve been in 5 ‘debates’ so far, with the candidates on a panel taking questions from a moderator. I’ve just focused on what I’m going to do about each issue, both for the national economy and the USVI economy, while the other candidates have had no specific agenda apart from promising to work hard (and taking cheap shots at each other, of course!)

More and more the audiences seem to be responding with ‘your the only one who knows what to do’. And the ‘anti incumbent’ feeling in general is actually alarmingly high as conditions here continue to deteriorate. Our cost of electricity, for example, just went up to over 50 cents/kw, while government salaries that were already half the national average were cut 8%, with thousands of lost jobs due to the closing of the Hovensa refinery here on St. Croix and widespread government layoffs of nurses and teachers in an already grossly under served community.

I assure you that if I get in Washington will soon be aware of the hurricane that’s come up from the USVI. The Fed chairman will suddenly face ‘innocent’ questions of profound magnitude, such as, ‘Isn’t true that a $trillion deficit adds exactly that much to global dollar net savings, and not a penny less or a penny more, or these two gentlemen next to me from the CBO would have stay late at work looking for their arithmetic mistake?’ ‘Isn’t it true, that by your own regulatory standards, loans to the ECB collateralized with euro deposits would be classified as unsecured loans?’ ‘Given that you do the actual spending on behalf of Congress simply by crediting accounts, and therefore ability to pay, insolvency, and prior funding for Congress, unlike for Greece, is never an issue, and, again unlike Greece, for all practical purposes the Fed sets US interest rates by voting and not the market, what then, is the short term or long term risk posed by deficit spending? And many more. And with all of these questions serving the agendas of various members of Congress there is every incentive for them to be asked. And not to mention testimony and discussions on banking, budgets, and trade. Looking forward to gettng the job done/close the output gap!!!

If any of you want to contribute to ‘THE CAUSE’ remember the limit is $2,500 per person and checks can be made out to ‘Mosler For Congress 2012’.

You can also click here or paypay and further information.

All the best!!!

Warren

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