By J.D. Alt
The (Semantic) Problem with MMT: An Exercise in Framing
Category Archives: Deficit
Issuers vs Users of a Currency
Interview with The Norwich Bulletin, Oct 6, 2010
macro update
The US economy seems to be muddling through at modestly positive GDP growth, supported by a still sort of high enough 8% or so govt fiscal deficit.
The year and fiscal cliff is a looming disaster but it’s too soon for markets to discount a high chance of it actually happening.
Lower oil prices are helping the US consumer and the $US.
The stronger $US works against US exports some and earnings translations a bit as well. Weaker global demand also works against US exports.
Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.
That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.
That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.
So as the member nations stumble their way through each successive securities auction, it won’t surprise me if their economies sort of stabilize around 0 growth or so. And then begin to pick up a tiny bit. All supported by the current, higher levels of deficit spending.
And the lower euro could help their exports some as well.
Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.
51% Predict U.S. Government Will Go Bankrupt Before Budget Is Balanced
51% Predict U.S. Government Will Go Bankrupt Before Budget Is Balanced
Just over half of U.S. voters are still skeptical that their elected officials will get the federal budget under control before it’s too late.
A new Rasmussen Reports national telephone survey finds that 51% of Likely Voters believe the federal government will go bankrupt and be unable to pay its debt before the federal budget is balanced. Thirty-six percent (36%) disagree and think it’s more likely that the federal budget will be balanced first. Thirteen percent (13%) are not sure. (To see survey question wording, click here.)
Quick update
US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.
Lower crude prices should also help some.
I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.
But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.
So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.
But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.
It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.
Not to mention possible dislocations from the whale, which may or may not have run their course, etc.
And then there’s the news from Greece.
First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.
Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.
It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.
And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.
As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.
And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.
For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.
The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?
Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.
Romney: Debt is like ‘prairie fire’
Spain’s Valencia Struggles To Repay Debt
Note how ‘currency users’ are limited to relatively low levels of debt by markets:
Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.
Spain ran up it’s current national debt as a currency issuer when it not only didn’t matter financially with regards to funding and solvency, but it was, for all practical purposes, a requirement to accommodate non govt savings desires at desired levels of output and employment.
Spain, and the rest of the former currency issuers, then waltzed into the euro zone arrangements as currency users who all agreed to keep the same debt levels they had accumulated as currency issuers, rendering the euro arrangements ‘an accident waiting to happen’ from the get go.
Spain’s Valencia Struggles To Repay Debt
By Jonathan House and Art Patnaude
May 4 (Dow Jones) — Spain’s financially troubled Valencia region had to pay a punitive interest rate to roll over a short-term debt Friday, raising new concerns about its solvency and prompting the regional government to offer assurances it can avoid a default.
“We have covered our refinancing needs through June and we are planning on meeting our commitments,” a Valencia spokesman said.
Valencia had to offer institutional investors a 7% interest rate to roll over a EUR500 million debt for six months on Friday, a new sign of a deepening financial crisis for the regions that control over one third of spending in highly decentralized Spain. That’s more than four times what the Spain’s central government offered at its last auction of six-month treasury bills.
With a long history of overspending, Spain’s regions have moved to the center of the country’s fiscal crisis. As Prime Minister Mariano Rajoy tries to close yawning budget gaps at all levels of government and return the ailing local economy to growth, his government is scrambling to make sure the regions meet their financial obligations while reining in expenditures.
Spain had a general government budget deficit equal to 8.5% of gross domestic product in 2011, far in excess of the 6%-of-GDP target it had committed to with the European Union and international investors. Much of the overrun was the fault of the regions.
In recent months, the fiscally frail regions are facing increasing difficulty in financing themselves. International investors are steering clear. “There’s still a great deal of reluctance from institutional investors to get involved in Spain. The uncertainties are a bit too big,” said Elisabeth Afseth, fixed-income analyst at Investec Bank in London.
Valencia, on Spain’s Mediterranean coast, is one of the most troubled of its 17 regions. With its hundreds of kilometers of beachfront properties, it is ground zero for the collapse of the Spain’s housing industry, which has punched a large hole in national tax revenue and sent the economy into a long slump. The housing bust, coupled with years of high spending, has made Valencia one of the most indebted regions.
Valencia’s total outstanding debt at the end of 2011 was EUR20.76 billion, equal to around 20% of its GDP.
Late last year, Moody’s Investor Service downgraded Valencia’s credit to junk status and the central government had to advance Valencia some of its regular financing to prevent it from defaulting on a EUR123 million debt to Deutsche Bank AG (DB). In Spain, most tax revenue is collected by the central government.
Since then, Rajoy’s government, which came to power in December, has strengthened financial support for the regions and said it won’t let any default on their obligations. It set up an EUR10 billion credit facility they can draw on to refinance their debts and is offering EUR35 billion worth of loans to help them pay off debts to suppliers.
The Valencia spokesman said his region has received EUR2.69 billion from the credit facility that will allow it to meet all its debt obligations in the first half of the year. In addition, Valencia and other regions are pushing hard to get Madrid agree to guarantee their debts, which should help lower borrowing costs, he added.
Valencia has to refinance EUR4.5 billion worth of debt this year.
Answer to question on stocks
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> Warren, what do u think stocks do here?
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Been bearish all along from mid March and still thinking same.
Euro zone still melting down.
US coming off Q4 rebuild of Japan’s pipeline.
And now unemployment benefits expiring in 9 states with more to come?
State and local cutbacks are ‘high multiple’ and actual state and local deficit spending coming down as well?
Housing not picking up enough to add meaningfully to aggregate demand/GDP.
With ‘real productivity’/technology and management advances’ continually reducing labor needed per unit of output, recent declines in productivity in line with softer employment?
Global austerity = global slow motion train wreck?
Reinharts, Rogoff See Huge Output Losses From High Debt
A black mark on Morgan Stanley
Reinharts, Rogoff See Huge Output Losses From High Debt
By Rich Miller
April 30 (Bloomberg) — The U.S. and other developed economies with high public debt potentially face “massive” losses of output lasting more than a decade, even if their interest rates remain low, according to new research by economists Carmen and Vincent Reinhart and Kenneth Rogoff.
In a paper published today on the National Bureau of Economic Research’s website, they found that countries with debts exceeding 90 percent of the economy historically have experienced subpar economic growth for more than 20 years. That has left output at the end of the period a quarter below where it would have been otherwise.
“The long-term risks of high debt are real,” they wrote. “Growth effects are significant” even when debtor nations are able to borrow “at relatively low real interest rates.”
In spite of those dangers, the economists said they are not advocating rapid reductions in government debt at times of “extremely weak growth and high unemployment.”
Carmen Reinhart is a senior fellow at the Peterson Institute for International Economics in Washington, while her husband, Vincent, works as chief U.S. economist for Morgan Stanley in New York. Rogoff is a professor at Harvard University in Cambridge, Mass., and a former chief economist at the Washington-based International Monetary Fund.
Their paper looked at 26 separate episodes in 22 countries since 1800 in which central government debt exceeded 90 percent of gross domestic product for at least five years. Advanced economies with such big liabilities grew on average 2.3 percent a year, compared with 3.5 percent in the lower debt period, they said. The high-debt period on average lasted 23 years, according to the study.
U.S. Debt
Gross federal U.S. debt has exceeded 90 percent of GDP for the last two years and is projected to remain above that level at least through 2017, according to the White House’s Office of Management and Budget.
Publicly-held debt, which excludes debt held by the Social Security Trust Fund and other government agencies, was 68 percent of GDP on Sept. 30, 2011, the OMB data show.
The lower level of publicly held debt should not be a source of comfort to the U.S. and other heavily-indebted nations because such trust funds generally are “woefully underfunded,” the Reinharts and Rogoff argued in their paper.
They also cautioned the U.S. and other developed nations against taking solace from low levels of interest rates on their debt. The yield on the 10-year U.S. Treasury note stood at 1.92 percent at 3:15 p.m.
‘Warning Signal’
“Contrary to popular perception, we find that in 11 of the 26 debt overhang cases, real interest rates were either lower or about the same as during the lower debt/GDP years,” the economists wrote. “Those waiting for financial markets to send a warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time.”
Greece and Italy were the two countries in the study that experienced the most instances in which their debt exceeded 90 percent of GDP.
The economists warned that nations with excessive government liabilities now may even fare worse than history suggests because their private and foreign debts also are large.
“The fact many countries are facing ‘quadruple debt overhang problems’ — public, private, external and pension — suggests the problem could be worse than in the past,” they said.
Carmen Reinhart and Rogoff are co-authors of the book “This Time is Different: Eight Centuries of Financial Folly.” Carmen’s husband, Vincent, is a former director of the monetary affairs division at the Federal Reserve in Washington.
U.K. Factory Index Falls More Than Forecast on Export Slump
As expected, the export channel doesn’t look to be able to save Europe this time around. That leaves only domestic demand and net public sector spending via ‘borrowing to spend’ to do the trick, which doesn’t look all that promising either.
U.K. Factory Index Falls More Than Forecast on Export Slump
By Scott Hamilton
May 1 (Bloomberg) — A U.K. factory index fell more than economists forecast in April and U.S. manufacturing probably slowed as the world economy stayed reliant on China to drive economic growth.
The gauge of British factory output dropped to 50.5 from 51.9 in March, London-based Markit Economics said today. The median forecast of 27 economists in a Bloomberg News survey was for a decline to 51.5. The Institute for Supply Management’s U.S. index probably eased to 53 last month from 53.4, according to the median of 77 forecasts. A Chinese purchasing managers’ index rose to 53.3 from 53.1. A level above 50 indicates growth.