Category Archives: Deficit

GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT

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The news out of Europe has turned from mixed for the last week or so to troubling.

On the one hand they seem to realize that the answer is the ECB writing the check, and on the other they seem to be saying they don’t want to do that. And on the one hand they say Greece won’t default, and on the other is a serious discussion of the ramifications of default. And as the haircut talk on private holders of Greek debt has gone from 21% to 50% and maybe more, the ECB says they will keep their Greek bonds which will presumably mature at par, but at the same time additional ECB capital calls are under consideration due to what they call increased risk of loss.

The idea that the EFSF alone writing checks to support Portugal, Spain, and Italy would weaken the credit worthiness of the core has also been discussed, which is why talk of ECB support had materialized.

Meanwhile, even as the austerity continues to bite, perhaps to the point where the austerity is now causing deficits to be larger, additional austerity measures continue to be demanded and imposed.

And where the banks stand with regard to solvency is anyone’s guess as well.

In other words, it’s all moving further away from any sense of resolution, with uncertainty about as high now as it’s ever been, as is the potential for a catastrophic financial event.

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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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Bill Mitchell on Thomas Sargent and the Nobel Prize

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Rewarding those who are culpable

By Bill Mitchell

October 14 — I didn’t comment earlier this week on the recent decision to award the (not)Nobel Prize in Economics to Thomas Sargent. My thoughts were otherwise occupied but it is worth recording that Sargent has been at the centre of the mainstream macroeconomics literature which has been used to justify the claims that government fiscal interventions are ultimately futile and only generate accelerating inflation. His ideas helped my profession to claim authority in its campaign to pressure governments in deregulation, privatisation, inflation targetting and abandoning full employment as a primary policy target. The upshot has been three decades of policy development which really laid the foundations of the current crisis. If Sargent and his cohort had not been so influential the world economy might not have been in the mess that it finds itself in. And … millions might still have their life savings and be gainfully employed. The so-called Nobel Prize in Economics continues to reward those who are culpable.

I covered the event last year – Nobel prize – hardly noble – and noted that the award had nothing to do with Alfred Nobel’s will which wanted prestige to be bestowed on “shall have conferred the greatest benefit on mankind”. Instead, the economic prize was established in 1968 by the ultra-conservative Swedish central bank and the prize is awarded by the Royal Swedish Academy of Sciences.

There is a good critique of Sargent’s selection by John Cassidy in his New Yorker article (October 12, 2011) – A Nobel for Freshwater Economics. He said:

This week’s announcement of the Nobel Prize in Economics got me thinking about the state of the subject, and my thoughts weren’t very positive. Three years after the great financial crisis of 2008 discredited the ruling orthodoxy in macroeconomics and finance, the Royal Swedish Academy of Sciences has chosen to honor one of the leading creators of that orthodoxy: Tom Sargent, of New York University. And judging from the reactions to the Nobel announcement, most academic economists heartily approved of it.

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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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Mosler Bonds for the ECB, and reasons why Greece will not be allowed to default

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First, The ECB should turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.

The ECB holding Mosler bonds will shift the default option from the issuer to the ECB, as in the case of non payment,
the ECB would have the option to make it’s holdings available for sale to tax payers of that nation to offset their taxes.

Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national govt debt are ‘money good’ without regard to external credit ratings, and give the ECB control over the default process.

Second, I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.

Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.

The purchases are not inflationary because they are directly tied to reduced Greek spending and increased Greek taxes, which are both deflationary forces for the euro zone.

Funding Greece facilitates the purchase of German exports to Greece.

Funding Greece does not reward Greek bad behavior.
Instead, it exacts a price from Greece for its bad behavior.

With the ECB prospectively owning the majority of Greek debt, and, potentially, Greek Mosler bonds, Greece will be paying interest primarily to the ECB.

The funding of Greece by the ECB carries with it austerity measures that will bring the Greek budget into primary balance.

That means Greek taxes will be approximately equal to Greek govt expenditures, not including interest, which will then be largely payments to the ECB.

So if default is not allowed, the Greek govt spending will be limited to what it taxes, and additional tax revenues will be required as well to pay interest primarily to the ECB.

But if default is facilitated, Greece will still be required to spend only from tax revenues, but the debt forgiveness will mean substantially lower interest payments to the ECB than otherwise.

And while without default, it can be said that the holders of Greek bonds have been bailed out, the euro zone will be considering the following:

The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.

The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.

In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.

Therefore, I see the main reason Greece will not be allowed to default is that not allowing default serves the further purpose of Germany and the EU by every measure I can think of.

It sustains the transfer of control of fiscal policy to the ECB.
It’s deflationary which helps support the value of the currency.
It provides for an ongoing income stream from Greece to the ECB.

Note, however, that not long ago it was not widely recognized as it now is that the ECB can write the check without nominal limit.

Before the EU leaders recognized that fundamental of monetary operations, Greek default was serious consideration for financial reasons as it was believed the funding of Greece and subsequently the rest of the ‘weaker’ euro zone nations would threaten the entire euro zone’s ability to fund itself.

It is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose.

(as always, feel free to distribute, repost, etc.)

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Senator Warner, Democrat, announces bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction

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posting..

Senator Warner announces formation of bipartisan group of 38 senators to encourage super committee to “go big” on deficit reduction
~ Warner leads new Senate coalition of 19 Republicans, 18 Democrats & 1 Independent ~
Senator Warner today announced that he has organized a bipartisan coalition representing more than one-third of the members of the U.S. Senate to encourage the members of the congressional “super committee” to seek the broadest possible bipartisan agreement to address the nation’s deficits and debt. This group of 38 Senators — 19 Republicans, 18 Democrats and one Independent — builds upon Sen. Warner’s yearlong efforts, along with Sen. Saxby Chambliss (R-GA), to craft a deficit and debt framework as the two co-founders of the Senate’s bipartisan “Gang of Six.”

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