Category Archives: Deficit

Robert Reich’s no so innocent fraud

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Obama’s Real Budget Plan (and Why It’s a Huge Gamble)

By Robert Reich

Here’s the part of interest to me:

Yet what are the chances of a booming recovery? The economy is now growing at an annualized rate of only 1.5 percent. That’s pitiful. It’s not nearly enough to bring down the rate of unemployment, or remove the danger of a double dip. Real wages continue to drop. Housing prices continue to drop. Food and gas prices are rising. Consumer confidence is still in the basement.

Fair enough, now on to the problem and the remedy:

By focusing the public’s attention on the budget deficit, the President is still playing on the Republican’s field. By advancing his own “twelve year plan” for reducing it – without talking about the economy’s underlying problem – he appears to validate their big lie that reducing the deficit is the key to future prosperity.

Promising rhetoric there- deficit reduction isn’t the answer!

The underlying problem isn’t the budget deficit.

Really getting my hopes up now!

It’s that so much income and wealth are going to the top that most Americans don’t have the purchasing power to sustain a strong recovery.

****sound of a balloon deflating****

Until steps are taken to alter this fundamental imbalance – for example, exempting the first $20K of income from payroll taxes while lifting the cap on income subject to payroll taxes, raising income and capital gains taxes on millionaires and using the revenues to expand the Earned Income Tax Credit up to incomes of $50,000, strengthening labor unions, and so on – a strong recovery may not be possible.

Message to Bob:

I suspect you understand taxes function to regulate aggregate demand, not to fund expenditures per se?

So please don’t blow smoke and instead just state that the tax cut part of your proposal is meant to add to aggregate demand,

And that the tax increase part is to achieve your vision of social equity without subtracting very much from aggregate demand.

Instead, by doing it the way you are doing it, you are implying that the deficit per se is of economic consequence.

This makes you part of the problem, rather than part of the answer, as you are supporting the deficit myths which are preventing any actual solution from being implemented.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama’s transition advisory board. His latest book is Supercapitalism.

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What happened to Q1?

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This is typical of recent announcements:

“With most of the news on 1Q growth now in, the GDP “bean count” looks even softer than it did a couple of weeks ago. The most recent disappointments have come on the export side—with trade now set to subtract significantly from growth in the quarter—and from inventories. Consequently, we are downgrading our real GDP growth estimate to 1¾% (annualized), from 2½% previously (and from 3½% not too long ago).”

So what went wrong?

Maybe, as I guessed at just prior to year end:

The effect of world austerity was underestimated, particularly in Europe and China?

The effects of income channel from QE2 (remember the Fed turning over $79 billion to the tsy that the economy would have earned if the Fed hadn’t bought/owned those securities?) were underestimated?

The effect of the year end tax adjustment was less than anticipated, as work for pay that was eliminated maybe had higher propensities to consume than the 2%, one year FICA reduction?

Rising gasoline prices slowed things down some?

Rising food price as we burn up our food supply for fuel wreak havoc world wide?

So how about Q2, which is starting about as high as Q1 did?

High food and gasoline prices continue.

Supply disruptions from the Japan.

The Fed owns more tsy secs and has thereby removed more interest income from the economy.

World austerity intensifies, now including the US.

China’s inflation fight intensifies.

And business top line growth starting to falter from modest levels?

And this time the fiscal safety nets are in jeopardy as govt’s believe they have ‘run out of money’ and need to tighten up, with Japan now the prime example, looking at tax hikes to ‘pay for’ earthquake damage.

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MMT to Obama- Taxes Function to Regulate Aggregate Demand, Not to Raise Revenue per se

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We, the undersigned economics and financial professionals,
seeking to foster world prosperity,
send the following urgent message to President Obama and the US Congress:

Taxes Function to Regulate Aggregate Demand (total spending),
Not to Raise Revenue per se

That means:

Federal spending is NOT inherently dependent on revenues from taxing or borrowing.

ANY constraints, including debt ceilings and budgeting rules, are necessarily self imposed by Congress.

The US can’t EVER have a funding crisis like Greece- there is no such thing for ANY issuer of its own currency.

The correct analogy is between Greece and the US states.
A US state can indeed become unable to fund itself, and look to the US Federal Reserve Bank for funding, much like Greece is getting assistance from the European Central Bank. But as issuers of their own currencies, the notion of a funding crisis for the US Federal Reserve Bank or the European Central Bank is entirely inapplicable.

Furthermore, federal borrowing is nothing more than a matter of the Federal Reserve debiting reserve accounts and crediting securities accounts. And paying off the Federal debt, as done continuously as US Treasury securities mature, is nothing more than a matter of the Federal Reserve debiting securities accounts and crediting reserve accounts.

THERE ARE NO GRANDCHILDREN INVOLVED IN THIS PROCESS!!!

Nor is there any inherent financial risk posed by foreigners or anyone else buying or not buying US Treasury securities.

Additionally, the risk of federal overspending relative to taxation, as available labor and materials become fully employed,
is higher prices, and not insolvency or any kind of funding crisis.

Therefore, with our currently recognized and highly problematic shortage of aggregate demand,
as evidenced by unemployment and economic slack in general, you’ve all got it backwards.

Given the current depressed state of the US economy, an informed Congress would be in heated debate
over whether to increase federal spending, or decrease taxes.

And with the current risk of inflation largely from crude oil prices and food prices,
which are now closely linked, for all practical purposes price stability is also currently in your hands.

Signed:

Warren Mosler
President, Valance Co.

Roger Erickson, PhD; Chairman
Operations Institute

Joseph M. Firestone, Ph.D.
Managing Director, CEO
Knowledge Management Consortium International
A Division of Executive Information Systems, Inc.

Stephanie Kelton, Ph.d
University of Missouri, Kansas City

Thomas E. Nugent
Chief Investment Officer, Victoria Capital Management, Inc.

Chris Hanley
Owner/Broker Farchette & Hanley Real Estate, US Virgin Islands

Art Patten
President, Symmetry Capital Management, LLC

Andrea Terzi
Franklin College Switzerland

Bernard J. Weis
Norfolk Markets

***If you wish to sign on, return this email with how you would like your name and associations to appear, thanks, and please distribute this to other academics and financial professionals who may be interested in signing on***

Obama Urges Democrats Help Him ‘Finish the Job’

April 15 (Reuters) — President Barack Obama said Thursday a Republican debt-reduction plan would create “a nation of potholes” as he used the first events of his 2012 re-election bid to strike a sharp contrast with his opponents.

Seeking to reignite the energy of supporters that propelled his candidacy in 2008, Obama said “extraordinary progress” has been made during his two years in the White House but much work remains.

He called on supporters to help him finish the job.

The president, who offered a 12-year plan Wednesday to reduce the U.S. deficit by $4 trillion, skewered a proposal by Republican Representative Paul Ryan.

Ryan would trim about the same amount without raising taxes and by making cuts in spending, such as on medical and social programs for the poor and elderly. Republicans have attacked Obama’s plan for raising taxes on wealthy Americans.

“Under their vision, we can’t invest in roads and bridges and broadband and high-speed rail,” Obama said.

“We would be a nation of potholes.”

The Republican approach, he said, is that “we can’t afford to do big things anymore” and says to the underprivileged, “tough luck, they’re on their own.”

Obama, who reluctantly agreed to extend Bush-era tax cuts late last year even for the richest Americans, said if the wealthy were to “pay a little more in taxes,” it would help solve America’s fiscal challenge without forsaking its responsibility to its people.

“If we apply some practical common sense to this, we can solve our fiscal challenges and still have the America that we believe in. That’s what this budget debate is about and that’s what the presidential campaign is going to be about.”

Obama has tried to straddle a middle ground and sought compromise with his political adversaries since Republicans took command of the House of Representatives and picked up strength in the Senate in elections last November.

He said he recognized that some of his liberal supporters have been frustrated “because we’ve had to compromise with the Republicans a couple of times,” and that he felt the same way sometimes.

“We knew this wasn’t going to be easy.”

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CNBC’s Kudlow: Take Away Washington’s Credit Card

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The economists with the financial media are a complete disgrace.

And they don’t want to know better.

They just want to sell news.

How does that go again about capitalism selling the rope that it gets hung with?

The Debt Bomb Is Coming Due

By Larry Kudlow

April 12 (CNBC) — White House press secretary Jay Carney said Republicans should not “play chicken with the economy.” The administration wants a prompt vote to raise the federal debt ceiling quickly. Carney went on to say, “The consequences of not raising the debt ceiling would be Armageddon-like in terms of the economy.”

But then again, if the federal debt limit keeps getting raised without any real new spending-limitation rules, Armageddon for the economy may come just as quickly.

The problem with the rising debt burden is too much spending and too little growth. A spending-limitation of 20 percent to GDP would go a long way toward fixing the debt-bomb problem.

A number of Republicans are proposing such a limit, with real teeth to force automatic spending cuts across the board if the limit is violated. House and Senate Republicans will not agree to an increase in the debt limit without these kinds of serious spending reforms. As they say, it’s time to stop maxing out the credit card. There has to be some discipline in the fiscal system.

The current $14.3 trillion debt ceiling will run up against the wall sometime early this summer. As of the end of March, there’s a $76.1 billion borrowing limit left. Treasury man Tim Geithner says all measures to postpone a U.S. default on its obligations will end approximately July 8, 2011. At that point, government payments — including interest on the Treasury debt — would be stopped.

So the message for investors is tighten your seatbelts. The hard-driving politics of spending reform and debt limits will go down to the wire. At virtually the same time, the Fed will probably have ended QE2. So debt-default worries, along with possible inflation fears, could drive up interest rates and hurt the stock market as well.

But let’s not forget, the debt bomb is coming due, sooner or later. Better for Washington to cancel its summer vacation and put some serious disciplined limits on federal spending and borrowing. Take away Washington’s credit card.

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Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances

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>   
>   (email exchange)
>   
>   Hi Warren,
>   
>   Do you have any thoughts on Stiglitz calling for a new reserve currency?
>   Is this something you see as a problem or is Stiglitz getting it wrong?
>   

Yes, my advice for Joe is to stop talking about these things entirely.
He’s in it all way over his head.

Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances

By John Detrixhe and Sara Eisen

April 10 (Bloomberg) — The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.

He doesn’t seem to grasp the notion that imports are real benefits and exports real costs, nor that the national debt is nothing more than dollar balances in Fed securities accounts that are ‘paid back’ by debiting the securities accounts and crediting reserve accounts, also at the Fed. No grandchildren writing checks involved.

A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York.

There is no such thing as weakening the ability of the US to make US dollar payments. All that’s involved is crediting reserve accounts at the fed.

The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficitwidened more than forecast in January to the highest level in seven months.

“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire.

He just assumes there’s some problem with a nation running trade deficits, not realizing it’s a sign of success- improved real terms of trade- and not failure.

“Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”

The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.

Deficits per se obviously don’t drive up interest rates.

“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”

Doesn’t matter with a currency issuer like the US, Japan and UK.

Japan’s ‘debt’ is nearly 3x ours, has had multiple downgrades, and their 10 year rate just ‘skyrocketed’ to about 1.3%, for example.

The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said.

Agreed, because nations don’t realize that their taxes function to regulate their aggregate demand, and not to raise revenue per se. And seems Stiglitz doesn’t get it either.

It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”

It’s unfair for a lot of reasons, except that one.

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Death by 1000 cuts: The economics of innocent subversion

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Even NY Fed Chief Bill Dudley, well aware of his role as a manager of expectations, is worried:

Dudley Headlines:

DUDLEY SAYS IMPORTANT NOT TO OVERREACT TO RISING INFLATION
DUDLEY ATTRIBUTES LOSS OF MOMENTUM TO RISING OIL PRICES
DUDLEY SAYS U.S. ECONOMY LOST SOME MOMENTUM IN PAST TWO MONTHS

Last I heard Congress agreed cut $38 billion in spending from this year’s budget as a ‘down payment’ on reducing the federal deficit.

Followed by every economic forecaster on Wall St. and Main St. reducing estimates for this years’s GDP by maybe 1/2% or more. (These are people who get paid to be right, and not to produce propaganda.)

I have no problem with cutting wasteful and unnecessary spending, but when we have this kind of shortage of aggregate demand said cuts would be more than matched with either tax cuts and/or other spending increases, to sustain aggregate demand.

(Aggregate demand is the total spending, private and public, that supports employment and output).

The proposals are now to get to work on more serious deficit reduction- maybe $5 trillion over the next 10 years, or about $500 billion or so per year.

Ask your favorite forecasters what that does to GDP. I’ll guess they’ll tell you it would be a proactive reduction of more than 3% per year. Plus multipliers. And maybe a 50% increase in unemployment as the output gap skyrockets from already insanely high levels.

In other words, maybe 10 years of negative growth, unless private sector (including non residents) spending somehow increases at least by that much.

For domestic sector spending to increase to fill what my mate Bill Mitchell likes to call the spending gap, there would need to be an increase in private sector debt (which is likewise measured as a drop in private sector savings).

With today’s credit conditions, I don’t see where that could possibly come from. Borrowing to spend on houses and cars- the traditional engine of consumer growth- rising to levels sufficient to close the output gap seems highly unlikely. Particularly when federal deficit reduction is cutting incomes and savings.

For the foreign sector (non residents) to fill that spending gap, the trade gap would have to somehow stop going up and suddenly drop down by that amount. Not impossible, but a very ugly process (for us)- massive decline in our real terms of trade, etc.- should that actually happen.

So why is this happening? Why are we drinking the hemlock?

Because both sides- Democrats and Republicans- have it all dead wrong.

They both agree the federal deficit is too large and is a dire threat to our well being.

When, in fact, the exact opposite is the case- the output gap/unemployment is telling us- screaming at us- that the federal deficit is too small, and that Congress should be arguing over whether they should cut taxes and/or increase spending.

(And throw in an energy policy, and fast, but that’s for another post).

But because they think we could be the next Greece and face a federal funding crisis, they continue to work to turn us into the next Japan with two lost decades- and worse.

It’s either ignorance or subversion, so let me take the liberty to again borrow from John Kenneth Galbraith and call it innocent subversion.

“The worst part is that, because both sides have no clue about the real functioning of the monetary system, they have both been hard at work misinforming the public. And, since they both watch and react to daily polling numbers, unless something is done, they will continue to react to the reflections of their own ignorance.”

Atty Donovan Hamm

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FED Fisher’s comments embody all that’s wrong with the FOMC

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Fisher headlines:

DJ Fed’s Fisher: Continued QE2 Buying Creating ‘Significant Risks’

The risks they envision do not exist.

DJ Fisher: Possible Fed Should Stop Short On QE2 Buying Goal

This would be the case only if they thought mortgage rates should be higher than otherwise.

DJ Fisher: Absolutely Opposed To Expanding QE2 Beyond Current Plan

Only if he is concerned mortgage rates are too low.

DJ Fisher: Firms May Soon Pass On Input Price Increases

This is about what’s called cost push inflation, vs demand pull inflation, and represents shifts in relative value.

DJ Fisher: See ‘Unpleasant’ Inflation Data On Horizon
DJ Fisher: More Fed Liquidity May Exacerbate Inflation Problem

What he calls inflation is not a function of what he calls Fed liquidity.

*DJ Fisher: See Signs Fed Bond Buying Creating Market Imbalances

Fed bond buying can cause financial market alterations but not imbalances.
There could in theory be real imbalances, for example a Fed induced housing shortage due to too low mortgage rates, but this is not the point he’s making.

DJ Fisher: US Government Must Get Fiscal House In Order

Here’s the big one. The FOMC seems to be on complete agreement that there is at least a long term deficit problem

They don’t seem to understand it’s about aggregate demand and not finance per se.

*DJ Fisher: Failure To Fix Deficit May Wound Economy’s Prospects

The make these kinds of statements without identifying the specific channels from deficit spending to the economy’s prospects. Nor are they ever questioned on this and pressed to identify said channels.
(The only one I’ve heard is the interest rate channel which always fails the test of close examination.)

This rhetoric from the FOMC is supportive of the position of both sides of the debate that the federal deficit is an immediate problem, with fears that the US could be the next Greece as proclaimed by Congressman Ryan appearing daily in the popular media, which elevates the real risk of proactive deficit reduction that could undermine the current modest levels of GDP growth and employment growth.

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