Category Archives: Deficit

German balanced budget law pending

Posted on by


[Skip to the end]

(email exchange)

>   On Mon, Jun 22, 2009 at 9:10 AM, wrote:
>   
>   And reach Wolfgang Munchnau in the FT today. Germany is really going nuts here.
>   German sado-fiscalism!
>   

As he says towards the end, it’s a moral issue.

This type of thing is the largest long term risk to economic well being.

I am starting to call it the federal ‘contribution’ rather than the federal ‘deficit’ hoping that might help.

Berlin weaves a deficit hair-shirt for us all

by Wolfgang Münchau

June 21 (FT) —

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe’s stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

Anchoring the stability law at the level of the national constitution is an extreme measure – like locking the door, and throwing the keys away. It can only ever be undone with a two-thirds majority – and even a future Grand Coalition may not be able to deliver this as both of the large parties are in a process of secular decline. It means that future fiscal policy will be in the hands of the justices of Germany’s Constitutional Court. The new law replaces a much softer constitutional clause – a golden investment rule that said deficits can only be used to finance investments. It was not a satisfactory rule, but at least it allowed structural deficits in principle. The new law not only sets draconian deficit ceilings, it also provides a detailed numerical toolkit to implement the rules over the economic cycle.

I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.

To meet the interim deficit reduction goals, the new government will have to start cutting the structural deficits by 2011 at the latest. There is clear danger that the budget consolidation timetable might conflict with the need for further economic stimulus, should the economic crisis take another turn for the worse. There is still economic uncertainty. Bankruptcies are rising, and the German banks are just about to tighten their credit standards again. I simply cannot see how Germany can produce robust growth in such an environment, not even in 2011. If that scenario prevails – as I believe it will – the new constitutional law will produce a pro-cyclical fiscal policy with immediate effect.

One could also construct a virtuous cycle – the second outcome. If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.

Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany’s lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

I am a little surprised not to hear howls of protests from France and other European countries. Germany has not consulted its European partners in a systematic way. While the Maastricht treaty says countries should treat economic policy as a matter of common concern, this was an example of policy unilateralism at its most extreme.

What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.

While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. Der Spiegel, the German news magazine, had an intriguing report last week on the country’s young generation. One of the protagonists in its story was a young woman who had borrowed a little money to set up her own company. The company turned out to be a success, and she had began to repay the loan. And yet she said she had not felt proud of having taken on debt.

This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.


[top]

Share

Twin deficit terrorists Ferguson and Buiter

Posted on by


[Skip to the end]

This is the exact same line Niall Ferguson is spewing.
He also says the two choices are inflating or defaulting.

The inflation would be from too much aggregate demand and a too small output gap.

That would mean that fatefull day would be an economy with maybe 4% unemployment and 90%+ capacity utilization and an overheating economy in general.

Sounds like that’s the goal of deficit spending to me- so in faccct he’s saying deficit spending works with his rant on why it doesn’t.

And if we do need to raise taxes to cool things down some day, we can start with a tax on interest income if we want to cut payments to bond holders.

Regarding the supposed default alternative to inflation, in the full employment and high capacity utilization scenario that might call for a tax increase to cool it down, I don’t see how default fits in or why it would even be considered.

In fact, with our countercyclical tax structure, strong growth that follows deficits automatically drives down the deficit, and can even drive it into surplus, as happened in the 1990’s. In that case one must be quick to reverse the growth constraining surplus should the economy fall apart as happend shortly after y2k.

Feel free to pass this along to either.

The fiscal black hole in the US

June 12 (FT)—US budgetary prospects are dire, disastrous even. Without a major permanent fiscal tightening, starting as soon as cyclical considerations permit, and preferably sooner, the country is headed straight for a build up of public debt that will either have to be inflated away or that will be ‘resolved’ through sovereign default.


[top]

Share

deficits and future taxes

Posted on by


[Skip to the end]

(email exchange)

The latest noise is that today’s deficits mean higher taxes later.

Answer:

1. Taxes function to reduce aggregate demand.

2. A tax hike is never in order with a weak economy, no matter how high the deficit or how high the interest payments may be.

3. Future tax increases would be a consideration should demand rise to the point where unemployment fell ‘too far’- maybe below 4%.

4. That is a scenario of prosperity and an economy growing so fast that it might be causing inflation which might need a tax hike or spending cut to cool it down.

So when someone states that today’s high deficit mean higher taxes later, he is in fact saying that today’s high deficits might cause the economy to grow so fast that it will require tax increases or spending cuts to slow it down.

Sounds like a good thing to me — who can be against that?

And, of course, the government always has the option to tax interest income if interest on the debt is deemed a problem at that time.

>    On Fri, Jun 12, 2009 at 8:46 AM, James Galbraith wrote:
>   
>   A comment in the National Journal, on the ever-green deficit alarmism that so preoccupies
>   people in Washington, to no good effect.
>   
>   Also, my June 5 lecture in Dublin, at the Institute for International and European Affairs, on the
>   crisis.
>   
>   With Q&A
>   
>   And a small postscript, reprising the old story of Eliza in Cuba, which I’ve promised her I
>   will now retire
>   
>   Jamie


[top]

Share

National Journal Expert Blog debate on fiscal sustainability

Posted on by


[Skip to the end]

What Is Fiscally — And Politically — ‘Sustainable’?

By James K. Galbraith
Professor of Economics, University of Texas

June 11th —Chairman Bernanke may, if he likes, try to define “fiscal sustainability” as a stable ratio of public debt to GDP. But this is, of course, nonsense. It is Ben Bernanke as Humpty-Dumpty, straight from Lewis Carroll, announcing that words mean whatever he chooses them to mean.

Now, we may admit that the power of the Chairman of the Board of Governors of the Federal Reserve System is very great. But would someone please point out to me, the section of the Federal Reserve Act, wherein that functionary is empowered to define phrases just as he likes?

A stable ratio of federal debt to GDP may or may not be the right policy objective. But it is neither more nor less “sustainable,” under different economic conditions, than a rising or a falling ratio.

In World War II, from 1940 through 1945, the ratio of US federal debt to GDP rose to about 125 percent. Was this unsustainable? Evidently not. The country won the war, and went on to 30 years of prosperity, during which the debt/GDP ratio gradually fell. Then, beginning in the early 1980s, the ratio started rising again, peaked around 1993, and fell once more.

Thus, a stable ratio of debt to GDP is not a normal feature of modern history. Gradual drift in one direction or the other is normal. There seems no great reason to fear drift in one direction or the other, so long as it is appropriate to the underlying economic conditions.

History has a second lesson. In a crisis, the ratio of public debt to GDP must rise. Why? Because a crisis – and this really is by definition – is a national emergency, and national emergencies demand government action. That was true of the Great Depression, true of war, and true of the Great Crisis we’re now in. Moreover, we’ve designed the system to do much of this work automatically. As income falls and unemployment rises, we have an automatic system of progressive taxation and relief, which generates large budget deficits and rising deficits. Hooray! This is precisely what puts dollars in the pockets of households and private businesses, and stabilizes the economy. Then, when the private economy recovers, the same mechanisms go to work in the opposite direction.

For this reason, a sharp rise in the ratio of debt to GDP, reflecting the strong fiscal response to the crisis, was necessary, desirable, and a good thing. It is not a hidden evil. It is not a secret shame, or even an embarrassment. It does not need to be reversed in the near or even the medium term. If and as the private economy recovers, the ratio will begin again to drift down. And if the private economy does not recover, we will have much bigger problems to worry about, than the debt-to-GDP ratio.

It is therefore a big mistake to argue that the next thing the administration and Congress should do, is focus on stabilizing the debt-to- GDP ratio or bringing it back to some “desired” value. Instead, the ratio should go to whatever value is consistent with a policy of economic recovery and a return to high employment. The primary test of the policy is not what happens to the debt ratio, but what happens to the economy.

*****

Now, what about those frightening budget projections? My friend Bob Reischauer has a scary scenario, in which a very high public-debt-to-GDP ratio leaves the US vulnerable to “pressure from foreign creditors” – a euphemism, one presumes, for the very scary Chinese. Under that pressure, interest rates rise, and interest payments crowd out other spending, forcing draconian cuts down the line. To avert this, Bob has persuaded himself that cuts are required now, not less draconian but implemented gradually. Thus the frog should be cooked bit by bit, to avoid an unpleasant scene later on when the water is really boiling hot.

With due respect, Bob’s argument displays a very vague view of monetary operations and the determination of interest rates. The reality is in front of our noses: Ben Bernanke sets whatever short term interest rate he likes. And Treasury can and does issue whatever short-term securities it likes at a rate pretty close to Bernanke’s fed funds rate. If the Treasury doesn’t like the long term rate, it doesn’t need to issue long-term securities: it can always fund itself at very close to whatever short rate Ben Bernanke chooses to set.

The Chinese can do nothing about this. If they choose not to renew their T-bills as they mature, what does the Federal Reserve do? It debits the securities account, and credits the reserve account! This is like moving funds from a savings account to a checking account. Pretty soon, a Beijing bureaucrat will have to answer why he isn’t earning the tiny bit of extra interest available on the T-bills. End of story.

The only thing the scary foreign creditors can do, if they really do not like the returns available from the US, is sell their dollar assets for some other currency. This will cause a decline in the dollar, some rise in US inflation, and an improvement in our exports. (It will also cause shrieks of pain from European exporters, who will urge their central bank to buy the dollars that the foreigners choose to sell.) The rise in inflation will bring up nominal GDP relative to the debt, and lower the debt-to-GDP ratio. Thus, the crowding-out scenario Bob sketches will not occur.

I’m not particularly in favor of this outcome. But unlike Bob Reischauer’s scenario, this one could possibly occur. And if it did, it would lower real living standards across the board. This is unpleasant, but it would be much fairer than focusing preemptive cuts on the low-income and vulnerable elderly, as those who keep talking about Social Security and Medicare would do.

****

Now, it is true, of course, that you can run a model in which some part of the budget – say, health care – is projected to grow more rapidly than GDP for, say, 50 years, thus blowing itself up to some fantastic proportion of total income and blowing the public finances to smithereens. But this ignores Stein’s Law, which states that when a trend cannot continue it will stop, and Galbraith’s Corollary, which states that when something is impossible, it will not happen.

Why can’t health care rise to 50 percent of GDP? Because, obviously, such a cost inflation would show up in – the inflation statistics! – which are part of GDP. So the assumption of gross, uncontrolled inflation in health care costs contradicts the assumption of stable nominal GDP growth. Again, the consequence of uncontrolled inflation is… inflation! And this increases GDP relative to the debt, so that the ratio of debt to GDP does not, in fact, explode as predicted.

I do not know why the CBO and OMB continue to issue blatantly inconsistent forecasts, but someone should ask them.

Further confusion in this area stems from treating Social Security alongside Medicare as part of some common “entitlement problem.” In reality, health care costs and haphazard health insurance coverage are genuine problems, and should be dealt with. Social Security is just a transfer program. It merely rearranges income. For this reason it cannot be inflationary; the only issue posed is whether the elderly population as a whole deserves to kept out of poverty, or not.

Paying the expenses of the elderly through a public insurance program has the enormous advantage of spreading the burden over all other citizens, whether they have living parents or not, and of ensuring that all the elderly are covered, whether they have living children or not. A public system is also low-cost and efficient, and this too is a big advantage. Apart from that, whether the identical revenue streams are passed through public or private budgets obviously has no implications whatever for the fiscal sustainability of the country as a whole.

****

What is politically sustainable is nothing more than what the political community agrees to at any given time. I have been surprised, and pleased, by the political community’s acquiescence in the working of the automatic stabilizers and expansion program so far. The deficits are bigger, and therefore more effective, than many economists thought would be tolerated. That’s a good sign. But it would be a tragedy if alarmist arguments now prevailed, grossly undermining job prospects for millions of the unemployed.

Let me note, in passing, that Chairman Bernanke should please read the Federal Reserve Act, and focus on the objectives actually specified in it, including “maximum employment, stable prices and moderate long-term interest rates.” He does not have a remit to add stable debt-to-GDP ratios or other transient academic ideas to the list. One might think that the embarrassing experience with inflation targeting would be enough to warn the Chairman against bringing too much of his academic baggage to the day job.


[top]

Share

Jim Grant-Fed Would Be Shut Down If It Were Audited

Posted on by


[Skip to the end]

On Wed, Jun 10, 2009 at 8:48 PM, Scott Fullwiler wrote:

(email exchange)

>   On Wed, Jun 10, 2009 at 8:48 PM, Scott Fullwiler wrote:
>   
>   Thanks, Ian.
>   
>   Warren . . . Ian was one of my students at your presentation last week . . . some people are
>   learning how this works, at least. I feel like a proud papa!

Yes, congrats!

I’m nominating this for both the stupidest article of the year and the stupidest article of all time in the category of ‘statements by economic experts:’

And it was only a few weeks ago Bernanke explained the Fed/government makes payments by simply changing numbers in bank accounts and that their spending is not operationally constrained in any way by revenues.

Fed Would Be Shut Down If It Were Audited, ‘Expert’ Says

June 10th (CNBC)—The Federal Reserve’s balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant’s Interest Rate Observer, told CNBC.

With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.

“If the Fed examiners were set upon the Fed’s own documents-unlabeled documents-to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down,” he said. “The Fed is undercapitalized in a way that Citicorp is undercapitalized.”


[top]

Share

‘Legacy of Debt’ Gives Fiscal Stimulus Bad Name: Caroline Baum

Posted on by


[Skip to the end]

This article gives Baum a bad name.

‘Legacy of Debt’ Gives Fiscal Stimulus Bad Name: Caroline Baum

Commentary by Caroline Baum

June 5(Bloomberg) — By the time the U.S. government unveiled its Public Private Investment Partnership in March, the toxic loans and securities clogging bank balance sheets had become “legacy assets.”

What if deficit hawks took the same tack and marketed the $787 billion fiscal stimulus as “legacy debt?”

They would be making yet another error. This is no basis for an article unless one is intent on being part of the problem rather than part of the answer.

“The $787 billion the U.S. Treasury will be borrowing or confiscating from you via taxation will saddle future generations with a legacy of debt,” the press release might read. “Your children and grandchildren can look forward to higher taxes, a lower standard of living and minimal government support in their old age.”

Wonderful, another deficit terrorist spewing counterproductive rhetoric and irresponsible journalism.

First, there is no intergenerational transfer of debt in real terms. Whatever goods and services our children produce will be consumed by whoever happens to be alive at that time. And a nominal government deficit does not keep them from operating at less than full employment.

Second, government securities function as benefits for investors, not costs. One buys them voluntarily and, at the macro level, directly or indirectly, as an alternative to holding reserve balances at the Fed. This means they are purchased at prices where they are preferred to holding balances at the Fed. Nothing is ‘taken away’ by sales of treasury securities and total (non government)holdings of financial assets remain unchanged.

Third, taxes function to reduce aggregate demand. Taxes need be raised in the future when aggregate demand is deemed too high, and not the deficit per se. That is a scenario of low unemployment and high consumption relative to available resources. Not ‘a lower standard of living’ or ‘minimal government support in their old age.’

Maybe the public would balk. And maybe some member of Congress would be bold enough to sponsor a measure to call off the still-uncommitted expenditures.

And thereby contribute to even lower output and employment.

After all, the economy appears to be recovering without fiscal stimulus.

??? The relative improvement has come only after the (non TARP) deficit got over 6% of GDP
And it has barely slowed the collapse.

The 9.4% unemployment is clear evidence aggregate demand is grossly deficient.

The rate of decline in real gross domestic product has slowed from an average 6 percent in the fourth quarter of last year and first quarter of 2009. Real GDP is expected to fall 1.9 percent in the current quarter, according to the median forecast of 61 economists in a Bloomberg News survey from early May. Less negative is the first step toward positive.

Yes, due to the ‘automatic stabilizers’ increasing the deficit, as above.

And only when GDP grows faster than productivity does the output gap fall.

And that’s before any real money gets spent. So far $36.7 billion has been distributed via various government agencies, according to Recovery.gov, the Web site that tracks where your tax dollars are going. That’s 7.4 percent of the $499 billion of outlays ($288 billion of the $787 billion is “tax relief”) and 29 percent of the funds that have been committed to a purpose or a project.

Patient, Heal Thyself

Tax relief comes in the form of larger monthly paychecks for workers and tax credits — for investment in renewable sources of energy, for first-time home buyers — that are encouraging activity now even though the benefit is in the future.

Still, it’s a trickle, not a waterfall.

So if fiscal stimulus can’t take credit for the improvement in the economy, what can? The answer is a combination of monetary policy and self-healing (an economy’s natural tendency is to grow).

Wrong. It’s been all fiscal to this point. Yes, its healed itself, via the very ugly automatic fiscal stabilizers of falling revenue and rising transfer payments with rising unemployment. This could have been avoided with proactive fiscal measures last July.
The Federal Reserve has thrown the kitchen sink at the economy, using traditional and non-traditional means to provide liquidity and credit when the banking system wasn’t up to the task.

Lower rates have drained aggregate demand as savers lost a lot more income than borrowers gained. The Fed’s portfolio alone has removed over $50 billion of annual interest income from savers and investors.

Fed’s CPR

Even before the Fed lowered the overnight interbank lending rate to 0 to 0.25 percent in December,

Savers have seen rates fall by about 5%, reducing aggregate demand, while most borrowers have seen little, if any, drop in rates as bank net interest margins widened to over 4%. And this additional bank income has a marginal propensity to consume of near 0.

the central bank was already ministering to markets and institutions outside its normal discount window customers, otherwise known as depository institutions. It was supporting the commercial paper market; had committed to purchase mortgage-backed securities and agency debt; had agreed to finance investor purchases of asset-backed securities; and had leant support to specific institutions, taking on some of Bear Stearns’s toxic, I mean, legacy, assets in March 2008 and bailing out American International Group in September.

Yes, and all of this has served to lower the term structure of rates and reduce saver’s incomes.

That’s the beauty of monetary policy. It can be implemented instantaneously. The Fed’s challenge is to be as quick on the return trip.

And, as per Bernanke’s 2004 paper, said rate cuts reduce aggregate demand via the ‘fiscal channel’ which means it reduces interest paid by government which needs to be offset by easier fiscal policy to not be a drag on output and employment.

The problem with fiscal stimulus, aside from the fact that it’s a misnomer, is that it arrives too late.

And further delayed by articles like.

Also, a payroll tax cut is instant, as would be per capita revenue sharing checks to the states.

At least that was the standard criticism prior to the enactment of the $787 billion American Reinvestment and Recovery Act of 2009 in February. The government’s tax and spending policies require the approval of a majority of the 100 senators and 435 members of the House of Representatives. And as we know, these 535 individuals sometimes confuse the people’s business with their own: getting re-elected.

True, which includes dealing with public opinion that is further jaded by unintentionally subversive articles like this one.

Preferred Stimuli

This time around, a new president with solid majorities in both Houses of Congress was able to saddle future generations with trillions of dollars of debt less than a month after he took office. The Congressional Budget Office projects the debt- to-GDP ratio rising to 70 percent in 2011, the highest since the early 1950s, when the U.S. was winding down the war effort.

You are including purchases of financial assets which is highly misleading and shows a further lack of understanding of public accounting.

If you believe, as I do, that monetary policy is the more potent of the stimuli, that fiscal “stimulus” just transfers spending from tomorrow to today and from the private sector to the government, with no net long-term gain, then maybe it’s time to stand up for the next generation.

And stand against the accounting identities.

Government deficits add directly non government savings of financial assets. To the penny.

Changes in interest rates only shift incomes between savers and investors.

And all the econometric evidence shows ‘monetary policy’ does little or nothing while fiscal policy is directly traced to changes in GDP.

Besides, where is it written that the ill effects of years of over-consumption and under-saving have to be repaired in a year? Instant gratification means future deprivation.

Over consumption? Did we consume more than we produced? No, investment remained positive during the growth years, which were years of high investment as well. That is not over consumption.

Now, with the recession and consumer pull back, is when investment is falling and we can be said to be thereby over consuming.

Word Choice

Fed Chairman Ben Bernanke used part of his June 3 testimony to the House Budget Committee to warn of the consequences of unchecked spending, even in the face of recession and financial instability.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

Yes, sadly, he’s in that camp as well. As is the entire administration if you believe their current rhetoric.

If it takes a marketing gimmick — labeling fiscal stimulus a “legacy of debt” — to convey the message to the public and Congress, so be it.

How about taking the effort to get it right and trying to undo the damage you’ve done…

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

Opinions are her own, as selectively published by Bloomberg News.


[top]

Share

WestLB Was Close To Being Shut Down Over Weekend

Posted on by


[Skip to the end]

What seems to be happening is bank ‘funding needs’ are become funding needs of Germany itself.

While this adds to Germany’s funding pressures, this process can go on indefinitely unless/until germany cannot somehow fund itself.

Not long ago the finance ministers announced they had a contingency plan for that possibility but wouldn’t say what that plan was leaving open the possibility they were bluffing. The CDS markets could be the best leading indicators of real trouble. With the US ‘recovery’ hitting a ‘soft patch’ of very low and very flat gdp and unemployment rising with productivity gains, an export dependent Eurozone looks like it will continue to struggle.

It just dawned on me that the Bush recovery got help from the fraudulent sub prime lending while it lasted, as the Clinton expansion got an assist from the pie in the sky valuations of the dot com boom, as the Reagan boom was assisted by the fraudulent S and L lending while that lasted. Without that kind of supplemental dose of aggregate demand, the automatic stabilizers alone while braking the decline probably do not produce all that robust of a recovery.

And if we follow the lead of Japan and tighten fiscal with every green shoot we wind up with the same results.

DJ WestLB Was Close To Being Shut Down Over Weekend

June 8 (Dow Jones) — German state-controlled bank WestLB AG was
close to being shut down over the weekend, people familiar with the
situation told Dow Jones Newswires Monday.
Bundesbank President Axel Weber and President of Germany’s BaFin
financial regulator Jochen Sanio threatened to close down the state bank
at crisis talks held over the weekend, the people familiar with the
talks said. It was only after this threat that savings banks agreed to
raise the guarantee framework for the debt-laden bank, the people said.

Late Sunday, WestLB owners said they raised their guarantee
framework for the bank by another EUR4 billion. The people familiar with
the situation said the savings bank agreed to extend the guarantee
umbrella after it was ensured that a solution wouldn’t hamper the spin
off of toxic assets into a so-called “bad”
German bank.

Regional banking associations WLSGV and RSGV together hold more than
50% of the shares, while the state of North Rhine-Westphalia has a 17.5%
stake and NRW.BANK holds 31.1%. NRW.BANK’s owners are the state of North
Rhine-Westphalia with 64.7% and WLSGV and RSGV with 17.6% each.


[top]

Share

PIMCO’S Gross proposes tax increase

Posted on by


[Skip to the end]

Raise taxes with unemployment rising due to a shortage in aggregate demand?

Just in case you thought the great marketer understood the monetary system:

Pimco’s Gross: Maybe Obama Should RAISE Taxes

By: JeeYeon Park

June 3 (CNBC) — Inflation is likely three to five years down the road, and investors should stay relatively close to the front end of the yield curve where the bond prices are protected by the Fed position of low Fed funds and interest rates, said Bill Gross, co-CIO and founder of Pimco.

“Further out on the curve, anticipate deterioration in inflation, a deterioration possibility in terms of the dollar, which will produce negative returns for those long-dated securities,” Gross told CNBC.

Gross said the recovery is being driven by a $2 trillion annualized deficit. To take its place in the economy would require at least $1 trillion increase in consumption and investment, which would be quite challenging as baby boomers and consumers become more thrifty.

He also said the Obama administration should cut back on inefficient defense programs — and consider raising taxes.


[top]

Share

Bernanke/ISM

Posted on by


[Skip to the end]


Karim writes:

Doesn’t break a lot of new ground. Forecasts appears consistent with prior statements and still casts financial markets in a fragile light despite recent run-up in equities. Makes no mention of upping asset purchases and issues longer-term fiscal warning:

*The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

Agreed. And unemployment continues to increase until GDP growth outpaces productivity gains.

*Recent data also suggest that the pace of economic contraction may be slowing.

*Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

*We continue to expect overall economic activity to bottom out, and then to turn up later this year.

Agreed. Deficit spending is not large enough to support aggregate demand and savings desires at levels that equate to modest GDP growth

*Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further.

Agreed. And weak overseas economies both limit export growth and bode for increased imports.

And higher crude and product prices raise nominal imports and dampen us domestic demand.

Also, state and local govt are also just now engaging in cutbacks and tax increases.

*Financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Yes, this allows lower taxes and/or higher government spending to support aggregate demand. Unfortunately, the noises from the administration are moving in the other direction, with President Obama’s latest statement that the US has ‘run out of money.’

*Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

I do not agree. In my book fiscal responsibility means supporting demand at desired levels of output and employment.

Financial sustainability is not an issue with non convertible currency and floating exchange rate policy, as it was when on the pre 1934 gold standard..


Non-Mfg ISM up from 43.7 to 44 but details weaker.

  • New orders down from 47 to 44.4
  • Backlogs down 44 to 40
  • Export and import orders both down


This indicates the slowing in the rate of decline is slowing, supporting the forecasts of nominal GDP hovering near 0 and unemployment continuing to rise.

  • Employment up from 37 to 39
  • Prices paid up from 40 to 46.9


There could be a rethinking of the output gap and an upward adjustment of the ‘neutral rate of unemployment if CPI continues to rise.


[top]

Share