Category Archives: Financial Times

Consumer credit up, Friday update

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It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

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MMT history and overview

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Excellent post from Johnsville:

Modern Monetary Theory (MMT) in a Nutshell

A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet. New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.

MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.

However, Chartalism and Functional finance did not directly spawn this new mutant monetary theory. Rather, Modern Monetary Theory had a hot, steamy, Rummy induced, immaculate conception as its creator, Warren Mosler, has stated:

The origin of MMT is ‘Soft Currency Economics‘ [1993] at www.moslereconomics.com which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago, who sent me to Art Laffer, who assigned Mark McNary to work with me to write it. The story is in ‘The 7 Deadly Innocent Frauds of Economic Policy’ [pg 98].

I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.

The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it.

The name Modern Monetary Theory was reportedly coined (pun unintended) by Australian economist Bill Mitchell. Mitchell has an MMT blog that gives tough weekly tests in order to make sure that the faithful are paying attention and learning their MMT ABC’s. MMT is not easy to fully comprehend unless you spend some time studying it.

MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government. The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money. MMT’s full potential and its massive monetary fire power were not locked and loaded until President Nixon took the U.S. off the gold standard on August 15, 1971.

There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.

The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government. This point is graphically described by Warren Mosler as follows:

what happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.

Yes, it gets thrown it away [sic]. Destroyed!

— The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler

 Gadzooks!

The delinking of tax revenue from the budget is a critical element that allows MMT to go off the “balanced budget” reservation. In a fiat money world, a sovereign government’s budget should never be confused with a household budget, or a state budget. Households and U.S. states must live within their means and their budgets must ultimately be balanced. A sovereign government with its own fiat money can never go broke. There is no solvency risk and the United States, for example, will never run out of money. The monopoly power to print money makes all the difference, as long as it is used wisely.

MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings. This is a straightforward accounting identity in MMT, not a theory. Warren Mosler put it this way:

So here’s how it really works, and it could not be simpler: Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us – businesses and households, residents and non-residents – what is called the “non-government” sector. In other words, government deficits equal increased “monetary savings” for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny).

— The 7 Deadly Frauds of Economic Policy, page 42, Warren Mosler

Therefore, Treasury bonds, bills and notes are not needed to support fiscal policy (pay for government). The U.S. government bond market is just a relic of the pre-1971 gold standard days. Treasury securities are primarily used by the Fed to regulate interest rates. Mosler simply calls U.S. Treasury securities a “savings account” at the Federal Reserve.

In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.

Under MMT the real problems for a government to address are ensuring growth, reducing unemployment, and controlling inflation. Bill Mitchell noted that, “Full employment and price stability is at the heart of MMT.” A Job Guarantee (JG) model, which is central to MMT, is a key policy tool to help control both inflation and unemployment. Therefore, given the right level of government spending and taxes, combined with a Job Guarantee program; MMTers state emphatically that a nation can achieve full employment along with price stability.

 

As some background to understand Modern Monetary Theory it is helpful to know a little about its predecessors: Chartalism and Functional Finance.

German economist and statistician Georg Friedrich Knapp published The State Theory of Money in 1905. It was translated into English in 1924. He proposed that we think of money as tokens of the state, and wrote:

Money is a creature of law. A theory of money must therefore deal with legal history… Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective — “Chartal.” Our means of payment have this token, or Chartal form. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.

Alfred Mitchell-Innes only published two articles in the The Banking Law Journal. However, MMT economist L. Randall Wray called them the “best pair of articles on the nature of money written in the twentieth century”. The first, What is Money?, was published in May 1913, and the follow-up, Credit Theory of Money, in December 1914.  Mitchell-Innes was published eight years after Knapp’s book, but there is no indication that he was familiar with the German’s work. In the 1913 article Mitchell-Innes wrote:

One of the popular fallacies in connection with commerce is that in modern days a money-saving device has been introduced called credit and that, before this device was known, all, purchases were paid for in cash, in other words in coins. A careful investigation shows that the precise reverse is true…

Credit is the purchasing power so often mentioned in economic works as being one of the principal attributes of money, and, as I shall try to show, credit and credit alone is money. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce…

There is no question but that credit is far older than cash.

L. Randall Wray, in his 1998 book, Understanding Modern Money,was the first to link the state money approach of Knapp with the credit money approach of Mitchell-Innes. Modern money is a state token that represents a debt or IOU. The book is an introduction to MMT.

L. Randal Wray is a Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. These institutions are hotbeds of MMT research. Wray also writes for the MMT blog, New Economic Perspectives.

Finally, to finish the historical tour, here is how Abba Lerner’s Functional finance is described by Professor Wray:

Functional Finance rejects completely the traditional doctrines of ‘sound finance’ and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high.

Given its mixed history it is not surprising that MMT has been given different labels. Some economists refer to MMT as a “post-Keynesian” economic theory. L. Randall Wray has used the term “neo-Chartalist”. Warren Mosler stated, “MMT might be more accurately called pre Keynesian.” Given that Georg Knapp’s work was cited by John Maynard Keynes, the use of “pre-Keynesian” does seem more appropriate than “post-Keynesian”.

But under any category, MMT has been considered fringe or heterodox economics by most mainstream economists. It therefore has been relegated to the equivalent of the economic minor leagues, somewhere below triple-A level. However, that perception is changing.

MMT is slowly seeping into the public policy debate. These days Warren Mosler and others with an MMT viewpoint are frequently being interviewed on business news channels.  MMT articles are being published. Recently, Steve Liesman, CNBC’s senior economics reporter, used a Warren Mosler quote to make a point. Liesman said: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’.”

MMT is not easy to for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is:

it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

Emotions run hot in the current economic environment, especially on the internet. In some cases the energetic online promoting of MMT has turned into passive aggressive hectoring, hazing, name calling, badgering, and belittling. So be warned, if you write some economic analysis online that disagrees with MMT doctrine you might find yourself attacked and stung by a swarm of MMTers. If you are an economic “expert” and you do not understand monetary basics you may also get mounted on an MMT wall of shame.

A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.

Another school of economics feeling the heat from MMT are the Austrians. Austrian economist Robert Murphy recently wrote an article critical of MMT, calling it an “Upside-Down World“. MMTers lined up to disassemble and refute Murphy’s essay. Cullen Roach at the Pragmatic Capitalist blog shot back this broadside::

we now live in a purely fiat world and not the gold standard model in which Mises and many of the great Austrian economists generated their finest work. Therein lies the weakness of the Austrian model. It is based on a monetary system that is no longer applicable to modern fiat monetary systems such as the one that the USA exists in.

Does MMT really offer a path to prosperty? Or did the ancient Roman, Marcus Cicero (106 BC – 43 BC), have it right when he said: “Endless money forms the sinews of war.”? The debate will only intensify. If you value those green, money-thing, government IOU tokens in your wallet then it pays to learn what all the commotion is about.

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Because of MMT’s growing popularity it might be helpful to present a quick start guide so beginners can get up to speed and understand some of its fundamental elements. As a starting point here are some basics of Modern Monetary Theory (MMT) compared to some other principles of money and economics that might be considered conventional wisdom or old school wisdom.

1. What is money?

Modern Monetary Theory: Money is a debt or IOU of the state

[The] history of money makes several important points. First, the monetary system did not start with some commodities used as media of exchange, evolving progressively toward precious metals, coins, paper money, and finally credits on books and computers. Credit came first and coins, late comers in the list of monetary instruments, are never pure assets but are always debt instruments — IOUs that happen to be stamped on metal…

Monetary instruments are never commodities, rather they are always debts, IOUs, denominated in the socially recognized unit of account. Some of these monetary instruments circulate as “money things” among third parties, but even “money things” are always debts — whether they happen to take a physical form such as a gold coin or green paper note.

— Money: An Alternate Story by Eric Tymoigne and L. Randall Wray

“money is a creature of law”, and, because the state is “guardian of the law”, money is a creature of the state. As Keynes stated:

“the Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account… (Keynes 1930)…

— Chartalism, Stage of Banking, and Liquidity Preference by Eric Tymoigne

John Maynard Keynes in his 1930, Treatise on Money, also stated: “Today all civilized money is, beyond the possibility of dispute, chartalist.”

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Old School Wisdom:

Money is essentially a device for carrying on business transactions, a mere satellite of commodities, a servant of the processes in the world of goods.

— Joseph Schumpeter, Schumpeter on money, banking and finance… by A. Festre and E. Nasica

Conventional Wisdom:

Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.

— Wikipedia

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2. Why is money needed?

MMT: Money is needed in order to pay taxes

Money is created by government spending (or by bank loans, which create deposits) Taxes serve to make us want that money – we need it in order to pay taxes.

— The 7 Deadly Frauds of Economic Policy, Warren Mosler

The inordinate focus of [other] economists on coins (and especially on government-issued coins), market exchange and precious metals, then appears to be misplaced. The key is debt, and specifically, the ability of the state to impose a tax debt on its subjects; once it has done this, it can choose the form in which subjects can ‘pay’ the tax. While governments could in theory require payment in the form of all the goods and services it requires, this would be quite cumbersome. Thus it becomes instead a debtor to obtain what it requires, and issues a token (hazelwood tally or coin) to indicated the amount of its indebtedness; it then accepts its own token in payment to retire tax liabilities. Certainly its tokens can also be used as a medium of exchange (and means of debt settlement among private individuals), but this derives from its ability to impose taxes and its willingness to accept its tokens, and indeed is necessitated by imposition of the tax (if on has a tax liability but is not a creditor of the Crown, one must offer things for sale to obtain the Crown’s tokens).

— Money: An Alternate Story by Eric Tymoigne and L. Randall Wray

Money, in [the Chartalist] view, derives from obligations (fines, fees, tribute, taxes) imposed by authority; this authority then “spends” by issuing physical representations of its own debts (tallies, notes) demanded by those who are obligated to pay “taxes” to the authority. Once one is indebted to the crown, one must obtain the means of payment accepted by the crown. One can go directly to the crown, offering goods or services to obtain the crown’s tallies—or one can turn to others who have obtained the crown’s tallies, by engaging in “market activity” or by becoming indebted to them. Indeed, “market activity” follows (and follows from) imposition of obligations to pay fees, fines, and taxes in money form.

— A Chartalist Critique of John Locke’s Theory of Property, Accumulation and Money… by Bell, Henry, and Wray

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Conventional Wisdom:

Money is needed as a medium of exchange, a unit of account, and a store of value.

Old School Wisdom:

Money is needed because it could “excite the industry of mankind.”

— Thomas Hume, Hume, Money and Civilization… by C. George Caffettzis

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Old School Tony Montoya, aka Scarface, Wisdom: money is needed for doing business, settling debts, and emergency situations…

Hector the Toad: So, you got the money?

Tony Montana: Yep. You got the stuff?

Hector the Toad: Sure I have the stuff. I don’t have it with me here right now. I have it close by.

Tony Montana: Oh… well I don’t have the money either. I have it close by too.

Hector the Toad: Where? Down in your car?

Tony Montana: [lying] Uh… no. Not in the car.

Hector the Toad: No?

Tony Montana: What about you? Where do you keep your stuff?

Hector the Toad: Not far.

Tony Montana: I ain’t getting the money unless I see the stuff first.

Hector the Toad: No, no. First the money, then the stuff.

Tony Montana: [after a long tense pause] Okay. You want me to come in, and we start over again?

Hector the Toad: [changing the subject] Where are you from, Tony?

Tony Montana: [getting angry and supicious] What the f**k difference does that make on where I’m from?

Hector the Toad: Cona, Tony. I’m just asking just so I know who I’m doing business with.

Tony Montana: Well, you can know about me when you stop f**king around and start doing business with me, Hector!

[…]

Hector the Toad: You want to give me the cash, or do I kill your brother first, before I kill you?

Tony Montana: Why don’t you try sticking your head up your ass? See if it fits.

[…]

Frank Lopez: [pleading] Please Tony, don’t kill me. Please, give me one more chance. I give you $10 million. $10 million! All of it, you can have the whole $10 million. I give you $10 million. I give you all $10 million just to let me go. Come on, Tony, $10 million. It’s in a vault in Spain, we get on a plane and it’s all yours. That’s $10 million just to spare me.

— dialog from Scarface, the movie

Note: The comment about the $10 million stashed in a Spanish vault highlights a small chink in MMT’s armor. If the taxing power of the sovereign state is sabotaged, or there is widespread tax evasion, then MMT falls apart.

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3. Where does money come from?

MMT: The government just credits accounts

Modern money comes from “nowhere.”

— Bill Mitchell

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Conventional Wisdom: Money comes from the government printing currency and making it legal tender.

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4. Government Spending: any limits?

MMT:  government spending is not constrained.

a sovereign government can always spend what it wants. The Japanese government, with the highest debt ratio by far (190 per cent or so) has exactly the same capacity to spend as the Australian government which has a public debt ratio around 18 per cent (last time I looked). Both have an unlimited financial capacity to spend.

That is not the same thing as saying they should spend in an unlimited fashion. Clearly they should run deficits sufficient to close the non-government spending gap. That should be the only fiscal rule they obey.

— Bill Mitchell

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Conventional Wisdom: government spending should be constrained

One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order.

— House Majority Leader Eric Cantor (R-VA), June 23th, 2010

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5. What is Quantitative Easing?

MMT: It is an asset swap. It is not “printing money” and it is not a very good anti-recession strategy.

Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts… So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell…

Invoking the “evil-sounding” printing money terminology to describe this practice is thus very misleading – and probably deliberately so. All transactions between the Government sector (Treasury and Central Bank) and the non-government sector involve the creation and destruction of net financial assets denominated in the currency of issue. Typically, when the Government buys something from the Non-government sector they just credit a bank account somewhere – that is, numbers denoting the size of the transaction appear electronically in the banking system.

It is inappropriate to call this process – “printing money”. Commentators who use this nomenclature do so because they know it sounds bad! The orthodox (neo-liberal) economics approach uses the “printing money” term as equivalent to “inflationary expansion”. If they understood how the modern monetary system actually worked they would never be so crass…

So I don’t think quantitative easing is a sensible anti-recession strategy. The fact that governments are using it now just reflects the neo-liberal bias towards monetary policy over fiscal policy…

— Bill Mitchell

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Conventional Wisdom:  Quantitative Easing is “money printing”

James Grant, editor of Grant’s Interest Rate Observer, says Quantitative Easing Is Just Money Printing

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6. What is the view on personal debt?

MMT: personal debt is not dangerous

Americans today have too much personal debt. False. Private debt adds money to our economy. Though bankruptcies have increased lately, that is due more to the liberalization of bankruptcy laws, rather than to economics. Despite rising debt and bankruptcies, our economy has continued to grow. The evidence is that high private debt has had no negative effect on our economy as a whole, though it can be a problem for any individual.

— Free Money: Plan for Prosperity ©2005 (pg 154), by Rodger Malcolm Mitchell

Note: Rodger Mitchell is an MMT extremist. He calls his brand of MMT, “Monetary Sovereignty“. Not all of his views may be in sync with mainstream MMT doctrine.

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Conventional Wisdom: too much debt is dangerous

The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment.

— Paul Krugman, NY Times

Old School Wisdom: debt is always dangerous

“Neither a borrower, nor a lender be”

— Polonius speaking in Hamlet, by William Shakespeare

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7. What is the view on foreign trade?

MMT: Exporters please just take some more fiat money and everyone will be fat and happy!

Think of all those cars Japan sold to us for under $2,000 years ago. They’ve been holding those dollars in their savings accounts at the Fed (they own U.S. Treasury securities), and if they now would want to spend those dollars, they would probably have to pay in excess of $20,000 per car to buy cars from us. What can they do about the higher prices? Call the manager and complain? They’ve traded millions of perfectly good cars to us in exchange for credit balances on the Fed’s books that can buy only what we allow them to buy…

We are not dependent on China to buy our securities or in any way fund our spending. Here’s what’s really going on: Domestic credit creation is funding foreign savings…

Assume you live in the U.S. and decide to buy a car made in China. You go to a U.S. bank, get accepted for a loan and spend the funds on the car. You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are “happy.” You would rather have the car than the funds, or you would not have bought it, so you are happy. The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy. The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.

There is no “imbalance.” Everyone is sitting fat and happy…

— Warren Mosler, The 7 Deadly Frauds of Economic Policy

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Old School Wisdom: Trade arrangements will break down if a currency is debased

“Sorry paleface, Chief say your wampum is no good. We want steel knives and fire-water for our beaver pelts.” — American Indian reaction after Dutch colonists debase wampum in the 1600’s

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“Sometimes nothing is a real cool hand”

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Perhaps the chilling reason no bill is even beginning to emerge from Congress is raising its ugly head. Could it be that members of Congress and the President, deep down, want to see the US government go cold turkey to a balanced budget? Like taking away the drugs from an addict, might they all believe it’s for our own good and our children’s future to take away the government’s credit card now, before it’s too late?

We know they all believe that because of the deficit we are on the verge of a Greek like financial crisis. We know they all believe we need deficit reduction to prevent catastrophe. We know they all believe the government has been borrowing from China to spend like a drunken sailor, leaving the debt to our grandchildren. We know they all believe we either make the tough choices now, or soon face the undeniable consequences. And we know they all believe that even the most aggressive packages under consideration won’t be sufficient to solve the problem.

So what’s a patriotic politician to do? What solves the problem and, while there will be near term pain, minimizes the total long term pain? Yes, running out the clock and doing nothing, which is exactly what’s happening. And all the while trying to make sure your opposition gets the blame for the initial pain, while positioning yourself to take credit for the good that will surely follow. Is that not what’s happening?

They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere. With the automatic fiscal stabilizers disabled (Treasury spending can’t increase in a slowdown, and in fact is forced to decrease as revenues fall) the downward acceleration of the economy from the sudden cut in government spending will be far more severe than anyone has begun to imagine. The lack of general concern for what might happen is directly evidenced by the current market complacency, allowing those properly alarmed to get their hedges in place at very attractive prices.

…

What happens in the do nothing scenario?
Stocks go down globally, the US dollar goes up, commodities go down, US Treasury rates fall, credit sensitive interest rates rise, sales and GDP fall, unemployment rises, all in the context of a general global deflationary spiral.

So continue to hope for the best while being prepared for the worst.

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Debt ceiling dynamics: President Obama now irrelevant

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It now seems to me the President will sign anything Congress sends to him for final approval.

So the question is whether the Senate and House can agree to anything they can both pass and send to the President.

And there is no point in further discussion with the President.

It’s all up to the Congress and it’s not looking promising.

Especially when deep down most probably think:

“It’s a good thing for the govt, like a drug addict, to get it’s credit card taken away and go cold turkey and be forced to limit spending to current tax revenue.

Yes, bad things might happen- stocks might go down, interest rates and unemployment might go up, and tens of thousands of businesses fail as GDP falls.

But with govt out of the way, the pain will pass and the private sector then flourish as never before.
Best to take that medicine now, suffer that pain now, and get by it to the promised land.

Not getting the debt under control will mean far worse consequences for all of us and especially for our posterity.”

So it’s the entire mindset that’s working against getting any bill to the President’s desk.

The last time I felt this was was during the Cuban Missile crisis.
Fortunately, back then, Russia blinked.

Obama

July 22 (Bloomberg) — House of Representatives Speaker John Boehner broke off talks with President Barack Obama on Friday and said he will begin negotiations with Senate leaders aimed at meeting an Aug. 2 deadline to avert an unprecedented U.S. debt default.

In a dramatic turn of events with the deadline to raise the U.S. debt ceiling just 11 days away, a stern-faced Obama expressed frustration at the Republican leader’s move, saying it was “hard to understand why Speaker Boehner would walk away from this kind of deal.”

In a letter to congressional colleagues, Boehner, the top U.S. Republican, said talks with the Democratic president had become futile, citing Obama’s demand to raise taxes.

Putting the onus on Obama, Boehner said: “The president is emphatic that taxes have to be raised. As a former small businessman, I know tax increases destroy jobs.

In a press conference, Boehner said the White House “moved the goal posts” at the last minute. He said, “Dealing with the White House is like dealing with a bowl of Jell-O.”

“We put plan after plan on the table,” Boehner said, adding that the president never brought a plan to the table.

Still, he said he’ll attend the Saturday morning meeting President Obama called of all the congressional leaders, adding that he doesn’t believe the relationship with the White House is permanently damaged.

“I’m confident that Congress can act next week,” he told reporters.

Lawmakers will need to have a deal in place by early next week in order to make sure it can be passed by both houses by the Aug. 2 deadline.

President Obama held a press conference to announce the news. He said Boehner’s decision came after the president offered to cut discretionary spending by $1 trillion. He said he thought he was offering an “extraordinarily fair” deal.

The president said the talks broke down over tax revenue but that both sides had been only about $10 billion apart on spending cuts.

Obama told reporters “there does not seem to be a capacity” for Republicans to agree to a debt limit deal.

Obama said he has summoned Boehner and other congressional leaders—Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi—to the White House for a meeting at 11 a.m. ET Saturday.

“We have run out of time and they are going to have to explain to me how it is that we are going to avoid default and ask them to do the tough thing but the right thing,” the president said.

Both the president and Rep. Boehner said they were confident that the U.S. wouldn’t default on its obligations.

“We have never defaulted on our debt and we’re not about to do it now,” Obama said.

Obama said he was confident the $14.3 trillion limit on U.S. borrowing would be raised by the Aug. 2 deadline.

Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters: “If not reversed within the next few days through crisis negotiations, this breakdown will be highly detrimental to the already-fragile health of both the US and global economies.”

Obama has faced increasingly vocal complaints from his own Democrats on a deal-in-the-making that could mean painful curbs in popular health and retirement programs but no immediate increase in taxes.

“I’ve never seen frustration higher,” Democratic Senator Dianne Feinstein said after a week of sometimes chaotic efforts to sort through conflicting options and stave off a potentially devastating default on the nation’s financial obligations.

Republicans and many Democrats are refusing to raise the debt limit unless it is accompanied by steep spending cuts to tackle rising budget deficits.

Attention now turns to the Senate, where negotiations are likely to resume on a convoluted plan put forth by Republican Senate leader Mitch McConnell that intended as a fallback option if all else failed.

An unprecedented national default could push the United States back into recession and trigger global financial chaos.

Treasury Secretary Timothy Geithner met Friday with Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley to talk about the implications for the U.S. economy if Congress failed to raise the debt.

They remained confident Congress would act in time, they said in a joint statement.

The hope in Washington is that a wide-ranging, 10-year package of deficit cuts being worked out will be enough to save America’s triple-A credit rating.

Rating agencies have threatened a U.S. bond downgrade without a comprehensive deficit-cutting deal.

Seeking to ratchet up pressure on lawmakers, Obama said the consequences if they failed to act on the debt limit would include higher interest rates and greater reluctance by businesses to hire and invest.

“If we don’t solve it, every American will suffer,” he said.

Casting himself as a centrist in the bitter debate, Obama is trying to appeal to moderate independent voters he needs to win re-election in 2012.

Still the two sides remain far apart on the main issues.

Obama and Boehner took discussions on a so-called “grand bargain” behind closed doors this week.

Talks have whipsawed and stalled over raising tax revenue, which Democrats insist must be a part of any spending cut deal while Republicans reject tax increases.

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Comments on Summers latest

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The deficit hawks have ripped the headline deficit doves to shreds.
The problem is the deficit doves, as previously discussed.
Again, here’s why:

How to avoid our own lost decade

By Lawrence Summers

June 12 (FT) — Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now halfway to a lost economic decade. In the past five years, our economy’s growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 per cent to 58.4 per cent, reducing the number of those in jobs by more than 10m. Reports suggest growth is slowing.

True!

Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent once unimaginable, new college graduates are moving back in with their parents. Strapped school districts across the country are cutting out advanced courses in maths and science. Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.

True!

You cannot prescribe for a malady unless you diagnose it accurately and understand its causes. That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident, as shown by three points: the propensity of workers to quit jobs and the level of job openings are at near-record low; rises in non-employment have taken place among all demographic groups; rising rates of profit and falling rates of wage growth suggest employers, not workers, have the power in almost every market.

True!

A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire.

A ‘normal’ economy is one with sufficient demand for full employment, so there’s no particular need to promote even more demand.

When demand is constraining an economy, there is little to be gained from increasing potential supply.

True. The mainstream theory is that increased supply will lower prices so the same incomes and nominal spending will buy the additional output. But it doesn’t work because the lower prices (in theory) work to lower incomes to where the extra supply doesn’t get sold and therefore doesn’t get produced. And it’s all because the currency is a (govt) monopoly, and a shortage in aggregate demand can only be overcome by either a govt fiscal adjustment and/or a drop in non govt savings desires, generally via increased debt. And in a weak economy with weak incomes the non govt sectors don’t tend to have the ability or willingness to increase their debt.

In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained.

True!

Traditionally, the US economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6 per cent or more – that seems inconceivable today.

True!

Why?

Inflation dynamics defined the traditional postwar US business cycle. Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. After inflation slowed, rapid recovery propelled by dramatic reductions in interest rates and a backlog of deferred investment, was almost inevitable.

Not so true, but not worth discussion at this point.

Our current situation is very different. With more prudent monetary policies, expansions are no longer cut short by rising inflation and the Fed hitting the brakes. All three expansions since Paul Volcker as Fed chairman brought inflation back under control in the 1980s have run long. They end after a period of overconfidence drives the prices of capital assets too high and the apparent increases in wealth give rise to excessive borrowing, lending and spending.

Not so true, but again, I’ll leave that discussion for another day.

After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence – vacant houses, malls without tenants and factories without customers. At the same time consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors.

True!

Pressure on private spending is enhanced by structural changes. Take the publishing industry. As local bookstores have given way to megastores, megastores have given way to internet retailers, and internet retailers have given way to e-books, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.

Probably has some effect.

What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

Partially true. It’s all about spending and sales. We lost 8 million jobs almost all at once a few years back because sales collapsed. Businesses hire to service sales. So until we get sales high enough to keep everyone employed who’s willing and able to work we will have over capacity, an output gap, and unemployment.

The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth.

NOT TRUE!!! And here’s where the headline deficit doves lose the battles and now the war. There is no threat to the credit worthiness of the US Government. We can not become the next Greece- there simply is no such thing for the issuer of its currency. Credit worthiness applies to currency users, not currency issuers.

Discussions about medium-term austerity need to be coupled with a focus on near-term growth.

There he goes again. This is the open door the deficit hawks have used to win the day, with both sides now agreeing on the need for long term deficit reduction. And in that context, the deficit dove position that we need more deficit spending first, and then deficit reduction later comes across as a ploy to never cut the deficit, and allow the ‘problem’ to compound until it buries us, etc.

Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip.

They certainly helped, and ending work for pay hurt, and even with whatever support that provided, we are still facing the prospect of a double dip.

Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.

True, except the extension to employers works to lower prices, as it lowers business costs. This is a good thing, but it adds to aggregate demand only very indirectly. To get it right, I’d suspend all FICA taxes to increase take home pay of those working for a living which will help sales and employment, and to cut business costs, which, in competitive markets, works to lower prices.

Raising the share of payroll from 2 per cent to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.

True, as far as it goes. Too bad he reinforces the overhanging fears of deficit spending per se. You’d think he’d realize everyone would like to cut taxes, and that it’s the fears of deficit spending that are in the way…

At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement,

True!

and take advantage of a moment when 10-year interest rates are below 3 per cent

Bad statement!!! This implies that if rates were higher it would make a difference with regards to our infrastructure needs during times of a large output gap, as it perpetuates the myths about the govt somehow being subjected to market forces with regard to its ability to deficit spend. Again, this mainstream deficit dove position only serves to support the deficit hawk fear mongering that’s won the day.

and construction unemployment approaches 20 per cent to expand infrastructure investment.

It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand.

True! But, as above, he’s already defeated himself by reinforcing the fears of deficits and borrowing.

The underlying rate of inflation is still trending downwards and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not overconfidence is the problem, and needs to be the focus of policy.

Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work in promoting export growth by modernising export controls, promoting US products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy to promote exports of tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should also be rigorously implemented.

Too bad he’s turned partisan here, as I’m sure he’s aware of how exports are real costs, and imports real benefits, and how real terms of trade work to alter standards of living. So much for intellectual honesty…

Perhaps the US’ most fundamental strength is its resilience. We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognising economic reality.

First we need to recognize financial reality, and unfortunately he and the other headline deficit doves continue to provide the support for the deficit myths and hand it all over to the deficit hawks. Note that, as per the President, everything must be on the table, including Social Security and Medicare. To repeat, fearing becoming the next Greece is working to turn ourselves into the next Japan.

The writer is Charles W. Eliot University Professor at Harvard and former US Treasury Secretary. He is an FT contributing editor

(Feel free to distribute, repost, etc.)

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U.K. Daily – CIPS May Manufacturing Index Falls to 20-Month Low

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My Q2 guestimate for the tipping point may not have been too far off

U.K. CIPS May Manufacturing Index Falls to 20-Month Low (Bloomberg)

A U.K. manufacturing index, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, declined to 52.1 in May from a downwardly revised 54.4 in April. “Domestic market weakness was the main drag on order books and output,” Rob Dobson, senior economist at Markit, said in the statement. “This was exacerbated by the additional bank holidays in late April, which fell during the early part of the latest survey period, and ongoing supply-chain disruption following the Japanese earthquake.” Producers of consumers goods and small-scale manufacturers were hit hardest last month as output and new orders fell for the first time since the middle of 2009, CIPS said.

U.K. April Mortgage Approvals Fall to Lowest in Four Months (Bloomberg)

Lenders granted 45,166 loans to buy homes, compared with a revised 47,145 the previous month, the Bank of England said. The April figure is the lowest since December. The Bank of England figures show net mortgage lending rose 739 million pounds ($1.22 billion) in April and gross lending amounted to 11.2 billion pounds. Consumer credit rose a net 504 million pounds in April. Credit-card lending increased 347 million pounds, the most since February 2010, while personal loans and overdrafts rose 157 million pounds. A measure of M4 money-supply growth that the central bank uses to assess the effectiveness of its asset purchases fell 2 percent in the three months through April on an annualized basis.

U.K. Inflation May Be Hurting Economic Growth, Sentance Says (Bloomberg)

Former Bank of England policy maker Andrew Sentance said U.K. inflation at more than twice the central bank’s 2 percent goal may be hurting economic expansion.
“The fact that inflation is high is not necessarily associated with strong growth,” he said in an interview with Sky News late yesterday, marking his final day as a member of the Monetary Policy Committee. “In some ways inflation is squeezing out the growth of the economy because it is squeezing people’s disposable incomes.”

Sentance, who will today be replaced by former Goldman Sachs Group Inc. economist Ben Broadbent, said interest rates need to start going up “gradually” now to curb consumer price growth and prevent “much sharper” rate increases in the future.

He also said the central bank’s view of inflation didn’t put enough weight on the influence of the international economy, commodity costs and the decline of the pound.

“I think we should revisit our thinking on the economy,” he said. “We went through a period where there seemed to be a very predictable relationship between growth and inflation. Now we’re in a much more complex situation.”

Sentance said it was difficult to judge how long the impact of the pound’s weakness on inflation would last, as it hadn’t been offset by the impact of the recession holding down prices and wages.

“The issue with the fall in the value of the pound is how big its effect will be and how long it will continue,” he said. “We’re an economy very open to international trade and the value of the pound affects the amount of competition on the markets, the way in which companies price in markets so I think we do have to take the value of the pound very seriously.”

U.K. Housing Transactions to Fall 5.2% This Year, CML Forecasts (Bloomberg)

U.K. housing transactions will probably fall 5.2 percent this year before rising in 2012 as the economy experiences a “weak and patchy recovery,” the Council of Mortgage Lenders said.

Transactions will fall to 840,000 this year from 886,000 in 2010, the London-based group said in a report on its website today. They will rise to 900,000 in 2012, matching the level in 2008. Gross mortgage advances will amount to 140 billion pounds this year and 150 billion pounds in 2012, which compares with
253 billion pounds in 2008.

The CML sees the Bank of England keeping its key interest rate at 0.5 percent for “most” of this year before starting a “modest” tightening cycle that will continue through 2012.

“The prospect of a gentler upward profile for interest rates significantly mitigates the adverse impact on household budgets of weak growth in incomes, and this will help borrowers keep up with their mortgage payments,” it said.

U.K. Consumer Spending Rebound Likely to Be Very Slow, FT Says (Bloomberg)

U.K. consumer spending is likely to recover more slowly than in any post-recession period since 1830, the Financial Times reported, citing its own analysis of forecasts from the Office for Budget Responsibility.

Households are forecast to spend 5.4 percent more in 2015 than they did before the 2008 financial crisis; at the equivalent stages of the 1980s and 1990s recessions, spending was 20 percent and 15 percent higher, respectively, the newspaper said.
In the 18 significant U.K. recessions that have occurred since records began in 1830, consumer spending rose 12 percent above its previous peak within seven years, the FT said, citing Bank of England figures.

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China- Growth of FDI slowing

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With its capital constraints FDI has been channel for speculative inflows to facilitate bets on yuan appreciation.

While month to month numbers are volatile, they’re worth keeping an eye on.

In the long run inflation weakens a currency.

Also, JPM yesterday suggested increased risk of what they called a hard landing

Growth of foreign direct investment in China slowing

May 18 (Global Times) – Foreign direct investment (FDI) in China rose to $8.46 billion in April, driven largely by investment in the property sector. The figure is 15.21 percent higher than the previous year but represents a slower rate of growth than seen in March, according to official data released Tuesday.

The slowdown of FDI growth as well as other economic indices this month showed that the economy is cooling down, economists warned Tuesday.
April’s figure was lower than the $12.52 billion invested in March and represented less than half of March’s year on year growth rate of 32.9 percent. The ministry did not elaborate on the reasons for the fall.

The property sector attracted about 24 percent of April’s investment flows, Ministry of Commerce spokesman Yao Jian said at a press briefing.
During the first four months of the year, FDI rose 26.03 percent over levels of the previous year to $38.80 billion, the data showed.

During this period, 10 Asian economies including Japan, Singapore and Hong Kong set up 6,487 new businesses, up 9.87 percent from the previous year, and invested $32.9 billion, up 31.23 percent from the previous year.

EU countries set up 562 new businesses in China, up 16.36 percent from the previous year, while investment from the EU rose 23.42 percent to reach $2.6 billion.
“Despite the financial crisis, European companies are still expanding and investing abroad, including in China. We encourage further market access in China to attract even more EU companies to invest there and indeed we also encourage Chinese companies to invest in Europe,” William Fingleton, a spokesman for the Delegation of the EU to China, told the Global Times in an email.

However, investment from the US dropped 28 percent during the first four months of this year to $1.03 billion in April.

FDI in China plunged after the financial crisis in 2008 but rebounded strongly last year to reach $105.7 billion.

“If the figures released in the first three months are regarded as volatile, April’s FDI figure as well as the month’s imports, manufacturing and other economic indices reported earlier showed a cooldown has firmly set into the economy,” Tian Yun, director of the research center of China Society of Macroeconomics, told the Global Times.

“The economy risks a further slowdown if the government’s monetary tightening policy continues and the country’s employment situation, which should always come before inflation issues, will remain worrisome,” Tian warned.

Inflation Outlook

Governor Zhou Xiaochuan said China’s central bank was focused on controlling prices, without mentioning threats to growth, an indication that he has been more concerned about inflation than any risk of a growth slowdown.

The central bank will “control the monetary conditions behind excessively rapid gains in prices,” Zhou said in comments dated April 18 and released yesterday in the central bank’s annual report. The comments tally with a monetary policy report released May 3 and were before data showing industrial output growth weakened last month.

Home prices rose in China’s 67 of 70 cities monitored by the government in April from last year, led by smaller cities that are defying efforts to control property prices nationwide. Housing prices increased at a faster pace in smaller cities and slowed in major ones, data posted on the statistics bureau’s website today showed.

Rising Coal Demand

Shenhua, the nation’s largest coal producer, rose 0.9 percent to 28.53 yuan. Yanzhou Coal Mining Co., the fourth biggest, advanced 0.9 percent to 32.99 yuan.

Demand for thermal and coking coal may increase between 8 percent and 10 percent this year as less rainfall curbs supplies of hydropower and boosts demand for coal-fired electricity, Luo Zeting, an analyst at Citic Securities, wrote in a report today.

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DJ Mexico Ctrl Bk Bought 100 Tons Of Gold In Feb, March -FT

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From a nation with a great tradition of condemning its people to life in the mines.

This modern version is to work their tails off for a pittance in the US for the further purpose of moving gold from one hole in the ground to another.

Not mention the real resources consumed in the actual process of mining.

*DJ Mexico Ctrl Bk Bought 100 Tons Of Gold In Feb, March -FT
*DJ Mexico Gold Buy Worth $4.6 Bln At Current Prices -FT
*DJ Mexico Gold Buy One Of Largest By A Ctrl Bk In Recent History -FT
*DJ CORRECT: Mexico Gold Buy Worth $4.6 Bln At Current Prices -FT

DJ Mexico Ctrl Bk Bought 100 Tons Of Gold In Feb, March -FT
05/04/11 06:09

DOW JONES NEWSWIRES
Mexico’s central bank bought nearly 100 tons of gold in February and March, a purchase worth about $4.6 billion at current prices and one of the largest such purchases of gold by a central bank in recent history, the Financial Times reported Wednesday on its website, citing data provided on the central bank’s website.

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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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BoJ Gov Shirakawa – Japan’s Fiscal Situation “Very Severe”

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Because they think they could be the next Greece they *are* Japan.

BOJ’s Shirakawa Says Japan’s Fiscal Situation Is ’Very Severe’

By Mayumi Otsuma

March 23 (Bloomberg) — Bank of Japan Governor Masaaki Shirakawa said that while Japan’s fiscal situation is “very severe,” investors’ trust in the country’s policy makers is keeping bond yields low. He spoke in parliament today in Tokyo.

Japan Mulls Postwar-Style Reconstruction Agency, Adds Cash

By Takashi Hirokawa and Keiko Ujikane

March 23 (Bloomberg) — Japan may set up a reconstruction agency to oversee earthquake repairs, while data showed the central bank pumped record liquidity into lenders, as the nation grappled with its worst disaster since World War II.

Underwriting Bonds

“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and economic activities,” as has happened in the past, Shirakawa said.

By law, the central bank can directly buy JGBs only in extraordinary circumstances with the permission of the Diet. Vice Finance Minister Fumihiko Igarashi said in parliament that the government needed to be “cautious” in considering whether to have the BOJ make direct purchases.

Bond sales, cuts to other spending and tax measures could pay for reconstruction, Economic and Fiscal Policy Minister Kaoru Yosano said yesterday. Morgan Stanley MUFG Securities Co. analysts led by Robert Feldman in Tokyo wrote in a note this week that policy makers will likely implement “several” spending packages of 10 trillion yen or more.

Loan Programs

Fiscal spending won’t be the only channel for stimulus, according to Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo.

“We expect the utilization of government lending” vehicles such as the Government Housing Loan Corporation and Finance Corporation for Municipal Governments, as was done in the wake of the 1995 Kobe earthquake, Morita wrote in a report to clients yesterday. This would help reduce the increase in government-bond issuance, he said.

In the wake of the devastation of World War II, Japan’s government set up the Economic Stabilization Board in August 1946. Among its duties was to ration commodities and oversee the revival of the nation’s industries.

To maintain short-term financial stability, BOJ policy makers have added emergency cash every business day since the quake. Lenders’ current-account balances at the central bank yesterday exceeded the 36.4 trillion yen record set in March 2004, when officials were implementing so-called quantitative easing measures to counter deflation. Deposits have climbed from about 17.6 trillion yen on March 10.

Japan Forecasts Earthquake Damage May Swell to $309 Billion

By Keiko Ujikane

March 23 (Bloomberg) — Japan’s government estimated the damage from this month’s record earthquake and tsunami at as much as 25 trillion yen ($309 billion), an amount almost four times the hit imposed by Hurricane Katrina on the U.S.

The destruction will push down gross domestic product by as much as 2.75 trillion yen for the year starting April 1, today’s report showed. The figure, about 0.5 percent of the 530 trillion yen economy, reflects a decline in production from supply disruptions and damage to corporate facilities without taking into account the effects of possible power outages.

The figures are the first gauge of the scale of rebuilding Prime Minister Naoto Kan’s government will face after the quake killed more than 9,000 people. Japan may set up a reconstruction agency to oversee the rebuilding effort and the central bank has injected record cash to stabilize financial markets.

Damages will probably amount to between 16 trillion yen and 25 trillion yen, today’s report said. It covers destruction to infrastructure in seven prefectures affected by the disaster, including damages to nuclear power facilities north of Tokyo.

Wider implications on the economy, including how radiation will affect food and water supply, are not included in the estimate.

Bank of Japan board member Ryuzo Miyao said today that it may take more time to overcome the damage of the quake than it did after the 1995 disaster in Kobe, western Japan.

Power Shortage

Tokyo’s power supply may fall 20,500 megawatts short of summer demand, or 34 percent less than the peak consumption last year, according to figures from Tokyo Electric Power Co. The utility is capable of supplying 37,500-megawatts and plans to add about 2,000 megawatts of thermal generation by the end of this month, company spokesman Naoyuki Matsumoto said by telephone today.

The government had previously projected growth of 1.5 percent for the year starting April 1 after growing an estimated 3.1 percent this year.

Bank of America Merrill Lynch cut its GDP projection for fiscal 2011 to 1 percent from 1.7 percent. RBS Securities and Nomura Securities Co. have also cut their forecasts while noting that the economy will still expand because the rebuilding will spur demand and help offset damage on growth in the period.

Rebuilding efforts in fiscal 2011 could push up GDP by 5 trillion yen to 7.75 trillion yen, the government said today.

Japan’s growth will return to normal “very soon” as reconstruction work starts, Justin Lin, the World Bank’s chief economist, said in Hong Kong today. At the same time, some are worried the boost won’t come soon enough.

Biggest Concern

“My biggest concern is that a positive impact from reconstruction may take a while to materialize,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “This earthquake and tsunami destroyed infrastructure and that will delay a recovery in production, a major driving force for the economy.”

The government maintained its assessment of the economy for March as the economic indicators released before the earthquake showed exports and production rebounding, while also voicing “concern” about the impact of the temblor on the economy.

“Although the Japanese economy is turning to pick up, its ability to self-sustain itself is weak,” the Cabinet Office said in a monthly report.

The U.S. National Hurricane Center in August 2006 calculated the damage of Hurricane Katrina, which slammed into New Orleans the year before, at $81 billion.

Future assessments will need to address damage to much of the northeast’s economy, and the disruptions to electricity and distribution systems that’s spread south to Tokyo and beyond.

Toyota Motor Corp. said yesterday it will halt car assembly in Japan through March 26. Sony Corp. said it shut five more plants.

Export Decline

Koji Miyahara, president of the Japanese Shipowners’ Association, said today exports may decline for six to 12 months after the earthquake, adding that the disaster won’t affect the industry in the longer term as reconstruction efforts take hold.

Kan is now faced with the challenge of finding ways to pay for the damage to the economy. BOJ Governor Masaaki Shirakawa has reiterated a reluctance to underwrite debt from the government and said today that nation’s fiscal situation is “very severe.”

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