Category Archives: Government Spending

Bernanke on deficits

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>   
>   (email exchange)
>   
>   On Wed, Jul 18, 2012 at 10:39 AM, wrote:
>   
>   Bernanke just said, “We will simply not be able to pay our bills” if we don’t attack the
>   long-run fiscal sustainability issue.
>   

Yes, hasn’t change a bit from from these statements earlier this year:

Bernanke Points to ‘Increased Possibility of a Sudden Fiscal Crisis’

By Matt Cover

(CNSNews.com) — Federal Reserve Chairman Ben Bernanke said that the current trajectory of the federal budget – marked by large annual deficits – was “clearly unsustainable” and that “serious economic consequences” could result.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the Senate Budget Committee Tuesday.

“Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.”

Bernanke said that while nobody knows when a fiscal crisis will come, it is surely “ever closer.”

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Fed Chairman remains a non trivial obstacle to prosperity

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From Chairman Bernanke earlier today:

The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery.

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John’s got it!

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Congress, Not the Fed, Needs to ‘Get to Work’

By John Carney

July 17 (CNBC) — The Senate Banking Committee’s grilling of Federal Reserve Chairman Ben Bernanke just got weird.

Senator Charles Schumer, the New York Democrat, proposed a novel theory of political management of the economy shortly before 11 am Tuesday morning.

The gist of the theory: If the elected branches of government cannot agree to act, the responsibility for the economy falls to the Fed.

Schumer’s argument amounted to the idea that that because disagreements between Republican and Democrats (and, of course, the political ambitions of members of both parties in a presidential election year) are blocking any agreement to provide fiscal relief to the economy, the Fed should “get to work.”

It’s tempting to say that this is the drunk’s theory of the bar tab.

The drunk has been drinking so much he can’t work—and therefore can’t afford to pay his tab. So it’s up to the bartender to pour another cocktail and extend the tab a bit longer.

But this would be insulting to drunks everywhere. The drunk actually understands the economics of the bar better than Schumer understands the difference between monetary and fiscal policy.

The economy right now suffers because the private sector is attempting to save more than it spends, mostly by paying down its enormous debt burden. Because everyone’s income comes from someone else’s spending, reduced overall spending results in income reduction. In our economy, that means higher unemployment.

If the economy is going to grow while households and businesses pay down their debts instead of spending, someone else must take the opposite side of the trade by growing spending more than its income.

With the rest of the world heading toward recession, the only plausible source of this added income is the government. In other words, the government must cut taxes relative to spending (or grow spending relative to taxes) to replace the lost income in the private sector.

What the economy certainly isn’t suffering from right now is a shortage of liquidity or a meager money supply. Which is to say, we’ve reached the limits of what the Fed can do to spur growth. (Although perhaps not the limits of what the Fed can do to fend off a sharp turn downward in the economy.)

To hear a member of the shirker branch of our government blame the Fed for not doing enough would be laughable if we weren’t living with the consequences of the shirking.

Sen. Schumer—and his fellow lawmakers—are the ones who should “get to work.”

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The certainty of debt and taxes- comments on the Fiscal Cliff

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It takes a fiat currency to sustain full employment.

And a fiat currency, like the $US and the euro, includes the certainty of debt and taxes.

Taxation is required to allow the government to spend its otherwise worthless currency.

And ‘debt’- some entity spending more than its income- is required to ‘offset’ an entity’s desire to spend less than its income.

These desires to not spend are known as demand leakages.

That means, at full employment, either a private sector entity or the government will be spending more than its income to offset the demand leakages.

Private sector spending is, operationally, revenue constrained. It is limited by income and credit worthiness.

Public sector spending in a currency it issues is not revenue constrained.

The private sector, the user of the currency, must first obtain funds before it can spend.

The public sector, the issuer of its currency, must, from inception, spend or lend first, before it can ‘collect’ taxes and/or borrow.

The private sector is necessarily pro cyclical. In a down turn, the private sector loses credit worthiness and therefore is limited in its ability to spend more than its income.

That leaves only the public sector to spend more than its income to fill any residual output gap and sustain full employment.

Those claiming ‘the problem is too much debt- private sector and public sector’ are entirely missing the point.

That includes everyone in Congress, President Obama, and Candidate Romney.

Those now pushing for Federal deficit reduction are entirely missing the point.

There is not Federal solvency problem, short term or long term, with any size deficit.

There could be a long term inflation problem.

However, I have seen no credible, professional long term forecasts of substantial inflation. That includes the Fed, the CBO, and the forecasts of the largest financial institutions, as well as the inflation rates implied by the long term inflation indexed US Treasury securities.

Last year the pre debt ceiling war cry from all sides was that immediate deficit reduction was imperative to keep us from becoming the next Greece.

That fell by the wayside after the downgrade, that was supposed to cause interest rates to spike and find the US, Greek like, on its knees before the IMF,
instead cause rates paid by the US Treasury to dramatically fall. The difference is the US govt is the issuer of the $US, while Greece is but a user of the euro.

So seems to me in this economy federal deficit reduction should be off the table, and the burden of proof of a sufficiently high long term inflation risk
be on those who want to put it back on the table. Anything less seems subversive, either by accident or by design.

(feel free to distribute)

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more hints euro zone gdp may be stabilizing

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A couple of more hints deficits may be high enough for stability and even a bit of positive GDP growth:

German Industrial Production Increased More Than Forecast in May

By Jana Randow

July 6 (Bloomberg) — German industrial output rebounded more than economists forecast in May as construction buttressed Europe’s largest economy against the sovereign debt crisis.

Production rose 1.6 percent from April, when it dropped 2.1 percent, the Economy Ministry in Berlin said today. Economists forecast an increase of 0.2 percent, the median of 36 estimates in a Bloomberg News survey shows. Production was unchanged from a year earlier when adjusted for working days.

The European Central Bank cut interest rates to a record low yesterday as the worsening debt crisis threatens to tip the euro area, Germany’s largest export market, into recession.

While German business and investor confidence have slumped amid signs growth is slowing, record-low unemployment and demand from outside the region have helped insulate the economy. Factory orders unexpectedly rose 0.6 percent in May, the Economy Ministry said yesterday.

“German factories are still doing quite well, but we’ll see some skid marks as a result of the euro region’s debt crisis in the coming months,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “In the euro area, everything points toward recession and the global economy has slowed to an extent that it can’t compensate for the weakness in Europe.”

Manufacturing output gained 1.8 percent in May, driven by a 3.8 percent jump in production of consumer goods, today’s report showed. Investment goods production rose 1.7 percent and construction activity was up 3.1 percent.

France’s Trade Deficit Narrowed in May to 5.3 Billion Euros

July 6 (Bloomberg) — France’s trade deficit narrowed 7.7 percent in May as exports rose.

The deficit in May was 5.325 billion euros ($6.6 billion) compared with 5.77 billion euros in April, the country’s customs office said in an e-mailed statement.

Exports rose 1.3 percent from the previous month to 37.44 billion euros while imports rose 0.1 percent to 42.77 billion euros.

For the first five months of the year, the deficit narrowed 10 percent from the same period a year ago to 29.4 billion euros

Airbus exported 22 planes for 1.58 billion euros during May, compared with 28 planes for 2.23 billion euros the previous month.

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EU update

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More possible hints that deficits may be large enough to support stability

A little better than expected:

Euro-Area Manufacturing Contracted for 11th Month in June

By Mark Deen

July 2 (Bloomberg) — Euro-area manufacturing output contracted for an 11th straight month in June as Europe’s debt crisis sapped demand across the continent.

A gauge of euro-region manufacturing held at 45.1 in May, London-based Markit Economics said today in a final estimate. That compares with an initial estimate of 44.8 on June 21. A reading below 50 indicates contraction.

A little better than expected:

Italian May Unemployment Rate Declines for First Time in a Year

By Chiara Vasarri

July 2 (Bloomberg) — Italy’s jobless rate unexpectedly fell from a 12-year high in May, the first decline in more than a year.

The unemployment rate decreased to a seasonally-adjusted 10.1 percent, from 10.2 percent in April, Rome-based national statistics office Istat said in a preliminary report today. It was the first decline in the jobless rate since February of last year. Economists forecast an increase to 10.3 percent, the median of eight estimates in a Bloomberg News survey showed.

Joblessness among people aged 15 to 24 rose to 36.2 percent, from 35.3 percent, Istat said.

Better than expected improvement here:

U.K. CIPS Manufacturing Shrank for Second Month in June

By Jennifer Ryan

July 2 (Bloomberg) — U.K. manufacturing shrank for a second month in June as demand “remained weak,” Markit Economics said.

A gauge of factory output was at 48.6 from 45.9 in May, Markit said on its website today. The median estimate in a Bloomberg News survey of 25 economists was 46.5. A reading below 50 indicates contraction.

Some ok Swiss news as well.

Also, sufficient progress at the EU level to give the ECB cover to write checks as needed to get from here to any of the prospective EU measures.

This includes taking forever to get from here to there.

They all seem to understand that the ECB is at least one answer to the solvency issue, and seem to be willing to allow the ECB to provide bank liquidity while they try to finalize an alternative solution. Indirectly that means, at least for now, the member governments will be able to make their payments for the immediate future.

So as previously discussed, they solved the solvency issue, and markets have responded, which leaves them with a bad economy to focus on.

With deficits now perhaps large enough for stability, and maybe a bit of modest GDP growth, I’d at best expect a ‘wait and see’ attitude from an EU that has found it highly problematic to act even in an emergency.

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Italian Business Confidence Unexpectedly Rises to 88.9 in June

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Another glimmer of hope in a June number that deficits are sufficient for stability:

Italian Business Confidence Unexpectedly Rises to 88.9 in June

June 27 (Bloomberg) — Italian business confidence unexpectedly rose in June from the lowest level in almost three years. The manufacturing-sentiment index rose to 88.9, from a revised 86.6 in May, the lowest since August 2009, Istat said. Istat originally reported a May reading of 86.2.

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