The authors are making fools of themselves with this statement:
As a nation, we will have to make a choice, one way or another. If the national debt grows faster than the economy for long enough, investors could lose their appetite for Treasury bonds, making it impossible for the government to borrow money at any price — as almost happened in 1813.
Seems low interest rates aren’t all the tool they’re cracked up to be?
But they’ve only been low for a bit over 3 years.
Monetary policy works with a lag and all that.
Much like Japan.
Again like the carpenter said of his piece of wood, no matter how much cut off it’s still too short?
Along the same lines, next thing they’ll be doing is increasing savings incentives to help investment.
And note the slight twist on the same theme, increasing bank capital requirements to support confidence.
It’s about aggregate demand, and how you can’t drain yourself to prosperity.
How hard is that?
New Home Sales Unexpectedly Slip 1.6% in February
March 23 (Reuters) — New U.S. single-family home sales fell in February, but a jump in prices to their highest level in eight months kept hopes alive of a recovery in the housing market.
The Commerce Department said on Friday sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. January’s sales pace was revised down to 318,000 units from the previously reported 321,000 units.
Sales for November and December were revised up a bit.
Economists polled by Reuters had forecast sales at a 325,000-unit rate in February. Compared to February last year, new home sales were up 11.4 percent.
The median price for a new home rose 8.3 percent to $233,700, the highest level since June. Compared to February last year, the median price was up 6.2 percent.
The report, which rounded off a week of mixed housing data, followed a similar pattern seen in the market for used homes. Home resales fell in February, but prices rose from a year earlier. Housing starts slipped, while permits for home building approached a 3-1/2 year high in February.
Says it all:
Schaeuble Says Deficit Spending Backers Have ’Learned Nothing’
(Bloomberg) German Finance Minister Wolfgang Schaeuble said that deficit spending is the wrong way to bolster economic growth.
People who believe you can generate growth without pursuing budget consolidation have “learned nothing from the experience of the crisis,” Schaeuble said in a speech in Berlin today.
Germany Turns Up Pressure on ECB
(WSJ) “I hope that the ECB acknowledges its limits and quickly rakes in the money later,” said Volker Kauder, the head of parliamentary group of Ms. Merkel’s conservative alliance of Christian Democrats and its sister party, the Bavarian Christian Social Union, in a Wirtschaftswoche interview on Saturday. Responding to warnings by Brazil about a “tsunami of cheap money” flooding global markets, Ms. Merkel, at the most recent summit of European leaders on March 2, said that she was certain that the ECB had now ended its program of issuing cheap 3-year loans to banks. Merkel also reassured critics that the ECB would not repeat such measures again.
ECB calls for tougher rules on budgets
(FT) The ECB has sharpened its hardline stance on eurozone fiscal policy by urging the still-tougher policing of member states’ public finances. In a report on proposed European Union regulations to monitor budgets better and strengthen the surveillance of countries in difficulties, the ECB makes clear it sees significant scope for further improvement. Among the proposals in the report dated March 7, the ECB suggests the surveillance of countries that run into difficulties in the future should be strengthened by public warnings for the most recalcitrant. Where a country under surveillance is threatening the eurozone’s financial stability, there should be an automatic recommendation that it seeks financial assistance, the ECB says.
As previously discussed. It’s all part of the overall deflationary scenario from the US federal budget deficit being too small:
Merck said sales in the latest period were reduced between 1 percent and 2 percent due to currency translation.
For the rest of the year, currency is expected to trim between 2 percent and 3 percent from its sales.
Not to be outdone by the rest of the world’s central bankers:
Japan Not Immune To Debt Crisis, BOJ Kamezaki Says
By Tatsuo Ito
February 28 (DJ) — A Bank of Japan policy board member said Wednesday that Japan is not immune to a Europe-style debt crisis as confidence in the country’s government bonds could quickly weaken if concerns over its fiscal state mount.
The European crisis “is not a fire on the other side of the river,” Hidetoshi Kamezaki told business leaders in Fukuoka, western Japan, using an phrase frequently employed by Japanese policy makers over the last few months to warn that a Europe-style crisis could spread to Japanese shores.
“It’s not appropriate to assume there won’t be concerns about JGBs,” in the future just because the bonds continue to be smoothly bought in the market, Kamezaki said, adding that confidence in government debt can change unexpectedly.
Japan’s fiscal conditions are the worst among developed nations, with a gross public debt of around 200% of its annual economic output, but the country has so far avoided a Greece-style crisis as domestic investors hold almost all of its debt.
An ample and steady flow of funds from overseas in the form of a surplus in its current account — which includes trade — has financed the debt, but recent data suggest that could be changing.
Japan recorded a trade deficit for all of last year, meaning that if the trend were to continue, the country may need to rely on foreign capital to finance its debt, like many of the European countries being hit by the debt crisis.
Kamezaki played down the possibility of Japan’s current account moving into the red, saying flows of income stemming from the country’s external assets worth Y250 trillion could be maintained.
“The trend of Japan’s current account surplus will not change for a while unless the trade deficit grows rapidly,” Kamezaki said.
At around 0030 GMT, the benchmark 10-year government bond yield was at 0.965%.
Kamezaki also said the central bank should keep actively implementing policies to ensure the Japanese economy can overcome deflation and achieve sustainable growth with price stability.
“The BOJ should continue to pro-actively implement policies needed to achieve these purposes,” Kamezaki said.
The BOJ on Feb. 14 surprised the markets by boosting the size of its asset purchase program–the main tool for credit easing amid near zero interest rates–to Y65 trillion from Y55 trillion by increasing purchases of Japanese government bonds. It also clarified a near-term inflation goal for overcoming deflation.
The financial markets have reacted positively to the BOJ’s actions, with the dollar briefly hitting a nine-month high of Y81.66 on Monday and the stock market rallying.
Eurozone: How to Drive an Economy in Reverse
By Warren Mosler
February 27 — The situation in Greece brings me back to the conclusion that merely resolving solvency issues in the Eurozone doesn’t fix the economy. Solvency must not be an issue, but if there is negative growth, solvency math simply doesn’t work for any of the Euro members.
Without growth in the Eurozone the resolution (for now) of the Greek crisis will simply result in the focus moving on to one of the next weaker sisters. As this happens the risk remains that other countries in trouble will ask for haircuts on their debt (similar to Greece) as part of their rescue. And that could trigger a general, global, catastrophic financial meltdown.
Follow up:
Monetary and Fiscal Expansion are Needed
My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.
Alternatively, the ECB could simply guarantee all national government debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.
And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.
Strong Euro First
However, all policies seem to be ‘strong euro’ first. And the ‘success’ of the euro continues to be gauged by its ‘strength’.
The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.
Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.
Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations of euro denominated financial assets, along with all the unspent interest and earnings compounding.
Offsetting all of that unspent income (private savings) is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.
Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.
Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than zero, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.
All of this serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.
Three Reverse Thrusters in Use
This works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations – and that continues the negative feedback loop.
Given the demand leakages of the institutional structure, as a point of logic, prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.
And right now it looks like they are still going backwards on all three. And with the transmission in reverse, pressing the accelerator harder only makes you go backwards that much faster.
So look what slipped into a Fed statement:
*DJ Fed’s Williams: Current Economic Conditions Call For Strong Fed Response
*DJ Williams: Weak Total Demand Calls Supports Fed Policy Action
*DJ Williams: Sees Value In Targeted Stimulus Actions
*DJ Williams: Mortgage Bond Buying Has Helped Housing Market
*DJ Williams: Fiscal Actions May Also Help Revive Housing, Aid Economy
*DJ Williams: Fiscal Stimulus May Be More Potent Than Monetary Policy Now
*DJ Williams: Housing Has Hurt Economy, Not Sole Cause Of Slow Recovery
Comes back to the idea that resolving solvency issues in the euro zone doesn’t fix the economy.
And with negative growth the solvency math doesn’t work for any of the euro members.
And what’s with the ECB threatening to back away on liquidity support for the banking system?
So looks to me like the Greek resolution is not the end of the solvency issues, but that the focus simply moves on to the next weaker sister.
And, as previously discussed, the risk remains elevated that if Greece gets to haircut its obligations and gets funding, others will ask for the same, triggering a general, global, catastrophic financial meltdown.
My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.
Alternatively, the ECB could simply guarantee all national govt debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.
And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.
Meanwhile, elsewhere in today’s world news:
The likes of Ford adding to pension funds makes the point of the increasing and ongoing demand leakages putting a damper on GDP.
And oil prices have now crept up enough to materially cut into aggregate demand as well.
Nor are banks adding to capital to meet expanding demand for credit, which remains anemic.
Headlines:
Data Suggests Euro Zone May Slide Back Into Recession
German Manufacturing Slows as New Export Orders Fall
China’s Factory Activity Shrinks for Fourth Month
ECB Preparing to Close Liquidity Floodgates
Ford Pours $3.8 Billion Into Pension Plan
Oil Could Turn to Headwind as Dow Flirts With 13,000
UBS to Issue More Loss-Absorbing Capital
Iran ‘Winning’ on Oil Sanctions: Top Trader
Greek Bailout Puts Focus Back on Credit Default Swaps
Iran Fuels Oil-Price Rally—And Prices Could Keep Rising
The Challenge to Status Quo Economics Everybody is Talking About
By Lynn Parramore
February 22 — Over the last week, an important approach to economics that has spent years on the sidelines went mainstream: Modern Monetary Theory. This is good news for anyone who wants to see the neoliberal paradigm challenged, and a positive sign to heterodox economists who have difficulty getting a hearing in a field still gripped by outmoded models.
The theory, which provides unusual perspectives on issues including currency, debt, and government spending, kicked off in the mid-90s and has since grown into a movement. Its roster of proponents includes James K. Galbraith; Australian economist Bill Mitchel; Randall Wray and Stephanie Kelton of the University of Missouri-Kansas City; Rob Parenteau; Scott Fullwilier; Warren Mosler; and blogger Marshall Auerback. Their insights have been particularly valuable in countering the deficit hysteria which reached a fever pitch in the U.S. during the summer of 2011, and still darkens policy debates worldwide.
I worked with several MMTers after the financial crisis, especially Auerback, and met with plenty of scoffs, despite the fact that the renowned Galbraith was a key adherent. When I published a piece on the deficit in the Huffington Post which featured the insights of several MMTers, I received more mail than I’ve ever gotten on a single article — most of it hostile (See: The Deficit: Nine Myths We Can’t Afford). The majority of the liberals and ‘progressives’ I spoke to about MMT could not begin to consider an approach than upturned so much of what they knew to be "true" about the economy — despite the fact that much of that "truth" had been handed to them by neoliberals.
Establishment types told me the theory was "too out there" and "too controversial." But to me, "out there" and "controversial" was just what we needed to shake up a field that was mired in dangerous mythology and flawed thinking. Gradually, MMTers became part of a vibrant economic conversation on the websites bold enough to publish their work (New Deal 2.0, a blog I founded in 2009, was at one time such a venue). Recently, I’ve been proud to introduce Auerback to a new and receptive audience at AlterNet. Coming soon: economist Stephanie Kelton of UMKC will be explaining the theory in a feature article for AlterNet.
In the mean time, here’s a look at what people are saying.
From the Washington Post:In contrast to “deficit hawks” who want spending cuts and revenue increases now in order to temper the deficit, and “deficit doves” who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all. Owls see government spending that leads to deficits as integral to economic growth, even in good times.
The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone — members of Congress, think tank denizens, the entire mainstream of the economics profession — has misunderstood how the government interacts with the economy. If their theory — dubbed “Modern Monetary Theory” or MMT — is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong.From the Financial Times‘ Alphaville blog:
We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.
But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.
And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.From CNBC’s John Carney:
It was obvious to me way back before I had ever heard of MMT that government’s should probably never run a budget surplus—or should do so only in dire emergencies. When the government runs a surplus, that means it is taking more money out of the economy than it is spending back into the economy. It is making us poorer.
Anyone who worries about wasteful government spending should be all the more concerned about government surpluses. When corporations accumulate too much cash, investors rightly worry that management will lose discipline and engage in wasteful acquisitions or expansions. Better to pay it out in a dividend.