Category Archives: Government Spending

July CPI Shows 1st Increase In 2.5 Years

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Bet they’re sorry now for all that deficit spending, two decades of 0 rates, and untold QE ‘money printing’- inflation is finally ripping!

Not

July CPI Shows 1st Increase In 2.5 Years

May 25 (Dow Jones) — Japan’s core consumer price index rose 0.1% in July from a year earlier for the first time in two and a half years, despite a revision to the data’s base year giving a downward bias to the index, government data showed Friday.

The outcome was higher than the median forecast for a 0.1% drop in a poll of economists surveyed by Dow Jones and the Nikkei. The index declined 0.2% from a year earlier in June.

Core CPI for the Tokyo metropolitan area–an early indicator of price trends for the rest of Japan–fell 0.2% on year in August, compared with a forecast 0.1% fall. In July, it declined 0.1%.

The results came after the government changed the data’s base year to 2010 from 2005, which was expected to produce a lower-than-usual figure.

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Japan To Cut Policy Spending By 10% Under FY12 Budget

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Continuing the policy that got it to where it is:

Japan To Cut Policy Spending By 10% Under FY12 Budget

August 23 (Kyodo) — Finance Minister Yoshihiko Noda instructed other Cabinet members Tuesday to cut policy spending by 10 percent in the fiscal 2012 budget from the current year, aiming to secure funds that would help cover burgeoning welfare costs in Japan and reflect the policy priority of a new prime minister.

The government decided to delay by a month the deadline for its offices to submit their request for the state budget, in a move to concentrate more on reconstruction work following the March earthquake and tsunami.

Noda also ordered government spending of no more than 71 trillion yen ($924.5 billion), excluding costs to service existing debt, in the year starting next April and capping the issuance of new bonds at 44 trillion yen, both at the same level as the fiscal 2011 budget.

But spending and debt issuance necessary for quake-relief efforts will be managed separately from the capping rules, as the government intends to issue reconstruction bonds that would be serviced with proceeds from provisional tax hikes, although there remains opposition to the idea even within the ruling coalition.

The envisaged 10 percent policy spending cut would lead the government to secure 1.2 trillion yen.

Combined with some tax revenue hikes, the government will secure 1.7 trillion yen to cover an annual increase of nearly 1.2 trillion yen in social security costs, which have been growing amid the aging population, and 600 billion yen which would reflect the policy priority of a new prime minister succeeding the incumbent, Naoto Kan, who is certain to step down within this month.

The instruction came before the Cabinet approves in mid-September the guidelines for submission of budget requests by ministries and agencies, a process that has been delayed this year due to the March 11 disaster.

The government offices normally file their requests with the Finance Ministry at the end of August and the government formulates a national budget in December for a new fiscal year starting April 1.

The Cabinet decided Tuesday on a government ordinance to postpone the deadline for submission, effective Friday.

The delay comes as the government focuses on reconstruction work, which has required it to make separate budgetary arrangements. Japan has already implemented two extra budgets for fiscal 2011 and is considering a third that could be bigger than the previous two.

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I’m ok, eur ok?

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First, the euro funding issue/crisis could vanish with a simple announcement, like:

The ECB hereby guarantees all the debt of the national governments.

But they won’t do that.
They are worried about their ability to subsequently enforce the Growth and Stability Pact, which has already proven unenforceable.

In fact, the only enforcement tool for austerity seems to rest with the ECB, which conditions its funding on austerity.

This is also the disciplinary principle behind my proposed ECB annual revenue distribution of maybe 10% of euro zone GDP to the national govts on a per capita basis-
The ECB would have the right to withhold future distributions to members who fail to comply with deficit rules. But this proposal isn’t even a consideration, so not likely to happen.

Mosler bonds (in the case of default they can be used for payment of taxes) for individual euro nations offer real hope, but time is short and the political process long.

That leaves the euro zone with what it’s been doing all along.
Muddle along anticipating, entertaining, debating, various funding proposals,
but ultimately,
when it gets bad enough,
relying on the ECB writing the check and buying national govt debt in the market place to facilitate ongoing funding.

All contingent with the member nation in question complying with terms and conditions of austerity set by the ECB.

It’s all highly deflationary, strong euro medicine, while it lasts.
It’s also operationally sustainable.
And phase 1- where austerity reduces deficits- has proven politically sustainable as well.

However we may now be entering phase 2,
where austerity results in falling GDP and higher deficits for all the euro members.
Yes, it’s operationally sustainable and continues to support the euro.

So the question is whether austerity measures intended to bring deficits down, that instead cause deficits to increase, are politically sustainable.

And, if not, what next?
And when?
How bad does it all have to get before they change policy?
And what change would that be?
The first step would probably be some ‘new’ form of QE,
and maybe even an interest rate cut,
which only make things worse,
as they wait for the appropriate lag before said policy ‘kicks in’.

And how long would it all continue to deteriorate before they stop waiting for it to ‘kick in’ and again change policy?

US deficit reduction round 2 coming soon as well.

To again quote that carpenter working on his piece of wood,
‘no matter how many times i cut it, it’s still too short’.

Is a misguided fuss over a reserve drain going to bring down global capitalism?

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From Professor Andrea Terzi, MMT’s non-gnome soldier in Lugano

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Andea Terzi is a former student of Paul Davidson, now a professor of economics at Franklin College, Lugano, Switzerland.

The institutional structure in the euro zone has been it’s own undoing since inception, very much like we all described at that time.

Current policy responses continue to support the same repressive fiscal policies that again look to be driving the otherwise prosperous euro zone into negative GDP growth.

The glimmer of hope may be that they have discovered the sector balance approach.

The next step in the right direction would be a recognition of the actual causations.

From Professor Tezi:


Does the ECB understand sector financial balances?

The August 2011 Monthly Bulletin of the European Central Bank has an interesting chart of financial balances of different sectors in the euro area. The chart is reproduced below.

chart


The figure shows how rising deficits in Europe in 2008 and 2009 have produced higher net financial savings in the private sector.

This is evidence that automatic (anti-cyclical) stabilizers worked as usual: as growth declines, or goes negative, tax revenues fall, government deficits increase, and this stops the economy from falling further. This can only work, however, until market-constrained governments in the euro area begin acting pro-cyclically. Governments acting pro-cyclically during recessions means that deficit reductions will reduce private savings below the desired level, and this means a further fall of demand and incomes.

Looking at 2010, and considering that the euro area’s current account balance is marginally negative, there is evidence of this pro-cyclical effect, as government deficits declined, and net private lending inevitably declined.

What is remarkable is how the ECB interprets the chart:

With euro area total investment growing faster than saving, the net borrowing of the euro area increased (to 0.9% of GDP, expressed as a four-quarter sum). From a sectoral point of view, this masked further rebalancing between sectors, with another reduction in government net borrowing (the government de?cit falling to 5.5% of GDP on a four-quarter moving-sum basis, from a peak of 6.7% in the ?rst quarter of 2010) and a further decline in households net lending, while the net borrowing of NFCs increased sharply. (ECB, Monthly Bulletin, August, 2011, pp. 37-8)

The ECB is assuming that savings are needed to finance investment and sector rebalancing is always a good thing. And it makes no reference to the connection between financial balances and nominal GDP growth.

In plain language, this is what the ECB is telling us:

In 2010, Euro area’s savings were insufficient to finance investment. Business needed to borrow to finance their investments and households savings were not enough to fill the gap. This is why the euro area runs a current account deficit, and is a net borrower. European governments, however, are doing their part by reducing their own net borrowing, thus contributing to a progressive rebalancing in financial deficits/surpluses across sectors.

For the ECB, the government net borrowing bar getting shorter (in the chart above) is a reason for optimism. In our reading, this optimism is unwarranted, and what the ECB calls “rebalancing between sectors” is a most worrying financial development of the euro area.

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MMT to Ryan- Apologize NOW about the US being the next Greece

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Congressman Ryan’s response to the President Obama’s State of the Union address included
something we’ve all hear a lot of ever since.

He warned along the lines that that the US could become the next Greece,
and be faced with some kind of a sudden financial crisis,
where the world would no longer lend to us,
interest rates would skyrocket,
and the US,
unable to spend,
would be down on it’s knees before the IMF begging for the needed funding.

And no one with any kind of national public forum took issue with him.
Including the President and the Democrats in Congress,
who for all appearances quietly agreed and acted accordingly.

Well, today, based on the near universal response to the S&P downgrade,
everyone now knows, or should know,
there is no such thing as the US becoming the next Greece.

The overwhelming response to the S&P downgrade by everyone from Buffet to Greenspan, and
most every financial and academic economist in the world was along the lines of:

The US is the issuer of the dollar.
It can print dollars.
So it can always make timely payments without limit.

THERE IS NO SOLVENCY ISSUE FOR THE US.
There is no such thing as the US running out of dollars to spend.
There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend.

Greece is very different.
Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro,
any more than the US states, corporations, and households can print dollars.
And so they are all indeed dependent on revenues from somewhere to be able to spend.

So, Congressman Ryan, please apologize NOW for being so wrong and so misleading.

There is no solvency risk for the US.
The Fed is price setter for the interest rates for the US government and the banking system, not the market,
just like the European Central Bank sets the interest rates for its banking system and its own debt.

Congressman Ryan,
your reasons for deficit reduction have vaporized.

You see,
the risk of overspending is inflation,
not solvency.

So if you want to argue for deficit reduction,
apologize NOW,
regroup,
and come back with your next round of fear mongering
about how the deficit can be inflationary,
or something like that,
and see how that flies.

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Swiss currency issues

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Gnomes need MMT too, even thought they would undoubtedly try to punch holes in it…

Yes, currency intervention works. It’s what I call ‘off budget deficit spending’ and there are no nominal limits.

But seems they haven’t yet figured out that a tax cut and/or spending increase would do the trick all the better re: the currency, domestic demand, and employment.

Swiss Producer & Import Prices Drop Further In July

August 15 (RTTNews) — Switzerland’s producer and import prices decreased at a faster pace in July, data released by the statistical office showed Monday.

The producer and import price index dropped 0.6 percent year-on-year in July, faster than the 0.4 percent decrease recorded in June.

The producer price index decreased 0.8 percent annually during the month, while the import price index fell by 0.1 percent.

On a monthly basis, the producer and import price index decreased 0.7 percent during the month. There was a 0.4 percent monthly decline in producer prices, and a 1.1 percent decrease in import prices during the month.

Swiss Government, SNB in ‘Intense’ Talks, SonntagsZeitung Says

By Simone Meier and Matthias Wabl

August 15 (Bloomberg) — The Swiss government and the central bank are in “intense” talks about a possible franc target to stem currency gains, SonntagsZeitung newspaper reported, citing unidentified people close to the situation.

The plans are “ready” and the Swiss National Bank may set such a target in “coming days,” the newspaper reported yesterday. The discussions are focused on the government’s role and an “appropriate plan” may be adopted on Aug. 17, it said. Walter Meier, a spokesman for the SNB, declined to comment.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to deter investors from piling into the franc and stop the currency’s ascent to near parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers from the People’s Party to the Christian Democrats have signaled their support for tougher measures to protect the economy and avert job losses.

“The SNB is ‘leaning against the hurricane’ in a major way,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange Ltd. in London, said in an e-mailed note today. While the central bank is probably “still looking for a better entry point to initiate a new round” of currency purchases, it “will have a very difficult time limiting the extent of the franc strength.”

The franc traded at 1.1404 versus the euro at 9:45 a.m. in Zurich, down 2.9 percent from Aug. 12. It reached a record of 1.0075 on Aug. 9. Against the dollar, the currency was at 79.74 centimes, down 2.5 percent.

October Vote

Lawmakers, facing elections in October, have become increasingly concerned that the franc’s strength will erode exports and hinder growth. Consumers became more pessimistic about the economic outlook and job prospects in July and investor confidence slumped. The government held an extraordinary meeting on the franc on Aug. 8 and forecast growth to weaken over the coming months.

Goldman Sachs Group Inc. said in an e-mailed note on Aug. 5 that cut its Swiss economic-growth forecasts for this year and next to 1.9 percent from 2.1 percent and to 0.6 percent from 2 percent, respectively.

Christophe Darbellay, head of the Christian Democrats, said in a telephone interview on Aug. 12 that the party supports the SNB and called for “extraordinary measures.” People’s Party Vice President Christoph Blocher, who previously objected to currency purchases, said policy makers need to use all tools to fight a “war.”

Secret Meeting

While the SNB is formally independent, the government may comment on a target to make such a step “as efficient as possible,” the newspaper said. The SNB may introduce an initial lower limit of slightly above 1.10 versus the euro before gradually increasing it, SonntagsZeitung reported, citing insiders.

Swiss Economy Minister Johann Schneider-Ammann led a secret meeting in Bern on Aug. 2 with leaders including Swatch Group AG Chief Executive Officer Nick Hayek and Credit Suisse Group AG Chairman Urs Rohner to discuss the franc, Neue Zuercher Zeitung am Sonntag reported yesterday, without saying where it got the information. The participants all agreed to support the SNB weakening the currency, it said.

Andre Simonazzi, a government spokesman, confirmed that the franc will be on the agenda when the Cabinet meets on Aug. 17 in Bern. The government is in close contact with the SNB and Hildebrand also attended the extraordinary session last week, he said. He wouldn’t comment on possible measures.

‘Several Hundred Billions’

SNB policy makers have been reluctant to start purchasing foreign currencies to weaken the franc after intervention attempts in the 15 months through mid-June 2010 sparked a record loss of $21 billion last year.

Lukas Gaehwiler, head of UBS AG’s Swiss operations, told SonntagsZeitung in an interview that the SNB has “better chances of success” with interventions, given the current exchange rate. Policy makers would have to be ready to spend “several hundred billions of francs or more,” he said.

“The SNB is wary of currency interventions given that they were not very successful the last time,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. Still, “with the franc moving closer to parity, a lot of measures are becoming more realistic.”

Swiss Franc Slides Amid Speculation of Target-Setting; Yen Falls

By Keith Jenkins and Kristine Aquino

August 15 (Bloomberg) — The Swiss franc fell against the euro and headed for its biggest three-day decline since the European currency’s 1999 debut on speculation Switzerland will take further action to counter recent gains.

The franc slid for a fourth day versus the dollar after the SonntagsZeitung newspaper said the Swiss government and the central bank are in “intense” talks over setting a target for their currency. The yen dropped the most in a week against the euro after Japan’s Finance Minister Yoshihiko Noda indicated he’s ready to intervene in foreign-exchange markets again.

“The market is rightly nervous about what’s likely to come from the Swiss authorities as they have a track record of going down more unconventional policy steps,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If the steps will be enough to reverse the Swiss franc’s strengthening trend remains to be seen, but at these levels of overvaluation, which are very extreme, the risk-reward is more favorable in their way.”

The franc tumbled 1.6 percent to 1.12642 per euro at 7:12 a.m. in New York, from 1.10857 on Aug. 12, after rallying to a record 1.00749 on Aug. 9. The Swiss currency has slid 8.7 percent over the past three days, the most in 12 years. The franc declined 1.3 percent to 78.81 centimes per dollar after advancing to a record 70.71 centimes on Aug. 9.

Yen Versus Euro

The yen declined 0.4 percent to 109.78 per euro and depreciated 0.1 percent to 76.79 per dollar after climbing to 76.31 on Aug. 1, approaching its post-World War II record of 76.25 set on March 17. The 17-nation euro increased 0.3 percent to $1.4279.

The franc has soared 12 percent in the past three months and the yen added 3.5 percent, according to Bloomberg Correlation-Weighted Indexes. The currencies have gained as debt crises in Europe and the U.S. boosted demand for safety.

The Swiss National Bank may set a target for the currency in “coming days,” SonntagsZeitung reported. Talks are focusing on the role of the government and an “appropriate plan” may be adopted Aug. 17, the newspaper said.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to stop the franc’s ascent to almost parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers have signaled their support for tougher measures to protect the economy.

‘Shock-and-Awe’

“The market is paying much more respect towards the idea that there’s some sort of shock-and-awe tactic being put together in Switzerland,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “It’s this fear of the unknown that has sparked a significant move” in the franc.

Gains have left the franc 41 percent too strong against the euro, according to an index developed by the Organization for Economic Cooperation and Development in Paris that uses relative costs of goods and services. It’s also the most overvalued currency against the dollar, at 49 percent.

The yen has risen beyond the level that prompted Japan to sell the currency on Aug. 4, its first intervention in foreign-exchange markets since March. A stronger yen reduces the value of overseas income at Japanese companies when converted into their home currency.

“An unstable situation is continuing,” Noda said yesterday during a television talk show on the public broadcaster NHK. “As foreign-exchange market matters are my prerogative, I will continue to closely watch the markets and take bold action if it becomes necessary.”

Japan’s Economy

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third quarter of contraction, government data showed today. The median forecast of economists surveyed by Bloomberg News was for a 2.5 percent drop.

The euro rose for a third day versus the dollar on speculation a meeting tomorrow between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris may result in action to contain the region’s debt crisis.

The two leaders “will come out with something,” said Alex Sinton, senior dealer at ANZ National Bank Ltd. in Auckland. “It may even be long-term viable. I suspect there’ll be a range broken this week.” Investors will be looking to sell the euro on rallies toward $1.44, Sinton said.

Foreign-exchange traders reduced bets against the dollar by the most on record as demand for Treasuries soared amid global growth concerns. Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the franc and the Mexican peso plunged by 154,105 contracts to 153,216 in the week ended Aug. 9, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in November 2003.

Pound Outlook

Traders are betting on pound weakness even as the euro-area debt crisis deepens because of slumping consumer sentiment and a growth rate that may trail behind Germany’s by more than two percentage points in 2011, analysts in Bloomberg surveys said. Analysts cut forecasts for sterling versus the euro by 5.7 percent this year, the most of 17 developed-nation pairs tracked by Bloomberg.

The pound declined 0.2 percent to 87.66 pence versus the euro today and appreciated 0.2 percent to $1.6306.

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comments on Krugman’s post

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Franc Thoughts on Long-Run Fiscal Issues

By Paul Krugman

August 11 (NYT) — Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency.

Right, ability to pay is not an issue.

I really don’t want to get into that fight right now, because for the time being the MMT people and yours truly are on the same side of the policy debate. Right now it really doesn’t matter at all whether the United States issues zero-interest short-term debt or simply prints zero-interest dollar bills, and concern about crowding out is just bad economics.

Right.

But we won’t always be in a liquidity trap.

We don’t have one now. It’s a fixed fx concept at best.

But we won’t always be in a liquidity trap.

Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation.

Yes, because they ignore the interest income channels.

And when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter.

Yes, deficit spending adds to aggregate demand and nominal savings to the penny. Add too much and you get ‘demand pull inflation’

With fixed fx, that can drive up interest rates and threaten reserves. With floating fx it only causes the currency to fluctuate.

I have a specific example that illustrates my point: France in the 1920s, which I wrote about in my dissertation lo these many years ago. Like many nations, France came out of World War I with very large debts, peaking at 240 percent of GDP according to this recent IMF presentation (pdf, slide 17). And France was unable politically to raise enough taxes to cover the cost of servicing that debt. And investors lost confidence in the government’s solvency.

If it was a floating fx policy, interest rates would have been wherever the bank of france set them. If it was a fixed fx policy, rates would be market determined, as the tsy had to compete with the option to convert at the CB.

And taxes falling short of spending is the norm in most nations. Japan for example has one of the largest debts and deficits and one of the strongest currencies. So there’s more to it.

Various expedients were tried, including — late in the game — creation of monetary base, which was advocated by a finance minister on the (very MMT) grounds that the division of government liabilities between currency and short-term bills made no difference. But it turned out that it did: the franc plunged, and the price level soared.

He still hasn’t indicated whether it was a fixed or floating fx policy, and I don’t recall, so I can’t comment.

Now as it turned out this was just what the doctor ordered: because France’s budget problem was overwhelmingly the debt overhang rather than current spending, inflation eroded the real value of that debt and made possible the Poincare stabilization of 1926.

Yes, if a nation goes to a fixed fx policy at the’wrong’ price a further adjustment can address that, though it still doesn’t address the fundamental difficulties of living with a fixed fx policy.

So what does this say about the United States? At a future date, when we’re out of the liquidity trap,

that we aren’t in

public finances will matter — and not just because of their role in raising or reducing aggregate demand. The composition of public liabilities as between debt and monetary base does matter in normal times —

Yes, it determines the term structure of risk free rates.

hey, if it didn’t, the Fed would have no influence, ever.

True, and it doesn’t have much in any case, apart from shifting income between savers and borrowers and altering the interest income of the economy, which is a net saver to the tune of the govt debt, to the penny.

So if we try at that point to finance the deficit by money issue rather than bond sales, it will be inflationary.

Only under a fixed exchange rate policy, which we don’t have.

And unlike France in the 1920s, such a hypothetical US deficit crisis wouldn’t be self-correcting: the biggest source of our long-run deficit isn’t the overhang of debt, it’s the prospective current cost of paying for retirement, health care, and defense. So such a crisis — again, it’s very much hypothetical — could spiral into something very nasty, with very high inflation and, yes, hyperinflation.

Highly unlikely. It would probably take annual deficit of well over 20% to get that kind of inflation from excess demand.

Now, all of this is remote right now. And notice too that France in the 1920s stabilized with debt of 140 percent of GDP — far higher than the numbers that are supposed to terrify us now. So none of this is relevant to the current policy debate.

But since the MMTers seem to have decided to harass those of us who want stronger action now but think there really is a long-run fiscal issue, I needed to put this out there.

MMT explains the difference between fixed and floating fx policy.

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