Category Archives: Government Spending

Geithner takes the pledge

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Score one for the deficit terrorists
This is one of the largest risks to the recovery:

Geithner Pledges to Cut Deficit Amid Rating Concern

by Robert Schmidt

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

The dollar, Treasuries and American stocks slumped today on concern about the U.S. government’s debt rating. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33, and the dollar tumbled 0.8 percent to $1.3890 per euro.

Gross’s Warning

Gross said in an interview today on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” financial markets are “beginning to anticipate the possibility.”

Britain saw its own AAA rating endangered earlier today when Standard & Poor’s lowered its outlook on the nation’s grade to “negative” from “stable,” citing a debt level approaching 100 percent of U.K. GDP.

It’s “critically important” to bring down the American deficit, Geithner said.

Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.

The Treasury chief said it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”

‘Very Challenging’

“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. “These early signs of stability are very important” although “this is still a very challenging period for businesses and families across the United States.”

Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released today. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.

As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.


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Galbraith video

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In Every Way a Good Thing”: The Upside of Soaring Federal Budget Deficits

by Aaron Task

With the federal budget deficits expected to exceed $1.8 trillion this fiscal year and borrowing expected to top $9.3 trillion over the next decade, it’s no wonder many policymakers, politicians, economists and everyday Americans fear the worst.

But rising federal budget deficits are “in every way a good thing,” according to University of Texas professor James Galbraith.

Higher budget deficits are a natural result of declining tax revenues and rising unemployment and serve as a “great stabilizer” to the consumer and the economy as a whole, he argues — as you’d expect from the son of famed Keynesian economist John Kenneth Galbraith.

The government’s bailout of the banks was an “unproductive use of Federal borrowing,” but Galbraith is otherwise fully supportive of the administration’s borrow-and-spend efforts so far.

Furthermore, he believes those calling for the government to reverse course soon are being “terribly imprudent,” noting it took more than 20 years for the private sector to fully recover after the 1929 crash.


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My 2002 letter on the ratings agencies downgrading of Japan

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Hi David- been a long time, seems nothing has changed!

(See my 2002 letter to you below)

You downgraded Japan below Botswana, their debt/GDP went to over 150% with annual deficits over 8%, and all with a zero or near zero interest rate policy for over a decade, cds traded up, and 10 year JGB’s were continually issued in any size they wanted at the lowest rates in the world.

This is no accident. It’s inherent in monetary operations with non convertible currency and floating exchange rates. Your analysis is applicable only to fixed exchange rate regimes regarding defaulting on their conversion clauses.

Do the world a favor, reverse your position, and explain the reason for your current and prior errors, thanks!

All the best,

Warren

AN OPEN LETTER TO THE RATINGS AGENCIES

Flawed Logic Destabilizing the World Financial System


Repeated downgrades of Japan by the ratings agencies due to flawed logic have been destabilizing both Japan and the financial world in general. Their monumental error can be traced to a lack of understanding the operational realities of a Government that issues its own currency. For the Government of Japan, payment in yen, its currency of issue, is a simple matter of crediting a member bank account at the BOJ (Bank of Japan). There is no inherent operational constraint for this process. Simply stated, Government checks (payable in yen) will not bounce. The BOJ has the ABILITY to clear any MOF check for ANY size, simply by adding a credit balance to the member bank account in question. Yes, the BOJ could be UNWILLING to clear ANY check, but that is an entirely different matter than being UNABLE to credit an account. Operationally, concepts of the BOJ not having ‘sufficient funds’ to credit member accounts are functionally inapplicable.

As a point of logic, the concept of ABILITY to pay being inherently revenue constrained is not applicable to the issuer of a currency. Any such constraints are necessarily self-imposed (including various ‘no overdraft’ legislation in some countries for the Treasury at the Central Bank). The issuer can always make payment of its currency by crediting the appropriate account or by issuing actual paper currency if demanded by the counter party.

An extreme example is Russia in August 1998. The ruble was convertible into $US at the Russian Central Bank at the rate of 6.45 rubles per $US. The Russian government, desirous of maintaining this fixed exchange rate policy, was limited in its WILLINGNESS to pay by its holdings of $US reserves, since even at very high interest rates holders of rubles desired to exchange them for $US at the Russian Central Bank. Facing declining $US reserves, and unable to obtain additional reserves in international markets, convertibility was suspended around mid August, and the Russian Central Bank has no choice but to allow the ruble to float.

All throughout this process, the Russian Government had the ABILITY to pay in rubles. However, due to its choice of fixing the exchange rate at level above ‘market levels’ it was not, in mid August, WILLING to make payments in rubles. In fact, even after floating the ruble, when payment could have been made without losing reserves, the Russian Government, which included the Treasury and Central Bank, continued to be UNWILLING to make payments in rubles when due, both domestically and internationally. It defaulted on ruble payment BY CHOICE, as it always possessed the ABILITY to pay simply by crediting the appropriate accounts with rubles at the Central Bank.

Why Russia made this choice is the subject of much debate. However, there is no debate over the fact that Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default.

Note that even Turkey, with lira debt in quadrillions, interest rates in the neighborhood of 100%, annual currency depreciation in the neighborhood of 50%, little ‘faith’ in government, and only inflation keeping the debt to gdp ratio from rising, has never missed a lira payment and never had a lira ‘funding crisis.’ Turkey has had problems with its $US debt, but not with its ability to spend lira. Government spending of lira is limited only by the desire to purchase what happens to be offered for sale. It is not and cannot be ‘revenue constrained.’ Operationally, Turkey has the same unlimited ABILITY to pay in its own currency as does Japan, the US, or any other issuer of its own currency.

The Turkish example, and many others, makes it quite obvious that ABILITY to pay in local currency is, in practice as well as in theory, unlimited. ‘Deteriorating debt ratios’ and the like do not inhibit a sovereign’s ABILITY to pay in its currency of issue.

So why have the ratings agencies implied that default risk for holders of Japan’s yen denominated debt has increased to the point of deserving a downgrade? Do they understand that ABILITY to pay is beyond question, and therefore are basing their downgrade on the premise that Japan may at some point be UNWILLING to pay? If so, they have never mentioned that in their country reports.

A few years back, due to political disputes, the US Congress decided to default on US Government debt. The only reason the US Government did not default was because Treasury Secretary Robert Rubin was able to make payment from an account balance undisclosed to Congress. The US Government clearly showed an UNWILLINGNESS to pay that Japan has NEVER shown or even hinted at. Furthermore, again unlike Japan, the US continues this behavior just about every time the self imposed US ‘debt ceiling’ is about to be breached. And yet the ratings agencies have never even considered downgrading the US on WILLINGNESS to pay.

Therefore, one can only conclude 1) Japan has been downgraded on ABILITY to pay, and 2) The logic of the ratings agencies is flawed. In a world where currently there are serious ‘real’ financial problems to address, the ratings agencies have introduced a ‘contrived’ financial problem of substantial magnitude, as many regulations regarding the holdings of securities specify ratings assigned by the leading ratings agencies. Governments have chosen to rely on the ratings agencies for credit analysis, and downgrades often compel banks, insurance companies, pension plans, and other publicly regulated institutions to liquidate the securities in question.

Japan’s yen denominated debt qualifies for a AAA rating. ABILITY to pay is beyond question. WILLINGNESS to pay has never been questioned, even by the agencies engaged in recent downgrades. The destabilizing downgrades are the result of flawed logic.


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Weber Says ECB Monetary Policy Increasingly Effective

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They wouldn’t dare give the rising budget deficits any credit.

Weber Says ECB Monetary Policy Increasingly Effective

by Christian Vits

May 18 (Bloomberg) — European Central Bank Governing
Council member Axel Weber said the bank’s monetary policy is
increasingly stabilizing the economy.

“Monetary policy is contributing significantly to the
stabilization of the economy and its effectiveness is
increasing,” Weber, who heads Germany’s Bundesbank, said in a
speech in Dusseldorf today. After a “massive” reduction of the
ECB’s benchmark interest rate, the present level of 1 percent
“is appropriate in the current environment,” he said.

In additional to cutting its key rate by 3.25 percentage
points since early October, the ECB has announced it will buy 60
billion euros ($81 billion) of covered bonds and extend the
maturities in its unlimited refinancing operations to 12 months.

Weber said providing banks with as much money as the need
is “of particular importance” and extending the maturities of
the loans “certainly will push the yield curve even lower.”
The plan to buy covered bonds is in line with the ECB’s strategy
of supporting the banking channel, he said.


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America’s Triple A Rating at Risk

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He’s public enemy #1 and senior spokesman for all the deficit terrorists.

He’s also an intellectually dishonest, paid propagandist.

I’ve got the recording posted on my website from the Mike Norman show where he agrees government solvency is not a risk.

If anyone has his email address feel free to email this to him.

The ratings agencies, however, don’t understand the monetary system, and it is indeed possible they will downgrade the US much like they have downgraded Japan.

While this did no harm to Japan and won’t hurt the US, it could be damaging for eurozone nations who are institutionally dependent on funding. However, even in Europe, the ECB has already stretched the limits of the Treaty and would likely go further as needed (though that is not a certainty.)

America’s Triple A Rating is at Risk

by David Walker

May 12 (FT) — Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moodys focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we are in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funneled into the financial system will hopefully rescue it and stimulate our economy.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?

He knows as per the recording on my website that the US government spending in USD is not constrained by revenues, and that any default would be due to a political decision not to pay, and not financial circumstances per se.

James Galbraith and I recently testified at the gao/fasb hearings on sustainability immediately following Walker.

Our presentation is on my website.

The panel agreed with us and reportedly has changed their report, including the elimination of the concern over intergenerational transfers.

I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.

Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.

First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation’s fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

David Walker is chief executive of the Peter G. Peterson Foundation and former comptroller general of the US


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Obama Serious About Balancing the Budget

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Yes, it’s early, but seems he’s serious about his campaign promise to balance the budget.

The economy won’t see the drop in demand until it actually happens.

But valuations can adjust to rising tax rates long before GDP does.

Obama Proposes New Taxes on Dealers, Life Insurance

by Ryan J. Donmoyer

May 11 (Bloomberg) — President Barack Obama proposed raising money to pay for his health-care overhaul by imposing $58 billion in new taxes on securities dealers, life insurance products and Americans with valuable estates.

The eight new proposals, outlined in budget documents released today, are in addition to more than $1 trillion in tax increases over the next decade the president wants to impose beginning in 2011. Those would include higher rates for top earners and restrictions on tax-avoidance techniques commonly used by U.S.-based multinational corporations.


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Richard Koo on fiscal policy and interest rates

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Met Richard years ago. Seems he’s still confused on fiscal policy:

Bond issues to fund capital injections will not lead to higher interest rates

Right! The CB sets rates. Too bad he didn’t stop here rather than try to explain the process.

Japan’s second round of capital injections was four times the size of the first, and some question the ability of US capital markets to absorb such a large emission of government debt. However, the 1989 S&L crisis demonstrated that funds raised for the purpose of rescuing the financial sector will not lead to higher interest rates.

True!

This is because, unlike fiscal outlays for public works, money spent to rescue the financial system does not reduce the amount of investment funds available in the financial markets.

Huh???

Assume, for example, that the government issues $100 of Treasury bonds to recapitalize a troubled bank.

And then makes a payment to the bank.

The bank receiving the capital injection would credit its capital account by $100 and then invest that $100. In effect, there will be $100 in the market to be invested regardless of whether the government issues debt to rescue the bank.

The $100 gets credited to the banks account at the CB. The bank can leave it there or look for alternatives.

Purchases of alternatives in the private sector cause the banks $100 to be ‘wire transferred’ to another bank.

That means the bank’s account at the CB is reduced by $100 and another bank’s account at the CB is increased by $100.

Because the $100 represents capital, the bank’s investment should be liquid and easily convertible into cash. The asset that best fills this bill is government securities

Ok.

If the bank decides to buy government debt with the money, the government will have another $100 to fund a capital injection.

I assume he means new government debt as he started with the government issuing $100 of bonds and recapitalizing the bank.

Two rubs.

First:

The government would only issue additional bonds if it wanted to (deficit) spend additional funds.

And it if wanted to issue bonds and (deficit) spend new funds, it would do so whether this particular bank wanted to buy the bonds or not. That is, the bank wanting to buy bonds is not the enabling force for (deficit) spending.

Second:

The sale of the original $100 of bonds reduced total bank reserves by $100 and the payment of the $100 to the bank added $100 to total bank reserves. So the initial bond issue and the recapitalization left bank reserves offset each other leaving total bank reserves unchanged. Institutionally, issuing new bonds starts a new series of transactions, and, again, that particular bank is not the enabling force.

If, on the other hand, the government uses that $100 to build bridges or roads, that money will leave the capital markets and be spent on wages or construction materials, producing a corresponding decrease in the amount of investment funds available.

I don’t follow this distinction at all.

In this case, as before, the Treasury borrowing $100 reduces bank balances at the CB by $100, and the Treasury spending $100 as above adds $100 to bank balances at the CB, leaving total bank balances (reserves) unchanged.

In short, money spent on public works projects leads to higher interest rates because it does not find its way back to the capital markets.

Not the case, interest rates go to where the CB sets them, one way or another.


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Deficit spending for dummies

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The media is screaming that deficit spending simply takes money from borrowers and gives it to someone else, so it doesn’t work.

This is NOT the case. In fact, deficit spending ADDS to our total savings of financial assets.

Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:

  1. The Treasury sells $100 billion of treasury securities.

  2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.

  3. And our holdings of treasury securities increase by $100 billion.

    4. Quick recap-

    We buy treasury securities from the government which means we have $100 billion more treasury securities.

    We pay for them which means we have $100 billion less in our bank accounts.

    So far all we have done is exchange bank balances at the Fed for treasury securities, which also held at the Fed.

    So far nothing of economic consequence has changed, apart from now we could be earning more interest on our treasury securities than we had been earning on our Fed balances.

  4. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.

  5. This increases member bank balances at the Fed by $100 billion.

Final recap:

  • Bank balances are back where they started from.

  • Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.

Conclusion and proof:

Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.

Please distribute as widely as possible as a matter of further public purpose!!!


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The euro falls again

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Each time the euro falls like it has done over the last several days suspicions arise that ‘this is it’ and it’s on the way towards 0, with a wholesale exit by individuals and institutional investors afraid of everything from inflation to a total breakup of the currency union.

The cross currents are enormous, and the range of predicted outcomes wide.

What’s sure as always is in the end someone will have had the right forecast, but it will be because of ‘statistics’- the forecasts cover all possibilities- or maybe inside information, but not greater wisdom.

Partial list of cross currents:

Euro positive:

  • The eurozone has relatively tight fiscal policy, with no proactive fiscal package of consequence. This keeps the euro strong, and promotes deflationary domestic conditions as the economy tries to export to gain needed financial assets.

  • Fed swap lines tend to support the euro vs the dollar, as institutions that otherwise would need to sell euros and buy dollars to cover dollar losses can instead buy time and borrow them cheaply via the swap line arrangement. This kept the region from collapse in the fall.

Euro negative:

  • The dollar losses don’t go away with the swap lines, unless dollar asset prices and credit quality improve, which has not been the case. So any euro strength tends to see sellers of euro vs dollars to cover some of the losses.

  • In a breakup of the eurozone there is a risk euro securities get redenominated to the new national currencies which may be subject to high levels of deficit spending to support domestic demand and promote high inflation, high interest rates, and falling currencies as in the past.

  • Euro governments could default and payments be suspended indefinitely.

  • Bank deposits could be frozen indefinitely with major bank failures too large for any national govt. to politically or even operationally write the check.

  • The low price of crude supports the dollar by keeping dollars ‘hard to get’ for the foreign sector.

The exit from the euro includes those who buy gold, which has been driving gold to extremes vs other commodities even though you can’t eat it and it doesn’t pay interest, and it’s been a very long time since it was what you needed to pay taxes.

This is a major bubble in progress that ends in a very sharp collapse when the buying has run its course, and as those owning gold need it for payment purposes and begin to sell.

Along with the real buyers who are exiting the euro (and other currencies) are the usual specs and trend followers who exacerbate every trend on the way up and the way down.

And the fact remains that all the ‘money’ in the world is nothing more than spread sheet entries of what is needed to pay taxes.

And there aren’t a lot of practical alternatives to storing ‘wealth’ apart from inherently worthless gold, and various forms of ‘property’ that can all be taxed and therefore demands currency for payment.

Ironically, it is a spreadsheet crisis- there is no shortage of real resources- and therefore readily ‘fixed’ by the right data entry by governments on their own spreadsheets.

For the US that means something like:

  1. A full payroll tax holiday where the treasury makes all payments for employers and employees- why are we taking $1 trillion per year from workers and business struggling to make their payments?

  2. $300 billion to the states on a per capita basis with no strings attached- the per capita distribution concept removes the need for specific federal oversight.

Those two spreadsheet entries would end the ‘crisis’ in very short order.

And a government funded $8/hour job for anyone willing and able to work begins to replace the current unemployed labor buffer stock with an employed labor buffer stock, which is both a superior price anchor and potentially a source of increased useful output and reduction of the high real social costs of our current system.

But deficit myths are likely to remain the obstacle to making the spread sheet entries readily available to restore output and employment.

The latest ridiculous bit of non sense is that government borrowing takes ‘money’ from one place and puts it in another.

Government deficit spending adds exactly that many NEW ‘bank balances’ to non government financial assets, and government borrowing subsequently offers those NEW, ADDITIONAL bank balances CREATED BY DEFICIT SPENDING alternative financial assets called Treasury securities.

At the end of the day there are NEW financial assets called Treasury securities added to the existing stock of financial assets in the non govt sectors by federal deficit spending.

Spread the word!


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