As previously discussed, since the S&P downgrade, the talk of the US becoming the next Greece has gone conspicuously quiet.
And, as suggested may happen, the anti deficit talk is shifting to inflation.
And that’s a much tougher sell in Congress. Especially with no forecast showing any inflation risk, including tips, and a Fed still fighting deflation.
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.
First, I see no public purpose in burning any crude oil to fly the Chairman and his entourage to make any speech.
He could just as easily deliver this one from the steps of the Fed in DC.
Congress should demand a statement of public purpose before endorsing any travel by its agents.
Next is what I expect from the speech.
The short answer is not much.
I don’t see more QE as the purpose of QE is to bring long rates down, and they are already down substantially. And the Fed now has sufficient evidence to confirm that long rates are mainly a function of expectations of future FOMC votes on rate settings.
To that point, when the Fed announced QE, and market participants believed it would spur growth, and therefore FOMC rate hikes somewhere down the road, long rates worked their way higher. And when the Fed ended QE, and market participants believed the economy would be slower to recover, long rates worked their way lower. Not to mention China hates QE and it still looks to me there’s an understanding in place where China allocates reserves to $US as long as the Fed doesn’t do any QE.
The Fed could cut it’s target Fed funds rate, the cost of funds for the banking system, down to 0 and lower that cost of funds by a few basis points. But those few basis points can hardly be expected to have much effect on anything.
It’s not the Fed has run out of bullets, it’s that the Fed has never had any bullets of any consequence.
And with the few it’s fired, it hasn’t realized the odds are the gun has been pointed backwards.
For example, it still looks to me lower rates, if anything, reduce aggregate demand via the interest income channels.
And QE isn’t much other than a tax on the economy, that also removes interest income.
So look for a forecast of modest GDP growth with downside risks, core inflation remaining reasonably firm even as unemployment remains far too high, all of which support continued Fed ‘accommodation’ at current levels.
Spending cuts have higher multiples, but in any case it’s all beside the point.
The problem is the deficit is too small, not too large.
After the post S&P downgrade discussions, where all agree the US govt ‘prints the dollar’
the argument that there could be a Greek like financial crisis has quietly vanished.
The only remaining case against the deficit,
which no one is making,
for obvious reasons,
is that inflation from ‘overspending’ is too high, and even higher levels of unemployment are needed to fight inflation.
Spending Cuts, Not Tax Hikes, Best for Deficit: NABE
August 22 (AP) — The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.
The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases.
As for how to reduce the deficit, nearly 40 percent said the best way would be to contain Medicare and Medicaid costs. Nearly a quarter recommended overhauling the tax system and simplifying tax rates and exemptions. About 15 percent said the government should enact tough spending caps and cut discretionary spending.
The latest survey by the NABE was conducted in the two weeks ending Aug. 2, the day that the Senate passed and President Obama signed legislation to cut spending by more than $2 trillion and raise the nation’s debt ceiling.
The agreement managed to avert a potential default, but Standard & Poor’s downgraded U.S. credit from AAA to AA+, citing the political wrangling over the deal as a reason.
According to the survey of 250 economists who are members of NABE, nearly 49 percent of those responding said the country’s fiscal policy should be more restrictive, while nearly 37 percent said they believe the government should do more to stimulate the economy. The remainder said fiscal policy should remain the same.
At the same time, more than 70 percent of the people that responded said they expect U.S. fiscal policy to be more restrictive over the next two years.
More slowing noises.
Jury still out on possible hard landing (GDP under 6%), and elements of the ongoing inflation fight sustains downside risks as well. The cuts in deficit spending and state lending hurt the economy, as the higher interest rates from the bank of china keep upward prices on inflation.
And lots of miguided comments below as well.
Public investment is entirely sustainable, for just one example, but because they believe it’s not, they seem to be trying to move away from it. For example, it’s perfectly ‘sustainable’ (moral hazard issues, efficiencies, etc. aside) to build housing and give it away for no charge.
Analysis: China unlikely to cool investment as its growth engine
Excerpt:
In spite of global clouds, most economists still expect China to grow well above 8 percent in 2012. That is in line with the market refrain that China won’t have a hard landing. A Reuters poll in mid-July showed economists think 2012 growth will be 8.8 percent, well above Beijing’s 7 percent growth target.
REBALANCING, SOME DAY
Some of the 4 trillion yuan ($626 billion) stimulus package announced in 2008 was squandered on ill-advised projects and economists now worry that a sizable fraction of loans to local governments won’t be repaid.
Banks may be wary of extending more large loans, making it difficult for local governments to invest their way to growth in the future.
Last week alone, China halted new railway projects and cut its building target for public housing by 20 percent to 8 million units for 2012, from 10 million.
Yet, economists say little has changed in reality.
China’s bullet trains may be a beguiling metaphor for its rapid urbanization, but rail investment accounted for just a paltry 1.9 percent of total fixed asset investment in the first six months of this year.
If anything, some economists argue Beijing is most likely to increase investment in housing if it decides to stimulate growth in coming months.
HOMES PRICED OUT OF REACH
Soaring property prices have put homes out of reach for many ordinary Chinese, and that has become a source of public ire. Keenly aware of that, Beijing wants to build more public homes to keep them affordable.
And with the real estate market accounting for a quarter of total investment in the first half of this year, China could get decent bang for its buck if it ramps up spending in the sector.
Judging by Beijing’s recent remarks on monetary policy, it appears that China is ready to pause its 10-month policy tightening campaign as rain clouds gather over the world economy.
Alongside wide expectations that China’s inflation is near its peak after hitting a three-year high of 6.5 percent in July, many analysts think Beijing is ready to support economic growth if needed.
To be sure, Beijing says it wants to cure China of its penchant for investment-driven growth. Under its broad five-year economic plan starting from 2011, it envisions a fairer Chinese economy where consumption climbs on rising incomes.
But the grand plan drew skepticism when it was unveiled as it was short on details on how changes would come about.
FEW BIG SPENDERS
Many analysts have said that Chinese consumers cannot pull their weight as big spenders because the bulk of national income goes to the state instead of workers. A flimsy social safety net encourages high saving rates.
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.
A hard landing may be in progress as data continues to soften.
I’m still thinking July and August data will be telling.
China’s Economic Growth Targets Cut at Daiwa, Inflation Raised
August 14 (Bloomberg) — China’s 2012 GDP growth target was cut to 8.5 percent year-on-year from 9 percent at Daiwa Capital Markets, which “weaker external demand growth” and to the government’s “recent efforts” to lower investment growth.
A double-dip recession in Europe and the U.S. would affect growth “even more negatively,” while China would be “unlikely” to announce a big stimulus package, analysts at Daiwa led by Mingchun Sun wrote in a report dated Aug. 12. They raised their 2011 consumer-price inflation forecast to 5.4 percent year-on-year from 4.9 percent.
They also revised down their 2012 export growth forecast to 10 percent year-on-year from 15 percent and lowered their import growth target to 13 percent from 18 percent.
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.
*DJ Fed’s Dudley: Drop In Market Rates A Plus For Economy
He forgets about the interest income channels
*DJ Dudley: US Economic Growth Slower Than Expected
Yes, but still higher than the first half, as recently revised
*DJ Dudley: Has Revised Down Expectations Of Growth
Yes, but still higher than the first half when corporate earnings were relatively strong
*DJ Dudley: NY Region Growing Faster Than Nation
*DJ Dudley: NY Region Has Grown At ‘Slow Pace’
Yes, and better than the first half, helped by auto production resuming after earthquake delays
Retail sales were ‘normal’
The 9% federal budget deficit continues to provide reasonably support for modest GDP growth
The Fed’s ‘forecast’ for unchanged rates for two years is just that. It’s their expectation for rates based
on their outlook.
And while the Fed’s outlook will change as conditions change, markets are not taking it that way.
From comments by Warren Buffet to Alan Greenspan,
And from all the responses to the S&P downgrade by economists and financial professionals from the four corners of the world,
THE WORD IS OUT!
The US government is the issuer of the US dollar.
So no matter how large the federal deficit might be:
The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt running out of US dollars.
The US government always has the ‘ability to pay’ any amount of US dollars at any time.
NOW CONNECT THE DOTS TO:
The US is not dependent on tax revenue or foreign borrowing to be able to spend.
And,
whereas Greece is not the issuer of the euro,
much like the individual US states are not the issuer of the US dollar,
THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE
There is no such thing as the US getting cut off from spending by the financial markets and forced to go begging to the IMF to get US dollars to spend.
Nor is the US government subject to market forces driving up interest rates on US Treasury bills.
EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%
Why, because, any nation that issues its own currency also sets its own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate
SO, THEN,
WHAT IS THE POINT OF DEFICIT REDUCTION?
Suddenly, it’s NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.
So now,
the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION
or shut up!
they must FLIP FLOP
or shut up!
Yes, there is a new reason they can flip flop to.
Inflation.
They can start claiming the current path of deficit spending will lead to inflation.
Fine.
Bring it on!
First, they need to do the research, as they haven’t even thought about this yet.
Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children
But ONLY because some day,
if we don’t do something when the time comes
and even though we don’t have an inflation problem now,
and haven’t had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.
Fine.
Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?
How about we get the word out and find out, thanks!
Please distribute!