Category Archives: Inflation

Japan

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Karim writes:

There is a piece typifying the logic behind the buying of high strike payers in Japan (Japanese govt debt ‘Ponzi Scheme’).

Also heard GS put a similar piece out today but have not seen.

Makes no sense but seems to be gathering steam.

Right, the sustainability issue with floating FX is the issue of the sustainability of low inflation.

The ‘risk’ is that ‘excessive’ deficit spending adds inflationary demand, weakens the currency, etc. however the article seems to reject that argument as it suggests quantitative easing will continue due to weakness of demand, etc.

Nor are the ‘sustainability remedies’ applicable to floating FX. Any ‘stress’ is taken out by the exchange rate, and the way things generally work ‘excessive’ deficits increase nominal gdp/inflation and tend to stabilize debt/gdp ratios when that point of ‘excessiveness’ is reached.

As always, it’s about inflation, not solvency.
Govt spending is in no case inherently revenue constrained.
Any such constraints are necessarily self imposed.

This is all not to say this type of rhetoric can not trigger portfolio shifts and trading plays that can substantially move markets while they last.

In fact, that’s often what bubbles are.

Decline in Government Debt Sustainability
An extended period of heavy fiscal deficits will reduce the sustainability of government debt, which is already in the danger zone. The general-government debt was equivalent to 196% of GDP at the end of FY2008 (156% for long-term debt) and we project a rise to 222% (181%) for end-FY2010. This escalation is in part the consequence of low nominal GDP growth — we forecast an average -1.4% for 2009-10—and the average JGB yield is almost continuously above the nominal growth rate. The sustainability remedies are a deep cut in the debt ratio through sales and liquidation of government assets, combined with a demographic boost for the potential growth rate from measures to boost the birthrate and encourage immigration.


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EU Daily | European Construction Output Declined for Fourth Month

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European Construction Output Declined for Fourth Month

Domestic housing markets still weak.

Eurozone officials say they support strong dollar

I’m sure they do- they are hoping to export their way out of their recession.

EU Ministers Agree to Start Cutting Deficits in 2011

Back to their old formula- tight fiscal to keep deflationary forces at work on labor costs, to support exports.

Except that formula requires the govt to sell its currency and buy dollars, like Germany and the rest used to do,
to keep relative costs low enough to support exports.

ECB’s Bini Smaghi Says Doesn’t See ‘Any Risk’ of Inflation

Right, the deflationary forces are so severe the ECB actually hit its inflation target for the first time since inception.

German September Producer Prices Decline on Cheaper Energy

It’s not a weak dollar, it’s a strong euro as the eurozone continues to deflate.

Bundesbank Says Germany Continued Recovery in Third Quarter

Like the US, gdp stopped falling while increased productivity keeps employment from increasing.

Merkel in stand-off over tax cuts

They need to cut taxes, increase spending, and at the same time cut the deficit.
Haven’t figured out how to do that yet.

Germany Mulls Fund to Ease Labor, Health Budget

France’s Woerth May Roll Back Tax Deductions

They haven’t figured out how to do it either.

German Bonds Advance as Stock Declines Stoke Demand for Safety

Stock declines reduce chances of rate hikes


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Buiter blog

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The economics profession is a disgrace. None of them seem to fathom monetary operations.

Fiscal expansions in submerging markets

By Willem Buiter

This morality tale has important consequences for a government’s ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms.

Not true. This is some kind of ricardian equivalent twist that is inapplicable. For example, govt spending to hire someone is a direct increase in demand. And any dollar spent due to a tax cut increases demand by that dollar. (these are minimums)

If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetise the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations.

In fact that has already happened. As evidenced by the price of gold in an otherwise deflationary environment.

Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary.

‘Monetization’ alters interest rates, not inflation. Only to the extent that interest rates influence inflation does monetization influence inflation. And there’s not much evidence rates have much to do with inflation, and mounting evidence they have no influence on inflation. Not to mention my suspicions that lower rates are highly deflationary.

This would raise long-term nominal interest rates

Not directly- only to the extent market participants believe the fed will raise rates over the long term.

and probably give risk to inflation risk premia on public and private debt instruments as well.

Has already happened in many places.

Default would build default risk premia into sovereign interest rates, and act as a break on demand.

This has already happened and has not functioned as a break/brake? On demand or as a constraint on deficit spending.

Beacause I believe that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts commensurate with the up-front tax cuts and spending increases they are contemplating,

Since taxes serve to moderate agg demand, this implies that when economies ‘overheat’ the authorities won’t tighten fiscal policy. However, the automatic fiscal stabilizers conveniently do that for them, as tax revenues rise during expansions faster than even govt can spend. And this fiscal consolidation does induce contraction and ends the expansion. It was the too low deficit in 2006 the slowed aggregate demand and began this latest down turn, with a little help from the drop in demand when the housing frauds were discovered.

I believe that neither the US nor the UK should engage in any significant discretionary cyclical fiscal stimulus, whether through higher public spending (consumption or investment) or through tax cuts or increased transfer payments.

There is no other way to add to aggregate demand, except by letting the auto stabilizers doing the exact same thing the ugly way- through a deteriorating economy- rather than proactively which prevents further decline.

Instead, the US and UK fiscal authorities should aggressively use their fiscal resources to support quantitative easing and credit easing by the Fed and by the Bank of England (through indemnities offered by the respective Treasuries to the Fed and the Bank of England to cover the credit risk on the private securities these central banks have purchased and are about to purchase).

Qe is just an asset shift that does nothing for aggregate demand, except possibly through the interest rate channel which, as above, is minimal if not counterproductive.

The £50 bn indemnity granted the Bank of England for its Asset Purchase Facility, by HM Treasury should be viewed as just the first installment on a much larger indemnity that could easily reacy £300 bn or £500 bn.

Purchasing financial assets doesn’t alter aggregate demand.

The rest of the scarce, credibility-constrained fiscal resources

Fiscal resources are not credibility constrained.

Japan today forecast deficits of over 200% of GDP with no signs of market constraints. In fact, their 10 year JGB’s trade at about 1.3%, and they were downgraded below Botswana.

of the US and the UK should be focused on recapitalising the banking system with a view to supporting new lending by these banks, rather than on underwriting existing assets or existing creditors.

Govt capitalization of banking is nothing more than regulatory forbearance. Bank capital is about how much private capital gets lost before govt takes losses. In the US, having the Treasury buy bank equity simply shifts the loss, once private equity is lost, from the FDIC to the Treasury, which funds the FDIC in the first place.

Other available fiscal resources should be focused on supporting, through guarantees and insurance-type arrangements, flows of new lending and borrowing. As regards recapitalisation and dealing with toxic assets I either favour temporary comprehensive nationalisation or the ‘good bank’ model. Existing private shareholders of the banks, and existing creditors and holders of unsecured debt (junior or senior) should be left to sink or swim without any further fiscal support, as soon as new lending, investment and borrowing has been concentrated in new, state-owned ‘good banks’.

The problem with banking is the borrowers can’t afford their payments. This needs to be fixed from the bottom up with payroll tax holiday or VAT holiday, not from the top down as he suggests.

It is true that, despite the increase in longer-term Treasury yields from the extreme lows of early December 2008, recent observations on government bond yields don’t indicate any major US Treasury debt aversion, either through an increase in nominal or real longer-term risk-free rates or through increases in default risk premia – although it is true that even US Treasury CDS rates have risen recently to levels that, although low by international standards, are historically unprecedented.

Yes, and 10 year rates in Japan are 1/3 of the US rates, and their debt is 3 times higher. He’s barking up the wrong tree.

In a world where all securities, private and public, are mistrusted, the US sovereign debt is, for the moment, mistrusted less than almost all other financial instruments (Bunds are a possible exception).

And Japan even less mistrusted with triple the deficits?

But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics –

Only because those numbers include the tarp which is only a purchase of financial assets, and not a purchase of goods and services. Ordinarily tarp would have been done by the fed and the deficit lower, as it’s the Fed’s role to purchase financial assets. But this time it didn’t happen that way except for maiden lane and a few other misc. Purchases.

I expect that US sovereign bond yields will begin to reflect expeted inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia.

That’s all priced in the TIPS and I don’t see much inflation fear there.

The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency –

A govt doesn’t care which holders of its currency buys its securities. Deficit spending creates excess reserve balances at the Fed. The holders of those balances at the fed, whether domestic or foreign, have the option of doing nothing with them, or buying Treasury securities, which are nothing more than interest bearing accounts also at the Fed. The other option is spending those balances, which means the fed transfers them to someone else’s account, also at the Fed.

and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely. While it is hard to be scientifically precise about this, I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system (and to a growing list of other more or less deserving domestic industries and other good causes) will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old. The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.

Meaning what? Just empty rhetoric so far.

Under conditions of high international capital mobility, non-monetised fiscal expansion strengthens the currency if the government has fiscal-financial credibility, that is, if the markets believe the expansion will in due cause be reversed and will not undermine the sustainability of the government’s fiscal-financial-monetary programme.

It’s a function of nonresident ‘savings desires’ of US financial assets.

If the deficits are monetised, the effect on the currency is ambiguous in the short run (it is more likely to weaken the currency if markets are forward-looking),

Because it’s a non event for the fed to buy financial assets, apart from small changes in term interest rates.

but negative in the medium and long term. If the increased deficits undermine the credibility of the sustainability of the fiscal programme, then the effect on the currency could be be negative immediately.

Ok, lots of things can turn traders against anything that’s traded. No news there.

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors.

With non convertible currency and floating fx there is no such possible constraint on federal spending and/or federal lending. The private sector, and other users of the currency, is a different story, and always vulnerable to a liquidity crisis.

Hence the ECB was bailed out by the fed with unlimited swap lines (functionally unsecured dollar loans from the Fed) when its member banks got caught short dollars last year.

That was their ‘sudden stop’ and it happened only because of foreign currency issues, not euro issues, and it happened to the private sector, not the public sector. Not to say current institutional arrangements don’t make the euro national govts subject to liquidity issues, but that’s another story.

There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers.

Yes, it’s about credit worthiness for borrowers who are users of a currency and not govts. In their currency of issue.

But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

The fact that this article has any credibility speaks volumes.


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Obama Trickle down policies would make Reagan blush

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Looking for more of the same with the preponderance of ‘top down’ initiatives.

Wall street banks dividing up tens of billions in bonuses, as fees and net interest margins remain wide, helped by income lost by ‘savers’ due to fed rate cuts, while unit labor costs plunge with productivity high and wages stagnating.

Negative headline CPI means no social security increase, unemployment near 10% and jobs still being lost, foreclosures running at record levels, and mortgage delinquencies continuing to climb.

And now with real GDP growing at maybe 3% and lower income groups still going backwards, a larger chunk of the output has to be going to the top.

Wealthy U.S. Shoppers Boost Spending 29%

By Cotten Timberlake

Oct. 16 (Bloomberg) — Spending in the U.S. on luxury goods and services spurted 29 percent in the third quarter from the previous three months, as consumers with the highest incomes unleashed pent-up demand, according to Unity Marketing.

Spending among 1,067 consumers with average annual income of $228,800 rose to $18,826 each in the three months ended in September from $14,554 a quarter earlier, the Stevens, Pennsylvania-based luxury-market research firm said today. Shoppers cut spending by 3.2 percent in the second quarter and spent $13,429 in the third quarter of 2008.

The increase was driven by consumers with the highest income levels, starting at $250,000 a year, said Pam Danziger, Unity’s Marketing’s president. Spending was strongest in the home, travel and dining segments, she said. The wealthy curbed purchasing earlier this year because of Wall Street job cuts, lower home values and volatile financial markets.

“No question that this quarter’s spending increase is good news for luxury marketers,” Danziger said in a telephone interview today. “Many affluent consumers returned after sitting on the sidelines for a year. However, the richest are few in number, 2.5 million households, so competition will be fierce to win their attention.”

MasterCard Report

U.S. luxury sales rose 3.4 percent to $891 million in September from a year earlier, the first such gain since August 2008, according to figures provided today by credit-card company MasterCard in its SpendingPulse report. Last month, those sales fell 13 percent from the previous year.

The luxury category covers apparel, leather goods and department-store sales at the highest 10 percent of prices. SpendingPulse measures retail sales across all payment forms, including cash and checks.

United Marketing said purchases increased in all but three of the 22 product and service categories it tracks.

The highest-income group spent an average of $43,111 in the latest quarter and the lowest-income group tracked, with earnings of $100,000 to $149,999, spent $10,423. The three categories that didn’t gain were fashion accessories, fashion apparel and art, Danziger said.

Gains in confidence among luxury consumers, meanwhile, slowed, Unity Marketing said.

The researcher’s luxury confidence index rose 1.6 points to 75.9, after jumping 18.6 points to 74.3 in the previous quarter. That index peaked at 113.2 at the end of March 2006. Its low was 40.3 in September 2008. It started at 100 in January 2004.

The findings were based on a survey conducted among adults aged 24 to 70 with income of at least $100,000 from Oct. 2 to Oct. 7. Unity Marketing does not calculate a margin of error. It plans to publish the survey results Oct. 19.


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EU warns UK that its debt is unsustainable

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EU warns UK’s debt is ‘unsustainable’

By Sean O’Grady

Oct. 15 (The Independent) —A damning report by the European Commission on the long-term prospects for Britain’s public finances warns that Britain is at “high risk” of running unsustainable debts – implying that the nation will be unable to service its debts and that only default or high inflation can relieve the burden.

That implies the high deficits will close the output gap to 0 with ultra low unemployment and high cap utilization.

And then taxes will have to go up to cool it down.

Sounds like a good plan to me!

The Commission’s 2009 Sustainability Report says that Britain will suffer a
“sustainability gap” of 12.4 per cent of GDP – meaning tax rises or spending
cuts amounting to close to £200bn a year.


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latest Bernanke remarks

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Like depository institutions in the United States, foreign banks with large dollar-funding needs have also experienced powerful liquidity pressures over the course of the crisis. This unmet demand from foreign institutions for dollars was spilling over into U.S. funding markets, including the federal funds market, leading to increased volatility and liquidity concerns. As part of its program to stabilize short-term dollar-funding markets, the Federal Reserve worked with foreign central banks–14 in all–to establish what are known as reciprocal currency arrangements, or liquidity swap lines. In exchange for foreign currency, the Federal Reserve provides dollars to foreign central banks that they, in turn, lend to financial institutions in their jurisdictions. This lending by foreign central banks has been helpful in reducing spreads and volatility in a number of dollar-funding markets and in other closely related markets, like the foreign exchange swap market. Once again, the Federal Reserve’s credit risk is minimal, as the foreign central bank is the Federal Reserve’s counterparty and is responsible for repayment, rather than the institutions that ultimately receive the funds; in addition, as I noted, the Federal Reserve receives foreign currency from its central bank partner of equal value to the dollars swapped.

Looks like they still fail to recognize these dollar loans are functionally unsecured.

The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses. As best we can tell, the programs appear to be having their intended effect. Most notably, 30-year fixed mortgage rates, which responded very little to our cuts in the target federal funds rate, have declined about 1-1/2 percentage points since we first announced MBS purchases in November, helping to support the housing market.

Correct on this count. Treasury purchases are about interest rates and not quantity.

Currency and bank reserves together are known as the monetary base; as reserves have grown, therefore, the monetary base has grown as well. However, because banks are reluctant to lend in current economic and financial circumstances, growth in broader measures of money has not picked up by anything remotely like the growth in the base. For example, M2, which comprises currency, checking accounts, savings deposits, small time deposits, and retail money fund shares, is estimated to have been roughly flat over the past six months.

Correct here as well, where he seems to recognize the ‘base’ is not causal. Lending is demand determined within a bank’s lending criteria.

The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets.

Here, however, there is an implied direction of causation from excess reserves to lending. This is a very different presumed transmission mechanism than the interest rate channel previously described.

Such purchases should in principle both raise asset prices and increase the growth of broad measures of money, which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services.

Raising asset prices is another way to say lowering interest rates, which is the same interest rate channel previously described.

In a quantitative-easing regime, the quantity of central bank liabilities (or the quantity of bank reserves, which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation.

The degree of policy accommodation is the extent to which interest rates are lower than without that accommodation, if one is referring to the interest rate channel, which at least does exist.

The quantity of central bank liabilities would measure the effect of the additional quantity of reserves, which has no transmission mechanism per se to lending or anything else, apart from interest rates.

However, the chairman is only defining his terms, and he’s free to define ‘accommodation’ as he does, though I would suggest that definition is purely academic and of no further analytic purpose.

Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.”11 In a credit-easing regime, policies are tied more closely to the asset side of the balance sheet than the liability side, and the effectiveness of policy support is measured by indicators of market functioning, such as interest rate spreads, volatility, and market liquidity. In particular, the Federal Reserve has not attempted to achieve a smooth growth path for the size of its balance sheet, a common feature of the quantitative-easing approach.

Here he goes back to his interest rate transmission mechanism which does exist. But the implication is still there that the quantity of reserves does matter to some unspecified degree.

As we just saw in slide 6, banks currently hold large amounts of excess reserves at the Federal Reserve. As the economy recovers, banks could find it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures and, ultimately, lead to inflation pressures.

When he turns to the ‘exit strategy’ it all goes bad again. Banks don’t ‘lend out their reserves.’ in fact, lending does not diminish the total reserves in the banking system. Loans ‘create’ their own deposits as a matter of accounting. If the banks made $2 trillion in loans tomorrow total reserves would remain at $2 trillion, until the Fed acted to reduce its portfolio.

Yes, lending can ‘ultimately lead to inflation pressures’ but reserve positions are not constraints on bank lending. Lending is restricted by capital and by lending standards.

Under a gold standard loans are constrained by reserves. Perhaps that notion has been somehow carried over to this analysis of our non convertible currency regime?

As such, when the time comes to tighten monetary policy, we must either substantially reduce excess reserve balances or, if they remain, neutralize their potential effects on broader measures of money and credit and thus on aggregate demand and inflation.

Again, altering reserve balances will not alter lending practices. The Fed’s tool is interest rates, not reserve quantities.

Although, in principle, the ability to pay interest on reserves should be sufficient to allow the Federal Reserve to raise interest rates and control money growth, this approach is likely to be more effective if combined with steps to reduce excess reserves. I will mention three options for achieving such an outcome.

More of the same confusion. Yes, paying interest will be sufficient to raise rates. However a different concept is introduced, raising interest rates to control ‘money growth’ rather than, as previously mentioned, raising rates to attempt to reduce aggregate demand. Last I read and observed the Fed has long abandoned the notion of attempting control ‘money growth’ as a means of controlling aggregate demand. The ‘modern’ approach to monetarism that prescribes interest rate manipulation to control aggregate demand does not presume the transmission mechanism works through ‘money supply’ growth, but instead through other channels.

First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements (reverse repos) with financial market participants, including banks, the GSEs, and other institutions.

Reverse repos are functionally nothing more than another way to pay interest on reserves.

Second, using the authority the Congress gave us to pay interest on banks’ balances at the Federal Reserve, we can offer term deposits to banks, roughly analogous to the certificates of deposit that banks offer to their customers. Bank funds held in term deposits at the Federal Reserve would not be available to be supplied to the federal funds market.

This is also just another way to pay interest on reserves, this time for a term longer than one day.

Third, the Federal Reserve could reduce reserves by selling a portion of its holdings of long-term securities in the open market.

Back to the confusion. The purpose of the purchase of long term securities was to lower long term rates and thereby help the real economy. Selling those securities does the opposite- it increases long term rates, and will presumably slow things down in the real economy.

However, below, he seems to miss that point, and returns to assigning significance to ‘money supply’ measures.

Each of these policy options would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.


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UK Bank rate to ‘stay frozen’ for 5 years

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Thanks, Dave, if this is the new mainstream conventional wisdom it looks like the monetarists have somehow gotten back in control.

Their transmission mechanism that increases demand seems to be asset prices and the exchange rate for export growth and reduced imports via higher domestic prices with the implied currency depreciation.

In fact it’s a policy of ‘both feet on the brakes’ which would mean moving towards a Japan like rates environment.

Hard to believe this actually will happen. Very, very odd.


Interest rates in Britain are to stay low for years to compensate for a severe fiscal squeeze on the economy, a report to be published this week says.

The Centre for Economics and Business Research, in its latest UK Prospects, to be published tomorrow, predicts that Bank rate will remain at 0.5% until 2011 and not reach 2% until 2014.

It also expects further quantitative easing by the Bank of England on top of the £175 billion so far announced, and says that the programme of asset sales will not start to be rolled back until 2014 at the earliest.

Its forecast is based on the assumption that an incoming government will announce £100 billion of fiscal tightening, split between £20 billion of tax rises and £80 billion of spending cuts, over the lifetime of the next parliament.

With this fiscal tightening putting a brake on growth, the Bank will be obliged to keep interest rates down, the CEBR argues.

“We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward,” said Doug McWilliams, chief executive of the CEBR and one of the report’s authors. “Our analysis says that this ought to work. If it does so, we are likely to see a re-rating of equities and property, which in turn, should stimulate economic growth after a lag.”

The forecast implies a good outlook for the stock market and house prices, but could put further downward pressure on sterling.

Charles Davis, a senior CEBR economist and co-author of the report, said the main risk was a rise in inflation from higher commodity prices, which could force the Bank’s hand.

Inflation figures this week should show a drop from 1.6% to 1.2%, which City economists expect to be the low point. Higher Vat at the turn of the year is likely to push inflation temporarily above the official target. Unemployment figures will also be released this week.

+ Profit warnings fell to a six-year low in the third quarter, Ernst & Young, the accountant, said. There were 52 warnings from quoted UK companies, a year-on-year drop of 53%, and 17% less than in the second quarter.

Ernst & Young said, however, that the decline did not mean the worst was over. “This dramatic fall is due to a complex mixture of previously withdrawn company guidance, already depressed market expectations and an improving economic outlook that has encouraged companies to look ahead with greater confidence, with the worst of the downturn seemingly past,” said Keith McGregor, restructuring partner at Ernst & Young.

“Nevertheless, confidence should not turn to complacency. The one-off effects of monetary and fiscal stimulus, and inventory rebuilding have put a gloss on current demand that could soon tarnish once this support is withdrawn.”


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Geenspan Comments

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Yes, in case you thought the former Chairman understood monetary operations and reserve accounting

>   
>   (email exchange)
>   
>    On Fri, Oct 9, 2009 at 3:15 PM, Roger wrote:
>   
>   You can’t make up stuff like this! Reuters: Greenspan
>   says Fed balance sheet an inflation risk “You cannot
>    afford to get behind the curve on reining in this extraordinary
>    amount of liquidity because that will create an enormous
>    inflation down the road,” Greenspan said at a forum hosted by
>    The Atlantic magazine, the Aspen Institute and the Newseum.
>   

Greenspan says Fed balance sheet an inflation risk

Oct. 2 (Reuters) — Former Federal Reserve Chairman Alan Greenspan said on Friday that the Fed risks igniting a burst of inflation if it does not withdraw its extensive support for the economy at the right moment.

“You cannot afford to get behind the curve on reining in this extraordinary amount of liquidity because that will create an enormous inflation down the road,” Greenspan said at a forum hosted by The Atlantic magazine, the Aspen Institute and the Newseum.

In its battle against the worst financial crisis in 70 years, the Fed has chopped interest rates to zero and flooded the financial system with hundreds of billions of dollars in the process. In so doing, it has more than doubled the size of its balance sheet to over $2 trillion.

The Fed has said that with high unemployment and a record level of factory idleness, none of the pressures that would ignite inflation is on the horizon. A government report on Friday that showed a weaker-than-expected job market in September is likely to provide additional support for that view.

Greenspan said the economy is “undergoing a disinflationary process,” and stressed that the Fed faces no urgent need at the moment to unwind its monetary stimulus.

Still, his comments echo concerns raised by some policymakers who worry that delays in shrinking the Fed’s bloated balance sheet will tempt fate and recommend action sooner rather than later.

“It’s critically important the Fed’s doubling of its balance sheet be reversed,” Greenspan said. “If you allow it to sit and fester, it would create a serious problem.

Greenspan chaired the Fed from 1987 until his retirement in 2006. Hailed by many as a sage during his Fed tenure for a long period of prosperity, his legacy has been called into question over the long period of ultra-low interest rates and the Fed’s hands-off approach to overseeing the financial industry before the global economic crisis.

(Reporting by Mark Felsenthal; Editing by Kenneth Barry)


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Ritzholtz Blog

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Mosler: PAYROLL TAX HOLIDAY

Warren Mosler, economist, perturbed by the misunderstanding of monetary policy by the current and past administrations, is running for President in 2012. He has been speaking at the Tea Parties, explaining to taxpayers that Washington is either at best ignorant of economic policy or at worst deceptive.

~~~~

Federal Reserve Chairman, Ben Bernanke, has indicated that the economy is improving and the recession is ending. The media informs us that the stock market has added $2 trillion to national wealth since the market lows in March 2009. However, the stock market is still more than $2 trillion from its previous high in 2008 and real estate values are down $6 trillion and still declining. Not only has nominal wealth evaporated, but incomes are also treading heavy water. The Government informs us that unemployment is up to 9.8% with the only ‘good news’ being that the rate of job loss has declined. In July, there were only 2.6 million jobs available for 14.5 unemployed.

Also many are working part time when they want full time jobs. Americans are taking lower paying jobs and incomes are on the decline, especially when adjusted for the massive bonuses paid to bank employees and CEOs. The Department of Labor reported that young Americans (16 to 24 years old) have the highest unemployment rate ever (25.5%, although the New York Post has it at 53.4%). Regardless, America has a large and growing under utilization of labor among all age demographics.

At the same time, state tax collections have been declining and budgetary constraints (balanced budget requirements) are placing enormous pressures on state finances, especially California. In response, states and local municipalities are cutting jobs (teachers, policeman etc.), services, university, and infrastructure funding. Additionally, the states and municipalities are increasing taxes to gain the additional revenues.

The Administration and Congress are informing the public that everything is beginning to look good because of the trillions of dollars that they provided to repair the banks. The problem is that they have it backwards; the economy is best fixed from the bottom up rather than the top down.

In June 2008, Warren Mosler proposed three ‘bottom up’ policies to fix the economy. The first proposal is for a full Payroll Tax Holiday for both employees and employers. This stops the government from taking approximately $20 billion a week from people working for a living (a total of $600 per month for someone making $50,000 per year) rather than using that $20 billion to keep some bank limping along. The Government would still continue to credit the social security and the Medicare accounts, so employees and employers will never have to pay back the monies they received. The Payroll Tax Holiday would restore income to American workers (and businesses) to help make their loan payments, rents, pay bills, and sustain their households. The real economy would benefit as Americans both reduce debt and resume consumption. Banks will benefit because there will be fewer delinquencies and foreclosures in non fraudulent mortgages, which will also help limit home price declines. The Payroll Tax Holiday would also reduce corporate cost structures and help contain prices and inflation. The payroll tax is regressive (it is not graduated based on income like the income tax), so the Payroll Tax Holiday will benefit those in the lower income levels the most. This “People Power” solution will be far more effective than the Bush and Obama trickle down solution. And the Government can decide to end the Payroll Tax Holiday should the economy become too strong and inflation become a concern.

The second part of the proposal would to assist the states by providing them with $150 billion in revenue sharing on a per capita basis with no strings attached. This will help the states to fund operations, keep workers employed, provide necessary services and fund infrastructure projects.

The third part of the proposal would be to fund an $8/hr National Service job for anyone willing and able to work that includes full federal health care coverage. This, like the Payroll Tax Holiday, addresses unemployment from the ‘bottom up’ rather than the ‘top down’. A determination can be made as to what the jobs will be, but the goal is to improve America by providing useful output. It will also provide for a far superior price anchor, as it has been well documented that private employers more readily hire those already working over anyone who is unemployed. In 2001, Argentina introduced its Jefes de Jugar version of the Mosler Plan that employed nearly 2 million people that had never worked in the private sector, and within two years 750,000 moved up to private sector jobs.

If any of these proposals strikes a personal chord regarding how we can rebuild our economy, please forward them to your elected representatives in Washington. These are not proposals for out of control, top down, trickle down, Government spending on corporate welfare that insults the majority of Americans working for a living, but fundamental, proven, bottom up solutions that reward that vast majority of Americans that work for a living and struggling to make ends meet.


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