Balance of risks revisited

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“I don’t think that’s fair because I don’t — again, I think I’ve been pretty clear in saying we have an economy in the US that is fundamentally healthy. I think the jobs numbers today showed an economy that is fundamentally healthy. We’ve got very strong demand outside of the US. We’ve got exports growing, employment strong, inflation is contained. There are some risks, and I’m focused on those risks. That’s my job, and the biggest risk we have is housing and housing is a big drag on our economy and still, we’re going through a turbulent time in the capital markets. That’s a risk so we’re focused on the risks, but let’s not forget that we have a healthy economy.”
-Paulson

Two days before the Fed meeting Paulson is making the case that the economy is strong and he says the risks are *his job* and not the Fed’s job. Also, he said we have a strong $ policy after being silent on that for several months or more. No cut in the fed funds rate Tuesday would support his statements.
This article is the consensus view that’s pricing in a 25 cut on Tuesday.

US Fed seems poised to lower interest rates again at its meeting Tuesday

By JEANNINE AVERSA updated 6:46 a.m. ET, Sun., Dec. 9, 2007 WASHINGTON

A lot has changed since the U.S. Federal Reserve hinted two months ago that it might be finished cutting interest rates for a while. Credit has become harder to obtain,

Not true per se. Some spreads have widened, but absolute levels for mortgages, for example, are lower, and good credits are getting LIBOR minus funding in the bond markets. Yes, funding is more difficult and more expensive for ‘Wall Street’, but ‘Main Street’ borrowing needs are being met at reasonable terms.

Wall Street has convulsed again,

Stocks are generally up recently, and up for the year.

and the housing slump has intensified.

Maybe modestly, with some indicators flat to higher. Prices down for the quarter but YoY prices still higher as reported by the two broader measures.

As a result, policymakers at the central bank now appear to have changed their minds about the need to drop interest rates again.

Yes, that’s the appearance as seen by the financial press. (I haven’t read it that way.)

The Fed had cut rates twice this year and officials suggested in October that might be enough to help the economy survive the credit and housing stress.

And immediately afterward in several speeches as fed officials attempted unsuccessfully to take the cut out of Jan FF futures.

Then the problems snowballed,

There were no ‘snowballing problems’ only some spread widening even as absolute rates were generally lower and LIBOR rates going up over the next ‘turn’ at year end.

leading Fed Chairman Ben Bernanke to signal that one more cut might be needed.

Again, that’s how the financial press heard him. They never even reported firm the firm talk on inflation risks becoming elevated. The attitude is anything the fed says about inflation is just talk they have to say and that they don’t mean and not worth reporting.

Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at the meeting Tuesday. Some even speculate about the possibility of a half-point cut.

Yes, that’s the consensus.

Banks, financial companies and other investors who made loans to people with spotty credit

and fraudulent applications

or put money into securities backed by those subprime mortgages have lost billions of dollars (euros). Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Yes. But again, ‘Main Street’ still remains well funded at reasonable terms.

All this has added to the turmoil on Wall Street, and Bernanke and other Fed officials say they must take it into account when deciding their next move.

Yes. And the economic numbers have come in strong enough for markets to take up to 35 bp out of the Eurodollars and nearly eliminate pricing in a 50 cut in the last few trading days.

But does lowering rates mean the Fed essentially is bailing out investors or encouraging more sloppy decision-making? In other words, what exactly is the Fed’s job?

Bernanke and other Fed officials say it is to make policy that keeps the economy growing and inflation low, a stable climate that benefits individuals, businesses and investors. The Fed also has a responsibility to ensure the banking system is sound and financial markets run smoothly.

Yes, exactly.

“There is a link between Wall Street and Main Street. The Fed is taking the right actions, but they should be careful,” said Victor Li, an economics professor at the Villanova School of Business.

That implies the question is whether the ‘market functioning’ risk is higher than the inflation risk, which is what the fed was addressing with the last two cuts.

This time ‘market functioning’ risk rhetoric has taken a back seat to ‘economic weakness’ risk rhetoric.
One more story of note:

Fed’s Inflation Measure Says Rates Can’t Fall as Traders Expect

By Liz Capo McCormick and Sandra Hernandez

Dec. 10 (Bloomberg) — The key to whether the Federal Reserve continues to cut interest rates after this week may hang on the wall behind economist Brian Sack’s desk in Washington.

Sack, head of monetary and financial market analysis at the Fed in 2003 and 2004, uses a chart that plots forward rates measuring investor expectations for inflation in five years. The gauge is so accurate that Sack and his colleagues persuaded the central bank to use it to help set policy. The chart is autographed by former Fed Chairman Alan Greenspan.

Right now, it shows current Fed Chairman Ben S. Bernanke may have less room to lower borrowing costs than investors in Treasuries anticipate, potentially setting bondholders up for a fall. The expected inflation rate, which Sack says replicates what Fed officials use, reached 2.91 percent last week, the highest since 2004, when the central bank began the first of an unprecedented 17 rate increases. The measure was at 2.79 percent on Nov. 1.

“One of the defining features of the Bernanke Fed to date is its emphasis on measures of longer-term inflation expectations,” said Sack, whose partners at Macroeconomic Advisors include former Fed Governor Laurence Meyer. “The Fed is willing to tolerate short-run movements in inflation, but only as long as those movements don’t appear to be dislodging long-run inflation expectations.”

Any evidence that accelerating inflation is becoming entrenched may heighten the Fed’s debate as policy makers consider cutting rates to keep the worst housing market in 16 years and mounting losses in securities related to subprime mortgages from tipping the economy into recession.

`Inflationary Pressures’

The gauge used by Sack, dubbed the five-year five-year forward breakeven inflation rate, suggests bets on lower Fed funds rates may be too bold.

Sack and other analysts derive the measure of inflation expectations from yields on five- and 10-year Treasury Inflation Protected Securities and Treasuries.

Five-year TIPS yield 2.15 percentage points less than five- year notes. This so-called breakeven rate is the average inflation rate investors expect over the next five years. The forward rate projects what the breakeven will be in five years, smoothing blips in inflation expectations from swings in oil prices or other events.

The five-year TIPS’ breakeven rate rose to a six-month high of 2.47 percent Nov. 27, the week after oil climbed to a record $99.29 a barrel, from about 1.9 percent on Aug. 31. As crude fell to a six-week low on Dec. 6, the breakeven rate declined and Sack’s measure dropped to 2.85 percent.

Bernanke mentioned the forward rate in a 2004 speech. Simon Kwan, a vice president at the San Francisco Fed, singled out the measure in a 2005 report, saying it “captures the market’s assessment of how well the Federal Reserve promotes price stability in the long run.”

Gaining Steam

Most analysts expect the economy to gain steam through 2008. Growth will slow to 1.5 percent this quarter from a 4.9 percent annual rate last quarter, and rise to 2.6 percent by 2009, according to the median forecast in a Bloomberg survey from Nov. 1 to Nov. 8.

The dollar, which is poised to depreciate against the euro for a second straight year, is also fueling inflation concerns. The currency’s drop and oil’s climb pushed import prices up 1.8 percent in October, the most in 17 months.

The government may say this week that consumer prices, which set TIPS rates, increased 4.1 percent last month from this year’s low of 2 percent in August and the biggest rise since July 2006, according to the median estimate of 19 economists. Food, imports and energy prices may raise inflation expectations, Bernanke said in a Nov. 30 speech in Charlotte, North Carolina.

To contact the reporter on this story:
Liz Capo McCormick in New York at Emccormick7@bloomberg.net ;
Sandra Hernandez in New York at shernandez4@bloomberg.net .

Last Updated: December 9, 2007 10:58 EST

‘The numbers’ could be used to support most anything the fed might do.The inflation numbers are both more than strong enough to support a hike, with CPI due to be reported north of 4.1 on December 14, and core moving up out of ‘comfort zones’ as well, not to mention ‘prices paid’ surveys higher and higher import and export with the weak $. Add to that the recent strong economic data – employment, CEO survey, and even car sales up a tad, etc. etc.

Inflation can also be dismissed as ‘only food and energy’ and due to fall based on (misreading) future prices as predictors of where prices will be, leaving the door open to cuts due to both ‘market functioning’ as justified by FF/LIBOR spreads at year end and the possibility of Wall Street spilling over to Main Street by ‘forward looking models’.

I can see the fed meeting going around in circles and it will come down to whether they care about inflation or not. Most of the financial community thinks they don’t, and they may be correct.

I think they do care, and care a lot, but that fear of ‘market functioning’ was severe enough to temporarily overcome their perceived imperative to sustain and environment of low inflation. And at the October meeting, the fear of some members has subsided enough to report a dissenting vote, along with half the regional banks voting against a cut.

I do think that if the fed cuts 25 it will be because they are afraid of what happens if they don’t as markets are already pricing in a 25 cut, even though this is what happened October 31, and Fisher said they wouldn’t price in a cut for that reason.

The Balance of Risks

So what would they anticipate if they don’t cut FF? The $ up, commodities down, stocks down, and credit spreads widening.

Is that risk less acceptable than the risk of promoting inflation and risking the elevation of inflation expectations if they do cut 25?

Then, there is the ‘compromise’ of cutting the discount rate and removing the stigma to address year end liquidity and ‘market functioning’ in general, with and/or without cutting the fed funds rate. The anticipated results would be a muted stock market reaction as FF/LIBOR spreads narrow, and hopefully, other credit spreads also narrow.

And if they cut the discount rate and don’t cut the FF rate, the $ will still be expected to go up and commodities down. And, with liquidity improved, stocks may be expected to do better as well.

But even though Kohn discussed this in his speech and others touched on the ‘liquidity versus the macro economy’ as well, there is no way to know how much consideration it may be given.

♥

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Paulson on the dollar

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Maybe he knows the fed won’t cut the fed funds rate….

Paulson says economy healthy

updated 10:33 p.m. ET, Fri., Dec. 7,2007
SOURCE: Reuters

Treasury Secretary Henry Paulson said on Friday Washington was following a strong dollar policy and indicated he expected it to rebound, emphasizing the U.S. economy’s long-term strength should help the currency.

But Paulson warned in a radio interview in Cape Town that some aspects of the U.S. subprime mortgage crisis would become worse before getting better.

Paulson is in South Africa partly for a weekend meeting of finance chiefs from the Group of 20 economies, some of whom have expressed concern that the dollar’s falling value is putting strain on their ability to export.

“We have very much a strong dollar policy … that’s in our nation’s interest. Our economy, like any other, goes through its ups and downs but I believe the U.S. economy will continue to grow and its long-term strength will be reflected in our currency markets,” Paulson told 567 Cape Talk radio.

♥

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December’s inflation expectations

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2007-12-07 Infation 1yr Expectations

Inflation 1 year

December 3.5%
November 3.4%
Δ Percent 2.94%

2007-12-07-inflation-5yr-expectations.gif

Inflation 5 year

December 3.1%
November 2.9%
Δ Percent 6.90%

This is most troubling for the fed. The absolute limits of easing for ‘market functioning’ have to be the point of letting inflation expectations elevate.

Right now, the fed is likely seeing the balance of risks tilting towards inflation.

♥

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2007-12-07 US Economic Releases

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On 12/7/07, Karim Basta wrote:
>
>
> NFP +94k
> Net revisions -48k, with Sep revised from 96k to 44k (lowest mthly gain
> since 2/04)But October revised up to 170,000, indicating Sep the low so far, and
> improvement since then. And the Fed surely remember Sep 11 meeting
> where the Aug employment number was reported down and later revised to
> a relatively strong up number.

> UE rate down from 4.727% to 4.658%

And the Fed is concerned a falling labor force participation rate due to demographics means labor tightening with fewer new jobs.

> Most important to me was the diffusion index dropping below 50 (more
> industries losing jobs than gaining jobs) for the first time since Sep 2003

Yes, but only just below to 49.8 from 53.

> Retail job change from -15k to +24k looks suspect and reflective of poor
> seasonal adjustment factor;likely borrowing heavily from Dec job gwth
> Index of aggregate hours up 0.1% and avg hrly earnings up 0.5% (off a low
> 0.2% last mth)

Might result in Fed upward revisions for q4 gdp?

>
> Base case for next week is -25bps on FF and -50bps on DR.

2007-12-07 Change in Nonfarm Payrolls

Change in Nonfarm Payrolls (Nov)

Survey 80K
Actual 94K
Prior 166K
Revised 170K

Better than forecasting, and jobs being added about as fast as the fed thinks possible given fed perception of current demographics – no slack evident. Sept revised down and October up to 170,000 so the chart looks fine.

2007-12-07 Unemployment Rate

Unemployment Rate (Nov)

 

Survey 4.8%
Actual 4.7%
Prior 4.7%
Revised n/a

 

Better than forecast, and still well below the fed’s ‘unspoken’ concern that anything below 5% is more than non-inflationary full employment level.

2007-12-07 Change in Manufacturing Payrolls

Change in Manufacturing Payrolls (Nov)

 

Survey -15K
Actual -11K
Prior -21K
Revised -15K

 

2007-12-07 Average Hourly Earnings MoM

Average Hourly Earnings MoM

 

Survey 0.3%
Actual 0.5%
Prior 0.2%
Revised 0.1%

 

Above expectations, nudges up inflation risk.

2007-12-07 Average Hourly Earnings YoY

Average Hourly Earnings YoY

 

Survey 3.8%
Actual 3.8%
Prior 3.8%
Revised 3.6%

 

2007-12-07 Average Weekly Hours

Average Weekly Hours (Nov)

 

Survey 33.8
Actual 33.8
Prior 33.8
Revised n/a

 

Total hours holding up nicely and growing some – could see Q4 GPD numbers revised up by some firms.

2007-12-07 U. of Michigan Confidence

U. of Michigan Confidence (Dec P)

Survey 75.0
Actual 74.5
Prior 76.1
Revised n/a

 

This is also from watching CNBC.

2007-12-07 Comsumer Credit

Consumer Credit (Oct)

Survey $5.0
Actual $4.7B
Prior $3.7B
Revised $3.2B

 

Still in a reasonably narrow range.

♥

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2007-12-06 US Economic Releases

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2007-12-06 Initial Jobless Claims

Initial Jobless Claims (Dec 1)

Survey 335K
Actual 338K
Prior 352K
Revised 353K

Down from the week before, chart still looks like a modest up move has taken place. Still comfortably below the 375-400K level that would signal a slowdown.


2007-12-06 Continuing Claims

Continuing Claims (Nov 24)

Survey 2620K
Actual 2599K
Prior 2665K
Revised 2658K

Also backing off from last week’s mini spike and not a problem for the fed at current levels.

2007-12-06 Mortgage Deliquencies

Mortgage Delinquencies (3Q)

Survey n/a
Actual 5.59%
Prior 5.12%
Revised n/a

 

Delinquencies up some, but probably not far from fed expectations.

2007-12-06 ICSC Chain Store Sales YoY

ICSC Chain Store Sales YoY

Survey 2.4%
Actual 3.5%
Prior 5.12%
Revised n/a

 

These look fine – up a touch and no sign of collapse.

♥

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Update: balance of risks since October 31st

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Conclusion

♥ Jury still out pending tomorrow’s employment number and pre meeting developments.

♥ Labor markets stronger than expected, inflation about as expected. While several funding spreads have widened vs fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down.

♥ The largest risk the Fed is probably worried about is that if they don’t match the 35 bp cut priced into the fed funds futures, the subsequent market reactions might result in extreme technical dysfunction. This was given as a non trivial factor for the 25 ‘insurance’ cut on October 31, and subsequent statements seemed determined to not have this be a factor at the next meeting. But it is.

Inflation

♥ CPI consensus (Dec 14): 4.1yoy from 3.5, core 2.3yoy from 2.2

♥ Oil down last from 94 at the meeting, vs 55 last year. Futures structure flattened.

♥ Prices received up in all the reported surveys (ism, purchasing mgrs, region feds, etc.), Phil Fed survey prices paid down slightly, others up.

♥ 10 year TIPS floater at 1.70 shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.

♥ 10 year TIPS CPI break even rate down to 2.68 after month end when Nov fell out, from 2.77 at meeting. (interim high of 2.89)

♥ Michigan inflation expectations up – one year 3.4 from 3.1, 5 year 2.9 from 2.8.

♥ Q3 deflator up very slightly from .8 to .9.

♥ PCE deflator up 2.9 yoy, vs 1.8 pre Oct 31 meeting.

♥ Core PCE up .2, up 1.9 yoy. (unchanged)

♥ Q3 unit labor costs and productivity somewhat higher than expectations.

♥ OFHEO home price index down .4%, first decline since 1994, still up yoy, in line with forecasts.

♥ PPI up .1 vs up .3 expected, core flat vs up .2 expected, PPI 6.1% yoy, core 2.5%.

♥ Import prices up 1.8% vs 1.2 expected, yoy up 9.6% vs 9% expected.

♥ Saudi oil production up indicating higher demand at the higher prices.

Market Functioning/Financial Conditions

♥ Stocks down since the last meeting, but up for the year and substantially off the recent lows.

♥ Ff/libor wider but year end issue only.

♥ Mtg rates down, but jumbo mtg spreads vs fed funds and swaps widened.

♥ Bank loans up, commercial paper down.

♥ Assorted losses and recapitalizations but no business interruption.

♥ Mtg delinquencies up, probably within Fed forecasts.

Economic Outlook

♥ Mtg. apps strong and trending up.

♥ ADP employment strong.

♥ Weekly claims very slightly higher.

♥ GDP revised up to 4.9%.

♥ Personal income and spending up .2, (.1 less than private forecasts), real spending flat.

♥ Total vehicles sales unchanged.

♥ Factory orders up .5 and .3, above expectations.

♥ Consumer confidence down.

♥ Construction spending down .8, up .2, somewhat below expectations.

♥ Congressional response to adjustable rate mtgs.

♥ New home sales 728k vs 750k expected, then 716.

♥ Existing home sales 4.97m vs 5million.

♥ Permits 1.178m vs 1.200m expected prev revised to 1.261 from 1.226.

♥ Housing starts 1.229 vs 1.117 expected.

♥ NAHB housing index 19 vs 17 expected.

♥ Durable goods -.7 vs up .3 expected but previous month revised from .3 to up 1.1.

♥ Cap U 81.7 vs 82 expected.

♥ Industrial prod down .5 vs up .1 expected.

♥ Retail sales ex autos up .2 in line with expectations, core up .1%.

♥ Pending home sales up .2% vs down 2% expected.

♥ Sep trade balance -56.5 vs 58.5 expected.

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Re: more in ism

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(an interoffice email)

> ADP came in higher than expected and caused most dealers to raise their
> payroll forecasts.
>
> Productivity revised UP to 6.3% vs 4.9%preliminary. Unit Labor Costs revised
> to DOWN 2% vs. -0.2% preliminary.
> ISM Non-Manuf, Nov — slips to 54.1 vs. 55.8 prior, weaker-than-forecast.

still expanding

> Prices rose to 76.5 vs. 63.5,

inflation risks increasing

> Employment falls to 50.8 vs. 51.8,

still expanding

> New Orders
> slipped sharply to 51.1 vs. 55.7.

still expanding

> Bank of Canada cut rates this morning citing a soft outlook for US housing.

worried about their currency being too strong and losing demand to the US

> Fannie Mae cut it’s Quarterly dividend and announced it will be issuing
> preferred securities.

no business interruption

♥

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Re: credit recap

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Blood flowing around the clot. Markets functioning to keep the ‘real economy’ moving along. This will take some of the bid for bank LIBOR funding away as well.

Credit Recap

Source: Bear Stearns Credit Research.

The wave of new supply has continued to come at even wider concessions than August and September. New issues have been coming at 25 bps to over 40 bps, in excess of the 5-10-bp discounts we saw pre-credit crunch.

The disconnect between LIBOR and the 5-year Treasury yield has invited more high grade new issuance. Typically, commercial paper of high grade issuers comes at LIBOR +10 bps. In the current market environment, LIBOR is artificially higher than many argue it should be, because banks (particularly in Europe) have been shepherding cash. Banks have had little excess cash to lend to one another as they face their own year-end reserve needs and prepare for the potential funding needs of SIV maturities, which they cannot readily refinance and must take onto their own balance sheets. Thus, the price of short-term inter-bank borrowing remains well above the typical 12 bps over Fed Funds. In fact, 3-month U.S. LIBOR at 5.15% is 90 bps over an expected 4.25% Fed Funds, and 115 bps over a more aggressive 4% FF estimate. By comparison, new high grade 5-year issues have been coming at T+135 to 170, or 4.65% to 5%-well below LIBOR of 5.15%.

We expect this window of cheaper-than-LIBOR capital markets financing could continue for some time, perhaps months-at least until the credit markets are comfortable that the SIV problems have been resolved and banks have restored whatever Tier 1 capital they feel they need. Bank-owned SIVs holding portfolios of bank-issued notes, mortgage ABS and CDO liabilities have not been able to refinance the commercial paper funding these SIVs, and they have been forced to either liquidate the portfolios at a loss or take the SIVs on balance sheet and fund the maturities that come due, absorbing more of a bank’s capital.

5-Year Treasury-Based Financing Cheaper to Issue Than Commercial Paper

Source: Bear Stearns Credit Research.

More subordinated bank and financial issues are on the horizon, and even infrequent non-financial issuers are getting ahead of this expected supply. Notice in the table below of recent new high grade issuance, there are plenty of issuers who haven’t tapped the capital markets for several years (for example Kellogg, McCormick, Nordstrom, Rockwell). We think they are tapping the markets now for several reasons: first, as we said, 5-year Treasury based financing is cheaper to issue than commercial paper; second, issuers like to have fresh financing benchmarks along the curve; third, 10s/30s curves continue to flatten as spreads widen (even though yields are not changing that much), encouraging longer-dated new issuance; and fourth, syndicate desks (including reverse inquiry from investors) are encouraging issuing before the expected wave of financial issues comes to market throughout the first quarter of 2008.

Banks, brokers and financial companies are in need of capital, to repair balance sheets from write-downs and replace capital that is tied up in unsold positions like SIVs and unsold LBO funding commitments. We have seen recent bond issues by Bank of America and Wells Fargo, although banks need to watch their credit ratings and need to issue non-debt capital. Most common equity of most financials has been beaten down, so the likely product will be preferred, hybrids and subordinated securities which generally come to market at significantly wider spreads than where the already-wider bonds are trading. Wachovia recently announced its plan to sell $500 million of 30-year subordinated debt. From our discussions, many banks want to sell long-dated hybrid and preferred issues, yet there is thin institutional demand. Since these deals will likely need to be distributed through retail channels, the market can only slowly absorb just a few deals at a time, and we understand a long line is forming to sell paper. Barclays, for example, just issued a $1-billion 7.750% perpetual preferred, and last week Citigroup sold a $7.5-billion private 11.000% preferred.

♥

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Re: BBC E-mail: UK interest rates trimmed to 5.5%

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(email)

Philip,

Yes, thanks. Might be to ‘give room’ to the Fed or maybe the modern version of ‘trade wars’ being played out?

The UK is saying to the US there’s a limit to using the $ as a ‘weapon’ to ‘steal’ agg demand. They see it as a game of chicken- the cb that’s willing to risk the inflation the most cuts and get the agg demand? An interesting twist on the ‘beggar they neighbor’ wars under fixed fx.

warren

On Dec 6, 2007 8:22 AM, Philip Arestis wrote:
> Philip Arestis saw this story on the BBC News website and thought you
> should see it.
>
> ** Message **
> Dear Warren,
>
> This has just come through. Not unexpected.
>
> Best wishes, Philip
>
> ** UK interest rates trimmed to 5.5% **
> The Bank of England cuts UK interest rates from 5.75% to 5.5% amid signs that the economy is slowing down.
> < http://news.bbc.co.uk/go/em/fr/-/1/hi/business/7130443.stm >

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Re: change of govt = change of practice

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(Email)

On Dec 5, 2007 11:50 PM, Wray, Randall wrote:
> Bill: thanks. Yes I think the data are overwhelming for very serious problems, for deep recession, and for rate cuts.
the problems to the real economy aren’t showing up yet

  1. exports have been more than filling the housing gap- as long as foreigners continue the move to ‘spend their hoard’ of $US we can probably muddle through for quite a while.
  2. housing feels like it’s bottomed and won’t be subtracting from gdp. mtg rates are lower than in august and banks are pushing hard to loan directly without the securitization process and are keeping the (wider) spreads for themselves.
  3. none of the losses so far have been anything more than rearranging financial assets and have not resulted in business interruption in the real economy.
  4. unlike the 30’s, we are not on the gold standard. If we had been on it, instead of the run up in gold prices of recent years the same relative value changes would have instead been evidenced by a massive deflation (gold held constant), outflows of gold from the govt, and maybe higher rates to keep that from happening, eventual devaluation (1934), and more powerful motivation for trade wars- all like the 1930’s and other standard gold standard collapses. So comps with the 1930’s can be highly misleading. With today’s non convertible currency the ‘adjustments’ are very different and the financial stresses tend to be more removed from main street. Note the s and l crisis, the crash of 87, the 98 credit crisis had relatively minor effects on gdp. Loans create deposits unconstrained by the gold supply, and capital is likewise both endogenous and not constrained by gold. Instead, all is constrained by income, and govts are pretty good at sustaining that at least at modest levels during slowdown with countercyclical tax structures leading the way, and lots of ‘off balance sheet deficit spending’ leaking out all over the world. This includes massive state bank lending from China, to even the eurozone (though that may be catching up with them under current arrangements), and budget deficits around the world sufficient for the moment to keep things muddling through.

> there is a very large body of evidence to indicate this is the worst situation seen in the US since the 1930s. It is a good time for >pragmatism and for throwing out silly rules. Central bankers are doing what they can. Unfortunately, as we all know only too well, the importance of fiscal policy is not understood.

Right, while I would cut rates to 0, I would also offset the resulting fiscal drag but cutting social security taxes. Irony is current rate cuts in isolation tighten the fiscal balance.
(http://www.epicoalition.org/docs/Forstater_Mosler_article.pdf)

Also, I’m thinking a world wide cap on the $ price of imported crude and domestic gasoline prices might be a short term path to price stability and a long term path to using less of it as costs of production rise and it can’t be sold profitable.

Just in the beginning stage of this concept!

Meanwhile, I don’t think any slowdown will cut net demand for crude sufficiently to take away Saudi and Russian pricing power for at least the next 6 months. and if they simply spend their income here the higher prices won’t slow gdp, just hurt our real terms of trade and keep upward pressure on cpi which is starting to spill over to core, and which the Fed won’t ignore as it climbs past 4, 5 and 6%.

warren

>There isn’t too much reason to be optimistic. As they say, we live in
interesting times, that are making us long for boring. See you in
January.
>
> L. Randall Wray
> Research Director
> Center for Full Employment and Price Stability
> 211 Haag Hall, Department of Economics
> 5120 Rockhill Road
> Kansas City, MO 64110-2499
> and
> Senior Scholar
> Levy Economics Institute
> Blithewood
> Bard College
> Annandale-on-Hudson, NY 12504
>
> ________________________________
>
> From: Warren Mosler [mailto:warren.mosler@gmail.com]
> Sent: Wed 12/5/2007 8:13 PM
> To: Bill Mitchell
> Subject: Re: change of govt = change of practice
>
>
>
>
> Hi Bill, good info, thanks very much!
>
> warren
>
> On Dec 5, 2007 3:48 PM, Bill Mitchell wrote:
> > dear warren
> >
> > history was made yesterday – the RBA published the minutes of their
> > meeting
> > on Tuesday where they spell out their reasoning on rates (no change).
> > This
> > is the first time they have done that and it follows the election
> > campaign where
> > Rudd made a big point of returning honesty and transparency to his govt
> > after
> > the bad howard years of lying and covering up anything that moved.
> >
> > So you can see the minutes tell you that a further rate rise is now not
> > inevitable
> > despite inflation being above the magic upper bound of 3 and despite
> > them expecting
> > it to remain that way for at least 6 months more.
> >
> > They are now saying that world trends are for lower interest rates to
> > cope with the
> > worsening credit crisis.
> >
> > So: (a) their strict Inflation Targetting is being violated by “other
> > concerns”
> > (b) they think the US is heading for recession.
> >
> > local commentators last night said the Fed will lower by 0.5 next week
> > after BOC went
> > down this week and BOE is heading that way too.
> >
> > anyway, today the CofFEE conference starts – 2 days.
> >
> > see you
> > bill

♥

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