Tag Archives: Ben Bernanke

Rising Deficits Pose Major Threat to Economy: Bernanke

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Not much progress here:

Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

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Bernanke comments

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> *DJ Bernanke:US Can Learn From China’s Succesful Economic Growth Story

Right, like how their annual deficit spending has been over 20% of GDP
if you count state lending.

Wonder how he missed that one?

> *DJ Bernanke:Promoting Technology, Education Behind Emerging Nations’ Success
> *DJ Bernanke:Sound Fiscal Policy, Open Trade, Better Rules Behind Emerging Nations’ Success
> *DJ Bernanke:China, India, Other Emerging Nations Can Keep High Growth Rates For Years
> *DJ Bernanke:Over Time, Emerging Economies Like China Will Gradually Slow Down
> *DJ Bernanke:Trade Imbalances Threaten Emerging Nations’ Economic Stability
> *DJ Bernanke:Emerging Nations Will Be Challenged If They Rely On Trade For Growth
> *DJ Bernanke’s Prepared Remarks From Cleveland Clinic Speech

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Jackson Hole- comments tomorrow’s speech by Fed Chairman Bernanke

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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.

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Comments on Chairman Bernanke’s testimony

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>   
>   (email exchange)
>   
>   On Thu, Jul 14, 2011 at 9:55 AM, wrote:
>   
>   I see Bernanke is speaking your language now…
>   

Yes, a bit, but but as corrected below:

“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?

BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

Not exactly, as all govt spending is done by adding reserves to member bank reserve accounts. Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.

What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts.

But yes, spending is in no case operationally constrained by revenues.

DUFFY: Does it come from tax dollars, though, to buy those assets?

BERNANKE: It does not.

Operationally he is correct, and in this case, to the extent QE does not add to aggregate demand, he is further correct. In fact, to the extent that QE removes interest income from the economy, it actually acts as a tax on the economy, and not as a govt expenditure.

However, and ironically, I submit he believes that QE adds to aggregate demand, and therefore ‘uses up’ some of the aggregate demand created by taxation, and therefore, in that sense, it would be taxpayer dollars that he’s spending.

DUFFY: Are you basically printing money to buy those assets?

BERNANKE: We’re not printing money. We’re creating reserves in the banking system.

Technically correct in that he’s not printing pieces of paper.

But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’

All govt spending can be thought of as printing dollars, taxing unprinting dollars, and borrowing shifting dollars from reserve accounts to securities accounts.

DUFFY: In your testimony — I only have 20 seconds left — you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3? Or is that something that you’re considering?

BERNANKE: I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where we’re like, you know, the economy — recovery is faltering and — and we’re looking at inflation dropping down toward zero or something, you know, where inflation issues are not relevant, then, you know, we have to look at all the options.

DUFFY: And QE3 is one of those?

BERNANKE: Yes.

Very hesitant, as it still looks to me like there’s an tacit understanding with China that there won’t be any more QE, as per China’s statement earlier today.

PAUL: I hate to interrupt, but my time is about up. I would like to suggest that you say it’s not spending money. Well, it’s money out of thin air. You put it into the market. You hold assets and assets aren’t — you know, they are diminishing in value when you buy up bad assets.

But very quickly, if you could answer another question because I’m curious about this. You know, the price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?

BERNANKE: Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think people are — the reason people hold gold is as a protection against what we call “tail risk” — really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.

PAUL: Do you think gold is money?

BERNANKE: No. It’s not money.

(CROSSTALK)

PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

BERNANKE: Well, you know, it’s an asset. I mean, it’s the same — would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset.

Right answer would have been gold used to be demanded/accepted as payment of taxes, which caused it to circulate as money.

Today the US dollar is what’s demanded for payment of US taxes, so it circulates as money.

In fact, if you try to spend a gold coin today, in most parts of the world you have to accept a discount to spot market prices to get anyone to take it.

PAUL: Well, why do — why do central banks hold it?

BERNANKE: Well, it’s a form of reserves.

Yes, much like govt land, the strategic petroleum reserve, etc.

PAUL: Why don’t they hold diamonds?

Some probably do.

BERNANKE: Well, it’s tradition, long-term tradition.

PAUL: Well, some people still think it’s money.”

“CLAY: Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling?

BERNANKE: Yes, we’ve — of course, we’ve looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That’s what it means to have a deficit.

So immediately, there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.

So this is a matter of arithmetic. Fairly soon after that date, there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.

If in fact we ended up defaulting on the debt, or even if we didn’t, I think, you know, it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse.

But clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It’s the foundation for most of our financial — for much of our financial system. And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.

And higher interest rates would also impact the individual American consumer. Is that correct?

BERNANKE: Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates and all other types of consumer rates.”

“BERNANKE: A second problem is the housing market. Clearly, that’s an area that should get some more attention because that’s been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the tax code needs a look to try to improve its efficiency and to promote economic growth as well.”

While housing isn’t growing as in the past, housing or anything else is only a source of drag if it’s shrinking.

It’s not that case that if housing were never to grow we could not be at levels of aggregate demand high enough to sustain full employment levels of sales and output.

We’d just be doing other things than in past cycles.

G. MILLER: Well, the problem I had with the Fannie-Freddie hybrid concept was the taxpayers were at risk and private sector made all the profits.

BERNANKE: That’s right.

That’s the same with banking in general with today’s insured deposits, a necessary condition for banking. Taxpayers are protected by regulation of assets. The liability side is not the place for market discipline, as has been learned the hard way over the course of history.

G. MILLER: That — that’s unacceptable. What do you see the barriers to private capital entering mortgage lending (inaudible) market for home loans would be?

BERNANKE: Well, currently, there’s not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect, though, that, you know, when the housing market begins to show signs of life, that there will be expanded interest.

I think another reason — and go back what Mr. Hensarling was saying — is that the regulatory structure under which securitization, et cetera, will be taking place has not been tied down yet. So there’s a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market securitization, et cetera, going forward.”

As above, bank lending is still a public/private partnership, presumably operating for public purpose.

See my Proposals for the Banking System, Treasury, Fed, and FDIC (draft)

And there’s no reason securitization has to play any role. Housing starts peaked in 1972 at 2.6 million units with a population of only 200 million, with only simple savings and loans staffed by officers earning very reasonable salaries and no securitization.

“CARSON: However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our nation’s small businesses and the American public in general?

And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time. Are the Fed’s actions meaningless unless banks are willing to lend?

CARSON: And, lastly, what are your thoughts on requiring a 20 percent down for a payment? And do you believe that this will impact homeowners significantly or — or not at all?

BERNANKE: Well, banks — first of all, they have stopped tightening their lending standards, according to our surveys, and have begun to ease them, particularly for commercial and industrial loans and some other types of loans.

Small-business lending is still constrained, both because of bank reluctance but also because of lack of demand because they don’t have customers or inventories to finance or because they’re in weakened financial condition, which means they’re harder to qualify for the loan.

Right, sales drive most everything, including employment

“PETERS: Do you see some parallels between what happened in the late ’30s?

BERNANKE: Well, it’s true that most historians ascribe the ’37- ’38 recession to premature tightening of both fiscal and monetary policy, so that part is correct.

Also, Social Security was initiated, and accounted for ‘off budget’, and, with benefit payments initially near 0, the fica taxes far outstripped the benefits adding a sudden negative fiscal shock.

The accountants realized their mistake and Social Security was put on budget where it remains and belongs.

I think every episode is different. We have to look, you know, at what’s going on in the economy today. I think with 9.2 percent unemployment, the economy still requires a good deal of support. The Federal Reserve is doing what we can to provide monetary policy accommodation.

But as we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation, make sure that stays well controlled.

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President Obama and Chairman Bernanke believe in the Confidence Fairy

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“RENACCI: I know some people have asked in previous questions, but do you put uncertainty as a — as a concern? I mean, again, being a business owner in the past, uncertainty will cause a lockup. And we could talk about, you know, the government cutting costs and cutting jobs, but the private sector small-business owners create almost 67 percent of our jobs. We have to give them the certainty so they can create jobs.

BERNANKE: Well, you’re not interested in my Ph.D. thesis of 32 years ago, but it was entitled, “Uncertainty and Investment,” and it was about how uncertainty can reduce investment spending, and I believe that, but there are many kinds of uncertainty. There’s the uncertainty about regulation and those sorts of things. But there’s also uncertainty about whether this is a durable recovery.

People don’t know whether to invest or to hire because they don’t know whether this is — whether the recovery is going to continue.

So I think part of what we can do — obviously, we want to address the regulatory, trade, tax environment, absolutely fiscal environment. We also want to do whatever we can to make the economy grow faster and make people more confident.

I think we’ll see a dynamic going forward If, in fact, the economy begins to pick up some, I think confidence will improve because people will have more certainty about the sense that this will be a durable recovery. I think that’s a very important thing to be looking for.”

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Fed Chairman Ben S. Bernanke on Fiscal Sustainability

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This is from the same Ben S. Bernanke that stated the Fed spends by using their computer to mark up numbers in bank accounts.

Now, by extension, he’d propose basketball stadiums have a reserve of points for their scoreboards to make sure the teams could get their scores when they put the ball through the hoop.

If he was a state Governor this would be a pretty good speech. But he’s not.

Comments below:

Bernanke Speech

At the Annual Conference of the Committee for a Responsible Federal Budget, Washington, D.C.
June 14, 2011
Fiscal Sustainability

I am pleased to speak to a group that has such a distinguished record of identifying crucial issues related to the federal budget and working toward bipartisan solutions to our nation’s fiscal problems.

Yes, we now have bipartisan support for deficit reduction. Good luck to us.

Today I will briefly discuss the fiscal challenges the nation faces and the importance of meeting those challenges for our collective economic future. I will then conclude with some thoughts on the way forward.

Fiscal Policy Challenges
At about 9 percent of gross domestic product (GDP), the federal budget deficit has widened appreciably since the onset of the recent recession in December 2007. The exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. As the economy continues to expand and stimulus policies are phased out, the budget deficit should narrow over the next few years.

Both the Congressional Budget Office and the Committee for a Responsible Federal Budget project that the budget deficit will be almost 5 percent of GDP in fiscal year 2015, assuming that current budget policies are extended and the economy is then close to full employment.1 Of even greater concern is that longer-run projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show the structural budget gap increasing significantly further over time. For example, under the alternative fiscal scenario developed by the Congressional Budget Office, which assumes most current policies are extended, the deficit is projected to be about 6-1/2 percent of GDP in 2020 and almost 13 percent of GDP in 2030. The ratio of outstanding federal debt to GDP, expected to be about 69 percent at the end of this fiscal year, would under that scenario rise to 87 percent in 2020 and 146 percent in 2030.2 One reason the debt is projected to increase so quickly is that the larger the debt outstanding, the greater the budgetary cost of making the required interest payments. This dynamic is clearly unsustainable.

Unfortunately, even after economic conditions have returned to normal, the nation faces a sizable structural budget gap.

The nation’s long-term fiscal imbalances did not emerge overnight. To a significant extent, they are the result of an aging population and fast-rising health-care costs, both of which have been predicted for decades. The Congressional Budget Office projects that net federal outlays for health-care entitlements–which were 5 percent of GDP in 2010–could rise to more than 8 percent of GDP by 2030. Even though projected fiscal imbalances associated with the Social Security system are smaller than those for federal health programs, they are still significant. Although we have been warned about such developments for many years, the difference is that today those projections are becoming reality.

Up to hear he’s discussed the size of the debt with words like ‘unfortunate’ and ‘imbalances’ and finally we here why he believes this is all a bad thing:

A large and increasing level of government debt relative to national income risks serious economic consequences. Over the longer term, rising federal debt crowds out private capital formation and thus reduces productivity growth.

What? Yes, public acquisition of real goods and services removes those goods and services from the private sector. But this is nothing about that. This is about deficits reducing the ability of firms to raise financial capital to invest in real investment goods and services to keep up productivity.

The type of crowding out the chairman is warning about is part of loanable funds theory, which is applicable to fixed exchange rate regimes, not floating fx regimes. This is a very serious error.

To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt.

Yes, if the interest payments set by the Fed are high enough, that will happen. However it isn’t necessarily a problem, particularly with the foreign sector’s near 0% propensity to spend their interest income on real goods and services. Japan, for example, as yet to spend a dime of it’s over $1 trillion in dollar holdings accumulated over the last six decades, and china’s holdings only seem to grow as well. In fact, the only way paying interest on the debt could be a problem is if that interest income is subsequently spent in a way we don’t approve of, and it’s easy enough to cross that bridge when we come to it.

High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

There is no actual, operational impairment to spend whatever they want whenever they want. Federal spending is not constrained by revenues, as a simple fact of monetary operations. The only nominal constraints on spending are political, and the only constraints on what can be bought are what is offered for sale.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis.

Where does this come from??? Surely he’s not comparing the US govt, the issuer of the dollar, where he spends by using his computer to mark up numbers in bank accounts, to Greece, a user of the euro, that doesn’t ‘clear its own checks’ like the ECB and the Fed do?

As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.

He is looking at Greece!

Although historical experience and economic theory do not show the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory is moving the nation ever closer to that point.

‘That point’ applies to users of a currency, like Greece, the other euro members, US states, businesses, households, etc.

But it does not apply to issuers of their own currency, like the US, Japan, UK, etc.

Is it possible the Fed chairman does not know this???

Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point.

Again with the ‘some point’ thing. There is no ‘some point’ for issuers of their own currency, like Japan, who’s debt to GDP is maybe 200% and 10 year JGB’s are trading at 1.15%.

These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy. The choice is ours to make.

Right, the sky is falling.

Achieving Fiscal Sustainability

As if we didn’t already and automatically have it as the issuer of the currency.

The primary long-term goal for federal budget policy must be achieving fiscal sustainability.

What happened to his dual mandates of low inflation and full employment? That’s just for the Fed, but not for budget policy?

Well, if you believe the sky is falling no telling what your priority would be.

A straightforward way to define fiscal sustainability is as a situation in which the ratio of federal debt to national income is stable or moving down over the longer term.

And what does ‘straightforward’ mean? The math is easy? Is that how to set goals for the nation?

This goal can be attained by bringing spending, excluding interest payments, roughly in line with revenues, or in other words, by approximately balancing the primary budget. Given the sharp run-up in debt over the past few years, it would be reasonable to plan for a period of primary budget surpluses, which would serve eventually to bring the ratio of debt to national income back toward pre-recession levels.

All arbitrary measures not tied down to real world consequences apart from being a defensive move to keep the sky from falling.

Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk.

A glimmer of hope here where he seems to recognize how fiscal adjustments alter the real economy. Unfortunately, with the sky about to fall, he has more important fish to fry.

At the same time, acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run,

Right, so govt doesn’t crowd out private capital formation with a floating fx regime…

but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

Yes, long term rates would likely be lower, because markets, which anticipate Fed rate settings, would believe the economy would be weak for a very long time, and therefore the odds of rate hikes would be lower.

While it is crucial to have a federal budget that is sustainable,

Don’t want to crowd out that private capital that gets borrowed from banks where the causation runs from loans to deposits (there’s no such thing as banks running out of money to lend).

our fiscal policies should also reflect the nation’s priorities by providing the conditions to support ongoing gains in living standards and by striving to be fair both to current and future generations.

Living standards are best supported by full employment policy, which happens to be a Fed mandate, in case he’s forgotten.

Interesting question, does the Fed’s mandate extend to influencing policy through speeches as to what others should do, or is it just a mandate for monetary policy decisions?

In addressing our long-term fiscal challenges, we should reform the government’s tax policies and spending priorities so that they not only reduce the deficit, but also enhance the long-term growth potential of our economy–for example, by increasing incentives to work and to save, by encouraging investment in the skills of our workforce, by stimulating private capital formation, by promoting research and development, and by providing necessary public infrastructure.

Big fat fallacy of composition there. Especially from a Princeton professor who should know better.

We cannot reasonably expect to grow our way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.

Making Fiscal Plans
It is easy to call for sustainable fiscal policies but much harder to deliver them. The issues are not simply technical; they are also closely tied to our values and priorities as a nation. It is little wonder that the debates have been so intense and progress so difficult to achieve.

Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating

Maybe, but he’s just guessing.

if the objective is to chart a course toward a better fiscal situation for our nation.

The current level of the debt and near-term borrowing needs reflect spending and revenue choices that have already been approved by the current and previous Congresses and Administrations of both political parties. Failing to raise the debt limit would require the federal government to delay or renege on payments for obligations already entered into. In particular, even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of U.S. government debt, create fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term.

All of which has happened to Japan, with no adverse consequences on the currency or interest rates, as is necessarily the case for the issuer of a non-convertible currency and floating exchange rate.

Interest rates would likely rise, slowing the recovery and, perversely, worsening the deficit problem by increasing required interest payments on the debt for what might well be a protracted period.3

Some have suggested that payments by the Treasury could be prioritized to meet principal and interest payments on debt outstanding, thus avoiding a technical default on federal debt. However, even if that were the case, given the current size of the deficit and the uneven time pattern of government receipts and payments, the Treasury would soon find it necessary to prioritize among and withhold critical disbursements, such as Social Security and Medicare payments and funds for the military.

Yes, as congress is well aware, to the point that it’s no longer about a debt default, but about a partial shutdown of the rest of the govt.

This has been yesterday’s speech. Congress has moved on from the risk of debt default to the risk of partial govt shutdown.

Moreover, while debt-related payments might be met in this scenario, the fact that many other government payments would be delayed could still create serious concerns about the safety of Treasury securities among financial market participants.

That doesn’t follow?

The Hippocratic oath holds that, first, we should do no harm. In debating critical fiscal issues, we should avoid unnecessary actions or threats that risk shaking the confidence of investors in the ability and willingness of the U.S. government to pay its bills.

Our reps take a different oath

In raising this concern, I am by no means recommending delay or inaction in addressing the nation’s long-term fiscal challenges–quite the opposite. I urge the Congress and the Administration to work in good faith to quickly develop and implement a credible plan to achieve long-term sustainability. I hope, though, that such a plan can be achieved in the near term without resorting to brinksmanship or actions that would cast doubt on the creditworthiness of the United States.

What would such a plan look like? Clear metrics are important, together with triggers or other mechanisms to establish the credibility of the plan. For example, policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path.

Again, the falling sky trumps concerns over output and employment.

Indeed, such a trajectory for the ratio of debt to GDP is comparable to the one proposed by the National Commission on Fiscal Responsibility and Reform.4To make the framework more explicit, the President and congressional leadership could agree on a definite timetable for reaching decisions about both shorter-term budget adjustments and longer-term changes. Fiscal policymakers could look now to find substantial savings in the 10-year budget window, enforced by well-designed budget rules, while simultaneously undertaking additional reforms to address the long-term sustainability of entitlement programs.

In other words, cuts in the social security and Medicare budgets. This at a time of record excess capacity.

If only the sky wasn’t falling…

Such a framework could include a commitment to make a down payment on fiscal consolidation by enacting legislation to reduce the structural deficit over the next several years.

Conclusion
The task of developing and implementing sustainable fiscal policies is daunting, and it will involve many agonizing decisions and difficult tradeoffs. But meeting this challenge in a timely manner is crucial for our nation. History makes clear that failure to put our fiscal house in order will erode the vitality of our economy, reduce the standard of living in the United States, and increase the risk of economic and financial instability.

And what history might that be? There’s no such thing as a currency issuer ever not being able to make timely payment.

Madison sq garden will not run out of points to post on the scoreboard.

And check out the references. He relies on the information from the group he’s addressing:

References
Committee for a Responsible Federal Budget (2010). The CRFB Medium and Long-Term Baselines. Washington: CRFB, August.

Congressional Budget Office (2010). The Long-Term Budget Outlook. Washington: Congressional Budget Office, June (revised August).

National Commission on Fiscal Responsibility and Reform (2010). The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform. Washington: NCFRR, December.

Zivney, Terry L., and Richard D. Marcus (1989). “The Day the United States Defaulted on Treasury Bills,” Financial Review, vol. 24 (August), pp. 475-89.

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Bernanke Admits Economy Slowing; No Hint of New Stimulus

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In fact, no one on the FOMC has called for QE3, so it’s highly unlikely with anything short of actual negative growth.

So the question is, why the unamimous consensus?

I’d say it varies from member to member, with each concerned for his own reason, for better or for worse.

And I do think the odds of their being an understanding with China are high, particularly with China having let their T bill portfolio run off, while directing additions to reserves to currencies other than the $US, as well as evidence of a multitude of other portfolio managers doing much the same thing. This includes buying gold and other commodities, all in response to (misguided notions of) QE2 and monetary and fiscal policy in general. So the Fed may be hoping to reverse the (mistaken) notion that they are ‘printing money and creating inflation’ by making it clear that there are no plans for further QE.

Hence the ‘new’ strong dollar rhetoric: no more ‘monetary stimulus’ and lots of talk about keeping the dollar strong fundamentally via low inflation and pro growth policy. And the tough talk about the long term deficit plays to this theme as well, even as the Chairman recognizes the downside risks to immediate budget cuts, as he continues to see the risks as asymetric. The Fed believes it can deal with inflation, should that happen, but that it’s come to the end of the tool box, for all practical purposes, in their fight against deflation, even as they fail to meet either of their dual mandates of full employment and price stability to their satisfaction.

They also see downside risk to US GDP from China, Japan, and Europe for all the well publicized reasons.

And, with regard to statements warning against immediate budget cuts, I have some reason to believe at least one Fed official has read my book and is aware of MMT in general.

Bernanke Admits Economy Slowing; No Hint of New Stimulus

June 7 (Reuters) — Federal Reserve Chairman Ben Bernanke Tuesday acknowledged a slowdown in the U.S. economy but offered no suggestion the central bank is considering any further monetary stimulus to support growth.

He also issued a stern warning to lawmakers in Washington who are considering aggressive budget cuts, saying they have the potential to derail the economic recovery if cuts in government spending take hold too soon.

A recent spate of weak economic data, capped by a report Friday showing U.S. employers expanded payrolls by a meager 54,000 workers last month, has renewed investor speculation the economy could need more help from the Fed.

“U.S. economic growth so far this year looks to have been somewhat slower than expected,” Bernanke told a banking conference. “A number of indicators also suggest some loss in momentum in labor markets in recent weeks.”

He said the recovery was still weak enough to warrant keeping in place the Fed’s strong monetary support, saying the economy was still growing well below its full potential.

At the same time, Bernanke argued that the latest bout of weakness would likely not last very long, and should give way to stronger growth in the second half of the year. He said a recent spike in U.S. inflation, while worrisome, should be similarly transitory. Weak growth in wages and stable inflation expectations suggest few lasting inflation pressures, Bernanke said.

On the budget, Bernanke repeated his call for a long-term plan for a sustainable fiscal path, but warned politicians against massive short-term reductions in spending.

“A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,” Bernanke said.

“By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk,” he said.

All Tapped Out?

The central bank has already slashed overnight interest rates to zero and purchased more than $2 trillion in government bonds in an effort to pull the economy from a deep recession and spur a stronger recovery.

With the central bank’s balance sheet already bloated, officials have made clear the bar is high for any further easing of monetary policy. The Fed’s current $600 billion round of government bond buying, known as QE2, runs its course later this month.

Sharp criticism in the wake of QE2 is one factor likely to make policymakers reluctant to push the limits of unconventional policy. They also may have concerns that more stimulus would face diminishing economic returns, while potentially complicating their effort to return policy to a more normal footing.

But a further worsening of economic conditions, particularly one that is accompanied by a reversal of recent upward pressure on inflation, could change that outlook.

The government’s jobs report Friday was almost uniformly bleak. The pace of hiring was just over a third of what economists had expected and the unemployment rate rose to 9.1 percent, defying predictions for a slight drop.

In a Reuters poll of U.S. primary dealer banks conducted after the employment data, analysts saw only a 10 percent chance for another round of government bond purchases by the central bank over the next two years. Dealers also pushed back the timing of an eventual rate hike further into 2012.

The weakening in the U.S. recovery comes against a backdrop of uncertainty over the course of fiscal policy and bickering over the U.S. debt limit in Congress, with Republicans pushing hard for deep budget cuts.

Fragility is Global

Hurdles to better economic health have emerged from overseas as well. Europe is struggling with a debt crisis, while Japan is still reeling from the effects of a traumatic earthquake and tsunami.

In emerging markets, China is trying to rein in its red-hot growth to prevent inflation.

Fed policymakers have admitted to being surprised by how weak the economy appears, but none have yet called for more stimulus.

In an interview with the Wall Street Journal, Chicago Federal Reserve Bank President Charles Evans, a noted policy dove, said he was not yet ready to support a third round of so-called quantitative easing. His counterpart in Atlanta, Dennis Lockhart, also said the economy was not weak enough to warrant further support.

While Boston Fed President Eric Rosengren told CNBC Monday the economy’s weakness might delay the timing of an eventual monetary tightening, the head of the Dallas Federal Reserve Bank, Richard Fisher, said the Fed may have already done too much.

Evans and Fisher have a policy vote on the Fed this year while Rosengren and Lockhart do not.

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Weekly Credit Graph Packet – 06/06/11

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Recognizing that ‘it’s all one piece’
The rest of the credit stack seems to be moving up in yield roughly in line with equities.

The slowdown seems to be getting serious.

Hopefully the euro zone and UK haven’t yet reached the tipping point where austerity shifts from reducing deficits to adding to them (due to induced economic weakness).

And hopefully Japan decides to go with an all out reconstruction plan without increasing taxes or otherwise ‘paying for it.’

And hopefully China’s second half weakness doesn’t get out of hand.

And hopefully the US Congress doesn’t accomplish any serious near term deficit reduction.

And hopefully the Fed informs us all that QE and 0 rates reduce interest income for the economy, as indicated in Bernanke’s 2004 published paper. And therefore, as he indicated, a fiscal adjustment is called for to sustain aggregate demand at congressionally mandated levels.

Credit Graph Packet

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FOMC Statement

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Also note that long term forecasts continue to assume ‘appropriate monetary policy’

This means the forecasts contain the assumption that the Fed can hit it’s long term goals for inflation and unemployment by adjusting ‘monetary policy’

In other words, the presumption of being able to hit their targets means the longer term forecasts are nothing more than the their targets.

This is in contrast with non Fed forecasters, who attempt to forecast actual results, which while they do incorporate assumptions about monetary policy, do not necessarily assume those Fed policy adjustments will be successful.


Karim writes:

  • Mid-point of 2012 Core PCE forecast now 1.55%! Rates wont be 25bps in that event
  • 2011 GDP growth shaved lower by 0.3% (now 3.25%)
  • 2012 GDP growth lower by 0.1% (now 3.85%)
  • Unemployment rate lower by 0.35% in 2011 (now 8.55% by Q4) and lower by 0.1% next year (now 7.75%).

LAST STATEMENT (MARCH) AND FORECASTS (JANUARY)

Federal Reserve Press Release
Release Date: March 15, 2011
For immediate release

Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

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