Tag Archives: Deficit

Our govt molding our children’s minds

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See below what our govt. is directing at our children.

Truly depressing.

All donations to my campaign are added to what I’m spending anyway to try to get the word out.

Many thanks to all of you who have already donated, no matter how small!!!
It all goes into the pot to sustain the effort.

Also many thanks to all of you who continue to try to organize meetings and speaking events for me- much appreciated!

CBO’s Director’s Blog: Letter to a Seventh Grader

A short time ago, I received an interesting letter from a young man in Michigan asking about federal budget deficits. I thought that perhaps other students would be interested in the kinds of questions he asked and how I answered him, so I’ve decided to share my letter to him with all of you. Here’s what I wrote:

1. What are the primary causes of the current federal budget deficits?

The current large deficits are the result of a combination of factors. These include an imbalance between tax revenues and the government’s spending that began before the recent economic recession and turmoil in the financial markets, sharply lower revenues and higher spending related to current economic conditions, and the budgetary costs of policies put in place by the government to respond to those conditions.

2. How will budget deficits affect people under the age of 18?

The government runs a budget deficit when it spends more on its programs and activities than it collects in taxes and other revenues. The government needs to borrow to make up the difference. When the federal government borrows large amounts of money, it pushes interest rates higher, and people and businesses generally need to pay more to borrow money for themselves. As a result, they invest less in factories, office buildings, and equipment, and people in the future—including your generation—will have less income than they otherwise would.

Also, the government needs to pay interest on the money it borrows, which means there will be less money available for other things that the government will spend money on in the future. Squeezing other spending affects different people in different ways, depending on their individual situations. For example, many young people benefit from government programs that provide money to families in need of food or medical care or to people who have lost their job, or from the financial support the federal government provides to local schools, or from the grants or loans the government offers to help pay for college education.

3. How is the U.S. government working to reduce budget deficits?

The President created a National Commission on Fiscal Responsibility and Reform to draw up plans to address the deficit problem. Most of the people on the commission are Members of Congress.

The commission will consider ways to reduce the budget deficit by 2015 as well as ways to improve the long-term budget outlook. Under current government policies, the gap between the government’s spending and revenues in coming years will be large. Therefore, balancing the budget would require significant changes in spending, taxes, or both. On CBO’s Web site, you can find information about the budget outlook during the next 10 years and over the long term.

More information about the commission can be found on its Web site: http://www.fiscalcommission.gov.

Congress also has enacted a new law (called “Pay-As-You-Go”) that typically requires legislation that increases spending or lowers tax revenues to include other measures to offset the costs of those changes.

4. What can people, and especially school-aged children, do to help curb budget deficits? The most important thing that school-aged children can do to help reduce future deficits is to study hard and acquire the best possible education. This will help you and your classmates get better jobs when you grow up, which will help the economy grow. In turn, a stronger economy will produce higher tax receipts for the government, which will lower the deficit.

When young people get jobs, they should be sure to save some of the money they earn. Through a fun and important bit of math called compounding, savings of small amounts can grow over time into significant amounts. For the economy as a whole, the more people save, the more money is available for businesses to invest in factories, office buildings, and equipment. For individuals and families, more savings provide a financial cushion in times of economic difficulty. In particular, more savings can help people pay large medical expenses or save their home in case they lose their job or become ill, thus helping them avoid needing government assistance.

People of all ages can also help to reduce the deficit by learning how the government spends money and from whom the government collects money. Understanding the current budget is essential for choosing intelligently among different ways to change programs and policies in order to reduce deficits.

5. If I am to convey one key message to my school regarding the federal budget deficit, what would it be?

The prospect of budget deficits for many years in the future is a serious problem for our country. Ultimately, people in the United States will have to bring into balance the amount of services they expect the government to provide, particularly in the form of benefits for older Americans, and the amount of taxes they are willing to send to the government to finance those services. Because it takes a long time to implement major policy changes, deciding what those changes will be is an urgent task for our citizens and for our policymakers.

Thank you for taking the time to write to us about these difficult issues.

Best wishes,

Doug Elmendorf

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just when you thought it couldn’t get any more inane

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Getting worse by the minute.

>   
>   (email exchange)
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>   On Thu, May 27, 2010 at 7:51 PM, wrote:
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>   Does anyone know of some way to talk to her?
>   This is embarrassing.
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Clinton spotlights US debt as diplomatic threat

Clinton says debt, deficit threaten U.S int’l position

U.S. committed to tough political steps on budget

Clinton urges new “national security” budget (Adds quotes, updates throughout)

By Andrew Quinn

May 27 (Reuters) — The United States’ huge national debt — now topping $13 trillion — is becoming a major threat to U.S. security and leadership in the world, Secretary of State Hillary Clinton said on Thursday.

“The United States must be strong at home in order to be strong abroad,” Clinton said in remarks on the Obama administration’s new national security doctrine, which was made public on Thursday.

“We cannot sustain this level of deficit financing and debt without losing our influence, without being constrained in the tough decisions we have to make,” Clinton said, adding that it was time to “make the national security case about reducing the deficit and getting the debt under control.”

The new Obama security strategy joins diplomatic engagement with economic discipline and military power to boost America’s standing, and pledges expanded partnerships with rising powers like India and China to share the global burden.

Clinton emphasized controlling the budget deficit, saying it was “personally painful” for her to see the yawning U.S. spending gap after her husband, former President Bill Clinton, ended his second term in 2001 with budget surpluses.

“That was not just an exercise in budgeteering. It was linked to a very clear understanding of what the United States needed to do to get positioned to lead for the foreseeable future, far into the 21st century,” she said.

Clinton said that as a Democratic U.S. senator from New York during the administration of former President George W. Bush, she had voted against “tax cuts that were never sustainable, wars that were never paid for” — but without success.

“Now we’re paying the piper,” she said.

Clinton in February blamed “outrageous” advice from Former Federal Reserve Chairman Alan Greenspan in part for the grim U.S. deficit picture.

POLITICALLY TOUGH

President Barack Obama, who pushed through his own huge stimulus spending plan last year amid the global financial crisis, was committed to taking the politically difficult steps needed to put government finances back in order, Clinton said.

“We are in a much stronger economic position than we were. And that matters. That matters when we go to China. That matters when we try to influence Russia. That matters when we talk to our allies in Europe,” Clinton said.

Obama has formed an 18-member bipartisan commission to study ways to reduce the U.S. deficit projected at about $1.5 trillion this year and bring long-term debt to manageable levels. It aims to find $229 billion in savings in 2015 to bring the deficit down to 3 percent of the overall economy from about 10 percent now.

The U.S. debt this week topped $13 trillion, according to USDebtClock.org, a website that tracks real-time growth in U.S. debt. That amounts to about 90 percent of annual gross domestic product, a level that could start impacting the economy.

Big budget deficits and rising U.S. debt are becoming major issues in the run-up to November’s congressional elections, and the European debt crisis that has unnerved financial markets has fueled these voter concerns.

While arguing for tighter overall economic discipline, Clinton said it was no time for the United States to roll back spending on international diplomatic and development programs, particularly as civilian agencies take up more of the work in Iraq and Afghanistan formerly done by the military.

“In order for us to meet the obligations that are now being asked of our civilian personnel, it costs money,” Clinton said, adding that it was time to look at an overall “national security budget” that would encompass funding for diplomatic, development and military operations.

“You cannot look at a defense budget, a State Department budget and a USAID (U.S. Agency for International Development) budget without defense overwhelming the combined efforts of the other two and without us falling back into the old stovepipes that I think are no longer relevant for the challenges of today,” Clinton said.

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Lawrence Summers on the economy

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>   (email exchange)
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>   On Mon, May 24, 2010 at 6:50 PM, wrote:
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SUMMERS: “FOR MILLIONS OF AMERICANS, THE ECONOMIC EMERGENCY GRINDS ON” – WH adviser Larry Summers spoke to the Johns Hopkins School of Advanced International Studies today: “[T]he observation that the economy is again ascending does not mean that we are out of a very deep valley. Far from it when we are nearly 8 million jobs short of normal employment and about $1 trillion – or $10,000 per family – short of the economy’s potential output and income and when recent events in Europe have introduced uncertainty into the prospects for global growth. Shortfalls in output and employment stunt the economy’s future potential as investment projects are put off and as the skills and work habits of the unemployed atrophy. This last point is especially important when for the first time since the Second World War the typical unemployed worker has already been out of work for more than six months. And behind these statistics lie millions of stories of Americans who have seen the basic foundations of their economic security erode. Beyond the economic projections and equations we economists make lie the struggles of communities devastated by the impact of this recession.Whatever the judgments of groups of economists about the official parameters of the recession and the growing signs of recovery, for millions of Americans the economic emergency grinds on.”

>   
>   So why doesn’t he damn well do something about it?
>   

Because we’ve run out of money.

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Krugman has it right

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Lost Decade Looming?

By Paul Krugman

May 20 (NYT) —Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

As we discussed, could not agree more!

Let’s talk first about those interest rates. On several occasions over the past year, we’ve been told, after some modest rise in rates, that the bond vigilantes had arrived, that America had better slash its deficit right away or else. Each time, rates soon slid back down. Most recently, in March, there was much ado about the interest rate on U.S. 10-year bonds, which had risen from 3.6 percent to almost 4 percent. “Debt fears send rates up” was the headline at The Wall Street Journal, although there wasn’t actually any evidence that debt fears were responsible.

Correct, it was fears that growth would cause the fed to hike rates to something more ‘normal’

Since then, however, rates have retraced that rise and then some. As of Thursday, the 10-year rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

Yes, though I would say pessimism that slow growth and negative CPI cause markets to discount ‘low for a lot longer’ rates from the Fed. It’s all about the Fed’s reaction function. Long rates are the sum of short rates, plus or minus a few ‘supply technicals.’

What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move.

The euro govt debt is highly problematic as they are all set up like US States and will bounce checks if they don’t have sufficient funds in their accounts. Unlike the US, Japan, UK, etc. the credit risk in the euro zone is real, just like the US States. And that forces them to act pro cyclically, cutting back and tightening up in slowdowns, again like the US States.

But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

Banks, too, are necessarily pro cyclical, making matters worse in down turns. Only the Federal government can be counter cyclical, however, unfortunately, our Federal government thinks it’s ‘run out of money’ and ‘dependent on foreign borrowing that our children will have to pay back.’ Complete nonsense, but they believe it, as does the mainstream media and academic community.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.

Agreed!

It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

Agreed, and because they don’t have a sufficient grasp of monetary operations to support the case for a fiscal adjustment large enough to close the output gap and get us back to full employment.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Completely agree! See my ‘7 Deadly Frauds of Economic Policy’

Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping. But hope is not a plan.

They seem complacent with the forecast 5 year glide path to 5% unemployment.

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senator kohl on SS “solvency”

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Press Release of AGING – NON Committee

KOHL: SOCIAL SECURITY SOLVENCY, TARGETED BENEFITS CAN BE IMPROVED WITH MODEST TWEAKS

Aging Committee Report Delivered to Members of the Fiscal Commission
Contact: Ashley Glacel (202) 224-5364
Tuesday, May 18, 2010
WASHINGTON, D.C. – Today U.S. Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, released an official Committee report on Social Security. The report outlines the challenges currently facing America’s retirement program and highlights options for addressing program solvency,

There is no solvency issue. The premise for the changes is a mistake.

benefit adequacy, and retirement income security for economically-vulnerable groups. Emphasizing that a majority of America’s seniors rely on Social Security as their primary source of income, the report calls on Congress to enact modest changes to Social Security in the near future to bring its long-term financing into balance and improve benefits for those who need them most.

“This report shows that, contrary to popular belief, the sky is absolutely not falling for Social Security. By implementing one or more of these modest changes, we can ensure solvency and even strengthen benefits for those who count on their monthly check the most,” said Chairman Kohl.

The sky is not falling even with the ‘modest changes’

Copies of the report were delivered to all eighteen members of President Obama’s National Commission on Fiscal Responsibility and Reform. Many of the Commission’s members have publicly mentioned their interest in addressing Social Security as part of their work to reduce the federal deficit.

Deficit reduction also stems from an incorrect premise

“Social Security has never been responsible for one penny of the federal deficit, and by law is barred from doing so. In fact, it has been in surplus every year since its inception. If the Commission chooses to take a look at the program, it is my hope that they find our Aging Committee report of use,” Kohl said.

Whether it is in surplus or deficit alters aggregate demand, not solvency. Solvency is not the issue.

The report points out that the nation’s demographics have changed significantly since the Social Security program began in 1935. Americans are living longer, women’s participation in the labor force has significantly increased, and with a rise in the divorce rate, household composition has changed. The labor force is also growing more slowly and with fewer companies offering pensions, the nature of work and compensation has altered in ways that affect workers’ ability to save for retirement. Therefore, in addition to improving solvency,

Solvency is not an issue

any future reforms to the program should take into account America’s evolving demographics in order to ensure that benefits are adequate and equitable for generations to come.

Those are the only relevant criteria.

The report includes an important disclaimer that the options laid out represent a range of commonly-considered proposals, and that none of them should be construed as having been endorsed by the Committee or its members. In the foreword, Chairman Kohl asserts: “Many members of the Committee, including myself, do not support and actively oppose many of the options. However, a full and informed debate begins with the collection of research and information, and it is our hope that this report will serve as a resource to Congress and policymakers as they discuss ways to ensure that Social Security will remain strong for another 75 years.”

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Trichet statement

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Trichet rejected the notion that fiscal discipline would hamper growth in the Eurozone.

He’s wrong for the macro economy.

“It is a complete fallacy to say that fiscal soundness dampens growth. It is exactly the contrary. It is the absence of fiscal credibility which dampens growth,” he said.

He’s right at the micro level of the national govts given the eu’s current institutional structure.

They need fiscal expansion to come from the ECB level rather than the nat gov level.

But he probably wouldn’t agree with that either.

With current policy, the eurozone institutional structure can only survive with an impossibly large surge in exports.

A cartoon with a fencer stabbing a figure labeled the euro zone and exclaiming ‘Trichet’ as he stabs it?

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Marshall’s latest

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REPEAT AFTER ME: THE USA DOES NOT HAVE A ‘GREECE PROBLEM’

By Marshall Auerback

To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri (link), whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called respectable policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability”.

The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks (link), and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.

But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph (link), the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:

“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”

“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:

1. There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
2. Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
3. Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.

Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.

King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”

This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.

But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.

The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.

Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.

José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.

The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.

Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.

The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.

There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.

First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.

These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.

Let’s repeat this for the 100th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.

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Fighting back against the move to slash Social Security

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Social Security is not being attacked on its merits.

Therefore the bleeding heart arguments will not prevail.

The protagonists believe the problem is that the federal government is on the road to financial ruin, and not merits of Social Security per se .

My conclusion is the only message that will work is that operationally social security is not broken as the protagonists believe.

Their central premise is simply wrong and they can be proven wrong on that central contention.

Government checks don’t bounce- all Federal spending is done by using their computer to mark up numbers in bank accounts (Bernanke quote)

The Federal government will always be able to make all its payments including Social Security payments (Greenspan quote)

Federal spending is in no case operationally dependent on revenues from taxing or borrowing and everyone in Fed operations knows it.

Spending begins to cause inflation only after all the unemployed have been hired and all the excess capacity is used up.

Government deficit spending = world dollar savings, to the penny and everyone in the CBO and OMB knows it.

If government spending isn’t enough to allow the economy to pay its taxes and meet its savings desires
the result is unemployment, excess capacity, and deflationary forces in general.
All as a point of logic.

The wholesale interest rates for the banking system, which also determines interest rates the Treasury pays, are set by the Federal Reserve Bank, not market forces.

The move to cut Social Security is an innocent fraud coming from a position of ignorance of monetary operations.

It is coming from those who mistakenly believe that the federal government has run out of money,
that federal spending is dependent on borrowing that our children will be left to repay,
and that any deficit spending always risks hyper inflation.

It is driven predominately by people who would support Social Security if they didn’t believe the federal government was on the road to financial ruin.

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ECB meeting preview / ECB intervention?

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In case you had not seen this.

If the ECB bought Greek bonds in the secondary market and issued an ECB bond as suggested below,

that could be a reasonable solution out of this mess?

They don’t need to issue the ecb bonds unless the money markets have excess reserves driving short rates below target rates

It doesn’t solve much any more than the Fed buying Lehman bonds in the secondary market would have helped Lehman.
It just lets some bond holders get out, presumably on the offered side of the market.

That’s why it’s allowed in the first place- it does not support the member nation and introduce that moral hazard.

To keep things fair, they could state that they would buy up to a maximum of a certain amount of bonds per capita (or even the average of the last 5 years of GDP) for all EUR denominated countries on a discretionary basis.

As above.

It sort of accomplishes what you suggested but with tools already in place and most importantly with the mainstream economists actually discussing it?

I don’t think so, as above. The member nations would still be in Ponzi, where they have to sell debt to make an expanding amount of debt payments.

The ECB might even make money if Greece paid off; just like the FED did with mortgages and bank stocks.

The ‘profits’ are similar to a tax, removing net financial assets form the private sector. They made money because the Federal deficit spending was sufficient to remove enough fiscal drag to allow the private sector to return to profitability.

The Fed and Tsy profits simply somewhat reduced the deficit spending.

— Original Sender: —

From our Economics Team…..

ECB meeting preview / ECB intervention

The current market action has prompted many questions on the ECB possible interventions and what Trichet might say/announce tomorrow at the ECB press conference. I think an ECB intervention is indeed now becoming very likely. Remember that the ECB “printed” 500Bn EUR in just 2 weeks in October 2008 to fund the money market which had became dysfunctional after Lehman. The primary mandate of a central bank is to maintain financial stability; hence the Oct 2008 change in repo rule and the 500Bn of money created; de facto, the ECB made teh clearing of the money market. The same might happen for the sovereign market.

Yes, but as above, it doesn’t address solvency or credit worthiness of a member nation in Ponzi, which is all of them.

The real problem is austerity probably won’t bring down deficits, as it weakens the economies, cutting into tax revenues and adding to transfer payments.

The following is a quick summary.

*** Fundamentals:

– The problem with Greece was a problem of sustainability of public finances. Lending more was not the solution, the solution was to cut dramatically the deficit to reduce it to a level at which public finances are sustainable. Hence the need for an IMF plan, i.e. loan and more importantly an ambitious fiscal consolidation.

Except that the cutting can actually increase deficits, as explained above.

– The other countries are in a very different economic and fiscal situation, the situation is manageable (for e.g. see our weekly last Friday comparing Greece and Portugal). So the problem for the other countries is essentially a problem of market liquidity. This means ECB intervention.

If that’s all it was, fine. But seems to me they also can’t bring down deficits with austerity, but only increase them, for the reasons above.

*** ECB intervention: When?
– Probably early next week.

– Usually markets react when money is provided, not when the plan is announced. This is what happened for e.g. with the TARP. So there is a case for waiting until the IMF plan is enacted to see market reaction and design the measures accordingly.

Agreed. And the IMF plan requires the member nations to buy SDR’s with ‘borrowed money’ to fund the IMF loans, so there is no help from the IMF balance sheet regarding credit worthiness.

No matter how they slice it, without the ECB doing the lending, any package for Greece diminishes the other member nation’s credit worthiness

– The German Parliament votes Friday. It is probably not desirable from the ECB perspective to act before.

They don’t have popular support as seems German’s don’t want to pay for Greek public employees salaries and benefits which are higher than their own.

*** ECB intervention: How?

There are probably an infinite number of intervention mechanisms available. The following bullet points list the most obvious ones. These bullet points are based on the note published Monday “Greece after the IMF plan”.

– The ECB could deploy its balance sheet, initiating expansionary liquidity provisioning. This would be pure QE with the ECB buying directly governments bonds. Note that this is not against the status of the ECB: the ECB (or any central bank of the Eurosystem) cannot “finance a public deficit” hence cannot buy on the primary market, but there is no limits on the secondary market.

This is allowed for a good reason- it doesn’t do much, as described above.

Note also that the intervention can be sterilized, the ECB has the possibility (although it never used it so far) to issue a bond, it could thus issue an ECB bond of the same size as its intervention on the market; having then a zero effect on the net liquidity provided. We though QE was unlikely given past ECB policy, but under the current circumstances it would definitely be a possible option.

‘Liquidity’ only matters if it drives the overnight rate below ecb target rates. They can then ‘offset operating factors’ as they call it as needed to keep the interbank rate on target.

This is purely technical and of no monetary or economic consequence.

– In theory, the ECB could deploy reserves under management, about €350Bn, to buy bonds of the country at-risk. Here, however, we doubt the ECB would respond in this fashion. The fund would be limited and it would imply that a disproportionate part of the reserves would be invested in the “trouble” countries.

Operationally they can readily buy anything they want.

– Rather, most ECB policy intervention is channeled through banks. Various options are available to the ECB, including adjusting repo rules or collateral rules on existing sovereign paper. One option would be to accept the paper at par instead of accepting it at market value. This would mean that a bank could buy a sovereign paper at 70cents and repo it at 100cents.

Yes, but still full recourse- the bank remains on the hook if the collateral goes bad, and it has to report its net capital accordingly- recognizing full ownership of the collateral.

Another option would be to argue current market failure and, as a consequence, repo at the average price of the past year (same logic, note that this option has been used for e.g. by the SFEF in the financing of French banks). The ECB could also accept as collateral banks loans to governments.

Bank liquidity is not an issue. The price of the repo is of no consequence until bank liquidity is an issue.

– Financing could even be channeled via supranational institutions. In that case the intervention would not need to need to be made public.

*** ECB press conference tomorrow: what will Trichet say?

– Difficult to preannounce the measures and give details even if ECB is planning an intervention.

– Impossible to say nothing about the current situation.

– Trichet is likely to say “we have the tools to intervene and will not hesitate to do so”.

Agreed!

This is unlikely to calm the market much.

Agreed!

The question is, does he care? The ECB still has the single mandate of price stability.

Technically they would intervene to stop deflation, or something like that.

But with higher prices pouring in through the fx window that’s now problematic as well.

Warren Mosler

UTFITF (unheard tree falling in the forest)

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