The Trillion Dollar Day

Yesterday, $1.048 trillion dollars was printed out of thin air, which gave the globe its first Trillion Dollar Day.

Everyday, all government spending is ‘printed out of thin air’, and all payments to the government ‘vanish into thin air’.

However, there were no net payments yesterday for all practical purposes.

$506 bb was injected by the ECB into European Banks,

The uninformed language continues with ‘injected’ implying net funds ‘forced in’ somehow.

All that happened was the ECB offered funds at a lower interest rate to replace funds available from the ECB at higher interest rates. This has no effect on aggregate demand.

$518 bb was earmarked as an addon to the USA federal spending for 2008

Federal deficit spending does increase net financial assets of the ‘non government’ sectors. That is more properly called ‘injecting’ funds, as government exchanges credit balances for real goods and services (buy things), thereby adding to aggregate demand.

plus, $24 bb was taken by banks from other central banks to shore up reserves.

Not what happened. It was all about substituting one maturity for another.

Most importantly, 3 month Libor and Euro Dollar rates declined by only 15 – 20 basis points. The markets expected these rates to decline more as a sign of greater liquidity. The European and USA markets sold off over night and this morning in reaction to stubbornly high short-term rates.

When the CB’s fully understand their own reserve accounting and monetary operations, they will offer unlimited funds at or just over their target rates and maturities and also have a bid for funds at or just under their target.

An anonymous person from the ECB told Bloomberg this morning that the $518 bb was the single greatest injection of emergency lending in central bank history

Probably. Interesting thing to remember for trivial pursuits.

and that it was a climatic effort to free up inter-bank lending.

Should have been done long ago. CB’s main job as single supplier of net reserves is setting rates.

They also said it was all that they could do (for now).

It’s not all that they can do. Operationally, it’s simply debits and credits, for the most part totally offsetting with no net funds involved, not that it matters for the ECB anyway.

Here is my take on ECB efforts as I have discussed with members of our firm. Some bank(s) and/or investment bank(s) most likely have sustained huge market to market losses that they must bring onto their balance sheets soon, which are causing them and others who fear losses from counter parties in our $500 trillion plus derivatives market. My suspicion is that these losses include derivative losses that are not directly related to subprime.

OK. Point?

I also think that the FED and Central Banks have suspected the above since August 2007, which caused them to reverse course from fighting inflation to supply liquidity to save the banking and financial system.

Seems to be the mainstream view right now?

I also do not have much faith in central banks and government authorities ability to manage a widespread financial crisis because THEY created this crisis with their lose money and lax regulatory practices that have been rampant since 2002.

Point?

There is also evidence that USA government spending and deficits are much larger than actually reported since 2002. I have found reports from numerous ex-GOA officials and current GOA staff that have come clean with our BUDGET. Former government officials are now reporting that TSY SEC O’Neil was fired because he wanted to right the ship at GOA and report true numbers in his reports to Congress and the American public.

If they were larger than reporter and added more aggregate demand than appears on the surface, they are responsible for sustaining growth and employment.

Below is a take on this from John Williams. John also publishes the CPI using pre-1982 methods that show annualized CPI running 3-4% higher than reported under current methods.

I recall that debate and the results seemed very reasonable at the time. Can’t remember all the details now.

Here are adjusted Budget numbers for 2006-2007.

The results summarized in the following table show that the GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare narrowed to $1.2 trillion in 2007 from $4.6 trillion in 2006. The reported reduction in the deficit, however, was due to a one-time legislative-related accounting change in Medicare Part B that likely will be reversed, and, in any event, needs to be viewed on a consistent year-to-year accounting basis.

On a consistent basis, year-to-year, I estimate the 2007 deficit at $5.6 trillion, or worse, based on the government’s explanation of the process and cost estimates.

What matters from the macro level is the fiscal balance that adds/subtracts from the current year aggregate demand. This was learned the hard way in 1937 when, if I recall correctly, tax revenue from the new social security program was put in a trust fund and not counted as federal revenue for purposes of reporting fiscal balance and funds available for federal spending. The result was a fiscal shock/drop in demand that upped unemployment to 19% after having come down close to 10%.

From Note 22 of the financial statements, under “SMI Part B Physician Update Factor:”

“The projected Part B expenditure growth reflected in the accompanying 2007 Statement of Social Insurance is significantly reduced as a result of the structure of physician payment updates under current law. In the absence of legislation, this structure would result in multiple years of significant reductions in physician payments, totaling an estimated 41 percent over the next 9 years. Reductions of this magnitude are not feasible and are very unlikely to occur fully in practice. For example, Congress has overridden scheduled negative updates for each of the last 5 years in practice. However, since these reductions are required in the future under the current-law payment system, they are reflected in the accompanying 2007 State of Social Insurance as required under GAAP. Consequently, the projected actuarial present values of Part B expenditure shown in the accompanying 2007 Statement of Social Insurance is likely understated (my emphasis).”

Since this was handled differently in last year’s accounting, the change reduced the reported relative deficit. The difference would be $4.4 trillion, per the government, if physician payment updates were set at zero. I used that estimate, tentatively, for the estimates of consistent year-to-year reporting, but such likely will be updated in the full analysis that follows in the December SGS.

With Social Security and Medicare liabilities ignored, the GAAP deficits for 2007 and 2006 were $275.5 billion and $449.5 billion, respectively. Those numbers contrast with the otherwise formal and accounting-gimmicked cash-based deficits of $168.8 billion (2007) and $248.2 billion (2006).

Yes, net government spending may increase over time and may lead to higher rates of reported inflation, but solvency is not the issue.

These ‘deficit terrorists’ totally miss the point; fore, if they did ‘get it’ they would be doing the work and projecting future inflation rates, not just deficit levels.

Furthermore, they ignore the demand drains, like pension fund contributions, IRA’s, insurance reserves, corporate reserves, etc. that also grow geometrically and help ‘explain’ how government can deficit spend as much as it does without excess demand driving nominal growth to hyper inflationary levels.

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