Saturday, April 30, 2011
Friday, April 29, 2011
As usual, Warren Mosler saw this before anyone else. In a post yesterday he talked about China's growing external debt.
We know China has an inflation problem and we know they have been trying different measures to control it such as raising interest rates and reserve requirements.
MMT proponents realize this doesn't work because it simply raises incomes and prices (the former through the interest channel and the latter through higher bank cost of funds, which are passed along).
Now it appears they are trying to halt inflationary pressures by pushing their currency up. But how are they doing it?
Curiously, despite over $3 trillion in available foreign currency reserves, China appears to be borrowing (mostly dollars) and using these funds to buy their own currency. (That's Warren's speculation as well as mine.)
This is how countries typically get in trouble: by getting in debt in another currency.
China's $430 bln in foreign debt (as of 12/31/2009) effectively offsets some of their reserve position. How far will this go? Anybody's guess, but it could get out of control rather quickly if it persists.
By the way, even though the IMF and others harp about all the external debt of the U.S. the truth is, we don't have ANY external debt. All our debt is denominated in dollars and regardless who holds it, it all sits in accounts at the Fed.
Here’s an interesting chart I put together from data taken from the Bureau of Economic Analysis.
It shows the quarter-over-quarter average percentage increase in government spending under presidents Reagan through Obama. As you can see, average levels of government spending were highest under Reagan, by a huge margin. We had a boom back then. Next was Bush, then Clinton, then Bush I and last, but not least, was Obama. Average quarterly increases in gov’t spending under Obama have been a miserly 0.7%. This data belies the claim that spending has surged. The nominal amounts are large, yes, but the percentage increases have been very modest. In contrast, Reagan put the pedal to the metal.
Average quarter-over-quarter percentage gain in government spending
Bush I 1.4
Bush II 2.1
Thursday, April 28, 2011
'The Donald is the gift that keeps on giving. Every time he opens his mouth a million Americans move toward President Obama,"
Keep your eye on the ball Bo, its a flea flicker play. Trump is running as (in the National Review’s memorably dubbed George Wallace) as a country and western Marxist… though I guess Ed Glaeser’s term “small government egalitarian” probably sounds better. He’s running on cultural and foreign policy issues (pro-birther, pro-life, anti-gay marriage, pro-trade war with China and OPEC) and yet running left on fiscal policy. Thanks to the birther indirection (with a helpful assist from the Obama WH), he’s leading in the GOP polls even as he tells conservative supporters like Sean Hannity what he’d do about entitlement reform;
“I don’t care what plan the Republicans put, I’m protecting the seniors..”
And when Hannity asks how he’d balance the budget, Trump changed the subject from deficits to jobs (taking a whack at China along the way), “Don’t forget China is taking our jobs…. the best thing for balancing the budget is to have a strong economy. And the economy can never come back if we are going to always have high unemployment.”
That last part, of course, is a neat paraphrase of Kennedy’s famous line from his 1962 Economic Club speech, “only full employment can balance the budget”. Not quite accurate to blame China for our unemployment , if we spent enough in public investments to fill the $500 billion demand leakage created by our trade deficit, itt wouldn’t be a problem. But since one has to throw something out to appease the deficit zombies, Trump has the right idea, better to turn on free trade than the sick and elderly. What was it that Wynne Godley and Francis Cripps proposed in the mid 70s… “non-selective protectionism with matching fiscal easing” (i.e. use tariff revenue to cut payroll tax). if he ran on a “fair trade tax cut”, he would win over that fraction of the US population that doesn’t work in DC or on Wall Street (leaving the rest for Obama). (Ed: ooohhhh!)
Trump is rich enough to self-fund and has hit on the perfect angle of attack (if he pulls the trigger and runs), lock down the GOP base on cultural issues by going farther right than anyway else, and then down stand ready to pivot to economics to hammer the President from the left. Politico quoted an interview from last month where Trump sounds like he read Jamie Galbraith’s book.
“When this country becomes profitable again, we can take care of our sick; we can take care of our needy,” he told Human Events. “We don’t have to cut Social Security; we don’t have to cut Medicare and Medicaid. We can take care of people that need to be taken care of. And I’ll be able to do that.”… And he says we won’t need to raise taxes either. Trump is suggesting that, as our economy improves, it will expand to cover trillions of dollars in future deficits…”
I think Beowulf has some insightful analysis and nicely includes some perspective and history in accordance with MMT.
So Trump has so far been taking on Obama, on trade and jobs and our social safely net programs, but next I would like to see him kick the fiscal morons and ”free markets”, Paul Ryan types of the GOP right in the backside for a change, he'll have to do it sometime if he is going to run in the GOP primaries.
It’s a pretty sad state of affairs in our sitting government when it’s up to the flamboyant businessman Donald Trump to make the current political establishment on both sides look like a bunch of Marie Antoinettes.
Government consumption expenditures and investment fell at the fastest pace in 28 years in the first quarter of this year. That largely contributed to the sharp slowdown in growth. If that 1.8% growth rate is not bad enough, consider this...more spending cuts are on the way...big ones!
Where are the Republicans showing us how spending cuts lead to growth? They're silent. What's worse, where is Obama? He is silent when he should be all over the Republicans now, pointing to these results and saying that the worst is yet to come.
This is just another glaring example that spending cuts and austerity will kill growth. The Eurozone, Britain and now us. But the dogma rages on.
Quantitative Easing has become the new “hot term” for a policy that in reality does pretty much next to nothing.
Quantitative easing is the term used when the central bank has already lowered its target rate (Fed funds) to zero and can go no lower. So to act like it’s still doing something, it buys securities somewhere else along the term structure and continues adding to bank reserves. In QE2 the Fed targeted government bond yields and bought Treasuries. In QE1 the Fed targeted mortgage rates and bought mortgage backed securities.
When the Fed buys Treasuries it’s as if the Government never sold them in the first place. It is removing that supply of Treasuries that was first put there by government debt sales. And remember, Treasuries comprise part of the financial assets held by the public, so you’re basically taking those assets away.
Here’s what happens…
The public gets stripped of one asset—a Treasury—and loses the 3.5% interest payment (I’m using the 10-year) and gets another asset—a reserve balance—with a 0.25% interest payment.
The public has just lost 325 basis points of interest income!!! Some deal!!!!
Yet people view this as being wildly inflationary and stimulative. You can clearly see, it’s not. In fact, one could argue that the loss of interest income is really deflationary, particularly when so many people remain unemployed.
So why does the market rally on this and commodities go crazy?
Good question. I really don’t know. Probably a belief that QE does a lot more than it does.
But if that’s what it takes to move the market, it’s good enough. The Fed may know this and is manipulating expectations. The Fed is big on “expectations theory.”
Wednesday, April 27, 2011
I will be on "Cavuto" on Fox Business tonight. Hit times are 6:15pm and 6:50pm EDT. Tune in if you can.
Tuesday, April 26, 2011
If I hear this one more time I'm going to throw up, seriously. It's a big, fat, lie and it's coming from the most unlikely places.
Why is it that Tea Partiers and others, who reside nowhere near the ranks of the wealthiest in this country, are suddenly so adamant about protecting the earnings of the rich? Have they been brainwashed that effectively? They seem oblivious to the fact that they are speaking against their own interests and more importantly, that what they are saying about the rich being more productive is just a total fallacy.
Now, to be square with MMT, I'll say that I am not arguing for higher taxes on the wealthy. Any MMTer worth his salt would tell you that; a) taxes do not fund governmment, they serve to regulate demand and; b) the problem we are having has nothing to do with excessive demand coming from rich folks.
Furthermore, as much as I am in favor of greater income equality I am not in favor of doing it by some "Robinhood" scheme of rasing taxes on the rich and giving it to the poor (or the non-rich).
On the contrary...what I am attacking here is this ridiculous statement that somehow the rich are more productive than everyone else and therefore, we should safeguard their earnings over everyone else's.
That's a bunch of crap.
Just take a look at the Forbes 400 list of richest Americans. The vast majority of the people on that list owe their fortunes to inheritance, real estate ownership and/or stock investment and speculation. They "produce" nothing. They basically collect rents off assets. They haven't added one iota of real capital to the economy. Why, then, do we prioritize their incomes over everyone else's?
Do you mean to tell me that some landlord collecting rents off a portfolio of buildings in Manhattan, LA or Chicago is more important or productive than the sanitation worker collecting his garbage? Is some hedge fund manager more productive than the teacher who teaches your kids or the cops and firemen that keep our streets safe and our property protected? Are they more important than a nurse in an Intensive Care unit or the construction worker that's fixing a highway or repairing a bridge?
I mean, come on...really!!!
Yet this is the dialogue we are having in our country today. There are people of limited means, working class people, saying that we shouldn't be taking money from productive people and giving it to unproductive people. They've got it backwards. We ARE taking money from productive folks, just not the folks they think are the productive ones.
Budget cuts, spending cuts, cuts in services, education, Medicaire, and all the rest are the fiscal equivalent of taking money from the most productive. This equates to taking money from the people that keep our streets safe and clean, protect our property, teach our kids, care for our sick and infirm, put things together on production lines, operate our trains, boats and planes and everything else that goes into making a modern society modern.
Now don't get me wrong, I'm not knocking the rich and I'm certainly not knocking those who made their fortune creating and adding to the overall supply of real assets (good and services). Those are the things that define our very standard of living. They deserve every penny as do the rich folks who got their money from inheritance or real estate and stock speculation.
But it's time to drop this BS that people who have lots of money are more productive or important than those who have less. It's just not true.
Monday, April 25, 2011
Sunday, April 24, 2011
Saturday, April 23, 2011
"Let's ask a slightly different question. Why do governments pay interest on their debt? Actually, it sounds like a different question, but it's really the same question. Why finance government deficits with interest-paying debt, when you could use non-interest-paying currency?
The answer is the same: you pay interest on the debt to encourage people to hold it and stop people spending it. If you cut the interest rate on government debt, will people sell it back to the government for money, spend the money, and cause inflation? If not, then Aggregate Demand is too low, and the problem is deflation, not inflation. So there's a free lunch from cutting the interest rate on government debt. And the government should eat that free lunch. And then the Long Run Government Budget Constraint kicks in again".
Friday, April 22, 2011
Thursday, April 21, 2011
I will be on the "Judge Jeanine Pirro Show" on Fox News Channel at 2pm EDT today and also on "Bulls & Bears" on Fox Business at 4:20pm EDT. The Bulls & Bears appearance will be my regular weekly debate with Charlie Gasparino.
There is only $26 bln in spending power for the Federal government under the current debt limit.
(Figures are in millions $)
You can see the full statement here.
Not much talk about this and the markets continue to kite higher. Negotiations on the debt ceiling remain at a stalemate. Oil prices at $112 now, other sensitive commodities surging. Is a crash coming? It "feels" like it.
Wednesday, April 20, 2011
Tuesday, April 19, 2011
Monday, April 18, 2011
Just watched some guy from S&P being interviewed on CNBC. Steve Liesman asked him if he thought that the probability of a default by the U.S. had just increased. The guy said, "yes." Then Liesman asked him to explain how the U.S. can default when it issues its own currency and when its debts are denominated in its own currency. The guy basically couldn't answer. He pretty much said it didn't matter and spoke about a "rich history" detailing the problems of countries with high debt, failing to make any distinction between what nations in that rich history were under gold standards or fixed exchange regimes (all). Then he just said "we do not accept the idea that a country with its own currency, treasury and central bank is immune to debt problems."
Now that's arrogance for you. Since S&P simply cannot accept the idea, they will rate on the basis of their misguided belief and bias. Ordinarily that would simply be a reason to laugh at them and see them for what they are: a bunch of arrogant and elite functionaires. Sadly, though, policy makers, investors and others listen to these idiots and their ratings and pronouncements, which means this will have a real impact on people.
I worked at S&P back in 2000 and was basically fired after getting into an argument with chief auto analyst Scott Sprinzen after I wrote a highly negative article about General Motors, whose stock was trading at 80 per share at the time. I questioned GMs outlook and the rosy assumptions that they were making for their finance unit. Sprinzen took exception to this saying that GM was strong and would not have any problems. Well, I was forced to resign.
Fast forward: GM went bankrupt and had to be saved by taxpayers. Sprinzen is still there at S&P. I am not.
These agencies have been conducting business for years despite the fact that they operate with huge conflicts of interest. They are paid by the entities they rate so there is massive incentive to make things look rosy when they are not. They are protected by the government and have no competition. This has made them arrogant to an extreme, as exhibited by the jerk being interviewed on CNBC. Sadly, nothing will be done to reign them in or make them more accountable for their ratings.
I’ve said for a long time that the rating agencies (idiots) will eventually downgrade US debt even though there is NEVER, EVER, EVER a solvency risk for a nation that issues its own currency and where its debts are denominated in that currency.
However, these are the same IDIOT agencies that rated all the toxic subprime debt AAA, so what do you expect? (Watch the movie, Inside Job for more unbelievably eye opening footage on how corrupt the financial sector AND mainstream economics has become. It will make you sick.)
The rating agencies WILL eventually downgrade the US, just as they did to Japan. (BTW, the bond market has barely moved on this announcement.)
This is just one near-term problem that could be presenting itself for stocks. The other is the debt ceiling. This ratings scare will likely cause Obama to panic and go with MASSIVE spending cuts, making the longer-term outlook somewhat negative.