Wednesday, January 30, 2013
US economy shrinks 0.1 pct., 1st time in 3 ½ years
This should not come as a surprise to our readers. AP report at Yahoo.
September through December deficits netted to only $221B or only $55B per month while Mike has tracked trailing twelve month average deficits at $90B per month; which was minimally required for, as Warren terms it, a "muddle through" economy. We have now broken below "muddle through" looks like.
January trend does not look promising at this point either, month to date only a $23B deficit.
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33 comments:
The GDP shrinkage appears to be rolling off the market's back, at least so far. Equities are pretty flat and bonds yields are actually UP. The market seems to believe that the Q4 weakness was due to temporary factors like Hurricane Sandy and Inventories, i.e. the weaker Q4 just means a stronger Q1 this year. We shall see.
Geoff,
I think we have to turn our attention to the "sequester" now....
Mike and Dan K. have been observing the administration as being very pro austerity lately and in this regard if these "sequester" cuts go thru then that would lead to even worse than present conditions wrt $NFA injection....
At this point in 2008, the GOP admin was proposing $650 tax rebates for the bottom up... where is that view now? Gone from the scene....
rsp,
Have to admit I was kind of surprised. These numbers are pre-payroll tax increase. What is going to happen when the payroll tax bites into the macro numbers ?
Matt any ideas on how to match credit expansion deltas with deficit deltas to get an even clearer macro picture ?
Any thoughts on how to play this in the markets. Short SP500 long VIX ? Long dollar?
JC,
It may not depend on the credit side... it may basically depend on the withdrawal side of the DTS...
ie reports are that DoD withdrawals dropped off substantially in q4 which are discretionary spending...
The govt has to sustain NFA flow.
Scott commented yesterday that it has to be at least 2-5% of GDP minimum while I think above that amount currently for US situation with the high CAD (45B/month).
Since September, we have averaged 55B per month deficit while the CAD has probably been 45B so that only leaves about 10B per month for the domestic economy to work with... no way that can work even with credit creation that can only put if off a while as interest and taxes are still due in excess of that amount from the domestic non-govt sector...
system is designed to fail. no getting around it under current arrangements.
rps,
Much of the austerity appears to be coming from Defense cuts, which is not totally a bad thing ;)
Regarding $NFA injections, I thought they were supposed to be endogenous? Aren't changes in $NFA more an effect than a cause?
"Aren't changes in $NFA more an effect than a cause?"
If it is an effect what's the cause?
What does endogenous mean, specifically?
Geoff,
Thats what I mean when I draw attention to the 'withdrawal' side of the DTS...
govt has to so to speak "push" nfa into the non-govt, actively.
Bush/Cheney sent out $650 checks to all taxpayers bottom up in 2008... the govt has to take an ACTIVE role...
or the system fails as non-govt simply does not possess balances to pay taxes and interest.
rsp,
I had a look at the daily treasury statement and got a little lost. Which line/section does the month to date deficit show up in?
Paul,
The cause would be the private sector. My understanding is that changes in $NFA accommodate what is happening in the non-govt sector, and the economy has a whole. From a sector balance perspective, the decline in the govt deficit is accommodating the decline in the non-govt surplus, no?
gee,
Take total withdrawals and subtract UST redemptions
Then take total deposits and subtract UST issuance,
Take then the difference between those and that should be the net deficit/surplus ie if deposits are higher than withdrawals then you have a surplus and vice versa...
rsp,
Matt,
Thanks, I wrote the comment above before seeing yours. So liquidity is your primary concern?
"The cause would be the private sector"
Geoff, no $NFA's enter the private sector unless Congress appropriates them and the Treasury credits bank accounts as the money is spent.
It's true the private sector needs them, but if it doesn't get them the response will be higher unemployment among other things. The sectoral balance will adjust but probably not in the ways that we want.
It is possible people will draw down savings to compensate but I wouldn't bet anything important on it.
Just like a car needs gas to run the economy needs liquidity (spending) to "run"…the car doesn't "cause" gas to be put in the tank…an external source must actively do that as Matt pointed out.
$NFA is exogenous…vertical money.
Right,
Certain cohorts in the non-govt sector (net liability folks) are not being provisioned with enough $NFA to pay taxes and interest on loans or consume to provide retained earnings to corporate sector, pay for imports, etc...
Mike has trailing 12 month NFA flow at 90B/mo average... you cant just stop making critical TGA withdrawals all of a sudden with no effects...
rsp,
"My understanding is that changes in $NFA accommodate what is happening in the non-govt sector, and the economy has a whole. From a sector balance perspective, the decline in the govt deficit is accommodating the decline in the non-govt surplus, no?"
Geoff,
Thats the way the math works out at the top level system pov... yes...
but that statement gets teleological if you try to use it to explain things... ie it is not explanatory imo...
Things happen because people make it happen....
rsp,
The White House says the drop is due to "uncertainty" in the defense industry over the fiscal cliff. I guess that means defense industry folks holding off on projects until they were sure the Treasurer will be willing to pay them. But there are massive defense cuts included in the March sequester, and so anticipation of those cuts might be leading contractors to shut some things down early.
While the defense cuts might themselves be needed, it's not a good think if those cuts mean a declining US gov net contribution to the private sector. Cuts to defense should be offset dollar for dollar by increased spending in other areas. Public investment in energy is the obvious choice.
http://neweconomicperspectives.org/2013/01/only-public-enterprise-can-heal-our-sick-economy.html
Exogenous changes in govt spending policy or tax rates cause exogenous changes in NFA. Automatic stabilizers result in endogenous changes in NFA that accommodate non-government activity.
So causation can go both ways. For given fiscal settings, the changes in NFA move endogenously in response to non-government activity. But active changes in fiscal policy alter NFA exogenously.
For example, in simple Keynesian models, government spending is often taken as exogenous and taxation (including transfer payments, treated as negative taxes) as endogenous.
Right Dan,
I think it is more than Defense as Mike has chronicled some austerity going on in Education programs in the NYC area so it is probably across the board austerity.... tho heavy defense (no more special supplemental $200B appropriations for GWOT for instance...)
We have to try to stay on this "sequester" issue and yourself and Mike here have been pretty singular that the govt view is towards austerity (Warren Mosler stated today that it looks like it could actually go thru) .... not good... I'm trying to stay "glass half full" but it is becoming more difficult...
rsp,
Just for the record, we can certainly intelligently discus these issues here but no one in actual policymaking has near a clue into what is actually going on....
just in case anyone forgot that ;)
rsp,
PS: SCARY!!!
"Automatic stabilizers result in endogenous changes in NFA that accommodate non-government activity."
Right...it's a feedback loop that works well until Congress decides to de-fund it or benefits sunset (which tends to happen after 99 weeks I think).
I guess as long as we can force the unemployment on new candidates with eligibility it's all good, right. :-)
Unfortunately we seem to have a bunch hell-bent on undermining the system in order to prove it doesn't work.
Take total withdrawals and subtract UST redemptions
Then take total deposits and subtract UST issuance,
Take then the difference between those and that should be the net deficit/surplus ie if deposits are higher than withdrawals then you have a surplus and vice versa...
Matt,
I almost follow, hopefully you can bear with me for one more dumb question :) Why are redemptions and issuance subtracted rather than added? That is, wouldn't redemptions and withdrawals both be "spending" and added together for total spending. Then, deposits and issuance both "revenue" and added together for total revenue?
Santelli is reporting that we need to let the economy "get smaller in order to get healthy".... nice... blaming the "printing presses".... "When did we pass an amendment banning recessions?"....
Moron-fest at CNBC...
gee,
I take that out because it is like an "asset swap" or "$NFA swap" and doesnt result in an actual $NFA add or $NFA subtract...
iow a UST redemption takes some RBS in the TGA and exchanges it with the security received from the non-govt... does not result in additional or less $NFA in the system... sort of same thing in reverse on the deposit side...
from non-govt perspective the non-govt $NFA position does not change if an OTR UST is redeemed...
helps?
rsp,
Matt,
That helps quite a bit. To cut it down to just two numbers from the report, it's net change in operating cash balance - net change in public debt outstanding.
It does lead me to another question though...
I take that out because it is like an "asset swap" or "$NFA swap" and doesnt result in an actual $NFA add or $NFA subtract...
Right, redemptions are a swap and issuance is a swap and the difference between the two swaps is net public debt outstanding which, being all swaps, doesn't affect $NFA. That being the case, why adjust for net change in public debt outstanding at all vs just straight net change in operating cash balance?
I've been saying that when the government cut all that deficit spending for defense and did not compensate with comparable new spending elsewhere, there was going to be some deflation. That's the beauty of MMT!
But we still have a so-called national debt problem. But is there really a national debt? It starts out looking like one, but does it end up as national debt?
Here's how it begins: Congress has deficit spending to do. Treasury has to get money to cover the deficit. So it issues securities (IOU's) that it sells to banks at public auction in return for the money.
The United States owes the banks for the loan of the money, which must be paid back at a certain future date.
Now, what would it look like for this debt to be redeemed? Well, the government would come to the banks with its money and buy back the securities.
Keep that in mind.
The banks do not want to hang on too long to these securities because when they sent the money to the Treasury their reserves were seriously diminished.
They cannot loan as much now, and loans are how they make money. So the banks put the securities up for sale at the auction, and this time the Fed buys them, using U.S. legal money it creates out of thin air. The Fed now has the securities. While that has redeemed the government's debt to the banks, most people say that the government's debt has now shifted to the Fed. Really?
What is the Fed? According to FAQ's at the Fed, the Fed is a government agency independent within the government of political influence. What does it use for money? It uses money it creates. It is the government's main money issuer. The Treasury issues some coins. And by what authority does it create money? (?) I suppose it is delegated to the Fed from Congress, which gets the authority from the Constitution, Article I Sect. 8 to con (create) money. So, when the Fed buys the securities it looks like the government buys them with its money. So, why is the Fed owed anything for them? To claim that, the Fed would be like a bank clerk who buys securities for a bank from a bank customer with bank money and then claims to be paid the value of the securities for doing the purchase! Nonsense!
Absurd! So, the government doesn't owe the Fed for the securities. However, it does owe the Fed a transaction fee of 6% of the interest on the securities. That's in the law. But that can be paid for separately and even without using taxpayer money. (Just issue some securities to create a fund for these transaction fees).
A couple of important consequences: (1) The Treasury now has debt-free money to spend.
(2) The money supply has been increased by the new money equal to the value of the securities created and paid to the banks. (3) This is "equivalent" to a case in which the Treasury just issues the debt-free money on its own. The only difference is that the securities become tools of the Fed to control inflation by selling securities to banks to drain money from the banking system.
gee,
One other thing I have been looking at is the 'net withdrawals' so I compute that component... this I believe indicates the degree the govt is "pushing" $NFA into the non-govt...
For instance net withdrawals in Nov was like 380B yet this month so far it is like 280B so that is quite a difference month to month... so this might be something to look at... ie Is the govt doing things proactively to provision the non-govt with $NFA ?
So i guess Im looking at it as it is more than just the "deficit" if you start to try to understand what is going on at a lower level...
rsp,
Matt,
I think I kinda have my head wrapped around it at this point. Thanks for taking the time to walk me through it.
gee,
all I look at as non-govt $NFA is non-govt:
1. USTs,
2. bank accounts,
3. and notes and coin in circulation...
that's just me I dont know if others agree with this but it seems close enough for estimating purposes at least imo...
That seems like all we (non-govt) have at our disposal...
rsp,
You've got to be kidding. Santelli is out there pushing a form of liquidationism so draconian that even Hayek wouldn't touch it? I don't suppose he elaborated on how shrinking the economy makes it stronger?
Question:
Is state and local public spending cuts accounted for when we talk about austerity?
Usually when these issues are discussed it will be in regards to federal policies as the states are currency users and the federal government is a currency issuer. MMTers will usually come down on the side of federal government picking up the spending slack for the states when economic times get rough.
JK, Us state have to run balanced budgets within pretty narrow tolerances. That means that when tax receipts fall, they either need to get funding from the federal government, borrow by issuing bonds, which most states are reluctant to do in hard times even through rates are low, or reduce expenditure. Reducing expenditure often means freezing hiring, reducing pay, laying off workers or cutting their hours. So if the federal government doesn't increase its contribution, self-imposed austerity in the states becomes autocatalytic as incomes fall, taxes fall more, etc., in a downward spiral.
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