Tuesday, July 7, 2015

My friend calls and asks, "Mike, whaddya think now?" Here's what I said...

My friend who's a stockbroker called me up earlier and asked what I thought now that all this stuff has transpired.

Here's what I said.

First of all I said that austerity is not dead. (I put up a post on this earlier.) You can forget about it. I've been seeing a bunch of stuff about how this is the beginning of the end of austerity, but I think that's wishful, no, naïve, thinking. There's no way that the "Powers that Be," the elites, the oligarchs, whatever you want to call them, are going to relinquish their absolute hold on power. No effen way. And we cannot "take it back by force." You can forget that, too. Law enforcement, the military, the entire national security apparatus is controlled by them. This is not 1776 and we're gonna wage some guerrilla war against our oppressors. I don't care how many guns you have (Texans) if they want us on lockdown they will have us on lockdown.

Okay, sorry, I'm digressing a bit.

With austerity the European economic slow motion train wreck continues. That means the euro goes lower. That is the "counterbalance" to declining internal demand. The euro goes lower because European exporters (read: German and to a lesser extent, French firms) make price cutting an ongoing thing. Sure, they'll take a break once in a while, like now, because sales are booming at these lower exchange rates, but soon consumers (i.e. Americans) will want better deals or, the Japanese and China will force that to happen by undercutting the Germans.

So, the euro  is going down, slowly. There's no "getting harder to get" bullshit. (Although  for the Greeks the  euro truly is getting harder to get, unfortunately.) Anyway it's always about price and not quantity. People should know that.

Next, in the U.S. the key number is $4 trillion. Matt Franko and I have been saying this for five years. Four trillion is the top line spending of the Federal Government. We have not been under that since 2008 and since 2009 (the first year we topped $4 trillion gross spending) the stock market and economy have been rising/growing.

The deficit?

Forget it. Those who have been focusing on that have been wrong. You'd think that a $1.2 TRILLION REDUCTION in the deficit since 2012 would have made them scratch their heads and wonder about their predictions by now, but they keep on going. I'll say this again (and Matt Franko has said it here a million times), the deficit is EX POST. It's what's left over after everyone spends/earns/pays taxes.

That means we don't even know what the deficit is going to be unless the government first spends its money. It's that top line expenditure that flows to income and investment. It goes to firms and individuals who then and only then know what their tax liability is going to be. What's left AFTER that is the deficit. The deficit (or surplus) is the savings (or deficit) of the non-government. We cannot predict what effect savings will have on the economy other than to say the ACT of saving was a demand leakage. On the other hand, what the government spends will ALWAYS have an effect because that is DEMAND by definition and it is immediate.

I'll even go one step further. I'll say that the government can and likely will, go into SURPLUS and it still won't cause a recession. Why? Because the private sector can handle much more debt now than was the case back in 2007. Back in 2007 total monthly debt service payments as a percentage of disposable income was over 18%--a post WWII record. (Maybe an absolute record, too, I don't know.) Now, total  debt service as a percent of disposable income is down around 15%. That may not seem like much of a difference, but the current debt burden is at 30 year low. That means the private sector can "finance" much smaller government deficits and even a surplus (maybe even a big one) before getting into trouble.

Therefore, the economy will grow, maybe not strongly, but it will grow. And stocks will go up. That will frustrate a lot of people, I am sure. This will all be interspersed with mini-panics about Greece and Europe (and maybe China, too), but you have to be a buyer of those panics. As long as the government keeps spending its $4 trillion annually, that'll be enough to float the boats and allow the S&P companies to make their $1.8 trillion or so in profits.

Oh yeah, there  is one caveat: at some point we will have to deal with the debt ceiling again. We haven't had to do that because tax revenues are going gangbusters and Jack Lew has the  Treasury's coffers flush with cash, but that will not go on forever. At some point as the economy stays tepid, tax  revenues will become insufficient to allow the government to continue operating under the debt ceiling. That's when things could get rocky. Who knows? We could even have our own, "mini-Greece" over here. We came close a couple of times and the "moron content" of Washington has grown exponentially since then.

For now, however, it'll be steady as she goes. Just as I laid out I think and we'll be keeping an eye on the all important spending numbers here at Mike Norman Economics. Just keep tunin' in.


Tom Hickey said...


John said...

Mike: "I'll say that the government can and likely will, go into SURPLUS and it still won't cause a recession. Why? Because the private sector can handle much more debt now than was the case back in 2007."

But will they? Ordinarily, I'd agree with you, but Americans seem very fearful about the state of the US economy, and rightly so. As Bill Mitchell points out, the quality of jobs being produced is truly appalling. The working class wouldn't mind taking on extra debt just to make ends meet, but no one in their right minds will lend them the money. The middle class are scared as hell of any further debt and probably wouldn't take it even if offered it. Not that the rich particularly need to take on any further debt given that their net worth has sky rocketed since 2008, the only problem they ever faced was beating back those offering loans, and any spending by them, with or without incurring any further debt, won't close the gap necessary to put the economy back on its feet. Only the working and middle class have the numbers to do something about aggregate demand, and I don't see anybody helping them out with reductions in tax and the government spending that would put them back into decently paid employment.

There'll almost certainly be more flight to safety and that'll probably keep the US markets from any notable decline.

The only fly in the ointment is If any of the apelike Republicans make it to the White House next year. Then we may be in for one helluva ride! Although I can well imagine that even in the unlikely event of Rand Paul making it all the way to the Oval Office that big business may have a quiet word in his ear and make it clear they're not overly keen on Depression 2.0.

Dan Lynch said...

Re: 'we cannot "take it back by force." You can forget that, too. Law enforcement, the military, the entire national security apparatus is controlled by them. This is not 1776 and we're gonna wage some guerrilla war against our oppressors.'

When I stated that if we want power we'll have to take it by force, I was simply stating a fact. TPTB are not going to surrender their power out of the goodness of their hearts. I did not say that it would be EASY to take power by force or that we should run out and do it today.

The US has not won a war since WWII. It particularly sucks at guerrilla war. There is no reason to believe that a guerrilla war could not be successful.

However, guerrilla wars may last decades and entail much death and suffering. In order to convince people to be willing to die for a cause, you have to have a cause that people believe in. At the moment there is no such cause in the U.S..

The likely scenarios:
-- Endless neoliberalism.
-- WWIII forces TPTB to deficit spend back to full employment
-- a "good oligarch" takes power.
-- some yet unforeseen movement comes along.

Michael Norman said...


Don't worry. I love ya! ;)

Tom Hickey said...

I am hearing that credit is still tight other than for the top tier. People that were easily qualifying for loans now have to submit substantial documentation that the creditors are actually checking out and asking questions about.

Undocumented loans for an extra point are a thing of the past. The housing ATM is shut down, too. With incomes stagnant and people just still not seeing a robust recovery, a new credit binge doesn't seem to be around the corner.

I don't know that it is even correct to say that people are adding to credit "cautiously." A lot of people use credit for to manage cash flow since they are barely making ends meet. I'm not hearing about a lot of customers showing up at counters either. When asked about the recovery, many people will say, "what recovery?" It's not trickling down and there is no indication when it will or that it will. The new normal?

Housing is lackluster. The bright spots are borrowing for student loans and vehicle sales. The new sub-prime?

Tom Hickey said...

For that, Dan, the domestic security force and military need to break ranks and join the insurgents, or at least stand aside. When things get really bad, that's what happens in a successful uprising. But that's when people don't have enough to eat.

Ignacio said...

Most of the SP500 depends a lot on international markets (specially Europe and China), I don't think it can be claimed that USA is isolated from international problems.

If the situation in China keeps getting worse (which looks like it will) and the economy there slows down dramatically, it will affect Europe a lot (which depends a lot on sales in China for profits right now) and this feedback loop will make international trade slow down. This will hit profits, and buyback abusing has been sending valuations higher for a while.

And ofc we have that the 99% are not getting better since 2008 but muddling through, if the world economy stagnates the 99% are going to feel it the first. Most people right now cannot face an unexpected $500 repair bill without big trouble, that's how the real situation is for people in the West, one steep away of disaster. You cannot 'isolate' an economy of this type of things.

A small push and the whole thing is going to blow up.

Dan Lynch said...

Last I heard the fracking bubble had turned on again, even though it's not profitable:

"capital flow to U.S. unconventional plays has increased. ... almost $17 billion in equity offerings flowed to U.S. oil companies in the first quarter of 2015, more than in any other period since 2010. The percent of E&P equity rose to over 10% of overall issuance from an average of about 4-5% over the last decade. This can only be explained because there are no alternative investments with comparable yields and that investors believe that they are buying assets that are somehow viable at current oil prices."

Tom, or if the police/military are corrupt and ineffective, while the guerrillas are highly motivated, as we have seen in Ukraine.

Tom Hickey said...

Well see what happens as Ukraine breaks down.

Already there are defections to the separatists, and young people of draft age are migrating to Russia. Ordinary UAF soldiers are deserting.

Of course the Pravi Sector is not going to change but they are a minority.

Auburn Parks said...


"If the situation in China keeps getting worse (which looks like it will) and the economy there slows down dramatically, it will affect Europe a lot (which depends a lot on sales in China for profits right now) and this feedback loop will make international trade slow down."

What makes you think that the Chinese Govt will let growth slow down? China has masterfully executed general fiscal policy (not the specific proposals MMTers support other than infrastructure spending but the amount of Govt money creation) according to MMT fiscal understanding and if anything has been the best real world example of MMT****. And if there is anything MMT has taught us, its that the Govt has the endless capacity to create nominal GDP growth via its money creation powers. "endless" and "infinite" do not suggest that China will necessarily slow down as long as the Govt continues its current fiscal policy stance. In order for China to reach real per capita GDP parity with the USA, they have to get 6X larger than they are now ($60 GDP annually with 3.5X the population) and thats going to take decades of 7% growth which they are guaranteed to have if they continue business as usual and dont let too many western educated financial elites ruin their country like they have everywhere else.

**** China does lots of its fiscal policy via its state owned and operated banks, so even though their "official" deficit numbers are not that large as a % of GDP, the amount of money creation is through the roof via its 'big four' state owned banks. In fact, Chinese monetary and fiscal policy look to me like a cousin to how the Positive Money folks would like the banking system to operate (at least on the money creation by committee and public access to deposit accounts at state owned banks, after all the ICBC alone has 150 million depositors.

John said...

Dan, if it comes down to the US military versus hillbillies, militias, inner city gangs and soccer moms? Let's just say my money isn't on the US military. In any case, if and when the American people rise up, it's all over: the elites look tough because they're pushing at an open door. If faced down, they'll relocate elsewhere concluding that all is lost. They'll find a libertarian paradise, to use Matt Franko's lovely-scary image, in Somalia, Bangladesh and the like.

Ignacio said...

Families off the books (not even shadow banking, purely off the books unaccounted wealth) equity is crashing right now, the subprime crisis was a joke compared to what is happening in China, the system is leveraged to stupid levels. They government may have control over the banking system, but they are still lending to the population not accommodating saving desires via spending, banks still expect those loans to be returned, and families are counting with incomes and equity generated by bubbles.

Can the government offset that? Maybe they would do a huge debt jubilee. If any govt in the world has understood that they are not constraint by money are the Chinese (as long as the western educated do not come back home with ordoliberal mentality, as you said), which can distinguish between the real and the financial, but there is so much the govt can do to support equity except throwing money from helicopters.

Not discounting that yet, but the reality is that the real estate bubble is crashing and the secondary equity market bubble is also crashing. This will hurt activity and consumption, maybe they decide to do a debt jubilee on the population (maybe indirectly through money printing or inflation), but either way is going to be disruptive even if it's for a limited time period. I think now is the moment of truth to see if they "really get it", is easy to leverage your system when you come from low levels of leverage and run big deficits when you are running on huge trade surplus and have projected huge growth (don't need to apply MMT), but when you are in a downturn is when you need to really understand (and China like Europe also has an ageing population).

The problem is not so much that it will slow down, but the extreme weakness of the rest of the world economy and the interdependencies between the different regions that would impact Europe or USA (or other emerging markets).

Dan Metzger said...

Mike didn't mention the other great leakage, the foreign trade deficit. In the decade leading up to the 2008 crisis, abnormally high trade deficits (~5% GDP) helped suck about $1.6 trillion out of the private sector. (I-X) is still running about 3% and not likely to drop. Does that affect the prognostication?

Auburn Parks said...


Yes the Govt has the ability to offset any nominal financial problem it wants, thats the nature of fiat monetary systems.

Tom Hickey said...

I would put it slightly differently.

A Govt that is sovereign in its currency as doesn't borrow in a currency it does not issue has the power to offset any nominal financial problem it wants, but not necessarily the ability to do so successfully.

Having the power to do something doesn't imply having the ability to do it by putting the power to use.

Ignacio said...

What Tom said, not necessarilly going to use that power.

Greg said...


"The likely scenarios:
-- Endless neoliberalism.
-- WWIII forces TPTB to deficit spend back to full employment
-- a "good oligarch" takes power.
-- some yet unforeseen movement comes along."

I agree with that list and I see number 3 as the most likely choice. Even though we have the infrastructure to do "direct democracy" in most western countries via the internet and social media, it would be very messy and I think most people don't want to use that route to decide everything. We will always have some sort of leaders/institutions that will have to exercise some "antidemocratic" powers from time to time so our best hope is a benevolent dictator. I actually see the Pope as a modern model for such a thing. He is not technically an oligarch but he does have immense power with a lot of people.

As averse as I am to any type of theocracy, given what type of theocrats our American system has generated, the Pope actually is a guy I could live with in charge. While I mostly see it as a flaw in our design, our human propensity to gravitate toward strong individual leaders and follow them is undeniable............... and maybe unchangeable. Its certainly unchangeable in time to deal with our present problems so we are going to have to find some very strong "nice guy" and get behind them. I actually think they are out there....... I'm a romantic fool that way I guess.

TPTB will not give up what they have, as I believe was pointed out in another thread, it will need to be taken from them and the people WILL take it once they are convinced of the moral superiority of the case against TPTB. TPTB all have exit plans. They pile their dough and buy alternate worlds to live in just in case the SHTF. Once the resistance meets a certain level many of these guys will just bail. They will fight only with proxies. Once they have to fight their OWN fight they will run off. Thats what money is for to them...they buy security.


I agree with your distinction between power and ability and I think China offers a very interesting test case of a lot of the things MMT/Post Keynesians/Chartalists have been talking about the last 7+ yrs. I think it is a mistake to view China through the lens of the American financial media and make any bets based on their analysis. China is clearly operating on different principles that our CNBC types will never get being the hopeless neoliberals that they are.