...what actually is the base rationale for action? A particularly searching answer was offered in mid-June by ECB Executive Board member Isabel Schnabel in a talk she gave in the financial center of Luxembourg.Most of the post answers this question. Depressing from an MMT standpoint.
Chartbook
Chartbook 223 Acting out of ignorance: the new logic of central bank inflation-fighting
Adam Tooze | Shelby Cullom Davis chair of History at Columbia University and serves as Director of the European Institute
23 comments:
Warren said in that discussion I posted up yesterday during the Volker years interest rates were at 12% and the budget deficit was at 6%. And some of that 6% was being caused by the interest income channel being at 12%.
He said On the surface things looked okay because the budget deficit was 6%. However in real terms with interest rates at 12%, what actually crashed the US economy was they were running actual 6% budget surpluses.
Does everyone agree with that and if so can this calculation be used at all times.
For example in the US today with interest rates at around 5% and the budget deficit at 5.8% is the US currently running budget deficits of less than 1% ?
And along with the fact that the fiscal from the interest income channel makes up some of the 5.8% of the deficit.
If true, and the calculation Warren came up with during the Volker years can be applied at all times this looks like a recipe for disaster to me.
Thoughts ?
1 hour 32 mins into the discussion for reference
https://m.youtube.com/watch?v=LCUPBpSiISU&pp=ygUNV2FycmVuIG1vc2xlcg%3D%3D
He is saying deficits are good and deficits are bad at the same time…
He’ll say “if someone saves then we can’t buy all of our output” (bad) …
Then hell say “deficit is too small” (ie larger deficit is good) …
Art degree paradox.. I don’t get it…
The best economy would be one with very small deficit… ie all output would be bought…
I'm just going to throw things out there ......
The Eurozone has interest rates of 4%
Budget deficit 3.6%
So On the whole the Euro area is running a budget surplus ?
Take Germany:
Interest rate 4%
Budget deficit 2.6%
Is all the bad data coming out of Germany because in real terms they are running budget surpluses of 1.3% ?
Or do you have to take into account the fact that Germany's trade surplus widened to EUR 18.4 billion. Pay attention to the sectoral balances ?
Does this means Warren's calculation only applies if you run trade deficits ?
The Eurozone as a whole posted a trade deficit of EUR 11.7 billion. The Eurozone as a whole has interest rates of 4% and a Budget deficit 3.6%. Using Warren's calculation things look dire for the Eurozone as a whole.
As per usual it will be the periphery of the Eurozone that suffers and places like Greece again.
Greece Interest rate 4% with a Budget deficit of 2.3% and trade deficit of EUR 2.15 billion ?
Thoughts ?
“ what actually crashed the US economy was they were running actual 6% budget surpluses.”
Back then and in late 90s the Tsy was using TTL accounts so the govt surpluses would be accrued in deposit accounts at the Depositories…
This would suppress Leverage ratios of the depositories (A-L)/A so you can see the numerator is under pressure as govt surpluses are accrued as ever increasing bank deposit liabilities under surplus…
So this would retard credit creation and cause a macro slowdown…
Not the situation at present time… not using depository TTL accounts , using TGA at the Fed only
Right now the Fed is providing additional bank capital via the IOR and leverage ratio is being increased via QT…
(Not financial advice)
In EZ the CPI is a lot higher than where they currently have their risk free rate .. So their equity indexes are making highs..
US is opposite.., Brandon has our risk free rate a lot higher than our CPI.., so our indexes are still discounted …
Matt I don't think he is really saying that with the Volker scenario. What he is saying, is as always, big picture thinking and you have to look at everything. Including the size of the debt to GDP.
That of course deficits are a good thing running at 6% On the surface but not when interest rates are at 12%.
In real terms under the table that is 6% budget surplus ?
I've seen him do this recently on his Twitter feed last year about the current situation in the US. Also on his blog.
It's very interesting if true and what I really want to know is can this be applied at all times when running a trade deficit ?
He applied it to the US last year. So I suppose he thinks you can ?
I'll try and find it to add to the debate.
Maybe because the debt to GDP ratio since Volkers time has went from 40% of GDP to 120%?
Yup, looks like it
https://twitter.com/wbmosler/status/1618662745448275968?cxt=HHwWgIDTmZzM0vYsAAAA
Debt 3X higher plus 8 trillion reserves.
So calculation can't be used at all times as ever need to look at everything.
And yet on the 10 th of May 2022
https://twitter.com/wbmosler/status/1523836277438697473?cxt=HHwWgsCyyanB4KUqAAAA
So he is bearish because the rate is this high?
“ In real terms under the table”
What does that mean?
We don’t use “real/nominal”….
Everyone is bearish onEurope and indexes at all time highs…
I don’t know what else to say..,
Twitter will only allow me to go so far back.
Anyhoo, on several occasions over the last few years he has used that calculation to describe America today.
At other times totally ignored it.
So who knows what he thinks.
June 17th 2022
There it is again....
https://moslereconomics.com/2022/06/17/housing-starts-industrial-production-small-business-index/
" Growth overall remains sluggish as the economy becomes dependent on private sector credit expansion (private sector deficit spending) to offset the too tight post-Covid fiscal policy.
Fed rate hikes add interest income to the economy as gov pays more interest on the $30+ trillion of public debt, which, if anything, supports rather than dampens demand or credit expansion, but it does contribute to higher prices which further reduces the real, inflation adjusted value of the public debt, which is a fiscal tightening. This is a repeat of 1979 where the increase in the price level exceeded the growth in deficit spending which is functionally the same as the govt running a budget surplus. "
The same calculation he used during the Volker period.
Yet, there are many other posts that contradict his own view.
At this point I'm not sure he even knows himself which point of view he supports. Maybe it is the inflation rate rather than interest rate he is talking about but who can tell.
And Again,
" With the rate of CPI increase above the rate of deficit spending, the effect is that of a budget surplus "
https://moslereconomics.com/2022/06/10/consumer-sentiment-federal-receipts-cpi/
So can somebody email him and ask with inflation at 4% and the budget deficit at 5.8% is the US only running a 1.8% deficit ?
What that means for the UK with 8.7% inflation and running a Budget deficit of 5.5%.
Is the UK running a 3.2% budget surplus ?
I'm really struggling to believe it.
Because if this was the case, in normal times when countries were asked to hit 2% inflation targets and told to not run deficits above 3% of GDP.
Every country was either running a balanced budget, tiny deficits or tiny surpluses depending on how close they got to those set of rules.
Or if true,
The cynic could say those rules ensure countries run near to balanced budgets at all times. The way the Conservatives have always wanted it.
“countries run near to balanced budgets at all times. The way the Conservatives have always wanted it.”
That would result in the best economy as we could then be able to buy all of our output…
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