Monday, January 31, 2011

Caution: MMT can be hazardous to your love life!

On Saturday night I went out on a date. I was going to have dinner with a girl whom I had just recently started dating. We agreed to meet at one of my favorite restaurants--a nice Italian place with cozy atmosphere in the Flatiron District of Manhattan. Everything was superb. We were seated at an intimate little semi-circular booth near the back, which had a nice view of all the goings on. I knew the owner of the joint so we were treated like celebrities. The evening started off wonderfully, the wine flowed and so did the conversation.

Most people know that there are two things you never talk about early on in a relationship: politics and religion. I know this and I'm always careful to steer clear of these subjects unless I am certain that the person I’m with shares my views. On the other hand economics is not that sensitive a subject, at least I thought.

You guessed it, before long the conversation started to gravitate into economics. I'm not quite sure why; maybe she started asking me more about my profession or maybe I started making my usual observations about the economy generally and how upsetting it was to see so many people out of work and struggling.

For the record my date was self-employed in a field obliquely associated with the entertainment industry. She spoke about how tough her business had become, but added that she still felt that if she worked very, very, hard she could eke out a modest living, but it was no cakewalk by any means. I said that I thought it was a shame that so much sweat was required to make just a bare subsistence and that it didn't have to be that way.

She looked puzzled and asked me to elaborate. That's when it all began. Like a fool, I started with the MMT stuff and from that moment on the whole evening started to go downhill. I "explained" to her how there could be plenty of productive work and income for everyone if the government simply made the investments that our country needed on a scale that we needed them. Stuff like infrastructure, health care, basic R&D, transportation, alternative energy, etc.

Then she asked me how we would “pay” for those things? I responded with my best MMT explanation, that the government merely “pushes a button” and bank accounts are credited and Voila! It’s all paid for just like that. Moreover, I said that there was no limit to how much it could spend and that it needed to spend to distribute enough money into the economy to get it moving again. She looked at me like I was nuts. She said, "You mean just print money?” “Sorry," she said, "But that's just going to create inflation and destroy the value of our currency.”

At this point I could see the debate coming, but I didn't panic because I had been here before. (Though never with a tall, gorgeous, blonde who I really wanted to sleep with!) I responded by saying that as long as the spending resulted in the greater production of goods and services—which it would--then there needn't be any inflation. "You are creating more wealth by definition," I said. "That’s not inflationary."

I could see the smile evaporate from her face and her eyes start to glaze over. She went on and on about the money printing and going into debt and the burden on future generations. She was obviously not buying anything that I was selling. In fact, rather than convince her I could see her moving farther away from my views. She was becoming irritated. To make matters worse, the more I tried to explain it, the more my explanation seemed to become desperate.

Suddenly the conversation went dead. Both of us sat there in silence, staring out into the restaurant when just minutes before we were gazing longingly into each others' eyes. I'm sure she was thinking the same thing that I was thinking: that all she wanted was to be someplace else.

After another seemingly endless moment of silence she turns to me and hits me with this: "If you're so sure about this why isn't there anyone else in economics or in policy or in the media who says anything like this?" To which I responded with this beauty of a refrain: "A lot of people didn't believe Christopher Columbus either when he said the world was not flat!"

The look on her face went to sheer pity. A few more awkward comments were exchanged, but at that moment we both knew the evening had come to an end. I ordered a double grappa. She left. In a strange way I felt relieved, like a fighter who had just taken pounding, but the fight was at least over.

In the end I realized that the next time I am on a first date, I will never discuss religion, politics and MMT!

Friday, January 28, 2011

Social Unrest in N. Africa Expands

A story from Reuters here. As governments in the west continue to implement the fiscal policies of austerity, the violence and nationalism will continue to increase also, both inside and now outside the west.

These North African states posses sizable petroleum resources for export to the west. Even though the price of petroleum has been strong, apparently it is not high enough to provide an external surplus to result in satisfactory economic outcomes for this region of the world and the disaffected are lashing out.

Tuesday, January 25, 2011

UK fourth quarter GDP down 0.5 percent, shocking market expectations for continued recovery

No shock here. Welcome to a UK government austerity budget environment. My short perusal of some of the coverage of this 4Q result indicates that many of the surprised forecasters are resorting to the "do you believe those numbers?!" type of response. Classic denial.

Even in the face of this "double dip", I saw former UK PM Gordon Brown interviewed on CNBC this am warning that the UK still had to have a credible deficit reduction plan...will they never learn?

Hey Gordo, GDP= C + I + G + (X -I), where "G" is government spending!

Story here.

Friday, January 21, 2011

House GOP group proposes deep spending cuts

Washington Post out today with some new information on the magnitude of Federal spending cuts the new "Tea Party" backed members of the GOP led House of Representatives are proposing.

Some key excerpts:

"Members of the conservative Republican Study Committee said the GOP must keep its campaign pledge to immediately slice at least $100 billion from non-defense programs, "

The Tea Party people have put out a $100B number. But then we have:

"House Budget Committee Chairman Paul Ryan (R-Wis.), who is empowered by new House rules to unilaterally set a limit on spending, has said he plans to direct appropriators to slice only about $60 billion from this year's budget. The House Appropriations Committee is identifying cuts at that level."

So the mainstream GOP House leadership is only looking at $60B immediately. But overall the GOP House leadership is committed to further cuts:

"Our immediate goal is to cut spending to pre-bailout, pre-stimulus levels. That's what we pledged, and that's what we'll fight for," said Boehner spokesman Michael Steel. "But that will be the beginning, not the end, of our efforts to cut spending and create jobs (Ed: Huh?) - and we appreciate every member's input."

Top level, it looks like the GOP House would like to roll back the 2008 "stimulus" levels of Federal expenditures, which are probably running off anyway without reauthorization. The $100B cuts that the Tea Party people desire (worst case scenario), would represent about one months worth of Federal deficit levels the US economy has been enjoying over the last two years, the pace of these cuts will probably be more important than the magnitude.

Looking at this FY, through 1Q FY 2011, net spending (gross Treasury account withdrawals minus Treasury Security redemptions) was $1.012T, a projected annual rate of over $4T in net Federal spending. The Tea Party $100B cuts would represent about 2.5% of this projected 2011 Federal spending on an annual basis, and less than 1% of current US GDP. Consensus GDP growth forecasts seem to be running just above 2% for this year. It is not clear to me whether those consensus forecast models take into account these types of fiscal issues.

Thursday, January 20, 2011

Don't mess with my dogma! My conversation with KT Mcfarland

KT Mcfarland was deputy assistant secretary of defense for public affairs at the Pentagon from 1982 to 1985 under President Ronald and a key member of Henry Kissinger's National Security Council staff. Not a bad resume.

I ran into her at Fox yesterday and I asked her what she was going to talk about.

She said, "China." Then she offered that, "We're really in a pickle with China."

I asked her why and she said because our options are very limited.

Then I said, "That's because we give them the leverage over us."

To which she responded, "Well, we have no choice, they are our banker."

I asked her what she meant by that and she repeated, "They are our banker," then added, "They own $3 trillion of Treasuries and we need them to buy a lot more."

At this point I couldn't sit still. You know me.

"They're our banker?" I asked incredulously. "What are they lending us? Dollars?"

She actually responded by saying, "Yes."

Then I asked her why any nation would need to borrow its own currency?

I didn't get a response, but I did get a cold stare, like the look that a child would get from an adult for being insubordinate. As if to say, "Watch it, or you'll be in even bigger trouble next time.

I continued...

"China sells us stuff and they get dollars. Then they put those dollars into Treasuries, which are just like a savings account."

Another cold stare.

Then I said, "It's like buying a bank CD. Are you financing the bank when you buy a CD? No. If anything the bank is making money off of you."

Silence. She turned to finish reading the Wall Street Journal.

That's it. Another example of policymaking elites totally undesirous of the truth if it conflicts with their dogma.

Aint this fun!

Thursday, January 13, 2011

Fed official explains monetary operations and how the Fed creates money

Official states it as Bernanke stated it on 60 Minutes one time.

"Fed looks at a screen, presses a button and banks have more money."

Listen to the broadcast here. The conversation occurs around minute 35.

Wednesday, January 12, 2011

House GOP readies push for balanced budget amendment

Here it comes...the Doomsday Amendment!

They tried this in 1995 and it missed by a single vote. This time it's likely to go through because of the rampant, deficit reduction dogma that has gripped the electorate. A lot of newly-elected, deficit hating "true believers" now reside in Congress and my guess is, they're gonna make this happen.

This amendment will cause an explosion in poverty in the United States like nothing we've ever seen before. With the quantity of money essentially fixed (same concept as a gold standard), growth will stagnate for good and the gap between rich and poor will surge. The streets will become a dangerous place.

The lawmakers who are pushing this, along with most of the electorate, are deeply ignorant when it comes to this subject. But that's not stopping them...they're moving forward with a zeal that looks shockingly similar to some type of religious fanaticism. Fundamental extremism, like Muslim terrorists. Only, they are the Deficit Terrorists.

Monday, January 10, 2011

Fed pays US Treasury record $78.4B last year

The Fed has returned a record amount of balances to the US Treasury in the past reporting year. Story over at Yahoo!

Excerpt:"Critics in Congress have expressed concerns that the Fed's
purchases could put taxpayers at risk by reducing the amount turned over to
The Fed is funded from interest earned on its portfolio of
securities. It is not funded by Congress. After covering its expenses, the Fed
gives what is left over to the Treasury Department."
Congress is apparently concerned that 'the taxpayer is on the hook' for balances that Congress themselves have temporarily placed with the Fed (via payment of interest on US Treasury securites, interest on US Agency bonds, interest on US GSE MBS, etc....that the Fed holds) until the end of the year when the Fed has to just give it back, minus a few $billion for the expenses of the Fed staff and operations (nice!).

Apparently no one here stops to think about where the taxpayers would get the funds to 'get the Treasury off the hook', as if they ever would have to.

We may be at an all-time high as far as Fed remittances, but sadly at an all-time low as far as economic leadership in western civilization.

Here We Go Again: Hedge Funds Almost Double Bullish Gas Bets on Cold Snap

Story at Yahoo!.

Excerpt: "The funds and other large speculators raised their net-long positions, or wagers on rising prices, in four gas contracts by 94 percent in the seven days ended Jan. 4, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report."
Bullish bets on gas when these gas shale formations (Haynesville, Marcellus, Bakken, etc.) seem to depict the entire subterranean US as one large underground storage facility.

Wednesday, January 5, 2011

2011 Battle Over Debt Ceiling Begins

Here is a CBS video segment from their Sunday morning show that focuses on what portends to be the major fiscal issue this year: The politics of increasing the US "debt" ceiling.

On the GOP side, Rep. Bachmann looks like she will be in a leadership position on this issue, here in this video, her bottom line to the Congress is: "Stop spending money you don't have", think about the absurdity of that statement!. She is also running an online petition on her PAC website for citizens to sign urging Congress NOT to raise the "debt" ceiling.

On the Democrat side, Rep. Weiner, who takes what at best can be called a "deficit dove" position that only advocates raising the "debt" limit in order to protect the "faith and credit" rating of the US Treasury, looks like he will be representing this position from that side.

The leadership in the Congress on both sides looks like they are not aware of the true fiscal and monetary authorities vested in the government; a government that they play a major role in.

At this point, it looks like the best we can hope for is some sort of compromise where the GOP agrees to an increase in the "debt" ceiling, in exchange for some sort of future nebulous commitment to cut future expenditures that (hopefully!) may never materialize. This (at best) could result in a continuation of current fiscal policy that on average is providing approximately $110B per month of NFAs to the non-government sector with sub-par output growth and zero employment growth. Some sort of "balanced budget" initiative, with tax increases and spending cuts, which would be the disaster scenario, seems like an outlier at this point, but you never know how politics may twist events.

This issue will play out over the next 3-4 months as that is when Treasury will run out of this self-imposed government limit on it's authority to net issue new securities.