Wednesday, August 10, 2011

Why I think things are not as bad as 8 days ago.

Anyone who has been following my comments for the past year knows that I have been warning about a sharp stock market and economic downturn for a while. The warnings go back to the midterm elections, which saw historic gains by the Republicans and most notably, lots of Tea Party candidates.

The fact that they embraced a set of very destructive beliefs--in fiscal austerity, dismantling of social safety nets, anti-environment, anti-labor, etc--made me feel that we would begin to head off in a new and dangerous direction.

In January of this year I released my 2011 Yearly Outlook and I predicted weakness in the second half and beyond. This was before Goldman, Morgan Stanley, JP Morgan Chase or anyone else.

I also spoke about the potential turbulence that could come about as a result of the debt ceiling debate and I even raised the possibility of a U.S. default. In addition I predicted that the rating agencies would downgrade the America's credit rating, and I said this going all the way back to 2007.

All of these things came true.

The question is, what now?

Unfortunately, I don't see a broad-based embrace of MMT or similar policies that would put us back on the right track. The Austerians remain firmly in charge both here and around the world. If anything, the movement in this direction has accelerated though I do admit that there has been a small bit of progress in getting the MMT message out thanks to our little community of dedicated believers, some of whom contribute to this blog.

The gloomy longer-term outlook aside, the market turmoil that we're seeing now just doesn't seem justified to me. The selling appears to be completely indiscriminate and utterly panicky, when it should be time to breath a sigh of relief.

That's right, I said breath a sigh of relief.

The reason I say this is because the storm may be over, at least for now. We got the debt ceiling increase and we got it with no concomitant cuts in spending, at least until 2013. That's good thing. If we hadn't got the debt ceiling increase the government would have been forced into operating in "balanced budget mode," meaning that $130 bln per month of income would have been sucked out of the economy.

By the same logic, the fact that we didn't get spending cuts is also good, because with the economy as weak as it is and with unemployment so high, spending cuts would have been a killer. At least we don't have to worry about this for the next two years and by then we could have a completely different government from top to bottom for all we know.

These are good outcomes and they are real--they're a reality at this moment.

But that's not the end of the story. Other good things have happened. We see oil prices 8-month lows and that will translate into lower gasoline prices at the pump. Consumers will see some much needed cost savings and they'll be able to use that extra money on other stuff instead of gas. Commodity prices in general have come down and that's a positive, too.

Bank lending is also finally starting to pick up. Total loans and leases at commercial banks are now at the highest level of the year, up some $100 bln from the March lows and loans outstanding are nearly positive on a year-over-year basis for the first time since the crisis began three years ago.

In addition, there is talk of a jobs stimulus and the president is also asking for an extension of the payroll tax cut. By the way, the payroll tax cut was a measure first recommended by the MMT community way back in 2008.

Finally, interest rates have fallen to historic low levels and that happened despite the idiotic and terribly misinformed downgrade issued by S&P. It hurt our pride as Americans to see that AAA go, but now it's done. We will do our mourning and get over it like any loss and then we will realize how stupid and immaterial the credit rating agencies are. What happened following the downgrade anyway? Bonds rallied and interest rates plummeted. That was the market expressing a huge, "no confidence" vote on S&P.

Maybe the best thing of all is that we see more and more of MMT getting out there in the blogs and being talked about, usually without attribution and usually coming under attack. But hey, bad publicity is still better than no publicity as they say. We'll take it and we'll defend ourselves. (And we do it intelligently and well!)

Bottom line, there is hope. Things are less bad than they were just a month ago. Actually, they're less bad than they were just 8 days ago. My outlook has shifted a bit and I don't think this wanton selling is justified. We may still be in the storm, but we've just entered a clear patch and I think that clear patch will persist for a while until the rest of the storm comes along. And maybe, just maybe, it'll pass us by.


Letsgetitdone said...

Harold Meyerson advocated a full payroll tax cut in the WaPo today, without attribution, of course.

Anti said...


You've forgotten more about economics than I'll ever know, and yes you've been rightly pessimistic due to coming fiscal drag for sometime now, but I think we're much worse off than we were 8 days ago and that's being reflected in the markets.

One reason is that even if spending cuts don't come before 2013, given the prospects for AD in the meantime, that fiscal drag may be accounted for already, having been made worse by S&P, perhaps because markets fear there'll be more pressure to cut spending/raise taxes.

Hence, falling oil prices are a bad sign in my view. It would be great if it were only related to an easing of the supply shocks of earlier this year, but I think they reflect lower expected AD going forward, and hence are a symptom rather than any boost. This further feeds the cycle of raising the debt/GDP ratio via slower or even contracting GDP, and then could spur calls for even more fiscal austerity, both in Europe and the US.

Similarly, I see bank lending as not being sustainable with lower expected future AD.

The problems leading markets down today are in the Euro zone, not the US. Dollar liquidity's being sucked out and the Fed isn't doing enough to counter it, as usual. We saw a nice big boost in the markets yesterday merely due to the Fed setting conditional a date positive until which rates will be near zero.

Of course, we're also seeing evidence of weakness in some US banks, such as BOA and Citi which isn't helping matters.

So, I would agree with much of what you said here, except that our biggest drag right now's actually in Europe. It's hard to imagine Italy and Spain going down and dragging the rest of the Euro zone into recession without us being dragged down significantly as well.

I won't be surprised to see another US recession soon, because I have little faith in the EU vis-a-vis this Euro crisis and of course we here in the US won't do enough to counter its effects. In fact, we may be in recession now.

Tom Hickey said...

A lot will depend on the '12 election. The GOP has been in full campaign mode since '08, trying to obstruct any gains by Democrats, even when they adopt formerly GOP policy proposals. Moreover, there is real revulsion for the president and an intense desire to "break" him. Expect not only more of the same but an intensification. This portends to be a very dirty and divisive campaign, which is not good for the national psyche.

The GOP has been driven so far rightward it is now an ideological party. This prevents adaptation to changing context. If they undermine the economy to beat Obama, as they seem intent on doing, then if they win power, they will be taking a combination Austrian and neoliberal positions wrt unfolding events, which is not promising for financial and economic health. Moreover, the neocons are likely to control foreign policy, risking wider war and greater global instability. In my view, this is the looming risk.

I would say that the the GOP is pretty much a shoe-in if they had a viable presidential candidate, but so far it doesn't seem like that is the case. Moreover, it seems like the majority is becoming fearful of the Tea Party bomb-throwers.

The question now is whether the Democrats can be democrats rather than republicans, that is, on the side of all the people rather favoring the "job creators." Progressives have been marginalized and there is no longer a party of the left, just right and far right.

I also suspect that the Bernanke put is still in place, and the market is figuring that into price, so financial assets should do better than the real economy based on the Fed desiring to support the wealth effect by keeping financial assets valued higher than they otherwise would be. Of course, this creates distortions that must eventually be corrected, so there may be volatility.

Add to this the wild card of shocks, some rather obvious threats and others unknown, and the mix doesn't promise a comfortable ride for the foreseeable future. I am seeing bad news compounding. I don't think that one shrug off the London riots as only due to a bunch of bad apples. This is one more symptom added to many others that the status quo is not working.

Perhaps, the largest problem is that the powers that be are missing the financial cycle and balance sheet recession and presuming a normal business cycle. Meanwhile, without reform a new crisis is in the making and I expect to see another leg down in the GFC before resolution and reform undertaken in ernest. This could stretch out over several years. For example, it doesn't seem that the housing/mortgage crises are anywhere near resolved. Until a real recovery in housing, a general recovery will be very weak.

As Warren says, in trying to avoid becoming the next Greece, the US is becoming the next Japan. And there is also the possibility that this will turn out to be 1931 redux instead of 1937.

Matt Franko said...

Mike I will check the Fiscal flows at the end of the week after a full week of Daily Statements from Treasury post the debt ceiling fiscal drag.

I believe they were running at about $115B/mo prior to the ceiling being hit. Then down to $80B/mo while at the ceiling.

If this fisrt full week we see flows return to the $25-30B/week rate then perhaps the worst is behind us.

I know that Geithner put everybody on "slow pay" as a way to get thru to Aug. 2nd. People were taking their govt invoices to the bank to get loans against them as the govt virtually stopped paying for a couple of months... this is perhaps the bank credit increase that was commensurate with the debt ceiling fiasco. These are short term arrangements and if this is what it was, bank credit should fall back down shortly if Geithner starts to open the spigot and pay the bills....

I'll look at it at the end of this week....


Mario said...

what you say is true except for a few things that I don't think you're considering.

#1. People don't understand MMT and they are starting to view the deficit deal as NOT enough and that it is only kicking the can down the road. Things could very easily get worse before too soon.

#2. Equities could continue to sell off for these false reasonings until that mindset changes or is satisfied.

I agree with what you're saying and the stats but I am not as confident if you will...there are just way too many volatile variables in play these days. Plus technically I think we are in a secular bear market.

Anti said...


Do you suspect much of the coming fiscal drag is already baked into the market at this point?

Anti said...

I just saw this, via Krugman:

Yes, we may already been in recession, though I don't claim to know.

wh10 said...

Hi All,

Sorry for being off topic, but I don't know how else to reach you guys. Did you see this article -

It's Ellen Brown, who we speculated might have had the original PPCS idea. She cites MMT!

Ryan Harris said...
This comment has been removed by the author.
Tom Hickey said...

Ellen is prolific and she is coming into paradigm with MMT.

googleheim said...

Hi Tom

Yes, there is a lobotomist disconnect with this debt / china / export thing.

A right wing journalist was on last night on Charlie Rose, and again in the same sentence there is this vast gulf between debt and treasuries and exports.

Here are the two versions :

Incorrect version : China is a rich country that exchanges their Yuan to us so we can borrow so we can then lend cheap money out.

Correct version : China's Yuan is used internally and it is strictly undervalued and reserved for domestic slave trade of keeping workers inside China working or slaving for China. China makes exports and they are sold to the USA in U$D and no currency is exchanged. China deposits the monies made here in Treasury accounts. China is able to do this because of free trade ( for all intensive purposes ) and neoliberal access to USA market b/c of Kissinger, Nixon and Bush I, II and probably Clinton.

The only currency exchanged is when they repatriat it back in Yuan if they even do that.

China is sitting on treasuries and could use this money to buy USA goods, but it is not.

This means the Bush plans have backfired. China is not buying our goods, but maybe the USA farmers are making out OK with their soy and wheat sales to China while being subsidized for ethanoCorn.

Therefore, the reason China has our debt is because we bought their crap which has flooded our markets. US global companies flocked to tax free zones in China in droves and so our manufacturing is down.

The incorrect version is based on austrian "taxes pay for everything" gold standard mentality.

Where is protectionisto Dick Gephardt ? safety netter with social programs and fair trade hawk ?

googleheim said...

It is easier to say that China already owns the money ( or us ) and that we past the "we owe them money or are in debt to them"






this is called the CHINA BOMB so to speak in fewer words.

SchittReport said...

this just came out:

Swann, S&P's top analyst for the U.S., in a phone conference with investors":

"So we do see more seriousness in addressing fiscal issues in France than in the U.S.,"

nice to know there is a 'seriousness' index along side the 'happiness' index on vox. my god, what is this world coming to?

googleheim said...

the social contract has been elliminated

the UK riots are just a start of where spending and taxes go a LONG way to promote peace

the ultra rich can hoard but they cannot quell the peasants

Mario said...



what do you suggest as a means of taking measure?

googleheim said...

import trade tariffs up the wazoo

Mario said...

sounds like a good solution. But what is the danger of them hoarding (or spending)?

googleheim said...

I guess according to MMT there is no damage if they spend or not.

But if they spend we could have inflation and with the deflation spiral today, it would be good.

Because they do not spend, they are not doing themselves good either.

If someone hoards cash in Monopoly, then at some point the game is boring or you have to print more.

I don't know. does it matter to MMT ? don't know either

Matt Franko said...


Lets wait a day or two more and see what the the fiscal flows are looking like a full week or more out of the gate from the limited fiscal environment of operating at the debt ceiling....


Mario said...

matt where do you get the data for the fiscal flows off the treasury website?

google yeah I would think the real risk lies in if they spend it not if they don't spend it, b/c when they spend it could mean buying up real US assets (which the government would never allow them to do) and depending on how they spent all that money it could mean reckless or uneven inflation. If they spent all that cash somehow at once it could be rather disastrous, but again that type of spending is actually preventable by the US government.

I would think that throwing up trade tariffs wouldn't exactly be the best way to get them to spend their savings dollars though since one is a revenue constraint while the other is a savings desire.

Not the expert but something tells me it's better to avoid trying to fix something that's working okay for the time being. Yes they have a lot of cash but that's cool...we have alot of goods. The US jobs market is changing and could change for our favor, if we played our cards better. I don't consider those jobs as a real "loss" to the American citizen except as an easy revenue stream. We can do jobs that are more advanced and stimulating for our minds/brains/ideas, etc. And advance ourselves into the 21st century while everyone is just catching up to the 20th. That's how I see it.

Matt Franko said...


You have to look/glean the data out of the Daily Treasury Statements here:

I'll try to look at the week ending Weds, 8/10 tonite. This would inlcude the Statement days Th/F/M/T/W 8/4 thru 8/10. These 5 business days may be representative of how this flow measure has recovered (or not) after the debt ceiling has been raised....


Mario said...

nice thank you matt.

Tom Hickey said...

While hoarding wealth doesn't matter so much economically as long as the deficit is large enough to offset saving, it does matter politically. Wealth equates to political power, allowing the wealthy to aggregate ever more national wealth to themselves until they own everything and determine everything. This is the route to debt serfdom and a banana republic.

Taxing away economic rent and recycling it is the only way to obviate this. Read Michael Hudson. He has laid this out in detail in his work. While Michael is not MMT per se, he is a member of the Kansas City School of Economics.

Mario said...

I agree Tom. But do you think China's bonds holdings fit into that category as well? I wasn't putting them in that boat.

Tom Hickey said...

Interest on tsys is a subsidy and should be eliminated. Why should the US subsidize China's savings in USD which acts against a more balanced trade and investment relationship.

Calgacus said...

I guess according to MMT there is no damage if they spend or not The dollar debt to China is a real debt, we owe them what the dollars can buy in the USA. There is a big difference on the effect of the spending whether it is done when the US is at full employment or not. There are almost always these two opposite cases; theoclassical economics is the pretense that the second case, the usual condition, does not and can not exist.

If they spend the dollars on importing stuff from the USA now, then it would be win-win for everyone. They would get stuff for their dollars, and while we would be sending them real goods, the export industries would boom and have a multiplier effect. The wealth created by the dollars coming back would more than make up for the goods sent abroad.

If they spent them when we were at full employment, it would be a real restriction on the amount of US domestic spending, but that's the kind of problem you want to have, and yes, it could be inflationary, so we might have to raise taxes, although the present level of taxation would probably be an sufficiently deflationary automatic stabilizer. If we were sane and ran a deficit to cover foreign and domestic savings leakages, then we would be in the second, problem you want to have case.

googleheim said...

thank you
thank you

googleheim said...

the important thing to remember is wrong way of looking at debt - gosh we owe them big time

and the right way - we've paid them in dollars and they've got the account so let's kick them to spend it

stimulus spending without big government

this is exactly what Bush intended but the Chinese never fulfilled their side of the bargain

plus their tax free zones for US mfgs reduced our capacity for export

and screw Germany !

Mario said...

Tom I understand you don't like bonds as a subsidy and I can respect that, but I still don't see any harm in China collecting off of their export dollars. It's not economic rent as we know it, unless they are trying to "starve" the US of jobs in some way perhaps. Except we can counter that ourselves with proper fiscal policy plus they would be putting themselves out of business. So it seems like a weak argument to me.


I hear you and those are good points for sure. But I still fail to see the harm in the status quo. I understand that things could be different with them spending those dollars and it would allow the US government to not have to spend, etc. But their not spending can be offset by our own actions, so what's the harm? Real deficit cuts are a harm to us and more serious b/c we have control over that. We can't control China's spending patterns. I still don't see why we are concerned that they spend or not.

Calgacus said...

But I still fail to see the harm in the status quo. I understand that things could be different with them spending those dollars and it would allow the US government to not have to spend, etc. But their not spending can be offset by our own actions, so what's the harm? Indeed. I did not say there was any substantial harm from the status quo. If - & this is a big if - we use non-insane economics = MMT = functional finance. The only possible real harms could be from externalities which are not accounted for properly in trade. E.g. becoming dependent on others for absolute necessities like food is not a good idea. Or complete destruction of industrial capacity. If the Chinese have a plan to corner rare earths, direct some spending to maintaining capacity there. Basically, buffer stocks of goods, capacities and labor are the solution.

I still don't see why we are concerned that they spend or not. We shouldn't be. MMT is about tending your own garden. We should just offset the effects of their saving, which are exactly the same as domestic saving. Governments have more direct power over domestic industries and monopolists, problems can be solved more quickly and directly when they arise domestically. So there should be a little more care taken about the long-term externality costs of foreign trade, that's all.

It would be a closer approximation to a theoclassical utopia if the Chinese (& everyone else) ran balanced trade and currencies floated to a perfect equilibrium. There would be some, probably small, theoretical economic gains from that, even over the case of China running a surplus, saving dollars, and our running a trade deficit which is offset by functional finance. But that is not something one country can or should enforce. Every country practicing functional finance / MMT should eventually lead to that balanced trade world.

During the full employment era, functional finance was practiced globally well enough that there was a balanced trade, theoclassical kind of world, where classical economics applied - because Keynesian economics had been applied. Enough so that the zombie ideas - idiocies like rational expectorations & fraudulent pseudomathematics - took over from the flawed but still-in-touch-with-reality "Keynesian" consensus. Half the work that MMT must do is to rebuild the good part of the knowledge which was once widespread, but basically consigned to book-burning.

Shaun Hingston said...


IMO the only valid exchange of bonds is for external forms of capital. Not exchanging USD for USD bonds. That is illogical, the state may aswell the print the money itself.

Bonds are an unnecessary complication to the system. They make it harder to understand the financial system, and introduce an unnecessary dead-weight loss. Hence there would actually be an economic gain in removing internally denominated bonds altogether.

The whole idea of internally denominated bonds is absurd. Just print more money according to a popular average.

Shaun Hingston said...


Don't even need bonds for external capital, just pay them in freshly minted fiat.

Tom Hickey said...

Mario, what I don't like about bonds is that they are operationally unnecessary and constitute a subsidies. Public subsidies that do not promote public purpose are deadweight, i.e., inefficient.

What public purpose is served by giving bondholders a public subsidy to hold bonds when they are operationally unnecessary?

Traditionally, bonds constitute rentier income. Why should the public subsidize rentiers unnecessarily?

In China's case, the trade imbalance is disadvantaging the Chinese people in favor of exporting companies. Why would the US want to support that kind of exploitation? Moreover, it funds Chinese employment while costing US jobs. If the US is not going to make up the difference with a deficit offset for the Chinese saving in USD, then US workers are disadvantaged also.

Matt Franko said...

Looked at the net fiscal flow for the five days ending Weds 8/10... only $18B... not very much, less than $80B per month rate.

This Flow has not yet been re-established...

Mario said...

yes I agree with you guys about bonds.

And Tom I see what you're saying is the issue with China's savings rate, but in all honesty, I'm not really too concerned with the Chinese at this point. My point is that we can handle our end of the issue regardless of what China does (spend it or not).

Also even without bonds, it is possible though granted less likely that they could still just save the dollars.

thanks guys I see what you're saying now.

Tom Hickey said...

Mario, in imbalanced world in the age of globalization is a dangerous place. Instability, especially of large countries, is contagious. Just as the whole world has a stake in the US, the US now has a much bigger stake in the ROW than previously. If the US is going to continue to be the global leader, then it has to act beyond narrow self-interest. Moreover, it is the right thing to do, and moral leadership is even more important than economic and military.

Mario said...

well I must say you're totally right there as well. What you're saying is the ideal to be sure, however we need to at least get our own house in order before we work on fixing the world. We need to take care of our citizens first and then expand outwards from there. But really either one first is fine with me as long as something gets done!

Tom Hickey said...

This needs to be a coordinated effort or it won't be successful. The world is too interconnected and interdependent now. Cooperation and coordination is the sole solution in the face of grave dangers.

Calgacus said...

Mario: however we need to at least get our own house in order before we work on fixing the world. Have to agree with you here more than with Tom. MMT/Functional Finance is a bulletproof, always successful strategy, that can be carried out independently of other states' strategies.

Coordination & cooperation will largely be the result of good, sane, tend-your-own-garden economics, not the cause.

Coordination & cooperation can mean - states coordinating and cooperating to benefit the international bankster & predator capitalist elite, against the interests of their own peoples. An historical example concerning the London Economic Conference which had a recent echo is described here: The Story Behind Obama’s Remarks on FDR . While many historians excoriate FDR for what they call his narrow economic nationalism, Keynes called him "magnificently right". Floating exchange rates are a good enough mechanism of international coordination. Once a critical mass of nations practice MMT/FF, or even just the US, its advantage will be such that every nation will practice it, or risk being a basket case compared to its neighbors.

Tom Hickey said...

I don't disagree that the US should take the lead, since it is the global leader. However, the US cannot only pursue its own self-interest and remain the global leader for long, no matter how much weight one has to throw around. The world faces great challenges, and only international cooperation and coordination can avert impending economic disaster and political instability. So far, many fine words are being spoken — world leaders recognize this obvious fact — but too little action is being taken.

Mario said...


Calgacus said...

Yes, international cooperation may be necessary on the micro level- which on the global level is not very "micro". But my point was that international macro-economic cooperation is not necessary, and what is called international cooperation there is usually criminally destructive. The world would be far better off without an IMF.

If a country as big as the UK, with its own currency, went back to sane economics, vigorously and publicly "applied MMT", the demonstration effect would be highly contagious. It's essential that everyone be insane, so that insanity appears to be sanity.

Tom Hickey said...

@ Calgacus


Mario said...

agreed as well.

best way to cooperate with others is to first cooperate with yourself.

Calgacus said...

Glad we agree. Good way of putting it, Mario.