Mnuchin says US must cut spending and reduce the deficit: Recipe for guaranteed recession.

Mnuchin says the U.S. government must cut spending and reduce the deficit. This will absolutely guarantee a recession.

It's amazing that these views still prevail. Complete and total ignorance.

Neil Wilson — The Function of Government Spending

Any government outlay causes somebody somewhere to receive some income they didn’t have previously in return for supplying some good or service. They then pay some tax, and decide how much of that income to spend on other goods and services in the economy and how much to save for a rainy day. That process then continues with the money bouncing around between people causing transactions.

We can represent the initital government outlay with the following definitions.…

 Understanding issuance and taxation.

Modern Money Matters

The Function of Government Spending

Neil Wilson

Here's what's single handedly keeping us out of recession

Social Security!

Here's why the economy won't go into recession. The expansion in the Social Security rolls will necessarily mean increasing levels of government spending. It might not be a boom, but it's a broadening, guaranteed, income flow to tens of millions. This is single handedly keeping us out of recession. 

And these idiots in Congress want to do away with it. BUT NOT TRUMP!!!!!!!!

Keep buying the dips. Spending really accelerating now.

Federal Government spending is really accelerating now. We are $45 billion over last year and last year was the biggest increase in six years. There will NOT be a recession. You can look at the deficit all you want; you're wasting your time. The Fed will raise rates at least two more time this year.

The stock market is giving everyone easy opportunities to get in. There's been plenty of good, back and forth action. That won't always be the case. We'll go parabolic at some point.

Forex is also presenting great opportunities. If you don't trade forex, get my course.

Spending up YUGE! Starting to really accelerate. Here we go go go!!!

After that late, Jan-early Feb hiccup (IRS glitch, paperwork, whatever), Federal Gov't spending is now really starting to take off. Check it out:

We are nearly $40 billion over last year already and it's accelerating. This month alone, tax refunds have now caught up and surpassed last Feb. (Thanks to our tax accountant, MNE reader, John, for keeping me patient.)

Forecasts:

No recession
Stocks to rally sharply
Economy to show increasing strength
Fed will raise rates at least two more times
Bonds down
Dollar DOWN as foreign exporters regain some pricing power
Gold up.

If you're looking at the deficit (i.e. how "small" it has become) then, bye, bye. You are going to be left in the dust!

Much more detailed updates, analysis and forecasts in my Fiscal Trend Trader Report. Subscribe here.

China devaluation and how I am playing it in the Forex market now

Last week's news that China had devalued its currency by 3.0% whipped the markets around. I am speaking of the Forex market now. The dollar initially rallied, then declined. As of late last week it started to recover and we see more dollar strength today.

Matt Franko has been posting up some good info about price cuts (here and here) or further price deterioration in Europe. This was my take as well: that the Chinese move would put pressure on German and Japanese exporters and that would similarly put pressure on the euro and the yen.

It all makes sense except for one thing: that's the fact that U.S. Federal government spending is experiencing a slowdown in momentum. It's subtle, but it's happening and it has been happening since, depending on where you start measuring it, either early April or early May.

Overall spending is up year-over-year and that's good, but the slowdown in momentum suggests that we may see more surprises on the downside with respect to the economic data and that will cause Forex traders to sell.

My strategy right now is basically to "range trade," but I have a bias for selling rallies in the dollar.

For once Bloomberg posts something on their website that makes sense.

I thought I was seeing things just now when I came across an article on Bloomberg.com that was entitled, "Here's how to add 2.4 million jobs to the economy." I figured since it was Bloomberg there'd be a bunch of dumb suggestions like get the government out of the way, reduce regulation, cut corporate taxes and that sort of stuff.

To be honest I don't even know why I started reading it because I hardly ever read what's on that site as it's always the same, incessantly wrong, out-of-paradigm neoliberal cheerleading that we hear everywhere.

However, this article was different. So different in fact that I don't know how Bloomberg let this slip through the cracks. It was written by some guy named Peter Gosselin and I have no idea who the dude is, but he seems to get it.

Check it out:

"The U.S. is paying a big price in growth, jobs and wages by practicing the kind of fiscal austerity that it criticizes European nations for pursuing." Read on. 

In the article Gosselin talks about how government spending cuts are weighing heavily on the economy. He  points out what we have been saying here on MNE and what every MMT person knows: that government consumption  and investment is the second biggest component in GDP and the most easily varied (save for the politics, anyway, and I know that's not easy).

The article states pretty emphatically that government  spending has to be increased; that's the only way to boost GDP and job growth. It also says we "gave up on fiscal stimulus too soon." (We said that here on MNE back in 2009!)

Gosselin also rightly shames clueless Conservative lawmakers and doesn't give the Democrats a pass either. Read below:

Opponents of using fiscal tools, especially higher government spending, focus on what they regard as a greater threat than tepid growth: federal deficits and debt. “Government can’t spend its way back to a strong economy,” said Representative Kevin Brady, a Texas Republican and member of the House Ways and Means Committee.

and...

"The nation’s retreat from tax cuts and spending increases to promote the recovery has been a bipartisan affair. Democratic President Barack Obama and Republican House Speaker John Boehner agreed in 2011 to apply the fiscal brakes by negotiating $1 trillion in spending cutbacks over 10 years and a process to impose more."

Anyway, kudos to Bloomberg--THIS ONE TIME.

I'm sure they'll go right back to doing what they usually do, which is posting up the same ignorant and inapplicable shit that has become a mainstay of their opinion writers. (Cue Caroline Baum right about now.)

Economy may be at "stall speed"

I know the jobs report bounced back and everyone got all excited and clearly, it's a good sign because it would have been a nail in the coffin, I think, for the growth trend for the remainder of the year had that not happened.

However, looking at Federal Government spending trends--and there is the risk that I am getting too "micro" in my analysis, here, but nonetheless--it seems to me that spending data has slowed to a stall, at least the way I see it, and that suggests the economy is also at a stall.

Spending could pick up and, admittedly, it is looking a little bit better now than it looked around the first and second weeks in April and I understand that April, being tax month, is when individual and firms' bank accounts get drained so there is some seasonality at play here.

With respect to that latter comment, being that this is the seasonal, "Sell in May and go away" period and the market is hanging in there pretty well (i.e. undergoing perhaps a "churning" correction), then things may actually not be all that bad.

I will see in the coming days, based off flows from the DTS, what it looks like.

#Itsnotaboutthedeficit

Inflation is about to pick up. This time it's real.

We saw a small uptick in the CPI for March this morning, but the real issue here and the one not reported (you will only get it here), is that we are going to experience the first significant increase in government spending this year in six years.

My projections, based on all the data on Federal spending (from the DTS) so far this fiscal year, and the rate of spending, is that we will hit $4.38 trillion. That would be a $200 billion increase from the prior year.

Here is a graph with the projection for this year.

The only other increase in spending that we saw was in 2013 and that was only $20 billion over 2012. So this year's increase is serious.

Government spending is different from central bank monetary operations. The former adds to net financial  assets ("printing money"), while the latter is only an asset swap. That's why all the "inflationista's" got it wrong these past years. It was because they believed monetary operations were money printing. It's not.

Therefore, based on this development here is my outlook...

• The top is in for the dollar. It's going down.
• Bonds are headed lower. Rates will go up and YES, the Fed will raise rates this year, possibly even in June.
• Stocks will continue to climb for a while until rates get high enough to siphon away investment (and we're still a long way from that).
• Gold will rally.
• Commodities and oil have bottomed.

P.S. Some may claim that they predicted, all along, that the euro would rally, but that would be false.

Valerie Ramey and Sarah Zubairy — Government spending multipliers in good times and in bad: Evidence from US historical data

There is no consensus among economists about the size of the multiplier of government purchases. It is not clear either how multipliers vary with the state of the economy. This column presents new evidence on this issue using large historical data set from the US. The findings suggest that there is no evidence that fiscal multipliers differ by the amount of unemployment or the degree of monetary accommodation.… 

Our findings suggest that there is no evidence that fiscal multipliers differ by the amount of slack in the economy or the degree of monetary accommodation. These results imply that, contrary to recent conjecture, government spending multipliers were not necessarily higher than average during the Great Recession. Our estimates imply that government spending during WWII lifted the economy out of the Great Depression, not because multipliers were so large, but because the amount of government spending was so great.

VOX.eu
Government spending multipliers in good times and in bad: Evidence from US historical data
Valerie Ramey, Professor in the Department of Economics, University of California, San Diego, and Sarah Zubairy, Assistant Professor in the Department of Economics, Texas A&M University

Jerry Khachoyan — No, Government Spending Is Not Exploding

Charts.

The Armo Trader
No, Government Spending Is Not Exploding
Jerry Khachoyan

Randy Wray — When Will They Ever Learn: Uncle Sam is not Robin Hood

Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own.

Economonitor — Great Leap Forward
When Will They Ever Learn: Uncle Sam is not Robin Hood
L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Velocity of money at an all-time record low!

Velocity of M2 at an all-time record low. This is screaming...the government's got to spend, spend, spend!

John T. Harvey — Five Things The Shutdown Taught Us About Trying To Balance The Budget

The government just underwent a reduction in spending for sixteen days. What did we learn about how that affects the economy?

Forbes
Five Things The Shutdown Taught Us About Trying To Balance The Budget
John T. Harvey | Professor of Economics, Texas Christian University

Total hypocrisy! GOPers, fiscal conservatives, Chris Christie, Michael Grimm, Peter King, cry when they don't get their money from the Fed's government

This trio--N.J. Governor Chris Christie, Representative Peter King (R-NY) and Representative Michael Grimm (R-NY)--take the prize when it comes to hypocrisy.

They're all staunch fiscal conservatives, who run around saying the government is broke, we're out of money and we need to see drastic spending cuts to ensure our national "solvency," yet they cry when they don't get THEIR money from the Federal government.

Christie gutted education, health care, police, fire, unions, I had a conversation with Grimm when I was still at Fox News where he hit all the conservative talking points about out of control spending, national solvency, etc and King as well, but now they're incensed that the government is not bailing out their states and constituents. This is a shameful display of hypocrisy. These guys are the worst of the worst.

Public spending creates money? Taxes destroy money?

Randy Wray explains the process of creation of state money aka "currency" and destruction of previously created state money through taxation.

What is a sovereign currency? It is (mostly) a keystroke that results in an electronic entry on a bank’s balance sheet. (Yes it can also be shiny coins, paper notes, and watermarked checks—but those are increasingly less important.) To be more accurate, it is two entries: an entry in the deposit account of the fighter plane’s producer and a reserve credit at the central bank for the producer’s bank.

In the case of a modern “fiat” sovereign currency, what does the government promise? To “redeem” its currency in tax payment. When the fighter plane producer pays taxes, the keystrokes are reversed: the deposit is debited and the bank’s reserves at the Fed are debited. Presto-change-O the sovereign currency disappears in redemption.

The fighter plane ends up at the government. That, of course, was the whole purpose of the keystrokes.

Now let’s take Bradford’s example. Instead of keystroking a deposit, the government issues a “tax credit” to be used later in redemption of its tax liability. When tax time comes, the tax credit is sent on to the Treasury (presumably, it will be an electronic entry so little electrons pulse their way to Washington). Presto-change-O the tax credit is gone.

Yep, [David] Brooks has that part right. It is exactly the same thing. The fighter plane is moved to the government.

After all, that’s what it is all about, right? From inception, the purpose of the monetary system is to move resources to the public sphere.

Global Economic Intersection | Op Ed
Sovereign Currency as a Tax Credit: Confusion for David Brooks
L. Randall Wray
(h/t beowulf in a comment at MMR)

Public sector expenditure adds financial assets to the domestic private sector by marking bank accounts. Taxation withdraw financials assets previously created through public expenditure by marking down bank accounts. Account entries appear with spending and disappear with taxation. Public spending "creates money," and taxation "destroys money."

Note: For those wondering about notes and coin, government does not issue either notes or coin directly into the private sector. Banks exchange reserve balances for vault cash to meet window demand.

The myth of out of control government spending

The myth of runaway spending.

Many of you have probably already seen the chart I posted below, but I it's worth another look particularly in light of Mitt Romney's recent comments on "fiscal responsibility."

"The mission to restore America begins with getting our fiscal house in order. President Obama has put our nation on an unsustainable course. Spending is out of control. Yearly deficits are massive. And unless we curb Washington’s appetite for spending, the national debt will grow to the size of our entire economy this year."

The chart shows that spending is clearly not out of control. In fact, it is lower now as a percent of GDP than when Ronald Reagan was in office.  By the way, the Republicans had no problem with Reagan's "out of control" spending.

Look at how government spending collapsed under Clinton. We still haven't recovered from that. And the Clinton surpluses are considered to be so virtuous. It was totally the opposite.

Spending under Obama lowest in post WWII period

Nice comparison chart put together by AttackWatch that shows average annual spending. It's currently the lowest in the post WWII period. No wonder why we're stagnating. Hey all you, "government get out of the way so the private sector can boom," people...what's your explanation for this, huh???

Open letter to Maria Bartiromo: Here's what the government spends money on

CNBC's Maria Bartiromo keeps saying, she doesn't know what the governemnt spends money on and how much. She's said she's "looked for this information for years, but can't find it."

Hey, Maria, here it is (http://www.fms.treas.gov/dts/index.html). It's called the Daily Treasury Statement and it's published each and every day on the Treasury's website. It shows every line item of expenditure and every line item of revenue.

Not so hard to find if you really wanted to find it.

Enjoy!

P.S. I'd be happy to come on and explain it to you, but I'm not holding my breath.

-Mike Norman

Deficit spending at highest level in three months. That's bullish!

The deficit this month is the largest since February. A lot of the money drained from the private sector in April is now being recycled back into the economy in the form of higher spending. This should be supportive. The market selloff is likely reaching a climax.