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warren mosler
24 Comments
TARP Won't Cut It: Immediate 'Payroll Tax Holiday' Needed
constu: there is no solvency risk for the US govt or any other govt with a non convertible currency/floating fx policy. all sov. defaults are due to fixed fx policies gone bad and/or debt in external currencies. the risk is inflation, which is going the other way. at the moment!
smart: it 'savings desires' were 100% you could do that. but they are not. japan's currency has been more than stable with deficits of 8% of gdp. we currently probably need something like that as well.
see 'soft currency economics' at moslereconomics.com under 'mandatory readings'
M2 Growth Suggests That 1970s Inflation Won't Return
James Galbraith Joins the Obamanomics Team
EXACTLY MY POINT. THE SAUDIS POST THEIR PRICES AND LET THEIR BUYERS BUY AS MUCH AS THEY WANT AT THEIR POSTED PRICES. THAT'S HOW A MONOPOLIST WITH EXCESS CAPACITY HAS TO INTERACT AS A BASIC POINT OF MICRO.
Mexico does not sell into the spot or futures markets either - it comes here under a contract price, and it sure ain't $135 a barrel or the oil companies couldn't post record profits.
THEY MAY WELL BE SETTING PRICES AS WELL, BUT I DOUBT IT AS THEY DON'T SEEM TO HAVE EXCESS CAPACITY AS THE SAUDIS DO. SO THEY SELL A QUANTITY AT THE BEST PRICE THEY CAN GET.
If you mean the Russians and Saudis control the price by limiting production, then explain why the Saudis announcement to produce 200,000 more barrels per day resulted in increased oil prices.
THEY DON'T LIMIT PRODUCTION, AS ABOVE. THE SAUDIS POST THEIR PRICES AND THEN LET THE MARKETS DECIDE QUANTITY.
MY TAKE IS THEY MUST HAVE INCREASED PRODUCTION BECAUSE DEMAND INCREASED BY THAT AMOUNT AT THEIR POSTED PRICES.
THIS INCREASE IN DEMAND TELLS ME PRICES ARE MORE LIKELY TO GO UP THAN DOWN.
The speculative paper futures price is being taken advantage of to gouge the world economy. Joseph Pogue, head of Standard in 1928 stated, "it matters little who owns the oil, what matters is who extracts, transports it, refines it, and markets it." Nothing has changed.
APART FROM THE SAUDIS BEING THE ONLY ONES WITH EXCESS CAPACITY WHICH MEANS THEY ARE PRICE SETTER AS A POINT OF LOGIC.
James Galbraith Joins the Obamanomics Team
RIGHT. IN FACT, IT'S BETTER STATED THAT SAVINGS IS THE ACCOUNTING RECORD OF INVESTMENT.
INVESTMENT IS ACCOUNTED FOR AS SAVINGS
INVESTMENT IN THAT SENSE 'CREATES' SAVINGS
THIS ISN'T THEORY BUT 'ACCOUNTING FACT.'
That has been true in the past. The US has been very good at recycling the rest of the world's savings.
IT'S NOT ABOUT RECYCLING.
THE SAME HOLDS FOR BANK DEPOSITS- BANK LOANS 'CREATE' BANK DEPOSITS.
However, I would be very nervous of any economist who assumes that the "gravy train" has not been disturbed by recent events. I am all for free trade and free capital flows but a slightly higher savings rate in the US might actually be a decent idea.
THE ENTIRE POINT OF ECONOMICS IS TO MAXIMIZE CONSUMPTION
OVER SOME TIME HORIZON.
UNLIKE RELIGION, IN ECONOMICS ITS BETTER TO RECEIVE THAN TO GIVE.
Perhaps the next administration can take some of the disincentives for savings out of the tax code.
THAT WOULD CUT SPENDING (DEMAND) WHICH WOULD REDUCE SALES AND THEREFORE REDUCE EMPLOYMENT AND OUTPUT. IT'S CALLED 'THE PARADOX OF THRIFT' IN THE TEXT BOOKS AND A FALLACY OF COMPOSITION.
INVESTMENT IS MORE A FUNCTION OF CONSUMPTION THAN ANYTHING ELSE. (AND THERE IS NO SUCH THING AS CONSUMPTION CROWDING OUT INVESTMENT- THE PRICE SYSTEM DOESN'T LET THAT HAPPEN.)
THE PROBLEM FROM TOO MUCH DEMAND IS INFLATION, NOT TOO MUCH CONSUMPTION.
UNLESS YOU ARE WORRIED ABOUT USING UP SCARCE RESOURCES, BUT THAT'S ANOTHER ISSUE ENTIRELY.
IF THE CONSUMPTION IS DOWNLOADING SONGS OR HAIRCUTS AND OTHER SERVICES THE LIMIT IS SOME NOTION OF TIME LIMITATIONS, VALUATIONS, AND FULL EMPLOYMENT.
Not as sexy or quick as a rebate check but it might put the country on a firmer footing.
WITH OUR FLOATING FX POLICY WE CAN SUSTAIN FULL EMPLOYMENT WITH DOMESTIC DEMAND MANAGEMENT INDEFINATELY.
INFLATION IS ANOTHER STORY, FOR ANOTHER POST
James Galbraith Joins the Obamanomics Team
Regarding NAFTA, Prof Galbraith knows imports are real benefits, exports real costs, and that domestic full employment can be suststained by domestic demand management policies.
This puts him above the rhetoric of both parties, but both also have a lot of political capital invested in their current positions.
moslereconomics.com
Fed Pumps More Money Into the Economy
And that a change in interest rates merely shifts income between borrowers/savers.
And that any change in demand from a change in rates has to come from the differences in the propensities to spend/consume between borrowers and savers.
And that the govt is a net payer of interest, so any difference in propensity to spend has to overcome that hurdle as well.
That's why changes in interest rates, though disruptive, seldom can be shown to have done much.
so yes, borrowers have been helped some, and savers hurt some
and net govt spending is a tad lower than it would have been
see 'zero is the natural rate of interest' at moslereconomics.com
Bernanke Fed: Still Waiting for Inflation to Moderate
with a non perishable commodity like crude oil, the term structure is indicative of current inventory conditions, not price expectations.
the current backwardation indicates relatively tight spot supplies, and not expectations of falling prices, as a simple point of market logic.
Money Markets and the Federal Reserve
there is no reason for the fed not to accept ANY member bank collateral- it's all eligible for fdic insured funding anyway, and the occ and others carefully regulate/monitor capital ratios, etc. for compliance.
and the fed should accept said collateral in unlimited quantities, as net lending to the banks remains the same in any case. loans 'create' deposits which means the banking system as a whole is necessarily entirely 'funded' without the fed, and intervention is limited to 'offsetting operating factors' as a matter of accounting (as i'm sure you well know from your days at the fed?)
as a point of logic there is no reason for any interbank/ff trading- the fed can clear it all as other cb's have done without ramification beyond avoiding interbank trading issues such as the current ff/libor spreads.
the case can be made that interbank funding issues of the last 8 months are entirely due to the FOMC's lack of understanding of actual monetary operations.
and the fact that the TAF is for limited quanties and limited collateral alone indicates this is still the case?
moslereconomics.com
Fed Pumps More Money Into the Economy
what the fed is doing is attempting to keep interbank interest rates closer to it's target rates.
the fed does this by offering member banks a lower cost alternative when the interbank rates are higher than the fed desires them to be.
net lending to the banking system remains unchanged.
to the penny
as a matter of accounting
it's about price, not quantity
moslereconomics.com
What Is the ECB Smoking?
get inflation right and that 'automatically' optimizes long term growth and employment.
adding to demand with a negative supply shock turns a 'relative value story' into an 'inflation story.'
the ecb is following mainstream theory, while the fed is not.
why?
the fed sees looming systemic, deflationary tail risk at the door. at least up to now.
the panic of 1907 and the early 1930's deflationary collapse- both previous examples given by the fed- were gold standard events.
with a gold standard (and/or other fixed rate regimes) there are direct supply side constraints on the reserve currency. interest rates are market determined, and during a credit crunch rates spike higher 'automatically.' even the tsy must fund itself and faces the same supply side constraints, thereby limiting fiscal responses. This continues in today's fixed fx currencies.
with floating fx/non convertible currency there are inherent no direct supply side constraints on bank lending, deposit creation, and credit in general. any constraints are on the demand side, including financial capital where constraints are also on the demand side. the cb necessarily directly sets rates, not market forces, and govt. spending is not constrained by taxing, borrowing, etc. hence fiscal packages are subject only to political choice.
today's risks are much the same as previous financial crisis type risks like 1987 and 1998, where the govt and its agencies have the open option of 'writing the check' as desired, with inflation the price to pay, not govt. solvency as with fixed fx regimes.
just like the 70's, the saudis are acting the swing producer and setting price and letting quantity they pump adjust. this is also necessarily the case when one is single supplier at the margin with excess capacity. the alternative of pumping flat out and hitting bids in the spot market is not a functional option for any monopolist. only price setting is.
russia is also a monopoly supplier at the margin, and probably is also acting as a swing producer. so crude prices go to where the higher of the two set them.
mainstream theory hasn't yet publically addressed this kind of negative supply shock.
one option is to match the domestic inflation rates to the price hikes to try to avoid declining real terms of trade.
this is both politically impossible and it can quickly lead to accelerating inflation.
we have two choices, neither particularly attractive:
watch our real terms of trade continue to collapse as crude prices are continuously hiked.
try to inflate to moderate the drop in real terms of trade.
ironically, we will chose the later as we did in the 70's because inflation is not a function of interest rates in the direction cb's subscribe to.
increasing nominal rates increases inflation via the cost and demand channels.
costs of holding inventory and investment rise with rate hikes.
govts are net payers of interest to the non govt sectors, so rate hikes also increase govt spending on interest to support incomes in the non govt. sectors.
good luck to us!
warren mosler
moslereconomics.com
U.S. Export Trends: Looks Good, Feels Bad
look at it this way. if someone offshore sells goods or services to the US it either spends the funds on US goods and services (no trade gap in that case) or it doesn't (trade gap and foreign accumulation of $US financial assets) This is an accounting identity as well.
so yes, if no further accumulation takes place- trade gap goes to 0- imports and exports net to 0
yes, real terms of trade are not a consideration when, for example, China buys $US. my point is that these decisions do alter real terms of trade, and in this case they are going against us
exports are real costs, imports real benefits- no getting around that
consider 10x just an example of what can happen. it can go the other way as well. point is, again for example, japan has 'decided' to accumulate over $1 trillion in $US financial assets in return for shipping us 'boat loads' of cars and other products for the last 60 years. so far that has net reduced their standard of living and net increased ours, and they have far less than a guarantee they can get real value for their $1 trillion if they decide to spend it. For example, they can buy a lot less crude oil with it than they could have 30 years ago, etc.
current year US consumption is exceeding output. yes, that may change in the future, but not necessarily. it's a matter of public policy.
you are entitled to your opinions as well.
seem my 'mandatory readings' at moslereconomics.com?
U.S. Export Trends: Looks Good, Feels Bad
IT'S AN ACCOUNTING IDENTITY.
AND HERE'S ANOTHER ONE FOR YOU:
GOVT DEFICIT = NON GOVT ACCUMULATION OF $US NET FINANCIAL ASSETS
EXPORTS ARE REAL COSTS- YOU WORK AND PRODUCE, SOMEONE ELSE GETS TO CONSUME THE FRUITS OF YOUR LABOR
IMPORTS ARE BENEFITS- SOMEONE ELSE WORKS AND PRODUCES AND YOU CONSUME
IT'S ALL ABOUT REAL TERMS OF TRADE
FOR YEARS WE WERE INCREASINGLY CONSUMING MORE THAN WE PRODUCED (TRADE DEFICIT GROWING)- LOOKED BAD BUT FELT GOOD.
NOW IT'S BEEN REVERSED AND AT THE SAME TIME DOMESTIC OUTPUT GROWTH HAS BEEN SLOWING AS WELL.
AND YES, THERE'S AN ELEMENT OF INTERTEMPORAL CONSUMPTION, BUT IT'S VOLUNTARY IS AN IMPORTANT SENSE.
THINK OF THE $ JAPAN COLLECTED FROM US NET SELLING US CARS AT $2,000 EACH. NOW IF THEY TRY TO BUY CARS FROM US THEY CAN GET BACK AT BEST ONE TENTH THE CARS THEY SOLD US, AS PRICES ARE UP BY AT LEAST 10 TIMES THAT, AND IF THEY ACTUALLY DID TRY TO BUY 2 MILLION CARS A YEAR FROM US THEY MIGHT RUN PRICES UP TEN TIME HIGHER AGAIN- NOTE THE DOLLAR DEPRECIATION AND RISE IN US EXPORT PRICES EVEN WITH A RELATIVELY SMALL SHIFT IN THE TRADE GAP.
(YES, THEY EARNED HAVE EARNED SOME INTEREST, BUT THE POINT REMAINS)
U.S. Export Trends: Looks Good, Feels Bad
AGREED, THAT'S BEEN QUITE A BIT OF IT. AND WITH PAULSON GOING AROUND AND CALLING ANY CB THAT BUYS $ US A CURRENCY MANIPULATOR AND AN OUTLAW HE'S ALL BUT REVERSED THIS PROCESS, AND THEREBY DRIVING UP US EXPORTS, WHICH HE CONSIDERS A GOOD THING.
it looks like a small group of "sovereign creditors" is financing not only the entire US trade and current account deficit, but also a substantial "capital flight" of private investors.
I PREFER TO SAY THAT US DOMESTIC CREDIT EXPANSION HAS BEEN FUNDING FOREIGN $US FINANCIAL ASSET SAVINGS.
IF I BUY A GERMAN CAR, AND BORROW FROM CITIBANK, MY LOAN CREATES AN EQUAL DEPOSIT WHICH IS TRANSFERED TO THE GERMAN'S ACCOUNT IN EXCHANGE FOR THE CAR. DOMESTIC CREDIT FUNDS FOREIGN ACCUMULATIONS OF $US FINANCIAL ASSETS- THERE IS NO 'FOREIGN FUNDING' INVOLVED.
THANKS!
The Fed Must Keep Pace with a Constantly Changing Economic Reality
Read my bog where I've made it clear that as exports are real costs for the macro economy and imports real benefits, our rising exports are diminish our real terms of trade and our standard of living. Furthermore, export economies are characterized by low domestic demand and consumption, as there are relatively high levels of employment sustaining output, but prices and wages are such that workers can't afford to consume their own production with the difference being exported for foreign consumption.
"Absolutely moronic. It takes a full 18 months for the real (not psychological ) effects of a Fed reserve move to fully impact the economy."
All of the Central Bank studies I've seen show very little correlation between interest rates and GDP and/or inflation, and, as you say, what little they do show has lags in the 18 month range, which on average crosses a fiscal cycle.
My conclusion, until convinced otherwise, is that inflation and GDP are not functions of interest rates, but only functions of fiscal policy.
I have also repeatedly pointed out on my blog that domestic demand has been diminishing since q2 06 when the federal budget deficit became too small to allow the domestic sector to increase it's debt at rates sufficient to sustain domestic demand.
Exports came on strong and picked up the slack, sustaining output and employment, but a at very high cost to our real terms of trade and standard of living.
see moslereconomics.com
the 'mandatory readings' are on the right margin.
Fed's Actions: Less Than Meets the Eye
with today's non convertible currency fed action is about 'price' (interest rates) and not 'quantity.'
nothing they do alters net financial assets.
unfortunately even the fed doesn't quite get it, or, for example, they wouldn't set quantities for the taf or have an auction. they would just announce a target rate and clear all takers at that rate.
and, as above, net system wide reserves would not change.