billy blog Wed 2010-09-29 10:15 EDT

Budget deficits do not cause higher interest rates

Bill Mitchell

...An often-cited paper outlining the ways in which budget deficits allegedly push up interest rates is -- Government Debt -- by Elmendorf and Mankiw (1998 -- subsequently published in a book in 1999). This paper was somewhat influential in perpetuating the mainstream myths about government debt and interest rates...Their depiction of...Ricardian equivalence...alleges that: ``the choice between debt and tax finance of government expenditure is irrelevant...[because]...a budget deficit today...[requires]...higher taxes in the future...'' ...I have dealt with this view extensively...Ignoring the fact that the description of a government raising taxes to pay back a deficit is nonsensical when applied to a fiat currency issuing government, the Ricardian Equivalence models rest [on] several key and extreme assumptions about behaviour and knowledge. Should any of these assumptions fail to hold (at any point in time), then the predictions of the models are meaningless. The other point is that the models have failed badly to predict or explain key policy changes in the past. That is no surprise given the assumptions they make about human behaviour. There are no Ricardian economies. It was always an intellectual ploy without any credibility to bolster the anti-government case that was being fought then (late 1970s, early 1980s) just as hard as it is being fought now...So where do the mainstream economists go wrong? At the heart of this conception is the [pre-Keynesian] theory of loanable funds...where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times...Mankiw claims that this ``market works much like other markets in the economy''...[assuming] that savings are finite and the government spending is financially constrained which means it has to seek ``funding'' in order to progress their fiscal plans. The result competition for the ``finite'' saving pool drives interest rates up and damages private spending. This is what is taught under the heading ``financial crowding out''...Virtually none of the assumptions that underpin the key mainstream models relating to the conduct of government and the monetary system hold in the real world...When confronted with increasing empirical failures, the mainstream economists introduce these ad hoc amendments to the specifications to make them more realistic...The Australian Treasury Paper [used advanced econometric analysis to find that] domestic budget deficits do not drive up interest rates. The long-run effect...is virtually zero. The short-run effect is zero!...toss out your Mankiw textbooks...

Billy Blog; budgets deficit; caused higher Interest rate.

Jesse's Café Américain Sat 2010-09-25 09:55 EDT

FOMC: Sound the Bell. School's In, Suckas

Jesse

...What the Fed cannot do is breathe vitality into a zombie economy, and provoke a sustained recovery not tied to some sort of credit bubble. That is why stagflation remains the most likely outcome until the nation obtains the will and the determination to reform the financial system and restore a balance to trade and the real economy through a commitment to sound and practical public policy not driven by self-serving economic quackery. The dollar and bonds are made stronger through a vibrant underlying economy with the ability to generate taxable income and real returns to their holders. But in the meanwhile the special interests will be served. A profound deflation and hyperinflation remain as possibilities for the future, but they will most likely be seen on the horizon in advance of their arrival as the result of some exogenous event or catastrophic failure. So far, not a glimpse...

bell; FOMC; Jesse's Café Américain; school's; sounds; SUCKAS.

Mon 2010-09-20 09:49 EDT

Escaping the Sovereign Debt Trap

Ellen Brown

...Debt forces individuals into financial slavery to the banks, and it forces governments to relinquish their sovereignty to their creditors, which in the end are also private banks, the originators of all non-cash money today. In Great Britain, where the Bank of England is owned by the government, 97% of the money supply is issued privately by banks as loans. In the U.S., where the central bank is owned by a private consortium of banks, the percentage is even higher. The Federal Reserve issues Federal Reserve Notes (or dollar bills) and lends them to other banks, which then lend them at interest to individuals, businesses, and local and federal governments...n the past there have been successful models in which the government itself issued the national currency, whether as paper notes or as the credit of the nation. A stellar example of this enlightened approach to money and credit was the Commonwealth Bank of Australia, which operated successfully as a government-owned bank for most of the 20th century. Rather than issuing ``sovereign debt'' -- federal bonds indebting the nation to pay at interest in perpetuity -- the government through the Commonwealth Bank issued ``sovereign credit,'' the credit of the nation advanced to the government and its constituents... The Commonwealth Bank was able to achieve so much with so little because both its first Governor, Denison Miller, and its first and most ardent proponent, King O'Malley, had been bankers themselves and knew the secret of banking: that banks create the ``money'' they lend simply by writing accounting entries into the deposit accounts of borrowers...Today there is renewed interest in reviving a publicly-owned bank in Australia on the Commonwealth Bank model. The United States and other countries would do well to consider this option too.

escape; Sovereign Debt Trap.

Sat 2010-08-07 20:57 EDT

Medicare Trustees: Fund Now Viable till 2029 >> naked capitalism

Yves Smith

Don't expect this updated assessment, that Medicare now is expected to be viable till 2029, to stem the expected push to gut Social Security and Medicare...the stresses on Medicare are due...almost solely [to] the rising health care cost projections...the US has grotesquely costly health care which produces no better results than that of other advanced economies. And the differences, in terms of rationing and queuing, are exaggerated. What are insurer denials of coverage for costly treatments if not rationing?...Obama, as with the banking industry, blew his opportunity to have a real impact on the underlying problems of health care that lead to high costs, including its fee for service model and perverse incentives.

2029; funds; Medicare trustees; naked capitalism; viable.

New Deal 2.0 Fri 2010-07-16 18:50 EDT

Despite Foreign Debts, U.S. Has the Upper Hand

Henry Liu

U.S. public debt as of July 8, 2010 was $ 13.192 trillion against a projected 2010 GDP of $14.743 trillion. As of April 2010, China held $900.2 billion of US Treasuries, surpassing Japan's holding of $795.5 billion. As of 2007, outstanding GSE (Government Sponsored Enterprises like Fanny Mae; Freddy Mac) debt securities (non-mortgage and those backed by mortgages) summed up to $7.37 trillion. Does this mean disaster for the US? ...the U.S., while vulnerable, is not critically over a barrel by massive foreign holdings of U.S. sovereign debt. The reason is because U.S. sovereign debts are all denominated in dollars, a fiat currency that the Federal Reserve can issue at will. The U.S. has no foreign debt in the strict sense of the term. It has domestic debt denominated in its own fiat currency held in large quantities by foreign governments. The U.S. is never in danger of defaulting on its sovereign debt because it can print all the dollars necessary to pay off foreign holders of its debt. There is also no incentive for the foreign holders of U.S. sovereign debt to push for repayment, as that will only cause the U.S. to print more dollars to cause the dollar to fall further in exchange rates... ...trade globalization through cross-border wage arbitrage also pushes down wages in the US and other advanced economies, causing insufficient consumer income to absorb rising global production. This is the main cause of the current financial crises which have made more severe by financial deregulation. But the root cause is global overcapacity due to low wages of workers who cannot afford to buy what they produce. The world economy is plagued with overcapacity as a result. It is not enough to merely focus on job creation. Jobs must pay wages high enough to eliminate overcapacity. Instead of a G20 coordination on fiscal austerity, there needs to be a G20 commitment to raise wages globally. [Henry C.K. Liu]

0; Foreign debt; new dealing 2; U.S.; upper hand.

Fri 2010-07-16 18:30 EDT

On Pelosi's Duplicity and Apparent Sandbagging of Elizabeth Warren <<; naked capitalism

Yves Smith

Despite her longevity as a California pol, house speaker Nancy Pelosi is looking like every bit as much of a dyed-in-the-wool financial services industry backer as the Congressmen on the New York-Boston corridor...So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel...Nieman is the New York Superintendant of Banks. He helped Goldman set up its bank holding company...Nieman fell out with the other Democrats and wrote a joint opinion with John Sununu...to anyone with a passing acquaintance with the facts, the dissenting views are absurd...I can't imagine that Nieman would have fallen in with the Republicans without at least as a courtesy informing Pelosi in advance...So Pelosi is at a minimum sitting this one out (which I deem unlikely) or on board with the program to undermine Warren. And let us not kid ourselves, the knives are coming out...[2009-04-26]

Apparent Sandbagging; Elizabeth Warren; naked capitalism; Pelosi's Duplicity.

billy blog Thu 2010-07-15 16:58 EDT

We have been here before ...

The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the ``expectations'' belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate...

Billy Blog.

billy blog Mon 2010-06-14 18:13 EDT

The OECDs perverted view of fiscal policy

...the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks...

Billy Blog; fiscal policies; OECDs perverted view.

billy blog Mon 2010-06-07 19:00 EDT

Central bank independence -- another faux agenda

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. ...Today, I am looking at another faux agenda -- the demand that central banks should be independent of the political process...The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy...I find it ironical that the freedom mongers have very limited appreciation of what freedom actually is. Allowing the unemployed to be ``bullied'' by amorphous bond markets is not a path to freedom...inflation targeting countries have failed to achieve superior outcomes in terms of output growth, inflation variability and output variability; moreover there is no evidence that inflation targeting has reduced inflation persistence...Central banks operating under this charter have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities have further worsened the situation with complementary austerity...The conclusion that I have reached from studying this specific literature for many years is that there is no robust relationship between making the central bank independent and the performance of inflation...From a MMT perspective, the concept of CBI is anathema to the goal of aggregate policy (monetary and fiscal) to advance public purpose. By obsessing about inflation control, central banking has lost sight of what the purpose of policy is about...under the CBI ideology, monetary policy is not focused on advancing public purpose. Fighting inflation with unemployment is not advancing public purpose. The costs of inflation are much lower than the costs of unemployment. The mainstream fudge this by invoking their belief in the NAIRU which assumes these real sacrifices away in the ``long-run''...

Billy Blog; Central bank independence; faux agenda.

Mon 2010-05-24 15:16 EDT

World Order, Failed States, and Terrorism: Part 1: The Failed-State Cancer

Henry C K Liu

...Failed and collapsed states are a structural trait of the contemporary international system, and not a temporary dysfunction of the Westphalian world order of sovereign states. Failed states are not always weak states. They are sometimes strong states that have voluntarily forfeited basic state functions as a matter of ideology, or allowed them to be usurped by special-interest groups. Strong failed states are states that possess powerful military/police power for advancing the narrow economic interests of a small class of citizens while sacrificing a significant segment of the population as failed market victims. In the US, socio-economic Darwinism is celebrated as indispensable for the survival of the economy in the market place, while scientific theories of evolution are challenged by Creationism in public schools. Those who believe God created man apparently do not believe he created all men as equals...World order, then, is the network of economic and strategic pressures that both holds a system together and constrains its members to act in acceptable ways through commonly accepted rules and institutions. When those rules and institutions are set by a hegemon or an empire, failed-state status will be defined by those rules and institutions. When the rules of balance of power are dominant, state failure is a different phenomenon...

failed state; Failed-State Cancer; Part 1; terror; World ordering.

Mish's Global Economic Trend Analysis Wed 2010-05-19 15:00 EDT

Retail Sales Rise: Where? Let's Take a Look; Expect Nothing Less Than Panic

Michael Shedlock

...To understand why the Advance Retail Sales report is completely bogus, we must first analyze the Census Bureau Methodology...The published numbers are based on "same store sales". Think about all the companies that have gone bankrupt. Take Circuit City for an example. Gone. The doors are closed. Some of those shoppers went to Best Buy where same store sales rose. Also remember that Best Buy and many other chains closed weak stores. The result: same store sales went up again. Government methodology for reporting retail sales is based on sampling stores in existence. It does not factor in stores not in existence but recently were. Nor does it handle closed stores when the chain is still doing business. Government reporting of retail sales is fatally flawed. To understand what is going on, all one has to look at actual tax data. Heard any rosy numbers from states about sales tax collections?

expectations; Let's take; looking; Mish's Global Economic Trend Analysis; panic; Retail Sales Rise.

Wed 2010-05-19 11:56 EDT

billy blog >> Blog Archive >> When you've got friends like this ... Part 3

...how limiting the so-called progressive policy input has become. One could characterise it as submissive and defeatist. But the main thing I find problematic is that its compliance is based on faulty understandings of the way the monetary system operates and the opportunities that a sovereign government has to advance well-being. Progressives today seem to be falling for the myth that the financial markets are now the de facto governments of our nations and what they want they should get. It becomes a self-reinforcing perspective and will only deepen the malaise facing the world...When the neo-liberals cry about the burdens of the public deficits that the future generations will have to bear they are talking nonsense. The actual burden we are leaving for our children and their children is the dead-weight losses of real income and the opportunities that that income would have provided them...

Billy Blog; blogs Archive; friends; Part 3.

Wed 2010-05-19 11:53 EDT

billy blog >> Blog Archive >> When you've got friends like this ... Part 2

Part 2 in a series I am running about the propensity of self-proclaimed progressive commentators and writers to advance arguments about the monetary system (and government balances) which could easily have been written by any neo-liberal commentator. The former always use guarded rhetoric to establish their ``progressive'' credentials but they rehearse the same conservative message -- the US has dangerously high deficits and unsustainable debt levels and an exit plan is urgently required to take the fiscal position of the government bank into balance. In doing so, they not only damage the progressive cause but also perpetuate myths and lies about how the monetary system operates and the options available to a currency-issuing national government...

Billy Blog; blogs Archive; friends; Part 2.

Tue 2010-05-18 14:16 EDT

billy blog >> Blog Archive >> The enemies from within

...Unemployment is the major source of poverty whether it be in a advanced or developing country. It is alienating, soul destroying, extends its costs well beyond the individual and the income losses alone dwarf the costs arising from so-called microeconomic inefficiencies. The daily loss of GDP involved in not having all available workers doing something productive is mammoth. It is a no-brainer that it is the large economic problem that should be solved in any country...If the private sector cannot produce enough then there is only one sector left ladies and gentleman who can do the trick!...Given the private sector doesn't want to spend at present -- and you cannot blame them for that given the appalling state of their balance sheets and the very unsteady housing market -- there is a danger that demand will drop further unless the government adds to its stimulus packages...the US is an economy that desperately needs more aggregate demand. The only constraint on employment is the lack of spending and there is no financial constraint that exists in a fiat monetary system that prevents the government from eliminating that demand deficiency...

Billy Blog; blogs Archive; enemies.

Tue 2010-04-27 08:22 EDT

Anecdotal Economics: A Chicken in Every VAT

...The retail consumer is back, and she* is in the mood to shop, we reliably are told. The Census Bureau reported March 2010 Advance Retail and Food Service Sales improved 7.6 percent from a year ago, and for 1Q2010 are 5.5 percent above 1Q2009...So why do state sales tax revenues tell a different, disconnected story? In the Nelson A. Rockefeller Institute of Government's April 2010 State Revenue Report, which chronicles the woeful status of state tax collections, concludes that sales tax collections fell almost 9.0 percent in 2009, a statistically significant 2.8 percent more than the reported decline in retail and food service sales made up estimated by the Census Bureau...It's a significant disconnect between theory (Census Bureau) and reality (actual sales tax collections), much as the similar, significant disconnect between the Employment Situation reported by the Bureau of Labor Statistics (theory), which appears to be masking the true extent of unemployment in America with all those marginally attached and discouraged workers, and the meaningful decline in actual payroll tax withholdings (reality), as reported by the Treasury Department in its Daily Treasury Statements...

Anecdotal Economics; chickens; VAT.

Mon 2010-04-19 15:42 EDT

Why The World Is Headed For A Balance Sheet Recession - Credit Writedowns

...[Richard Koo] believes the US, Europe and China are headed for a period of incredibly weak consumer spending not unlike what Japan has been through...what US policymakers are trying to do is to both increase asset prices and consumption in order to short circuit the D-Process i.e. prevent the debt deflation that results from deleveraging and asset and price deflation. Almost all measures taken to date are attempts to prop up asset prices (artificially I believe)...we are in for a debt restructuring across Europe, and in America and China because of the accumulation of debt and malinvestment. Policy makers are reverting to the same old game of asset price inflation to stave this off...It leaves us with chronically weak consumption trends acutely exacerbated by the demographic trends of an aging populace...these dynamics are particularly problematic for Europe because of the strictures imposed by the Euro, the large public sector debt-to-GDP ratios and the advance age of the populace. The Greek problem is the tip of the iceberg and the Europeans are seriously deluded if they think their troubles are over...

Balance Sheet Recessions; credit writedowns; Head; world.

naked capitalism Fri 2010-03-19 16:02 EDT

Calibrating differences between China and Japan's bubble blow-off top

Edward Harrison

...Is China experiencing a massive bubble or not? If so, will the bubble's inevitable pop spill over into the real economy in a nasty way as it has done in the U.S. and elsewhere?...My own point of reference has been the 1920s and the 1930s more than the 1980s and 1990s. In the 1920s, Great Britain played the role now played by the United States: military power, declining economic power, anchor global currency, and largest debtor nation. The United States played the role now played by China: rising economic and military power and `alpha creditor,' a phrase our Yves Smith coined. (The key difference is that the U.S. was more advanced relative to Great Britain than China relative to the U.S.)...China is effectively doing what France did by accumulating reserves despite fears of currency depreciation. I think this reserve policy is significant because this is what is behind all of the talk of protectionism and currency pegging. The Chinese are afraid that the U.S. are actively looking to devalue the currency while the U.S. are fed up with the peg and the resultant imbalances...

Calibrating differences; China; Japan's bubble blow; naked capitalism; Top.

Sun 2010-02-28 13:27 EST

Janet Tavakoli: Washington Abandons Greece: Beware of Geeks Bearing Grifts

Janet Tavakoli

The European Union (EU) is shocked--shocked I tell you!--that Greece used financial engineering to qualify for admission. Exactly how did they think that weaker countries managed to meet the requirements?...A few years ago, Greece engaged in derivatives transactions which essentially gave it a disguised loan, a gift from geeks. Greece may or may not have had plans to invest the money to create national wealth instead of say, blowing it all on national bling. Either way, Greece used its national credit card in a futile attempt to keep up with the EU Joneses...Today, rumors are that crony capitalists are using derivatives to profit from Greece's misery. There are allegations that investment banks and hedge funds used their knowledge of Greece's hidden debt to drive up its borrowing cost and drive down the Euro. Then these speculators reversed their positions, when they had advance information of a potential bailout for Greece. Other rumors suggest customized trades on the sovereign credit derivatives index also exploited Greece's problems. Still other rumors point to a campaign to manipulate Greek debt prices and knock down the Euro.

Beware; Geeks Bearing Grifts; Janet Tavakoli; Washington Abandons Greece.

Sun 2010-01-31 11:43 EST

Hussman Funds - Weekly Market Comment: The Stock Market Has Never Been This (Intermediate-Term) Overbought - October 19, 2009

In reviewing the status of the market late last week, the condition of the data was something of an anomaly in that regard. On the valuation front, stocks are presently overvalued, but to levels that we've observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980...the peak of the furious advance in S&P 500 driven by enthusiasm over "less bad" economic news, though with little proven economic strength. It was the last day of the 1980 bull market. The economy later proved to have been in a short lull within a double-dip recession, taking stocks to their final lows in 1982...One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out...

2009; Hussman Funds; intermediate term; October 19; Overbought; stock market; weekly market comments.

Fri 2009-10-23 08:41 EDT

The US as Failed State

Paul Craig Roberts:

The US has every characteristic of a failed state. The US government's current operating budget is dependent on foreign financing and money creation. Too politically weak to be able to advance its interests through diplomacy, the US relies on terrorism and military aggression. Costs are out of control, and priorities are skewed in the interest of rich organized interest groups at the expense of the vast majority of citizens. For example, war at all cost, which enriches the armaments industry, the officer corps and the financial firms that handle the war's financing, takes precedence over the needs of American citizens. There is no money to provide the uninsured with health care, but Pentagon officials have told the Defense Appropriations Subcommittee in the House that every gallon of gasoline delivered to US troops in Afghanistan costs American taxpayers $400.

failed state.

Wed 2008-07-09 00:00 EDT

Bank of America - Consumerist

Bank Of America: Bank Of America Treats Parking Meter Payments As Cash Advances, Charges $10 Fee

America; bank; Consumerist.