Rajiv Sethi Mon 2010-09-20 10:04 EDT

An Extreme Version of a Routine Event

Rajiv

The flash crash of May 6 has generally been viewed as a pathological event, unprecedented in history and unlikely to be repeated in the foreseeable future...far from being a pathological event, the flash crash was simply a very extreme version of a relatively routine occurrence...the flash crash can provide us with insights into the more general dynamics of prices in speculative asset markets...The crash revealed with incredible clarity how (as James Tobin observed a long time ago) markets can satisfy information arbitrage efficiency while failing to satisfy fundamental valuation efficiency...Aside from scale and speed, one major difference between the flash crash and its more routine predecessors was the unprecedented cancellation of trades...this was a mistake: losses from trading provide the only mechanism that currently keeps the proliferation of destabilizing strategies in check...

extreme version; Rajiv Sethi; routine event.

billy blog Sat 2010-09-18 10:52 EDT

There is no solvency issue for a sovereign government

Bill Mitchell

...There is no debt crisis in sovereign nations. The only public debt problems that have emerged in the current crisis have been in non-sovereign countries and even then with appropriate ``fiscal support'' those crisis were managed. I am referring to the intervention by the ECB when they decided to purchase outstanding public debt in the secondary bond markets -- which amounte to a fiscal act within a flawed monetary system. But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this absurd journey in self-importance...From a Modern Monetary Theory (MMT) perspective public Debt/GDP ratios have no relevance at all. What exactly do they tell us? The implication is that the bigger the economy the larger the tax base and so the government can support more debt. But a sovereign government does not need to tax to spend and its taxation powers serve different functions...It might be that the size of the economy limits nominal government spending because it provides some indication of the real resource base but that doesn't tell us anything about the capacity of the government to service any outstanding debt. A sovereign government can always service its nominal debts. It simply credits a bank account when the interest or maturity payments are due...

Billy Blog; solvency issue; sovereign Government.

naked capitalism Thu 2010-09-16 17:05 EDT

Elizabeth Warren on Way to Being Sidelined as Head of Consumer Protection Agency, Relegated to ``Advisor'' Role

The body language of the Administration has been clear from the outset on the question of whether Elizabeth Warren would get its nomination to head of the new financial services consumer protection agency. Despite the occasional public remark regarding her undeniable competence, which really amounted to damning her with faint praise, Team Obama has never been on board with the idea...The reality is that the Administration was never going to appoint her; the only question is whether she can be kept in their orbit and not be a net negative as far as their dubious priorities are concerned...the Warren marginalization isn't about personalities, although the powers that be love to pigeonhole thorns in their side that way. The clashes reflect fundamental differences in philosophy. Geithner, the Administration that stands behind him, and Dodd all are staunch defenders of our rapacious financial services industry, even though they make occasional moves to disguise that fact. Warren, by contrast, is clearly a skeptic, and a dangerous one to boot, because she understands the abuses well and is able to communicate effectively with the public. Expect Warren to be pushed further to the sidelines, just as Paul Volcker has been (oh, and pulled out of mothballs when the Administration desperately needed to create the appearance it really might be tough on banks)...

advisors; consumers protection Agency; Elizabeth Warren; Head; naked capitalism; relegation; role; sidelined; way.

PRAGMATIC CAPITALISM Thu 2010-09-16 16:15 EDT

CREDIT SUISSE: 6 BULLISH FACTS ABOUT HOUSING

TPC

Here's a contrarian view for you. Credit Suisse says the fears about housing are well overdone. In their analysis they cite 6 different bullish factors that should help to bolster house prices in the USA...The government now owns or guarantees about 70% of US mortgage debt...Valuation is extremely cheap on all measures...Delinquency ratios, charge-off and foreclosure rates seem to have peaked...Housing starts are about 1m below trend demand of housing units -- based on household formation and replacement demand... * Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009...Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%...

6 BULLISH FACTS; Credit Suisse; Housing; PRAGMATIC CAPITALISM.

Mish's Global Economic Trend Analysis Mon 2010-09-13 15:53 EDT

Debating the Flat Earth Society about Hyperinflation

Michael Shedlock

Over the past few weeks, many people have asked me to comment on John Hussman's August 23, 2010 post Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar. Most wanted to know how that article changed my view regarding deflation. It didn't...I was asked about a guest post by Gonzalo Lira on Zero Hedge. I had seen the article and I made an off-the-cuff statement that the post was so silly it was not worth commenting not...Commenting on the above is tantamount to debating the flat earth society. The premise is so silly it's not worth discussing, yet here I am trapped into discussion by a mischaracterization of my statement "Hyperinflation Ends The Game"...The commonality between Zimbabwe and Weimar is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, triggering hyperinflation...To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter...Hyperinflation could theoretically come from massive sustained political will to bail out the little guy at the expense of the banks, the wealthy, and the political class. However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy. Indeed, Bernanke's, Paulson's, and Geithner's actions to date have done the exact opposite!...

Debate; Flat Earth Society; Hyperinflation; Mish's Global Economic Trend Analysis.

billy blog Wed 2010-09-08 19:04 EDT

Michal Kalecki -- The Political Aspects of Full Employment

...several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki -- The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki's argument given that it is often raised by progressives as a case against effective fiscal intervention...[Job Guarantee concepts briefly summarized]...While orthodox economists typically attack the Job Guarantee policy for fiscal reasons, economists on the left also challenge its validity and effectiveness. In 1943, Michal Kalecki published the Political Aspects of Full Employment, in the Political Quarterly, which laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy...Kalecki's principle objection then seemed to be that ``the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.''...the major political blockages are no longer those that Kalecki foresaw. The opponents of fiscal activism are a different elite and work against the ``captains of industry'' just as much as they work against the broader working class. The growth of the financial sector and global derivatives trading and the substantial deregulation of labour markets and retrenchment of welfare states has altered things considerably since Kalecki wrote his brilliant article in 1943...

Billy Blog; full employment; Michal Kalecki; political aspects.

Thu 2010-08-26 09:03 EDT

Why Doesn't the United States Have a European-Style Welfare State? | The Weatherhead Center for International Affairs

Alesina, Alberto, Edward L. Glaeser, and Bruce Sacerdote

European countries are much more generous to the poor relative to the US level of generosity. Economic models suggest that redistribution is a function of the variance and skewness of the pre--tax income distribution, the volatility of income (perhaps because of trade shocks), the social costs of taxation and the expected income mobility of the median voter. None of these factors appear to explain the differences between the US and Europe. Instead, the differences appear to be the result of racial heterogeneity in the US and American political institutions. Racial animosity in the US makes redistribution to the poor, who are disproportionately black, unappealing to many voters. American political institutions limited the growth of a socialist party, and more generally limited the political power of the poor. [2001 Brookings Papers on Economic Activity; pdf downloaded]

European-Style Welfare State; internal affairs; United States; Weatherhead Center.

billy blog Thu 2010-08-19 16:25 EDT

There is no credit risk for a sovereign government

Bill Mitchell

...UC Berkeley economist Brad DeLong...likes to think of himself alongside Krugman as part of the ``Keynesian'' army against all the neo-liberals. Both are in fact New Keynesians. In that sense, they are not very dissimilar to Mankiw and his gang. Interestingly, they appear to be continually trying to one-up Mankiw as part of some internecine struggle within the American economics academy. But from a Modern Monetary Theory (MMT) perspective, it is hard to tell their various narratives apart...a sovereign government is never revenue constrained because it is the monopoly issuer of the currency. That is a basic starting point in exploring the differences between spending and taxation decisions of a sovereign government and the spending and income-earning decisions/possibilities of the private sector entities (households and firms). The two domains -- government and non-government -- are very different in this respect and any attempt to conflate them as if both are subject to budget constraints is wrong and starts the slippery slide down into the total mispresentation of how the macroeconomics system operates...When a government runs a surplus it is not ``saving'' anything. The surpluses go nowhere! They are just flows that are accounted for and the aggregate demand which is drained by the surpluses is lost in that period forever...DeLong is actually teaching some bastardised course in Political Science here and only allowing the conservative side of the debate to be aired...HSBC economist Steven Major ...[writes in the Financial Times (FT)]...so contrary to what is being peddled each day in the financial press that a medal for bravery should be awarded...

Billy Blog; credit Risk; sovereign Government.

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.

naked capitalism Sat 2010-07-24 16:34 EDT

Summer Rerun: ``Unwinding the Fraud for Bubbles''

Tanta at Calculated Risk

This post first appeared on March 27, 2007. ...Telling the difference between the victims and the victimizers, the predators and the prey, and the fraudulent and the defrauded, is getting a lot harder when you have borrowers not required to make down payments able to lie about their incomes in order to buy a home the seller is overpricing in order to take an illegal kickback. The lender is getting defrauded, but the lender is the one who offered the zero-down stated-income program, delegated the drawing up of the legal documents and the final disbursement of funds to a fee-for-service settlement agent, and didn't do enough due diligence on the appraisal to see the inflation of the value. Legally, of course, there's a difference between lender as co-conspirator and lender as mark, utterly failing to exercise reasonable caution, but it's small comfort when the losses rack up. With tongue only partially in cheek, I'm about to suggest a third category of fraud: Fraud for Bubbles...My theory of the Fraud for Bubbles is, in a nutshell, that it isn't that lenders forgot that there are risks. It is that the miserable dynamic of unsound lending puffing up unsustainable real estate prices, which in turn kept supporting even more unsound lending, simply masked fraud problems sufficiently, and delayed the eventual ``feedback'' mechanisms sufficiently, that rampant fraud came to seem ``affordable.'' So many of the business practices that help fraud succeed--thinning backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans, speeding up review processes, cutting back on due diligence sampling, accepting more and more copies, faxes, and phone calls instead of original ink-signed documents--threw off so much money that no one wanted to believe that the eventual cost of the fraud would eat it all up, and possibly more...

bubble; fraud; naked capitalism; summer reruns; unwinds.

Wed 2010-07-21 10:26 EDT

Professor Jamie Galbraith's testimony to Deficit Commission | Angry Bear

1. Clouds Over the Work of the Commission. ... 2. Current Deficits and Rising Debt were Caused by the Financial Crisis. ... 3. Future Deficit Projections are Generally Based on Forecasts which Begin by Assuming Full Recovery, but this Assumption is Highly Unrealistic. ... 4. Having Cured the Deficits with an Unrealistic Forecast, CBO Recreates them with Another, Very Different, but Equally Unrealistic Forecast. ... 5. The Only Way to Reduce Public Deficits is to Restore Private Credit. ... 6. Social Security and Medicare "Solvency" is not part of the Commission's Mandate. ... 7. As a Transfer Program, Social Security is Also Irrelevant to Deficit Economics. ... 8. Markets are not calling for Deficit Reduction; Now or Later. ... 9. In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector. ... 10. The Best Place in History (for this Commission) Would be No Place At All.

Angry Bear; deficit Commission; Professor Jamie Galbraith's testimony.

New Economic Perspectives Mon 2010-07-19 13:51 EDT

The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff

Yeva Nersisyan

...with nearly 10% of the US labor force unemployed and another 7% underemployed, the public debate is now focused on the false issue of deficits and debt. A case in point is a recent book by Carmen Reinhart and Kenneth Rogoff, ``This Time is Different'' that has become a bestseller...The media as well as academia have fawned all over this book...The crux of the book is that each time people think that ``this time is different'', that crises cannot occur anymore or that they happen to other people in other places. True. This is exactly what Hyman Minsky was arguing more than 40 years ago. Reinhart and Rogoff don't really explain why this perception leads to crises...The book is mostly on crises driven by government debt...[however] Aggregating data over different monetary regimes and different countries cannot yield any meaningful conclusions about sovereign debt and crises. It is only useful if the goal is to merely validate one's preconceived myth about government debt being similar to private debt...As far as I can tell Rogoff and Reinhart haven't identified a single case of government default on domestic-currency denominated debt with a floating exchange rate system...Professional economists are a major impediment on the way to using our economic system for the benefit of us all. And Reinhart and Rogoff are no exception.

Carmen Reinhart; Deficit; government debt; Kenneth Rogoff; myth; New Economic Perspectives; told.

Fri 2010-06-18 10:37 EDT

Monetary Economics Review

Pablo Gabriel Bortz

Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, W. Godley and M. Lavoie, Palgrave/Macmillan, London, 2007...Acknowledging the existence of a complex institutional structure that includes households, firms, banks and governments (sometimes separated from the Central Bank), "our aspiration is to introduce a new way in which an understanding can be gained as to how these very complicated systems work as a whole"...the "new way" referred above is currently known as Stock-Flow Consistent modelling (SFC)...The main bid of Godley and Lavoie (G&L, from now on) is to show (successfully, one could note) that the SFC models make it necessary to fully articulate an accounting structure, avoiding "black holes", gaining in consistency, accuracy, and providing a common framework for the comparison of different models...one gets really convinced that it is the type of approach that makes it possible to analyse a great number of elements and complexities of the real world, as much as one wishes!...G&L adopt an institutional classification (households, firms, banks, government and the central bank). All the models presented in the book start with a "balance sheet" matrix, where all the assets and liabilities of each sector are described...

Monetary Economics Review.

Rajiv Sethi Tue 2010-06-15 14:25 EDT

Defenders and Demonizers of Credit Default Swaps

Rajiv Sethi

The recent difficulties faced by Greece (and some other eurozone states) in rolling over their national debt has let some to blame hedge fund involvement in the market for credit default swaps...Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider...such contracts allow pessimists to leverage (much more so than they could if they were to short bonds instead). The resulting increase in the cost of borrowing, which will rise in tandem with higher CDS spreads, can make the difference between solvency and insolvency. And recognition of this process can tempt those who are not otherwise pessimistic to bet on default, as long as they are confident that enough of their peers will also do so. This clearly creates an incentive for coordinated manipulation...

Credit Default Swap; defending; demonic; Rajiv Sethi.

Thu 2010-06-03 17:42 EDT

World Order, Failed States and Terrorism, Part 3: The Business of Private Security

Henry C K Liu

...Social order is the main component of domestic security. Social security is the foundation of social order. Henry J Aaron of the Brookings Institution calls the US Social Security system "the great monument of 20th-century liberalism". Privatization of social security is not a solution; it is an oxymoron. It merely turns social security into private security. Neo-liberal economics theory promotes as scientific truth an ideology that is irrationally hostile to government responsibility for social programs. Based on that ideology, neo-liberal economists then construct a mechanical system of rationalization to dismantle government and its social programs in the name of efficiency through privatization. Privatization of social security is a road to government abdication, the cause of failed statehood...In the era of financial globalization, nations are faced with the problem of protecting their economies from financial threats. The recurring financial crises around the world in recent decades clearly demonstrated that most governments have failed in this critical state responsibility. The economic benefits associated with the unregulated transfer of financial assets, such as cash, stocks and bonds, across national borders are frequently not worth the risks, as has been amply demonstrated in many countries whose economies have been ravaged by external financial forces. Cross-border capital flows have become an increasingly significant part of the globalized economy over recent decades. The US depends on it to finance its huge and growing trade deficit. More than $2.5 trillion of capital flowed around the world in 2004, with more than $1 trillion flowing into just the US. Different types of capital flows, such as foreign direct investment, portfolio investment, and bank lending, are driven by different investor motivations and country characteristics, but one objective stands out more than any other: capital seeks highest return through lowest wages. The United States is not only losing jobs to lower-wage economies, the inflow of capital also forces stagnant US wages to fall in relation to rising asset values.

business; failed state; Part 3; private security; terror; World ordering.

Tue 2010-06-01 17:29 EDT

billy blog >> Blog Archive >> In the spirt of debate ... my reply

Bill Mitchell

...Steve Keen and I agreed to foster a debate about where modern monetary theory sits with his work on debt-deflation. So yesterday his blog carried the following post, which included a 1000-odd word precis written by me describing what I see as the essential characteristics of modern monetary theory. The discussion is on-going on that site and I invite you to follow it if you are interested. Rather than comment on all the comments over on Steve's site, I decided to collate them here (in part) and help develop the understanding that way. That is what follows today... We distinguish the horizontal dimension (which entails all transactions between entities in the non-government sector) from the vertical dimension (which entails all transactions between the government and non-government sector)...A properly specified model will show you emphatically that the horizontal transactions between household, firms, banks and foreigners (which is the domain of circuit theory) have to net to zero even if asset portfolios are changing in composition. For every asset created there will be a corresponding liability created at the same time...you will make errors if there is not an explicit understanding that in an accounting (stock-flow) consistent sense all these transaction will net to zero. In adopting this understanding you might abstract from analysing the vertical transactions that introduced the high-powered money in the first place, but never deny its importance in setting the scene for the horizontal transactions to occur. I think the differences between Steve's models and modern monetary theory are two-fold. First, I do not think that Steve's model is stock-flow consistent across all sectors. By leaving out the government sector (even implicitly) essential insights are lost that would avoid conclusions that do not obey basic and accepted national accounting (and financial accounting) rules. This extends to how we define money. Second, I think Steve uses accounting in a different way to that which is broadly accepted. It might be that for mathematical nicety or otherwise this is the chosen strategy but you cannot then claim that your models are ground in the operational reality of the fiat monetary system we live in. I have no problem with abstract modelling. But modern monetary theory is firmly ground in the operational reality and is totally stock-flow consistent across all sectors. If we used the same definitions and rendered Steve's model stock-flow consistent in the same way as modern monetary theory then Steve's endogenous money circuits would come up with exactly the same results as the horizontal dimensions in modern monetary theory. His results might look a bit different in accounting terms but most of the message he wishes to portray about the dangers of Ponzi stages in the private debt accumulation process would still hold.

Billy Blog; blogs Archive; Debate; reply; spirt.

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.

Mon 2010-05-24 10:11 EDT

Hussman Funds - Weekly Market Comment: Don't Mess with Aunt Minnie - May 24, 2010

John P. Hussman

...Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications....Treasury Secretary Eddie Haskell/Timothy Geithner has scheduled a trip to Europe this week to urge European leaders "to pay better attention to potential market reactions to policy moves, and to accelerate the European rescue program." This promises to be a fiasco. What could European leaders possibly find more arrogant than to be lectured on bailout policy - not simply by the U.S., but specifically by a one-trick pony bureaucrat whose chief trick is the ability to smoothly talk the language of prudence while simultaneously pillaging the fiscal stability of an entire nation for the benefit of bondholders who made bad loans?...Providing Greece (and possibly some of its neighbors) a graceful exit from the Euro requires greater courage but lower ultimate cost - particularly to the citizens of Greece itself - than a policy of forcing heavy austerity, dislocations, and internal deflation within Greece. The effect of austerity policies will be to damage the revenue side of the Grecian economy enough to leave the deficits little changed in any event. One would like to go back a decade in time and choose different policies that would have allowed Greece to maintain the Maastricht deficit limitations, but it is far too late to push a full-grown genie back into an itty-bitty bottle...

2010; 24; Aunt Minnie; Hussman Funds; Mess; weekly market comments.

Sat 2010-05-22 21:31 EDT

It's Hard Being a Bear (Part Six)?Good Alternative Theory? | Steve Keen's Debtwatch

...Chartalism rejects neoclassical economics, as I do. However it takes a very different approach to analyzing the monetary system, putting the emphasis upon government money creation whereas I focus upon private credit creation. It is therefore in one sense a rival approach to the ``Circuitist'' School which I see myself as part of. But it could also be that both groups are right, as in the parable of the blind men and the elephant: we've got hold of the same animal, but since one of us has a leg and the other a trunk, we think we're holding on to vastly different creatures...a leading Chartalist, Professor Bill Mitchell from the University of Newcastle, [writes] a précis of the Chartalist argument...The fundamental principles of modern monetary economics, By Bill Mitchell...The following discussion outlines the macroeconomic principles underpinning modern monetary theory (sometimes referred to as Chartalism)... [MMT principles]

Bear; Good Alternative Theory; hard; part; Steve Keen's Debtwatch.

Credit Writedowns Sat 2010-05-22 20:55 EDT

MMT: Yes Virginia, There is a Difference Between Greece and the US

Marshall Auerback

...The cries of the deficit hawks grow louder: Repent all ye fiscal profligates, before the ``day of reckoning'' comes. Let's dial down the Biblical hysteria a wee bit while there's still time for rational debate. The market's recent response to the intensifying pressures in the euro zone suggests that investors are beginning to differentiate between countries that are sovereign issuers of currency, such as the US or Japan, and non-sovereign issuers, such as Greece or any other nations in the euro zone...That the US has the reserve currency is an irrelevant consideration here. The key distinction remains user vs. creator. The euro zone nations are part of the former; Canada, Australia, the UK, Japan and the US are representatives of the latter...Using ``PIIGS'' countries as analogues to the US or the UK, as Rogoff, Ferguson and countless other commentators do, is wrong. Their faulty analysis comes as a result of the deficit critics' failure to distinguish between the monetary arrangements of sovereign and non-sovereign nations. Any sovereign government (none within the EMU enjoy that status any longer) can deal with a collapse in revenue and an increase in outlays from a financial perspective without invoking the sort of deadlocks that are now crippling the EMU zone...Trying to engineer a reduction in the deficit via austerity programs (or freezes or whatever else one might like to call them) at a time when private spending is still insufficient to maintain adequate real GDP growth is a recipe for disaster. It will increase the deficit...

credit writedowns; different; Greece; MMT; Virginia.

Credit Writedowns Sat 2010-05-22 20:22 EDT

On debt monetization

...Scott Fullwiler has a post out today at the UMKC Economics Blog which answers whether `monetizing the deficit' is even more inflationary. I will present some of his ideas...There is no difference between the monetization scenario and the government bond sale scenario except in regards to the Fed Funds rate. So, in a situation in which the Fed Funds rate is essentially zero, the Federal Government does not have to issue any bonds at all. Moreover, there is no difference in terms of the inflationary impact as the two scenarios have identical impacts on base money...

credit writedowns; debt monetization.

Mish's Global Economic Trend Analysis Sat 2010-05-22 13:55 EDT

Richard Koo On Why This Recession Is Different; Mish On What To Do About It

Michael Shedlock

The Business Insider has a very interesting presentation by Richard Koo on The Real Reason Why This Recession Is Completely Different...The reason the recession is different is this is credit bubble busting depression not a recession. The effects are masked because of food stamps, unemployment insurance, and because of foreclosure policy...Koo blames cutbacks in fiscal stimulus in 1999 and 2001 as the reason Japan remains mired in deflation. I do not buy it...The real lesson is no matter how much money you throw around, economies cannot recover until noncollectable debts are written off...The moment fiscal stimulus stops economies are virtually guaranteed to relapse until the core problem is resolved. The problem is Asset Bubbles, Malinvestments, and debts that cannot possibly be collected...

different; Mish; Mish's Global Economic Trend Analysis; Recession; Richard Koo.

zero hedge Fri 2010-05-21 13:45 EDT

"If The US Can Do It, So Can We": Japan To Keep Pumping Cash And Monetizing Debt Until Deflation Goes Away

And with that Japan joins the competitive devaluation currency race...Speaking before lawmakers BOJ governor Masaaki Shirakawa, who recently said Japan was powerless to fight deflation on its own, has changed his tune, and today said that Japan will print the kitchen sink if it has to to beat "stubborn deflation."...Shirakawa noted that monetization is happily chugging along: "We are buying JGBs in order to inject ample funds into financial markets in a stable manner and we are buying Y21.6 trillion of JGBs annually" and he made it clear that adjusting for scale differences, the Japanese monetization program is three times faster than the Fed's Treasury QE...

Deflation Goes Away; Japan; Keep Pumping Cash; Monetize Debt; Zero Hedge.

PRAGMATIC CAPITALISM Tue 2010-05-18 15:15 EDT

A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

TPC

...the performance of the dollar is the surest evidence of the kind of environment we're currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world. The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high...As for the gold rally, I think it's clear gold is rallying in anticipation of its potential to become a future reserve currency. The potential demise of the Euro has become a rally cry for inflationistas who don't understand that the Euro is in fact another single currency system (like the gold standard) which is destined to fail. In the near-term, the rise in gold is likely justified as fear mongering and misguided governments increase demand for the yellow metal. Ultimately, I believe investors will realize that there is little to no inflation in the global economy and that the non-convertible floating exchange systems (such as the USD and JPY) are fundamentally different from the flawed currency system in place in Europe. Debt deflation continues to plague the global economy. Thus far, policymakers have been unable to fend off this wretched beast and I attribute this largely to the widespread misconceptions regarding our monetary systems. This extends to the very highest levels of government...Positioning yourself for hyperinflation and a U.S. dollar collapse has been a recipe for disaster and will continue to be a recipe for disaster as debt deflation remains the single greatest risk to the global economy.

DEFLATIONARY RED FLAG; PRAGMATIC CAPITALISM; U.S. dollar.