billy blog Tue 2010-08-31 18:22 EDT

Monetary policy under challenge ... finally

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City...some notable presentations...suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker [BOE deputy Charles Bean] indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession....

Billy Blog; challenges; final; monetary policy.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-30 15:41 EDT

China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes Uncovered

...a report [Fitch] released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system... [moreover, Yi Xianrong,] an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country... China's banks are increasingly becoming more opaque in data presentation, which one can assume is due to their unwillingness to reveal the true state of affairs... [According to] Xianrong ``investment in the domestic property market has completely overturned China's traditional concepts of wealth management and investment and its price formation system'' [Chinese real estate bubble]

65; China; covert funding; dropped; housing bubble; long; survival rate; Time larger; Timeline; Vacant Homes Uncovered; zero; Zero Hedge.

Credit Writedowns Thu 2010-07-29 17:00 EDT

James Montier does MMT

It seems that a lot of analysts have caught onto the MMT framework popularized by the late economist Wynne Godley and made topical in this downturn by Rob Parenteau of the Richebacher Letter...Now, it's James Montier's turn...He concluded: ``There is a danger the proposed fiscal tightening in the eurozone will lead to further deflation and economic collapse. The Spanish government faces what Mr Parenteau calls ``the paradox of public thrift'': the less it borrows, the more it will end up owing. It is unfortunate that it has taken a severe global recession to vindicate Prof Godley's macroeconomic analysis. If economic policymakers start to pay more attention to financial balances, they might forestall the next crisis. European politicians might also understand the potentially dreadful consequences of their new-found frugality.'' ...A downward shift in the government's net fiscal deficit means a downward shift in the private sector's net fiscal surplus -- totally doable except for this little thing called debt in places like Spain, the US, Ireland or the UK. Moreover, the savings rate is already incredibly low in countries like the U.S. and the U.K. If the government tries to pare its fiscal deficit, the result will not be less private sector savings to meet the lower public sector deficit, but rather lower aggregate demand and a larger deficit -- that's the paradox of thrift...

credit writedowns; James Montier; MMT.

Wed 2010-07-28 10:55 EDT

Economics: No, America lacks the necessary commitment to stimulus | The Economist

Richard Koo

...the US today is suffering from a balance sheet recession, a very rare ailment which happens only after the bursting of a nationwide debt-financed asset price bubble. In this type of recession, the private sector is minimising debt instead of maximising profits because the collapse in asset prices left its balance sheets in a serious state of excess liability and in urgent need of repair...fiscal stimulus becomes indispensible in a balance sheet recession. Moreover, the stimulus must be maintained until private sector deleveraging is over...When the deficit hawks manage to remove the fiscal stimulus while the private sector is still deleveraging, the economy collapses and re-enters the deflationary spiral. That weakness, in turn, prompts another fiscal stimulus, only to see it removed again by the deficit hawks once the economy stabilises. This unfortunate cycle can go on for years if the experience of post-1990 Japan is any guide. The net result is that the economy remains in the doldrums for years, and many unemployed workers will never find jobs in what appears to be structural unemployment even though there is nothing structural about their predicament...

America lacked; economic; Economist; necessary commitments; stimulus.

Wed 2010-07-21 10:31 EDT

Social Democracy for the 21st Century: A Post Keynesian Perspective: Galbraith versus Krugman on Deficit Spending

In a recent post, Paul Krugman has criticised James K. Galbraith's view of deficit spending. The latter is obviously influenced by Modern Monetary Theory...Krugman has misunderstood Galbraith...Galbraith understands that there are real constraints on deficit spending, not phantom ``financial'' ones. Moreover, it is perfectly clear that Galbraith is talking about deficit spending during a period of high unemployment and low capacity utilization, and perhaps even in the face of a double dip recession. In his response to Galbraith, Krugman adopts the flawed quantity theory of money and attempts to prove mathematically what is perfectly obvious: that hyperinflation can result from continuous budget deficits that are monetized by the central bank. But, since Modern Monetary Theory already acknowledges that inflation is a real constraint on deficit spending, Krugman's analysis seems rather pointless.

21st century; deficit-spending; Galbraith versus Krugman; Post Keynesian Perspective; social democracy.

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.

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 Tue 2010-05-18 16:29 EDT

Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust

Michael Shedlock

Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it's both. China's property and infrastructure bubbles are massive; that is for certain. Moreover, China's biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs. While it's doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest. Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not. ... The "China Story" that most of the world is in love with is nothing more than excess credit finding a home in malinvestments just as happened in the US.

Asia; Begins; canaries; China; China credit; coalminer; Euro Bailout Lovefest; Mish's Global Economic Trend Analysis; participated; real estate bust.

naked capitalism Thu 2010-04-22 18:21 EDT

Guest Post: Are Interest Rate Derivatives a Ticking Time Bomb?

Washington's Blog

...Most economists and financial institutions assume that interest rate derivatives help to stabilize the economy. But cumulatively, they can actually increase risky behavior, just as portfolio insurance previously did. As Nassim Taleb has shown, behavior which appears to decrease risk can actually mask long-term risks and lead to huge blow ups. Moreover, there is a real danger of too many people using the same strategy at once... Given that the market for interest rate derivatives is orders of magnitude larger than credit default swap market -- let alone portfolio insurance -- the risks of a ``black swan'' event based on interest rate derivatives should be taken seriously...

Guest Post; Interest Rate Derivatives; naked capitalism; ticking time bomb.

Tue 2010-04-20 10:58 EDT

Get the Yuan Right, Prove Pundits Wrong: Hype over an 'imminent' increase in yuan value ignores China's greater need for higher interest rates and fewer bubbles

Andy Xie

Unless China exits its economic stimulus quickly, the nation's inflation rate could rise to double digit levels sooner than many expect. The right sequence of events for a proper response to inflation would be to raise interest rates and then, if necessary, move the yuan exchange rate. But acting on the currency first, especially in small steps, would further inflate China's property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan's value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure...

bubble; higher interest rate; hype; imminent; increased; proving pundits wrong; Yuan right; yuan value ignores China's greater need.

Mish's Global Economic Trend Analysis Mon 2009-10-12 09:22 EDT

One Hand Clapping Theory Analyzed

Michael Shedlock

Numerous people have asked me to comment on Chris Martenson's article The Sound of One Hand Clapping - What Deflationists May Be Missing. Chris Writes: ...``Trillions in probable and provable losses quietly exist, out of sight, on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct beyond all doubt. But let me ask this: What prevents the authorities from simply storing them out of sight forever?...I am now wondering if they cannot keep this up indefinitely.'' ...In a credit based economy, the odds of a sustainable rebound without bank credit expanding, and consumers participating is not very good. Even if one mistakenly assumes that the recent rally is a result of pretending, should we count on sustained success now more so than a measurement of stock prices in April of 1930, or any of Japans' four 50% rallies? I think not. Pretending cannot accomplish much other than prolonging the agony for decades. This is the message of Japan. Moreover, the US is arguably is worse shape than Japan because our problems are unsustainable consumer debt, high unemployment, and massive retail sector overcapacity. Those are structural problems that no amount of pretending in the world can possibly cure. In due time, the market will focus on those problems.

hand clapping theory analyzed; Mish's Global Economic Trend Analysis.

Mish's Global Economic Trend Analysis Mon 2009-09-21 14:09 EDT

Is Pent-Up Inflation From Fed Printing Waiting On Deck?

Michael Shedlock

Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed...Hardly. A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks. Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts, banks need those reserves to cover future losses...banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow.

deck; Fed Printing Waiting; Inflation; Mish's Global Economic Trend Analysis; pent.