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.

Mon 2010-09-20 10:14 EDT

Mish's Global Economic Trend Analysis: Fictional Reserve Lending And The Myth Of Excess Reserves

...1) Lending comes first and what little reserves there are (if any) come later. 2) There really are no excess reserves. 3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional". 4) Banks are capital constrained not reserve constrained. 5) Banks aren't lending because there are few credit worthy borrowers worth the risk. ...concern that excess reserves will lead to lending and inflation is totally unfounded in theory and practice. Fractional Reserve Lending is really Fictional Reserve Lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans.

excess reserves; Fictional Reserve Lending; Mish's Global Economic Trend Analysis; myth.

naked capitalism Fri 2010-09-17 18:52 EDT

Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?

... Big finance has an unlimited credit line with governments around the globe. ``Most subsidized industry in the world'' is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large...The usual narrative, ``privatized gains and socialized losses'' is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported...banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction...

bank; fiction; Keep Indulging; naked capitalism; private enterprise.

Fri 2010-07-16 18:09 EDT

A Blistering Ride Through Hell: Key Property Charts to Make Sense of This Week's Housing Numbers and This Year's Financial Crisis - Michael David White -- Seeking Alpha

Michael David White

Housing inventory rising, housing price versus housing inventory may imply dramatic price falls; deleveraging is a myth; mortgage bubble; negative equity; forecasts total fall in property prices about half over, another 20% to go.

Blistering Ride; hell; Key property charts; make sense; Michael David White; Seeking Alpha; Week's Housing Numbers; year's financial crisis.

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 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

zero hedge Fri 2010-01-15 17:46 EST

Is The Mysterious "Direct Bidder" Simply China Executing 'Quantitative Easing' On Behalf Of The Federal Reserve?

...we make the claim that the Fed has now informally offloaded the Treasury portion of Quantitative Easing to China, which does so via the elusive Direct Bid. It also explains why the Fed has generically been much less worried about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7 trillion in monetization). It does beg the question of just how much Chinese holdings of US Debt truly are, as this number is likely hundreds of billions higher than the disclosed $799 billion...if there is indeed an implicit understanding between Bernanke and his Chinese colleagues, it means that not only the housing market (via Agency and MBS security purchases), but the Treasury market as well, are both manipulated beyond recognition and implies that broad securities are massively overvalued due to the stealth purchasing of core "riskless" assets by the US and China, as investors look higher in the cap structure for yield. Lastly, implications for world trade are great, as Asian countries will have to deal not only with the Chinese behemoth, which will constantly seek to keep its currency as low as possible, thus exacerbating the rest of Asia's foreign trade balances, but that of the US itself. The immediate implication is that China (or the US for that matter) will likely not reflate their currencies out of their own volition any time in the foreseeable future. Look for a much weaker dollar in the coming months.

behalf; Direct bidders; Federal Reserve; mysteriously; Quantitative Easing; Simply China Executing; Zero Hedge.

Thu 2010-01-07 19:18 EST

'Greater Depression' More Bullish for Gold than 1930s -- Seeking Alpha

...The current, global financial system is in the process of coming to an end -- one way or another. History teaches us it is highly unlikely that this transition can be accomplished without economic catastrophe. As the only superior currencies in existence, it is inevitable that gold and silver will benefit, as the inferior paper currencies (which we mistakenly call ``money'') suffer the same deaths that have awaited every other fiat currency, throughout history.

1930s; bullish; gold; Greater Depression; Seeking Alpha.

naked capitalism Tue 2009-12-29 09:03 EST

Guest Post: Investor Psychology ... Fear Turns People Into Sheep

George Washington

Investors are basically rational, right? In fact, as many studies have demonstrated, the answer is no...Rather than search rationally for information that either confirms or disconfirms a particular belief, people actually seek out information that confirms what they already believe. For the most part people completely ignore contrary information...

Fear Turns People; Guest Post; Investor psychology; naked capitalism; sheep.

Jesse's Café Américain Tue 2009-12-01 10:06 EST

Morgan Stanley Fears UK Default in 2010

Jesse

As you may recall we are bears on sterling, and view the UK as the Iceland of the G20.The monetary policies of the Bank of England were as bad as those of the Greenspan - Bernanke Fed. The difference is that the UK does not hold the world's reserve currency as a captive source of revenues. As an aside, we see that Bank of England advisor and economic franc-tireur Willem Buiter has decided to seek greener pastures as chief economist with Citi in the States. Timely exit. Bravo, Willem.

2010; Jesse's Café Américain; Morgan Stanley Fears UK Default.

zero hedge Wed 2009-11-25 12:13 EST

Two Opposing Amendments Emerge That Seek To Either Perpetuate The Fed's Secrecy, Or Overturn It

As the time to make or break the Fiat Money Overlords (no, not Chrysler), aka the Successor to the Second Bank of The United States which President Andrew Jackson managed to disassemble in 1832, yet which came back with a vengeance in 1913 under the guise of the Federal Reserve, approaches, two independent amendments emerged today: one drafted by Fed transparency proponents Ron Paul and Alan Grayson (found here) and one by Bank of America and Citigroup's favorite Congressman, North Carolina democrat Mel Watt (found here). As a reminder, here is a list of the Congressman's top contributors and sources of money in 2007-2008, which may explain some of his motivations: #1 Bank of America;#2 Wachovia Corp;#3 American Express;#4 American Bankers Assn.

Fed's Secrecy; Opposing Amendments Emerge; overturn; perpetual; seek; Zero Hedge.

naked capitalism Thu 2009-11-19 10:41 EST

Fed Authorized 100% Payout by AIG on CDS

It had generally been assumed that the AIG payouts of 100% on credit swaps (when the insurer was under water and bankrupt companies do not satisfy their obligations in full) was the result of some gap in oversight plus traders at AIG exercising discretion (they were unhappy about bonus rows and had reason to curry favor with dealers, who were potential employers). The article makes clear that AIG had been negotiating to settle on the swaps prior to getting aid from the government, and was seeking a 40% discount. The Fed might not have gotten that much of a discount, but there was clearly no need to pay out at par. This massive backdoor subsidy to the likes of Goldman, DeutscheBank was authorized by Geithner while he was at the New York Fed.

AIG; CDS; Fed Authorized 100; naked capitalism; payout.

Thu 2009-11-19 10:09 EST

The downfall of Washington Mutual - Puget Sound Business Journal (Seattle)

Kirsten Grind

WaMu suffered through not one but two bank runs in its final months. The first run was many times larger than the run that felled California lender IndyMac in July 2008, though neither shareholders nor the public knew about it. WaMu survived that run, and the second run was tapering off when regulators moved in and shut the bank, citing the run as the reason. In addition, WaMu's top executives, led by CEO Alan Fishman, were trying to sell the bank after federal regulators imposed a deadline, only to discover that they were being undermined by those same regulators, executives say. The government's plan to seize the bank, if it became known beforehand, would cause potential buyers to immediately cool their heels, because buying after a government takeover would be a lot cheaper than even the desperate private purchase deal that Fishman was seeking.

downfall; Puget Sound Business Journal; Seattle; Washington Mutual.

Tue 2009-10-27 13:06 EDT

Courthouse News Service

Bank of America and Countrywide Home Loans destroyed mortgage documents, and "recreate" them by "insert(ing) data as they see fit," to cover up their own failure to keep records - or their fraud - according to a federal RICO class action. "To cover up the servicing mistakes and fraud and misrepresentation in the servicing of a consumer escrow, Defendants 'recreate' letters, insert data as they see fit, and fail to produce the entire HUD complaint form. This way, a consumer is left in the dark about the fraud that occurred to them," the complaint states. Lead plaintiff Kim Gorham says that when she sent a letter seeking information about her escrow account, she was informed that it had been "destroyed by a letter opener."

Courthouse News Service.

naked capitalism Tue 2009-10-27 12:18 EDT

Guest Post: Capitalism, Socialism or Fascism?

George Washington of Washington's Blog

What is the current American economy: capitalism, socialism or fascism? ...Nouriel Roubini writes ``We're essentially continuing a system where profits are privatized and...losses socialized.'' Nassim Nicholas Taleb says ``the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren.'' Nobel prize winning economist Joseph Stiglitz calls it ``socialism for the rich'' ...leading journalist Robert Scheer writes: ``What is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as ``financial fascism'''' ...Italian historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because ``the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social'' ...one of the best definitions of fascism -- the one used by Mussolini -- is the ``merger of state and corporate power`` ...Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the causes of the S&L crisis and other financial meltdowns...[Looting is the] common thread [when] countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust...Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations ...Whether we use the terminology regarding socialism-for-the-giants (''socialized losses''), of fascism (''public and social losses''), or of looting (''left the government holding the bag for their eventual and predictable losses''), it amounts to the exact same thing. [kleptocracy] Great comments, including Joseph: Three core ideas characterize the myth of our society: 1. Free market; 2. Capitalism; 3. Democracy. The conceptual error that people make is to think that they are compatible, or indeed represent aspect of the same thing. In fact they are all deeply antagonistic towards each other. It is the miracle of post-war society that we managed to hold them in balance for so long. That balance has now been destroyed. A simple example of the contradiction, and the one that the over-socialised right finds most confusing, is the contradiction between capitalism and the market. Capitalism is a system of ownership; the market is a system of distribution. The perfect world for the capitalist is one in which they are price setters in terms of the commodities they produce and labour they employ -- ie a state of monopoly. Each individual capitalist seeks the destruction of the market. What has occurred over the past year is not corruption; it is the triumph of capitalism. The market and democracy have been defeated. Not socialism, not fascism,...

capitalism; Fascism; Guest Post; naked capitalism; social.

naked capitalism Tue 2009-10-13 19:53 EDT

Central Banks Diversifying Away from Greenback

Sentiment on the dollar is very bearish, and its long-term outlook is not promising at all. But this could point to either another leg down (the beginning of a disorderly slide that many observers worry about) or could also produce a snapback rally if an unexpected rise led to short covering (particularly if equities markets rallies were to fade and lead investors to seek cover until the dust settled in Treasuries). [dollar losing reserve currency status]

Central Banks Diversifying; greenback; naked capitalism.

The Big Picture Mon 2009-10-12 10:03 EDT

Fixing Derivatives Regulation

Any plan that seeks to reverse the unregulated wild west that derivatives have existed in since 2000 must have a simple beginning: Repeal the Commodity Futures Modernization Act. This ruinous and corrupt legislation, pushed through by the Bonnie & Clyde of deivatives, Enron Board member Wendy Gramm, and her astonishingly clueless ideologue husband, former Texas Senator (and current UBS member) Phil Gramm, lay at the heart of the current derivatives debacle. After Greenspan, Gramm is the single most culpable individual in terms of damaging the global economy.

Big Picture; Fixing Derivatives Regulation.

THE PRAGMATIC CAPITALIST Sun 2009-09-20 12:29 EDT

CHINA WILL BE A BIGGER BUBBLE THAN JAPAN >> Most Recent Stories >> THE PRAGMATIC CAPITALIST

SocGen analysts Dylan Grice says the Chinese economy has many similarities to the Japanese economy before it imploded in the 90's...the real cause of Japan's deflation is probably more demographic than debt-related...Japan has been the first industrial economy to begin demographic contraction. Indeed, thanks to Deng Xiaoping's 1979 one child policy, China will soon face the same problem...Japan's experience also hints at what may be the future catalyst unleashing this frenzy: capital account liberalisation. Financial history is filled with financial liberalisations gone wrong and Japan's bubble can be traced directly to the removal of controls on international capital flows and banking in the early 1980s. Seeking a larger international role for the renminbi, China is now, albeit tentatively, embarking on a similar path. Full liberalisation, when it occurs, could be the starting gun for the biggest bubble the world has ever seen.

bigger bubble; China; Japan; pragmatic capitalists; recent story.

zero hedge Wed 2009-09-02 20:01 EDT

Money On The Sidelines... 1930 Versus 2009

There is a saying, that everything new is just well-forgotten old. The same apparently is especially applicable to propaganda that seeks to part fools with their money. Today's brownie point question is: was the statement below just uttered by Larry Kudlow, or did it appear first more than 79 years ago? There's a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when ``cheerful sentiment is more firmly intrenched.'' Economists point out that banks and insurance companies ``never before had so much money lying idle.'' If you answered "the latter" you were correct. It first appeared on August 28, 1930 to be precise (and who knows how many times prior...

1930 Versus 2009; money; sidelined; Zero Hedge.

Mish's Global Economic Trend Analysis Thu 2009-08-27 10:52 EDT

Bankrupt Auto Parts Suppliers Seek $100 Million In Executive Bonuses

Michael Shedlock

In every corner, greed continues to amaze. Please consider Bankrupt suppliers seek exec bonuses. A growing number of bankrupt auto suppliers are seeking court approval to pay tens of millions of dollars in bonuses to key executives, as they shed employees and cut costs.

100; Bankrupt Auto Parts Suppliers Seek; executives bonus; Mish's Global Economic Trend Analysis.

Thu 2009-07-30 00:00 EDT

Hussman Funds - The Destructive Implications of the Bailout - Understanding Equilibrium - May 18, 2009

-- ``The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured...transferring wealth from those who did not finance reckless loans to those who did... the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.''

18; 2009; Bailout; Destructive Implications; Hussman Funds; Understanding Equilibrium.

Tue 2009-06-16 00:00 EDT

naked capitalism: Administration Seeking to Circumvent Restrictions Imposed on Bailout Recipients

Administration seeks; bailout recipient; Circumvent Restrictions Imposed; naked capitalism.