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 Fri 2010-07-23 17:08 EDT

Deficits Do Matter, But Not the Way You Think

L. Randall Wray

In recent months, a form of mass hysteria has swept the country as fear of ``unsustainable'' budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government's stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still -- likely -- years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson's well-funded public relations campaign, fronted by President Obama's National Commission on Fiscal Responsibility and Reform -- a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness...[however] the notion of ``fiscal sustainability'' or ``solvency'' is not applicable to a sovereign government -- which cannot be forced into involuntary default on debts denominated in its own currency...If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve...

Deficit; matter; naked capitalism; Think; way.

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.

Credit Writedowns Mon 2010-07-19 12:08 EDT

Misunderstanding Modern Monetary Theory

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)." The gist of Krugman's post was to refute Modern Monetary Theory's view on money and deficits...Krugman's post mischaracterizes both MMT and Galbraith's statement...Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world...the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can't spend at will under MMT; eventually the output gap closes and inflation becomes a big problem...

credit writedowns; Misunderstanding Modern Monetary Theory.

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.

Wed 2010-06-09 18:45 EDT

London business figures embroiled in Kaupthing fraud investigation: Serious Fraud Office team thought to be to be scrutinising Deutsche Bank's role in alleged suspect trades| Business | The Guardian

Simon Bowers| The Guardian

A Serious Fraud Office investigation into Kaupthing, the failed Icelandic bank, is understood to be pursuing a number of allegations of market manipulation involving investment vehicles controlled by some of the bank's largest clients, including several high profile UK business leaders. It is alleged that in the weeks and months before Iceland's financial system went into meltdown, certain trades improperly used at least €500m (£413m) of Kaupthing funds in an effort to manipulate credit derivatives. Bank bosses hoped this would restore crumbling confidence in Kaupthing's solvency in the months before the bank collapsed in October 2008...The effect was for investment vehicles -- financed by Kaupthing loans, and at least nominally controlled by some of the bank's largest clients -- to take on risk associated with the bank going bust. Kaupthing loans were being use to write insurance against Kaupthing bonds defaulting...Iceland's Truth Commission obtained details of emails sent by Deutsche Bank staff to Kaupthing which, according to its report, demonstrated that the German bank had been offering advice on how to influence the CDS price on Kaupthing bonds from early 2008...

alleged suspect trades; business; Guardian; Kaupthing fraud investigation; London business figures embroiled; scrutinising Deutsche Bank's role; Serious Fraud Office team thought.

The Money Game Fri 2010-03-19 12:38 EDT

Kenneth Rogoff's Sovereign Debt Warnings Are So Wrong, It's Like He's Living In A Different Time Period

Marshall Auerback

We've persistently taken the view that there is no economic doctrine, no magic number, which would imply a firm external constraint as far as public spending goes, when dealing with a sovereign government issuing debt its own floating rate, non-convertible currency. At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue. Yet the hysteria surrounding fiscal policy has moved from the realm of rational debate and metamorphosed into a matter of national theology...A sovereign government is never hostage to the dictates of financial capital because it no longer faces the external constraint that was always present under a gold standard regime. A nation that adopts its own floating rate currency can always afford to put unemployed domestic resources to work. Its government may issue liabilities denominated in its own currency (for interest rate maintenance reasons or to offer its savers an interest-bearing alternative to cash), and will service any debt it issues in its own currency...

different time periods; Kenneth Rogoff's Sovereign Debt Warnings; lively; Money game; wrong.

Mish's Global Economic Trend Analysis Sun 2010-02-07 18:15 EST

Nonperforming Loans in China Rise to "Trillions of Renminbi"

Michael Shedlock

Inquiring minds are questioning the solvency of the Chinese banking system. Please consider China Defaulting Loans Soar, Insolvency Lawyer Says. Non-performing loans in China have risen into the ``trillions of renminbi'' because of poor lending practices, an insolvency lawyer said...The US, led by Hillary Clinton and president Obama, is putting enormous pressure on China to float the RMB, in expectation that it would rise and US exports would soar. I believe that if China floated the RMB on the Forex markets, it might crash.

China rises; Mish's Global Economic Trend Analysis; nonperforming loans; renminbi; trillion.

Thu 2009-10-08 17:04 EDT

After subverting bank insolvency, our leaders are now about to make a mess of liquidity

FT.com | Willem Buiter's Maverecon

Unless there is a major change of direction among global economic and financial officialdom, we are at risk of ending up with a world in which liquidity provision is privatised and insolvency risk for banks is socialised. This would be the exact opposite of what makes sense: solvency is (or should be) a private good and liquidity is (or should be) a public good...The authorities should not waste their limited organisational capital to force banks to provide inefficiently the public good of liquidity when confidence and trust are low. They should instead focus on ways of enforcing hard budget constraints on banks - to confront them with the realities of insolvency in a way that separates shareholders, unsecured creditors, boards and managers from their investments while leaving the bank as a functioning organisation capable of continued intermediation.

leaders; liquidity; makes; Mess; subverting bank insolvency.

The IRA Analyst Mon 2009-09-21 17:23 EDT

Exposure at Default: As Banks Shrink, So Does the Economy

...before Treasury Secretary Tim Geithner and the other G-20 finance ministers set about to raise capital levels, they need to understand that the earnings of the banking industry are going to be impaired for years as the cost of resolving failed banks is repaid. Restoring solvency is the first issue for many banks, then we can talk about increased capital and restrictions on risk taking equally. And as the banking industry shrinks defensively in order to conserve capital and fund liabilities impaired by realized losses, the credit available to the US economy also shrinks. You can't have economic growth without credit growth...Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices.

Banks Shrink; default; economy; exposure; IRA Analyst.

naked capitalism Sun 2009-09-20 11:53 EDT

Financial Reform: Not happening but the need is clear

Edward Harrison of Credit Writedowns

If you are looking for reform in the financial sector, the moment has passed. And only to the degree that the underlying weaknesses in the global financial system are made manifest and threaten the economy will we see any appetite for reform amongst politicians. So, as I see it, the Obama administration has missed the opportunity for reform...Steve Keen, an Australian economist whose theories are heavily influenced by Hyman Minsky, has a cogent analysis of the true structural deficits in the current economic model...today we have finally reached a level of debt which is so great that another reflation is impossible. The collapse is now....unlike Keen, I am not convinced the time is now...What I would like to see is economic thought leaders developing a blueprint of a financial crisis strategy which tackles both the immediate crisis issues (liquidity) and the structural, regulatory and monetary issues that create financial volatility (solvency). When crisis does occur, I believe it will be systemic in nature due to the forces Keen so lucidly explains. Therefore, a blueprint which is 1) heavy on tactics and, 2) if implemented in a real systemic crisis, is likely to work, builds credibility. This is political capital which will carry over to longer-term preventive strategies and reforms.

clear; Financial reform; happened; naked capitalism; needed.

The IRA Analyst Fri 2009-07-24 00:00 EDT

The Institutional Risk Analyst: Mortgage Duration Risk: The Banks Are No Longer the Problem

``Washington has indeed fixed the solvency problems of the large zombie banks...by turning them into GSEs via FDIC guarantees on their debt.''

bank; Institutional Risk Analyst; IRA Analyst; longer; Mortgage Duration Risk; problem.

Tue 2009-06-16 00:00 EDT

Calculated Risk: Bank Balance Sheet: Liquidity and Solvency, Part II

bank balance sheets; Calculated Risk; liquidity; parts II; solvency.

Tue 2009-06-16 00:00 EDT

Calculated Risk: Bank Balance Sheet: Liquidity and Solvency, Part I

bank balance sheets; Calculated Risk; liquidity; part; solvency.

Fri 2008-11-07 00:00 EST

We have successfully transformed credit risk into solvency risk

by Euro Intelligence Adivsors

solvency risks; successfully transformed credit risk.

Fri 2007-11-02 00:00 EDT

Mish's Global Economic Trend Analysis: Question of Solvency at Citigroup

Citigroup; Mish's Global Economic Trend Analysis; questions; solvency.