Sunday, July 17, 2011

The Neuroscience of the Debt Debate

Eleventh-hour negotiations aren't uncommon in Washington, D.C., but the most recent duel over the debt limit seems especially tense. Unless its debt ceiling is raised from its current $14.3 trillion, or its budget is miraculously balanced, the U.S. will default on its financial obligations on August 2, leading to a credit downgrade, delayed government payments and other serious economic troubles.Debt default is an outcome that's almost unanimously opposed, so the failure of decision-making feels especially frustrating. With such complex political gamesmanship at play, neuroscience and game theory may offer some insight into the stalemate, suggesting that a sense of moral superiority could be disrupting a natural tendency to cooperate.

From an immediate political perspective, the primary cause of the standoff is that Republicans won't raise the debt ceiling without major spending cuts, and they're unwilling to accept any tax increases as part of a deal. Needless to say, this position is a nonstarter for negotiation with the Democrats, many of whom want to increase tax revenues to ease the degree of the draconian cuts. At some point, a mutual decision will be made, leading both parties either to claim at least partial victory or to pass the responsibility to someone else.

Viewed with scientific detachment, whatever compromise eventually emerges will be a remarkable product of the complex neuronal calculus that goes into collectivedecision-making. Each brain in the House and Senate is trying to master an intricate game of strategy. Risk is being measured against payoff, stakes are being continually reassessed, and all of these calculations are updated fluidly as new information becomes available. Moreover, each congressional brain has to run a simulation of other brains to determine whether cooperation is likely—a feat with its own host of computational complexities.

Links — Two short summaries of MMT principles

James Juniper lectures in Economics at the University of Newcastle. He is an Associate of the Centre of Full Employment and Equity, whose director is Bill Mitchell, one the developers of MMT.

Neil Wilson is the publisher of 3Spoken, which provides economic analysis from an MMT perspective. He is a frequent contributor to MMT blogs. Neil is based in the UK.


[Reposted from The Center of the Universe]

Comments welcome, and feel free to repost:


Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!
And therefore, deficit reduction takes away our savings.



There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.
The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,
An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

Saturday, July 16, 2011

Financial Cycles

Three members of the Research Department of the International Monetary Fund have posted
at They cite useful data about credit, house price, and equity price and trace correlations among cycles. May not be not Minsky, but it's a step in the right direction.

What are the main lessons and policy implications?

Our study takes a first step in exploring financial cycles and documents two major features of these episodes:
Financial cycles can be long and deep, especially those in housing and equity markets.
Financial cycles accentuate each other and become magnified, especially during coincident cyclical episodes in credit and housing markets.

Our analysis suggests that it is important to account for the interactions among cycles in different financial market segments when designing regulatory policies aimed at ensuring the overall health of the financial system, especially in terms of the design of macroprudential rules. For example, our results indicate that, as cycles in credit and housing markets tend to enhance each other, if both credit and house prices are growing rapidly, then it might be necessary to employ stricter rules and standards for mortgage lending as well as larger countercyclical buffers to moderate fluctuations in banks’ capital positions.

Friday, July 15, 2011

Dr. Housing Bubble — "The impending slow motion doom for housing"

The real estate market is destined for a slow and painful adjustment for the upcoming decade. The demographic shift and also the reality that the current generation will be poorer than the baby boomers will make it difficult to sustain home values even at current levels. Our economy is largely driven by the financial sector and their asset of choice is real estate.

Yet we are running out of options when it comes to keeping real estate values inflated. We’ve tried artificially low interest rates with the Federal Reserve buying up mortgage backed securities with no natural market demand. We’ve tried tax credits. We’ve even tried ignoring homeowners who miss mortgage payments as a method of artificially keeping supply low. Yet home prices continue to move lower in tandem with lower household incomes. Home prices in the U.S. are now back to 2003 levels painfully retracing a decade long boom. But as we are now realizing, no amount of financial engineering can come up with a free lunch....

Thursday, July 14, 2011

Graphs speak louder than words

L. Randall Wray at EconoMonitor, Household Borrowing and Debt
Randy's conclusion: "Combine that with tighter fiscal policy and another Great Depression cannot be ruled out."

Wednesday, July 13, 2011

Let's end the "money printing, dollar debasing" argument once and for all.

This is going around a lot. It’s this ridiculous false notion that the Fed is printing money and that it has “debased” the dollar.

First of all, the Fed has NO ABILITY TO CREATE NEW MONEY. Only the government can do that via spending. The Fed can only affect the DURATION and COMPOSITION of financial assets held by the private sector. PERIOD!!

Now, on this point that the Fed “money printing” (NOT) has caused the value of the dollar to decline, let’s look at the facts.

Below I give you the US Dollar Index and the size of the Fed’s balance sheet.

Date                 Dollar Index Value             Fed’s Balance Sheet
3/14/2008            71.66                                        $921 bln
7/13/2011            75.24                                        $2.9 TRILLION!

So, here are the FACTS…over the past three years the Fed expanded its balance sheet by $2 TRILLION and the dollar went UP!!!!!!!!!!!!!!!!!!!!!!!!!


Tuesday, July 12, 2011

Who's buying them now? (con'd)

Bill Gross, I hope you are listening.

Today, the Treasury did their first post-QE2 3-year note auction that went off AT THE LOWEST INTEREST RATE OF ANY 3-YEAR AUCTION SINCE THE BEGINNING OF THE QE2.

Thank you, Matt Franko!

Matt Franko is a frequent contributor to this blog.

3-year Note Auction Today: Lowest Rate Since BEFORE the Fed's QE2

Today's high rate at the first 3-year Treasury Auction since the end of the QE2 resulted in the LOWEST 3-year note yields since before the start of the Fed's QE2 back in mid November 2010. Below is a Table of the dates of all of the 3-year auctions for the subject time period and the high rates for that date.

7/12/2011 0.670%

QE2 ENDS 6/30/2011

6/7/2011 0.765%
5/10/2011 1.000%
4/12/2011 1.280%
3/8/2011 1.298%
2/8/2011 1.349%
1/11/2011 1.027%
12/7/2010 0.862%

11/8/2010 0.575%

So the empirical data suggests that the Fed's QE2 operation raised the risk free interest rate for the 3-year point of the term structure. This is the opposite of what we are typically led to believe concerning the Fed's QE2 project, that is, that this Fed program lowered interest rates out the term structure. The data says otherwise.

Maybe businesses and households can now enjoy lower financing costs now that the Fed has finally exited the Treasury market.

Bill Gross: "Who will buy them now?"

Bill Gross is looking more and more like the most confused and frustrated guy in the investment business. Remember his ridiculous "tweet" back in late June when he said to the world, "Who will buy them now?" He was referring of course, to U.S. Treasuries and fretting publicly (or hoping, since he is purportedly short the US bond market) that there won't be anyone around to buy bonds now that the Fed is ending its Quantitative Easing program. When he tweeted that, yields on 10yr Treasuries were 3.16%. Today the yield is 2.89% and guess what? No Fed.

Gross still doesn't understand that government spending CREATES the funds that are used to buy Treasuries and, therefore, there is NEVER a lack of funds (or buyers) for these securities. If Gross ever "gets it" it would be nice if he explained it to another misinformed clown, Rick Santelli of CNBC, who rants about this constantly. After nearly 20 years on the air covering the bond markets and screaming about "supply" and "lack of buyers" before every single auction, you'd think he'd catch on by now.

The sad part is that both these guys have influence on policy. We are all affected in some way by their ignorance.

Monday, July 11, 2011

Thoughts on the Link Between Peak Oil and Peak Debt

Gail the Actuary at Our Finite World has a post today on The Link Between Peak Oil and Peak Debt – Part 1.

There is a good discussion in progress, and I've elucidated the MMT position in several comments.

In my view, money and energy are two sides of the same coin. Money fuels the financial economy, turning the wheels of commerce, and energy fuels the real economy, turning the wheels of industry and agriculture. Both are flow issues and can be approached similarly on that basis.

For 80% of Americans, the US is in a depression

More stores across the U.S. that offer deeply-discounted products are seeing their sales decline after years of growth amid America’s “Great Recession” — and one analyst said on Monday it’s another sign of even deeper downturn.

“I think what’s going on in those stores is that we are in a depression for 80 percent of Americans,” top retail analyst Howard Davidowitz told KNX 1070.

America’s three largest discount chains — Dollar General Corp., Family Dollar Stores Inc. and Dollar Tree Inc. — all recently missed their quarterly earnings targets.

Get ready for the second leg down.

Should economists be good, or be good Libertarians?

The world's largest association of economists is considering ethics guidelines after outrage about undisclosed conflicts of interest, but only a handful of its 18,000 members have bothered to offer any input.

The American Economic Association earlier this year charged a five-person panel with looking into ethics and economics -- in part a response to the 2010 documentary "Inside Job" that vilified a number of big-name economists for arguing in favor of deregulation while on Wall Street's payroll.

The film also notably skewered former Federal Reserve Governor Frederic Mishkin, who wrote a glowing paper about Iceland's financial system in 2006 -- for which he was paid by the Icelandic Chamber of Commerce. Two years later, the country's financial system collapsed.
So what is the consensus among the economists? Turns out that they don't want to violate their Libertarian principles.
Card said it is possible the AEA's conflict of interest guidelines will be written along similar lines but said any code would be difficult to enforce.
"We are very modest about the possibility of actually policing badly-intended people," he said. "How can you figure out who got paid by who if they don't want you to know?"
Card added that the committee is reluctant to be too prescriptive."
"Economists have lots of flaws, but there is a general belief that economists don't like to tell other people what to do. This particular committee is made up of a broad group of people but no one who is a tell-other-people-what-to-do type of person."

Geithner calls spending cuts what they really are: tax increases

On Face the Nation yesterday, Treasury Secretary Geithner said that the proposed cuts in Medicare would reduce medical coverage for seniors by a total of $6,500 per year. He called that "the same thing as a tax increase."

Finally, someone high up in the Administration characterized spending cuts as what they really are: the fiscal equivalent of tax increases. The only difference being, who they affect. Tax increases fall primarily on upper income people whereas spending cuts (tax increases) are borne by the middle and lower income earners.

So the hypocrisy of Republicans should have been exposed. While Republicans stand united against tax increases (for the wealthy), they are advocating tax increases for the middle class and poor.

Saturday, July 9, 2011

"There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud"

Washington's Blog: There's No Recovery Because the Government Made it Official Policy Not to Prosecute Fraud
Fraud caused the Great Depression and it has caused the current financial crisis. But fraud is not not being prosecuted, and so it will occur again and again, and prevent a sustainable economic recovery.

Numerous economists have been saying this for years.
Not enough attention is being paid to this. Of course, the situation is highly complex and there were man causal and contributory factors. But the proximate cause of the Great Depression and the Global Financial Crisis (GFC) was Ponzi finance, typical at the culmination of a financial cycle according to Hyman Minsky's financial instability hypotheses. So far, much too little attention has been paid to this and and as a result the crisis is lingering and far from resolved.

MMT is well aware of this. MMT economist and developer L. Randall Wary was a PhD student of Hyman Minsky, for example. William K. Black was one of the earliest and loudest voices warning about massive control fraud."

Owing to capture, those responsible for oversight were suborned, Black charges. Owing to the same influence, politicians conveniently lost the plot and erected strawmen to attack. The result is a problem that continues to fester.

UPDATE: Randy Wray explains the gory details:
But that is easy to overlook in Washington/Wall Street since the biggest financial institutions escaped with barely a scratch, and have returned to the same practices and rewards that caused the GFC. By hook and by crook, Wall Street also escaped re-regulation as the flaccid Dodd-Frank Act avoided any fundamental reform. In any case, the Republicans have made clear that they will not provide new funding to regulatory agencies, so even the weak rules in the Act will never get enforced. And, so far (fingers crossed!) none of the big Wall Street crooks has been prosecuted for high crimes. Yes there have been some fines and civil cases, and a few lesser criminals like Bernie Madoff were sacrificed, but all the big banksters are not only free—they are still running their criminal organizations (called “chartered banks” in polite conversation), advising the White House, and gearing up to fund the next presidential campaign.

All of that is to say that financial reform is deader than Elvis. Nothing can be done until the next Wall Street-induced crash. But I am an eternal optimist—the crash will come soon—and so it is time to enumerate the lessons we should have learned from the GFC so as to prepare the reforms that should have been adopted.

Rodger Malcolm Mitchell: Understanding Debt

Rodger Malcolm Mitchell at Monetary Sovereignty: Why bank lending leads to recessions. A counter-intuitive finding.
In summary, federal deficit spending is good for the economy, always good, endlessly good (up to the point of inflation). Private and local government spending/borrowing also is good, but not endlessly. Unlike the federal government, the private and local-government sectors eventually reach a point where debt is unaffordable and unsustainable.

To prevent recessions, the government continuously must provide stimulus spending, then provide added stimulus spending to offset the periodic reduction of money creation by the private sector.

These data call into question the popular belief that encouraging bank lending stimulates the economy. While short-term effects may be positive, long-term bank lending seems to lead to recessions, as servicing loans becomes ever more onerous for the monetarily non-sovereign sectors. In contrast, Federal deficit spending easily is serviced by the government, and therefore is preferable to private borrowing as a stimulus.
Mitchell demonstrates how this is true using the evidence of charts. Take a look.

The point of sex: parasite evasion

Now researchers have discovered that animals reproduce together, rather than simply cloning themselves, because it helps them to ward off parasites.

The findings support the evolutionary theory that blending of two animals' genomes creates an offspring with a new genetic code which may make it more resistant to attack, experts said.

Cross-fertilisation helps creatures stay a step ahead in the continuous "arms race" with parasites, which are forever evolving to try and infect them.

Biologists have described the situation as "Running with the Red Queen" in reference to the character in Lewis Carroll's Through the Looking-Glass, who tells Alice: "It takes all the running you can do, to keep in the same place."
Interesting article. Now how do we apply this knowledge to economics and finance to evade economic and financial parasites infecting our body politic?

Friday, July 8, 2011

"Saving money" to reduce the deficit by redefining inflation indexing

Bruce Krasting:
Those making Less Than $100k would get hit by the highest percentage. Those that make $500k-1mm do pay 0.1% more, but the really fat cats making over a Mil don’t feel it at all.
Fortunately, this time the AARP is on the case.

Tim Duy: "No way to put lipstick on this pig"

Tim Duy at Fed Watch is perplexed:
The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.
By trying to avoid becoming the next Greece, the US is becoming the next Japan.

Bachmann & Goolsbee On the Economy

U.S. Rep. and Presidential candidate Michelle Bachmann was interviewed on CNBC this morning right after the lackluster employment report came out from the Labor Dept.

Of course she is out of the MMT paradigm, but she shows how easy it is to score political points against the President on the issue of the economy.

Later CNBC had outgoing Obama Administration economic policy advisor Austan Goolsbee on for an interview, video below:

Unfortunately Goolsbee also is out of the MMT paradigm, and there is really not much difference between what Goolsbee comes up with here and what Rep. Bachmann came up with in her interview. They often sound the same here.

Both are unable to propose any real solutions to the current problem of lack of employment growth in the U.S. because both are economic morons foolishly concerned about the debt and the fiscal deficit in our current environment of a domestic output and demand shortage. This leaves fiscal policy options off the table for now for both political parties.

As both parties have managed to somehow back themselves into a political corner against an apparently new "third rail" of politics, the debt and deficit, I have to think that political pressure will again build on Fed Chairman Bernanke to "do something" to help foster employment growth through what has proven to be an impotent and probably damaging monetary policy.


The views expressed may contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. This material represents an assessment of the market and conditions at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The opinions expressed here are the author's and do not reflect any opinion of John Thomas Financial, my Broker/Dealer, or any of its Affiliates. Securities offered through John Thomas Financial, Member FINRA/SIPC/NASDAQ. Accounts are carried by Sterne Agee, LLC, Member NYSE/SIPC.