I will attend to the new list. 23:00
A sad and depressing time as the news is willfully ignorant.
Naked Capitalism has been busy:
Paul Krugman had a busy day:
Inaction is the Greatest Risk (Wonkish)
Brad DeLong
is exasperated with people who insist that the Fed’s modest moves
toward more support for the economy are “risky”, but can’t explain why
in any intelligible fashion. I agree. I also agree with Brad that the
starting point for any discussion has to be that right now matters
monetary are very out of whack, so that it’s just bizarre to angst about
how the Fed might “distort” markets that are already hugely distorted.
But my first take on the nature of that distortion is a lot simpler than Brad’s.
The key point is that we are in a liquidity trap — a situation in which even reducing policy interest rates to their lowest possible level isn’t enough to restore full employment. In terms of IS-LM analysis, the situation looks like this:
Another
way to look at the same thing is to draw the savings and investment
schedules that would prevail if the economy were at full employment,
which look like this:
The
point is that the “natural” interest rate, the rate that would match
savings and investment at full employment, is negative. And we can’t get
there, because of the zero lower bound (which in turn reflects the fact
that rather than accept negative rates, people can always just hold
cash. Yes, there are slight exceptions, but they’re trivial from a macro
point of view).
Now, you can talk about what has caused this situation; debt overhang and forced deleveraging is a prominent candidate. In any case, however, it exists. And the Fed’s duty is to try to correct the distortions this situation creates, above all the distortion of mass unemployment. It can do this by trying to raise expected inflation, so that the real interest rate falls even though the nominal rate can’t; it can try to correct it by buying risky assets, and thereby raising the natural rate.
Whatever it does, however, should be seen as an attempt to rectify a huge existing market failure, not as somehow distorting a well-functioning market. And the riskiest thing it could do is nothing, allowing the unemployment crisis to fester.
But my first take on the nature of that distortion is a lot simpler than Brad’s.
The key point is that we are in a liquidity trap — a situation in which even reducing policy interest rates to their lowest possible level isn’t enough to restore full employment. In terms of IS-LM analysis, the situation looks like this:
Now, you can talk about what has caused this situation; debt overhang and forced deleveraging is a prominent candidate. In any case, however, it exists. And the Fed’s duty is to try to correct the distortions this situation creates, above all the distortion of mass unemployment. It can do this by trying to raise expected inflation, so that the real interest rate falls even though the nominal rate can’t; it can try to correct it by buying risky assets, and thereby raising the natural rate.
Whatever it does, however, should be seen as an attempt to rectify a huge existing market failure, not as somehow distorting a well-functioning market. And the riskiest thing it could do is nothing, allowing the unemployment crisis to fester.
Further Notes on ONE TRILLION DOLLARS
So, in fiscal 2012 (which ended September 30) we did in fact have a federal deficit of $1.1 trillion (pdf). The question is, however, whether this deficit represents, as everyone claims, a fundamental mismatch between what we want and what we’re willing to pay for — or whether it’s mainly just a reflection of the depressed state of the economy.
For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.
That still leaves $700 billion. Where’s that coming from?
OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP — what the economy would have produced at full employment — was $16.5 trillion over the same period. And if the economy had been at more or less full employment, we wouldn’t just have collected taxes on the additional income; historically, the tax share of GDP varies strongly with the business cycle. If the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.
Meanwhile, on the spending side, a large part of the rise in spending came from “income security” payments — in this case, basically unemployment insurance and food stamps — which surged due to high unemployment, but are already coming down. Here’s what happened:
Put these together: $400 billion that doesn’t increase the debt-GDP ratio; $450 billion or so in slump-related revenue loss; $150 billion or more in slump-related expenses; and guess what: the ONE TRILLION DOLLARS is basically just a depressed-economy story, having nothing to do with any fundamental mismatch between what we want and what we’re willing to pay.
And this makes a lot of sense! The budget wasn’t deep in the red in 2007, and there have been no fundamental increases in government responsibilities or cuts in taxes since then (Obamacare won’t kick in until 2014, and it’s paid for in any case).
Let me say once again that this doesn’t mean all is well in the longer term. Baby boomers are retiring and health costs are still rising, so the budget prospect for 2020 or 2025 is troubling. But the current deficit has nothing to do with those troubles — which means that anyone who invokes ONE TRILLION DOLLARS to make a point about the budget thereby demonstrates that he has no idea what he’s talking about.
Whistling Past the Gun Lobby
Almost five years ago Thomas Schaller published an important book titled Whistling Past Dixie,
which basically argued that it was time for Democrats to stop running
scared of the views of Southern whites — they weren’t going to get those
votes anyway, and demographic change had proceeded to the point where
they could win national elections without the South. Indeed, so it has
come to pass: while Obama did win Virginia, he did it by appealing to
the new Virginia of the DC suburbs, not the rural whites, and otherwise
he had a totally non-Dixie victory.
So Nate Cohn argues that this same logic applies to gun control: the voters who care passionately about their semi-automatic weapons are rural whites who ain’t gonna vote Democratic in any case — and the new Democratic coalition doesn’t need them. David Atkins takes it further, saying the awful truth: the pro-gun fanatics are basically the kind of people who think that Obama is a Kenyan socialist atheistic Islamist, and the urban hordes are coming for their property any day now. People, in other words, who already vote 100 percent Republican — and lose elections.
As Cohn says, it’s not clear whether Democrats realize how things have changed. But maybe yesterday’s horror will provoke some fresh thought, and they’ll realize that this does not have to go on.
So Nate Cohn argues that this same logic applies to gun control: the voters who care passionately about their semi-automatic weapons are rural whites who ain’t gonna vote Democratic in any case — and the new Democratic coalition doesn’t need them. David Atkins takes it further, saying the awful truth: the pro-gun fanatics are basically the kind of people who think that Obama is a Kenyan socialist atheistic Islamist, and the urban hordes are coming for their property any day now. People, in other words, who already vote 100 percent Republican — and lose elections.
As Cohn says, it’s not clear whether Democrats realize how things have changed. But maybe yesterday’s horror will provoke some fresh thought, and they’ll realize that this does not have to go on.
"Greece’s bond buyback has succeeded,
after a fashion. There weren’t enough bids by the original deadline of
Friday, but then the offer was extended and two things happened. First,
Greece’s banks bowed to the inevitable and tendered all of their bonds,
rather than just most of them. And second, the Greek government made its
most explicit default threat yet:
Joseph Cotterill makes a good point: with the Greek banks now having been taken out of their bonds, the low-lying fruit for any future restructuring offer is now gone, which means that in any future restructuring, Greece is going to be dealing with hard-nosed hedge funds rather than complaisant domestic banks. That said, Greece might conceivably now have a nuclear option in its back pocket: the comments to Cotterill’s post are full of speculation that Greece might be able to find a way not to cancel the bonds its buying back. In which case it could use its new supermajority vote to cram down a very bad deal indeed on any holdouts.
All of which is to say that this buyback deal is increasingly feeling a lot like a second default, just months after the first one. It’s good for the optics of Greece’s debt-to-GDP ratio, and it doesn’t seem to be triggering any CDS. But it’s a useful lesson for any other European countries (Ireland and Portugal are the obvious next candidates) who are thinking about restructuring their private debts. You don’t necessarily need to do the whole deal at once: especially if you are clever in your use of collective action clauses, you can start with a small and insufficient haircut, and then follow it up with a second restructuring a bit further down the road. If your creditors are largely domestic banks, that could work out much better than socking them with one-off monster losses."
Stelios Papadopoulos, the head of the Public Debt Management Agency, stated “We have decided to extend the Invitation to offer Designated Securities for exchange to 11 December 2012. Holders that have not tendered so far can still take advantage of the liquidity opportunity offered by the Invitation. Investors should bear in mind that even if Greece accepts all bonds tendered in the Invitation, it will continue to engage with its official sector creditors in considering further steps to put its debt on a sustainable path. Future measures may not involve an opportunity to exit investments in Designated Securities at the levels offered for this buy back.”In English: you can hold on to your bonds and hope to get paid out in full, if you want — rather than accepting 33 cents on the dollar right now. But be aware: Greece has to do what its official-sector paymasters tell it to do. And if it takes “further steps to put its debt on a sustainable path”, who knows how much money you might end up with when it’s all over. Are you sure you don’t want to just take those 33 cents?
Joseph Cotterill makes a good point: with the Greek banks now having been taken out of their bonds, the low-lying fruit for any future restructuring offer is now gone, which means that in any future restructuring, Greece is going to be dealing with hard-nosed hedge funds rather than complaisant domestic banks. That said, Greece might conceivably now have a nuclear option in its back pocket: the comments to Cotterill’s post are full of speculation that Greece might be able to find a way not to cancel the bonds its buying back. In which case it could use its new supermajority vote to cram down a very bad deal indeed on any holdouts.
All of which is to say that this buyback deal is increasingly feeling a lot like a second default, just months after the first one. It’s good for the optics of Greece’s debt-to-GDP ratio, and it doesn’t seem to be triggering any CDS. But it’s a useful lesson for any other European countries (Ireland and Portugal are the obvious next candidates) who are thinking about restructuring their private debts. You don’t necessarily need to do the whole deal at once: especially if you are clever in your use of collective action clauses, you can start with a small and insufficient haircut, and then follow it up with a second restructuring a bit further down the road. If your creditors are largely domestic banks, that could work out much better than socking them with one-off monster losses."
http://robertreich.org/post/37861706928
Why is Washington Obsessing About the Deficit and Not Jobs and Wages?
"Thursday, December 13, 2012
It was the centerpiece of the President’s reelection campaign. Every time Republicans complained about trillion-dollar deficits, he and other Democrats would talk jobs.
That’s what Americans care about — jobs with good wages.
And that’s part of why Obama and the Democrats were victorious on Election Day.
It seems forever ago, but it’s worth
recalling that President Obama won reelection by more than 4 million
votes, a million more than George W. Bush when he was reelected — and an
electoral college majority of 332 to Romney’s 206, again larger than
Bush’s electoral majority over Kerry in 2004 (286 to 251). The
Democratic caucus in the Senate now has 55 members (up from 53 before
Election Day), and Republicans have 8 fewer seats in the House than
before.
So why, exactly, is Washington back to
obsessing about budget deficits? Why is almost all the news coming out
of our nation’s capital about whether the Democrats or Republicans have
the best plan to reduce the budget deficit? Why are we back to showdowns
over the deficit?
It makes no sense economically. Cutting the
budget deficit — either by reducing public spending or raising taxes on
the middle class, or both — will slow the economy and increase
unemployment. That’s why the so-called “fiscal cliff” is so dangerous.
In the foreseeable future our government has
to spend more rather than less. Businesses won’t hire because they still
don’t have enough consumers to justify additional hires. So to get jobs back at the rate and scale needed, government has to be the spender of last resort.
The job situation is still horrendous. Twenty-three million Americans can’t find full-time work. Less than 59 percent of the working-age population of the nation is employed, almost the lowest percent in three decades. 4.8 million Americans have been out of work for more than six months. The 40-week average spell of joblessness is almost three times the post-1948 average.
And even those who have jobs are finding it
harder to make ends meet. Jobs created since the trough of the recession
pay less than jobs that were lost. The median wage is 8 percent below
what it was in 2000, adjusted for inflation. And wages are still heading
downward: Average hourly earnings in October were 3.1 percent below what they were in October, 2010.
This isn’t just an ongoing tragedy for 23
million Americans and their families. It also robs all of us of what
these people would produce if they were fully employed – roughly $2
trillion worth of goods and services that won’t be created this year.
These folks would also be paying taxes — and they’d
require less unemployment insurance, fewer food stamps, and less public
assistance than they do now. According to estimates by Bloomberg News,
the total cost of those lost tax revenues and the extra social spending
is more than twice what taxpayers will shell out this year to pay
interest on the federal debt.
In other words, unemployment is hugely expensive.
Debt, by contrast, is relatively cheap. The yield on the 10-year
Treasury is only about 1.7 percent. Creditors worldwide are willing to
lend America money that won’t be repaid for a decade at the lowest rate
in living memory.
So why are we debating how to cut the deficit
when we should be debating how best to use the cheap money we can
borrow from the rest of the world to put more Americans to work?
Because too many Democrats inside and outside
the Beltway have ingested the deficit cool-aide that the “serious
people” on Wall Street have serving for two decades.
And the President has been all too willing to
legitimize their deficit obsession by freezing federal salaries,
appointing a deficit commission, and, now that the election is over,
going back to deficit-speak.
A month after the election Obama was on
Bloomberg Television saying business leaders need “a deal on long-term
deficit reduction” before they’ll increase hiring.
That’s just not true. Before they’ll increase hiring they need customers."I see that there is a list up. I will attend to that.
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