More Balanced Budget Nightmare

As long as we have articles like this about the deficit, our economy is screwed.

Senate Republicans have endorsed a call for a constitutional amendment requiring the government to balance its budget after Tea Party candidates made erasing the deficit a rallying cry throughout the U.S. election campaign.

While the calls may be urgent, even Washington’s leadingdeficit foes say it will take decades to balance the books.

We are doomed if these guys get control of the federal budget.  They do not understand that the Federal Government needs to run a Deficit to finance Private Savings.

Government Savings + Private Savings + Foreign Savings = 0

What does Foreign Savings mean for a reserve currency like the USD – or for that matter, any currency?

Will our Recovery technically be a Recession?

I am starting to wonder about our next recovery.  I suspect that while we will have something that feels really good to the consumer, we might technically have a double dip recession!

Our inventory build up has been so large and the change so dramatic, that we must slow down inventory growth – it is all but a certainty.  Additionally, inventories get drawn down during fast expansions – it is difficult to build inventories when facing a deluge of orders.

Combine a deluge of new orders, plus low future orders according to the ISM, and record inventory growth, and you have a recipe for negative inventory growth.

Ireland GDP a Charade?

Some Incredible facts and figures about Ireland from the FT: Exports 80% of its GDP. 20% of its GDP comes from value added accounting tricks from U.S. Companies.

As Simon Johnson points out, much of Irelands GDP is probably a charade – and any restructuring would point out that most Eurozone banks are insolvent.

This country could fall off the GDP cliff.

 

Soros says we need more stimulus

Soros is the best speculator in history. He says we need more stimulus. You’d think that this alone would give him some respectibility in the financial world, but it seems that people listen to people like John Cochrane instead of the best speculator in history.

Also, I just don’t understand how people fail to understand Chartalism. For people like Scott Sumner, it involves making a huge distinction between Cash money and T-Bills. He really thinks that having cash instead of T-Bills makes a difference.

T-bills are so close to cash money that they are accepted by the Chicago Mercantile Exchange at zero haircut.

 

MMT Part I: The Government gets to spend all it wants*

I see lots of people around the internet misunderstanding the basics of Modern Monetary Theory (MMT).  It is not their fault.  There are few easy to understand descriptions of MMT.  Warren Moslers 7 Deadly Innocent Frauds is very good, but even this doesn’t give the whole vision in a few sentences.

The problem is not that MMT is difficult to understand – it isn’t.  The problem is that there is not a well established set of talking points that people can use as mental crutches to work through the ideas.

The usual story of money creation is easy:  The Fed has a printing press, and can create all the money it wants.    MMT doesn’t have anything like this – at least until this series.

First, lets restate that simple statement about money creation into one that is factually accurate:

The Government Treasury has a printing press, and it can create all the money it wants.

This is the major difference between MMT and the traditional view of the money creation process.  But while this seems like a trivial distinction, it is huge.  It makes a difference so large that no one post can contain it – heck, a series of books wouldn’t be enough.

This difference profoundly impacts the world financial system – and so few people even know about it that it makes me want to cry.  We are much poorer than we need to be because MMT is not widely understood.

The Government Treasury has a printing press, and it can create all the money it wants.

To understand Modern Monetary Theory (MMT), you need to think differently about the entire money creation process.  Do not try to put it into any framework until you are pretty sure you understand the very basics. Imitate, then innovate.

If you try to put it into a trading model or other framework too soon, you will miss the important basics, and then make egregious errors in the analysis.   Start simple.

Again:

The Government Treasury has a printing press, and it can create all the money it wants.

In your mind:

Does QE really do anything? Nope.

There has been so much fear over the last few years that inflation will smash the U.S. economy.  The reason given is that the fed is printing tons and tons of money through quantitative easing.

Here is the plain truth about Quantitative easing – it does not print money.  It exchanges cash money for term money.  Quantitative easing is as though the Treasury has issued 3 month T-bills instead of longer term paper, that is all.

Even quantitative easing that purchases MBS instead of Treasury notes is similar in effect – it is a swap of 3 month T-bills for MBS.

That is why this video is not even wrong:

The fed isn’t printing money – the money was created when the Treasury spent more than it received in taxes.   Federal Reserve actions with any Treasury bill are about the price of borrowing at term, and not the quantity of money.

If there was a Dollar Crash, what would people trade into?

I keep asking this question, I have yet to hear a good answer.  For the U.S. Dollar to crash, some other market must absorb all of that selling with lots of buying.

What market would that be?  Now, as a practical issue, this market must be large enough to absorb several trillion Dollars of buying, perhaps as much as 4 trillion. Only a few markets could potentially handle this much buying.  Even spread across many markets, this much buying is too much.

So let us be more precise in our question.  If the U.S. Dollar crashed, what gigantic asset class(es) would have a the largest rally in human history?

My basic take is that there is not any asset class, or combination of asset classes, large enough to absorb this much buying.

Emerging markets simply do not have enough value to justify a tripling of their current valuations.  Ditto on the non-US stock markets. Real Estate is radioactive across the globe in developed countries, and not large enough in emerging markets.  Plus, anyone that’s ever been outside the U.S. knows – our buildings are really, really nice compared to other places.

The total GDP of the BRIC countries (in PPP) is close enough to the total GDP of the US that they could potentially absorb a massive amount of buying.  However, this would entail at least three impossible things:

1. A doubling of their stock markets
2. A doubling of their currencies values
3. cutting bond yields in half for these countries
4. using Brazilian Reals, Russian Roubles, and Indian Rupees as reserve currencies

Numbers 2 and 4 are particularly impossible.  If their currencies went up this much, these export dependent countries would be plunged into deep, deep recessions.

James Grant – a very smart man – makes this horrible mistake in the pages of the New York Times.  The U.S. Dollar cannot plunge without something else having a massive rally.  But he bases his entire article on something impossible, or close enough to impossible that it probably won’t happen in my lifetime of 50-60 more years.

He recommends gold as a way to create a sound dollar.  I just do not know what the point of a sound dollar program is either, but that is beside the point.  He is afraid of monsters under the bed and in the closet, laying in bed quaking in fear like a 5 year old, calling out for daddy gold to rescue him from his imagination.

Long Term 30 Year Yield Chart – Where are we?

I keep hearing about how inflation will flood the world.  I just do not see it in this chart.

Still, if you look to the last years, you might say that this is a inverted head and shoulders.

IMF Power Grab disguised as Gold Bug bait

Until people understand that value cannot be stored outside of something actually valuable, the economy is doomed. Money is first and foremost a medium of exchange- the store of value is a second derivative related to the medium of exchange function of money.

Money gets its initial value from the unique ability to extinguish tax liabilities. Note even the article about Shell Money from wikipedia makes this quite clear. The shells had value because you needed to supply 1000 of them per year to the king! Sounds like a head tax to me.

Here is the head of the IMF proposing an idea designed to have money better store value.  This looks like a power grab to me through an appeal to Gold Bugs, and not a real proposal designed to help the world.

Andy Xie mistakes cause and effect

Xie gets cause and effect wrong. China locked their currency to the U.S. dollar, not the other way around. Blaming the U.S. for wanting to feel the effect of QE is projection – a basic psychological error.

QE I (thats right – the first round, much less QE II) would not be viewed as necessary without the Chinese Currency lock. If china had let their currency float 3 years ago, the Yuan would have been at least 10% stronger now. The first round of QE would have caused 2.5 to 3% inflation in the U.S. and other countries. Chinese inflation would be much less as well.