Fw: NYTimes.com Article: A Fiscal Train Wreck

["Javier Finkman" <finkman@xxxxxxxxxxxxx>]

Did ever arrive complete? Because I only saw Paul Davidson´s excerpts.

 

----- Original Message -----

From: Javier Finkman

To: PK List

Sent: Monday, March 17, 2003 6:08 AM

Subject: Re: NYTimes.com Article: A Fiscal Train Wreck

Essentially, Mosler reply to Krugman´s article disputes how interest rates would react to higher fiscal deficits presumably financed with debt. The rest follows from the different conclusion about rates behaviour (for both sides).

 

Krugman was too mechanical in his reasoning: rates could go up but not necessarily. The same applies to Mosler: rates could stay down but not necesarily. None of them had provided the dynamics (short pieces not incompetence, obviously).

 

The US could be Japan but I presume that the demand for US assets is more volatile. What would happen if and when foreigners decided that the US current account deficit went too far (sorry high)? As a matter of behaviour, demand for Japanese assets -by Japanese themselves- looks pretty solid.

 

There is one significant difference between both countries: external data.

 

Japan and US current account relative to GDP 1985-2004 (OECD data and estimates):

 

Japan

3.7

4.2

3.4

2.7

2.1

1.5

2.0

3.0

3.0

2.7

2.1

1.4

2.2

3.0

2.6

2.5

2.1

3.2

3.8

4.2

United States

-2.8

-3.3

-3.4

-2.4

-1.8

-1.4

0.1

-0.8

-1.2

-1.7

-1.4

-1.5

-1.5

-2.3

-3.2

-4.2

-3.9

-4.9

-5.1

-5.3

 

Their trade balances in USD billions:

 

Japan

54.9

90.7

91.3

92.3

80.3

69.2

96.2

124.7

139.4

144.1

132.1

83.7

101.6

122.5

123.3

116.6

70.3

98.5

115.1

130.3

United States

-122.2

-145.1

-159.6

-127.0

-117.7

-111.0

-76.9

-96.9

-132.5

-165.8

-174.2

-191.0

-198.1

-246.7

-346.0

-452.4

-427.2

-477.5

-504.4

-542.2

 

In addition, not a minor difference, their gross national savings as percentage of nominal GP rate:

 

Japan

30.3

31.2

32.0

32.2

32.7

33.6

33.6

33.5

34.4

33.6

32.0

30.1

29.6

29.9

30.2

29.1

27.6

27.7

..

United States

16.3

18.5

17.2

15.4

15.9

17.2

16.7

15.9

16.1

15.1

15.0

15.8

16.4

16.7

17.6

18.3

17.9

18.0

16.1

 

By the way, not an essential part of my story but debt to GDP is much different when you considered both gross and net. On the gross side of general government gross financing liabilities relative to GDP, Japan looks uglier (sorry higher) but not 5 times...

 

Japanb

67.7

71.2

71.6

69.6

66.7

64.6

61.1

63.5

69.0

73.9

80.4

86.5

92.0

103.0

115.8

123.4

132.6

142.7

151.0

159.2

United States

59.0

62.6

64.1

64.7

65.0

66.6

71.4

74.1

75.8

75.0

74.5

73.9

71.4

68.3

65.3

59.5

59.7

60.7

62.0

62.5

 

Nevertheless, the net...

 

b Japan

35.0

33.7

27.9

23.7

19.4

12.4

6.4

7.3

10.1

12.1

16.9

21.6

27.9

38.0

45.2

50.4

58.4

67.2

75.5

83.7

United States

41.9

45.4

47.4

48.5

48.7

49.9

53.6

57.1

59.1

59.7

59.2

58.8

56.7

53.0

48.7

43.7

42.9

44.3

45.6

46.2

 

This should make a difference and definitely increases the likelihood that rates would go up rather than down.

 

I leave the mechanics aside but I am in good company. You can imagine them (or let`s open another thread for dicussing them).

 

Regards,

 

Javier Finkman

 

 

 

 

----- Original Message -----

From: "pdavidso" <pdavidso@xxxxxxx>

To: "Warren Mosler" <mosler@xxxxxxxxxxxxxx>

Cc: <pkt@xxxxxxxxxxxxxxxx>

Sent: Thursday, March 13, 2003 2:19 AM

Subject: Re: NYTimes.com Article: A Fiscal Train Wreck

> I think your reply to the Krugman article is great Warren!
>
> Paul
>
> >===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
> >--- fthayer@xxxxxxxx wrote:
> >> This article from NYTimes.com
> >> has been sent to you by fthayer@xxxxxxxx.
> >>
> >>
> >> You should critique this and send to
> >> pkrugman@xxxxxxxxxxxxx.
> >
> >FRED,
> >
> >HOW ARE YOU???!!!
> >
> >CC'd to the good Dr., but he's probably too far 'out
> >of paradigm' to expect a response.
> >
> >>
> >> fthayer@xxxxxxxx
> >>
> >>
> >> A Fiscal Train Wreck
> >>
> >> March 11, 2003
> >> By PAUL KRUGMAN
> >>
> >>
> >> With war looming, it's time to be prepared. So last
> >> week I
> >> switched to a fixed-rate mortgage. It means higher
> >> monthly
> >> payments, but I'm terrified about what will happen
> >> to
> >> interest rates once financial markets wake up to the
> >> implications of skyrocketing budget deficits.
> >
> >MUCH LIKE JAPAN.  DEBT TO GDP 5X THE US, 7%
> >ANNUAL DEFICITS, DOWNGRADED TO JUNK, YET 3 MOS
> >JGB'S FUND AT .0001$ AND 10 YEAR JGB'S AT .7%.
> >
> >MORAL:  RATES GO UP IN US ONLY IF FED RAISES THEM
> >OR MARKETS EXPECT FED TO RAISE THEM.  NOT BECAUSE
> >OF DEFICITS PER SE.
> >>
> >> >From a fiscal point of view the impending war is a
> >> lose-lose proposition. If it goes badly, the
> >> resulting mess
> >> will be a disaster for the budget.
> >WE NEED A FED DEFICIT OF AT LEAST 5% OF GDP, MAYBE
> >7%+ TO RESTORE NON GOVT NET FINANCIAL 'SAVINGS'
> >AND SUFFICIENT AGGREGATE DEMAND TO USE UP OUR
> >EXCESS CAPACITY (ESPECIALLY LABOR!).  REMEMBER
> >GOVT DEFICIT = NON GOVT SURPLUS OF NET FINANCIAL
> >ASSETS.
> > If it goes well,
> >> administration officials have made it clear that
> >> they will
> >> use any bump in the polls to ram through more big
> >> tax cuts,
> >> which will also be a disaster for the budget. Either
> >> way,
> >> the tide of red ink will keep on rising.
> >
> >IT WILL RISE ANYWAY, JUST A QUESTION OF HOW.
> >PROACTIVELY VIA SPENDING INCREASES OR TAX CUTS,
> >OR THE UGLY WAY- FALLING REVENUES AND INCREASED
> >TRANSFER PAYMENTS AS INSUFFICIENT AGG DEMAND
> >BITES HARDER.
> >
> >>
> >> Last week the Congressional Budget Office marked
> >> down its
> >> estimates yet again. Just two years ago, you may
> >> remember,
> >> the C.B.O. was projecting a 10-year surplus of $5.6
> >> trillion.
> >
> >IN OTHERWORDS, A DROP OF $5.6 T IN NON GOVT SAVINGS!
> >THAT WAS A RIDICULOUS PROPOSITION!  NON GOVT SAVINGS
> >IS THE 'FINANCIAL EQUITY' THAT SUPPORTS THE CREDIT
> >STRUCTURE.
> >
> > Now it projects a 10-year deficit of $1.8
> >> trillion.
> >
> >I WOULD GUESS A 'NEUTRAL' DEFICIT FOR 10 YEARS
> >WOULD BE ABOUT 3% OF GDP, WHICH IS ABOUT 5 TRILLION
> >(DON'T HOLD ME TO THE EXACT MATH HERE!)
> >
> >>
> >> And that's way too optimistic. The Congressional
> >> Budget
> >> Office operates under ground rules that force it to
> >> wear
> >> rose-colored lenses. If you take into account - as
> >> the
> >> C.B.O. cannot - the effects of likely changes in the
> >> alternative minimum tax, include realistic estimates
> >> of
> >> future spending and allow for the cost of war and
> >> reconstruction, it's clear that the 10-year deficit
> >> will be
> >> at least $3 trillion.
> >
> >FOR SURE, AS ABOVE, JUST A QUESTION HOW, NOT HOW MUCH,
> >OVER TIME.
> >
> >>
> >> So what? Two years ago the administration promised
> >> to run
> >> large surpluses. A year ago it said the deficit was
> >> only
> >> temporary. Now it says deficits don't matter. But
> >> we're
> >> looking at a fiscal crisis that will drive interest
> >> rates
> >> sky-high.
> >
> >ONLY IF THE FED RAISES THEM.
> >
> >>
> >> A leading economist recently summed up one reason
> >> why:
> >> "When the government reduces saving by running a
> >> budget
> >> deficit, the interest rate rises." Yes, that's from
> >> a
> >> textbook by the chief administration economist,
> >> Gregory
> >> Mankiw.
> >
> >IT'S BACKWARDS, WITH ALL DUE RESPECT, TO THE DYNAMICS.
> >WHEN GOVT RUNS A DEFICIT, NON GOVT FINANCIAL SAVINGS
> >GOES UP BY THAT EXACT AMOUNT, TO THE PENNY, AS A
> >MATTER OF ACCOUNTING.  IT'S AN ACCOUNTING IDENTITY!!!
> >
> >>
> >> But what's really scary - what makes a fixed-rate
> >> mortgage
> >> seem like such a good idea - is the looming threat
> >> to the
> >> federal government's solvency.
> >>
> >> That may sound alarmist:
> >IT IS!  GOVT SPENDS ONE WAY ONLY- BY CREDITING
> >A MEMBER BANK ACCOUNT.  THERE IS NO SOLVENCY ISSUE.
> >
> > right now the deficit,
> >> while huge
> >> in absolute terms, is only 2 - make that 3, O.K.,
> >> maybe 4 -
> >> percent of G.D.P. But that misses the point.
> >AGREED!  (FOR A DIFFERENT REASON, OF COURSE!)
> >
> >
> > "Think
> >> of the
> >> federal government as a gigantic insurance company
> >> (with a
> >> sideline business in national defense and homeland
> >> security), which does its accounting on a cash
> >> basis, only
> >> counting premiums and payouts as they go in and out
> >> the
> >> door.
> >
> >EXCEPT IT 'ISSUES' IT'S OWN CURRENCY!
> >
> >
> > An insurance company with cash accounting . .
> >> . is an
> >> accident waiting to happen." So says the Treasury
> >> under
> >> secretary Peter Fisher;
> >
> >AGREED, WHEN IT'S LIABILITIES ARE IN SOMEONE ELSE'S
> >CURRENCY!
> >
> > his point is that because of
> >> the
> >> future liabilities of Social Security and Medicare,
> >> the
> >> true budget picture is much worse
> >YOU MEAN 'HIGHER' I PRESUME...
> >
> > than the
> >> conventional
> >> deficit numbers suggest.
> >>
> >> Of course, Mr. Fisher isn't allowed to draw the
> >> obvious
> >> implication: that his boss's push for big permanent
> >> tax
> >> cuts is completely crazy.
> >
> >NOT.
> >
> > But the conclusion is
> >> inescapable. Without the Bush tax cuts, it would
> >> have been
> >> difficult to cope with the fiscal implications of an
> >> aging
> >> population.
> >
> >WHAT DOES 'FINANCE' IN ONE'S CURRENCY OF ISSUE
> >HAVE TO DO WITH THE DEPENDENCY RATIO????????
> >
> > With those tax cuts, the task is simply
> >> impossible.
> >
> >A SOCIAL SECURITY PAYMENT CONSISTS OF GOVT CREDITING A
> >MEMBER BANK ACCOUNT.  THAT'S ALL IT CAN BE.  LIKE A
> >TEACHER HANDING OUT GOLD STARS....
> >
> > The accident - the fiscal train wreck -
> >> is
> >> already under way.
> >
> >WHAT'S GOING TO HAPPEN?  TSY CHECKS GOING TO BOUNCE?
> >FED EMPLOYEE GOING TO GET AN ELECTRIC SHOCK WHEN HE
> >TRIES TO CREDIT A MEMBER BANK ACCOUNT?????
> >
> >>
> >> How will the train wreck play itself out?
> >
> >DEPENDS ON THE UNDERSTANDING OF THOSE THEN IN
> >CONTROL.  INFLATION MAYBE.  BUT NO BOUNCED GOVT CHECKS
> >FOR SURE.
> >
> >Maybe a
> >> future
> >> administration will use butterfly ballots to
> >> disenfranchise
> >> retirees, making it possible to slash Social
> >> Security and
> >> Medicare.
> >
> >THEY MAY INDEED USE THESE TYPES OF ARGUMENTS TO CUT
> >BENEFITS!  THEY ALREADY ARE!  YOU AND YOUR FIXED
> >EXCHANGE RATE ANALYSIS ARE PART OF THE PROBLEM, NOT
> >PART OF THE ANSWER!
> >
> >
> > Or maybe a repentant Rush Limbaugh will
> >> lead the
> >> drive to raise taxes on the rich. But my prediction
> >> is that
> >> politicians will eventually be tempted to resolve
> >> the
> >> crisis the way irresponsible governments usually do:
> >> by
> >> printing money, both to pay current bills and to
> >> inflate
> >> away debt.
> >
> >THERE IS ONLY ONE WAY FOR GOVT TO SPEND.  THEY
> >CREDIT AND ACCOUNT.  THERE IS NO DISTINCTION BETWEEN
> >'PRINTING MONEY' AND ANY OTHER WAY OF SPENDING ONE'S
> >OWN CURRENCY.  THIS IS A FLOATING EXCHANGE RATE
> >REGIME- THE CURRENCY IS NON CONVERTIBLE- GET WITH THE
> >PROGRAM!!!
> >>
> >> And as that temptation becomes obvious, interest
> >> rates will
> >> soar.
> >
> >ONLY IF THE FED RAISES THEM...
> >
> >It won't happen right away. With the economy
> >> stalling
> >> and the stock market plunging, short-term rates are
> >> probably headed down, not up, in the next few
> >> months, and
> >> mortgage rates may not have hit bottom yet. But
> >> unless we
> >> slide into Japanese-style deflation,
> >
> >THE LAST MAJOR NATION TO ALLOW ITS BUDGET TO GO INTO
> >SURPLUS AND WIPE OUT HEAPS OF PRIVATE SECTOR NET
> >FINANCIAL EQUITY WAS JAPAN IN 1987-1982...
> >
> > there are much
> >> higher
> >> interest rates in our future.
> >
> >JUST AS SOON AS THE FED IS PROMPTED TO ACT.
> >>
> >> I think that the main thing keeping long-term
> >> interest
> >> rates low right now is cognitive dissonance.
> >
> >NOT SUPPLY AND DEMAND???????  WHO WOULD HAVE THOUGHT..
> >
> > Even
> >> though
> >> the business community is starting to get scared -
> >> the
> >> ultra-establishment Committee for Economic
> >> Development now
> >> warns that "a fiscal crisis threatens our future
> >> standard
> >> of living"
> >
> >NOW YOU SAY IT THREATENS REAL OUTPUT???  WITH TODAY'S
> >LACK OF AGG DEMAND THE OUTPUT GAP IS MASSIVE AND
> >GROWING.  AND YOUR THINKING SERVES TO PERPETUATE IT.
> >
> >
> > - investors still can't believe that the
> >> leaders
> >> of the United States are acting like the rulers of a
> >> banana
> >> republic. But I've done the math, and reached my own
> >> conclusions - and I've locked in my rate.
> >>
> >FRED, THIS IS A DISGRACE TO THE ECONOMICS PROFESSION.
> >
> >BEST,
> >
> >WARREN
> >
> >
> >>
> >>
> >>
> >>
> >http://www.nytimes.com/2003/03/11/opinion/11KRUG.html?ex=1048390999&ei=1&en=a
> 845d2139fa4e693
> >>
> >>
> >>
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> >>
> >>
> >
> >
> >=====
> >http://www.mosler.org
> >      http://www.moslerauto.com
> >
> >Primary email contact:  wmosler@xxxxxxxxxx
> >
> >__________________________________________________
> >Do you Yahoo!?
> >Yahoo! Web Hosting - establish your business online
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>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> phone # (561)369-1951; fax #(561)369-1951;
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>
>
>