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

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

--- Javier Finkman <finkman@xxxxxxxxxxxxx> wrote:
> Did ever arrive complete? Because I only saw Paul
> Davidson´s excerpts.
>
> 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.

MY POINT IS THAT 'RISK FREE' RATES WILL GO AS DIRECTED
BY THE FED.  THEY ARE NOT *DIRECTLY* SUBJECT TO MARKET
FORCES.

> None of them had provided the dynamics (short pieces
> not incompetence, obviously).

VERY SIMPLY, THE FED VOTES ON THE RATE.

>
> 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)?

THEY EITHER STOP SELLING IN THE US OR THEY START
BUYING US GOODS.  THOSE ARE THE ONLY TWO CHOICES.
YES, THE PRICE ADJUSTMENTS TO MAKE THIS 'HAPPEN'
COULD BE VIA AN EXCHANGE RATE SHIFT.

 As a
> matter of behaviour, demand for Japanese assets -by
> Japanese themselves- looks pretty solid.

???  JGB'S ARE ISSUED AS ALTERNATIVE TO YEN RESERVES
AT THE BOJ.

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

HOW IS THIS DEFINED?
>
>
> 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...
>
OK, BUT, AGAIN, DEPENDS ON HOW MEASURED.

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

ONLY IF THE CENTRAL BANK VOTES THEM HIGHER.

WARREN MOSLER
>
> 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@xxxxxxxxx
> > >>
> > >>
> > >> You should critique this and send to
> > >> pkrugman@xxxxxxxxxxxxxx
> > >
> > >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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> > >> Copyright 2002 The New York Times Company
> > >>
> > >>
> > >
> > >
> > >=====
> > >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
> >
> >
> >


=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
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Primary email contact:  mosler@xxxxxxxxxxxxxx

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