Archive for February, 2011

Straight from the Glorious Leader

February 23, 2011 25 comments

In case ya’all were thinking that MMTers think that spending is never inflationary.  It’s buried in the comments, but it is there.

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Will Saudi Arabi flood the oil market to keep their heads on their shoulders?

February 23, 2011 1 comment

Expect Saudi Oil Production to go up as fast as it fell

Saudi Arabi is the worlds biggest swing supplier of oil – they can decide to change the amount of oil supplied at to the world markets at nearly any time.  As recently as 2009, they were supplying about 1 million barrels more every day.

They will try to keep their heads on their shoulders in any way they can.  To prove this, about 6 moths ago they announced a $385bn, 5 year jobs program.  At 25k a job, this is 2.8m jobs, when the GDP per capita is only 23K.  You know that GDP isn’t spread equally per capita, so the average cost per job may be even less.  This is in a country with only 25m people.

I don’t know if this will be enough to keep a lid on oil prices.  I am just saying that the odds are very, very high that the Saudi Arabia is already pumping oil at a far greater rate than the most recent numbers show.

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Just Sayin…

February 22, 2011 Comments off

Koch Industries is known as being extremely litigious.  I have a friend who is a lawyer in a downtown firm in Chicago.  He told me they recommend to their clients if they do business with Koch in any material form to set aside additional money for future litigation.

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Two Minutes Hate: Why not accept the Basic Accounting of MMT?

February 22, 2011 4 comments

From the Comments:

Given that, I still cannot understand why it is so hard for people to grok the sectoral balances accounting identity
G-T = S-I + M-X
which makes it clear that for a country with CAD (M-X>0) such as ours government deficit G-T is absolutely necessary for domestic private sector’s surplus S-I. I did not study economics but I had the impression that this equation is taught in every elementary economics course. What is then the objection people might have to this simple fact? What am I missing?

If you look to why people don’t like MMT, Austrians are the leaders of the two minutes hate.  People like Bob Murphy hate the fact that money is and always has been a construct of the state.

Murphy mistakes assets for savings, and he doesn’t understand the fundamental powers of government. I’ll give him a very, very slight break – Austrians confuse the real and monetary economy as a badge of honor.  See the discussion of 1 for more details.

Discussion of Murphy’s mistakes: Murphy makes two fundamental mistakes.  The first mistake results from his confusion of assets and savings. Murphy doesn’t understand the meaning of the word savings in an national accounting sense, or deliberately confuses real and monetary accountings.

Wynne Godley's Matrix of Accounts

The word savings in national income accounting has a very specific meaning, and stock ownership isn’t part of the definition. Stock ownership isn’t part of the definition because of a simple reason – any transaction involving stock simply transfers money from one person to another person, and doesn’t create any money at all.  The amount of money in the system remains the same.

The goal of monetary accounting is to identify where the money is.  It is not to value investments and assets.

Really, he makes two different errors related to this identity, but I’ll roll them up into misunderstanding of the word savings.   (Aside: Wynne Godley does a better job with the accounts in his work and is must read  to further your understanding money.)

Murphy’s confusion of savings and assets can be demonstrated easily.  To have savings in a monetary economy, you must have those savings in money.  Owning and asset worth money is not savings, even though it may be a valuable asset that you could exchange for money.  In national income accounting, we count the money, not the valuable assets.  The total net worth of the United States is roughly $55 Trillion, nobody in their right minds would say we have $55 Trillion of savings, simply because worth and savings are two very different ideas.

His example of a bus driver buying stock is a perfect example of this error.  The bus driver has decreased his savings of $1000 to purchase an asset for $1000.  Somebody else now has the $1000 cash money and the bus driver has some stock that someone else owned, so the savings across the economy are the same.

Nowhere in any national accounting does this transaction make any difference – because the amount of cash and stock in the economy does not change.  There is still $1000 in cash out in the real world.

For any given currency, savings only matters across the entire economy. Yes, my personal savings matters to me. But if I hold my savings, and somebody else has a deficit that exactly equals my savings, overall, there is no savings in the economy.

Re Murphy’s second mistake:  Governments are different than all other entites.  Here is a quote:

But perhaps a clearer way to pinpoint the fallacy in Nugent’s argument is to tweak it ever so slightly. Note that there is nothing special in choosing the US federal government as the financial entity in question. Nugent could just as easily have argued, “The Murphy household deficit = non-Murphy-household savings (of net financial assets).” Then, if the data indicate that right now the Murphy household spends $10,000 more annually than it earns in income, while my wife’s Colombian relatives lend us $10,000 net this year, then US (government and private) net savings (vis-à-vis my household, that is) must be zero. Clearly I need to go buy some more Big Macs and plasma screen TVs lest the nation’s children find it literally impossible to put money in their piggy banks.

He is right – on an accounting level, there is no difference between people and governments.  The accounts are treated the same – debits and credits are debits and credits.

On a practical level, there is a massive difference. Governments have a monopoly on the legitimate use of force within a geographical area.  Murphy understands this as he demonstrates in his next section.  What he fails to understand is that as far as I know, the advance of civilization has been always and everywhere accompanied by  government and government issued money.  There is one non-contacted tribe in the Amazon who doesn’t pay any taxes, and Mr. Murphy is free to live where he chooses – so he could go live with them and not pay taxes on his earnings. But everyplace else on the globe requires the payment of taxes.

It seems like a universal law of human behavior – Humans use speech, use tools, create government, collect taxes.  Didn’t Ben Franklin have something to say about Death and Taxes?

In many ways, the story of civilization is the story of advances in government.  For example, there is an entire sub-discipline of economic history devoted to the investigation of why former English colonies have performed so much better than French colonies.

It appears that when the hand of government is light, modern weaponry allows brutal monsters to take control of the population with ease. See Northern Mexico for what happens when government abdicates responsibility within a region.

Do Austrians like the idea of Freedom, but hate actual Freedom?

Murphy is disgusted by this idea that people like government and are willing to pay for it.  In fact, a leading light of the “libertarian” movement, Peter Thiel has come to a similar conclusion.  Thiel says: “I no longer believe that freedom and democracy are compatible.”  Wow.  He must want a dictatorship where his ideas of freedom are enforced at gunpoint.

One of the more odd things about the Austrian arguments is that in many ways, MMT provides them with a huge tool set to do real research, but because they hate empirical study so much, they won’t bother.  Check out this quote from Murphy:

The standard Misesian/Hayekian explanation of the business cycle is that the commercial banks arbitrarily increase the supply of loanable funds, even though the community hasn’t actually increased its real savings.

That isn’t far from the MMT/Minksy view in some ways.  MMTers also say that banks are not constrained by deposits, and Minsky’s instability hypothesis is that banks increase lending (and go through his 4 levels of financing) due to competitive pressures until small, unexpected shocks make formerly profitable loans massively unprofitable. We’ve just done the accounting to show this is the case, instead of stating it as a truism.

There is another class of 2 minutes haters, and these are people who understand the math and accounting, but wave their hands because they don’t like the conclusions.  This includes people like Jessie over at Cafe American, and a few other people. They either mock the math as being defined as true and therefore meaningless, when nothing can be farther from the truth. As .  or simply don’t like the fact that you can actually do hard work and figure out with math something they’ve spent a lifetime talking about with mushy words.  I’ll have more on Jessie Thursday.

Are Investors Paying the U.S. 8% for the privilege of owning U.S. Debt? Zero Hedge and The Daily Capitalist think they are!

February 16, 2011 10 comments

I like to read both Zero Hedge and The Daily Capitalist.  I find Zerohedge perfectly amusing, but I actually get something out of The Daily Capitalist.

John Williams: The easiest way for the U.S. Government to get out of debt is to issue more debt.

But then, the Daily Capitalist quoted Shadow Stats – saying that inflation might be closer to 8% than 1%.  Fortunately, we have some market indication about what inflation might be.  The equation for Treasury rates is generally given as

Treasury Rates = Inflation Rate + Real Rate of Return


Real Rate of Return = Treasury Rate – Inflation Rate

The real rate of return is important, because this is how much money you make after you take inflation into account.  If you make a total return of 3% a year, but the inflation rate is 100% a year, you’re losing your ass in that investment, because you need 100% a year just to retain your purchasing power.

We know the yield for any maturity in the U.S. Treasury Market.  We have numbers from yesterday for the entire yield curve – the market for U.S. Treasuries is one of the most liquid in the world.  Let’s plug in the 6 month Treasury Rate and the Shadow Stats “8% inflation” number into see how much real return investors in U.S. Treasuries are getting.

RR of R = .16% – 8% = -7.84%

-7.84% Real Return.  A negative real return!!  These investors are losing truckloads of money in real terms!  That means that investors are so desperate for Treasuries, they are willing to pay nearly 8% to lend money to the U.S. government for 6 months.  Do you believe investors are paying money to hold U.S. debt?  I do not.

If Shadow Stats is correct, issuing debt is a money making operation for the U.S. government.  If these investors are getting a -7.84% return, that means the U.S. government is making 7.84% on every dollar it lends! That’s a solid return.

Clearly, the best way for the U.S. to get out of debt would be to lend as much money as possible right now – because they are making 8% a year on just lending money!

Of course, this isn’t the case.  The U.S. government is not getting paid to lend money, and it is not making 8% on every Dollar it borrows.

I pointed this out a few days ago, but it bears repeating.  Shadow Stats is very, very, very wrong about inflation.

Was the bond selloff entirely due to Pimco selling at least $100bn of Treasuries??

February 16, 2011 1 comment

Bill Gross runs the largest bond funds in the world.  His flagship fund has $250bn of bonds in the fund.  In September, 51% of the fund was in Treasuries.  By the end of December, only 22% of the fund was in bonds. Today, only 12% of the fund is in bonds.

This is a sale of about $100bn in bonds over that time.  In the first three months, the fund sold about $75bn of bonds.  This is a gigantic flow of bonds by any measure.

But this $250bn fund is only a fraction of the entire Pimco fixed income allocation. Pimco manages over $1,300bn as of the end of 2010.  Pimco says the “bulk” of the money is devoted to fixed income investing.  “Bulk” to me means 80% or more – which given $1.3tn in total funds, would be 1,040bn allocated to fixed income investing.   Wow.

We don’t know the entire amount of Treasuries that Pimco sold in total, but if they sold in their other funds with the same intensity, Pimco divested their funds of at least $200bn in Treasuries, and perhaps as much as $400bn!   That is as much as 2/3rds of the size of QEII!  And much of this selling had to happen before the buying in QEII even began.

We do not know when Gross started selling bonds. Nor do we know if any of his other bond funds also sold treasuries.   But we do know there are no other $1.3 Trillion funds who are willing and able to dramatically change their allocations over the course of  a few weeks.

Can you find the runaway spending during the crisis? How about the Surplus of the late 1990’s?

February 16, 2011 Comments off

A good way to highlight recessions is to make the area of the recession Gray.

This graph has been mentioned a few different places.  The idea is that government spending didn’t really accelerate during the crisis – in fact, you can barely tell any difference at all in the total amount of spending.  But I don’t like this graph for a few reasons.  First, it has a 10 year time line, which is too short to tell if the trend is really solid.  Then, it has called attention to your eye by using the recession bars.  Also, it uses raw numbers, and not log numbers.  Log numbers are appropriate for dealing with things that grown exponentially, like economies.

Clearly, this chart could be improved with a few simple changes. It would show what actually happened better, and in a way that makes it totally clear that the government hasn’t been out of control in its spending for the last few years. I made a chart of the same data that:

  • Covers 20 years instead of 10
  • Takes out the recession bars so your eye does not know where to look for more or less spending
  • Uses logarithmic scaling to account for exponential growth

Can you spot the runaway spending during the Crisis? I cannot

I think this updated chart shows pretty well that the entire deficit we’re facing today was due to a falloff in tax collections prompted by a huge drop in economic activity, not runaway spending by the U.S. government.  I think this chart more accurately shows the real change in government spending due to the crisis: nearly nothing.  State governments cut back as much as the federal government expanded spending, so the net effect was as though there was no extra spending at all.

Once we take into account that nearly all of the extra federal spending went directly to prop up the banks, then this graph becomes even worse.  If we correct for this, government spending probably actually fell for normal people.

Of course, I’ve played a trick with the data. I included the 1990’s in this graph. Remember the Surpluses of the late 1990s?  I do.  Can you spot the surpluses we had in the late 1990s? No?  Me neither.  Seems likely the surpluses were due to economic growth and not any spending constraints.

Our government deficit – or surplus – is determined almost entirely by the amount of taxes collected due to economic conditions and not due to dramatic changes in spending.

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