[jeffkrol]

The Center of the Universe Blog Archive MMT to President Obama and Members of Congress:

MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!

And therefore, deficit reduction takes away our savings.

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Furthermore:

There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.

The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,

An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

[newarts]

...All the government can do is to print more and more phony money, which does nothing but drive up inflation, making every dollar we hold worth less and less....

This is a misconception I once shared - as a result of looking at extremes rather than small changes in real situations.

Increasing consumer's money supply has the primary effect of increasing demand for goods & services. If the economy is at less than full production it will ramp up to meet this increased demand with little increase in unit costs or prices....because new facilities need not be built (only employment need be increased).

But when the economy is already at full production, supply cannot be increased easily so costs and prices will rise.

Of course if an infinite supply of dollars rained from the sky hyper-inflation would result. But that's not what's being suggested. Getting the balance right is tricky perhaps but not impossible.

[newarts]

...Businesses, at least can produce something useful that produces more wealth and increases the value of a dollar which contributes to our and our countries wealth.

But not in the absence of demand - both supply and demand sides are equally important in the equation.

[deadwolfbones]

lolz

[Nesster]

...all of which is nonsense in the context of the OP. What happens to our finances and jobs has more to do with what actually happens, and not why, and what the crowd thinks of what happens.

As I see it there are two ways for the stock markets globally: up or down spike depending on whether the debt ceiling is raised or not. Followed by more of what is already happening, with the US role/stature re-evaluated.

Debt markets, in the event of a default or other serious impact to the treasuries, will go down (i.e. rates go up) which likely is just an acceleration of what is bound to happen regardless. If there are major dislocations here, stocks tank, banks may need life support again.

Should a deal include a lot of de-stimulus, the US economy, plus perhaps many other economies, have a real chance of recession.

So: there's a window of upside spike with stocks should a deal happen, but a lot of downside either immediately or in the long run. My thought is to stay in stocks, but if there is an up spike, sell at that point... and non-US stocks may be a better long term bet at this point. There will be a time to accumulate US stocks later.

But as the bond markets are also at risk of dumping, I suppose the only safer places are with money markets (and hope there's not a credit freeze like a couple of years ago) and mining/materials sort of thing.

Then again, this is all wild ass guessing. As we're selling our house now and closing on it after, that's moot at this point: except the mortgage on our next house may have a much higher rate.

[newarts]

What happens to our finances and jobs has more to do with what actually happens, and not why, and what the crowd thinks of what happens.

I disagree; it is useful to understand the viewpoints of participants in an argument, however ill-informed they may be.

To turn your sentence around a little bit:

what the crowd thinks will happen has a great influence on what will actually happen; if sufficient people think a default will be harmless the default may occur

[mikemike]

I disagree; it is useful to understand the viewpoints of participants in an argument, however ill-informed they may be.

T turn your sentence around a little bit:

what the crowd thinks will happen has a great influence on what will actually happen; if sufficient people think a default will be harmless the default may occur

Ness understood exactly what I was trying to get at with this thread. Every day the likelihood of a default, even if only for a few hours, increases simply b/c it takes congress about 2 weeks to simply go through the motions of turning a blank sheet of paper into a bill and a bill into a law for the president to sign.

At this point, the only people whose opinions really matter regarding this are the 535 people with a vote in congress and the president who votes with his veto pen.

If you feel vulnerable to the tidal wave of changes that will occur depending on the outcome, now is the time to act.

[mikemike]

So: there's a window of upside spike with stocks should a deal happen, but a lot of downside either immediately or in the long run. My thought is to stay in stocks, but if there is an up spike, sell at that point... and non-US stocks may be a better long term bet at this point. There will be a time to accumulate US stocks later.

I was thinking kind of the opposite. I figured that US stocks maybe a safer bet either way. If a deal falls through, I think there is an uncomfortably high probability that the administration might choose to inflate our way out of the problem. If that happens, I think international stocks which are easily accessible to US investors will be hurt if they are from exporting nations like Japan or Germany while US exports will be more competitive from the weaker dollar. US companies will be especially competitive if a big jolt causes China to rethink their policy on the Yuan.

[Nesster]

I was thinking kind of the opposite. I figured that US stocks maybe a safer bet either way. If a deal falls through, I think there is an uncomfortably high probability that the administration might choose to inflate our way out of the problem. If that happens, I think international stocks which are easily accessible to US investors will be hurt if they are from exporting nations like Japan or Germany while US exports will be more competitive from the weaker dollar. US companies will be especially competitive if a big jolt causes China to rethink their policy on the Yuan.

Interesting, and may well be a good forecast - however: much of the US listed companies derive their revenues out of country... and what is likely to happen to the dollar vs other currencies. I'm thinking long term the US is not going to have such a huge place in the world, but you're probably right that before that happens the world will be casting about for safety...

The true doomsday scenario has us pulling all money and putting hard metal cash in the mattress, as even MMT admits that eventually the house of cards (and our civilization) will fall. The US Dollar in effect has been the 'gold standard' for global commerce, and I can imagine a sequence of events that dislocates and brings down everything.

[jeffkrol]

Interesting paper. a bit historical and O/T though.............

http://moslereconomics.com/wp-content/pdfs/Proposals.pdf

[deadwolfbones]

Personally I think they're going to dither for so long that they'll get backed into a corner where McConnell's plan is the only way out.

[Nesster]

Debt-Ceiling Silence: What Does Wall Street Know?

There are only two possibilities: Either Wall Street knows something the rest of us don’t, or Wall Street is in denial.

Wall Street Knows Something

Based on the lousy job financiers did anticipating the 2008 financial crisis, we can rule out the idea that the Street actually knows the future. What it does know is what everyone else on the Street is saying about the future. And what they’re saying is that the debt ceiling will be raised.

When asked why the Street isn’t more worried, Brian Salisbury, senior policy analyst for FBR Capital says, “Because for the past six months they’ve been listening to people like me tell them that everything will be okay.”

What makes analysts like Salisbury so sure? Logic, for one thing. “However we got here, and however we're going to get out of it in the long run,” David Kelly of JP Morgan told Barron’s, “the debt is too large to go to zero overnight, and therefore it's simply untenable to say that you are not going to raise the debt ceiling. No serious politician should say that.”

Anyone who understands finance knows that a default would send the U.S. back into recession, which would only widen the deficit. They know it makes no sense to vote to extend the Bush tax cuts in December and thereby accelerate the need to raise the debt ceiling, then seven months later to vote against raising it.

Most of all, Wall Street sees the debt ceiling debate as mere political theater, which, by the way, House Speaker John Boehner has promised will have a happy ending. Because Armageddon can be avoided, and because avoiding it is in everyone’s interest, logic suggests it will be avoided. That frees financial executives and traders to focus on issues that really will affect their profits: earnings season, new regulation, and Greek debt. As Grant’s Interest Rate Observer editor Jim Grant puts it, “The talks in Washington, DC, over the debt ceiling, we regard as political posturing. Not so the [Greek mess]. Now there is a crisis.”

Wall Street Is in Denial

But suppose that logic is not the most relevant attribute here? Boehner may understand the need to avoid financial calamity, but it’s not clear that he controls the GOP’s junior members. For them, there is too much political thrill to be gained by racing still closer to the edge of the cliff before jumping out of the car. Indeed, some 90 of them, according to Salisbury, have declared their willingness to drive over the cliff rather than vote for tax increases.

Some analysts are starting to warn the financial markets that the sanest course isn’t necessarily the one Congress will take. Greg Valliere, chief political strategist at Wall Street consultant Potomac Research, estimates a 35% chance that there will be no deal before August 2. Salisbury puts it at 25%.

In that case, Treasury Secretary Tim Geithner will almost certainly ensure that Treasury bondholders are paid, even if other parts of the government must be selectively shut down. But here’s the rub: The credit rating agencies have made it clear that a shutdown will trigger a downgrade of U.S. debt. You may or may not respect Standard & Poor’s and Moody’s, but many institutions’ investment policies allow them to hold only triple-A-rated securities. It’s not clear what will happen if they can’t hold U.S. bonds. But it’s surely not going help bond prices.

If there is no deal by the end of this week, Valliere predicts, you can expect Wall Street to begin to focus on the issue. Some on the Street ask whether it will take a stock market crash like the 700-point downer that followed Congress’s refusal to pass TARP in 2008 to get Congress to compromise. That’s the last thing the economy (or Wall Street) needs. It’s time for the big dogs to start barking.

[jeffkrol]

The tax and spending compromises embodied in both the revised McConnell plan and the Gang of Six proposal appear to have public support, according to a series of recent polls.

A CBS News poll released Monday indicates that two-thirds of Americans say any agreement should include spending reductions and tax hikes, with 28% saying a deal should only include spending cuts and 3% saying it should only include tax increases.

According to the survey, there is little partisan divide on the question. More than seven out of 10 Democrats and more than two-thirds of independent voters support a balanced approach, as do 55% of Republicans and 53% of self-described tea party movement supporters.

A Quinnipiac University poll released last week had similar findings. The survey indicated that two-thirds of the public supported a deal that included spending cuts as well as tax increases for wealthy Americans and corporations. Nearly nine out of 10 Democrats and two-thirds of independents questioned supported the inclusion of tax increases.

Republicans in that poll were divided on the issue.

Obama dismisses GOP debt measure, praises compromise plan - CNN.com

[Pentaxor]

US DEBT would continue to skyrocket unless the buck stops comin. the sad thing is, politicians are more concerned of their personal ventures rather than the state of the economy. maybe an general uprising might help solve the debt crisis. I mean let's face it, if the politicians fail to make such measures for the public, let the public to it themselves and start kicking those useless representatives out.

[Nesster]

The Aleph Blog Blog Archive Where to Hide?

We can’t rely on US Treasuries? If so, what can you do to preserve purchasing power? I will ignore a variety of exotic strategies/derivatives and focus on things that can be executed by individuals and small institutions.

The first idea that comes to mind is gold, silver and commodities. Commodities don’t lie, they just sit there. But the prices don’t just sit there. They go up and down with demand and supply. I’m not an expert there, so I would say keep positions small, enough for diversification relative to volatility.

Idea two is foreign debt of unquestionable solvency. Well, that takes much of the world off the table, leading to investment in the developed fringe currencies — Canada, Australia, New Zealand, Norway, Sweden, and the Swiss Franc. Toss in the Yen, though it isn’t fringe. Not a very large group, and their currencies have run like mad. Could they fall? Imagine a US default, where aggregate demand drops across the world because the Treasuries in the banks of other nations are only worth 70% of face value. Deflation would drive commodities and fringe currencies lower.

Idea three is an echo of two — buy the debts of emerging markets with more orthodox economics than the US, Eurozone, and China. Nice, but their currencies are high as well. Same problem as two.

Idea four is buy high quality equities that pay dividends. There’s a plus and a minus here. Minus: Equities are highly sensitive to confidence / trends in aggregate demand. Plus: equities, if conservatively financed have positive optionality, subject to the same problem you have: what is a good store of purchasing power?

Even buying needed resources ahead might not work because demand conditions might be lower going forward.

Idea five is buying high quality non-Treasury domestic debt. Along with ideas 2, 3 and 4, this seems to be Pimco’s strategy. But our payments system is interconnected. Any non-payment, or serious threat of non-payment will disrupt the ability and willingness of others to pay.

Idea six is stay in US Treasury debt — where else can you go? You’ll get paid back eventually, with interest, most likely… Hey, TIPS could work in an inflationary scenario.

Idea seven is hold physical US cash. That should retain value of a sort until the debt ceiling situation is settled.

My main point is that there is nowhere to hide with certainty. There are places to diversify into, and maybe you should consider some of them as part of a broader asset management strategy. But avoid changes motivated by panic. They almost never work.

In a debt-driven world, with fiat currencies, everything is confusing because there is no obvious store of value offering some small (but not near-zero) yield. A small positive inflation adjusted return is healthy for savers, and good for the economy. Let the Fed adjust its policy, and then the hiding place would be simple — CDs