Orwellian Centrism

Will Obama’s latest $990 billion stimulus package work? – The graphic below shows a breakdown of where the tax cuts are going in the latest deal the President and the Republicans in Congress have hammered out. The expected impact is that unemployment will finally start to fall from its current high of 9.6% to 5.7% by 2015 and that as economic growth picks up, the budget deficit will fall back to more manageable levels (see article).  How successful this expansionary fiscal policy will be depends on how much of these cuts will actually be spent and saved. The graphic shows that $280 billion of tax cuts will go to middle income households who are more likely to spend any additional income they receive (higher marginal propensity to consume) than higher income earners and therefore have a greater impact on overall GDP. A while ago I blogged about the importance of the multiplier for policymakers when deciding which of their policy options will have the most desired impact (More bang for your buck) and the evidence suggested that government spending rather than tax cuts, would have a larger impact on total demand. With US unemployment still high and this plan worrying some commentators, Obama and co will hope they get some value for almost a trillion dollars spent! 

Andy Harless on monetary policy – I’ve been asked to comment on a recent Andy Harless post that denied the existence of monetary policy: So there you have it: there is no such thing as monetary policy. There is “central bank directed stabilization policy,” and, for convenience, you can refer to that as monetary policy if you want. If so, recognize that you are using the term loosely, and let’s not get into arguments about whether some particular Fed action is “really” monetary policy. None of it is really monetary policy. I agree that when one takes a close look at monetary policy, things are never quite what they seem.  And that it’s hard to draw a bright line that separates monetary policy from other policies.  But I still think one can identify two basic types of monetary policy:

  • 1.  Policies that affect the supply (or quantity) of the medium of account. 
  • 2.  Policies that affect the demand for the medium of account.
Failed Us Bank Count In 2010 Nears 150-Mark – The number of American banks that went out of business in 2010 has surged to a whopping 149 entities so far this year.  The count of collapses, which has already surpassed last year’s total of 140, is expected to rise till the US labour market situation stabilises. As per the latest official data, two banks were shut down on December 10, pushing this year’s failures to 149.  In the last two months, 22 banks went belly-up. The maximum number of failures this year occurred in April, when 23 entities went out of business. Official estimates show that the number of problem banks — those at risk of failing — climbed to 860 in the three months ended September from 829 in the June quarter. 
If cows were money (a response to Brad DeLong) If cows were money, an increased demand for milk would cause a recession. People would stop spending their cows to buy goods and services, because if you spend your cows you don’t have as much milk. Was the recession caused by an excess demand for milk, or an excess demand for money? If gold bars were money, an increased demand for bling would cause a recession. People would stop spending their gold bars to buy goods and services, because if you spend your gold bars you don’t have as much bling. Was the recession caused by an excess demand for bling, or an excess demand for money? If dollars were money, an increased demand for savings would cause a recession. People would stop spending their dollars to buy goods and services, because if you spend your dollars you don’t have as much savings. Was the recession caused by an excess demand for savings, or an excess demand for money?
Williams Calls for "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal – As inflation and its costs could become more important to us soon, I thought it would be useful to consolidate some key ideas. As well, this is much more interesting to me than whether people in Congress want to, or do not want to, tax rich people. Since the Volcker disinflation, inflation in the United States has been low-profile in the minds of most people, outside of policymakers in the the Federal Reserve System and some groups of monetary economists. However, given our recent central banking experiments, which have greatly expanded the Fed’s balance sheet, and increased the probability of higher inflation, everyone should have inflation on their minds.

Here come the ’99ers – As I mentioned last week, the proposed tax legislation provides no additional help for the so-called "99ers". The "extension of the unemployment benefits" is an extension of the qualifying dates for the various tiers of benefits, and not additional weeks of benefits. The above quote is from an article  in the Oregonian: Oregon aid agencies brace for tens of thousands losing unemployment benefits Each week, about 600 Oregonians exhaust jobless benefits. In January, about 4,000 a week will lose coverage. And state officials expect those numbers to spike in April when more than 35,000 people will exhaust benefits in a single week.  The mass exhaustion of benefits, an echo effect of the great recession, is unprecedented …This graph shows the change in payroll jobs each month. The peak job losses were in early 2009 – and 99 weeks is just under two years – so many of those people will be exhausting their benefits over the next few months. There is much more in Richard Read’s article.


You are going to LOVE these Numbers…The Collapse of the USSA…Incoming Speaker of the House, John Boehner, fresh off of ridding Congress of those out-of-control, tax and spend Democrats announced his first big plan to cut the budget today and he started close to home – in his and other congressman and senator budgets. He stated:“I’m gonna cut my budget — my leadership budget — 5 percent,” he said, in video released by CBS. ”I’m gonna cut all the leadership budgets by 5 percent. I’m going to cut every committee’s budget by 5 percent. And every member is going to see a 5 percent reduction in their allowance. All together. that’s 25, 30 million dollars that likely would be one of the first votes we cast. We can start with ourselves.”Wow!  $30 million out of a $3.9 trillion budget.  That’s 0.000007%! Just out of curiosity, I went to the US Debt Clock website and timed how long it took for the US national debt to increase by $30 million.  The amount of time?  13 minutes. Therefore, if the amount of time spent enacting this budget cut takes up more than 13 minutes it will, literally, be a waste of time.


 Wall Street’s cozy derivative club – When you make trading of financial instruments open and competitive, it becomes less profitable for dealers and banks. This happened in 1975 with stock broking and in 2002 with corporate bond trading, and in both cases broker-dealers lost billions of dollars as aggressive price cutters entered the market and commissions shrunk. It was good news for buyers and sellers, but bad news for banks. So what about derivatives trading, the biggest and most profitable market by far on Wall Street? You will be unsurprised to learn that big banks have never been keen on the prospect of putting derivatives trading into a clearinghouse and requiring that prices be made public. They much prefer the current system, in which a small number of banks control the entire market and neither buyers nor sellers have any idea exactly what commissions they’re paying when they puchase derivative contracts. Sadly for the big banks, the Dodd-Frank bill mandates the end of this cozy relationship.

Euro Will Not Fail, Say Wolfgang Schaeuble And John Major
- Germany’s finance minister Wolfgang Schaeuble has warned those who bet against the euro that they "will not succeed".  The single currency won’t fail, and the region’s nations are determined to defend it, Mr Schaeuble told German newspaper the Bild am Sonntag in an interview published on Sunday.  "All those responsible in Europe agree: the euro is to all our advantage. And that’s why we will successfully defend it,” Mr Schaeuble was cited as saying.  “ His comments come ahead of a European Union summit this week that is to focus on establishing a permanent rescue mechanism starting in 2013 for crisis-hit eurozone nations. The euro has come under pressure since Ireland followed Greece in tapping into the region’s €750bn rescue fund.  Separately, John Major on Sunday gave the single currency his vote of confidence.

A Rant Against Monetarism – Think about the problem of the "double coincidence of wants." If the baker wants meat and the butcher wants bread, they can trade. But what if the baker wants candlesticks, the butcher wants bread, and the candlestick-maker wants meat? Only if they contrive a medium of exchange can they trade. Today, you have a former construction worker and a new college graduate who are both unemployed. In some sense, there are goods and services that they could be producing and trading, but in the context of a huge, complicated economy, they cannot figure out what to produce and trade. If you took money out of the picture, the construction worker and the college student would still be unable to solve their problem. When it comes to the failure of wants to coincide, the existence of money is part of the solution, not part of the problem.Which is not to say that printing more money is what solves the problem. What solves the problem is a series of entrepreneurial experiments, many of which fail, that ultimately create a roundabout pattern of production that enables the construction worker to produce something that is indirectly of value for the college grad, and vice-versa.


OPEC Dismisses $90 Oil Price as ‘Blip,’ Maintains Production Targets Again – OPEC discounted last week’s $90 oil price and kept its output targets unchanged yesterday, betting supplies in storage and a fragile global economic recovery will prevent crude from surging.  Supply and demand are “in balance,” and $70 to $80 is “a good price” for oil, Saudi Arabian Oil Minister Ali al-Naimi said at the group’s meeting in Quito, Ecuador. OPEC forecasts demand growth will slow as the economy struggles to recover, amid ample supplies, according to a group statement.  “The issue they looked at was whether $90 is a blip or a trend,” said Bill Farren-Price, founder of consultant Petroleum Policy Intelligence, based in Winchester, U.K. “They’ve taken the view that there are one-off factors such as the cold snap, a weak dollar, that won’t be sustained in the new year.”

Bond Market Signals No End to Deflation for Eight More Years: Japan Credit – The Bank of Japan’s forecast for an end to deflation in 2011 and 35 trillion yen ($417.8 billion) of spending have done little to change the thinking in the bond market, where investors see eight more years of falling prices.  Bonds designed to protect investors against inflation show that money managers in Japan anticipate prices will decline at an average 0.6 percent pace over the next five years and 0.4 percent annually through 2018. Japan is the only country where bonds linked to price changes show entrenched deflation expectations, according to data compiled by Bloomberg.  “Japan is not going for any aggressive reflationary policy mix and therefore is likely to prolong Japan’s deflation,”

Senate Bill Extends IRA Donations, Other Provisions – Since the announcement of the deal by the White House and top Republicans to extend Bush-era tax cuts for two years and cut payroll taxes for one, taxpayers have been anxious to learn the fate of other tax breaks that have expired or are set to. Now there is news: The Senate bill released Thursday night reveals which "extenders," as they are known, would be renewed and for how long. The Senate plans a vote on Monday, but it’s unclear when and what House members will do.  Several important individual extenders made the cut—and one didn’t. The extended provisions would be continued for two years, retroactive to the beginning of 2010, so they would expire again in 2011.  Taxpayers could make tax-free distributions of up to $100,000 of IRA assets to charities per year. The bill allows donations made in January, 2011, to be treated as if made in 2010. The provision, which allows people to take the required minimum distribution while minimizing their tax bill, is a popular one, says Ms. Labant. By giving their IRA assets to charity, taxpayers don’t have to claim the distributions as income, so they avoid being disqualified for other tax breaks and deductions. 

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