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My MMT "State of the Union" Economics Report: A Recession is Likely

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  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    These charts were compiled for Q3 of 2012:

    This shows US corporate sector net-savings:
    http://www.businessinsider.com/richard-koo-deleveraging-isnt-over-2013-1

    This shows US household sector net-savings (or lack thereof):
    http://www.businessinsider.com/richard-koo-deleveraging-isnt-over-2013-1

    As you can see, the corporate sector is in net-surplus, and US households have recently moved into net-deficit, via the loss of financial assets, and not by more borrowing.

    Government deficit=non government surplus

    This chart shows the division between government sector, foreign sector, US household sector, and US corporate sector.
    Together the US household and corporate sectors make up the domestic private sector. The domestic private sector + foreign sector make up the non-government.

    Note: this chart needs to be revised for Q3 and Q4, as it was made in Q1 in 2012 and optimistically projected out.

    https://sphotos-b.xx.fbcdn.net/hphotos-ash4/398127_518792334808531_1981654095_n...

    As reported by Mike Norman economics blog, over the last two months, the monthly government deficit is averaging out at $9 billion per month vs. the $90 billion that is typically needed to offset non government savings demands and maintain system stability. This is due to spending cuts that have been going into effect, the improvement of the economy leading to more tax revenues, and the ongoing budget battles in Washington, which have delayed a lot of payments to avoid hitting the debt-ceiling. This will continue happening until we get a clean debt-ceiling raise sufficient to provision the Treasury with the quantity borrowing authority needed for the year. My own view is that quantity regulation of Treasury borrowing authority is unconstitutional per Sec 4. of the 14th Amendment. Article 1, Section 8 says nothing of quantity authorization, only borrowing authorization. Rules based Treasury borrowing operations is the only constitutional choice.

    Current authority has been provisioned for 3 months, with Republican lawmakers demanding massive government spending cuts for another increase. It's a quirky debt-limit increase, with the debt-ceiling ignored for 3 months, then retroactively approved with some conditions (article here).

    Here's a link to the Monthly Treasury Statements:
    http://www.fms.treas.gov/mts/mts1212.pdf

    Pg 2 shows the monthly deficit/surplus amount. If you notice, the government ran a 123 billlion dollar surplus in September coinciding with the US household deficits reported for Q3 of 2012.

    Lending to US households is still very tight, and US households are spending their finite financial asset savings (which obviously can't go on forever), and which makes them even less credit-worthy to lend to. Remember, these charts are before the Fiscal Cliff deal, in which everybody working got a tax increase from the FICA holiday expiration (btw: barring a recession, the FICA holiday expiration will bring in more revenue than the tax increases on the wealthy by about $400 billion over the next 9 years). We also have massive government spending cuts expected in March, which would all but guarantee recession. The government deficit is too small right now to maintain economic expansion throughout the year, attempts to cut it down even more will produce the opposite effect desired (bigger deficit + more unemployment).

    So on the course we are, at some point there's a high likelihood that there's going to be a "liquidation event," where all the non government (domestic private sector{US household + US corporate sector} + foreign sector) savings demands create "paradox of thrift" involuntary unemployment to produce the sized government deficit desired by the non government, via a fall in tax revenues from a rise in unemployment and the automatic stabilizer government spending that "catches" or slows the economy's free-fall. If government responds with even more austerity, expect total chaos.

    For any agent to save, another agent has to run a deficit, or that amount of output doesn't get sold, leading to unemployment and less aggregate savings. The "paradox of thrift" is such that the decision to save by all sectors (government and non government alike) leads to less aggregate savings.

    So with the US household sector running a deficit (about 3% of GDP in Q3 of 2012) that amount offsets corporate sector savings (1-2% of GDP annually), with the remaining difference helping to offset foreign sector savings (3.6% of GDP anually), with the avg monthly smaller government deficits making up the difference. In Q3 of 2012, US households were supporting these other sector's savings desires by spending financial assets and spending more than current incomes, which makes them even less credit worthy as borrowers. Once US households stop spending more than current incomes by exhausting their willingness to spend saved financial assets, non government savings demands will outstrip the current monthly size of the government deficit leading to "paradox of thrift" unemployment without a sudden increase in US household borrowing (possible), or corporate sector borrowing to finance business expansion (not very likely), or a sudden surge in net-exports (least likely of the three).

    As stated, with less financial assets, US households are less credit worthy to lend to, and thus lower debt-service ratios are sustainable. Putting economic growth on private sector credit cards is not sustainable, and leads to bubbles; but over the short term while the leveraging is going on, it does produce economic growth, albeit with more inequality (but once the credit bubble pops/slows the economy goes into recession without government action to add to spending, via spending increases or tax cuts). In 2000, the credit bubble slowed, leading to government action (Bush II deficits which were insufficiently sized to offset foreign sector savings demands) to keep it going and pile on the debt-service ratios; whereas in 2008, the credit bubble finally popped/exploded due to the rampant expansion of liar's loan lending in 2006 that led to debt-service ratios that went vastly unsupported by non government equity.

    Mainstream economics is totally clueless and absolutely worthless. I was just at UTD trying to explain how the checks clear to a few graduate students and their professor. The crowd was decidely conservative. Conservatives don't like to be told or find out that they are idiots, and it took a lot of patience on my part to get through to them. More than a few of them were still clinging to beliefs that are inapplicable even after I exposed how little they understood by asking simple questions that they could not answer. Conservatives are genuinely horrified to find out their entire view of the economy is based on fantasy, lies, and anti-government religion. They are like mentally ill children.
    Here's a tip: let the facts guide your beliefs and politics and you won't have these problems. It takes character to admit you are wrong, and conservatives have very little.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    More bad news: Consumer Confidence Index dips in January. Hiking FICA with the holiday expiration was the stupidest part of the Fiscal Cliff deal, besides all the loaded giveaways with little redeemable public purpose to corporations.

    Anyways here's the link to the January data.

    http://www.conference-board.org/data/consumerconfidence.cfm
  • Center Left
    Independent
    Central, FL
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    Carlitos,
    Wow, your posts on this site are incredible. So much information and analysis. I truly think that you are an asset to this message board. I'll be honest and say that sometimes you give so much information that it's hard for me to fully absorb it all. Anyway, we are lucky to have you here. Thanks for continuing to keep everyone informed.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Hey thanks for that. I try. :)

    But I have more bad news.

    GDP contracts on tepid inventories, government spending cuts.

    How 'bout this part: "Economists polled by Reuters had expected output to increase at a 1.1 percent rate. None of the economists surveyed had predicted a contraction."

    Did they talk to any MMTers? No.

    This isn't a huge dip, and we need the January numbers to really tell where we are headed now in the aftermath of the FICA hike, but clearly something needs to be done.

    I do expect a good jobs report on Friday.

    Thing is whatever growth we have....just accelerates the speed in which we hit the wall, unless there's some massive increase in household deficit spending, which just puts that off, but adds to the inevitable explosion.

    I don't see those March 1 government spending cuts not going into effect, and that's a huge chunk of GDP just wiped out.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Right on cue. Here's my friend and a local MMTer, Dr. John Harvey of TCU on his Forbes blog.

    The Coming Recession: How Fiscal Responsibility is Economic Suicide
  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    CBB -- Once again thanks. I echo McClellan's comments. I will note that it is not just the MMTers pushing for more deficit spending (although they have been the most consistent and vocal). Paul Krugman also agrees with the MMT philosophy at least in the short term. From the NPR interview he uses the example of Japan:

    "KRUGMAN: Yeah, except, you know, the European countries that have their own currencies are, like us, able to borrow very cheaply. Japan, right, Japan is much deeper in debt that we are, but like us, they have their own currency. They borrow in their own currency, and they're not having any problem. Their interest rates are low, and the new government in Japan has announced a stimulus program. The markets don't seem at all disturbed. If anything, they're cheering, because Japan clearly needs a boost to its economy.

    So, you know, this is a - we've, basically, you know, we've got a psychosomatic disorder, right? Our governing classes are suffering from an ailment that exists only in their imagination. And unfortunately, the rest of us are paying a very, very heavy price for that obsession."


    Krugman sounds like an MMTer here.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Yeah, Krugman has picked up a lot from MMT, often with accreditation.

    But he's still a deficit dove. So they have the same goal in mind as the hawks, it's just a matter of speed.

    And he's still framing the argument wrong.

    Here's Warren today:
    "The headline ‘deficit doves’ pushing for larger deficits with their ‘out of paradigm’ arguments are also serving to continue to support austerity. They have been arguing that the low interest rates are a signal from the markets (as if they know anything about markets) indicating the economy wants the govt to sell more bonds. This is in response to the hawk’s equally out of paradigm argument that financing deficits will eventually drive up interest rates. So now that interest rates have started going higher, the dove’s case is for higher deficits is pretty much gone, removing the resistance to ‘getting our fiscal house in order’ just as the sequester date is approaching. Whether it’s gross ignorance or intellectual dishonesty doesn’t matter all that much at this point- it’s happening."

    http://moslereconomics.com/2013/01/30/a-word-on-the-euro-us-deficit-doves-and-t...

    Also, Krugman talks about FED monetary stimulus. What stimulus? FED policy is restrictive as "blantantly evidenced by the recent turn over of some $90 billion of ‘profits’ to the Treasury that otherwise would have been earned by the economy"-Warren Mosler.

    So I don't see Krugman making much of a dent in policy circles, but it's nice to have there to rally the people against austerity. He could be so much more effective if he opened his eyes. But that's what education does to people. If they learn something that is wrong growing up, it takes just as much time to unlearn it.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    More evidence that the FICA hike is hurting the economy:

    http://www.moslereconomics.com/wp-content/graphs/2013/02/rb.png