Tuesday, April 13, 2010

Final destination “rising public deficits” with a stopover in “falling public deficits”

Brad DeLong and Mark Thoma posit that a falling US public deficit is bad news – they are right!

Deficit hysteria is now mainstream thinking, while the more appropriate hysteria should be “jobs hysteria”. How in the world is nominal income growth expected to finance a drop in consumer debt leverage if the government supports a smaller deficit? TARP costs less and tax receipt growth is beating expectations. But that's all it is, beating expectations.

This only proves the endogeneity of the deficit: the sole reason that the private sector is producing stronger-than-expected growth in tax receipts is BECAUSE the government ran large deficits.

Put it this way: as long as the US is running current deficits, then a shrinking government deficit will, by definition, squeeze liquidity from the private sector. During a “balance sheet recession”, the government should be growing its balance sheet not shrinking it.

An excerpt from the Japan's Quarterly Economic Outlook (Summary*) (Summer 1997):
“Thus, recovery in personal consumption is expected to continue after the reaction to the rise in demand ahead of the consumption tax hike subsides in the near future. However, the pace of recovery is likely to be moderate considering the increases in the tax burden, such as the rise in the consumption tax.”
RW: Boy were they wrong – moderate?

GDP fell 2.0% in 1998 (from +1.6% growth in 1997) and consumption growth turned negative over the year, -1.1% (from +0.8% in 1997). Please see slide 9 from one of Richard Koo’s presentation in 2008; he highlights the policy-mistake-induced “unnecessary government deficits". The point is: the government deficit is not some exogenous “thing” that the government controls; it’s very much endogenous and a function of private demand.

We’re on this road now: squeezing liquidity out of the private sector; supporting minimal wage growth; and imminent deleveraging is on the horizon(more likely the default route). And Congress is happy that they are squeezing private sector liquidity? I guess so, as reported by the Wall Street Journal yesterday:
"Like a number of Democrats, Mr. Blumenauer said he's "intrigued" with the consumption-tax idea. Tax experts say consumption taxes are regressive, because lower-income people tend to spend more of their income. But a consumption tax could be designed with offsetting breaks for lower-income Americans, to shield them from its impacts."
Rebecca Wilder

15 comments:

  1. What happened to all the focus on the Dow Jones, too? Its overr 11,000 and everyone is in exstacy. Great (thud!). I'm still looking at not only the jobs numbers but also the true real estate values & mortgage mess. There has to be some kind of consequence to the problems in those sectors. And, they are worldwide, not just here. aj

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  2. Well at least markets are not stupid enough to believe that the Greece deal is going to solve anything!

    Hi Aunt Jane!! R

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  3. This isn’t as clear.  (on the preface on the H.8) in the latest reporting week (March 31st), the banks applied 2 different FASB accounting rule changes (FAS 166 & 167), for off-balance sheet transfers (consolidations), from their special purpose vehicles (SPV’s).  Some of the commercial bank balance sheets, & thus commercial bank credit, has been re-calculated & transferred (now showing these higher volumes).
    <span><span></span></span>See memoranda items:

    #44 (net unrealized gains /losses on available-for-sale securities), + $.5b
    #45 (securitized consumer loans), -$360.6b
    #46 (securitized credit cards & other revolving plans), -$337b
    #47 (other securitized consumer loans), -$23.6b &
    #48 (securitized real-estate loans) -$26.9b

    Writedowns totaled (-)$747.6b?
    <span><span></span></span>
    Lower evaluations (higher writedowns) don't translate into an increase in commercial bank credit.  So the banks actually did transfer a lot of assets (how much was obscured by changes in bank credit). 

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  4. 2010  
    my numbers before...&...revised

    jan…..0.25...0.25 top
    feb…..0.10...0.10
    mar...0.08...0.09
    apr…..0.09...0.12 top
    may...0.01...0.03 stocks fall

    Even though historically, falling from .12 to .03 is still (-9) and a big drop, the rate-of-change representing real-growth is now definitely increasing (but at a much lower rate).  

    Someone at the FED hit the gas pedal, i.e., it looks like the FED's forecasting ability suddenly improved (bank liquidity increased at a time, when on a seasonally adjusted basis, it is usually withdrawn).   I can fine tune these numbers, but I stopped day trading.

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  5. Solving imbalances with growing deficits means creating financial perpetum mobile. Let's see how it works..... Surging deficits will be financed at lower and lower rates - welcome in the sustainable communism..... Politicians and central banks make you believe in miracle instead of restructuring the system.

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  6. I'm still thinking about the implications (double-entry bookkeeping), of the consolidations, e.g., construction of the money supply. 

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  7. <span><span><span><span>See: EXTEND & PRETEND:  Minsky Melt-Up:</span></span>    
     
    <span>"This crisis brought to light a vast array of financial instruments (CDO’s, CDS’s, CLO’s, etc.) being offered by murky financial entities (SIV’s, VIE’s, SPE’s, QSPE’s etc.) that were completely unregulated, often offshore, always <span>OFF BALANCE SHEET</span> and never traded through any regulated exchange."</span><span></span>    
     
    <span>"...we have implemented the greatest experiment in Monetary Policy in the history of the capitalist system with the implementation of: 1) TARP, 2) TALF 3) PDCF 4) TAF 5) TDWP 6) TSLF 7) CPFF 8) MMIF 9) AMLF and 10) Massive foreign currency SWAPS</span>"   </span></span>
    <span><span>
    <span>"...In March 2009 the market bottomed…this occurred immediately after the reversal of FASB 157 in March 2009. Congress…forced the ACCOUNTING STANDAARDS STANDARDS BOARDS to reverse the Level 1 Capital Ratio standards regarding the treatment of “MARK-to-MARKET” of the massive ‘TOXIC’ assets on the books of the banks.  This change took insolvent banks and obscured problems by making them completely non-transparent to any analysis"</span>   
    <span></span>   
    <span>http://home.comcast.net/~lcmgroupe/2010/Article-Extend_Pretend-Accounting_Driven.htm</span>  </span></span>

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  8. The consolidated condition statement (H4.1) shows the balance sheet for the commercial banking system and illustrates the expansion of bank credit and new money.

    Increases in CB loans and investments/earning assets/bank credit, are approximately the same as increases in transaction/time/saving deposits/bank liabilities/bank credit proxy.
     
    That the net absolute increase in these two figures is so nearly identical is no happenstance, for deposits largely come into being through the credit creating process.

    Is this deposit destruction? $ (-) .747 trillion

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  9. & unlike write-downs deposit destruction is not a one day event

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  10. Unlike the consolidations involved in the FASB’s revision for an individual bank's portfolio: statements:166 & 167, the subjective disclosure of the BANKING SYSTEM's receivables
    write-downs (book re-valuations/re-calculations based on, e.g., refinancing, loan modification, pay history, delinquencies,& foreclosures, whatever), & the determination of write-offs (allowance for uncollectable debts), which were recorded as a one-time event (a “true-up” adjustment to loan loss reserve provisions”), as opposed to the on-going updates reflected in the line item “BANK CREDIT” on the H.8, at the end of a specific call report/accounting period;

    DEPOSIT DESTRUCTION within the federal reserve system, is not a one day, single balance sheet, posting event (factor this error in your economic forecasting time series)….(-$).747 trillion dollars of write-offs (or credit quality deterioration), were processed thru GAAP’s consolidation accounting.  So far, primarily on the March 31st 2010 H.8 statement Assets & Liabilities of commercial banks, these revisions (charges against the individual bank’s earnings), "washed out" ¾ of a trillion dollars in the money stock.

    But this is history.



    Or was the FED "double counting" a portion of the money supply before/after?  (part from the member banks &  part from the non-banks)??

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  11. <p><span><span><span>Unlike the consolidations involved in the FASB’s revision for an individual bank's portfolio: statements:166 & 167, the subjective disclosure of the BANKING SYSTEM's receivables write-downs (book re-valuations/re-calculations based on, e.g., refinancing, loan modification, pay history, delinquencies,& foreclosures - whatever), & the determination of write-offs (allowance for uncollectable debts), which were recorded as a one-time event (a “true-up” adjustment to loan loss reserve provisions”), as opposed to the on-going updates reflected in the line item “BANK CREDIT” on the H.8, at the end of a specific call report/accounting period;</span></span></span>
    </p><p><span><span><span>DEPOSIT DESTRUCTION</span><span> within the federal reserve system, is not a one day, single balance sheet, posting event (factor this error in your economic forecasting time series)….(-$).747 trillion dollars of write-offs (or credit quality deterioration), were processed thru GAAP’s consolidation accounting.  So far, primarily on the March 31st 2010 H.8 statement Assets & Liabilities of commercial banks, these revisions (charges against the individual bank’s earnings), "washed out" ¾ of a trillion dollars in the money stock. </span></span></span>
    </p><p><span><span><span>But this is history.</span></span></span>
    </p>

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  12. <p><span>Unlike the consolidations involved in the FASB’s revision for an individual bank’s portfolio: statements 166 & 167, the subjective disclosure of the BANKING SYSTEM’s receivables write-downs (book re-evaluations/re-calculations based on , e.g., refinancing, loan modification, pay history, delinquencies, & foreclosures – whatever), & the determination of write-offs (allowance for uncollectable debts), which were recorded as a one-time event (a “true-up” adjustment to loan loss reserve provisions”), as opposed to the on-going updates reflected in the line item “BANK CREDIT” on the H.8, at the end of a specific call report/accounting period;</span>
    </p><p><span> </span>
    </p><p><span><span>DEPOIST DESTRUCTION within the federal reserve system, is not a one-day, single balance sheet, posting event (factor this error in your economic forecasting time series)…(-$).747 trillion dollars of write-offs (or credit quality deterioration), were processed thru GAAP’s consolidation accounting.<span>  </span>So far, primarily on the March 31<sup>st</sup> 2010 H.8 statement, Assets & Liabilities of commercial banks, these revisions (charges against the individual bank’s earnings), “washed out” ¾ of a trillion dollars in the money stock.</span></span>
    </p><p><span>But this is history.</span></p>

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  13. <p><span>Unlike the consolidations involved in the FASB’s revision for an individual bank’s portfolio: statements 166 & 167, the subjective disclosure of the BANKING SYSTEM’s receivables write-downs (book re-evaluations/re-calculations based on , e.g., refinancing, loan modification, pay history, delinquencies, & foreclosures – whatever), & the determination of write-offs (allowance for uncollectable debts), which were recorded as a one-time event (a “true-up” adjustment to loan loss reserve provisions), as opposed to the on-going updates reflected in the line item “BANK CREDIT” on the H.8, at the end of a specific call report/accounting period;</span>
    </p><p><span> </span>
    </p><p><span><span>DEPOIST DESTRUCTION within the federal reserve system, is not a one day, single balance sheet, posting event (factor this error in your economic forecasting time series)…(-$).747 trillion dollars of write-offs (or credit quality deterioration), were processed thru GAAP’s consolidation accounting.<span>  </span>So far, primarily on the March 31<sup>st</sup> 2010 H.8 statement, Assets & Liabilities of commercial banks, these revisions (charges against the individual bank’s earnings), “washed out” ¾ of a trillion dollars in the money stock.</span></span>
    </p><p><span>But this is history.</span></p>

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  14. <span>The balances cited in your inquiry are primarily the result of domestically chartered banks and foreign-related institutions having to consolidate onto their balance sheets the assets and liabilities of off-balance-sheet vehicles owing to the adoption of FASB's Financial Accounting Statements No. 166 (FAS 166), Accounting for Transfers of Financial Assets, and No. 167 (FAS 167), Amendments to FASB Interpretation No. 46(R).</span>

    <span>As a result of the institutions adopting the FASB statements, the balances in the Memoranda items have decreased and were brought onto the balance sheet, resulting in the respective asset categories increasing from March 24th to March 31st.  Overall, to estimate the week to week change in bank credit, the balances that were brought onto the balance sheet from the Memoranda items would need to be backed out of the respective loan categories on the asset side of the balance sheet. </span>

    <span>In the "Notes on the Data" section of the H.8 release, the approximate amounts affected by the adoption of these FASB statements are cited and will aide in deriving the balances affected by the FASB statements and the changes in commercial bank credit from March 24th to March 31st.  </span>

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