It’s off to the races for a while in the euro zone as the adjustment that began when the ECB started buying member nation debt continues, and the still large budget deficits support incomes and growth while the still low euro supports exports.

Fears of solvency risks for govts and the banking system are fading fast.

The euro meanwhile will continue to adjust/appreciate with a small lag in response to rising net exports and ultimately keep a lid on them.

If US jobless claims are up it’s good for US stocks, as unemployment is perceived to keep labor costs and interest rates down.
If claims are down it’s good for stocks as it’s evidence of a bit more top line growth, which trumps any fears of damage from interest rate hikes.

China weakness serves to keep a lid on resource costs which is good for stocks.

Earnings season has confirmed that business has figured out how to make money in the current environment, supported by 8%+ federal deficits that is also supporting 4% personal income growth as well as nominal and real GDP growth.

Unemployment working its way lower in tiny increments unfortunately causes politicians and mainstream economists to think their measures are ‘working,’ including revised down deficit projections from the automatic stabilizers, and that it all just need lots of time due to the severity of the downturn.

This is very good for stocks which further supports the political desire to prove themselves right. And it is very bad for people forced to wait years before their lives can begin to recover, as with modest improvement in GDP a fiscal adjustment that could drastically accelerate the move back to full employment is highly unlikely.

At age 60, it’s not looking like I’ll get to experience how good this economy could be for everyone if we understood monetary operations and reserve accounting.

EU Headlines

Europe Economic Confidence Rises as Exports Improve

ECB Puts Bigger Discounts on Low-Quality Collateral

German Unemployment Fell for 13th as Exports Boom

Lagarde Predicts Significant Pickup in World Growth

Berlusconi Survives Confidence Vote to Pass Deficit Reductions

Italian Business Confidence Rises to Two-Year High on Exports

Inflation in Spain at highest point in 18 months

29 Responses

  1. Keep the faith Warren!

    I don’t suppose anybody’s working on a condensed pictoral version of the 7DIF? It might help some understand. I’m on my 3rd time through and each time, more light bulbs go on.

    Were this economy a car, we’ve been trying to drive it by hopping up on the hood, stuffing hay in through the grille and whacking the fenders with a stick! How many people are employed in implementing this nonsense??? They’re going to need something to do as the fear and nonsense start to evaporate. I suppose some of them could become docents at the Museum of Fiscal Silliness, but we’re talking about a lot of potential manpower here…

    1. Unforgiven,

      “I don’t suppose anybody’s working on a condensed pictoral version of the 7DIF? It might help some understand.”

      Perhaps not what you were envisioning, but early this year I started to set up a balance sheet visualizer tool that shows how things like government spending, bond issuance, etc affect balance sheets, net equity, etc… perhaps helpful for some types of people?

      I need to get back to work on improving it (and suggestions/corrections are still welcome), but I decided a step-by-step tutorial-driven flow-visualizer could be helpful to a broader audience. Unfortunately that one’s trickier and is not very far along yet 🙁 But I agree if someone (not necessarily me!) can get the visual approach to MMT right that it could help in reaching new people.

      1. Thanks for that, Hbl!

        I may take a crack at a Fraud by Fraud PowerPoint presentation. It will help fix the basic concepts in my mind in any case.

  2. The ECB buying of government bonds is down to a trickle, it is not stopping the programme but it’s leaving it on the back burner.
    Is that enough to settle things down, to let the market know that the ECB is ready to step in and buy government debt if necessary?

    The following is a graph of: ECB bond purchases and peripheral spreads since the programme started.

      1. China publically stating that they were buying Eurozone bonds was the factor of the month. If china says Eurodebt is fine, then Eurodebt is fine.

  3. Hello everyone,

    I am learning about MMT. Could you answer one question for me. Many proponents of MMT are using it to guarantee full employment. Why is full employment desirable?

    1. Student, it is biblical, idle hands are the devil’s work. To give you a real world practical example, I have some neighbors that used to work for GM (general motors) screwing nuts and bolts into door panels. They were laid off, and now they sit around drinking beer (pabst blue ribbon – the poor mans brew) on the front porch. Last week while drinking some Pabst they got in a fight and broke through my front screen door and another houses too. They are constantly hollering and cussing each other in drunken rages too. This has greatly disturbed my peace and starting to affect my sanity as well, I would happily pay a “tax” to keep idle hands busy so they don’t break my screen door and irritate me with thier drunk drama. AS it is now, I am going to be moving within the next month to somewhere away from these pabst blue ribbon drinking fools.

      The late great Dennis Hopper talking about PAbst blue ribbon: 🙂

    2. The strongest economic reason is foregone opportunity due to sub-optimal GDP resulting from operating at under-capacity and from waste of the most valuable resource a country has, its human resources. Human resources degrade significantly with unemployment and drastically with persistent high unemployment.

      It is not possible to recoup these losses once incurred and their social, political and economic effects persist over a genrations, since children are also adversely affected. Unemployment is a scourge on society that no society should permit when it has the means to prevent it from happening and resolving it if it does happen.

      1. So no morality/politics needs to be involved correct?
        Basically we can achieve full employment. Person that is working is productive. Productivity is good and therefore we should follow this policy.

        Can you link me to a resource negating full employment causing inflation etc?

        Thank you!

      2. Giving everyone a job allows everyone a claim on scarce physical resources. So 6 billion+ are going to get petrol from the filling station? I don’t think so. If everyone gets a job then it surely cannot be of any value? Isn’t something valuable because it is scarce or difficult?

      3. “So no morality/politics needs to be involved correct?”

        Correct. Management is about handling resources efficiently and effectively. MMT shows how to manage an economy to optimize real output relative to capacity, along with full employment (defined as a job available for anyone who desires to sell their labor, instead of theoretically), and price stability. MMT uses monetary and fiscal policy based on Abba Lerner’s principles of functional finance. A job guarantee by the government as employer of last resort establishes an anchor for the floor price (wage + benefits) of labor.

        See also L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (Elgar, 1999).

      4. Rdg there are these things called money and markets which allocate scarce resources. People who are involuntarily unemployed spend a lot of time doing nothing. Employing them, having them do something constructive, constructs things and provides services – real wealth. Their pay is spent in other sectors of the economy and boosts usage of slack capacity, non-human resources which are being wasted, and the formerly unemployed themselves have a higher standard of living and dignity. If we had a planetary full employment economy, everybody would get richer a lot quicker, and the world would be much better equipped to tackle big problems, like global warming and finding substitutes for scarce resources. The postwar era till around 1980 was run much more pro-full employment than nowadays, and economic growth was much superior, especially for most poorer countries. It all boils down to the trivial observation that doing something, anything constructive is better than doing nothing.

      5. “The postwar era till around 1980 was run much more pro-full employment than nowadays, and economic growth was much superior,”

        So the billion chinese and indians that are coming up in the world the past 20 years to achieve american middle class standards doesn’t count? I don’t understand.

      6. Strawberry Picker: Of course they count, particularly China. but they don’t count enough to offset the effect of the advanced economies being run in a more rational way from 1945-1980, which helped the whole world, to the foolish (for the advanced economies) and disgusting, predatory way (for the third world) that national and international economies have been run in the past 30 years.

  4. With Germany emerging as Europe’s locomotive, I wonder if it’s not the same thing all over: Germany out-exporting everyone else. France, the Netherlands, the US & the UK are Germany’s largest trading partners. It’s rather striking that, according to Randstad, hiring has picked up in both France and Germany, but is lagging in the Netherlands. If so, it means the imbalances, which previously added to the crisis, haven’t been addressed at all. That’s not a recovery, but preparing the way for more of the same. And help from deficits & bond buying ECB seems a happy coincidence.

  5. Thanks for the sources!
    One more question:

    Why is price stability desirable?

    (Not being a dick, but so often ‘good’ things turn out to be be ‘bad’ etc)

    1. Price stability is desirable because “price instability”, i.e. excessive inflation, results in everyone wasting time and effort constantly changing prices in price lists, catalogues, etc. Imagine putting a house up for sale, and then having to up the price twice a week. Plus everyone wastes time keeping their stock of cash to minimum. And in the worst cases, e.g. 1920s Germany, people go shopping with wheel barrow loads of paper money: not an efficient way to do business. Plus high inflation is tough on those without maths skills: e.g. pensioners with fading I.Q.s have no idea what they ought to pay for anything.

      1. Price stability is desirable because “price instability”, i.e. excessive inflation, results in everyone wasting time and effort constantly changing prices in price lists, catalogues, etc. Imagine putting a house up for sale, and then having to up the price twice a week.

        Now I look at the stock market, and the hundres of millions of people who have trading terminals constantly repricing stocks and then companies hiring top math guys to do high frequency trading algorithms to constantly reprice stuff in microsecond and nanosecond time frames and I really feel our society has lost its way and we are wasting so many human minds on this sillyness. I have asked top officials why don’t we just have trades 1 time a quarter, right after earnings, why is microsecond and nanosecond liquidity so important and employing so much human brain cycles and computer cycles to just to reprice? I don’t understand, how wasteful. If price stability is DESIRED for what you say Ralph, why isn’t it also desired for the casino stock market, currency markets, commodity markets, etc etc?

    2. “Why is price stability desirable?”

      The government as monopoly currency provider has the prerogative and corresponding responsibility to provide the correct amount of currency to maintain balance between nominal aggregate demand (“spending power”) and real output capacity (“everything for sale capable of being offered given existing resources”) so as to achieve price stability as a relatively constant value of the currency (“purchasing power”).

      If the government injects net financial assets (“money”) in excess, nominal aggregate demand (“spending power”) will rise relative to the goods and services available at full output, and inflation will result as prices are bid up, which diminishes the purchasing power of money. Since money is declining in purchasing power, people want to spend it quickly before it loses value, and this increases demand, leading to ever higher prices. Creditors hate inflation, because it reduces the real value of the loans they are holding since they can be repaid in cheaper money.

      If the government falls short in its money creation, then there will not be enough spending power to purchase all the goods and services available at full production, so inventories build up, businesses cut back, recession sets in, and unemployment rises until spending power is restored. In the worst case scenario, deflation sets in, the value of money (real interest rate) increases, and people hoard money in expectation of lower prices in the future, which becomes a self-fulfilling prophecy. Deflation is difficult to reverse once it takes hold in earnest, especially if debt defaults multiply. Deflation clobbers debtors as the loans they are holding become more expensive to repay in real terms, and money is harder to come by. Then, there is a depression.

    3. ‘Price Stability’ (like ‘Full Employment’) is another forever redefinable accounting term that is meaningless. The basic idea is to create illusions. ex. “Your crackerbox house has only increased in price by a reasonable percentage over a period of time”. Of course, the fact that they hid the inflation in cheaper materials, labour, etc is supposed to be lost on you.

    4. the mainstream thinks it’s prerequisite for optimal growth and employment, so their prescription is, get price stability right and market forces will optimize it all.

      however, all the evidence shows that show inflation up to at least 40% doesn’t hurt real growth and, if anything, helps it.

      fact is, people hate inflation, so it has to be addressed as a political situation, not an economic situation

  6. Calgacus: “Their pay is spent in other sectors of the economy”

    Hopefully, the Government lotteries and (hypothetically) soft drug monopolies, right? But if those ELR’ers turn out to be valuable hard asset hoarders ‘gold crackpots’ then all MMT promises are off.

    1. No, just the normal expenses of everyday living. The government doesn’t need and would want to NOT have their money, which came directly from the government in the first place. They aren’t going to hoard because the ELR wage would be a living wage, but not so high as to allow them to squirrel away gold nuggets.

      A WPA style ELR program would be very beneficial right now because of the vast number of formerly unemployed people throughout the economy who have lost their jobs through no fault of their own. They and the businesses that served them that have failed could all be brought back into the working economy, doing productive work and keeping the economic machinery humming near capacity, creating real wealth, providing real services, making life better for everyone – and pretty soon the private sector would boom again, and shrink the ELR program greatly.

  7. “when the ECB started buying member nation debt continues … ”
    “Fears of solvency risks for govts and the banking system are fading fast.”

    Wouldn’t you love to hear what David Walker and Pete Peterson are saying about the ECBs “deficit”?

    Are there DLs (Deficit Luddites) in Europe too?

    OECD says that most euro-nations are, indeed, drifting towards “pre-paid” pension schemes, in line with what the Peterson Foundation claims about “pre-payment” of Social Security benefits here.

    Warren isn’t being overly pessimistic about change. Aggregate outcomes typically have to get worse before a threshold proportion realize they could be better.

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