On 3/1/08, Wray, Randall wrote:

agreed supervisors/regulators need to do their job. however there is also something to be said for economic growth restoring balance sheets. i think his proposal to clamp down hard on banks now to get capital ratios up would make things worse.

Yes, seems it could hurt current demand. The government of Japan wound up buying preferred stock from the banks at the expense of shareholders, much like the sovereign wealth funds are doing today in the US.

No one seems to understand the US doesn’t ‘need money’ from any source, and instead feels the nation owes a debt of gratitude to those who invest $ here.

For a long time no one understood the fundamentals: exports are costs, imports benefits, no govt solvency issues, nominal vs real issues, what is and isn’t a function of interest rates, financial equity for one sector must come from another, savings is the accounting record of investment, loans create deposits, CBs are about price not quantity, etc.- but it didn’t matter that much they all had it wrong on the way up.

On the way down it is turning what was potentially a non-event for the US real economy into a massive real loss for the US standard of living.

The ‘answer’ to restoring domestic demand and enhancing price stability and real wealth remains:

Offer a public service job to anyone willing and able to work:

  1. better price anchor than unemployment
  2. can produce useful output
  3. reduces social costs of current system
  4. provides a channel to ‘distribute’ productivity gains from the bottom up
  5. let’s the market set the budget deficit

Eliminate using the liability side of banking for ‘market discipline’ by lowering the discount rate to the target interest rate and opening it to any bank with any ‘bank legal’ collateral for any gross $amount. The net will be very small in any case.

Use capital requirements for market discipline and also regulate assets as currently is the case.

Get the treasury out of the capital markets by eliminating government securities and leave the excess balances from government deficit spending in bank reserve accounts.

Leave interest rates at zero, and let the Fed concentrate on regulation.

Unilaterally eliminate restrictions on exports to the US apart from quality and env. concerns.

To keep domestic industries deemed essential for national security have government buy from them, but let the private sector source anywhere.

Restore the notion of real terms of trade to national politics.
etc.

But since none of that is going to happen, I see continued weakness and a lower standard of living via ever higher prices and deteriorating terms of trade.

And a Cervantesesque Fed pursuing a merchantalist ideal.

5 Responses

  1. Warren, a local theme park had been employing the local adult citizens. After a time they found it was cheaper to employ the local citizen’s teenagers. With more time they found it was cheaper still to employ latino’s (many illegal) and last month I visited this theme park and a large part of their workforce was from small african nations – places like Gambia. I asked some of the local businessmen now that the theme park has found perhaps the cheapest worker on the planet (short of prison labor), who are just happy to leave the war and jungles back home, how will they streamline labor costs any further? They chuckle and say Japan is coming out with amazing robotic technology.

    I personally feel it will take a lot longer for this theme park to switch from human laborers to robots than it did to replace the locals with latinos and then finally with africans – which was a bout a 10 year process. I just don’t see that many foreign people coming to the USA for jobs like I recall a few years ago, so how far are we from scraping the bottom of the global barrel for the cheapest most motivated worker/laborer? My asian friends tell me that there are many chinese now who wait for work that will pay them a better wage, they just don’t jump to “any” job like in the past. If all this anectodal talk is true, global labor costs have reached the bottom and wages are going to go up no? Still if a Gambian is willing to live in a tent behind the themepark with 20 other Gambians and eat ramen noodles for 5 years, what hope does an american worker who has much higher expectations have of finding employment? The business owner looking to streamline labor costs is never going to hire the american worker over the gambian, the gambian’s “expectations” are so much lower that it may take a whole new generation of americans to appreciate a tent and ramen noodles the same way a Gambian does. You talk of reduced standard of living, I had to give up my trophy girlfriend who was a Bo Derek 10 because she wanted a new car, a new house and 10 trips to the US virgin islands every year to exclusive resorts. The lady I date now, an 8, is happy with used car in a rented condo and a couple nights a week out to the local steakhouse. I agree the “american standard” is going to go down and in my heart I don’t feel sorry it is either. Spoiled Princess has lived la vida loca for too long.

  2. PS I almost forgot, I am thinking of trading in the USA 8 on a Gambian 11, several of the Gambian 11’s have told me they would be happy with one steakhouse dinner a month, a bicycle (no car), and if I would stick around and raise the children I wouldn’t even have to give them much more than a tent (no miami condo). Do you expect me to believe I could ever go back to Bo Derek 10 and tell her listen, its a global world now, you have to change your expectations or you are going to get replaced by the Gambian girlfriend, no, that will never happen, but Bo Derek’s kids who have starved for 10 years may not harbor the same “expectations” as mom.

    I don’t see USA workers changing their expectations this generation to live without, and while their are others who will work harder for less, USA worker is doomed.

    Last year the trucker in the below article was taking the family out to 150 dollar dinners every week, now he doesn’t know how he will buy his daughter a prom dress, boo hoo.

    http://ap.google.com/article/ALeqM5hs2aTIvUJrZa3rqSyTpFVG84yJsQD8V4IGMG0

    Independent Truckers See End of the Road
    By ELLEN SIMON – 1 day ago

    Trucker Robert Griffith is on the road three weeks out of four, pulling oversize loads like crane booms, railroad ties and air conditioning ducts. One of his biggest worries: How he’ll find the money to buy his daughter a prom dress.

    As the cost of diesel doubled over the last four years, his take-home pay has plummeted, from $50,000 to $11,000 last year. He’s literally burning money; he spent $64,000 on diesel in the last eight months. Since he canceled his satellite radio, he’s on citizens band radio constantly (handle: Instigator) talking about what needs to change so truckers like him can survive.

    “I had to learn to live totally different,” said Griffith, 41, of Lebanon, Tenn.

    No more $150 family outings to Shogun sushi. No more weekly washes for his Western Star 4900 EX truck. No more health insurance for him and his family.

    “It hurts,” he said. “I’m a man who’s trying to make a living for my family and I’m not succeeding.”

    continues….

  3. Let me just say any nation with a non convertible currency/floating fx can sustain sufficient domestic demand for full employment. This means the ability to purchase both all we can produce domestically and anything the rest of the world wants to net send us. And set the interest rate at any level they want. There is no solvency issue. And remember, exports are always a real macro cost, and imports a real benefit.

    The next issue is distribution. The labor market is a simple game theory. Workers must work to eat while employers need only employ if they perceive a desired return on investment. So it’s not a fair game, and, left alone, real wages should be expected to stagnate while increased income due to productivity increases flow straight to the top. Hence, and ever widening income gap.

    If this is not a desired outcome for the electorate, the option I suggest is presented in ‘Full Employment AND Price Stability’ under MANDATORY READINGS at this website. (no offense meant if you haven’t seen it)

    The implementation is simple- govt offers a job to anyone willing and able to work at a ‘non disruptive’ wage so as not to materially lure workers from the private sector, apart from a few at the margins. That wage today may be in the $9-$10 per hour range.

    That’s the whole proposal. It eliminates unemployment by some definitions, let’s the market decide the size of the govt. deficit, provides a superior ‘price anchor’ than the current system of only unemployed as a buffer stock, and allows introduction of real benefits ‘from the bottom up.’

    Take a look and let me know what you think.

    Also, seems the way people treat each other goes a long way to explain the universal popularlity of keeping dogs and cats.

  4. Where is Jimmy Hoffa? These truckers seem very mad.

    The implementation is simple- govt offers a job to anyone willing and able to work at a ‘non disruptive’ wage so as not to materially lure workers from the private sector, apart from a few at the margins. That wage today may be in the $9-$10 per hour range.

    Warren thanks for the speedy reply, I will read your material, did you read the entire article I posted, there was content in there where the truckers are about to strike and are demanding government intervention – some of the more choice comments:

    Industries that depend on independent truckers, like logging, are starting to suffer. Maine Gov. John Baldacci declared a civil emergency at the end of November, speeding fuel tax reimbursements for logging truck operators and asking the Department of Transportation to identify roads that could tolerate logging-truck weight, allowing truckers to take more direct routes and save fuel.

    Warren my gas prices are already pretty high, in the 70’s were truckers offered a better deal on gas than regular retail consumers?

    Like other truckers, she’s hoping for government help. “The government stepped in and helped the farmers when they were in trouble,” she said. “Why? Because the farmers feed America, the farmers put food on the table. But who do you think delivers that food?”

    Truckers say they want caps on diesel prices, or tax credits for truckers, as well as increased regulation for the middlemen who broker truck loads.

    Warren, The truckers are asking for Gas Price Controls, I thought the 70’s proved that gas price controls was not so good an idea??!?

    Three-quarters of his pay is going to fuel and maintenance, up from half in the past. And how much work he can cram in is regulated, with the number of hours he can drive capped by federal regulations at 11 a day, all of which must be recorded in a log book.

    “People will say, ‘Run harder,'” he said. “I can’t run harder. You can’t run beyond your log books.”

    Warren I remember watching the movie about jimmy hoffa with jack nicholson, and truckers wanted to drive 20 hours a day, they would put out lit cigarettes into their palms and burn their hands to help them stay awake. This guy could make more money if we let him work 20 hours instead of regulating him to 11 hours, but if I am driving my new Warren Mosler Super Car down the road, do I want a sleepy truck driver who is going to wreck his 18 wheeler into my ride? Have you done any testing on your Super Car to see how it handles a Semi Rig impact at 70 MPH? 😉

  5. what happens is the price of trucking goes up to cover the increased costs.

    It’s not a pretty process as you indicate.

    Think of it as the price of fuel going up until ‘we’ use less.

    Subsidizing the price means the gov’s buying it so prices go up elsewhere in the economy (sometimes via the currency going down).

    It’s a political choice, generally made by politicians who don’t understand the economics, and are influenced by various voters and organizations driven by self interest.

    The macro question is resource allocation, including fuel and labor. With a vision of where you want to go incentives can be put in place to move in that direction.

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