[Skip to the end]

Looks like nothing is trickling down, at least yet, even with 5.7% real growth. Still going the other way, in fact, for the lowest income groups.

On Wed, Feb 3, 2010 at 9:38 PM, Russell Huntley wrote:

From Jon Prior at HousingWire:

Mortgage Delinquencies Pass 10%: LPS

Home-loan delinquency rates in the US reached 10% in December, up from the record-high 9.97% in November, according to Lender Processing Services … which provides data on mortgage performance.

Accounting for foreclosures in the pipeline, the total non-current rate stands at 13.3% …. When extrapolated for the entire mortgage industry, 7.2m mortgage loans are behind on their payments.

More foreclosures and short sales coming!

Note: the MBA reported the delinquency rate in Q3 was 9.64%; the MBA Q4 delinquency data will be released soon.


48 Responses

  1. Which is why I am amazed that you think it is a good time to buy stocks. I held stocks for the past year–largely on your advice–but have recently moved to cash or short because I think that the trend toward deficit reduction will kill this recovery. I think the stock market is already sending that message. I find it hard to understand your newfound stock bullishness. It seems to contradict everything you taught us about deficit spending, aggregate demand, etc.

    1. I think there will be no meaningful deficit reduction for a while and the automatic stabilizers are kicking in.

    1. Apparently, It’s “a no brainer”

      “Deficits are like putting dynamite in the hands of children,” Taleb said in an interview with Bloomberg Television. “They can get out of control very quickly.”

      Poor Swans got associated with his name 🙂

  2. Mike Norman – Inflation is hard without increased wages for labor isn’t it?

    By Christopher S. Rugaber, AP Economics Writer , On Thursday February 4, 2010, 5:49 pm EST
    WASHINGTON (AP) — Employers are managing to boost production without creating new jobs. The question is when they’ll feel the need to ramp up hiring.

    Squeezing more output from their existing staffs allowed companies to boost productivity in the October-December quarter. And last week, the number of people filing new claims for jobless aid rose. The two Labor Department reports Thursday suggested that companies are still cutting costs and putting off hiring even as the economy recovers.

    Many employers lack confidence that the recovery is sustainable, especially as government stimulus measures fade, economists said. Companies still feel bruised from the recession.

    “Businesses have been through a traumatic experience and are going to be cautious about hiring,” said Julia Coronado, senior U.S. economist at BNP Paribas.

    Productivity rose by a seasonally adjusted 6.2 percent in the fourth quarter, above analysts’ expectations of a 6 percent rise. That was the third straight quarter of sharp gains. It indicated that companies are squeezing more output out of their work forces.

    Productivity often increases at the end of recessions as companies ramp up output before hiring new workers. Rising productivity can raise living standards in the long run. But it can also make it easier for companies to put off adding jobs.

    “It is starting to look as though the downward trend in claims … has stalled,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients.

    On Friday, the Labor Department will issue its January employment report. Economists project it will show a tiny gain of 5,000 jobs. That wouldn’t be nearly enough to lower the unemployment rate, which is expected rise to 10.1 percent.

    Most economists say claims need to fall to about 425,000 or below for a month to signal that employers are stepping up hiring.

    “You can push your workers but so far,” said Anika Khan, an economist at Wells Fargo Securities. “At some point businesses have to begin to hire.”

    What’s not clear is when. Employers are increasing the hours worked for their current employees and adding temp jobs, Coronado said. Those are positive signs that companies want more labor.

    “But it hasn’t yet spilled over to permanent hiring,” Khan said.

    An example is Marvin Windows and Doors in Warrod, Minn., which has reduced the hours for most of its 5,000 employees from full time to 32 hours a week. And spokesman John Kirchner said the company isn’t going to hire anyone before all its workers are back to full time.

    Khan thinks the economy could begin generating net job gains as early as March. But they won’t be enough to hold down the unemployment rate. Wells Fargo expects the rate to peak at 10.5 percent in the second half of this year.

    Employers have shed 7.2 million workers since the recession began. Productivity has jumped as the economy has begun to recover. The nation’s gross domestic product, the broadest measure of output, rose 5.7 percent in the October-December quarter, the fastest rise in six years.

    Productivity is the key ingredient to rising living standards. It enables companies to pay workers more without raising prices and spurring inflation.

    A separate report from the Commerce Department reinforced that manufacturing activity has become a pocket of strength in the economy. Orders to U.S. factories posted a big gain in December — rising 1 percent last month, double the forecast by economists surveyed by Thomson Reuters. The advance was the eighth in the past nine months. It was led by orders for metals such as steel and aluminum, as well as machinery.

    Meanwhile, the number of people continuing to claim unemployment benefits was unchanged at 4.6 million. That data lags behind initial claims by a week. But the continuing claims don’t include millions of people who have used up the regular 26 weeks of benefits typically provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.

    More than 5.8 million people were receiving extended benefits in the week that ended Jan. 16, up from about 5.6 million the previous week. That figure indicates that overall hiring hasn’t picked up.

    Other employers are still cutting jobs. Wal-Mart Stores Inc. said Wednesday that it will eliminate 300 administrative jobs at its headquarters. The company has cut almost 14,000 jobs in the past 13 months, including 11,200 positions at its Sam’s Club stores.

  3. Taleb might be smart when it comes to swans but when it comes to sovereign currency debt he is an idiot. I hope he and lots of people like him short Treasuries when the other idiots–the rating agencies–downgrade America’s credit rating, which they will. Once Taleb and the others are good and short, I will be buying like crazy and plan to retire on my yacht after this trade.

      1. No Curious.

        If Govt does not raise debt ceiling, it just caps how many Treasuries they can issue. So all that will happen is that reserves pile up, and since there are already lots of Fed reserves and Fed is paying interest on them, nothing will happen.

      2. Thanks for correcting my mistake Zanon.

        If the gov’t doesn’t raise the debt ceiling though, how does the Fed balance its books?

        Any reserves that the Fed gives to the Treasury, increase the Fed’s liabilities. What asset does the Fed get in exchange, if not Treasury securities?

      3. Fed does not need to give reserves to the Treasury.

        Govt spends, creates reserves, they can sit there quite happily doing nothing (as they are doing right now). The Treasury can balance its books by going into overdraft, although that would require a change in law as well. I have no idea how close the Treasury is to doing that though. They can probably also come up with some tricky thing that lets them balance their books without formally announcing an overdraft if it comes to that.

        I don’t think it will happen though. The only thing that would actually result in a debt ceiling being kept is if someone in Govt wanted to prove a point. BoE almost did this when they spoke about stopping issuing gilts.

  4. Auto stabilizers have kicked in and are only sustaining the economy with 10% unemployment. That’s not enough. Nor is the deficit sufficient to bring down unemployment, so even if the deficit remains at current levels it is not bullish for stocks. That means ANY deficit reduction or spending freezes, no matter how small or surgical in nature, are detrimental to the economy and by corollary, to the stock market.

  5. I just love watching this stuff 🙂

    Don’t short those treasuries. The current crisis in Europe – Mike Norman called it over a year ago as he did the Chinese stock market rally. And late summer 2008, he said short the Euro. Pay attention to Mike and you’ll see – he definitely has it going on right now. 🙂

  6. When Obama says its time to sell…..

    If there is a crisis it will be to get people’s attention. Once there is enough attention, legislative action will be taken.

    The question/timing on how to ‘spin’ a fall in the market in a way to achieve a POTUS objective (Volker Rule, Obama Levy, Health Care, Jobs Bill).

    It would be interesting to watch, though I’m not going to be caught standing on the sidelines as who knows what happens?

    Already the Fed is backpedaling on withdrawing quantitative easing.

    “The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness, ”


    I think a severe market contraction will result if the status quo of legislative inaction continues into the end of March, which will then qualify the economy for a new round of Fed/gov stimulus.

  7. two things.

    this isn’t a bad stock environment apart from the eurozone melt down. when/if that gets resolved and/or otherwise fully discounted stocks should be more than ok. earnings are reasonable, multiples low relative to interest rates, and the deficit is large enough for real nominal growth which should translate into some top line growth, with productivity gains adding to bottom line growth.

    the end of qe is adding to the selling and it’s for the ‘wrong reason’ as qe doesn’t matter either way, apart from a modest decrease in agency mtg rates.

    second thing. if tsy spends without selling tsy secs when it uses up its balances at the fed the additional spending will be booked as an overdraft at the fed, which is not allowed. so the no overdraft rules and the debt ceiling rules combine to force the tsy to issue secs first and then spend. operationally this is entirely unnecessary and at the macro level these self imposed constraints serve no purpose apart from being potentially disruptive and counter to public purpose.

    1. The CBO not projecting a surplus and announcing that they will retire the public debt in 15 years is a good sign!

      Warren: I am surprised that they do not allow overdrafts. I have read – probably here or Scott/Randy’s papers that they target a balance of $5B everyday. The Treasury also has a quick access to the TT&L account, which seems more at the control of the Fed. I think now the amount is much higher than $5B because of higher Treasury issuance, but it is surpising – so many things have happened over the years/decades and the Treasury does not get itself in the overdraft position. Is the direct purchase of Treasuries by the Fed allowed ? Of course they – the Fed- will NEVER bounce a check because it will bring down the system.

      Of course I understand that this is a voluntary constraint and is not needed and a waste of lot of manhours of the Fed/Treasury- my question is about an operational issue.

      1. Warren’s right, of course, but I just want to reiterate here (since I’ve seen the point he made interpreted incorrectly by Keen’s commenters) that this doesn’t change the fact that deficit spending comes first, even under current operating requirements.

        To buy a Treasury, you need reserve balances, as that’s how they settle at auction. Where do reserve balances come from? From previous govt deficits (either already circulating or put into circulation when the Fed buys a Tsy security, which is obviously the result of a previous deficit). The only other option is to borrow the reserve balances from the Fed (repo, standing facilities, overdraft).

        So, as we’ve always said, the funds to buy Treasuries come from previous deficits or borrowing from the govt sector. It’s not the case operationally that the govt sector is borrowing from the non-govt sector, no matter what silly gymnastics the Tsy is required to do by Congress when it runs a deficit.

      2. Scott,

        how does the very first $1 of reserve balances come into existence?

        The Treasury has to borrow it from the Fed, since there is no money in the private sector yet and the Fed is the only 1 who can print money.

        Once the Treasury has that $1, it can spend it and subsequently borrow it from the private sector, but all the money that the Treasury spends, must be borrowed first.

        Since the Treasury cannot overdraft and it has a limit on how much it can borrow, if the debt limit doesn’t get raised, there is a possibility of default (albeit self inflicted), correct?

      3. Scott,

        I understand your point. Yes in the life history of a country, spending comes first and then taxes and government bond issuance. In a short time frame, say one quarter, I don’t look at it it that way really – the question of which came first really does not bother me, though they will keep haunting Keen’s commenters! I just see it as balance sheets evolving over time.

        My question was regarding the fact that the Treasuries balance has not gone negative, let us say in the last 30 years. Purely technical, nothing conceptial really. How did they mahage that ? Most countries have an overdraft – serves as a good buffer. Can the Fed purchase securities directly from the Treasury ?

      4. There are three separate issues here that don’t necessarily overlap, though they are often talked about as if they do. I plan to do a blog on this to elaborate further.

        First, buying a Tsy today requires either a previous deficit or borrowing from the Fed. There’s no real way around it in the current system, and this is unrelated to whether the Tsy has to have a positive balance in its account before it spends or if there is a debt ceiling. It’s just how the accounting works.

        Second, whether the Tsy gets an overdraft from the Fed or issues a security to the non-govt sector, the rate it pays is set by monetary policy, not the market (aside from expectations of monetary policy that drive lt securities), so there’s no real difference. Here, it doesn’t really matter if the Tsy is forbidden from Fed overdrafts.

        Third, if the debt ceiling isn’t raised AND the Tsy can’t get overdrafts from the Fed, then there can be self-imposed default and all kinds of other problems, regardless of the first two points.


      5. Ramanan,

        Scott has covered the critical structural issues.

        My assumption is that Treasury has good daily information on total disbursements from the general account at the Fed. They know what outflow they need to cover to avoid overdraft. They can cover that outflow with:

        a) Buffer levels in the general account
        b) Buffer levels in the TT&L accounts, available for transfer in
        c) Settlement of net treasury issuance

        This is all front end cash management. It doesn’t negate the fact that Treasury issues securities in response to the trend effect on bank reserves of government spending net of taxes. Issuance depends on the desired trend reserve level in that context.

        That’s my assumption, since I haven’t read much on this lately. Somebody can correct if necessary.

      6. That last sentence on “issuance depends” is only vaguely right at best.

        I’ll stop there before doing more damage.

        Yes, Scott. Please do a blog.

      7. Scott/JKH – thanks – point 2 is close to what I was looking. Waiting for the blog. There is a minor thing about issue #1: a non-bank does not have reserves and doesn’t need reserves because the Fed accepts bank deposits for purchasing Treasuries. However, banks need to do the settlement – even though they may not be involved in the transaction. The Fed may do a repo post the purchase of Treasuries.

    2. JKH: Keenisian Economics is now going to consider the bank capital : check out comment #107 here


      Found Steve’s comment in my feeds luckily and commented on it as well.

      Thought it might interest you since you have managed to convince him that there is no such thing called banker’s deposits and that he should consider the equity account.

      1. Yikes. I wouldn’t want to be accused of having convinced him of anything based on his comment 107.

        A repaid loan changes the composition of credit lines from utilized to unutilized. It reduces risk weighted assets. And it changes capital allocation, reducing utilized capital and increasing excess capital. But it certainly doesn’t affect nominal capital. The paradigm he’s created might be salvageable if it were properly reformed, translated and framed in a risk management context, but it is the height of confusion and error in any standard accounting context.

      2. Ok JKH – apologies – I just wanted to say he is thinking of removing the usage of “banker’s deposits”

        I see what you mean – he may end up with confusions similar to required reserves, excess reserves etc… rt ?

      3. That’s OK – he gave the impression at one point he was going to consider changing something. But he’s still with it, as I expected – it’s hard to change ways of thinking about things.

  8. Scott says “It’s not the case operationally that the govt sector is borrowing from the non-govt sector…..”. I think this phraseology is misleading.

    If I build highways for the government, my account at the Fed is credited (or rather the account of my commercial bank at the Fed is credited, and I have a healthy bank balance at my commercial bank).

    I can then lend that money back to government if I want. I.e. shouldn’t the above sentence of Scott’s be re-phrased – something like: “Government can borrow from the private sector, although the relevant units of currency being lent were create in the first pace by the government/central bank machine.” Is that a more accurate description of what is going on?

  9. when you buy tsy secs, your bank’s reserve account at the fed gets debited and a securities account at the fed gets credited.

    in other words, functionally, buying tsy secs means the fed ‘moves dollars’ from a ‘checking account’ at the fed (reserve account) to a ‘savings account’ at the fed (securities account)

    there is no operational connection between this process and spending, which, operationally, is just the fed changing numbers up in someone’s bank account.

    the tendency to charterize numbers being changed up and down on a spread sheet as ‘moving something between accounts’ can be misleading, as nothing ‘moves’

    perhaps a bit, though not exactly, like talking about waves rolling in from way out to the beach. the water itself is only moving up and down.

  10. when you buy tsy secs, your bank’s reserve account at the fed gets debited and a securities account at the fed gets credited. What are the differences in operational accounting flows when a treasury bond is sold by the treasury, to fund its reserve account at the fed and a treasury bond sold by the fed as an interest rate maintenance operation?

  11. none as far as the private sector is concerned.

    in either case we ‘send’ the Fed dollars, and get them back later plus interest.

    That was my original ‘revelation’ back in the early 90’s when it dawned on me the whole ‘govt debt’ was nothing more than a glorified reserve drain

  12. 1. When I buy a treasury security directly from the Treasury, the Fed moves reserves from my bank’s reserve account to the Treasury’s reserve account.

    The Treasury in their computer credits my securities account by the same amount.
    2. When the Fed buys a treasury security directly from the Treasury, the Fed credits the Treasury’s reserve account and also its own securities account.

    The Treasury in their computers credits the Fed’s account by the same amount.

    Is that correct?

    1. I believe the Fed does not generally buy direct from Treasury. It buys from the market, crediting bank reserve accounts.

      Also, Treasury’s operating account at the Fed is technically not a reserve account. It is just a checking account, referred to as the Treasury general account.

      Treasury also has something called a supplementary financing account at the Fed. It was used actively in the early part of the crisis as part of the mechanism to drain excess reserves. Treasury issued bills and left the proceeds in the SFA. It’s no longer used to the same extent now, since the Fed just pays interest on excess reserves.

      see here:


      1. I believe the Fed does not generally buy direct from Treasury. It buys from the market, crediting bank reserve accounts. Thats right. I asked Warren that offline and he confirmed that to be the case. Also it seems logical that the treasury’s balance in its Fed account does not get counted in the monetary base because they are not a federal funds market participant? Can someone confirm that?

      2. Both points are correct. The Fed has been prohibited since 1979 from buying Tsy’s at auction and is only allowed into the secondary mkt (prior to that, it’s authority to do this was sporadic). The Tsy’s account is not part of the monetary base . . . changes to the Tys’ account have the opposite effect on rb’s and thus the monetary base.

      3. Isn’t this just the traditional view of money creation in a nutshell? People think because the Fed uses the secondary market, they make money, but if they bought directly from the Tsy, they wouldn’t be making money.

  13. Open question on whether or not the government borrows:

    Suppose the entire commercial banking system consisting of a single institution. Such an institution would be a monopoly provider of deposits, roughly speaking. It would still take risk and it would still be constrained in risk taking by capital, both of which distinguish it from the central bank in the normal course. It could still issue debt. If it issues debt, it replaces deposits. That’s not so dissimilar from the idea of Treasury debt replacing reserves. Would it be incorrect to suggest that the commercial banking system is borrowing in that case?

    In the actual case, individual banks in a competitive system still use debt to replace deposits somebody has created. Is it incorrect to say they have borrowed? We tend to say they’ve borrowed (notwithstanding the somewhat separate fact that banks don’t borrow reserves per se from non-banks).

    So if the terminology and meaning of “borrowing” is wrong for the government, shouldn’t it be wrong for the commercial banking system as well?

    One rationalization might be that the actual commercial banking system is competitive, without a monopoly supplier of deposits. The fact that the system as a whole creates deposits on a self-sustaining basis, but that individual banks compete for them might suggest more strongly that they borrow. Still, I’m not sure I see the distinction between borrowing where the means of payment is from one’s own deposits versus from somebody else’s deposits, monopoly issuer or not.

    I’m wondering if semantics is getting in the way here.

    1. JKH: You raise an interesting point. Certainly I feel that “debt” is not the right word for the accumulation of period deficits at the Federal level.

      I think implicit in notion of “debt” and “borrowing” is the idea that eventually the money will have to be paid back. This is true for banks, but not true for the Fed. Maybe this is the distinction?

      1. deficit spending in the first instance is a credit to a reserve account at the fed.

        a tsy sec is a credit in a securities account at the fed.

        the fed is ‘scorekeeper’ and simply debits one account and credits the other when tsy secs are purchased and when they mature.

        the national ‘debt’ is the total funds held by ‘outsiders’ in these ‘savings accounts’ at the fed.

        all the fed owes is to transfer them back to ‘checking accounts’ at the fed.

        the govt functions as ‘transfer agent’

        it is ‘debt’ in the broad sense in that something is owed.

        but all the govt owes is a bank statement.

        yes, i know this isn’t quite to the point

      2. Winterspeak,

        I just saw WM’s response to you as well, which I like a lot, particularly “but all the govt owes is a bank statement.”

        On your point, actually, the banks just credit the account of the debt buyer. If the banks aren’t reserved constrained, which they aren’t, they won’t have a problem paying for this in the clearing. But your point more generally reinforces my notion that the deeper underlying issue has to do with the position of a monopoly issuer.

        More generally, it’s only a subtle point that I’m raising. I’m not questioning the basic MMT observed fact that a currency issuer doesn’t have to worry about attracting funds in order to float debt. And maybe it shouldn’t be called borrowing or debt. I’m just trying to go a little deeper and asking the question whether there is an element of this thinking that doesn’t apply to the commercial banking system as well. The currency issuer spends its way into a net liability position that can be met by issuing reserves, currency, or debt. The commercial bank lends its way into a “matched” position that can be met by issuing deposits or debt. The mechanism by which one is converted to the other is similar. It’s the constraint and the profile of the balance sheet that are different. The currency issuer is constrained by real economy capacity and its implications for inflation. The liquidity (i.e. risk free (net) financial assets) it provides allows it to generate a net liability or negative (technically) equity position. The commercial bank is constrained by capital, whereby it must keep a positive equity position. Yin and Yang – negative equity and positive equity. (Remember our negative equity discussion?)

        Likewise, WM’s scoreboard analogy applies in a reduced form way to the commercial banking system. If I were a smart ass commentator lurking in the background at CNBC, I might ask after the interview, don’t the commercial banks have their own scoreboard? That would assume of course that such a commentator knew something about the monetary system.

      3. JKH:

        Oh yes, no one is taking issue with the basic MMT (or PK or whatever) principle.

        I do remember our equity discussion, where I suggested that Govt carries a negative equity entry and call it “paid-out capital”. I think you did not like this formulation. It does stake out a clearer distinction between what a bank does and what the Fed does.

        Personally, I’m still recovering from your revelation that ALL bank spending is generated by balance sheet expansion.

      4. I will return with a more thoughtful assessment of the “paid-out capital” notion at some future date. It’s never too late for redemption.


      5. Looking forward to it.

        I think this may also touch on the conversation I had with SRW at Interfluidity.

        Although deposits are bank liabilities, I think they are fundamentally different from bank bonds in that they represent a “not-spending” decision, and not an “investing” decision. SRW wants to it to become an investing decision. I think that approach is a fools errand.

      6. This is a side show, I guess. It doesn’t detract from the fact that the operational story about government deficits is the right one.

Leave a Reply to warren mosler Cancel reply

Your email address will not be published. Required fields are marked *