Thanks,
It was an hour interview and to some degree taken out of context.
I would not buy euro here- chart looks terrible!!!
But I would look to see it show signs of turning with an eye to getting long, probably vs the yen.
The problem with the euro zone has been a tendency for the currency to continually adjust to levels where the trade balance can’t go into surplus in a meaningful way, like China, Japan, and Germany before the euro.
To run a trade surplus generally requires tight fiscal to keep domestic demand down, but then a policy of buying fx (off balance sheet deficit spending) to keep the currency ‘competitive’ to support exporters at the expense of the macro economy.
Euro May Rise to $1.60 Due to Austerity: Economist
By Antonia Oprita
June 4 (CNBC) — Austerity measures imposed by the euro zone will likely push the euro back towards $1.50 or even $1.60 but the European currency is unlikely to achieve the status of reserve currency, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com Friday.
The euro has fallen sharply versus the dollar since the euro zone’s sovereign debt worries began, with many analysts predicting it will slide to parity with the greenback or even below.
But Mosler thinks the recent plunge has been caused by portfolio adjustments – investors shifting assets from euros to gold or dollars – and that this trend is nearly over.
Rising taxes and spending cuts, pledged by governments in the single European currency area to cut debt, are “like a crop failure” because they will decrease the amount of euros available, he said.
“Everything they do in the euro zone is highly deflationary,” Mosler told CNBC.com in a telephone interview.
“I think there’s a very good chance the euro would be stronger because of the austerity measures; this can very easily get it back to $1.50-$1.60,” he added.
To keep the euro down, the ECB would have to buy dollars but “ideologically, that would mean they’re accumulating dollar reserves,” which the European Union does not want, Mosler said.
The euro is unlikely to become a global reserve currency because the EU’s economic policy is geared towards growth based on exports and the euro zone is running a surplus, he explained.
“The only way the rest of the world will hold your currency is if you run a trade deficit,” he said. “Economics is the opposite of religion, it’s better to receive than to give.”
The ECB Could End the Debt Crisis
The European Central Bank could easily appease the fears of default which have plagued markets regarding by creating money and giving it to its members, Mosler said.
The ECB, “if it wants to credit any nation, it can,” he added. “The ECB could make a distribution of, say, 10 percent of GDP to each member. The ECB can just credit the accounts of the member nations based on how many people they have. That would reduce all debt ratios this year by 10 percent.”
The measure would not contradict EU anti-bailout rules, since the money would be distributed equally among members and if the cash is used to cover the deficit would not be inflationary, Mosler added.
“My proposal is to put the ECB in a position where governments become dependent of checks from the ECB,” he said. “Operationally, it’s very simple to do, you just credit their accounts. The Finance Ministers would direct the money.”
The central bank could make this an annual distribution, and attach financial discipline conditions to it, such as respecting the EU’s Stability and Growth Pact.
The country that does not respect the pact does not get the money, making it a more powerful enforcement mechanism and helping fight speculators at the same time, he explained.
“Austerity measures imposed by the euro zone will likely push the euro back towards $1.50 or even $1.60…”
This makes sense. How did you come up with the $1.50 – $1.60 price range though?
Considering laws of supply and demand this makes sense but certainly, there must be something else going on. Austerity is the new buzz word. At TJ Maxx the other day I over heard a little boy say “We have to start practicing austerity.” I don’t know what he was talking about or who he was talking too but my point here is, isn’t it possible that markets have already responded to and factored in this mindset?
I don’t see why austerity measures would increase the Euro. Any money withdrawn from the private economy as a result of a fiscal surplus has to be re-injected by the Central Bank (or the Government through the repurchase of some of its debt) so that it does not affect the ovenight rate.
In Canada, we were mostly in a fiscal surplus situation in the last 10 years, and any money withdrawn from the private economy as a result of the fiscal surplus was re-injected the same day in the form of loans to financial institutions through daily auction of Receiver General Account balance. (Canada did not use its surplus to repurchase its debt just like Norway)
A fiscal surplus does not decrease the level of money in circulation, but does decrease net private wealth overall. If government repurchases its debt, then it decreases money holding of one individual, and swap money for treasuries with another individual (the individual holding the treasury that is repurchased). If the government does not repurchase its debt, then it simply confiscate the money of one individual and grant a loan to this individual (through an auction process of Receiver General Account balance in Canada for example). In both cases, the amount of money in circulation does not change, private net wealth does decrease however in both cases.
I’ve come back to this thread to understand the Euro appreciation (or not) argument. Would someone care to qualify Qc’s argument above?
When talking about (managed) fx rates, then don’t you need to talk about fx market?
If Government run surplus, the private sector NFA decreases as accounting requirement. Government may need to alter composition of remaining private sector asset to maintain target interest rate, but quantity of private sector NFA remains at the same (lower) amount.
In and of itself, I do not see how this impact fx channel, and therefore exchange rate.
Both Krugman and Aurbach talk more about Canada example:
http://krugman.blogs.nytimes.com/2010/06/10/oy-canada/
http://www.newdeal20.org/2010/06/09/the-united-kingdom-draws-the-wrong-lessons-from-canada-12009/
It will impact the fx market through domestic aggregate demand and therefore foreign trade. Domestic aggregate demand will drop, which will cause imports to drop. Excess capacity will cause prices to drop, which will make exports more attractive to trading partners. So the trade balance goes more positive (or less negative), which creates more demand for the currency. The currency appreciates which then feeds back on the trade balance to arrest the appreciation. I think this is what Warren means when he says that he guesstimated a 1.50-1.60 range on the Euro because that’s where the last equilibrium was reached when the Euro was being driven higher by a trade surplus.
Thanks.
Reduction in debt though higher taxes must correspond to reduced trade deficits : less money out to buy imports, less money in from selling debt.
Taxes are a money destruction, so as an international asset it is more scarce, hence the appreciation, was how I understood WM’s argument.
I’m just trying to make this into something coherent.
Also, Qc was hinting at some kind of compensation mechanism.
ESM:
Are you sure that lower domestic AD means imports will drop? Is that absolute or relative? Suppose country manufacture luxury locally (can sustain high labor cost) but imports inferior good. Then, at lower AD, total import may be lower but balance between import and export may tilt to even more imports! Maybe if you take it far enough, imports may INCREASE.
Not sure what happens in the real world, this may be like the geffen good, exist in theory hard to find in real life, but still I do not see how you can say with certainly that lower AD mean lower import.
I agree that excess capacity makes prices drop, which may benefit exporters. But that is assuming all else is equal, I do not think that is necessary the case here.
I picked 1.50-160 as those were the old highs ‘needed’ to keep exports in check, as per the above logic.
And yes, markets could already be discounting austerity at least to some degree.
Feels to me like we are in a violent trading range as previously discussed as stocks can gap up a lot or down a lot depending on if the eurozone figures it out or not. and china too.
My personal estimate is also for 1.60 range. This assumes that many foreigners will not want to hold euro debt.
However, if the Euro is able to regain international credibility, we could easily see the Euro at 2.00+
the reason for this is pretty simple. We know what creates money. The eurozone is proposing true money growth that is a fraction of what it is in the other major reserve currency.
If the Euro regains credibiltiy, this means that the old levels of 1.50 are valid. If it then has additional austerity measures, then 1.70 is valid. If it it also increases its allure to holders of reserve currency, then 2.00 is a easy target.
This is probably going to prompt, again, some murmurs of indignation about messing with MMT, but so be it.
WM is explicitly recognizing here
“thé central bank could make this an annual distribution, and attach financial discipline conditions to it, such as respecting the EU’s Stability and Growth Pact.”
that the SGP has been so far fictitious (I should add: just as the rule not to purchase sovereign debt). Not even any need for “a nod from parliament”, to borrow an expression that was used to sum up the advantage of the US (replace parliament by US congress), only the agreement of the Eurogroup, essentially Merkel and Sarkozy and a nod of pure from all other heads of states (compare that with reaching bi-partisan agreement in Congress).
And yet, have we not trench-warfared over the issue? I’m waiting to hear that it was never questioned (perhaps by cherry-picking a few quotes from Marshall’s latest) and reminded that it’s the probability of default that really demarcates EMU from the US (remember : “teeny- weeny”). How about this, then?
“I think there’s a very good chance the euro would be stronger because of the austerity measures; this can very easily get it back to $1.50-$1.60,”
Would it not imply that EMU’s probability of default is “teeny-weeny”, in the eyes of the market?
How did we go from “checks will bounce” to checks will be handed out?
“The ECB can just credit the accounts of the member nations based on how many people they have”
I suppose the first assumption wasn’t so relevant, after all, I suppose?
Is this proposal
“The ECB can just credit the accounts of the member nations based on how many people they have….The measure would not contradict EU anti-bailout rules, since the money would be distributed equally among members”
not framed in a manner to suggest it has some chance of being envisaged? In this case, what’s left to support the claim that EMU is operationally constrained (well politically constrained, but in terms of “ability”, not “willingness”), like a US state? That the US Federal government could do just the same for the 50 states, so the EMU/US states analogy still holds? Ridiculous.
Really, all these 500 comments (Marshall’s latest) to defend the view that EMU is like a US state, has been a (poor, in my view) exercise in keeping up appearances, and I could easily find contradictions among supporters of the same cause.
“To keep the euro down, the ECB would have to buy dollars but “ideologically, that would mean they’re accumulating dollar reserves,” which the European Union does not want, Mosler said.”
Would not the real terms of trade improve in favor of EMU, by letting the Euro appreciate, as per MMT?
“The country that does not respect the pact does not get the money, making it a more powerful enforcement mechanism and helping fight speculators at the same time, he explained.”
The no bailout rules were intended to never have to worry about countries running deep deficits as speculators would keep them in check, and it failed. So, after waving the big stick, now we should wave a carrot, with this string attached : we’ll give you upfront what otherwise would have warranted use of the stick, but after that, don’t come begging for more! The markets can only conclude one thing : there is no stick only carrots.
daring do there
also, n’er answered:
what is the effect of the $ 1 trillion on the ECB balance sheet?
I think it must be negative capital; not overdraft
“what is the effect of the $ 1 trillion on the ECB balance sheet? I think it must be negative capital; not overdraft”
What you are saying, I think, is that the transfer will not be recorded as an overdraft to the member states’ Tsys, but as transfer of the ECB’s capital to them, which would be self defeating, to some extent, as the ECB’s capital is donated by the member states in the first place. No, I think it has to be an overdraft or something that isn’t but amounts to the same thing (purchasing bonds, whatever).
Another would be to
1) To raise the SGP ceiling for as long as deflationary forces are at play
2) To have a centralized bond issuer for all member states,
rather than national ones.
1) Showing some sensible macro policy can only benefit the credibility of EMU, and the approach will seem less lax than handing out checks, although it amounts to the same thing.
2) Given that it’s understood that member states will support each other, or so they claim, that would seal the agreement.
Greece would not have to pay a premium on borrowing costs, which ultimately is borne out by the entire EMU community (if/when it has to bail out).
Also who keeps the purse controls spending i.e. spending arrangements between each other would be binding operationally, not as a result of incentives that may not work.
Quite right; it would be self-defeating.
But I was only addressing the $ 1 trillion proposal as I’ve seen the details of it – which is basically zero details. The only thing I understand is that treasury accounts get credited through some sort of pixie dust process. I haven’t seen the proposed accounting, so I’m surmising about it.
My understanding is that the proposal pretty much endows the ECB with a supranational fiscal effect capability – like a supra helicopter drop.
So I’ve been assuming it doesn’t buy bonds. (For one thing, there are no supranational bonds to buy. That’s not insurmountable, but its an inconvenience.)
The only other thing left is a debit to capital as the offsetting accounting entry. The existing capital position does have a supranational, or multinational, characteristic.
Of course, if you ignore accounting (which we are often told we should do when it obscures “underlying intrinsics”), then you just credit the national treasuries pro rata and forget about it. That’s pretty well the equivalent of turning the ECB into a supranational fiscal authority from a formal institutional perspective – i.e. consolidating the central bank with an on the spot comparable supra fiscal authority.
btw, its not really a transfer of capital – the credit still comes from the CB writing a check
from an accounting perspective as I prosposed it, its a central bank expenditure that comes out of equity and therefore creates a negative capital position
as opposed to a loan via purchasing bonds
the key is that it’s accounted for as an expenditure; that’s why it comes out of equity
there’s nothing in theory preventing a central bank from running with negative capital indefinitely – just present value the seigniorage long enough and you’ll get the capital back
dealing with the capital position is a function of the reality of a deconsolidated institutional framework
if you consolidate on a pretend basis or formally, as per MMT, you can forget about central bank capital because it just comes out in the wash of what is effectively a much larger negative capital position for the combined G+CB entity – from a formal balance sheet perspective
your proposal might make sense
I was just considering the one that’s been on the table quite some time now
(i like taking it one step at a time)
so maybe its not entirely self-defeating
negative capital would be a bookkeeping device to allow an expenditure that could be “covered” from a bookkeeping perspective over future years
again, if you create/consolidate supra-institutions (G + CB) formally as per boiler plate MMT, you don’t have to worry about any of this
but i like to know how proposals are going to be dealt with in the world in which we actually live now
Bx12,
Not sure what you actually are looking for. Here is what I have to say.
The problem in the Euro Zone has lead to massive suffering of citizens living in the area. Now, before the rescue plan and without the intervention of the ECB, some countries’ governments would have defaulted surely. Now Warren’s idea would be to just break the Euro Zone and go back to the original setup. This seems difficult because there is resistance and because of that people continue to suffer. So in case, they want another workable solution, Warren’s proposal is what you have been seeing. As he mentioned in a video in another post, this is a better system than imposing fines and will make countries do something rather than be the mercy of markets – at least to some extent.
For example, in Greece the problem is that the informal economy is huge and taxes are not collected. This will force them to act.
As far as the Euro is concerned, it will keep getting difficult for them because in the medium run, huge dependency on exports seems like the only way out. However, that is problematic because the markets will not allow them – the exchange rate may move such that it makes it difficult for the EZ to have an export led growth.
BX,
SGP: not fictitious. Current austerity measures in spirit of SGP. Short term Unemployment data in Euroland already ticking up (going to be long hot summer, I wonder how many cars will burn). EU did give nod, imo they drove the current band-aid measures as ECB was sitting on hands.
FOREX of Euro: To paraphrase Prof Wray who literally wrote the book: ‘As long as there are legal taxes levied and enforced for Euros, the Euro will have value that can float up or down. Euro could go up if Greece defaults.’ My take: forex not related to solvency issue.
Checks will not be handed out, in WMs proposal balances will be provided to Govts. so as to avoid chaos that could result from defaults where j6p always gets screwed and specs profit.
If EMU nations were like the US govt in authorities/arrangements we wouldnt even be having this thread. Resp,
“SGP: not fictitious.”
There you go again, arguing over the subtleties of the English language.
“Checks will not be handed out, in WMs proposal balances will be provided to Govts.”
Double speak.
“To paraphrase Prof Wray who literally wrote the book”
As opposed to figuratively write a book?
“If EMU nations were like the US govt in authorities/arrangements we wouldnt even be having this thread.”
Here’s what I call fudging the issue. I would not have this conversation had the claim not been made that EMU is a like a US state, NOT that it is only unlike the US gov.
“Not sure what you actually are looking for.”
Why not? Explain yourself.
anon,
The capital showing as a liability of ECB is an asset to the Tsys of the member states. The ECB can rename part of that capital “deposit” and likewise from the perspective of the Tsys. Once the Tsys start spending, the ECB only reshuffles the deposits from the spender to the beneficiary. Overall, the operation is like a stock repurchase. It’s not handing out money, so I don’t think that’s what is intended.
Handing out money must come through an increase in the B/S of the ECB i.e. deposits as a liability and Tsy IOUs as assets. Only MMT claims that Tsy liabilities are virtual. Hence the oft repeated claim that the government is not revenue constrained. I take issue with that, but it’s another matter.
For the matter at hand, I’m only saying two things:
1) MMT’s contribution is to recognize the following hierarchy : (ECB + Tsy) –> Banks –> Non bank private sector
To claim that EMU member states are like a US state is to put them at the bottom of the hierarchy. If supporting that claim hinges on particular subtleties of the English language, it’s not fooling me.
2) Yes, the helicopter drop is like gov spending. But handing out money looks like welfare, even if you attach strings to it. Even though it amounts to the same thing, it’s better to leave the initiative to member states to increase their spending, but within raised SGP limits, and announce that this is a recognition that SGP needs to be contra-cyclical.
Binding agreements between member states can be made more credible by having only one bond issuer (A Euro treasury, if you like). Greece would not be able to issue Greek-Tsy bonds hence spend beyond agreed limits. The upside is that they won’t have to pay higher borrowing costs. All would benefit as ultimately Greek’s debt burden falls on everyone else (with some probability).
“The ECB can rename part of that capital “deposit” and likewise from the perspective of the Tsys”
No. There’s not anywhere near enough capital to do that. Capital is minuscule compared to the outlay in question – $ 1 trillion.
that’s why capital goes negative
and it is handing out money
checks are disbursed
deposits with the ECB go positive
capital goes negative
essentially the same way a government does by increasing bonds, except gov doesn’t record negative capital through normal accounting
$1T a year will lead to the interbank rates falling to the deposit facility rate of the ECB.
There are already excess deposits in the system.
Yes what I meant was that it will lead to banks reducing their indebtedness to the ECB/NCB (the “claims on banks” on the Eurosystem will go down) and then there will be excess reserves without “Advances from the Eurosystem” /similar item on the banks’ liabilities.
It will be like the MMT proposed system.
Self-imposed constraints are always political, so the question of whether EMU nations appear on top of that hierarchy or at the bottom is not really about whether they can push buttons to spend, but about the rules in place to prevent this, the political will to abide by them and, once they fail, what to replace them with? The nations imposed the SGP straightjacket under the illusion that it would keep them from having show solidarity. The irony is that the SGP itself would ultimately force it upon them.
But the question remains: what’s next? The EZ countries aren’t like US states under the federal govt., they’re more like US states without a federal govt. Each on its own but with consequences for all others under the common currency.
Translation from an online article in the NZZ:
http://www.nzz.ch/finanzen/nachrichten/vorsicht_wenn_alle_das_gleiche_tun_1.5836691.html
…The markets have not ignored the cataclysm in the EU. France’s Secretary of State let the cat out of the bag when he said to the ‘Financial Times’ that the bailout and with it a new institutionalised solidarity are tantamount to a fundamental revision to the EU rules and compared it to article 5 of Nato rules that regulates common defence. The European rules have de facto been rewritten…
So the problem isn’t that the rules can’t be rewritten, but that nobody has the authority (and until recently the will) to do so. It takes a crisis to force one of the countries to take the lead. and has culminated in a showdown between Sarko and Merkel. The EZ was conceived as a headless chicken to be guided by the invisible hand.
Agreed. The euro is doubtless a fiat currency, and as such there are no financial or operational constraints, since the sovereign has control over both issuance and operational rules.
As I understand it, the operational rules are set by treaty. How is the treaty modified? Who specifically is the monetary sovereign that issues? This is a question that doesn’t seem to have been answered adequately, as far as I can determine. Are the EMU nations currency users (like US states), or if not, what?
Most importantly, are there any democratic controls involved in currency issuance, or is the ECB independent? Seems like this wasn’t adequately thought through — “The EZ was conceived as a headless chicken to be guided by the invisible hand.”
The Nation: Europe’s Democracy Deficit
Tom Hickey: “The euro is doubtless a fiat currency, and as such there are no financial or operational constraints, since the sovereign has control over both issuance and operational rules.”
The sovereign? Who’s that?
That was one of my questions. Read second paragraph.
What Warren proposes is identical with what then U.S. government should do for then U.S. states, whose situation is identical with the EU nations’ governments.
Of course, as soon as the EU begins to credit their member nations’ accounts, the debt hawks will scream, just as they do here. See: FRANCE
“U.S. states, whose situation is identical with the EU nations’ governments.”
I need it hammered against my stubborn head a few more times. Anyone?
it seems so Bx12
Individual States are simply not a good analogy to EU countries, and pressing the point confuses more than explains.
EU countries are not like Federal Govt either! But there is more to life than you must either be christian or mosalman.
Seeing MMT cling to EU nations = US states is like seeing academics cling to money multiplier.
Bx23,
Warren made an analogy to help a layperson understand some important differences between the legal arrangements within EMU and the US. It may not be 99.999% accurate but it is good enough to get the point across.
You may be a very clever economic professional that can find a 0.001% discrepancy, many of the nonprofessional readers of his blog are not, but it is still important for them to know there is a wide legal difference between EMU v US arrangements.
You’re not really helping by splitting hairs here.
Matt Franko,
Thanks for reminding me the world runs on hypocrisy.
@anon in #4
Yes, agree completely. As it stands, the ECB distribution would have to come out of ECB capital. Not a loan/overdraft to Tsy’s of the nations, but simply a credit to the national accounts and a reduction in capital (which, as you note, would go negative).
As Ramanan noted, the overnight rate would fall to the ECB’s remuneration rate, and this would be a further reduction in ECB capital. This is offset to the extent that claims against banks are reduced (though the “claims” are a net income earner for the ECB, it would seem).
(And btw, the ER already in the system are consistent with the current target rate. Raise ER beyond this amount, as will happen as national govt’s spend the $1T, and you get a fall in the overnight rate unless otherwise drained back to desired ER levels.)
Clarification: the overnight rate falls as national govt’s spend, since national govt’s in the EZ spend by crediting bank accounts and thereby creating reserve balances (yes . . . I said it!).
mirabile dictu
“Raise ER beyond this amount, as will happen as national govt’s spend the $1T, and you get a fall in the overnight rate unless otherwise drained back to desired ER levels”
I’ve been a little puzzled by the ON rate comments from Ramanan and yourself – figured we were already there in terms of the rate. I thought the EZ system differentiated between excess reserves and excess deposits with the ECB. I thought there were already substantial deposits with the ECB. These would appear as excess reserves in the Fed system. But maybe I’ve got this wrong. Anyway, I’m confused on the rate comments.
At present the target is 1.00%, deposit facility rate is 0.25% and the marginal facility lending rate is 1.75%.
Not sure if the ECB has been able to achieve its target because the reserves are in excess.
As I thought, they’re already there on the rate. Don’t see how they couldn’t be, given the excess that has been created. (Deposited excess is not technically classified as excess).
“June 4
FRANKFURT -(Dow Jones)- The amount of cash banks have parked with the European Central Bank one-day deposit facility rose to a new record high of EUR350.903 billion Sunday, ECB data showed Monday, indicating that pressure remains on money markets.
The previous record of just over EUR320 billion was reached Wednesday. Banks park cash with the ECB at a rate of 0.25%. This is in line with market levels as bid-ask overnight rates are quoted at 0.21%-0.29% at 0721 GMT. These are the levels at which banks lend short-term funds to each other to finance regular operations.
In contrast, banks have borrowed only EUR9 million via the ECB’s one-day marginal lending facility, which is available for banks at an above-market level of 1.75%.
The heavy use of the ECB’s deposit facility, and the contrasting limited use of its marginal lending facility signal that there is enough liquidity in the market but banks prefer placing their cash with the ECB, rather than lending to each other amid fears that other banks could fail.”
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201006070347dowjonesdjonline000064&title=banks-park-record-amount-at-ecb-deposit-facility
“but simply a credit to the national accounts and a reduction in capital (which, as you note, would go negative).”
I’m probably splitting hair again in the eyes some subservient commentator, but letting the ECB go into negative capital has ZERO acceptability in the minds of Trichet, unless something dramatic forces him to change it. Likewise for the overdraft.
The only politically acceptable option is to raise SGP limits and provide the framework to make it work (see June 6th, 2010 at 9:20 am). Anyways that is hypothetical in the current environment.
agree on zero acceptability
it was merely a technical point on the original $ 1 trillion proposal
you strike me as someone in favor of technical clarification
that way the politicians (maybe) and the rest of us know what we’re dealing with
Yes, politically a non-starter at the moment. Just a technical point to differentiate from overdrafts in the US.