Karim writes:
Very solid number in many respects

  • NFP +151k plus Net revisions +110k
  • Private sector job gwth +159k
  • Average hourly earnings +0.2% and index of aggregate hours +0.4% will combine with the jobs increase to produce a very strong personal income number for October
  • Hours data will also show up in stronger industrial production, cap u, etc.
  • Unemployment rate unch at 9.6% but that is well understood to be the last labor market indicator to turn
  • Some industry highlights in terms of net job changes: Construction +13k; Retail +16k; Temp +11k; Leisure and Hospitality -24k
  • Diffusion index roughly unch at 55 (from 55.6)
  • Median duration of unemployment at 21.2 from 20.4; U6 measure at 17% from 17.1%

The income gains generated from this number plus recent equity gains put consumer balance sheets in much better shape; the mix between spending, savings and debt reduction remains to be seen, but the outlook for spending is certainly better than it appeared before today.

So it looks like a 9% budget deficit is sufficient to overcome the drag from the 0 interest rate policy and the size of the Fed’s portfolio to support GDP at modest levels of growth, perhaps just above levels of productivity increases, which means a very modestly improving employment outlook.

But not enough for a meaningful reduction in the output gap, which probably requires a fiscal adjustment like a payroll tax suspension, or a jump in private sector credit expansion via houses and cars.

QE2 will add a bit more drag, but probably not enough to make much difference.

Extending the tax cuts is a positive for demand versus letting them expire.
But that would not be a tax cut, just not a tax hike.

And there’s a chance it would get ‘paid for’ with a spending cut elsewhere, maybe social security or medicare after the sustainability committee reports Dec 1 and scares them all.

Still looks like fear that we might be the next Greece is turning us into the next Japan.

22 Responses

  1. Here is an article detailing why white house choose not to advocate for a payroll tax holiday. Warning, if you are an MMT’er, it will make you sick to your stomach.
    Unbelievable. I want George Bush back. Give me some leadership with a bit of backbone!

      1. Actually, one of the comments from that WP article reveals a good chunk of the hurdle we’re all facing, and thus reveals how to overcome it.

        “That may be the dumbest and most dangerous thing I have ever read for future generations. Cut SSI loose from a self paying system and just let congress ‘vote’ on what benefits should be? In the long run that really means asking future generations to pay for an open ended retirement for the baby boomers.”

        Literally >95% of the public has a VERY steep learning curve to re-orient to post-gold-std thinking. For most people, you basically need a comic book approach to even start the process.

        It’s really necessary to know each, individual, audience you speak to. All one can say is: “good luck”, lots more work is needed, and some PR innovation.

      2. That may be the dumbest and most dangerous thing I have ever read for future generations. Cut SSI loose from a self paying system and just let congress β€˜vote’ on what benefits should be?

        Does the writer have any idea what the acronym “SSI” means? He’s confusing it with Social Security retirement benefits.

        Supplemental Security Income (SSI) is a Federal income supplement program funded by general tax revenues (not Social Security taxes):
        It is designed to help aged, blind, and disabled people, who have little or no income; and
        It provides cash to meet basic needs for food, clothing, and shelter.


    1. Nice infuriating article, thanks. But at least this idea has enough pull to get into the pages of WashPost and get support of some members from both sides. Maybe now with his defeat and the seeming impossibility of increased spending, Obama will be willing to try this to boost spending power.

      But bring back Bush? I wouldn’t go that far!

  2. “Still looks like fear that we might be the next Greece is turning us into the next Japan.”

    Ohayo gozaimasu in America. πŸ˜‰

    One big difference, I think, is that Americans are less fatalistic than Japanese. It may be Shiyo ga nai (Can’t be helped) in America now, but that won’t last. πŸ™‚

  3. Since you say QE is a drag I take it that you disagree with others in the MMT camp who advocate for direct government spending. Why do you think your colleagues are wrong in this regard? If these low yields are punishing savers then what should the optimal yield be?

    1. The lower interest payments to the private sector constitute a fiscal drag which is the opposite of direct government spending. MMT does not consider QE spending because it doesn’t create new net assets (it in fact reduces spending). QE only swaps existing assets thus changing the overall term structure of outstanding government liabilities. Generally MMTers argue for ZIRP and adding NFA via fiscal policy instead.

      1. Yes – 0 is the natural rate of interest. Most in the MMT camp argue for a ZIRP with fiscal policy adding NFAs in the form of reserves. Clearly there is no need for bond financing of government spending, something which I have read here and of course many times on Bill Mitchell’s and the UMKC blog.

        The problem I am having is that this is exactly what QE is doing. It is allowing for fiscal policy to add NFAs in the form of reserves. It is probably less efficient than just crediting accounts, since both the Treasury and the Fed have to give up the bid/ask spread to dealers, but given the fact that the laws regarding Treasury overdrafts, bond financing, etc., are not going to change, QE is the closest thing we have to the MMT ideal of direct issuance of reserves.

        But it now seems many in the MMT camp say that this form of direct government spending is a drag on aggregate demand. What gives here? If it is such a drag then what should be the appropriate rate? How much higher do interest rates need to be then to ‘stimulate’ aggregate demand?

      2. I like QE a lot- seriously!
        In fact, I’d target 0 for the risk free term structure of rates, and have the tsy stop issuing as well.

        QE reduces rentier aggregate demand, and increases savings desires.
        It is a drag on the economy and increases the number of people seeking paid work (unemployment), helping the dependency ratio if they find work.

        That means that for a given size govt, we can enjoy lower taxes!!!

        The problem is not QE per se, it’s that our leaders think QE adds to demand, and they want to lower the federal deficit to boot.

      3. Interesting – this falls out directly from the “natural rate of interest” idea.

        Employ QE until zero risk assets have zero return.

  4. It is allowing for fiscal policy to add NFAs in the form of reserves.

    The crux is the underlying assumption over the measure and definition of money. Since bonds are government liabilities, not counting them as money is a questionable distinction that only really applies to an exogenous and/or asset backed currency such as under the gold standard. MMT claims that QE does not add NFAs because it relies on the comprehension that under non-convertibly fiat, bonds can be viewed as a type of ‘money’ for all practical purposes. QE thus changes one type of money for another but doesn’t net add any ‘money’.

    1. Thanks for the reply. I agree with you — QE does not add NFAs. But surely what type of ‘NFAs’ the private sector holds makes a difference in the motivation to invest and the propensity to consume. In the extreme case, QE can take out all assets — mortgages, car loans, etc., leaving the private sector with nothing else but an equal amount of cash. In that case, NFAs are still left unchanged, but the Fed has eliminated all risk off of the balance sheets of the non-government sector. Surely this would motivate some degree of expansion, inflation, or both.

      Even though in accounting terms bonds are the same as cash, you cannot buy a car with government bonds. Giving up cash to hold a bond means you are giving up the opportunity to consume in the near future. Relative to direct spending with a zero rate, when government sells bonds at market does this not have the tendency to increase the risk free rate at that maturity? And if the risk free rate at that maturity increases, does this not reduce demand for real investment and increase the desire to save out of a given income?

      I agree that QE leaves NFAs unchanged, but one level of NFAs does not mean one level of output. It seems to me that deficits financed by bond sales reduce the multiplier of those same deficit expenditures relative to direct spending with a zero reserve rate. QE therefore adds to aggregate demand.

      1. ever heard anyone say,

        ‘i wish the govt would pay off it’s tsy’s so I could get may money back’


        ‘i wish i hand’t bought those tsy bonds because now i want to buy a car’

        sure, it’s possible, but seems to me not much of a driving force.

        and what I do hear is:

        ‘i’ve cut back now that i’m not earning anything on my savings’

    2. This is what I’ve understood so far from reading Warren and others (so correct me if I’m wrong):

      First, there is an argument of sequence: bond holders are by definition and by desire saving, not consuming. I doubt that taking away income from saving will suddenly induce consumption.

      Second, the main message is not that that QE will have no effect but that it will have far less of an effect than a: the mainstream proponents within the profession and b: the public in general believe it will. What I think MMT is saying is that both the fact that it forces down the yield on savings of government assets and the fact that people believe it will have wild inflationary effects, will trigger a run into other financial assets such as corporate equities and bonds that have more risk attached to them. But, since the quantity effect is actually negative, the matching run on the demand side will not take place, save for some marginal psychological wealth effects or if it were combined with more fiscal stimulus. That, in turn, means that the extra risk will not pay off, leading to an opposite reaction in the medium term, as was experienced in Japan after their attempts of QE-ing their way out. So, the net effect is more volatility in the financial markets and much ado about preciously little else.

      1. Using an expectations-based argument I can see how QE would lead to a drag in aggregate demand. Keynes argued that lower interest rates might actually lead to less investment in the case where the reduction in rates set the expectation for further reductions. In that case people flood into bonds assuming yields will drop even further, which depresses investment and worsens the output gap.

        I can see your first point, but at some point along the chain someone is shifting into cash. If a saver is always a saver, then why would they want to hold onto cash as opposed to bonds or something else with a yield? Perhaps it is another expectations argument — maybe people are selling in anticipation of hyper inflation and a bond-market crash. In that case the cash does not get spent.

        Other than that, though, I don’t see any other way where QE can drag AD. The more direct arguments are all in its favor. Either way I agree in that the real problem is with insufficient stimulus and QE — especially QE2 which only buys Treasuries — will have little effect.

Leave a Reply

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