It’s been about a week, and the initial reactions are already wearing off and markets settling in.

The lasting effects are those of the income lost to the economy as the Fed earns the interest on the securities it buys instead of the economy. This reduces the federal deficit and is a ‘contractionary’ force. At the same time the Fed removes securities/duration/convexity/vol from the economy which tends to lower the term structure of risk free rates some and further reduce volatility as well.

Initially the long end sold off on the presumption that QE works to lower the output gap/restore growth and employment, which means the Fed would, down the road, be hiking rates in response to the improving economy.

However, as the reality that QE doesn’t work to support aggregate demand sinks in, long end yields can come down on the anticipation that future growth prospects are not good, increasing the odds that the Fed will be keeping rates low that much longer.

Likewise, it’s a mixed bag for stocks, though overall modestly supportive. QE doesn’t improve earnings prospects, and serves to keep growth down, but the lower interest rates help valuations, and high unemployment along with productivity increases work to keep unit labor costs down.

Europe has solved the solvency issue, but it’s all conditional on bringing deficits down, and so far it looks like they are all working to keep doing exactly that, and with no prospects for material private sector credit expansion or export growth,
GDP can continue to be negative.

Then there’s the US fiscal cliff. Everyone agrees deficit reduction slows things down, which is why they say we shouldn’t do it now. But they also therefore know it will slow down things whenever they do it in the future. So how hard should it be to come to recognize that slowing things down is actually the point of deficit reduction, and is appropriate only for that reason? Apparently it’s impossible. And the fiscal cliff is already taking its toll as anticipated contracts for next year along with purchases are being delayed.

So without some kind of fiscal paradigm shift I don’t see much good happening, and even the muddle through scenario is now at risk.

46 Responses

  1. “The lasting effects are those of the income lost to the economy as the Fed earns the interest on the securities it buys instead of the economy.”

    “CBO estimates in its Monthly Budget Review for September that the Treasury Department will report a deficit of $1.17 Trillion for the first 11 months of fiscal year 2012, almost $70 billion less than the deficit at the same point last year.

    So, the Fed hands over about $80 billion in interest income to the Fed and CBO reports the deficit for the first 11 months of FY 2012 has fallen $70 billion. Must be a coincidence?

      1. And yes, I know, you advocate a zero interest rate. If that is indeed genuine, then stop repeatedly harping about the removal of rentier subsidation.

  2. you cannot watch Bloomberg or CNBC with out hearing the Fed is printing money with QE ..Without MMT in mind it is easy to see how every one can be convinced of it ..

    1. @Dave Begotka, No, warren says housing is recovering, and the automatic stabilizers are enough to get us through this mess. You are on a football field, there are 50 teams and 5000 fans all tackling each other, there is 1 referee who is totally overwhelmed and even millions of people watching all the tackles can’t keep up with all the chaos, but warren says we need to talk about score, that is what matters, not the chaos down on the field.

      1. @WARREN MOSLER,

        Not “soon”, but in the lame duck session. Or even January, depending on how the Congressional elections go. No way will they let the Bush tax cuts for the lower 5 brackets expire.

      2. @John Horkin,

        You know this re-blow the real-estate bubble has some holes in it the way I see it……..
        Last I checked you need a job to get a loan?
        Maybe they should start giving loans to people without jobs………..they could have some sort of a built in 5 or 8 year bankruptcy plan……LOL

  3. Paradigm shift, yes. They are on the household paradigm. That’s the thing that you must convince them is wrong. Maybe if you make the same special order speech every day, until they get it.

  4. OK, the problem with saying the national economy is not like a household is that a significant number of people do not understand the significance of ‘not.’
    The genius of the Constitution, IMHO, is that it is permissive. It outlines what agents of government may and must do. The Amendments break that convention and issue prohibitions and those are a problem because, as we’ve seen, prohbitions are easy to evade. “The Congress shall make no law,” gets redefined as Congress can regulate or issue advisories or declare national security as the basis for an exception (people are indefinitely detained instead of arrested because arrest triggers a judicial process and detention doesn’t).
    Anyway, a nation’s economy is what? Is it a web of transactions with a unique language or code? How do we distinguish between speech and noise?

    1. @roger erickson,

      Why is mandating a 90% prison fill rate a good thing for our society? Am I the only one that thinks this is madness?

      WASHINGTON – At a time when states are struggling to reduce bloated prison populations and tight budgets, a private prison management company is offering to buy prisons in exchange for various considerations, including a controversial guarantee that the governments maintain a 90% occupancy rate for at least 20 years.

      The $250 million proposal, circulated by the Nashville-based Corrections Corporation of America to prison officials in 48 states, has been blasted by some state officials who suggest such a program could pressure criminal justice officials to seek harsher sentences to maintain the contractually required occupancy rates.

      “You don’t want a prison system operating with the goal of maximizing profits,” says Texas state Sen. John Whitmire, a Houston Democrat and advocate for reducing prison populations through less costly diversion programs. “The only thing worse is that this seeks to take advantage of some states’ troubled financial position.

    2. @roger erickson,

      Yes, they’ll withdraw the SS tax hikes and introduce cuts in holiday subsidies instead. Big deal! The net effect will be the same: a disastrous decrease in aggregate demand coming on top of an already nasty recession.

      The main trade union of Portugal (communist-leaning) also came out today in support of austerity…for the rich – by taxing them more heavily and also targeting the parallel economy by forcing it to pay taxes.

      It’s all pretty depressing in Europe right now, particularly in its southern fringe. Everybody seems to have swallowed the austerian mindset and all the left and the right do is engage in meaningless babble over whether the proper target for tax increases should be the rich or the middle class.

      Perhaps this is the right time to create new political forces in the periphery of Europe, with fresh faces that can be presented to the public as an MMT-based alternative.

      Their electoral program would be a simple promise to withdraw all spending cuts and tax increases introduced in the last couple of years. This reversal could be easily financed by government deficit spending under the rules of Target2 – which would show up in the end of the process as a minuscule negative balance on each country’s NCB (minuscule, that is, when compared with the amounts that have been accumulating on the NCBs of the periphery as a result of capital flight to Germany: 224 billion euros for Spain alone during the last 12 months!).

    3. @roger erickson, ROGER ERICKSON, that scumbag Mike Norman is FREAKING OUT about IDENTITY, he is TRYING to CONTROL what he cannot CONTROL, in a land of 7 billion people and growing, agent SMITH is everywhere. He is a POWER CONTROL FREAK just as bad as the worst of the scumbags you point out here. I don’t have a google account or open id, so you are going to lose all my gracious exchange of information over there? Who abdicated such a DUMB policy? See how small minded all you little children are, its SO EASY to push your little buttons and get you to do TOTALLY PREDICTABLE knee jerk reactions, I am laughing at you suckers.

      Did little matt franko or lori franko get MAD that someone was using a series of characters to “mark” a post that they thought should have been thiers? Was the PROBLEM the content of the posts? LOL! So now we have easily predictable kneejerk human emotions because one human being inputted a series of bits (ones and zeroes) that Matt or Erickson thought they should OWN? You guys are so small minded, pathetic, you guys aren’t gonna make it in this NEW INFORMATION AGE of agent smith’s everywhere you go, you are all gonna get steamrolled! Close yourselves off, CUT that RETURN ON COORDINATION because someone inputs ones and zeroes that you thin you OWN, fools, BWAHAHAH!

    4. @roger erickson,

      Roger Erickson, here is a movie on narcotweets, how anonymous twitter users are using “return on coordination” to take down drug cartels. If you will watch the whole movie, you will notice that one thing these various twitter users get upset about, is if someone steals thier tweets and retweets them, or if they don’t get enough “credit” for the tweets they make, even though these are ANONYMOUS accounts, human emotions begin to breakdown the RETURN ON COORDINATION. Its not enough they are doing GOOD things, they want the anonymous twitter account to get REPUTATION for doing good things, how so last century.

      I had hoped you had risen above such pettyness, but I guess not. You still want to live in the land of identity, even at the COST of hurting RETURN ON COORDINATION, don’t be a hypocrite.

      Roger, what makes human beings so NEEDY for this emotional personal “acknowledgement” that they are willing to DESTROY the RETURN ON COORDINATION. I expected better from your group over at Mike Norman Economics, pathetic and disgraceful what weak willed monkeys you really are when a few “indetity meme” buttons are pushed LOL! Va La Bamba!

    5. @roger erickson, Roger Erickson, I once asked warren mosler what if I stole his identity and took “mosler bonds” as my own, implemented it in europe, and claimed all the reputation for it if it succeeded, he said go for it. Where is the threshold for stealing his identity and ideas too much though? Or should I say borrwing his identity? Or how about expanding on his identity or increasing it and its exposure? Are those bad things?

      What if I literally got a plastic surgery change and passed myself off as the real warren mosler, but was doing good work borrwing his identity, would that be too much?

      Why do you place such a HIGH importance on having control of the characters R O G E R in the virtual world of the internet on a rather unknown blog?

      Like Warren Mosler talking about the gold standard needing to be left in the past of the pirate days and embracing the future, I don’t understand all these Borg that want to also hold onto the past and get upset if someone borrows what they think is thiers (namely identity)

      You are either a drone, part of the borg, and going to help the collective in a REAL return on coordination that is not limited by ego, identity, etc, even if that means losing R O G E R to some other borg, or you are a hypocritical fraud that only wants return on coordination under certain controlled conditions, as bad as the kleptocrats who control you now. Some fathers are happy to pass thier estate and assets on to thier direct children, maybe even grandchildren, only after thier death, some are willing to give to thier communities or PBS after their death, more benefitting the collective, some still while they are alive. Who is willing to give even thier identity to the collective, for a TRUE return on coordination that rises all boats, not just R O G E Rs? LOL! In the end we are all dead, why is control of identity so important to you in virtual internet land?

  5. Warren could you please comment on this? I don’t understand. I thought the fed was answerable to congress and the people, but it seems they are not. How can our politicians make good public policy, if they must “trust” the regional banks and can’t peer into the darkness? Why wouldn’t the NY Fed want to make public this information? Is information assymetry important? I thought a more open, transparent system was the goal of the Obama administration, who is served by keeping 300 million electorate in the dark?

    ““While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.”

    For that reason, the New York Fed alleged in the lawsuit brought by Bloomberg to force the Fed to reveal some information about its loans – Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan) – that it was not subject to Federal Freedom of Information Act.”


  6. Hey,

    Just wondering if Warren or anyone else happens to know how the ‘To deploy an army of MMT proponents to respond to deficit terrorism on the web’ is going?

      1. But Fed ‘profits’ come from interest on government bonds and loans to banks, right?

        So if a bank sells a bond to the Fed, or borrows money from the Fed, they still recieve income from the interest on the bond or the loan!

        Essentially they receive income on assets they don’t own, and on their own debts to the Fed!!

        Win Win!

  7. I know this is way off topic, but I am trying to fully grasp MMT, so would appreciate some feedback: Was reading a book recently in which, in one section, the contention is that Canada was able to rebound from their recession in the early 1990s (apparently resulting from an inflationary bubble that came to a head in the late 80’s) by slashing Gov’t spending and raising taxes. I looked into it and found that it took them most of the 1990’s to turn the ship around. My question is, did reduced spending and higher taxes achieve this rebound OR, would MMT suggest that they could have rebounded much quicker had the Gov’t cut taxes and not cut spendoing. Thanks

    1. @John,

      According to Canadian economists Marc Lavoie and Mario Seccareccia (writing in the Canadian edition of the Macroeconomics textbook by Baumol and Blinder) the following reasons explain the high growth rate of the Canadian economy in the second half of the 1990s (4.5% plus), despite the major cutback in government expenditures of the 1995 budget:

      – the strong economic expansion in the U.S. that raised demand for Canadian products.

      – the weakness of the Canadian dollar that provided a further boost to exports.

      – the very low interest rate environment, boosting private expenditures especially consumption of durable goods.

      These factors increased aggregate demand and more than compensated for the negative effects of the budget cuts.

      1. cuts in government spending can be offset by increase in private borrowing or an increase in exports or foreign investment.

  8. Interesting – thanks! I think these ideas are finally starting to sink in with me. Yes, it makes sense that, with the factors you guys listed, recovery was possible through the increased demand. They do have quite an abundance of resources – never realized it. Plus, they only have like a tenth of our population, so things like socialized medicine are more workable (although I have heard many horror stories).

    1. @John, John: Please do not believe everything you “hear”. Medical expenses are the major cause of American bankruptcies ( I cannot see anything good about the current American Kafka nightmare of private insurance, where companies profit by denial of care. We have more people on Medicare (44 million in 2007, 15% of our population) than the entire Canadian population, and Medicare works reasonably well.

  9. Warren (and others) what do you think about this comment regarding QE3. True/False/sort-of:

    So, it looks like the Fed decision last week to buy $40 billion a month in mortgage paper is the ultimate plan to clear the market once and for all of fraudulent mortgages, mortgage backed securities and related derivatives. This means Fannie and Freddie will be bailed out and winding down through the back door. This means the big banks may be paid in full for your mortgage. It also means your pension fund assets will not be marked to market – at the price of debasing the purchasing power of your assets and benefits.

    full article here:

    1. @Mario,

      to be clear I am referring to the back-door bailing out of banks with underwater mortgages and not so much the last little flicker of a line about “debasing the purchasing power of your assets and benefits.” as we already know how QE relates (or doesn’t relate) to inflation, etc.

      But what about this offloading of toxic assets? Seems possible. Wouldn’t you take less in annual interest payments for a great return on the principal of your toxic mortgages? I’d think so…or is this inaccurate somehow?

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