Looks like a big ‘risk off’ day coming up.

The authorities are embodying uncertainty at a time when it’s ‘their move’

Where things go is not about market forces, but about what politicians and their appointees do next.

The competence of the G20 is looking much like that of the FOMC, and it’s not a pretty sight.

We can do nothing but ‘wait and see.’

For example, will they or won’t the fund the euro members?
The mixed message is both no, and they will do what it takes to ensure solvency.
And taxpayers don’t want to pay for it, whatever that means.

And the same time the US authorities are being exposed as, to be kind, being on the sidelines.

President Obama has both nothing of substance to add to the debate, either in the euro zone or domestically.

The Fed itself said QE does nothing but modestly lower rates (Bernanke speech, Carpenter paper) which hopefully boosts asset prices which hopefully adds to aggregate demand. Hasn’t worked in Japan, (even with the net exports we also aspire to) but hopefully here. And skeptical markets that fear the Fed is engaged in ‘irresponsible money printing’ are coming around to the reality.

The sustainability commission has reported and recommended ways to reduce the deficit and ensure unemployment rises and our standard of living falls.

The theme continues- by fearing we are the next Greece, we are turning ourselves into the next Japan. Including burdening ourselves with an export driven economy.

So on an otherwise quiet post holiday Friday I look for a risk off rush to the sidelines, and a continuation of illiquidity in general.

23 Responses

    1. thanks!

      The mistakes stand out in my mind- mainly in 2008 not thinking the Fed would cut rates when inflation expectations started rising in a meaningful way even with the financial sector beginning to deteriorate, after Kohn told me to my face the fed wouldn’t tolerate rising inflation expectations under any circumstances.

  1. Has it been noted that Mr. Warsh is running a Mosleresque style campaign?

    “The fiscal authorities should begin this exercise by asking two questions: How big a government is desired? And how is it to be funded? We can no longer afford the answers to each of these questions to be at odds. But, the conduct of fiscal policy should not stop there. The government can fund its endeavors in ways that are growth-friendly or growth-stifling. We can no longer afford to be indifferent to the choice.”


  2. very interesting; voices of sanity at the Fed? liked this part especially

    “The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies. Given what ails us, additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility–and monetary policy can lose its considerable sway–if its policies overpromise or underdeliver. We should be leery of drawing inapt lessons from the crisis to the current policy conjuncture. Lender-of-last-resort authority cannot readily be converted into fighter-of-first resort power.”


    1. although it still sounds like Warsh is still worried overmuch about both inflation & “total U.S. indebtedness”

      ps:”And if the Fed’s holdings work predominantly through the so-called portfolio balance channel, the cessation of purchases should not reverse any benefits attained.”

      that’s a pretty big “IF”; what’s the net benefit of the portfolio balance he touts?

  3. Somewhere, is there a clear, step-by-step, not jargon-laden, description of what exactly occurs in QE, and what it is supposed to accomplish, and wheter is does or does not, and what it actually does accomplish? Somebody, somewhere must have put this into plain English, right?

    1. Mosler explains it in previous articles here, although a bit tersely if you’re not clear on financial jargon. His comments are being extensively discussed now at http://www.pragcap.com
      also in posts at

      many other sites; just google quantitative easing, but be prepared to wade through a lot of panic by people still on gold-std thinking

    2. qe:

      1. the fed asks for competitive offers of tsy secs.

      2. the fed buys what it wants at prices offered to it, by crediting that dealer’s fed reserve account.

      (the tsy sec becomes a fed asset, and reserve balances are fed liabilities)

      1. So, if the Fed desires, it can pump up T-sellers profit a bit, by buying at terms favorable to the banks (which it wants to protect)?

        Will this be enough to help those banks with further expected losses from mortgage write downs?

    3. what does qe accomplish:

      asset prices adjust to where the economy is indifferent between all the investment choices.

      the choices for govt liabilities have shifted to fewer tsy secs and more reserve balances, which changes the entire term structure
      of interest rates and asset prices, presumably, but not necessarily lowering them.

      this is presumed to raise the prices of existing assets- houses, stocks, bonds, and anything else valued against the term structure of risk free interest rates.

      the reduction in tsy secs held by the economy reduces income earned by the economy from the tsy

      So qe is a policy to lower the term structure of interest rates and hope that somehow ‘spills over’ into more aggregate demand (spending on real goods and services which increases sales and employment)

      I’ve seen no evidence, ever, that qe helped aggregate demand anywhere it’s been tried.

      And let me add that the Fed buying tsy secs is functionally the same as the tsy not having issued them in the first place.

      So qe works on the theory that issuance of tsy secs slows aggregate demand, which many many mainstream economists steadfastly believe to be the case.

      These are the ones who believe taxing and borrowing both ‘remove money’ and therefore both reduce demand.

      No surprise they think QE adds to demand.

      1. whether a futile attempt to boost speculation, or even an intervention to boost capital at troubled banks – isn’t either intent a misguided attempt to manage nominal currency metrics by letting real labor & production metrics float?

        shouldn’t the bulk of citizens be outraged by such meaningless distractions masquerading as public purpose, and standing in for fiscal action?

      2. The public would be outraged by all this if they could figure it out. Now they are confused and being misled purposefully. The dual objective is to rescue wealth and undercut labor and the welfare state. And they are even willing to use the legal apparatus itself to abrogate contracts as well as evade the commercial and criminal code. Shameless. The US is becoming recognized abroad as a banana republic over this. Confidence in the entire US system is waning. Bad scene. And it ties in with failure to deal with war crimes, torture, and constitutional issues. The rule of law is breaking down, which is dangerous.

  4. Exactly, Tom.
    Did you catch Hudson’s blog today at C-punch? He’s a little “out of paradigm,” though, isn’t he? Do you suppose it’s for rhetorical purposes?

    1. Henry, I think that Michael Hudson has this right. It is basically an attack on economic rent-seeking. That’s were the wealth transfer is predominant. He recommends elsewhere taxing away economic rent as a disincentive, while incentivizing productive investment.

      Sometime Prof. Hudson’s terminology seems out of paradigm with MMT. But I didn’t see that in this post, since it doesn’t get into government finance. It’s pretty much limited to the effect of economic rents in the domestic private sector and the ability of elite to shape policy to favor rent-seeking.

    1. Thank you, Tom!

      You should consider a blog of your own. Really. It wouldn’t stop you commenting here and elsewhere, and would add fuel to the fire.

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