Karim writes:

  • Real trade balance widens from -46bn in May to -54bn in June
  • Exports down 1.3% but imports up 3%
  • Even though civilian aircraft imports up 53% (after -49% prior month), imports up across the board
  • Consumer goods imports up 7.8% and capital goods up 1.2%
  • Even though the import data suggests final demand is holding up well, the final Q2 GDP print wont be pretty
  • Wholesale inventory data yesterday and trade data today were worse than initial BEA estimates for Q2 GDP
  • Headline GDP likely to be revised from initial estimate of 2.4% to somewhere in 1-1.5%. But final private demand may actually be revised up.

Yes, Q2 GDP to be revised down, but it’s been down. Q2 is history. Corporate earnings were based on the actual numbers- sales, costs, profits.

In other words, we know what the S&P were able to earn even with very modest headline GDP growth.

The higher final demand is also at least sustainable.
The relatively large and ongoing fiscal deficit that added that much income and savings to the non govt sectors allowed for the higher final demand AND higher savings.

While the QE from the Fed does nothing beyond causing term rates to be marginally lower than other wise, it does add some support for asset prices via implied discount rates.

As discussed earlier this year, markets are figuring out that the economy is flying without a net. All the Fed can do is alter interest rates which, with each passing day since the recession began, has been shown to not be able to support output and employment, or even prices and lending. (Just like Japan has shown for going on 20 years.)

And a Congress and Administration that thinks it’s run out of money and is dependent on borrowing and leaving the bill to our grand children to be able to spend is unlikely to provide meaningful fiscal adjustments to support aggregate demand.

So we muddle through with unthinkably high levels of unemployment and modest GDP growth waiting for an increase in private sector demand to kick in via credit expansion from the usual channels- cars and housing.

The risk to growth is now primarily proactive fiscal consolidation- spending cuts and/or tax hikes- in advance of private sector credit expansion. So far I haven’t seen anything meaningful enough to be of consequence. But the anti deficit rhetoric is certainly there, counterbalanced to some degree by the call for jobs.

So it remains a pretty good equity environment but a very ugly political environment.

23 Responses

  1. It’s very irritating to read economists who say that we are “slightly recovering,” or statements to that effect. This is what is maddening about them: always a failure to situate a given micro-analysis into the overall picture, to the point that everyone stays confused. Another bone to pick: MMT’ers always harp on how wonderful it is that we give the Chinese paper and we take the good stuff. Well, what about the enormous hollowing-out of the economy that has taken place? Labor arbitrage has created a world of suffering. And the solution is not ditch-digging jobs or more bar-tending jobs or more greeters for Walmart. Which leads to the matter of the legal status of corporations. This is in great measure the underlying problem: the corporatization of the world. Companies like BP do what they please because they are immensely wealthy and powerful. They can buy the politicians. Corporations and government are becoming one and the same, to the detriment of the private citizen, and to the point that what seems in store is the virtual enslavement of the population, the reduction of humanity to a kind of ant heap, the total loss of economic independence and even the possibility of it. Meanwhile, the big picture in the US is as depicted here

    From Counterpunch:

    American’s are suffering. Daily reports about the deepening economic stagnation detail the rising unemployment rate, increasing number of housing foreclosures, growing number of homelessness and hungry people (often intact families) and mounting piles of unpaid utility, medical and credit card bills. These are some of the most apparent signs of the profound economic crisis overwhelming working Americans.

    We are living through an apparent up-tick in workplace murders, along with an increase in suicides, family killings, domestic violence, child abuse and abandonments, random shootings, break-ins, robberies and petty crime, and (most ominous) racist/ethnic hate crimes. They are the unacknowledged consequences of the deepening economic crisis. Collectively, these desperate acts of violence bear witness to finance capital’s seizure of a large portion of national wealth and the likely far deeper and more long-term social consequences, especially for the poor, particularly the white poor.

    America is in crisis. In simplest terms, the “American century” is over. No one says it, but all seem to recognize that capitalism’s historical development is moving further east, to China and other Southeast Asian countries. A century ago, Europe was in crisis. World war followed world war, with economic destabilization fueling global crisis, resulting in the collapse of long-dominant empires and the revolutions that remade Europe. America inherited a European-centered world in crisis and became the anchor of a globalized world economy. It held firm to world dominance for half-a-century and still clings to post-modern imperialism through its role as the public military for the extraction industries.

  2. To add to the above, I believe that the great problem is by no means “innocent fraud.” This may be a good line for running for political office, but it conceals the truly awful truth. We see the same thing happening all over the Western world: a tremendous transfer of wealth and power into the hands of the financial sector. It is impossible to imagine that this is due to simple ignorance rather than to a strategy both political and economic. It is an orchestrated attempt to convince societies that they are on the verge of bankruptcy, and that the only way to survive is to do all that the central banks tell them to do. The endgame is what has been termed ‘debt peonage.’ Labor is being over-taxed and the oligarchy is in the ascent. This is not innocent fraud, it is criminal activity and should be called such. Neoliberal economics may be propounded to some extent by ‘useful idiots’, but what is occurring in the halls of power is a hijacking of government by the financial-banking power which replaces government. It is clear that the central banks are calling the shots. This is not innocent fraud, it is deliberate, orchestrated fraud.

  3. If Mosler and co. cannot write an answer to this–in language that can reach people–they will not succeed:

    How Close is America’s Demise?
    The Ecstasy of Empire


    The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.”

    As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats.

    It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.

    However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging. Kotlikoff thinks the solution is savage Social Security and Medicare cuts or equally savage tax increases or hyperinflation to destroy the vast debts.

    Perhaps economists lack imagination, or perhaps they don’t want to be cut off from Wall Street and corporate subsidies, but Social Security and Medicare are insufficient at their present levels, especially considering the erosion of private pensions by the dot com, derivative and real estate bubbles. Cuts in Social Security and Medicare, for which people have paid 15 per cent of their earnings all their lives, would result in starvation and deaths from curable diseases.

    Tax increases make even less sense. It is widely acknowledged that the majority of households cannot survive on one job. Both husband and wife work and often one of the partners has two jobs in order to make ends meet. Raising taxes makes it harder to make ends meet–thus more foreclosures, more food stamps, more homelessness. What kind of economist or humane person thinks this is a solution?

    Ah, but we will tax the rich. The rich have enough money. They will simply stop earning.

    Let’s get real. Here is what the government is likely to do. Once Washington realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.

    The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?

    The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.

    These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?

    The Treasury was able to unload a lot of debt thanks to “the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt.

    This movement from euros to dollars weakened the alternative reserve currency to the dollar, halted the dollar’s decline, and financed the US budget deficit a while longer.

    Possibly the game can be replayed with Spanish debt, Irish debt, and whatever unlucky country is eswept in by the thoughtless expansion of the European Union.

    But when no countries remain that can be destabilized by Wall Street investment banksters and hedge funds, what then finances the US budget deficit?

    The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve’s purchase of Treasury debt.

    Do goods and services expand by the same amount? Imports will increase as US jobs have been offshored and given to foreigners, thus worsening the trade deficit. When the Federal Reserve purchases the Treasury’s new debt issues, the money supply will increase by more than the supply of domestically produced goods and services. Prices are likely to rise.

    How high will they rise? The longer money is created in order that government can pay its bills, the more likely hyperinflation will be the result.

    The economy has not recovered. By the end of this year it will be obvious that the collapsing economy means a larger than $1.4 trillion budget deficit to finance. Will it be $2 trillion? Higher?

    Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency. At that point wholesale dumping of dollars will result as foreign central banks try to unload a worthless currency.

    The collapse of the dollar will drive up the prices of imports and offshored goods on which Americans are dependent. Wal-Mart shoppers will think they have mistakenly gone into Neiman Marcus.

    Domestic prices will also explode as a growing money supply chases the supply of goods and services still made in America by Americans.

    The dollar as reserve currency cannot survive the conflagration. When the dollar goes the US cannot finance its trade deficit. Therefore, imports will fall sharply, thus adding to domestic inflation and, as the US is energy import-dependent, there will be transportation disruptions that will disrupt work and grocery store deliveries.

    Panic will be the order of the day.

    Will farms will be raided? Will those trapped in cities resort to riots and looting?

    Is this the likely future that “our” government and “our patriotic” corporations have created for us?

    To borrow from Lenin, “What can be done?”

    Here is what can be done. The wars, which benefit no one but the military-security complex and Israel’s territorial expansion, can be immediately ended. This would reduce the US budget deficit by hundreds of billions of dollars per year. More hundreds of billions of dollars could be saved by cutting the rest of the military budget which, in its present size, exceeds the budgets of all the serious military powers on earth combined.

    US military spending reflects the unaffordable and unattainable crazed neoconservative goal of US Empire and world hegemony. What fool in Washington thinks that China is going to finance US hegemony over China?

    The only way that the US will again have an economy is by bringing back the offshored jobs. The loss of these jobs impoverished Americans while producing oversized gains for Wall Street, shareholders, and corporate executives. These jobs can be brought home where they belong by taxing corporations according to where value is added to their product. If value is added to their goods and services in China, corporations would have a high tax rate. If value is added to their goods and services in the US, corporations would have a low tax rate.

    This change in corporate taxation would offset the cheap foreign labor that has sucked jobs out of America, and it would rebuild the ladders of upward mobility that made America an opportunity society.

    If the wars are not immediately stopped and the jobs brought back to America, the US is relegated to the trash bin of history.

    Obviously, the corporations and Wall Street would use their financial power and campaign contributions to block any legislation that would reduce short-term earnings and bonuses by bringing jobs back to America. Americans have no greater enemies than Wall Street and the corporations and their prostitutes in Congress and the White House.

    The neocons allied with Israel, who control both parties and much of the media, are strung out on the ecstasy of Empire.

    The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated.

    Without a revolution, Americans are history.

    1. Roberts: The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve’s purchase of Treasury debt.

      Uh, no. That would result in a Treasury overdraft at the Fed, which is not permitted under current law. What the Fed could do is repurchase agreements through OMO, moving tsy’s to its balance sheet and increasing bank reserves. This would just be leaving the nongovernment net financial assets created by the deficit spending that the tsy’s offset in bank reserves, where they started. This is QE and so far the effect is not noticeable. A lot of money was lost in betting it would be hyper-inflationary. What happens is that it drives the overnight rate on excess reserves to zero unless the Fed pays interest on excess reserves.

      Roberts apparently doesn’t get how the monetary system operates.

      1. Tom,

        I do not know the context in which you quoted Roberts. However he is right! (at least the quote in italics above)(Ref: Marshall’s latest) (Assume breaking the law)

        Overdraft is simply an overdraft. The purchase of government bonds by the Fed is monetization. It is also true that when the Treasury spends the funds created, it it increases the money supply, though by twice the amount.

        I can’t make sense of what you said though.

      2. Ramanan, As you well known, when the Treasury spends it creates deposits. The Fed provides reserves for settlement, for which the Treasury is required to issue debt to offset any deficit. Auction of Treasury securities converts the reserves created by increasing deposits to tsy’s held by non-government, reducing the amount of excess reserves. MMT holds that this is only a monetary operation to drain the reserves, not actually borrowing in the sense of financing government spending. MMT also holds that increasing base money has no direct causal effect on increasing funds in circulation by spurring bank lending, especially in a liquidity trap.

        When the Fed does OMO and takes tsy’s on its books it just returns the amount to reserves. IF the Fed does QE, it just increases reserves also. The MMT point is that all dollar denominated money is an IOU of the US government. Some of those IOU’s bear interest and some don’t. All the Fed does through its unilateral operations is change the composition of IOU’s.

        The Fed recently purchased outright (“monetized”) a bunch of MBS, expanding its balance sheet hugely and creating massive excess reserves that a lot people concluded would be hyper-inflationary, so they placed their bets accordingly and then watched bonds increase in value as rates dropped instead of rising as expected. They lost their shirts when they had to cover. Similarly, China just reduced its holdings of tsy’s, and instead of rising as predicted by the-world-is-ending crowds long rates fell. The end of the world never came.

        What I am saying is that Robers has created an imaginary scenario that he implies if not actually asserts ( I would say asserts) WILL happen. That is an eye-roller for me. He is another end-of-the-world’er, and he appeals to people that like to scare themselves needlessly about the sky falling.

      3. Tom,

        Your description in the first para was precisely where Marshall’s Latest became Marshall’s Longest!

      4. Yeah. I think we left that unresolved but a lot better informed for the effort that went into debate.

        All I can say is that the people betting on inflation (implying rising interest rates) have lost big, e.g., watching the monetary base go exponential and shorting the dollar. Those that bet the other way, like Pimco, have done just great. Now Bill Gross is calling for more stimulus. (He claims his plan is deficit-neutral; hence, it could get political traction. It would involve investors taking the hit. I’d say that make is not starter, especially since Krugman likes it.)

        That doesn’t mean that the worm can’t turn, of course, and in the long run it will. But all indications are that it will be after recovery. While hyperinflation and currency crises are always in the realm of possibility, and they can develop suddenly, e.g., through a supply shock or some such, I would have to see a good argument that something like this is impending and I don’t see any.

        For me, the big question is not the possibility of hyperinflation but rather depression or Japanification. The people that are concerned are looking at public debt and not private debt. It’s the private debt that is the time bomb. But almost no one of note is mentioning it. Instead, there is an obsession with growing pubic debt that is all out of proportion with the facts. BTW, Rogoff & Reinhardt just came out for more stimulus, therefore, more public debt.

        However, I will reiterate that I am not convinced that MMT is entirely correct in assuming that floating rates will always do the job. That would be like assuming that automatic stabilizers always do the job for a domestic economy. MMT has a good answer for how to repair the domestic economy is such a case, but I’m not sure that it does for the international economy because there is no overarching control mechanism that can operate in response to conditions in extremis. And that applies individually to all open economies in the global economy.

        What I am particularly concerned about, as you are also, is that the threat is largely to small countries that are either emerging or largely undeveloped. The big guys act as if they don’t really count for much, but in a global economy everything is interlinked, similar to the way the states are in the US. Moreover, human beings live there and the environment is global. It’s not just an economic issue but an issue of human rights and Earth as a shared resource. It’s the only planet we’ve got. What happens anywhere affects everywhere.

        So I am not rejecting your concerns out of hand. I am interested in pursuing this and am interested in what you come up with. I just think that things like the Roberts screed add nothing but emotion, which is unhelpful and just a distraction. (Not that I don’t agree with some of what he says about the problems we face. Certain hyperinflation is not one of them, and currency crises need not be, if we take a global approach instead of pursuing nationalism childishly.

      5. Yes no objection with anything else at all.

        I recently came across a Bloomberg article where Taleb continued his cry about hyperinflation. Amazing how he never gave a thought on why he went wrong.

        Btw do know there was a recent paper by the Fed whose title was “Is the Money Multiplier a myth” or something of that sort.

        Any link on R&R ?

      6. I’ve downloaded the Fed paper but not read it yet.

        I picked it up from Krugman’s blog this AM. Here’s the linkto Krugman on R & R. He provides a link to them from there.

      7. an overdraft is a loan from the fed
        purchase of govt bonds by the fed is monetization only if you don’t count the bonds as ‘money’ as monetization means ‘turn into money’

        For me, discussion ‘net financial assets’ is a lot more to the points at hand than ‘money’ and ‘money supply’ with their academic only definitions.

        Treasury spending adds to private sector net financial assets. Taxes remove net financial assets from the economy.

    2. Roberts:
      ” The deficits are already too large for the dollar to survive as reserve currency,”

      “Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency

      I reject the use of the term “Reserve Currency” in general, its another term that provides these morons with an “out”, a falacious mis-direction rebuttal.
      Roberts uses it here in the usual deceptive pattern of the fear mongers. It’s like they try to identify to their readers/dupes that the USD a special form of currency…to the uneducated, they probably think that some international banking body designates the USD as a special “reserve currency” that such a special status can be taken away and then it will be bad for the US. When in reality, the situation is best looked at like Warren has described it here: Certain foreign entities zealously seek to save in USD financial assets for their own reasons.

      When you point out to people these facts, and how the foreign sector has no other choice of what to do with their USD surpluses, they draw a blank and change the subject to “well, that’s because the USD is a reserve currency“, trying to imply that if somehow that designation were taken away (BY WHO?), then the US would have hell to pay, etc. Completely deceptive argument, certain foreign countries collect USD FA balances, the end.

      “There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?”

      This is actually a GOOD question, that I wish people like Roberts would take the time to answer CORRECTLY: It comes from the govt spending itself. Check out the Z.1 reports B.100 and B.102 schedules going back to just before the GFC until now and in between, every sectors USD bank account balances have gone UP, while bank credit has collapsed. Where INDEED did the “money” to buy the Treasury Bonds come from?
      If one of his (Roberts) accolytes would like to show me where any sectors bank accounts have actually FALLEN over these latest times of supposed record “borrowing” Id like to see it. Its right in the Z.1 reports.


  4. Crisis. What Crisis? Profits Soar!

    By James Petras

    August 16, 2010 “Information Clearing House” — While progressives and leftists write about the “crises of capitalism”, manufacturers, petroleum companies, bankers and most other major corporations on both sides of the Atlantic and Pacific coast are chuckling all the way to the bank.


  5. “I’d reply if I thought anyone of consequence who didn’t already know what I was going to say would take me seriously. Otherwise no time, sorry.”

    I’m a new reader and not anyone of consequence, but I would be very interested in how you’d reply–at least a sketch or a reference to something I could read. Roberts’ perspective is very common and it would good to have some ammunition to counter his points.

    1. Perry, the basic problem with Roberts piece, other than his lack of understanding of how the monetary system operates, is his assertions of points that are highly controversial without proving any justification. The answer to that is, prove your points. It really is a waste of time to rebute bogus claims with no basis in fact. It’s just made up, based on gratuitous assumptions that make one’s eyes roll. There is no reason to take it seriously, and I am not even an economist.

  6. Thanks, Tom. You say that “It really is a waste of time to rebute bogus claims with no basis in fact. It’s just made up, based on gratuitous assumptions that make one’s eyes roll. There is no reason to take it seriously, and I am not even an economist.” I disagree. Most of what we see and hear on the media is propaganda or mythology. It is necessary to refute it. People today are not laboring under rational positions that are in error here and there. They are laboring under serious propaganda manipulations. If someone as intelligent and experienced as PCR can propound this, in harmony with Gerald Celente, what can you expect from the average intelligent but beleaguered citizen? Just think how tiny a minority understands or has even heard of the perspective of MMT, for example. PCR may make your eyes roll, but you are an exception. And the fact that your eyes roll does not make PCR a lunatic. He may be mistaken, but I think it fair to say he is sincere and genuinely concerned, and the fact is that an enormous number of people will take him seriously and already believe much of what he is saying.

    1. Perry, the people putting this stuff out are heavily bankrolled. The people here aren’t and have limited time and resources. Given this limitation, they have generated a tremendous amount of oppositional and contributory writing, much of it original.

      Begin with the mandatory readings at this site. Check out the archives and read the comments, too. Warren’s 7 Deadly Innocent Frauds is a good place to start. Check out Bill Mitchell’s billy blog. Bill provides excellent cross links. To understand what’s going on, it is necessary to understand the current monetary system and how to use it to full potential. That’s what MMT is about. Trust me, it is not possible to understand current debate on economics and political policy without understanding monetary/fiscal operations. Otherwise, it is just myth and propaganda, stemming from ignorance and disingenuousness.

    1. Well, again, assertions. The post skims the surface of the agenda and effect of global financial capitalism. This has been investigated in great detail by economist and economic historian Michael Hudson. I suggest looking at this stuff if there is an area of interest.


  7. Thanks again, Tom. I really appreciate your taking the trouble, and I’ll be sure to do the reading you recommend.

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