Category: Economics
Money and Trading 101
When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts
Goldilocks, the Crash, and the Perfect Fiscal Storm
Randall Wray revisits the Clintonian Goldilocks economy to find the seeds of the Global Financial Crisis, using the sectoral balance approach
What are the differences between QE1, QE2 and QE3?
Last week, when discussing what QE3 could look like I indicated that were the Federal Reserve to start expanding its balance sheet, QE3 will see interest rate caps after a pause and period of reflection. Let me address the differences between the various QEs here to illustrate why interest rate caps are being contemplated
Can Obama cut the deficit and have job growth too?
Stephanie Kelton demonstrates that as long as unemployment remains high, the deficit will remain high. Here’s the formula: Spending creates income. Income creates sales. Sales create jobs. If you think you can cut the deficit without destroying jobs, dream on. She argues that instead of dreaming about ways to pull off the impossible, it’s time get to work on a plan to increase employment
The Euro system contains a serious design flaw
The primary difference for Euroland to sovereign issuers is that the Euro can only be created by the ECB – it is the issuer of the currency. The governments of Ireland, Greece, Spain, Germany, etc. are the USERS of the currency. The implications of this distinction cannot be overstated. Members of the Eurozone are like individual states in the US. Like California, Ireland must go out and ‘get’ the currency – either by taxing or borrowing – before it can spend. It must pay whatever financial markets demand, and it can be priced out of the market. It can become insolvent, and it can be forced to default on its debt
Operation Twist
Marshall Auerback and Rob Paenteau explain a method the Fed might use to target interest rates further out on the yield curve
How to become virtuous and save more
In this column, Michael Pettis uses Germany and Spain as examples of the interplay between savings rates, trade balances and economic policy. Looking at this interplay, it turns out that domestic policies by the German government can explain both high German savings and low Spanish savings
To repeat, the ECB is not conducting a stealth bailout
Karl Whelan finds that a recent analysis by Hans-Werner Sinn on an alleged ECB bailout is incorrect. Willem Buiter is now out with a commentary on the same issue corroborating Whelan’s view. Below are the bullet points he highlights in his analysis for Citigroup followed by the full article. This is seriously technical stuff, but still very important. I have underlined the key bits because his argument ties in with something I have been banging on about for some time, namely that banks are not reserve constrained in a convertible floating exchange rate credit system
Rajan: Easy money will not create sustainable growth
Raghuram Rajan, one of the few mainstream economists to warn of the US housing bubble, has recently written a piece which is highly critical of US monetary policy. His view, one that I share, is that US policy favours debtors over savers in a way which will not create sustainable growth. On the contrary, easy money will lead to distortions that create asset bubbles and longer-term systemic problems
William Dudley on Budget Deficits
If the public sector balance must over time move from around -10 percent to around -3 percent to stabilize the federal debt-to-GDP ratio at tolerable levels, then the private sector balance and the current account balance must move by roughly 7 percentage points of GDP to take up the slack
Voodoo People
It just isn’t going to work, and it’s very interesting that the man who invested this type of what I call a voodoo economic policy -George H.W. Bush, Carnegie Mellon University, 10 April 1980, in reference to Ronald Reagan’s economic policy Luke Johnson, the head of Risk Capital Partners, a private equity firm in the
Koo says QE2 drove speculation, but what about the real economy?
So, the Fed has basically just announced it will stop QE2. It will then start selling Treasuries. And remember, this is at the same time the Treasury is selling $10 billion a month in mortgage securities. Only after this will rates be hiked. That doesn’t sound like a bullish scenario for risk assets. Bond yields could fall even though the Fed is selling if the economy swoons as a consequence