Warren Mosler: Consumer Borrowing Has Kept Economy Afloat, but for How Much Longer?

Yves here. Warren Mosler, who is one of the leading writers on Modern Monetary Theory, circulated an e-mail with his assessment of the state of the economy and the impact of quantitative easing and agreed to letting me publish it.

I’ve only got one area of difference with his assessment. He thinks that having ended QE will be more positive economically than some might believe because savers will have more interest income. However, like many, I have my doubts about the adjustment process. The Fed and the Administration have relied heavily on the confidence fairy (supported by a recovery in wealth levels due to super low interest rates) and as he details, deficit spending and consumer borrowing. Past tightenings have always been gradual and on the short end of the yield curve, which means the effect on long-term bond yields has similarly gradual. Here, we’ve had a sharp move in a month. ZIRP and negative real yields gave investors incentives to go for riskier assets (indeed, some argued that was the point of QE). And even though Mosler speaks of eventual benefits for investors in terms of income (ie, assets will be priced to provide decent income), they are going to suffer mark-to-market losses getting there. The wealth effect isn’t as strong for stocks as for housing, but there has to be a wealth effect for bonds as well. How will retail investors react in a world where Vanguard and Schwab give them intraday prices to bond losses (many investment advisors recommend a 50/50 or 60/40 stock/bond allocation, although Mandelbrot would have told you that was way too high)? Even if they hated the lost income under the ZIRP and QE regimes, I find it hard to believe they did not see themselves as having more wealth when their computer screen and monthly statements told them so. How will they react to Uncle Ben’s bond market whackage, particularly since the stock market should also price in higher required returns (ie, start assigning lower multiples to earnings)?

Mind you, I’m not arguing against a QE exit; I was never a fan in the first place. It’s the idea of exiting when the impact of deficit-cutting is grinding through a not-so-hot economy that gives me pause. While Mosler argues that investors have reacted to QE incorrectly, their reaction to its reversal can’t help the underlying dynamic he describes.

By Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract

So back to basics.

For $16 trillion in output to get sold there must have been 16t in spending, which also translates into $16 trillion in some agent’s income.

And (apart from unsold inventory growth), for all practical purposes nominal GDP growth is another way to say sales growth.

To state the obvious, sales = spending, income = expense, etc.

Working against growth is ‘unspent income’, also called ‘demand leakages’ Those include pension contributions, insurance reserves, retained earnings, foreign central bank foreign exchange purchases, cash hoards, etc. etc. etc.And for every agent that spent less than his income, some other agent spent more than his income, to the tune of the $16 trillion in GDP.

And GDP growth is a function of that much more of same.

Well, the 2% or so growth we’ve been getting once included the government spending maybe 10% more than its income to keep sales growing more than the demand leakages were working against sales growth.

And with growth, the so called automatic fiscal STABILIZERS work to temper that growth, as growth causes government revenues to increase and government. transfer payments to decline.

You can think of this as institutional structure that causes the economy to have to go uphill to grow.
That’s because as the economy grows, the growth of government net spending is ‘automatically’ reduced.

So after a couple of years growth the government went from spending maybe 10% more than its income to something under 6% of its income, which translated into about 2% real growth, and about 3.5% nominal growth.

Well, to keep this going in the face of the demand leakages, some other agents were picking up the slack.

Looking at the charts seems to me it was the home buyers and car buyers who were consistently spending more than their incomes, driving the nominal GDP growth.

But then on Jan 1 FICA taxes went up as did some income tax rates, by about $3.5 billion/week, removing that much income from potential spenders. And a few months later the sequesters hit, both reducing GDP by the amount of those spending cuts and reducing income by about another $1.5 billion per week.

In other words, the government suddenly reduced the amount it was spending beyond its income by about 1.5% of GDP, which had been working along with the domestic credit expansion to outpace the demand leakages.

So how has domestic credit managed to expand to fill that spending gap caused by the already retreating government deficit spending proactively dropping another 1.5%?

With great difficulty!

Since January, after climbing steadily, car sales look to have gone sideways.

And looks to me like the rate of domestic deficit spending on housing has declined as well.

In any case there hasn’t been an the increase these ‘credit expansion engines’ needed to fill the spending gap from the proactive drop in government deficit spending. And add to that decelerating person income statistics (and remember, the pay for additional jobs comes from someone else’s income, and hopefully income spent on output)

And in any case to keep growing at about 2% credit expansion has to overcome the demand leakages and climb the hill of the automatic fiscal stabilizers as with the current institutional structure nominal growth automatically reduces the contribution of government deficit spending, which is now maybe down to 4% of gdp. Note that with forecasts of 2% growth the forecast for the government deficit spending falls to only 2% of gdp, implying far more rapid increases of ‘borrowing to spend’ in the domestic sector. And if that net new borrowing doesn’t materialize, the sales don’t either.

Is it possible for housing related credit expansion to suddenly accelerate? Sure, but is it likely, especially in the face of the drag the government layoffs and tax increases that made the hill the domestic credit expansion needs to climb that much steeper? And sure, the foreign sector could suddenly spend that much more of its income in the US, but is a US export boom likely in the current anemic global economy? I wouldn’t bet on it.

Now add this to the taper nonsense.

As previously discussed, QE is at best a placebo, and more likely a negative as it removes interest income from the economy.

But with none of the name institutions of higher learning teaching this, today’s portfolio managers think it’s somehow a ‘stimulus’ and act accordingly, driving up stock prices globally, supporting global ‘confidence’, even as growth and earnings show signs of fading. And then when the Fed even discusses the possibility of reducing the volume of QE, they all stampede the other way, with bonds reacting to the same misguided QE logic as well. But in any case, these are misguided, one time portfolio shifts, that tend to reverse with time as the reality of the underlying economy/earnings eventuates, refudiating the presumed effects of QE… :)

To conclude, I just don’t see the source of the credit expansion needed for anything more than modest nominal growth, which has now continued to decelerate to maybe 3% of GDP, and a real risk that the domestic credit expansion can’t even keep up with the demand leakages, and real GDP goes negative, along with top line growth and earnings growth.

In fact, with annual population growth running at about 1.25%, per capital GDP is already only about equal to productivity growth, as the labor force participation rate hovers at multi decade lows.

Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan

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  1. Conscience of a Conservative

    I think defenders of Q.E. will always have a difficult time quantifying the impact on the real economy. With the exception of some mortgage refinancing at lower rates there isn’t much annectdotal evidence. Corporations have taken advantage but the impact there has been more on engaging in financial engineering then on job creation, and while stocks are up an we risk having suckered in another generation of stock buyers, the Q.E. impact was probably not that strong as the wealth effect from stocks is decidedly less strong thna that on equities. And we never saw much of a wealth effect from real estate as mortgage lending still for the time being frowns upon equity take-outs although lenders do have short memories and its only a matter of time. It might be the economy improved because it would have anyway. People eventually need new cars, etc.

    1. Ben Johannson

      With the exception of some mortgage refinancing at lower rates there isn’t much annectdotal evidence.

      And even that could have been achieved without QE.

      I think Bernanke realized in 2010 that QE wassn’t working as textbook theory says it should, but kept on doing it because he couldn’t come up with anything else.

      1. washunate

        That very well could be. But isn’t another possibility that the bailouts are doing exactly what they’re intended to do? Transfer wealth from the public sector to connected insiders while holding the system together ‘enough’ so that there isn’t widespread social unrest and demand for change?

        QE/ZIPR/two-tiered justice system has basically allowed the national security state, healthcare cartel, and financial fraudsters to continue plundering the public commons without requiring raising taxes on the wealthy to pay for it.

        1. jake chase

          I read stuff like this and wonder what bubble the author lives in? It never occurs to him to wonder about the details of this ‘growth’, or who gets what out of it. It is no wonder that investment managers, like lemmings, all end up in the same hole at the same time.

          Credit expansion kept the economy going and growing from 1980 to 2008. The only consumers with any credit left are those who were too young to borrow before the crash, but most of them who have jobs worth having are overloaded with student debt and have just about enough left for Starbucks and Taco Bell. Savers (as opposed to Fed engorged speculators) have been denuded by four years of ZIRP. Those who plunged into equities or bonds in 2009 are few and far between. All the action has been leveraged speculation. Speculators who have not taken profits are holding on with fingers on the trigger, because any chump can tell you these assets have nowhere to go but down, the only question being how far and how fast? That leaves houses. Fewer and fewer people qualify for mortgages, artificial shortages have left prices far too high for anybody with common sense. No doubt the speculative minded continue to plunge in, hoping that the savings on historic interest expense will justify the artificially high purchase prices.

          But the real problem is unemployment and underemployment, which continue growing despite what Go’mint statisticians keep saying.

          The entire world of finance is engaged in a self justifying circle j**k and hoping their bonuses will pay out before the roof over their heads caves in. I don’t know why anyone bothers to write this stuff or read it either.

        2. jake chase

          I have just been vaporized again for no reason. Sorry you missed an excellent comment. It just may be my last one, since irrational censorship just as is repellent as rational censorship, and nobody can tell which is going on here.

          1. craazyman

            dont worry, I was vaporized yesterday. I thought it had somethng to do with my previous Nostradamus comment but then i thought more about it and realized what I was trying to post was really pretty stupid. sometimes you get lucky!

          2. Lambert Strether

            For those experiencing persistent problems: no data will be lost if you compose offline or copy before submitting. The Internet is a hostile computing environment, far more so than the desktop.

            * * *

            Jake: There isn’t a little bell that dings so admins can go in and muck about with your comments. See, again (and again (and again)) the link above. This is a technical issue and one of the things we hope our new host can solve, though (see the link (again (and again))) that’s not an easy task.

    2. Cameron Hoppe

      Of course QE has limited effect on the real economy. That’s not the point. The goal is and was to create monetary space for the financial industry to clear out their bad debts, and to give public policy makers monetary space to implement fiscal policies to stimulate employment. As far as nominal GDP growth goes, the US is doing just fine and in that sense QE has worked. But reality is that when demand is depressed the profit-driven sector cannot produce swift employment growth. That role has to fall to government entities and non-profits. Truth is that elected officials in the US have not taken advantage of the monetary space, and within the next year that window will close.

    3. Dan Kervick

      My guess is that if QE has any positive impact at all, it has it through placebo effects. As Warren M. says, QE sucks dollars out of the economy in addition to injecting them into the economy. But the press and mainstream punditry constantly portray QE as a stimulatory measure that “pumps money into the economy.” They don’t seem to have noticed the rising Fed profits, which indicate that the income flows attached to the MBSs that the Fed has purchased exceed the quantity of dollars the Fed spent in purchasing those MBSs.

      1. Detroit Dan

        It seems to me that Bernanke is doing the equivalent of declaring victory and leaving Iraq (or Vietnam). As Rex Nutting noted the other day at MarketWatch:

        “The core inflation rate (excluding volatile food and energy prices) is up just 1.05% over the past year — the lowest rate on record.

        “Also, the trimmed mean PCE index (which is an alternative way of looking at underlying inflation trends that doesn’t automatically exclude food and energy) fell 0.1% in April. That was its first decline ever.

        “Inflation expectations are also low and falling.”


        It’s not working as it’s supposed to, so better to declare victory and go home…

  2. Jim Jams

    When investors are either angry or start blaming poor people it’s an enjoyable read, and when they start reacting incorrectly, that’s also pleasurable. Listening to the desire for sales though means they want blood again, liars loans, stated income ninjas, mortgage your kidneys. Then they start whining when the wheels come off of that hustle. Pathetic.

  3. craazyman

    Just thinkng about this, it seems to me if somebody sells their MBS or TReasury to the Fed and takes the Fed’s cash and then buys a NEWLY ISSUED bond that yields more than the bond they sold to the Fed, that might increase overall interest income in the economy.

    Of course It would have to be a new issue bond, since if it was an existing bond there would be no new interest income created, the interest would only change hands from previous owner to new owner.

    Also, if corporation has 100 cash and does capital spending with 50 of it. Their expense for depreciation would be a lot less than 50 but the other guy’s revenue would be 50. So you have income higher than expense. ON a cash basis of course one party’s outflow does equal the other’s inflow. so it may just be a language issue.

    IT seems to me it’s almost impossible to say whether QE “works” or not, it seems like each variable has a cloud of uncertainty surrounding it and when one tries to assess cause and effect through time the uncertainty clouds magnify faster than facts presented by path of the inherent relationships.

    1. diptherio

      Interesting thoughts on macroeconomic accounting, craazy.

      One thing I think we can say about QE’s effectiveness is that it doesn’t seem to have much of it in isolation, at least not for the real economy.

      It just occurred to me that QE could be made more effective with a minor design tweak: instead of purchasing MBS and Treasuries from primary dealers, the Fed could start buying “internal intelligence” reports from regular Amerikans. Make a list of suspicious activities you see your neighbors engaging in, take it to your local Reserve branch and they buy it, file it, and save it forever. This way our national and economic security can both be ensured, in one fell swoop!

      Also, under my proposal, since everyone would be able to create intelligence documents to sell to the Fed, the QE would be more widely distributed and thus more effective. It would also provide the NSA with a treasure trove of information on possible terrorists within our borders.

      Think about it…this one could really have some legs…

      1. John Funk

        Great idea, however it’s already partially initiated. The ruling class already pays people to do the monitoring, mostly while Joe Six Pack isn’t even aware of it. Seriously, it’s a lucrative thing for management consultants, like Booze.

    2. Dan Kervick

      Buying a financial product doesn’t increase national income, unless there is some extrinsic multiplier effect. Suppose X buys a bond from Y for $10,000 that, when all of the principle and coupon payments have been made, will result in $11,000 being paid by Y to X.

      When the bond is purchased, X has $10,000 less and Y has $10,000 more. No net change in private sector financial assets.

      After the payments have been made, X has $11,000 more and Y has $11,000 less. No net change in private sector financial assets.

      Net effect: X has $1000 more and Y has $1000 less. No net change in private sector financial assets.

      Yes, there is more interest income than there would have been without the bound purchase, since X received $1000 in interest payments that X wouldn’t have received. But that interest payment to X is an interest payment from Y that Y wouldn’t have incurred otherwise. So it’s a wash in terms of net income.

      This isn’t to say that all of that borrowing and lending doesn’t have positive economic impacts. Presumably Y was willing to pay that interest price for $10,000 in borrowed funds because Y has some opportunity for the profitable employment of cash in the here-and-now that is worth promising to give up even more cash in the future. But if there is a net economic benefit to the transaction, it isn’t simply a consequence of interest income.

      So one possibility would be that there is a liquidity effects to be expected from QE, as firms swap financial assets of various maturities for cash in hand. But given that firms are supposedly sitting on record amounts of cash-like assets, I don’t know how big a factor that is.

  4. diptherio

    Warren hits the nail on the head, as usual. Reducing the gov’t deficit sucks money out of the rest economy, which is something few economists really seem to get (and even fewer pundits). They’ll concede the point, sure, but not many seem to have the courage to, as S. Kierkegaard put it, “think the thought through to its end.”

  5. washunate

    “today’s portfolio managers think it’s somehow a ‘stimulus’ and act accordingly, driving up stock prices globally, supporting global ‘confidence’, even as growth and earnings show signs of fading”

    I would be curious to hear more about this. The vast majority of stocks are owned by the top households. The rich HAVE benefited from the bailouts. Doesn’t it make sense that in a world of bailouts, they would put their money in the stuff being bailed out? This perspective seems to assume that short term stock market action is governed by Efficient Markets rather than public policy and the behavior of humans responding to it.

    Precisely because this is ‘hot money’ or whatever we want to call it, it’s not invested for fundamental reasons. It’s just front running government subsidies. If USFG started backing baseball cards, we would find out that baseball cards have all been bought up by the wealthy.

    1. Banger

      Compelling argument. Investment, like money itself, is kind of a result of politics. Economics as a field is way overrated–it governs the mechanics of how the elites fix power-relations among people. That is one reason I’m skeptical now of the business cycle–I think right now we have business cycles by fiat not the operation of efficient markets. In that sense I believe we are in a situation where we will not see any dramatic rises or falls in the economy barring unforseen disasters.

  6. Eeyores enigma

    “Consumer Borrowing Has Kept Economy Afloat,…”

    Nobody even questions this kind of statement anymore.

    That debt, which is a LIABILITY and a heavy burden on the entire population, is touted as a positive and the only thing that will save us is insane.


    1. Eeyores enigma

      I should add that debt is a heavy burden on the planet as well.

      It is the single biggest reason that we are unable to live on the planet in anything resembling an ecologicaly sustainabe way.

      Debt based money is a claim on future resourses. Debt grows exponentially. resource extraction and its consumate waste stream must grow also.

      We here all understand that what can not go on for ever will eventually end but its how it ends that we MUST decide before it is decided for us.

      1. Dave

        Eeyores gets it! How long can folks continue to buy that which takes energy and other irreplaceable resources to produce? (stuff we don’t need with money we don’t have) All this just to stimulate an economy that in the US at least, provides an obscene standard of living relative to much of the rest of the world. Our poor have it made compared to those in Latin America for instance.

        It appears to me that many commentators here take for granted that they have an inalienable right to a higher standard of living than many of the world’s population and are entitled to an abundance of manufactured goods no matter what they do or don’t do. Just for breathing, in other words.

        Our too rich 1% would not have nearly as much of this undeserved wealth if these middle and lower classes did not buy all their expensive garbage!

        1. systemic

          Yes! Too many economic discussions take place in a bubble, and in that bubble, you don’t discuss resource constraints, or biocapacity, or the undeniably obvious fact that nothing can grow infinitely within a constrained system. Environmental overshoot never comes up. Natural limits never come up. Instead, all you hear is “how to kickstart growth”, without anyone stopping to think if that’s really the right question to be asking. A lot of very well-meaning people are still living in fantasy land in that respect. Everyone here should acquaint themselves with the Ecological Footprint. We need to start having discussions of economics that take sustainability into account before we all experience ecological overshoot firsthand.

      2. washunate

        Right on.

        The environmental stupidity is one of the primary critiques of the system.

      3. systemic

        I recently encountered someone who tried to explain how we could have some part of the economy that could grow forever while holding population and resource consumption fixed. I’ve never found anyone who could sufficiently explain how that is possible. I don’t think any intelligent person would deny that we have limited resources at our disposal – the end of growth in material consumption has to come at some point. Most people will also agree that population can’t grow forever due to constraints on drinking water and arable land. So if people readily admit that we can’t infinitely consume natural resources, and we can’t infinitely grow our population, why do we still have an economy that depends on infinite growth? There is some serious cognitive dissonance at play here.

    2. Don Levit

      Excellent point.
      When debt = wealth, you have a society that has gone cockeyed.
      Mosler sems to suggest savings = demand leakages, which he seems to put in a totally negative light.
      So, savings is bad and debt is good?
      Am I crazy or is he crazy?
      One of us HAS to be nuts!
      Don Levit

      1. Banger

        Well, if debt = money then all money and all debt is fictional and can be changed as needed. The current power-elite have one collective goal–to maintain the current structure and power-relations economic policy along with “security” policy are the means they use. Value will be a matter of decree not markets–though the fiction will be maintained.

  7. denim

    More muddled wordsmithing rather than economics. Using the word “spent” has an underlying implication of “used up.” If one uses Buy and Sell, the implication is a transfer of something of value, indeed a cash flow that results from labour. Keynes, in his General Theory, believed in two measures of an economy:
    “It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole; reserving the use of units of particular outputs and equipments to the occasions when we are analysing the output of individual firms or industries in isolation; and the use of vague concepts, such as the quantity of output as a whole, the quantity of capital equipment as a whole and the general level of prices, to the occasions when we are attempting some historical comparison which is within certain (perhaps fairly wide) limits avowedly imprecise and approximate.” Money, Keynes maintained, connects the present with the future: “The importance of money flows from it being a link between the present and the future.” For example, I work an hour for my customer/employer and I store that value in the form a $50 bill from him. In the future, I can trade that $50 for a nice steak dinner produced by the then current labour of the chef and crew. Labour and cash flow. The simple is as hard to understand as the muddled complex. That was the genius of Keynes.

    1. rob

      just sayin’

      This guy works for an hour, gets fifty bucks.For doing what?What does he do for a living?Postulating?
      Whereas, the fifty dollars he made doing”?”, is spent on people who provide a place to sit,keep the lights and refrigerators on,another guy who cooks the steak, a waiter who brings it to him, a truck driver who delivered the inventory, a farmer who raised and fed the cow. a butcher who killed the cow.AND finally, the cow who gave up a piece of his ass.
      All of that as a fair trade for someone who sits around and “thinks” about stuff…
      Income inequality.
      Not to pick on anything in particular, the statement just seemed to say a lot about what people who get to make decisions,actually do, compared to everyone else.
      No wonder why this world is so screwed up.

      1. denim

        I picked $50 an hour out of the blue.. But here is reality in Table 3, according to gov surveys. Pick your own preferred occupation.


        According to the IRS, there were 30.533 million Americans making between $50K and $100K adjusted gross income. At 2080 eight hour days a year that would mean they make between $24 and $48 and hour. That is the largest grouping the table shows. See figure B2 at

        1. rob

          I didn’t mean to make you waste your time with a reply,or take the thread off course.I wasn’t quibbling with anything you said.The numbers, really aren’t important.I really am talking about people on the HIGH end of the spectrum who would be making $1,000/hr,or $10,000/hr,and the like.Who claim to be doing such important work….Whatever that is.

  8. Conscience of a Conservative

    I’ve always believe the prime motivation behin Q.E. was to recapitalize the banks. Banks have primary access to money an have benefited far more than consumers refinancing a mortgage from the drop in rates, Fed purchases of mortgages and zero Fed Funds rates. Now that the banks are arguing that they are well enough to start paying dividends again, it might be Bernanke figured there’s less need to continue punishing savers.

    1. Conscience of a Conservative

      One correction to my post above, lately the Q.E. medicine has lost of it’s original effectiveness with the big banks. We see that in their NIM numbers..

  9. Susan the other

    So afraid of Greece we embrace Japan. Well, the former Japan. That QE is a placebo sounds accurate. Money can’t stimulate an economy that doesn’t exist (except to borrow and spend). So it all goes to the banks, which is justified by rising asset prices. The Fed’s entire reason for existing is to save the banks. The only thing I can think of that could be indicating the banks are going to be able to stand on their own soon is TAFTA and TPP. There will be financial deregulation for trade deals, maybe not for domestic deals. But its nutty to think turbo-trading itself is going to be anything more than a placebo either. A global placebo. Somewhere along the way to signing the trade pacts, Bernanke will cut back QE using the excuse that it is no longer necessary because the deficit is down (nevermind the illogic of that one); unemployment is miraculously at 6% or some other nonsense. Because without a big jobs bill coming out of congress, this country is going nowhere.

  10. impermanence

    It’s really pretty pathetic to observe the intellectual and academic community attempt to analyze that which is elemental.

    It’s a debt crisis, so until the debt is significantly reduced, nothing [real] is going to get better in a debt-based monetary system.

    It’s like being down to your last gallon of gas and the sign says, “Next gas 100 miles.”

    It’s time to get out and walk [the walk].

  11. be'emet

    don’t higher rates suck money out of the economy (debt deflation)?

    doesn’t government create jobs, in every kind of service, contrary to the mutual assertions of Romney/Obama?

    wouldn’t government sponsored infrastructure development put an end to unemployment?

    wasn’t the Fed, an organization of major bankers, created to protect their interest, without regard to national benefit?

    In what sense does Mosler’s piece show any semblance to MMT?

    1. The Rage

      Nope, nominal interest rates are overrated. Real rates are so far down due to capital inflight, nominal ones would have to rise wayyyyyyyyyyyy up just to cause ‘debt deflation’.

      Matter of fact, rising nominal rates is a sign of “health” into the economy.

  12. kaj

    There are both exogeous (e.g., increased oil production via fracking) and endogeous (via improved and more stable state budgets) drivers today that were absent during 2008-2010 and for state budgets even till 2011.

    Economic growth in capitalist economies is a dynamic process and not based upon formal equations. Only in retrospect does one realize what the cause of particular events was. By all reckoning now, it is realized, that the banks’ hare-brained lending for house purchases to over-extended households and crazy nominal derivative contracts was merely the tip of the iceberg; it was more like the export of capital from less developed economies after the 1990s disaster that was the major driver of the crisis.

    It appears that QE did help stabilize the economy despite its varying effects upon different income-savings groupings, eg, savers, who were later compensated by the wealth effect from a rising stock market; however, QEs slow withdrawal won’t likely damage the economy because of emergent local and national economic drivers which will replace it, again slowly as they gain traction. That means the U.S. economy is on a long, slow growth trajectory, especially with the emergent increase in the military budgets from increase in armament production and the “need” for cyber-security due to both Syria and China. There are too many national growth drivers in this Empire-crazy, environment-destroying economy for one to to foresee the future on the basis of mathematical equalities.

  13. Lafayette


    The Replicants painted the Obama Administration into a corner. Having won the mid-terms, where Americans stoopidly elected the T-Party (T for troglodyte) into control of the HofR. (From which issues all spending bills.)

    The Replicants then concocted the mindless dogma that austerity was necessary to “correct” the National Budget that was spending Uncle Sam into the dirt. Lo and behold, that proved to be untrue. But, you see, that dogma was just an electoral tactic to maintain unemployment high up to the 2012 elections and – abracadabra! – place a Replicant in the White House.

    They got that strategy wrong, BUT they did keep control of the HofR (how Americans did not shove them out will remain a shameful example of Collective Electoral Stoopidity.) Where they continue to stonewall any Stimulus Spending – for God knows now what reason.

    The Fed offered Obama a palliative solution, called QE – which is the monetary policy by which the Fed prints money and buys bank debt. This supposedly “frees the banks” to lend more easily consumer spending.

    Yet another fallacy by dorks who cannot understand the monetary policy is not the all-round economic panacea that Friedman would have had us swallow. Whyzzat?

    Because those who believe in QE think that bank interest-rates in a wholly Credit Economy, as we have in America, is sufficient to stimulate Consumer Demand.

    Wrong, wrong, and wrong again. It’s necessary but not as important as the Feel-Good-Factor (FDF). Whazzat?

    The FDF is the simple notion that since nobody around you is losing their job, then they need not worry about losing income and can therefore safely assume debt in order to obtain credit. And, given that the US was coming out of the worst recession in 70 years, it would take a lot of proof for the FGF to return in the collective mentality of American households.


    It is nonetheless making its way back – slowly, slowly. And as it does continue to improve then Americans loosen further their purse strings, and get back to a shop-till-you-drop lifestyle.

    There is little reason that this buildup of consumer confidence should not continue for as long as unemployment continues to wither.

  14. Hugh

    I am unimpressed. All this is saying is that austerity doesn’t work, but we knew that.

    QE has real effects. The Fed is mediating a shift in private holdings (of the rich) from one asset class to another. It is creating money out of thin air to purchase MBS. It doesn’t really matter that this MBS is GSE backed. If it is mispriced, the only question is who will eat any losses when this mispricing can no longer be swept under the rug. In any case, this leaves investors with an extra $80 billion in cash each month looking for a profitable home. ZIRP can only go so far and it is really the QE money that has kept stock markets goosed and rising.

    You will no doubt note that none of this has anything to do with any underlying fundamentals in the economy. The country’s industrial base continues to be stripped. Unemployment remains high. Gains in the housing market are fictive, the result of manipulation of inventory and predatory investors.

    Raising interest rates or cutting back on QE threaten this whole Ponzi house of cards scheme.

    1. The Rage

      wrong, wrong, wrong. QE is irrevelant.

      Rising rates are a good sign of economic recovery and falling debt levels. Your not putting it together at all.

      Overall “real” debt levels have fallen down down and further down. The only real lag left is mortgage debt, which will probably be back on its path by 2015.

      You misunderstand the difference between the nominal vs. real.

    2. denim

      If you postulate that the Fed’s QE is the printing money out of thin air in bad times, do you accept that the Fed’s charging high interest rates in good times is burning money or at least recapturing it and hoarding it from circulation?

      1. financial matters

        I think that from an MMT standpoint, interest rates don’t really have a bearing on ‘money printing’. A sovereign can always afford to pay any interest rate.

        I think high interest rates can have a stabilizing effect by making money market funds more attractive and discouraging ‘carry trades’ and speculative investments to try and get more gains.

        The more important effect seems to be what it would have on productive investment. We don’t seem to be seeing much of that now so I think that would take fiscal changes to make rentier income less attractive and encourage regular profit motivated growth. Along with labor sharing in that growth which would also be more dependent on better government regulation and guidance on distribution.

    3. Dan Kervick

      But the sale of the MBS means the private sector loses securities assets as well as gaining cash assets. Those MBSs don’t appear to be garbage at all, since the Fed appears to be profiting from these transactions, which I would suggest is just the opposite of what we would like to happen, since Fed profit is private sector loss.

      If the Fed were just buying worthless garbage and overpaying for it, that would actually be somewhat better: effectively a direct, net increase in private sector financial assets.

      If the impact of QE is just a swap of liquidity for an equal or greater amount of long term value, then the question is what the sellers are doing with the liquidity. My fear is that all they are doing is chasing yield by buying other financial assets and blowing up another tail-chasing financial sector bubble.

      1. skippy

        Pray tell the value of fraud – MBS – when every single loan is infected.

        skippy… which infected every other credit security to the tune of 24 trillionish… eh.

      2. Hugh

        My understanding is that most of the MBS is written for 5 years. That means, if another major downturn happens within that period, the Fed will be holding a lot of paper backed by assets that will be worth considerably less than their current value. Like skippy, I have my doubts about the quality of what the GSEs are backing. What I see is the Fed buying up these pumped up assets at par, which means that there are large losses hidden in them. That’s what I meant by mispricing.

        I agree that the liquidity produced by these buys is being used to blow a bubble in stocks and commodities. When these blow up, there will also be large losses there.

        “If the Fed were just buying worthless garbage and overpaying for it, that would actually be somewhat better: effectively a direct, net increase in private sector financial assets.”

        This overlooks wealth inequality. Increases in aggregates don’t mean much if the benefits flowing from them go only to a few. They simply exacerbate the already intolerable levels of wealth inequality.

        1. from Mexico

          Hugh said:

          This overlooks wealth inequality. Increases in aggregates don’t mean much if the benefits flowing from them go only to a few. They simply exacerbate the already intolerable levels of wealth inequality.

          Yep. Words like fairness, justice and equality before the law don’t even exist in the technocrat’s vocabulary.

        2. skippy

          They shot themselves in the foot – all the way back – when they fiddled with CC standards.

          Now the presumptions they have made whilst issuing debt, is rubbish, and they made that bed but don’t want to sleep in it.

          skippy… Oh yeah[!!!]… scoio – psychopaths don’t do its my fault… they externalize… FFS~

        3. Yves Smith Post author

          No, the Fed has no real cost of money. It does not plan to sell the MBS. The average duration of MBS is 5 years (as in the payout of their cashflows is like a 5 year current coupon bond, between amortization + some loss of principal due to early extinguishment of the loan due to house sale, death, etc).

          It also bought 7 and 10 year Treasuries. In theory it could lose money on them, since those are the type of bonds it uses in open market operations. But it says it intends to hold on to them too.

          The only time the “losses” matter is if they get really big and the monetization causes inflation. We are so far from that happening as for it not to be a real rlsk.

          1. Hugh

            If there is another event like 2007 or 2008 and the economy and the housing market go south again, what happens to the MBS? Will there not be losses and who will bear them? And do you think the current crop of kleptocrats can juggle all the balls they have in the air for another 5 years without there being such an event?

          2. washunate

            Hugh, my read is that the government is on the hook for huge MBS losses, but the Fed isn’t the agency that would show it (unless there is some kind of nonlinear shock, like a hyperinflationary collapse, but I personally don’t think that’s likely – that requires currency to be much more widely spread than it currently is).

            Rather, the federal budget is what would show it as taxpayers fork over dollars to the GSEs, their debtholders, or however the particular mechanics would work. TARP was the big bill in terms of public consciousness, but HERA was the big bill in terms of shuffling housing oversight around and entering into unknown risk – the government essentially assumed a liability without limits.


            I remember fondly how the Obama Administration announced the three year removal of a cap on Christmas day. Clearly they wanted people to think about the announcement.


            I think this distinction is extremely important to understand. It’s the USFG backing of the GSEs that is the risk; the Fed buying GSE MBS is just the Fed buying Treasuries by another name, just another line on a piece of paper that Congress and the President have committed future taxpayers to bailing out in the event something goes wrong.

            Right now, in fact, the GSEs are showing huge paper profits, sending money back to the Treasury (this is one of the prime reasons the DC Dems were all excited about the irrelevant CBO projection showing lower budget deficits – GSE payments were higher than expected). Well, if things go bad, the money simply flows the other direction. That (directly) impacts the federal budget mostly, not the Fed balance sheet.


            The Fed holdings of MBS would only be affected if USFG announced (credibly) that it was no longer backing the GSEs. Now that would be an interesting development.

  15. The Rage

    A bunch longer. Your not putting together where this “borrowing” is coming from. Cheap prices via capital flight from Europe and some from Asia. It is flying into local and regional markets dropping real interest rates far far down. Capital will leave government bonds and rising nominal rates will boost US production even more as money goes back into muni’s, accounts and pensions.

    You can get a well stocked Chevy Malibu cheaper than hell. This capital is reducing real prices and sucking up overcapacity.

    If I was a betting man, this is what the global elites want to keep the “engine” running. Of course if you are in southern europe, you may not like this plan.

    1. Mr. Jack M. Hoff

      Oh really now, where are you finding vehicles cheaper than hell? I suppose if you’re in the upper 10% that might be true, but certainly not for anyone else.

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