Yesterday, on March 22, 2019, the yield curve inverted for the first time since 2007. Specifically, the spread between the 3-month Treasury and the 10-year Treasury has flattened and then flipped: short-term yields are now higher than long-term yields, the reverse of what is normally the case. It is a leading indicator of a coming recession, since it basically means that investors are becoming so bearish that they would rather lock in current interest rates as they expect rates to drop significantly in the near future rather than continue rising further. And since it typically precedes the onset of a recession by 6 to 18 months on average, it means that the odds of a 2019 or 2020 recession are looking very, very likely.
And while the stock market seemed to be rebounding from the December mini-crash of 2018, it now seems to be once again teetering on the edge of the Big One, the coming Crash of 2019. And with Trump's tariffs and resulting trade war really starting to bite hard recently, leading to GM and Ford both announcing layoffs, and American soybean farmers getting creamed, things really don't look so hot right now.
In Bernie we TRUST, in Trump we RUST. Tired of "winning" yet? Hey, American Brexit, now do you finally Regrexit?
Saturday, March 23, 2019
Monday, March 18, 2019
What MMT Gets Wrong, And Monetary Sovereignty Gets Right (Part Deux)
Recently, we wrote an article discussing the theoretical and practical differences between Modern Monetary Theory (MMT) and Monetary Sovereignty (MS). But still, some may wonder why there is essentially no correlation between deficit spending and inflation, at least not in the post-gold standard era and not even during WWII.
Surely there must be some connection, right? Well, there technically is, but essentially only at the extremes. Why? Because of the "velocity of money", spending (sources of dollars) need NOT be symmetrical with taxes (sinks of excess dollars), only that enough dollars are clawed back in the long run (with the definiton of "enough" being quite elastic). And as the velocity of money increases along with actual or potential inflation, so too does the tax take, narrowing the gap between sources and sinks.
For example, if the velocity of money factor is 7 (i.e. newly created dollars changing hands seven times on average, before being destroyed), spending can theoretically exceed tax revenues at any given time by up to a whopping factor of seven (!) before the excesses begin to accumulate year after year to the point where inflation increases when demand for goods and services grows much faster than supply, all else being equal. Of course, the velocity will vary, and all else may not be equal, but that only makes it even more of an automatic stabilizer overall.
(Of course, it sure didn't hurt that during WWII, taxes were collected in real time (i.e. withholding) and the tax base was greatly broadened as well, despite record-high yawning deficits.)
And of course, another major sink is the FERAL Reserve draining excess bank reserves, while raising interest rates increases the demand for dollars and thus the relative value of dollars. And paying down debts of any kind is another major sink as well. And of course, a growing economy requires a growing supply of money, just to prevent recession and/or deflation, so the sources can still exceed sinks of all kinds by quite a large margin before inflation begins to bite, and we are currently nowhere near that point.
And of course, banks create money out of "thin air" all the time every time they make loans. The difference is they don't create the interest that is owed, which must come from somewhere when it is paid back. And if this were the only method of money creation (which it would be, if federal "deficit" spending money into existence interest-free were zero or negative, that is, a so-called "balanced budget" or "surplus"), then there would NEVER be enough money to pay it back, leading to net destruction and artificial scarcity of money. And that would be VERY harmful for any economy--it was, after all what turned the mild-at-first 1929 recession into the full-blown Great Depression by the time 1930 had come and gone.
So it's no wonder we don't see any robust correlation between deficit spending (i.e. money creation) and inflation in either the short or long run. Thus, another myth bites the dust.
Surely there must be some connection, right? Well, there technically is, but essentially only at the extremes. Why? Because of the "velocity of money", spending (sources of dollars) need NOT be symmetrical with taxes (sinks of excess dollars), only that enough dollars are clawed back in the long run (with the definiton of "enough" being quite elastic). And as the velocity of money increases along with actual or potential inflation, so too does the tax take, narrowing the gap between sources and sinks.
For example, if the velocity of money factor is 7 (i.e. newly created dollars changing hands seven times on average, before being destroyed), spending can theoretically exceed tax revenues at any given time by up to a whopping factor of seven (!) before the excesses begin to accumulate year after year to the point where inflation increases when demand for goods and services grows much faster than supply, all else being equal. Of course, the velocity will vary, and all else may not be equal, but that only makes it even more of an automatic stabilizer overall.
(Of course, it sure didn't hurt that during WWII, taxes were collected in real time (i.e. withholding) and the tax base was greatly broadened as well, despite record-high yawning deficits.)
And of course, another major sink is the FERAL Reserve draining excess bank reserves, while raising interest rates increases the demand for dollars and thus the relative value of dollars. And paying down debts of any kind is another major sink as well. And of course, a growing economy requires a growing supply of money, just to prevent recession and/or deflation, so the sources can still exceed sinks of all kinds by quite a large margin before inflation begins to bite, and we are currently nowhere near that point.
And of course, banks create money out of "thin air" all the time every time they make loans. The difference is they don't create the interest that is owed, which must come from somewhere when it is paid back. And if this were the only method of money creation (which it would be, if federal "deficit" spending money into existence interest-free were zero or negative, that is, a so-called "balanced budget" or "surplus"), then there would NEVER be enough money to pay it back, leading to net destruction and artificial scarcity of money. And that would be VERY harmful for any economy--it was, after all what turned the mild-at-first 1929 recession into the full-blown Great Depression by the time 1930 had come and gone.
So it's no wonder we don't see any robust correlation between deficit spending (i.e. money creation) and inflation in either the short or long run. Thus, another myth bites the dust.
Saturday, March 16, 2019
We Wholeheartedly Condemn The New Zealand Shooting
"On March 15, 2019, a horrific racist, xenophobic, and Islamophobic hate crime and act of terrorism shook New Zealand as well as the world. A white supremacist hatemongering terrorist launched a deadly attack on two mosques in Christchurch, New Zealand, killing 49 people and injuring countless others, including children, who were worshipping in those mosques. Horrible as this unprecedentedly deadly mass shooting was, it would likely have been far worse still had the terrorist been able to set off his many bombs as well. And we wholeheartedly condemn this horrific and cowardly act of hate and terrorism, and all other such acts as well as the virulent ideologies, including white nationalism, racism, xenophobia, and Islamophobia, that inspire and lead to such senseless violence."
This was literally all that Trump and his sycophantic lackeys would need to have said to avoid being unnecessarily tainted (as much) by having somehow inspired such horrific and hateful violence with his own virulently hateful rhetoric against (non-white) immigrants, refugees, and especially Muslims. (Which, by the way, his rhetoric apparently DID inspire in part, according to the killer's own rambling manifesto.) But apparently the Donald can't even do that, preferring instead to just punt on the issue altogether and give the usual pat answers. And that, ladies and gentlemen is, in a word, "Sad!".
This was literally all that Trump and his sycophantic lackeys would need to have said to avoid being unnecessarily tainted (as much) by having somehow inspired such horrific and hateful violence with his own virulently hateful rhetoric against (non-white) immigrants, refugees, and especially Muslims. (Which, by the way, his rhetoric apparently DID inspire in part, according to the killer's own rambling manifesto.) But apparently the Donald can't even do that, preferring instead to just punt on the issue altogether and give the usual pat answers. And that, ladies and gentlemen is, in a word, "Sad!".
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