|Contemporary Monetary Analysis|
|by Doug Noland||Mon, Feb 27, 2012, 04:04 PM|
February 21 – CNBC (John Carney): “The Washington Post ran a long and well-wrought article on Modern Monetary Theory over the weekend. The piece, by Dylan Matthews, starts with Jamie Galbraith’s experience trying to explain to a large audience of economists in the Clinton White House that the budget surpluses the federal government was running was immensely destructive. Or, rather, it starts with those economists laughing at Galbraith’s attempt to explain this. It was obvious to me way back before I had ever heard of MMT that governments should probably never run a budget surplus—or should do so only in dire emergencies. When the government runs a surplus, that means it is taking more money out of the economy than it is spending back into the economy. It is making us poorer.”
In my initial CBB back in 1999, I trumpeted the need for a Contemporary Theory of Money and Credit. Some thirteen years later, I lament that the void remains as large as ever. Mr. Matthews’ Washington Post article highlighted “Modern Monetary Theory,” an alternative economic framework with Keynesian roots that is receiving heightened attention in our age of unrelenting government stimulus. I will not be jumping on board.
From Mr. Matthews’ article: “‘Modern Monetary Theory’ was coined by Bill Mitchell, an Australian economist and prominent proponent, but its roots are much older. The term is a reference to John Maynard Keynes, the founder of modern macroeconomics. In ‘A Treatise on Money,’ Keynes asserted that ‘all modern States’ have had the ability to decide what is money and what is not for at least 4,000 years. This claim, that money is a ‘creature of the state,’ is central to the theory. In a ‘fiat money’ system like the one in place in the
And from Wikipedia: “Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e. fiat money… The modern theoretical body of work on chartalism is known as Modern Monetary Theory (MMT). MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government. In MMT, money enters circulation through government spending; Taxation is employed to establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation… Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.”
My “contemporary theory…” takes an altogether different approach. “Money” is not foremost a creature “ultimately created by the government,” but is instead primarily an issue of market perceptions. “Money” is as money does (“economic functionality”). The reality is that we today operate in an age of globalized electronic Credit – a comprehensive virtual web of computerized general ledger debit and Credit entries linking creditors and debtors round the globe. This “system” of electronic IOUs comprises myriad types of financial obligations of diverse structure, maturity, Creditworthiness and currency units of accounts. Importantly, if the marketplace perceives that a Credit instrument will act as a highly liquid and stable store of nominal value, this Credit enjoys “moneyness.” It is the nature and nuances of contemporary marketable debt – especially with respect to the prominence of governmental and central bank support - that should be the analytical focal point. A static view of government-based “fiat money” is anachronistic.
Economists argued in the late-nineties that government budget deficits were a “fiscal economic drag.” They later claimed that the 2001 recession proved their point. Many of these same economists today support ongoing massive deficit spending. They fret over the thought of “austerity.” I take issue with this line analysis, especially from a monetary theory perspective.
First of all, it’s generally inaccurate to claim that government surpluses “take money out of the economy” and “make us poorer.” To this day, the economic community fails to appreciate key monetary dynamics from the nineties – issues that remain just as relevant today. The federal government ran a small surplus in 1998, a surplus of about $100bn in 1999 and one approaching $200bn in 2000. There was talk of paying down the entire federal debt. Economists and policymakers alike were oblivious to momentously destabilizing developments in “money” and Credit. We’ve made little analytical headway since.
Nineties’ surpluses were primarily driven by a massive inflation of government receipts. In the five year period 1995-2000, federal revenue surged 46% to $2.057 TN. Over this period, federal spending rose 16% to $1.872 TN – hardly a fiscal drag and harbinger of recession. Why were receipts exploding? Well, because system Credit was surging. In the four years ended in 1999, total
In the four years ended 1999, total Financial Sector borrowings jumped 74% ($3.1TN) to $7.349 TN. What was driving this historic growth? Primarily the GSEs. In just four years, GSE Credit obligations (agency debt and GSE MBS) jumped 64% ($1.5TN) to $3.888 TN. And with rampant GSE Credit growth ensuring market liquidity abundance, outstanding Financial Sector corporate bonds jumped 56% in four years, while the Asset-backed Securities (ABS) marketplace doubled. CPI may have been relatively tame, but Credit and speculative excess were fueling historic asset market inflation. And asset market capital gains – bonds, tech stocks, houses, etc. – were helping fill government coffers (and boosting expenditures!) from
I’m not sure how a modern monetary theory can be relevant without delving deeply into the profound role the evolution of GSE and Wall Street finance had on
The 2008 crisis and subsequent economic and financial fragilities were a direct consequence of a historic Bubble in mortgage finance.
The lack of respect for “money” and moneyness is a primary issue I have with most monetary analysis. They don’t get it. From the perspective of my analytical framework, money is both powerful and precious. Historically, sound money has been as rare as government-induced monetary inflation has been commonplace. The biggest risk coming out of the 2008 crisis was that runaway
Somehow, many “monetary” economists seem to believe that money is like Doritos chips: don’t fret, quite easy for us to make a lot more. After witnessing the consequences of a collapse in confidence in Wall Street Credit and, more recently, the Credit obligations of
The GSE/mortgage monetary inflation was not as conspicuous. Today, we are witnessing in broad daylight the dangerous side of “money.” The Treasury is issuing Trillions of debt - in an environment of virtually insatiable demand. Over the years, I’ve noted how a boom fueled by risky junk bonds wouldn’t be that dangerous from a systemic point of view. Limited demand for junk would create self-imposed market constraints. A Bubble in “money,” on the other hand, would tend to last longer, go to greater excess and, as such, have much greater deleterious impacts on financial and economic structures. And severe structural impairment can require multi-decade workouts and restructuring periods (think Great Depression and
Fine, economists can sit around and debate deficit spending and the role of fiscal stimulus in recessions and recoveries. Meantime, there is scant discussion of the extraordinary monetary backdrop and untested experimental nature of monetary management. Governments have assumed unprecedented roles in the marketplace, much to the advantage of a multi-Trillion global leveraged speculating community. Government market backstops have been instrumental in the mushrooming of global derivative positions to the hundreds of Trillions. A financial insurance marketplace of unfathomable scope has been operating on the flimsy premise of liquid and continuous securities markets. Meanwhile, most economists, “monetary” and otherwise, argue that tame inflation ensures that there is little risk associated with ongoing massive government stimulus and market intervention.
Most today fail to appreciate the potential catastrophic consequences of a crisis of confidence in “money” – a crisis of confidence in the moneyness of government debt and associated obligations. I sense little appreciation for the momentous role played by “money” as the core foundation of overall global Credit – or for Credit as the fuel for global economic activity. We saw again in 2011 how abruptly things can begin to unravel when the marketplace perceives that policymakers don’t have the situation under control. We’ve witnessed, as well, how quickly aggressive concerted global policy responses can transform de-risking/de-leveraging back to re-risking/re-leveraging. In a span of a few weeks, problematically illiquid markets morphed right back into liquidity abundance and speculative excess.
From a monetary and market perspective, we’ve returned to the precarious stage. Risk embracement and leveraging create market liquidity abundance. Strong markets then emboldened the perception that policymakers have everything under control, which stokes even more speculation and stronger risk market inflation. And global risk asset prices - from stocks, to junk bonds to sovereign debt to emerging market debt and equities – enjoy inflated prices based on the view that policymakers can ensure a low-risk macro backdrop. Market players impute moneyness upon Trillions of debt instruments of suspect quality – Credit that will be vulnerable in the next bout of risk aversion and attendant de-leveraging.
I just don’t believe that policymakers have the situation under control. Sure, they can incite a reversal of short positions and risk hedges. They so far retain the capacity to foment “risk on” and speculative excess. Yet, in reality, this is more destabilizing than it is a source of system stability. The amount of mercurial speculative finance has become so enormous as to be unmanageable. When this massive pool embraces risk things can quickly get out of hand (how about $150 crude?). But when this pool inevitably turns risk averse, illiquidity and market disruption once again become immediate problems. And it all hinges on the perception of the efficacy of policymaking and the moneyness of sovereign debt – and, in the end, the sustainability of the massive issuance of non-productive government Credit. The analysis of Bubbles and Bubble dynamics is integral to a Contemporary Theory of Money and Credit.
This afternoon, former Bundesbank Vice President and ECB Executive Board member Juergen Stark warned that public finances in advanced economies were in “dire straits” and that fiscal deficits were “unsustainable.” He was also critical of the ECB bond purchase program, warning that “intervention in the sovereign bond markets postponed adjustment requirements.” I’m with Mr. Stark on this – and I’m with the German economic viewpoint more generally. Indeed, my analytical framework draws heavily from the “Austrian”/German perspective of the overriding importance of stable money and Credit. The Germans well appreciate the danger of monetary inflation, flawed policymaking doctrine, economic maladjustment and Bubbles. And most American economists believe the Germans remain hopelessly fixated on the
For the Week:
The S&P500 added 0.3% (up 8.6% y-t-d), and the Dow increased 0.3% (up 6.3%). The broader market was resilient. The S&P 400 Mid-Caps added 0.1% (up 12.1%), while the small cap Russell 2000 dipped 0.2% (up 11.6%). The Morgan Stanley Cyclicals gave up 0.4% (up 15.7%), and the Transports dropped 1.9% (up 2.4%). The Morgan Stanley Consumer index declined 1.2% (up 2.9%), while the Utilities added 0.1% (down 3.2%). The Banks were down 2.0% (up 13.5%), while the Broker/Dealers were up 1.8% (up 20.1%). The Nasdaq100 added 0.8% (up 14.3%), and the Morgan Stanley High Tech index gained 0.8% (up 17.6%). The Semiconductors fell 1.9% (up 16.3%). The InteractiveWeek Internet index slipped 0.4% (up 11.7%). The Biotechs declined 0.6% (up 23.6%). Although bullion was little changed, the HUI gold index jumped 4.1% (up 8.7%).
One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 9 bps. Two-year government yields were little changed at 0.29%. Five-year T-note yields ended the week up a basis point to 0.85%. Ten-year yields declined 3 bps to 1.97%. Long bond yields ended down 5 bps to 3.06%. Benchmark Fannie MBS yields dipped 3 bps to 2.84%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 87 bps. The implied yield on December 2012 eurodollar futures rose 4 bps to 0.61%. The two-year dollar swap spread increased 2.5 to 31 bps. The 10-year dollar swap spread increased 2.5 to 10.5 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 3 to 96 bps. An index of junk bond risk fell 24 bps to 547 bps.
Debt issuance picked up. Investment grade issuers included American Honda $1.75bn, John Deere $1.5bn, Citigroup $1.25bn, Reliance Holdings $1.5bn, Cargill $1.0bn, Viacom $750 million, Alexandria Real Estate $550 million, Marriott International $400 million, Ryder System $350 million, and CSX $300 million.
Junk bond funds saw inflows decline to $837 million (from Lipper). Junk issuers included United Rentals $2.8bn, Ball Corp $750 million, Goodyear Tire $700 million, Range Resources $600 million, and Viasat $275 million.
I saw no convertible issuance this week.
International dollar bond issuers included BHP Billiton $5.25bn, Arcelormittal $3.0bn, DBS Bank $1.0bn, Banco Bradesco $1.0bn,
Ten-year Portuguese yields jumped 60 bps to 12.41.% (down 36bps y-t-d). Italian 10-yr yields ended the week down 9 bps to 5.47% (down 156bps).
The German DAX equities index added 0.2% (up 16.4% y-t-d). Japanese 10-year "JGB" yields rose 3 bps to 0.97% (down a basis point).
Freddie Mac 30-year fixed mortgage rates were up 7 bps to 3.95% (down 100bps y-o-y). Fifteen-year fixed rates increased 3 bps to 3.19% (down 103bps). One-year ARMs were down 9 bps to 2.73% (down 67bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 10 bps to 4.72% (down 83bps).
Federal Reserve Credit declined $0.7bn to $2.917 TN. Fed Credit was up $412bn from a year ago, or 16.4%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/22) jumped $14.4bn to $3.462 TN (3-wk gain of $52bn). "Custody holdings" were up $73.3bn year-over-year, or 2.2%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $943bn y-o-y, or 10.1% to $10.253 TN. Over two years, reserves were $2.437 TN higher, for 31% growth.
M2 (narrow) "money" supply surged $27.8bn to a record $9.80 TN. "Narrow money" has expanded 12.6% annualized year-to-date and was up 10.1% from a year ago. For the week, Currency increased $4.1bn. Demand and Checkable Deposits slipped $0.4bn, while Savings Deposits surged $29.5bn. Small Denominated Deposits declined $2.8bn. Retail Money Funds dipped $2.3bn.
Total Money Fund assets rose $6.0bn to $2.665 TN. Money Fund assets were down $30bn y-t-d and $85bn over the past year, or 3.1%.
Total Commercial Paper outstanding dropped $24.5bn to $937.6bn. CP was down $109bn from one year ago, or down 10.4%.
Global Credit Watch:
February 23 – Bloomberg (Sandrine Rastello): “The International Monetary Fund will seek to keep its exposure to
February 21 – New York Times (Peter Eavis): “
February 21 – Bloomberg (Marcus Bensasson): “Greece’s economy will contract 4.3% this year and stall next year before returning to growth in 2014 under assumptions used to calculate the country’s debt sustainability before of an agreement on a second bailout. The nation’s debt will peak at 168% of gross domestic product in 2013 and decline to 129% in 2020, according to a base scenario… from the troika…”
February 20 – Bloomberg (Angeline Benoit): “Spain’s debt load is set to double from where it was when Europe’s sovereign debt crisis began, eroding the economic advantages that distinguished it from the region’s periphery and helped shield it from Greek contagion…
February 23 – Bloomberg (Angeline Benoit): “Spanish residential mortgages decreased for a 20th month in December as the euro area’s fourth-largest economy contracted and banks reined in lending amid a surge in bad loans. The number of home loans fell 37.2% from a year earlier after a 35.8% drop in November... The total amount lent on all mortgages fell 37.4%...”
Global Bubble Watch:
February 20 – Bloomberg (Keiko Ujikane): “Standard and Poor’s affirmed Japan’s sovereign-debt rating at AA-while maintaining a negative outlook and warning that a downgrade is likely if medium-term growth prospects weaken. The ranking is ‘supported by the country’s ample net external asset position, relatively strong financial system, and diversified economy,’ S&P said… It cited the yen’s role as a ‘key international reserve currency.’”
February 20 – Bloomberg (Svenja O’Donnell): “Asking prices for London homes rose to close to a record in February, helping push national values up the most in almost a decade, Rightmove Plc said. Average asking prices in the
The dollar index declined 1.2% this week (down 2.2% y-t-d). On the upside, the Swiss franc increased 2.7%, the Swedish krona 2.6%, the Norwegian krone 2.5%, the euro 2.3%, the South African rand 1.9%, the
February 20 – Bloomberg (Chanyaporn Chanjaroen and Nicholas Larkin): “Malca-Amit Global Ltd., a Hong Kong- based company that stores and transports precious metals and diamonds, plans to open a vault in Beijing and is doubling space in Singapore as rising demand spurs gold’s 12th year of gains.”
The CRB index jumped 2.7% this week (up 6.8% y-t-d). The Goldman Sachs Commodities Index surged 3.9% (up 10.9%). Spot Gold was little changed at $1,722 (up 10.2%). Silver surged 6.0% to $35.42 (up 27%). April Crude jumped $6.17 to $109.77 (up 11%). March Gasoline rose 4.5% (up 19%), while March Natural Gas dropped 5.0% (down 15%). March Copper gained 4.1% (up 13%). March Wheat slipped 0.5% (down 2%), and March Corn declined 0.2% (down 1%).