Q & A

Question:

Is fiscal responsibility essential to creating a stronger, more prosperous nation, or is the matter overhyped?

Mosler:

Worse, the matter is totally confused. By identity, government budget deficits = ‘non-government’ accumulation of financial assets denominated in that currency.

That means net savings desires of the non-government sectors can only be accommodated by the government’s fiscal balance. (Deficit to add financial assets; surplus to reduce financial assets.)

Therefore, if government deficit spending is insufficient to satisfy the total net savings desires of the non-government sectors, the evidence is unemployment and excess capacity in general, which is also known as a lack of aggregate demand.


Question:

What is the most exciting thing going on in business today?

Mosler:

The combination of weak demand, due to world budget deficits being too small, and rising prices of food and fuel, due to the Saudis acting as the swing producer (they are a monopoly supplier at the margin), is creating a highly disruptive ‘stagflation’ condition much like the 70’s.


Question:

Where is capitalism failing today?

Mosler:

Capitalism is functioning within the given institutional structure, which includes tax laws, labor laws, govt. spending decisions, contract law, etc.


Question:

What needs to change in the system?

Mosler:

The system changes continually with changes in the application of the institutional structure and with the advancement of knowledge on how to use any given structure.

Currently, we have a floating exchange rate system in place, which is capable of sustaining full employment and price stability. This is a major advancement over the previous gold standard, which necessarily resulted in periodic recessions and depressions and allocated real resources to the production and accumulation of gold.

However, we continue to fail to recognize how to sustain sufficient demand for full employment and we fail to utilize techniques of government spending that will promote price stability; so, the promise of floating exchange rates has yet to be realized.


Question:

Everyone deserves a fair price for their work,

Mosler:

As a matter of ‘game theory’ if a person has to work to eat and survive, but business only has to hire if it determines it can sufficiently profit by adding employees, it is an ‘unfair game’ biased against workers, and we should expect real wages to stagnate over time.

And this is exactly what we observe.


Question:

but should there be caps on CEO salaries?

Mosler:

The corporate structure is part of the general institutional structure, which is producing the seemingly higher than necessary CEO salaries. Simple caps would have other consequences.

More fundamental changes to the institutional structure are needed to put incentives in place for alternative distributions of incomes.


Question:

Is it fair to lay off workers when your own salary is worth tens of millions of dollars.

Mosler:

At the macro level, with sufficient aggregate demand to ensure full employment, efficiency increases total output. Therefore layoffs without production cuts potentially benefit the entire population.

However to get that outcome, the current institutional structure has to be adjusted to include the necessary incentives.


Question:

Or, does the market require high salaries to retain the highest quality leaders and the lifestyle they must lead in their high risk jobs?

Mosler:

No. The reason for the high CEO salaries is a function of the corporate structure that includes the legal arrangements between shareholders, board of directors, and management. It is the resulting interaction that will continue to push up CEO salaries.


Question:

There are a plethora of reasons for Americans to work later in life today. It is difficult to live off of Social Security benefits alone, we are living longer and 401(k) plans are far less reliable than traditional retirement plans. So do older members of our society get a fair shot when it comes to employment? What about younger workers? Does youth and inexperience repel employers?

Mosler:

Employers attempt to maximize their profits. That means ‘hiring off the top.’ In other words, they try to hire the best first, and the seemingly less attractive workers get hired last.


Question:

Is war the biggest growth economy? It pours unknown amounts of wealth from around the world into technology, man power and manufacturing as well as using up, or destroying a great deal of natural resources.

Mosler:

Again, this is the result of institutional structure which is currently providing the incentives that give us the observed results.

And the situation is actually much worse than described above.

Current tax and other elements of fiscal policy are supporting biofuels. The result is that we are directly and indirectly burning up our food supply for fuel. This is already creating food shortages which have the potential to kill more people than were killed in World War II over the next few years.


Question:

How many people have an income either directly or indirectly derived from armed conflict? Since the industries that profit from the various aspects of war have become so vast and dependent on world wide struggles, will they ever let the world create peace?

Mosler:

First, biofuels will kill tens of millions over the next few years if nothing is done to stop that process. That is far higher than any of the current wars.

Second, the lack of understanding of the application of fiscal policy to ensure full employment and price stability is contributing to regional conflicts.

Third, profiting from war is an example of how institutional structure functions channel economic resources. The outcomes are a function of the structure.


Question:

Are you worried about America’s economy?

Mosler:

Yes, I see weaker demand, supported by rising exports that diminish demand in the rest of the world, while inflation accelerates due to imperfect competition in the production of crude oil.


Question:

We wonder whether the downward revision to the PCE for Housing Services was in the “imputed services rendered by owner occupied housing”. If so such may speak to Chairman Bernanke’s comment during the Q&A following the FOMC meeting wherein he said that the deflator for the imputed portions of the PCE may be too low. We will have a better handle on this tomorrow.

Away from the PCE for Services, there were only minor offsetting revisions, not really worthy of comment

What does the downward revision to Q1 GDP and Q1 PCE for Services imply for Q2 GDP?

Mosler:

And Q1 was the bounce back from the 0.4% Q4 print?

So now seems the govt deficit reduction happened in the face of even lower levels than previously thought?

And so the question remains of which agents are going to step up and fill that spending gap, as the ‘demand leakages’ are continuous?


Question:

I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.

– Should the federal deficit and associated payments be taken completely out of the budget discussion?

Mosler:

Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.


Question:

That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).

Mosler:

Right. And potential consumption is always what goods and services we are physically capable of producing.


Question:

I understand that, but does value (rather than money) get added to the economic system when the transfers are made?

Mosler:

Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.


Question:

Does it have any impact on inflation or taxation?

Mosler:

Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.

For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.

But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.

The first example is spending on a ‘price rule’ that says $8 max

The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.


Question:

I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?

Mosler:

The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.


Question:

Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?

Mosler:

There is the risk that China might do that.

But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.

Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.


Question:

I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.

Mosler:

It allows available savings to be added to the economy.

For a given size of govt, there is a level of taxes which keeps the real economy in balance.

Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.


Question:

My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along

Mosler:

Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.


Question:

and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.

Mosler:

Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.


Question:

Do you think there is any chance that the Fed ever puts us into a steeply inverted curve, say something like 10% short rates with 6% long rates? Hard to imagine that happening with the housing market weak, but what do you think?

Mosler:

Very high probability – I’d say 85% chance if, as I expect, crude stays here or goes higher. maybe a lot higher.

Hiking causes inflation to accelerate via the cost structure of business, so when they start hiking, inflation accelerates. Guaranteed!

Only a major supply response will break the inflation. Like pluggable hybrids in 5-10 years or cutting the national speed limit to 30mph, which is highly doubtful.


Question:

I noticed the crude spreads have slipped back into contango today. Are the ETFs up to their old tricks?

Mosler:

For sure inventory conditions have shifted, but they always seasonally shift up around this time. Could be ETFs to some degree.

More interesting, if the Fed is still up to their old ways, this would signal to them that markets are anticipating higher prices down the road, rather than elevated inventories, and may nudge them to hike sooner than otherwise.


Question:

Any reason why the Saudi’s are allowing the price of oil to slide?

Mosler:

Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.

There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.

It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.

So most likely they just let this inventory liquidation run its course, and then work prices higher again.

Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.


Question:

“People will be offering their possessions and their labor for sale to try and get the cards to pay the tax”

Says who? Thomas Paine? Didn’t he go to jail for awhile?

Warren, so ultimately I am being told that I will have some thug with a gun lock me up in a small room if I don’t play ball with the “rules” some other human being has made for me. Heck like my friend in prison said – three meals, free AC, TV, free medical, nice gym and library, no taxes. He encourages everyone to sit down and get arrested – since I know you are a big thinker – what percentage of the population can you “allow” to develop this mindset and be locked up before the model breaks down? You assume all your agents will WANT to pay taxes and sell their services/labor to avoid jail, but I know more and more people who are just choosing to sit down and are tired of the treadmill and jail is not a big enough deterrent to motivate them to run on your treadmill.

I went to the local court last year and watched the judge look at the 200 or so people that day who did not pay lots of things, taxes, child support, alimony and he told one of the non paying mothers who owed child support that she was going to jail, and she said Judge, you can’t lock us all up, there isn’t enough resources to imprison everyone.

Mosler:

You are correct.

The currency is only as good as the government’s ability to enforce tax payment.

Some taxes are easier to enforce than others, which is why I keep coming back to a real estate tax as the base case. If you don’t pay the tax, the government sells the house. They don’t even have to know who owns it.

I don’t like income tax because of the high compliance cost. I know it sounds high, but those costs might be 10-15% of GDP when you include all of the time spent in record keeping, laws, contracts, and enforcement.

And the fact that there is so much money in tax law means that the brightest and the best gravitate to those positions. So instead of having our brightest and best cure cancer, they are working in difference places in tax law and, of course, other places in the financial sector.

It is the biggest brain drain in human history, and it’s getting larger everyday.

Also to your question, if we legalize most of the drugs and take the money out of that sector, there should be plenty of room in the jails at least for the near future. But with the real estate tax, of course, there is not jail, apart from the odd case of fraud; the property just gets sold if the tax isn’t paid.

One last thing, we already have a national real estate tax at the local level. So, switching over from all the federal taxes to a federal real estate tax should be relatively simple and add substantially to our real standard of living.


Question:

Any reason why the Saudi’s are allowing the price of oil to slide?

Mosler:

Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.

There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.

It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.

So most likely they just let this inventory liquidation run its course, and then work prices higher again.

Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.


Question:

I noticed the crude spreads have slipped back into contango today. Are the ETFs up to their old tricks?

Mosler:

For sure inventory conditions have shifted, but they always seasonally shift up around this time. Could be ETFs to some degree.

More interesting, if the Fed is still up to their old ways, this would signal to them that markets are anticipating higher prices down the road, rather than elevated inventories, and may nudge them to hike sooner than otherwise.


Question:

Do you think there is any chance that the Fed ever puts us into a steeply inverted curve, say something like 10% short rates with 6% long rates? Hard to imagine that happening with the housing market weak, but what do you think?

Mosler:

Very high probability – I’d say 85% chance if, as I expect, crude stays here or goes higher. maybe a lot higher.

Hiking causes inflation to accelerate via the cost structure of business, so when they start hiking, inflation accelerates. Guaranteed!

Only a major supply response will break the inflation. Like pluggable hybrids in 5-10 years or cutting the national speed limit to 30mph, which is highly doubtful.


Question:

Why would shareholders approve the sale of Bear Stearns at $2 per share?

Mosler:

Answer, they may not. They may take their chances with getting more $ in bankruptcy.

Or a higher bid might surface.

The Fed has turned Bear Stearns into a ‘free call’ with their non recourse financing,

And the Fed has moved spreads of agency and AAA paper back towards ‘fair value’ with their open-ended funding lines. This removes ‘liquidity risk’ and allows the securities to return to being priced on ‘default risk.’

This has dramatically increased the business value of Bear Stearns.

The large shareholders can now say no to the sale, maybe add a bit of capital or take on a ‘business partner,’ and outbid JPM for the remaining shares (if needed).

Might even start a bidding war.

There could still be well over $60 per share of value for the winner.

And there’s a reasonable amount of time for them to put something together.

And maybe this was Bear’s plan all along.

They knew they needed Fed funding to maximize shareholder value, and the JPM involvement to stabilize their client base and buy the time to find a real bid.


Question:

For 2 a share is Chase getting a boat load of non prime paper that over time is worth a lot more than 2?

Mosler:

From what I’m hearing it’s already worth maybe 75 or more.

And the Fed gave JPM a free call.

The $2 is the least that it’s worth, as the fed is providing non recourse funding for the assets at prices that support the $2 price.

And at the same time the Fed took action to restore pricing of agency and AAA assets to more accurately reflect their actual default risk, which is near zero.


Question:

And the Fed has said in times of crisis they will not punish the many for the few.

Moral hazard is not a fixed doctrine. It requires flexibility and in times of crisis they accept that their action (the Fed’s) will not address the doctrine. On balance it is a price (overlooking moral hazard) they must pay for the greater good.

They have done it in the past so doing it again reflects a degree of consistency not a change in policy.

Mosler:

This is different. In this case the moral hazard is in not funding the primary dealers. It’s too easy for the predators (other dealers, hedge funds, etc.) to first get short the stock and then start a run on any broker that has to have any non tsy inventory financed and drive them out of business.

By funding the primary dealers who are in good standing (they report their finances to the fed) and regulating capital requirements and haircuts predators are kept at bay and shareholders continue to assume the business risk of the primary dealers.


Question:

How do you respond to the moral hazard argument of the Fed bailing out Bear Stearns?

Mosler:

I’ll let the word ‘bailout’ go for now, and begin by saying the liability side of banking is not the place for market discipline, and it’s also probably not the place for market discipline for the Fed’s appointed (anointed?) ‘primary dealers.’

(I will also not here question the idea of having primary dealers in the first place, but don’t take that mean i approve of that setup, thanks!)

So given the Fed wants primary dealers, it then follows there are specific securities they go along with this assigned role.

Presumably those would include the likes of tsy secs, maybe agency paper, maybe AAA rated mtg backed securities, etc.

Presumably also are functions the Fed wants its primary dealers to perform, like being market makers, providing some notion of liquidity, etc. etc.

And, presumably, the Fed has some notion of public purpose behind this entire creation.

So, given all that, to support this ‘institution of public purpose,’ it behooves the Fed to ensure the primary dealers themselves have the available lines of credit to perform this vital public function (almost hurts to write that”¦).

The bank primary dealers do have ‘guaranteed liquidity’ and so are safely able to function as primary dealers, knowing they can always finance their inventory positions. This can be done via raising fed ensured bank deposits, and borrowing from the fed by using their inventory as collateral, etc.

The non banks were at a disadvantage to the banks in that they relied on the banks to fund their inventories.

Bear Stearns got shut down when the banks said ‘no’ for non credit related reasons. Bear had perfectly good collateral that they held as part of their primary dealer function (as defined by the govt regulations), and the banks said no, perhaps because they had their own internal issues.

The same would happen to the banks, and the entire economy, if the Fed simply said no to the banking system and one morning and didn’t open the payments system.

It’s just one of countless flaws in the institutional structure that doesn’t get noticed until it’s a problem, no matter how many times I’ve pointed it out to ‘authorities.’

So to your question, while I do see a lot of other moral hazard issues, I don’t see this as one of them.

The Fed simply told JPM to deal with Bear in the normal course of business and lend vs qualifying collateral as has always been the case, and as is the case when the Fed lends to JPM.

Let me know if I’m missing something, thanks!


Question:

This from Q&A following Bernanke testimony:

Barney Frank: Do you think there is any realistic prospect of America’s defaulting on its debt in the near future?

Mosler:

Bernanke: Not unless Congress decides not to pay….

Yes, I see weaker demand, supported by rising exports that diminish demand in the rest of the world, while inflation accelerates due to imperfect competition in the production of crude oil.

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