Among news items of interest:
* The US Treasury briefly paid negative rates of interest on three-month bills (it’s now paying a more sensible zero).
* The outgoing Republican Administration in the US is about to nationalize General Motors perhaps proving the old adage, “what’s good for GM is good for the US”
* The Canadian Parliament has been prorogued until late January, precluding any legislative action against the economic crisis, but giving the Harper minority government another couple of months in office.
Any of these stories would have seemed unbelievable a year ago.
John Quiggin 
The linked story says that it is the incoming Democrat administration that may nationalise GM.
The ‘old adage’ is not quite what he said: http://en.wikipedia.org/wiki/History_of_General_Motors http://www.bartleby.com/59/18/whatsgoodfo2.html etc.
John, it has been reported that labour costs in the auto industry is around 10 percent of the total manufacturing costs. The question begs as to what is really going on in the industry.
#1, a minor detail!
In prosecuting an argument it is not necessary to be factually correct, more important to logically appealing
Talking of the world turned upside down, I was hoping someone could explain this chart to me.
I mean, that’s a pretty long timescale (100 years) and nothing like this has happened in that period.
carbonsink,
This one shows it well, too. The great inflation, something approaching steadiness over the last few years and now this.
I am far from being one to argue that base money is more than a useful guide, but that is ridiculous.
These numbers aren’t just outliers, they’re in another galaxy. The Great Depression is a mere blip by comparison.
I’m not qualified to say whether change in base money is significant or not, but on those numbers, I sure hope its not significant!
I found the chart here: Mish’s Global Economic Analysis
Where you will also find a chart of the M1 Money Multiplier crashing. i.e. banks hoarding, not lending
carbonsink/Andrew – plausible explanation here.
If you’re willing to lend money to the US government at negative rates of interest then it means your expecting to make a capital gain by holding US dollar denominated debt (ie deflation) or you’re scared silly by all the alternatives (presumably cold hard currency as well).
p.s. The gold price somewhat suggests we are in deflationary times.
#1 Spiros, the linked article is written in a slightly misleading way. While the Obama team has a significant influence, and will have to live with the outcome, the deal is set to go through in the next couple of days and to be signed into law by Bush.
#3 Rog, your comment is accidentally self-referential.
It makes some sense to nationalise GM, it may be the only way to salvage what is left after being ravaged by socialism
http://www.washingtonpost.com/wp-dyn/content/article/2007/09/26/AR2007092600155.html
carbonsink,
the spike in the monetary base indicates that the fed. is merely supplying liquidity to an extremely illiquid market.
The adjusted monetary base consists of cash plus bank reserves on deposit at the fed. Banks must hold a portion of their assets as liquid assets in order to meet the demand from depositors for their money. If they go below the threshold, the fed. demands they promptly increase their liquid assets.
The fed. is stepping in, expanding their balance sheet and providing this liquidity, via the various alphabet soup facilities recently put in place.
The fed. is taking the illiquid assets held by the banks, and in exchange, providing the banks with MZM [money of zero maturity] instruments, such as t-bills.
These instruments are liquid and are fungible to cash (but not quite), whilst they have the full faith of the u.s. fed. reserve behind them and thus tradable on the capital market.
They are, therefore, not injecting new capital into the market and monetising the debt, as some have been led to believe.
In this way the fed. is injecting liquidity into the capital market, without providing new cash.
The base money, in this way, is expanding although at the same time the change in monetary base velocity has literally collapsed, from a 1-year moving average growth rate of 4% to -2%.
This is definitely not inflation, rather deflation.
Further to my previous post, the fed. is moving towards a policy of quantitative easing, although not yet stated officially. They appear to want to grow the money supply (M2) by beginning with the purchasing of GSE debt and securities. This is, I suspect, to counteract the countervailing collapse in the monetary base velocity.
I’d just like to note I am not “iconoclast” and he is not I. “Iconoclast” talks details of money policy which are out of my knowledge and purview.
The gold price is falling which would suggest to a supply side gold bug such as myself that there is definitely a need for the extra liquidity as indicated by the M0 charts. A fiat gold standard (ie a fixed exchange rate with gold) at this point would see even more currency being put into circulation, although I’d also argue that the US wouldn’t have got itself into this situation to the same extent if they’d been running a gold fix.
Also at the beginning of December gold went into backwardization for the first time in history suggesting that there is some sort of difficulty in meeting the demand for bullion (ie a delivery problem). If demand is so strong and yet the price is falling in price this suggests that US dollars have been rising in value (deflation).
Everything about gold says to me that increase the currency base is the right response at this point in time.
p.s. There has been a lot said about the backwardization of gold. Don’t believe all of it.
p.p.s. Central banks should be selling gold at this point in time. That’s what reserves are for.
In these times of imminent eceonomic depression and imminent dangerous climate change, there is only one macro policy which would make sense. There ought to be a major government investment (deficit funded) in renewable energy. In Australia’s case, this ought to amount to many billions up front, say $20 billion to pick a number out of the hat.
I don’t know about “only one” policy, but it is a policy that makes sense.
A good quote (dramatized and embellished by mymemory) from Nomura strategies analyst, heard this morning on Fran Kelly on way to work:
“The Bush administration has a achieved what legions of socialists and communists have failed to achieve after generations of political struggle: the nationalization of the commanding heights of US capitalism.”
They have also made paying to invest in government debt look like a good deal as compared to investing in blue chip corporate securities and equities.
Lenin must be splitting his side laughing. Talk about giving them enough rope!
Ikonoclast @ 18:
I agree that would be an excellent policy, but why stop at $20 billion? If the US can find $100B US dollars for one company (AIG), surely we could find $100 billion to rebuild our energy infrastructure.
We need bold vision, not endless delay, more green papers and white papers. Why aren’t we taking the lead at Poznan instead of being a holdout? Doesn’t Rudd realise the blood money (sorry ‘mining income’) has dried up, and he’s no longer beholden to Big Coal?
iconoclast @ 13:
My biggest concern about the current strategy of relaxing monetary policy, providing liquidity, and large fiscal stimulus, is that it merely attempts to reinflate the debt-bubble/consumerist economy, and doesn’t move us to a more sustainable world, both economically and ecologically.
Again I recommend everyone look at this chart before they dismiss current events as a run-of-the-mill recession.
Perhaps the world is an intermediate state between order and randomness
http://en.wikipedia.org/wiki/Edge_of_chaos
which some say is needed to produce overdue change.
I second the proposal to spend $20bn on renewables and efficiency measures. After all that’s only the Christmas retail boost times two, the difference being that in the future we’ll still be reaping the benefits.
If you compare the business plans of the Big 3 US auto makers with those of Toyota you can see that despite quotas and trade restrictions the Big 3 have been falling for some time whilst the Japanese non unionised businesses have succeeded.
Toyota is now No1 car brand in the world.
i believe lower c iconoclast that you are dead wrong,
if they are not actually monetising the debt then why has the national debt exploded at exactly the same time that they are performing this liquidity magic,
deflation is temporary, in the depression the money supply was linked to gold and they couldnt inflate their way out of the crisis,
but they sure as hell are this time,
and i reckon inflation will be rampant within two years
The following is intended to address operational questions about the program announced by the Federal Reserve on November 25, 2008 to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Will these operations be reserve neutral?
No, these operations will be financed through the creation of additional bank reserves.
http://www.newyorkfed.org/markets/gses_faq.html
monetising debt?
The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.
Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
http://online.wsj.com/article/SB122888021757894023.html
we are getting mugged by reality,
it does seem though that some people are taking a very long time to understand that
Yep, I couldn’t agree more, especially the mainstream economists…
– John Edwards, chief economist HSBC, after today’s unemployment figures were released.
Alan Kohler gets it though: China cracks
Australia is partying on the beach while the economic tsunami rolls in from the US via China.
Rog,23, Are BMW, Volkswagen, Citroen-Peugeot and Daimler also ‘non-unionised’, as you put it? I’d have thought not, and yet they are not in need of nationalisation. Could it be that Detroit has got it wrong for 25 years: bringing in rebadged small cars to meet average fuel economy limits and selling them at break-even (at best) while making profits from big cars and 4WDs, and hence not learning that the world had changed?
I liken the financial crisis to the fate of the Titanic. They were not only short a few life boats but poorly prepared for the unthinkable.
No different to the AGW movement over enthusiatic unclearly thought out proposals.
I suggest they all go back to the drawing board, go to “Clinical Trials” at wikepidia and launch AGW solutions on this basis.
http://en.wikipedia.org/wiki/Clinical_trial
Just as Drug companies are accountable for the therapeutic poisons they want to market, so should the AGW movement and the government be accountable.
Moderation and strategic contingencies should be part of the solution. I am fortunate that I had contingencies for the financial crisis but dodging the melodrama of the AGW movement and the pandering government officials may be more difficult.
Yes I know climate disaster is iminent and even I dread the fact that the the poms might have to migrate to Australia.
We certainly need a visionary “Future Policy” and we are not getting it from Mr Rudd’s government to date. They seem slow, ineffective and lacking in policy imagination to me. They also seem to be too “Howard-like”. The spending sop to buy pensioner favour is straight out of Howard’s book.
Pensions (and the uneplyment benefit) need to be lifted to a better living rate. A better on-going rate would be of more paractical use to pensioners than a one-off bonus which fails to commit the Government to paying better pensions permanently.
Perhaps in this case they could have announced the bonus (for initial stimulatory effect) and an extra rise (double the CPI) for pensions in March 2009 plus a lift to unemployed benefits so that they match pension rates from March 2009 also.
Then, as disccussed, a long term investment needs to go into renewable energy. Subsidies, implicit and explicit, for fossil fuel use need to be progressively removed.
It would not mean the end of the coal industry ovewrnight. Quality coal will still be needed for steel making. Thermal coal can be progressively relieved of the power generaion task instead becoming the Carbon feedstock for the fertilizer and plastics industries as oil runs out.
I could go but I won’t here. What we need is a full transition plan with contingency uses and substitutions on the way through to a pure renewables and no fossil fuels economy.
what is agw?
Terje
Why should central banks be selling gold Terje? That would be deflationary.
Anyway, the problem is not with the money base, as we know it has grown around 70% in just a few months.
Unfortunately the increase in the base remains as excess reserves with the Fed. We have seen something similar in the past few years with the Japanese experiment with quantitative easing.
As with the Great Depression, the problem is with the multiplier due to the financial crisis.
In the US VW has struggled for market share.
Sdfc – you are right. My comment advocating that central banks should be selling gold makes no sense. I retract it.
TerjeP@16:
The gold price is falling because:
1. the environment is deflationary and not inflationary. Gold is a hedge against inflation of fiat money.
2. Funds are flowing into treasury paper not gold. The yield on this paper demonstrates the immense demand.
3. Unless central banks allow further banks to collapse without guaranteeing depositors funds, then the counter party risk in holding fiat money is not present. Recent events demonstrate that this is definitely not on any central banks agenda.
4. Backwardization is rare in gold, okay, it has occured. It does occur, from time to time, to other metals as well, so what.
carbonsink@21:
What you are referring to does not demonstrate that the fed. has thrown reason out to the wind, and commenced a precarious relaxation of the money supply, well not in earnest and not yet, at least. The steps taken are to supply steralised liquidity into an illiquid market, period.
The spike is larger than any other in it’s history, however, the U.S. economy is also significantly larger than at anytime in it’s history. In comparing the size of the spike of the monetary base in 2008 to that of 1929 provides an incomplete picture, one *must* also relate this to the size of the nations economy now, 2008, and then, 1929.
The economic turmoil that we are now living through is, by no means, a run of the mill economic downturn, that is for sure!
The idea of them trying to inflate the bubble is long gone.
The proposed fiscal policies are an attempt to put a floor under aggregate demand, so as to prevent it from entirely collapsing. This is not trying to re-inflate the bubble, the U.S. is past that stage.
They are attempting to stop the deflationary death spiral. Traditional monetary policy is no longer effective, they have hit the zero bound on the short end of the yield curve. They are now intending to use other more exotic means in their monetary arsenal, such as quantitative easing, pioneered by the Japanese with little success, which for a start, will be to purchase GSE debt and securities held by the GSEs’ *without* the counterveiling sterilisation that they have been performing to date.
Futher, they are likely to begin to move towards targeting the longer end of the yield curve as an attempt to bring down the yield of long dated maturities as an attempt to put a floor on mortgage defaults, as well as, purchasing corporate paper and even intervening and purchasing in the equity market.
There is no magic bullet here that will stop debt deflation or avoid a deep and severe recession. Although, the measures being used are an attempt, at least, to diminish the pain and duration. To what extent they will succeed will be written by historians.
To adjust to a more economically and ecologically sustainable world, we will need to seriously think about population growth control measures and an economic model that does not function on the premise of incessant compounded growth; it is otherwise an oxymoron.
smiths@24:
The exploding debt does *not* infer that this debt, in total, has or is to be monetised. The government has the option of also fiscalising a large portion of this debt, where by future generations of U.S. citizenry will be obliged to take on the burden of paying this debt down.
To believe the U.S. will simply use monetary policy to innocently monetise the entire debt, as a means out of this mess, is nonsense. A policy of that nature, perceived by the capital markets would precipitate a collapse in the U.S. dollar.
The Chinese have already lectured the U.S. administration, as recently as last Thursday, that they must stabilise their economy, boost their savings rate and protect Chinese investments. The U.S. will likely use a combination of fiscalisation and monetisation to get themselves out of this chasm.
The monetisation of some debt does not infer rampant inflation.
From the fed. reserve board, bureau of economic analysis HIMCO.
Q3 2008: V=GDP/M, GDP=14.4 trillion, M2=7.7 trillion, V=1.87
Q1 2008: V=GDP/M, GDP=14.17 trillion, M2=7.6 trillion, V=1.85
Q3 2007: V=1.9
They are at present expanding M2 at a rate of about 7+% to counteract the collapse of the monetary base velocity. Whether this growth is too little or too large, we will have to see. History tells us, the Japanese did not succeed.
It must be understood that growth of the money supply does not directly infer inflation. The other variable, just as important as the money supply, is the monetary base velocity. Both matter. To look at one, whilst ignoring the other leads to conclusion that are just wrong, period.
One concurs that by fixing the currency to a gold standard would have likely averted the disaster that has beset the world. However, we would have had to live with significant credit rationing and timid economic growth. This, however, would have benefited the already prosperous nations and prevented the poorer nations, whose people live in abject poverty, little possibility of improving their living conditions. The gold standard would certainly have put the brakes on world economic growth that we have experienced for the past thirty odd years, and coincidentally guided the world’s environmental mismanagement on to a lesser unsustainable trajectory.
simths@25:
That is what I stated in my post@14. The fed. is moving towards a policy of quantitative easing, although not yet stated officially. They have commenced with the purchase of GSE (fannie mae et al.) debt and securities. A policy of quantitative easing implies monetisation of debt; that is it’s raison d’être. Refer to above, as to why those purporting hyperinflation is just around the corner, are merely hyperventilating. After twenty years in an economic malaise Japan did not hyperinflate. It is not, however, out of the real of possibility, although, it is far less likely than likely. The more likely outcome being a long and bleak economic malaise.
Huh? The chart is the percentange change on the year before!
Re #13 – Other data suggests the TARP funds are actually being parked by the banks they were given to into? you guessed it, FED treasury paper and deposits, so the Paulson plan lent to the banks, who lent the money back, claim a credit and then the government pays interest offsetting the repayment costs of the banks they lent to, looks like an almighty scam to me. The looting of the US treasury continues. The the Bush administration saves Kevorkian and others by saving GM, a company that produces what it’s consumers do not want to produce what and when? AT the least the Canadians have not pretended they know what to do so suspended democracy hoping it all goes away. Somehow it will all muddle through then the oil price will recover as demand v limited supply hits again then it all hits the wall again.
Add investing in rail transport and local communities to that of renewables as the only feasible polices to spend our taxes and go now! The Americans seem to think their tax system will provide like some sort of magic pudding, all that borrowed money has to be paid back sometime.
carbonsink@36:
Yes, it’s a massive injection of liquidity predominately *sterilised*, and consequently a large percentage change. Nothing unusual about that, that is what you would expect.
MH@37:
Well it is, what one can call reverse seneorage, one why to recapitalise the banks.
Well, I suspect that after the sugar money runs out GM will be put into bankruptcy. Given that the Pontiac brand is high on the agenda of being given the chop, does not at all bode well for Holden-GM in Australia.
The next question that follows from fiscal stimulus is how do we then wean ourselves of these massive stimulus packages.
A very good analogy, which I have come across, that distills this problem clearly–it is all very well and good for us to build pyramids of Italian marble, and in return for our trade partners to build pyramids of Australian granite but how do we eventually redirect our resources back to a true market economy?
Iconoclast;
1. Yes. I think that is what I already although with a slightly different slant.
2. Yes.
3. Yes. Although if more banks did collapse the effect on currency would be to make it more valuable. ie more deflationary.
4. I thought my point was clear. Backwardization is indicative of delivery problems. That suggests strong demand. However gold is falling in value so that supports the deflationary thesis.
I think you are using tones that suggest we disagree on these points. However if you re-read what I said (except for the comment I retracted) then I think you will find there isn’t much difference between what I said and what you are saying.
“The US Treasury briefly paid negative rates of interest on three-month bills ”
This is less surprising than it seems at first given that real US official rates have been negative for some time.
TerjeP@40:
point taken.
Ian Gould@41:
The FOMC instructs the open market desk at the Fed. Reserve Bank of New York to keep the actual Fed. funds rate close to the target Fed. funds rate.
However, since mid November the open market desk of the Fed. Reserve Bank of New York was not succeeding, or rather, it appears, they have not been trying, because the discrepancy has been too wide.
The actual Fed. funds rate has been trading very inconsistently below the target rate. These departures are traditionally very small and transitory. This is not accidental, something has happened at the Fed. Reserve that has not been publicly announced. There has been a policy shift, but it has not been announced to the market. There is a requirement by law that policy changes be announced by the FOMC!
The Fed. Reserve has also been paying interest on bank reserves as an attempt to bring the actual Fed. funds rate back to the target rate. However, only authorised deposit taking institutions can access this interest on reserves facility. The GSEs’ for example can not, and so they have been lending their funds at rates lower than the target rate.
The actual Fed. funds rate has been dipping below zero for short periods of time, but has in general been near zero compared to the target Fed funds rate of 1%.
They may formally announce this policy shift on December 15-16.
looks like the USD just turned the corner against the euro. All those debts have now been paid off in USD, demand is begiining to reflect the reality again. The quickening…
Funds are flowing into treasury paper not gold.
gold jumped $27 over night
The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into “backwardation” for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.
http://www.telegraph.co.uk/finance/economics/3703565/Fear-triggers-gold-shortage-drives-US-treasury-yields-below-zero.html
Smiths – it would seem that some of the mints can’t make the bars quick enough.
absolutely terje,
there is not a mint in the world that can keep up with demand for physical gold
but mainstream media view at the moment is that its not happening and forget about it
Ikonoklast says “Pensions (and the uneplyment benefit) need to be lifted to a better living rate. A better on-going rate would be of more paractical use to pensioners than a one-off bonus which fails to commit the Government to paying better pensions permanently.”
In the whole ‘debate’ about increasing the pension (it can hardly be called a debate, considering that a proper debate usually involves hearing both sides of an argument rather than merely having one side make demands), issues of intergenerational equity have largely been ignored.
Because of the ageing population, existing pensioners and those about to reach retirement age are generally likely to receive far more benefits than what it would have cost these same people to fund government programs for the elderly during their working lives. At the same time, younger generations of workers are being saddled with an increasing tax bill in order to fund various benefits for retirees that they are unlikely to receive themselves when they reach retirement age (while also having to fund their own retirement through compulsory super).
Increasing aged pensions would only exacerbate these inequities. Yet these issues are barely even being raised in what passes for a ‘debate’.
The welfare state, plus associated changes in society like the divorce revolution, family breakdown etc. have pretty well destroyed traditions of intergenerational solidarity. So it’s not surprising that it’s now every man for himself.
Another reason why raising the age pension significantly would be bad policy is that because Australia has a means-tested aged pension, this can have the effect of reducing incentives to save for retirement as well as encouraging people to draw down their retirement savings sooner.
The Howard government’s decision to allow everyone 60 and over to cash out their entire superannuation tax-free will exacerbate these trends, making it easier for people to stop working at 60, cash in their super and blow it all, before going back onto the government pension.
Making the aged pension more generous would only increase the incentives for people to do whatever is necessary to qualify for the pension, thereby exacerbating the perverse incentives already in the current system. It would further undermine the policy direction of encouraging more private provision to deal with the costs of ageing populations.
Unless you want to increase pensions and also abolish the means test. In which case, this would cost a fortune and be unsustainable.
smiths@45:
Let’s not get all too excited.
Gold only recently pulled back by $50USD in one day as well.
Let’s put things into context.
And yes, the bulk of funds are still landing on treasury paper.