Mosler: Dovish on GDP & Equities, Bearish on Wealth & Income

Interesting comments from Warren Mosler yesterday:

The fact that q2 earnings were very strong even as Q2 GDP was not so strong is a good sign for stocks.

Congress has extended unemployment benefits, approved 26 billion for the states, and is toying with extending the tax cuts set to expire, all indicating there will not be any serious deficit reduction interference for at least the rest of the year.

Last I checked Federal revenues had bottomed and were starting to rise indicating an underlying positive tone to the economy.

8%+ continuing Federal deficits are a very large tailwind that I expect to keep GDP in positive territory.

Weekly claims are on the high side, but not at double dip levels and continuing claims continue to fall. And the combo of hours worked and new jobs shows ongoing improvement.

Lack of consumer credit expansion (borrow to buy) keeps it all moderate, though poised for expansion as debt to income ratios have continued to fall due to the federal deficits.

Federal deficits have added to net financial assets and incomes of households, allowing them to spend from income and also add to savings, as indicated by firm final demand in the Q2 GDP revisions.

Mosler followed up with this in the comments section:

It’s just a guess that 8%+ deficits will keep things muddling through with very modest top line growth until the ’savings deficiency’ is filled and eventually starts over flowing. Before the surplus years of the late 90’s seems deficits averaged maybe 4% over 10 year periods (?) and unemployment was often 5% or less. So maybe the underlying need for deficits to offset the demand leakages and support the resulting credit structure that keeps unemployment at 5% or less is 4%? That means 8%+ deficits have been sustaining some growth and also been filling the savings hole as both savings have been high and increasing, and unemployment at least stabilizing. When the savings deficiency gets neutralized the next step should be expanding consumer credit for the likes of cars and houses.

We think Mosler’s overlooking age structure effects at his peril.  For example, it seems unlikely that there will be enough demand for car and house purchases and financing to make a meaningful dent in unemployment levels.  And as Mosler has previously noted (pdf), “high and lingering unemployment…contain real wages and direct real wealth towards rentiers and upper income individuals.”

That prediction brings up the concern we expressed yesterday, whether ”distribution of income won’t become as serious an issue in the years ahead as it was at the turn of the 20th century,”  and we noticed this morning that Marshall Auerback addressed it in a rather provocative way back in June:

…my point was not that corporate tax receipts are required for the government to spend, but more that the threat of taxation might induce the corporate sector to do some of the government’s “heavy lifting” on the job creation front. There’s some political advantage here because, as we are witnessing today, there are profoundly strong forces currently mobilizing against government spending on the spurious grounds of “fiscal sustainability.” 

So let’s call their bluff.

There are additional social benefits to be derived from this proposal. If the government taxes excess corporate savings, it means there are fewer corresponding opportunities for corporate financial engineering, control frauds, etc., and therefore greater financial stability as you have an economy less prone to financialisation. That’s an unalloyed social good.

In effect, this becomes a tax aimed explicitly at the corporate rentiers who are not reinvesting their super profits in tangible capital equipment, except in tech/telecom bubbles, or in Chinese malinvestment schemes, etc. And it serves an ideological purpose of a) forcing nonfinancial capitalists to, well, be capitalists, not speculators, and b) ties the deficit reduction initiatives, which, as we have argued many times in the past, are insane and suicidal, but are nonetheless being carried out, to making the rentiers pay their “fair share.”

Things are fluid in macro land to say the least.

We do agree with comments Mosler has made recently that equities are interesting in this environment, but like Marc Faber and others, we believe that stock picking will be favored over buying and holding an equity index in the decade ahead.  And as Mosler noted elsewhere, “the economy is flying without a net.”  That means that risk management remains paramount for investors.

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