SP 500 and NDX Futures Daily Charts - Earnings Season Begins

Earnings season kicks off tomorrow with Alcoa after the bell.

The VIX chart is included to show its dramatic drop back to complacent lows since the end of December and the 'fiscal cliff.' Almost time for another wash and rinse.

The debt ceiling fight looks to be bloody, with both sides already talking trash about threatening debt default, shutting down the government, and platinum coins.

Never waste a crisis they say.

Common decency and humanity are in short supply.

Chris Hedges speaks about the fiscal cliff and financial system here.

The Legacy of the Fed and the US Experiment with Fiat Currency In One Chart

Please notice that the CPI really 'gets some legs' when Nixon closed the gold window and released the modern monetary theory from its next to last restraint, the bond vigilantes being the last thin blue line.

And below that a quote on the modern monetary system, in which I detect the root of Paul Krugman's confusion about money.

To his credit, Krugman does recognize the liquidity trap, which sets him head and shoulders apart from the Austerians. He just does not understand the markets and how they work in practice rather than theory, and the absolutely compelling need for reform. But that puts him in with most regulators, central bankers, and the herd of academic economists.

Shifting Mandates: The Federal Reserve’s First Centennial
Carmen M. Reinhart and Kenneth S. Rogoff

For presentation at the American Economic Association Meetings, San Diego,
January 5, 2013

Session: Reflections on the 100th Anniversary of the Federal Reserve

Read the entire paper in PDF form here.


h/t Bill P and Business Insider

"The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate [History suggests that while they technically can print as much as they wish, there is an effective upper bound along with a law of diminishing returns in there somewhere. Weimar and John Law, amongst others, tended to show that. - Jesse]

There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy.

While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80.

The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk) [O brave New World, that has such derivative sophisticates in it. - Jesse] but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity." [Yes, THOSE countries may experience a financial collapse because of a monetary credit bubble, no doubt because of a lack of economic sophisticates. - Jesse]

Paul Krugman, The Goldbug Variations, 22 November 1996

Why Paul Krugman Should Not Be Treasury Secretary

As you may have heard, there is a petition making the rounds to suggest to Obama that he appoint Paul Krugman to be Treasury Secretary. As if. Obama is a CEO president, and no idealistic progressive.

I wanted to memorialize this column by Paul Krugman because I have the feeling that five years from now he will have forgotten that he wrote it, or handwave it away, suggesting that it was merely a sarcastic fancy or some clever political ploy.

To me this speaks to the silliness, careerism, and political immaturity that infests the heart of the economics profession. There are no politics so petty, and yet so vicious and yet silly, as those that often infest academic departments.

What Krugman suggests here is that in response to the Republicans taking the nation's credit rating and debt hostage, that Obama should take the nation's currency hostage and threaten to use seignorage to erase the debt and thereby render the debt ceiling moot. If this were a pickup football game, it is the equivalent of calling 'Statue of Liberty play!'

While I feel his pain and frustration at the current political climate in Washington, this is not some minor league blogger spinning their latest fantasy, but a Nobel prize winning economist writing in the NY Times who is using his bully pulpit to endorse extreme economic nonsense.

For him to say that it is 'silly but benign' to threaten to take the step of overtly monetizing the nation's debt without market involvement to evade the debt ceiling, and to institutionalize the notion that the currency is nothing more than the squeaky toy of the Treasury, is almost as incredible as it is reckless and immature.

But it does demonstrate that all too often we tend to become what we despise.

Be Ready To Mint That Coin
By Paul Krugman
January 7, 2013

Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious.

For those new to this, here’s the story. First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit — tax and spending bills the president is legally required to implement — and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default.

And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can’t pass through normal constitutional processes.

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all...

Read the rest here.

Platinum Coin: Crossing the Monetary Rubicon

You may be reading more and more commentary about the platinum coin solution, and arguments why it doesn't really matter if the US does it or not.

To summarize the concept, the Treasury creates one special platinum coin, with a stated face value of $500 billion or so.

They trot down to the Fed and deposit the special coin(s), redeeming that amount of US notes and voila. It is a overt monetization, but the platinum coin adds a novel touch, and a bit of shiny misdirection.

Some mainstream economists seem to be toying with the idea of climbing aboard the train with the Modern Monetary Theorists. Enthusiasm Builds for Trillion Dollar Coin . Paul Krugman has a typically obtuse take on this in a recent column titled Monetary Rage.

I am not going to argue the pros and cons of this approach at this time. I have said quite a bit about this, and MMT, before. For me it shows that economic silliness is not the exclusive domain of the Austerians.

But I do want to firmly draw your attention as to why this particular solution and approach to the debt is important, and why it raises concern among many, even though that concern is often scorned and ridiculed by the economic savants. And by the way, this is very reminiscent of the same reactions to Alan Greenspan's policies, TARP, and the housing bubble with many of the same players in similar roles.

From a Bloomberg story entitled: Why We Must Go Off the Platinum Cliff.

"In case you're not familiar with this idea: In general, the Treasury Department is not allowed to just print money if it feels like it. It must defer to the Federal Reserve's control of the money supply. But there is an exception: Platinum coins may be struck with whatever specifications the Treasury secretary sees fit, including denomination.

This law was intended to allow the production of commemorative coins for collectors. But it can also be used to create large-denomination coins that Treasury can deposit with the Fed to finance payment of the government's bills, in lieu of issuing debt."

Currently it is against the laws of the land for the Treasury to issue debt, and for the Fed to buy it directly, as opposed to running that debt through the test and discipline of the markets. I researched this a number of years ago, and do not recall the particular law offhand, but in effect the Treasury cannot sell debt directly to the Fed. It must pass through the marketplace first to be valued.

This is all the difference between a democracy, as imperfect and occasionally corrupted as it may be, and a diktat by a central authority.

The platinum coin solution uses a statute regarding commemorative coins to evade that law of money. If the Treasury creates money out of nothing on its own volition, whether it be by assigning a purely whimsical value to a platinum coin, a wooden nickel, or a magic money wand, and deposits that symbolic object with the Fed, it is a game changer. It is purely arbitrary monetization.

And that step requires debate and a proper law, if the country chooses to accept it.

Now one might argue that this sort of overt monetization means nothing. And the MMTers have plenty of convoluted arguments why it does not matter, at least to them. And if anyone objects to their sophistry, they are ridiculed. They might say that the Fed is monetizing the debt already, and inflation has not resulted. But that is not the point. The Fed are pretending that they are NOT doing it, and are thereby maintaining appearances and some level of deniability.

But what people forget, or rather, what they would like us to forget, is that a modern fiat currency is based on the full faith and credit of the issuer, and the willingness of people in the market place to trust them, their word as contract, and the integrity of their actions.

Trust is a funny thing. One can bend it, twist it, and strain it by their actions over time. But at some point it may break, and the parties expected to maintain that trust may say, 'enough!'

And trust is gone, broken. And retracing one's steps to regain it is not a simple matter of a apologizing for and remediating their latest transgression, but a long slow climb back through what in many cases are years of continuing abuse and broken promises.

It is good to note that when dealing with people's resistance to accepting this monetization and artificiality of value, the MMTers quickly resort to arguments that involve the use of force, legal but even physical, in order to stifle dissent to an arbitrary monetary power.

That is the significance of taking the step of overt monetization at will, which is what the gimmicky platinum coin solution is all about. And those who promote it best understand that this is what they are doing, and be prepared for the consequences.