by Felipe Rezende

In previous posts (see here and here), I discussed Standard & Poor’s (S&P) downgrade of Brazil’s long-term foreign currency sovereign credit rating to junk status, that is, to ‘BB+’ from ‘BBB-‘, and its decision to downgrade Brazil’s local currency debt to a single notch above “junk” status.

S&P hosted a conference call on Monday morning to explain its downgrade of Brazil’s credit rating (you can view the video webcast replay here). During the conference call I had the opportunity to ask a couple of questions.  My first question, to S&P analyst Lisa Schineller, at around the 41:53 minute mark, was the following:

Question: “Are there solvency risks associated with Brazil’s local currency debt? Brazil issues its own currency.”

[Lisa Schineller]: “We would not say there are solvency risks, we rate, for both local currency and foreign currency, our ratings are continuum. Yes, we lowered both ratings, we are by no means thinking about a solvency issue here and risks there. There is less policy flexibility at hand, these ratings for the local currency BBB- is still in the investment grade category and the foreign currency is at the high end of the speculative grade category. I think this is an important point to highlight. There is this increase in the stress in the economy, in the policy execution, but it is very different than talking a solvency issue.”

That is, as the S&P analyst confirmed, there are no solvency risks. In its sovereign ratings methodology S&P looks at “sovereign government’s willingness and ability to service its debt on time and in full.” Standard & Poor’s sovereign rating is:

A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery). (Lisa Schineller)

As I explained in my previous posts (see here and here), there is no credit risk in obligations denominated in the domestic currency, that is, the risk of payments not being made on government debt denominated in Reais is zero. Why? Because Brazil’s local currency debt outstanding promise to pay Reais and the federal government is the monopoly issuer of currency (Rezende 2009).

My second question to Lisa Schineller, at around the 52:05 minute mark, was the following:

Question: What is the sovereign’s ability and willingness to its service financial obligations to nonofficial (commercial) creditors for a country that has more assets denominated in foreign currency than debt? The government can pay all of its obligations in foreign currency. continue reading…

by Felipe Rezende

So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’.

First, what are sovereign debt ratings? Standard & Poor’s sovereign rating is defined as follows:

A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery).

So the ratings are related to “a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors.”

What does this tell us? To begin with, credit rating agencies have repeatedly been wrong. The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple-A rating to toxic subprime mortgage-backed securities are now downgrading Brazil’s sovereign debt. As the FCIC report pointed out, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011)

After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign currency debt (figure 2). Brazil’s public sector can pay all of its long-term financial obligations denominated in foreign currency. Moreover, Brazil’s federal government can never become insolvent on obligations denominated in its own currency (note that since 1999 Brazil maintains a floating exchange rate regime, which increases domestic policy space). continue reading…

The Levy Economics Institute Master of Science in Economic Theory and Policy is a two-year degree program that emphasizes theoretical and empirical aspects of economic policy analysis through specialization in one of five key research areas: macroeconomic theory, policy, and modeling; monetary policy and financial structure; distribution of income, wealth, and well-being; gender equality and time poverty; and employment and labor markets. Headed by Levy Institute Research Director Jan Kregel, the MS program draws on the expertise of Institute scholars as well as selected Bard faculty.

Application deadlines for Fall 2016 are November 15 for Early Decision and January 15 for Regular Decision. Scholarships are available. For more information, visit the Levy MS website; to apply, go to connect.bard.edu/apply.

Senior Scholar Fernando J. Cardim de Carvalho is emeritus professor of economics at the Federal University of Rio de Janeiro. He has worked as a consultant to the Central Bank of Brazil and the Brazilian National Bank for Economic and Social Development, among other institutions, and is the author, most recently, of Liquidity Preference and Monetary Economies.

Senior Scholar John F. Henry is professor emeritus, California State University, Sacramento, where he taught economics from 1970 to 2004. He also lectures at the University of Missouri–Kansas City. Henry’s research interests include the history of economic thought, economic history, and political economy, and he has published widely in the academic press.

Research Scholar Fernando Rios-Avila, who joined the Institute in 2013, is also new to the MS faculty this year. His research spans labor economics and applied microeconomics as well as development economics, poverty, and inequality.

The Binzagr Institute for Sustainable Prosperity is holding its inaugural conference — Provisioning and Prosperity: Sustainable Full Employment and Transformational Technologies  — October 2nd-3rd at Denison University. For those who cannot attend, the event will be livestreamed (and questions can be posed via Facebook and Twitter @BinzagrInfo).

More information on registration and conference themes can be found here. See below for the list of speakers:

Jan Kregel*, Advisory Board Member, Binzagr Institute
William A. Darity, Jr.*, Professor of Economics, Duke University
Stephanie Kelton*, Chief Economist, U.S. Senate Budget Committee
Julianne Malveaux*, Advisory Board Member, Binzagr Institute
L. Randall Wray, Professor of Economics, University of Missouri – Kansas City
Mathew Forstater, Research Director, Binzagr Institute
Fadhel Kaboub, President, Binzagr Institute
Ahmed Soliman, Research Scholar, Binzagr Institute
Scott Fullwiler, Research Scholar, Binzagr Institute
Pavlina Tcherneva, Research Scholar, Binzagr Institute
Ellen Brown, Research Scholar, Binzagr Institute
R. Paul Herman, Founder and CEO, HIP Investor
Robert W. Parenteau, Research Fellow, Binzagr Institute
Elsadig Elsheikh, Director, Global Justice Program: Haas Institute (UC-Berkeley)
Marco Vangelisti, Research Fellow, Binzagr Institute
Raúl Carrillo, Research Fellow, Binzagr Institute
Shama Azad, Research Fellow, Binzagr Institute
Natalie Brown, Research Assistant, Binzagr Institute
Aqdas Afzal, Research Assistant, Binzagr Institute

* invited (to be confirmed)

At last, the eurozone economy appears to be experiencing some kind of recovery. GDP started growing again in the spring of 2013, following seven quarters of decline, with domestic demand shrinking for even nine consecutive quarters between 2011 and 2013. Today, it is conceivable that within a year or so the eurozone might recoup its pre-crisis level of GDP, perhaps marking the end of a “lost decade.”

But it is too soon to declare victory and become complacent. The eurozone remains fragile and the recovery uneven. Having primarily relied on export demand for its meagre growth since 2010, developments in China and elsewhere in the emerging world are posing an acute threat. More recently home-grown demand benefited from peculiar tailwinds that are temporary in nature. It is unclear at this point whether these forces will merge into a stronger self-sustaining recovery, while the likelihood of renewed and spreading political instability along the way keeps rising. It seems unwise, in fact hazardous, not to have a plan B ready at hand should growth falter once again.

Figure 1 shows index values for GDP, gross capital formation, final consumption, exports, and imports, all relative to their respective levels in the first quarter of 2008. Remarkably, only exports have seen some real recovery. Gross capital formation, on the other hand, remains stuck at a severely depressed level to this day, while final consumption is only slightly ahead of its pre-crisis peak. Clearly, the eurozone owes it largely to the rest of the world that it has not sunk into even deeper depression.

The gaping external imbalance that has built up since the crisis quantifies the extent to which the eurozone has weakened and undermined the global recovery in recent years. Its soaring external surplus has required other countries to “over-spend” accordingly. As numerous over-spenders appear overstretched at this point, the eurozone’s external imbalance also signifies its own vulnerability to a deteriorating global environment. In a way, the ongoing deterioration in the global environment also reflects the fact that the driving forces of global growth have come full circle, and seem exhausted and spent today – unlikely to fire up again any time soon. continue reading…

The second edition of L. Randall Wray’s Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, an updated and expanded version with new chapters on tax policy and inflation, is now available for order and will be released September 23rd:

“This book synthesizes the key principles of Modern Money Theory, exploring macro accounting, monetary and fiscal policy, currency regimes and exchange rates in developed and developing nations. Randall Wray addresses the pressing issue of how misunderstandings about the nature of money have caused the current global financial meltdown, and provides fresh ideas about how policymakers around the world should address the continued weaknesses in their economies.”

Harry Frankfurt, whose formal concept of “bullshit” is indispensable to both professional and everyday life, recently published an article for Bloomberg View arguing that (1) economic (income and wealth) inequality is, in and of itself, morally insignificant and (2) “egalitarianism” (being concerned about economic inequality in and of itself) is harmful. The article is an excerpt from a book he has coming out at the end of the month.

According to Frankfurt, egalitarianism is loosely based on the belief that “the possession by some of more money than others is morally offensive.” This belief is false, he says, and it leads us astray. Frankfurt suspects that what most of us are really — and justifiably, in his view — reacting to when we express moral reservations about inequality is the potentially abject condition of those lower down the income distribution; not simply because there are others who have more, but rather if those in the lower income or wealth percentiles do not have enough resources to achieve some substantive standard of well-being (“not a relative quantitative discrepancy but an absolute qualitative deficiency”). In other words, it is poverty, or, more broadly, the condition of not having “enough,” that is morally significant, rather than monetary inequality per se:

“Mere differences in the amounts of money people have are not in themselves distressing. We tend to be quite unmoved, after all, by inequalities between those who are very well-to-do and those who are extremely rich. The fact that some people have much less than others is not at all morally disturbing when it is clear that the worse off have plenty.”

Frankfurt goes further: not only is egalitarianism based on a false belief, it is itself morally disorienting. Being overly focused on other people’s incomes — on the mere quantitative relationships between incomes — he argues, interferes with our ability to determine our own substantive economic needs and interests. (“A preoccupation with the condition of others interferes, moreover, with the most basic task on which a person’s selection of monetary goals for himself most decisively depends. It leads a person away from understanding what he himself truly requires in order to pursue his own most authentic needs, interests, and ambitions.”)

From this perspective, it would seem to follow that a great deal of economic research on patterns of income or wealth distribution not only dwells on morally insignificant issues but, to the extent it is motivated by egalitarian concerns or draws public attention to supposedly trivial monetary differences, such work “contributes to the moral disorientation and shallowness of our time.” In fact, if we buy all this, we might even be compelled to say that income distribution research is less significant (and more harmful) than ever these days, since, as those who study the US distribution have pointed out, so much of the action lately is focused on the increasing distance between the top 1 percent and all the rest (or even the top 0.01 percent).

What should we say about this?

First, even if we grant Frankfurt everything he argues for, this would not necessarily require us to disregard economic inequality or do nothing to remedy it. There are other reasons to worry about inequality. There is, for instance, a macroeconomic case. Papadimitriou, Nikiforos, Zezza, and Hannsgen argue that the growing disparity in the US income distribution has been a major contributor to financial instability and threatens the sustainability of economic recovery. There are also normative political reasons for being concerned about excessive amounts of wealth and income being concentrated in the hands of the few. So even if we’re persuaded by Frankfurt, we would have to weigh these other considerations (macroeconomic, political, social, and so on) against the moral harm he believes results from preoccupation with income differences.*

Second, the implications of Frankfurt’s argument are not necessarily as conservative (for lack of a better term) as some might imagine. continue reading…

Nancy Folbre, who recently joined the Levy Institute roster as senior scholar, was interviewed by Dollars & Sense on the topic of how conventional economics and policymaking deal with (or rather, fail to deal with) household and caring labor:

D&S: What is the practical consequence of not measuring household labor and production? Are economic policies and institutions different, especially in their impact on women, than what they would be if household labor were fully reflected in statistics on total employment or output?

NF: One macroeconomic consequence is a tendency to overstate economic growth when activities shift from an arena in which they are unpaid to one in which they are paid  (all else equal). When mothers of young children enter paid employment, for instance, they reduce the amount of time they engage in unpaid work, but that reduction goes unmeasured. All that is counted is the increase in earnings that results, along with the increase in expenditures on services such as paid childcare.

As a result, rapid increases in women’s labor force participation, such as those typical in the United States between about 1960 and the mid-1990s, tend to boost the rate of growth of GDP. When women’s labor force participation levels out, as it has in the United States since the mid 1990s, the rate of growth of GDP slows down. At least some part of the difference in growth rates over these two periods simply reflects the increased “countability” of women’s work.

Consideration of the microeconomic consequences helps explain this phenomenon. When households collectively supply more labor hours to the market, their market incomes go up. But they have to use a substantial portion of those incomes to purchase substitutes for services they once provided on their own—spending more money on meals away from home (or pre-prepared foods), and child care. So, the increase in their money incomes overstates the improvement in their genuinely disposable income.

A disturbing example of policy relevance emerges from consideration of the changes in public assistance to single mothers implemented in the United States in 1996, which put increased pressure on these mothers to engage in paid employment. Many studies proclaimed the success because market income in many of these families went up. But much of that market income had to be spent paying for services such as child care, because public provision and subsidies fell short.

The rest of the interview is posted here at the Triple Crisis blog.

The LIMTIP (Levy Institute Measure of Time and Income Poverty) team has done extensive empirical work around this sort of framework, in which the time and/or money required to meet household production needs is integrated into an assessment of economic well-being — with the aim of providing a clearer picture of the depth and breadth of poverty in many countries.

A Nonbehavioral Theory of Saving
Michalis Nikiforos

“We present a model where the saving rate of the household sector, especially households at the bottom of the income distribution, becomes the endogenous variable that adjusts in order for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the household debt-to-income ratio, and maintaining it depends on some sort of asset bubble. This framework allows us to better understand the factors that led to the Great Recession and the dilemma of a repeat of this kind of unsustainable process or secular stagnation. Sustainable growth requires a decrease in income inequality, an improvement in the external position, and a relaxation of the fiscal stance of the government.”

Is a Very High Public Debt a Problem?
Pedro Leão

“we propose a policy architecture that differs from [Abba] Lerner’s in two aspects: it envisions a different way of preventing a very high public debt from ending in default, and it eliminates the burden associated with levying taxes to meet the interest payments on the debt (in one word, it eliminates the debt burden altogether). Our architecture requires flexible exchange rates. It involves (i) having the central bank impose near-zero nominal government bond yields for as long as necessary—a stance that should be accompanied by (ii) a replacement of monetary by fiscal policy as the instrument to control inflation.

A second objective of this paper is to show that government deficits associated with a full-employment fiscal policy do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector’s savings always come in the form of government bond purchases or, if a default is feared, of ‘acquisitions’ of new money.”

Making the Euro Viable: The Euro Treasury Plan
Jörg Bibow

“The idea is to create a Euro Treasury as a vehicle to pool future eurozone public investment spending and have it funded by proper eurozone treasury securities. Member state governments would agree on the initial volume of common area-wide public investment spending and on the annual growth rate of public investment thereafter. Beyond that, the Euro Treasury operates on auto-pilot. … This is not simply another ‘euro bonds’ proposal, though. In particular, there is no debt mutualization of existing national debts involved here. Member states alone would remain responsible for their respective national public debt. …

As to the evolution of national public debts under the Euro Treasury plan, steady deficit spending on public investment funded at the center that is the basis of Europe’s common future will finally allow and enable national treasuries to (nearly) balance their structural current budgets. Within one generation, there will be little national public debt left to worry about. … In general, member states will experience a decline in their overall interest burden as cheaper debts replace more expensive debts over time. While mimicking the original Maastricht criteria of fiscal rectitude and stability at the union level, the overall outcome would also resemble the situation in another—functioning—currency union during normal times: the United States.”

Marx’s Theory of Money and 21st-century Macrodynamics
Tai Young-Taft

“Marx’s theory of money is critiqued relative to the advent of fiat and electronic currencies and the development of financial markets. Specific topics of concern include (1) today’s identity of the money commodity, (2) possible heterogeneity of the money commodity, (3) the categories of land and rent as they pertain to the financial economy, (4) valuation of derivative securities, and (5) strategies for modeling, predicting, and controlling production and exchange of the money commodity and their interface with the real economy.”

The Effects of a Euro Exit on Growth, Employment, and Wages
Riccardo Realfonzo and Angelantonio Viscione

“A technical analysis shows that the doomsayers who support the euro at all costs and those who naively theorize that a single currency is the root of all evil are both wrong. A euro exit could be a way of getting back to growth, but at the same time it would entail serious risks, especially for wage earners. The most important lesson we can learn from the experience of the past is that the outcome, in terms of growth, distribution, and employment, depends on how a country remains in the euro; or, in the case of a euro exit, on the quality of the economic policies that are put in place once the country regains control of monetary and fiscal matters, rather than on abandoning the old exchange system as such. …

Although the exit from a monetary union such the eurozone would be unprecedented, some important pointers can be found in the currency crises of the past that more closely resemble the present case. For this purpose, we will examine the currency crises that in recent history have entailed large devaluations of the exchange rate and that were accompanied by the abandoning of previous agreements or exchange systems. This allows us to take into account both the phenomenon of devaluation and the political-institutional changes that follow when exchanges regimes are abandoned.”

by Felipe Rezende

S&P has issued a negative outlook regarding Brazilian sovereign debt. The S&P’s announcement stated that

Over the coming year, failure to advance with (on- and off-budget) fiscal and other policy adjustments could result in a greater-than-expected erosion of Brazil’s financial profile and further erosion of confidence and growth prospects, which could lead to a downgrade. The ratings could stabilize if Brazil’s political certainties and conditions for consistent policy execution–across branches of government to staunch fiscal deterioration–improved. It is our view that these improvements would support a quicker turnaround and could help Brazil exit from the current recession, facilitating improved fiscal out-turn and provide more room to maneuver in the face of economic shocks consistent with a low-investment-grade rating.

This warning has been echoed by other credit rating agencies threatening to downgrade Brazilian sovereign debt to junk. But, should anyone trust credit rating agencies? Once more, credit rating agencies are clueless in their assessments. They have specialized in making the wrong assessments regarding sovereign governments’ capacity to pay local-currency debts. They have downgraded sovereign governments like the US, UK, Japan, and now Brazil. Paradoxically, credit rating agencies, which have a track record ranging from arbitrary and imprecise to clueless (here, here, here, here), can still dictate the outcomes of the fiscal policies of sovereign governments.

Recent downgrade warnings by CRAs and market pundits have triggered discussions inside the Brazilian government to implement austerity measures, including welfare programmes and public investment initiatives.

President Dilma Rousseff won’t change course. She has reiterated that “[It] will last as long as necessary to rebalance our economy.” She has invoked the government-as-household analogy, stating that: “You who are a housewife or the father of a family know what this is … Sometimes we have to rein in expenses to keep our budget from going out of control … to ensure our future.” Rousseff is under pressure to impose a fiscal austerity agenda to avoid a downgrade by credit agencies.

The current direction of Rousseff’s policies has exposed its contradictory tendencies in combining austerity policies while trying to maintain or reclaim the pre-crisis progress. This combination leads to incoherent policy formulations and more drift, rather than embracing a demand-led strategy. continue reading…