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Tuesday, November 10, 2009


deficits, transfers and spending

i've come to harp on the need of the federal government to provide the counterbalance in national accounts needed to offset private sector balance sheet repair if a deflationary collapse is to be at least mitigated, if not avoided.

but it's necessary to note that, while the government is going to run a deficit of about (-12%) of GDP in 2009, not all of that deficit is in fact fiscal stimulus. a significant chunk is not spending at all but rather direct transfers to entities such as the GSEs. to the list which includes FNM and FRE we'll soon add the FHA. via alphaville:

As the Washington Post reported on Tuesday, the FHA’s emergency reserve fund has fallen to a 7-year low, below the 2 per cent threshold of its outstanding loans, which it is required by law to maintain:

The Federal Housing Administration, which has played a crucial role supporting American home buyers after the collapse of the mortgage market, has burned through a huge cash reserve in less than a decade and could soon wind up with what amounts to an automatic taxpayer bailout if the agency’s fortunes don’t improve, according to a review of FHA finances.

To be clear, if the losses continue — and all indications are that they will — the FHA will be granted a line of credit with the Treasury, which would put more pressure on the ballooning US deficit and ultimately, taxpayers.

this wasn't unexpected, and they'll be followed by the regional FHLBs (as bruce krasting via zero hedge reminds today). but i think it's important to separate the transfers of obligations to the federal balance sheet (which prevent liquidation of debt pyramids) from spending which supports incomes. those boosted incomes will be used to retire private sector debt in a general deleveraging -- indeed that's what should be hoped for -- but will help to support aggregate price levels as well.

while its true that shifting obligations to the government can free cash flow for the relieved (akin to a default), many of the relieved will be banks or financial companies who will -- in a net negative loan demand environment -- will in aggregate be unable to employ stronger balance sheets in lending. they may instead boost treasuries by expanding their portfolio, but that's about all.

actual spending, on the other hand, is cash flow and will propagate through the economy on its way toward retiring debt.

so when examining the impact of government deficit spending on economic performance -- which i think will be paramount -- one has i think to be careful to factor out such transfers.

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