By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.
Usually, we dread the regular Congressional testimonies of the Fed Chairman. They generally constitute a mix of obfuscation on the part of Mr. Bernanke mixed with political grandstanding on the part of Congress. But occasionally, a glimmer of truth comes through, as occurred today in this exchange between the chairman of the Federal Reserve and Congressman Barney Frank:
Frank: Do you think there is any realistic prospect of America’s defaulting on its debt in the near future?
Bernanke: Not unless Congress decides not to pay….
So there you have it. If Congress doesn’t pass the debt ceiling, the Treasury can default. But this constraint is not operationally inherent in the monetary system. It is put there by the same Congress that could (and should) revoke the unnecessary constraints, much as the European Union could (if it chose to do so) could eliminate its arbitrary rules limiting government expenditure. This is a problem of “willingness to pay” and not “ability to pay”, as the government is at all times in control of its spending process. In short, here we have the Chairman of the Federal Reserve openly acknowledging that, short of voluntary political constraints, there are no financial constraints on the ability of a sovereign nation to deficit spend.
To anticipate the usual objections that we usually encounter whenever we point this out, please note that this doesn’t mean that there are no real resource constraints on government spending; this should be the real concern, not financial constraints. Government spending should be analyzed in regard to its effects on the real economy, which means that it should, like Goldilocks, be neither “too hot” (or else inflation will result), or “too cold” (as is the case today, where we have an economy characterized by high unemployment and significant resource underutilization) Debating whether the social losses due to operating below full employment are higher than economic losses due to inflation or currency depreciation, are germane discussions to POLITICAL debate, but totally separate from the issue of national solvency.
So what’s with the Fed Chairman’s obsession with fiscal sustainability, when Bernanke knows that there is no insolvency issue?
There’s obviously a degree of self-interest here. As head of the nation’s central bank, Mr. Bernanke (like any other central banker) is keen to assert the primacy of monetary policy over fiscal policy, despite the fact that the former’s impact on real economic activity is far more ambiguous. The manipulation of interest rates may be used to control inflation and that inflation expectations may have an influence on the spreads at the longer end of the yield curve. But the way in which interest rate manipulation (that is, monetary policy) impacts on inflation is unclear: rising interest rates certainly increase costs for borrowers and may choke of aggregate demand but equally they increase incomes for those with interest-rate sensitive portfolios which may add to aggregate demand. Fiscal policy, by contrast is far more targeted in terms of the impact it seeks to achieve.
There is also a political dimension: the financial class (whose views still reflect the predominant economic thinking at the Fed and on Wall Street), benefits from the deflationary bias imparted as a consequence of these artificial financing rules, which are remnants of the gold standard era. But in reality this is a denial of the essence of the fiat monetary system that we now live in and there is thus no economic basis for these constraints. Keeping unemployment high provides a strong means of disciplining wage demands and enhancing profits.
A stable ratio of federal debt to GDP may or may not be the right policy objective. But it is neither more nor less “sustainable,” under different economic conditions, than a rising or a falling ratio and Mr. Bernanke implicitly recognized that in his testimony today. We wish he had gone further. It is not, as Professor James Galbraith has argued, “a hidden evil. It is not a secret shame, or even an embarrassment. It does not need to be reversed in the near or even the medium term. If and as the private economy recovers, the ratio will begin again to drift down. And if the private economy does not recover, we will have much bigger problems to worry about, than the debt-to-GDP ratio”.
The public is told that government spending causes inflation and is warned that if we do not control the budget deficits that a Weimar Germany fate awaits us. Conveniently forgotten is that German production capacity was either significantly damaged by WWI, or redirected toward output required by the military. Additionally, Weimar Germany faced large foreign claims from war reparations, as well as exploding budget deficits. By 1919, it is reported the German budget deficit was equal to half of GDP, and by 1921, war reparation payments represented one third of government spending (the so-called London ultimatum required annual installment payments of $2b in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports).
Neither of these conditions remotely pertains to the US today. In the highly unlikely event that inflation started to accelerate in the US, a highly non-unionized workforce has neither the bargaining power nor the access to credit to keep up with rising prices. Household claims on real resources would wither under inflation as real wages would simply fall behind.
The reality is that all questions of “national insolvency” or fiscal sustainability go by the wayside whenever Wall Street or some other major corporate interest demands a hand-out from the government.
And if they don’t get satisfaction from one party, they’ll shift their support to the other, as Wall Street is doing today According to new data compiled for The Washington Post by the Center for Responsive Politics, the securities and investment industry went from giving 2 to 1 to Democrats at the start of 2009 to providing almost half of its donations to Republicans by the end of the year. Similarly, commercial banks and their employees also returned to their traditional tilt in favor of the GOP after a brief dalliance with Democrats, giving nearly twice as much to Republicans during the last three months of 2009.
The naked self-interest of the financial sector trumps all. All this talk about “free markets” and the virtues of “private market disciplines” go out the window should the actual discipline of markets impose losses on these institutions. Virtually the moment the handouts are made, in comes the discussion of national insolvency and the public mobilization against further government spending. Never do we step back and ask the question – what is the public purpose being served by net government spending? Perhaps this is the line of enquiry that should be directed at Ben Bernanke the next time he appears before Congress and lectures us on fiscal and monetary policy.
36 comments
Comments are closed.
This admission by Bernanke, adds to the evidence of an unfolding deflationary scenario, in my view.
http://whatisthatwhistlingsound.blogspot.com/2010/02/more-evidence-of-deflation.html
So spending like a drunken sailor doesn’t cause inflation, except when its wasteful (like it usually is). And an example of wasteful activity is warfare (we are two wars) and transfer payments (bailouts).
And inflation is suppose to be great for the common man, except when you believe that wages don’t seem to keep up with prices, which you think is true today.
So what exactly was your point again?
I believe this comment reflects the view that we are inexorably headed to a Japan super-stagnation situation. I wonder if Yves or someone else could discuss the possibility that one major economy can flounder for a decade and a half when it has several large growing economies to sustain it while now we are entering an EU debt and US debt contagion which surely changes the dyanamic of the Japanese economy or does it ?
I appreciate it when Mr. Auerback publishes that there are some limits to deficit spending outside the mechanical process that is able to produce lending in one’s own currency to a degree greater than common sense might otherwise indicate:
I agree about national solvency. I also agree that most economic
knuckleheadspundits don’t ‘get it’. I don’t agree that there are no finance limits to sovereign finance. The issue is credibility. A ten- quadrillion dollar deficit is absurd. A ten year old knows its absurd. No country can service a ten- or twenty- or three hundred gazillion- quadrillion dollar deficit. There are limits – money limits – to sovereign borrowing.The biggest real limits are resources, claims against them and reality. Auerback’s remark, “where we have an economy characterized by high unemployment and significant resource underutilization,” is an economic mischaracterization that undermines his greater thesis. The problem of all the world’s economies – including China’s – is the OVER utilization of resources leading to credit distortions and reliance on borrowing/deficit spending to create paper substitutes for the overutilized resources.
The result of this deficit spending is a (large and increasing) surplus of claims against a declining resource base. I know, I know, Auerback uses a word resource that means a lot of funny economic things that don’t matter …
The resource that matters is oil and it’s vanishing in its most important iteration – the cheap form. $20 oil has disappeared forever and nothing the Treasury, Barnanke, Auerback or anyone else can do can bring it back. Without cheap oil resource, the vast and varied oil dependent infrastructure that makes up the equally vast majority of our modern world is stranded and unprofitable to operate.
Welcome to the great economic meltdown, beginning around 2000. Peak oil took place in 1998, people! We don’t have ten or twenty or eight gazillion years to get ready for it. The ship left the dock over ten years ago and all the calamities promised by the ‘Peak Oil Theorists’ have already begun … to bite us on our collective asses!
Auerback has as always put the finance cart before the energy horse and his argument dissolves as a consequence. Even though it is a decent one – it’s irrelevant. It doesn’t matter how much the Treasury can borrow, it cannot borrow energy and the Fed cannot print oil or jobs.
Thank you Steve. I’m glad to see I am not the only person in America who is getting tired of Auerback.
“We can service any amount of debt we want… we have a printing press!” is not a persuasive argument to any thinking person and I’m shocked at the number of people who are willing to give him a forum.
Well John Haskell,
It’s a free country. As they say in TV land, if you don’t like watching what’s on the television, change the channel! As for the other points that other commentators have made, my arguments are not simply theoretical; they are grounded in reality and in history. Continuous budget deficits are the norm for a nation where the private domestic sector desires to save (spend less than they earn) and the external position doesn’t offset the decline in demand associated with this. History shows us that these continuous deficits do not “blow out” or generate accelerating inflation unless we’re at full resource utilisation and employment, which almost never happens because we don’t deploy fiscal policy correctly. And we don’t “print” money. This is another one of these weasel words used to invoke an emotive reaction when the facts don’t suit the argument.
Mr. Auerback,
The problem with your argument is that it bootstraps ever increasing government entanglement in the economy. Do you approve of permanent war, booddoggling internal security, corrupt drug enforcement, pie in the sky ‘investments’, endless unemployment benefits, mindless medicare swindles? These are what you get from more and more and more government spending. As for private economic activity, one must distinguish the monopoly sector enabled by this omnivorous government in which you seem to place limitless trust, and truly private economic activity (perhaps twenty to thirty percent of the total) energized by individuals without power or pull who must bear the load of supporting an increasingly parasitic collection of bureaucrats, bull throwers, toadying academics, politicians, lobbyists, shysters, criminals. Modern Monetary Theory misses the point. It justifies continually expanding thievery and power grabs in the name of ‘public interest’. Hayek put all this stupidity to bed in 1944. What is your answer to him?
First of all, the New Deal shows how “destructive” government spending was during the Great Depression. We basically reduced unemployment by 60%, from catastrophic levels, in 4 years (gasp! horror! socialism!). The unemployment rate (and this was net of work relief) fell from 25% to below 10%
As for the answer to Hayek, it’s very simple. I don’t approve of permanent war, but I do approve of permanent full employment, something which the free markets (on their own) have never been able to achieve:
The only way that the large nations can grow again given the return to overall private sector saving is for that saving to be supported. What does that mean?
An explicit shift to higher saving directly impacts on aggregate demand. This will cause inventories to accumulate and soon enough firms start cutting back production and employment and the process of output-spending losses them multiplies as the rising unemployment becomes a deflationary force in itself.
The only way the shift to higher saving can be realised without the descent into recession and even depression is for fiscal intervention to fill the spending gap.
The higher incomes support the saving and the deflationary impacts of unemployment are avoided.
The typical pattern of advanced nations is to run current account deficits and support private saving with public deficits. In a modern monetary system that combination of sectoral balances is entirely sustainable and will support economic growth levels that are sufficient to maintain high employment levels.
This growth pattern is also the best for emerging economies who rely to some extent on strong export markets for growth.
But we have to be absolutely clear that this does not mean “exit plans”. It does not mean that we plan to go back into budget surpluses as soon as all the shouting has died down. It means permanent deficits will be required and the public has to be made aware of that and understand that this strategy is the only one that sustain steady growth.
Where a nation can exploit a strong net export position, then surpluses are possible (depending on the strength of the external position and the strength of the desire to save by the private domestic sector. But not all nations (obviously) can run external trade surpluses. So it is a special case.
Continuous public deficits is the general and normal case and they should be directed and building strong public infrastructure include first-class education and health systems. Investing in people is the only durable investment.
And for the Chicago and Austrian School types that are now whipping up inflation fears consider Japan – again – they have growing deficits and are still fighting deflation or advocating silly liquidationist recipes that simply achieve nothing.
What would you have us do, Jake? Stop spending and reduce the size of government? Well, you can certainly reduce spending, but you can’t reduce deficits, because deficits are largely determined endogenously, not by legislative fiat. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. Has any household been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837? As discussed above, there are firms that grow their debt year-after-year so it is conceivable that one might be found with a record of “profligate” spending to match the federal government’s. Still, the claim might be that firms go into debt to increase productive capacity and thus profitability, while government’s spending is largely “consumption”.
Fourth, the United States has also experienced six periods of depression that began in 1819, 1837, 1857, 1873, 1893, and 1929. Therefore, every significant reduction of the outstanding debt, with the exception of the Clinton surpluses, has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative private-debt fueled euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might yet suffer another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, as we will show below, our less serious downturns in the postwar period have almost always been preceded by reductions of federal budget deficits. This brings us to an obvious point: the federal government is big—especially since WWII—and movements of its budget position have a big impact on the economy. Exactly what that impact is will be the subject of the next section.
Finally, the most important point is that the federal government is the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). These are topics to be explored in detail below. But the point is that no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why we will ultimately conclude that the notion of “Ponzi finance” does not apply to government, because unlike private debtors it can always service debt by issuing more of its own debt.
Of course, Hayek chose to ignore all of this.
You have made a cogent critique and offered some nice insights.
OK! So…we have to adapt to this new set of circumstance, whether we like it or not. Which means adoption of new technologies (the plural is intentional here) and new behaviors. I don’t buy the argument “after oil came the Great Void”, unless of course, we fail to adapt.
So, what does the above has to do with the gist of Marshall’s post?
It also should be pointed out that sovereign borrowing/spending only gains traction when credit multipliers are functioning. Otherwise, there is no new money being created – as is the case right now.
No new money, lack of velocity, the new hard dollar (pegged to crude oil by the swing producer Saudi Arabia) misguided inflation fears on the FOMC … the new super- hard petrodollar means deflation is hitting the US economy like the hammer of Thor.
If you think times are tough on Main Street America this year, check back this time NEXT year!
Look, I’m pretty unschooled when it comes to economic jargon, but what I know is this…no matter what happens, the middle class will pay.
Until we stand up against TPTB we have no HOPE.
While MISH and his crew rail against the unions protest against having to pay for the sins of the banks and their monoline enablers, maybe we should be joining in the protest.
Who stole our pension funds? Who sold garbage to municipal bonds? Who stole our future? Who’s going to get away with it by making it our problem, not theirs. Why do we fall for this crap, are we that insecure in ourselves that we allow these assholes to define the situation.
We need to grow a set and call them out on this. All of them, Goldman, Dodd, Pelosi, Barnanke, Geithner, Summers and Obama. Times up gents, The Jig is up. We don’t believe a word you say, you lying bastards.
Marshall Auerback nails it.
“The reality is that all questions of “national insolvency” or fiscal sustainability go by the wayside whenever Wall Street or some other major corporate interest demands a hand-out from the government.”
The same could be said for the wars or tax cuts for the rich. It is, as he says, a question of willingness. For our political classes and financial elites, deficit spending never stops them from what they want to do. And yes too, it is a matter of credibility. This is what the Bush and Obama Administrations have been running through far faster than any debts we have accumulated. The truth is we could be running much higher deficits than currently if there was a real perception that our government had a solid plan for the economy and a strong commitment to it. Of course, what we see is the very opposite. We see a muddle, deficits and a lack of direction. This does not destroy but it does weaken the resources we have to deal with the economy. I am a broken record on this, but the greatest obstacle to economic recovery is our elites.
progress!
So do the MMT boys and girls believe that the Treasury Secretary and the Federal Reserve Chairman were acting in the public interest when they stepped in, with the help of Congress, to save the private financial oligarchy?
Do the MMT boys and girls believe that both the private financial oligarchy and the sovereign state sector have mutual interests which end up facilitating massive wealth transfers to themselves at the expense of the American people?
Do the MMt boys and girls assume that there is a level playing field or do they recognize that their analytical framework does not come close to dealing with this issue?
Do the MMT boys and girls see that their appropriate critique of neo-liberalism combined with their fawning analysis of the state sector leads many of them (not all) to endorse a standard left/right paradigm which is politically inadequate and, in fact, a hindrance to understanding and changing the corrupt structure of power that has evolved in the U.S. since the early 1970s?
Jim,
It’s like you can’t even read….to answer any of your questions just read Auerbacks post or any other of his recent posts.
MMT is not a “morals” issue, it is just a recognition of the realties of how our Treasury and Central Bank actually operate….no paranoid conspiracies.
What is MMT?
Modern Monetary Theory, I think. Blog below is devoted to teaching it. Everything has been different since Nixon abandoned Breton Woods (?), but economic theory/profession has been slow to recognize. Only thing I understand from it is that, at least currently, a government deficit is nothing to fear.
http://bilbo.economicoutlook.net/blog/
I am currently reading Rogoff right now, and he goes to great pains to elaborate on ‘ability to pay’ and ‘willingness to pay’ as being variation on a similar theme, as he states that countries never go belly up, they just simply find that the benefits of a partial default are sufficiently high for the government to chose to do so. The US does not have a history of outright default, but he does claim inflation (70s) and debasement (30s) is the US way of achieving default. He also is unambiguous that we are likely to head one of these directions again sooner than later. We have an exorbinant privilege visa-vis the dollar, and history tells us governments act only as prudently as they need to. A typical bank crisis raises debt by 70%, and our bank crisis is not over yet. By his numbers we will be have very high debt levels compared to most countries who end up defaulting.
Higher short interest rates will push sovereigns over the edge.
WTF is this-
The manipulation of interest rates may be used to control inflation and that inflation expectations may have an influence on the spreads at the longer end of the yield curve.
Short. Declarative. Sentences.
The manipulation of interest rates may be used to control inflation.
Inflation expectations may have an influence on the spreads at the longer end of the yield curve.
So the money question for Mr. Auerback is: What level of deficit spending would be consistent with restoring full employment within the next two years? Five, Six, Seven trillion per annum? And why not shoot for it this year by going for a deficit of say eight or ten trillion? Maybe these numbers are high. Maybe they are low. The point is that Mr. Auerback seems to imply that with unemployment so high there really are no resource constraints on high deficit spending. Well, he should put out a number.
We the few in the many! Have been summoned for a time such as this. To rise up against the FOES that are within us disguised as Politicians, Pundits, and Warring Generals and Corporate billionaires with sin sick mean cruel lust and love for money agendas.
By Dwight Baker
February 25, 2010
Dbaker007@stx.rr.com
Birds Eye View Pointing the Finger for We the People Advocates
Yes those are ‘the one’s hired by us’ but they represent the will of the Military Industrial Complex and the Old Line of Barons who have been in control of our nation for over 200 years. Some in Politics have thought of We the People as PUSH OVER’S. Those thoughts have emerged from the supposed intellects that comprise many of the think tanks that earn their living by studying out the best of ways of how to lie, cheat, steal and finally defeat us.
WHY, are We the People the object of such attention? It is our communed held wealth in our People and Property. The real value of We the People living in our Rich and Abundant America far exceeds $400 Trillion net worth. And for over 200 years our individual industrious genius has been clearly seen in our creativeness in producing wealth. The deist lust for our wealth and to that end all of these people doing these things are out there to destroy the will of We the People to fight back.
We the People by accumulating such wealth have been ‘set up’ for the siege led by Barbarian Predator Beast Wiccans along with the Barons of old worshiping the Devilish Canaanite religions. We have been ‘set up’ to be run over and overcome from within by our own elected Politicians, Pundits and Warring Generals. Included with them are the many of the Giants in the corporate cultures as Billionaires who have believed in and become converts to the same failed religious views known as Deist. They have been allowed to run rough shod over us time and time again without We the People standing up against them as in times gone by, when our true blue agrarian Patriots in our rich history resisted such tyranny.
The siege was set up long ago and is operating today as many have seen done — too:
1. Demoralize the American People
2. Refuse to enforce the Laws against the many white-collar criminal minded and the controlling Predator Beast elite that are the worst of all offenders and defy the laws and have the legal staffs to put off prosecution and they have known and used ways to bribe Federal Judges to get decisions as too their wishes.
Note: Our Present elected Federal officials have proved they cannot enforce our laws loosing 1/2 of the money spent on Medicare and Medicaid because of fraud. Therefore proving that the RULE of LAW does not exist as a NEED to DO item on the top priority. Since the beginning of the Medicare program, CMS has contracted with private companies to operate as intermediaries between the government and medical providers.[5] These contractors are commonly already in the insurance or health care area. Contracted processes include claims and payment processing, call center services, clinician enrollment, and fraud investigation. Medicare contracts with regional insurance companies who process over one billion fee-for-service claims per year. In 2008, Medicare accounted for 13% ($386 billion) of the federal budget. In 2010 it is projected to account for 12.5% ($452 billion) of the total expenditures. For the decade 2010-2019 medicare is projected to cost 6.4 trillion dollars or 14.8% of the federal budget for the period.[35]
3. Lie about the REAL VALUE of our communed held wealth.
4. Confuse to diffuse ALL the real Care for US issues at hand
5. Divide the American People in warring factions one against another.
6. Destroy the Republican Party leaving We the People uncovered by the protections of our Laws in our Constitution guaranteeing our sovereignty.
7. Continue the dilemmas in the ravages of un-justified wars abroad spending our communed wealth without our agreements and destroying our young for no Real American Purpose.
8. Strip away our communed owed obligations to each other and our personal defenses in an orderly devious and seemed legal way.
Propel hypocrisy as just a rule for those to follow inside the Beltway of Washington DC.
The above things and matters have been created and envisioned by those listed below to totally enslave us sooner than most of We the People think.
The Pirates [offenders] in the New World Order will continue to strip from We the People our sovereignty and our love admiration and honor we hold as sacred for our People and Property. The language that We the People use should be revised to declare —we name the names of the offenders and their offense spelled out in proper legal form. Listed below.
Why, should we do that? To let ALL of them know foremost and at first dawn daily that their CON’S HAVE RUN THE COURSE and they are coming out as the rejected and dejected losers. And sooner than they think — they will be charged and indicted for misdemeanors, felonies and acts of treason against We the People and prosecuted with the authority found in our Constitution as the Law.
A Partial list of our FOES.
http://mapper.nndb.com/maps/286/000003277/
I submit you do the math. By doing you will see the CONS.
Medicare (United States) – Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/United_States_federal_budget
My take STOP THE WARS—STOP THE FRAUD —COLLECT 12.9% taxes from our Corporations. All then will work out just fine.
Forget most you hear and see on National TV and found in the Internet Progressive Media but never forget to:
Stand up and Shout out Stop This Madness
STOP ALL THE WARS.
This message brought to you by We the People Advocates
Pass along — publish if you will in part or complete
By Dwight Baker Grassroots Organizer for those who want to think clearly using sanguine sane common sense and reason working toward civility using sanity. With facts in history as our guide under the control of each ones own conscience! Where your voice is heard and your vote is counted. We the People Advocates
Dwight Baker PO Box 7065 Eagle Pass TX 78853 Tel 830-773-1077
Sure, we can print as much money as we like. No one would ever argue there is a physical constraint on a fiat currency. That would be an exercise in sheer stupidity.
The problem, still, lies with the crowding out effect of private investment, the global limit to simultaneous debt creation, and the limit to export absorption. Japan was only able to avert a depression over the last two decades by means of its willingness to depreciate its currency in order to export and by keeping its low interest rates its deficit. However, Japan is the perfect example of why Keynesian stimulus is not the correct solution. After experimenting for two decades with these types of policies they show virtually no economic growth, face a retirement crisis and destroyed many resources in meaningless make work projects. That withstanding, save four identities, Japan would have gone into a major depression despite these measures. These four circumstances unique to Japan and the time period are:
1. A Japanese cultural propensity to save and thus buy JGBs (and a demography largely positioned in the sweet spot to save)
2. The willingness of other countries’ governments to allow their populations to absorb Japan’s productive surplus
3. An asset/interest rate environment that favored consumption over savings in the world’s largest economy
4. A lack of meaningful competition from the world’s large economies to do the same export/deficit stimulate
Absent these four phenomena, the Japanese government would find themselves without buyers for both its bonds and its goods. The stimulus would have ran into hyperinflationary waters and we probably would have seen the rise of fascism or socialism (whichever way the pendulum swung). With their coming retirement crisis we will see the erosion of Japanese living standards to the point of near crisis. Hopefully, the old will be too tired for revolution.
We are different than Japan. Both our society and the global environment are substantially different than the ones Japan faced while undergoing their Keynesian stimulus/mercantilist export regime. At the end of the day government spending cannot fill the breach and stimulus will not be as “successful” for us in the same way it worked for Japan (if you call what occurred a ‘success’).
Our largest population demographic is past the point of saving and our services based economy is geared towards consumption. Also, unlike the environment of the 90s/00s, no foreign government will allow us to flood their markets with our cheap goods absent tariff or quota. Furthermore, there is no greater economy in the world that will absorb the amount of goods we need to produce in order to achieve at least sideways growth. Last, and most importantly, we are currently in an environment, unlike Japan, where every other major economy will try to compete with us to enact the same type of stimulus/export measures.
While you argue stimulus spending should continue until private spending fills the gap, at what point does this occur? Even with the most favorable of circumstances, Japan has not been able to kick the stimulus/deficit spending habit despite 20 years of record exports and a debt/GDP over 200%. How will we do better in a less favorable situation? And with massive stimulus spending without financial reform and possibly a cap/trade regime, are we not just further siphoning off capital away from real, productive industries and towards meaningless, lobbyist connected financial/asset/government subsidized businesses?
Sure the Fed can take down each auction indirectly through the dealers (and give the BDs a easy few ticks on the purchases, I HAVE SEEN IT HAPPEN ACROSS THE YIELD CURVE). Sure they can do reverse repos, pay interest on reserves or enact any manner of ways to limit monetary base growth. No one would question their short term financial influence. But what type of risk perversion will we further endure if they continue to massage the interest rates on the back end (and front end) of the yield curve? At what point do we stop trying to fuel asset inflation at the point of crowding out real investment into productive industries? How long will the Fed keep back end rates low in the face of exploding M3 and eventually inflation? How long will the private lending market reflect these dovish inflationary expectations? Even with all the policy options it retains, the FED is playing hot potato with the massive amount of reserves it is creating/injecting into the economy. If they lose control of the unprecedented growth of M3 (yes you can still measure it), what magnitude of inflation (perhaps hyper) will occur in a speculative, non-productive, service based environment? Do you have a model for this? I believe you mentioned a similar one in your above missive.
You argue these two things, fiscal and monetary policy are interrelated – they are, but again, at what point do the inflationary pressures tip the Fed’s hand to stop buying Treasurys and stop perverting risk? At that stopping point, what occurs then in terms of a US Govt bond auction? Will we see a failed auction as the broader market chokes on supply or will we see treasury rates 15.00% or more? Perhaps the latter than the former?
This unlimited printing press facilitates inflation, perhaps not hyperinflation, but inflation none the less. If the Fed continues to misprice long term interest rates, what asset class will enable enough return for middle class investors to save enough for retirement? With interest rates kept so low, how much more real capital will be diverted toward speculative markets instead of fueling production? And in speculation, how much more capital destruction will this incur? How much more wealth transfer to the financial oligarchy will occur as the big boys scalp these retail specs?
Are the soon to be retired to rely entirely upon social security in the face of a constantly ‘adjusted’ CPI that reflects anything but real inflation? Is the middle class going to see their savings eroded by inflation? Or will the lack of real investment return force them into low yield treasury prices? Or will we see another unproductive asset bubble? Or will all of these things occur? What will happen to the real economy when it faces both high inflationary costs, high lending rates and another asset bubble?
Where does this dog and pony show end? What is the end game other than kicking the can down the road? Do you hope that one day we will discover some sort of technology or industry that will create magical economic prosperity that will solve these issues? Are you planning on placing these burdens solely upon the shoulders of people like myself, the young?
“And if the private economy does not recover, we will have much bigger problems to worry about. . .”
– Exactly my point. The economy has not recovered in Japan, why do we think it will be any different here in a cutthroat, beggar-thy-neighbor environment?
“The problem, still, lies with the crowding out effect of private investment”
All of the talk around the “crowding out effect” as well as the “Treasury view” in general assumes an economy operating ON the Production Possibilities Frontier (PPF), or, in other words, an economy operating at capacity with no unemployed labor or capital.
During a recession, the economy is operating INSIDE the PPF. There is slack labor and capital. There is no crowding out effect.
Regarding PPF.
I have heard the PPF arguement and I have trouble digesting it.
During a recession, an economy operates insides it’s PPF – without question it does. But slack labor and demand does not necessarily necessitate the fact that there is a lack of investment. In this case it is more indicative of the lancing of a debt bubble that the marginal labor and demand was based upon. This is especially a pertinent fact in our debt based economy. In fact, I would argue that PPF has nothing to do with investment. The relationship between PPF you cite assumes that investment can only flow to existing capital – it does not have to. That
withstanding, PPF does not measure investment – it measures utilization
of existing resources. The PPF also does not allow for what is being produced and how useful it is to the broader economy. If you assume we previously were at a PPF then you must concede it was a PPF in FIRE industries that extracted value of existing assets/resources rather than creating new assets/exploiting new resources.
If the government were to arbitrarily restore us to the old PPF then we would wind up in the same precarious imbalance that we were
caught in earlier – this is another problem with the government “stimulating” the economy.
At the end of the day I do not see how investment can be related to a PPF – it seems entirely counterintuitive to construct production as window into investment. This makes sense especially in a model that weights the creation of new/different productive capital and a model that places merit into how efficient/worthwhile/useful that production is to a society.
Solely saying that we on the inside of the PPF, therefore there is no crowding out effect sound droll to me. It seems more of a ancilliary arguement that does not relate to investment.
RPB,
This baby boomer doesn’t expect your generation to pay more because taxing you will not fix this. There simply isn’t enough to tax without POLTICAL shocks of a magnitude that cannot be “quantified”. I went back and forth with another blogger yesterday over whether AUSTERITY is on the horizon or not and who will likely pay for it. We both agreed that AUSTERITY of the unthinkable kind was in the offing but only touched on the structural/institutional factors involved.
Mused on it a bit more in my dreams overnight and then posted this elsewhere this AM. I reproduce it here because it touches on the other elephant in the room that is rarely discussed in such expositions by proponents of MMT.
In other threads you referred to “simple math”… Is one of the structural forces in your math POPULATION? As in aging populations in Europe, US, Canada, Australia, and Japan coupled with much lower population growth [some would say insufficient] in these countries with the result that fewer workers will be able to pay higher taxes to support the “baby boomers” in their retirement. Add to this the fact that with a smaller younger population the overall demand for new housing and the appliances, etc to go with it will be much less as a result. Indeed, there will be a glut of housing and reduced demand throughout the economy as a result. DEFLATION… [I recall a report/study conducted by McKinsey that focused on this topic (population) with conclusions that are very sobering! Perhaps someone else knows what I’m referring to and will point us to it if available. McKinsey is way ahead of the curve on this one…] Equally disconcerting is that the pile of cash tucked away in 401Ks – what’s left – and savings will now be drawn down and not available for investment purposes, leading to a capital shortage…
Deficit spending is merely the hammer insofar as this population factor is the anvil in this equation. Increasing taxation on the workforce in all these countries has its limits. Likewise with the wealthy, as investment has been decoupled from production at the national level. Capital can now seek a higher return on a global playing field. As we both have suggested, deficit spending has its limits as well contrary to what MMT proponents would have US believe. Borrowing/begging the Chinese and Indians to “lend” US the monies to pay for the benefits promised to the “baby boomers” would also seem to have its limits, particularly as “lending” implies that the debt incurred will be paid back some time in the distant future. I know the Chinese [Asians in general] have a much longer time horizon than most of us in the West, but this assumption will surely test that proposition. What will we pay it back with? Or will we?
Of course, if the Chinese and Indians were TAXED to pay for the benefits/pension obligations incurred by the countries identified above, in effect globalizing the transfer of payments from the periphery to the center, then it would no longer be a debt incurred would it? Such obligations would be PAID out of their reduced consumption in the creation of a global welfare state. After all we’re ALL in this together, right?
From the notion of the “white man’s burden” to the “tax burden of the white man”! Now that would be a real twist… not that I expect the Chinese, Indians, or anyone else to subscribe to such thinking. I’m not a regular at Bohemian Grove, Davos, or the Bilderberg Conference so I wouldn’t know if the topic has come up for consideration among the working groups. Problem solved!
But once the baby boomers died off with the population bulge and distortions accompanying it eliminated naturally, the world could get back on track. I always knew my generation had changed the world, but only now am I beginning to realize how. I was so much younger then!
This may be seen as a bit tongue-in-cheek but the aging populations in the aforementioned countries coupled with their debt mountain is not encouraging despite what MMT proponents would have US believe. Of course, they do not weigh in on the issue of DEBT and FREEDOM. Their’s is merely a technical argument that does not touch upon the latter as it is outside the scope of MMT. But by the time this debate is sorted out I’ll be one of grateful dead!
What an outrageous lie.
The US already defaulted about 40 years ago when Nixon took us off the gold standard. Since then its only been the end game that has been playing out and is now starting to reach a final conclusion.
Technically Bernamke is right when everyone accepts the legalized couterfeiting ring that exists between the Treasury and the Federal Reserve. I for one and a growing number of Americans do not. I will call it exactly what it is – theft and lawlessness.
Matt
Let me try to be more clear. MMT advocates would probably argue that the reason that goverment (as lender of last resort) stepped in to save the private financial oligarchy was that the goverment is in charge of promoting the general welfare and had no other choice if it was to prevent a general liquidation of debt.
Is this, in your opinion, why Paulson and Bernanke did what they did? Certainly that was ( in so many words) their stated opinion–they were protecting the general welfare.
Were they simply protecting the general welfare?
the puppets act out the play, and we are to be assured, because the rest of the planet is addicted to US economic activity.
keep juggling boys.
RPB, Mickey,
Yes there’s a “pyramid” problem with Social Security type programs. And we’re looking kind of upside down on that going forward.
The “Greatest Generation” that we “boomers” supported had advantages we probably won’t. Those people tended to have lots of kids, full up America’s vast empty spaces. One of my aunts had 9 children! I made up for it by not having any, coming of age in the time of ‘Population Bomb” worries.
That generation saved money for the future if they possibly could – kept it in the bank, earning a bit of interest, usually. But those people had their savings eaten up by the inflation of the ‘70’s. The ones past their productive years were sitting ducks for it.
I was just coming into the jobs market then. As a young person, I did whatever made sense to me at the time to survive. I could adapt. And my earning was taking place in realtime.
Now I’m less energetic and less adaptable. I’ve had a long entrepreneurial career, but I’m less likely to push a new business into the marketplace, or to pour endless effort and long hours into it and wait for it to pay off.
In fact, with the failure of one business (making electronic things in the US that get made elsewhere now) and the disapointment of a business that has ‘failed to launch’ into the current climate, I have no longer got an income. I have savings, and I’m living very carefully on that money.
I’m vulnerable to inflation. If the US inflates its way out of its problems, my nest egg will be less valuable, just like what happened to the older generation in the 70s.
Politicians are giving Social Security the very hairy eyeball. People are making ugly noises about wanting to solve the “problem” of that “liability.” (Those people rarely mention that people like me have been paying into that all our working lives, and we have a right to expect the other end of that compact to be upheld. Otherwise it’s stealing.)
You have the maneuverability of youth. You will be earning money in realtime. If it seems like the old folks are getting “more” out than they put in (and yes I’ve heard this spoken of by those who argue against keeping Social Security’s promises) it is because inflation makes older dollar amounts look smaller and smaller. As a percentage of our income, and in terms of buying power in its time, our contributions back then were more substantial than they look now (e.g. coffee at 50 cents then, 5 bucks now).
I see people who practically call Social Security some kind of “handout” or unearned welfare!
I have even seen suggestions that the priviization idea be put back on the table! Yes, even after the big harvest/meltdown when 401ks dropped a quarter of their value in a week. A present to the stock market, and a way to dismantle Social Security at the same time.
If people llike me – who HAVE saved, who HAVE contributed to society, who have paid into the Social Security system in good faith all this time – can be reduced to (at this stage) worrying quite a bit about whether all our preparations will have been sufficient; if we are potentially to be reduced to hardship in our declining years, then what does the US as a whole to look forward to?
Think of all the grannies and grandpas out on the street, feebly asking for a spare fifty bucks for a cup of coffee….
Not a pretty thought.
I understand the contention that you paid into the system – therefore you should be entitled to benefits. However, the system at large will have trouble digesting the large influx of new dependents relative to the number that existed while you were paying into it. We both know the age of 65 is an arbitrary figure that was chosen at a time when many did not live to be that age. As cited above, there will be relatively many more retirees relying upon fewer workers paying into the system. While it is not fair to reassess benefits and you are getting the shaft after paying so much in, eventually the system needs to be changed.
At some point someone has to pay for this – it’s trite and true.
Something is wrong with the comments section, and I am pinging my tech guy.
When I am logged in as me, I see 29 comments. When I log out, I see only 22. That should not happen.
If you happen to find your comment to be missing, it is not as a result of any action by me but a weird server glitch. It seems to be sometimes not showing comments below a certain level in a thread.
“During a recession, the economy is operating INSIDE the PPF. There is slack labor and capital. There is no crowding out effect.”
Of course there is. When you have the government tax income earners and uses those taxes for funding politically opportunistic schemes, workers and investors have less money to spend on what they prefer and find useful. And when the government talks about taxing successful businesses to bail out failures the uncertainty causes lower levels of investments, which means lower economic activity and higher unemployment.
I find this type of analytics’s extremely shallow and devoid of understanding of reality. It is obvious that the US government can print as much ‘money’ as it wishes to in order to pay off what it owes. But that is not an argument in favour of solvency because possessing green pieces of paper is not the real issue.
In the real world what matters to individuals and institutions is the purchasing power of the currency in which savings are denominated. It is obvious that once a certain point is reached there will be no way to pay back debts and to retain the original purchasing power. That makes a devaluation inevitable and provides incentive to hedge by transferring holdings from paper to real assets.
The only fix is to let the markets work by rewarding the prudent individuals who made good decisions and punish the individuals who gambled and lost. When governments use the convenient excuses that are based on discredited Keynesian arguments that do not work in the real world they make things worse and act to further move economic activity away from where it should be. For some reason many smart people refuse to learn that lesson.