The first section of this post is by Warren Mosler, the President of Valance Co. who writes for New Deal 2.0
Deficit doves are doing more harm than the hawks — here’s what they need to know.
The deficit hawks are prevailing. The economy remains an economic and social disaster. Medicare has already been cut by the Democratic majority in the new health care bill. Social security is now under attack by the new bipartisan Congressional Commission on Fiscal Sustainability and Reform. Meanwhile, the media tries to present a balanced approach, pairing deficit hawks with deficit doves.
But the deficit hawks aren’t the problem. They do the best they can with arguments that feature empty rhetoric supported by the underlying assumption that deficits are ‘bad.’
Actually, it’s the well-intentioned but misinformed deficit doves featured by the media that may be doing the most harm. They don’t understand actual monetary operations and reserve accounting, and therefore incorporate the same fundamentally incorrect assumptions as the deficit hawks. They agree deficits are ‘bad,’ but try to argue that’s the case only in the long term. They agree that deficits can be too high, but try to argue they have been higher, particularly in World War II, and therefore larger deficits should be easily manageable, while agreeing there is a level that could not be manageable. They agree markets could be ‘unfriendly’ and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that at least for now confidence is high indicating markets are eager to fund current deficits. And they agree that ‘bang for the buck’ matters and support tax cuts and spending increases based on higher multipliers.
The problem is that the two sides of the story are in fact fundamentally on the same side. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration’s ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred true doves, including many senior economics professors. The problem is this professional, highly educated, highly experienced collection of true doves does not get a fair hearing.
The true deficit dove positions include:
1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
3. Interest rates for government are set by the government, and not by the market place.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.The answer to why the true doves capable of articulating the above points don’t’ get a fair hearing may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn’t cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn’t helped either. Seems billionaires get celebrity status and lots of airtime for just about anything they want to say.
The same is true of the economics professors who’ve got it right. Without being from and at the usual ‘top tier’ schools, none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as ‘deficits = savings’ or ‘loans create deposits’ or ‘Federal spending is not constrained by revenues’ is immediately labeled ‘heterodox’ and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled ‘unorthodox’ because his mathematical models featured the deficits = savings accounting identity.
My three proposals that can immediately turn the tide and get us back to full employment and prosperity remain:
1. A full payroll tax (fica) holiday
2. $150 billion of Federal revenue sharing to the States on a per capita basis
3. An $8/hr Federally funded job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.The only thing between today’s state of the economy and unimagined prosperity is the space between the ears of policy makers that’s filled with the deficit hawk rhetoric, and unfortunately further supported by the rhetoric of the deficit doves the media selects to present the ‘opposing view.’
Yves here. Mosler wrote this piece to address the debate over the federal budget deficits in the US, which meant he could skip over some important caveats.
Modern Monetary Theory does describe how the world works in a fiat currency regime, meaning the “government” is the issuer of sovereign currency. Despite all the hyperventilating about default, governments that issue their own currency will never be forced to default (note that Greece, Spain, Ireland, and California are not in this position). They can create a lot of inflation, but that is a separate issue.
The times in the modern era when sovereign states have defaulted is:
1. Under a gold standard
2. When they either are not currency issuers OR have adopted a currency they do not control (eg. countries like Argentina that dollarized their economies)
3. Countries that have overly large banking sectors relative to GDP AND those banks have large liabilities in foreign currencies AND those banks have major solvency problems (Iceland, this would also be the reason for a UK default)
The lone exception is the Russia default of 1998, which remains a bizarre, opportunistic incident. Russia’s sovereign debt was under 20% of GDP, and there was no reason for it to have defaulted, even if its debt levels had been higher.
Now to a general point about MMT. The negative responses to it are almost reflexive, shoot the messenger: deficit = bad, we aren’t prepared to listen to anyone who says otherwise.
Sorry, gang, it IS more complicated than that. We’ve provided this formula before:
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0
Now let’s consider what has happened in the US, and some other advanced economies. Our corporations, in their infinite wisdom, have decided increasingly to offshore and outsource, which means move operations outside the US and to turn big chunks of their operations over to other companies, again often foreign ones.
Let’s go back to the formula. First result is that we have a current account deficit. So that means that the sum of the other two parts of the economy, the private sector plus the public sector will run deficits, as in borrow more than they spend. Maybe one is a net saver, the other a bigger net borrower, or both are net borrowers. But at least one sector will be a net borrower.
But let’s consider another set of issues. The fixation of public companies on quarterly earnings plus the offshoring/outsourcing phenomena have led them to become net savers, even in expansions (see here for a long-form discussion). Normally, the household sector is a net saver (households generally try to save for retirement and for emergencies). Most readers appear to implicitly assume that those funds should be used by business, that government borrowing crowds out private sector borrowing. But while INDIVIDUAL businesses do borrow, recall they also generate cash. The trend, even in periods of growth, when businesses as a whole ought to be borrowing and investing in growth, is instead that they are net savers.
In that scenario, even if the US had no trade deficit, the government would need to run a deficit to accommodate the desire of the private sector to save. The alternative would be that the US would need to go from its assumed trade balance to a trade surplus. That would happen through a fall in prices and wages in its tradeable goods sector (which can happen via domestic deflation, which will make debt burdens worse in real terms, or a fall in the dollar) and/or an increase in productivity so that our exports gained market share.
Now the private sector in the US is deleveraging, which and reducing debt is tantamount to saving. We have pointed out that the euro would likely have to fall to 60 to 80 cents to the dollar to prevent the eurozone from falling into deflation (which will make debt levels in real terms worse and almost certainly precipitate the defaults that the austerity programs being implemented are meant to avoid.
The certain continued fall in the euro (the trajectory is a given, the open questions are how far and how fast), and China’s signaling that it is likely to devalue its currency if the euro falls materially means the dollar is likely to remain strong, Right now, every country with overly high debt levels wants to break glass, weaken currency, and use exports to provide it with some lift to offset the contractionary impact of deleveraging. It appears unlikely that the US will be able to play that game. Odds are high that we will continue to be a net importer.
So, if we decide to run government surpluses now, the result is almost certain to be deflation, at best a Japan-type stagnation with high unemployment (and the US has far less social cohesion than Japan does), at worst a deflationary downspiral. But in either case, austerity becomes self-defeating. The value of outstanding debt rises as prices fall and GDP contracts. Default becomes more likely, and as defaults rise, banks become more impaired, investors more cautious, and the downturn can easily accelerate and become self-reinforcing.
Now some readers are correctly concerned about the wisdom of letting the cohort in DC spend more, given our misadventures in the Middle East, and healthcare “reform” serving as a Trojan horse for further entrenchment and enrichment of Big Pharma and the heath insurers. I am certainly not keen about handing a blank check to the likes of Geithner (oh wait, we did that already, it was called the TARP). We also need to keep pressure high on the need to reform governing structures.
As much as the logic of continued government spending is unpalatable to many, be careful what you wish for. If you think the economy now is not so hot, just wait to see what happens if deflation takes hold.
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1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
There is inflation, which is bad, and can’t be dismissed with the phrase “separate issue”. Trust me, no ones going to buy that if we end up with high inflation.
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
You can achieve full employment and price stability while lowering living standards, now and in the future. Digging ditches and filling them being an example.
3. Interest rates for government are set by the government, and not by the market place.
The marketplace gives government an impression of what prices should be, including the price of money over time. We like market prices, in places where governments try to outsmart market prices we get into trouble.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
You might as well just say we can invest our human and physical capital poorly and it doesn’t matter, which is as absurd a statement as you can get.
Honestly, posts like this scare me. You want to win so bad you’re really diluting your thinking into something bordering on religion.
Dave, your response sounds religious to me. Standard dogma that landed us in this mess. How well is that working for you?
“Standard dogma that landed us in this mess.” ?????
Liar loans? Deficit spending? Fractional reserve banking? Exotic financial instruments? Regulatory capture? GSE’s?
”
deflation, at best a Japan-type stagnation with high unemployment (and the US has far less social cohesion than Japan does), at worst a deflationary downspiral. But in either case, austerity becomes self-defeating. The value of outstanding debt rises as prices fall and GDP contracts. Default becomes more likely, and as defaults rise, banks become more impaired, investors more cautious, and the downturn can easily accelerate and become self-reinforcing.
Now some readers are correctly concerned about the wisdom of letting the cohort in DC spend more, given our misadventures in the Middle East, and healthcare “reform” serving as a Trojan
”
Go out, buy a pack of Trojan~s then set back relax, and beg for deflation.
Will deflation punish the hilt-mortgaged-big-spenders, poor planners, risk takers, speculators and debt bubble freaks who put us here? Will deflation reward the staunch silent Americans who pinch pennies but teach good accounting habits to their children? Will deflationary rewards to the solid citizens put capital back into the hand that does not misdirect investment? Will Mosler’s Maxim of repealing the Payroll ( FICA ) Tax put resources back into the hearts and souls of the heavy lifters of our pioneer society? Is each tax a distortion of our now fragile economy? Would paying off all public sector debts allow tax reduction thus distortion reduction for a more efficient economy? Does a wild bear dump his truck in the forest?
You bet your bottom booty Your Yveness!
But what if we don’t want more efficient economy? Should we then invoke the very antithesis of frugality to descend upon our scene? To save Planet Earth from that pollution concomitant to accelerated market system should we ask for fiscal irresponsibility? How you gonna pay off public debt? Let British dig up our oil? Sell the Okinawan’s back to the Japanese? Sell off one by one each Congressman as a hostage to El Kayeda? Now there is a thought.
But what does all that inefficiency do to our Planet?
Check, Mate
!
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
You can achieve full employment and price stability while lowering living standards, now and in the future. Digging ditches and filling them being an example.
As opposed to what we have today in almost every sector, which are mass unemployment, price volatility, and lowering living standards for everyone except the rich, who steal obscene amounts of money to not just dig ditches and then fill them in, but to throw as many of our corpses into the ditch as possible before filling to back in.
The fact is there’s no conceivable government make-work program which would be remotely as wasteful or pointless as the corporate welfare and welfare-for-the-worthless-vandal-parasites regime we have today.
What we have today isn’t the government paying actual workers pennies to dig ditches, but rather it steals from the workers and then pays criminals trillions of dollars to do nothing but stand around uselessly and “supervise”. That describes the finance racket, the weapons racket, the insurance racket, the agribiz racket, and all the rest.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
You might as well just say we can invest our human and physical capital poorly and it doesn’t matter, which is as absurd a statement as you can get.
How could “human capital” possibly be worse “invested” than the way this criminal system does now? How ignorant are you, that you’re claiming not to have heard of what a destructive black hole the finance sector has been for decades now, sucking in and destroying incalculable human potential which could have served constructive purposes?
As I’ve said before, the Khmer Rouge and the Nazis set out to physically liquidate the educated class among targeted groups, but America’s finance sector has accomplished pretty much an identical liquidation, for all intents and purposes.
Are you making my point for me?
MY NEW COMMENTS IN CAPS:
1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
There is inflation, which is bad, and can’t be dismissed with the phrase “separate issue”. Trust me, no ones going to buy that if we end up with high inflation.
‘INFLATION’ FROM A MONETARY POINT OF VIEW IS EXCESS DEMAND/SPENDING DRIVING UP PRICES. THAT HAPPENS WHEN EXCESS CAPACITY/UNEMPLOYMENT GET ‘USED UP.’ YOU THINK WE SHOULD STAY AT CURRENT LEVELS OF UNEMPLOYMENT RATHER THAN RISK HAVING MORE CONSUMER SPENDING DRIVE UP PRICES? (I’M PROPOSING A FULL PAYROLL TAX(FICA) HOLIDAY THAT WILL RESTORE SALES, OUTPUT, AND EMPLOYMENT, AS WELL AS CUT BUSINESS COSTS TO HELP LOWER PRICES WHERE BUSINESS IS COMPETITIVE)
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
You can achieve full employment and price stability while lowering living standards, now and in the future. Digging ditches and filling them being an example.
RIGHT, SO WHY WOULD WE WANT TO DO THAT? YES, SPENDING CAN BE GOOD OR BAD FOR LIVING STANDARDS. MONEY CAN BE SPENT TO BUILD THE PANAMA CANAL OR TO BLOW IT UP. WHAT’S YOUR POINT?
3. Interest rates for government are set by the government, and not by the market place.
The marketplace gives government an impression of what prices should be, including the price of money over time.
THE MARKET PLACE ANTICIPATES WHERE THE FED IS GOING TO SET RATES NEXT, PLUS OR MINUS A FEW TECHNICALS. AS MONOPOLY PRICE SUPPLIER OF NET CLEARING BALANCES THE FED IS PRICE SETTER.
We like market prices, in places where governments try to outsmart market prices we get into trouble.
IN THE CASE OF A PURE PUBLIC MONOPOLY LIKE THE DOLLAR, MARKET FORCES DO NOT APPLY TO THE SETTING OF INTEREST RATES. THE MONOPOLIST IS PRICE SETTER.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
You might as well just say we can invest our human and physical capital poorly and it doesn’t matter, which is as absurd a statement as you can get.
WHAT DOES THAT HAVE TO DO WITH STATEMENT 4 ???
IT MEANS IF YOU WANT PRIVATE SECTOR EXPANSION, YOU CUT TAXES ON THE PRIVATE SECTOR TO ALLOW IT TO INCREASE ITS SPENDING. IF YOU WANT RESOURCES DIRECTED TO PUBLIC INFRASTRUCTURE, YOU INCREASE GOVT. DIRECTED FUNDS IN THAT DIRECTION. THESE ARE POLITICAL DECISIONS, NOT CONSTRAINED BY THE NUMERICAL LEVEL OF THE DEFICIT, SO ‘BANG FOR THE BUCK MULTIPLIERS’ ARE NOT APPLICABLE.
Honestly, posts like this scare me. You want to win so bad you’re really diluting your thinking into something bordering on religion.
I’M TELLING IT LIKE IT IS. NO THEORY OR PHILOSOPHY. JUST FACTS OF MONETARY OPERATIONS, RESERVE ACCOUNTING, AND NATIONAL INCOME ACCOUNTING.
THE DOLLAR IS DATA ON A SPREADSHEET. GET OVER IT!!!
MY NEW COMMENTS IN CAPS:
1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
‘INFLATION’ FROM A MONETARY POINT OF VIEW IS EXCESS DEMAND/SPENDING DRIVING UP PRICES. THAT HAPPENS WHEN EXCESS CAPACITY/UNEMPLOYMENT GET ‘USED UP.’ YOU THINK WE SHOULD STAY AT CURRENT LEVELS OF UNEMPLOYMENT RATHER THAN RISK HAVING MORE CONSUMER SPENDING DRIVE UP PRICES? (I’M PROPOSING A FULL PAYROLL TAX(FICA) HOLIDAY THAT WILL RESTORE SALES, OUTPUT, AND EMPLOYMENT, AS WELL AS CUT BUSINESS COSTS TO HELP LOWER PRICES WHERE BUSINESS IS COMPETITIVE)
I have no problem with your proposed solutions, but your proposed solutions don’t flow from your argument that “deficits don’t matter” and “it doesn’t matter how we spend the money”. Once you make those conclusions you give Washington free reign to close the employment gap anyway it wants, even the Cheney way of starting a war. However, I believe there is a cost to such actions now and in the future (no doubt pressing young men into service can “employ” them, but when they come back physiologically and physically damaged it reduces the productivity of our nation for generations).
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
RIGHT, SO WHY WOULD WE WANT TO DO THAT? YES, SPENDING CAN BE GOOD OR BAD FOR LIVING STANDARDS. MONEY CAN BE SPENT TO BUILD THE PANAMA CANAL OR TO BLOW IT UP. WHAT’S YOUR POINT?
That blowing up the Panama Canal would be a bad idea, and it would make future generations poorer, even if it “employed” people in the short run. That’s exactly the kind of capital consuming employment I’m speaking of. Achieving full employment and balanced prices in the short run is easy. All you’ve got to do is consume or squander capital and you’re there. What is hard is building up the physical, human, and cultural capital necessary for a country to grow and prosper producing the things necessary to raise living standards over the long run. To do that you’ve actually got to spend money wisely.
3. Interest rates for government are set by the government, and not by the market place.
THE MARKET PLACE ANTICIPATES WHERE THE FED IS GOING TO SET RATES NEXT, PLUS OR MINUS A FEW TECHNICALS. AS MONOPOLY PRICE SUPPLIER OF NET CLEARING BALANCES THE FED IS PRICE SETTER.
IN THE CASE OF A PURE PUBLIC MONOPOLY LIKE THE DOLLAR, MARKET FORCES DO NOT APPLY TO THE SETTING OF INTEREST RATES. THE MONOPOLIST IS PRICE SETTER.
The market gives the FED an idea of when its actions will lead to inflation. If there are no bidders at a given rate then the market is indicating it thinks that represents a negative interest rate and is unacceptable. If the FED forces the issue by becoming the only buyer of its debt it risks inflation going out of control as bondholders sell their now overpriced debt and start to bid up real assets.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
WHAT DOES THAT HAVE TO DO WITH STATEMENT 4 ???
IT MEANS IF YOU WANT PRIVATE SECTOR EXPANSION, YOU CUT TAXES ON THE PRIVATE SECTOR TO ALLOW IT TO INCREASE ITS SPENDING. IF YOU WANT RESOURCES DIRECTED TO PUBLIC INFRASTRUCTURE, YOU INCREASE GOVT. DIRECTED FUNDS IN THAT DIRECTION. THESE ARE POLITICAL DECISIONS, NOT CONSTRAINED BY THE NUMERICAL LEVEL OF THE DEFICIT, SO ‘BANG FOR THE BUCK MULTIPLIERS’ ARE NOT APPLICABLE.
1&4 are sort of related, though if you don’t understand #1 you won’t see why.
The higher the deficit the more difficult it is for the public to understand the true cost of political decisions. If you issue $1 trillion in new currency to bankers without issuing treasury bonds to soak up the new currency in the present time period there will be high inflation as goods get big up with the new money. People can see inflation in the here and now, the visible cost of the policy can rally people against it. But if the cost is deferred over years by a bond offering, if people mistake the cost of the bailout for an asset in their 401k then they don’t see the cost of bad political decisions until its too late. Deficit spending to build infrastructure to provide for future needs is one thing. Deficit spending for cronyism and waste, the kind we have now, is merely a way to disguise the cost of such waste over time from the public.
I’M TELLING IT LIKE IT IS. NO THEORY OR PHILOSOPHY. JUST FACTS OF MONETARY OPERATIONS, RESERVE ACCOUNTING, AND NATIONAL INCOME ACCOUNTING.
THE DOLLAR IS DATA ON A SPREADSHEET. GET OVER IT!!!
Here’s reality. If you take the wealth of a nation and waste it on make work and consumption you will end up poor.
Dave
1. Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue
“There is inflation, which is bad, and can’t be dismissed with the phrase “separate issue”. Trust me, no ones going to buy that if we end up with high inflation.”
Are you suggesting that ANY level of govt spending is inflationary? And it IS a separate issue to solvency or sustainability. Saying we can run out of money is FALSE saying we can have high competition for scarce resources is accurate. Screaming that all govt spending is inflationary is hyperbole.
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2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
“You can achieve full employment and price stability while lowering living standards, now and in the future. Digging ditches and filling them being an example.”
Yes or you can go the currently prescribed(by conservatives) route of deliberately lowering living standards AND worsening unemployment. If we are going to have lower living standards (austerity) lets at least have lower unemployment.
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3. Interest rates for government are set by the government, and not by the market place.
“The marketplace gives government an impression of what prices should be, including the price of money over time. We like market prices, in places where governments try to outsmart market prices we get into trouble.”
Oh really ? How does the market know what prices “should” be? Should oil be $70/bbl like now or over $150/bbl like 2 yrs ago.? The market is simply like Vegas setting odds lines. It has no idea of the “right” or “should be” price it simply reacts to stupid human desires and irrational wishes.
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4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
“You might as well just say we can invest our human and physical capital poorly and it doesn’t matter, which is as absurd a statement as you can get”
As opposed to saying, we dont want to do anything so lets delberately impoverish another 5-10% of the working population so the “market makers” can keep the “value” of their dollar. “The market” already invested our capital poorly in the housing run up.
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“Honestly, posts like this scare me. You want to win so bad you’re really diluting your thinking into something bordering on religion”
Uhhhhh its this unbending “faith” in markets that is quasi religious. Invisible hands, “forces” which bring equilibrium, magic yellow metals which entrance people and make the money system stable, THOSE are articles of religious faith. Stating that money IS a govt construct, that spending does not require “printing” or that bank lending is not supply constrained are verifiable truths, relying not on faith but just opening your frikken eyes.
Dave
1.
Are you suggesting that ANY level of govt spending is inflationary? And it IS a separate issue to solvency or sustainability. Saying we can run out of money is FALSE saying we can have high competition for scarce resources is accurate. Screaming that all govt spending is inflationary is hyperbole.
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I”m not saying any level of government spending is inflationary. I’m saying the kind of government spending we are engaging in today is inflationary in the long run. Since what we are spending the money on is inflationary the more we spend the more inflation.
2. The right size deficit is the one that coincides with our stated goals of full employment and price stability.
Yes or you can go the currently prescribed(by conservatives) route of deliberately lowering living standards AND worsening unemployment. If we are going to have lower living standards (austerity) lets at least have lower unemployment.
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Unemployment can at least force people to retrain and reorient to new lines of production. If you give someone a job digging ditches and filling them next thing you know there is a ditch digging union lobbying congress to keep ditch digging jobs and it becomes a special interest group for the next 30 years.
I’d like it if either are private or public institutions where capable of employing people productively, but this is the hand we are dealt at this time. I see no benefit to creating a permanent drag on our economy just to give someone a job today.
3. Interest rates for government are set by the government, and not by the market place.
Oh really ? How does the market know what prices “should” be? Should oil be $70/bbl like now or over $150/bbl like 2 yrs ago.? The market is simply like Vegas setting odds lines. It has no idea of the “right” or “should be” price it simply reacts to stupid human desires and irrational wishes.
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It’s still the best pricing mechanism available. Certainly better then a government bureaucrat guessing what a price should be. You’ve got to make the best of the tools you’ve got, setting prices ain’t easy.
I’d like to see several market reforms take place to improve price determination (including the elimination of government mismanagement of money supply which screws with all prices). But even in the present state I’d take market prices of government fiat any day.
4. Bang for the buck considerations are moot as the size of the deficit per se is not an issue.
As opposed to saying, we dont want to do anything so lets delberately impoverish another 5-10% of the working population so the “market makers” can keep the “value” of their dollar. “The market” already invested our capital poorly in the housing run up.
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I don’t support letting banksters keep their money, but remember that is what the government chose to spend their money on. Using inflation to indirectly dilute the value of what you gave them, rather then just taking back what was foolishly given away, is irresponsible and will harm the whole of society.
“Bang for the buck considerations are moot”
Why not make the minimum wage $100 an hour? That would help clear personal debt and stimulate spending. When we get “what if” posts like this I know we are in serious, serious trouble.
I dub thee the HOW TO LOVE THE MMT (cough bomb) POST, and yes my biggest concern is whom is at the helm, fix that, and maybe there will be hope for a transitional economy.
Skippy…still want some ass in jail…a hole lot of asses!
PS. my ansetors still like the set on fire and set free idea, in wide screen LED glory for the miscreats that perpetrated this fiasco.
Amendum:
Miscreants should be run though a triathlon challenge course located near lets say Louisiana, with the finish line an ignition source.
Skippy…with out any PPE gear.
If you think the economy now is not so hot, just wait to see what happens if deflation takes hold.
Since it has to happen anyway (the ponzi economy is already an absurd bubble which wants to deflate; and with Peak Oil setting in there will just be more and more excess dollars which reflect no underlying energy reality), it would be far better for it to happen as quickly as possible, before the gangsters’ preparations are advanced much further.
On Mosler’s terminology, I agree about the sniveling “deficit doves”. The wussy liberals strike again.
But why does he want to rehabilitate that very same dubious term?
Why don’t MMTers call themselves stimulus hawks or something like that? Active, assertive, affirmative, is always how one should try to describe oneself and be.
Or job hawks.
One of MMT’s core proposals is a job guarantee by government acting as employer of last resort, but as it acts as lender of last resort to the financial sector.
Congress’s mandate to the Fed is to maximize price stability and employment. Instead the Fed use a rule to set monetary policy that uses unemployment as a tool to target inflationary expectations even before there is any sign of actual inflation.
That’s why I say MMT should functionalize by emphasizing a job creation ideology and program.
The general theory could be recast as, “The money is always going to be flowing anyway, one look at the bloating Fed balance sheet proves that, so the choice is to let it flow to the same banksters who destroyed your job, or to have it flow into constructive all-American projects to get real Americans working again, the way all you decent hard-working people want. The banks want socialism; we want to put America to work again.”
And then you need a specific action upon which to build the movement, like the way the Populist movement built upon the Farmers Alliance cooperatives.
Could someone sends this post to Zimbabwe?
They seem to have missed a step or two.
I suggest you read Ed Harrison’s posts on hyperinflation. You need very specific conditions to be in place to get hyperinflation. They are simply not operative here.
http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html
You also seem not to have read the post. This is accounting. If the private sector saves, which it IS, big time, and you are not running a surplus, the public sector needs to run a deficit to accommodate the private sector savings. If you try to force a government surplus instead, you force adjustments in wages and prices, ie, create unemployment and deflation.
And pray tell me exactly why are you worried about inflation? We have massive unemployment and underutlization of capacity. We also ran up huge private borrowings and government deficits in the post 2000 expansion. Where was the hyperinflation you are so worried about?
The hyperinflation was in private debt and housing. An entire generation was suckered.
How about this for an accounting identity
WE + DEBT = SUCKERS
Where was the accounting identity when credit needed to be reined in?
Everyone seems to worry about the government, funding and such. The government will do fine, they can always print, how about the rest of us?
You are talking nonsense. See Bill Mitchell, Zimbabwe for hyperventilators 101 where Bill takes the comparison of the US and Zimbabwe apart and shows it to be ridiculous. Do your homework before you post remarks you think are snarky but are just show your ignorance of monetary economics.
Excellent explanation, Warren. A fundamental problem is that most economists don’t have a solid grasp of double-entry bookkeeping, let alone reserve accounting. As result they don’t understand how the monetary system works, and if one doesn’t understand those things, then one cannot do credible macro analysis. As a result, the ordinary fare being offered is a mish-mash.
Given the national accounting identities, if the public want to save more (including paying down debt), then if the CAD doesn’t go into surplus correspondingly, then either the government makes up the different with deficits or the economy contracts and unemployment rises. Being an accounting identity, this is a tautology.
The public is maxed out on debt and desires to save/deleverage. The best way to make space for this is for the government to provide the wherewithal directly to consumers through a FICA holiday as Warren has proposed, which would chiefly impact the middle class and small business, as well as to provide direct assistance beyond automatic stabilization to the poor and long term unemployed as may be required.
When the public has satisfied its desire to save/delever, then it will naturally begin to spend and borrow to consume, reversing the automatic stabilization and increasing tax revenues as business pick up, increases profits and starts rehiring.
The government should not be recapitalizing the banks or cutting them space through forbearance. Banking is pro-cyclical, and it will pick up with demand. The idea that the government must strengthen the financial sector to spur lending is just backwards.
Otherwise, stand by for either Japanification and a lost decade, or, worse, debt deflation and liquidation as debts that cannot be repaid, aren’t.
With U-3 unemployment stuck at almost 10% and U-6 well over 15%, along with sagging demand and underinvestment, inflation is not on the horizon and will not be for some time.
Wondering why, then, all the calls for austerity? MIchael Hudson has the answer for you here.
Otherwise, stand by for either Japanification and a lost decade, or, worse, debt deflation and liquidation as debts that cannot be repaid, aren’t.
As far as I can tell, the only thing “Japanification” achieved was to turn the deflationary liquidation process into a long, drawn out form of water torture — now coming up on TWO decades, and we don’t even know yet whether it won’t end with the usual 1930s-esque collapse anyway. And the pleasant side-effect of their courageous refusal to recognize losses and restructure their bad debts was a Lost Generation and houses full of hikikomori. In the meantime, their savings and capital have been diverted into a lot of useless airports, bridges, and other public works concrete pouring exercises which will contribute exactly jack-all to supporting their rapidly aging population as it moves into retirement. Good thing bang for the buck wasn’t a consideration, as Richard Koo assures us.
After turning a good chunk of our most fertile lands into soulless suburbs, after creating a hundred million fat and obese citizens and a generation of children threatened with adult onset diabetes, after filling our homes and landfills with mountains of cheaply made useless crap, after wasting finite resources at a rate hundreds of times that of previous generations after trashing our environment and squeezing out species that had lasted tens of millions of years, the answer to our dilemma is……… .more please! We are that last belligerent drunk at the bar at closing time. The bartender says no more but we see those full shiny bottles behind the bar.
Gee, you seem to have missed the fact that we have crumbling infrastructure and pathetic public transport. There are a lot of places public moneys could be productively spent. I agree with our corrupt political system, funds are just as likely to be spent unwisely, but there is no lack of good targets for public spending in the US right now.
Not just more, exponentially more. If we are shooting for a 4% growth rate, we will be doubling it every 17 years or so.
The need to grow exponentially almost guarantees that the kind of growth will be as you described.
Even an alcoholic passes out sooner or later…right?
“When the public has satisfied its desire to save/delever, then it will naturally begin to spend and borrow to consume…”
Having saved and delevered, why do we want consumers to load back up on debt just to consume? If we ever hope to dismantle Medicare, we need people to save for the inevitable dance with illness and death.
Isn’t that the good libertarian position? If you haven’t properly prepared, the rest of us shouldn’t be forced to bail you out?
The major problem now is the misallocation of resources.
Ideally, the government would have spent its stimulus money on worthwhile ventures that would turn into productive aspects of the economy for years to come, and would fund a whole host of supporting ventures, and give revenue to state and local governments to keep the infrastructure up.
Instead, all the money goes either to military waste or to banking waste due to massive corruption. And due to the corruption, it will never be spent in actual productive ways. The idea that the U.S. government is out of money and has to suddenly start cutting pensions and medical care is absurd. It’s just a ploy by some mean-spirited billionaires to grab even more for themselves.
Yet, because of the corruption, they will win, and you’ll have a large debt and nothing to show for it, plus deflation, which means the banks will own you even more.
Good luck with that.
“The major problem now is the misallocation of resources.”
I wholeheartedly agree. This is a crucial fact that gets left out of the debate.
We spend $5B/mo. in Afghanistan alone.
That alone could go a long way in expanding the capacity of public transportation, upgrading the power grid, etc. Hell, even jobless benefits.
Just to elaborate further. If it’s been decided for you that all the economic surplus of your country will go towards paying the gambling debts of inveterate gamblers, and if these gamblers are also sociopaths, then whether there is a deficit or not doesn’t make a huge difference.
At the end of the day, “you load 16 tons, what do you get? Another day older, and deeper in debt.”
I don’t understand all this talk about fiscal stimulas, tax breaks and what have you. If the basic problem is *solvency* – that is there is too much debt in the system to be supported by income levels, then no amount of stimulas is going to help. You just can’t spend your way out of a solvency problem.
Giving someone an $8 an hour government job is not going to allow them to pay their option ARM, the credit cards and the 2nd lien. It’s not going to help the college students leaving college with 6 figure student loans.
The private sector jobs that are available are not capable of supporting either the tax structure currently in place or the private sector debt. Building bridges and repaving highways will not change that reality.
The problem is too much debt – solvency. We’re bankrupt.
Put another way, giving a former mortgage broker who used to make 80k a year an $8/hour job is not going to allow them to pay their bills. And when all the former brokers default, they drive the banks, hedge funds, retirement accounts and pension funds into insolvency.
My gut feeling is the only way out of this mess is balancing income versus expenditures and allowing all the bad debt to default. We also needs legislation to reign in financial institutions and some resolution to our huge current account deficit.
The basic problem for banks and households is solvency. The basic problem for the US Federal Govt is not solvency. It is very important to make this distinction because you have argued as if one follows the other. It does not.
The government equivalent of insolvency is debt default, being locked out of the credit markets and being forced to balance tax receipts and expenditures.
See Argentina for example.
Bankruptcy is very simply the inability to pay your bills because you don’t have enough money and can’t borrow, beg or steal any (or for a government, print it).
Other than the ability to print money, there’s nothing special about a government. They have revenue and they have bills. If they can’t pay the bills, they don’t pay the bills.
The question of whether governments can solve cash flow problems by printing money is a much larger topic. My gut feeling is that they cannot, since there is no such thing as a free lunch.
“Other than the ability to print money, there’s nothing special about a government.”
That’s a rather large difference to brush aside so casually. I can assure you that it would completely transform my financial position if I could legally print money.
You really need to stop and think about what that means.
> You really need to stop and think about what that means.
It means no one will take your currency as payment, as
soon as they realize you are diluting it faster than they
can extract the original purchasing power.
We’re not going to have inflation.
We’re going to have a currency crisis, where no one wants to hold dollars….mostly because we think we can endlessly print with impunity. There will be a limit to that function, after which we go non-linear in a way that we cannot reverse.
KnotRP
Do you really believe this scenario even REMOTELY likely? …..
“It means no one will take your currency as payment, as
soon as they realize you are diluting it faster than they
can extract the original purchasing power.”
………….Cmon! No one will take the US dollar as payment for anything??
RIIIIIIIGHT!!! The truth is this “accepting the US$ as payment” is LAW! Especially to extinguish tax liabilities.
“We’re not going to have inflation.
We’re going to have a currency crisis, where no one wants to hold dollars….mostly because we think we can endlessly print with impunity.”
The thing about modern soft currencies is they cant go too far either way, there is a certain equilibrium to the system. If there was the “run” on the dollar you entertain as a possibility, what would it run to? Some other currency (Yen, renmibi), gold?? As soon as that run was complete the dollar would again look like a good investment and the other currency and gold would be in bubble territory.
The truth is there really is nowhere to run. We’re all in it together whether we like it or not.
This………….
“There will be a limit to that function, after which we go non-linear in a way that we cannot reverse.”…………..
is absurd, regarding the US dollar anyway. Too many people hold $US and are dependent on their existence for your scenario to play out as described.
There will and already has been some heartache,uncertainty and large losses, this isnt news, but your ARmageddon scenario is as much fantasy as the” Left Behind” series of novels.
greg b> The truth is there really is nowhere to run.
Ah…relying on the assertion that the dollar cannot be
worthless as long as the US economy is functional (tax receipts
mainly, to paraphrase you), yet the same argument does not address or does not accept what happens to a currency backed by an economy, where the economy itself stops functioning.
It seems you just believe an economy cannot be mismanaged to a point of destruction. I guess we will have to agree to disagree.
I hope we don’t push it that far, but with the current structural problems unaddress, and the mounting debt (and expected further QE), we’re going to live in interesting times at a minimum.
greg b> The truth is there really is nowhere to run.
In fact, a better argument you might want to use is that most of the US population is carrying enough debt that they’d cheerful
welcome a dollar devaluation of sufficient degree to make
their debt choices pay off.
I’m not sure retirees and other savers will necessarily respond
to a general devaluation with no change in their future behavior, however…and that was my point…mismanage it enough, and the dollar economy will cease to funciton.
knotRP
“It seems you just believe an economy cannot be mismanaged to a point of destruction. I guess we will have to agree to disagree.
I hope we don’t push it that far, but with the current structural problems unaddress, and the mounting debt (and expected further QE), we’re going to live in interesting times at a minimum”
I dont believe that at all. Its austerity that IS the mismanagement however, that will lead to deflation and social unrest, not “money printing”. Your position seems to be that currency issues are primary, I maintain they are secondary to real economic collapse. Let unemployment get to 25%+ destroying incomes for everyone (but keeping the dollar strong!!!) and THEN you’ll see a bad outcome. You and too many see inflation as the road to ruin when in fact its DEFLATION that is the end result of ruin.
Your scenario where investors will dump the dollar because of “devaluing” must answer the question; where will they go en masse? To “get rid” of their dollar they need someone who wants it. If there is someone who wants it then you have already discredited the “no one will want it” scenario. Any large moves NEVER work, they are self limiting. If too many people run from dollars to gold, gold gets too expensive and the dollar looks good. The market has a very efficient way of punishing rash moves. This is the effectiveness of a soft currency regime. Gold backed or hard currencies suffer from inflexibility and will go hyperbolic.
“In fact, a better argument you might want to use is that most of the US population is carrying enough debt that they’d cheerful
welcome a dollar devaluation of sufficient degree to make
their debt choices pay off.”
This is a good point. But I still maintain that the market forces and the fact that all the large dollar holders can be trusted to chase the best deal, any large move out of dollars will be followed by another group moving in when the deal gets good, provided we have an economy. We only wont have an economy if we stop paying people to work and start laying them off.
“I’m not sure retirees and other savers will necessarily respond
to a general devaluation with no change in their future behavior, however…and that was my point…mismanage it enough, and the dollar economy will cease to funciton.”
Sure theyll change behavior but it wont be extreme, market forces almost guarantee that. One more time, IF we mismanage the economy by embarking on a plan to deliberately cut incomes and force layoffs (austerity) we will create the deflation that can crash the economy ( but the dollar will be strong by god!!!)
greg b….you are not reading very carefully at all.
I never said we’d have an inflation.
I don’t think you are grasping what I mean by non-linear
response to dollar devaluation.
Daniel,
If you’d been reading these posts carefully, you would see that the basic issue isn’t solvency. Clearly, if you can’t get past that simple step, the rest isn’t going to make sense to you.
The identity
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0
reminds me of another one
The value of human slaves, etc shipped to Roman from the German tribes – the value of olive oil, wine, etc shipped from Rome to the German tribes = 0
To sell more olive oil, the Romans had to buy more slaves.
MMT = Hyperinflation
Governments do not issue money, Central Banks do. These are NOT the same entities. All our money is backed by debt – either private debt or increasingly taxpayer debt.
Central Banks know that pure fiat Government money would lead to hyperinflation, and so luckily for us, ensure that all money is back by debt, not merely fiat.
What we are seeing now is Central Banks realising that debt is maxed out and it’s time to wind it back.
If politicians wrest control of money supplies from central banks, we will get MMT, then hyperinflation. We should all pray that this does not happen. If it does, there will be turmoil. Eventually private banks, central or otherwise, will regain control anyway, this is the only way money supplies will be properly controlled, nothing else works.
MMT people do not understand that government spending is not just a matter of adjusting book entries. Those entries represent taxpayer debt. The only way that debt will be repudiated is destruction of the central banking system, and heaven help us all if that happens. The money supply can never be left in the hands of politicians.
“MMT = Hyperinflation”
Evidence for this unfounded statement please?
There is ample evidence the statement is not true. For starters what is used to purchase government debt? Central bank issued currency is the answer. Debt purchasers are not looking to spend, they are looking to save. When did saving ever cause inflation?
Yes, Central Bank issued currency is used to purchase government debt. That is the current system and will prevent inflation, as the Central Bank will insist on the debt being paid back by taxpayers. That is my point in a nutshell.
Under MMT, there is no such insistence – that is the problem with MMT.
You’ve missed my point, the government liability was already created through the currency used to purchase the debt. The debt purchase merely exchanges one liability for another – there is no prevention of inflation as the inflation has already occurred. At best treasury issuance ties up inflation that has already occurred. I say it doesn’t even do that because the treasury purchaser is risk averse by definition. He’s not going to turn around and speculate in commodities.
Government liability is created when the government decides to borrow, either from the private sector or the central bank. I agree this is inflationary at the time. My point is that it is deflationary when the government repays the debt through taxation.
Under MMT the debt does not need to be repaid, which will lead to hyperinflation because growth in credit + money undergoes a positive feedback loop that has nothing to hold it back.
Over the very long term under central banking the money supply is stable, through repeated inflationary and deflationary cycles. We have had a seventy year inflation, and if the central banking model holds we will now have deflation. If politicians wrest control of the money supply from central banks (akin to MMT) we will have hyperinflation.
“Under MMT the debt does not need to be repaid, which will lead to hyperinflation because growth in credit + money undergoes a positive feedback loop that has nothing to hold it back.”
The government can stop dead *any* inflation through targeted taxation if it has the will. Better still would be to use counter-cyclical spending programs like a job guarantee.
So saying there is nothing to hold back hyperinflation is pure lack of understanding on your part.
“The government can stop dead *any* inflation through targeted taxation if it has the will”.
Yes of course it “can”, but history has shown that governments don’t have the “will”. The proof is in the success of central banking compared to pure fiat regimes.
The incentives are out of whack. Governments want to get re-elected and people prefer free money to working.
_Toil is stupid_if it anchors a chain around ones neck or leg, coinage is the links of said chain…the more I have the more sojourned you are too me.
““The government can stop dead *any* inflation through targeted taxation if it has the will”.
Yes of course it “can”, but history has shown that governments don’t have the “will”. The proof is in the success of central banking compared to pure fiat regimes.
The incentives are out of whack. Governments want to get re-elected and people prefer free money to working.”
Paul
Someone or something(robots) will always produce whatever it is we desire to consume. These fears that “everyone” will just take free govt money and stop producing are absurd. There will always be an incentive to produce.
There is no ‘under MMT’
MMT simply describes the operational and accounting realities, beginning with the fact that US govt. spending is not operationally constrained by revenue.
It isn’t. Really. Ask anyone in monetary operations at the Fed. See quotes from Bernanke, Greenspan, and even David Walker that all agree with that fact, but then conveniently act and theorize as if it’s not the case.
Flat earth economics is winning the day. And we’re all paying the price.
“MMT simply describes the operational and accounting realities, beginning with the fact that US govt. spending is not operationally constrained by revenue.”
MMT tries but fails to describe the operational and accounting realities. For example, revenue hasn’t been a constraint for the last 70 years, but is beginning to be now. MMT people can’t see it because they think Government = Central Bank.
MMT assumes that Government = Central Bank. This is not the case. Our money system is built on credit, and this cannot work without an independent central bank, or at least a system of independent private banks.
If MMT were true, the dynamics of pure fiat would lead to hyperinflation. If governments wrest control from central banks in the future then MMT may describe the resulting situation. They are nowhere near close to doing this at present though and we should hope that they never do.
“It isn’t. Really. Ask anyone in monetary operations at the Fed. See quotes from Bernanke, Greenspan, and even David Walker that all agree with that fact, but then conveniently act and theorize as if it’s not the case.”
The most recent quotes from Greenspan seem to suggest he certainly thinks spending is constrained by revenue. He expressed a different opinion in the past when there was still capacity for taxpayers to take on more debt. i.e. at that point in time revenue was not a constraint, but now it is, because creditors are starting to worry that debts may not be paid back.
“Flat earth economics is winning the day. And we’re all paying the price.”
I’m not sure what you mean by this. How is paying back borrowed money “flat earth”? Taxpayers entered into credit contracts and are, and should be, bound by them.
“The money supply can never be left in the hands of politicians.”
The Constitution specifically gives control of the money supply to the politicians. I’m uncertain why anyone believes non-elected and unaccountable private interests are preferable to elected representatives. If accountability is an issue, perhaps we need to consider what is broken with the system of representation.
In a system unconstrained by independent central banks, politicians will always resort to debasement eventually in order to appease the electorate. This has been proven time and again throughout history. It is not a problem with the system of respresentation, but a problem with human nature, and the nature of democracy.
The system of independent central banking introduced the best system we have for creation of a non-inflationary (over the very long term) money supply, a money supply based on credit, not gold, silver or pure fiat.
It is this system that MMT proponents don’t know/believe exists, or do not understand.
That’s a nice fantasy you’ve got going on there, Paul. Offer, if you can, one shred of evidence that US Government spending is financially constrained by its Central Bank in any way.
I didn’t hear Greenspan offer any negative indicator at trillions in war spending. Nor did the bond market have anything to say about trillions in bank bail outs.
I say that if the narrow interests that really run most of the show want to do something, it is done at any cost. And if there is anything on the agenda that they don’t want to do, then the deficit doves and hawks come out and it is shot down. Prove me wrong.
It may appear as if the US Central Bank will never constrain the money supply, as they have not done so for seventy years.
The US Central Bank has allowed money + credit to grow as much as possible, this is true. Seventy years of population growth and technology improvements have allowed them to do so for seventy years. This is the sensible path for any creditor, to lend as much as possible while the chances of being repaid are good.
However a sensible creditor will not lend past the point where the debt is in danger of not being repaid.
Central Banks now know that that point has been reached. They will now stop lending and focus on managing their debtors to ensure they can be repaid as much as possible.
Paul said:
“Central Banks now know that that point has been reached.”
This is an extraordinary statement aside from the fact that we’ve heard it repeatedly for decades on end. I call BS. Provide evidence that this point has been reached, please.
I don’t have concrete evidence, I just see telling signals. Recent statements by Greenspan, ECB statements, reported dissension at the Fed.
I admit I may be wrong that now is the exact time. There may be another round of QE or bailout via MBS purchase for instance. However I am convinced that the time is coming very soon.
If that time is not soon, then central banking will fail and there will be chaos. I don’t believe that the main benficiaries of central banking will allow that to happen.
Paul
your notion that the central bank controls money supply is a farce. They stopped even thinking they could control money supply early in the Reagan days.
The money supply of the credit type (bank credit), which is what most of us use, is driven by DEMAND not supply. It is endogenous not exogenous to use another term. Central Banks set short term rates and are supposed to monitor their member banks credit conditions. Other than that they are pretty worthless.
The main reason they were created was as a lender of last resort to stem credit crises.
“your notion that the central bank controls money supply is a farce. They stopped even thinking they could control money supply early in the Reagan days.”
I don’t mean that the central bank is the only determiner of money supply. I mean that the central bank controls supply of M0. Other money and credit comes into being through private credit creation. This forms, of course, the vast bulk of money and credit.
This system is one of mankind’s greatest achievements.
You are correct, this credit creation is driven by demand. The demand is not limitless of course, and is constrained by ability to service debt.
I have probably used the term “central bank” in places where the term “private banking system, headed by the central bank” would be more accurate.
I should add that it is usually the creditor who finally implements the restraints, through fear of not being paid back. Debtors generally will borrow until someone tells them “no”, especially when they have been conditioned to expect inflation.
Central banks are created specifically to serve as engines of easy credit and credit inflation (as well as the secondary function of transferring wealth and resources from private citizens to the government through deficit monetization). If the canonical Bagehot Rule (which counsels lending to failing firms which otherwise could not obtain credit) does not convince you of the Fed’s purpose as a credit engine, then the fact that the two biggest credit bubbles in U.S. history have been blown under the Fed’s careful stewardship should. We know how the first one ended and we’re still waiting to see what happens with the second.
CBs don’t prevent inflation, rather, they severely exacerbate cycles of credit inflation and deflation, replacing any genuine asset money with a sea of debt in the process. They’re a scourge on the financial system.
The Bank of England has survived since the 1600’s through numerous inflationary and deflationary cycles. It is the model for all modern Central Banks.
The Bagehot rule was specifically meant for resolution of short term panics and liquidity crises, not as a long term permanent policy measure.
The US Fed presided over a huge inflation, followed by a deflation in the 1930’s. They let the inflation run as far as possible in the 1920’s until it was no longer sustainable, then deflated. The only alternative would have been hyperinflation.
So no, I am certainly not convinced that the Fed is only an engine for credit creation. It is an engine for credit management, that has evolved over time and despite its flaws I believe it to be the best large scale credit management engine yet devised.
As reprehensible as the Central Banking system may appear to be, it does deserve credit for its part in the great prosperity of many nations over the last few hundred years. If it were to disappear, to be replaced by MMT, I fear we would be headed for a long dark economic period.
Paul
you completely misunderstand MMT and its position on CBs. MMT advocates would have the CB stop tinkering with interest rates and instead keep them at ZERO forever. In addition, as Warren has so elegantly argued in other places (google it), the CB should start regulating the banking system from the asset side instead of the liability side. MMT does not remove the CB , it certainly sees an important role for lender of last resort activities, but it would remove some of the fluff activities (monthly announcements of interest rate changes)
So you are saying that MMT proponents believe there should be a CB, but it shouldn’t do what CBs do.
That is not a CB! It doesn’t matter what you call it. If it doesn’t lend money at an interest rate of its own determination it is not a CB.
“So you are saying that MMT proponents believe there should be a CB, but it shouldn’t do what CBs do.
That is not a CB! It doesn’t matter what you call it. If it doesn’t lend money at an interest rate of its own determination it is not a CB.”
What I’m saying is that MMT recognizes that the CB activities of raising and lowering interet rates are a blunt ineffective instrument to achieve its own stated objectives. What many MMTers like Warren and Bill Mitchell have advocated is for central banks to leave the interest at near zero forever. They can still do other monetary operations like buying bad debt from private banks, functioning as lender of last resort, buying treasuries if desired.
This
“f it doesn’t lend money at an interest rate of its own determination it is not a CB.”
can easily be a zero interest rate of “its own determination”. There is nothing that says a central bank needs to vary its interest rate. There are plenty of useful activities a CB can do without tinkering around the edges with interest rates.
See this if interested
http://bilbo.economicoutlook.net/blog/?p=4656
or this
http://moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/
I enjoy coming to this site, but have to say that the quality of this post is pretty low. There is a legitimate debate to be had about whether the government should engage in more deficit spending, but to argue that an accounting identity holds the key to the answer is weak to say the least. For example, take the identity national savings-investment=net exports. Yves seems to take net exports and private savings as a given, so it follows that a decrease in government savings (larger deficits) will result in lower investment. Is that good? Who knows. But the whole premise of this kind of analysis is wrong. You can’t simply take net exports and private savings as given. These accounting identities ultimately have as much analytical content as x=x. If someone tries to use such an identity to make their case, you can probably ignore them.
I too have my qualms about this post, about the “deficits don’t matter” claims of some MMT proponents, and in particular with the post’s line that “they can create a lot of inflation, but that is a separate issue.” Inflation is not a separate or trivial issue.
However, some of your objections don’t make sense either. What do you mean by “you can’t simply take net exports and private savings as given”? Is there some situation in which there won’t be net exports and/or private savings, or do you mean their value won’t always be positive? I don’t understand your objections.
Then you say that “these accounting identities ultimately have as much analytical content as x=x”. How does x+y-z=0 become x=x? These accounting identities are similar to conservation principles in physics (conservation of energy, conservation of momentum, etc.). While a bad student might setup the problem such that he gets a degenerate x=x, that’s not the case for better students, and certainly doesn’t make conservation principles useless. It’s often very important to know what part of a system has what value of a given quantity. For example, my bank seems obsessed with how much principal I have left on my mortgage, and are utterly unimpressed with my argument that since credit-debt=0, it’s a meaningless identity and they should stop wasting my time.
Alex,
When I say that you can’t take something “as given,” I mean that you can’t change a key variable in a system and assume other endogenous variables will remain constant. It was probably my choice words, but surely as someone who understands physics, you must understand this as well. Moreover, I was also trying to point out that I can use the very same identity and assumptions to emphasize a different implication, namely that government spending may result in lower investment.
Ironically, your example of debit-cedit=0 actually captures my point about the _analytical_ emptiness of these accounting identities in certain contexts. The fact that debit-credit=0 indeed doesn’t tell much about your principal repayments. But look, I agree that these identities play an important role in a broader equilibrium analysis. My point was that you can’t simply take an equation that always holds true regardless of the level of deficit spending and that has several other unknowns and then draw a lot of inferences about the consequences of deficit spending, unless you work out all the other moving parts, i.e., accounting identities are not the stuff of deep economic analysis.
“It was probably my choice words, but surely as someone who understands physics, you must understand this as well.”
I’d use “given” a little differently and say “fixed” or “constant” instead, but let’s put semantics aside since I now understand what you mean.
“Moreover, I was also trying to point out that I can use the very same identity and assumptions to emphasize a different implication, namely that government spending may result in lower investment.”
Sure, it depends on other conditions. Analogously, a thinking Keynesian would say that excessive government spending during an economic boom will crowd out private spending. What Mosler is saying is that there isn’t a lot of private investment now so the government should take up the slack.
“My point was that you can’t simply take an equation that always holds true regardless of the level of deficit spending and that has several other unknowns and then draw a lot of inferences about the consequences of deficit spending, unless you work out all the other moving parts”
Sure, you need other conditions and principles, but where has that been omitted?
“accounting identities are not the stuff of deep economic analysis”
No conservation principle is enough for a complete analysis – you need other principles or information. That doesn’t mean they’re a trivial or unimportant part of such an analysis. Their very simplicity is a virtue. Ignoring them invalidates any analysis.
It doesn’t seem like you understand accounting at all. You should start studying accounting before you say MMT is bunk.
As long as GDP = I + C + G + NI then, under a fiat system, MMT must be true.
These days people seem to reflexively mingle the discussion of fiscal policy and monetary policy. This obviously stems from the fact that some people are concerned about the Fed financing the government’s giant deficits by printing money. But I think most people would agree that the U.S. government has not yet hit its _real_ borrowing capacity. For now at least, in discussing deficit spending, the big question is whether additional government spending is a good use of real resources. Basically, it seems more important to focus on how we use and spend the real stuff produced in the economy than to focus on the mountain of paper our central bank has and will continue to create. Our government is becoming a larger and larger hub of real activity. I personally find this worrying. Our current trillion + dollar deficits don’t seem to satisfy the Keynesians, who insist on still larger deficits. MMT and other monetary mumbo jumbo is a sideshow compared to the massive implications of our government controlling and allocating an increasing share of the real resources in our economy.
Yes MMT is a sideshow.
Fiscal stimulus is a huge waste of resources, however banks don’t care as long as they are reasonably sure of being paid back.
However Fiscal Stimulus is the will of the ignorant masses, who do not understand that every future taxpayer dollar they spend purely for the sake of stimulus is a problem for taxpayers, not a benefit.
This is democracy. People enter into this of their own free will, through their elected representatives.
People will only learn once it starts to have negative consequences, and for this we must simply wait.
Paul,
When did our fathers produce real goods and services and send them back in time to pay off the debt incurred during WWII?
No matter how much debt exists and no matter how much money exists, only goods and services produced now can be consumed now. This is all about who gets to consume what right now and as long as the deficit doves / hawks continue to be confused and so confuse most others, the ones who are consuming the most right now get to continue to do so in the future. And THAT is what it is all about.
Taxpayers’ debts are repayed by creating goods, services and capital, and giving part of those goods, services and capital to the creditors. No time travel necessary. Our fathers and grandfathers worked hard to produce goods and services consumed by the rich (i.e. the creditors), and to produce capital for deployment by the rich. To show for this many of them still owe money to private creditors.
“every future taxpayer dollar they spend purely for the sake of stimulus is a problem for taxpayers, not a benefit”
Love your logic. You’ve assumed that all taxpayers are in the same position, a representative or homogeneous agent model taken to reductio ad absurdum. Right now the biggest problem we have is high unemployment (and even the unemployed pay some taxes, though I should also note that our government is supposed to have representation based on citizenship rather than tax burden). Do most unemployed have much in common with say, Pete Peterson, who’s so concerned with our government’s deficit and how we should reduce it by cutting “entitlements”, lest we reduce it by eliminating the carried interest rule or even by taxing all capital gains at as high a rate as capital gains. Horrors! What will become of capitalism if we eliminate Mr. Peterson’s special tax breaks?
“banks don’t care as long as they are reasonably sure of being paid back”
Or of being bailed out by the government. Why do the same people who gnash their teeth over the Fed possibly printing more money to handle government debt have so little to say about the Fed printing over $1T to buy trash from banks?
“However Fiscal Stimulus is the will of the ignorant masses …”
Ah, the “ignorant masses”, of which you are clearly not a member. Does it then follow that you’re a member of the “well-informed masses”? Why are those people so rarely mentioned?
Every free dollar given out is a disincentive to work. The line on transfer payments must be made somewhere. I say that an exorbitant public debt shows that the line must be drawn somewhere below the current level.
I agree it was stupid of taxpayers to take on massive amounts of extra debt to bail out banks. (The government don’t “print”, they borrow from the Fed). This is democracy in action. Once people learn to elect trustworthy representatives, this sort of thing will be less likely to happen.
There are no well-informed masses. There is a very small well-informed minority, and I guess I am either part of that or I am deluded. Either way, I am fairly sure that central bankers are part of it, and that politicians are not.
“Every free dollar given out is a disincentive to work.”
And yet there are still plenty of people working for banks – some of them paid quite well. It doesn’t seem like all the free dollars they got, and are continuing to get, was a sufficient disincentive to work.
If you’re talking about unemployment insurance, how much of a disincentive is it if you’re getting paid, at most, 50% of what you were making? Most people can’t afford to live that way for long. Sure, there are a few freeloaders, often young single people with few responsibilities and the option to move back in with their parents. I’ve known some myself, but they’re a distinct minority.
As for disincentives, having five unemployed people for every job opening is a much bigger disincentive.
And what about stimulus spending? Does someone in the private sector who’s working on a government contract have a disincentive to work? Seems like they’re already working.
“I say that an exorbitant public debt shows that the line must be drawn somewhere below the current level.”
“Exorbitant”? How do you define that? What percentage of GDP is it? Why below the current level? Some contend that 90%/GDP is a good rule-of-thumb above which growth slows. Others point out that after WW2 we had 125%/GDP and yet the ensuing decades were a boom. Where’s your line and what’s the rationale for it?
“I agree it was stupid of taxpayers to take on massive amounts of extra debt to bail out banks.”
While I don’t know what you personally said about it, many deficit hawks (especially of the large bond holder variety) were surprisingly quiet about the bailouts. Think that could be because they’ll loose more money from bank failures (receivership) than from cuts to unemployment insurance or Social Security?
“The government don’t “print”, they borrow from the Fed.”
Most of the bank bailout came (and continues to come) directly from the Fed, which just prints the money for it. TARP and other Treasury actions were a sideshow.
“I am fairly sure that central bankers are part of it [well informed]”
Does that include Alan “Maestro” Greenspan and Ben “Helicopter” Bernanke, both of whom missed an $8T housing bubble and its financial ramifications?
“politicians are not”
Do you really think that Alan, Ben and their fellow presidentially appointed Feds aren’t politicians? If your job comes from presidential appointment and senate confirmation, you’re eligible for re-appointment, and your job actions seriously affect the president’s and senators re-election prospects, then you’re either a politician of you’re looking for another job.
By free dollars I am talking about payments by taxpayers to people who are not working.
I believe current taxpayer debts are far too high – you seem to disagree and that is fine. I presume there is a point at which you would draw the line though? There are many who seem to think there is really no limit.
Yes the Fed printed to buy bonds. This means that money previously owed by mortgage holders to banks is now owed by mortgage holders to the Fed, backed by real estate as collateral. Of course many of these are defaulting and that is a big issue. I’m not sure how this affects the discussion – my point was that the Government cannot print money. The Fed is a separate entity.
Yes I include Greenspan and Bernanke. Of course, they know a lot more than any of us, and are smarter than they sometimes appear. They wanted to push credit growth as far as it could go. Now Alan is making noises about credit constraints because the growth is over, and the natural deflation part of the cycle is commencing.
By “politicians” I meant “elected representatives”. I also meant the current batch, I’m not saying that all elected representatives are always part of the ignorant masses.
“By free dollars I am talking about payments by taxpayers to people who are not working.”
Why is paying a few hundred a week to someone who’s unemployed through no fault of their own so much worse than the government enabling an otherwise insolvent bank to pay millions to its CEO, especially when that CEO’s reckless mismanagement would have, save for enormous government handouts, made that bank insolvent?
“I believe current taxpayer debts are far too high – you seem to disagree and that is fine. I presume there is a point at which you would draw the line though? There are many who seem to think there is really no limit.”
I’m not of the “deficits don’t matter” camp. To me 90%/GDP is easy to handle, based on historical evidence, and we’re not there yet. 125% is probably tolerable if worse comes to worse. Japanese style 160-200% would scare me – if their interest rates have to go up they’re toast.
Again though, why do you think current government is too high given the conditions? Where would you put the limit?
“my point was that the Government cannot print money. The Fed is a separate entity”
Hardly entirely separate. The Fed can print money only because the government has given it that authority, and most of the Fed’s governance is by government appointment. Ultimately the Fed is using government authority to bail out the banks.
“Yes I include Greenspan and Bernanke. Of course, they know a lot more than any of us, and are smarter than they sometimes appear.”
Ok they’re smart, but that doesn’t mean they’re wise or that they’re interested in the well-being of the average American instead of the banks.
“They wanted to push credit growth as far as it could go. Now Alan is making noises about credit constraints because the growth is over, and the natural deflation part of the cycle is commencing.”
You’re saying he’s got it backwards, and I think you’re right. Fed policy is supposed to be counter-cyclical, not pro-cyclical. The idea is to cut back on credit when the economy is doing well, and increase it when it’s doing badly. A former Fed chairman said his job was to take away the punch bowl when the party got going. Alan spiked the punch bowl when everyone was swinging from the chandeliers, but now that the fun is over he’s playing the temperance preacher.
alex,
You’ve pretty much reduced Paul Andrews to a quivering blob of moral and cognitive dissonance.
So my hat’s off to you.
“Why is paying a few hundred a week to someone who’s unemployed through no fault of their own so much worse than the government enabling an otherwise insolvent bank to pay millions to its CEO, especially when that CEO’s reckless mismanagement would have, save for enormous government handouts, made that bank insolvent?”
I’m not saying it’s worse. Both are inconducive to a healthy economy and society.
“I’m not of the “deficits don’t matter” camp. To me 90%/GDP is easy to handle, based on historical evidence, and we’re not there yet. 125% is probably tolerable if worse comes to worse. Japanese style 160-200% would scare me – if their interest rates have to go up they’re toast.”
So you admit that debt gives us helpful metrics for controlling the money supply? How would this work under a fiat system with no government debt?
“The Fed can print money only because the government has given it that authority, and most of the Fed’s governance is by government appointment. Ultimately the Fed is using government authority to bail out the banks.”
That’s the official line. In reality the Fed is controlled by the banks.
“Ok they’re smart, but that doesn’t mean they’re wise or that they’re interested in the well-being of the average American instead of the banks.”
They are well-informed, and know that the central banking system works and needs to be kept in place. This benefits everyone and has done since 17th century Britain.
“You’re saying he’s got it backwards, and I think you’re right. Fed policy is supposed to be counter-cyclical, not pro-cyclical. The idea is to cut back on credit when the economy is doing well, and increase it when it’s doing badly. A former Fed chairman said his job was to take away the punch bowl when the party got going. Alan spiked the punch bowl when everyone was swinging from the chandeliers, but now that the fun is over he’s playing the temperance preacher.”
You need to separate cyclical inventory driven inflations from the longer inflation/deflation cycles. Central Banks keep lending in the former because they know that more dent can be loaded on. Central Banks will tighten, as you seem to be agreeing, once debt is maxed out.
Warren and Yves –
Thanks for again trying to get us all over the threshold of some vague notion of monetary sovereignty, obviously a concept not available to the Zimbabwe-prone and the haters of Statism.
There is much to be said for Warren’s several specific measures for restoring economic stability, but I still see the real debate hiding behind the veil of double-entry bookkeeping and fiscal sustainability.
Lincoln called it the supreme prerogative of a sovereign government, and its sovereign people – may I add.
The power to create the nation’s money belongs to its sovereign peoples.
This nation is already fully empowered to create ALL of the national circulating medium in order to carefully drive the national economy.
For a hundred years we have turned that sacred right over to the capital marketeers and private bankers.
It is THEY that have gotten us HERE.
If Warren wants to change the tenor of the debate, simply demand the restoration of monetary sovereignty, the separation of the money-creation and banking powers, and never again utter a bunch of counter-intuitive MMT truisms.
The Money System Common.
Let’s get on with it.
Yes THEY have gotten us from there – disease, poverty, low life expectancy, high childbirth death rate for mother and child, to HERE, where the average person lives like a King of old, for 75+ years.
It all sounds very nice “The power to create the nation’s money belongs to its sovereign peoples”. But which of the peoples will do the creating? And how much will they create? And who will get first use?
When did this scheme ever work?
We are a free society first and foremost. We must be free to enter into credit contracts. Credit contracts create the money supply. It makes no sense to assume that this can be somehow controlled by government and yet society remain free.
“When did this scheme ever work?”
During the most prosperous period in human history.
“We must be free to enter into credit contracts.”
Who’s talking about changing that?
“Credit contracts create the money supply.”
Government creates M0. There’s nothing controversial about that or anything specific to MMT. Credit contracts multiply M0 to get M1, etc. Again, nothing new, controversial or MMT specific.
“During the most prosperous period in human history.”
Which was when, and where?
“Who’s talking about changing that? [freedom to enter into credit contracts]”
You can’t stop creation of money by the private sector without curtailing freedom to enter into credit contracts.
“Government creates M0. There’s nothing controversial about that or anything specific to MMT. Credit contracts multiply M0 to get M1, etc. Again, nothing new, controversial or MMT specific.”
You are referring here to bank loans creating M1 deposits. I am referring to broad credit – anyone lending anything to anyone.
The idea that government can create/destroy M0 at the right rate to maintain price stability is dubious. This is not what happens now – the central bank creates M0 as loans to private banks, in exchange for collateral (usually treasuries), or purchases assets from private banks (again, usually treasuries). Without the central bank mechanism governments cannot be entrusted to keep M0 constrained.
“Which was when, and where?”
The latter 20th century and (despite our current setbacks) the early 21st. Our current problems are not the result of fiat money per se – we had plenty of worse financial meltdowns on the gold standard.
“You can’t stop creation of money by the private sector without curtailing freedom to enter into credit contracts.”
Again, who’s suggesting that?
“You are referring here to bank loans creating M1 deposits. I am referring to broad credit – anyone lending anything to anyone.”
Ok, M2, M3.14, whatever.
“the central bank creates M0 as loans to private banks, in exchange for collateral (usually treasuries), or purchases assets from private banks (again, usually treasuries).”
That’s how the discount window works, and the discount window is a last resort for banks, who prefer borrowing from other banks at the federal funds rate.
The Fed’s open market operations buy and sell securities – the Fed just printing money to buy if it so desires.
we had plenty of worse financial meltdowns on the gold standard
We did? I don’t remember the part from my economic history class where effectively the country’s ENTIRE banking system became insolvent and threatened to take down a good 70-80% of depositors with it.
This crisis just seems more benign (so far) because the government stepped in and ripped off taxpayers in order to kick the can (and the realization of losses) down the road a couple of years. That couple of years is almost up.
“I don’t remember the part from my economic history class where effectively the country’s ENTIRE banking system became insolvent and threatened to take down a good 70-80% of depositors with it.”
Really? Never heard of the Great Depression? How about the Panic of 1837 caused by a real estate bubble? Or the Panic of 1873 that led to the Long Depression? Or the Panic of 1983 that led to 19% unemployment?
There are a bunch of others too, but those are the biggies that come to mind. Despite the “unprecedented” hoopla, there’s really nothing new about this meltdown, in either cause or severity.
Unprecedented Hoopla?
What about the hoopla of 1968, or the hoopla of 2008, or the hulabaloo of 1776?
I should have said “hoopla about it being unprecedented”.
However my point about the numerous severe panics and depressions under the gold standard still stands.
“You can’t stop creation of money by the private sector without curtailing freedom to enter into credit contracts.”
Actually, you can. All you do is require that the person SELLING the credit contract actually OWN the thing they are lending – just like people think they do now.
“You are referring here to bank loans creating M1 deposits. I am referring to broad credit – anyone lending anything to anyone.”
Again, ANYONE can lend ANYTHING to ANYONE as long as the lender OWNS what (s)he is lending. It’s just a morality thing, you know – like an honest money system.
“The idea that government can create/destroy M0 at the right rate to maintain price stability is dubious.”
ummmmmmm.. the unregulated, shadow-banker controlled financialization industry has been creating funny-money at a 12 percent annual rate for a while.
That you COULD trust them should be obviously more than dubious.
The Money System Common
Really? Never heard of the Great Depression? How about the Panic of 1837 caused by a real estate bubble? Or the Panic of 1873 that led to the Long Depression? Or the Panic of 1983 that led to 19% unemployment?
In none of these cases did the extent of the banking system’s insolvency even approach what we saw in 2008. As far as their economic effects (depressions and high unemployment), again, we have yet to see whether we will avoid a similar fate as fallout from our own bubble. There is no example from economic history where it has ever been done.
Since the Fed was simply accommodating a bubble-driven public’s desire for credit expansion, I don’t necessarily believe (as Austrians do) that there would have been less total credit expansion than we got with fiat money and a central bank. The difference would have been that, in the absence of legal tender laws, it would have been possible for prudent individuals to opt out of it by keeping their savings in sound banks. All the Fed accomplishes is to spread the rot of the credit bubble throughout the entire monetary system.
“The latter 20th century and (despite our current setbacks) the early 21st”
So we had the Money System Common in the late 20th century?
Sorry I missed the dialogue here.
As to which of the sovereign peoples will create the money – all of us – acting through our government using the budgeting process, exactly as the Neo-chartalists of the day proscribe deficit spending to fill the gap left by inadequate private sector debt-money.
The amount they will create will be that required for economic stability and full-employment, the two national economy objectives of every modern nation.
Milton Friedman proposed 3 – 5 percent annual growth – seems on the high end.
The people get first use, again on whatever government priorities are set in the transparent budgeting process – issuance debt-free and deposited in banks where bankers make loans using real money.
This scheme worked for a hundred years for the Colonies and during the Lincoln administration with Greenbacks. It hasn’t been tried since, despite the fact that the private federal reserve was sold as a public money system.
We would be COMPLETELY free to enter into credit contracts.
If you can’t distinguish between money creation and bank lending – I suggest you read Friedman’s “Fiscal and Monetary Framework for Economic Stability”.
We don’t advocate government controlling credit contracts – quite the opposite. With an honest money system, much of the present and proposed regulation would be unnecessary.
Money-creation.
Not credit creation.
The Money System Common
“As to which of the sovereign peoples will create the money – all of us – acting through our government using the budgeting process, exactly as the Neo-chartalists of the day proscribe deficit spending to fill the gap left by inadequate private sector debt-money.”
OK, so elected politicians will determine the supply of non-credit-based M0?
“The amount they will create will be that required for economic stability and full-employment, the two national economy objectives of every modern nation. Milton Friedman proposed 3 – 5 percent annual growth – seems on the high end.”
So the elected politicians will grow M0 by 3 to 5% per year? Did Friedman prove that this would produce economic stability and full employment? Who will they give the new M0 to? I think that’s coming up…
“The people get first use, again on whatever government priorities are set in the transparent budgeting process – issuance debt-free and deposited in banks where bankers make loans using real money.”
Ah, the people. No, the banks. So the banks get first use and lend free money out at interest? Which banks, and how to allocate?
“This scheme worked for a hundred years for the Colonies and during the Lincoln administration with Greenbacks.”
I don’t think so. Yes a direct printing episode was initiated by Lincoln, but never proven over any significant period of time. In general it was a period of experimentation, with the BofE involved, gold, silver, private banks etc.
“We would be COMPLETELY free to enter into credit contracts.
If you can’t distinguish between money creation and bank lending – I suggest you read Friedman’s “Fiscal and Monetary Framework for Economic Stability”.”
I will take your word for it, but this implies less control over money and credit supply than the current system.
Actually I notice above that you do not advocate complete freedom to enter into credit contracts.
You want credit contracts to be limited such that a party can only “lend what they own”.
So right off the bat I cannot borrow $1Billion at 4% and then lend on in chunks of $1Million at 6%. Is that correct?
“OK, so elected politicians will determine the supply of non-credit-based M0?”
First, I mentioned at the outset that ‘monetary sovereignty’ doesn’t connect with anti-statists.
In Friedman’s paper, he advocates the END to the private ‘creation and destruction’ of capital.
So, it’s ALL private money creation we’re talking about replacing here, not the reserve base.
It’s the Federal Monetary Authority that determines the amount of money to be created; all the ‘politicians’ do is plug that balance(formerly known as a deficit) into the
budget and identify its use in the expense side.
“So the elected politicians will grow M0 by 3 to 5% per year? Did Friedman prove that this would produce economic stability and full employment?”
If you read the Friedman paper and the Chicago Plan for Monetary Reform proposals, it is the ‘creation and destruction of capital’ that drives the pro-cyclical boom and bust cycles that cause financial and economic instability. The replacement would be a permanent money system.
“Ah, the people. No, the banks. So the banks get first use and lend free money out at interest? Which banks, and how to allocate?”
Obviously, the banks get use of the money AFTER it is deposited in the account of the government contractor or beneficiary, just as now. But the government has created the money, debt-free, and its first use was to pay for government-procured goods and services.
“I will take your word for it, but this implies less control over money and credit supply than the current system.”
Actually, MORE control over money-supply – all money would be government created without creating any debts.
Actually less control and regulation over credit(debt) issuance as ALL banks can lend ALL money thus created.
“So right off the bat I cannot borrow $1Billion at 4% and then lend on in chunks of $1Million at 6%. Is that correct?”
That is debatable, but I say yes, you could.
But that $Billion is SOMEONE’S REAL MONEY.
It’s not leveraged.
Why would anyone lend their real money to you, as a calculated risk, if you plan to speculate with their monies?
Very questionable risk-management of these savings-investment trusts.
Help me out here.
The Fed buys 1.25 trillion in MBS (from China and other investors). The money received by the investors is recycled into Treasuries. So net we have no change in private sector borrowing, an increase in public sector borrowing of $1.25 trillion (-1.25 trillion fiscal balance), and $1.25 at the Fed (where does that fit in the equation?)
If anything it shows that the private sector is incapable of saving at the rate demanded by the “fiscal balance”.
“Now to a general point about MMT. The negative responses to it are almost reflexive, shoot the messenger: deficit = bad, we aren’t prepared to listen to anyone who says otherwise.”
“Cherish those who seek the truth but beware of those who find it.”
-Voltaire
The problem with MMT is that, like orthodox monetary economics, it is premised upon a certain set of assumptions, and some of those assumptions are either false or incomplete. I identified a few of those assumptions in a previous post on this blog.
To extend Voltaire’s quote above, I’d add – “Beware of anyone who tells you the entire world is wrong, gives you a few examples of where the rest of the world actually is wrong, and then attempts to make you feel as if the knowledge they’re bestowing on you makes you a member of some true elite.” It’s a con as old as history.
All that having been said, the people arguing in favor of deficit elimination at this point in the cycle and talking about the federal government running out of money are ignoramuses.
It is not enough to say we are ignoramuses, you need to explain why you think we are ignoramuses.
On which point?
On the point of claiming the federal government is running out of money – the MMT people are largely correct on this issue. A government whose debts are issued in its own sovereign currency cannot run out of money. There may be consequences to monetizing debt, and there actually are, but to frame it in terms of running out of money is wrong.
On the point of attempting to balance the budget during a recession with ~10% unemployment and large slack capacity – this will certainly make matters worse. I’m not going to argue it from the standpoint of rearranging accounting identities like the MMTers do, because anyone who actually understands how accounting identities work (from an epistemological standpoint) understands why no actual knowledge can be obtained in this manner. Instead, I’d argue it from the standpoint of a Production Possibilities Frontier, where we’re clearly operating INSIDE the frontier rather than on it. Thus attempts to reduce government spending, rather than moving us along the frontier by substituting more private spending instead move us further away from the frontier, which implies further reductions in output and employment.
“On the point of claiming the federal government is running out of money – the MMT people are largely correct on this issue. A government whose debts are issued in its own sovereign currency cannot run out of money.”
The US does not have a sovereign currency. The government borrows money from the Fed, a separate independent institution. This is MMT’s fundamental flaw. The Fed will not allow the government to borrow unlimited amounts, and therefore the government can, in effect, run out of money.
“On the point of attempting to balance the budget during a recession with ~10% unemployment and large slack capacity – this will certainly make matters worse”
Yes, but taxpayers going into more debt will make matters even worse than that.
Things are going to be hard, there is no doubt. We can’t dismiss a course of action because it will be hard. It’s a question of lots of pain now, or even worse pain down the track.
“The US does not have a sovereign currency. The government borrows money from the Fed, a separate independent institution. This is MMT’s fundamental flaw. The Fed will not allow the government to borrow unlimited amounts, and therefore the government can, in effect, run out of money.”
The Fed was a creation of Congress, and Congress can change its structure whenever they so desire.
“Yes, but taxpayers going into more debt will make matters even worse than that.”
It is not enough to say it will make matters worse, you need to explain why you think it will make matters worse.
“The Fed was a creation of Congress, and Congress can change its structure whenever they so desire.”
Absolutely. This concedes the point that what we have now (as opposed to what we might have later if Congress were to do this) is not a sovereign currency.
“It is not enough to say it will make matters worse, you need to explain why you think it will make matters worse. [taxpayers going into further debt]”
Worse in the sense that taxpayers will have to work harder for less share of production in the future, due to profligacy now.
RueTheDay: “I’m not going to argue it from the standpoint of rearranging accounting identities like the MMTers do, because anyone who actually understands how accounting identities work (from an epistemological standpoint) understands why no actual knowledge can be obtained in this manner.”
What do you mean “no actual knowledge”? If I know that x+y=0 and that I can increase x, that means that y must decrease. How is that not actual knowledge? Sure there are other ramifications that have to be explored, but that basic conservation principle is a good starting point.
“Instead, I’d argue it from the standpoint of a Production Possibilities Frontier, where we’re clearly operating INSIDE the frontier rather than on it. Thus attempts to reduce government spending, rather than moving us along the frontier by substituting more private spending instead move us further away from the frontier, which implies further reductions in output and employment.”
I like the PPF approach – as in most recessions and depressions we haven’t lost productive capacity so much as we’re not using it all. But not using it all is a distributional question, and money is how we account for distributional issues. To someone who’s out of work it doesn’t matter if his neighbor is sitting on a fortune, unless that neighbor is spending part of that fortune. So whether money is borrowed from the rich neighbor, or he’s taxed on it, or new money is created, matters very much.
If we had a command economy (and I’m not saying you’re advocating that) we could just say factory X is at only 70% output, crank it up! But we don’t, so the whole money creation, destruction, distribution, credit, debt thing is essential.
“If I know that x+y=0 and that I can increase x, that means that y must decrease. How is that not actual knowledge?”
X+Y=0 is an equation, not an identity.
All sorts of confusion will result from confusing the two.
Identities are a subset of equations.
What confusion do you think arises from using the identity
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0
“What confusion do you think arises from using the identity
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0”
———
Take foreign trade out for a moment, to simplify.
Now you have Private Sector Balance = -(Public Sector Balance).
Swap the terms to get Public Sector Balance = -(Private Sector Balance).
What does this mean? It means that the Federal Budget Position(Deficit or Surplus) is the same as the private sector’s additional holding of Treasury securities. That is quite literally ALL that it says. It is true by definition, a mere tautology, like saying X * X = X^2.
Just because it’s a simple result doesn’t make it a tautology. In both your simplified and in the original version it defines the terms and specifies an important if seemingly obvious constraint.
An analogy would be to Kirchoff’s Current Law, which states that the sum of all electrical currents into a node must equal zero.
http://en.wikipedia.org/wiki/Kirchoff%27s_first_law#Kirchhoff.27s_current_law_.28KCL.29
While perhaps not an insight with the profundity of some other physics principles, it’s nevertheless an important constraint that’s an essential part of much circuit analysis.
It is absolutely a tautology, like ANY accounting identity. Go back and look at it again, all it is saying is that the increase/decrease in the government’s budget deficit is always equal to the increase/decrease in private sector holdings of Treasury securities.
It’s the same thing with the foreign trade identities. People make a big deal out of the fact that the current account deficit/surplus and the capital account deficit/surplus always exactly cancel to zero. This says ABSOLUTELY NOTHING about capital inflows causing current account deficits or vice versa. It’s simply the result of how transactions are treated by definition.
Which takes us back to my original point – rearranging accounting identities is a complete waste of time if you’re trying to gain knowledge about how the economy works.
It’s a tautology that virtually nobody understands. That’s the point. And that’s why it’s significant. And that’s why it needs to be repeated over and over.
You may think it’s trivial, and if so, good for you for understanding. But ask yourself how many people actually understand that a govt deficit is equal to the net saving of the non-govt sector. If you say more than a few handfulls of people in the entire world, I would love to see some evidence that this tautology is self evident to so many.
I suspect all but the wealthiest Americans are tapped out. Wasn’t the nearly full employment we had over the last 20 years was funded by a stock bubble, a real estate bubble, and mountains of consumer debt? People moved into new homes, refincanced at lower and lower interest rates (my first home purchase in 1990 had a 10.6% mortgage!), and used home equity lines of credit to buy cars, take trips, and supercharge the economy.
Meanwhile, constuction, real estate, and retail provided decent jobs to the middle class. Manufacturing jobs were shifted to low cost labor outside the US or automated away.
It was an aberration.
Old people are outliving their money thanks to advances in medical care. Since death panels are out of the question, Medicare will grow unrestrained as babyboomers retire. The cost burden for taking care of them will fall on taxpayers and their children further depressing demand.
These are not liberal, conservative, or libertarian perspectives. These facts cannot be changed; they are driven by demographics.
Demand for American products could come from increasing standards of living around the world assuming we make something they want, but I cannot imagine exports will produce jobs on the scale needed to reach the mythical full employment. And all that assumes nearly endless resources and no impacts from climate change.
Please, tell me I’m wrong in my analysis. I really hope I am.
“Wasn’t the nearly full employment we had over the last 20 years was funded by a stock bubble, a real estate bubble, and mountains of consumer debt?”
Yes, in other words it’s a distributional issue. Instead of paying people more and having them buy more, the plutocracy loaned the money to people to buy stuff. Problem: ala Minsky, excessive debt levels are unstable.
However, it is a distributional issue, and not one of productive capacity.
“Old people are outliving their money thanks to advances in medical care. … Medicare will grow unrestrained as babyboomers retire.”
The vast majority of the problem with Medicare is increasing healthcare costs in general, not the comparatively minor demographic bubble of the baby boom. Fix the exorbitant inflation of healthcare in general and the retiring baby boom is quite manageable.
“The cost burden for taking care of them will fall on taxpayers and their children further depressing demand.”
It doesn’t depress demand, it shifts it to another sector.
“I cannot imagine exports will produce jobs on the scale needed to reach the mythical full employment.”
IIRC our trade deficit is about 3.5%/GDP. At it’s peak a few years ago it was 6.5%. With 10% unemployment, eliminating the trade deficit would fix a big chunk of unemployment.
“And all that assumes nearly endless resources and no impacts from climate change.”
Dealing with dwindling resources and reducing GHG emissions actually increases labor demand. Somebody has got to build the new GreenMobile3000 and figure out how to make it from recycled soybean waste (seriously).
“Since government spending is merely a matter of changing numbers in bank accounts on its own spread sheet, there is no solvency issue or sustainability issue”
Mmmmm …. until you try to trade that Mosler currency on the foreign markets and they say it is worth the effort of chaning numbers on spread sheets. As someone already pointed out why pay $8/hr for that Federally funded job? Is there some relative value of that Mosler currency? How did you mentally arrive at that number? Why wouldn’t that ‘process’ be applied to the Mosler currency once everyone realizes that it is “just a spread sheet entry”?
Sorry, but your currency is immediately worthless.
“Is there some relative value of that Mosler currency? How did you mentally arrive at that number? Why wouldn’t that ‘process’ be applied to the Mosler currency once everyone realizes that it is “just a spread sheet entry”?
Sorry, but your currency is immediately worthless.”
I should let Warren reply, but WTH.
I agree that MMT terminology is fraught with a natural disbelief.
But in reality, those bookkeeping entries are only necessitated by the existence of the 17 percent unemployment and 70 percent capacity utilization that the private sector has decided it can afford.
So, the use of the bookkeeping entried monies is to put people to productive employment and to use the capacity that exists to foster the people’s well-being.
It is not created for nothing.
It receives goods and services in EXCHANGE for the bank deposit entries.
Actually, such a system would result in the kind of economic strength(increased employment and capacity utilization) that this currency and this system would be copied throughout the world.
Pray tell, why not.
Thanks.
I generally agree with this post’s three specific policy suggestions…
Here’s a wingnut idea for implementation… though not quite yet ready for execution… conceptually it may be worthy of consideration.
It’s from my crank post “On Social Energy, Enterprise & Expanding the Technology of Money”
http://culturalengineer.blogspot.com/2010/01/on-social-energy-enterprise-expanding.html
The CITIZENS’ Commons-dedicated Earmark!
Assuming the network of Accounts I envision (also ideal for the public finance of elections directly between citizens and legally established candidates)…
There then results the ability of Congress (or some gov entity at whatever level) to fund directly to its citizens’ earmarks enabling self-organization for Commons purposes within the conditions set by that particular legislation.
In other words separate from the concept of direct payments to individuals for consumption or maintenance (social security, welfare, etc.).
An example:
Make it easy, let’s assume 200 million adult citizen accounts each given $10 (a measly $2 Billion total)… what parameters (if any) might be set as to how account holders could organize and utilize their funds? Is it feasible? Could it be another tool to encourage the kind of civic involvement required for a vibrant social contract?
The brief point here is that the network directly enables an entire panapoly of NEW capabilities for the relationship between government and the citizen!
From “What the Ancient Greeks Can Tell Us About Democracy”
“The original meaning of democracy was ‘the capacity of a
public… to accomplish things of value in the public
realm’ – thus ‘the empowered people’ rather than simply ‘the power of the people'”
Interesting debate, but shouldn’t we be having it in German?
When you look at economics as a discipline concerned with the ‘metabolism’ of a civilization and ‘social energy’ as its driver(Individual and collective decisions. A decision is an Idea + An Action)…
It may provide some clarity for understanding why the ‘distribution’ of money within a society may be more reflective of its well-being than a statistical representation of ‘wealth’ may suggest.
E.g. The per capita wealth or income in the U.S. does not correlate well with a multiplicity of real world conditions… longevity, personal satisfaction, social cohesion, etc.
Further, the history of civilizations suggests that the problem of excessive concentration repeats. And at least so far this repeats regardless of what political ideology dominates.
Money (mediums of exchange) are essential. And it’s not always so easy to measure ‘social well-being’ or the strength of social cohesion. But we’d better get to it.
This implicit recognition is why people are so (correctly) angry about the bailout of the financial elite.
And know instinctively that its NOT in their interest to make the rich richer.
P.S. Obviously inflation and deflation have a connection to the money supply… but it’s they way its distributed and the belief of people in their social contract that may be even more determinant of its utility and value at any particular time.
I’m still trying to understand MMT. The identity appears to lack something. Is there a consideration for the continuing loss of purchasing power in that identity?
That’s what bugs me, if demand is constant an increase in the quantity of credit money supplied will lead to higher prices. But then, if you increase the quantity of money itself; then, the level of prices will fall. In the face of falling prices, demand will increase, or will it?
Why is that prices have not fallen? Why does everything cost more in the future? Why are we unable to hold prices stable?
Is it our unit of account that is flawed? Is it the flaw in our unit of account that makes this MMT business inherently suspect?
Siggy,
Recognising there are no constraints on govt. spending other than inflation does not mean that all spending policies are good policies.
Don’t fall for the words others are putting into MMT’s mouth: “Deficits don’t matter”, etc.
Which others? Mosler is an MMT proponent and is effectively dismissing inflation concerns by just saying that it’s a “separate issue”.
Some MMT proponents say inflation is a prime concern and other don’t. Who are we supposed to believe? If inflation is the limit to government deficit spending aided by printing money, then how does MMT differ from conventional monetary theory? They both come to that conclusion.
Go read the article again. It’s a “separate issue” from solvency of the national govt, not a “separate issue” in the sense of not mattering. But with 10% unemployment and another 10% underemployed, you’re dreaming if you think AD is a serious threat as a source of inflation in the economy right now. What economic theory out there can seriously make that case?
Hi Yves, Warren:
I agree with the math, but what about the 1970s? The rest of the world can impose supply shocks on us if they don’t like what we are paying with, no? Given the commodity requirements of the USA, how can we expand the economy if the providers of oil demand as many dollars as we can write into the ledger. Hopefully, in the long run, a robust economy can innovate its way out of this problem; but, we are not there yet. What do we do about this?
Also, do we really know where our economy’s full capacity really is? So much of GDP growth over the last decade has seemed illusory (houses nobody wanted, financial products that turned out to be worthless). Given the current structure of our economy (we have a minimum wage but force our labor to compete with countries that don’t; we have environmental protections but force our industry to compete with countries that don’t; we import huge amounts of commodities and seem to only be able to sell back financial products that are not worth much if we show ourselves committed to full employment)how do we know where our economic capacity really is? If we start building new infrastructure (hopefully renewable energy infrastructure to get us off the import addiction) how do we know we’ll get to the point where it can pay for itself before those who sell us stuff decide our bid is too small?
Again, MMT makes sense from a financial perspective. But there are economic constraints (in the short run the economy can reach full capacity and then we have to choose: health care for all or BMWs for some?) and we don’t know where those limits are. Of the 9.7 percent unemployed, how many are trained to do the kind of work the government needs them to do to renew America ( mortgage brokers are not great at figuring out how to build 1 million windmills down the east coast. At least I don’t think they are, but maybe I’m wrong).
I fully agree that our dysfunctional economy needs to be reorganized, but I don’t know how that will happen. MMT shows it’s possible and that the financial constraints are not real. It doesn’t show us how to do it.
Thanks in advance for your thoughts.
-Art
Art
Thanks for a wonderful thoughtful comment.
These are the discussions that need to be taking place, not ones about US govt insolvency and the need to impose cuts on payments to people living near the edge (the cuts being recommended by those living quite far from the edge). How do we manage our demands with the demands of the rest of the world? The Rush Limbaughs say fuck the rest of the world keep driving your SUVs because you can afford to, keep buying $20,000 watches because they look good and if the rest of them dont like it, we’ll send a missile up their ass. We are Americans and we RULE.
You said;
“Hopefully, in the long run, a robust economy can innovate its way out of this problem; but, we are not there yet. What do we do about this?”
Again this is the direction of conversation we need and MMT simply wishes to push the conversation there and away from “funding” or “revenue” or “fiscal sustainability”. I’m sure Warren, Bill Mitchell and Marshall have their own views of how to answer the question you pose but MMT does not give them the framework per se. MMT simply describes how things are funded under our floating exchange rate currency system. When the conversation wont get past funding there is no way to even discuss your question.
You add;
“Also, do we really know where our economy’s full capacity really is? So much of GDP growth over the last decade has seemed illusory (houses nobody wanted, financial products that turned out to be worthless). Given the current structure of our economy (we have a minimum wage but force our labor to compete with countries that don’t; we have environmental protections but force our industry to compete with countries that don’t; we import huge amounts of commodities and seem to only be able to sell back financial products that are not worth much if we show ourselves committed to full employment) how do we know where our economic capacity really is?”
Interesting question. I’m not sure we’ll ever know our full capacity, we do a great job of holding others back when we can, but I know this…. we’re not even near the capacity we were 24 months ago. You point to some very troubling realities of economic life in the global world, and the American worker who has enjoyed higher standards than most is suddenly being pulled down to others lower standards rather than people insisting that everyone elses standards be raised to meet ours. A race to the bottom as they say.
I liked this comment a lot…………….
“Again, MMT makes sense from a financial perspective. But there are economic constraints (in the short run the economy can reach full capacity and then we have to choose: health care for all or BMWs for some?) and we don’t know where those limits are. Of the 9.7 percent unemployed, how many are trained to do the kind of work the government needs them to do to renew America ( mortgage brokers are not great at figuring out how to build 1 million windmills down the east coast. At least I don’t think they are, but maybe I’m wrong).”………………………….
because it puts the debate in the correct place. Warren has no magic pill or system that will make the answer to the question obvious. This needs to be worked out politically. However the real utility of MMT is that it shows us beyond a doubt that we can never (in this country) complain that we hav no money to do something. We dont NEED to tax for our govt to spend and we dont NEED to issue debt $4$ when we spend. these are imposed constraints that, when you really examine them, make us poorer, more unstable and less tuned to reality.
Thanks again
Hi Greg b,
Thanks for your reply.
The more I think about what is going on with the current conversation, the more I realize that what we are seeing is a debate about social and political issues dressed up as cold economics and public finance rules. While this might be obvious to some, I think it’s kind of scary that the nation’s leaders (especially those that ares supposed to represent the left) refuse to actually talk about what the real choices are: (1) will we have deflation, where savers are rewarded and workers lose their jobs; or (2) inflation, where savings is chipped away by the government in an effort to redistribute our productive capacity more equitably? Or, to describe another choice: will we allow (1) a clear vision for domestic industrial policy to set the parameters of the American economy for the next fifty years; or (2) the industrial policies of foreign governments to set those parameters? Perhaps I’m stating these complicated issues too simply, but this is how I see it. Am I wrong?
What’s great about MMT is that it shows this is a debate about everything other than finance. In the modern world, it seems to me, finance is how the private sector keeps score; but various national government policies (as well as the competing/complementary policies of other countries) are what actually dictate the future of the country. Why don’t people understand this? Why do people think the bond market runs America?
Long story short, “market fundamentalism” is a great term to describe a very scary sort of religion. How can we solve our national problems, if we can’t even talk about them directly.
By the way, I do think it is bad form to take away from savers. But, it is better than fully ending the middle class. The one thing I agree with when it comes to talking about economics is that we must choose. I’ll choose a society where everyone has something to lose over a society of lords and serfs any say. Sorry for the dramatic language.
All the best,
Art
Art
I think you just out did yourself with that response.
This……………
“The more I think about what is going on with the current conversation, the more I realize that what we are seeing is a debate about social and political issues dressed up as cold economics and public finance rules” …………..
can only be responded to with……..BINGO!!!!!
” I think it’s kind of scary that the nation’s leaders (especially those that ares supposed to represent the left) refuse to actually talk about what the real choices are: (1) will we have deflation, where savers are rewarded and workers lose their jobs; or (2) inflation, where savings is chipped away by the government in an effort to redistribute our productive capacity more equitably? ”
Its scary alright if you are not one of the privileged class. Our govt has been thoroughly and completely captured by finanzcapital (a few lawmakers have openly complained about this…….. none republican to my knowledge) so when the “govt” talks it is private bond market interests writing the words they say.
“What’s great about MMT is that it shows this is a debate about everything other than finance. In the modern world, it seems to me, finance is how the private sector keeps score”
Absolutely true. MMT is the nuts and bolts of money and how it operates in the modern economy. In reality the govt is the scorekeeper since they are the taxer but everyone is keeping their own score as well. The deficit is simply the net amount of points in the non govt sector. Why this is so hard to understand is beyond me. I didnt undestand it this way til about a year ago but once I started reading Mosler, Mitchell, Auerbach and Wray it was so obviously clear. We clearly do not understand the nature of modern money and the people with the money LOVE it that way.
“Long story short, “market fundamentalism” is a great term to describe a very scary sort of religion. How can we solve our national problems, if we can’t even talk about them directly”
Once again all I can say is AMEN to that!!
“By the way, I do think it is bad form to take away from savers. But, it is better than fully ending the middle class. The one thing I agree with when it comes to talking about economics is that we must choose. I’ll choose a society where everyone has something to lose over a society of lords and serfs any say. Sorry for the dramatic language.”
The dramatic language is appropriate, these are dramatic times. My take on savings has changed a lot over the last few months. I think we have allowed a very skewed perspective to take hold in regards to savings. If I make the choice that I dont want to redeem all my claims this month and instead wait to see what I can get later, I have no right to expect that at some time down the road I will be able to get exactly the same or MORE than I would have gotten in real time. When you forgo present consumption you shouldnt expect everyone else to work harder to make your future consumption at a comparable level. You yourself are responsible to make sure that that future consumption is available. Dont sit back counting dollars and bitch when it looks like you may not get the equivalent value in the future. The present is the only time we know. Buy it now if you need it or want it. We have let the big savers hijack everything and its not right. Saving is good, I save plenty, and having minimal needs is good but we must remember that there is no saving without someone else spending. My income which I choose to save out of is the RESULT of someone else foregoing saving.
I totally agree with your choice of societies.
Hi Greg b,
So what does one do about it, other than buy six-month puts on GE?
Best,
Art
Art
I dont have any investment advice. 6 month puts on GE doesnt sound too bad.
Right now I’m mostly cash and paying down debt. Paying for my sons college as well (hope its a good investment)
This continuing argument between the validity of running government deficits vs allowing market forces to run their course seems to miss a deeper internal contradiction that makes both argument invalid.
The later argument is based on markets as a self-correcting mechanism reflects a market fundamentalist argument that sees booms and bust as nature like, and the only truly sound course of action (or really non-action).
There is truth to this argument in a capitalist economy. This shake out of the economy is described in the following quote (from an author who is not siding with market capitalism, but who provides a good synapses of the process, so I present it here).
“In an economic slump (a recession or depression), physical capital is destroyed as machines and buildings lay idle, rust, and deteriorate. More importantly, debts go unpaid, the prices of financial assets such as mortgage loans and mortgage-backed securities fall, and other prices may also fall, so capital-value, the value of the physical capital as well as the nominal value of financial assets, is destroyed.”
“Yet the destruction of capital isn’t only a main effect of serious economic crises and the slumps they trigger. It is also a main cause of the booms that follow, because it is a crucial factor that helps to restore profitability. Capitalists invest in equipment, hire workers, and produce only in order to make a profit. So if the expected rate of profit––profit as a percentage of the amount of money they’ve invested–– isn’t high enough, there won’t be sufficient investment and hiring, so there won’t be a boom. But by restoring profitability, the destruction of capital sets the stage for a new boom.”
The author goes on to make a compelling case that since the 1970’s, to one degree or another, this process has not been allowed to play out as increasing amounts of public and private debt has served to offset economic stagnation. This debt has substituted for what otherwise would service debt: income. Stagnate income in the US has thus required ever increasing amounts of debt to offset the ability to serve that debt.
“In order to lessen the effects of this relative stagnation, and perhaps in order to overcome it, policymakers have tried to prop up economic growth and profitability artificially throughout the last three decades. In the U.S., the sluggishness has been papered over especially by an ever-growing mountain of mortgage, consumer, business, and government debt. The increase in indebtedness is both a consequence of the relative stagnation and a factor that masks it and delays its impact. (The tactic is very similar to that of a household that can’t pay its credit-card balance. It gets a second credit card, borrows still more, and uses the borrowed funds to pay the first debt. Then it gets a third credit card, borrows, and uses the borrowed funds to service the second debt. And so on.)”
During the Great Depression this process of liquidation/capital destruction was allowed to play out, but “it seems that the amount of capital-value that needed to be destroyed in order to restore healthy rates of capital accumulation and economic growth was substantially more than liquidationists had expected.”
http://marxisthumanistinitiative.org/2010/05/17/appearance-and-essence-neoliberalism-financialization-and-the-underlying-crisis-of-capitalist-production/
As global economic growth post-WWII began to stagnate in the 70’s, the need for governments to play a bigger and bigger role in sustaining debt creation to replace income took on greater and greater force. That takes us to where we are now.
So does either course of action (liquidation/capital destruction and thus boom following bust, or massive debt creation) offer a viable solution? Are we stuck with no other alternative? Seems to me, the argument for continued deficit spending is based first of all on the recognition that ‘free’ market liquidation/capital destruction is not a path that is in any way acceptable. I would agree (the market fundamentalist position sets up the conditions for future austerity and the resulting cuts in Social Security and other public supports, with the resulting impacts on those who can least afford it, exasperating already exist wealth disparity).
But advocates of massive state intervention and an increase in deficit spending rely on their own assumptions, namely that once adequate inputs from deficit spending to restored consumer demand, substitution of income, etc., has played out sufficiently to re-start economic growth, then and only then can deficit reduction begin. The assumption here is that deficit spending will work in time. The deficit critics wonder what will happen if this doesn’t work (in fact they are certain it won’t). Are we then stuck with permanent government deficits? And what would be the consequences of this? I would take it a step further, wondering if we wouldn’t simply see a trend towards state capitalism, which suggests intra-state competition and risks of global conflicts
I find neither argument satisfactory from a historically and intellectually. Neither seems to be addressing roots causes, and neither seems to be really honest (as they go about their business of talking past each other while assuming there is no other practical alternative to be considered). Seems to me that the ‘free’ market approach is simply ideologically driven by assumptions of market purity, while the other position (really no less ideological, just not as obviously so), while more progressive, also sidesteps the real issue: that more fundamental changes need to occur, changes which they believe (of which I’m sympathetic with) simply are not going to happen. So lets therefore accept that and keep with the path of state intervention and high government deficits in the hope that the economy will improve, that consumers can get back on their feet, that an export industry can be revived, that wages will go up in Asia and elsewhere to help offset the global imbalances, leading to more global consumption, that Europe, Japan and the UK will shake off their trance and get back to government subsidies, that economic perma-growth is desirable, that we are hostage to this course of action for the alternative is collapse.
Where does this debate leave me? Thinking that the collapse is all the greater.
Ah yes, the posts from ND2.0 that make me want to take NC off my Google Reader.
“Please government, I know you screwed us with AIG, Fannie, Freddie, being owned by Goldman, promising huge pensions to public employees, but this time we really need you to help by spending ridiculous gobs of money in a way that actually saves the economy!”
Good luck with that.
did you see the part where Mosler proposed a payroll tax holiday? would you be against that?
Scholastics arguing over how many angels fit on the head of a pin…….please, get real. “Austerity” -vs- “deficit spending” is a ridiculous false dichotomy in the US.
There is NOTHING that can be done by the government other than hoping to boil the frog slowly.
Deflation is here to stay, its just a question now of the speed of decay.
Here’s a proposal: how about Fed Chair Bernanke be good to his word and print off $50,000 in fresh new FRNs to be promptly sent to every adult in the US?
Wouldn’t that be simpler and faster to way create “unimagined prosperity”?
Here’s a proposal: how about Fed Chair Bernanke be good to his word and print off $50,000 in fresh new FRNs to be promptly sent to every adult in the US? Bruce
That should work just fine but I would bypass the Fed and use new legal tender United States Notes instead. This would:
a. enable underwater home owners to pay down their mortgages to market price levels.
b. compensate savers for years of artificially suppressed interest rates.
c. Fix the banks in nominal terms.
d. Fix state tax revenues.
Inflation risk? Maybe, but if banks were put out of the counterfeiting business via a 100% reserve requirement then the only source of new money into the system would be under government control, the Fed and US Treasury.
Long term solution? Allow liberty in money creation, usage, and acceptance. Government money should be legal tender for government debt only (“Render to Caesar …”) while private money would be allowed to serve the private sector.
@ ALL
Great conversation!
Well, it’s nice at least to be called a hawk and not a terrorist. I think we’re moving in the right direction here.
If the government was able to spend in a way that obviously enhanced the future wealth of the nation, over and above the interest payments required to engage in spending, you wouldn’t find many hawks. The population would not be sympathetic to the deficit hawk POV. Clearly that hasn’t happened and it ain’t gonna happen.
“it’s nice at least to be called a hawk and not a terrorist”
Just because somebody calls you a hawk, doesn’t mean they don’t also think you’re a terrorist (sorry, couldn’t resist).
“If the government was able to spend in a way that obviously enhanced the future wealth of the nation, over and above the interest payments required to engage in spending, you wouldn’t find many hawks.”
Saying the benefit isn’t “obviously” worth the deficit isn’t the same as saying it isn’t worth it. The debate is still on!
“Clearly that hasn’t happened and it ain’t gonna happen.”
Never say never. Depending on how the questions in the polls are phrased (they can be biased either way) you’ll find that deficit hawkishness is far from universal.
“But the deficit hawks aren’t the problem. They do the best they can with arguments that feature empty rhetoric supported by the underlying assumption that deficits are ‘bad.’”
It’s not an underlying assumption. It’s an observation, based on the deficits we’ve run continuously since the Vietnam War.
Dick Chaney, a personal hero of all Republicans famously said: “Deficits don’t matter.”
QED.
Damn straight. When Republicans are in power they don’t matter; when democrats are in power they do.
Its the terminology thats loaded.
Calling it a deficit is not accurate. There’s nothing MISSING. The deficit is the negative sign reflection of the positive sign in the private sides reserve accounts. There is an equal and opposite positive sign somewhere (and its not in the govt) so why dont we choose to focus on the positive sign!!
This is not simple wordplay either. Its what side of the ledger you choose to look at.
Unlike a banks ledger though, the govts negative ledger never needs to be paid back. The govt bank will not go insolvent
Financial assets need to represent real world means of production. If they don’t simply crediting private sector accounts with government bonds is worthless, even harmful.
“Unlike a banks ledger though, the govts negative ledger never needs to be paid back. The govt bank will not go insolvent.”
No, but you can have lots of inflation. So how is MMT different from conventional monetary theory? They both say a government with its own fiat currency and debt in that currency can’t become insolvent, but that the limiting factor is inflation.
“No, but you can have lots of inflation. So how is MMT different from conventional monetary theory? They both say a government with its own fiat currency and debt in that currency can’t become insolvent, but that the limiting factor is inflation”
This is NOT an accurate representation of conventional monetary theory. Conventional monetary theorists claim we can look at Greece and see where we could be headed!! Greece is NOTHING like the US. NOT. EVEN. CLOSE. The conventional monetary theorists claim that issuing money without $4$ debt issuance is in and of itself inflationary which is ………..ABSURD.
MMT is so contra-conventional theory your assertion should simply be laughed at.
If you check the OMB’s data from 1930 to 2008, the US government’s budget was in deficit of varying proportions of GDP 67 of those years (that is, 84 per cent of the time). Each time the government tried to push its budget into surplus, a major recession followed which forced the budget via the automatic stabilisers back into deficit.
These deficits have provided support for private domestic saving over most of this period. The US current account was in surplus (very small though) up until the 1970s and then has been more or less in deficit since the mid-1980s and increasingly so in the 1990s and beyond. In times of crisis – the Great Depression and World War 2 – the deficit grew relatively large and national debt followed it upwards as a percentage of GDP. Then as growth resumed and stability was re-established the deficit fell back as a percentage of GDP to the level required to support private domestic saving and maintain aggregate demand to support relatively high (but not high enough) employment levels.
Movements in interest rates and inflation rates and changes to US tax regimes bear no statistically significant relationship with the fiscal parameters over this entire period. The strongest relationship that can be established is the relationship between deficits and expenditure and hence economic growth (and employment growth).
So the question that has to be answered by those who are predicting hyperinflation or worse – given the historical period experience – why are the current Deficits/GDP, which are smaller by a long way from what they were in the 1930-40s, suddenly signalling something that is unsustainable?
“Each time the government tried to push its budget into surplus, a major recession followed which forced the budget via the automatic stabilisers back into deficit.”
Just because A preceded B doesn’t demonstrate that A caused B (post hoc ergo propter hoc). For example, the latter Clinton era budget surplus didn’t necessarily cause the recession that followed. The simplest explanation is that good times lead to high tax revenues and hence budget surpluses. You’d see the same pattern regardless of the causes of the business cycle.
“So the question that has to be answered by those who are predicting hyperinflation or worse – given the historical period experience – why are the current Deficits/GDP, which are smaller by a long way from what they were in the 1930-40s, suddenly signalling something that is unsustainable?”
First a reminder: not everyone who questions MMT is predicting hyperinflation or some such nonsense.
Second, saying “1930-40s” is lumping together three very separate periods: GD, WW2, post-war. Federal deficit in GD (as %/GDP) was much less than what we have now. I’m no deficit hawk, and maybe GD era deficit should have been higher, but I’m concerned about keeping the historical record straight.
Here is another accouting identity:
Assets = liablities + equity
It’s true for Enron (or was) and BP as it’s true for Altria and Microsoft. But it doesn’t tell you how to go from one coropartion’s numbers to another’s.
Just because your entity satisfies it, it doesn’t mean it’s healthy.
Looking at the accountaing identity mentioned above,
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0
We don’t know what levels are appropriate or healhty, first of all, if we just look at the identity. Besides, I hate to see more government spending end up in current account deficit.
Let say, ‘in foreigners’ pockets’ instead of ‘current account deficit.’
Agreed, it makes the point.
“We don’t know what levels are appropriate or healhty, first of all, if we just look at the identity.”
Agreed – that’s what’s missing.
Moreover, under MMT, why does the government need to have any debt if they can just print money?
MMT’ers say you should want the private sector to have net savings, but why? The private sector is not homogeneous, and it’s fine to have some net creditors and some net debtors, so long as the total level of debt isn’t too big (Minsky hypothesis).
Note that the private sector having a _net_ debt of zero is _not_ the same as saying the debt level is zero, it just means that for every X dollars of private sector debt there is X dollars of private sector credit. But if that means that too many people (or companies) in the private sector are too highly indebted, it’s still unstable. Nor is it just the debtors who’ll be hurt – when the debtors start defaulting in big numbers the creditors get hurt too.
A house of cards is a bad way to build an economy.
In a fiat (nonconvertible floating rate) system a monetarily sovereign government issues currency by fiat (Latin for “let it be”). It does not need to fund itself with taxes or finance itself with debt, as is required under a convertible fixed rate system like the gold standard.
Government debt is a holdover from the gold standard days. It is no longer financially necessary and is a voluntary requirement, supposedly to impose fiscal discipline. Government debt actually represents nongovernment savings.
In a fiat system, debt issuance simply removes the excess reserves created by government expenditure from the interbank overnight market, allowing the central bank to hit its target overnight rate (in the US the FFR). This is just a shift in the composition of assets with addition of interest payments. From the government’s point of view, it is a monetary operation rather than a fiscal operation.
What unnecessary debt issuance actually does is transfer a huge amount of interest to the holders of bonds, funds that could be directed for public purpose. Some proponents of MMT recommend no bond issuance, with excess reserves left to accumulate in the interbank market, thereby allowing the overnight rate to fall to zero. In this way, the government eliminates its interest rate payments.
All it would take is a legislative approval. This would remove the need for the present façade, where Congress regularly raises the debt limit, revealing the whole thing to be a farce. Let’s just apply Ockham’s razor and get rid of bond issuance altogether.
Hey Tom,
Better be careful in your explanation of what is and what ought to be possible.
Just add full-reserve banking and the Chicago Plan’s Federal Monetary Authority, and you’ve got some dadgum monetary sovereignty right there.
Very few here are ready for that meaningful a solution.
It’s more like, yadda-yadda Zimbabwe, yadda-yadda Wiemar, yadda-yadda necessary debt-deflation-cum-austerity.
More of that ‘bootstrapping’ kind of solution.
Weimar Republic
Boy, are you behind the times. These days you’re supposed to shout ‘Zimbabwe’ when, without evidence or argument, you give dire warnings of hyperinflation.
Rocky R,
Have you ever actually read the history of the period during Weimar? Because if you had, you would see that there is ample difference between that period and the US today. First off, it is important to remember that German production capacity was either significantly damaged by WWI, or redirected toward output required by the military. The Allied blockade further restricted imports well into 1919, and in 1923, French and Belgian troops occupied the Ruhr valley which held a good deal of Germany’s manufacturing base. All of these measures significantly restricted Germany’s capacity to produce, fueling the distributional conflict that fed the hyperinflation.
This time around, the real net capital stock growth in the US has been slow, on the order of 1-2% per year, and the manufacturing sector is currently operating with one third of its capacity idled. Plant, equipment, and labor have not been physically destroyed – rather, reinvestment rates have remained low. While trade has been inhibited by credit disruptions and some protectionist responses, import prices are falling as export driven economies struggle to reverse declining shipments.
Second, 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. Projected fiscal deficits are as high as 10-12% for the US and the UK in 2009, so the scale of the fiscal responses, though large, is not nearly as large as the undertaken by the Social Democratic Party as they attempted to quell social unrest following the Revolution of 1918 with a variety of social benefit programs.
Third, German trade union membership quadrupled from 1914 to 1920, and the 1918 revolution ushered in a government led by a Social Democratic party that instituted an 8 hour work day and provided social benefits in order to reduce social unrest. Many unions were able to negotiate cost of living adjustments in their wage packages after the mark fell in 1921, creating an automatic feedback mechanism from price inflation to wage hikes. Absent such mechanisms, nominal wage and salary growth cannot keep up with rising consumer prices. Real wages fall, household purchasing power is undermined, and the volume of output households can claim diminishes unless consumer credit facilities can fill the gap.
The new US administration does display a social democratic rhetoric, but so far, redistributive policies have primarily benefited financial institutions.In fact, the Obama Administration has presided over one of the most regressive transfers of wealth in history. Moreover, trade unions outside the public sector have withered, and cost of living adjustment clauses have largely disappeared since the early ‘80s (although some government benefits like social security retain them). Central bank mayhem aside, the final culminating chapter of the Weimar hyperinflation does appear closely related to the response to reparation demands. The May 1921 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. Germany attempted to accumulate foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into free fall on foreign exchange markets as this ploy fell flat. The January 1923 occupation of the Ruhr by Belgian and French troops seeking to secure reparation payments in goods – since the mark was nearly worthless – was the final straw. German production was lost as workers employed a passive resistance response, and money was printed by the Weimar government to continue to pay workers despite their production halt. Within months, the German monetary system collapsed.
Tom Hickey has already highlighted an excellent piece by Bill Mitchell, which explains why the Zimbabwean analogy is similarly flawed.
if money was nothing more than an entry on a spreadsheet, and if deficits led to prosperity, weimar germany would have made out just fine.
keep printing and keep building that mound of debt. it will be fun while it lasts.
excellent post, btw. thank you for the education.
RockyR
What does this…….
“if money was nothing more than an entry on a spreadsheet, and if deficits led to prosperity, weimar germany would have made out just fine.”
mean???
Weimar Germanys problems were real. Thats the point. They had real production losses that could not be reversed so the real price of goods went astronomically higher, which was reflected in the nominal price of goods.
Do you not understand the difference between real and nominal. Not all price increases (nominally) reflect real cost increases(US housing bubble) but in Weimar Germanys case it certainly did. There was no way to avoid high costs to Germans they were being attacked essentially and being made to pay for their sins of WWI.
Virtually every hyperinflation in history shares a story like Weimar Germany. Real costs are inflicted upon a society and the nominal prices of goods shoot through the roof. Hyperinflation is an effect not a cause.
Where the elephant (of fiat currency) walks the dogs begin to bark. Maybe the dogs don’t like its relative freedom; or its size; or its power; or its presence! Government that can buy anything that is for sale? How threatening is that? Government that can create and destroy fiat currency at will? Begorrah! A non-government sector whose assets and liabilities sum to zero – powerless before the fiat? Better we manacle the elephant before it tramples us all is what the loan sharks say. And once we have him manacled we can use him to stampede through the village – teach everybody who’s boss!
What do you want? We are human beings! Elephants can also lift logs and build bridges if you want them to!
MMT simply points out an operational reality and its potential. It’s up to people to make it work.
Even if you won back the power to regulate the loan sharks why should they have control over the elephant?
The situation the average American is faced with today has been articulated brilliantly by Kindra Arneson in her recent speech in Venice Louisiana. “We are expendable to theses people, we do not matter.”
This is the foundational truth in our current situation around which there is still much denial.
I consider “these people” to be in managerial positions in both Big Capital and Big Government.
This regime of crony capitalism, plutocaracy, oligarchy, kleptocracy or managerial democracy did not just drop from the sky one day. It has had at least a 200 year evolution in the U.S.
The evolution consisted of two key components: the more commonly acknowledged history, at least on the liberal/left of our outdated political spectrum, illuminates the role of corporate capitalism and its logic in precipitating a redistribution of authority and re-organization of power relations.
But this history has tended to ignore a parallel mode of domination articulated through purely political power relations. The latter has been institutionalized through the development of highly centralized state.
These two dimensions of domination is what Kindra is now confronting in Louisiana and which all us must now confront.
She has become a partisan for her particular community because it is now under attack.
She makes me hopeful that it just might be possible to someday reformulate and place on the political agenda the question of qualitative social reform so dear to the “left” while simultaneously articulating ideals cherished by the “right,” like local autonomy, individuation and cultural particularity.
We all need to become Partisans now.
Man I love me some MMT posts!!!!
I just read every comment. Am i insane? (Don’t answer that.)
I actually like a lot of what this cat Mosler has to say. I think he gravely underestimates the stupidity of a politician armed with MMT theory, but I’m all ears.
Kind of like the OJ trial (where many blacks knew OJ to be guilty, but didn’t’ admit it to white people) many Austrian deficit hawks know MMT a more functionally accurate description of how our monetary system works, but won’t admit it to the snazzy liberal MMT crowd.
But its not the DE-scription that scares them, its the PREscription that does.
I think many would be more amenable to MMT if we had, you know, a semi-efficient federal GOV.
I mean the stimulus bill has us building friggin roads. DO we need more roads in this country? Is it 1952?
Great comments to all above!!!!!!!!
BTW, Is Mosler running for senate solely to debate Peter Schiff, king of the Austerians? (sarcasm)
If you look at a Federal Reserve note and see that it’s backed by the full faith and credit of the US government, you soon realize we are talking faith, belief and therefore, possibly religion.
Credit is not enough.
You must have faith as well.
When a government issues too much debt or prints too much money, that faith will be tested. Forget about your credit anaylsis. Forget about your rating agencies but remember the faith part of the notes from the Federal Reserve.
It makes you wonder how close we are to the Dark Ages, when we are dependent on fiat currency. And it seem appropriate that first few comments here mentioned religion.
“1. A full payroll tax (fica) holiday
2. $150 billion of Federal revenue sharing to the States on a per capita basis
3. An $8/hr Federally funded job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.”
I find Mosler’s distinction between deficit doves and MMTers to be more contrarian than helpful. This reflects a general problem that I have with MMT, that it often gets lost in its own glitz and self-conscious edginess.
With regard to the suggestions above. I would note that $8/hr is about $16,000/yr. You are not going to generate much in the way of tax revenue off that. Food, rent, and utilities would eat up most if not all of it. Good for teenagers but almost everyone else would find it less than a living wage.
While $150 billion in aid to states seems like a lot, state budget shortfalls are likely to be in the $180 billion range this year, and this doesn’t even get into the devastation at the local level.
The fica holiday is a wild card. For one thing, it depends on how long it lasted. Ballparking employee contributions, I think this would be about $400-$450 billion/yr (working off of 2007 numbers). Even if it was for a year, it would depend on how it was spent. If it was used to pay down debt, its effect on the overall economy would not be that great.
Hugh
The point of the federally funded job is not to create revenue. and you can set the wage wherever you want, but realize that the higher you set it the larger the increase in the price level. the point of the job, overall, is that it is far better as a means of sustaining the economy and prices than the current method of using unemployment (nairu) to do that. tweak the details however you want beyond that.
regarding fica, paying down debt, and impact on the economy, you again missed his point. in a balance sheet recession, you cannot get the private consumer spending again until you reduce private debt service burdens.
My interest is in seeing the greatest number of people helped to greatest extent possible. Mosler’s suggestions don’t do that. Now you are arguing they aren’t meant to. I think it is you (and he) who are missing the point.
Where did I say they aren’t meant to. You are about the best at twisting words around and changing the subject I’ve ever seen.
Regarding his #3 with an $8 an hour wage. I can’t help but laugh. The whole point of what has been going on has been to drive down lifestyles for 2 reasons. 1. is that the world cannot support 7 billion middle class ppl like what we have had the last 50 years. 2. the elites do not want ppl who have their basic needs met because then they rebel and riot and make demands.
It would be a great idea tho.