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Wray: The Federal Budget is NOT like a Household Budget – Here’s Why

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By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City who also writes for New Deal 2.0

Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.

1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don’t know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no “day of reckoning”, no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to — and issue — the currency we use, and to demand that those taxes are paid in the currency it issues.

2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.

4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment.
Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.

5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.

If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?

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165 comments

  1. Tom Hickey

    Randy Wray bring in the key MMT point that the government as currency issuer is completely different from households (firms, states in the US, and countries in the EMU). Bill Mitchell lays out the implications of this as a vertical-horizontal relationship between government and non-government (domestic and external) Barnaby, better to walk before we run, and develops it in Stock-flow consistent macro models. Warren Mosler debunks the other prevalent myths in 7 Deadly Innocent Frauds

    1. Fed Up

      I think everyone is missing a vital point(s).

      There is a difference between price inflating with currency and price inflating with debt.

      Some others are:

      If cheap labor and positive productivity growth produce price deflation and assuming a positive price inflation target, how should the fungible money supply grow?

      If there is a positive price inflation target and positive real GDP target and then some group saves, doesn’t at least one other group have to dissave and how?

      If the gov’t dissaves by borrowing and then spending that borrowing, won’t it have to at least earn back the interest and probably eventually the principal?

    2. Greg

      Yves,

      Thanks VERY VERY much for starting this discussion with this “alternative” (but correct) view of our monetary system. Its obvious we have many hurdles to overcome but they can and will be.

      The most interesting aspect to this comment section is the fact that nobody disputes his basic tenet that debt does not mean the same thing to a govt and a household, yet NONE of the dissenters were capable of making that distinction prior to Mr Wrays article. They ALL have toed the party deficit terrorist line their whole lives and now when presented with counter intuitive facts the first response is SO WHAT!!?? The information given by Mr Wray IS NOT TRIVIAL!! It is 180 degrees from what you have been told for decades and you simply say SO WHAT!!??

      This is an astounding reaction requiring a level of cognitive dissonance that one normally only sees in followers of Jim Jones or David Koresh.

      If you accept that Mr Wray is correct in his basic argument of the difference beween govt and household debt, and this was his argument not any policy prescriptions per se, then we are truly living in a different world than we have been told about for the last few decades. So what else does this mean? There is MUCH MUCH more to Chartalism/MMT than what Mr Wray presented yesterday and those of you dismissing it after accepting his basic premise are refusing to acknowledge the level of MIS understanding you have been living with your whole life. This is not unlike a person rejecting their childhood faith.

      Its astounding how many have little idea about the level of misinformation you have BEEN receiving about the way our financial world works.

      WAKE UP!! Its not scary its liberating!!!!

      1. Kataphraktos

        The author of this post assumes that there is a causal relationship between reductions in public debt and economic depressions. Except, of course, when there aren’t, like in the 1990s. Oh, and the fact that the 1873 depression emanated from a European financial crisis that led to a 25-year global depression in which the US was but one player. And the 1817-1821 and 1867-1873 periods were post-war periods.

        It would not require the flexing of great intellectual muscle to see the obvious flaws here. This statement the long-view economic equivalent of a conspiracy theory at best.

        1. Greg

          There is a huge difference between saying that every period of debt reuction/surplus attainment was followed by recession or worse and saying that every recession is preceded by debt reduction/surplus attainment. Mr Wray said the first, you are trying to claim he said the second.

          And you accuse him of flawed reasoning??

          1. carol

            Greg said: “…And you accuse him of flawed reasoning??”

            Apparently you yourself accuse Randy of flawed reasoning, as Randy wrote under his point 3:

            “With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction.”

  2. anon

    “I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency”

    Households with a credit line do exactly that – create bank deposits by borrowing through their bank, just like the government creates deposits by writing checks drawn on the central bank

    (reserves are beside the point)

    1. stf

      Not the same thing, at all, operationally, as the ability of a household to do this depends on the bank granting the credit in the first place. Sovereign currency issuer doesn’t need this, operationally.

      1. But What Do I Know?

        One might argue that it needs the Federal Reserve Bank to grant the credit. The Treasury’s money is an account balance at the Federal Reserve–if it needs money it simply draws on its credit line from the Fed, until it can issue more bonds/bills/notes, if I read the daily Treasury statement correctly.

        Now, if you tell me the Fed isn’t independent of the Treasury I’m not going to argue with you, but then isn’t the situation akin to a private citizen/corporation owning their own bank (and being able to get loans from it). If we ignore reserve requirement, they would have unlimited access to credit–as long as other people would accept their paper!!!

      2. anon

        it is the same thing operationally

        the household has a credit limit

        the government has an inflation limit

        different limits; same operations

  3. Chris

    I’m just a working stiff, certainly not an economics professor, but this article smacks of a strawman argument. I fail to see how any of these differences are relevant.

    When you’re in debt you’re paying interest to someone. This is true whether you’re a household or a country. Unless this article was written to counter some specific instances of demagoguery then I would posit that this point is the central thrust of anyone trying to make the comparison between a household and our country.

    1. Age has nothing to do with anything. Since debts or assets are passed on in some form or another, the fact that a household “ends” is irrelevant.
    2. Since we’ve always been in debt it’s okay to always be in debt?
    3. This ignores the idea that some pain should be expected to get us out of a bad situation (indebtedness). This also ignores the idea that the people getting the money from the interest on our debt might have some power to affect government and markets and do things that make it *look* like being in debt is the best way to be. Please tell me that major market players wouldn’t do things that harm the overall market in order to boost their positions or make more money. And please tell me that those groups haven’t been doing this for hundreds of years.
    4. This is irrelevant. Please see the point about paying interest on debt.
    5. Inflation *does* erode our dollar. The only way for ever-increasing debt to not crush us altogether is to inflate our way out of the debt burden. This has been happening on a continual basis. Ron Paul talks about this all the time. It seems evident to me from the reading that I’ve been able to do over the last few years of following the housing bubble that this is the only plausible strategy for Bernanke et al. They plan to inflate us out of this mess at some future time.

    Please someone blast my arguments to pieces, as I’d love to be more educated on these fine points. But please start with an explanation of how paying interest to someone is better than floating a surplus, regardless of whether you’re a household/individual or a country.

    1. Adam

      I think people are missing and or confusing some key elements here. When the professor says the government can “credit” a bank account it does not mean the government just added to the deficit. Now the government can and currently does issued debt to pay for its credits, but as the sovereign and sole issuer of money it is not required to. The governments only constraint on spending is inflation and inflation really only occurs when there is too much money in circulation relative to the economies ability to produce and absorb the funds.

      Another item that people seem to confuse is money versus currency. The US dollar is a fiat currency. It only has value because the US sovereign says so. However the vast majority of US money is credit. The money in your bank and in almost all US bank accounts is really based upon credit. A bank issued someone a loan and that loan because someone else deposit – and the cycle continues to go on until banks stop lending creating ever more money. (Note: people talk about deposits becoming loans, but there is NO evidence that that is actually how it works – it just makes for a good story. The empirical evidence says that loans or credit makes deposits. Also, credit money does NOT require a fiat currency, they are separate.)

      So put these things together and what does it mean… Right now we are going through a huge period of deleveraging because a HUGE credit bubble just burst. What does that mean? It means that people are paying back their loans (or defaulting on them) and DESTROYING money (credit money). As the US credit money supply shrinks so will GDP. The FED has been trying to pump it back up with quantitative easing, but given the situation it is ineffective policy (the FED creates the credit in to bank, bank accounts but the banks aren’t lending). The Obama administration has been trying to prop the economy up with large deficit spending, but it too is ineffective – and mostly because it’s too small and they are issuing debt instead of pure credit.

      More effective policy would be massive TEMPERARY government spending financed with pure credit money (or monetized by the FED); and cleaning up the US financial system (while we all hate them we will eventually need healthy banks).

      1. Mr. E

        According to Neo-classical theory, Japan should have exploded in hyperinflation 15 years ago. And yet here they are with 200% debt/GDP and facing outright deflation yet again.

        How is this possible? It isn’t possible in neo-classical theory, so you don’t hear any real explanation, other then that at some point, they will have inflation. Well, when and why? MMT gives a way to say when and why they will have inflation.

        We won’t have inflation in Japan until the BoJ loses its infatuation with a strong currency.

  4. Froggy

    Did you say, “Clinton surpluses”? Clinton may have signed those budgets, but he sure as hell had nothing to do with producing them. The GOP got squirelly on spending with Bush’s “compassionate conservative” BS, but the big deficits didn’t start showing up until 07 when Nancy and Harry took over.

  5. IL

    No Way, Prof Wray. Your assumption is that the government exists in its own contained system and does not interact with anything else (this is not a surprising assumption coming from most ivory tower economists), but you’re forgetting that there is market and there are other nations. The market WILL give a vote of no confidence to the government if its debt outpaces its ability to service it or that the interest payments eat-up all productive activities within a country. Sure, the government can push the reset button by starting a new currency regime or use inflation to erode away the debt but a leading nation like the US will suffer irreparable damage in its reputation and standing in the world. Nations and empires do go bankrupt, that’s a fact. The market is the check-and-balance on the government.

  6. eric anderson

    Is the professor trying to argue that trees can indeed grow to the sky? If not, then what is a tolerable level of deficit? What is the optimum level of deficit, and how would one measure it? Optimum by whose standards?

    Most people believe our debt/deficits are too high. When politicians spout folk wisdom about the nation needing to balance its books like a household, they’re not making a technical argument about whether a growing economy can support continual deficits at some finite level. Neither are they necessarily demagoguing. They are appealing to the common sense of the people who believe that doubling our debt in the next ten years (or five years, if growth remains sluggish and spending is not cut) will have negative consequences that outweigh the real or imagined benefits. I guess pedants like the professor cannot see beyond the literal meaning to what is actually being communicated.

    He may believe we should follow Japan to a double-decade stagnation with exploding debt. Most Americans do not. Further, he doesn’t really help his case by raising the specter of inflation and currency devaluation as a remedy. You won’t find too many Americans, especially those who lived through the last bout of high inflation, on his side if that is the “solution” he’s offering up.

  7. charles

    “People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency.”

    Of course the Sovereign CAN use its power to force people to accept its IOU’s. But the enlightnment movement precisely found that LIMITING the exercise of the Sovereign raw power( through laws, checks and balance, etc…) had a positive impact on the population welfare. This is why UK and the US became dominant power in the 19/20th Century, replacing autocratic continental europe powers and China.
    Having a “household-like” budget in times of Gold Standard, or an independent Central Bank a la Bundesbank with a low inflation mandate in times of credit based money (an independent Central Bank is really a distinct Branch of Government), is one of these limitations to raw power that are components of a democratic country. In times of emergencies, (like for instance during ww2), it is legitimate to use the full strenght of raw power, but doing it in normal times negates what modern democracy is about.

    This Hobbesian view on the Sovereign budget constraints is a very dangerous slope.

  8. killben

    Wray: The Federal Budget is NOT like a Household Budget – Here’s Why

    By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City who also writes for New Deal 2.0

    Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.

    1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don’t know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no “day of reckoning”, no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to — and issue — the currency we use, and to demand that those taxes are paid in the currency it issues.

    Ok. Households time will be up much faster than Government. But in case of governments, when income is far lower (tax revenues are lower) than expenditure (unemployment benefits, bailouts, subsidies etc.) then while the “day of reckoning” may be far away, your cost for footing the bill goes up consisitently (in a free market). Will that not be enough to make “day of reckoning” arrive much sooner than expected

    2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

    Ok. But that was when the growth story was seen to be good enough. So it was expected that we may be able to repay the principal and interest from the future. If this is no longer true, then your ability to accumulate debt reduces considerably. It just goes to prove that if it was possible to generate bubbles and illusory propserity on an endless basis, then this 230-odd years could extend to 500-odd years, but it seems creating bubbles endlessly may not be possible

    3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.

    “I don’t know of any case of a national depression caused by a household budget surplus”

    Is the reverse true? We are seeing this!!

    4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment.
    Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.

    “Its IOUs are always accepted in payment” .. Till the federal government has to borrow to redeem the IOU.

    5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.

    “my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount”

    true as long as it is only your households. When it involves million households and they go bankrupt and the Fed prints money, to make the banks (who would have lost the money) whole, then the purchasing power reduces by measurable amount

    If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?

    “is 173 years long enough to establish a “sustainable” pattern?”

    Not when you do not see opportunities to create fresh bubble or when your tax revenues are diminishing

  9. Patriot

    Folks– remember, as a sovereign issuer of currency, the USG does not have to borrow money to run a deficit. Think this one through folks.

      1. reprobate

        You are assuming inflation will be the result. We have 17% unemployment, tons of stores being closed, low capacity utliization. The government can keep “printing” with no adverse consequences until inflation kicks in. No risk of that until we see a real turnaround, not this bumping along a bottom with lots of slack in the system.

        And this hard money fixation is an illusion. Under the gold standard, when the value of money was supposedly stable, you had big swings from pronounced inflation to pronounced deflation over short time periods. Go back and check the stats from the gold standard era. It was hugely disruptive to businesses and farmers (remember William Jennings Bryan’s “Cross of Gold” speech? He was against the very same idea you are upholding because it hurt farmers so much).

        You really need to do your homework. In all honesty, this and your comment below just show you are not only out of your depth, but completely unwilling to learn.

        1. scharfy

          Not at all. I understand quite well that all the “printing” is not at this point finding its way into actual money supply. The money is simply padding the balance sheets of major financials.

          Given that the monetary stimulus isn’t finding its way into the credit supply, it isn’t stimulating a damn thing. Lenders and borrowers are tapped out. Public and private debt is maxed relative to output.

          Pointing out some of the pitfalls of “hard money” in no way absolves the sins of the disaster that is our current system. But thanks for the lesson.

      2. Mr. E

        This is not true in most situations. In fact, you could easily say insufficient currency issuance redistributes wealth from current workers to owners of capital.

  10. scharfy

    Do not skewer the above article too badly.

    It must be preserved for future inhabitants of the earth so that they understand how humanity perished.

    It is most certainly the single most ridiculous document that has ever existed.

    Real Housewives of Atlanta: Season 2 would rival its stupidity.

  11. OccamR

    Maybe they are not like households but sovereign states can still go broke and default, much to the chagrin and pain of their people…or were the Argentina, Thailand and Russia defaults just the result of my vivid imagination…? Didn’t they print their own currencies, raise their own taxes etc etc? Maybe they were not as big and as ugly as the USofA (and yep they didn’t have the world’s reserve currency) but I think the principle still stands…yep its a simple principle…once doubt and then severe doubt exits over the ability to pay back debts, the CONfidence game is up and then bad stuff happens (regardless of who you are). Sometimes it just takes a little longer to get there…

    1. Greg

      Your use of Argentina as similar to the US totally exposes your mis- understanding of money. Argentina was NOT sovereign in their currency, they were PEGGED. They also had debt denominated in someone elses currency, a very bad idea.

      See the problem is too many people dont analyze whether a currency is commodity backed (gold standard), pegged to some other currencies value or within a truly floating exchange rate. The differences between how debt accumulates and the effects on a countries buying power within these different scenarios is NOT trivial.

      One cannot compare our (USA) situation to Weimar Germany, Argentina, Russia or ZImbabwe. Its ridiculous to assume that the dynamics of the debt are anywhere near the same.

      1. Ishmael

        Greg — Your understanding of Argentina is lacking. Argentina was a far wealthier country in the 1930. In fact the country which was the place to be was Argentina and not the United States. The Argentina peso was not pegged to the US dollar. Then similar policies which are now being implemented in this country were implemented there. The government started growing bigger and bigger. Social programs became bigger and bigger. Problems started setting in and then the Peron’s got control and Argentina started the final stage of its blow off.

        I was involved with Argentina in the 70′s when it was experiencing hyper-inflation. It literally drove the people crazy. It has since defaulted on its debt at least twice.

        Argentina did not peg it’s currency to the dollar until I believe in the 1990′s. This might have occurred in the late 80′s. I do not remember the exact date.

        The peg did not work for a number of reasons.

        I continue to be amazed at the denial of true world examples for hyperbole.

        1. Anonymous Jones

          I find it interesting that “social programs” grew bigger and bigger in most industrialized countries around the world (seriously, Scandinavia?) and yet most of those countries didn’t collapse like Argentina. I’m not saying I understand any of this, but it does seem like you are perhaps simplifying the tale a little bit. But it’s everyone else that is in “denial” of an obvious and simple truth, right?

        2. L. Randall Wray

          Actually, Ishmael, Greg is correct. Argentina pegged to the dollar and then could not generate enough dollars to service its debts (appreciation of the dollar versus brazil was part of the problem)and that led to slow growth, rising unemployment and eventually the crisis. Note also that the causes occurred even though it would have met Maastricht criteria: its budget deficit maxed at about 3%. But it was not sovereign. Argentina resolved the crisis by going back to a sovereign currency and adopting a job guarantee program. None of this is meant to endorse Argentina’s policies from 1930 to 1990–sovereign governments can adopt terrible policies, too.

      2. Mr. E

        Russia defaulted because it was run by crooks, tried to lock its exchange rate artificially high, and issued bonds in a non-native currency.

        http://en.wikipedia.org/wiki/1998_Russian_financial_crisis#Course_of_events

        Look up Eurobond if you haven’t heard the term. Once they started this, the default was inevitable.

        “It was later revealed that about $5 billion of the international loans provided by the World Bank and International Monetary Fund were stolen upon the funds’ arrival in Russia on the eve of the meltdown”

        I know this history is tough, but those who forget the past are doomed to repeat it.

  12. OccamR

    I should have added in my previous comment “once doubt and then severe doubt exits over the ability to pay back debts in something of the approximate value of the original debt (not some greatly devalued version thereof),the CONfidence game is up and then bad stuff happens (regardless of who you are).

  13. bob

    Its a very simple point he is making, that government budgets are different from household budgets.

    Why is it that most of the above people only use their ability to think in order to extrapolate an argument to absurdity?

    All of the straw man arguments after are nonsense. Just because you put an absurd argument forward does not mean that you are entitled to a response. It just means that you are not capable of intelligent thought. Demanding an answer to your absurd argument makes you a brat.

    What is the collective phrase for Battered Person Syndrome?

    I am not going to get between you and your aggressor, it would not matter. Inevitably, you both end up beating on me, and the politicians and bankers, in the mean time, keep beating the sense out of you.

    1. Chris

      Maybe because this article written by a *professor* is full of logical fallacies that are manditorily taught to every college freshman (at the school I went to at least), and so despite the truth/validity of the point he’s trying to argue, it’s ridiculous and incredible to see a professor using such a weak article to make the point. I may be grossly under-educated when it comes to economic theory, but I know a poor argument when I see one.

      Is the point to make a point, or try to help people understand your viewpoint? If comparing sovereign governments to households is such a basic mistake for anyone that knows economic theory (as is the seeming implication by the professor and many commentators) then it is obvious that the main effort should be on making the argument at a level that those people could understand it. Saying “we’ve always been in debt therefore it’s okay to always be in debt” is ludicrous. It completely undermines the article.

      1. bob

        “we’ve always been in debt therefore it’s okay to always be in debt”

        SLOWLY-

        “we’ve always been in debt” FULL STOP

        That is all he is saying, and he is using that to back up his argument that households and government budgets are different, the title says as much.

        “therefore it’s okay to always be in debt”

        These are your words, not his.

        “Is the point to make a point, or try to help people understand your viewpoint?”

        How does he try to help you understand? By putting up with slights such as *professor*? The first thing I do when I am looking for help from someone is to call them an asshole. Depending on the neighborhood, they then attempt to help me find my teeth on the ground.

        “If comparing sovereign governments to households is such a basic mistake for anyone that knows economic theory (as is the seeming implication by the professor and many commentators) then it is obvious that the main effort should be on making the argument at a level that those people could understand it.”

        How does he make this point any smaller? You are the one projecting your idea “that it is always okay to be in debt” onto the Professor.

        What smaller level would make more sense? This is a very narrow point, with very good supporting evidence.

        1. Chris

          How is emphasizing that he’s a professor a slight? Plenty of others have already pointed out that analogies are imperfect by their very nature. Writing a full blown article elucidating how a particular analogy has certain flaws is pointless. There is a very simple point being made by I would guess most people making the comparison between households and the government, and they have very little to do with any point the professor made.

          I didn’t post a comment on this article with the main aim of getting help or furthering my understanding. I *read* Yves’s blog for that. I’ve done so for a long time and never felt compelled to post a comment because I am out of my league in most respects, or have little to offer, so I just soak it up. But when something this bad is posted by a professor it rankles me, and I feel compelled to express myself to the professor as well as to Yves. There are some very basic logical fallacies being used here, and it is shameful for a college professor to fall prey to something they teach college freshmen.

          You posted a general comment (look up just a few lines there) that resorted to name calling and general disdain. I at least offered what I felt was point-by-point feedback, that while wasn’t alturistic knowledge-seeking at least offered the chance to rebut my arguments and enable a constructive discussion (which your reply to my reply here has done to at least an acceptable level).

          1. bob

            “There are some very basic logical fallacies being used here, and it is shameful for a college professor to fall prey to something they teach college freshmen.”

            Please, point to one fallacy. That would be a starting point.

  14. Kevin de Bruxelles

    Just a couple questions from a non-economist,

    1.In order to make the case for deficit spending more convincing, you need to discuss the ultimate limits of government borrowing. Surely there are limits somewhere, perhaps you would argue that we are no where near these limits yet, but I think it is important to place some limits since no one will believe that we can just borrow to infinity.

    2.On the political side, surely you understand that there will be no decrease in the deficit any time soon. Even before the most supposedly anti-deficit crowd in America, Ms. Palin had to scratch “budget cuts” off her hand and replace it with “tax cuts”. All the discussion about deficits is just a question of distribution; there will be a lowering of the percentage benefiting the masses (social programs) and an increase in the share going primarily to the elite (bank bail-outs, military spending). So how do the masses ensure that any potential increase in the deficit that you discuss will primarily benefit them and not just find its way on to Wall Street bonus checks?

    3.In these articles there is always a suggestion that running higher deficits will reduce unemployment. This implies the problem of unemployment is fiscal instead of trade policy. Please discuss what percentage of every dollar borrowed by the US goes towards employing Chinese peasants and which percentage goes towards actual US employment. It seems to me a better solution to the unemployment problem would be to react to Chinese. protectionism by not forcing our workers to compete against sweat shop workers. With much less leaky borders (as was the case with pre-WW2 Japan, Germany, and WW2 US) then most people would agree that an increase in government spending would lower unemployment.

    4.Does an increase in the government borrowing load tend to increase or decrease the overall power that Wall Street can deploy over the nation?

    1. Yves Smith Post author

      The strongest attack is your point 3. and perhaps 4, that standard models don’t allow for the foreign trade sector, and hence a fair bit of stimulus/jobs leaks to our trade partners. And we have this dumb free trade ideology, when our trading partners are more mercantilist and care more about wages and have trade surpluses, or at least not deficits.

      My understanding of this terrain is it COULD be incorporated into standard models, but isn’t. The result is we have been driving our fiscal and monetary policies with a bad speedometer. So the flaw isn’t in the mechanisms that Wray discusses per se, it’s the policy mix (focusing on the easy to implement tools, like fiscal and monetary policy, and not enough use of other tools, like trade and industrial policy, which we have by default, via which special interest groups get favored treatment, rather than via setting national goals and seeing how to make investments to further those aims).

        1. Greg

          An excellent question about the limits of borrowing and if you go to “billy blog” you can get a more in depth answer than I’m going to give.

          The limits of govt spending should be determined predominantly by 3 metrics I would say

          1) Unemployment
          employment is directly related to spending, when spending drops employment drops

          2) Private sectors willingness to save

          As the private sector wishes to save it will spend less, driving down incomes…..

          3) Trade deficit

          As we import more we are working less so a CAD will always lead towards fewer jobs

          The govt should fill the “gap” left by those metrics in order to sustain aggregate demand. The size of the gap is not predetermined it must be measured as you go

          1. Kid Dynamite

            hah. i’ve spent the last two days on billy blog thinking myself in circles until my head smokes, and the best I can come up with is that his theoretical examples (which are cute and interesting in a vacuum or a one household example: the business card economy) bear little to no relevance in our actual real world economy.

      1. Anonymous Jones

        I actually thought the strongest point is number 2. Economics could well be described as the allocation of scarce resources. All of this is about distribution. It’s about who wins and who loses, across the dinner table, across the street and across the national borders.

        I like point number 1 too, and I think the answer is that debt is eventually limited by the willingness of the creditor to extend more of it. The sequence of events is probably this in the national sector with debt denominated in one’s own currency (don’t depend upon this!): the creditor finds other investment opportunities offering better returns, the creditor demands higher interest rates in response (in this case, the creditor bids lower amounts for nominal bond amounts), interest carry becomes a larger and larger percentage of government expenditures, eventually forcing cuts in other spending or the printing of new money. As we all know, cuts in other spending is hardly likely to win out if you can just print money. Print enough money and you will create inflation (surely you would agree that if the government printed $300 trillion and gave each citizen $1,000,000, we would have inflation, right?). With inflation, real debt declines, debt to nomimal GDP declines, and the process begins anew.

        What this does to foreign trade, I’ll let the smart people figure that out. Uh, actually, with all apologies to Yves, I’ll let them figure it out as long as they agree *not* to model it. Whenever they model something, they get invested and start defending it. Chaos theory is about the behavior of dynamic systems that are highly sensitive to initial conditions. You can have all the models you want, but with 6 billion people running around you are likely not going to be able to measure initial conditions accurately enough to have much confidence in the results of the model. Actually, I don’t think you could have a sophisticated enough model to deal with the 6 billion “independent” variables running around (and not just independent, in my experience, totally irrational (ah, neoclassical assumptions!)). I could be wrong!

        Point number 4, Yves? Really? Look, I’m as upset with the redistribution to the banksters as well, but, and I mean this will all due respect, living in NYC and blogging about this every single day, I think it is possible that you are losing the forest for the trees. Wall Street is a problem, but even if we fixed that problem, number 2 is always going to be there. This is a fight for resources. Living fat and happy in this country of abundance makes many people forget that, but this is a struggle about who gets what, and you could wipe NYC and the City off the face of the earth and we’d still be killing each other for just a little bit more.

        Homer: Mr. Burns, you’re the richest man in the world. You OWN EVERYTHING!

        Mr. Burns: Ah yes, but I’d give it all up….

        [pause]

        … for just a little bit more.

        1. carping demon

          @Anon.Jones: “surely you would agree that if the government printed $300 trillion and gave each citizen $1,000,000, we would have inflation, right?” I always see this question asked this way and it mystifies me. If the gov. printed $300T, why would they *give* anybody any of it? They would make their interest payments, which are denominated in dollars, spend what it thought it needed to to bring about the inflation and employment rates they think they want, *pay* people to produce usefull things that they think will advance the country growth. Why on earth do you think they would just *give* people money? The meme that “it will have to be paid back sooner or later, and probably sooner” contains within it the very misapprenhension L. Wray is writing about. You simply cannot apply household budget concepts to soveriegn government finances. It’s like applying football rules to three dimensional chess.

      2. Kevin de Bruxelles

        Thanks for your (and everyone else’s) responses. Just to be clear, I am really interested in Professor Wray’s ideas (I got halfway through Chapter 1 of his book last night) and I didn’t really mean to attack them; I’m just struggling to understand. Since I’m always harping about the need for a third party, I have this hope that perhaps his ideas could provide the economic basis for a progressive party.

        On point 1, I spend all day long fighting constraints and so I am sure there must be fiscal constraints on any sovereign government. He probably discusses this in his book.

        Points 2 & 3 (internal resource allocation & trade policy) may be beyond the scope of Chartalist ideas.

        On point 4 what the Chartalists seem to be saying is that going to the bond market is a political choice and is not a necessary step to finance a government. In a very simplistic way this seems to me to be a way to separate government finance from Wall Street and other bankers. In other words a good thing!

        1. Dave Raithel

          “[W]hat the Chartalists seem to be saying is that going to the bond market is a political choice and is not a necessary step to finance a government. In a very simplistic way this seems to me to be a way to separate government finance from Wall Street and other bankers.”

          That’s what I get out of them, but their vocabulary is inexplicit that those without capital should not be indebted to those who have it – at least not what I’ve read from them yet.

    2. IL

      Don’t necessarily agree with Point 3. It’s just blaming free trade as the culprit. Take Japan for example–it’s trade policy is export oriented and merchantilist in nature for 20 years, but the Japanese unemployment situation is also bad and stagnant–tons of temp workers. It all boils down to wages not the trade policy. If I have $100 to hire people I can only hire 2 US workers for 1 hr but I can hire 10 Chinese workers for 1 hr all with engineering degrees.

  15. Gaucho

    So Cheney was an economic genius… deficits don’t matter. I hope these idiots understand the concept of debt capacity. we are exhausting it very fast. it makes sense to run deficits in a recession… to the extent you have debt capacity to afford it. Unfortunately, Bush with his stupid tax cuts didn’t save for the rainy day. now we have to suck it up.

  16. Andrew Bissell

    If I understand it correctly, Chartalist theory claims that a government which deficit spends (on _something_, this is never really specified) up to the level of full employment will spur enough economic growth that the debt created will be easily serviced from future production (whether that production is partially expropriated through tax revenues or inflation).

    It seems to me a key assumption here is that the conditions of ceteris paribus can be maintained for any given level of deficit spending. What if, instead, citizens who see the government running deficits at 10% of GDP begin to expect higher taxation, inflation, or benefit cuts down the road, and curtail spending and investment (aside from highly liquid and safe forms of saving like cash or gold) as a result? The Chartalists are free to argue that this would be an irrational response on the citizens’ part, but surely it would change the equations around a bit.

    It just looks very much to me like a “pull this lever, produce this outcome” type of argument, which we now know to be somewhat dodgy when applied to the economic realm.

    (I haven’t actually looked into the empirical relationships between private spending+investment and public deficits, but can certainly share plenty of anecdotes about acquaintances who do link the two.)

    1. But What Do I Know?

      **Chartalist theory claims that a government which deficit spends (on _something_, this is never really specified) up to the level of full employment will spur enough economic growth that the debt created will be easily serviced from future production (whether that production is partially expropriated through tax revenues or inflation).**

      I think the Chartalists assume that government (deficit) spending will somehow magically spur economic growth. Government (or any other) spending does not necessarily produce economic growth–in our case, it can merely keep the status quo going for a little while longer.

      The only way government spending produces economic growth is if the money is spent on something useful–otherwise, you are just using up excess labor as an excuse to pay wages–like building a pyramid, or, in Keynes’ famous example, digging holes and filling them back up again. Call me Hayek, but I have little faith in the government’s ability to decide which projects are worthwhile, and to implement those that are in a timely manner.

  17. Expat

    This guy is a teacher? I think I would prefer to send my kids to Bob Jones University for a degree in evolutionary biology than have them taught by him.

    If I understand correctly, deficits are good because surpluses lead to depression. Deficits are harmless because we have had them for 221 years. Deficits don’t matter since we everyone will always accept US dollars. Let’s look at this genius’s points.

    Surpluses always lead to depression: This post hoc, ergo propter hoc argument could, if accurate, be interpreted by saying that the US economy has been a socialist Ponzi scheme for two hundred years. Only by virtue of government spending has any economic growth occurred.

    Deficits are harmless: we have always had them therefore they are harmless. Like cancer or AIDS. That is, until they kill you. So, running increasing debts forever is the solution to our economic problems. So, let’s apply this to the entire world.

    US dollars will always be accepted. Because empires never fall, nations never disappear, governments never topple over. Can I exchange Egyptian beads and Roman IOU’s for some dollars, please. These empires lasted much longer than the US and therefore should be worth much, much more than dollars.

    In conclusion, we should simply print up a few hundred trillion in bills (which is essentially borrowing against future tax receipts) and hand them out to everyone in the world. We would all become immensely rich overnight and stimulate the economy into the greatest period of growth ever. This would lead to massive tax receipts, a bad, evil thing, so we would have to keep borrowing more and more(printing money) to avoid the horrors of surplus.

    Ha, this economics stuff is easy. How come this Citi and BOA couldn’t figure this crap out?

  18. ds

    Wow. A lot of ignorance here on this board. Like the commenter Bob said earlier, what makes it so hard to understand that the government is not subject to the same financial constraints as a household?

    One strain of commentators seem to believe that inflation is part of some engineered conspiracy by government on behalf of the banks and Wall St. designed to rob the common man of his hard-earned money. This is ridiculous. If anything, inflation HELPS the common man. The rich man holds most of his wealth in currency-denominated assets such as bonds. Bank assets are almost entirely nominal.

    The common man consumes out of current wages, and holds most of his wealth in real assets, i.e. his house. Banks and the rich detest inflation precisely because it reduces the value of their nominally-denominated assets. A non-inflationary environment is best for them as it enforces a system of debt-slavery from which the common man cannot escape without rising wages. Why do commentators think that it was the common man — the Know-Nothings of Kansas, the labor unions of the industrial North — who fought against the gold standard in the 19th century while the rich industrialists and East Coast bankers fought to preserve it?

    Using its strictest definition, ten percent of our working population is unemployed. There are 100 dogs but only 90 bones. If the government printed some money and offered it to the unemployed in exchange for their labor, does anyone really think that those unemployed wouldn’t accept it? So how can this current deficit be inflationary? In the end, there can be no sustained inflation with the amount of slack present in our economy. The “markets” might think otherwise and push bond yields up temporarily, but without an increase in real demand, this cannot be sustained. Just ask one of the many bond-traders-turned-cab-drivers who shorted JGBs back in the 1990s out of the belief that Japan’s 200% debt-GDP ratio was “unsustainable”.

    Perhaps the government is underestimating the power of the private sector to recover and, ultimately, when full capacity utilization returns, its deficits will lead to inflation. If that is the case, the government can just simply cut spending. I would MUCH rather see the government overshoot and cause inflation than undershoot and let our productive capacity go to waste. How exactly is letting 17 million people sit idle an example of “responsible” fiscal policy?

    1. Andrew Bissell

      One strain of commentators seem to believe that inflation is part of some engineered conspiracy by government on behalf of the banks and Wall St. designed to rob the common man of his hard-earned money. This is ridiculous. If anything, inflation HELPS the common man. The rich man holds most of his wealth in currency-denominated assets such as bonds. Bank assets are almost entirely nominal.

      This is all well and good as long as you remember to die the day you retire. Otherwise it has the effect of pushing those attempting to save into desperate inflation-beating gambits like, oh, I don’t know, real estate, stock, and commodity speculation. Why has Warren Buffett been getting burned telling investors to buy stocks for 10 years running? Because he thought inflation was sure to erode the value of their cash holdings and stocks seemed like the way to compensate.

      The banks are pretty clearly major beneficiaries of the credit inflation created by the Fed, for a variety of reasons. They might lose out if the QE money went to anyone other than MBS holders and primary dealers, but for now it appears that they benefit from any currency inflation the Fed decides to engage in as well. The government could nationalize the Fed and change that policy if they desire … it would make for “interesting times” in the markets, I will say that much.

  19. Peter Schaeffer

    Can you really be a professor of economics and write stuff like this? I quote

    “Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction.”

    Check out http://www.usgovernmentspending.com/federal_debt_chart.html

    The national debt fell rapidly after WWII. Any depression as a consequence? Not that I remember. Also see http://oregonstate.edu/cla/polisci/faculty-research/sahr/ntdt.htm

    The real point is that depressions reduce revenues and raise outlays, pushing debt higher. In other words, crashes have tended to raise public debt rather than being triggered by some attempt to reduce debt.

    1. Andrew Bissell

      The real point is that depressions reduce revenues and raise outlays, pushing debt higher. In other words, crashes have tended to raise public debt rather than being triggered by some attempt to reduce debt.

      And, the other side of the coin, they are also usually preceded by boom periods which lead to increased tax receipts. The vaunted surpluses Clinton ran (on a cash accounting basis, anyway) were underwritten in large part by capital gains taxes from the .com bubble.

      The simple fact is that policymakers have much less direct control over this process than they (or even their critics) assume.

    2. L. Randall Wray

      Mr Schaeffer: I cannot tell whether you are confused or dishonest. The link you provide to government debt is A RATIO of debt to GDP. Yes, that ratio fell after WWII BECAUSE GDP GREW. Not because govt retired debt; not because of sustained budget surpluses. The outstanding debt was never retired; WWII’s debt is still held. Rather, we were able to leverage that safe debt in private portfolios and used it to grow.

      1. Anonymous Jones

        Obviously, he is confused. Look at the first sentence, “Can you really be a professor of economics and write stuff like this?” I don’t know how long Peter has lived, but the idea that he would be surprised that someone can become a professor with ideas that are different than Peter’s (or even make a mistake every now and then, smart people do make mistakes some times!) shows how little Peter understands the world. Has he ever been to a university? I think if he went to one, he’d find a lot of professors less able and less tethered to reality than you.

      2. Peter Schaeffer

        L. Randall Wray,

        “The link you provide to government debt is A RATIO of debt to GDP.”

        If you follow the second link I provided, you will see that actual public debt fell in constant dollars after WWII. Of course, the debt also fell (faster) as a percent of GDP.

        1. stf

          “constant dollars” is yet again not the right way to know if debt was paid off, as you adjust the debt downward as inflation rises with constant dollars. You need nominal dollars.

        2. L. Randall Wray

          OK Peter, you are dishonest or at least intentionally slippery. “constant dollars” is of course another way of getting around the fact that we did not run surpluses and retire debt. It is simply dividing by something else–price level–rather than GDP. We can divide the debt by hotair spewed by Austrian economists, if you like.

          1. Peter Schaeffer

            LRW,

            Two points. Contrary to what even I believed, the actual national debt fell in nominal dollars from $278.7 billion in 1945 to $256.7 billion in 1950. See http://fraser.stlouisfed.org/publications/ERP/page/4980/1722/download/4980.pdf. Yes, the Federal government ran surpluses back then and the debt fell in nominal dollars. Of course, with inflation it fell much faster. No depression occurred.

            However, the constant dollar value of the debt provides a better measure of taxation versus expenditures. Let me respond directly to your comment.

            “OK Peter, you are dishonest or at least intentionally slippery. “constant dollars” is of course another way of getting around the fact that we did not run surpluses and retire debt”

            Actually, I disagree. Consider the following. In a zero inflation environment the only way a government can reduce the outstanding debt (other than default) is to run a primary balance surplus greater than interest costs. Since interest costs in a zero inflation environment are the real cost of borrowing, it is also true that the primary balance must exceed the real interest cost of the debt.

            If the inflation rate is non-zero, then the nominal cost (interest rates) of the debt will increase while inflation diminishes the constant dollar value of the outstanding debt. If the excess interest (additional interest from inflation) is simply added to the debt, then the constant dollar value of the debt will remain constant over time.

            To reduce the constant dollar value of the debt with inflation greater than zero, the primary balance must exceed the real interest cost of the debt, but need not exceed the total interest cost of the debt. In other words, the conditions for reducing the value of the debt are the same with and without inflation.

            After WWII, the primary balance considerably exceeded the real interest cost of the debt and the debt fell in constant dollars (in nominal dollars as well). With zero inflation, the same primary balance would have produced an even greater fall in the nominal value of the debt.

      1. L. Randall Wray

        Schaeffer: Yes: that really looks like a significant reduction of the debt! It fell by 0.0788%! That must really have reduced the terrible debt burden!
        Anyway, the reduction of the “burden” relative to GDP due to output growth or to inflation is exactly the point made by Domar at the end of the war: don’t worry about the war debt because economic growth will reduce all the ratios, while trying to reduce the debt by running budget surpluses would kill the economy and only cause more deficits and debt.

        Dave: yes that is correct–the fall of GDP as we downsized after the war was the sharpest contraction in the postwar period; and it really took the Korean war to get the economy pumping. I suspect that is why Schaeffer carefully chose 1950 as his endpoint.

        I never denied that there were some small brief budget surpluses in the postwar period previous to Clinton’s surpluses. I just said there was no significant reduction of the debt. Schaeffer can twist and turn the data as much as he wants but he just can’t get around the truth of my statement. And yes we still have WWII’s debt outstanding. We will always have it. The Bush/Obama debt will always be with us, too. But eventually we will get out of this depression, the economy will grow, prices will rise, and Schaeffer will stop worrying about it because the debt ratio will fall.

        1. Peter Schaeffer

          LRW

          “Yes: that really looks like a significant reduction of the debt! It fell by 0.0788%!”

          Are you sure about this? Debt was $278.7 billion in 1945 and $256.7 in 1950. That looks like a 7.9% reduction to me. Nominal GDP in 1950 was $293.7 billion (BEA). Using 1950 GDP as the denominator, the reduction appears to be 7.49%. Of course, in constant dollars the fall would be considerably greater.

          I choose 1945 and 1950 as my starting and ending years because 1945 was the debt peak and 1950 the debt trough. That makes sense to me.

        2. Peter Schaeffer

          In my opinion your claims about the linkage between the retirement of public debt and depressions are suspect. Let’s start at the beginning. The public debt of the U.S fell from $127 million in 1816 to $96 million in 1819). That’s a reduction of around $7 million per year. Back then U.S. GDP was roughly $750 million back then. In other words, the public debt fell by roughly 1% of GDP per year.

          Did this crash the U.S economy and if not what did? Well an examination of the GDP deflator provides a better explanation. From 1814 to 1819 the GDP deflator fell from 8.39 to 5.19. Falling prices brought down the U.S. economy.

          Why were prices falling so dramatically? Well as it turns out 1814 was the all time high for many commodity prices because of the Napoleonic Wars. Global commodity prices crashed after the Congress of Vienna. The U.S. economy was commodity based back then and predictably suffered as commodity prices fell.

          For another perspective see “Financial Panics of the 19th Century”. A quote

          “Panic of 1819. It was triggered by a collapse in cotton prices. A contraction in credit coincided with the problems in the cotton market, and the young American economy was severely affected.”

          It is worth noting that real GDP never fell in the crash of 1819 and actually grew every year from 1816 to 1825.

          The actual course of the public debt doesn’t support your argument about the crash of 1837. Public debt fell gradually from 1820 to 1826 with no apparent adverse impact on the U.S. economy. After 1826 ($81 million) public debt plunged until 1833 ($7 million). The economy didn’t crash. After 1833 public debt was so low (less than 1% of GDP) that the changes aren’t material.

          The U.S. economy did crash in 1837. See the same source for some details. Notably, the GDP deflator fell from 5.24 in 1837 to 4.95 in 1840. Real GDP continued to increase over the period in question.

          Why did the economy crash in 1837? Of course, we have the standard (and quite real) arguments about runaway speculation ending in disaster (a recurring theme). However, many folks point to a more specific cause. In 1836 Andrew Jackson issued the legendary Specie Circular requiring that public lands be paid for in Gold or Silver (versus paper money). It appears that this executive order popped the bubble.

          The crash of 1857 fits the same pattern. The public debt did fall from $68 million in 1851 to $29 million in 1857. However, nominal GDP was around $4.14 billion in 1857. So we are talking about a reduction in public debt of around 0.15% per year.

          In truth, the 1850s were a period of stellar growth in U.S. GDP rising from $49.59 billion (2005 dollars) in 1850 to $72.84 billion in 1857 to $82.11 billion in 1860. For better or worse, the economy was not a precipitating cause of the Civil War.

          The crash of 1873 provides a more ambiguous case. Public debt did fall from $2.773 billion in 1866 to $2.148 billion in 1873. Given that nominal GDP was $8.99 billion in 1866 and $8.75 billion in 1873 (real GDP grew much faster, the GDP deflator was falling), the public debt was declining by around 1% of GDP per year.

          Did this trigger the crash of 1873? The usual sources attribute the crash to speculation, railway overbuilding, the fall of Jay Cooke and company (he was trying to build the Northern Pacific). All of that is true.

          However, the economy was under significant pressure from a declining money supply. Notes in circulation fell from $983 million in 1865 to $750 million in 1873 (the low point was $700 million in 1870). The GDP deflator fell from 9.39 in 1865 to 6.33 in 1873. Given the falling money supply and prices the crash isn’t that surprising.

          The crash of 1893 did occur in a period of declining public debt. However, the details from the period don’t show any causality. Actually, they could be used to argue that a failure to reduce the debt caused the crash. The debt falls from $1.723 billion in 1880 to $725 million in 1890. Over the same period real GDP rises from $191.8 billion in 1880 (in 2005 dollars) to $319.1 billion in 1890. Given that nominal GDP was $15.1 billion in 1890, the debt is falling by around 2/3rd of a percent per year with fast economic growth.

          After 1890, the public debt stops its rapid decline (falling from $725 million in 1890 to $585 million in 1893) and the economy stalls. Real GDP was virtually the same in 1890 and 1893. The crash of 1893 appears to be a consequence of poor economic growth that finally brought down the stock market and the economy. Notably, real GDP fell from 1893 to 1894. This was the first significant fall in real GDP in U.S. history save for the first year after the Civil War.

          Overall, the 19th century can be divided into two periods. Before the Civil War, the public debt was too small and changes were too small to account for the crashes that occurred. Other well known (at least today) factors were clearly evident.

          After the Civil War, the public debt was material. However, changes in the public debt were a consequence of booms and busts, not a cause. The causes appear to be found elsewhere in the money supply and general economic trends.

  20. Michael Fiorillo

    I have a proposal for those who are so bent out of shape over federal deficits (which, let’s not forget, are helped along by maintaining a rather aggressive global military presence): rather than borrow from the rich, let’s tax them.

    1. Andrew Bissell

      I have a proposal for those who are so bent out of shape over federal deficits (which, let’s not forget, are helped along by maintaining a rather aggressive global military presence): rather than borrow from the rich, let’s tax them.

      I’m actually all in favor of raising taxation to the level required to pay, in the current fiscal year, for all spending that the government pursues. Let them spend only that money that they can steal from the taxpayers, fair and square. At this point, it may be the only way to create much-needed pressure from voters to cut public spending. But I doubt Professor Wray would agree with you or me on this point.

    2. Ishmael

      Long live socialism/communism with that comment.

      Tax the rich until they are rich no more. Worked well in the USSR didn’t get.

      We pretend to work and you pretend to pay us.

      Let’s implement that policy and me and my money are the freak out of here. Good riddance.

      This is called capital flight.

  21. Patrick

    The absurdity that people take causation to in support their Keynesian view of deficits. People live with cancer for many years and have meaningful lives. Hmmm, I guess cancer is good. Wow.

  22. ds

    None of this takes away from Wray’s central point. The government is not financially constrained like a household is. It doesn’t have to raise revenue to service its debt. The US has run deficits for the vast majority of its history. No household or business can do this.

    Sometimes running surpluses is good, sometimes it is not. But on balance, there is a net desire for savings on the part of the private sector. Absent an export surplus, only government deficits can provide these net savings to the private sector. Given this, the government should run deficits most of the time if it desires an economy anywhere near full output.

    1. Kid Dynamite

      yes, DS – the government owns the printing press (digital or otherwise) and can create new money if it needs to pay back debts… so it is different from the household… my question is – SO WHAT? that’s not an action (creation of new money, that is) without consequences.

    2. Ishmael

      I have a pie that is sliced into four pieces. I then slice it into eight pieces. Do I have any more pie. No, I might fool people for a while who did not see or what was done but did not in truth have any more pie.

      The same applies to money printing. In the end the poor suffer the worse. Education smart people know what is happening and protect themselves (capital flight) and the poor are left to carry the burden of the devaluation of their currency.

  23. Fred

    This fool (Wray) cant seem to grasp that although the govt has ‘unlimited’ taxing power, if it taxes beyond consumers ability to produce and spend, which is what this fool implies(unlimited), there is no income left to tax! The difference is made up by borrowing or spending cuts. We can see what thats done for us(unlimited borrowing courtesy of Fed Reserve printing our ‘borrowed’ money.

    Inasmuch as this is true, govt does NOT have unlimited taxing power, and is indeed, in the long term, just like a giant household. Income and outgo must balance or the result is hyperinflation, depression, and war.

    If this were not true, govt’s that dont have the world reserve currency standing behind it wouldnt be in crisis(can you say PIIGS?) like they are now.

    Why put forth drivel like this Yves? Wray embarasses his employer.

    1. L. Randall Wray

      Foolish Fred: can you please stick to the points I raised in the blog? I said nothing that would lead anyone to believe that I am arguing that there is no limit to ability to tax.

  24. Don

    So does the government have a money tree that we do not know about. If they print money eventually the money needs to be financed unless other wealth can be created to cover the deficits. And this is the reason the USA has been so phenomenal during its existence because we have created so much wealth/value. There is still the possibility for growth in the USA. But excessive interest payments will hinder that growth.
    I believe this is the reason the Chinese recently said there is not enough money in the world to finance our spending as projected. And did not the Chinese military just say that they should sell some of the debt they owe to punish us. A true adage is the borrower is slave to the lender.
    And remember our fearless leader said during the campaign that he was going to fundamentally change the economy of the USA.

  25. Brick

    Professor Wray is right household budgets and federal government budgets are not the same for all the reasons he mentions. The question then becomes is a household budget a good analogy for federal government budgets. Personally I am in two minds about this because I am not sure whether the differences statistically make a difference to the two in terms of consequences and limitations. On balance I lean toward Professor Wray’s view point and perhaps in a way I am influenced by the impression some have rather skimmed over the real thrust of his argument.
    When the professor talks about budget deficits leading to currency devaluation being an obvious distinguishing characteristic he is right, but I think some commenters are a little concerned that some other distinguising characteristics are not highlighted in this argument. I am thinking about potential imported inflation, balance of payments with external countries, size of markets and other things.
    One of the things I might take issue with are the idea that government IOUs are always accepted in payment, because there are some circumstances when that might not be true.I also find the argument that only a moron would refuse to accept dollars today rather misleading, as it would be perfectly feasable for some one to ask for payment in gold or Canadian dollars. I guess being from a country in which payments can be in different currencies I find this argument typically parochial. On debt and the fact that the US has always been in debt, then I think the professor has rather skimmed the surface on this. The important point is not whether you are in debt, but the size of the debt going forward with interest relative to the ability to raise taxes and print more money without consequences. Yes the federal state can raise taxes and/or print money but there becomes a point where the secondary effects negate intentions.Where the line is drawn I doubt any body really knows, but we know its there as through history some have found out.My take would be that the US is sailing a lot closer to the wind than many think.

    1. KRN

      Brick: A comment on your quote: ”The important point is not whether you are in debt, but the size of the debt going forward with interest relative to the ability to raise taxes and print more money without consequences.”

      Note that Wray is not trying to cover all aspects in his post.

      A few of things to think about.

      1- Re the burden of interest payments: The Fed directly controls the short term interest rate which is currently around zero. The cost of servicing a zero interest rate bond is zero. In any case when there is positive interest the bond holders earn income from the bond, not a bad thing. It supports aggregate demand.
      2- The Fed does not need to issue bonds at all. If it doesn’t, government deficit spending accumulates as excess reserve balances at the banks’ reserve accounts at the Fed. It amounts to a change in the assets held by the banks, excess reserve balances at the Fed instead of Treasury bonds. There is very little difference between the two.
      3-The point is the government (which includes the Fed)can set the interest rate and the reserve balances at anything it wants. Inflation will occur if the government deficit spends too much and the resulting demand for goods and services is larger than what the country can produce. If that happens the government must reduce spending or even go into surplus (probably by raising taxes) in some cases (very rare for the US). The US is very far from that situation today.
      4-If the US government doesn’t deficit spend the US economy will drag along at a low level of growth unless private debt and spending takes off (that’s the bubble that just burst) or exports increase hugely.

  26. Bates

    One commentor above said (paraphrase) ‘The wealthy are hurt most of all by inflation because they hold their wealth in dollars that are being inflated away’.

    Prove it! If the wealthy believe for a nanosecond that inflation is around the bend they will convert a large portion of their dollars, drachma, yen, etc, to some hard commodity and store it in an offshore account or safety deposit box.

    We have seen time and again the dictators of banana republics escaping their imploding countries by escaping to a safe haven in their private jets while the populace are waving pitchforks and torches in front of their quickly abandoned government buildings. Does anyone believe the same cannot happen in any country? Human nature is the same everywhere!

  27. Tom Cabanski

    My favorite part is where he explains that the deficit never causes currency devaluation. Next he’ll tell me that currency devaluation does not lead to higher prices for oil, cars and almost every other item imported into this country.

    Whew! Now my mind is at rest. Let’s get congress to pass a $1 trillion dollar stimulus and get back to the business of “stimulating” the economy! Maybe the small business I had to close thanks to this moronic administrations policies will magically re-open.

    1. L. Randall Wray

      Tom: I wonder if you are a careful reader? Here is what I actually said: “Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.”

      Now where in that statement do you find me claiming that government deficits will NOT lead to currency devaluation.

      Like so many on this list, you apparently did not actually read the blog.

  28. wojciech

    I believe that number 1. is based on assumption of generation replacement and population growth. But what happen with state tax revenues when population decline or at least getting in huge part to old to work? I suppose kicking a can in such situation is getting harder even for a mighty state.

  29. Luke

    For those who are unaware, Professor Wray is describing some of the basic principles of what people refer to as “Modern Monetary Theory” or “Chartalism”.

    The essential belief of MMT seems to be that unemployment is in all cases due to a shortfall in aggregate demand which can easily be remedied through government deficit spending.

    So far, so Keynesian.

    The twist with MMT, is that proponents believe that the bond markets are an unnecessary impediment so their laudable goals of full employment, and hence advocate direct issuance of currency (ie crediting of bank transaction accounts) to fund government efforts to support demand.

    Unfortunately, MMT has little of substance to say about the possibile inflationary consequences of their suggestions. Rather, it is something of an article of faith amongst MM theorists that inflation will not and cannot occur in an economy while ever there is spare capacity (ie unemployment is greater than 2%).

    What the MMT advocates fail to acknowledge is that all of these ideas are basically old hat. The monetary and fiscal arrangements of the 1970s were actually quite close to what MMT suggests we should be doing now.

    In the 1970s, governments all around the world were running large deficits, some of which (such as in Australia for example) were partly funded through borrowing from the central bank, rather than through debt issuance. The effect of this was that monetary policy and fiscal policy were far closer together and interlinked than they are today.

    As everyone knows, the 1970s was a time of high unemployment AND high inflation. It was really in reaction to this confounding sitation that central banks and governments worldwide came to a general agreement about the idea of clearly seperating monetary policy activities from fiscal activites. This is the origin of the self-imposed constraint most governments and central banks worldwide today operate under – that budget deficits should be funded through debt issuance, and monetary policy should be left free from these fiscal constraints to concentrate on ensuring price stability.

    Much of the output from the Chartalist camp is similar to Professor Wray’s article – rhetorical pieces which are long on simplistic reasoning and at times utopian idealism, but short on empirical analysis and justification.

    But most importantly, MMT falls short in actually making a case for what ultimate advantages their system hopes to provide over the current deficit funding arrangements. Exactly what is the point of your theory Professor Wray?

    1. Kid Dynamite

      “Unfortunately, MMT has little of substance to say about the possible inflationary consequences of their suggestions. Rather, it is something of an article of faith amongst MM theorists that inflation will not and cannot occur in an economy while ever there is spare capacity (ie unemployment is greater than 2%).”

      terrific summary of the issue.

      1. stf

        Wrong. They’ve explained inflationary consequences many times. You’re just cherry picking and building a straw man here like most of the rest. And you run a reputable blog? One would think you would at least to a little research before agreeing with something so obviously wrong.

        1. stf

          See Randy below at 12:51pm as he makes the same point.

          If all you contrarians here are trying to convince chartalists they’re wrong, you’re not doing a very good job.

    2. marc fleury

      Full employment is but one of the “applications” of MMT (albeit the one preferred by Dr Wray in his book).

      As I argue in another comment, the FED has just provided another application of MMT: by printing money and participating in various markets including CDO. Keeping the securitization market semi alive has been a huge application of MMT.

      MMT has served to stabilize the world markets after a huge financial implosion. How did it do so ? by maintaining liquidity levels or at least preventing them from catastrophically breaking down.

      The gold standard may have precipitated the great depression by leaving societies with only the fiscal solution to their financing and draining the valuable exchange currencies from the system… there were trees full with fruits, man hungry and ready to work, yet no work would be done because the money was gone… how silly was that?

      Liquidity was the first syndrome that had to be addressed and it was addressed, in part, with MMT.

    3. Greg

      To blame the 70s inflation on the size of the govt debt or deficit is madness. Just because the two events were occuring at the same time doesnt mean one was causative of the other. The 70s inflation was without a doubt driven by the price of oil. Similar to the inflation we were experiencing in the summer/fall of 08.

      It wouldnt haver mattered what our debt to GDP ratio was the oil shock was gonna drive the price of everything up and it could happen today too, thats why an energy policy that reduces the dependence on oil for our energy needs is crucial.

    4. L. Randall Wray

      Hi Luke. I wonder if you have actually ever read any of the MMT literature. We spend more time addressing the inflation issue than just about any other topic. Our publications on that topic would run to literally thousands of pages. And we certainly do not deny that government spending can be inflationary. Indeed, we argue that the typical Keynesian demand pumping will almost certainly be inflationary.

      Is ignorance truly bliss?

      1. Luke

        Professor Wray,

        I have not read any of your own material. I have read much of Bill Mitchell’s writings. Would you consider him a colleague and able exponent of MMT?

        I would appreciate it if you could direct me to some literature or discussions on inflation within the context of MMT.

          1. L. Randall Wray

            Luke: And if you are willing to report back to this blog after reading the book, I will have a free copy sent to you!
            All you have to do is to promise to write a serious review. You can love it, you can hate it, just tell us what you think.

  30. uBig fatPig

    Within his grave j m Keynes is now standing up with the clap. But is this historical Eliot Wave merely the illusion of *Post hoc ergo propter hoc*?

    Are our monetary policy and federal budget deficits less important than our micro-fiscal policy? When we tax the payroll are we robbing the landlord and the home builders? Does our hidden robbery slow the economy that hires the carpenters, Karen?

    U B Judge

  31. L. Randall Wray

    Thanks for the comments. A few have made a valiant effort to understand the points made. Unfortunately, most have gone off onto tangents that have nothing to do with my blog. Some seem to have a bit of understanding of Chartalism or MMT (for those who have no idea what an MMT is, it is based on my 1998 book, “Understanding Modern Money”–short for “modern money theory”). Unfortunately, even those somewhat familiar with MMT seem to have a similar habit of going off to tangents and presuming conclusions that no Chartalist would want to conclude.

    To clear up one big misunderstanding in the comments above: in my blog I did not argue that deficits won’t cause inflation. Of course they can (they usually don’t, but that is a different matter). No Chartalist has ever argued that we should run infinitely large deficits. No chartalist has ever argued that government ought to use its spending to try to move all resources to the public sector. No chartalist has ever denied that government spending can affect exchange rates. No chartalist has ever believed that it does not matter what the government spends for.

    Perhaps it is too much to ask, but could commentators try to avoid imputing beliefs that are not implied?

    1. marc fleury

      Professor,

      I have read your book with great interest. It has left a deep impression on me. 6mo later I am still mulling over the content.

      Do not be surprised by the reactions and hesitations of people here. For many, printing money is “just wrong”. There is appropriation of resources by the government. Why that is good and in what context is it good is the focus of much angst.

      One comment I would like to make is that I am wondering how the theory holds up in the context of international trade. Then a government is but a collection of households. Not all government get away with printing. It is also a question of size. For example, it is obvious that what is true for the USG is not true for the government of Greece. The greek tragedy proves not even the EU can resort to printing presses so easily.

      At a time where the US is printing, china is printing tit for tat to prevent currency re-evaluation, and my guess will be a EU printing experiment to bail out greece, we are seeing a massive real scale application of MMT. It IS a chartalist understanding that is pushing the current central bankers. I think Bernanke to be a chartalist. Whether he knows is or not this is what the practice has been. Printing money to stabilize systems.

      1. L. Randall Wray

        Marc: I do not deny that size matters, but probably not in the way you imply. Greece is NOT a sovereign nation in the way I use the term. It does not issue a currency; it is a user of a currency (the euro). So it is in some respects like a household. Greece and other nations that adopt foreign currencies, gold standards, and pegged exchange rates surrender a great deal of their sovereign power. Exactly how much freedom they have to pursue domestic fiscal and policy space will depend on various factors but the most important is probably their ability to earn that foreign currency (or gold)–to build a warchest of reserves. So Taiwan, China, Singapore do have policy space even if they peg.

        1. charcad

          Here we agree. Greece is a semi-sovereign like Dubai and California.

          Have you written anything on how, in your estimation, the current federal deficits are being financed? If so, could you provide a pointer?

    2. JTFaraday

      “Thanks for the comments. A few have made a valiant effort to understand the points made.”

      Well, to be fair, you talked down to the audience so much I’m not sure you actually gave anyone anything to bother understanding.

  32. DoctoRx

    As Dr. Wray intimates above 10:32 AM (what time zone?) and as some others have, I think the key is whether governmental deficits go for productive/useful activities or not. Think winning WW II (big useful deficits) vs. losing the Viet Nam War (bigger useless deficits); interstate highway system (good); bailouts of bondholders of Big Finance companies 2008-9 (I argue bad).

    IMO the recent deficit spending on banksters has led to the explosion of anti-deficit spending sentiment. If spending was directed toward the needy, toward repair of necessary infrastructure, and toward medical care/research, I think that the public would be a lot more relaxed about deficits in this time of great economic slack.

    1. robert

      ds appreciate your views (as well as those of Mr. Wray)

      If the government does not issue bonds to fund spending (taxation serves this purpose) then why the constant furor over the amount of debt that most seem to assume must be issued this calendar year?

      I have presumed nominal government bond yields have risen recently (although rather modestly in a larger historical context) because of pricing issues. Investors do not want to pay as much for government debt because of perceived (or imagined) default risk. The (misguided?) notion the government has to sell boat loads of Treasuries or else then acts as a negative reinforcement to push prices lower (and yields higher). While I intuit this is an uninformed view given the intense deflationary forces gathering steam, there seems to be no shortage of treasury and dollar bashers (add Taleb now to the list of the former). If I was a believer in conspiracies I would guess that weak hands are being irrationally frightened out of longer duration treasuries so shrewd buyers can lock in better yields (actually quite extraordinary in real terms) for the deflationary period that lies ahead. The evidence that longer maturities are considerably under owned also dovetails nicely with such a “theory.”

  33. ds

    Luke, you make it sound like, back in the 1970s when Keynesians ruled the roost, the government spent money by issuing currency, but today, now that we have realized the folly of our ways, the government instead spends money by issuing bonds. This is simply not true, and shows a misunderstanding of how the monetary system works.

    Goverments of today spend money by issuing currency reserves. The Treasury writes a check. Then, after this money is spent, the government, at its discretion, issues bonds. They do this because, in order to maintain a positive interest rate target, the newly-created reserves must be drained from the system. Governments absolutely do not fund their spending by selling bonds. If that were the case, the reserve monetary base could never grow.

    This is how governments operated in the 1970s and this is how they operate today. Nothing is different.

    When a household borrows, it has to take someone else’s currency. Government borrowing is NOT the same. It creates the currency in the first place. This is the central point that Wray is trying to make in this post. Our government does not face a financial constraint in the same way a household does.

    This is really what MMT is arguing. The government does not fund its spending by selling bonds. Therefore, the decision to sell bonds — how much and what duration — should be left up to the Fed. Debt ceilings are arbitrary and irrelevant.

    You can argue that deficit spending will lead to inflation long before full output is reached. There is nothing wrong with arguing that. But on the other hand, you also have to account for the economic situation we face today, where governments around the world are running large deficits with inflation nowhere in sight. The reality of today is a huge problem for neo-classical economists. Where are the inflation expectations? Where is the lifetime budget adjustment? Where in the world is the real interest rate larger than real GDP growth, the necessary precondition for the government budget constraint? Their models cannot explain the extraordinarily large amount of persistent slack we are seeing in our economy.

    You are right though — the 1970s were a bad time for Keynesians. I think that, given what we are going through, their ideas will start to regain influence.

  34. constantnormal

    Another case of an economist out of touch with Reality. While presenting the case for “governments can’t go broke” the professor neglects to note that as a matter of historical fact, they can, and do.

    Arguments as to why the reality of actual fact is wrong are wasted.

    Perhaps the professor could better spend his day examining the history documented by Reinhart and Rogoff than explaining why a household is not the same thing as a nation (something that is obviously true), and using that to make the case that nations cannot go broke (which they clearly can, and do).

    1. Greg

      They “go broke” for political reasons, not because money disappears.

      If China declared war on us tomorrow do ya think we could “find” the money to sustain a fight as long as necessary? Why cant we “find” the money for health care?

      There truly is a limit to our wealth but we have NEVER been close to reaching or surpassing it. ITS ALL POLITICS NOT FINANCE.

    2. L. Randall Wray

      Hey Normal: nonsovereign governments can and do go broke. they are like households–users of currencies.

      Name one currency-issuing sovereign government that does not promise to exchange its currency for gold or foreign currencies that has ever gone broke. (Russia voluntarily defaulted on some sovereign debt as a political move, apparently to thumb its nose at Wall Street; I do not know of any other case.)

      The problem with the book by Carmen Reinhart and Kenneth Rogoff is that they lump together countries on gold standards with sovereign countries.

  35. constantnormal

    There is something wrong with the syllogism:

    households can spend more than they earn and go broke -> governments can spend more than they take in -> therefore, governments can go broke.

    But that does not imply that the counter-argument is true.

    Arguments as to why governments cannot go broke fall flat in the face of actual history. History cannot be defeated by sophistry.

  36. Mickey, Akron, Ohio

    It should be obvious that governments can engage in deficit spending much longer than most households. But what the deficit is incurred for over time would seem to be the more important question. If the deficit incurred is largely for CONSUMPTION – more of everything material – as opposed to INVESTMENT in education or social/physical infrastructure then the pursuit of the former to the detriment of the latter would suggest that there is a limit to how long any government can run a deficit. This analogy is also applicable to households as well. Neglect your home with half-ass repairs and when the time comes to sell it, see how much it’s worth. Neglect your children’s education and see how well they fare in the job market. Neglect infrastructure, the skills of the future workforce and see how well you, your business, or country fare in a global market.

    When governments/households crossover to CONSUMPTION at the expense of INVESTMENT their ability to pay, to service their debt, eventually catches up with them. Spain and England come to mind in this regard. [Yesterday's piece on empire/imperial overstretch is instructive.] In the case of the United States, I would venture that deficit spending for investment [private and public] took priority over consumption for much of its history. Only in the postwar period did CONSUMPTION begin to displace INVESTMENT, seemingly accelerating after 1980. I may be wrong but the past 30 years or so have resulted in a public education system that leaves much to be desired and a crumbling infrastructure, both physical and social. Has the deficit incurred been worth it? I know, it was one helluvah of a party while it lasted. But it’s over.

    Having devoured the future, there is no going forward, but an abrupt collapse. Right now, it would appear that we’re in the first stages of this collapse with regard to households. How much longer the government can continue down this road is the question in need of an answer. Of course, we haven’t answered the more important question asked above. Have we crossed or passed beyond this consumption versus investment threshold and can we restore a balance between them? I’ll leave it at that.

  37. ORLY?

    I’ve been struggling with Chartalism ever since the first Marshall Auerback post I stumbled on here. I’ve plowed through a lot of the material on New Deal 2.0 and billyblog and I am still confused. I guess I need to read Prof. Wray’s book. In the meantime, here’s what I can’t get past:

    *The government crediting bank accounts/creating reserves (out of thin air). How does this work in practice and where do these newly created reserves go? If we use current events as a guide, they go (have gone) onto the balance sheets of large banks and Wall Street broker-dealers and have been paid out as $145B in compensation. Right? Which is fine if you’re a banker but has of course created a major emotional/political backlash among pretty much everyone else.

    *How does creating new reserves not affect the value of dollars in circulation, and (circling back to the point above) how does the government determine who benefits from the creation of the new reserves?

    *How do you account for human psychology and emotion? If our entire society were to suddenly accept that we do not need to borrow to pull ourselves out of a deflationary spiral, that we do it by just creating reserves out of nowhere, what would that do to confidence in the value of our currency?

    P.S. If Chartalists want to try to foster understanding of their theories, it would help if responses to questions/criticisms aren’t steeped in arrogance, insults and an almost bizarre sense of touchiness. Frankly, a lot of your arguments lack clarity, especially for the layperson. Insulting those who are trying to grasp what you’re getting at won’t win you many converts.

  38. DR

    “We have seen time and again the dictators of banana republics escaping their imploding countries by escaping to a safe haven in their private jets while the populace are waving pitchforks and torches in front of their quickly abandoned government buildings”

    The US dollar is the worlds reserve and transaction currency-it can export inflation at will.

  39. Lockstep Investing

    Wow. This is a truly academic approach to the issue.

    You state…

    “The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. ”

    It looks like you are stating that debt reduction is a cause of periods of economic contraction. Get real.

    In at least three of those cases there were large speculative excesses that led to increased economic growth (and enlarged tax receipts) prior to a dramatic drop in economic activity. The fact that the government was responsible enough to payoff unpaid bills when things were flush does not mean it caused economic contraction. To even put that forward is ridiculous. Please, a little less academic supposition and a little more common sense.

    1. L. Randall Wray

      Hey lockstep. Let us say that once each year for the past 7 years Kenny Norton punched you in the face. the first 6 times your jaw broke. And you never had a broken jaw except on those 6 occasions. Today he hit you for the seventh time. Do you have any prediction? Even if you know nothing about mechanics or medicine, might you assume a bit of causation? Or would you continue to believe it is sheer coincidence.

      One claim about American Bison is that they have no notion of cause and effect. This allowed the Europeans to slaughter them and virtually wipe them out. They were saved only because a few were left in a zoo in NJ. I wonder if we need to put a few Austrian economists into a zoo for breeding purposes to try to keep the species alive.

  40. Aalan

    I’m surprised another basic difference was not mentioned.
    In a household, you assume that someone, maybe everyone, will work as needed to sustain income. If income and budget don’t match, the first thought might be “cut spending”, but a close second would be “earn more money.”

    And how does a government earn more money? By raising the level of economic activity, so that it can be taxed. You can’t do that by cutting spending!

  41. gigi

    Yves,

    Easily the worst article I have ever read on your site. This has to be some experiment, but I don’t know of what :-)

    If this is about a pedantic technicality that governments are not households then yes, I think we can all agree that governments are not households. I for one will NEVER question anyone comparing the government to a household and saying deficits are bad. It is an analogy and by definition they are inexact. So what is the point in writing papers about it and asking people to shred the analogy apart if someone offers it? Illogical and quite pointless.

    The arguments given by the author are mostly circular, or of the turkey variety. None of us have ever died and I wish I could make the assumption that we will never die. What Yves argues about in her blog all the time :-)

    The reason a a lot of people are having difficulty with this one is that the author starts with a simple statement but then adds a lot of statistical data parading around as truths (reducing deficits causes recessions) which is argumentative in itself and does not really lend much to the original statement.

    A lot of people here know that massive deficits are not sustainable. Whether the government defaults or prints is immaterial. This argument is a distraction and if anything will make it impossible to get this message to the masses. I think there is a greek term for this type of argument but not being versed in it and somewhat short on time I can’t look it up.

    1. wtf

      Easily the worst comment I’ve read regarding this article. And that’s saying something because the ignorance here today is so thick you would need a chainsaw to cut into it.

      Thirty years of anti-deficit anti-government propaganda have made Americans some of the most economically ignorant people on the planet. Prof. Wray has a major uphill battle on his hands.

      1. Chris

        Yes, and using logical fallacies to make points, and condescension and borderline ad hominem remarks to rebut criticisms is definitely the way to fight that uphill battle… /rolleyes

        1. gigi

          Thank you Chris.

          Yves site has always been one of the most civilized blogs I have seen. Mostly very pithy comments and top notch analysis from some very smart people. Even where I disagree I can see why the author is making the argument. No blind obedience on this blog, which is what I love about it.

          Today I am seeing a lot of comments that are very different in nature. It seems a lot of students/followers are here defending the prof.

          More debt is good for everyone is not an argument I will ever swallow, regardless of where it comes from. Deficits are NOT good. We should pay for what we need on an ongoing basis. Previous generations built wealth and passed it to us. I want to do the same for the next generation. My parents paid for my education. Why should my children pay for theirs by borrowing money? Etc.

          If common sense makes me economically ignorant, so be it. I am what I am. I take responsibility for my actions, I think for myself, and I don’t pray at anyone’s altar.

  42. nmtdoc

    Professor,
    Thank you for venturing into these waters.We are collectively ignorant of the true workings of our current monetary system and the blogoshere is full of self-righteous, angry commentary. Yves, please post more of these links. I also recommend Bill Mitchell’s blog to anyone out there interested in really understanding this topic.

  43. Wade Phipps

    It is not uncommon for households in the US, once established to be in debt until the household ceases to exist. I know plenty of folks who had a mortgage from when they got married until the day they died and most carried credit card debt when the household ceased to exist. The difference between a household and the government is that when the household ceased to exist, the creditors went after the estate. Plenty of households also hit the debt ceiling and no one will issue them more debt at a rate that is sustainable. Many go bankrupt at that point and default as they are usually deficit spenders. Governments all over the world have defaulted on there debt when they have gotten into the same situation, and the recovery from that is long and painful. At somepoint it will have to the US, history will repeat itself we are a different Greece. The US dollar being a reserver currency and the need by other countries for the US to act as a super consumer to drive their economies is the only thing keeping us pushing forward. It will end, either from support for the dollar moving on to others or by the US making a concerted effort to change before that happens, which is unlikely. I find it ironic that we constantly tell other countries to get their financial house in order when we neglict ours. Just because it takes longer sometimes for a country to financially fail than a household when it takes on debt to the point that it can’t be serviced does not make it a good analogy. Every country fails eventually through natural disaster, war, geopolitical change, or financial failure, which typical is in concert with one of the previous. The list of former world powers is long and they all were economic world powers early in that process and that typically faded long before their military might did.

  44. NKlein1553

    The level of hostility directed at Professor Wray by many of the commentators is pretty unbelievable. Judging by the amount of concern expressed over the possibility that deficit spending will automatically translate into hyper-inflation I guess a lot of naked capitalism readers are living on a fixed income. It’s unfortunate because as Professor Wray pointed out earlier Modern Monetary Theorists write quite extensively about the danger of inflation. I’m just beginning to go through these resources myself, but so far I’ve been quite impressed with what I’ve read. For those interested in learning more please see the Centre of Full Employment and Equity website:

    http://e1.newcastle.edu.au/coffee/index.cfm

    Basically, I think it all comes down to what you believe is the essential problem of capitalism: unemployment/underemployment or inflation? If history is any guide I’d have to answer that question with unemployment, but I’m underemployed myself right now so maybe I’m a little biased.

  45. Seth

    Right question, botched answers.

    Q.Why is the government not like a household?

    A.Because it lives ‘forever’.

    Why is a 30 year mortgage sensible, but not a 300 year mortgage? Because 30 years “fits” your productive working life. 300 years does not. Simple as that.

    The US Government has had a perpetual mortgage since the 1830′s, just as Britain has for even longer. The only relevant question is how manageable the payments are relative to GDP and tax revenues.

    This is hard for people because they have less than zero intuition for economics beyond their own ‘checkbook balancing’ arithmetic. Ignorance is a serious problem for a major power.

  46. Tom Hickey

    The ideas that Prof. Wray expresses about are not new. They stem of Abba Lerner’s principles of functional finance (193) and Wynne Godley’s Stock-flow consistent macro models. Godley and Cripps stated on the first page of Macroeconomics (1982) that confusion about how the economy actually works in relation to finance translated into policy-making that has is not reality-based and cannot accomplish its purpose, either domestically or internationally.

    The first principle for understanding the relationship of finance and macroeconomics is that the government and domestic private and external trade sectors is vertical. That is, the monetarily sovereign government issues the national currency and firms, households, and trading partners use this currency. As the monopoly currency issuer of a non-convertible flexible rate currency the government is not financially constrained and does not “fund” its disbursements with taxation or “finance” them with debt. There are real constraints, however, inflation/deflation if the government does not issue the proper amount of currency to balance nominal aggregate demand with real output capacity, and a rising/falling exchange rate, which influences trade.

    Commercial banks operate within the non-government sector and cannot issue currency. That create bank money through lending (loans create deposits). All bank money nets to zero since everyone’s bank money is someone else’s loan. Commercial banks cannot increase or decrease non-government net financial assets.

    The government injects funds into the commercial sector through its disbursements, which increase demand deposits with no corresponding loan. Therefore, deficit expenditure by the government creates non-government net financial assets.

    If the government issues debt corresponding to the deficit, then the non-government net financial assets are saved at interest in the form of government bill and bonds. This is simply a switch of one asset for another, so the funds injected by the deficit are switched into Treasuries to be saved for the interest. The interest is also a form of currency issuance that increases non-government net financial assets. When Tsy’s mature, the Fed simply increases reserves in that amount at the Federal Reserve bank of the holder’s bank, and the holder’s bank increases the holder’s deposit account by the figure. Poof. The debt is “extinguished” by the asset transfer. IN non-government this is the switch of one asset form for another, and from the government side, the switch of one liability form for another. That’s all there is to it.

    Taxation withdraws non-government net financial assets. Taxation is currency withdrawal, i.e., issuance in reverse. Where does the money go? Nowhere. It is just numbers on a spreadsheet, like points on a scoreboard. Where to the points go when changed or taken down?

    Government deficits are exactly equal to non-government surplus, while government surpluses are equal not non-government deficits. Non-government deficits result in decreased nominal aggregate demand, which translates into an output gap and rising unemployment unless consumers finance their spending with loans from commercial banks. This is not economic theory based on assumptions. It is just national income accounting based on stock-flow consistency.

    1. Ingolf

      Tom, I appreciate your clear summation of the mechanics underpinning MMT.

      If I’ve understood you correctly, isn’t this just another way of saying that under a fiat monetary system the government (broadly speaking and including the central bank) controls the monetary base? If so, it is indeed nothing new.

      What I fail to see is how a theory seemingly based in large part on this can tell us much about the vastly larger financial system and credit more generally, or about their real-world economic impact.

      On the comparison of federal budgets versus household budgets, it’s obviously true that a sovereign state with a fiat monetary system and the capacity to issue its own currency is never, strictly speaking, constrained. It can always satisfy its obligations by monetising its debt. Like nuclear deterrence, though, I wonder if this mightn’t be a capacity best left untested.

  47. Tom Hickey

    In the last para in my comment above, I should have written ” Non-government surpluses result in decreased nominal aggregate demand, which translates into an output gap and rising unemployment unless consumers finance their spending with loans from commercial banks.” Non-government deficits increase nominal AD, of course.

  48. Professor

    I am a professor of economics in university of Phoenix. I certify this professor’s argument as correct. He should be promoted to super-professor.

  49. JP Koning

    “4. The federal government is the issuer of our currency.”

    Wray assumes here that the central bank and executive branch are inextricably fused together into one entity called government.

    His attempt to aggregate institutions together hides the very important ways in which central banks have achieved separation from the executive branch. It is this independence that has prevented the executive branch from controlling the issue of currency.

    In real life, not academic fantasy, “government” is indeed more like a household than the pure instrument of power Wray so wants it to be.

    1. Tom Hickey

      Currency issuance is a power of the legislative branch because currency is issued into the economy through government expenditures that are either part of the budget passed by Congress and signed into law by the president, or else approved in special appropriation bills. Debt issuance also requires congressional approval.

      All the Fed can do is manage reserves in the interbank system, in the US the Federal Reserve System, where interbank settlement takes place. When the Treasury disburses funds as approved by Congress, the Fed adds reserves to the Treasury’s account so that it’s checks and electronic transfers will clear in the interbank settlement system. That’s how your SS checks get cashed, for example. Bank reserves are not used directly in the commercial economy. They are for interbank settlement that occurs in the Federal Reserve System in the regional FR banks, with which all commercial banks must be affiliated directly or indirectly through other banks.

      1. JP Koning

        Ok, I’ll bite.

        Let’s stick to technical and not abstract terms. So the US Treasury has an account at the Fed. All Treasury spending is done through this account. Say there’s nothing in it. Congress approves a disbursal by the Treasury. The Fed can now create checking account dollars for the Treasury to spend. Is that what you’re saying?

        1. Tom Hickey

          “Congress approves a disbursal by the Treasury. The Fed can now create checking account dollars for the Treasury to spend. Is that what you’re saying?”

          This is essentially what happens in the reserve system. Here’s how it works.

          Your example is in terms of the commercial banking system with which everyone is familiar. However, the monetary system is a vertical system in which government issues currency and non-government (domestic and external trade) uses it. In addition the commercial banking system creates bank money by lending (loans create deposit). These are actually separate types of money even though both are denominated in dollars in the US.

          The commercial system interacts with the government system at the level of the Federal Reserve because all interbank settlement takes place through reserves. The Fed creates the reserves. When the commercial banks need them, they either exchange Tsy’s they hold for them, or else rent them in the interbank market, with the Fed as the lender of last resort. The Fed always makes reserves available for its going interest rate.

          The Treasury, however, like the Fed (government central bank) is on the side of the government not the commercial sector. When it wants to spend, then it tells the Fed to create that amount of reserves in its account so the checks will clear when the checks are presented in the commercial system and the banks send them on for settlement. This transfers the reserves from the Treasury’s reserve account to the various banks reserve accounts. The banks then credit the depositors checking accounts and hold the reserves in the FRS for settlement if they surmise that checks will be written on these accounts, and the process goes not. These funds ultimately are used to purchase Tsy’s and that drains the reserves from the reserve system by “storing” them as Tsy’s. When the Tsy’s are sold, then the reserves go back into the system. This is just entering numbers into a spreadsheet and switching them around, as Warren explained. This is the way the monetary system works operationally.

          1. JP Koning

            “When it wants to spend, then it tells the Fed to create that amount of reserves in its account so the checks will clear when the checks are presented in the commercial system and the banks send them on for settlement.”

            So let me get this right. The Treasury can ask the Fed to create reserves in its account ex-nihilo? Out of nothing? That’s why it faces no fiscal constraint?

  50. Jeff65

    I think the main discomfort (aside from just plain misunderstanding) with the ideas presented by Prof. Wray, centers around the notion that the economy is very much about making choices rather than “the invisible hand” guiding the outcomes. As soon as it’s about making choices there is a fear someone else will be making those choices to your detriment. People thinking this need to WAKE THE HELL UP because someone is already making those choices to your detriment.

  51. chartalist

    For all of you here arguing that the article above is absurd: sit down and think for a second. Where do you think the dollars came from for you to be able to pay your taxes or to “lend” to the government. Imagine it’s year 0,there are no dollars in the economy, can you then pay taxes in dollars? or can you buy government bonds? NO! the government has to spend first, it has to hire you or buy something from you, so that you can get ahold of dollars. The funds for paying taxes and buying government securities come from government spending. If there was no government spending (or transfer payments) there would be no dollars in the economy. Hence your taxes or selling government bonds cannot finance government spending. it’s illogical! Just because institutionally the fed and the treasury are separate, it doesn’t mean that the fed can refuse to credit bank accounts when the treasury tells it to. Do you think that a US government check will bounce? this is mere stupidity that you have been taught to believe. A sovereign government that doesn’t peg its currency to any other currency or metal, is not restricted in its ability to spend. You are just led into believing this so that your social benefits can be cut and you won’t say anything. Or your taxes will be increased and you won’t say anything. If you all want a better life for yourself and your children, you better sit down and understand how the modern monetary system works.

    1. joe

      not sure i follow you, but basically what you are saying is something along the lines of zimbabwe? yes you can issue as much currency as wish, but at some point it does not matter if you have that ability. think that is more the issue people struggle with.

      1. Tom Hickey

        The hyperinflation of Weimar, Zimbabwe, and to some degree the inflation of the 70′s was cause by exogenous shocks, that is, something external to the system influencing the system.

        Zimbabwe is an interesting example, The government confiscated the lands of the existing farmer to distribute to more equitably. Of course, production fell drastically, and so did supply. With lower supply and the same demand, prices rose. Instead of using MMT principles and taxing to withdraw funds from the system to match spending power with the supply available, it added funds so that people could pay the higher prices. That kept driving prices up.

        Nothing like this is happening in the US, but there is no guarantee that there won’t be exogenous supply shocks in the future that may cause prices rises, but that’s not the issue here.

        A more pertinent example is Japan, where they had and still have humongous debt to GDP, but interest rates remain low. This has lasted over a long time, challenging inflationista presumptions, but it is easily explicable by MMT.

        1. joe

          i guess from what i understand your mmt and using taxes to control money supply eliminates the need for the fed. also, what is the difference between the fed tripling its balance sheet to prop up prices and zimbabwe trying to help affordabiity?

  52. Chris

    Another non-economist here. I was one who reacted negatively to earlier posts on this topic, but I’ve read the article and most of the comments and I believe I’m starting to come round to the idea. It’s less like managing a household budget and more like trying to maintain a lake at a constant level by controlling the rates of inflow and outflow, and in the presence of external factors such as droughts and rainstorms. There’s still an optimal balance and you can still be too high or too low, but perfect equilibrium is not always the right answer.

    If you take the view that we’re in a drought period and need to turn up the spigot a bit (inject money into the non-government economy) the trick would be to do it in a way that actually fosters economic growth and doesn’t end up finding its way into the same channels that landed us in this mess in the first place (i.e., the banking industry and the TBTFs). That’s easier said than done, as we’ve seen. Arguably tax relief for individuals would be the most likely to deploy resources where they would generate true economic growth. If the unemployment and household saving statistics are anything to go by, individuals and families are the closest of anyone to grasping the new reality, and can probably be relied on to spend it wisely. By contrast, if the banks get their hands on it it will be off to the casino once more.

    Having said that, I still don’t like the payroll tax holiday idea that was floated a while back as it seems excessive – we’ve had plenty of evidence in the past what a rush of money to the head will do. We need to tread cautiously so as not to blow any more bubbles.

    1. Tom Hickey

      By george, you got it! Great.

      I don’t agree with Warren on the payroll tax cut either for different reasons. I think that targeted tax rises to disincentives asset prices from rising too fast and tax cuts for small businesses would be better, along with increased stimulus through deficit spending is a more targeted way to proceed. But these are policy issues. MMT just says what what needs to happen, and policy deliberations determine what the options are. Then choice among the options is a political decision that can be made based on informed deliberation of the actual challenges, issues and available tools.

      Warren Mosler takes a more conservative position than Bill Mitchell and Randy Wray do, for example, but they are all MMT’er who agree on the principles.

    2. L. Randall Wray

      Hey Chris, yes, by george you’ve got it. I actually sent the following to Yves early this morning in response to your first post–but for some reason it did not get put up. anyway better late than never, even if you don’t need it now:
      The most important comment made by Chris concerns payment of interest. A sovereign government pays interest in the same way that it makes any other payment: by issuing an IOU. It credits deposits (and reserves), issues currency, or issues a bond depending on the portfolio choice made by the “creditor” (nongovernment holder of treasuries). Can a household do that? Can a household service its debt by issuing its own debt? Why is that important? Unlike a household, sovereign government NEVER promises to deliver anything but its own IOU in payment. (There is a caveat here: I do realize that some governments have issued foreign currency denominated debts–a crazy thing to do and something they should never be allowed to do. Essentially that makes them nonsovereign, and thus more like a household.) Regarding the question: OK we have always been in debt but does that mean it is a good thing? Answer: well, the US has done pretty darn well since 1837, and even better from WWII when it stopped trying to balance the government budget–until the Clinton years. Further, government debt is nongovernment assets and government deficit is nongovernment net income. So, yes, it is good for the private sector. Finally, YES inflation and effects on currency can be legitimate concerns. I did not deny that. I was focusing on the mistaken belief that government, like a household, needs to match spending and income. Beyond full employment, bigger deficits are likely to cause inflation.

        1. selise

          not annoyed – grateful!

          didn’t have anything to add to the thread, but do want to thank you for your persistence and willingness to discuss these ideas. if you (and bill, warren, et al.) are on the right track (i’m persuaded you are, but am still working on having the background to have an informed opinion — not there yet) we as citizens absolutely must come to terms with your ideas and what they mean for the policy space available to us.

          thank you!

          p.s. to my fellow commenters: as mentioned by others, randall wray’s book, Understanding Modern Money, is accessible to the lay reader and is also very well written and argued (my thanks to marshall, rob and others who recommended it to me).

      1. Chris

        The Chris above is not the same person that posted any other comments in this thread as Chris. Those are all me. You can have Yves check the email address.

        I do appreciate your response. I tried to make my first comment as neutral as I could, but some of my further replies were fueled by the contentious nature of quite a few of the commentators I responded to.

        My main hangup is the whole interest issue. I am just a working stiff, as I mentioned, interested in the housing bubble and all the workings of such (which is why I read this blog) and the conversations I have with other people are at the level that it seemed this article was trying to address (I’ve not really seen the “authorities” I read try to make this comparison, so it was safe to assume you were talking about most normal people, addressing the common-man sentiment). Yet you avoided that point, instead concentrating on points that seem completely irrelevant when you don’t tackle this central issue. “Stay out of debt” is probably the top principle touted to people, so when you hear normal people (non-economics educated people) trying to compare governments to households, it is surely this principle the comparison is based on. “The government is running up a huge debt. The piper is going to come calling.” I’m trying to assimilate what you and others have said specifically to the interest issue.

        1. Tom Hickey

          The debt of currency users is different from government debt. The confusion arise from using the same terms, which reinforces the household-government finance analogy that is false.

          Currency users — households, firms, and states in the US — are currency users, hence, they are revenue constrained and must service debt through income. The currency issuer — the federal government — is not financially constrained since it creates the currency. It “services” its debt through more currency issuance. Yes, this can contribute to inflation in combination with other facts that increase spending power in excess of the ability of the economy to produce goods and services for purchase, or the floating fx rate my drop making imports more costly (while correspondingly lowering the price of exports), but that is the problem for government, rather than finding the money. The government does not have to tax to pay interest. It just issues the currency as needed. Taxes don’t fund anything. They just withdraw purchasing power from non-government, reducing demand and therefore price pressure.

        2. Chris

          Yes, this Chris and that Chris are different people – this is my second comment on this topic, my first being the one that started this reply chain. I will pick a more unique name for future comments to save confusion.

  53. carping demon

    “Plenty of households also hit the debt ceiling and no one will issue them more debt at a rate that is sustainable. Many go bankrupt at that point and default as they are usually deficit spenders. Governments all over the world have defaulted on there debt when they have gotten into the same situation, and the recovery from that is long and painful. At somepoint it will have to the US, history will repeat itself”

    Governments all over the world haven not gotten into the same situation as households. They’re not households. So they must have defaulted for some other reasons. Considering what would drive a household to default does not help us understand government default.

    At somepoint is will have [happen?] to the US, history will repeat itself. Why should it?

    As unsettling as today’s circumstances may be, they won’t improve if/when history repeats itself. Nothing will be over. Nothing will be demonstrated.

    1. Tom Hickey

      Monetarily sovereign governments only have to default if they take on debt denominated in their currency of issue, or peg to other currencies. This is only applicable to emerging nations, not developed countries like the US. Comparing Argentina to the US in this regard is just silly.

  54. mikeVA

    Fine. We all agree expansionary fiscal policy creates growth, and fiscal policy breaks balance sheet recessions. Can we get to the heart of the matter – opening the goody bag for a few, large, select organizations and individuals rather than impacting real households and real incomes? Because the way I see it, we dumped a load of cash on JPMorgan with [2007] asset turns of .07 and leverage of 12.68, and we opened expansionary monetary policy, and these organizations still want to rip value from normal people and shed jobs. What happens when the fiscal policy gets grabbed and hoarded by Wall Street organizations that don’t give a wit about domestic jobs and disposable income?

    1. Tom Hickey

      This is a political question and this travesty is made possible by two major factors, money in politics and economic ignorance of voters who are persuaded to vote against their interests by specious arguments.

      The false household-government finance analogy is a chief way that the public is kept in the dark about what is really happening behind the veil.

      To get educated on the facts, read follow these bloggers on MMT (order is alphabetical not prioritized)

      Marshal Auerback

      Scott Fulwiler

      Bill Mitchell

      Warren Mosler

      Winterspeak

      L. Randall Wray

  55. Dave Raithel

    One point that lingers in the background and around the edges of all this discussion (great stuff, sorry I missed it when it started) is that Professor Wray simply disputes the history of money that most his critics (I suspect) accept as true and which we’ve all heard: That money evolved from barter through the “natural selection” of a preferred commodity. More on that can be found in one of his earlier papers (could be in his book too, I don’t know):

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=137409

    Very briefly, and with details not put here: Sovereigns invented money.

    That is heresy to anyone who, accepting the “natural selection” theory, views fiat currency as a perversion of the natural order. It’s just hard to be told that everything you thought you knew is wrong. Till one gets over that headache, absorbing Wray and Mitchell et al is impossible.

    1. Ingolf

      Dave, thanks for the link. I just finished reading the article and it helps to clarify some of the issues that have been debated in this thread.

      The monetary mechanics of Chartalism actually appear quite straightforward; namely, in a sovereign fiat money system where the state issues its own currency the monetary base is entirely an artefact of government fiscal and monetary activity. Whatever one’s views about the history of money, this description of the present reality seems uncontroversial, even if the manner of presentation may at times be sufficiently novel to generate some confusion.

      The application of these mechanics is another matter entirely. Here, the unlimited capacity to issue its own currency seems to be used in support of broader economic proposals, all of which I’m pretty sure remain very controversial indeed.

      Truth is, the more I read about it the less I understand where Chartalism actually breaks new economic ground. It’s hardly news that sovereign governments with their own fiat currency are unhampered by normal funding considerations. This has long been understood; they can, after all, produce money to their hearts’ content. The real issue (and the thing that’s tended to hold them back) has always been the economic consequences that might flow from the aggressive use of this capacity.

      Given the current rather extreme state of affairs, it may not be all that long before we get at least some answers to that question.

  56. Greg

    Dave

    You have hit the 10-penny squarely atop the cranium. But if you think about it its obvious. The market could never settle on a universal form of money that satisfies all aspects of moneyness. At some point a “state” stepped in and declared (fiat) “This is money that will be accepted as tax extinguisher” Even commodity backed money has a central authority that declares how much gold you’ll get for your dollar. Once you do that though gold is no longer a commodity. It loses its ability to really appreciate in value.

    In order to act as money everything within the sovereigns monetary space must be “priced” in the money of the state. Otherwise its just another form of barter.

  57. madmilker

    well, I wus liking the article until I got to tis part…

    “Of course, the last time we ran a budget surplus was during the Clinton years.”

    jus maybe you need to read a little more from Michael Hodges….

    “After bragging in the late 1990s about budget surpluses, when in fact the general government was in deficit (not surplus) despite the highest tax revenue share of the economy in peace-time history, we know they were claiming trust fund surpluses as their own. They were understating their claimed deficits by mixing in surpluses of trust funds.”

    http://mhodges701.home.comcast.net/~mhodges701/deficit-trusts.htm

    Now, spend a month are two on Grandfather Economic Report series and sumthig!

    http://mhodges701.home.comcast.net/~mhodges701/

    He is working to update the 2009 year has soon as the government comes out with all the figures….

    and remember…

    Retail makes nothing and for the past 80 years the US government has only made more debt.

    “It is the aim of good government to stimulate production, of bad government to encourage consumption.” – Jean Baptiste Say, French economist 1767-1832

    and also remember what George Washington wrote in his farewell address of September 17, 1796 but tat he never gave cause he wus to embarrassed over out having any teeth.

    “Observe good faith and justice toward all nations. Cultivate peace and harmony with all… The Nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest … Tis our true policy to steer clear of permanent alliances, with any portion of the foreign world.” – George Washington

    Now, how do you think he feels today on tat dollar bill being stuck in a foreign bank cause the American people don’t make anything for the foreigners to buy and it takes your government to sell bonds in order to get him back to the states to help you.

    Remember what Lance Winslow wrote in tat article “The Flow of Trade in a Global Economy”….dang! better yet…jus take the time and read tis ….”Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

    Also, think for a moment about George Washington….yes the man tat is on the US dollar bill…. “Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution.

    Take the time to read his farewell address after only eight years of serving his country and than ask yourself tis….How do you think George feels being sent overseas in return for all tat foreign so-call cheap items and being left in a foreign bank because the American worker doesn’t make anythig for the foreigners to buy. Cheap items didn’t make tis great union of 57…oops! 50 states the greatest place on the face of tis Earth…..the American worker (union and non-union) did.

    You can’t have a strong country without having a strong currency and you can’t have a strong currency unless you keep it floating around within your 50 states. Tis is why the store with the star in the name puts 95% China made items in their stores in China….to keep their “yuan” in their country helping the nice people there. And with only 5% left for all the other 182 country’s tat make stuff including the United States of America….tat doesn’t produce very many jobs outside of China.

    Being an old person myself and knowing how it wus back in the 40′s, 50′s and 60′s in tis union of 50 states….I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches jus maybe one day he will shake mine again.

    good day!

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