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Parenteau: Marching to Austeria* and Other Neolib Fibs

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By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute

Richard Alford has correctly identified the need to address global imbalances – rather than simply slouch our way back to some milder version of status quo before the pre- Lehman meltdown arrangement, as we presently appear to be doing – if we are to have any hope of finding a sustainable global growth path. On this much we can surely agree. As to the method of addressing global imbalances, however, and perhaps even the true nature of these imbalances, we find ourselves deeply at odds with some of his diagnosis and most of his prescriptions.

Richard specifically takes issue with those of us who have been warning about the pursuit of large, prolonged fiscal retrenchment paths in the eurozone. He believes this is a bit of a diversionary tactic on our part, akin to a stance John Connolly once took, of restating our problem as their problem to deal with, not ours. The solution to the US problem is plain and simple in Richard’s mind: stop fighting austerity policies abroad, and start advocating their implementation at home.

Now it is true, as a matter of double entry book keeping, that if the US as a nation is going to reduce the gap between its spending and its income (which would reduce the currently widening trade deficit by definition), then nations that are major trading partners of the US must be prepared to reduce their net saving. Just as it takes two to tango, there are two sides to every exchange or transaction. One nation cannot increase its financial balance or net saving with the rest of the world unless the rest of the world is prepared to reduce its net saving. So from a rational perspective, rebalancing global growth does, as a matter of fact, require both sides to move in the right direction. This is not a theory – it is simply an accounting reality. One side can initiate the move, but both must be prepared to move.

Frequently, we are told by neoliberals, who dominate the economics profession and policy making circles, that there is something called the “twin deficits” that must be recognized and addressed in the US. The twin deficit story goes like this: an increase in the fiscal deficit will tend to lead to an increase in the current account (or trade) deficit. Therefore, if reducing the US current account deficit is a desirable if not a necessary policy objective, then it is surely necessary to reduce the fiscal deficit. We have been hearing this story for nearly three decades from the neolibs.

The problem with the twin deficit story is the facts do not seem to bear the theory out. Below you may observe a chart for the US the shows the current account balance as a share of GDP, and the combined government fiscal balance as a share of GDP. You will notice the twins seem unrelated – not even separated at birth.

Specifically, look at the entire decade of the ‘90s, when the twins moved in opposite directions. The fiscal balance increased, while the trade balance fell. This is supposedly impossible under the neoliberal twin deficits story. Then observe the shaded bars, which encompass recessions of the past 45 years. Lo and behold, in nearly each of the recessions of the past nearly half century, the fiscal balance has fallen while the trade balance has risen. The facts indicate the twin deficit story is at best an incomplete or unreliable story (click to enlarge).

parenteau

Why might this be the case? The neoliberals are not playing with a full deck – or at least they are keeping some cards up their sleeves. In prior articles, policy briefs, and public presentations, we have traced out the fact that while for the economy as a whole, total saving out of income flows must equal total investment in tangible assets (houses, plant and equipment, etc.), this is not true for any one sector of the economy. Breaking the economy down into three sectors – government, foreign, and domestic private sectors – we can derive the following identity which must hold true at the end of any accounting period (we can provide the simple algebra to derive this upon request – it appears in other publications of ours, as well as in much of the research Wynne Godley performed while at the Levy Institute):

Domestic private sector financial balance + government financial balance – current account balance = 0

Or

DPSFB + GFB – CUB = 0

This means in order for the current account (CUB) and the fiscal balance (GFB) to be twins, as the neoliberals often assert, such that a fall in the fiscal balance (say an increase in the fiscal deficit) leads to a commensurate fall in the current account balance (say an increase in the trade deficit), then there must be little or not change in the domestic private sector financial balance (DPSFB). This, it turns out, is empirically false. The DPSFB is rarely stable, especially in the past two decades of serial asset bubbles, when both the household and nonfinancial business sectors have gone deeper than ever into deficit spending territory under the influence of asset prices kiting ever higher.

So what is the true twin of the trade deficit? We can split the DPSFB, as we hinted just above, into the household and nonfinancial business sectors.

DPSFB = HFB + NBFB

When we do so, we notice a new set of twins arises from the historical data. The true twin of the CUB is the HB, or household financial balance. And of course, this makes perfectly good sense since most of the trade deficit is in the area of tradable consumption goods (click to enlarge).

parenteau1

So if we decide the US CUB needs to turn around, we best find a way to increase the HFB, or the net saving positions (saving minus investment) of the household sector. How can this be achieved? Expanding and rearranging the accounting identity above, we find:

HFB = CUB – GFB – NBFB

If we want to get the two true twin financial balances increasing in value (thereby reducing the current account or trade deficit) then we have two choices available. Either reduce the government financial balance (increase fiscal deficits) or reduce the NBFB (get businesses to run down their free cash flow positions by reinvesting more of their profits in tangible capital equipment). If we rule out the former on neoliberal concerns about fiscal sustainability, we are left with but one choice to improve the position of the true twins, and that is a higher reinvestment rate in the domestic business sector.

And this, dear reader, brings us to the heart of the matter. Remember the global savings glut you keep hearing about from Greenspan, Bernanke, Rajan, and other prominent neoliberals? Turns out it is a corporate savings glut. There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment. Companies, ostensibly under the guise of maximizing shareholder value, would much rather pay their inside looters in management handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.

What we have here, in other words, is a failure of capitalists to act as capitalists. Into the breach, fiscal policy must step unless we wish to court the types of debt deflation dynamics we were flirting with between September 2008 and March 2009. So rather than marching to Austeria, we need to kill two birds with one stone, and set fiscal policy more explicitly to the task of incentivizing the reinvestment of profits in tangible capital equipment. A program to do so would include the following measures:

1) a prohibitive tax on retained earnings that are not reinvested with a 24 month period after they have been booked;

2) a financial asset turnover tax that raises the cost to businesses of playing casino games in various financial asset markets, rather than reinvesting profits in the productive capital stock;

3) a reinvigorated public or public/private investment program that helps speed up the shift to, and lower the costs of production of new energy technologies.

Regarding the last proposal, we must be willing to recognize the history of US economic development includes a number of very large and very bold public and public/private investment initiatives that provided numerous business opportunities and the basis for breakthrough technologies to emerge. The canal, railroad, highway, and other initiatives were hardly the doorway to the communist gulag they are made out to be. Indeed, if anything, Asia has mastered the use of this approach to push one of the most rapid adoptions of capitalism ever.

We know we need to reconfigure our energy infrastructure – we knew it over thirty years ago. It is time to act, and the third proposal could include such measures as solarizing all government buildings in the southern states in order to drive unit costs of solar cell production down, which in turn would increase the competitiveness of US producers of solar cells in global markets. There are undoubtedly more proposals we could bring to bear on the business sector to break the global corporate saving glut and force capitalists to act as, well, capitalists, but for the moment, this is a good enough place to start.

To conclude, Richard summarized his recent Naked Capitalism piece as follows: “The structural problems are reflected in mutually determined unsustainable current account and fiscal deficits, as well as depressed saving rates.”

Notice how his statement fingers the wrong twins – the fiscal and current account deficits are asserted to be mutually determined. Neoliberals tell this fib all the time. Empirically, we have shown you this is false, at least for much of the last four decades of US history, Theoretically, we have shown you this is also a suspect assertion: if you bother examine the macrofinancial balance equation in its full form, you find the neolib fib requires an implicit assumption that the DPSB show little or no change over time, which again is empirically false.

Notice the emphasis on depressed savings rates needing to be reversed and revived, when, as we argued above, the real source of US and global imbalances is a corporate savings glut. Firms are earning generous profits, but they are not reinvesting them in tangible productive assets. This visibly short circuits long run growth prospects, and is the foundation of the structural problem Richard alludes to, but we doubt he would recognize it as such.

That neoliberals with credentials, credibility, tenure, and positions of policy influence can continuously assert these glaring misconceptions is either malpractice, malfeasance, or both. It is not our place to speculate on their motives, though we have our own hunches (here is a heavy hint: just follow the money). Call it innocent fraud if you must, but neoliberals would have us marching to Austeria on the basis of their hollow, unsubstantiated slogans. It is high time for the neolibs to finally drop their fibs and step out of the way. Sorry Lady Thatcher, but there is an alternative to Austeria.

*Earlier in the month we coined the terms Austeria and Austerian Economics. We introduced these concepts in our June 10th BNN TV interview, and in our June 11 Richebacher Letter Weekly Alert to describe the policy stance we saw the G-20 embracing for Austeria, formerly know as the eurozone. (And yes, bloggers elsewhere who have been erroneously attributing these terms to Mark Thoma’s subsequent June 17th use of it at Economist’s View – please consider doing a little fact checking now and again).

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167 comments

  1. Francois T

    One data series does not exhibits any meaningful correlation and does not fit; thus, the Neolibs try to explain it away as…well, who knows?

    The other data series (DPSFB = HFB + NBFB) exhibits a strong correlation and fits well; thus, it is most likely the correct explanation.

    Yet, the first group is the one with all the trappings of power.

    The Neolibs remind me of Lysenko in agriculture. In other words, if neolibs economists had to feed the world, we would all starve in no time.

    1. MacroStrategy Edge

      Which, Francois, is why it is high time to ask whether the neolibs either do not understand the world we actually inhabit, or they are serving someone else’s interests – is it malpractice, or malfeasance, or both?

      That this question is not asked, or if it is, it is done in the context of dismissing all economics as useless drivel, surprises me to this day.

      1. Mannwich

        I think it’s clearly the latter. How else can we explain the fact that after WE the people bailout the very scoundrels who got us to this point, and now they’re (and the wealthy elite) are doing fine, they all of sudden want to “austeritize” the rest of us. So, in essence, the regular person gets screwed both times. Where’s the sacrifice or “austerity” at the top? Where’s the real “leadership”?

        1. MacroStrategy Edge

          Agreed Mannwich – we’ve been duped.

          We need to stop letting ourselves be duped.

          We can start by identifying who the neolibs are pimping for, and have been for sometime now.

          That is why Obama hired in Rubin’s boys, Geithner and Summers, to key positions right off the bat. And who made very large contributions to Obama’s campaign?

          Hedge funds.

          Wondering why the financial reregulation legislation is so watered down? Wonder no longer.

          Funny that.

  2. michel

    These awful neoliberals, probably mostly global warming deniers and neocons with it!

    This isn’t economics, its political prejudice. To get to the economics, what is needed is for the authors to state clearly:

    1) what percent of GDP should we aim for total debt to be, and why?

    2) what percent of GDP should the current government spending deficit be, and why?

    3) what exactly should the government be spending the money that it borrows on? What programs?

    The proposed tax, by the way, is harebrained. It will simply lead to unproductive investment, bubbles (defined as price levels in some areas which make return on investment impossible) and stagnation and unemployment as a result.

    The fundamental problem the authors are not admitting is that much of the current government spend is impeding economic growth. To maintain or increase it, especially with borrowed funds, will have no beneficial effects.

    1. MacroStrategy Edge

      Michel – I believe the neolibs have demonstrated a repeated pattern of malpractice or malfeasance. About this I am dead serious – we can all see the price paid for following their advice and subscribing to their world view. If you wish to make jokes about it, you are free to do so, but I do not consider serial asset bubbles that distort and undermine the underlying real economic structure and leading to financial crises, deep recessions, and prolonged periods of unemployment much of a laughing matter.

      Regarding your question on public debt limits, rememberr that the public debt is a stock at a point in time, and it is made up of the accumulation of flows, namely the government financial balance, over time.

      The appropriate fiscal balance in any accounting period is the one that, given the existing private sector preferences to invest in tangible assets and save out of income flows, gets you to full employment with price stability. This, I believe, is what we need to recognize is the true definition of a sustainable fiscal balance.

      The appropriate public debt load is the one resulting from doing just this – maintaing a sustainable fiscal balance -over time.

      The fact is there is no magic, fundamental limit to the public debt/income ratio, especially for a nation with a sovereign currency (that is, money that is not convertible on demand into fixed units of another currency, or a commodity).

      Rather, it all depends upon private investor perceptions and portfolio preferences. These, we know from experience in repeated asset bubbles in recent decades, are not well grounded in fundamentals or reality, and can be quite unstable and fickle.

      Why, for example, did global bond investors wake up toward the end of 2009 and decide eurozone fiscal balances were on a an unsustainable trajectory – why had their eyes remain closed to this possibility for the two or more prior years of rising fiscal deficits amongst the GIPSIs?

      Further, I believe it can be shown the Reinhart/Rogoff 90% debt/income rule is a bit of a canard at best, but that is a subject for another blog.

      As for where fiscal expenditures should be focused, I would suggest public and public/private investment initiatives are needed and historically have proven very effective. We’ve done this in the past – spurring new waves of growth with canals, railroad, highway systems.

      We’ve known we’ve needed to do it again with regard to new energy sources and infrastructure for over three decades. But ideological blinders, myopic financial managers and investors, and political corruption have kept us from executing. The hour, I think we can all agree, is getting late in this regard, and I also recognize we need political reform first if this is not going to turn into another exercise of pink elephants and political favoritism. This is no small order, but it is time to get it done.

      Where such investment initiatives fail to bring the economy to a point of full employment with final product price stability, I would use and employer of last resort program trained on reviving natural and human capital through a focus on environmental remediation, education, community building, cultural enrichment, etc.

      Regarding your reservations on my tax, I think we have seen repeated waves of irrational investment under the guise of maximizing shareholder value. Forcing capitalists to act as capitalists rather than looters or speculators might just be a good thing in light of this experience of the past three decades. I will take any and all suggestions on a better mechanism to get this result than the simple one I propose above, but I will not concede the fundamental point – something along these lines needs to be done at once to make capitalist economies run like something more than a casino.

      Running an economy for the short run winnings of financiers has not worked very well for anyone but the shrewdest, most sociopathic financiers, has it?

      1. Toby

        I agree with your proposals wholeheartedly, but fear the divisive effect of money dooms them to short term success and not long term fiscal sustainability, unless the deeper conequences of money itself (as a tool for dealing with the problem of scarcity) on society generally are addressed and debated openly.

        Can a tool, which logically and inescapably means being financially rich is better than being financially poor, lastingly bring people together in the community spirit you so rightly advocate? Social divisions are deep and bitter, and stubbornly refuse to go away. It seems to me the power money allows the rich lies at the root of this age old problem, rather than ‘human nature.’ And while I don’t believe all humans are born equally able, not only does money over-reward ‘success’ and over-punish ‘failure,’ it encourages hoarding which exacerbates the problem further, meaning small differences in ability result in disproportionately huge differences in quality of life.

        Put crudely, the monetary systems we have known thus far have an inbuilt set of incentives, each arising from the presumption of scarcity, which erode community bonds over time. They prevent abundance where abundance would be otherwise be possible, benefiting from scarcity in terms of profit. I believe this is the main reason renewables have not been aggressively pursued. They threaten to yield abundant and clean energy for all, especially if combined with a needed revolution in housing and transportation. Existing technologies are therefore an existential threat to the energy industry and governments alike.

        I’m currently reading Charles Eisenstein’s “The Ascent of Humanity” (and recommend it strongly). It’s available for free online. Chapter IV looks at this complicated issue in detail, though it has been addressed elsewhere too. The money system itself, at a deeper level than MMT offers, needs to be reformed before sustainability, whether fiscal or ecological, can reasonably be expected, in my view. To my mind, Bernard Lietaer is on the right track here, though more work is sorely needed in this direction.

        This is wacko-fringe stuff I know, but I like to put it out there, just in case. ;-) Not only might I be wrong, or have missed something obvious, I might, heaven forbid, be right!

        1. MacroStrategy Edge

          Toby – At this point, given the tremendous failure of conventional wisdom, mainstream views, etc. all we have left is to explore the fringes for solutions. So I will look at the chapters you recommend, although I find LETS systems too local and too small scale to be generalizable solutions, unlike MMT, but am open to persuasion.

          best,

          Rob

          1. Toby

            Thanks for the open-minded response, Rob.

            I think MMT theories would dove-tail well with Lietaer’s multi-money suggestions. He does not push LETS at the expense of other money-types, but as one of many potential local money-types to compliment other local, as well as national, currencies (a la MMT), and an international currency for investment and trade (if memory serves), which would carry a demurrage of around 4-4.5% (again, if memory servers). He pushes multiple money-types to fulfil multiple purposes and reach sustainability by fostering diversity, and also to encourage the rebuilding of community. He’s on record in support of MMT, but thinks (and I agree) it does not go far enough.

            In the end it will be trial and error of course, but there’s nothing wrong with that. All propaganda aside, trial and error is all we’ve ever had.

            Toby

        2. DownSouth

          Toby,

          I think you and I are both converging on the same conclusion, and that is that there are much more profound problems here than just classical economic theory gone bad. Classical economic theory’s flaws are intrinsic. And yes, such heresy is “wacko-fringe stuff.”

          What I find most surprising is how economists, such as Michael Hudson in the piece I linked below, can defend classical economics. It has almost always, from its first rattle out of the box, resulted in nothing but human misery and suffering, as was thoroughly documented by Simonde de Sismondi. In the first decade of the 19th century he visited England and was struck by the misery resulting from industrial progress. Why did the seemingly beneficial production of goods by machinery bring on “poverty in the midst of plenty?”

          His detailed criticism of the new society includes the observation that it splits labor from capital and makes them enemies, with the power all on one side. The idea of their “bargaining” over wages is absurd. Tyrant and victim describes the relation, yet without cruel intent of the one or knowledge by the other of who his oppressor is. Again, with overproduction the capitalist must seek foreign markets and precipitate national wars, while at home a class struggle goes on without end.

          Adam Smith was not an evil man. But he was a terribly naïve man. He “did not make the mistake…of giving simple moral sanction to self-interest,” the Christian theologian wrote in “The Children of Light and the Children of Darkness.” Instead, he “depended rather upon controls and restraints which proved to be inadequate.” Niebuhr marks Smith up in the “foolish children of light” column, “unconscious of the corruption of self-interest in all ideal achievements and pretensions of human culture.”

          So if Smith is not evil, then who is evil?

          Niebuhr defines the evil ones as “the moral cynics, who know no law beyond their will and interest, with a scriptural designation of ‘children of this world’ or ‘children of darkness.’”

          “[E]vil is always the assertion of some self-interest without regard to the whole, whether the whole be conceived as the immediate community, or the total community of mankind, or the total order of the world,” Niebuhr adds.

          It may come as a surprise to some that self-proclaimed atheists like the cultural psychologist Jonathan Haidt come to an identical conclusion:

          Moral systems are interlocking sets of values, practices, institution, and evolved psychological mechanisms that work together to suppress or regulate selfishness and make social life possible.
          http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/jonathan-haidt-1

          I think you can see the unavoidable collision with classical economic theory here because, as David Sloan Wilson observes, the “individual who maximizes his own self-interest lies at the core of [classical] economic theory.”

          So the bottom line is that bourgeois society (informed by liberal/classical theory) is every bit as vulnerable to what Smith calls “subversion” as the feudal society it replaced. In an analysis of early Calvinism, Smith discusses, as Niebuhr put it, the “stubborn, and ultimately victorious, conflict” the emerging commercial classes waged against the “ecclesiastical and aristocratic rulers of the feudal-medieval world”:

          The question is whether Calvinism is designed to benefit some individuals (presumably the leaders) at the expense of others within the church, or whether Calvinism is designed to benefit everyone within the church as a collective unit. Exploitation is sometimes naked, but more often it requires deception. Thus, we might expect Calvinism to appear good for the group at first sight but to emerge as a tool of exploitation upon closer examination. Some features of some religions undoubtedly can be explained in this way, such as many practices of the Catholic Church that led to the Reformation. Religious scholars have already reached this conclusion on the basis of qualitative information, and there is little reason to challenge it. I am not trying to explain every feature of every religion as good for the group, nor could I succeed if I tried. It is multilevel selection theory that explains the nature of religion, not group selection alone. Churches are subverted from within, which in part accounts for the formation of new churches… However, the details of Calvinism point strongly to genuine group-level benefits rather than an elaborate sting operation.

          I think Parenteau has his eyes firmly fixed upon the target, as I too am a utilitarian existentialist when it comes to public policy. I also believe that, as Parenteau seems to, that the age of the individual that we have lived for the past few decades is dead. A well-oiled group can produce resources that cannot be had by so many individuals toiling away in their private bunkers, as a functional group serves to increase the collective utility of its members. Human cooperation must evolve to a global scale, what Niebuhr called “the total community of mankind,” in order for humanity to find successful solutions to the problems it confronts, because the problems it faces are global in nature.

          The trick is to find those things that facilitate group functioning, cohesion and cooperation. But neither the extreme individualism preached by the libertarians and classical economists, nor the “greed is good” creed proselytized by the New Atheists, nor the “suffering is good” creed embraced by the Austrian School and ascetic saints, works to this end. Quite the opposite—-all these contribute to group dysfunction.

          1. DownSouth

            Oops! A couple of corrections.

            …what Smith calls “subversion”….
            Should read:
            …what Wilson calls “subversion”…

            …In an analysis of early Calvinism, Smith discusses…
            Should read:
            …In an analysis of early Calvinism, Wilson discusses…

          2. Toby

            DownSouth, I’ve been noticing a convergence in our thinking too.

            You said: “Human cooperation must evolve to a global scale, what Niebuhr called “the total community of mankind,” in order for humanity to find successful solutions to the problems it confronts, because the problems it faces are global in nature.”

            BINGO! To survive and attain a sustainable socioeconomic system (and what other goal is worthy of our efforts?) we must transition forwards away from ‘enlightened’ self-interest and Invisible Hand thinking, towards a renewed hunter-gatherer-esque global community rooted in the local but networked enough to prevent dehumanization from occurring. This is an almighty challenge, and we might not meet it.

            Economics contains nothing that I can find which redeems it. There are glimmers of hope in behavioural and biophysical economics, but for my money (ha ha) we need to start toying, intellectually at first, with post-scarcity economics — I suspect MMT + Lietaer will point that way in the end. Only by seeing the planet as the common heritage of all mankind — a post-scarcity corner stone — can we learn to share the abundant resources that are there, wildly scattered across the Earth. So much needs to be unlearned, so much hate and fear soothed, so much sociopathy confronted and stood down, it hardly bares thinking about. But as you so rightly say, it is sharing that is the way out of this mess. Sadly we are childishly addicted to the narrowest understanding of both competition and cooperation, so it is not going to be easy.

            In the meantime, we all have to keep talking to one another as best we can, and finding common ground where we can too.

          3. DownSouth

            Toby,

            “Abundance,” historically speaking at least, has been unachievable because humans keep moving the goalposts.

            Here’s what Niebuhr had to say on the subject:

            The idea that men would not come in conflict with one another, if the opportunities were wide enough, was partly based upon the assumption that all human desires are determinate and all human ambitions ordinate. This assumption was shared by our Jeffersonians with the French Enlightenment. “Every man,” declared Tom Paine, “wishes to pursue his occupation and enjoy the fruits of his labors and the produce of his property in peace and safely and with the least possible expense. When these things are accomplished all objects for which governments ought to be established are accomplished.” The same idea underlies the Marxist conception of the difference between an “economy of scarcity” and an “economy of abundance.” In an economy of abundance there is presumably no cause for rivalry. Neither Jeffersonians nor Marxists had any understanding for the perennial conflicts of power and pride which may arise on every level of “abundance” since human desires grow with the means of their gratification.
            –Reinhold Niebuhr, The Irony of American History

          4. Toby

            Good quote DownSouth. It’s always important to remember that perfection is not only impossible, it is undesirable also. A society without conflict and desire would be lifeless.

            That said, ambition, pride, desire, conflict etc., can each operate in different socioeconomic settings differently. There were of course wars between ‘rival’ hunter-gatherer groups, as well as internal conflicts (though without property theft is of course impossible), but escalation is avoided where possible, and rigid hierarchies are kept out of existence. I believe the presumption (if that’s the right word) of abundance, which is probably an offshoot of hunter-gatherer ‘embeddedness’ in nature, is a key reason why their desires and ambitions did not become destructive conflagrations of the type we civilized peoples know so well. The people of St Kilda offer another example of the kind of life sharing can offer, this time sedentary. Theirs is a fascinating story.

            For the rest of us seeking out a better path forwards, I believe the scarcity/abundance axis to be an important area for discussion. As the circle of reciprocity haltingly expands across national boundaries and even to include other life forms, while we simultaneously wield our powers of production and consumption as if there were no tomorrow, something has to give. Eisenstein talks of the Age of Separation ending and the Age of Reunion beginning, and he makes a lot of sense. I’m sure scarcity and abundance will play a key role no matter what transpires.

        3. Raging Debate

          I just printed it off Toby. You are one of the brighter minds on earth. Glad you are still out there and I do miss our private conversations which we should resume shortly!

      2. michel

        I don’t know who these neolibs are, or what they have done that has been so terrible. Terrible things are anyway not a monopoly of any particular subset of humans, terrible things have been done by adherents of almost every ethnic group, religion, geographical area, political ideology.

        I also do not know what this so called austerity is. We are told that the UK is engaging in unparalleled austerity, yet it seems to consist mainly in making sure that people in receipt of disability living allowance really are disabled. That a bunch of government and quasi government departments which do nothing and should never have existed in the first place will reduce their expenditure by 25%. If that is austerity, bring it on.

        I do not know whether neoliberals are responsible for the financial situation today, that’s a matter of which individuals took what decisions and which political grouping you put them in. What is rather clearer is where the problems originated. They originated in government interventions of various sorts. In the UK, the very well established and functional regulatory system was abolished by a government which was far from neolib, it was decidedly to the left of center. In the US, we had a series of grotesque blowups of money and credit bubbles, done on a scale that only a government could manage.

        The problem was not that regulation was abandoned, and markets left to themselves. The problem was that government intervention in markets intensified, but with lots of unintended consequences.

        On the question of what to do now, we have this: “The appropriate fiscal balance in any accounting period is the one that, given the existing private sector preferences to invest in tangible assets and save out of income flows, gets you to full employment with price stability….
        The appropriate public debt load is the one resulting from doing just this – maintaing a sustainable fiscal balance -over time…..there is no magic, fundamental limit to the public debt/income ratio, especially for a nation with a sovereign currency….”

        Perhaps so. If however you cannot say what exactly the size of the deficit that you wish to see is, and if you cannot say what programs you want to see the borrowing which accomplishes it spent on, then we are none the wiser.

        There is evidence of a magic limit. The limit is around 100% of GDP. No matter what the purity of your intentions, when total debt reaches that level, you will suffer, and you will default. You can default in a number of ways. The idea that devaluing the currency is not defaulting is simply idiotic. The idea that a debt holiday and haircut is not a default is equally so.

        It makes no essential difference whether you can devalue your currency. It just adds one to the number of ways in which you can default. But it does not change the fact that over indebtedness leads to default.

        So, once again, take a concrete case. People are advising the UK not to cut borrowing, not to cut government departments, but to keep on spending. Where is there an historical case of a country that has done that, with a debt ratio of about 60%, a current deficit of about 11%, and produced economic growth and no default of any kind?

        Don’t cite Japan. That was the lost decade or lost decade and a half.

        The urgent need at the moment is to have an environment in which investment seems attractive. If that can be brought about, and it will mainly be so by eliminating deficits and state borrowing, and lowering government spending, then you have no need for epicyclical taxes on retained earnings and the rest of this stuff. The problem is, you are advocating increased debt in order to have increased spending on what will inevitably be more economy retarding programs.

        We might just as well hire armies of people to go out and tear up the highways. It would contribute as much to economic growth as the government programs the UK is being so excoriated for cutting!

        1. MacroStrategy Edge

          Michel – The Reinhart/Rogoff public debt limit is a canard.

          Please, all of you who have been misled by this 90% public debt/income limit finding, go to the Levy Economics Institute website, and download working paper 603.

          Reinhart and Rogoff do not have this right. There is no automatic magic cutoff point for public debt to income ratios.

          In my earlier response to you I have addressed your other issues. Best not to repeat myself.

  3. David K

    Your math doesn’t seem to work out.

    I get your equation:
    HFB = CUB – GFB – NBFB

    And you are stating that HFB and CUB are the true twins, which if that is true suggests that (GFB + NBFB) does not vary much over time. I’m still with you, assuming your data is good then it seems to bear this out.

    But what follows does not make sense mathematically.

    You first say that if we want to increase CUB then we need to increase HFB. Assuming that (GFB + NBFB) continues to not show substantial change, then this is correct. But that is your key assumption in this statement.

    You then say that if we want to get the true two twin financial balances increasing then we need to decrease either or both of GFB and NBFB, but at that point you are violating your own statements already made. If (GFB + NBFB) is going to decrease, then you are breaking the link between HFB and CUB.

    Let’s think it through. You say we need to reduce either GFB or NBFB (or both, though you present it as either). So (GFB + NBFB) is reduced and thus the negative of this in your equation is increased. If CUB is held constant, then HFB must increase – you have solved for the one financial balance as promised. But if HFB is held constant, then CUB must decrease, the exact opposite of what you are promising.

    So while you state that the way to increase HFB is by decreasing (GFB + NBFB), the only way that this is necessarily true is to take CUB as constant in your equation. But in doing so, you violate your assumption that HFB and CUB are twins. You can’t hold CUB constant in order to get HFB increasing, and then turn around and say that CUB increases because HFB increases.

    1. Jamisia

      David K:
      “You can’t hold CUB constant in order to get HFB increasing, and then turn around and say that CUB increases because HFB increases.”

      I think you must. The increase in HFB increases CUB *and* holds it constant. So the assumption is asserted.

    2. greg b

      David David David

      The math is sound. Deal with the consequences of the math.

      Mr Parenteau is right. The neo libs dont care about truth, the people they are appealing to never question their claims, especially if it sounds mathematical. They themselves know exactly what they are doing, they are not stupid they are simply greedy soulless bastards, who will use ANY argument to allow the upper 5% to continue to skim billions form the rest.

    3. MacroStrategy Edge

      David:

      If you agree that a trade deficit is a two sided affair – some domestic sector wants to spend more on tradable goods than it earns selling them, and the counterpart to that is a foreign nation that want to sell more than it spends – then question to ask is which US sector displays a financial balance that most closely follows the trade balance, right?

      That sector is not the government financial balance, as is commonly, frequently, and I would argue, blindly asserted by the neolibs in policy positions and academia. It is not the business financial balance, although that has played a larger role, at least in the ’90s. Rather, as you can see for yourself, it is clearly and consistently the household financial balance that tends to move with the current account balance.

      And of course, this makes intuitive sense given the build up in household debt loads, which is evidence of their defict spending, and the composition of the trade deficit, which is dominated by consumer goods produced abroad.

      So we should be able to agree one of the keys to reducing the US trade deficit is to improve the household financial balance. (As an aside, the neolibs phrase this as the necessity of an increase in household saving, but it is really net saving, or household investment in tangible assets – mostly housing – minus gross saving out of income flows that matters as the full macrofinancial balance equation reveals. The neolibs, in other words, are dealing with an incomplete accounting framework – they only show you what serves their ideological purposes).

      If the household net saving or financial balance is going to improve, and this is going to be the causal mechanism that improvese the trade deficit, then some other sector must reduce its financial balance (reduce its net saving or increase its deficit spending).

      We then are left with three possibilities to increase the HFB:

      1. Decrease GFB – i.e. deepen the fiscal deficit by cutting taxes or increasing expenditures

      2. Decrease NBFB – i.e. reduce corporate net savings by incentivizing reinvestment of retained earnings in tangible capital equipment

      3. Decrease GFB and decrease NBFB at the same time

      I hope that clarifies the point I was trying to make in the essay above. If not, I am happy to try and walk through the logic of my position a different way until you can see it for yourself.

      best,

      Rob

  4. Dwight Baker

    WHO CARES IF SO WHAT DOES THAT BUY YOU AT THE MARKET?
    GET OFF THE GRID

    I am a sovereign American Citizen I will not bow down to the G-20 Banksters, none of those crookmasters were elected. CNN called that bunch lawmakers ??????

    With all the many reasons for folks to protest contest and dissent, no wonder we even have a nation half fit half-wit people to do so.

    But the simple truth of the matters about all our problems is in the cure if we will do so.

    Meaning get off the GRID. Refuse to play the game that the tyrants have set out to make us play.

    How hard can that be? Drain your bank accounts dry —- convert to spend able gold. Then set back, trim the sales, take a break, look around, lose all the un-necessary baggage, tear up the credit cards, drive less, spend less, eat right eat at home, tell the kids NO more often, put all on a strict budget.

    Buy a cheap pre-paid credit card to buy stuff on the web. Get away totally from the crooked banks.

    Take your mainframe computer and un- plug from the web.

    Never plug it in again then tell all who might want to know “ got destroyed in a fire”.

    By a cheap computer to keep at home —– put in on the web for nothing at all except to read etc. never take your private notebook with all your private stuff out.

    Now do your best to be sane while your ride out this storm?

    Last thought The Banksters G-8 and G-20 are shaking in their boots—- why else would they spend one billion for security?

    They only rule because we allow them too.

    Get off the D—mn Grid.

    1. MacroStrategy Edge

      I welcome your plea for people to take power back into their own hands, Dwight, and to start taking simple steps of asserting their own initiative rather than expecting someone else to carry them through the fire.

      But ask yourself, could all the inhabitants of NYC go off the grid, and if so, on what timeline and with what investment expenditures on small scale food and energy production.

      Also ask yourself, even if you individually can find a homestead and go off the grid, what happens when the default world, mainstream society, derails? Do you really think they will stay out of your cabbage patch? Do you have enough ammo to keep the starving looters at bay?

      As much as I love the image of rugged individualism and self reliance, having been born in a state where the license plates read “Live Free or Die”, I think we have to face the facts of contemporary society – going Daniel Boone will not work for hundreds of millions of people in America.

      Accordingly, we best work together to take the future into our hands and make it a sustainable path if at all possible. To do so, we are going to need to clean up the political process, expel the sociopathic wing that is distorting markets, and figure out how to make democracy really work for the average citizen in the context of an environment that cannot just be pillaged, consumed, and treated like a toxic waste dump. We cannot continue to sh*t where we sleep, I agree, but whole cities are unlikely to become homesteaders either, so we have to find an intelligent path forward together.

      1. LeeAnne

        The answer to why they are in such a hurry with austerity is that they are desperate to paper over the austerity perpetrated by them in the US by Wall Street policy over the last 20-30 years when each and every leveraged merger or acquisition resulted in huge leveraged fees for the likes of Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Suite 4200 … Kohlberg Kravis Roberts & Co. Ltd. Stirling Square 7 Carlton Gardens London SW1Y 5AD etc., here bloated stock options and millions of ‘downsized’ people at thousands of companies , eliminated benefits, eliminated journalism, imported garbage from slave labor, off shored profits, destroyed the justice system, tore up the constitution -ITS A LONG LIST.

        The austerity rush is a symptom of their panic over GAME OVER -people all over the world GET IT.

      2. LeeAnne

        apology -this is in the wrong place.

        I had been writing a rant on NYC Bloomberg-style preparation for crowd control and past human rights crimes against peaceful demonstrators but got started on this other.

  5. craazyman

    Lord Have Mercy!
    Finally!
    A macroeconomics article that nails the problem for what is is: the corporate savings glut and a failure of the corporate imagination.

    YOu can break Economic Imagination (EI) down into Consumer Imagination (CsI) and Corporate Imagination (CtI)

    and because GDP = Capital + Labor + Nature + Imagination, we can see that Imagination is a big component of GDP

    where Imagination (I) = CsI + CtI

    Now Imagination can vary between negative infinity (i.e. war, revolution and social collapse) and positive infinity (when Jesus comes in the clouds and we all ascend in the final eshaton).

    Now CtI is very negative, CsI is also somewhat negative due to what George Soros would call reflexivity, but which I will simply call being broke, which is another way of saying that there’s a corporate savings glut and looting surplus.

    Putting CtI into positive territory is like getting an addict to sober up. You can’t just ask nicely.

    1. MacroStrategy Edge

      Craazyman, there is wisdom in your madness.

      What we have here is a failure of our own imagination, and our willingness to actualize what we can imagine, which is one of the greatest gifts of being born a human being (although we also have to face the limitations inherent in the real world we inhabit too – it is not all about visualizing whirled peas and chasing The Secret with multi level marketing schemes).

      But then, we have in fact allowed our imaginations to be cannibalized by corporate advertising and political huckstering. Hey, it was easy and it felt good while it was happening. We bargain with the devil sometimes, and the devil always gets his due.

      So indeed, the time for detoxing has arrived, and I feel confident it can be done if we are willing to do it together in a true, small d democratic tradition, with the same swelling of imagination, true grit, and hard work of the founders of this nation.

      Up for it?

      1. craazyman

        Yes, I am up for it, although my imagination far outraces my mastery of the technical facts of macroeconomics, as does most people’s, including most so-called “economists”. ha ha

        I agree with Toby that the nature of Money itself is a root problem, and it’s nature must be changed for society to better channel logos and repress thanatos, which I believe is a primary function of well-designed monetary systems.

        I am working — usually after a few glasses of cote du rhone — on what I hope will eventually be a synthesis of psychoanalytics, anthropology, economics and political economy, which may inform the ideas for a revised political economy. But this may take me a while, because I have other distractions such as my interest in the arts.

        This field of thought I call “Contemporary Analysis” and I’m a Professor at a place called the University of Magonia, which exists only in my own imagination. But so does the world itself, and so do we all in our own.

        But your posts do help me in my work, and I appreciate them. Maybe I will eventually say something that is useful to the larger effort. In the meantime, I’ll keep talking anyway, regardless of how little sense I make.

  6. Sufferin' Succotash

    –The canal, railroad, highway, and other initiatives were hardly the doorway to the communist gulag they are made out to be.–

    I donno. I’ve always suspected that the Erie Canal was a communist plot.

  7. Kill All Keynesians

    Biggest pile of Krap I have ever read on NC. Back to whatever clueless interventionist hell you came from, and change the name of your service to something more truthful like “Moron’s Strategic Edge”. Some truly idiotic initiatives suggested.

    Color me Austerian.

    1. MacroStrategy Edge

      KAK – Am happy to address any issues of substance you take with my views. Ad hominem attacks, however, will get you nowhere. Please take your spew, join the Know Nothing Party, and have a nice austerity!

      best,

      Rob

  8. RueTheDay

    An extremely well-written piece. Certainly better than the majority of what guest posters have produced here recently.

    Interestingly enough, it’s not all that different than what Keynes suggested in the General Theory (which has little resemblance to what the Keynesians that followed him tried to implement). Keynes identified investment as the key unstable variable, called for splitting the government budget into an operating budget and a capital budget, wanted the operating budget to be in balance at all times, and wanted the capital budget to swing into deficit or surplus countercyclically to address the instability of private sector real investment.

    1. MacroStrategy Edge

      Rue -

      Yes, what Keynes actually wrote, and what the so called Keynesians (Samuelsonians/Robertsonians/Hicksians, really)wrote, are not the same thing.

      Because so few people read Keynes in the original, including tenured neoliberal professors calling themselves New Keynesians, this misrepresentation of his views has been perpetuated much longer than it should have.

      Glad you understand this – wish more people did. Keynes argued public investment on the capital budget was your primary tool for full employment with price stability if monetary policy came up short. Countercyclical fiscal policy on the current account (aka pump priming), of which there is very little mention in the General Theory, was a last resort which he did argue needed to be reversed during expansions (if the fiscal deficit on current expenditures and revenues did not reverse endogenously) on its own.

      1. mikkel

        Rob, what do you think of Steve Keen’s work, the only model I know of that actually implements what Keynes said?

        1. MacroStrategy Edge

          Mikkel – I am currently sitting at a Minsky conference with Steve Keen, who I count as a personal acquaintance. Which model, or which part of his Minsky inspired models, are you looking for me to comment upon?

          He is one of the few to mathematically formalize Minsky financial fragility dynamics, with some promising results, although he takes some circuitiste twists I would not.

          best,

          Rob

  9. anon

    It’s nice to see you decomposing the private sector balance (finally?).

    But I think I’m with David on first reading.

    You’re trying to improve the current account. Both private sub-sectors make directionally positive contributions to current account improvement (i.e. more positive for either households or business means more positive for the current account, ceteris paribus.)

    But you invoke the need for primary correlation between household and current account balances.

    So you want to get the household balance up.

    Then you do that by freezing the current account result whose improvement is the original objective.

    And so you reduce the business balance to get the household up, and then invoke correlation, and so on.

    Reducing the business balance means more investment.

    It seems like a lot of faith is involved in the sequencing.

    Without faith in that sequencing, I might say that increased investment increases the current account deficit, other things equal.

    But this is only my first impression. Need to read it more.

    P.S.

    Presumably you omit the financial sub-sector because it nets to zero. If that’s right, I understand it, but it makes me uncomfortable for some yet to be determined reason.

    1. anon

      All at the margin, it’s like corporate surpluses are working in the same direction as government surpluses – in terms of being a catalyst for household deficits. So the deleterious net saving effect of government surpluses on the private sector is compounded by similar corporate effects when that flows through to the household sector.

    2. anon

      The optically weird thing about this is that the business sector financial balance is chronically negative in both stock and flow terms, due to its net real investment position. So the SFB issue is whether it is negative enough.

      1. MacroStrategy Edge

        Anon – actually, post burst asset bubbles, the nonfinancial business sector tries to (and succeeds, if the fiscal deficit widens and the current account deficit shrinks enough) raise its net saving or financial balance position. This of course complicates the capacity of the household sector to also achieve a high (mostly precautionary) net saving position.

        In addition, professional investors have been favoring companies with high free cash flow (that is limited or negligible reinvestment of profits) since the LBO and corporate raiding days of the ’80s. At the macro level, this is the equivalent of investors betting and making money on the murder and death of capitalism. But they are all just maximizing their personal wealth and the wealth of their clients, so they cannot see this forest, as they are busy gnawing away at the roots of the trees.

        best,

        Rob

        1. anon

          Right. I haven’t looked at the numbers, but the non-financial business sector can’t improve its net financial asset position in flow/stock terms unless it actually reduces its net real asset position in flow/stock terms, can it? I.e. real capital stock actually has to shrink, which means the net financial liability position shrinks. Has that actually happened?

          1. MacroStrategy Edge

            not all nonfinancial corporate business debt is used to position tangible assets – quite a bit of what the Japanese called zaitech, or financial engineering, got into the system over the last two decades

        2. anon

          Maybe I’m being repetitive here, but it seems to me the improvement in the business net financial asset position can only happen via depreciation that isn’t replaced in gross real investment terms. I.e. it’s depreciation that improves the sector NFA.

        3. Doug Terpstra

          Unenlightened self-interest in-action, undermining democracy and corrupting capitalism. Seems I’ve read something recently along those lines; not sure where, but I think we’ve been econned!

          Thank you, Lord (and Rob and Yves) for an exceptional eureka post. This has the caliber of revealed, Solomonic wisdom, clearly bringing out a halleujah choir of great thinking and resources, (with the exception of KAK, but I suppose even aimless crap-flingers serve their purpose:-). This is so compelling, despite the account balance stuff mostly above my head, the gist of it rings of self-evident truth. At some point it will be irresistible, but unfortunately it may required a large collapse to break down the casino first.

          Anyway, thanks, Mr. Parenteau and thanks, Yves. Take your time resting and recovering, especially if you have guests like this to cover for you.

    3. anon

      Several bloggers have solicited recommendations for antonyms for Austerian/Austeria, following from the root stimulus. Have you fashioned something there as well?

      1. MacroStrategy Edge

        Yes but I won’t share it unless the blogosphere, who almost to a man assigned the origin of Austeria/Austerian Economics incorrectly to a fellow blogger, Mark Thoma, at Economist’s View, agrees to this time correctly assign attribution to me. It is only fair. Not asking for royalties here, just recognition of actual sources, which is a chronic problem in old media, and not surprisingly, magnified even more in new media.

      2. MacroStrategy Edge

        Ok, I will give it up.

        They opposite of the Austerians is…the Libertinians.

        If you use it, please be smart enough not to go attributing it to someone who did not come up with it first, ok?

      1. MacroStrategy Edge

        PSFB has been decomposed into HFB and NBFB for many, many years. I do so in my prophetic Nov. 2006 Levy Public Policy Brief no. 88, but Godley was doing it for many years before.

        Higher levels of aggregation are chosen to make the approach more accessible to people. 3 moving parts, 3 dimensions, seem to be the limit of most people’s capacity to handle models and such.

        best,

        Rob

        1. Ramanan

          Wynne Godley’s views are also at odds with the Modern Money economists. His views are more (Post) Keynesian and different from MMT.

      2. anon

        I hadn’t seen the decomposition before this, sorry.

        I’m still struggling a bit with the intuition from another perspective. Let’s just flip the terminology a bit and refer to a generic current account surplus (i.e. its a deficit when the surplus is negative, as in the case of the US). Then what you’re saying effectively is that a shift in the share of the current account surplus from non-households to households will end up increasing the surplus in total (making the surplus more positive, or a deficit less negative). If the shift in share doesn’t happen via the government, then it must happen through the business sector. And if that’s the case, it must happen through increased real investment. The net result of all that is that increased investment domestically will increase a current account surplus (reduce a deficit) and increase even more so the household surplus. So I’m just trying to get some intuition on the last sentence, which is the logical implication of your sector balances portfolio shift approach.

  10. Jackrabbit

    Why are governments suddenly talking about austerity and why do they need to do it so quickly?

    Austerity = ensure that government has the ability to socialize bank losses without raising taxes (on the wealthy).

    It started in eurozone because EMU means Germany and France bear the brunt of the necessary adjustment. In the US the wealthy/bankers would LOVE to follow along – making the schoolyard excuse that the others are doing it.

    With millions out of work on both sides of the Atlantic, fiscal austerity is misguided and may be the new depressionary beggar-thy-neighbor. Next up: reduce unemployment benefits and lower the minimum wage. Those lazy ba*terd* need a swift kick in the a**. (side benefit on boths sides of the atlantic: no more immigration problem, hurrah!)

    1. MacroStrategy Edge

      Yes, precisely Jackrabbit.

      I believe we will find the Austerians, whether in tea party guise or neoliberal garb, are wittingly and unwittingly in some cases, just dupes for global finanzkapital.

      Sock puppets is the phrase I use for politicians in their keep.

      So you are barking up the right tree – and I remain surprised how few people can figure out this is the tree they need to be barking up. Really, how much more obvious could it be after the GFC and the Great Mop Up policy manuevers that followed?

    2. LeeAnne

      Jackrabbit,

      The answer to why they are in such a hurry with austerity is that they are desperate to paper over the austerity perpetrated by them in the US by Wall Street policy over the last 20-30 years when each and every leveraged merger or acquisition resulted in huge leveraged fees for the likes of Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Suite 4200 … Kohlberg Kravis Roberts & Co. Ltd. Stirling Square 7 Carlton Gardens London SW1Y 5AD etc., <a href="The answer to why they are in such a hurry with austerity is that they are desperate to paper over the austerity perpetrated by them in the US by Wall Street policy over the last 20-30 years when each and every leveraged merger or acquisition resulted in huge leveraged fees for the likes of Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Suite 4200 … Kohlberg Kravis Roberts & Co. Ltd. Stirling Square 7 Carlton Gardens London SW1Y 5AD etc., here bloated stock options and millions of ‘downsized’ people at thousands of companies , eliminated benefits, eliminated journalism, imported garbage from slave labor, off shored profits, destroyed the justice system, tore up the constitution -ITS A LONG LIST.

      The austerity rush is a symptom of their panic over GAME OVER -people all over the world GET IT.

      1. LeeAnne

        and furthermore, they want some kind of government imprimatur on austerity while people are struggling with day-to-day existence still blaming themselves, and before they become one uncontrollable reaction.

  11. DownSouth

    Rob Parenteau,

    You’re selling sound logic, rationality and factual truth, and the neoliberals are selling a morality play, and you’re getting your ass kicked.

    I certainly don’t wish to challenge the substance of what you put forth here. Your evidence and logic are unimpeachable. However, you need to stop and ask yourself why you’re doing so badly in the courtroom of public opinion.

    I’m currently reading David Sloan Wilson’s Darwin’s Cathedral: Evolution, Religion and the Nature of Society, and it’s chock full of wonderful insights.

    One of those is that the social sciences are all over the map in their theorizing. The anthropologists have their theories, the sociologists have theirs, the psychologists have theirs, the economists have theirs and so forth. And as Wilson concludes, “You know there is a problem when one man’s heresy is another man’s commonplace.”

    The economists have erected rational choice theory as their be all and end all. As Wilson explains, it is “presented as a psychological theory that attempts to explain the length and breadth of human nature with a few axioms about how people think.” But, alas, as Wilson goes on to explain,

    physics might be reducible to a few fundamental laws but not psychology. The human mind is a mélange of adaptations and spandrels that have accumulated over millions of years, during which both culture and life in groups have been integral parts of the evolutionary process. Cost-benefit reasoning is an important part of human (and animal) psychology but not the only part.

    “Emotions are evolved mechanisms for motivating adaptive behavior that are far more ancient than the cognitive process typically associated with scientific thought,” Wilson continues.

    The end result is that economists tend to be more prescriptive than descriptive when it comes to human behavior.

    To wit, Wilson asserts, “a fictional belief system can be more motivating than a realistic one.” And look at your current situation! Doesn’t that describe it perfectly?

    Amitai Etzioni in The Moral Dimension: Toward a New Economics also asserts “that commitments to moral values also affect economic activities.” And when it comes to saving behavior, he counters classical economic dogma as follows:

    Neoclassical economists explain the level of saving mainly by the size of one’s income (the higher one’s income the more one saves), by the desire to provide for consumption in retirement, and by the level of interest rates. However, these factors explain only part of the variance in the amount saved. There are at least three moral values that also affect the amount saved: the extent to which one believes that it is immoral to be in debt; that one ought to save (for its own sake) and in order not to be dependent on the government or one’s children; and that one ought to help one’s children “start off in life.”

    I think if you will look at some of the arguments the neoliberals are making, they are punching some of these moral buttons, applying them to nation-states.

    Someone here on Naked Capitalism yesterday provided a link to this article by Michael Hudson:

    http://neweconomicperspectives.blogspot.com/2010/06/europes-fiscal-dystopia-new-austerity.html

    To me this represents a tremendous leap forward for economists, as it finally starts addressing the moral dimension:

    If the financial sector can be rescued only by cutting back social spending on Social Security, health care and education, bolstered by more privatization sell-offs, is it worth the price? To sacrifice the economy in this way would violate most peoples’ social values of equity and fairness rooted deep in Enlightenment philosophy.

    The point I’m trying to make is that there is nothing wrong with empirical truth and rational thought. I’m all for that. But in order to motivate the masses, those by themselves fall short. Empirical truth and rational thought, in order to be salient and to resonate with a broader audience, must be presented within a larger moral framework.

    1. MacroStrategy Edge

      DownSouth – Yes, as Lord Turner said at the INET inaugural conference in Cambridge, we are dealing with a cult.

      I have suggested to others who advocate views similar to my own that we need to hire a cult deprogrammer to get our perspective across.

      Rational discourse is hardly enough in a world where people have been trained to respond to superficial subconscious cues through years of advertising and campaigning.

      If you have any contacts in this area, I am dead serious about this – send me e-mail addresses or phone numbers or books by cult deprogrammers with a very successful track record, and please do so soon.

      best,

      Rob

      1. Oliver

        Rob,

        First of all, great article, thank you!

        Regarding your quest to deprogram the masses, I have a feeling you’re barking up the wrong tree. That would be tantamount to erasing our own psychological susceptibility to subliminal messages and such imprinted survival strategies as judging with the help of associations and subconsciously recorded memories. As you may be aware, Warren Mosler, a fellow Chartalist, has been testing the limits of communication and rational thought while on the stump. I don’t always agree with his terminology, but I think he is headed in the right direction in bringing his message across. Soundbites and carefully calibrated undertones are important building blocks of communication (especially for a broad audience), in my opinion. A knowledgeable person on this subject (whom you are probably aware of) is George Lakoff with his cognitive science theories on framing and moral politics.

        Anyway, not sure this was helpful or in any way news to you, but I wish you well on your quest!

        For those interested: in this speech Lakoff starts off with comparing morals with accounting. That should keep MMT fans entertained.
        http://www.youtube.com/watch?v=5f9R9MtkpqM

        1. Oliver

          Did I just miss that great big tongue in your cheek? Maybe I’m the one who needs deprogramming…

  12. PDC

    “There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment. Companies, ostensibly under the guise of maximizing shareholder value, would much rather pay their inside looters in management handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.”

    Well, this is COMMONPLACE for everybody… or it is?

    A CEO who plans to work, let’s say, five years for a company and is paid for performance, possibly with a lot of stock options, would be a FOOL or an IDEALIST to spend a dime in “upgrading of productive plant” or similar amenities.
    He wouldn’t be hired in the first place.

    I work for what used to be a famous US “high-tech” company.
    In the last 10 years, 90% of sites both in US and UE have been shut down, 90% of R&D has been wiped off, most production has been outsourced in China, some in Malaysia, and as a consequence we are now quite profitable, we are doing great on NASDAQ, and our CEO has become VERY well off.

    So, here are my equations: to get high earnings (E) and a high share trading price (S) you need to keep downsizing the company (C) firing people, closing plants, closing R&D…
    Something like:
    δE/δt = -K δC/δt
    δS/δt = -J δC/δt

    (where K and J are empirical constants and t is time)

    In the long run, some dependence of K and J from C (i.e. the actual size of the company) might lead E and S to decrease, even to vanish, but if you are smart you won’t be anywhere near at that time…

    1. MacroStrategy Edge

      PDC – Agreed, we get what we pay for. If we want to pay management to play, they will play casino games. If we want to pay managers to reinvest profits in tangible capital assets, we need to change their incentive structures, and the incentive structures faced by their investors who heretofore have been happy to let them loot and speculate in the name, paradoxically, of honoring “shareholder value maximization”.

      Strange world indeed. Glad you can see through the lies and distortions.

      best,

      Rob

  13. Mickey Marzick in Akron, Ohio

    “Turns out it is a corporate savings glut. There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment.”

    Why is the question and the three provided by the author are only part of the story. There are other structural factors/imbalances at work. MGI [McKinsey Global Insight] suggested in a series of studies a few years back that the “baby boomer” population explosion so distorted “aggregate demand” after WW II that as they die off, said demand in Western countries will decrease or return to “normal” historical levels – that there will be a glut of housing, etc. With birth rates falling below the replacement rate in some of these countries, there will also be “labor shortages” absent significant immigration along with the political turmoil it engenders with consequences for pension obligations, etc. Major corporations have concluded rightly, assuming MGI’s analysis is accurate, that investment in plant and equipment in the capitalist core countries is not required as their will be “excess capacity” across the board for years to come. Consequently, what additional investment in plant and investment there is is likely to be capital-intensive and labor saving, exacerbating unemployment with its downward pressure on both wages and aggregate demand and their impact on government deficits. Increasing taxes on these same corporations for not investing in plant and equipment when it isn’t needed is likely to be resisted and counterproductive. Capital is on STRIKE for a number of reasons. It is “simply” adjusting supply to meet forecasts of decreased demand in the United States and Western Europe.

    While this absolute ability to produce goods and services is no longer in doubt, there is a mismatch between this postscarcity of goods/services and the growing “scarcity” of gainful employment – the means to consume/purchase these goods/services – in the West and Japan with the consequences mentioned previously. The fact that the production of many of these goods occurs offshore in low-wage countries only exacerbates this problem. “Technological unemployment” is not a topic for discussion by most economists, regardless of their other differences. Yet with unemployment and underemployment approaching 20% in many of these countries, the “scarcity” of gainful employment amidst a postscarcity of goods and services – excess capacity – will not be resolved without serious consideration of this subject. It is a downward deflationary spiral with decreases in aggregate demand fostering little investment. if any, in additional plant and equipment with an increase in unemployment resulting in a further decrease in demand… and deficits, making the AUSTERITZATION of consumption – public and private – appear a self-fulfilling prophecy.

    This structural imbalance absent “full employment” policies isn’t even considered and signifies the triumph of Austerian economics among ruling elites in this country over the course of the past 40 years and elsewhere as well. Unemployment levels reached their lowest level in the entire post-WW II era during the late 60s and early 70s. Ever since they have steadily increased in a “ratchet effect” with each successive recession giving rise to the notion of “jobless recovery”. Low unemployment gives LABOR a distinct advantage vis-à-vis CAPITAL in such a situation, whether organized or not, and accounts for the labor militancy witnessed during the late 60s and early 70s in this country and Western Europe. It was not uncommon back then to quit one’s job in one rubber company, steel company, or auto company and find a job in another one the same day in NE Ohio. This situation was not lost on employers or policy makers. Combined with the subsequent downsizing of manufacturing and its offshoring, this “offensive” by capital has destroyed the blue-collar manufacturing base of the Democratic Party and impressed upon workers just how important steady employment is. It’s no coincidence that strikes and other forms of labor militancy have steadily decreased during this period as well. High levels of unemployment and the uncertainty it generates provide capital a distinct advantage in this context and make fiscal austerity even more likely. Witness the recent failure of the extension of unemployment benefits because of deficit concerns..

    When seen in this light, fiscal AUSTERIA is merely a continuation of the AUSTERITY that began three decades ago with policies that made higher levels of unemployment acceptable. It signified a decisive policy shift away from full employment and a growing reliance on debt to offset deficits, both public and private. Yet it doesn’t even show up on the radar screen as AUSTERITY. “Solarization” has to be seen in this light and merely as a first step in redressing this growing structural imbalance between the postscarcity of good/services and the “scarcity” of jobs that make for their consumption. Full employment renders fiscal austerity a moot issue as both aggregate demand and government tax receipts will increase across the board, perhaps even allowing for deficit reduction over time. That much I think Mr. Parenteau would agree with. MMT adherent’s have to couple their anti-austeria broadsides with “full employment” as a counterweight to AUSTERITY to gain any political traction. Employment is straightforward and something that resonates with the average American. Having a job, not having one, or the threat of not having one bears directly on how the issue of fiscal austerity is perceived regardless of what MMT might have to say about deficits.

    1. MacroStrategy Edge

      Agreed Mickey, which is why I have encouraged advocates of MMT views to lead with an employer of last resort/job guarantee argument, rather than more abstract monetary economic principles, when they state their case in public forums. I think some of them are getting this and adjusting their message accordingly. See Mosler’s Senate campaign in Connecticut for example.

      best,

      Rob

      1. anon

        If they lead with ELR, they should follow with the zero rate, zero bond proposal. That’s the only way the monetary piece has any bite. Otherwise, they’re no different than Krugman in the monetary part of the messaging.

    2. DownSouth

      Mickey Marzick in Akron, Ohio,

      I would just add that there is a moral component to be found here also, because labor is good. Work is good.

      We have Marx to thank for this, as Hannah Arendt explains:

      The really anti-traditional and unprecedented side of his [Marx’s] thought is his glorification of labor, and his reinterpretation of the class—-the working class—-that philosophy since its beginning had always despised. Labor, the human activity of this class, was deemed so irrelevant that philosophy had not even bothered to interpret and understand it.

      [….]

      Labor is necessarily prior to any economy, which is to say that the organized attempt of men living together, handling and securing both the needs and the luxuries of life, starts with and requires labor even when its economy has been developed to the highest degree. As the elementary activity necessary for the mere conservation of life, labor had always been thought of as a curse, in the sense that it made life hard, preventing it from ever becoming easy and thereby distinguishing it from the lives of the Olympian gods. That human life is not easy is only another way of saying that in its most elementary aspect it is subject to necessity, that it is not and never can become free from coercion, for coercion is first felt in the peculiarly all-overwhelming urges of our bodies. People who do nothing but cater to these elementary coercive needs were traditionally deemed unfree by definition—-that is, they were considered unready to exercise the functions of free citizens. Therefore those who did this work for others in order to free them from fulfilling the necessities of life themselves were known as slaves.

      [….]

      Marx is the only thinker of the nineteenth century who took its central event, the emancipation of the working class, seriously in philosophic terms. Marx’s great influence today is still due to this one fact…

      [….]

      To put it another way: while others were concerned with this or that right of the laboring class, Marx already foresaw the time when, not this class, but the consciousness that corresponded to it, and to its importance for society as a whole, would decree that no one would have any rights, not even the right to stay alive, who was not a laborer. The result of this process of course has not been the elimination of all other occupations, but the reinterpretation of all human activities as laboring activities.
      –Hannah Arendt, “Karl Marx and the tradition of Western political thought”

      The modern-day manifestation of the earthquake in values that Marx heralded is as described here by Amitai Etzioni:

      If one examines people’s allocation of resources among work, consumption, leisure, saving, and civility, a similar balance is evident. Juster (1986, unpublished) found, in contradiction to the neoclassical assumption that work is a pain, and leisure a pleasure (people must be compensated to work), that most people prefer a mix of work and leisure over leisure alone, and that work has great intrinsic rewards. Specifically, many people prefer a part-time job and more leisure to either full-time work and little leisure, or full-time leisure. However, as part-time jobs are scarce, people prefer full-time jobs and little leisure to full-time leisure, because being at work is valued positively in our society.
      –Amitai Etzioni, The Moral Dimension: Toward a New Economics

      So Mickey, I’m completely, 10,000% in agreement when you conclude:

      MMT adherent’s have to couple their anti-austeria broadsides with “full employment” as a counterweight to AUSTERITY to gain any political traction. Employment is straightforward and something that resonates with the average American. Having a job, not having one, or the threat of not having one bears directly on how the issue of fiscal austerity is perceived regardless of what MMT might have to say about deficits.

      1. Toby

        Good and interesting points, but check out this little ripper (if you haven’t already):

        http://www.primitivism.com/abolition.htm

        Necessity is inescapable of course, and working towards some outcome is a good and necessary part of desired outcomes. Accomplishment and genuine success demand application and dedication, but they are their own rewards. Money muddies that clear water. The question is: whence the necessity? Making a living in monetary terms, or living that life which is, on the whole, good for you, for others, and the environment?

        Because I prefer the latter necessity, I like to make a semantic distinction between ‘labour’ and ‘work’, where labour involves wage and money-exchange, and work does not. Going forward, I think we need more ‘work’ and less ‘labour’, where work need not be unpleasant at all. Animals everywhere, for example, learn from play. Play is creative and engenders joy and intimacy, and is therefore very valuable. We desperately need more of both.

        1. DownSouth

          Nice article Toby.

          It’s provocative to mull over, and certainly a useful critique, but I can’t go the distance with these radical Hegelians.

          In this vein you can mark me up with Hegel himself, who sought to constrain some of the millenarian politics.

          I’m sure these latter-day disciples of Hegel find Hegel and me, who argue for a more limited notion of freedom, as mere quietists or bourgeois ideologists seeking to maintain the status quo.

          Almost all the more radical Hegelians reject Hegel’s notion that rational freedom requires a reconciliation with nature and an acceptance of existing social, economic, and political institutions. In place of the existing order these radical Hegelians imagine a world in which everyone will be able to do whatever they wish, to “hunt in the morning, fish in the afternoon, and be a critical critic in the evening.” However, such universal freedom and prosperity can only be achieved if nature can be completely mastered. To achieve this goal, they believe it will be necessary to free human productive forces by means of a revolutionary overthrow of the existing social and political order. In this way the artificial constraints on the productive power of technology can be removed, a superabundance created, and all want eliminated.

          Like Hegel, I share much of the Enlightenment optimism. I believe human progress is possible, but by no means a historical certainty. And like Hegel, I believe the pursuit of absolute freedom can only lead to disaster. Rational freedom requires an accommodation with nature in general and with the natural, self-interested desires of individual human beings in particular.

          1. Toby

            Agreed. Limits and constraints are necessary and inescapable, and I think most humans sense that (that’s one of the reasons austerity has such appeal). There are those who want to cut the bonds and fly high, and those who seek to work ‘productively’ within them. As Jung said, “Free will is doing gladly that which one must do.”

            At bottom, I see the current crises collectively as a good old clash between the Father Sky God and the Mother Earth Goddess and hope that, when this phase has passed, we can unite those opposites and enjoy a very long period of real progress.

      2. JTFaraday

        “MMT adherent’s have to couple their anti-austeria broadsides with “full employment” as a counterweight to AUSTERITY to gain any political traction.”

        Full employment at $8 an hour sounds *exactly* like an austerity plan to me.

        If it’s true, as MMT asserts, that “deficits don’t matter (as much as you think)” what kind of sick scumbag comes up with a labor contract like that?

        I’m not buying it. Just thinking about it gives me hives.

        Go back to the land, people. Hunt and gather with Toby. Or wander the countryside and pretend you’re Rousseau–because this is definitely not cutting it.

        1. Mickey Marzick in Akron, Ohio

          JT,

          We agree! When I read Marshall Auerbach’s proposal for just such a “scam” a few months back I disagreed then and still do.

          Gonna’ leave it at that for now. I do not subscribe to that version of “full employment”.

        2. Toby

          I feel addressed!

          I don’t seek a return to hunter gathering, nor do I embrace MMT fully, nor am I a Rousseauian. MMT has some important and strong ideas, which, in my view, need to be combined with others. And even then it’s going to be scrabbling around in the dark. Mickey’s ideas are closer to mine, in actual fact, though it might not look like it from the comments here. Full employment is a noble intention, but the devil is very much in the detail.

          My interest in hunter-gatherers is in direct response to the platitude that ‘human nature’ is X, where X might be greedy or violent or some such. There has been such a variety of human societies all we can really say for certain about human nature is that it is very flexible. Just thought I’d mention that.

  14. Dan Duncan

    A very good post…even if I disagree with just about every word of it.

    Amongst the questions I have with the MMT, is what, exactly is the role of the Central Bank? You hardly mention it.

    In the US, MMT’ers appear to fuse the Fed and Treasury into one…as the Treasury’s account is on the Fed’s book, so changes in the Treasury’s account invariably leads to changes in the Fed’s balance sheet. Additionally, the Fed is providing the Treasury with liquidity.

    For those who love MMT, but loathe the Federal Reserve (which seems to be most of the Naked Cap universe), you may want think twice: You are asking for an even stronger “quasi-independent, semi-private, beholden to nobody” Federal Reserve. [For some reason, the MMT'ers don't mention this most special quasi-amorphous institution very much.]

    But compare the US situation with that of Europe. In Europe, the Central Bank Charter is a bit more “austere”. In Europe, the mandate is all about inflation, so its Central Bank has a more limited mandate. Thus, the ECB is more closely aligned with private banks, rather than with a “European Treasury”.

    While this fact may satisfy those of us who are concerned about bequeathing too much power to the central bankers, it’s a disaster for public finances. As a result of the separation of the Central Bank from the Treasury, the Europe state cannot simply go to its Central Bank in order to monetize its public spending. Unlike the US, the European State actually has to “give another thing of value” in order to monetize its public spending.

    Since the European state cannot “just give nothing else” in exchange for this public spending, the role of private banks is much more important. If your banks are sick (as they are in Europe), then it’s a huge problem.

    Ironically, the European situation definitely does seem to support MMT’ers…if you trust governments and central bankers.

    The problem with MMT’ers, in my opinion, is they spend too much time elevating simple accounting realities into a Magic Bullet Panacea…attendant with the 3 Card Monty that accompanies EVERY MMT post where they go through the HFB Shuffle: “HFB = CUB – GFB – NBFB, ergo HFB+CUB=GFB-NBFB. Did you see that! 600 years of accounting cannot be wrong!!!”

    Opponents of MMT/Chartalism, don’t necessarily fall into the pejorative labeling of “Neo-Libs”…many of us do not think markets are perfect.

    Rather, many of us just don’t trust the government and an all-powerful Federal Reserve. We want the value of our goods and services to be established by something other than a government. If it’s an imperfect free-market, so be it. I’ll take an imperfect free market over a perfect government any day.

    1. Toby

      Right now money is created as debt, which means all CBs, regardless of minor differences, are borrowing money from somewhere, somehow. Of course that somewhere is, ultimately, the private sector, in which plenty of money creation takes place. Govt. is therefore totally dependent on the all powerful private sector and the big bad corporate behemoths. This has a deeply corrupting influence on govt. One of the solutions that needs to be looked at is the MMT advocacy of spending money into existence, and taxing it out of existence. This reduces govt’s dependence on the private sector, giving govt a better chance of good governance, of being less a mere puppet of vested interests, and more a vehicle for democratic processes.

      That said, we don’t want simply to transfer money-power from priv. to govt. and wash our hands of the whole affair. I too share your concerns about concentration of power, and therefore welcome Rob’s call for democracy with a small d. I would add, though, that the way of giving democracy a good chance of coming back to life (if it has ever really lived) is to offer the planet multiple money-types (a deeper monetary reform than MMT offers), which is why my (short term) position is:

      MMT + Bernard Lietaer’s ideas = about as good a chance as we can hope for right now.

      Then we can start to look carefully at technological unemployment too. That’s already a big (undiscussed) issue, and it’s only going to get bigger. And a total revolution in education. That’s also a must.

      There are, as you suggest, no silver bullets. We are confronted, globally, by a huge, multi-headed problem that will takes years of trial and error to redress. Long term I see humanity at war with centuries of its own ignorance and bad decisions. I think civilization is on the line.

      1. Ming

        Very Nice Post!

        As an engineer and someone who has witnessed the power of increasing productivity, I believed that Technological induced unemployment is a wonderful problem to have! In fact it is a blessing. It is the source by which the West has increased its properity to the over-abundance of stuff that we have now. But to address the social ills unemployment due to technological improvement we need some imagination and some foresight and some willingness to change, and perhaps to share. For a given amount of demand (for real products and services, not gambling services by the financial sector), increasing technological productivty means we need less hours of human work, which means we either unemploy some people, or we cut everyone’s work hours and extend the deadlines for any project to be completed. The french did attempt this by legislating a 35 hour work week for everyone, but this is not bold enough. I suspect we would probably have to re-configure the work week from 7 days to two groups of 4 days, along with the required social changes in the social/work calendar for this system to work. Of course what I am saying is an oversimplification, and we would need some manner to experiment with the system so that we do not enact chaos on the entire economy…nontheless this is a problem that is a wonderful opportunity.

        1. Mickey Marzick in Akron, Ohio

          Ming,

          I wish I would have seen this before I answered your post below as I’ve “ranted” on this very issue of postscarcity before, arguing that AUSTERITY isn’t even necessary.

          It isn’t a question of “sharing the wealth” so much as it is “sharing the work” – reducing the normal work week from 40 hours… Hell, it’s been like that since the Fair Labor Standards Act of 1938. And how much has productivity increased since then… 16 hour days to 10 hour days to the 8 hour day and somehow capitalism adapted without ceasing to exist. Will the miracles ever cease?

          Mickey

  15. MacroStrategy Edge

    Jamie Galbraith probably can be, after his article in the Nation 2-3 months back or so, counted in the MMT camp.

    I strongly recommend you take a glance at his book Predator State.

    You will also find me referring to sock puppets in many of my writings when dealing with policy makers.

    So I am far from ignorant of the critique of the state and have encouraged MMT advocates to please take Galbraith’s critique to heart and lead with it.

    The ELR/job guarantee aspect of MMT policy prescriptions, by making this the key mechanism of fiscal policy to stabilize the private economy, does take a lot of power away from the sock puppets in Congress, in the Administration, and in the Fed.

    This aspect is not emphasized by MMT advocates very much, but it needs to be, because the capture of government, cognitive or material, by special interests like global finanzkapital, is obvious to all. Political reform is important, but in some sense, I would argue, ELR initiatives bypass or short circuit the game of doling out funds to banks, Wall Street, and other sociopathic wings of the financial world.

    best,

    Rob

    1. MacroStrategy Edge

      Regarding monetary policy, neolibs tend to favor this as the only effective policy response to financial and economic contractions.

      I think recent repeated experiences suggest this adjustment mechanism via the Fed works primarily by generating or atat least facilitating serial asset bubbles.

      I would hope we could agree it is time to move beyond neolib inspired, Fed facilitated serial asset bubbles. We need a better adjustment mechanism when private market signals and institutions fail. Fiscal policy, in the form of secular, transformational, structural public and public/private investment programs, plus ELR/job guarantee, will prove to be that mechanism.

      best,

      Rob

  16. Jose Guilherme

    I do enjoy your posts, but today you write something that does not make sense to me.
    You say “If we want to get the two true twin financial balances increasing in value (thereby reducing the current account or trade deficit) then we have two choices available. Either reduce the government financial balance (increase fiscal deficits) or reduce the NBFB (get businesses to run down their free cash flow positions by reinvesting more of their profits in tangible capital equipment)”.
    I beg to differ.
    If CUB = HFB + NBFB + GFB, then in order to reduce the negative CUB (Current account deficit), we shall have to reduce the HFB deficit, that is force consumers to spend less and save more. HFB will have to be less negative, in order for CUB to become less negative. And, contrary to what you say, if we increase the NBFB deficit (firms spending more than they save via retained earnings) that would do nothing to ameliorate the CUB deficit, since the right hand side of the equation would become more negative.
    So – I like your articles, I don’t sympathise with the neo liberals and I laugh at the austerity hawks, but I still think it’s important do see through the consequences of our accounting identities in a coherent way. Thank you for your attention,

    1. MacroStrategy Edge

      Jose – see my response at 8:12 to David.

      Yes, one must be careful taking an accounting identity, which is true by definition at the end for a point in time (balance sheet) or a period of time (income and cash flow statements) and assigning causality.

      Monetarists screw this up all the time with the Equation of Exchange or the Quantity Theory of Money, MV = PQ

      If the 8:12 response does not help, come back to me with where it fails for you. We are dealing here in partial differentials, which I suspect we will find change over time and can also differ across nations.

      By definition the current account balance equals national saving minus national investment, or national income minus national expenditure. The question is how do we raise national income relative to national expenditure, or alternatively, national saving relative to national investment, in a fashion that is growth positive for the national economy.

      The question we may need to be looking at, if we share concerns over a deepening trade deficit, is can the current account balance rise (the trade deficit shrink) while the economy grows – and how can it?

      One concrete example, in case this is too abstract: a public or public/private investment expenditure program that helps us implement a new energy infrastructure and that largely takes us off foreign oil dependence.

      That would require a deeper fiscal deficit today for a smaller current account deficit tomorrow.

      Case closed.

      best,

      Rob

      1. Jose Guilherme

        Rob,
        Thanks for your answer. In fact, I think we were talking about two very different things. When we are only dealing with accounting identities, then the only possible “twin” deficits are the negative CUB on the left hand side and the SUM of the private and public sector deficits on the left hand side of the identity. In this sense the neolibs are plainly wrong and you are 100% right – the public deficit all alone is not enough to explain the CUB deficit in an accounting framework, that would be tantamount to forgetting the third term in the identity.
        Now it turns out that the passage I quoted from your initial post is mainly about economics, not simply accounting. You’re suggesting that by increasing corporate investment the US can both grow its way out of the present recession and reduce its current account deficit, presumably via the higher productivity in tradable goods achieved through spending in infrastructure. This may well be a plausible scenario, but it can of course be subject to discussion. Anyway, it is certainly very different from the simple enumeration of basic accounting identities that the neolibs (as well as many mainstream economists) conveniently choose to forget, and that you have so brilliantly pointed out in your posts. So, on the accounting your point is irrefutable, on the economics it is strong yet only plausible. I add that my personal point of view is similar to yours – both the US and Europe should invest a lot more in the infrastructure of their physical economy and a lot less in their financial sectors in order to overcome the twin plagues of recession and austerity. They probably should also reduce or altogether eliminate the corporate form in the financial sector and mandate unlimited liability partnerships in order to get the incentives right. Remember that in Brazil the executives of financial firms may be personally liable for debts in case of bankruptcy, and this has been a powerful incentive to behave responsibly.
        Regards,
        Jose

  17. ep3

    I would like to know more about the money turnover rates. Specifically, we have been moving as a society over the last 30 years in a direction where our bills our due on ever shorter time scales. Not just for consumers, but for businesses as well. Ask any retail goods business what their terms were 20 years ago and what they are now. Demand for payment sooner has greatly increased. So on a national scale, we have a cash turnover rate that has increased dramatically; not an increase in real profits, but a decrease (I call squeeze) on the amount of time something of value can be held interest free.

  18. William Neil

    Thanks for this excellent post. Its reasoning is supported by Martin Wolf’s “Fixing Global Finance” at several places including here, page 65: “If we look at the world as a whole and at many significant countries, we find the notion of a savings glut is not right. It might be better thought of as an investment dearth…In particular, American policy makers had at least some influence on whether the counterpart of the capital inflow would be consumption or investment. While they could not compel companies to invest, they could have increased public investment. As it is, the counterpart has been consumption.” (Page 109; and remember the book was published in 2008, without the benefit of the 2008-2009 crisis and collapse in consumption.)

    Readers also might want to give some credit to Kevin Phillips, who has now, in the summer of 2010, sadly fallen silent (hopefully because he’s working on another book, I don’t know).

    Phillips had this to say in his 1994-95 book, “Arrogant Capital: Washington, Wall Street and the Frustrations of American politics,” speaking at the high level of economic history and the troubles that late phase empires seem to have in “renewing themselves.” It goes right to the point made in Rob’s posting: “In retrospect, the rich of eighteenth-century Holland an Edwardian England should have been taxed more heavily, so that the public sector would have had funds the private sector refused to allocate to rebuild each country’s manufacturing economy and neglected infrastructure.” (Page 161).

    Later, on the next to the last page, in picking a half-dozen reforms to “renew” America, one of the six is a call for a “federal financial tranasctions tax,” which was most certainly not part of the Dodd-Frank bill which just cleared the joint resolutions committee in Congress.

  19. Matt Franko

    Rob,

    You get all professional/academic credit from me at least!

    With respect to the corporate sector hoarding financial assets. I think it would be interesting to ask some of the CEOs of the companies that have the large “cash” positions on their balance sheets why they dont do something with it, while pointing out your accounting here, and its effects on the American people. Even if they just bought back stock it could support equity prices and reduce the floats so then the future dividends per share could be increased for the same amount of profits. A broad cross section of americans would benefit from this policy as many (not just the “investor class”) have exposure thru pension funds, 401K, etc.

    One motivator that I think is perhaps on the CEOs mind is Terror; or at least it was coming out of the 9/11/01 attacks. Facing such uncertainty, they started to hoard “cash” as sort of an insurance policy that would be there to assure their corporate survivial after a domestic WMD attack. Perhaps now the firms have gotten comfortable with hoarding ‘cash’ and are having trouble moving on as the GWOT seems to be being fought successfully and the nation does feel alot safer now (at least to me). In a similar fashion, it looks to me like the household sector is doing the same sort of thing currently as housholds face what they see as a very uncertain future. So the corporate sector may have a method to their current seeming madness.

    Better leadership may/should prod the corporate sector to move forward, or at least start this dialog with them.

    This is a good point you are raising here (again!),

    Resp,

    1. MacroStrategy Edge

      What I don’t get Matt, is why investors do not force managers to act as capitalists rather than looters. Something has corrupted the incentive structures for both managers and investors, I conclude, and these need to be changed so profits made off of sales to US buyers are mostly reinvested in tangible capital equipment in US.

      Certainly profit margins and profit rates are high enough to incentivize this, but managers and investors prefer to play quick buck casino games instead.

      It is because of this low reinvestment rate (ostensible to enhance shareholder value maximization) that 1) the US loses its competitive position and runs ever larger current account deficits, and 2) the fiscal deficit has to be run larger to avoid recession and ultimately a private debt deflation spiral that we flirted with post Lehman.

      Unless we can get capitalists to act as capitalists are supposed to, by reinvesting profits in tangible capital equipment, these challenges will not go away.

      best,

      Rob

  20. Siggy

    Nicely said Jose.

    There is more than a little hubris in the idea that government can control economic activity. Government can indeed influence economic activity; but, control is beyond the realm of reality.

    Austerity is a nice descriptive little word. Is it the appropriate word to describe spending a little less than what one earns? There’s a problem in the symantics that triggers over simplified arguments and hypotheses.

    MMT is only as valid as is the fact of the global universe of fiat currencies coupled with miniacal adherence to fractional reserve banking. This global universe of fiat currencies is the engine of debasement and the financial distress we are confronted with.

    The bank holds fiat currency referenced balances in reserve. But then the fiat currency has no inherent valid and its worth is only specified in what it will buy today. Just what is the value of the fiat currency balances being held in reserve? So long as there is the belief that we can borrow and print money at will, there will be this continuing and pernicous erosion of purchasing power.

    The discussion here might be more profitable if it focused on the currency and the reality of what fractional reseve banking means.

    1. MacroStrategy Edge

      Siggy – We’ve done this dance before on this blogsite.

      Show me a 100% reserve banking/100% commodity money system, and I will show you Barney Rubble and Fred Flintstone.

      Seriously, meet my challenge Siggy.

      Answer the following question: when did a human society last work with such a monetary arrangement – the Stone Age?

      Or was it the Dark Ages? Suppose they were called this for a reason?

      best,

      Rob

      1. Siggy

        The last point in time that fractional reserves meant something was in July of 1971. Recall that in August of 1971, Nixon took us off the Bretton Woods Agreement and thereby the gold standard. Measured from that point to today, the rate of loss in purchasing power of the dollar has accelerated.

        What we are now experiencing is the debunking of fiat currencies. To believe that we can print money without fear of economic disruption is incredibly short sighted. The penalty comes long before we all dead, it is coming now.

        1. MacroStrategy Edge

          Siggy – You always dodge my question.

          Do not expect me to respond to any more of your posts.

          Instead, get a mirror, sit in front of it, and watch yourself repeating yourself.

          If you repeat them enough times, you might just start believeing them. Worked well for Goebbels and crew.

          best,

          Rob

  21. scharfy

    Neolibs sure do fib. But MMT’ers have a nasty side they don’t wanna talk about, it called the utter political hijacking of an economy.

    From China’s Great Leap Forward ( official death toll 14 million from resulting famine is probably higher though ) to the Soviet Collapse. Maybe empowering the Politburo isn’t the gravy train to prosperity.

    Maybe we could meet somewhere in the middle?

    Both approaches certainly have a downside, that has to be acknowledged.

  22. Ricardo dos Santos Leite

    “So if we decide the US CUB needs to turn around, we best find a way to increase the HFB, or the net saving positions (saving minus investment) of the household sector. How can this be achieved? Expanding and rearranging the accounting identity above, we find:

    HFB = CUB – GFB – NBFB”

    The above equation,although correct, does not exist in a vacuum and is dependent on exports and imports. Furthermore, since we operate in a global economy, CUB is the most important variable and really the most independent variable, i.e. HFB is more dependent on CUB, versus CUB being dependent on HFB.

    If we want to increase the annual CUB, preferably to numbers above zero, and thereby increase HFB, we don’t have to do anything to GFB or NBFB, they can remain constant, all we have to do is increase the export of goods and services that the rest of the world wants to buy. Admittedly this can be difficult to do when the CUB is greatly dependent on oil. (It can be done though, we just have to use that oil in an economically value enhancing way, but that is a different subject).

    Now if all of the increase of CUB gets accounted for in an increase of NBFB, then the HFB will be unchanged. But that is a different issue (although admittedly related)

    Matt Franko is right in the fact that the reason corporations are hoarding more cash is the fear of terror. Perhaps the terror is from 9/11/01 but I think the more recent terror of the fall of 2008 is more responsible. The terror of not being able to go to the commercial paper market for your short term funding needs (especially right before the holiday spending season), the terror of having your lines of credit with your bank being pulled and not knowing of how to get the cash just to operate.

    Of course exports and imports don’t exist in a vacuum either, and there are feedback mechanisms associated with currency rates etc.

    1. MacroStrategy Edge

      Ricardo:

      You write:

      “Furthermore, since we operate in a global economy, CUB is the most important variable and really the most independent variable, i.e. HFB is more dependent on CUB, versus CUB being dependent on HFB.”

      How then do you explain the empirical and historically observed fact that trade balances tend to show a high sensitivity to differences in real GDP growth – suggesting the CUB is not independent at all?

      You write:

      “If we want to increase the annual CUB, preferably to numbers above zero…we don’t have to do anything to GFB or NBFB, they can remain constant, all we have to do is increase the export of goods and services that the rest of the world wants to buy.”

      Ok, but sorta like saying the color red is red. There seems to be a real difficulty many people find in realizing the sector financial balances are interdependent.

      Abstractly, households spending less on residential housing and saving more out of income flows could be perfectly matched by a rise in the current account balance. Just get foreigners to reduce their net saving preferences.

      Realistically, and historically, and theoretically, however, we have lots of reasons to believe that changes in the HFB will have some influence on GFB and NBFB.

      You write:

      “Matt Franko is right in the fact that the reason corporations are hoarding more cash is the fear of terror. Perhaps the terror is from 9/11/01 but I think the more recent terror of the fall of 2008 is more responsible. The terror of not being able to go to the commercial paper market for your short term funding needs (especially right before the holiday spending season), the terror of having your lines of credit with your bank being pulled and not knowing of how to get the cash just to operate.”

      Possible, but the fact both capital spending plans and orders for nondefense capital goods orders are well off their recession lows would suggest this corporate cash hoarding is not related to fear and uncertainty, so what is the basis of your assertion in this regard?

      best,

      Rob

  23. NOTaREALmerican

    Jeeez. The peasants in this country have enough problems trying to figure out politics, and now we’ve got neo-liberals.

    Obama is a socialist? Lady Caribou is a fascist? The teabaggers are conservatives? Are the neo-liberals those guys on the Matrix?

    No wonder the dumbasses have been voting Republicrat for the last 40 years.

  24. steehead23

    I consider myself a student of macroeconomic thought, not a pro. I have railed against the Keynesian concepts Rob espouses. I do not argue the math, nor the logic, I simply view it as incomplete.

    Some view the current recession/depression as an insolvency crisis, not a liquidity crisis. Were the crisis primarily a liquidity problem, the massive injections of money from the Fed should have solved the problem. It did not, although, I will admit that the economy (that is, the economy we all see, not P/E ratios on Wall Street) has not collapsed as badly as it would have had Keynes not been tried. But, just as one cannot cure a drunk with whiskey, it is not possible to solve an insolvency crisis with more debt. The point I would like Rob to address is this – there are risks involved in deficits – primarily that if interest rates rise, debt service could become a major drag on economic expansion. That is, while austerity might be a policy choice now, if interest rates rise substantially (ala Volcker’s choice) austerity would be imposed by U.S. creditors. How does Keynesian theory deal with the limits of debt?

    1. MacroStrategy Edge

      steehead23:

      I concur, and did conclude at the time of TARP discussions as well, as the record will show, that this was a solvency not a liquidity issue, though the two are related.

      As I argued in a response to another reader above, the limit to any debt to income ratio is determined by private portfolio preferences, the perceptions of professional investors, unless a country with a sovereign currency is willing to recognize and use its currency sovereignty.

      Check out what happened to interest rates in WWII. It was a 2% war – why, and how?

      best,

      Rob

      1. Mickey Marzick in Akron, Ohio

        Rob,

        Then this is a titanic struggle between MARKET SOVEREIGNTY versus NATIONAL SOVEREIGNTY? And the financial markets at the center of this struggle [FINANZKAPITAL] now feel confident that they can dictate to the nation… or family of nations by imposing “rolling austerity” on each depending on its fiscal circumstances and its role in the grand scheme of things to ensure/restore market confidence. Clearly Greece will be handled much differently than Germany or the US… but even the latter must worship at the altar of market confidence.

        Perhaps I simplify the problem a bit but it seems more than obvious…

        1. MacroStrategy Edge

          Market were usually, and are best embedded in the larger fabric of social relations. Read some Karl Polanyi. Somewhere along the line in the last 30 years a large wing of the financial sector conveniently unlearned or denied this. This price we have all paid for this should be evident by now.

      2. Ming

        You said the above:

        MacroStrategy Edge says:
        June 28, 2010 at 11:18 am

        Agreed Mickey, which is why I have encouraged advocates of MMT views to lead with an employer of last resort/job guarantee argument, rather than more abstract monetary economic principles, when they state their case in public forums. I think some of them are getting this and adjusting their message accordingly. See Mosler’s Senate campaign in Connecticut for example….

        There was another blog that stated that what the economic system lacked was imagination, so not only should the government be employer of last resort, the government needs to elucidate a socially positive mission to galvanize the energy and imagination of the electorate. Energy sustainbility, global pollution reduction (and not just the canard of C02 reduction(which is a natural substance emitted by all creatures that require oxygen to live), but the truly dangerous substances emitted by industry that pollute the land, rivers and seas and the air). Traditional industry and the their masters in the finance industry(who own their debt) will raise a counter ruckus…some strategy will be needed to counteract them.

        What do you think?

        1. Mickey Marzick in Akron, Ohio

          Ming,

          Agreed. Clearly there must be a strategy, both shorterm and longterm because “good ideas” in and of themselves will not suffice. The state/government has a positive role to play but I prefer from the bottom up rather than from the top down. Change rooted in civil society is more difficult to control and/or stop once it attains critical mass. But that’s longterm… In the short term figuring out how to slow down this bullet train to AUSTERITY is something to focus on, especially as it pertains to the midterm elections in Novemeber. To vote Democrat or not? I suspect that this conundrum will be “discussed” more than once in the months ahead.

          My ability to concentrate is waning right now because I’m very, very tired. Bad day… Going to go before I really say something stupid like to vote Democrat or not. See what I mean… Please forgive me.

  25. anon

    I’ve had a look at Levy 88.

    I must say one thing I found confusing in it initially was your use of the term net financial assets. You use it I think in the sense of net meaning acquisition less disposal of financial assets. The MMT use is (acquisition less disposal of financial assets) less (issuance less retirement of liabilities). I’m using it in the second sense in my comments.

    It’s a minor terminology point, I suppose, but confusing in that there are two layers of netting – deltas, and assets less liabilities.

    A nicely written paper – and prescient for sure.

    To my original point, the blogs should be posting a lot more of this sort of analysis at the sub-sector level. Readers are curious about it, in my observation of comments. Don’t underestimate the intellectual curiosity of the herd.

    1. MacroStrategy Edge

      Got it anon, but I have to warn you, after doing blogs for 18 months or so, and writing a newsletter for 3000 subscribers for two years, I can tell you the more common request is to simplify further, make the language less abstract, and generally dumb it down to Fox News level if at all possible. And that runs at about a 3:1 or 4:1 ratio vs those like you who want more speficity, detail, and complexity. So because I feel a sense of urgency about getting this message out, given what is going on in Austeria, it may be harder for me to meet your request, but feel free to ping for more detailed work, some of which I do present in The Richebacher Letter even though the publisher wants this all to be made more accessible to the average citizen/individual investor.

      1. Rosewren

        I am one of those average citizens and I love reading this blog since I discovered it about 4 or 5 months ago. What I don’t understand, I go to your references and links and keep reading. I recommend nakedcapitalism.com all the time but most do not bother to really read it only a few. It is unfortunate as the way out of this economic mess that is continually recycled every few years will collapse sooner or later and then if there is anything left to work with perhaps people will listen and do something different. Thank you all so much for wrestling with these problems for those of us who need answers so much.

        Rosewren

  26. Jim

    MMT views the correct role of macroeconomics as steering the fluctuations in the economy. Fiscal and monetary policy are a part of that steering wheel.

    MMT believes that fiscal and monetary policy ought to advance public purpose and should ignore what they tend to consider the moralizing concept that public deficits are prolifigate and dangerous.

    But MMT, at its foundation, appears to substitute one moralizing concept “the state ought to advance public purpose” for another moralizing concept “that public deficits are prolifigate and dangerous (as defined by the deficit hawks)

    Both MMT and the neoliberals (as well as my own arguments)are part of this morality play.

    But MMT, by denying or ignoring the moral dimension built into its descriptions of how the monetary system actually operates, is able to present itself as offering superior knowledge about how our economy functions.

    So in contrast to what Down South has argued above, MMT is not simply selling logic, rationality and factual truth.

    Like the rest of us MMT is looking for adequate premises (in this case their stock-flow monetary accounting framework which is indeed quite brilliant)from which to infer conclusions, already independently accepted, because of their feeling or sympathies for the modern state as the appropriate steering mechanism( rather than the market) for advancing public purpose.

    It is indeed difficult to acknowledge the bare contigency of personal feelings as the origins and final stopping point for our arguments.

    But (on my good days) I find the circularity of our logic a strong foundation for democracy. If none of our arguments transcend cicularity this development undercuts the claims of particular individuals or groups (in this case MMT) to superior knowledge and thus justifies the inclusion of as many people as possible in public decision-making.

    In a democracy no public verdict can be considered as final, sometimes we endorse the market, sometimes the state and hopefully in the future, a new configuration of both institutions can be created, which will give us, once again, some control over our own destiny.

    1. Ming

      Jim you wrote the below:

      “Like the rest of us MMT is looking for adequate premises (in this case their stock-flow monetary accounting framework which is indeed quite brilliant)from which to infer conclusions, already independently accepted, because of their feeling or sympathies for the modern state as the appropriate steering mechanism( rather than the market) for advancing public purpose”.

      The market, composed of innnumerable participants with their own self-interest, who are in competition with other participants, cannot advance ‘public purpose’ , as each market participant seeks to maximize its own gain. Was it the market that proposed environmental protection, or social welfare and public education? No, it was individuals or group, with a sense of public purpose, that advances these initiatives. Frequently, those individuals or groups must battle against the rhetoric of ‘market participants’ who oppose the use of public funding for these social purposes. But these initiatives beenfit society, and over the longterm they do benefit ‘the market’.

      Markets(and market participants) are strong and effective when dealing with concentrated benefits and concentrated costs. The technology market is a good example. But there is always a danger that a strong market participant will attempt to coerce government involvement for its benefit and effectively socialize the costs of its activity…ie Wall streets lobbying of congress and coercion of the various oversight boards.

      Public purpose is necessary, as Markets are in-effective at dealing with issues where benefits are ill-defined or socially disbursed. Hence we need goverments to build infrastucutre like bridges and roads, enact programs like Malaria /Tuberculosis reduction, Sewage Treatement, as well as develop high risk, low short term rewards (but potentially large longterm rewards) such as the space program or experimental military research. The internet is also an example of innovative governement research (public purpose) that no market participant could have engaged in. Hence markets need intelligent government involvement.

      Of course, governements must be careful not to become wasterful, or to encourage slothfulness in its ranks of employees…this is a danger that must be manages carefully, but the solution is not the rightwing dogma of ‘less governement’.

    2. DownSouth

      Jim said:

      “But MMT, at its foundation, appears to substitute one moralizing concept “the state ought to advance public purpose” for another moralizing concept “that public deficits are profligate and dangerous (as defined by the deficit hawks)”

      You are conflating an ought statement (“the state ought to advance public purpose”) with an is statement (“that public deficits are profligate and dangerous”).

      An ought statement conveys a moral priority, which by its very nature is normative/affective—-prescriptive.

      An is statement, on the other hand, conveys a statement of fact, which is logical/empirical—-descriptive.

      Passing off a prescriptive statement for a descriptive statement is one of the many deceits that classical economics deploys, as described here by Robert L. Heilbroner:

      They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. Necker, the French financier and statesman, said at the turn of the [19th] century, “Were it possible to discover a kind of food less agreeable than bread but having double its substance, people would be reduced to eating only once in two days.” Harsh as such a sentiment might have sounded, it did ring with a kind of logic. It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.
      –Robert L. Heilbroner, The Worldly Philosophers

    3. DownSouth

      Jim said:

      “If none of our arguments transcend cicularity this development undercuts the claims of particular individuals or groups (in this case MMT) to superior knowledge…”

      Where have we heard this sort of argument before?

      Oh yes. We heard it used against the scientists who demonstrated that smoking causes cancer and other pathologies.

      And we heard it (hear it) used against climate scientists who have demonstrated the existence of manmade global warming.

      It’s called constructivism, or perhaps more aptly, French post-structuralism.

      It denies the existence of objective reality and veridical truth.

    4. MacroStrategy Edge

      Read Galbraith’s Predator State. Galbraith follows many MMT precepts. MMT advocates are by no means naive about the distortions in current political institutions. In a sense ELR because it acts as an automatic adjustment mechanism, takes control away from the pork barrelers etc., but my own feeling is we will need to clean house politically and revitalize democracy to assure MMT principles do not get twisted by the existing sock puppet parade in DC.

  27. dave

    Instead of plunging the government into huge deficits to “counter” savings on the part of the corporate sector, why not ask why the corporate sector is such a big saver? Perhaps the answer would yield policy solutions a little more elegant then ordering them to spend it on something within 24 months.

    1. Yves Smith Post author

      Dave,

      I answered that question, in 2005, in the Conference Board’s magazine.

      It has NOTHING to do with fundamentals, and everything to do with bad incentives, namely, a fixation on quarterly earnings, and top executive pay linked to share prices (which for instance, encourages share buybacks, which support a stock’s price immediately, vs. investment in the business, which takes much longer to yield results).

      So taxes to counter bad incentives is a perfectly legitimate policy move.

      And executives will not admit they are looting, so asking them will not yield honest answers.

      http://www.auroraadvisors.com/articles/Shrinking.pdf

      1. dave

        Yves,

        As best I can tell there are three suggestions in the article:

        1) a prohibitive tax on retained earnings that are not reinvested with a 24 month period after they have been booked;

        This strikes me as absolutely horrible. If your looking to create wild speculation and rampant asset bubbles you couldn’t pick a better law.

        2) a financial asset turnover tax that raises the cost to businesses of playing casino games in various financial asset markets, rather than reinvesting profits in the productive capital stock;

        This seems rather vague. I’m not sure how this is suppose to work, or if its really going to have the kind of direct effect you are looking for. I don’t think I’m against it, but I don’t see it as all that central to your goal.

        3) a reinvigorated public or public/private investment program that helps speed up the shift to, and lower the costs of production of new energy technologies.

        Maybe, but it could just as well be a disaster. Government has to do something to earn my trust before I’ll grant it trillion dollar deficits for vague energy initiatives. I’m too worried it will go into carbon trading scams or technological bridges to nowhere.

        ____________________________

        I guess my problem is they all seem like top down technocratic solutions. Why not fix the issues that make capitalists not want to act like capitalists. If they want to make good investments because we’ve got the incentives set up right then animal spirits will be working with us. If companies don’t want to reinvest earnings they will fight tooth and nail to find ways around whatever punitive tax or regulation you can come up with.

    1. Yves Smith Post author

      Please read the article in the immediately prior comment from me. It cites data as well as describing the behaviors.

    1. MacroStrategy Edge

      We are tracking flows of income and expenditures (or alternatively and equivalently, savings andn investment) related to the production of final goods and services by different sectors of the economy.

      The financial sector is treated as an intermediary, with inflows netting to zero with outflows.

      See Fed Flow of Funds data of the Fed website if you wish to track finacial sector flows by instrument or by type of institution.

      1. MichaelC

        I get that, as long as the flows do in fact net to zero. Under that assumption finance earnings could be ignored, since their earnings would be marginal.

        But finance profits (and losses) are a significant chunk of corporate profits. Urging corporate reinvestment of retained earnings must include a recognition of the (outsized) bankster profits.

        The case for policy that encourages corps to act like capitalists, as you recommend, sounds right.

        But it seems to me that non finance corp reinvestment strategies are in conflict with the finance corps objectives and the non finance corps are responding to their bankers concerns over their customers (us consumers), like rational capitalists.

        So the simplifying assumption complicates my understanding of the accounting identity.

        Now ,if you tell me to go back and do some homework because I missed somthing,I’ll do that, rather than demand you reteach a point I missed. But the accounting identity is appealing and powerful, and I assume you’re here to vet it with a wider audience. So in that spirit, can you enlighten me?

  28. Jim

    Down South, let me briefly present a more philosophical perspective which argues that our descriptions are disguisedly prescriptive(which is what I am arguing is the case with the MMT framework)and that our prescriptions are openly prescriptive–backed not by what you see as French Post-structuralism but by a founder of liberal political philsophy, Thomas Hobbes.

    Hobbes has stated “For the thoughts are to desires as scouts and spies, to range abroad and find the way to the things desired.”

    Such a statement is, to me, evocative of the circular logic of human reasoning, were the reasons generated by reason are largely concerned with the ends to which our passions are driving us and figuring out the most expeditious way of getting there.

    Hobbes theorizing of reason as the “scout” of the passions represents, for me, a transition to a theory of human nature of insights concerning the predominance of the prescriptive over the descriptive in human discourse and the consequent inevitablity of circularity.

    The acknowledgement of such circularity creates a philosophical space for the cultivation and nuturance of the idea of liberal democracy.

    By Hobbes conceding that reason is subordinate to the passions he implicitly embraces a vision of radical human equality.

    Reason is a set of capacities that is differentially distributed among us but the passions refer to a common set of vulnerabilites (for example, suffering and pleasure) which unite us–and to me, establish a poweful claim to equality.

    What unites us has more to do with our capacity to feel (to experience joy or suffering) than our capacity to think, and thus a foundation has possibly been established for justifying a greater and greater equalizaton of human societies.

    Hobbes philosophical liberalism finds expression in the waves of equalizaton that have characterized modern liberal societies.

    By overemphasizing the role of reason one can easily end up justifying a hierarchical scale of inequality (i.e. that only those who know should rule).

    Ming, I believe what has to be examined closely is the degree to which public bureaucracies carry out their manifest goals(for example, to advance public purpose).

    These manifest goals often clash with the latent particular goals of individual bureaucrats for more power, less responsibility, more status and less accountability.

    It have been my experience that bureaucratic strategies have this double agenda where the pursuit of the latent goals often tends to short-circuit the fulfillment of the manifest ones.

  29. Septeus7

    Brilliant Post! I love and the idea to tax retained earnings is great. I have promoted the Tobin Tax and Infrastructure investment for some time but using the tax code to push business into actually into physical investment could be very important in preventing future bubbles in non productive and even destructive assets. Using taxing to promote the investing in the physical capital and labor is kinda turning the old maxim that taxes are the power to kill. It’s produce or be taxed. I love it!

  30. JeffEry

    Who are the neolibs and what is this guy talking about? “Twin deficits” obviously hold little to no correlation. This could have been summed up by simply referring to japan: massive fiscal deficit with current account surplus.

    He is using the “neolibs” as a scapegoat for his fundamental lack of understanding for economic principles. I bet he would argue we needed to bail out the banks too. These keynesians need to get a grip.

    1. Yves Smith Post author

      I’m not impressed by name calling, and most readers here are too savvy to be swayed by it either. Do you have a substantive argument? You certainly didn’t make one. And Parenteau DOES characterize the neoclassical economics position correctly, whether you like that fact or not.

      All I see is an ad hominem attack and straw-manning. And had you bothered to read Parenteau’s other posts, he is no fan of bank bailouts.

  31. Matt Stiles

    Rob,

    I don’t know why it is just assumed that debt deflation is something we should avoid. Shouldn’t people who “bought in” to the asset based economy be made to pay for their false assumptions of perpetual asset price increases? Should those who lent to them be made whole by executive diktat? If they are – again – does that not entail an enormous moral hazard for lenders in the future – and another inevitable debt crisis?

    And I don’t think corporate savings rates are necessarily irrational. Yes, executive compensation incentives encourage such behaviour (eg. share buybacks), but there are other reasons they may be doing so:

    - high government deficits at federal and state levels imply a higher rate of future taxation
    - increased credit market risk to rolling over corporate debts (diminished lately, but could return again) What corporate exec wants to be the guy that didn’t learn from 2008 and is put out of business GGP style because he/she just assumed they could roll over?
    - they know that their pension programs are fatally underfunded and will need to be rescued

    I have a half dozen others.

    But to me, debt deflation is the cure, rather than the disease. When given a longer time horizon, dealing with it now puts us better off in the future. Lest we end up like Japan – 20 years in and still with no “cleansing” from which to expand sustainably.

    1. MacroStrategy Edge

      Matt –

      We ran that film back in September 2008. The financial markets froze, everybody grabbed existing cash and hoarded liquidity, and the system nearly went 3 Mile Island.

      The Austerian Solution of wholesale debt deflation may work in nations with low private debt to income ratios. The 1920-1 example the Austerians like to trot out occurs after WWI – the existing debt structure is largely public debt then, not private.

      Having said that, I do believe investors must be held accountable for their own decisions to take certain risks, and so debt restructuring, much like we saw with the Brady Bond initiative in Latin America in the ’80s, must have a place in those cases, like say Greece, where you simply cannot squeeze blood from a stone.

      I believe in a) forcing central banks to consider financial stability, not just inflation stability, so they are not accomplices to asset bubbles in the first place, and b) controlled burns, or rather than great conflagrations where possible to reduce this whole moral hazard gambit that professional investors have learned to play (basically, they know if they are headed to a bust, the casino will give them more chips to play the extend and pretend game).

      best,

      Rob

      1. Matt Stiles

        Well, call me idealistic or masochistic, but if “the system” is the asset based economy then 3 mile island is a feature, not a bug.

        I would rather the US (and similarly for other western economies) endure the liquidation of malinvestments and all of the side-effects that goes with it in the short term, and have a sustainable and more globally competitive base from which to expand. If the alternative is “muddle-through” for a decade or two, I clearly choose the former. I’ve been arguing such since 2006.

        Even if we were to endure a GD-style 30% drop in GDP (not really the best metric for “wealth”, but I digress) and subsequently grow at an average rate of 3.5%, we end up in a better situation by 2025 than if we were to muddle-through for the next 15 years with an average growth rate of 1%.

        I see a particular lack in long-term thinking in this discourse. I also think this “liquidationist” position is quite a bit different from the “austerian” position of those reactionaries who think cutting government spending will solve all our problems.

  32. michel

    The issue on Rogoff and Reinhart was stated succinctly by the leader of the Liberal Democratic Party in the UK, Nick Clegg.

    There is nothing progressive, Clegg said, about spending more on interest than you do on health and education. Take the total deficit over 100% of GDP, and this is where you end up. There are then three possible scenarios.

    One is where you default (in one way or another, perhaps you devalue, in which case you hope to stick it to foreigners, which is just a variant of Snoot-Hawley, beggar my neighbor).

    A second is where you have a decade or more of budgets crippled by obligatory interest payments until the debt is slowly paid down and retired.

    A third is where the economy grows so that tax receipts rise and interest payments as a percent of them falls.

    In practice, a combination of the last two seems to occur, but the problem is that with the huge debt load, growth is slow, the process is dragged out for a generation. In the meantime, social welfare programs are cut, after all, if you are not going to default, the interest payments have to come from someplace.

    In one of the replies, Rob starts to articulate what the debt would be spent on. Capital investment, in the form of green energy, more roads, bridges, railways. This is a recipe for unproductive investment. Particularly green energy! Covering the country with unnecessary concrete, and the wild areas with useless windmills, that will benefit no-one except the construction industry.

    1. Yves Smith Post author

      As Rob pointed out earlier, and you chose to ignore, the Reinhart/Rogoff analysis is bunk as far as the 90% figure is concerned. It includes data points from the gold standard, from Latin American dollarized economies, and other data points that are not germane. It is a garbage in-garbage out analysis. I like the rest of their study, but this part is bogus.

      And a country that is a sovereign currency issuer like the US does not need to issue debt. It can simply credit various accounts without selling a single bond. The constraint is inflation, and given that bond yields are low, unemployment is high, and capacity utilization is low, the last thing we have to worry about is inflation.

      1. michel

        Is it your view that, taking a particular case, that of the UK for the sake of clarity, the UK could perfectly well continue to have a government deficit of 11% of GDP or higher, and that if the total debt rose over three years from the current level of 60%+ to 100% of GDP, this would pose no problems?

        To do this, it would not need to sell Gilts. There would be no sovereign debt problem, since Sterling is not tied to any other currency.

        By extension, the Eurozone could do the same thing (though Greece could not, having foolishly abandoned the Drachma). The US can also do the same thing.

        There is in short no reason why currency areas cannot run large current accounts indefinitely, and there is no reason why debt to GDP ratios cannot rise indefinitely. And they can all do this simultaneously?

        One has the feeling that maybe this could be the solution to California’s budget problem. What they obviously need is their own currency, call it the Collar. Then they could credit various accounts without selling a single bond. Sounds like something that might appeal to them!

        1. MacroStrategy Edge

          Michel –

          I get the feeling you have not read my prior responses to you and others, and I do not have time to engage with people not sincerely interested in engaging.

          So I will repeat myself one last time.

          A nation with a sovereign currency – one not convertible on demand into specific units of another currency or a commodity – and with debt denominated in its own currency cannot run out of money with which to service the debt.

          An increase in a fiscal deficit need not lead to a higher public debt to income ratio – depends on the multiplier effects.

          It is also important to realize the money you use to pay taxes or buy government bonds must first be created by government deficit spending or central bank balance sheet expansion.

          You cannot print money. Nonbank firms cannot create money. Those two actions are deemed counterfeiting. Banks can create money, but this money is not a net financial asset of the private sector, as each bank asset has a matching bank liability holder in the private sector, so this nets to zero.

          That does not mean private investor perceptions and portfolio preferences cannot present challenges to nations running chronic (and growing) trade or fiscal deficits. Nor does it mean that trading partners may not demand payment for their exports in their own currency. I am, as a practitioner in the investment field for the past quarter century, quite familiar with these dynamics.

          Whether investor perceptions are grounded in reality is a matter we should agree is questionable after having lived through over the last two decades at least two of the larger asset bubbles in modern history, right? And we know there are policy measures to deal with these situations – WWII, when public debt to GDP surged, was fought with 2% or so long Treasury yields. Please investigage how this was done.

          best,

          Rob

      2. Paul Andrews

        Yves this is not correct. The treasury may be able to credit accounts, but each positive entry into its cash account (for spending) has a corresponding negative entry in its debt account. The debt may be to the Fed but it is still debt. The Fed is not the government. Interest rates can rise.

        1. Paul Andrews

          I might add also that the Treasury cannot do this at will. The Fed can say no. The fact they have not done so for a while does not mean that they won’t in the future.

          1. Paul Andrews

            Wray seems to conflate Treasury and Central Bank, in the standard MMT way. In reality HPM is issued by the Central Bank, not by the Government.

          2. Paul Andrews

            Other than that, the document seems to confirm my statement above, that the end result of government spending, without issuing of bonds, is an increase in their loan balance at the Fed (i.e. an increase in the Government’s debt to the Fed).

            Wray makes a logical leap (p 21) that because the Government can write cheques on their account at the Fed, they can do so without limit. I contend that the Fed has the ultimate control here.

          3. stf

            Three things, Paul:

            1. by accounting identity, when the Tsy spends by debiting its account at the Fed, it creates reserve balances.

            2. Yes, Wray is saying the Tsy would get an overdraft at the Fed, aside from currently self-imposed legal constraints. And self-imposed constraints are just that–self imposed. The Fed was created by Congress/President, after all.

            3. Assume the Tsy borrows from the Fed–you seem to think this is some constraint or a problem, while it doesn’t bother Wray. The Tsy owes the Fed interest, then. But remember that the Fed is legally required to send its profits to the Tsy. No matter what interest rate the Fed charged the Tsy (supposing that the Congress/President ALLOWED it to do so, since the Fed has to follow the orders of the former, rather than vice versa), it would have to send it right back to the Tsy. So, looks like on balance Wray is quite correct.

          4. Yves Smith Post author

            Paul,

            This reply comes from Warren Mosler. To your comment on debits and credits:

            e Fed debits and credits accounts. The tsy give instructions to the fed regarding transfers as do commercial banks.
            but each positive entry into its cash account (for spending) has a corresponding negative entry in its debt account.
            The Treasury has a ‘cash’ account called a reserve account and that balance goes up and down.

            When the Fed credits the Tsy’s reserve account it debits the counter party’s reserve account.

            So it might credit Treasury and debit Citibank if the funds were transferred from Citibank.

            When Citibank, for example, buys treasury securities, the Fed credits treasury’s reserve account and debits citibank’s reserve account.

            The Fed also shows citibank holding an asset, the tsy security it bought, in its securities account at the Fed.

            And the Fed shows Treasury as having a liability, the Treasury security outstanding.

            To your “Fed is not the government, interest rates can rise”:

            The Fed, functionally and for all practical purposes, is the government. All ‘profits’ are ‘turned over’ to the tsy and the Fed is run for further public purpose, not to make a profit.

            The Fed controls the term structure of risk free rates.

          5. Paul Andrews

            OK – so it seems we agree that all Government spending over and above taxes collected shows up as debt, to commercial banks or to the Fed.

            Can we agree on that part? And can we stop saying that “all the government needs to do is alter some balances” and the like?

            If so, then I think where we part company is our opinion on the nature of the Fed.

            Yves and Warren you think that the Fed is there to serve the interests of the public.

            I think that the Fed is there to serve the interests of the private banking system. The Fed is modelled on the BofE, as are all modern central banks. They are privately controlled institutions.

            If you are right, we are headed for hyperinflation there is no doubt, because inflation is not a good constraint for spending. The effects are too delayed. The spending in the final stages is misdirected. The marginal productivity of the debt will go below zero, as it is doing right now. Before inflation shows up, private enterprise will be decimated as unproductive activities usurp productive ones.

            Fortunately for all, I don’t think you are right. The spending *is* taxpayer debt, and the private banking system, with the Fed as its overarching body, will collect on the debt.

            If I can’t convince you that the Fed is not the government then at least we know the exact point at which we part company, which provides a better basis for further debate.

          6. Yves Smith Post author

            Paul,

            There’s fundamental confusion here: when you borrow from yourself, which is in effect what the Treasury is doing, it’s not debt in the classic sense of representing an external constraint. It’s an ex post accounting identity. If you can’t even get that simple point, then there’s very little to discuss.

            Federal government spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the Federal Reserve decline by that much and the recipient deposits the cheque for $100m in their private bank and its reserves at the Fed rise by that amount.

            Taxation works exactly in reverse. Private bank accounts are debited (and private reserves fall) and the government accounts are credited and their reserves rise. All this is accomplished by accounting entries only. The taxation does not go anywhere. It is not stored anywhere and certainly does not “finance” the spending. The non-government sector cannot pay its taxes until the government has spent! It is a good practice to think of taxes as just draining liquidity from the non-government sector reflecting the Government’s desire for that sector to have less spending capacity.

            One other point: even though governments have adopted a variety of self-imposed constraints, these are not normally binding in any case. For example, the prohibition on sale of treasury bonds directly to the central bank is easily circumvented. In the US, when the Treasury does not have sufficient funds in its deposit at the Fed, it sells bonds to special depositories that are allowed to buy the bonds by crediting the Treasury’s deposit. The Treasury then transfers its deposit to the Fed before spending. This would normally result in a reserve debit from the accounts of those banks but the Fed allows “float” (postpones the debit) because the spending by the Treasury will restore the reserves. The final result after the Treasury has spent is that banks hold bonds and their customers have received demand deposits. If the banks would prefer to hold reserves, the Fed will engage in an open market purchase—buying bonds and crediting bank reserves. The net effect is exactly the same as if the Fed had bought the bonds directly from the Treasury.

            As another example, each time the Treasury approaches its debt ceiling, it must go to Congress to obtain approval to expand its “borrowing limit”. After members of Congress dutifully wring their hands and declaim the burden the Administration is placing on future generations, the debt limit is increased. In any case, bond sales are a completely voluntary and self-imposed operation for any sovereign government. As we have discussed in other MMT posts on this blog, bonds are simply an interest-earning alternative to low-earning reserves; they are used by the Fed to hit its interest rate target. A central bank can simply pay interest on reserves—as Canada has long done, and as the Fed is now doing—and then government can dispense entirely with selling bonds and worrying about debt ceilings. The Fed would act as the Treasury’s bank, taking a Treasury IOU and crediting its account when it wanted to spend. When the Treasury spends, the Fed would credit private banks with reserves, and the banks would credit their customers’ bank deposits. Taxes reverse the procedures. Over time, budget deficits would lead to reserve growth (bank deposits at the Fed—the Fed’s liability) offset by growth of the Treasury’s liability to the Fed (the Fed’s asset). Congress can set the interest rate on the Treasury’s liabilities held by the Fed, used for accounting purposes. Fed earnings above a 6% return go directly to the Treasury, so effectively the Treasury would pay (much of the) interest to itself. The rest would go to the Fed to help cover the costs of paying interest on reserves—at the overnight rate chosen by the Fed. This would greatly simplify procedures, would make the operations more transparent, and would allow everyone to stop worrying about federal government debt. Since reserves are not counted as debt, there would be no publicly held debt. Hopefully it would be recognized that Treasury IOUs held by the Fed simply represent internal accounting—the government owing itself and paying interest to itself. The interest paid out to banks holding reserves should be booked as a government expenditure—a subsidy to the banking system.

          7. Paul Andrews

            “There’s fundamental confusion here: when you borrow from yourself, which is in effect what the Treasury is doing”.

            This is not a confusion, this is where we disagree. I am saying the Treasury borrows from the private banking system, via the Fed (and sometimes from the Fed itself). You are saying the Treasury borrows from itself.

            You see accounting entries as mere information. I see them as contracts. What enforces the contractual nature is that no body can unilaterally update the accounting entries. The Treasury can only update their entries if the Fed/Private Banks agree to make corresponding entries.

            You state that the Treasury is “borrowing from itself”, but do not present any evidence. The evidence in my favour is the actual accounting entries, and the fact that the Fed is a separate legal entity, definitely not the same entity as the Treasury.

            “Federal government spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the Federal Reserve decline by that much”

            Exactly, and if their reserves are in overdraft, the overdraft increases. i.e. the debt to the Fed increases. The collateral for this debt is future taxpayer production.

            I can see that if the government were in reality to gain control of the Fed and the private banking system, you would be correct. This would be very bad for us all however.

            Can you see that if the Fed is in reality controlled by the private banking system that I am correct?

          8. stf

            Paul

            On your comment at 6-29 at 7:32am you specifically referred to the case of the govt not issuing bonds. Your errors there are what we were responding to. Disagree if you like, but don’t try to make it sound like we are the ones misinterpreting when it is in fact you who is trying to change the subject now.

          9. Paul Andrews

            Stf, here is the comment to which you refer:

            “Other than that, the document seems to confirm my statement above, that the end result of government spending, without issuing of bonds, is an increase in their loan balance at the Fed (i.e. an increase in the Government’s debt to the Fed).”

            Can you please point out where this has been proven incorrect? Is not an overdraft on a cash account equivalent to a loan account?

            I didn’t feel any need to change the subject, I just thought we had reached agreement on this point and could move on.

          10. stf

            Paul,

            The problem wasn’t with the paragraph you quoted, but with the one that followed it:

            “Wray makes a logical leap (p 21) that because the Government can write cheques on their account at the Fed, they can do so without limit. I contend that the Fed has the ultimate control here.”

            If we are assuming the govt is running deficits without issuing bonds, which you granted in the previous paragraph you just repeated, then there is an overdraft (of course) at the Fed (this isn’t current operating procedures–probably, see my response to Anon’s comment below–but we were for the sake of argument assuming), but it is the Fed that takes its orders from the Congress/President. And if the Congress/President refuse to constrain the Fed and the Fed decides to push the interest rate on overdrafts for the Tsy up to, say 100%, even then it doesn’t matter because all the additional profits the Fed would make on this interest would be returned to the Tsy anyway.

          11. Paul Andrews

            “it is the Fed that takes its orders from the Congress/President”

            This was the point I was rebutting in the comment directly before you alleged that I had changed the subject.

            I don’t believe they do take their orders from the Congress/President. This is the fundamental point on which Yves and I disagreed.

            Because the evidence is cloudy, I can understand why people would think this. What I would like us to do is say “yes, this is the fundamental thing on which we disagree”, then we can move on without having to revisit it all the time.

            What you think on this issue makes a world of difference to all of your personal research and opinion forming. If I discovered today that the Congress do in fact control the Fed, or if I heard that today the Fed relinquished its independence, a lot of my opinions would change. I presume also that if a proponent of MMT were to discover, by disclosure of new information to which they were not previously privy, that in fact the Fed does operate for the benefit of the private banking system, they would also revise a lot of their opinions.

            I would like to coin a couple of new terms to help here:

            “Resautonomist”: Someone who believes the Fed operates independently of Congress and the President.

            “Rescaptivist”: Someone who believes the Fed is controlled by Congress and the President.

            Obviously it is a spectrum, you don’t have to be completely one way or the other. For instance, I agree that the government does exercise some limited control as they have the power to appoint the governor etc. But on the whole I am a Resautonomist.

            To believe that MMT is a correct description of the current operational and accounting realities, you need to be a Rescaptivist.

            I would propose that before trying to discuss monetary policy with anyone, you need to know whether they are a Rescaptivist or a Resautonomist, otherwise you are not likely to get very far.

            I won’t agree with Rescaptivists in the conclusions they reach, but I will respect them for declaring their core belief.

            This also frees us up to debate on the “away turf”. For instance I could mount some arguments that say “Even if rescaptivism were true, MMT conclusions would not hold water because of A, B and C”.

            As for interest, yes this is correct that interest paid by the Treasury to the Fed on bonds held by the Fed (or on any overdraft) is reimbursed to the Treasury. However the Fed can sell these bonds to the private market at any point. (Also they would, I believe, convert any overdraft quickly to bonds, as the cash account is for short term operational convenience only). In addition, the principal can still be called in by the creditor (the Fed), but if you are a rescaptivist you will not agree on that point.

          12. Yves Smith Post author

            Paul,

            You are effectively fabricating ideas out of whole cloth in your efforts to defend your position.

            Has the Fed EVER defied the Administration? The last time was in the 1950s, over a 1/4 percent interest rate move. I have written extensively here, as have former central bankers, on how the Fed gave up what little independence it had under Greenspan, and is functioning as an off balance sheet vehicle of the Treasury. Look at the story on AIG in the New York Times last night, the Fed’s advisers (three of them) told the Fed to negotiate haircuts, the Treasury didn’t want them. And what did the Fed do? Follow Treasury’s guidance.

            The evidence is overwhelmingly in against you, and all you do is resort to conjecture. You have not, because you cannot, must a single concrete bit of evidence to support your position.

          13. Paul Andrews

            Come now Yves, are you not prepared to even admit that Resautonomism is possible?

            Here is some evidence:

            $Trillions in High Power Money to private banks in exchange for garbage assets. Not loans, actual purchases.

            Not “helicopter money” to the people, but bailing out of the moneyed interests.

            Actually it seems you saying that the government AND the Fed are both run for the interests of the private financial sector. If that is the case then MMT is also not a correct description.

          14. Yves Smith Post author

            I have no interest in unsubstantiated theories. In case you were asleep during the crisis, rescuing the banks was first order of government policy, both in the Bush and Obama administrations. The fact that the Fed was used BY THE TREASURY as an off balance sheet vehicle (this is the reading of former central banker Willem Buiter) was to circumvent normal budgetary processes.

          15. Yves Smith Post author

            Paul,

            From Warren Mosler, your comments in italics:

            “There’s fundamental confusion here: when you borrow from yourself, which is in effect what the Treasury is doing”.
            This is not a confusion, this is where we disagree. I am saying the Treasury borrows from the private banking system, via the Fed (and sometimes from the Fed itself). You are saying the Treasury borrows from itself.

            I agree the Treasury goes through the motions of borrowing from the private banking system.

            My point is there is no operational imperative for the govt. to do that.

            It would be like a city saying it won’t sell it’s own bus tokens until after it collects them or borrows them from the public.

            You see accounting entries as mere information. I see them as contracts. What enforces the contractual nature is that no body can unilaterally update the accounting entries. The Treasury can only update their entries if the Fed/Private Banks agree to make corresponding entries.

            Correct, while both are functionally govt agencies acting for public purpose, the Treasury is at the mercy of the Fed in that regard.

            You state that the Treasury is “borrowing from itself”, but do not present any evidence. The evidence in my favour is the actual accounting entries, and the fact that the Fed is a separate legal entity, definitely not the same entity as the Treasury.

            Agreed!

            “Federal government spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the Federal Reserve decline by that much”

            Wrong, the Fed does the debiting and crediting. The Federal reserve functions like a bank and it is the entity that changes the numbers in its own accounts.

            Exactly, and if their reserves are in overdraft, the overdraft increases. i.e. the debt to the Fed increases.

            Yes, and overdraft is a loan from the Fed.

            The collateral for this debt is future taxpayer production.

            ??? That makes no sense.

            Initially there is no collateral for an overdraft loan. The fed subsequently can demand collateral.

            I can see that if the government were in reality to gain control of the Fed and the private banking system, you would be correct. This would be very bad for us all however.

            The govt IS in control of the Fed and its member banks.

        2. anon

          Paul Andrews,

          The MMT description of the monetary system implicitly assumes the institutional merger of treasury and the Fed. You have to pretend that’s happened in order for the operational description to make sense. Of course, it hasn’t happened, which is why the description is ambiguous.

          Under prevailing institutional separation, you are correct that spending without issuing bonds would result in a treasury overdraft at the Fed, which is equivalent to a Treasury loan from the Fed.

          1. stf

            Anon,

            That wasn’t the point of the discussion we were having with Paul. The discussion was assuming an overdraft and asking how that worked if it did happen. Obviously, that doesn’t happen under current legal arrangements (so we are led to believe–as I’ve explained many times, the Tsy gets secretive when you start asking for the actual details).

          2. stf

            “Under prevailing institutional separation, you are correct that spending without issuing bonds would result in a treasury overdraft at the Fed, which is equivalent to a Treasury loan from the Fed.”

            Of course, Yves, and I said as much above already, so I don’t see your point here.

      3. Paul Andrews

        Also look at the graphs in the latest Economist showing the declining effectivity of increased debt on GDP growth. We are getting to the point where each new dollar of debt produces zero GDP growth. And the graph is heading down. More stimulus will just make things worse.

        1. MacroStrategy Edge

          Paul: That is precisely what happens when private debt is issued to either hold leveraged positions in financial assets, rather than finance the expansion of tangible productive capital equipment and structures, or when public debt is issued to fund financial sector bail outs. When finance calls the tune like this, no wonder the change in income related to the change in debt falls, right?

          best,

          Rob

          1. Paul Andrews

            Yes, basically it behaves like a ponzi scheme, with no single scheme runner. The more people that know this, the smaller the next ponzi will be. All ponzi schemes have winners and losers – this cannot be avoided. The losers unfortunately are taxpayers – hopefully they will learn not to approve of these levels of debt next time around.

  33. Paul Andrews

    Rob it takes two to tango, but one must lead.

    If US taxpayers slow spending (public and private), trading partners have no choice.

    Debt deflation is not the problem – too much debt is the problem. The only way out is to deflate or to write the whole system off.

    Yout list of measures is mere meddling. Our global economy is a massive complex beast. Any measures like yours have indeterminate outcomes. The system needs to run its natural course – those who borrowed must service and eventually reduce their debt. Sounds highly moral to me.

    1. greg b

      Paul

      You said;

      “Yout list of measures is mere meddling. Our global economy is a massive complex beast. Any measures like yours have indeterminate outcomes. The system needs to run its natural course – those who borrowed must service and eventually reduce their debt. Sounds highly moral to me.”

      And you think debt deflation does not have an indeterminate outcome?? You think you can tell me exactly how it will all play out?

      You’re right about the massive and complex beast but you are wrong about “natural course”. There’s nothing “natural” about money. Money is a man made thing and as such is not swayed by laws of nature. Money itself is a form of “meddling”. Barter is more natural, money becomes a tool of oppression and deceit. You’re quite naive to think that the austerian way of deflation will simply remove what is bad, who gets to decide whats bad? It becomes a tautology for you, that which was destroyed was bad by definition.

      SImply standing back and letting prices crash and incomes disappear is a quite dangerous path to take, considering how many people use those prices and incomes to value everything they own.

  34. MacroStrategy Edge

    Yes, Paul, that is the Austerian view.

    I have stated repeatedly why I find myself in disagreement with it.

    I have invited the Austerians to please buy a failed nation and demonstrate to the world the wisdom of their ways.

    I have even encouraged them to start fresh with a cruise ship or an island if they don’t want to go full scale at first.

    Curiously, none of them will take me up on this challenge. Because it is a theology or a utopian fantasy for most of them, I suspect, which they know would end up like Lord of the Flies or Jonestown.

    But please – and I do mean this sincerely – prove me wrong and put your money where your mouth is. Demonstrate the wisdom and effectiveness of Austerian School principles in one nation for all the world to see, and you may win more converts.

    best,

    Rob

    1. Paul Andrews

      Rob that would be a dictatorship and would fail like all dicatorships.

      No failed nations need to be purchased, we are living through it. People borrowed. Borrowing means to have the use of something belonging to someone else, then to give it back, with agreed interest. It doesn’t mean just pretending to borrow but then keeping for one’s self.

      It means making an agreement then sticking to it. It’s no experiment, just basic human cooperation.

      You seem to think that people who simply believe that promises should be kept are somehow one big group of people with lots of money acting in concert, who can go around buying nations. I can assure you I can barely afford to buy a single plot of land.

  35. not2cool

    “The most common thing about common sense is that it is extremely uncommon.” not2cool

    http://perspicuity.net/common/comsen-2.html

    Note 1: See the classic book, The Road to Serfdom by Friedrich A. Hayek in which, way back in 1944, he warned that all governments — not just the Nazis — are always trying to increase their control and to decrease individual freedom.

    Attemps at controlling the actions of others is the organized insanity of humanity.

  36. Paralithodes

    “Note 1: See the classic book, The Road to Serfdom by Friedrich A. Hayek in which, way back in 1944, he warned that all governments — not just the Nazis — are always trying to increase their control and to decrease individual freedom.”

    Thomas Jefferson wrote that it was it was a natural tendency of government to try to increase its control at the expense of individual liberty. That was a reason he was for the construct of functions/layers of government being run from the most local levels possible.

  37. Lisa says

    You authors, contributors seem to understand this mess very well.
    Is there anyone in Washington that thinks this way?
    Is there any candiates running for state governer, Congress that we as a “herd” of people (could not help myself)need to support. NJ governer seems like he might have the right stuff. How can we tell for sure?

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