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Deficits Do Matter, But Not the Way You Think

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Crossposted from New Deal 2.0

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City.

Budget deficits and government spending are necessary to end today’s crisis.

In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government’s stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still — likely — years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson’s well-funded public relations campaign, fronted by President Obama’s National Commission on Fiscal Responsibility and Reform — a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness. But even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future. They insist that even if we do not need to balance the budget today, we will have to get the “fiscal house” in order when the economy recovers.

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

And, yet, there are a number of misconceptions circulating that need to be addressed. Many (often of the Austrian persuasion) interpret this simple statement as a Leninist plot to destroy the nation’s currency by flying black helicopters dumping an infinite supply of bags of money all over the planet. This is usually accompanied by a diatribe on the evils of fiat money, with a call to return to “sound money” based on shiny yellow metal. Others suggest that we are instead proposing to ramp up the size of government, until it completes Obama’s plan to gobble up the whole economy. Almost all critiques eventually produce a lecture on the lessons to be learned from Weimar Germany and from Zimbabwe.

The strangest criticism of all is that we MMT-ers argue that “deficits do not matter”. In a recent exchange in the New York Times, Paul Krugman put it this way: “But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency.” In that piece he took Jamie Galbraith to task for arguing that “Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks” facing a sovereign government. I won’t go into the details, but Krugman produced a simple model in which ever-larger budget deficits generate ever-rising prices. You can see the rest of that back-and-forth here.  But the strange thing is that Krugman never actually addressed Galbraith’s points that insolvency, bankruptcy, or higher interest rates are non-issues for a sovereign government. Nor did Krugman even try to justify his claim that MMT-ers “say that deficits are never a problem”.

In fact, MMT-ers NEVER have said any such thing. Our claim is that a sovereign government cannot be forced into involuntary default. We have never claimed that sovereign currencies are free from inflation. We have never claimed that currencies on a floating exchange rate regime are free from exchange rate fluctuations. Indeed, we have always said that if government tries to increase its spending beyond full employment, this can be inflationary; we have also discussed ways in which government can cause inflation even before full employment. We have always advocated floating exchange rates — in which exchange rates will, well, “float”. While we have rejected any simple relation between budget deficits and exchange rate depreciation, we have admitted that currency depreciation is a possible outcome of using government policy to stimulate the economy.

A favorite scenario used by the critics is the ever-rising budget deficit that causes the government debt-to-GDP ratio to rise continuously. As interest payments on the debt increase, government faces a vicious cycle of rising deficits, more debt, more interest paid, higher interest rates, and even higher deficits.

Our response is two pronged.

First, OK, let us accept your premise. Will the government be able to make all payments (including interest paid on debt) as they come due? The answer is, of course, “yes — by crediting bank accounts”. Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default. Instead, Krugman argues “the government would decide that default was a better option than hyperinflation”. In other words, Krugman veers off into politics — government “decides” to default — because the economics does not give him the result he wants.

Second. Your scenario is highly implausible. As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP. (In the US over the past two cycles, in the expansion phase federal tax revenue grew two to three times faster than GDP and government spending.) This reduces the government deficit (remember the Clinton boom and budget surpluses?). Even if the government spending is on interest (in Krugman’s model, the deficit is due to interest payments) that generates nongovernment income and spending. In other words, the cyclical upswing will automatically reduce the budget deficit. The scenario ignores the “automatic stabilizers” that cause the budget deficit to swing counter-cyclically.

What if the economy runs up against a full employment constraint, but government stubbornly keeps spending more, driving up prices toward hyperinflation? Even though incomes and thus tax revenues rise, government spending always keeps one step ahead so that the deficit rises. This is Krugman’s “infinite inflation” scenario.

OK, we never claimed that a sovereign government will necessarily adopt good economic policy. The last time the US approached such a situation was in the over-full employment economy of WWII. Rather than bidding for resources against the private sector, the government adopted price controls, rationing, and patriotic savings. In that way, it kept inflation low, ran the budget deficit up to 25% of GDP, and stuffed banks and households full of safe sovereign debt. By the way, Jamie Galbraith’s father, John Kenneth Galbraith, was the nation’s chief inflation fighter. After the war, private spending power was unleashed, GDP grew relatively quickly, and government debt ratios came down (not because the debt was retired but because the denominator — GDP — grew more quickly than the numerator — debt; see here). In other words, Galbraith, senior, used rational policy to avoid the Zimbabwean fate. I do not understand why Krugman prefers to believe that our policymakers would choose hyperinflation over more rational policy. If there is anything that policymakers of developed nations in the postwar period appear to hate, it is rapid inflation. In other words, the policy choice will not be between hyperinflation and default, but rather rational use of inflation-fighting policy should the need arise in order to prevent hyperinflation.

If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve. We may well need more government spending, and, yes, even budget deficits to tackle some of those problems.

So, yes, deficits do matter, but not for solvency.


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66 comments

  1. alex

    “WWII … ran the budget deficit up to 25% of GDP”

    I believe the correct figure is 125%, not 25%.

    1. Adam

      A deficit is the shortfall in one fiscal year. During WWII the US government’s annual shortfall was about 25% of GDP. The total DEBT at the end of the war was about 125%.

  2. dave

    Point 1)
    The argument is pure semantics. People don’t buy treasuries so they can be paid back in currency that can’t be converted into goods equal or greater then the goods they could have purchased when they bought the bonds. Negative interest rates are a haircut to bondholders, no different then any kind of partial default on debt. A haircut is a haircut, it doesn’t matter how you get there. Similarly, hyperinflation represents complete default from the bondholders POV. He doesn’t give a shit that the government hasn’t “defaulted”, in all real terms which matters it has failed to meet its implied obligation of maintaining the spending power of his wealth.

    Point 2)
    You are simply making the assumption that, “Eventually, this causes private spending and production to grow.”

    Why?

    Let’s take a Krugman recommendation, paying people to dig up bottles full of money. How does this increase production? How does it increase supply? It doesn’t, it simply adds more money without increasing goods production at all. More money + same supply = inflation.

    Full-employment is an excuse. You’re guessing what full employment is and how to achieve it. First, full employment seems to vary over time, place, culture, etc. Full employment in Japan is very different then France. And full employment in the US is very different then it was 50 years ago. When you spit out a number like 5.5% your just guessing out of context based on a flimsy historical precedent. Its only full employment if its the maximum level of employment that can be achieved where the employment increases supply. If its wasteful employment that adds no value is not really employment. If your entire economy is composed of people digging up bottles then the natural rate of unemployment is 100%, because none of those jobs is adding any value to the economy. The natural rate of unemployment is dependent on the context of the value of that employment. And yes, it is possible for an employed worker to have less value then an unemployed one if the work they are doing is value destructive (those diggers need shovels, supervisors, logistics personal, etc). Its no different then those bridges to nowhere in Japan that wasted even more resources then simply having those people sit at home.
    ————————————————-
    “OK, we never claimed that a sovereign government will necessarily adopt good economic policy.”

    Now we are getting somewhere. Personally I’m not a favorite of, “the government adopted price controls, rationing, and patriotic savings (negative interest rate war bonds for suckers).” It was one thing to accept those policies to beat the Nazis. Its entirely another matter to accept those sacrifices to pay for Wall Street bailouts, wars in the third world countries, or extremely generous retirement benefits for a baby boomer generation that basically gave the finger to their own kids and didn’t make the effective investments necessary to provide for them in old age yet they expect it anyway.
    ——————————————————–
    “In other words, the policy choice will not be between hyperinflation and default, but rather rational use of inflation-fighting policy should the need arise in order to prevent hyperinflation.”

    “Rational use”, huh. I’m sure I’ll love my price controls, rationing, and negative interest bonds. Face it, if the government isn’t willing to go all the way to hyperinflation then there is an upper limit on what it can spend. So they have to spend wisely.
    ——————————————————–
    “We may well need more government spending, and, yes, even budget deficits to tackle some of those problems.”

    We might, but only if its effective. If its wasteful then it will have an effect on the future. Either in future inflation or by limiting the ability of the government to spend in the future without creating inflation.

    1. FlimFlamMan

      “You are simply making the assumption that, “Eventually, this causes private spending and production to grow.””

      It’s not an assumption it’s an observation. And why? Because the money from government spending increases the effective demand within the economy which can be responded to with increased supply. Supply increases rather than prices because of capacity underutilisation: businesses can bring idle capacity to bear.

      It’s a completely nutty proposition, but lets take the bottle digging. The economy is currently running below its potential capacity; the government buries some bottles of money; people are employed digging up the bottles; they now have more money; they use it to pay down some debt and to spend on – keeping things nutty – porcelain statues of Milton Friedman; to increase production the statue manufacturers bring machinery online that was sitting idle, and order more materials from their suppliers. Increased goods production.

      Real policy would not involve people digging up bottles of money; it would involve paying people to do things like provide basic services that can allow the elderly to remain in their own homes; paying people to remove invasive plant species that are clogging waterways, and so on. Things which are inherently beneficial to society as well as providing the money to increase demand in the wider economy.

      “More money + same supply = inflation.”

      More money = more effective demand. More effective demand + ability to increase supply = more supply. No inflation.

      Neo-classical economics’ wacky definitions of full employment certainly vary wildly, but a genuine measure is easily had: everyone who wants a job has one. And of course none of them would be digging up bottles of money. Your comments about rationing to pay for bailouts are just a bizarre non-sequitur since nobody is proposing any such thing. Wray was simply pointing out the extreme measures taken to avoid inflation during a period of global armed conflict. Not exactly the normal condition.

      Eddie

      1. dave

        “manufacturers bring machinery online that was sitting idle”

        I guess this is the problem. I don’t consider idle resources “free”. It takes upkeep to run a factory and employ people. If what they are producing isn’t something useful then all of the resources that go into running the factory are wasted. In addition, if the workers are earning a wage above what they get from unemployment they will now be taking resources away from workers that are actually productive. They also have no incentive to find a new line of work as long as the government is paying them to maintain old production patterns.
        _________________________________________________________
        “Real policy would not involve people digging up bottles of money; it would involve paying people to do things like provide basic services that can allow the elderly to remain in their own homes; paying people to remove invasive plant species that are clogging waterways, and so on. Things which are inherently beneficial to society as well as providing the money to increase demand in the wider economy.”

        Idealism. I can see what the government is spending its money on and I know what a waste it is. That’s what is going on in the real world. You can employ a lot of people in ideas that sound good politically but aren’t actually productive. Building bridges to nowhere was a popular one in Japan. I’m sure installing inefficient and uncompetitive green energy programs loaded with pork will be a hit here.

        _________________________________________________________
        “More money = more effective demand. More effective demand + ability to increase supply = more supply. No inflation.”

        You are simply assuming “ability to increase supply”. I don’t take this as a given. The supply that matters is the supply of useful things a society needs. I’m not convinced throwing money at wasteful projects increases that supply.

        1. FlimFlamMan

          You seem to be confusing the target of government spending with the spending choices of the people. The scenario you put forward was that the government pays people to dig up bottles; what they then do with that money is their choice and I gave the example of spending some of it on statues. It’s the people who decide to buy statues.

          “I guess this is the problem. I don’t consider idle resources “free”. It takes upkeep to run a factory and employ people.”

          Who said they were free? What they are is available. Of course there are costs to running a machine that wasn’t running before, or employing someone who was previously unemployed, but these costs always apply. They apply to the machines and people that *are* working right now as well as to the additions that an increase in demand would create. Costs go up but so does output; cost/output remains the same so there is no inflationary pressure.

          “If what they are producing isn’t something useful then all of the resources that go into running the factory are wasted.”

          I deliberately picked a nutty example to keep to the spirit of nutty bottle digging, but people do buy porcelain statues so who am I to say they’re not useful? If you want something more obviously useful though you can substitute shoes for statues. In reality the money would be spent on all the things people spend money on.

          “In addition, if the workers are earning a wage above what they get from unemployment they will now be taking resources away from workers that are actually productive.”

          The statue/shoe producers are private sector workers, and yes they’re earning more than unemployment benefit, but what resources will they be taking away? Remember, this whole scenario is a situation – like the one we face in the real world – where productive capacity is under-utilised.

          “They also have no incentive to find a new line of work as long as the government is paying them to maintain old production patterns.”

          The government is not paying the statue/shoe manufacturers.

          “Idealism. I can see what the government is spending its money on and I know what a waste it is. That’s what is going on in the real world.”

          Even if everything government is doing right now was a waste, would the existence of bad policy mean we shouldn’t propose better policy? Policy based on a better understanding of how the economy actually operates?

          “You are simply assuming “ability to increase supply”. I don’t take this as a given.”

          No, I’m not. I’m looking at the economy and noting the unused capacity in terms of both capital and labour. Capacity which could be used but isn’t.

          Eddie

          1. dave

            “Costs go up but so does output; cost/output remains the same so there is no inflationary pressure.”

            Why does output go up? It only goes up in the sense that something is being produced, it says nothing about the value of what is being produced.

            Idle production is not fungible. Idle construction workers don’t convert to nursing if the government pays them to remain in the construction business by funding bridges to nowhere (ala Japan). Idle factories that made furniture to fill houses constructed during the housing bubble can no longer produce furniture because we are not constructing new houses to fill with furniture. Finance services that have now proven to be negative value added can’t be converted into something useful with the wave of a magic wand. The only way in which that capacity can be considered idle is if you believe returning to the old consumption patterns during the bubble is a good policy path, since that is the only thing that capacity is capable of producing. I don’t think we want to go there.

            If we want sustainable growth we have to convert as much of that capacity as we can to produce new, useful goods and services and scrap what can’t be converted as a sunk cost. That takes time and investment. Its a process that will not happen if the government pays people to maintain old production patterns simply in the name of maintaining GDP. Investment in new productive capacity that produces useful goods and services can come from a private source or public source and it can use debt. Any investment must be judged on its worth to society, not on some abstract idea that any kind of spending is good spending in a recession. Idiocy is idiocy regardless of the cyclical economic conditions and slightly lower input costs in a recession don’t give a bridge to nowhere a positive ROI.

            If you believe how the government spends money matter then the OP is wrong. MMTers say it doesn’t matter, if it spends money on anything output is magically going to increase in a way we want. To me I think it matters whether it is spent wisely or not. If not we will pay for it in inflation, taxes, or both down the road.

          2. FlimFlamMan

            Reply to dave at 3;24 pm

            You originally asked questions and made comments about general output and inflation, within the context of the nutty bottle digging scenario. But now we’re abandoning that, so I take it that you now understand that increased demand in an environment of under-utilised capacity will result in increased supply without inducing inflation. Good; we’re making progress.

            Now the problem is the specific nature of that production, and how to adjust it to a more sustainable form; shifting idle capacity rather than simply activating it, and shifting active capacity as well. So how does MMT help? MMT shows that governments can spend without having to worry about the source of that spending; they *are* the source. They just have to ensure that their spending doesn’t boost demand beyond the capacity of the economy to respond. You’ve been assuming that that spending would be wasteful, but would government funded research into sustainable energy and resource utilisation be wasteful?

            “If you believe how the government spends money matter then the OP is wrong.”

            Where does the OP state that it doesn’t matter how governments spend?

            “MMTers say it doesn’t matter, if it spends money on anything output is magically going to increase in a way we want.”

            Quotes please.

            Eddie

          3. dave

            “so I take it that you now understand that increased demand in an environment of under-utilised capacity will result in increased supply without inducing inflation”

            Certainly not. It will produce something, but that something isn’t necessarily something people actually want. And while some inputs used in the production process may be “underutilized”, some inputs are resource constrained. So if you are taking away some productive capacity from useful projects to produce “supply” that is useless and nobody wants then yes you are going to cause inflation.

            “You’ve been assuming that that spending would be wasteful, but would government funded research into sustainable energy and resource utilisation be wasteful?”

            Sure. The research could be a lobbyist driven and used to justify pork barrel spending, just like what happened with corn based ethanol. Simply throwing out a hot buzzword like “sustainable energy” doesn’t make spending useful.

            If you want new spending you need to justify it on a program by program basis and show that is has a positive ROI. The investment will be cheaper in a recession, but it will not be zero, so the return has to be large enough to justify the investment. You don’t just say we need to spend $x billion dollars on anything regardless of whether its a good idea or not because we need some amorphous “stimulus”.

    2. Dan B

      Bravo, Dave! This post is by a moron who is obviously drunk on Macroeconomics Kool Aid. For all the huffing and puffing of Central Bankers about how much they can do, unless the US’s economy experiences actual economic growth, the only two options to deal with all this debt are default (not happening) and inflation. And “Full Employment” is irrelevant to the discussion

  3. attempter

    I hope examples like this will finally start to convince people to view Krugman as the neoliberal hack he is.

    Although his arguments are usually more sophisticated and reasonable-sounding, he also happily goes in for Republican-style distortions and lies, as we see in this case.

    Other examples include his persistent, willful straw-man argument that those who insist on breaking up the big banks think that’s the only thing that needs to be done; his misrepresentation of the position of public interest opposition to Wall Street-driven cap and trade; his support (including the demonization of blogger Marcy Wheeler) for the Armstrong Williams-type fraud Obama perpetrated with Gruber; and of course his systematic lying on behalf of the health racket bailout itself.

    Sorry if that was a little bit off-topic, but I really don’t get why Thugman keeps getting a pass.

    As for his supposed support for real stimulus, that’s true as far as it goes, but notice how he always complies with the strictures of neoclassicism. Fiscal policy is only indicated under specialized, extreme circumstances, high unemployment and the zero lower bound. Otherwise it’s corporate fundamentalism all the way. He sure follows in the footsteps of his hero Samuelson, wanting to be just an anodyne tinkerer within the Chicago framework. Is that what being a “saltwater economist” is, a few sprinkles from a shaker into Lake Michigan?

    (Not that I want expanded Keynes within globalization either. The point is to get rid of a system proven to be a failure, practically and morally. But Krugman astroturfs for it, getting people to think if you’re following him it’s “progressive”. If MMT is ready for radical prescriptions, that would be more like it. That’s why Krugman’s hoping to be able to dismiss it with condescension. He hopes people won’t take it seriously at all.)

  4. orionorbit

    Well, you are basically right that debt can never lead to default in the NOMINAL value of the debt. However, when I buy 10 year French Government bonds (as I did a couple of months ago for my Father) paying 3% what I care is not how much money the French will credit my bank account with, but what is the spending power I derive from that money. If inflation is so high that even though I get back my money I can’t buy anything with it, what is the relevance of non-default? I and the rest of the savers in the economy experience the exact same consequence of default: A loss in the spending power of my savings.

    THIS is why the Krugmans switch the discussion to Weimar republic: Not because they fail to concede your point there, but because your point has absolutely no bearing in the way people experience money, people couldn’t care less about the number on the banknote, we only care about what goods and services we can get in exchange for that note.

    If the government erodes the spending power of private savings, does it really mater if the erosion comes through hyperinflation or through default on its debt? In that sense, can you please explain (preferably providing a few examples) on how the consequences of a sovereign default differ from deficit-driven hyperinflation as in Krugman’s model?

  5. Nick R

    Randall,

    You correctly point out Krugman’s basic error. Garden variety inflation is not a problem under an MMT framework. Job well done.

    The problem with MMT is that in a society in secular stagnation (like Japan) MMT calls for an ever increasing role for Big Government. MMT will allow for the “whithering away” of the private sector.

    Your mentor Hyman Minsky recognized that sovereign government debt of fiat nations can become stuck between the speculative and Ponzi phases. Minsky even acknowledged the possibility that US government debt could become Ponzi in his later writings. And he was absolutely right.

    Now MMT is theoretically correct that there is no financial reason why an unconstrained nation with a floating exchange rate and a fiat currency would ever have to default. But this in no way means that such a nation wouldn’t choose to voluntarily default.

    Russia — a so-called unconstrained nation — voluntarily defaulted in 1998. Japan defaulted on its internal and external debt in early 1942. And people here (in Japan) are starting to believe that the nation will once again do so in the coming years.

    More generally, the sharp distinction that MMT tries to make between finance constraints and political constraints is fine in theory, but wholly unworkable in practice. In reality there are no purely floating exchange rates. Intervention, trade wars and worse occur if rates move “too far”. There are no purely unconstrained nations. And much more importantly, human beings have always been concerned with the size of deficits. MMTers are the only folks I’ve come across who liken the size of the debt with scores at a bowling alley.

    Saying that people will learn to accept that debt is like a bowling score is simply crazy.

    Abba Lerner recognized that “creeping socialism” was a legitimate complaint against endless deficits. His functional finance was perhaps the forerunner of today’s MMT. And, quelle surprise, Lerner was a socialist (a “market-socialist”).

    Japan has passed its inflection point. Since inflation is impossible to be brought about and yen real rates will not turn negative, the nation’s public debt will have to be renegotiated or taxed. As such the nation’s private wealth is equally illusory. Japan has excessive and illusory private wealth. This has prevented its goods markets from clearing for 20 years. MMT cheers this on.

    MMTers may not care that Japan’s stock market is down over 75% (in real or nominal terms) over the past 20 years, but I can assure you it is of more than passing interest to Japan’s ever shrinking private sector. Lord help us if the rest of the developed world decides to emulate Japan and run up the deficits.

    Nick R.
    Kyoto — Japan

    1. marc fleury

      interesting…

      yes, I am a “real money investor” and am pissed off that a strict application of MMT is driving interest rates to near zero… it is tough to go find some yield… actually trade vol through puts since bonds don’t pay.

      At the same time I think about growth… growth accommodates a bond structure where growth is taxed. But when growth is gone or goes in reverse, or is less than the interest payment rate then the un-fairness of the capitalist bond interest becomes trivial to see. I have liked Trond Andersen work showing accumulation loops of wealth in the banking system. It seems that at this stage only the capitalist construct of equity, remains equitable…

      But the point is simple, when growth is temporarily gone, MMT goes a long way to re-establish fairness by driving basic interest rates down.

    2. john c. halasz

      You’ve made the evidential claim that the Nikkei is down 75% in several comments. But doesn’t that assume that Nikkei 39000 was a sustainable level rather than a massive bubble? And due to cross-ownership arrangements between Japanese banks and corps, the banks went down with the corps and, with the low NIM “convey system” to gradually write-down debt overhangs, neither banks, nor corps could readily recapitalize. The failure of the government to tackle the debt overhang through forcing loss recognition and publicly recapitalizing is likely the key cause of the long stag, since government policy was oriented to maintaining the mercantilist trade surplus status quo on behalf of the interlinked banks and corps, even after such mercantilism had imploded. So I don’t think you’ve successfully made an argument against Wynne Godley style national income accounting, though, on the other hand, the MMTers enthusiasm for floating exchange rates likewise fails to take trade imbalances and for-ex rates that are volatile and never do seem to settle at “equilibrium” sufficiently seriously.

  6. Brick

    It is quite right that the solvency issue would be a choice for government, not an implicit consequence of increasing defecits. I cannot help thinking that the arguments here don’t look at a global picture though. The argument seems to be that Eventually stimulus causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP.
    What I think is missing from this argument is what happens to trade flows, investment flows and credit availability.There appears to me to be a fine balance where if the currency is abused too much then credit is constrained and investment flows out of the country. In effect all the stimulus goes abroad and private spending and production don’t grow in the way that would be expected. This should of course be balanced by potential increases in export, although it seems to me highly likely that trade barriers would be erected against the US.
    Inflation fighting policy seems like a good idea, but again this has implications for investment flows and credit availability which could constrain the effects of government spending. The implications for the global economy could also be quite dire.
    So in insulated priciple deficit spending might be good, but in the global economy, I am not convinced all parameters and their feedbacks have been explored to allay the uneasy feeling that unexpected consequences would seriously derail intent.So I agree deficits do matter, but the choice on solvency may not be simple.

  7. Bruce

    You are making a distinction without a difference. Any inflation is a form of default, as purchasing power of the currency is reduced. That is why gvt bonds pay a coupon, to compensate more or less for inflation.

    That’s why everyone is piled into bonds today , no inflation and thus purchasing power is being maintained. But if the gvt prints too much, and the money starts being used, inflation will increase, and either bond coupons increase, or no one will buy the debt as it would a depreciating asset.

    If the MMT rejoinder is “then just print without issuing debt” then gresham’s law will apply and no one will want to hold the currency, then no one will accept it.

    Then you will have a default. Because default of a fiat currency is always and only “non-acceptance”. I have stacks of fiat currency from around the world with no “money” value whatsoever. Think 10000 lire Italian notes.

    Do you and the MMTers understand this? Are you actually advocating that the US test “how low can you go” because you think sovereign governments can’t go bankrupt? Of course they can. They go bankrupt when no one will accept what they are paying for services.

    1. marc fleury

      Bruce,

      I think there are a couple of points that MMT’ers will try to inject in your thinking.

      1/ Printing money is not necessarily inflation. See the main article by randall here: only money printed above and beyond full economic activity will result in inflation. As we speak, I think the current episode of QE is proof positive of this point… we have printed a T worth of USD. have you seen inflation as a result? no… you have seen a relative stabilization of housing prices, a stock bubble that quickly unwound and the dollar retained purchasing power.

      2/ the second point has to do with size imho. You cannot compare italian liras, zimbabwe dried dunk, and US of A dollars… not all fiat currencies are equal…The USA is still a industrial superpower, it produces things (still). The USA and the EU can engage in QE (an application of MMT) to deal with liquidity crisis and spread over time the impact of insolvency crisis…. A small country that doesn’t produce that much will see its currency destroyed as you point out. The USA saw a rally in the dollar because of other factors as it was going full steam with QE…

      1. dave

        The FED printed, but the economy as a whole went deflationary. Private credit collapsed, and private credit is the majority of our “money”, not base reserves at the FED. So its no surprise we don’t see any inflation, there isn’t any.

        1. marc fleury

          exactly… if the backdrop is deflationary then the inflationary contribution of QE still doesn’t make the overall monetary mass grow. MMT means an inflationary cont

          1. marc fleury

            pffff, jumpy pad… couldn’t finish the sentence.

            Yes, a positive contribution to inflation but not enough to counter private deflation. See Keen work on “not keen on bailouts”…

          2. vlade

            Ah, but I would argue it is inflationary, as it (artificialy) keeps the value of assets above where they would clear in normal conditions.
            Note that I did not make any observations whether it’s good or bad.

  8. john

    As I said the other day on Bill Mitchell’s blog, out self styled elite really don’t seem to trust the hoi pilloi with the knowledge that the government’s deficit is their wealth.

    “Fresh water economists” and “salt water economists” by definition have never experienced scarcity themselves, it simply doesn’t exist in their physical locations. Mitchell’s in Australia and Wray’s in Kansas City: these are “water on alternate day economists”.

    1. Chicken Little

      I wrote with Jerry Seinfeld. I knew Jerry Seinfeld. Jerry Seinfeld was a friend of mine. Danny boy, you are no Jerry Seinfeld.

      If not for the lack of self-awareness, I would have accused *you* of being Costanza, not the MMTers.

      http://www.youtube.com/watch?v=Nduf8_iCTOs

      [As an aside, it's amazing that you think the whole post is a delusion, not just parts of it. You are so threatened with the *policy implications* that you even deny the undeniable that a sovereign can avoid strict default (according to the terms of the bond) by simply crediting bank accounts. Seriously, go back and read up on resistance to cognitive dissonance. No, seriously. I mean it. I mean I really, really mean it. No, seriously. Really. Just think about it. Really. I mean, actually, think about it. For a few minutes. Really. Not kidding this time. I mean I actually, really, really mean it. Seriously.]

      1. Dan Duncan

        Ouch! You really got me with a zinger, Chichen Little.

        Especially that part where you write:

        “If not for the lack of…I would have…not them.”

        Nothing stings more than an ill-formed, ambiguous, nonsensical statement.

        [But you did write with Seinfeld!]

        If not… for a lack of… an ability to express a coherent thought…I would have been… insulted.

  9. marc fleury

    randall,

    glad to read you here and be able to answer directly.

    1/ I can’t shake the feeling that MMT is in fact dependent on the govt doing it. Clearly the US and EU can do it, QE being a proof positive. But zimbabwe can’t. MMT does not exist in a vacuum and not all governments are equal.

    2/ I think your presentation of MMT, focuses too much on central banking created liquidity. Many would argue that monetary levels are NOT under the exclusive control of central banking. One can make a compelling argument that liquidity levels are in fact set through derivatives and should be regulated as such. Take the naked CDS construct (synthetic CDO by product) that is so discussed here and you quickly see that these are “near-money” instruments. I would argue that the subprime bubble was nothing more than inflation of asset prices through MMT, as soon as you consider the modern instruments as near-cash contracts and thus part of the MMT money creation process.

    3/ As a corollary, the current finance bills proposed a public exchange of these near-money instruments. So that MMT would have a QUANTITATIVE framework above central banking to capture money flows. Monetary levels are set in the private sector and this would allow measuring and then regulation. A welcome development that gets lost in the sea of negativity.

    4/ I really think you should abstract MMT above politics in your presentation. In your book you choose full employment as an application of MMT. It is a social liberal program, which I personally like, but gets you flak, as in this thread. But you can make the claim that reagan deficit defense spending was in fact a full blown MMT era . It drove a relative prosperity by full employment :). MMT has been the dominant force across party lines….

    5/ thanks for banging on the gold bugs… the fascination with the little yellow metal is in fact an infatuation with balanced budgets… gold is a historical aberration…. returning from south africa I have come to see slavery and apartheid as a consequence of the gold system (british would be the sole buyer of gold and paid crap, leading to the creation of a perma under-class and the lack of industrial development in the late 19th. your presentation of what modern money is has been the most enlightening read I have had on the theory of money. Please keep it coming….

  10. JeffC

    “As budget deficits rise, this increases income and wealth of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP. This reduces the government deficit.”

    Ah, so basically the Republicans are right, tax cuts reduce the deficit. Sure worked for Wrong-Old RayGun in the 1980′s!

  11. ds

    The Greek economy was in a severe recession. Unemployment was high. Capacity utilization rates were low. There were no major supply issues, no shortages of raw materials, nor were there any major moves in import and export prices. Clearly the real capacity of the Greek economy was underutilized.

    At the same time, the Greek government found itself caught in a rising yield environment and was unable to place its debt. In the midst of a demand-driven recession it faced a solvency crisis.

    The point Wray is trying to make is that this cannot happen to the US. The US issues the currency it uses. Whether or not you define ‘solvency crisis’ strictly — meaning unable to pay its bills — or if you define it loosely — meaning monetization/inflation — the US will not face such a crisis so long as there is significant spare capacity in the real economy.

    The idea that we need to address the ‘structural deficit’ in a time of recession is absurd. These predictions of fiscal ruin are based on 20-40 year forecasts. Ten years ago these same forecasting models predicted trillions of dollars of surpluses and the elimination of the national debt! The reality is that the size of the deficit is irrelevant unless placed in the context of the state of the real economy. So long as the real economy is suffering, we need the government to take a large and aggressive fiscal posture to get growth back again.

  12. Bates

    MMTers are saying that printing lots of dollars does not matter and are pointing to QE1 as part of their proof. They are in effect saying ‘look, lots of new FRNs and treasuries were printed and no inflation occured.’

    The MMTers are right about this…so far. But, they are not taking a critical look at where the QE1 printing went. The FRNs/treasuries were/are bottled up in the money center banks and very little has entered the real main st economy.

    As long as wages remain stagnant or falling and the Fed does not issue new dollars directly into the main st economy there will probably never be inflation seen on main st…(with one caveat below) Wages will not rise because lots of manufacturing capacity has been shipped abroad and the unions left in America have little if any bargaining power. Consumer credit is in a nose bleed dive, unemployment may have stabilized at a high number, housing starts are way down, unsold housing inventory is way up, retail sales in same store sales are flat although many stores have been closed, revolving and non-revolving credit are shrinking. The US GDP, if measured as in 1970, is shrinking. The US economy is shrinking…the pie is getting smaller. Printing money and putting it into main st circulation would be a short term papering over of some of the above problems.

    But, for every action their is a reaction…and it might be a big one.

    The US is not a perpetual motion machine which means some external force must be added to keep the US machine in motion. That external force is a commodity from abroad and it is oil (leaving other commodity imports out of this discussion for simplicity). The US uses ~ 18 millions barrels of crude oil per day and we produce internally far less than we import. Without oil the US and the world as we know it stops.

    So the question I pose to the MMTers is how will those foreign countries that are currently supplying the US with oil react to a US Gov fiscal and Fed monetary policy of printing ever more dollars, when said policy happens to reduce the value of the dollars that the foreign oil producers are holding in their soverign wealth funds and the new dollars they receive daily for their oil?

    If foreign oil producers raise the price of oil in dollars because the Fed is printing more of them and the purchasing power of the dollar decreases…and US wages remain stagnant…then the US main st experiences a rise in the cost of everything because of MMT policy. MMT will cause the price of oil to increase.

    IMO, MMTers are too America centric and are not looking outside their own borders, they are not considering the effect of MMT policy on the various commodities that the American machine needs to continue running.

    1. Bruce

      Your last point is the point. MMTers are only here in the US, and it only seems to apply to the US. As for oil, like stocks it basically doubled when QE went into effect in March of 2009. So I always laugh when these peoplensay there is no “inflation”. Of course there is, it just went into store of wealth proxies like gold, oil, farmland (look it up), and yes, stocks. Printing money is the definition of inflation, and when you target the printing through asset holders, they ar going to bid up assets( not spend it on day to day stuff). The money is out there, and it bid up assets that in turn will benefit from further printing. So if you want oil at 100, by all means, print more and distribute it to asset holders. If you want a run on day to day stuff, send checks to lower tier income. You have to look at who gets the money, and there you will see the effects of inflation. And hamptons prices, last time I checked, are going up.

      1. FlimFlamMan

        Bill Mitchel – one of the ‘leaders’ of MMT – is an Australian who lives and works in Australia.

        Eddie

    2. NOTaREALmerican

      What makes me mad is the constant talk about “stimulus 1″ not working. Stimulus 1 wasn’t the first stimulus. The stimulated economic fantasy started 30+ years ago.

      The Krugmans of the world will stimulate until death. There’s no other choice available to the socialist (or fascist) debt addicts. Centralized state-ism needs the appearance of constant growth as a cover for the smart amoral scumbags looting the system. No other form of society is possible.

      Unfortunately, as most humans are unable to recognize who the sociopaths are, they’ll believe the economic experts singing the “song of perpetual growth” with debt. Debt is just another addiction; so we stimulate until death. It’s the only way this can play out.

      It should be pretty obvious that the “austerity” side lost the argument when the “action of not stimulating perpetually” was named “austerity” (by the nobility sycophants). “Austerity” does not project happiness; it projects doom.

      The last 30+ years have been one long stimulated fantasy. When fantasy ends societies collapse. TPTB know this and will do anything they need to keep the fantasy going.

      (Note to the optimists: there is absolutely NO chance that when society collapses “things will be different”. Nothing can change until humans learn to recognize the sociopaths. This will never happen. The smart amoral scumbags will lead the next society too. Sorry, that’s just the way it must be).

    3. Tom Crowl

      Can’t really argue with your position on the oil issue. And its the same with dependence on any external source for essentials.

      The only NON-”pie-in-the-sky” approaches to solution in such cases is:

      1. Replace the essential with a local source of the same or similar commodity. (produce)

      2. Use less of it. (conserve)

      3. Have something to offer for it the the guys who have it need or want. (trade)

      (The third solution is non-optimal for essentials which is a fundamental problem with the Rubin/Summers global paradigm of ‘national specialization’, btw. A true global resiliency will benefit by the distribution of self-sufficient capability to many separate ‘social organisms’… not limiting it to a single global monolith.)

      Ultimately the value of any currency used to trade for these necessities rests upon the capacity of the nation to produce recognizable value. That’s where our focus needs to be.

      I don’t believe MMT is in contradiction with this. Though it is critically important how any such currency creation is utilized. And significant levies and tax hikes on some sectors and individuals who overly-benefited by the pathology of the last several decades can help mitigate expansion of the money supply.

  13. Sean DiTulli

    1) Does anyone have a textbook I should read on MMT. I get bits and pieces from the blogosphere but would like to get a deeper knowledge
    2) Someone mentioned the Gold bugs (Which I am one of). It is MMT that makes me believe in gold. Absent exceptional increases in the money supply we would be in a deflationary environment. Gold is in fixed supply (and is/was a currency) for these factors it should appreciate relative appreciation to paper dollars. Dollars will be printed to prevent deflation but gold can’t be printed so it will capture the productivity gains/economic growth that paper money will not.

    I’m a good bug because I believe it has value and will appreciate as it becomes increasingly rare relative to paper money. I believe the purpose of paper money is to increase economic activity and find MMT as an ideal means of accomplishing that tasks while at the same time believing MMT will lead to appreciation of gold.

    1. NOTaREALmerican

      I don’t know a “text book” but if anybody would know this site would.

      This is a MMT “friendly” economics blog.

      http://bilbo.economicoutlook.net/blog/?cat=11

      Economics will never get beyond religion (organized) and philosophy (political “ism”s) because – like all religions and “ism”s – they exist solely as camouflage for the smart sociopaths to manipulate the dumbasses for fun and profit. (Or, to put it in economic lingo: Assuming the sociopaths don’t exists, it follows that all economic systems would work just fine.)

      1. marc fleury

        Randall, the author of the post, wrote the bible on MMT… it is called “modern monetary theory”, quelle surprise! :)… it is a bit of a dry read but very interesting if you are into this sort of things….

  14. Sungam

    As an aside, I am curious how much of the US deficit is currently domestically funded rather than funded by foreign bond holders.

    One of the reasons the USD has held up so well is that it is the current global reserve currency. It can only act as such as such as long as foreign governments can trust that it will old its value. In the current climate great care should be taken to maintain that trust. Bearing that in mind, even if policy makers agree with the MMT-ers it would be risky to do so publicly.

    Also, to cotton on to a previous reply, running a deficit only really stimulates the economy if it doesn’t go straight into a trade deficit (which has been rising again after dropping sharply).

  15. industry accountant

    Marc -

    Enjoying your insightful posts on this thread. Since you appear to be active today, let me challenge you and/or Randall with a scenario that I don’t see addressed in the ‘deficits matter, just not the way you think’ line. And that has to do with large trade deficits against the backdrop of large federal deficits/aggregate debt.

    This is where I think that deficit do absolutely matter and do impose real constraints on any MMT biased fiscal course of actions. And it has to do with the fact that in a large trade deficit scenario, the aggregate debt of the federal govt not only represents the net financial wealth the ‘private’ sector (i.e. usa citizens and businesses), but that of the foreign sector as well. And unless we want to take the view that we can ‘default’ on said foreign treasury purchases and then point our guns in their direction and say ‘too bad’, this does create a problem of not only inflation, but what I’d like to call resource/capital diminishment potential.

    Consider: China (cheap products) or Abu Dhabi (oil), with their large accumulations of our currency, sees the light and instead of purchasing treasury debt decides they want make it a national policy to recruit all our top thinkers across all industry lines with those $, paying superior salaries and essentially mobilising our ‘human capital’ to vastly improve their standards of living. Anecdotally, individual companies are already doing this, and there are a number of American expats already in these two example nations. Just as easily certain members of their country could immigrate over here, starting companies with those $, buying our real estate, etc, which is all fine and good as long as they remain politically benign/accepting of western ideology (would anybody here like to see our system slowly sway towards stricter islamic code or communist suppressions of speach?) Anyways, the point is clear that we have the potential to become weaker and less dynamic, and even less ‘sovereign’ if we keep bloating both our deficit and aggergate debt *in line* with consistent trade deficit (unless of course we are willing to go to war and bully other nations around).

    So if we want to issue ‘tax holidays’ or ‘print up debt free currency’ to stimulate aggregate demand we better damn well sure were in a position where that demand stays here within our borders. Which means balanced trade and a ciriculation of those dollars here at home, not China, South America, Saudi Arabia et al. How to get to balanced trade – energy independance first and foremost, with an uptick in manufacture which should then follow more fluidly (JMHO).

    None of these MMT posts I read address these issues, they seem so fixated on ‘the federal deficit is not a problem’ meme. I think it is until we get the trade deal taken care of. Would Randall disagree?

    1. marc fleury

      I like to keep in mind that a good money has both a store value and a exchange value and that these two aspects co-exist. MMT’ers focus on the exchange value: get everyone to move. Non-MMT’ers usually balk at the store value aspect they interpret it as haircut on debt holdings.

      In practice it has not turned out that way because there are other things factored in the price of the dollar. MMT is a factor. EU had its own mess etc etc… MMT is nothing but a book by Mr Randall and a good framework to understand modern money :)

      1. Toby

        Money is a medium of exchange for goods and services, as language is a medium of exchange for communicating our symbolic representations of reality. Neither medium can contain the things they represent. Language does not contain reality. Money cannot therefore ‘store’ value. This classic assumption about money is one of the many reasons we are in the deep mess we are in, pretty much across the planet.

        As the cliche goes, you can’t eat money. And gold cannot store value either, as King Midas discovers in the story. If any money could store value, there would be no such thing as inflation. But because money is a representation or abstraction of value, simply printing it off can result in inflation, though this depends on other factors too.

        We have confused money for wealth, have an interest bearing debt-based money system which logically addicts us to perpetual economic growth via ever increasing consumption of goods and services, and have forgotten that real wealth and value are stored in the health of the societies and ecosystems which make our lives possible. Money’s ‘wealth’ and utility value are functions of the real wealth of the real world. Take a trillion dollars to planet Mars and see how far it gets you. You’ll quickly discover how little value there is in there.

    2. alex

      “we better damn well sure were in a position where that demand stays here within our borders. Which means balanced trade and a ciriculation of those dollars here at home, not China, South America, Saudi Arabia et al.”

      I completely agree.

      “None of these MMT posts I read address these issues”

      The closest this post comes is mentioning floating exchange rates, but it assumes ideal floating exchange rates (e.g. no currency manipulation from excessive forex accumulation).

      “How to get to balanced trade – energy independance first and foremost, with an uptick in manufacture which should then follow more fluidly (JMHO).”

      Realistically I think it has to be the other way around. Energy independence will take a longer time than utilizing our unused industrial capacity or even than creating new industrial capacity. Not that we shouldn’t start on energy independence ASAP (in fact it could help us utilize our industrial capabilities) but realistically it’s a longer term project.

      1. industry accountant

        Alex -

        Thanks for your reply, we absolutely agree in principle, just vary a little on the nuance :).

        Marc -

        Agree that Mr. Wray’s book is a good tool as an academic aid. And I certainly don’t mean to browbeat you on these issues (that should be reserved for the author). I actually believe MMT has some potential and can more ideally serve a bottom-up, true liberal based economic policy.

        But to break the confines of ‘intersting but not too useful’ wonkish discussion it had better start addressing some practical real world constraints on its use, as well as the political angling as well.

        Otherwise, if the dialouge/posts just keeping hammering on the ‘fetishness of fiscal hawks’, ‘austerity is bad’ etc, then the message will be drowned out and we can look forward to more of the same unsustainable debt-based, monetary ponzi garbage from the neolib crowd. I do not want this to devolve into ‘one monetary hack theory vs. another hack theory’ waste of time…

  16. industry accountant

    Heh, looks like Bates beat me to the punch on my issues.

    Bates I am with you, capacity underutilization will narrow quickly if we lose control of the oil price (with inflation to follow thereafter – we thankfully didn’t quite get there in summer 08) .

    Which is why I say direct any MMT approach primarily to that sector (with some allowances for UE). Otherwise the rest won’t matter.

  17. Tom Crowl

    We often hear the phrase “We have to live within our means!”

    This is true enough…

    But our “MEANS” is determined by the level of ‘net’ social energy (the product of our actions in both the public and private spheres limited by physical laws and conditions) and is NOT directly related to any particular number of trade tokens (currency) in circulation.

    The ‘amount’ of a currency in circulation only has import to the degree it affects that level. It’s a MAP not the TERRITORY.

    When your may doesn’t match the territory… its time to fix your map. It’s not time to pretend the territory doesn’t matter because “We’ve got to protect our map!”

    Net social energy is primarily related to the health of the social organism. (A difficult metric, but not an impossible measure of its condition… and NOT necessarily directly linked to GDP or other typical economic metrics.)

    Mass-unemployment – when there are so many things to be done in the public sphere – is INSANE!

    (It might also be wise to provide jobs for Commons improvement with mechanisms encouraging consumption of locally produced goods and services to the extent practicable.)

    Technology, Human Development and the Social Energy Grid
    http://culturalengineer.blogspot.com/2010/04/technology-human-development-and-social.html

    Decision Technologies: Currencies and the Social Contract
    http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html

    1. Bates

      “our “MEANS” is determined by the level of ‘net’ social energy (the product of our actions in both the public and private spheres limited by physical laws and conditions) and is NOT directly related to any particular number of trade tokens (currency) in circulation.”

      Pie in the sky thinking…Our means are determined by the ‘trade tokens’ because those trade tokens bring oil and other commodities that we need to our shores. No amount of ‘net social energy’ is going to replace the dollar if it collapses as a trade token used to purchase commodities.

      “The ‘amount’ of a currency in circulation only has import to the degree it affects that level.”

      What ‘level’? I cannot make sense of this sentence although I reread it several times.

      “When your may[map?] doesn’t match the territory… its time to fix your map. It’s not time to pretend the territory doesn’t matter because “We’ve got to protect our map!””

      I cannot understand these 2 sentences and it’s not for lack of trying. Are you advocating we take over some other country to ‘expand our territory’?…or, is this more in the vein of social engineering? You are not getting your points across.

      “Net social energy is primarily related to the health of the social organism. (A difficult metric, but not an impossible measure of its condition… and NOT necessarily directly linked to GDP or other typical economic metrics.)”

      What ‘social organism’ are you writing about? We certainly cannot measure it or anything related to it unless we know what it is.

      “Mass-unemployment – when there are so many things to be done in the public sphere – is INSANE!”

      Yes, but so was the move to global corporatism and the accompanying off-shoring of millions of American jobs. Were you railing against those government/corporate actions or were you buying foreign made autos and shopping at Wal Mart? Conservative estimates say that it will take 20 years to get American manufacturing back to the level it was in 1980. It will also take major changes in corporate tax codes, training and retraining millions of workers, enormous investments in plant and equipment, etc. I have not heard any leader even discussing such enormous changes…have you? Hell, I haven’t heard anyone that sounds like a leader…just bs artists.

      Believe it or not there was a group of us engineers discussing what was going to happen when GATT and NAFTA proposals (and follow ons) were enacted into law and trade agreements. We were very close in our predictions and our discussions were 35 years ago. There was not a trained economist among us. So, if we could see what the changes were going to do to America, obviously those leading America could see where their actions would lead us…and here we are. You are a bit late to the party.

      If you are old enough perhaps you will recall what our ‘leaders’ were telling us 35 years ago: ‘We are going to become an information based economy.’ ‘We are going to become the financial center of the world’… and other such nonsense…well, to be fair we did become the financial center of the world long enough to blow up the world economy!

      It is going to take a hell of a lot more than a few people scratching around in the commons to help America rise again from the rust belt it has become…America was laid low by it’s own leaders from both sides of the aisle.

      1. NOTaREALmerican

        Re: America was laid low by it’s own leaders from both sides of the aisle.

        Or perhaps it was simpler even.

        What if – beyond a certain size – all human social organizations will be run by the smartest amoral scumbags. Perhaps, the US just got too big to measure-up to the ideals of the “foundin’ fadders”.

        The European nations are still somewhat governable because nationalism in each country keeps each nation’s smart amoral scumbags from completely trashing the country due of their own “patriotism” (fear of the other nations).

        This means the US and China are only possible future forms of government: Benevolent Corporate Fascism.

        1. Bates

          “Or perhaps it was simpler even.

          What if – beyond a certain size – all human social organizations will be run by the smartest amoral scumbags. Perhaps, the US just got too big to measure-up to the ideals of the “foundin’ fadders”.”

          I believe you and I see it the same way. The real tragedy of the civil war is that it lent impetus for the federal government to expand (not so different than the warning from Eisenhower in his departing speach). We went from a loose confederation of states (much as the EU today) to a evermore tightly bound group of states…To the point we find ourselves today where if a local school board in Teenytiny Idaho does not comply with some obscure federal mandate the fed education funds for Teenytiny are withheld. Same for highways, medical, etc.

          I don’t believe that the founding fathers ideals were all that pure…but thats another story. If you have not read Howard Zinn’s version of American Histoy you might want to. Your local library should have a copy for it’s by far the biggest seller on the subject. I have read a lot of history and all the Federalist Papers but Zinn’s was an eye opener…it’s original source material, not fantasy.

          “The European nations are still somewhat governable because nationalism in each country keeps each nation’s smart amoral scumbags from completely trashing the country due of their own “patriotism” (fear of the other nations).”

          Yes! Very true. Plus the Europeans have not forgotten the French Revolution where the ‘smart amoral scumbags’ heads rolled into baskets at the base of the guillotines…nor have the Europeans forgotten the sweeping away of most real power from the monarchies during and after WW1. America’s last real catastrophy was the civil war and no one remains alive to preserve a living memory of that debacle. The slaves were freed but they spent another hundred years under Jim Crow laws that provided conditions only marginally better than slavery for most blacks…so, some good did finally come from our civil war but at the cost of state’s rights.

          If you have access to 1866-on European Newspaper op/eds you will find that many scribblers were saying that the long term result of the US Civil War could only be a totalitarian state…since we did not have a monarch. Of course the Europeans thought we should have a monarch, since they all had one, but that is beside the point. Do you think those European scribblers were far off the mark?

          At least the Europeans are talking austerity, especially Germany with it’s memory of Weimar hyperinflation, but whether Europe can stick to austerity is doubtful in my mind. For austerity to be applied quickly would cause severe backlash in populations used to more luxurious lives. Whether austerity will work at all, even if the populace does not rebel, is also another, mostly economic one. Austerity will bring more economic contraction, as we are seeing in Ireland today. I think Ireland is a good economy to watch and use as a yardstick to gauge other Anglo/American economies that are contemplating austerity. Ireland as a petri dish. My apologies to all Irish but I am not making policy, simply commenting on it.

          “This means the US and China are [the?] only possible future forms of government: Benevolent Corporate Fascism.”

          I cannot comment much on this one because I don’t know if you left out a ‘the’ between ‘are’ and ‘only’. A ‘the’ would totally change your intended comment. Assuming for a moment that you did leave out ‘the’… I might leave out the ‘Benevolent’ and go with corporate fascism…benevolent being subjective. Benevolent compared to?…GWB, Mao, Hitler, Stalin, or China’s old neighbor Genghis Khan? Genghis, a guy with an effective good-neighbor policy!

          I appreciate your response.

          1. NOTaREALmerican

            Yup. Agree…

            Left out “the”. Probably should have put benevolent in quotes, too!

            Interesting times (unfortunately).

            Thanks for the info on Howard Zinn. I’ll check-it-out.

      2. Tom Crowl

        Let me see if I can work my way through your critique.

        Re the “social energy” concept… it’s simply a recognition that what you literally see as a nation or civilization is the result of trillions of individual decisions motivated by everything from money to morals to biological impulses. And that the effect of those decisions are, of course constrained by reality.

        (Technologies are the products of a myriad of decisions… which I’m sure as an engineer you recognize… as are government structures and laws, btw.)

        “Net” social energy is a recognition that decisions aren’t always in harmony… (which is a necessary condition for social health) and that the resultant society is a reflection of the ‘netting’ out of decision vectors going in many different directions.

        The ‘wealth’ of this nation, or any other similar ‘social organism*…

        (*a social organism is any group of individuals which makes decisions affecting that group’s well-being and survival. I hope that helps on that question. Yes, we all belong to overlapping ‘social organisms’.)

        is, in fact a product of those decisions. The ‘tokens’ it uses are a reflection of those productive (or non-productive) decisions… They are NOT the value thus created but only a reflection of it.

        So then my statement (thank you for correcting the typo):

        “When your map doesn’t match the territory… its time to fix your map. It’s not time to pretend the territory doesn’t matter because “We’ve got to protect our map!”…

        refers to the danger of relying on economic theories and formulations (maps) that ignore the reality of underlying conditions (the territory). I feel much political debate is concerned with defending ‘maps’.

        As for my age and past views:

        I’m 60.

        I’ve opposed Nafta and the globalization model being advocated from the start. (I voted for Perot and later Nader… and even contributed $10 to Ron Paul’s campaign because of his opposition to our Republic building an empire.) If you want to go back farther than that… I also not only refused induction during the Viet Nam era… but even refused the 2S deferment for which I was eligible because I believe wars in a self-governing body should be declared and the burden of all… a concept that seems to have been lost.

        I’d call myself an Adam Smith Progressive. And yes, I believe both the ethical and physical maintenance of the Commons is essential for a healthy ‘social organism’.

        Hope this helps. I don’t claim authority… but I am trying to take a rational approach.

        And believe it or not… I really do thank you for the critique… I know I’m too “sketchy” and I don’t mind clarifying.

        I recognize I could be wrong and/or that these approaches may have no value. But nevertheless, intellectual exploration is a valuable commodity also.

        1. Bates

          Tom, thanks for your response…it clarified a great deal but brought up some more questions/comments.

          Bertrand Russell is one the people that I have read and respect. Here is a bit of what Russell said about ‘reality’…

          “Bertrand Russell, Problems of Philosophy, on ‘Appearance and Reality’…

          http://www.ditext.com/russell/rus1.html

          “I recognize I could be wrong and/or that these approaches may have no value. But nevertheless, intellectual exploration is a valuable commodity also.”

          I like your comment very much…If only every human realized the truth in it. The problem with the human race, aside from their failure to comprehend the exponential function, is that most humans do now want to think. Most people go to great lengths to avoid thinking…they shop, they turn on the radio in the vehicle, the tv when at home, babble non-stop when there is someone to babble at (not with), keep their kids busy and become soccer moms, little league dads, keep the wheels of the vehicles rolling, go, go, go. Want to scare hell out of someone? Mention the word responsibility. lol

          “If I were granted omnipotence, and millions of years to experiment in, I should not think Man much to boast of as the final result of all my efforts.”
          Bertrand Russell / 1872-1970

          …and a bit of wisdom from another hero of mine, Fred Hoyle…

          “It has often been said that, if the human species fails to make a go of it here on the Earth, some other species will take over the running. In the sense of developing intelligence this is not correct. We have or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned. With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology. This is a one-shot affair. If we fail, this planetary system fails so far as intelligence is concerned.”

          If you can find a copy of Hoyle’s ‘The Intelligent Universe’ it is certainly worthy of a read. Perhaps your library has one?

          1. Tom Crowl

            Thanks for these references and your comments.

            I’ve given thought to the issue you mention (as have others with much more thoroughness) regarding the odds for survival of intelligent life. Our prospects may well be constrained by many of the very characteristics that catalyzed our development in the first place.

            The Problem in Scaling Altruism: Where’s the Intelligent Life?
            http://culturalengineer.blogspot.com/2010/04/problem-in-scaling-altruism-wheres.html

  18. Jim Haygood

    ‘As budget deficits rise … this causes private spending and production to grow. In other words, the cyclical upswing will automatically reduce the budget deficit.’

    This is true as far as it goes. But the assertion is focused on the cash-basis deficit, which rises and falls with the economic cycle and occasionally (e.g. 1999, 2000) achieves a cash surplus.

    Currently, though, the Financial Report of the United States shows that the U.S. is averaging accrual basis deficits on the order of $3 trillion a year, which eventually become cash obligations.

    In other words, there is an underlying secular trend toward more debt which will simply overwhelm cyclical (business cycle) fluctuations in the cash deficit. ‘Keystroking’ the funds to pay the mounting interest will eventually be hyperinflationary.

    Although theoretically sustainable, in practice hyperinflation burns out for a variety or combination of reasons: capital flight; cessation of domestic investment; replacement of government; introduction of a parallel stable currency, or the like.

  19. EmilianoZ

    All this MMT stuff sounds like BS to me.

    Wray writes: “As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP.”

    This is I believe the crux of his argument. And this is magical thinking. Where is the causal effect between government giving money to the non-government sector and production growth? What if we spend all that money buying stuff from China and other countries? The private sector has sufficiently demonstrated how stupid it could be, investing in houses instead of producing goods we could export.

    By the way we don’t need full employment to have hyperinflation. Weimar Germany had massive unemployment. I doubt Zimbabwe has full employment.

  20. Siggy

    Emiliano,

    Loved the movie, great social commentary. Love your rejoinder here.

    MMT, in my opinion, is snake oil. A government that simply prints money invites a Gresham’s Law response and some degree of inflation. In recent years the tendency has been the hyperinflation of asset prices. NASDQ, Houses Commodities etc.

    Reality, most of the ‘primary dealer’ banks were insolvent circa 2007/8. Most are still undercapitalized. Proof, if they had truly stong balance sheets they’d be writing new loans as opposed to charging higher rates on lines of credit relative to their cost of funds at the Fed.

    This argument should shift it’s focus to the maintance of purchasing power. That is the issue that speaks to whether or not deficits matter. The formal identification of default begs the problem.

    My view, MMT is crap think.

  21. BDog

    Why not just give everyone $200,000 a year that makes less than this? Everyone happy and problem solved. Vegas would be packed!

    MMT = Epic Stupidity, please stay on campus and off line

    1. NOTaREALmerican

      My mother-in-law – who is from the old Societ Union, and (btw) who is intelligent enough to be a full professor at an US university now – said something many years ago that I found very interesting.

      She’s been here 30+ years now. About 10 years ago, we were talking about the collapse of the Soviet Union and she said: “If they had only given everybody more pay everything would have been fine.” I asked how more pay would have improved anything. She said, “People couldn’t buy enough to be happy. If people had just a bit more money, they’d have been happier and nothing would have happened.”

      I attempted to tell her than if they gave her – and everybody else – 10% more money all it could accomplish – after a period of time – was a 10% price increase for everything. People weren’t happy because there wasn’t enough being produced for them to buy. The amount of pay didn’t matter.

      She still doesn’t agree with that. And never will. She’s also the same person who would tell the old Soviet joke of “We pretend to work, they pretend to pay us”. There was never any connection with this and “the pay increase”. The Soviet Union collapsed because the fantasy collapsed. All of Human life is based on fantasy.

      That’s why societies MUSY be the way they are. Humans are semi-psychotic.

  22. MarcoPolo

    You don’t have to know too much MMT to get this far:
    “ [T]he US dollar is a faith based currency of no intrinsic value that is manipulated by the Fed, and the consequences of the manipulation are often quite distinct, different from what was intended.” – Jesse ( perhaps quoting another)

    Solvency may not matter either for sovereigns or for even for commercial banks who from the day they open the doors cannot match current assets to current liabilities. Deficits do matter and not just in the small sense as mentioned above. It’s one thing to anticipate a 3%/year depreciation in one’s savings. It’s another thing to watch those savings diluted in an unconventional and unpredictable manner. The reliable expectations of the $ as a store of value are more important than the actual levels of depreciation. Similarly, when Moody’s (for example) places a baloney rating on an offering it doesn’t matter so much that everybody knows it’s baloney if the blessing itself is seen as sanctifying the offering. One can be reasonably certain that other people will buy it if it’s kosher. But if “kosher” loses its standing? What then?

    The way things are going, if we haven’t already lost our faith in fiat currency as a store of value we soon will. It will retain some transaction value longer. So question is, how will we know when that time has come? Watch for capital controls.

  23. NOTaREALmerican

    Re: So question is, how will we know when that time has come?

    Never underestimate patriotism.

    “Country First” (don’t forget).

  24. sgt_doom

    “In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits …”

    Puhhhlease….All this so-called mass hysteria has been generated by privately financed misinformation campaigns, and the populace isn’t that gullible and stupid as evidenced by that recent town hall meeting fiasco with that quack AmerikaSpeaks nazis.

    Many Americans today now grasp that both the debt and deficit spending are direct results of the scams foisted upon us by those debt-financed billionaires and war spending.

    End of that story…..

  25. Sy Krass

    Its not the absolute number or percentage of deficit, debt that matters. What matters is the confidence one has in a currency, 10 year Greek bonds didn’t go to 30% in a matter of months becuase anything really changed THAT much, it was because confidence was lost. Thus it will be here, BUT when the US interest rates rise uncontrollably, the entire world economy will collapse.

  26. vlade

    While I agree that there are some very good insights in MMT, I have a number of problems with it. One I’ll put forward here is the quiet assumption that government and private money are one.
    Let me explain what I mean by govt and private money. Govt money are effectively money that is used to extinguish future tax liabilities. From that perspective, it’s clear that gov’t can print as much as it wants – it can set up taxes wherever it wants, and hoover the money back, or just let the value of money (as in store of value) detoriate and re-denominate. Whatever.

    Private money is for private parties to extinguish their future private liabilities – I buy something from you, creating a liability, but instead of giving you a pint of beer now I move the liability to an unknown entity in the future. What a miracle!

    Clearly, as long as there are _ENFORCEABLE_ taxes, there has to be an interaction (and effectively an exchange rate) between private and government money. Gov’t buys services from private sector (including its employees), and in return provides them with gov’t money to extinguish their future liabilities. They in turn can move their surprlus of govt money to the private sector as necessary.

    In an ideal conditions private and gov’t money converge, and there is absolutely no difference (exchange rate = 1:1, the same currency). But, there’s a number of ways how this can break – especially since gov’t is ultimately a human creation that depends on humans – it doesn’t exist independently.
    When it breaks, we get stuff like Zimbabwe, former Yugoslavia, Somalia and like (replacing gov’t money with something else – ranging from other currencies via gold to barter).

    MMT (to the extent of my knowledge) assumes that the link between private and gov’t money is unbreakable, a six sigma event. I’d say that we’ve seen it often enough in the history to ignore it (regardless of whether it was or wasn’t a rational thing to do). At least stating it as an assumption would be nice. Remember, taxes are enforceable only to the extent that the majority of people finds it easier to pay than not to – it’s just a social construct in our minds, but if significant (doesn’t even have to be a majority) part refuses to pay, gov’t is stuffed. If 20% of Americans refuse to pay their taxes tomorrow, there’s no way on Earth that the gov’t can actually enforce it – it’s just too many to get into jails, and if I refuse to pay taxes, I’m probably more than happy to refuse to pay any penalties as well.
    The actual percentage for civil disobedience is probably even lower.

    Considering stuff in the ivory tower instead of real world that has to deal with politics and irrational people doesn’t get one too far.

  27. Corny

    “In other words, the policy choice will not be between hyperinflation and default, but rather rational use of inflation-fighting policy should the need arise in order to prevent hyperinflation.”

    “Rational use”, huh. I’m sure I’ll love my price controls, rationing, and negative interest bonds. Face it, if the government isn’t willing to go all the way to hyperinflation then there is an upper limit on what it can spend. So they have to spend wisely.
    serch

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