“President Obama, deficit terrorism is not the answer!”

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

Oh dear, there he goes again.

After sensibly calling for a jobs summit to deal with the problem of rising unemployment, President Obama’s Herbert Hoover-like alter ego has re-emerged again to warn us again about the evils of government deficit spending. According to Politico.com, the President “plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 — and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.”

The President and his economic advisors are now being driven by the polls, which, in turn, are being driven by the deficit myths of their own creation. It is a case of the blind leading the blind down the rabbit hole. They impose political constraints on their own actions in a manner which is highly destructive in terms of securing their prized legislative goals (like the health care debate, where all decent policy proposals have foundered on the question of “how are we going to make this ‘deficit neutral’”?).

The Administration fails to understand that the “solution” of cutting back government spending is not a solution at all. It won’t actually achieve the “desired” result because the destruction of tax revenue through a declining economy — caused by the cutbacks in spending — will run counter to the President’s stated (and misguided) goal. There are two ways to obtain large budget deficits: the “ugly” way and the “virtuous” way. Like Japan during it’s “lost decade,” we have mostly gotten the deficits the bad way–by destruction of tax revenue caused by a collapsing private sector. Early fiscal measures have done enough to stabilize aggregate demand, but done little to generate sustained recovery. So they get discredited and public debt trap questions keep getting raised, which in turn inhibits a fiscal response properly sized and held. The economy waffles through stagnation.

Now, I realize that some of the economic moralists amongst us think that cutting back government spending is a wonderful thing because we will “purge” the system of its “socialistic” tendencies (see Governor Rick Perry of Texas) and end “malinvestment.” But that’s an interesting social experiment I hope the President is not prepared to undertake.

At the core, we have a problem of insufficient aggregate demand. The government is the only entity in a position to remedy that problem, because only the government can create new net financial assets via spending. There are any number of measures which would have an almost instantaneous impact in terms of improving aggregate incomes and demand. A national payroll tax holiday, revenue sharing with the states (so as to preclude additional cuts in state spending which offset the Federal fiscal stimulus) and a government as employer of last resort (an idea we plan to expand on further in a subsequent New Deal 2.0 posting) would all do the trick.

In the 1930s, we had a president who was unafraid to embrace bold experimentation. He wasn’t always right, but by the end of 1934, more than 20 million Americans (one out of six) were receiving jobs or public assistance of one form or another from the “Welfare State”. The system remained viable thanks to FDR. As I’ve written elsewhere, the government hired unemployed Americans to work on projects that advanced our society during the Great Depression:

The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.

On housing (a huge contributor to the current crisis), both L. Randall Wray and Eric Tymoigne have argued,

A more effective way to restart the economic process on the solid ground is to deal with the underlying cause of the problem: borrowers cannot meet the required payments. This implies sustaining their income and employment and, if necessary, drastically modifying their debt service burden. The whole boom of the 2000s (and more broadly the growth process that emerged at the in the early 1980s) was based on household borrowing and the continuation of negative saving trends (that is, household deficit spending).

One good place to start would be loan modifications, which would have a much more beneficial impact than what we’re doing now. Today, when the homeowner stops making payments, the mortgage company that services the loan makes the payments that are then distributed to the securities holders, so the economic incentives actually discourage active loan modification and worsen the home owner’s personal balance sheet. It is in the interest of the mortgage companies that service mortgages to maximize the number of delinquencies as well as the amount of time each household is delinquent.

A vastly superior alternative would be a Home Owners’ Loan Corporation (HOLC) type of entity, advocated as early as January 2008 by Paul Davidson:

In 1933, the Home Owners Refinancing Act created the Home Owners’ Loan Corporation (HOLC) to refinance homes to prevent foreclosures, and also to bail out mortgage holding banks. The HOLC was a tremendous success, making one million low-interest loans which often extended the pay-off period of the original loan, thereby significantly reducing the monthly payments to amounts that homeowners could afford. In its years of operation, the HOLC not only paid all its bills, but it also made a small profit.

To be sure, any program designed to increase incomes and aggregate demand will certainly require a major increase in government spending, precisely the opposite of what Obama is calling for right now. Even a focus on the “jobs deficit” is misguided because the President fails to understand that it is the overall growth in government spending which will facilitate private sector deleveraging, not the selective application of government. But if the President is genuinely concerned about spending too much money, he can simply redeploy part of the $23.7 trillion committed to help the banks to finance the programs above.

In any event, the President’s single-minded focus on the budget deficit is profoundly misguided. Why? Because a sovereign government can always afford to buy anything that is for sale in its own currency –whether that is unemployed labor, real estate, or bad financial assets.

This focus on “affordability” and “fiscal sustainability” is ridiculous: these are empty phrases which mean nothing when divorced from the economic backdrop.

The size of the deficit is irrelevant in itself. There is no meaning in the terms a large deficit or a small deficit. You have to relate them to the extent of labor and capital underutilization, which is a human measure of the aggregate demand deficiency. The fact that labor underutilization is now in excess of 17.5 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message – the deficit is not large enough.

In a year Obama has gone from “we cannot afford not to do this” to “we’ve run out of money”.
If we continue down this path, such that robust recovery does not begin for many years, we will have large budget deficits for many years to come. Of course, it could always get worse –if Obama is serious about his singular focus on the deficit, which I fear he is.

Print Friendly, PDF & Email


    1. mmckinl

      Reisman does not account for the fixed debt service that most people and all governments have … therefore a 10% fall begins a deflationary spiral causing economic chaos …

    2. Yves Smith Post author

      I would suggest that you and Reisman familiarize yourselves with what Keynes actually said, which is NOT “Keynesianism”, but Reisman treats the two as identical. The arguments that Keynes made are different and far more complex that the straw man that Reisman puts up. It suggests he is either intellectually dishonest or does not know what he is talking about. And Paul Davidson is one of the very top Keynes scholars, acutely aware of the differences between Keynes’ ideas and the mathed up edifice created in the US in his name (which Keynes objected to, BTW).

      1. selise

        i like this line from the preface of minsky’s book “john maynard keynes” (typos mine):

        “… the most powerful trait Minsky shared with Keynes was that neither of them were Keynesians.”

    3. Steve2241

      I agree with sarath: Nonsense.

      And would add: Government make-work and spending cannot replace the “tax revenue” that was formerly paid by American industries and jobs now located in the third world – nor reduce the deficit.

      As to the underwater mortgageholders: No sympathy. There should be absolutely no government bailout that props up overinflated property values at the expense of those that skimped and saved for the deflationary Day of Reckoning.

    4. Doug Terpstra

      Sarath, without specific grounding, your blanket “nonsense” quip is itself meaningless and gratuitous. I followed your link but could hardly fathom the first two sentences.

      Reisman’s opening sentence: “…falling prices, far from being deflation, are actually the antidote to deflation. They are the antidote, I explained, because they enable the reduced amount of spending that deflation entails to buy as much as did the previously larger amount of spending that took place in the economic system prior to the deflation.” HUH?

      In the second sentence he jumps right to Glenn Beck’s favorite boogeyman, Marx, tarring Keynes with him simply by juxtaposition in space not reality, sort of like dubya conflating Saddam Hussein and 911.

      Then this… “In sum, while the influence of Marxism stands directly in the path of a fall in wage rates and prices, by blocking its way with laws and threats, Keynesianism aims to prevent any attempt to overcome these obstacles by allegedly demonstrating the futility and harm of doing so.”

      What laws and threats? Name one. Nothing whatsever has been done to curb the banksters casino operations or anything to slow the train wreck ruination of rigged trade.

      On what planet does Reisman spend most of his time, Ayn Randroid? Far from the sinister influence of Marxism, we have just witnessed a thirty years of Milton Friedman’s neocon social Darwinism, under Greenspin voodoo reaganomics, which shipped our jobs and productive capacity to Chindia, while real wages have declined and wealth disparity exploded. Uberlibertarianism under Greenspan, with cheap money for banksters while deregulating loansharking and everything in sight is the proximate cause of this unholy mess we are in.

      Reisman’s revisionism is the nonsense here; his blog is untethered propaganda fit only for an Orwellian “Ministry of Truth and Prosperity”.

  1. Alex

    One jobs program we need is to cut military spending and reallocate it towards productive spending that creates more jobs. If conservatives are serious about cutting the deficit they need to look where the money is spent, where there is the most waste, and what luxuries we can do without. Clearly maintaining a global empire and being the global policeman is a luxury we can no longer afford.

    Another “luxury” we can do without is private insurance companies. The standard argument against single-payer is there are long lines for elective surgery in Canada or something similar. SO WHAT, even if that was true, isn’t that worth it if we can cut our health care spending in half to Canadian levels? The conservatives argue that large deficits are going to destroy the country on the one hand but then turn around and say we can’t wait in line for elective surgery. They can’t ahve it both ways.

    Cutting military spending and instituting single-payer health care would save the country far more than years of painful budget cuts in other areas.

    1. charcad

      One jobs program we need is to cut military spending and reallocate it towards productive spending that creates more jobs.

      If this mindset were consistently applied across the budgetary board real results could be obtained.

      “One jobs program we need is to cut liberal arts college spending and reallocate it towards productive spending that trains people for real value-added jobs.”

    2. chancery

      If we actually wanted to save money, we would reduce the wages of federal employees and officials 50% (wage surveys show they are that much overpaid) and eliminate pensions and other benefits paid by the taxpayers. This would save far more money than a 50% cut in the military budget. Who knows, 1 or 2 of these bloodsucking bureaucrats might even quit!

  2. malingerer

    you know. all I want is my 120k job back.. something that is challenging and rewarding.. right now I work for $50k and am under freakin’ utilized.. it pisses me off.. I make it profitable, but current organizations only look for saving money, not actually making any money.. Under utilization of current resources only serve to demoralize the populace..

    Change the monetary system to something that actually works would solve most of the problems.. but the little man gets f*cked in the end.. No one will care until he/she rises up and says “NO MORE”.

    I have a feeling that this day is coming sooner than most politicians think.. We have NO problem with capitalism, we DO HAVE A PROBLEM WITH A FASCISTIC Capitalistic DICTATORSHIP..

    1. carol

      “…., but the little man gets f*cked in the end.. No one will care until he/she rises up and says “NO MORE”.
      I have a feeling that this day is coming sooner than most politicians think.”

      It has been completely obvious for more than a year now that we the people undeservedly are burdened with the bonus-banksters’ mess.

      Immediately during the transition, Obama picked the Clinton era, no-change ‘experts’ (remember Wall Street celebrating and rallying when Obama named Geithner as secretary). Then the continuation of the bail-outs (without ANY demands for fundamental changes in return). Obama rewarding Bubblenanke for his failure with another term at the FED. And on and on and on ….

      Where were the people all that time? Too busy to survive ? If all the fraud (NOT prosecuted) and bailouts (STEALING from the people by the WaWa-complex = Wall Street – K-street+Congress in Washington DC) did not trigger lots of ‘no mores’, what will?

      Hence, my other question: malingurer, what is your feeling based upon?

      1. Vinny G.

        I agree, Carol. The American people are pussies. They’ll never rebel. They like eating cake. To he’ll with it, I’m moving back to Greece asap.


  3. mmckinl

    If and until banks are solvent all that stimulus gets sucked into oblivion …

    Real employment and stimulus initiatives are; a 30 hour workweek, The USG putting a floor under people to replace the tattered safety net by guaranteeing everyone, single payer health care, unlimited though depreciating unemployment insurance. By making working hours shorter but reducing employee expenses more workers get hired, more businesses get established and more entrepreneurs have freedom from health care worries …

    We could implement a carbon tax to be disbursed per capita. This serves two purposes. gets real money right where it is needed and pushes people away from energy consumption. Exports would get tax credits …

    We need a 20% tariff, all countries do. This helps to keep economies diversified and insulates them from external subsidies, predatory pricing, currency manipulation and tax shopping …

    Our current situation is far beyond simple individual measures and needs a package of initiatives to even stem the unemployment tide.

  4. Roth

    Stop spending. Get rid of taxes. Liquidate government and turn it over to the private sector. Outlaw FraqRes lending. Default on our debt and freeze the money supply. Return dollar to what Constitution mandated (backed by gold and silver). Outlaw NATO & IMF(and all derivatives of them). Bring all military back to the US or let the countries they are harbored in pay for them if they want to keep them(downgraded to true merc. status). Get rid of DHS. Get rid of CIA. Get rid of nearly all Mil-industrial Complex. Outlaw anything resembling Goldman Sacks(intentional). Outlaw lobbying of Congress.

    Maybe then we can have something not resembling a Digital Banana Republic.

  5. Jo

    Another respected commentator off the reading list (Edward Harrison went last nite).

    Pork foh evah – eh!!!!!

  6. Richard Kline

    What I find particularly pernicous in Obama’s remarks is this thing, ‘the deficit.’ We hear this phrase from many commentators who should know better; especially from many well to the right who do know better but are happy to lump important differences into a false bundle of bamboozlement. The liabilities and expenses of the Guvmint are multiple. They are by no means equal or result, expense, permanence, or consequence. It is the aggregate drag of these costs which makes for a real problem.

    The Speculators Bailout, there’s the real villian. The guarantees, swaps, loans, outright gifts, all with neglibible oversight. And I call it ‘the Speculators’ Bailout’ because the _bank bailout_ as run by the FDIC is to this point being down with pre-existing funds dunned from the users. The Speculators Bailout is on the public ledger, and is so vast it risks destabilizing the currency and the public debt. Is _this_ part of ‘the deficit’ which Bo Prez means to ‘go neutral’ on after 1 Jan does anyone surmise? Anyone? No?? Not hardly: some way will be found to portray it as ‘jobs supporting’ or simply ‘systemically necessary’ but don’t expect FOR A SECOND that liabilities of the government will be reduced, here, where they are truly egregious. Such costs and committments are certainly going to massively expand based upon the experience of the past two years.

    Then there’s our surreally out of control military budget, which doesn’t even fully include the cost of our two (and a half: Pakistan) colonialist enterprises in SW Asia. And the graft, the graft, by the sixteen gods . . . . (Chris Hedges just did an expose over at Truthdig, crossposted at the Alternet, on the Afghan Army. Most of the $4B a day the US is _currently_ spending there goes directly in the pockets of _American_ contractors at cost+profit+plus, with pennies making it to actual spending on either the Afghan army or the war per se. Even for a complete cynic on the enterprise such as myself an eye-opener: we are running that strategic disaster not for the Afghans or even for the US but for the profiteer contractors AND NO ONE ELSE. Oh and the ‘When the Afghan Army stands up’ meme, complete self-deceived horseshit.) Anyone think Pres O is going to go ‘budget neutral’ on a dime’s worth of these committments? He’s bidding hard to expand on them!

    Then there’s ‘the stimulus.’ Far from perfect in application, in expensive and misapplied programs like Cash for Clunkers and the first homebuyers’ folderol, but at least some portions of it such as education spending and such infrastructure work (little) as has received funding being spend _in-country_ and potentially demand-supporting in a deflationary enviroment. That stimulus, be is said, is entirely affordable relative to the country’s resources. That is not a debatable issue, that is fact. Obama gave in to pressure to pass it, and not he’s going to try to get a long-jump away from it. Whether or not one supposes that another round is useful, it’s not on.

    Then one comes to ‘the expansion of public health spending.’ Which by comparison to any of the aforementioned is trivial. Less than what we are spending on Afghanistan. And paid for (in principle and substantially in practice) in the legislation which will enact it. Now, nothing is done (by design) to control the prodigiously wasteful and parasitical insurance industry which has taken the health care of the US citizenry hostage and is demanding annual ransom to release any of it contingently. That’s a real problem. But it isn’t a problem with spending, per se, or even entitlement, but private rent-seeking immorality and under-regulation.

    And in what order do all these shrill and ill-informed opiners choose to decry these entailments of the future revenues of the state? The reverse order of their actual relevence to the solvency of the enterprise, natch. It’s enough to make a body cry in his sherry, is what it is.

    All of you out there howling abour ‘pork and the Fall of Our’n,’ I suggest that you expend your spleen largely on the Bailout, and secondarily upon the war profiteering (and wars whereby to profiteer). These are the true government-killing asteroids. The rest is piffling by contrast. And obsessions with piffle do nothing for your credibility.

    But regarding Obama, this announcement, and his rag doll engagement with ‘the Afpak Mission,’ _are_ defining moments. He is a weakling, devoid of any leadership beyond image ops, desperate for others to form a consensus on difficult issues he can then embrace. Any tap of a reverse, and he falls back a yard. Now that he just surrendered to “The ‘deficit’ is a problem” talking point, he’s lost any control of the discussion, and will be pushed back on all fronts. And I say that as one extremely concerned regarding the consequences of the Speculators’ Bailout which Obama, of course, will do nothing to contain. I’m remined of the performance of the Social Democrats in Germany immediately after 1918. They inherited many problems not of their creation, too—and likewise lacked the leadership, program, nerve, or capacity to do anything but make them worse.

    1. attempter

      It’s very similar to the Social Democrats. And if and when a truly competent right wing demagogue comes along, he’s going to be able to say to the masses, very plausibly, that “the left” (in our case the liberals/Democrats) had the whole government in their hands, could do anything they wanted, and failed utterly because they’re incompetent and have no vision anyway.

      That was Hitler’s most convincing argument with the moderate/apolitical masses – not hating on the left but castigating its manifest incompetence and failure. What’s going to similarly discredit Obama and by extension the Dems once and for all is that everyone expects them to at least be more competent than the Reps.

      But with things like this utterly self-imposed deficit fetish, they’re revealing how they not only want to follow Bush with regard to corporatist policy and the assault on civil liberties, but that they’re apparently not even much more sensible about it.

      We already knew they were almost as cold, and not much less cruel than, Bush. Now they’re looking to be similarly stupid.

      By now I’m not even sure that Obama’s going to handle his Katrina, when it comes, much better. Until recently I would’ve thought he’d at least do much better with something like that.

  7. DownSouth

    Marshall, you say: “The President and his economic advisors are now being driven by the polls, which, in turn, are being driven by the deficit myths of their own creation.”

    What polls might those be?

    Here’s a recent poll that shows that by 3-to-1 (73% to 24%) respondents said it is more important to “invest in job creation, education, and energy independence” than “cutting government spending and reducing the deficit.” (see page 28)


    And perhaps even more eye-opening is this:

    A new survey of public views of the economy, released today, reveals that 57 percent of Americans are close to someone who has been laid off, 61 percent report that someone close to them has had their hours or pay cut, and 44 percent of all households have experienced one or the other during the past year. Because the pain of this recession is striking so close to home, Americans strongly support continuing government action to address unemployment.

    This would indicate that there is a small, but significant, minority (24%) who are deficit hawks. Then there is the other 3/4 of the population who are not.

    Obama is catering to that small minority, while at the same time giving the nod to a PR campaign of lies, distortions and half-truths, trying to make it appear as if that small minority represents a majority of Americans.

    Obama is “being driven,” alright. But it isn’t “by the polls” or by what a majority of Americans want, but by a minority of well-connected insiders that he has completely sold out to.

    1. Anonymous Jones

      Totally agreed on this point. This is very similar to the IMF policies in countries with financial crises. The structure of the response always favors the elites (the elites have the *power* natch, unless someone has not been paying attention). What the IMF does is prop up the failing country, allow the elites to transfer their wealth before the currency collapses, and then implement austerity measures that punish the weak for the looting by the elites. Does anyone not see the corollary here? This was the plan all along. (1) Bail out the financial gamblers who had been accustomed to thinking they should have $100 million in liquid assets when the median annual salary is more than a 1000x less than that. (2) Implement austerity measures vis a vis deficit reduction to “pay” for such bailout.

      I think most things are complex, and I have no monopoly on the truth on this, but there does seem to be a pretty clear pattern of how financial crises get resolved. The well-connected, the powerful, they shape the end-game, and they shape it to their own goals.

      1. Mickey


        I suspect you’ve read Naomi Klein’s Disaster Capitalism… It’s one of those rare books that comes along…

        But I’m old enough to have watched AUSTERITY plans play out in South America. It wasn’t pretty…

        As far as this country, I’ve stated for years that the ultimate goal of supply-side economics was and remains the dismantling of Social Security and Medicare. Americans will not vote to do so, but a financial/fiscal crisis will provide the opportunity for the ruling elites to dismantle them, destroying the last two vestiges of the New Deal – the ultimate target! Couple this with proposals to privatize unemployment insurance and the blueprint for AUSTERITY and AUTHORITARIANISM is almost guaranteed.

        The atomization of the population, perceived inefficacy and discrediting of the LEFT is very reminiscent of the Weimar Republic! A good ’bout of hyperinflation and the rest is history. Funny though, it will not have to be IMPOSED, it will likely take place with a whimper…

  8. Afat Panda

    First, we don’t know what the real deficit is. Most of the current deficit is being funded by printing money. This strategy by-passes the market so the government hasn’t the slightest idea of what the real cost of funding is. At this point, it is the cost of paper plus inflation during someone else’s election cycle.

    Second, not all government spending is equal. Just like business, government spending has an ROI which is most cases is pretty low. Buying signs that say “Your Stimulus At Work” has a very low ROI, and largely serves only to move private debt onto the public balance sheet.

    Since it doesn’t cost anything, see 1, and you don’t know the ROI of the money spent, how is that you say that deficits are good or bad?

  9. Charley

    “The fact that labor underutilization is now in excess of 17.5 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message – the deficit is not large enough.”

    This is not an argument for a bigger deficit, it is an argument for a shorter work week.

  10. dave

    Its funny. I look at Japan and I see the total opposite. A country that spent two decades engaged in massive public works projects building bridges to nowhere so it could employ people in make work jobs. I see Japan as the result of misguided Keynesian stimulus, 20 years of stagnation and a public debt so large they will never be able to afford it if yields ever rise.

    Keynesian look at Japan and say that if only they had blown up those bridges to nowhere and rebuilt them then that would have been enough stimulus to solve the whole thing. It didn’t work so we’re just going to keep trying bigger and bigger until we go broke. Its more like a utopian religion then an economic theory.

    1. Richard Kline

      dave, m’man, Japan’s choices 1989-present have _nothing_ to do with Keynesian stimulus. You’re applying entirely the wrong concepts (because, I suspect, you’re listening to the wrong people). Keynes is about many things, but he is particularly about supporting employment so that defuse demand for ‘normal’ products is not allowed to collapse, and recovers to typical levels as assets and incomes find a floor and begin to cumulate. What happened in Japan was _not_ focused on employment but upon steering contracts to financially desperate corporations in a form of crypto-bailout. Employment never got much of a bang for the bucks expended, there, but was never intended to. And the pointlessness of some many of those projects was irrelevant to the goal, to transfer public money to chumped out corporate speculators. But because demand never recovered, since employment got no substantial support, _real_ business for said corporations didn’t bring in actual cash flows, so they never got healthy again. We are following in _exactly_ the same course, but in neither case does it have anything directly to do with Keynes’ analysis and prescriptions.

      Here, btw, are three things which the Japanese did and which we follow, which furthermore would make any attepmt at simulus fail, whether an actual Keynesian initiative, or a crypto-wealth transfer with secondary (and comparatively minor while assuredly transient) employment support. The Japanese spent huge sums trying to support prices (in their case public buying of equities; in ours public support for nonsensical real estate valuations). They refused to let real estate prices adjust to their clearing value by having regulators conspire with title holders (large, politically connected firms) to avoid declaring losses, marking to market, or even revealing what all they held (which all US powers that be are assuredly doing as well). They refused to close patently bankrupt firms, but propped them up to suck up needed credit from the real economy to no sustainable return to that economy or the public. These latter three reason are substantially responsible for their failure, as they are and will be for OUR failure. The fact that they and we both on top of that have pursued pseudo-stimulative enterprises as a way to shift private losses into public debt is merely the final dynamtie suppository in what is a broadly economically suicidal schema.

      Japan didn’t try Keynesian stimulus, and we’ve yet to do very much in that regard, either. A tiny fraction of even the officially stimulative spending has gone toward actual _domestic_ employment supportive activity.

  11. sigmaseek

    This is probably the most logically and morally bankrupt article I’ve seen on this site. Where is the money going to come from to boost aggregate demand? If you say borrowing, you’re just saying pull it forward from consumers who pay taxes in the future by devaluing the currency. Transferring private credit to public credit is just a shell game and you know it. Goal seeking human behavior is a bad policy because people get pissed off at the end of a good run of “optimization”. It’s the ultimate black swan.

    1. marc fleury


      the whole theory of functional finance is that money is printed into existence by govt deficits. It is a generalization of “deficits don’t matter” that the repugs first articulated. The dems will embrace the same philosophy no matter what big O is saying.

      What matters is that we get to working (I would also prefer the shorter work week as indicated in another reply).

      Wray and the other theoreticians of ELR do require a singular understanding of monetary theory.

  12. on the arm

    Interesting Krugman’s post wistfully advocating
    inflation. Gee, Why didn’t we think of that before:
    screw savers to bail out debtors so that everybody
    caves and goes into hock?

  13. Skippy

    Well while everyone decides which economist is true or false, the gang is having a good laugh, hay look what happens when I move this pebble on thet ant mound…oooh!

    At least we can feel good knowing after a hard day poking their sticks at our little ant pile, they can retire to soothing comfort, no need to reflect on the losers of todays experiments. Ants are prolific breeders and there will always be more to study till they get it right.

    @richard Kline, I’m surprised, your surprised. Dead, but happy for giving your life so some REMF subby can make a packet, De Beers would be proud of that action. Obama is truly screwed, made a promise that he is now finding was a bad carrot to the center right.

    Skippy…anything from now to x-mas is just treading water, the numbers after that will show us if we even need a boxing day or not.

  14. Marshall Auerback

    On the question of Keynes and banks, I’m sure Keynes would say that We have far too many such bankers. He would surely add that these undercapitalised and illiquid institutions are little short of financial time-bombs and would no doubt recommend something along the lines of what FDR did with the banking system in the US in the 1930s (see Jesse Jones’s book, “Fifty Billion Dollars; My Thirteen Years with the RFC”). On the question of polls, I’ve seen a number which suggest that there is concern about the deficit, but perhaps there is an element of Obama projecting here. In any event, Obama needed to stand up and say you’ve been duped by Bush and the plutocrats; and then show them how, issue by issue; and then offer new, credible, alternative paths. Instead, he caved to Wall Street right out of the gate. He may have felt he had no alternative given the scale of the financial meltdown underway when he entered office, but when you are dealing with a jaded, frustrated public, probably not wise to coddle the fat cats as your opening move.

    On the question of cutting government spending and going the liquidationist route, well we tried that in the 1930s and it didn’t work very well. And if what we have is a deficiency in aggregate demand, I’m not sure how “clearing wages” at a substantially lower level, as Rothbard has suggested, would work.

    Government deficits are considered to represent sinful profligate spending at the expense of future
    generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.
    Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to
    recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private
    production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public
    investment takes place in infrastructure, education, research, and the like.

    Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that

    Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal
    government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses.

  15. DoctoRx

    “At the core, we have a problem of insufficient aggregate demand.”

    Wrong on at least 2 counts.

    1. There is no such thing as “insufficient” aggregate demand. People and companies but what they need and want.
    It’s not for Mr. Auerback or the Government to decide what is sufficient. Let’s see, GDP per capital approaches $50,00
    per capita. What is the correct level? I dunno, and I don’t want Government of any political tendency pretending to know.

    2. Per Schumacher’s Small is Beautiful, we should try to consume less, not more. Retaining more of earth’s resources in situ is a true form of saving that should be but is not accounted for in economic statistics. Leave more copper in place for the benefit of future generations, etc.. Production and consumption of petroleum products is a “positive” for demand, but we are fouling the earth by so doing. We are much more than economic beings, and economic policy does not consider this.
    Work is called work and play is called play for a reason.

    1. Richard Kline

      So DocRx, I’m sympathetic to much of what you say here. To me the tricky part of the proposition which you quote has always been “Insufficient compared to _what baseline_.” The economists like to pluck a GDP growth number out of the air and argue endlessly about who’s .1% off optimum. Without addressing the issue that you raise, that endless ‘growth’ is impossible.

      Now from the effective standpoint, there is nothing amiss with the statement. Demand declines drive a self-reinforcing decrease in practically any variable one cares to see in modern domestic economies. Output drops; hence employment or at least hours scale back. Income declines, making debt increasingly impossible to service. Credit becomes _harder_ to secure and more expensive, seemingly paradoxically but not so because declining demand and the resultant downward pressure on profits and eventually prices threatens load service: the loans are in fact riskier.

      The whole formulation of ‘an output gap,’ though is intended to avoid the Real mastodon in the room which liberal economists are loath to engage with: redistribution. As long as we have ‘growth,’ it’s supposed to spread a little cumshaw around, and hence redistribution of excessive wealth or exploitative advantage is stuffed under the carpet. When we start talking about redistribution in the US, the powers that be will get serious about solutions. Until then, they’ll bring in fuddy-duddies to fuddle on about how it’s really an ‘output gap’ rather than a class war that leaves the 90% poorer and the 10+% long-term unemployed.

      1. Mickey

        “The whole formulation of ‘an output gap,’ though is intended to avoid the Real mastodon in the room which liberal economists are loath to engage with: redistribution. As long as we have ‘growth,’ it’s supposed to spread a little cumshaw around, and hence redistribution of excessive wealth or exploitative advantage is stuffed under the carpet.”

        That’s the whole ball of wax! And neither Democrats nor Republicans will enter into this discussion, or if they do it’s only to dismiss/disparage it as unAmerican – socialism/communism – you name it.

        The CLASS card is the one card that cannot be played in American politics. Even the term is obfuscated by the MSM under the rubric “populism”.

  16. fresno dan

    “At the core, we have a problem of insufficient aggregate demand. ”
    Damn, beaten to the punch by Dr. Rx
    Not only is there not insufficient demand, there is far more demand than wallet – it seems to me thats how we got here. I like to go to strip clubs once or twice a month – if I had more money, I could go once a week (stimulating the economy and myself). And if I had 1/100 of the money given to Goldman, I could spend each and every day there.

    I could borrow and spend (O, btw, if not strip clubs, what??? a new car? – my car is fine, and why is the job of an autoworker better than that of a stripper as far as economy stimulation – she has to buy heels, makeup, aerobics classes, etc.??? Or Granite counter tops? – already have those; and I don’t know if they are really such a hot idea anyway, its not like food cut on them tastes better).
    But at some point, income and outgo have to balance for individuals, though I am willing to borrow millions and leave you guys with the bill when I die (and the government can bail them out – but I did my duty by spending). What bank will loan me the money??? (O, and at 0.0003% so I can actually make the payment). There is nothing wrong with borrowing for long term goods, such as a house (if your economy is stable).

    But hopefully as my example shows, consumption, whether of strippers or houses, if one basically doesn’t have the income to support one’s preferences, leads only to where we now are. Debt is not wealth, and borrowing is not income.

  17. Kolya

    It seems to me an economy that depends on some portion of consumption being the result of folks borrowing money they cannot possibly repay is not a stable one. So having the government create more consumption funded by debt that cannot be repaid does not seem to me to be the way out of this mess. After all some creditors will not be repaid – this will have consequences as well – whose savings should disappear in this process?

  18. dave

    The implicit idea behind New Deal 2.0 literature is that government debt is free. It doesn’t need to be paid back or serviced, you can always just issue more debt, etc. It’s rather childish, a mirror image of the fools that rushed to take out home equity loans to buy big screens. The bill always comes due. It doesn’t matter if your an individual, a corporation, or a government. The only difference between them is debt carrying capacity due to size. However, debt carrying capacity is not unlimited, even for governments that issue debt in their own currency.

    The true purpose of debt is to turn savings into productive assets which are used to service the debt. If you issue debt and then waste the funds on consumption that your just left with a debt to service and no productive assets to aid you in servicing it. The end result for any entity that does this whether it be an individual, corporation, or government is bankruptcy. The only difference is how much one can waste before the debt level becomes unserviceable.

    Having the government issue debt is only going to create long run growth if what it spends it on creates useful income generating assets that benefit society. If it’s wasted building bridges to nowhere it isn’t going to create any long term growth. Japan should prove this.

    Is the government using the money from debt issuance wisely? I don’t think so. So far it has used its debt carrying capacity to bail out Wall Street, sustain two wars, funnel a bit more into the medical complex each year, bail out miserably run car companies, etc. Honestly, they could burn the money and it would cause less damage then giving it away to those crooks. We aren’t getting anything for our debt. There is no stimulus. It’s just shackling our children to fulfill some Keynesian clap trap.

    1. marc fleury


      The explicit insight behind Wray’s work is indeed that “fiat money is free”. They never talk about issuing debt, just printing money. It is a lubricant to get people working. The fact that money is also a store of value leads to the confusion and tension, isn’t the government stealing from the people. But isn’t the government for the people by the people? In the case of an individual printing money is obviously a crime, as you are stealing from the rest of society. So no, it is not the same whether you are an individual, a corporation (group of individuals), or a govt (the sum of all individuals) that issues its own money.

      The second point, that govt would be “inept” in investing and managing the money is a point that is going to resonate with most people. It may be true to a degree but really, has wall street managed the money it created much better? Wall Street has proven they were stupid. Not just corrupt, incompetent but blind to the bigger picture they were creating. It is fine to bash government in a Reagan revival, but the current alternative of bank bailout and bonuses leaves most people with a bad taste in their mouth.

      1. dave

        The government isn’t “the people”. The government is an organization. Some people are at the top of that organization and benefit from its policies, often at the expense of others (most voters).

        Imagine taking this logic to a corporation. Is a corporation “the shareholders”? Is it run for their benefit? Could have fooled me. Sometimes when ownership of shares is concentrated and actively managed (think Buffet) a company is run for shareholders management because they keep a watchful eye on boards and executives. However, when shareholders are diverse and passive there is nobody minding the store and corporations are run for the benefit of whatever party is in power, often at the expense of shareholders.

        Voters are the “shareholders” in the government. Except their stake is so small that they have no real incentive to try and provide proper oversight. So the government is run to the benefit of its agents (elected representatives) and those that can help them gain power (special interests) with the voter playing the role of bag holder much the way a Lehman shareholder was. This romantic notion of democracy and government being “of the people” is a bunch of utopian hogwash.

        Inflation has a cost, and it is certainly stealing. Those who have their savings stolen are losers (the people) and those that get to spend the new money first are winners (hint, the people with the printing press and all the power). Of course you could argue we will all end up losers in the end because out of control inflation would shatter the foundation of the country itself.

        I hardly see how the government could be better then Wall Street in managing money when the government is Wall Street. The free market belatedly starting marking these investment banks down to zero, but right when the free market finally saw the light the government was there to give away a few trillion dollars to bankers. Talk about the greater fool. Or maybe it was just former IBers in top government posts helping out their friends at the expense of everyone else. Be the people for the people, aye.

        1. marc fleury

          1/ The argument against inflation in ELR is that you are not creating more money for equal number of goods but more money with more goods, the economy is stimulated, so you are not creating inflation. Wray in fact argues that there may be a deflationary period in ELR when you set minimal wages. Remember that this is money printing under the assumption that the economy is working at under capacity. I must admit it is one of the fuzzy parts for me, I am not entirely sold that such a QE experiment can be run without side effects (see current QE bubble)

          2/ I don’t disagree that corruption is a problem in any system. You either have corruption in banks+gov or corruption in corporation, you just don’t avoid it.

          3/ As far as system goes, I am tired of the “anti new world order” flair to some of the comments. The US of A is not a banana republic, its institutions not dead, and I am tired of the conspiracy theories. There are problems, they mostly can be fixed. The FED is an aberration and this discussion is being had, it may even lead somewhere. There is lobbying and corruption, facts of life, they are not deal-breakers.

  19. Marshall Auerback

    Well DoctorRX clearly hasn’t been persuaded by our little debate over financial balances. No one is saying that you shouldn’t save. Again, let’s look at this at the macro level. All people want to save. They don’t want to (or don’t think they can afford to go to the strip club, per Fresno Dan’s example). Taken in aggregate, this creates an insufficiency of demand.
    Who can rectify that? If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies – that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.

    DoctorRX, you know this, as we’ve discussed it before. Let’s go over this again and see if we can get rid of some of these ideological preconceptions which cloud this debate. In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.

    In a closed economy, NX = 0 and government deficits translate dollar-for-dollar into private domestic surpluses (savings). In an open economy, if we disaggregate the non-government sector into the private and foreign sectors, then total private savings is equal to private investment, the government budget deficit, and net exports, as net exports represent the net financial asset savings of non-residents.

    It remains true, however, that the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government. It does this by net spending (G > T).

    Additionally, and contrary to mainstream rhetoric, yet ironically, necessarily consistent with national income accounting, the systematic pursuit of government budget surpluses (G T) would be required.

    So how do deficits arise? How does the Federal government spend?
    The Federal government has cash operating accounts – to ensure that they can spend (G) on a daily basis and receive daily receipts (T).

    When the Federal government spends it debits these accounts and credits various bank accounts within the commercial banking system. Deposits thus show up in a number of commercial banks as a reflection of the spending. It may issue a cheque and post it to someone in the private sector whereupon that person will deposit the cheque at their bank. It is the same effect as if it had have all been done electronically.
    All federal spending happens like this. You will note that:
    • Governments do not spend by “printing money”. They spend by creating deposits in the private banking system. Clearly, some currency is in circulation which is “printed” but that is a separate process from the daily spending and taxing flows;
    • There has been no mention of where they get the credits and debits come from! Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency; and
    • Any coincident issuing of government debt (bonds) has nothing to do with “financing” the government spending. The bonds simply offer a savings alternative to people holding their assets in cash.

    Under a fiat currency system, spending logically precedes tax collection. Consequently, the government must likewise spend sufficiently before it can borrow. Thus, government spending must also, as a point of logic, precede security sales. To cite a ‘real world’ example, market participants recognize that when Treasury securities are paid for, increasing treasury balances at the Fed, the Fed does ‘repos’ on the same day; the Fed must ‘add’ so the Treasury can get paid. Since the currency issuer does not need to borrow its own money to spend, security sales, like taxes, must have some other purpose. That purpose in a typical state money system is to manage aggregate bank reserves and control short-term interest rates (overnight inter-bank lending rate, or Fed Funds rate in the U.S.).

    1. marc fleury


      I don’t think you addressed the objection of DoctorRX by re-hashing the tenets of functional finance.

      After battling my way through “understanding modern money” by Wray, actually looking at the equations by Andresen, understanding the mechanisms you describe above, and reading with interest the whole chapter about ELR (Only $50B to achieve full employment in the US???)

      I was left with the same question. If the market is saying “we need employment” why does the government know better?.
      Is full employment and the resource consumption it entails a divine right of mankind? You could cue some Ann Coulter rants about raping the earth etc etc

      Is the market telling us that not every american needs or deserves a mac mansion, a hummer and a biweekly visit to a strip club?

      But what if the market is not telling us anything rational? The flip side scenario of course is that in a fisher instability scenario, self-fulfilling capsizing will happen by anticipation and psychology of the markets. Companies clam up as they see the financial crisis coming, they cut expenses, produce less (see point about “I am under-utilized” above). So the market as a whole is then in a situation of under-utilization, over capacity.

      IN that case, aspects of ELR as a shock absorber seem very justified. I also like the jobs proposed: arts, elderly companionship, city beautification, etc the new deal was a period of creativity afterall, not everything is bridges to nowhere.

      Even if you assume that fiat money is free and probably safe (at least according to wray, I am wary) if the market is telling you “under-utilize” should you over-write its signal in the name of employer of last resort.

      “Because you can do it doesn’t necessarily mean it is a good idea”

      1. fresno dan


        Now I am merely trying to read economics cause I am a curious guy, but as the link above proves, Switzerland manages to run budget SURPLUSES (thats right – your eyes aren’t seeing things) and from what I read and what I saw when I was there, they see to do damn well. Doesn’t seem to me that the Swiss are getting poorer because their government doesn’t run deficits.

        I remember reading once that Keynes remarked why should anyone save. It seems to me that if squirrels have enough sense not to eat every nut they find, maybe we shouldn’t keep every nut…well, you know what I mean.

        1. Yves Smith Post author


          You are incorrect about the state of Switzerland. It has a massive banking sector, meaning its aggregate debt to GDP is far worse than that of the US. The famed once rock solid Swissie (their currency) has performed very poorly since the crisis. The Swiss banks have so much in dollar denominated debt that the Swiss government could not have credibly bailed them out. Investors were worried about a currency crisis, Iceland on a lesser scale.

          Re Keynes, I don’t know where you read that, but it is also a distrotion. Keynes did discuss at length the “paradox of thrift” that what is prudent on a household level is not necessarily good for an economy in aggregate. But Keynes did not favor unbalanced budgets. He large scale deficit spending as desirable only when a country had a big shortfall in demand.

          And the inflationistas here are missing the point. The US has a lot of slack. both in labor and manufacturing capacity. The idea that there is any risk of inflation near term, or even further out, is grossly exaggerated. The money is sloshing around in the banks and going into speculation of all sorts, not into the real economy.

          Look at Japan. It ran a very loose monetary policy and very aggressive fiscal spending, had the yen depreciate considerably (till recently) and Japan is FAR more dependent on foreign imports, particularly oil, than we are (ie, the “importing inflation” via seeing their currency fall should have been more powerful there than here). They’ve had borderline and sometimes actual deflation for two decades.

          1. a

            PS – This is being called a double posting, but the first posting never makes it until I change my mail address.

            “The famed once rock solid Swissie (their currency) has performed very poorly since the crisis. ”

            I don’t want to diminish the problems that Switzerland faces because it is a small country with a large banking sector, but the Swiss currency has performed poorly because, and only because, its central bank has intervened massively to drive down the currency vs the euro, in one of the best examples of competitive devaluation to date.

          2. Yves Smith Post author

            With all due respect, you have the the causality all wrong. The Swiss did intervene to drive down the price of their currency BEFORE LEHMAN!!!

            The reason they did this was because, as I said in an earlier piece, you can generate growth and private sector savings through increased deficit spending AND/OR exports. Switzerland has generally chosen the latter way. But this is not a realistic alternative for the US.

            But it was Lehman that the the Swiss franc collapsed, even more so than every other non-yen currency against the dollar, because of Switzerland’s need to pay back dollar denominated debt. This was most decidedly NOT “competitive devaluation.”

            But for the Federal Reserve’s decision to set up swap facilities, the SNB would have been forced to bid for dollars by selling francs in the open market, which would have made the Swiss franc about as valuable as the pieces of toilet paper that get stuck to your shoe in the bathrooms at Grand Central Station.

            And by the way, this would not have been possible under the gold standard system that so many of the libertarians seem to love.

            They had a huge banking crisis. I honestly am amazed at the way people allow their ideological biases cloud an honest assessment of history. With the current arrangements, the Fed could put $150 billion into the system immediately and drain it as soon as it wasn’t necessary. It’s one thing to be against govt finance even when you understand functional finance (no problem there, other than agreeing to disagree), it’s another to think that a modern payments system not managed by an entity able to credit as many accounts as necessary without regard to its own profitability or solvency could weather even medium-sized disruptions. I haven’t seen any historical examples to suggest otherwise.

          3. a

            “With all due respect, you have the the causality all wrong. The Swiss did intervene to drive down the price of their currency BEFORE LEHMAN!!!”

            And they have been doing it after as well.

            You say: Swiss Franc has been doing poorly since the crisis because of x.

            I reply: Actually, Swiss France has been doing poorly since the crisis because the Swiss central bank is intervening.

            You say: You’re wrong. They intervened before the crisis.

            Whether they intervened before the crisis or not is immaterial to your claim. Apparently, you think they have not intervened since the crisis. This is incorrect:

            “In March (2009), the SNB slashed its interest rate target for the three-month Swiss franc London interbank offered rate, its benchmark rate, to a record low of 0.25% and started intervening in foreign exchange markets to curb the Swiss francs rise. Most market watchers expect the SNB to continue its expansionary monetary policy well into 2010.”

            (from http://online.wsj.com/article/BT-CO-20091102-711731.html)

            I am correcting you on a point of fact. I am not following, or trying to follow, what you think this fact implies. But you are wrong about the fact.

          4. Marshall Auerback

            Yes, but this came AFTER they were rescued by the Fed via the swap facility, which ensured that the Swiss franc did not totally collapse post Lehman and also ensured that their banking system remained viable.

            This is silly. A person runs a marathon months after a cancer surgery and you claim that this is de facto evidence of the person’s overall health, but you conveniently ignore the fact that had the person not had the cancer surgery, he might well have been dead by this juncture.

            You’re not pointing out facts. You’re simply distorting reality because you cling to this illusion that Switzerland is a bastion of stability in comparison to the “profligate” US. That’s Alice in Wonderland thinking.

        2. Marshall Auerback

          Switzerland also runs current account surpluses. As does Norway. sustained growth can only come if the saving desires of the non-government sector are met. There are two sectors that can “support private savings” – the public and the external. And Switzerland, if you recall, was basically toast in 2008, but for the Fed swap facilities granted to them (yes, that horrible fiat currency again!). So your memory is rather faulty here.
          As for the idea that somehow everything would be hunky dory on the gold standard, my friend Scott Fulwiller points out that this sort of system would not be able to cope with the problems of Switzerland, indeed, the problems in the payments system following the 9/11/01 attacks. With the current arrangements, the Fed could put $150 billion into the system immediately and drain it as soon as it wasn’t necessary. It’s one thing to be against govt finance even when you understand MMT (no problem there, other than agreeing to disagree), it’s another to think that a modern payments system not managed by an entity able to credit as many accounts as necessary without regard to its own profitability or solvency could weather even medium-sized disruptions. I haven’t seen any historical examples to suggest otherwise.

          Finally, I am not asserting that the government direct everything or determine what people do with their money. As I have already said, if the private sector wants to save, then someone else has to take up the slack. This can be done through exports (difficult when you’re the US with the reserve currency), or via increased deficit spending. Yes, it’s a financial balances approach, but that’s how it works.

          Marc Fleury, it’s not the government saying there is insufficient demand but the private market. If you think liquidationism is good and 20% unemployment is OK, then fine, we don’t need to have this debate. I doubt very many people share this extreme opinion.

          1. marc fleury


            If the market was telling us to up the employment it would. As simple as that. But obviously it isn’t with 20% actual unemployment.

            BTW, as an intellectual approach of economics, I always try to understand both views. I presented two straw man extremes. One is laissez faire saying the market is always rational, telling us to deleverage and you should suck it up. The other that the market is irrational, psychology driven and un-efficient, and we should therefore correct its excesses centrally.

            Both points will have criticism, the first the one you make “20% unemployment is un-humane, we need to intervene”. The second will be fresno-dan’s “keep your government corruption and incompetence away from me, you don’t know better than the market”. I suspect the first view will be slightly dominant in the EU the second slightly dominant in the US.

            I am trying to find a modicum of truth somewhere in the middle, namely we want to deleverage (the market is telling us to deleverage, that entails unemployment, liquidations, and triage), but we want to 1/ soften the blow as much as possible (ELR type intervention, new deal 2.0?) 2/ avoid minsky/fisher type instability which are systemic collapses that lead to depression.

            The key is to deleverage with control, not out of control. IN physics you have these “quasi-equilibrium” movements and then these “dynamic instability”. You can fall while being in relative equilibrium as you do so (think parachute). Or you can just fall like humpty dumpty.

            I honestly believe we were humpty dumptying until march 2009. Namely until Bernanke et al pushed the QE button of asset stabilization. (God bless fiat money). I give them credit (so far) for avoiding scenario 2/ it has however done little for 1/

    2. michael

      “Saving […] creates an insufficiency of demand.”

      Is this thought, looking at todays situation, the anchor of your thinking?

      Lets verify such theorems by going back to the basics. Think of a society where everybody has no savings AND no debts, and has to work the whole day to achieve to live another day on a minimum living standard.
      Now applying your thought I can only go WTF??

  20. Eugene

    It is useless to argue with an incompetent idiot (Marshall Auerback).

    One can only wonder what kind of colleges/universities these people are graduated from. Just spend money the US government does not have and everything will be just fine. WOW.

    Unfortunately for Obama, US Congress, and for American people, US economy needs energy, natural resources, and many other items it needs to function and/or just survive but must acquire from outside suppliers. Lately, these outside suppliers have very little confidence in being paid “in full”. Consequently, this vital for US economy bloodline is about to go dry.

    As for domestic suppliers like farmers, industrial manufacturers, etc., they also will not be eager to work/produce for “nothing.” This is exactly how the old Soviet Union disappeared.

  21. a

    Deficit terrorism is not the answer, only because there is no answer. Americans must get poorer. Be it inflation, unemployment, loss of savings, what have you, they must get poorer.

  22. don

    I was under the impression that the problem is’/was that we, citizens of the US, have been consuming too much, and doing so beyond our means, i.e., by way of debt, which has replaced wages as a means to fund spending.

    So, here again we get the thinking from a progressive who is under the illusion that what is needed is more demand, more consumption. Thus the government must come to the rescue and save the economic system (one based on inequality and growing class disparity), by fixing the “problem” by increasing demand, giving us some breathing space so that eventually we can get to fixing the real problem of fixing the growing economic class divide.

    The real issue is how the writer and other thinkers searching for the solution are actually framing the issue as one of whether government is good or bad; whether government governs for the public good or the private good (increasingly a less applicable dichotomy), or whether we need to get government off our backs and allow the ‘free’ market to do what it does best: shake out the inefficient, bring about austerity, and see where we end up at. The later is based on naively believing that government and politicians should and could stand idle and passive, allowing things to unfold as they will, whatever the consequences.

    The former is no less naive, thinking that government – one that has all along been working for the interest of the economy’s beneficiaries – at the expense of the excluded – will become a government that governs the best, for all of us, in the public interest, by supposedly increasing demand (a hypothesis that fails to see its opposite, overproduction). These souls have invested a great deal of hope in Mr. Obama, but I suspect they have only time till they finally admit of their displaced faith.

  23. molecule

    I am getting weary of this argument by “defcient aggregate demand”. If I and millions of others decide to do with less for a while, then that’s how it’s going to be. There’s little anyone can do about it.

    What is the government going to do? Buy up all the surplus TVs and mp3 players until they run out of warehouses? Can we stop this nonsense already?

  24. Steve2241

    “In any event, the President’s single-minded focus on the budget deficit is profoundly misguided. Why? Because a sovereign government can always afford to buy anything that is for sale in its own currency –whether that is unemployed labor, real estate, or bad financial assets.”

    But the dollar isn’t this government’s “own”. The dollar belongs to the Federal Reserve Bank of the United States, a private entity. The writer is conflating an economic system that has not yet come to the fore; that is, an economic system absent the Fed.

  25. jdmcka

    IMO, this article is more opinion then expertise. I don’t think it measures up to usual standards on this blog (which are excellent IMO).

    The President and his economic advisors are now being driven by the polls,

    or maybe just panic in seeing feeble results from their massive, BushCo initiated econ/monetary policies.

    which, in turn, are being driven by the deficit myths of their own creation.

    Deficit myths are not always myths, especially when measuring an economy whose engines have been sold off while wanted and needed econ initiatives don’t seem to be on anyone’s minds.

    From there… AFAIC your article went downhill. You make it sound like BO has done things right ’till now, just really on top of things.

    Pretty clear to me that from beginning BO did pretty much nothing of what was needed. The reasons for this are unclear to me, but no principle/courage/insights… doesn’t stand for much. And I walked the streets to get this guy elected.

    This whole argument of deficit spending is entirely out of context from what matters: we have massive cultural ignorance of what’s real, what has value, what is even true.

    8 yrs of BushCo have bankrupted more than finance: it’s bankrupted the American soul.

    1. Skippy

      Yep the collective American mind is pretty toasty right about now. We have a large segment of the American public debating advanced economics theorems like never before hay, most are just becoming aware and usually attach them selves to what ever their favorite politician or religious/occult leader says.

      The universe does not suffer fools well, so all this talk about Debt creation and extinguish-ment as just a set of numbers moving around out side the very real *mass* effects these numbers have on *physical* mass to me is bunkum. So if the new deal 2.0 is espousing infinite debt to facilitate moving forward cuz changing or fixing our system is too hard, I’ll say they are just as bad as the old lot if not worse. They just give hugs rather than boots to the head.

      The one thing I have not seen discussed is the yo-yo effect ie: as in a military road march where the guys in the back of the march work in orders of 10^ x the number removed from the front as hard to keep speed and distance to the man in front of them constant. The guys up front breathing clean air may adjust their pace for a number of reasons, adjust gear, get water, change in road conditions etc. Now these changes cost little to them as they incur only a small amount of energy expenditure to effect and with out the worry of friction relationships. Now the further you move back down the line the more chaotic these changes manifest themselves (order of 10^ again) with detritus effects for these individuals. So the the further down the line one goes more energy is expended to cover the same amount of ground.

      These are my observations with regards to our economy/society to date, abate a linear one, it would take to long to describe the multi dimensional ones I use in my computer models. In ending I find economics nothing more than occultist sophistry with a dash of math to make it look legit.

      No wonder hacks like Ayn Rand, Krugman et al find so many bedfellows, front runners wet dream, people behind me f*#kum thats their problem *I* was born, gifted, entitled, worked hard to get to the front, narcissistic enabling crap. As long as we use their metrics to run our lives and the state of this planet were doomed and so is every other living thing that has the misfortune of sharing it with us.

      Skippy…All this whilst enjoying my first coffee of the mourning, have a great day whilst you can front runners! The cycles are getting bigger in mass and shorter in duration and ya know that don’t ch-ya.

      Disclaimer: I once was infected with their occultist machinations, thanks Mom, MSM, Religion, and Population in large! I wonder if one could enact a common law case against economics as a form of child abuse um mm, pro bono any one, it could make your career.

      PS. Bo is a day late and a dollar short every time, he’ll never catch up, looking forward to 2012 when S. Palin runs with Beck as VP what a hoot that will be!

      1. jdmckay

        So if the new deal 2.0 is espousing infinite debt to facilitate moving forward cuz changing or fixing our system is too hard, I’ll say they are just as bad as the old lot if not worse. They just give hugs rather than boots to the head.

        Fully agree, and IMO that’s what’s happening.

  26. EconHistory101

    i agree with poster sarath, more Keynesian nonsense…go find some reisman, or even some ron paul…
    all i need to hear is New Deal 2.0…

    valid economic thought is never this complicated!

    Keynesian econ is debunked via its underlying philosophies and assumptions…false assumptions= false models and false conclusions

    to yves smith…keynes does not need to be “keynesian” to have had the most significant impact on the development of keynesian economics…

    the fact is his nonsense psychobabble and his incredible charisma provide the fuel for the development of the nonsense psychobabble we have now…he is the reason we have keynesian economics at the forefront of most mainstream economics today whether he would have thought himself to be “keynesian” or not

    reisman does not treat the two as one and the same, but he does link the two…he is correct in so doing

    1. Doug Terpstra

      To EconHistory,

      Your “psychobabble nonsense” quip has little more grounding than Sarath’s. We’ve just suffered and are still suffering through a great period of anti-Keynesianism: deregulation, de-unionization, anti-environmentalism, and corporatism.

      I’ll repeat my above response

      Reisman’s opening sentence: “…falling prices, far from being deflation, are actually the antidote to deflation. They are the antidote, I explained, because they enable the reduced amount of spending that deflation entails to buy as much as did the previously larger amount of spending that took place in the economic system prior to the deflation.” HUH?

      In the second sentence he jumps right to Glenn Beck’s favorite boogeyman, Marx, tarring Keynes with him simply by juxtaposition in space not reality, sort of like dubya conflating Saddam Hussein and 911.

      Reisman again… “In sum, while the influence of Marxism stands directly in the path of a fall in wage rates and prices, by blocking its way with laws and threats, Keynesianism aims to prevent any attempt to overcome these obstacles by allegedly demonstrating the futility and harm of doing so.”

      What Marxism? What laws and threats? Name one. Nothing whatsever has been done to curb the banksters casino operations nor anything to slow the train wreck ruination of rigged trade. Obama is a continuation of business as usual.

      On what planet does Reisman spend most of his time, Ayn Randroid? Far from the sinister influence of Marxism, we have just witnessed a thirty years of Milton Friedman’s neocon social Darwinism, under Greenspin voodoo reaganomics, which shipped our jobs and productive capacity to Chindia, while real wages have declined and wealth disparity exploded. Uber-libertarianism under Greenspan and now Bernanke, with cheap money for banksters while deregulating loansharks and casinos is the proximate cause of this unholy mess we are in.

      Reisman’s revisionism is the nonsense here; his blog is propaganda fit only for an Orwellian “Ministry of Truth and Prosperity”.

      1. dave

        A great period of anti-Keynesian? Are you on crack.

        We spent 20 years running budget deficits. We lowered interests rates and had one or another kind of stimulus package every time there was even a mild recession recession. Our debt to GDP exploded. Our national savings rate became negative. How much more Keynesian do you get?

        1. Yves Smith Post author


          I suggest you try operating from facts rather than your religious beliefs.

          The debt explosion was in household debt, the data is crystal clear on that point. The fiscal debt explosion occurred on Republican watches, first Reagan, and then Bush II, thanks to his tax cuts and military spending, neither of which was endorsed by left leaning economists. The fiscal deficits incurred under Reagan and Bush the Senior were turned into surpluses under Clinton. Treasury was even worried about what would happen when, as they projected, Treasury bond issuance fell to the point where there weren’t enough T-bonds to provide the foundation for pricing of private debt (all private debt issues are priced as a spread against Treasuries). I’m no fan of the Clinton bank cronies, but their record is without a doubt less bad than that under the Republicans.

          The private sector debt explosion was in turn the result of deregulation and policies that used asset price appreciation and borrowing against that to mask stagnant worker wages. That has been the prevailing paradigm since the Reagan era, and it most assuredly IS a Friedmanite/University of Chicago creation.

          You’ve just discredited yourself again. Try trafficking in fact rather than your fantasies and distortions.

          1. a

            “The debt explosion was in household debt, the data is crystal clear on that point. The fiscal debt explosion occurred on Republican watches, first Reagan, and then Bush II, thanks to his tax cuts and military spending, neither of which was endorsed by left leaning economists. The fiscal deficits incurred under Reagan and Bush the Senior were turned into surpluses under Clinton.”

            If you don’t count Social Security, there were no surpluses under Clinton. And if you want to count Social Security, there may have been surpluses, under the accounting rules, but these rules are bogus, as the surpluses were more than offset by the discounted, expected future Social Security payments incurred.

            “I’m no fan of the Clinton bank cronies, but their record is without a doubt less bad than that under the Republicans.”

            Yes, Clinton was less bad than the Republicans, even way less bad than the Republicans, but still bad.

            I’m afraid that people who get all warm and fuzzy about deficit spending usually don’t plan to ever pay the money back. It’s just one long history of huge deficits now, followed by less huge deficits later, never paid back by, but made less onerous by growth. Maybe there will be growth. But if there doesn’t materialize, the present generation has set up future Americans for one big fall. That strikes me as the behaviour of gambling fools, rather than responsible decision-makers.

          2. marc fleury


            If you include “fiat money” in some of the Keynes thinking, namely that a government can stimulate its economy free of a gold standard by printing money and lowering taxes at the same time, you realize that the left and right distinction mostly fade away.

            In other words, there is no need to politicize in such a violent and exclusionary way this debate. I actually relate to the post you flame namely that “stimulus” has been a staple of repugs as well. We are living the consequences of too much debt, some of it sparked under reagan.

            I think the source of the tension is that monetary policy intersects fiscal policy, under a gold standard. However under fiat money fiscal policy CAN BE COMPLETELY detached from monetary policy. In clear you can run deficits, increase spending and raise NO taxes at all (zero), that is a possible scenario (although not probably) of functional finance.

            Once you understand this (and the original poster surely does, so you should too :) only fiscal policy differs across the political spectrum: right wants to lower taxes, left wants to raise taxes. It gives us something to fight over (give me your money vs don’t take my money). But monetary policy unifies everyone: EVERYONE wants free money!!!

            Raise above the fray.

    2. DownSouth


      You say “valid economic thought is never this complicated!”

      A year or so ago I was listening to an interview of the great mathematician Benoit Mandelbrot, and he was talking about how complicated weather was, and how, even though we’ve made many advances, we still are unable to predict the weather with any great precision. Imagine then trying to predict the behavior of large groups of people, he said, which are infinitely more complicated than winds and clouds, which behave according to the laws of physics.

      One of my favorite quotes comes from H L Mencken. He said that “For every complex problem there is a solution that is simple, neat and wrong”.

      Because economic behavior is so complex and so unpredictable, it makes the field ripe for messiahs and true believers of various stripes. Proving an economic theory right is impossible, but proving it wrong is also impossible. Economic theories therefore become little more than belief systems.

      And quite contrary to what you have been told or what you have come to believe, economists have also failed to do what the philosophers and theologians that came before them failed to do. Looking back over this thread and the various ideas expressed, some with great certitude, I am reminded of this passage from Hannah Arendt:

      The conviction that the greatest that man can achieve is his own appearance and actualization is by no means a matter of course. Against it stands the conviction of homo faber that a man’s products may be more–and not only more lasting–than he is himself, as well as the animal laborans’ firm belief that life is the highest of all goods. Both, therefore, are strictly speaking, unpolitical, and will incline to denounce action and speech as idleness, idle busybodyness, and idle talk, and generally will judge public activities in terms of their usefulness to supposedly higher ends—to make the world more useful and more beautiful in the case of homo faber, to make life easier and longer in the case of animal laborans.
      –Hannah Arendt, The Human Condition

  27. par4

    Bush’s third term. Biggest bait and switch ever. You cannot be a good citizen and support either major party. They are both corporate owned entities that are beyond redemption.

  28. Capitalist pig

    “destruction of tax revenue through a declining economy — caused by the cutbacks in spending”

    Wow, only a total idiot can release such stupidity.

  29. Hugh

    I am sure this post has produced the standard debate between Keynesians and non-Keynesians. The truth is it doesn’t matter. Obama and his economics team, Democrats and Republicans, economists credentialed or not, are simply not up to the problems confronting them and us. We should continue to lay out what the solutions should be, if only to form a record, but we should also look more at where the economy is heading given the failures of our political leadership and elites.

    It was that old reprobate Andrew Mellon who said, “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” (from wiki) Being rich, he could say tripe like this because he was insulated from the suffering and misery he was so willing to inflict on others in pursuit of his peculiar notion of morality.

  30. Hugh

    It was Andrew Mellon who talked about an economic purge when he was advising Hoover: “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people” Being rich, Mellon could say this kind of tripe because he was insulated from the suffering and misery he was so willing to inflict on others.

    No one, or almost no one, wants to do the math anymore perhaps because it is so frightening. If you look at the U-6, we are talking about 27 million un- or under- employed. Add in another 3 million or so who have exited the job market entirely and we are looking at 30 million. There is simply no way we can deal with a problem this large without a Keynesian approach. At the same time, it is important to recognize that a purely Keynesian approach is insufficient. What we need is an analysis of how big a Keynesian stimulus will be needed. As time goes by the needed size grows, if I had to guess, I would say we are in the range of $1.3 trillion (with a 90/10 split between spending and tax cuts) a year for as long as it takes to make substantial headway in the employment situation. As I said, by itself, even this will not be enough. We also need to look at how much debt repudiation we will need to do. This can take many forms. One would be to make cramdowns to pre-bubble prices in mods available to all homeowners, not just the currently distressed ones.

    If we don’t do something like this, we will be caught in a Catch-22. The economy will not be able to recover because of the enormous drag put on it by high unemployment and debt. At the same time, we will be unable to reduce these because we will be unable to restart the economy. As the fundamentals continue to deteriorate, this means that we are headed not so much for Japanification but rather a slide into depression.

  31. eric anderson

    Hey folks, this is Obama we’re talking about. Even assuming the report that he will talk about deficit reduction is true, what is the chance he will do anything more than talk about it? Near zero, I’d say.

    I am laughing at all the people here getting their knickers in a bunch over this. Obama does not know how to cut a budget. It’s beyond him. He does know how to talk about it, and in the narcissistic fantasyland of his own mind, he probably believes that talking about it will make it happen. Like the Creation, when the LORD spoke, Let there be deficit reduction, and there was deficit reduction.

  32. i on the ball patriot

    Interesting title, “President Obama, deficit terrorism is not the answer!”

    Scum bag Obama should also be told that FUNDING terrorism is not the answer! If he were truly concerned about the deficit he would cut these Taliban jobs in Afghanistan and instead spend that money at home;


    “Our American militarists love war so much that they even bankroll the enemy, just to keep the blood money flowing. This odd but absolutely crucial characteristic of the Never-Ending Terror War was borne out again in a remarkable story in the Guardian (with an expanded version in The Nation).

    As Aram Roston reports — and U.S. military officials openly admit — American taxpayers are giving Afghan insurgents at least 10-20 percent of the war machine’s multibillion-dollar transportation contracts. Hundreds of millions of dollars are flowing into Taliban coffers every year from bribes offered to stop insurgents from attacking supply convoys — convoys which are increasingly controlled by local warlords and druglords, including convicted drug dealers in the Corleone-like Karzai family.

    Of course, in Iraq, the Pentagon finally started paying insurgents as well. But in that instance, they were at least paying the enemy to stop fighting. Here, they only ask that the Taliban allow some trucks to roll through the countryside — which seems to be entirely in the hands of the insurgents, despite eight years of war and months of Obama’s “surge”. The Americans pay handsomely for the privilege — sometimes up to $1,500 per truck, depending on the cargo — even though they know the insurgents will use the money to keep fighting.”

    More here;


    Amazing how much energy is wasted on economic remedial action plans that are directed towards a non responsive government. Organize the election boycotts now. No balls, no brains, no freedom!

    Deception is the strongest political force on the planet.

  33. LeeAnne

    Obama’s use of the presidential bully pulpit to reinforce the right’s ‘deficit’ meme is the worst possible timing during health care negotiations and the height of concern over the direction his leadership is going.

    We know that the leadership Obama has been willing to provide is teeny weany, but didn’t expect him to repeat the current cheap Republican right wing propaganda meme about responsibility for controlling the ‘deficit.’ At least I didn’t.

    As Yves points out ” …if the President is genuinely concerned about spending too much money, he can simply redeploy part of the $23.7 trillion committed to help the banks to finance the programs above [on this blog].

  34. Vinny G.

    I am amazed that so many of the comments here deal with economics, when it is obvious the president’s “plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit” can only serve one purpose: to win over the far right and all tea party attendees, and thus secure a second term for himself.

    However, after careful analysis, I have determined that reducing the deficit is only one aspect of that will be necessary. There is a bit more that our leader needs to do in order to win over that crowd. Therefore, as a public service to our blessed leader, I am now unveiling 2 (two) different easy plans that he may follow in order to secure his reelection. The first plan consists of 12 easy steps, while the second one was distilled to only one very easy step. Please allow me to first unveil the longer version:

    Dr. Vinny’s 12 Easy Step Plan “A” for Presidential Reelection:

    Step 1: Act as if you don’t notice when your health care plan gets killed in Senate.

    Step 2: Give 2 new tax breaks to those earning over 250K a year.

    Step 3: Privatize Social Security.

    Step 4: Start speaking with a southern drawl, making frequent grammatical errors, and use a lot of “ya’ll”.

    Step 5: if David Duke is unavailable, choose Sarah Palin as running mate. Also, promise Dick Cheney’s wife the job of Secretary of State.

    Step 6: legalize fully automatic weapons in schools and kindergartens nationwide. Also, enact a federally-subsidized cash-for-clunker like program so that red necks everywhere may upgrade their arsenal.

    Step 7: Immediately join a high-profile Southern Baptist church.

    Step 8: Start bombing any Middle Eastern (Islamo-Fascist) nation that does not convert to the Southern Baptist cult immediately (notice the emphasis on the word “cult” here).

    Step 9: Begin an intensive skin bleaching program to eventually achieve the look of Jacko. This will likely get at least 1 (one) percent of white Texans to vote for you.

    Step 10: Pardon Bernard Madoff and send Michael Moore to Gitmo for “rehabilitation”.

    Step 11: Print lots and lots of new hundred dollar bills and immediately parachute them over to Goldman Sucks. Better yet grant GS the power to print their own money.

    Step 12: Get rid of that ridiculous American flag lapel pin you’ve been sporting, and replace it with an over-sized Confederate flag button.

    1. Skippy

      I think you forgot one Vinny.

      ?) Send misinformed young to fight wars abroad there by creating a chain of wealth via military industrial complex, sub-contractors, reciprocal money laundering war lords, drug trade, sub contracted physical and mental health in USA and finally your favorite the prison system.

      Skippy..suggest you rent *A Boy and His Dog* by Don Jonson. Great flick, its the neocons training video hacked.

      see link: http://www.youtube.com/watch?v=YfgtcZ0e0Fc

      1. Vinny G.

        I should have also added a separate step involving lots and lots of interviews on Fox News and Rush Limbaugh…LOL


        1. Will

          @Yves – I think you should strongly consider whether the last 3 comments have any place here. I’ve seen this sort of mob mentality in community sites before and it always leads to a coalesced community view that deals with alternative or opposing views with intense verbal hostility and sarcasm to the point at which even moderate opposing voices leave the site. Allowing such comments is typically rationalized as fair retort to some other comment moderators did not like. This is a mistake. If the original comment is disliked to that extent then that comment should be removed or commenter warned.

          1. Will

            I might have confused some comments in this thread a bit. I thought these were in reply to EconHistory101. Some of the cultural/regional attacks above have strong similarities to other comments posted in reply to EconHistory101. Never the less they seem egregious to me on a forum about economic policy.

  35. Vinny G.

    However, should the above 12-Easy Step Plan fail, the following even easier version remains available:

    Dr. Vinny’s 1-Easy Step Plan “B” for Presidential Reelection:

    Step 1 (and only step): Undo the greatest mistake your idol, Abraham Lincoln, has made, namely, allow the fuc*ing South and its ignorant morons to secede, and let us get on with our lives in a way that no longer involves compromising with their 18-th century ideas.


  36. EconHistory101

    to doug terpstra and downsouth…

    doug terpstra,

    1) my “quip” is just that, a quip, because we are on a blog…i wasnt writing my thesis, just trying to steer a couple readers in the right direction

    i typically do not take the time to argue with bloggers, because again, this is a blog…but since im bored and cannot sleep, and since you need some “grounding”….

    2) if you think ANY economic public policy (as a whole) undertaken since the beginning of the New Deal is anti-Keynesian, you are mistaken…and to call greenspan and bernanke uber-libertarian is absurd…i think you may have your words mixed up

    3) you take reisman out of context…it is easy to defeat an argument when you pull an excerpt and use it totally out of context…anyone who read your post, and had never heard of george reisman wont take the time to find out, and that is irresponsible on your part – any real argument takes the BEST points from the oppostion, understands them, then takes them apart…

    let me explain…

    reisman says falling prices are the antidote to deflation,
    “deflation IS NOT falling prices but a decrease in the quantity of money and/or volume of spending in the economic system. To say the same thing in different words, deflation is a general fall in demand. Falling prices are a consequence of deflation, not the phenomenon itself.”


    “falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, NOT FALLING PRICES.”

    now for the real point…which is simple, but obviously difficult for you to understand, or maybe you just arent open to it…

    “Thus, imagine that prior to the present financial downturn, Bill used to go shopping once a week in his local supermarket. When he went there, he could afford to spend $10 for bottled water. At the prevailing price of $1 per bottle, he was able to buy 10 bottles. Now, in the midst of the downturn, when Bill visits the supermarket, he can afford to spend only $5 for bottled water.

    Here’s the question: At what price per bottle of water would Bill be able to buy for $5 the 10 bottles of water he used to buy for $10? Answer: 50¢.


    it sounds complicated doug, but really it is not

    thus, the disconnect… there are those who mistakenly think of wealth in terms of how many paper dollars are in their pocket, and there are those who think of wealth in terms of how much (in real wealth, products, services, etc.) can these paper dollars in my pocket get me

    to downsouth,

    you take ME out of context, just as doug takes reisman out of context…i was simply trying to point out the history of the development of mainstream economic thought…

    i understand that no theory based in the subjective thought and action of different people can ever be proven (right or wrong) that is why they are called theories and not laws, and THAT IS THE POINT OF MY POST

    to be sure, i understand that the subject (of economic science, if it can be called a science at all) is infinately complicated …the point i was trying to make is that valid economic thought can be very simple if brought to its simplest terms…in other words, the simplest way to describe what i believe to be the closest thing we have to a solution (while understanding that there is no conclusive solution, and can never be) …that is, what it all boils down to is that if you (or we) live within your (or our) means, you save, and invest your savings in productive capital, what you get is real economic progress and increases in standard of living…i think it is easy to see where massive government spending and inflationary monetary policy can disrupt this process…

    the other side of my point is that Keynes, as well as Keynesian economics that are a product of his influence, attempts to predict outcomes (outcomes which rely on subjective thought and subjective, self interested action), with mathematical models based on false assumptions and false underlying philosophies, which as you so eloquently point out is IMPOSSIBLE

    just like a keynesian to quote a mathmatician in an argument that relies on subjective inputs that cannot be quantified

    downsouth, please dont take me out of context because you disagree with what YOU THINK i believe in… it is irresponsible

    doug and downsouth, economic thought is best left for the real world pragmatist, not for the idealist or the intelligentsia, and ill leave it at that


    shame on you

    1. Yves Smith Post author


      It is rather ironic that you (effectively) attack others of arguing unfairly when it is you, not they, who exhibit such tactics. Your arguments are not responsive to what they said. You merely seek to denigrate them without engaging their arguments.

      First, Reisman was NOT taken out of context, the comments were from a blog post written by the man himself, linked to at the top of the post! So your “out of context” remark does not hold water, this is an empty argument since you fail to show what was wrong with how the argument BY REISMAN IN HIS OWN post was represented by Down South.

      Second, you display utter ignorance of the history of economics and of policy in the US. The policies in force since the Reagan era are radically different than those from the Depression onward. Your “econ history” handle is wild misrepresentation. Supply side? Union bashing? Radical deregulation on just about every front, particularly banking?

      And Reagan did not run trade deficits to be Keynesian; if you read David Stockman’s book (Stockman was Reagan’s budget director, in charge of getting the tax cuts passed), they hoped to cut both taxes and spending, but having spent so much prestige on popular tax cuts, they were not about to undo them when they lost momentum on spending cuts. Bush II believed (or said he believed) his tax cuts would pay for themselves, an utter fantasy. Yet you call that Keynesian. Utter garbage.

      And you are also wrong re the use of mathematics. The mathing up of economics favored the Neoclassicals, the Friedmanites. Far more than Keynesians (not that I am a fan of them either) their school of economics (the Chicago School) is a triumph of simplistic math over messy facts.

      You also chose to misconstrue, I assume deliberately, the point re Mandelbrot, the mathematician. He says weather is too complex to be characterized by math, and human systems are no doubt even more complicated than that. You are no doubt unaware of the fact that some of Mandelbrot’s discoveries about markets in the 1960s were a fundamental blow to the budding “science” of financial economics, but its leading lights considered for a while, then rejected the implications. They chose to soldier on with flawed models.

      So you reject math, and yet you defend even more simplistic reasoning, as in your own! Mathematics is a model, and if you reject mathematics, you cannot hold up your own even more stripped down reasoning as an improvement.

    2. Skippy

      101 said…economic thought is best left for the real world pragmatist..

      aka the dog chaseing its tall or the grand master of cycles or occultist leader.

      Skippy…phew almost shot ya in the back there Yves, good thing I check my fields of fire, faster than a blow fly to the kill lady.

    3. Vinny G.

      To econhistory101:

      Let me guess… you must be that gun-toting Southern Baptist with lots and lots of confederate flag bumper stickers on your 1972 Chevy pick-up truck who dropped the gun at that townhall meeting last summer. Admit it!

      Shame on you!


  37. Richard Kline

    To EconHistory 101, yes, I recommend that you take the course. Because clearly you understand nothing about the subject they’ll be teaching . . . .

    1. Vinny G.

      He’s probably a high school dropout from Alabama who’s only interested in the history of the Civil War… Oh, pardon me, I meant “War of Northern Aggression”…LOL


  38. jdmckay

    re: my statement @ November 14, 2009 at 6:31 pm:

    This whole argument of deficit spending is entirely out of context from what matters: we have massive cultural ignorance of what’s real, what has value, what is even true.

    … and subsequent posters arguing both sides of Keynesian econ policies:

    What seems obvious to me (no brainer) is that Keynesian (let’s just call it deficit spending… borrowed against future spending) sometimes works and sometimes doesn’t.

    Original GI bill (college tuition for WWII vets) was huge such commitment. And… it worked!!! For it’s day, the bet was an investment in US citizens… a class of citizens (vets) deemed (for better or worse) worthy of such investment. It poured huge funds into a bet, as a nation, that committing resources to this large body of US public for the purpose of equipping/training/imbuing (etc.) them w/best knowledge available in that day would provide future returns in great ideas/engineering/knowledge which, again… at that time, was unknown and unforseen.

    One could say it was done on faith. But, most certainly, it was an bet on Joe Q. public. And it produced quantum leap in advances in more industrial activities then even the most optimistic planners of that day could forsee.

    Eisenhower’s hi-way projects similar… outcome much more valuable for it’s day than anyone predicted, and more valuable in unforeseen ways.

    Many similar examples… I could go on & on. One commonality in all these: the targets of investment were chosen and intended to benefit society as a whole… to provide knowledge and/or resources for everyone.

    BO was elected w/an opportunity unprecedented in my life time (I’m 54… tradesman/mech engineer 1st 18 yrs of my adult life, programmer/techie last 18 or so). In short, he was elected by a convincing majority including independents & non-radical conservatives who were fed up w/8 yrs of BushCo/K-street congress lies, and who had witnessed their 401k’s go up in smoke w/viturally no detailed explanation just how that was pulled off (how many Joe Q. Public(s) can give even a semi-accurate anatomy of the mechanics of this financial-meltdown?).

    People who have paid attention to these mechanisms of fraud can quibble about particulars. But AFAIC the over reaching theme: a political class (just happens this time it was republicans) who abandoned any semblance of honesty/sincere purpose/thoughtful consideration of principle/moral issues in order to…

    a) create publicly disseminated talking points w/approx. -0-% relevance to their backroom policies which…
    b) were a wholesale giveaway to their most generous donors: financial industry, oil (Iraq invasion), Zionist lobby… etc. etc.

    Incredibly, these guys were able to execute a clean wipe of US public’s collective memory after Enron (then biggest scam in history: cooked books, offshore phony shell game companies, etc etc.) and, in effect, seemingly use the Enron model as a beta test for the raping of US wealth by a connected few.

    Our manufacturing is gone. Educating our young people (college/sciences/engineering etc.) has slid off the map… much of it done under the guise of supporting “personal responsability” and preventing “socialism” etc. etc. All done, in fact… as mentioned above, to propogate talking points unrelated to known actions created in backroom boilerplate sessions w/well heeled donors to craft said donors wishes.

    The distinctions between these activities and a cleanly initiated capitalist or free market econ system are largely out of US public’s consciousess. Rather, said public is subject to absurd abstract pronunciations by pundits who can/will not acknowledge what’s happened, while promulgating memes draped in moralist contexts… memes they used during these same BushCo years to obscure the raping of US economy.

    BO has utterly failed… not even attempted to clarify these events to the US consciousness. His investments (TARP etc.) were not to empower a public at large, rather to bail out an utterly corrupt financial industry w/no moral underpinning left AFAIC. His targeted spending (more buses for cities, cash for clunkers, a few energy efficient tax credits, etc etc) were remarkably non-clairvoyant wrt determining what America needs for even immediate future:
    * water management: California is out of water… survived past decade only because of abnormal rainfall from various warming conditions. Georgia, much of agricultural mid-west… their running out of water. Many think Israel’s levelling of Lebanon was reall over water rights (Israel is out of water… uses more water per person than any developed country on our planet). Yet, our political class is capable only of skimming across the top of the problem (challenge) w/absurd discussions of “putting salmon over people” and such while a precise measuring of what it’s going to take for future (eg: increasing populations) water demands to be met are not even on the table. And we haven’t even talked about rampant groundwater pollution turned lose under BushCo that is… mindboggling, literally.
    * next generation of hi-tech energy production, the most promising of which is not being discussed at all
    * food quality/production: US can’t even trace orgins of produce sold on most shelves. Labelling (through K-street congress) is deliberately deceptive, allowing claims for “health foods”/”natural” etc. to be put on chemical/processed shit food… all done as a sop to K-street’s ag/food processing lobby.

    BO, essentially, has spent about all US has to spend: deficit/treasuries (IOU(s) to China/Russia/Japan etc.) to prop up the fuckers in suits who bankrupted us, and in fact chosen said industry’s representatives as his advisors. He has put little or no $$ to empowering JQ public w/any meaningful tools to meet demands for the future, let alone explain to them the mechanics of the mess we’re in.

    He seems oblivious to the fact that the 3rd world/emerging economies of Reagan’s era are no longer 3rd world: they’ve emerged!!! China now has, financed by US consumer spending/borrowing while we slumbered, the industrial production which used to be our backbone… and it’s gone for good. China is educating (by wide margin) it’s people in the sciences… preparing them w/tools to meet future, while we’ve got young (college age) kids who either can’t get classes, are going into huge debt for radically diminishing quality of 2ndary ed. …

    BO’s “keynesian” spending has nothing in common w/successful such investments of the past. His spending does not identify root, bottom line causes and condtions. By not identifying and articulating these baseline conditions he’s left himself open to the bullying, mindless “attacks” we saw by “republicans” through the Clinton years… deja vu.

    When you have a nation like US (huge, massive consumption, public who enjoys the “good life”) convinced they are geniuses because they made $$ flipping a few houses, rode a DOW housing bubble (fraud) telling them they were “smart” investors… all a vapid foundation for understanding an economy. And at the same time, the underpinning of skilled people in sciences/trades been cut out of our economy by (essentially) offshoring everything (the call it “increased productivity)…

    well I dun’o… looks like a trip down the rabbit hole to me. Ground hog day in perpetuity, w/a president and advisors participating in this loop while telling us about “change”.

    I think US public deserves what it’s getting. Not only do they buy hook/line/sinker the utter bullshit fed to them on nightly TV “news”, they seem largely incapabable of even beginning to ask the self-evident questions directing a collective attention to realities threatening to pull US standard of living into 3rd world status.

    So anyway… as I said in previous post, I find your article entirely non-illuminating. It identifies nothing that matters, and continues mindless US-pundit conversations over concepts/”philosphy” (etc.) that, literally, has no application to current conditions. In short, I think your article abandons the clarifying of reality reflected by language… eg. making meaningful distinctions, and does so in exact same way BO has failed.

    Just my $0.164 USD… and falling fast!!!!

  39. Will

    I’m no economist, but have been following this saga with intense interest since last year. Why do I find this debate over deficit spending and the usual assertions about its effectiveness overly simple? The concept of “insufficient aggregate demand” alone gives me the giggles, in a crying hopelessness sort of way. Not only do I wonder how anyone can determine what is the proper level of demand, I don’t know how you figure what price demanders should pay. I look at the massive amount of labor in China and India still coming online and can only conclude that labor in the US is radically overpriced (or Chinese/Indian labor is radically underpriced. Either way when do we reach sufficient aggregate demand – when labor and production capacity in the US is 90% utilized, or when global production and labor in Chine is 90% utilized. That seems like it could be a lot of deficit spending. And not to poke a hole in New Deal historical fantasies, but a considerable amount of spending in the last depression was considerably wasteful – building ditches and bombs. Fortunately for the US the latter investment paid off by wiping out the productive capacity of Europe. Like I said I’m no economist, but I find all those pitching the spend to make money mantra don’t seem to very well account for big factors in the global economic system. I also find it puzzling that the same large voices on the left now claiming deficits don’t matter where singing quite a different tune for a decade; if something is somehow “different” now, that needs explaining, because to me _now_ seems to be just more of the same game that has been played on us since Reagan – including Mr.Clinton’s administration for sure.

    I think there is a lot of overlap in what I am trying to say and what jdmckay wrote.

    1. craazyman

      See Will it works like this. First, Brazil China Russia and India and Eastern Europe all have to aspire to the middle class Elysian Fields. That means they have to play football, baseball, basketball and go to the Outback Steakhouse for beers and want to kick some financial butts. They are 1 for 4, because they play basketball. Then, they have to want to buy American exports, so the 16% unemployment rate can go down. That’s why Obama bowed to the Japanese. Because they have the cash and play baseball. Then it has something to do with the money supply, which needs to go up, but not a ridiculous amount. And the deficit has to come down, but not by much and not too soon. And if all these things happen then savings plus “X” = investment + “X”. What is X? You ask and where did it come from? X = economic growth. And it comes from N + I, which in mathematical terms = Nature + Imagination. Nature is pre-existing and so is Imagination. Both are constants and infinities, that is not mutually exclusive because Infinity can take an infinate variety of forms. Although either could go to zero if an asteroid hits the Earth. Both exist in a state similar to the electron and can be modeled by the probabilities that govern the wave form of the electron. And both are both potentials and actualities. And so there are a lot of variables here, as you can see. “I” has a duality similar to the electron. It can physically manifest as strip bars, IcBms, private prisons, or organic lettuce. N is also a duality in binary form and can manifest as coal, nuclear power, tacos or T-shirts or movie film strips. You can see that I and N have a similar Protean quality. All these variables make the math very complicated. You can spend all you want or borrow all you want or print all the money you want, but I + N > savings + investment and makes all the math kind of cute but useless. This is my own theory. And it is why I am a believer in predictive astrology instead of macroeconomic theory. I confess, readily, that I am totally unqualified to discourse on the corpus of economic thought. But I am a professor of contemporary Analysis at the University of Magonia and I have a unique perspective that sometimes carries me astray and other times it saves my rear. I am not a Baptist, but I am a beliver in God. Frankly, I’m a good Presbyterian and a fly fisherman. I am far too proper to be a really good Baptist, like Jim and/or Tammy Fay Baker used to be. But I probably could be an economist, with some effort, if I put my mind to it. The thing to realize is that economics is 13 equations and 16 unknowns.

      1. marc fleury

        are you a bot? you read “stream of consciousness” and most of it makes sense in isolated sentences, but the whole is liquid :)

        In any case you are one of the funniest bots I have read in a long time.

  40. EconHistory101


    i am southern, however i am hardly what one would call religious, and you would be hard pressed to catch me in a southern baptist church…ever

    i am not a dropout but a graduate ( summa cum laude, 7th in my class not to sound too proud, with a minor in economics) of a fairly prestigious liberal arts college that caters mostly to really smart kids and really rich kids…and i could have never afforded to pay my tuition if you are wondering…
    oh, and i do not own any firearms

    to your comments regarding the cival war? wtf?
    again shame on you, that is ridiculous

    i have great respect for your adamant defense of proper form in presenting argument…i am indeed the same way

    i am misunderstood,

    reisman was taken out of context IN DOUG’S POST, which is why mine was directed at his…not at the link to reismans blogpost,
    i was hoping to ariculate what reisman meant when he was quoted by doug…doug doesnt really attempt to make an argument at all, hes really just rambling, which is also what im doing, because again, this is blog

    as doug says:
    “Reisman’s opening sentence: “…falling prices, far from being deflation, are actually the antidote to deflation. They are the antidote, I explained, because they enable the reduced amount of spending that deflation entails to buy as much as did the previously larger amount of spending that took place in the economic system prior to the deflation.” HUH?”


    i DO NOT REJECT MATH, or the application of mathematics in models that are based on true assumptions, or inputs that can be empirically quantified, I simply reject math and its applications in attempt to quantify what cannot be correctly or effectively quantified because of the nature of the inputs involved, i.e. human action (we agree on this point), this demonstrates why as i said earlier, i am not fond of argument via blogpost…too much is lost in translation because of the informality of it all

    second, i agree with a lot of what you are saying, but
    as I said earlier,

    Keynes was largely responsible for a lot of (not all of) what we have today…this includes his influence on the Chicago school and the neoclassicals (this does not say that he is the founder of mathematical economics, but that he was no doubt influential in the viewpoint of these schools of thought)

    further, i never said anything about reagan, all i said was nothing has been ANTI_KEYNESIAN for a long time…this is because he had a tremendous influence on the development of mainstream modern economics, this is to include friedman, the chicago school, neoclassicals, and just about everything else, unless you are an austrian

    i never said bush was keynesian, i never said reagan or clinton or any of them were keynesian, which you imply in your above post…but they all attempt to control what they cannot control

    i totally agree with you that there is place for regulation, and that deregulation of banking in particular had tremendous input in the mess that is our financial industry

    finally you take me as a reisman lap-dog… i do not hold reisman to be all that is right and good, in fact i believe there is quite a bit that reisman, as well as many austrians, do not even consider…however, you cannot argue that his IDEAS are taken out of context IN DOUG’S POST

    read http://mises.org/story/3296

    before you jump into calling me a crazy libertarian, or goldbug, or uber-capitalist, i am not

    i simply understand, as i think we have both come to the conclusion, that NOONE has it figured out,
    thus it is important that all be exposed because there are some good ideas out there…none can be dismissed outright

    can we please stop the attacks, for those of you sitting and waiting to disagree or antagonize

  41. Yves Smith Post author


    I don’t even know where to begin with what you wrote. And I assume you went to Duke, BTW.

    First, Doug is not wrong here. You can’t isolate spending from income effects. Falling prices also means falling worker incomes which means falling wages and more unemployment. So assuming people have the same amount of discretionary income in a deflationary economy as in a mildly inflationary one is wildly incorrect. And that means the burden of debt sucks more income out of the productive economy. You claim to understand economics, yet are woefully unaware (or at least write as if you are) of the basic and well known mechanics of deflation. Have you never read Irving Fisher’s famous 1933 paper, for starters?

    Second, you are also 180 degrees wrong in the relationship between what Keynes actually said, Keynesianism (which Keynes tried disputing, but gave up, in part because he DIED) and the Chicago School. The Chicago School quite pointedly is opposed to government intervention of all sorts, including countercyclical policies. Are you utterly unaware of what Friedman said in the 1960s, or what Chicago School followers did in Chile (moved praised by Friedman that resulted in an utter economic disaster) and in Russia (a bigger, faster combo plutocratic land grab and train wreck in Chile?) Friedman wanted to set money supply growth on auto-pilot, remember? If you learned this rubbish in school, you need to get your money back. I cannot stress enough how counterfactual most of your remarks are.

    Third, you are 100% wrong about Keynes and math. The sort of ISLM stuff you see is the product of John Hicks and Paul Samuelson, it distorted Keynes badly and made his work a special case of neoclassical economics. The fact that you attribute this (I assume this is what you mean by Keynes and mathematics) again illustrates your lack of substantive knowledge here. Keynes (along with Frank Knight) was very leery of the use of mathematics in economics, precisely because both of them saw uncertainty as a fundamental element of the human condition, which makes modeling in many cases unrealistic. And Keynes was an accomplished mathematician. Keynes also saw financial markets as inherently unstable due to the unpredictable nature of investor liquidity preferences, while the Chicago School (and pretty much all of mainstream economics) assumes markets of all types have a propensity to equilibrium.

    I suggest you do a good deal of further study before you offer your views on economics here.

  42. EconH


    again i am misunderstood, whether or not you think so or not,

    there is a difference between what a man says and believes, and the effect (OR INFLUENCE) a man has on what comes after him, regardless of how hard he tries to argue against it…

    keynes was misunderstood, thus his influence is perhaps partly unintentional, but his massive influence in MOST of what is mainstream modern economics remains, whether he would like it or not

    im aware of the chicago school and thier opposition to intervention

    you are putting words into my mouth

    i learned all of what you are trying to teach me in school, but if i wanted to get my money back that would be impossible because i didnt pay to begin with….

    im done with this, you are terribly frustrating, and as i said before, and as we both believe in proper form of argument, a blog post doesn’t really provide the right opportunity to have this debate, because again, you are putting words into my mouth, and i am apparently unable to properly articulate myself

    btw you are wrong to assume i went to duke but would be interested to find out why you think i did

    have a nice life

  43. Peach Tree

    Proponents of bigger fiscal stimulus invariably imply that there is some magical threshold below which government spending is dismally ineffective, and above which everything turns out hunky dory. However, they are remarkably coy about where this threshold lies, preferring to justify their ‘more is better’ thesis on the grounds that previous public spending was ineffective because a) it wasn’t big enough and/or b) it was spent on the wrong things.

    Where are the results of research on the multiplier effects of deficit spending?

    I would prefer the advocates of larger fiscal stimulus offer a put-up or shut-up proposal – the government must spend x% of GDP and it will result in a y% increase in GDP; if it does not, we will admit we were wrong.

    How about it Marshall?

    1. Yves Smith Post author


      I suggest you not set up straw men. No one I can recall said there was a magical threshold, particularly in the context of the recent US stimulus. In the debate around the US fiscal stimulus (this year) most economists deemed the stimulus to be too low. Most economists also attribute the swing from contracting to growing GDP largely to stimulus.

      So you making an argument that others are in error by distorting facts. I don’t recommend anyone engage in an argument on substantive with someone who plays fast and loose with facts to score points. The individual is likely to repeat the pattern and again misrepresent what was said.

      I agree that there are issues to be discussed, and no doubt different ways to read the data, but your tone and manner of argument indicate you are not interested in getting to the bottom of things, merely trying to demonstrate the “rightness” of your views, whatever that takes.

      1. jdmckay

        Just a couple quibbling (IMO) clarifications…

        In the debate around the US fiscal stimulus (this year) most economists deemed the stimulus to be too low.

        “most economists” is a damn ambiguous term. Beyond that, from this group (eg: “stimulus too low”) I read practically nothing discussing thoughtful consideration of exactly where those $$ should go, by what means they should be directed, what US wanted & needed most that previous +/- 20yr “free market” mechanisms did not address…

        I read w/dismay & frustration Krugman’s discussion of bulk $$ stimulus thresh holds needed, based on his historical models, w/practically nothing from him addressing specifics of what I mention in prev. paragraph… virtually nothing from him on this. A bit (as I recall) suggesting infrastructure (hi-ways) using 40yr old supporting data, not much else.

        Only after stimulus cleared congress and it’s implementation began did he start recriminations.

        AFAIC, stimulus missed the target in near entirety. Perhaps BO’s most informed, non-partisan cabinet level member (Chu), particularly given critical importance of energy policy for the future… Chu was left out/ignored, largely hung out to dry.

        Unbelievable to me.

        My point: success of “stimulus” spending depends entirely on where it’s directed… the intended purpose of that investment. To base it on historical models w/historically determined targets is just more of the same: eg. living in the rear view mirror.

        Most economists also attribute the swing from contracting to growing GDP largely to stimulus.

        Perhaps. But I’ve seen nothing sustainable from most stimulus spending. Most of it directed to plugging a few holes in an economy based on fundamentals/mechanics that have been in serious decline for some years now.

        I don’t have words to express my disappointment in Obama. Given all we have in un(der) utilized knowledge in tandem w/soooo many unmet challenges critical to a truly prosperous future, in virtually every regard… BO has provided approx. -0- leadership in transforming our broken economy.

        It is essentially huge stimulus $$ (not to mention massive toxic assets assumed by FED) invested to continue a Reagan/Bush II style dribble down economy. There is very little $$ coming from anywhere that is going to the targets needed (I mentioned a few in previous comment).

        With several decades now being told by these free marketers that these policies would address society’s needs and do so efficiently, yet w/overwhelming evidence from this exercise that not only did that not happen, but rather the captains of this exercise plundered resources in their control…

        Personally, I think anyone taking encouragement from whatever data they see as stimulus success is delusional. We’ve got the exact same economy we had before the meltdown. We have the exact same absurd political nonsense directing it. And we have the exact same diminishing avenues for willing citizens to participate and contribute to meaningful production & contribution while the institutions to prepare these people to be real professionals has eroded.

        As Skippy alluded, given all we need to do, that public discourse is so largely influenced by the likes of Glenn Beck, Sarah Palin (“assertive no nothingness” as Wonkette aptly characterized her)…

        I dun’o. Not looking so good from my vantage point.

        1. DownSouth

          How does a once-great people allow itself to sink so low? What you describe is certainly a nation-killer, no? It’s all too reminiscent of this:

          The abandonment of the Tagus navigation scheme offers a striking local example of a national failure. It is true that the unexpected extent of natural obstacles in the river made the undertaking much more difficult than had originally been expected: but ultimately this was a human, rather than an engineering failure. The project was opposed by mill-owners along the river bank, and hampered by the imposition of tolls and dues on the traffic. But it seems that the decisive reason for the failure of the scheme was the constant opposition of the city of Seville, which saw in a navigable Tagus a serious threat to its own trade both with Toledo and with Lisbon. This was sadly typical of the reaction to any important project for the country’s improvement. In Catalonia, for instance, plans for irrigating the plain or Urgel were sabotaged by merchants who were dependent for their livelihood on the continuation of grain imports from Sicily. Seville itself never built the bridge it so badly needed over the Guadalquivir, and it failed to tackle the increasingly serious problem of the silting up of the river, which was finally to destroy its commercial prosperity. The reasons were similar to those which had wrecked the Tagus navigation scheme: a reluctance to invest money in public works; personal and municipal rivalries; and, ultimately, a deadening inertia, which crippled both the capacity and the desire to act…

          …Lerma seems to have appreciated, as did his successor, the Conde Duque de Olivaries, that the Councils were so routine-ridden, and so consumed with concern for their own prestige and precedence, that they were becoming increasingly inadequate organs for the government of the Monarchy. The use of Juntas to by-pass the Councils was an obvious way of escape from the dilemmas, but their effectiveness would clearly depend on the caliber of the men appointed to sit in them. There were great opportunities to infuse fresh ideas into the government by selecting men from outside the usual cursus honorum that led to a seat at the council table. But whether the right men were chosen depended upon the Favourite.

          Lerma’s choice of confidants was uniformly disastrous. Easily deceived by plausible rogues, he elevated to positions of great importance the most unsavoury characters…

          A Government which consisted of Lerma, Franqueza, and Calderon hardly offered very hopeful prospects for that great campaign of reform and renovation for which arbitristas and country were clamouring, and it soon showed itself adept at shirking measures likely to antagonize the influential and the articulate…

          Any fiscal measures which might help to reduce the gross inequalities between the exempt rich and the penalized poor was scrupulously avoided, and Lerma fell back instead on more comfortable expedients, such as the sale of offices and jurisdictions, the extraction of subsidies from the Portuguese Jews, and the manipulation of the Castilian coinage…
          –J.H. Elliottt, Imperial Spain: 1469-1716

        2. jdmckay

          There is an article up on CounterPunch today by some guy named Mike Whitney (never heard of him). It deals w/subject I tried to hi-lite. His opening quote summarizes my take on things well:

          “Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.”

          Franklin D. Roosevelt, Inaugural Address, March 4, 1933

          AFAIC, BO & his $$ crew have done none of that… none, zero, zilch.

  44. michael

    Yves, here my reply to your comment 66159, as it has no reply button to nest below:

    The Swiss Franc shot up in value to 0.96 SFR/USD in April 2008 after Bear Stearns imploded, just like other historically strong currencies and gold, as it was first perceived to be only a US banking crisis.
    Half a year later, after Lehman, it became clear that European including Swiss and GB banks were as shaky, at which point most people fled to the biggest wounded currency, as it would likely remain the last standing if ultimately SHTF.

    Then there was the famous FED swap facility, in which the FED (proactively?) supported EUR and SFR and GBP and…?
    I am not sure the Swiss Franc would have imploded without the FED giving a “strong shoulder” for the weak to grab.
    But I do know I felt it actually also chained these supported countries to the arm of the FED, in a way “if we (USD) go under, you go with us!”

    In November 2008, if I recall the month correctly, the SNB did massive interventions to WEAKEN the Swiss Franc, only after but then *directly* after the BOE started weakening their GBP – I believe the Swiss didn’t want to get finger pointed again.

    So all that I am stated contradicts what you wrote about the CHF!

    Overall I am wary some posts in your blog tend more and more towards “the beauty of the argument wins over the attempt to model reality”. With a little “How convenient!” on top.

    Marshall Auerback just presupposes savings and demand are a zero sum game. Which is nonsense.
    But even if he believes so, why doesn’t he open and honest state: “we have to go deeper and deeper into debt, until our currency is reduced to nothingness.”

    1. Yves Smith Post author


      The Fed increased its dollar swap facilities to $620bn by increasing it by $330bn on Sept. 29, 2008. That facilitated the process through which the SNB could obtain the dollars to rescue their banks.

      By the end of the year, the CHF did start to weaken again, although trading was thin, and throughout the first quarter of 2009, the Swiss franc weakened again.

      The trend has been weaker since April, 2009, but by that point the Fed’s actions had already succeeded in taking the pressure off the dollar.

      If we’re going to have a debate, try to get your facts straight. Take a look at a 2 year chart of the Swiss franc. Very easily accessible on Bloomberg.

      You claimed that the Swiss sought to weaken their currency as an act of “competitive devaluation”. In fact, the main driver was the very real possibility of a currency crisis, given the massive dollar liabilities of their banks. No one wants to hold a currency that might vaporize. You’ve never refuted or even acknowledged that issue.

      And this from Auerback:

      I could say that, but it wouldn’t be honest. And the misrepresentation of my views either comes from misunderstanding, or wilful ideological hatred of government. I don’t say it’s a “zero sum game”. I’ve consistently said that the only entity that can prevent this from becoming a ‘zero sum game’ is the government, due to its monopoly on currency. Libertarians, Austrians, anti-government ideologues all hate this, but it is a fact. You might not like the system, but I am describing it as it actually operates.

      The only way the currency would be reduced to nothingness is if we had complete political dysfunction, which precluded tax collection (the primary factor which gives value to a currency). What we’re discussing here is not some weird form of “high Keynesianism” but double entry bookkeeping, which has been in existence for several centuries. The second point is that I am not constructing policy on the basis that a government faces NO CONSTRAINT in terms of spending, but that many of the “constraints” that people normally discuss are not identified in an honest manner – which is to say that these commentators import nonsensical notions of “affordability” and “national solvency” (we’re getting a lot of this sort of talk today in regard to the US and Japan), when they have no applicability in a post-gold standard world in which government alone creates currency and extrinsically confers value on it via the imposition of a tax liability.

      The public would not give up goods and services to the government in return for otherwise worthless coins or paper notes unless there were good reasons to do so. The primary reason the public accepts what we call “fiat money” is because it has tax liabilities to the government. If the tax system were removed, the government would eventually find that its fiat money would lose its ability to purchase goods and services on the market. In the words of Abba Lerner (one of the architects of “Chartalism”): “The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”

      Once we accept the reality that the government creates new net financial assets exogenously, it renders notions of “solvency” to be nonsensical. It also means that the household analogy is totally fallacious, given that a household does not have the power to create currency or tax and therefore faces an external constraint unlike a government. Which brings us to the second point of chartalism. Again, as Lerner argues: “The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money, and its withdrawaal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.” So we look at the EFFECTS and IMPACTS of government spending. When we reach full employment and inflationary pressures are beginning to develop, this is the constraint faced by a government and it should reduce its spending and/or increase taxation to diminish demand. We’re interested in full employment and economic prosperity; we’re not auditioning for the role of finance minister in Zimbabwe, as many of our critics allege.

  45. Hugh

    Yves has answered so well that I have little to add. It seems very superficial to cast any kind of government spending program as inherently Keynesian. Governments spend money for all kinds of reasons, some good, some stupid. They aren’t necessarily being Keynesian. They are spending money because that is one of the things they do. Curiously, they did this even before Keynes was born. What seems to be going on here is a confusion between a description (governments spend money) and a prescription (governments should spend money to expand demand).

    “deflation IS NOT falling prices but a decrease in the quantity of money and/or volume of spending in the economic system”

    It is important to realize that the quantity of money and volume of spending are not the same thing. This should suggest immediately that deflation has more than one meaning. Yves has pointed to Fisher and I would just note that debt deflation can occur even if the quantity of money and volume of spending are kept constant. Too many assets put on the market at the same time can result in deflation, as in falling prices. These can feed back through the system causing job cuts contracting demand further resulting in a further need to liquidate assets with the concomitant deterioration in their value. This is the classic description of a deflationary spiral. In this, falling prices are part of the feedback loop, not an antidote. They not only don’t cure the problem. They exacerbate it.

    1. EconHistory101

      that is why he says “and/or”, which means one or the other, or both

      reisman is well aware, as am i, that deflation has more than one meaning

      i think what reisman is getting at is that falling prices makes the situation of deflation okay, in a way (though i wouldn’t necessarily agree with him);further, he may say (though i wouldn’t necessarily agree), that if there were no upward spiral (the reverse to you deflationary spiral) to burst, the deflationary spiral would never have to occur; we create bubbles, bubbles have to inevitably burst, yada yada yada (again, I WOULDN’T NECESSARILY AGREE)


      my discussion was with respect to the development of modern economics via the ideas, and incredible charisma of one of the most influential economists in history; again, to be very clear, keynes doesn’t need to be keynesian to have influenced the development of keynesian econ thought…further influence can take place positively or negatively – that is, through building upon his ideas, through perverting his ideas, or by way of his ideas provoking radical refutation of all that is keynes (be it valid or invalid)

      perhaps i made a mistake in a previous post where i broadly labeled someone or something keynesian (again, to yves, i realize that keynes wouldnt think himself to be “keynesian”, and i understand that keynesian is a misnomer), so dont get your panties in a wad

      finally…just because someone doesn’t take the time to detail everything they know in a blog post, does not mean they haven’t been exposed to something, or haven’t considered it which is why, as i repeat myself again, the blog doesn’t provide the proper avenue for argument, it is too informal

      i think, as i said before, ill retire from this post as it is painfully obvious that you would rather me not be here;i think michael has you pegged, i think you (yves included), would prefer to present a “pretty” argumentative post, not argument, over attempting to teach something, learn something, or pursue the truth (i understand that we can never find the truth, to agree with craazyman, because economics remains “13 equations, and 16 unknowns” – this does not mean however, that we cannot, together, pursue a better understanding than what we currently have

      so you have effectively run off a handle that you dont recognize, because “oh shit, I THINK he may have some ideas that i would rather not consider” ….perhaps this is for the best…this way everyone will just agree, and you all can go back to having a good ol time with yourselves, and return to the delusion that you have it all figured out

      1. reprobate

        I had decided to restrain myself. I’m not big on beating what ought to be dead horses, but lo and behold, EconHistory HAS to have the last word. So he has made himself fair game

        I was delighted that he had, in an earlier comment, promised he would depart when he said this:

        “keynes was misunderstood, thus his influence is perhaps partly unintentional, but his massive influence in MOST of what is mainstream modern economics remains, whether he would like it or not.”

        It is statements like which makes me happy that Yves went after him.

        Are we supposed to blame Nietzsche and Wagner for Hitler and the Nazis using this kind of pathetically stupid reasoning?

        He might believe in a “proper form of argument”, but it helps when you can marshal some facts to support your case, rather than bawl like a little baby when you get challenged on something patently absurd.

        I first thought Yves was a bit rough, but I see she judged him correctly, and was too kind.

        1. DownSouth

          Thanks reprobate. I couldn’t have said it better.

          And your pointing out that Nietzsche, like Marx and Keynes, is another brilliant thinker whom mediocre intellects have maligned and bastardized in order to justify their own perverse ideologies is most apropos. “The word superman, the phrase Will to Power, and the statement ‘God is dead’ are the tags that Nietzsche stand for in the casually educated mind,” Jacques Barzun tells us.

          And in the US, just like in Nazi Germany, “casually educated minds” have congealed into a mass movement, with perhaps Ayn Rand being the high priestess of these weak of mind.

          And the neoconservatives certainly drank the Kool-Aid. As Andrew Bacevich points out in The New American Militarism,, the defeat in Vietnam demonstrated to the neocons that “it was the absence of American power and will that invited catastrophe.” And perhaps it is to the neocons—to the grandfather of the movement, Norman Podhoretz–that we owe the new form of argumentation that EconHistory 101 uses, that has been popularized by the likes of Rush Limbaugh and which manifests itself in populist movements like the Tea Party Patriots. As Bacevich goes on to explain:

          From his editorial command post at “Commentary” (and through organizations such as the Committee on the Present Danger, in which he figured prominently), Podhoretz did much to create and refine the fiercely combative neoconservative style. That style emphasized not balance (viewed as evidence of timidity) or the careful sifting of evidence (suggesting scholasticism) but the ruthless demolition of any point of view inconsistent with the neoconservative version of truth, typically portrayed as self-evident and beyond dispute.

          In a universe where Nietzscheism has become so perverted the Will to Power trumps everything, even reality. “What rules the world is ideas,” observed Irving Kristol, another prominent neocon, “because ideas define the way reality is perceived.”

          All this is a throwback to the junk intellectualism of Rand, as Adam Kirsch explains:

          Rand’s particular intellectual contribution, the thing that makes her so popular and so American, is the way she managed to mass market elitism — to convince so many people, especially young people, that they could be geniuses without being in any concrete way distinguished. Or, rather, that they could distinguish themselves by the ardor of their commitment to Rand’s teaching. The very form of her novels makes the same point: they are as cartoonish and sexed-up as any best seller, yet they are constantly suggesting that the reader who appreciates them is one of the elect.

          But it is an elect of the weak, and especially the weak of mind. “The will to power, as the modern age from Hobbes to Nietzsche understood it in glorification or denunciation, far from being a characteristic of the strong, is, like envy and greed, among the vices of the weak, and possibly even their most dangerous one,” Hannah Arendt asserts. “Strength… is therefore always in danger from the combined force of the many,” she continues, “when the weak band together in order to ruin the strong.”

          Or, as Barzun explains:

          Nietzsche was naturally immune to the contagion of populism. His model aristocrat Zarathustra is such because he is truly and solely himself and aloof from collective enthusiasms. It was the mistake of Hitler and his intellectual aides to include Nietzsche among the early prophets of their social and racial dogmas. They soon found that he did not suit the role—quite the opposite—and within a short time he was quietly cast aside. [The book to read is “What Nietzsche Means” by George Allen Morgan.]
          –Jacques Barzun, From Dawn to Decadence

Comments are closed.