Rob Parenteau: Data Challenges Deficit Terrorist Beliefs

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

This 2009 analysis by UBS, presented in FT Alphaville, debunks a central tenet of the deficit terrorist camp:

UBS debt inflation

If the deficit terrorists were correct, there should be a much more defined population of the northeast quadrant of the graph attached and discussed in the link. Increases in public debt/GDP ratios should, under the logic of deficit terrorists like Pete Peterson, be associated with observations of escalating inflation. There should be a well defined cloud of historical observations moving up and to the right from the origin of this graph. No such thing to be observed.

Of course, one must be careful with this UBS analysis, since neither do they find a cloud of observations moving definitively in the southwest corner, as many of us might expect from fiscal retrenchment sucking cash flow out of, and reducing the net worth and net financial assets held by the private sector. Public debt to GDP ratios can obviously fall because the denominator is growing more quickly than the numerator, so again, this is a crude display at best, but I know from experience these do tend to become touchstones of market lore.

It also commits the heresy of assuming bond investors can en masse “require” an inflation premium without reducing the value of their existing holdings, a paradox Keynes used to critique Fisher’s interest rate theory which Jan Kregel has highlighted in some of his work, but still remains largely ignored by many.

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  1. Jo

    Yeah? Well his premise is as irrelevant now as it was in 2009. The problem of the ‘spend like there’s no tomorrow’ clowns such as him (since we’re throwing epithets) isn’t inflation, it’s the spending itself and what it turns us into.

    Nice attempt at demon-creation though (did he work on the Greek defense also?).

    1. MacroStrategy Edge

      Jo –

      I usually do not hurl ephithets, but somewhere between seeing all the schools in NY State and KC that are getting shut down, and seeing Glenn Beck dressed as a storm trooper on the cover of his new book, Arguing with Idiots, at the airport last night, I have to admit a lightbulb did finally go off in my head. Or maybe it was just what the statisticians would call a “spurious correlation”…or as my proper Bostonian grandmother used to say, if the foo sh*ts, wear it.

      Take another look at what I wrote. Nowhere in the piece did I make the argument that government spending should be infinite or unlimited, right? For example, if you get accelerating inflation, there is a strong case to be made for sucking cash out of the private sector by raising taxes and cutting government expenditures. Hopefully, that is something we both agree upon.

      But maybe you shouls also try thinking about it this way. You don’t want the government to spend like there is no tomorrow. We both want the private sector, particularly households, to save as if there will be a tomorrow. Part of what got us into this mess, after all, was the high deficit spending by households, as they consumed more than they produced.

      If you agree that households need to save like there is a tomorrow, and that is part of the solution, not part of the problem, then by definition, some other sector in the economy must be willing to deficit spend if that desired household saving is going to become actual household saving.

      Repeat after me: unless one sector spends more than it earns, another sector cannot earn more than it spends. That’s double entry bookkeeping, not high theory. So take your pick: it can be the foreign, the business, or the government sector that deficit spends in order for the household sector to net save, but someone has got to do it or else the attempt by one household to save will just lead to dissaving by another households. Then consider of this list of three other sectors, which one cannot default, unless it choses to do so for political reasons, because it creates the money that we use to pay taxes and buy government bonds.

      It really is that simple – if you want households to save like there is a tomorrow, then some other sector must be willing and able to deficit spend. If you chew on that long enough, you’ll get a strong enough jaw to bite the ass off the next deficit terrorist you come across.

      And yes, I did work on the analysis suggesting the eurozone has just signed itself up for a half dozen Latvia like implosions to take place, taking Germany and the Netherlands out with them as bad bank loans and eroding trade surpluses with the periphery come back to haunt these two as well. Good to see you are paying attention – send me an e-mail in 6 months and tell me whether I was right or not on the eurozone analysis.

      1. Costard

        I suggest you and Yves “familiarize yourself with basic fiscal accounting” and retire this old canard.

        Repeat after me: money saved IS MONEY SPENT. All bookkeeping can tell you is what sort of goods consumers are spending their earnings on, consumer products or capital goods (“savings”). It is a choice regarding expenditure, not a leaky faucet that must be compensated for by federal deficits — and it is a choice made in view of a government that encourages consumption and discourages investment. Capital is vastly different from govt debt… it is meant to be beneficial both to all parties. Furthermore, unless deficit spending is focused on replenishment of capital – we both know it’s not – then how does it in any way address the problem of a low savings rate, that is depletion of said capital? And why, coincidentally, should deficits change the spending habits of consumers and thereby increase the savings rate? Can you explain the mechanism for that? Are you saying that the primary market for government bonds is the American consumer? I’m chuckling at that. And, since you acknowledge that both sides of the balance sheet must add up, how can you suggest that private savings are a good if they must necessarily only come about from an equal increase public debt, which must then be paid off through taxation or inflation (or default)? How is there to be a net benefit in this scenario? Let me put it another way: who’s the sucker?

        Deficit spending is no different from any other spending. It must be paid for. Consequently it does not bring forces to the market, it merely redirects them. So instead of getting what we want, we get what we’re told we need: bailouts, wars, make-work schemes. And WE PAY FOR THIS, no different than if it was groceries or gasoline – do you understand that?

        You might try focusing less on bookkeeping and more on common sense. It is entirely possible for the numbers to improve while quality of life gets worse.

        Furthermore, this graph of yours is laughable in terms of what you seek to draw from it. You must have a window greater than one year if you’re going to make any judgment on the inflationary impact of deficit spending. Literally, all you can infer from this data is that most great increases in public debt take place during periods of relatively mild inflation — probably because they occurred during recessions.

        1. Greg

          So why do we get unemployment then Costard?

          If everyones savings is in fact another form of spending why does the GDP drop when we save more??

          You’ve been completely bamboozled by your econ 101 class. Capital is NO different than govt debt. All govt debt IS capital. It is an interest bearing asset for the private sector (if owned by the private sector)

          Deficit spending NEVER has to be “paid for”. It is the creation of brand new money. The govt only requires that you pay a certain tax rate (which can change depending on conditions) they never require we pay the deficit back.

          As to your comment “It is entirely possible for the numbers to improve while quality of life gets worse.” YOU ARE RIGHT.

          Just wait to see what happens to life in those countries that get bamboozled by the deficit terrorists to make those “deficit numbers” and “debt ratios” look better.

          1. Detroit Dan

            Well said, Rob and company.

            I find Costard’s assertion that savings is money spent to be counterintuitive. If I buy U.S. Treasury bonds, is that money spent? Does that provide as much income to others in the economy as if I had, for example, hired a gardener?

          2. Costard

            Unemployment exists because people quit or get fired. It is exacerbated in any number of ways. Savings rates rise when there is a credit crisis because people can no longer borrow. Savings decline when you have a credit boom pushing easy money. I’d like you to introduce you to Causality. Get to know her, if you get a chance.

            “Deficit spending NEVER has to be “paid for”. It is the creation of brand new money. The govt only requires that you pay a certain tax rate (which can change depending on conditions) they never require we pay the deficit back.”

            Have you even seen a treasury note? Govt debt always gets repaid. That’s why it’s “safe”. Whether the government can, in the future, issue new debt and recycle the outstanding deficit, is an UNKNOWN because it is in the future. If you think that the issuance of treasury bonds is “the creation of brand new money”, then you are hopeless.

            Detroit Dan – the short answer is yes. Every cent you put into bonds is getting spent by uncle sam. This does not mean it’s being spent wisely – I would argue that it’s almost certainly being spent foolishly… but it is being spent. If you deposit or invest your savings, it is essentially converted into a loan – to a bank, a business, etc. Where it is spent. And if you bury the money, there will have a tiny but proportional effect on the money supply, and increase the spending power of someone else’s dollars. There is no entropy.

          3. MA


            Regular hiring and firing is frictional unemployment, not the sustained sort that poses trouble to an economy. If that were the driver of unemployment (as opposed to a slack in overall activity) the rate would be very low, 3-4%. So you have not answered the question.

            And with all due respect, I suggest you look into government funding mechanisms and currency operations. It works very differently that you think it does. A government that issues its own currency does not need to sell debt at all to operate.

  2. Alexandra Hamilton

    I am not familiar with the term “deficit terorist” so obiously I can’t say what their beliefs are.
    However, UBS couldn’t even value their own stuff right and didn’t see anything coming before the crash. So, their analysises are probably self-serving, but at least they inform you only of what they want you to believe.

    1. Yves Smith Post author

      With all due respect, this is a data scatter. All you have done is make an ad hominem attack. That is no way, shape or form discredits their argument.

        1. Yves Smith Post author


          I have no doubt you know full well that “ad hominem” is a well known is an attack on the source, whether male (as in the Latin), female, or an organization (“oh you can’t trust Fox”). It is not considered a valid form of argumentation in rhetoric, since it does not disprove the validity of the argument.

          1. M.G. in Progress

            Ad hominem is just “argument toward the person” or “argument against the person”
            Person 1 makes claim X
            There is something “objectionable” about Person 1
            Therefore claim X is false

          2. i on the ball patriot

            Yes, like if a child molester hands you a scatter graph of his whereabouts in the last twenty four hours, don’t trust it.

            Deception is the strongest political force on the planet.

      1. IF

        It is either a shoddy or a deceptive graph, were axes are scaled differently and don’t go through the origin. To make meaning of it I have to transform it back mentally.

    2. MacroStrategy Edge

      A deficit terrorist is someone who insists, at all costs, the fiscal budget must either be balanced or brought into surplus (as when tax receipts exceed government spending)as soon as possible…like tomorrow would be best.

      They unfortunately (for the rest of us) do not realize that if the government rapidly sucks cash flow and net financial assets out of the private sector, odds are we will get a vicious spiral of falling private incomes and private debt distress, but they will also fail to get to their much vaunted surplus because tax revenues will fall with private income, and unemployment and financial distress related government expenditures will go probably rise as well.

      We have seen this movie play out before in Argentina almost a decade ago, in Latvia last year with a real GDP drop exceeding that of the US in the Great Depression, and we are about to see it replayed in Greece this year.

      Deficit terrorists are convinced the US is about to default or fling off into a hyperinflationary spiral. They do not realize (even the rating agencies do not get this) that a government with a sovereign currency cannot run out of money to service its liabilities. While it is indeed possible for fiscal deficit spending to fuel a hyperinflation, as we saw in the Weimar Republic in the early 1920’s (and which helps explain why German policy makers are so dead set on imposing arbitrary limits to deficit to GDP and public debt to GDP ratios on themselves and on the eurozone), as I argued in a recent Richebacher Letter (entitled Weimar 2.0) and as the UBS scatterplot above demonstrates, the conditions required for a hyperinflation to rip through a nation seem to be more than just a rising public debt to GDP ratio.

      My apologies if I have offended you or anyone else by taking up this epithet of deficit terrorism, but as I explained to Jo above, what is really going on now is all too obvious to me.

      1. Dan Duncan

        From your description, these people you describe are not really “Deficit Terrorists”, but rather…”Overly Concerned About Deficits Terrorists”.

        Deficit Terrorist. It’s a stupid term makes about as much sense as calling an Islamic Terrorist an Infidel Terrorist. I guess that makes you an Adjective Terrorist.

        Moving on from the riveting etymological discourse and as for your post, I have to admit, it certainly is an interesting counterpoint to the impending doom scenarios.

        But, when you responded to Jo earlier about the private sector “saving like there’s no tomorrow”…do you really think that the private sector is even close to such frugality? I don’t. The private sector spent like drunken sailors, and now they’ve cut back. That’s not anything close to “saving like there’s no tomorrow”.

        Then, when you say: “So take your pick: it can be the foreign, the business, or the government sector that deficit spends in order for the household sector to net save, but someone has got to do it or else the attempt by one household to save will just lead to dissaving by another households.”

        OK, I choose the foreign sector to pick up the slack and not the government.

        Obvious response: It’s not your choice!

        OK, fine. Then, I don’t want to prolong the inevitable. The epic private sector debt binge, followed by an epic governmental debt binge with no epic reversal on the foreign demand binge isn’t going to end well…and a scatter chart that freezes a moment in time doesn’t mean you are not immune to Heisenberg’s theory.

        From a particular frame of reference, you can either know the location of something or its speed…but not both. You’ve chosen locale, replete with 4 quadrants. This point of view is useful and hopefully equanimity to the hyperventilation.

        Others, though, like Krasting at 8:05 am choose to look at movement. Many don’t like where this train is headed.

        The Non-Nihilist Deficit Terrorist doesn’t want to blow up the train…they just want it to traverse a new track. If the trip will be long and arduous, better to get started sooner than later.

        1. Greg

          The private sector is retrenching. Saving like there is no tomorrow is overstating it a bit but they certainly need to in order to get out of debt.

          Robs point is very simple. When the private sector goes into saving mode and the export sector goes into import mode the public sector MUST run a deficit unless we want GDP to completely tank.

          You state you prefer our export sector make up the difference instead of the govt. Well the only problem with that is that means producing more and needing someone else to consume on the other end. Who is going to do the consuming?

          It (a stronger export sector) might happen down the road, but for NOW we need to run govt deficits to keep our economy afloat.

          The ONLY alternative is continued deflation and unemployment.

          1. Tom Hickey

            Greg, I would add that there is also the added complication of the US dollar being the global reserve currency. Therefore, many foreign countries want dollars (like to pay for their petro imports) more than they want US goods, so they desire to be net exporters to the US. This also works against the US becoming a net exporter. So when the US consumer wants to increase saving and deleverage, this reduces nominal aggregate demand, which also reduces the desire of business to invest. That leaves government to make up the sectoral balance with deficits, if real output is not to fall below capacity, resulting in rising unemployment and recession. This is simple accounting, not theory.

    1. MacroStrategy Edge

      Yes, what many people who have fallen under the sway of the deficit terrorists do not realize is they have been duped to serve the interests of the financial elite who have been, along with their predatory puppets in DC, been systematically looting the nation for longer than I can stand to recognize.

      The day Social Security gets privatized, a wide swath of large institutional investors receive a revenue and profit bonanza. Recognize behind the sweet sounding insistence on sound government finance and fiscal responsibility, there is a not so hidden agenda that lines the pockets of the financial elite…just look at Peterson’s background and you’ll understand his interests. Lehman, Blackstone – need I go on.

      Having said that, let me be clear. I was born in a state with license plates that read “Live Free or Die”. I really do not care to have the government telling me how much I need to save out of my income flows and where I can invest it. But I spent over 25 years working for an investment management firm, and I recognize most people in this nation have unfortunately been left in a state of financial illiteracy, because that makes for great broker bait.

      So personally, I am quite open to the idea of some form of personal responsibility for retirement, as long as financial literacy curricula are integrated into the math programs of schools…assuming there are any left open by the time the deficit terrorists have completed their scorched earth campaign.

  3. burnside

    It seems to me a narrow point, but valid, pending more discussion. I looked at the FT piece for reference to currency devaluation or wage inflation, but saw none. I suspect the inflation arguments rest in some part on these. Is there rebuttal?

  4. michel

    Deficit terrorists? WTF is the guy talking about? What does he want to see happen?

    The argument seems to be that deficits and debt either do not matter or are less bad than the alternative of balanced budgets, or….?

    If ever there was a financial adviser to run a mile from, its this guy. No power of logical thought, and even less power of clear expression.

    1. Captain Teeb

      “Deficit terrorist” seems to be a neologism, a web search turns up the above-mentioned sources first.

      It seems to be meant as a term for anyone who says “if we keep running such high deficits, something awful will happen”. The use of the loaded term ‘terrorist’ implies that the cassandras who issue the warning are themselves in a position to make the awful something happen, say, by shorting treasury bonds.

      Perhaps just saying that the deficit is too high will stampede the herd, like shouting ‘fire’ in a crowded theater.

      The use of such terms as ‘deficit terrorist’ by prominent commenters (e.g., Krugman) is an example of the debasing of language and political argument. Anyone who disagrees with you and yours, even on such mundane terms and budgets and interest rates, is a terrorist.

      Next they’ll be suggesting that balanced-budget fruitcakes be sent to Gitmo for some economics re-education.

      Next up: “Short-sale terrorists wreak havoc in stock market”

      1. MacroStrategy Edge

        Yes Captain, that does seem to be the way it has evolved. As I responded to Jo, it is not my usual style of engagement.

        And while your Gitmo suggestion may appeal to Krugman and others, I’m much more interested in Nuremberg Trials for the sociopathic looters in the financial elite and their predatory hand puppets in DC. Geithner and Greenspan up first, then on to Fuld, AIG’s wisest, and the rest of their pals who were performing, as GS CEO Blankfein put it, “God’s work”. We are a good 18 months past the Lehman bankruptcy, and only Madoff got hung out to dry. That is, to my mind, both insane and inexcusable. Now pass me my pitchfork.

    2. Yves Smith Post author


      I suggest you familiarize yourself with basic fiscal accounting.

      Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0

      Again, keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.

      So if we have no trade deficit or surplus, if the private sector wants to save (for emergencies, retirement) the government must run a deficit.

      When you get your mind around that, then you might be able to absorb what Rob is saying.

      1. Psittakos

        It is worth understanding the fiscal accounting identity you refer to, but that identity does not demonstrate that running a huge fiscal deficit on top of a current account deficit is sustainable. Like anything else that can’t go on forever, it won’t. Where are we in five years if, as many suspect, the US government cannot inflate or devalue its way out of a spiraling sovereign debt?

      2. MacroStrategy Edge

        Yves – Given the state of the US education system, it may be that 6th grade algebra is a bit beyond the reach of many, so do show some compassion if this is not sinking in with everybody.

        All you have to recognize here is that one segment of the economy cannot possibly hope to spend less than it earns (net save) unless another is willing and able to spend more than it earns (net deficit spend).

        There are, after all, two sides to every transaction. If we look at the financial balances of a sector in isolation, as the deficit terrorists tend to do, we set ourselves up to perrform all sorts of mischief…which we are apparently very good at, and we are about to see demonstrated live, in Greece and the other peripheral eurozone nations. With any luck, the dots will get connected before the swarm of locusts flee to the UK, the US, and Japan.

        1. Brian

          I think we get the algebra. You assume that those borrowing intend to pay it back. Given what the government is spending it’s money on (banks, wars, pensions, prisons, war on drugs/terror/war), that’s a bold assumption to make. Most people hate a significant amount of what the debt is being accumulated for and will not worry about defaulting on those “investing in torture/bailouts/pork”.

          Separating the political nature of spending from the economic nature of government debt should be left for a textbook.

          1. MacroStrategy Edge

            Yes, Brian, I agree the current priorities in US fiscal policy are horrendous, to put it mildly, and evidence of a political class that has been bought and paid for by a variety of special interests, not the least of which includes the best of Wall Street’s sociopathic looters.

            Hell, here we are 18 months after Lehman, and remind me again, who’s in jail.

            As I replied to another reader, we have a very serious problem with both political and corporate governance in this country. We need to address that. It won’t be easy. But it is long overdue, and maybe, just maybe, we have reached the point where average every day people are willing to stick their necks out to start dealing with this elephant in the room.

        2. Psittakos

          But if your main argument is correct, the swarm of locusts should be powerless. They should be beaten in the markets.

          1. Greg

            They are only powerless if they dont in fact get govts to change their fiscal strategies. That is the power they seek, to force austerity packages on electorates.

            They will be “right” if they actually get govts to stop spending because then there will be more unemployment, more hardship, less production and as tensions rise we might see all sorts of financial displacements.

      3. MyLessThanPrimeBeef

        Domestic private financial balance + fiscal balance – current account balance = 0

        1) I’d like to see a derivation of that based on the definitions.

        2) Where does money printing by the Fed go in that equation?

        1. MacroStrategy Edge

          Less than Prime Beef –

          For a derivation, try Part 1 of my piece on Naked Capitalism last week, entitled “Of Fiscal Correctness and Animal Sacrifices” or some such thing. It comes straight out of macro 101, where total expenditures on final goods and services = total income from the same, or alternatively, and equivalently, total saving out of final income flows equals total investment in tangible capital (houses, capital equipment, plant, etc.)

          Or you could go to the Levy Economics Institute and find anything written by Wynne Godley, perhaps starting with the earliest pieces from the mid ’90s like Seven Unsustainable Processes. Or you could shell out the dead presidents for the book he wrote with Marc Lavoie sometime in the past decade if you want to go deep with this. In addition, there is a growing base of research on the Levy website that will take you into a stock/flow consistent (SCF) approach to macroeconomics that could get you up to speed as well.

          Where does money creation by the Fed or by commercial banks show up in the financial balance equation? If you are familiar with cash flow statements used in business accounting (sources and uses), the financial balance equation is working with the net of the first two sections of that statement – cash flow from operations plus cash flow from (or more likely, used in) tangible capital spending.

          What is left is the cash flow from financing section, and this is where new credit or money creating activities shows up.

          So the financial balance equation captures the net flows of cash in macro sectors related to the sale of final goods and services. These flow imbalances build up over time in the form of balance sheet disequilibria.

          1. MyLessThanPrimeBeef

            So, are you saying domestic priviate financial balance excludes the macro equivalent of a business’s cash from operations and tangible captial spending?

          2. MacroStrategy Edge

            Less than Prime Beef:

            No, I never said that. Nonfinancial business sector cash flow from operations minus tangible capital investment is included in the domestic private sector financial balance. In the financial or business world, this is often referred to as free cash flow, when the difference is positive, if that helps. For further details on these definitions, I would recommend anything Wynne Godley has published on the Levy Economics Institute website. billy blog also promises to go into the details of these calculations in the near future. Suffice to say the inputs to the financial balance equatiton can all be found in the Fed’s Flow of Funds accounts, printed quarterly. Hope that helps.

      4. Captain Teeb

        This accounting identity is new to me. Can you recommend a link which explains it?

        How, for example, did this work with the USA in the 19th century? The government was not very indebted, nor was there a big trade deficit. But yet, presumably, net saving was positive. So who was carrying the counterweight of debt? Banks? Foreigners?


    3. i on the ball patriot

      Krugman is a sell out neo-con terrorist slut … having been instrumental in conning everyone into this intentional credit bubble/derivative global financial coup he now works to elevate the perpetual conflict in all of those affected.

      Deception is the strongest political force on the planet.

      1. Hayduke

        Another teenager who has just finished reading Atlas Shrugged and actually believes it.

        Seriously, go back to watching the best of Kudlow.

        1. i on the ball patriot

          Hey duke … you need to peeeeeeeeel away some of those layers of what you have been through …

          Deception is the strongest political force on the planet.

      2. Yves Smith Post author

        I have often taken issue with Krugman, and you are wrong on this one. He was early for someone who writes in the MSM to call the housing bubble. He was also a critic of the Bush deficits. You may not like a lot of what he writes, but your attack here is greatly overstated.

        1. i on the ball patriot

          A shill mouthpiece for; corporate globalization, the Clintons, ‘free trade’, ‘deregulation’, Enron, etc. … a corporate media, New York Slimes system choir boy, Krugman is an opportunist. He piles on milliseconds after the hard work of revealing the hypocrisy is done to ‘relate’, and then, spews the hate mongering divisive dialogue. All of that Bush bashing was a very late to the party, fake partisan, pile on ruse. He has been instrumental in co-opting and steering ‘progressives’ with his trumped up credentials and ‘Nobel Prize’, you know, like fellow puppet Obama was awarded. He should get the Leo Strauss ‘Noble Lie’ prize.

          Sorry, I don’t share your enthusiasm — he helped to create this bag of shit and now he stirs it up.

          Deception is the strongest political force on the planet.

        2. Kevin de Bruxelles


          “He was also a critic of the Bush deficits”

          This brings up an important point. Perhaps it is heretical of me to ask this, but were the Bush deficits really wrong in light of what we are reading in this post? Shouldn’t Krugman be defined as a recovering Deficit Terrorist?

          I think this is the problem that many people, particularly on the Left, have with all this talk of deficits. They spent eight years denouncing the Bush deficits only to be now told that Cheney was correct after all!

          Personally I think Keynes was right that normally the government should act counter cyclically: tax during the boom and spend during the bust. If we look at the time Bush came into office, a recession was starting and just before, during the late nineties, we had been running a surplus. It seems to me that it was quite orthodox for his Administration to start deficit spending at that point. Furthermore once the recovery started it was often called a “jobless recovery” and that was even with the huge deficits Bush built up in his first few years. Surely had he cut the deficit, unemployment would have sky-rocketed higher.

          My point is not to defend Bush. What I worry about is a partisan system that corrupts critical thinking. How many people on the Right in the 90’s, when Clinton was in office, were so against the US being the world’s policeman and all they could talk about were “exit strategies”. Then as soon as their boys got into office they suddenly dumped all that anti-war rhetoric and cheered the disaster in Iraq.

          So perhaps there needs to be a discussion of when deficits are appropriate that would distinguish between the Bush deficits and the Obama deficits. Just like war is not always wrong (if someone attacks you you have the right to defend yourself), deficits have their place as well.

          But own thought is that the real problems in the US are trade-based (the destruction of the manufacturing base) combined with a parasitic financial sector. Deficit spending just tends to cover up the real nature of the problem, similar to the way a stimulant helps disguise a serious underlying disease. So while it would be very painful short term — cutting the deficit and allowing the true problems to be revealed — this seems to be the first step towards finding a solution. This would force some of the imbalances due to Chimerica to be resolved – hopefully in a peaceful way (which I know is the danger in what I am proposing).

          1. Yves Smith Post author


            Andy Xie makes an interesting point in passing in a piece that will be listed in Links (going up in the next 15 minutes). The problem isn’t Keynesian deficits (and I stress Keynesian, Keyneianism is NOT Keynes), it is that the fixation on macroeconomic policy is a bad policy focus. It is an economist’s version of “if the only tool you have is a hammer, every problem looks like a nail.”

            Of course, there are TONS of other tools to influence economic performance, but macroeconomic policy is seductive because it is fast and easy. So we try to fix structural problems with hits of amphetamine. It works for a while, but as the structural problems remains unresolved (and even grow worse) the adrenaline gives you less in the way of results.

            And the predisposition not to use other tools in the US is even greater than elsewhere because we have a pervasive “free markets” ideology, so we have industrial policy set by special interest groups rather than by setting national priorities. So we over-invest in housing, subsizide sugar like crazy, give massive R&D to Big Pharma and still allow it to charge consumers a ton (and spend more on marketing than on their OWN R&D).

          2. MacroStrategy Edge

            Yves (and Kevin):

            That’s right. Read the General Theory. You will find little reference to the countercyclical fiscal policy that is associated with Keynes’ name.

            What you will find in his writings is an emphasis on using monetary policy to lower interest rates to encourage private investment spending, and an emphasis on using longer run public and public/private investment to take the economy to the point of full employment without inflation when the private sector could not get us there on its own.

            So now we have definable long term needs that are not being met by the ultra short run focus that institutional investors bring to the market (because of the short run incentive structures they face). These include energy, water, health care, and education infrastructure, to name but a few areas. Assuming we the people could take power back from the parasitical sock puppets posing as our elected representatives, which I admit is no easy task, Andy Xie is right.

            There are plenty of policy tools to encourage growth in the new, higher value added, higher social return areas of investment, which will help put the structure of productive capacity on a better, more competitive footing while older, lower value added industries fade out.

            Asia has been doing this for decades, and the reason they are eating our lunch has something to do with this conscious and policy facilitated shift to higher value added industries. I also address this at the Levy Institute/Ford Foundation speech I gave last year at the Minsky conference in NYC with my triple threat comments (audio and text at Levy Institute website).

            It is so obvious you are right, and this long run strategic investing issue must be brought to light. Investors playing for next quarter’s earnings report to be the management guided expectations by a penny are not necessarily going to get us where we as a nation, or a as a world, need to be, and can be.

      3. wunsacon


        >> Deception is the strongest political force on the planet.

        I’m having a case of deja vu. But, did I ask you to explain this phrase once? It sounds good at first. But, “deception” itself is not a force. It’s a tool. Maybe it should be “deception is the strongest political tool in the arsenal”?

        Maybe that needs work. But, it makes more sense, at least to me.

        1. i on the ball patriot

          Deception is a force within an organisms sensory integrating control center. It works in conjunction with its opposite force, perception, to create tools of dominance [externalizations in higher organisms] in order for the organism to get its needs met.

          Deception is the strongest political force on the planet.

  5. M.G. in Progress

    Does it debunks a central tenet of the deficit terrorist camp?

    A scatter chart can just suggest various kinds of correlations between variables with a certain confidence interval. Far from suggesting linearity or any causation like saying that low debt/gdp ratio means inflation later on. Even because the data on the chart seem to be collected on the same year whereas correlation or causation effects between debt/gdp and inflation could be stronger at different time (debt/gdp variable might lag behind inflation of 1 or 2 years).

    1. MacroStrategy Edge

      M.G. – Totally agree. At best, this scatterplot is only a first cut. The relationship between changes in the public debt to GDP ratio and the level of inflation may be complex and contingent.

      But you must admit, it is interesting that no obvious correlation between rising public debt ratios and accelerating inflation emerges from this scatterplot…and UBS did not even see this, judging from the text (although I realize, they were not looking, and I should also say I have met Paul Donovan and he is quite adept).

      If others have seen more complete or more sophisticated research, please do post the links. As I mentioned to Jo above, I do believe most people familiar with the Weimar incident and Latin America’s hyperinflation history reasonably acknowledge fiscal deficit spending can play a role.

      This is especially the case in the context of labor markets with rapid cost of living escalator clauses in their wage contracts, and especially when productive capital equipment and plant is being taken off line or laid to waste as entrepreneurs divert their reinvestment efforts into speculating in hard assets that are not easily reproduced, like land, antiques, and gold (what the Austrian School calls the flight to real values). In other words, there are supply side elements that have to be brought into play as well to get a full blown hyperinflation episode – fiscal deficit spending may at best be a necessary but not a sufficient condition.

      1. Greg

        From all the stuff Ive seen examining Weimar and Zimbabwe (Bill Mitchell does a great job here ) I think a safe statement to make is that hyperinflation results when fiscal spending increases in the face of REAL price increases (shortages usually).

        We are not in a real price increase situation right now. Deflation is the order of the day currently

        1. MacroStrategy Edge

          Yes, Greg, there tends to be a destruction or abandonment of productive capital equipment and plant that produces a supply shock or adverse supply curve shift as well. This appears to be a crucial component of a sustained hyperinflation episode which the deficit terrorists do not always mention.

          This happens naturally as entrepreneurs turn into commodity speculators, art collectors, real estate (especially ag land holders), and precious metal horders as inflation escalates, rather than reinvesting profits in tangible, productive, capital equipment. Those of you who were adults during the ’70s in the USA will recognize some of these features. Chinese porcelains became the rage amongst high net worth individuals as the stock market went nowhere, and the middle classes got caught up in real estate speculation. I should mention it may also take the form of capital flight from a nation with escalating inflation, as I would suspect is often the case in Latin American hyperinflation episodes, but I will let people with an expertise or experience in that area speak for themselves.

          1. Cathryn Mataga

            It seems to me whether inflation
            occurs or not depends on where the next speculative
            bubble shows up. For example, say oil
            prices are subject to a speculative
            bubble fueled by all those lurking
            dollars. Then what happens is that the prices
            of everything that depends on oil
            must rise also.

            Can we predict whether there will be a
            speculative price bubble on the value of
            oil? I imagine this cannot be predicted
            because price bubbles are by definition
            irrational. It’s the nature of the thing.

  6. Alexandra Hamilton

    Well, the FT article and the UBS analysis do (or try to) “debunk the myth” that governments could inflate their way out of debt.
    quote\: Here’s an interesting counterpoint to the theory that governments are attempting to inflate their way out of their financial crisis-related debt dilemmas.\end quote

    It does not say that large deficits wouldn’t matter.

    BTW, it is not the deficit as such, which are the problem, but the interest you pay on it. Once you get past a certain point, you will be unable to service your debt.
    This is not a problem, as long as you assume that you will always find someone willing to lend you money, even if they know that it will never be paid pack. But that would be more of a gift, than a loan.

    1. Yves Smith Post author

      I suggest you reread the headline and the post. They are both pointing to the data display shown. The post is not invoking either the FT article or the UBS report’s conclusions. It is using the data to make a different point.

        1. MacroStrategy Edge

          Precisely, M.G.

          There does not appear to be an automatic and well defined relationship between rising public debt to GDP ratios and accelerating inflation.

          Yet this is one of the planks of the deficit terrorists fear mongering campaigns. Apparently, it is a rotten plank.

          All I am doing is saying take a look for yourself at the facts, not the assertions, and make up your own mind, which is what we are supposed to have the luxury of doing in the land of the free and the home of the brave. But there are too many people preying on your fears so they can get you to serve their purposes.

          Your mind sees no well defined relationship, or at least no obvious connection between rising public debt to GDP ratio and escalating inflation pressures. I concur. So next time a deficit terrorist is corralling the herd with hyperinflation fears, this might be an interesting chart to put in front of them.

          Alternatively, we can follow the late President Reagan, and simply conclude “facts are stupid little things” and just go along with Glenn Beck, Peter Peterson, and crew…although as was noted in the Naked Capitalism piece on the eurozone I co-authored last week, even David Walker seems to be having second thoughts these days.

    2. i on the ball patriot

      Alexandra Hamilton says — “BTW, it is not the deficit as such, which are the problem, but the interest you pay on it. Once you get past a certain point, you will be unable to service your debt.”


      And … add to that, the problem is also what the deficit is used for; to bail out a parasitic banking industry, finance the drone bombing of innocents in Pakistan and Afghanistan, and of course, pay for the sell out gangster slugs in government.

      Deficits would be OK in a democratically controlled country with a utility banking system that made zero interest loans directly to citizens. That is what we should strive for.

      Deception is the strongest political force on the planet.

  7. Mark Alexander

    Perhaps I’m just confused, but the article refers to the “northeast quadrant” and data points “up and to the right” of the origin as places on the graph where one would expect increasing inflation to produce lower levels of government debt. Shouldn’t that be the southeast quadrant, or data points down and to the right?

    1. MacroStrategy Edge

      No, Mark, I am looking for something else in the UBS chart.

      They are asking the question, does higher inflation reduce the public debt to GDP ratio in a way that is historially evident enough to warrant governments trying to inflate their way out of rising public debt to GDP ratios (since inflation, or rising price levels, will tend to increase nominal GDP, or the money value of final goods and services, which is in the denominator of the public debt to GDP ratio).

      I am saying we can use the same scatterplot of historical observations to answer the question, does a rising public debt to GDP ratio tend to be associated with a pattern of higher and higher rates of inflation.

      I hope that clarifies things. And as M.G. concurs above, there does not appear to be any such simple relationship evident in their data, so this must make us question the deficit terrorist assertion that higher public debt ratios are the sure road to Zimbabwe or the Weimar Republic.

  8. Bruce Krasting

    I am a deficit terrorist. At least I have been called that. Too much has been made of the debt service to GDP ratio. Steglitz et al just look at that number and Say, “We can issue tons of more paper! The real cost of the debt is still very small”.

    That is a way of thinking that is going to pulverize the big deficit countries. The total amount of the debt, not its annual cost is now the issue to focus on. The US leads in this. Look at Moodys today. We are going to lose the AAA in a few years. But that does not matter so much. The real problem is that the cost of this debt is going to rise in both real and nominal terms.

    In two-three years we will be faced will a cost of the debt at 5%. The amount of debt will rise to 16T. That would put debt service at $800b per year. We won’t last long at that level.

    1. MacroStrategy Edge

      Bruce, judging by what I have seen of your blog, I would submit you just aren’t hysterical enough to make the cut as a deficit terrorist – at least not when the time comes to round them all up in stadiums and drop them out of airplanes.

      Yes, the higher the level of debt outstanding, and the higher the interest rate on that debt, the higher the annual interest expense will be on that debt. That is surely the case.

      So in the future, there is certainly a case to be made that interest expense will be a larger share of government expenditures. But that does not tell us much about the size of the fiscal balance, because remember, government interest expense represents a cash inflow to households owning government debt, so GDP will also be rising, tax revenues will be rising (unless interest paid on federal debt is also made tax exempt like state and local municipal bonds) and the government interest expense to GDP ratio, as well as the government fiscal deficit to GDP ratio, may not rise as much as you would otherwise think.

      These by the way are feedback loops rarely discussed these days, but once understood at the Fed, when Evsey Domar wrote an article “Burden of Debt and National Income” in 1944, when nations were staring at even larger public debt to GDP ratios and wondering how they were going to make it through the postwar period without runaway interest expense on public debt. His work deserves to be rediscovered, because this reflux channel to private income and tax revenues of government interest expense is rarely mentioned – yet it clearly has a thwartinng effect on the so called problem of the compounding of interest expense which is often cited by deficit terrorists, but which somehow policy makers managed to avoid following the huge public debt load incurred in WWII.

      You do neglect to mention an additional point, which I believe is very relevant this time around that much of the US public debt is held by foreign bond owners. So the interest payments on public debt, which are credits by the Fed (on behalf of the Treasury) to the bond owners bank accounts for each bond coupon paid, will represent a flow of purchasing power to people outside the US. All else unchanged, this will tend to deepen the current account deficit, unless we develop our export products enough to attract those dollars back to us as sales revenues from our export shipments. Otherwise, foreign bond holders will net save those government interest payments and reinvest them in US issued liabilities.

      That means ownership structure changes over time as US assets come under foreign control, but then again, given the state of corporate governance these days, as evident in the paucity of lawsuits against the looters of Wall Street firms, banks, and insurance companies, maybe this ownership change is a second or third order consideration. Maybe it is better that foreign owners get defrauded by those with a sociopathic bent operating in the executive suites of the financial world.

      So no, I doubt you are a deficit terrorist Bruce, but you do raise some relevant issues, even though the challenges they involve may not be the ones you directly cite.

      1. bob

        Link for Evsey Domar “The burden of the debt and the national income”

        Now on my reading list.

        You are doing god’s work here. I lose my shit trying to reason with these people who have been so badly beaten and misinformed that I fear they (and we) are lost. I really hope not.

        1. MacroStrategy Edge

          Thanks for the link Bob. It requires some math, but maybe I can find someone to translate this for those who are uncomfortable with that.

          I will tell you, on a personal note, when Lehman went down, every bone in my body told me to take my family as far from Oakland as I could get them, find some land, and starting digging holes for potatoes. And as it turns out, I resisted that impulse, even though it does turn out my intuition was right – the system, if you read Sorkin or any of the other accounts, even Paulson’s, was that close to going t*ts up, if you will pardon my french.

          The problem I quickly realized about trying to go Robinson Crusoe or Swiss Family Robinson in the face of the GFC was that no sooner would my potatoes be ready to dig out of the ground, a hungry crowd from the Bay Area would be killing me and my family to steal them from my land, regardless of how many boxes of ammo I stored.

          So yes, we probably need to drop the illusion that we can all just say f*ck it, walk away form the mess, and go Daniel Boone. We probably need to start to figure out ways we can pull together and develop plausible, small d democratic solutions, or we will all hang together.

          If this work is helping you get there, more power to you. Spread it wide and far because this is not going to be easy unless we are all willing to grow up a little more and face reality. It is very easy just to say screw it and give up, but that is unlikely to get us where we want to go…and time is running out to get this right.

    2. Matt Franko

      Yo must be psychic!… “In two-three years we will be faced will a cost of the debt at 5%…”….I didnt know that!

      I look forward to you becoming the richest man on earth with this knowledge…Lookout Carlos Slim! Resp,

    3. Greg

      Tell me why we should listen to Moodys??

      Didnt they (sell their ratings)rate all those subprime CDOs, filled with liar loans, AAA so they could get top dollar.

      I believe they made the same noise about Japan like 12+ yrs ago. Look at that hyperinflation in Japan. They’ve defaulted how many times since the downgrade?

      1. Tom Hickey

        Greg, my question is, who is paying Moody’s to put out this nonsense. The rating agencies had Japan lower than Botswana.

  9. DavosSherman

    This “Humble” blog amazes me time after time. This was about the most moronic post I have read here. GDP means jack.

    The author would be well advised to look at the 90 day late F2009 GAAP deficit and subscribe to John Williams so he can read that GAAP now stands for Geithner Acceptable Accounting Procedures. With a 9 trillion GAAP deficit if you are expecting ANYTHING but hyperinflation you are going to get your clock cleaned.

    1. MacroStrategy Edge

      DavosSherman –

      I am familiar with the work of John Williams, I have met the man on more than one occassion, I applaud his willingness to dig beneath the appearances of government data, because I know it is painstaking work, I know he gets little credit for it. I don’t always agree with his conclusions, but I do admire both his sincere intent and tireless effort to get to the bottom of things and capture the inconsistencies in the government reported figures.

      I would encourage you to open your wallet and take out one of those green, black and grey pieces of paper folded in it. Ask yourself, where does this piece of paper come from? You cannot print it. It does not come from any other household. It does not come from your employer, unless you work for the government. The nonbank private sector cannot create money (and to be clear, by money I am referring to a means of final settlement, so credit cards are not money) – that, under current monetary arrangements, is called counterfeiting and will get you jail time.

      The reality is the source of the dollars we use to pay taxes and buy government bonds is coming from none other than…the government itself. Unless the government deficit spends (credits more private sector accounts for expenditures than it debits for taxes) or unless the Fed buys assets from the private sector, the only money appearing in your wallet would be that created by banks.

      Now the dirty little secret is that banks do not need to acquire savings before they make a loan or buy an asset – they can simply credit your account for the principal of the loan they give you or the value of the asset they buy from you, and then they get reserves from the interbank lending market or from the Fed itself, which must, if it is targeting a fixed short term policy rate like the fed funds rate, provide all reserves demanded at that interest rate target (just like any monopolist in any market, they can set the price, but they cannot at the same time set the quantity of reserves – you all have been fed a huge bowl of bullsh*t with this money multiplier story in textbooks and Fed comic books).

      The money created by banks is what was once recognized as ” inside money” – it is not a net financial asset of the private sector. One man’s bank deposit is an asset he holds on his portfolio, while the counterpart loan is a liability in the portfolio of another man. These net to zero for the private sector, so bank created money cannot, for the private sector as a whole, be used to meet contractual commitments to other sectors – as in, they cannot be used en masse by the private sector to pay tax liabilities, buy bonds, etc.

      The money you require to pay taxes or buy bonds ultimately came from the government spending more than it earned, or buying more assets than it sold, and crediting private sector bank accounts accordingly. Nothing more, nothing less. Think about that one. Let it really sink in, and you might just begin to see under current monetary arrangements, the government can never use taxes and bond sales to finance itself. It must create the money it collects and get it in the hands of the private sector first.

      This is so obvious, we all tend to miss it. And it has and can be done without leading to a hyperinflationary result, if we understand what we are actually doing, rather than falling for the usual brainwashing we have been submitted to over the years.

  10. Namazu

    The full-court press is on. James Galbraith and Marshall Auerback (in about a dozen near-identical) posts are flogging the same argument, which–when you strip out the ad hominems and some weak factoid–always amounts to: the US can print money and inflation won’t be a problem. Some simple questions which never seem to get directly answered: how high do you want our deficits to run, and how much will oil then cost? How high will mortgage rates be in 5 years unless we socialize the entire housing market? Is your explanation of Japan simply that they didn’t spend enough, or are you going to surprise me with something original?

    1. MacroStrategy Edge

      Yes, that is right. Some of us who have been willing to think independently about economics and finance over the past decade or so, and were willing to stand up and warn about the impending crisis early on (if you doubt my words, listen to what I had to say, and what Jamie had to say, at the Levy Economics Institute in the spring of 2007 linked here: for the audio, where my analysis appears in the second half of session 1, or here in print summary form, ),have each independently reached the point where we are fed up seeing the systematic looting of the nation by sociopathic financiers and their predatory sock puppets in DC. We suspect we are not alone in this frustration.

      We are no longer prepared to keep silent while the US is submitted to the same bloodletting scenario now visiting Ireland, Latvia, Greece, and soon a half dozen other peripheral eurozone nations.

      So yes, you should definitely try to engage with this perspective, because it challenges alot of the lies you have been told.

      As to your specific questions Namazu, to my mind, the correct and most sustainable fiscal deficit is the one that allows the private sector to accomplish its net saving target at a full employment level of income, near current price levels. Regarding, read Richard Koo. They chickened out before they got there, time and again, because of fiscal orthodoxy. Regarding oil, I can see multiple ways we could use the government to reduce foreign oil dependence, from their own procurement policies (say stimulating the development of electric car battery development by ordering such vehicles for replacement purposes), to R&D tax credits and private/public university based incubators in new energy tech, to tax subsidies for insulation of homes in the North and solar installation in the South, to ending wars that consume lots of fuel (and lives), and on and on.
      The sucess of this country was in no small part built on the back of public investment – from the canals to the railroads to the interstate highway system to the aluminum industry stimulated by WWII production etc. Know your history – it helps pierce the lies flying all around that serve very select, rapacious interests.

      Regarding socialization of the housing market, please note that the failure to enforce existing regulations along with giving the GSE management the free reign to ape their sociopathic colleagues in senior management on Wall Street, has already delivered the virtual socialization of the mortgage market. But I will let Bill Black fill in the blanks for you on that one.

      Hope that helps Namazu. Keep questioning all of this stuff. I would not pretend to have all the answers, nor would I pretend all the answers are simple. But I think we all are beginning to recognize something has gone dramatically wrong, and we need to be willing to think outside the box to find some plausible answers. If you believe you have better answers, sincerely, I am all ears. We are just running out of time to get this right, and the deficit hysteria is cloaking some obvious approaches to viable solutions. But I have no illusions it will require a reworking of both our existing political and corporate governance structures, and that this will require that ordinary people be willing to stand up for the future they wish to see delivered to their children, and for generations to come.



  11. Peripheral Visionary

    I share the concerns from M.G. in Progress, above, over the time connection between the variables. It is not at all clear which way the cause and effect direction flows (does inflation impact government spending, or does government spending impact inflation?), nor how long that effect takes to manifest.

    The one implication of the graph, taken in isolation from other factors, would be that high levels of inflation seem to limit government’s ability to either increase or decrease its debt. Nations with lower inflation can run deficits or surpluses at their leisure; but when inflation is high, options seem to be much more constrained.

    Also, I would be interested in seeing this graph expanded out to include data points from non-OECD countries. The silent implication of the selection of the dataset–that developed economies are fundamentally different from developing economies–is suspect, and the distinction between the two sets of countries in recent years has become increasingly blurred.

    1. MacroStrategy Edge

      Peripheral –

      All of these are good points, and as I wrote above, I entirely agree this is nothing more than a simple scatterplot, and it may be cloaking deeper, more complicated connections between public debt to GDP ratios and inflation.

      So I invite any and all to link in better, more comprehensive work on this matter at hand. In the meantime, the deficit terrorists do not seem to have this connection quite right, and so it is worth doing two things: first, widening the scope and sophistication of the search for a relationship between the two, not just in the data but in the historical investigation of hyperinflationary episodes (where, I submit, you will find escalating fiscal deficits will tend to be a necessary but not a sufficient condition for hyperinflation episodes in the past), and second, asking yourself why deficit terrorists might have this widely and often hysterically asserted positive correlation between higher public debt to GDP ratios and accelerating rates of inflation so wrong.

      To my mind, those are the next steps if you wish to pursue this further. You at least, on the basis of the UBS results, need to plant a large question mark around this central plank of the deficit terrorist fear and loathing campaign.

      1. bandarlogician

        I worked my way back to this discussion now two weeks late, but fwiw, as I recall that UBS piece all their conclusion is cloaking is that the maturity profile/rollover rate of government debt tends to be such that the higher interest rates that accompany inflation are priced in too quickly for inflation to provide much relief. Given the daily-weekly-monthly rollover of shorter-term debt (and maturing longer debt debt issued long ago), instead of repaying principal with cheaper dollars, government issuers just pay more interest and the net burden remains about the same.

        Rob, you’re making an incredibly generous contribution here and everywhere you put so much time, effort and knowledge into the debate.

  12. Siggy

    I considered the chart for a bit and then I pondered the identity.

    I conclude that taken by themselves you can’t really conclude very much from either. There is simply too much description that has been omitted.

    I guess one could say that old Siggy is a deficit terrorist because I believe that you cannot borrow your way to prosperity. When the government spends money, for bombs and bullets, for a stimulus package, to service medicare and social security payments; the money comes from either taxes or debt. The difficulty with debt is that it needs to be carried by way of interest payments and ultimately repaid. Not infrequently the interest payment exceeds earnings and at that juncture it is necessary to repudiate that debt which cannot be serviced.

    The identity is particularly puzzeling to me in that how does one get the amounts attributable to each of the factors? Where is it that all of the private domestic balance sheets are recorded? And the other items, where are they recorded? Who adds them up? Are these numbers really just statistical artifacts only loosely related to real activity?

    Has anyone done work to evaluate the relationships between debt, earnings and interest rates in conjunction with the purchasing power of the currency? The more I root around in the available data sets the more I am convinced that an awful lot of people are using complete fictions to very precisely calculate whatever point of view they wish to champion.

    I observe the following dictum’s: You can’t calculate away inherent risk; You can’t add up the elements of GDP because there is no record of the component amounts that occur within the economy; and, The economist’s tactic of asserting ceterus paribus is absolute nonsense because economic systems are dynamic and energized by people who are anything but homogeneous in their preception and response to politcal and economic activity.

    Debt is a lovely instrument when used to acquire the means of production yet even in that it is critical that the rate of return to the means of production must be greater than the rate of interest plus some rate for profit. It is the failure to recognize that aspect of the use of debt that is ignored in most financial failures. National failures tend to occur when the nation borrows to fund a war or a social benefits program either or both of which cost more than the earnings capability of the population to be taxed.

    Inflation at say 2% per year would be accepted by many in today’s economic conditions. Do that 2% year in year out over 35 years and the price of everything doubles. That’s what we deficit terrorists are mad about. For a lollipop today we’re denying ourselves even a lick in the future. And that is what is so frustrating. The current government largesse is about relative lollipops while it allows, no fosters, the greatest financial fraud since Teapot Dome.

    1. Greg


      The govts money to pay for anything NEVER “comes from” taxes. Your money to pay taxes “comes from” the govt.


      The only source of money is the currency issuer. It provides the currency we spend it and pay taxes with it. Sometimes the taxation matches with the spending (balanced budget) sometimes its less (a deficit) and sometimes it more (a surplus). One can NEVER say that a surplus is always preferable to a deficit, it depends on the rest of the economic metrics like unemployment or inflation rate

    2. almostinfamous

      “When the government spends money, for bombs and bullets, for a stimulus package, to service medicare and social security payments; the money comes from either taxes or debt.”

      the money actually comes from the FIAT power of the government to create money. In this, the US dollar is no different than the Disney dollar. Can you imagine going up to tell Walt Disney Corp. that they can’t print Disney dollars to use on their property? Why would you think you can say the same thing to the US treasury?

  13. asphalt_jesus

    This is pretty basic stuff with no controversy. Rob lays out an elegant counterpoint to the deficits hyperbole.

    Maybe this needed to be a “part 2?” “Part 1” might have discussed the way deficit fear mongerers mutilate/conflate trade deficits, sovereign debt, and fiscal debt? “Part 3” might be the describing the political means-to-an-end game that the deficit fear mongerers are pursuing?

    It seems the label “deficit terrorists” was created to punch-up the story. I don’t agree with it’s use because it can easily take on a life of its own that takes away from the quality of the discussion.

    Otherwise, keep up the good work.

    1. briareus

      I understand the point the writer is trying to make here, and it’s a worthy point, but the idea of refuting ‘hyperbole’ while tossing the word terrorist around is enough to make me want to change this channel. It doesn’t help seeing Yves and Rob so adamantly defend an arguably hyperbolic argument by responding to commentators with venom. That I disagree with several of said commentators while appreciating the post’s thesis does nothing to diminish the off-putting sensation I get from reading this thread. Indeed, it makes me regret handing over dollars, just hours ago, for a book that might described what is happening to me here: Getting econned.

      1. tat

        I thought the use of the term “deficit terrorist” was very useful, and it seems to go back at least a few years (Google has changed its search algorithm to be more news oriented, which is annoying, I’d much rather see the biggest traffic matches first rather than most recent).

        It’s useful precisely because it reveals how invested people seem to be in the idea. If you call someone a “climate change denier” which is mildly pejorative at best, they get outraged. Look at links here. Even when there is a story about greenhouse gases and climate change that is strictly scientific in tone, you see some people go batshit in comments.

        So my take is the virtriol of the reactions has much more to do with the subject matter. The “terrorist” label just gives some people more license to get even more upset. But they’d get upset regardless.

        And given the venom of the remarks, I don’t see Rob and Yves as all that out of line (yeah, more chill would have been better, but look at the hysteria directed at the post). The reactions were knee jerk, very few bothered even to consider the argument. The same thing has happened on other posts on MMT that haven’t used the “deficit terrorist” expression. This is about people being closeminded much more than the use of provocative terms.

  14. S

    Yves (& Rob)
    perhaps I am mistaken but the accounting entry your flouting is predicated on another accounting entry whcih says that the current account balance + capital account balance = 0 (simplified). Therefore the gimmickry assumes away currency/devaluation risk, ceterus paribus.

    What are the assumptions about the current account deficit/surplus. Namely what are your assumptions about export growth (how we get there) and the ramifications for the price of oil?

    Surely, the capital account also warrants some discussion here, not just from an identy standpoint but a very real discussion of what happens when the wel TIC Tic tic tic tic tic.

    As an aside i am surprised that yves is such a proponent of accounting identities when this blog repeatedly lambasts bank balance sheets and their own A = SE + L. Anything can bemade to balance – the issue is your assumptions.

    1. Greg

      Yves lambastes SHODDY accounting not proper accounting.

      Not anything can be made to balance when done properly. When you mix identities and hide liabilities off balance sheet you can create a lot of “balanced sheets” but that doesnt meet that the real identities are in balance.

    2. MacroStrategy Edge

      S –

      Please see my response to Bruce Kasting above on the question of possible current account balance effects of higher public debt servicing payments.

      Regarding the balance of payments account having to balance at the end of any accounting period, such that the capital account + the current account nets to zero, I am not entirely sure I understand where you want to go with that.

      If it is a point about our dependence on foreigners to finance our deficit spending, please look again at my responses above. Foreigners cannot print US dollars. They have to earn them by running trade surpluses with the US and accepting US dollars as a means of final settlement, or they have to net sell their assets to US dollar holders.

      Households borrowing money from banks that create money when they make a loan, and deficit spending while the housing boom was on, is the source of many of the dollars that foreigners net saved and ploughed back into US dollar denominated assets.

      The Chinese would not have dollars to invest in US Treasury securities unless we persistently ran a large trade deficit with them. They cannot, to repeat myself, print or create dollars on their own. This point is essential and really quite simple, yet it is another one that eludes the deficit terrorists.

      Now changes in foreign portfolio preferences – changes in the desired mix of existing wealth holdings – can wreak all kinds of havoc, as we see when deficit terrorists wake up one day and decide a country has an unsustainable fiscal path based on an arbitrary definition of what constitutes the appropiate fixed public debt to GDP ratio. Then asset prices have to clear the change in desired portfolio exposures, until all existing assets are willingly and voluntarily held. But foreigners cannot “finance” US deficit spending until they somehow first earn the US dollars, because they have no way of creating US dollars themselves, short of counterfeiting.

      1. S

        The wage labor arb is so wide that even if china revalued the US labor is not competitive. As an academic exercise what happens if China revalues and say loosens capital restrictions (for say investment in the USA at the same time? Would the dollar go up or down? The US export strategy to devalue is fraught with many risks not least of which is the identity you mention (or Yves). Even if it was mildly accretive to the balance the capital requirements remain huge. it is a bit cavalier to dismiss changing preferences isn’t it? Typically when you go down this route we end up talking about the number of US aircraft carriers.

        You say:
        “Foreigners cannot print US dollars. They have to earn them by running trade surpluses with the US and accepting US dollars as a means of final settlement, or they have to net sell their assets to US dollar holders.”

        Well the fed (and BOE, BOJ etc..)can and are printing money in a coordination reflation – that has to be the reason that oil is at 80 with horrible fundamentals and copper, al and steel etc..That is devaluation of standards period. Call it whatever you want.

        While I do not endorse this thesis one might also consider that an effective unearned money laundering operation might be had in the supression of say gold for oil such as outlined by FOA – also the various thesis on gold lease rates. Have a read of the ZH post re gold and fed meetings (via GATA) yesterday or the many post of FOFOA. Much as the barbarous relic is the enemy of the bankers it tells an interesting story when judged by its 1000 years as the defacto standard.

        I find your arguments about rising interest as a net positive to consumer also a stretch. I assume you think there is no capital loss/wealth effect on legacy holdings from spiking rates (Fed balance sheet also) or that the Fed doesn’t hold down rates below real inflation which would of course result in a declining standards of living. GDP, is beocmeing ever more irrelevant as a measure of anything particularly the nominal. Also you make no mention of the fact that rising deficits and no more regualtoy underbrush to clear circa the 80s/90s that consumers don’t begin to mentally account for and discount the higher taxes coming. The fallback we will grow out of this is simply not borne out by facts (wages) other than to argue that another asset bubble is coming.

        Is that what youa re arguing here? becuase if another asset bubble doesn’t form those freshly minted FRN are going somewhere unless the fed plans to roll them for a decade plus until we can hope to grow into the bloating zombie

        As an aside, the entire derivatives market is a mechanism to create dollars: a synthetic CDO seems to fit the bill (bundled CDS, or the market entirely net of cash, or securitization)? All are ways to create money, no? Actually, as you alluded to, I stand corrected, when the markets are not allowed to clear it is a virtual liscence to steal/make money. Isn’t that what AIG was all about. We do not operate in a closed system much to the chagrin of academia

        So if the GDP grew by $5T since 2000 and we created no jobs, while debt exploded, why should nominal GDP be static to mildly down.

        The problem with your argument is that you assume as a starting point that the aggregate demand curve rested at a stable equilibrium in 2006/07 (or the debt creation machine is about to rev back up and compound forever). As a result asset prices were properly cleared during the greatest monetary bubble in history. Enter the fed and you know the rest. Therefore, to assume that there you can introduce money into a system to levitate an unnatural eequilibrium and not have devaluation in standards is the stuff of structured finance. Unemployment isn;t rising because the demand wasn’t real. Utilization is at 73% with trillions of stimulus/guarantees becasue the world is massivily capcity long.

        1. S

          Apparently others are anticipating the same thing on taxes.

          Also, perhaps you could address the following question? If real GDP increased by $5T and no jobs were created, how does nominal GDP stay anywhere close to level? if your answer isn’t inflation, I’d like to see an identiy that addresses how you no job growth, no wage growth and shrinking leverage sustain a bloated GDP number?

  15. eric anderson

    Since there is such an attachment to the term deficit terrorists, and no one can seem to admit that they’ve gone over the top, I see no alternative but to fight rhetorical fire with fire. I’m going to start calling all big-spending liberals (or big spending “conservatives” for that matter) money-printing terrorists, since in the end that’s what it will boil down to.

    This is akin to the AGW crowd terming all skeptics of the IPCC party line, even the luke-warmers, “deniers.” So, in response, I have decided I will call Al Gore and other climate alarmists “Climategate deniers.”

    I’m sure fans of fiscal restraint can come up with some kind of a scatter diagram to illustrate the likely outcome of the money-printing terrorists. Anyone want to help out?

    1. MacroStrategy Edge

      Again, stooping to name calling is not my preferred method, even though I realize it does appear to be the dominant form of discourse in much of the blogosphere and MSM. However, as I explained in a reply above, I think it is time for a wake up call. I see the wrecking ball and I want you to see it too.

      But by all means, feel free to bring your evidence to the table. I am perfectly willing to change my mind on compelling arguments and evidence. I have no illusions that I am perfect or have perfect views. Minds distort and conceal, so maybe you can see a clearer way forward. Please share it when you are ready.

      Just don’t bother misrepresenting my views, because then you will be wasting our time…and the time to get this straight is, in my estimation running out, as, I argued on Naked Capitalism last week, we are about to see in Greece.

    2. Greg

      I understand your point somewhat eric but the definition of terrorism is;

      “the systematic use of terror especially as a means for coercion”

      In spite of absolutely no evidence of a hard cap on deficit or govt debt levels, (meaning, no one can say what level of debt is unsustainable in and of it self) there are people who fancy them selves experts and have a voice in the national economic discussions who continue to try and frighten people that we are on a road to debt default, hyperinflation or some other such financial calamity. The terms thrown around are quite intentionally frightening and often times self serving. They are doing it to coerce the govt into paying higher interest rates on their bonds, not to actually decrease bond issuance.
      Bond demand would actually increase with a rise in interest rates meaning those folks have no interest in decreasing spending they simply want better returns on their savings. Completely self serving bull$hit

      It is ABSOLUTELY UNTRUE that the US Govt can default in US$. It can never happen. They may decide NOT to make a payment but they will NEVER be unable to make a payment.

      So really I think the label works.

  16. Paul Tioxon

    Deficit terrorists, they would be the proponents of a constitutional amendment to outlaw deficit spending. The House defeated a vote for such a proposal in 1994. More recently in the past week, The Republican Conference Committee produced a plan for another constitutional amendment to limit the federal spending: “[W]e propose a Spending Limit Amendment to the Constitution of the United States to limit spending to one-fifth of the economy—the historical average for spending since World War II. The limit could only be waived if a declaration of war was in effect or by a two-thirds vote of Congress.” This is an ongoing policy goal of conservative, now very mainstream republicans, further fueled by tea party outrage and general disgust and distrust of what is going on in Washington. While it may be debatable among the more knowledgeable economists and researchers who post on this site, there is absolute blind belief in the core proposal, to change the constitution and limit spending, and indirectly deficits to some fixed percentage, just like a good business plan. I don’t know, this MOSES complex, that somehow written directions will keep us from disaster doesn’t wash with me. The trouble we get into will always be struggled with through power struggles, not theories or ideas. Using these notions as propaganda to misinform the populace is one thing, but eventually there will be real crises such as we have now, that require real solutions. Limiting options, such as deficit spending, whatever the operational definition, is not very pragmatic. Finally, as a sovereign nation, we should be able to do whatever we want and are only limited by the general laws of physics, chemistry. Economics of course pretend it has iron laws, please, that is at best a literary metaphor. Until it can show the sub atomic particles of the economy, and something like gravity controlling the whole thing, we will do things the old fashioned way, electing people who scream and yell in legislatures and create the social order upon which property rights and business can prosper.

  17. scraping_by

    If Mr. Petersen is truly worried about the Federal Government’s general fund cash account, then he can throw his weight behind the obvious solution of higher taxes on the rich. I’m thinking a top end of 70% above $1M/yr, and 90% off estates of better than $10M.

    In other words, if you want pre-Reagan deficits, you need to have pre-Reagan taxes. I’m certain Mr. Petersen and his fellow plutocrats can live on less astronomical amounts, and whatever capital the real economy needs can be found other ways. Otherwise, it’ll look like he’s just trying to preserve Bushworld.

  18. wunsacon

    Hi, Yves,

    Sorry, but it bothers me when people use strong words like “terrorist” to vilify people with whom they disagree. Like the term “feminazi”.

    Admittedly, I haven’t read this “deficit terrorist” post. But, really I’m not going to.

    In any event, as you may or may not know, I LOVE your work. (Haven’t said that lately. But, it’s implied every day.)

  19. kevinearick

    as so aptly put, it’s a question of where the money goes, and they have no idea how to direct that money, so it ends up back in the nexus, in an infinite loop. the Fed re-booted the system, only to find itself back in an infinite loop. the Fed is now so deep in the rabbit hole of its own recursion that it cannot even define money any longer. it is being infinitely redefined inside the black hole / box. by all means, have government throw as much money in there as you can.

    what does a vegetative state think?

    is that chart supposed to represent the data on empire reserve currencies? didn’t think so.

    maybe a bigger lunch box.

    1. kevinearick

      government knows best … just look at the job it’s doing raising children. if I were an elderly person dependent on that system, I would be a little nervous before opening that property tax bill too.

        1. kevinearick

          this argument has gone global, under the assumption that real private investment has to show up on the current global radar system somewhere … along with all currencies cannot devalue simultaneously; they cannot devalue relative to each other simultaneously, as per the broadcast.

          1. kevinearick

            given the current pattern of seeking one last shot at the apple / punchbowl, we should be hearing about government “childcare” right out of the womb again soon.

  20. BS Inc.

    The author seems to make much of the fact that money “comes from the government”, but isn’t the actual asset backing the money created by the government (the “full faith and credit” part of it) the labor of the private sector and the government’s ability to tax that labor when it is expended?

    If so, then isn’t the motivation of the “deficit terrorist” (by the way, simply reading that term motivated me to think of ways in which the author is wrong, so you’re probably not doing yourself any favors using it if it automatically provokes people to poke holes in your argument, at whatever level of capability their ability to poke holes may be) a desire to not have his future labor taxed at higher rates in order to facilitate the creation of money in the present? The author seems to imply that is an illegitimate choice, yet it seems perfectly rational to me, especially if the resulting decline in GDP and price levels in the present day enables me to purchase goods I had foregone during the “bubble”.

    Some of us younger folks want to buy houses some day, you know, but the government keeps propping up prices for Baby Boomers’ benefit. Now you’re telling me that, after waiting for years to buy because prices were too high, I’m now supposed to both continue renting AND bail out people who overpaid? Forgive me for not being enthusiastic about that

    “Yes, Brian, I agree the current priorities in US fiscal policy are horrendous, to put it mildly, and evidence of a political class that has been bought and paid for by a variety of special interests, not the least of which includes the best of Wall Street’s sociopathic looters.”

    I read a very good article here by Edward Harrison showing, in the context of the panoply of bailouts, guarantees and stimulus packages of the past 18 months, that these “fiscal priorities” are probably a “feature” of said programs, not a “bug” and the most logically-consistent perspective on how large the government’s fiscal capabilities should be, given that backdrop, is the libertarian perspective.

    Simply put, you and those who think like you WILL NEVER be able to divert the government’s fiscal largesse in truly optimal directions, so please, for the sake of those who actually have to fund that fiscal largesse but who aren’t politically-connected enough to get in on the resulting gravy train, stop. If “small government” offends your moral sensibilities, start a non-profit.

    1. Greg

      While you made some decent points you massively failed at the end with your
      “for the sake of those who actually have to fund that fiscal largesse”. Do you really think that WE the taxpayers provide the US govt with the money it spends?

      Do we create the amount of money we want and then tithe the govt our percentage so they can do something with it?

      You have seriously got the flow backwards, and its not a trivial mistake. When you dont get the direction of flow right you cant possibly think of the correct policy prescriptions.

      The govt never suffers from a lack of funds. The private sector can but its never because the govt is spending too much that we have too little. Thats nonsense.

      Your statement “those who think like you WILL NEVER be able to divert the government’s fiscal largesse in truly optimal directions” is false. There will never be a 100% consensus on govt spending but it can sure reach a high enough level of agreement to be effective and optimal.

      1. BS Inc.

        “Do you really think that WE the taxpayers provide the US govt with the money it spends?

        Do we create the amount of money we want and then tithe the govt our percentage so they can do something with it?

        You have seriously got the flow backwards, and its not a trivial mistake. When you dont get the direction of flow right you cant possibly think of the correct policy prescriptions.”

        The reason I “got the flow backwards” is because my point was that the “flow” doesn’t start with the creation of “money”, it starts with the delegation, by the people to the government, of the power to tax labor as an asset backing the money. So, yes, “we the people” DO provide the government, not with money, but with a portion of our labor, which the government then turns into money.

        That is my point, that “deficit terrorism” is actually about future labor preferences on the part of the private sector. By opposing deficits today, what I am saying is that I prefer that my future labor be turned into money which I will then spend on items of my choosing in the future, rather than on items chosen for me by politicians in the present.

        “The govt never suffers from a lack of funds.”

        If no one works it does or if, as in Greece, tax evasion in rampant. No one is going to buy bonds issued by a government which can’t tax its citizens’ labor because said labor is non-existent or the taxing mechanism is lacking in enforcement on said labor.

        You need to revise your view of the “flow” in order to start it at the correct point.

        “There will never be a 100% consensus on govt spending but it can sure reach a high enough level of agreement to be effective and optimal.”

        The country is pretty much deadlocked at 50-50 on just about every major spending initiative. There is no “effective and optimal” spending in that context except for 0.

        1. MacroStrategy Edge

          BS Inc. –

          In exploring the possible flaws and weak points in this perspective, I came to a similar position as the one you have detailed above.

          If the private sector gets money from net selling goods, services, or assets to the government, obviously the whole thing breaks down if there is no production – or more pragmatically, if production goes underground and exchange largely takes place on black markets. And indeed, such responses are observed under high tax regimes. We have also seen dollarization, where private agents in a nation substitute a foreign currency for their own nation’s currency in many transactions (one reason why nearly half the dollars printed are held outside the US, or something on that order).

          So it made me go looking for better monetary arrangements, including 100% commodity money and other off the beaten path proposals, and frankly it is a search that remains ongoing (and I do describe some of the options in the March 2010 Richebacher Letter, including one that often comes up in libertarian circles, which you might find of interest). As I have said in earlier posts, I am open to better ideas, so do share if you got some that look better.

          Anyway, I believe that is why most of the variation in the fiscal balance needs to come from the expenditure rather than the tax side, and it is also why I believe you may find your are wrong to assert this cannot be implemented in a way that minimizes the role of the political sock puppets, although I understand what I propose in my response to scharfy, which I want you to look at next, will require people to go against the will of many incumbent members of the political class…and frankly, I am not prepared to give up on that possibility, especially after the Massachusetts Senate election results revealed people have had it with the status quo, but then again, I didn’t buy into the audacity of hope message of the current empty suit inhabiting the White House, especially after he appointed Bob Rubin’s spawn, Summers and Geithner, in key positions, so maybe I am just fooling myself.

          But yeah, if everyone wants to sit at home and just watch it on their brand spanking new flat screen TVs, you are right, nothing will happen except more of the same.

        2. Greg

          Its not just labor that is taxed but you are right that it is TAXATION that gives our money value. It is why we seek it.

          Your claim that if no one works is specious( unless you just mean works for a specific currency). There could not be a world where no one works. There is only unemployment where there is currency, otherwise we are back to bartering and gathering, which is work.

          Greece’s problem is not simply tax evasion, its being a state with no power to issue currency. They actually must issue bonds to spend. If they left the Euro and returned to the drachma they would have no such constraint.

          1. Andrew Bissell

            Your claim that if no one works is specious( unless you just mean works for a specific currency). There could not be a world where no one works.

            I guess the Roman emperors probably told themselves the same thing while they were busy diluting the denarius to pay off their armies and interest groups, and in the process destroying the money which provided a key foundation for the far-flung trade which ancient Rome had achieved.

            BS, Inc’s point is not that people will literally “stop working” and lie down and die, but that they will opt for less highly integrated and cooperative pursuits, if it allows them to avoid paying protection money to a government that is totally undeserving of their trust and unworthy as a steward of any finances whatsoever.

  21. Plschwartz

    I had a very British logic professor who stated that an Ad hominum argument is the retreat for Knaves

  22. scharfy

    The paradox of thrift isn’t totally insane. Everyone can’t save at once, else you get a drop in GDP. Ok. Simple accounting. Nice and neat.

    Lets continue this theoretical adventure.

    If the afore mentioned mechanisms of government slack removal are executed properly, whence the private sector has repaired its balance sheet and expands, the federal govt, withdraws. Thus no inflation.

    Wonderful, just wonderful.

    Just as the private sector starts to get back in the game, the savvy Government keenly withdraws its efforts…

    withdraws….. yes they reduce spending… like a clock….

    Ha… Ha.. and Ha…

    These deficit terrorists know full well that governments can’t ever restrain themselves once they are allowed to get their hooks in. Nope they keep right on a rolling and we get the bill. (and inflation in some form as a bonus, but i’ll omit that as I simply cannot prove it – though a 50 year chart of 2% continual inflation provides a decent opening argument)

    This is why many deficit terrorists are so reluctant to let them work their magic to save us. Many ever expanding bureaucracies prove this point.( in my eyes beyond a doubt.)

    I am not dismissing this article on technical grounds, but rather it fails me on its lack of implementability, and total disregard of typical behavior of politicians. Again, I get the accounting relationship – but what happens when the private sector has retrenched?

    But, if you absolutely must have 2% GDP growth next year, then by all means, lets start building some bridges.

    Anybody out there in favor of this line of thought, have a touch of worry giving the GOVT a blank checkbook with tentative and unclear exit strategy?

    Sounds like the Iraq war of monetary/fiscal policy. Its even got the word terrorist to scare us into it.

    1. MacroStrategy Edge

      Scharfy –

      Yes, you can build policies that do adjust endogenously (or in synch) with fluctuations in private sector net savings.

      Google Bill Mitchell on job guarantees or Randy Wray on employer of last resort. Bills’ work is also on billy blog and Randy’s is on New Economic Perspectives.

      Or if reading just is not your thing, YouTube has some illuminating interviews with these characters which no doubt get to JG and ELR proposals:

      Lest you conclude this is all a pipedream, the following link will take you to a study of the actual implementation of an employer of last resort program in the depths of Argentina’s derailment in 2002-3.

      If some degree of success can be achieved in such difficult circumstances, including extraordinary economic hardship and political disarray, surely it stands a fighting chance elsewhere. India as well has a version of this.

      So do tell, Scharfy, what was your point on lack of implementability again?



    2. GBear

      I get the accounting, I really do, and maybe in isolation like in Argentina it can work. But on the US scale, or heaven forbid, a near global scale it will be out of control!

      Chartalists seeks to perpetuate the current unsustainable growth path. They deride neo-classical economics, but to me this just looks like the other side of the same coin.

      A know its cold hearted, but the world simply cannot sustain the full employment approach of this doctrine.

      Man is just beginning to feel the impact of a finite world.

      The ultimate accounting is a growing human deficit offsetting the world resource surplus.

      Under the purportedly noble pretext of human upliftment both neoclassicals and Chartalists seem to want to denude this as quickly as possible.

      I think the “market” will set them both straight!

    1. kevinearick

      the financial pyramid trap:

      give the denizons a frame of reference rooted in self-fulfillment, a heuristic equation full of false assumptions, and a mechanically efficient methodology, then watch them reproduce, all the while thinking that the rising tide lifting all boats is something more than the latest ponzi scheme, and the people getting as far away from that keg of dynamite as possible must be stupid.

      what? you don’t like money? for $500 initiation and $150/yr, you can shake Donald Trump’s hand, as he runs in through the one-way front door, and out the back, before sealing all the exits.

      1. kevinearick

        don’t get me wrong, The Donald has the game down to a science – never stop moving the target, and owe the counter-parties so much that they will go belly up if they call the debt in, leaving the creditors with no choice but to aid and abet.

        The physicists at LTCM should have spent more time studying Mr. Trump’s methods, before replicating the operation. It’s one thing to be a big fish in a small lake, with the ability to cross the straits to other lakes. It’s quite another to be an increasingly big fish in an incredibly shrinking pond, with no outlet.

  23. michel

    Yves, I really still do not get it.

    Government deficits result from the government having higher outgoings than incomings. They are funded by borrowings. These borrowings have to have interest paid on them and have to be repaid (including rolled over). These borrowings are sometimes from savings by US residents, but are also importantly from savings from abroad.

    The claim being made about this is not at all clear. There is some point of view that is being rebutted, which is referred to as ‘deficit terrorism’, but its also not clear what this is.

    The weak form of the argument might be that current US deficits are small enough that they can continue at their current size for the forseeable future without leading to loss of purchasing power for the savers. They will also not lead to rising interest rates to attract savings, or to a refusal of savers to save with the US Government.

    The strong form might be that this is true not just of current levels of deficit, but any level of deficit.

    Maybe there is a still weaker argument which says that neither of the above things are true, the deficit has to be reduced, but that next year is too early to start reducing it.

    I think its obvious in view of the history of state defaults and episodes of inflation that the second proposition is false. The first is arguable but probably false. The weakest form is arguable and possibly correct.

    To refer to people who differ from any of these forms of the argument as deficit terrorists is simply stupid. They are rational people with a different view of the lessons of history and our present situation.

    1. Yves Smith Post author


      A big problem is that government operations are described PERVASIVELY in the press as if they are the same as a household. That is where the way of looking at the situation starts to go askew.

      Governments that can create their own currency are not funded by borrowings. They might choose to use bonds for various reasons, but they are NOT necessary to fund their operations. So California and Greece, which do not issue their own currency, DO need to borrow if they spend more than their tax receipts, but the US is not in that camp.

      Debt defaults occurred during the gold standard era, which effectively meant they could not issue currency (as in it was constrained by the gold reserves). In the Bretton Woods II era, sovereign defaults have occurred when countries had substantial debts not in their currency, for instance because they chose to dollarize their economy (like Argentina) which puts them in the same boat as California, or they had a banking sector with substantial foreign currency debts (Mexico, Iceland, and that is the real risk to the pound). Russia is the one exception, it was a strictly voluntary default (if you go back and read the records, the discussions at the time make it clear that Russia did not need to default and was not expected to either. It was a bolt from the blue).

      Billy blog is a very good source on how this works.

      1. Mansoor H. Khan


        Government can keep borrowing and/or simply printing money until the economy runs-up against its capacity to deliver the demanded output. Also, since USD is hoarded all over the world It is not even the U.S. economy that is the limit. It is the WORLD economy’s ability to satisfy the output demanded by deficit/new money spending of the united states government.

        This will only become a problem when USD is not desirable as a global/reserve/currency to be hoarded.

        1. Greg

          I think you make a great point Mansoor.

          There is a limit to the spending…….when there is nothing left to buy!!!
          In that case it wouldnt matter if govts had been “saving” money by running surpluses or if individuals had 3 trillion dollar 401ks, the money wouldnt be able to buy anything!

          Too much of todays discussions get finance confused with economics. Finance is how we have priced all the goods in the economy via our man made system of money, economics is about the real goods and services we all seek to different degrees.

          The power of Chartalism I think, is that it states right out front “money is worthless, we have as much as we want, now lets get down to the business of allocating the goods and services” . We have created money as a way for people to stake claims and and as way to denominate the number of claims one needs.

          1. Mansoor H. Khan

            Yeah. But We can allocate goods and services two ways:

            1. Mail a check to the unemployed until employed or until death of unemployed person.

            2. Dream up massive government projects in all kinds of fields and employ the unemployed and keep them physically and mentally fit, creative, disciplined and dignified.


          2. Greg

            I couldnt agree more Mansoor

            I think Number 2 is better, although the private sector needs to get involved with those projects.

      2. Psittakos

        I think everyone understands that in the US the Fed can create dollars. But, if it comes to the point that the Fed has to print money in order to continue to fund the federal government and service the debt, we will be in a lot of trouble (and so will the rest of the world). At that point, we will be in a kind of default. Everyone in the real world will see it that way. It might be better to default outright. The UK, Japan and the Eurozone face similar problems. We’re all in trouble, but that doesn’t mean the trouble isn’t real.

        1. Cathryn Mataga

          Oops, hasn’t QE already started, oh, has it
          been a year yet? My understanding is that
          Fed has been buying all sorts of oddball
          stuff with freshly summoned American
          dollars. Maybe this was never mentioned
          on the TV news…

          1. Psittakos

            I’m aware of the Fed’s QE efforts so far, and I’m aware of the fact that the Fed has essentially promised to stop at the end of this quarter. I don’t know if that will be possible. We are probably not yet to the point that the federal government is unable to survive on tax revenue and bond sales. When there is no choice but for the Fed to openly “print” money to fund the federal government and monetize the debt, or default outright, we are in trouble.

            I haven’t watched television news since before Chet Huntley died.

          2. Cathryn Mataga

            With low interest rates, the Fed can loan
            to banks and then the banks loan to the US
            Government. So technically the USG can
            survive without printing money. Is this
            all that different though, really than
            just printing the money?

            With the China inflation story, maybe
            what is happening is that the stimulus
            flows quickly from government salaries
            to cheap stuff at Walmart and then overseas.
            China’s economy goes to inflation, and the
            US private sector is largely bypassed
            aside from a few dollar store cashiers.

        2. mansoor h. khan

          we basically have a choices:

          1. Share the power to print money (I call them global equity shares) with other nations.

          2. Deflate our economy. Then Yuan will become the reserve currency (global equity of choice).


        3. MacroStrategy Edge

          Psittakos –

          Take a dollar bill out of your wallet. Assume you have to use this dollar bill to either pay federal taxes or buy a Treasury bond. Now ask yourself, where did that dollar bill come from?

          You cannot print it. The company you work for cannot print it. Unless the government spent more money than it received in taxes, or bought more assets than it sold, that dollar could not have landed in your wallet.

          Trace the journey of that dollar back to its creations, and you will come to the realization that taxes and bond issuance can never finance the fiscal deficit of a nation with a sovereign currency (as in nonconvertible upon demand into fixed units of any other currency or commodity).

          Psittakos, listen up. The money you use to pay taxes or buy government bonds ultimately comes from government deficit spending or the Fed expanding its balance sheet to bring that money into existence. This has already been going on for years.

          Get this much, and all kinds of brainwashing you and the rest of us have been submitted to over the years goes down the drain, and you can begin to see some plausible and constructive ways forward.

          It’s a real mindbender, I know. The money to “finance” federal government deficit spending comes from…the government. But let it sink in and see where it takes you.

          In the meantime, to acknowledge all of Yves’ readers who have made it known they take great offense at the label “deficit terrorist”, and to make it perfectly clear I do not subscribe to the idea that large fiscal deficits are always and everywhere to be defended, I will recommend to Yves that the title of my piece be changed to “Data Challenges Deficit Errorist Beliefs”, and I hereby pledge to make all future references to the misguided assertions of deficit errorists in this fashion as well.

          1. Psittakos

            Are you suggesting that Bernanke could simply fund all of the federal government’s needs without going through all of this foolishness with the Treasury and bonds and tax revenues?

            Where did Zimbabwe go wrong?

            The first thing Bernanke should do is defund the legislative branch. Why carry those idiots on his balance sheet?

            Yes, the dollar is a fiat currency. It is also the world’s reserve currency, for now. If you stretch it ad absurdum, it will no longer function the way you want it to.

          2. MacroStrategy Edge


            Regarding your March 16th 2:47 pm response:

            Yes, I am indeed saying that the dirty little secret of nearly every nation with a sovereign currency (nonconvertible on demand into a fixed quantity of units of other currencies or commodities) is that it must first create the money that is held as a net financial asset by the private sector and used to “finance” (a misnomer if there ever was one) government expenditures through tax payments and bond purchases by the private sector. If you understand the accounting, this is virtually inescapable.

            This has been going on for years in many countries. The gold standard has been dead for decades. It does not automatically result in hyperinflation: I see your Zimbabwe, and I’ll raise you with a Japan…for two decades running…with huge fiscal deficits…and quantitative easing…and persistent (albeit mild) deflation – not hyperinflation. Check it out.

            The conditions for hyperinflation turn out to require more than fiscal deficit spending, as I suggested in the body of the article, as well as in subsequent responses to the readers above. Take this point in.

            The sooner we recognize this reality and deal with it, rather than running in horror from it or denying it, the better. If recognizing it publicly means investors flee from every asset denominated in every sovereign currency, so be it. Should make for some bargain basement deals for the rest of us who have found a way to cope with the ongoing reality of contemporary monetary arrangements – hell, could even make for some trades of the century, or even the millenia. If you’ve got a better monetary arrangement in mind, please bring it out. I am sure this one can be improved upon, but I have yet to see anything that will fly in real time, with real gravity.

            Bottom line: governments of nations with sovereign currencies have been and will continue to create the money that is used to pay the taxes and the bonds used to finance government spending. There are no two ways about it. Hyperinflation, even accelerating inflation, as the UBS scatterplot at least suggests, is not the automatic result.

            Get over it.

  24. Psittakos

    The way fiat money works is not a dirty little secret from anyone. Yes, we’re clearly in a deflationary environment now much as Japan has been off and on for many years. I have never said that large fiscal deficits or QE automatically lead in short order to hyperinflation. They are tricky to pull off for a long time, however. I doubt Japan will do it forever. Their population is getting very old and will need to cash in those Japanese government bonds. Does saying that make me a deficit terrorist? I am just reacting to extreme positions that strike me as reductio ad absurdum.

    Actually, I have been betting successfully against those who have been calling for near-term inflation and collapse of Treasurys for the last three years or so.

    The Fed has tried and can continue to try various “unconventional” monetary policies. They don’t look to be very successful, and it is hard not to suspect that we are continuing to deflate while winding up for an ineluctable explosion of inflation somewhere near the end — perhaps the end of the United States as we have known it (for good or ill). But that time is not at hand.

    Get over it? Listen up? Take this point in? You sound like my sixth grade gym teacher.

    1. Greg


      You say “The way fiat money works is not a dirty little secret from anyone.”
      and then offer this in a previous post ;

      “Are you suggesting that Bernanke could simply fund all of the federal government’s needs without going through all of this foolishness with the Treasury and bonds and tax revenues?”

      Well the only conclusion one can draw is YES the way fiat money works IS a dirty little secret to YOU!! Treasury bonds and tax revenues are clearly not necessary to “fund” anything the US Govt does. Plus you mistakenly suggest that Bernanke funds anything. He is a central banker, NOT the Treasury chief and not the US Congress.

      Maybe you do need to admit that you dont quite understand how a floating exchange rate fiat currency regime operates. Its okay because he majority of people dont. The bankers of the world want it that way

      1. Psittakos

        It seems that you are hinting at some form of Chartalism. I understand where you’re coming from. Can you imagine a currency regime in which a government simply funds itself with its scrip without debt creation? Yes, but that’s not the system we have. It’s quite a leap to conclude that sovereign debt markets serve no purpose.

        The day that the Treasury can’t auction its bonds will be the day the dollar is not much valued around the world for its power to extinguish private bank debt. I don’t think that day is coming any time soon, and I think we’re seeing debt deflation now and maybe for a long time.

        1. Greg

          I didnt say that sovereign debt markets serve no purpose, only that their purpose did not serve public interests.

          It is time to take a Chartalist approach. There is no reason not to. We are already there if we simply remove the stupid rules like “debt ceilings” and tying bond issuance $4$ to spending. Removing these rules would not be inflationary in and of themselves. Tying your shoelaces together and saying you cant walk is silly. We do not HAVE to issue bonds when we spend it provides no stability to the economy it simply gives some bondholders access to risk free interest payments.
          Now removing the rules would not mean you NEVER issue bonds, it would simply mean it is not an operational necessity. Freeing the spending from the bondmarkets would free us from having to listen to Moodys squawk about debt downgrades and allow us to actually address unemployment in a direct way through a job guarantee program as described by Randall Wray.

          So yes I can imagine a currency regime where the govt funds itself (and everybody else too).

          I agree about the debt deflation for a long time, at least considering conventional approaches to the issue.

  25. MacroStrategy Edge


    Apologies, but I feel strongly that you are capable of getting this, and you are dodging or missing some key points here – as in, this has been going on for a long time in many nations, that hyperinflation appears to require more than just a fiscal deficit, etc.

    However, if you are long Treasuries in a currency you believe will ultimately prove hyperinflationary, I admire your big brass balls. Somebody once said consistency is the hobgoblin of little minds, or something to that effect, and I plead guilty as such of seeking consistency, while you are quite comfortable, it would seem, with complexity.

    Just don’t get squashed picking up nickels and dimes in front of the proverbial steamroller, my friend…and please do share what you are looking for that will tell you the hyperinflation episode is imminent, and the time has come to reverse your current long bonds poistion and short the hell out of Treasuries and dollar denominated assets in general.

    1. Psittakos

      I didn’t say dollar hyperinflation is imminent. I’m not sure what the steamroller is. They have gone through a lot of finance ministers in Japan, and they still don’t know which way is up or out. For all I know, we will all be sucked into a black hole of debt deflation until the end of time. Of course, there’s also Zimbabwe. Really, my own guess is that there is no way to engineer a controlled escape from the kind of debt deflation described by Irving Fisher without a lot of damage. Maybe that’s where we are.

      1. MacroStratedge

        Well, if you start to see the hyperinflationary steamroller coming your way, please do flag it, and please do make sure you get out of your long Treasury bond positions in time.

        Where we part is on the issue of escape paths from debt deflation doing more damage. That is an Austrian School perspective. Let the liquidation rip, and get it over with now, and then we can get back to solid, authentic supply and demand.

        Yet even the Austrians must admit that Hayek advocated policy responses to what he called the “secondary depression” effects of malinvestment and a burst credit bubble. Look it up. Hayek’s secondary depression has some of the flavor of Fisher’s debt deflation. And Fisher himself, who lost his shirt and his house in the Great Depression, also did not give up looking for solutions (although I cannot say I concur with most of the proposals he came up with).

        best of luck in the days ahead,


        1. Greg


          You’ve done yeomans work in this post and comments. I now have someone to add to my list of people to follow along with Marshall, Bill Mitchell, Warren Mosler, Scott Fullwiler, Randall Wray and Winterspeak. Ive truly enjoyed your posts here at NC and I’ve copied and saved many of your comments, especially in this thread.

          You confessed in an earlier response how you felt after the demise of Lehman and gave some post apocalyptical thoughts that I think are important. You talked about the fruitlessness of trying to remove yourself from all this and going it alone. I really think most people would see the fruitlessness of it as soon as they really tried to do it. This whole thing is so much bigger than us we really cant imagine how insignificant even half the US population is in the grand scheme. I’m constantly nagged in the back of my mind, when I hear people talking about “capital flight” from the US, with the question ;where are they going to go?

          We have too many libertarian minded, go it alone types in this country who are just absolutely clueless to the amount of support they are getting that they dont even realize or choose to ignore. What we have built here was the efforts of govt and private enterprise TOGETHER and ignoring that reality wont change it.

          We’ll see how these austerity programs being forced on govts will work out. It wont be pretty.

          1. MacroStrategy Edge


            Very kind of you to compliment the work, but best not to just follow any of us. Think it over, try to find the weak points and improve on what you find from each of these sources. None of us has the perfect model or solution, but it is imperative that people start searching for solutions,together. When you find stuff that looks like it could work, make sure you show it to others. And yes, the Robinson Cruso/Swiss Family Robinson exit strategy is limited at best (although I hear Limbaugh is headed to Costa Rica if Obamacare goes through this weekend). I was born in a state with license plates that read “Live Free or Die”, so that exit strategy is my natural inclination, but going it alone doesn’t really work when you examine the situation closely.

        2. MacroStrategy Edge

          Sorry, I meant Hayek’s theory of secondary recession.

          Type secondary depression into Google and you’ll see what the Greeks are catching right about now as the fiscal retrenchment works its magic.

  26. Andrew Bissell

    Although I am an Austrian (as well as a deflationist), and do bristle somewhat at the now-redacted “deficit terrorist” term, I’d like to thank MacroStrategyEdge for starting and contributing to this discussion, probably one of the best I have seen on MMT.

  27. flabbergasted

    One short comment to this exposition. WTF is he talking about?!? But I will keep the author’s name on my “don’t go there” list of investment advisers. As Bugs used to say “what a maroon.”

    1. MacroStrategy Edge

      Why thank you gabberflasted.

      But actually, I am not looking for clients or subscribers that don’t get (or perhaps aren’t willing to get?) what I am talking about.

      May it all make sense to us one day, preferably in the not too distant future.

  28. CrisisMaven

    What is inflation in your defintion? Rising prices? This is all too entangled to make sense of. State deficits do NOT NECESSARILY cause inflation, not, that is, if they are financed via the capital market WITHOUT a central bank expanding the money supply for it. So in a “perfect world” what the state spends on deficit would in turn decrease the amount of capital available elsewhere (not that that would be good policy). So deficits are neither a prerequisite nor a direct causation of inflation. But the expansion of central bank money is, and that has happened at an enormous rate of late. THAT is inflation. This “fear of deflation” is just a ruse by central banks to keep inflating the money supply. Deflation does not keep people from spending – they always spend what’s necessary. And money NOT “spent” is then saved which means it is credit to someone who invests it for capital goods etc. thus it is again being spent, only not for consumption. Money never lies completely idle to any extent whether there’s inflation, deflation, stability or a solar eclipse. For deflation to seriously happen, not only the current extreme credit expansion by the central banks and states (through “quantitative easing”, stimulus packages, monetising and then spending national debt etc.) but also the money that was released into the economy PRIOR to the collapse would have to be “mopped up” again. This is nowhere to be seen nor would it be technically possible (confiscation aside) so we will rather see inflation than deflation.

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