Marshall Auerback: Troubles in the EuroZone – Will the Contagion Affect the U.S.?

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

A recent poll by Douglas Schoen and Patrick Caddell suggests that swing voters in the US, who are key to the fate of the Democratic Party, care most about three things: reigniting the economy, reducing the deficit and creating jobs.

But the latter two goals are generally incompatible, especially during major recessions.

In times of high unemployment, government deficits are required to underwrite growth, given that the private sector shift to non-government surpluses has left a huge spending gap and firms responded to the failing sales by cutting back production. Employment falls and unemployment rises. Then investment growth declines because the pessimism spreads. Before too long you have a recession. Without any discretionary change in fiscal policy (now referred to in the public media as “stimulus packages”) the government balance will head towards and typically into deficit, unless the US miraculously becomes an export powerhouse along emerging Asia lines, and runs persistent current account surpluses, to a degree which allows the governments to run budget surpluses.

This is not going to happen, particularly when the largest current account surplus nations, notably Germany, cling to a mercantilist export led growth model, an inevitable consequence of that country’s aversion to increased government deficit spending. The German government’s reticence to counter any kind of shift in regard to its current account surplus is particularly significant in light of the ongoing and intensifying strains developing in the EMU nations (see here) . Last week’s Greek “rescue” is Europe’s “Bear Stearns event”. The Lehman moment has yet to come. One possible outcome of this could well be significantly larger budget deficits in the US and a substantial increase in America’s external deficit, given the unlikelihood of America becoming an export super power again. Let me elaborate below.

In the euro zone, I now see one of two possible outcomes. Scenario 1: the problem of Greece is not contained, and the contagion effect extends to the other “PIIGS” countries, leading to a cascade of defaults and corresponding devaluations as countries exit the EMU. Interestingly enough, the country which could well be affected most adversely in this situation is France, as the country’s industrial base competes largely against countries like Italy and the corresponding competitive devaluation of the Italian currency in the event of a euro zone break-up could well destroy the French economy (by contrast, as a capital goods exporter with few euro zone competitors, Germany’s industrial base will be less adversely affected in our view).

In Scenario 2 (more likely in my opinion) we get some greater fears about other PIIGS nations (discussion is now turning to Spain, Portugal and Ireland). The EMU might well hold together but the corresponding fear of contagion might well provoke capital flight and drive the euro down to parity (or lower) with the dollar. Of course, the euro’s weakness creates other problems: when the euro was strengthening last year due to portfolio shifts out of the dollar, many of those buyers of euro bought euro denominated national government paper (including Greece). The resultant portfolio shifts helped fund the national EMU governments at lower rates during that period. That portfolio shifting has largely come to an end, making national government funding within the euro zone more problematic, as the Greek situation now illustrates.

The weakening euro and rising oil prices raises the risk of ‘inflation’ flooding in through the import and export channels. With a weak economy and national government credit worthiness particularly sensitive to rising interest rates, the European Central Bank (ECB) may find itself in a bind, as it will tend to favor rate hikes as prices firm, yet recognize rate hikes could cause a financial collapse. And should a government like Greece be allowed to default, the next realization could be that Greek depositors will take losses, and, therefore, the entire euro deposit insurance lose credibility, causing depositors to take their funds elsewhere.

It all could get very ugly for the ECB. The only scenario that theoretically helps the value of the euro is a national government default, which does eliminate the euro denominated financial assets of that nation, but of course can trigger a euro wide deflationary debt collapse. The ’support’ scenarios all weaken the euro as they support the expansion of euro denominated financial assets, to the point of triggering the inflationary ‘race to the bottom’ of accelerating debt expansion.

So timing is very problematic. A rapid decline of the euro would facilitate a competitive advantage in the euro zone’s external sector, but it could also set alarm bells off at the ECB if such a rapid devaluation creates perceived incipient inflationary strains within the euro zone.

What about the US? In the latter scenario, we can envisage a situation in which the combination of panic and corresponding flight to safety to the dollar and US Treasuries, concomitant with the increased accumulation of US financial assets (which arises as the inevitable accounting correlative of increased Euro zone exports) means that America’s external deficits inexorably increase. There will almost certainly be increased protectionist strains, a possible backlash against both Europe and Asia, especially if the deficit hawks begin sounding the alarm on the inexorable rise of the US government deficit (which will almost certainly rise in the scenario we have sketched out).

Assuming that the US does not wish to sustain further job losses, the budget deficit will inevitably deteriorate further, either “virtuously” (via proactive government spending which promotes a full employment policy), or in a bad way , whereby a contracting economy and rising unemployment, produce larger deficits via the automatic stabilisers moving to shore up demand as the economy falters.
How big can these deficits go? Easily to around 10-12% of GDP or higher (versus the current 8% of GDP) should a euro devaluation be of a sufficient magnitude to induce a sharp deterioration of America’s trade deficit. Possibly even higher.

What will be the response of the Obama Administration? America can sustain economic growth with a private domestic surplus and government surplus if the external surplus is large enough. So a growth strategy can still be consistent with a public surplus. But this becomes virtually impossible if the euro zone’s problems continue, as we suspect that they will.

President Obama, however, has long decried our “out of control” government spending. He clearly gets this nonsense from the manic deficit terrorists who do not understand these accounting relationships that we’ve sketched out. As a result he continues to advocate that the government leads the charge by introducing austerity packages – just when the state of private demand is still stagnant or fragile. By perpetuating these myths, then, the President himself becomes part of the problem. He should be using his position of influence, and his considerable powers of oratory, to change public perceptions and explain why these deficits are not only necessary, but highly desirable in terms of sustaining a full employment economy.

Governments that issue debt in their own currency and do not promise to convert their currency into anything else can always “afford” to run deficits. Indeed, in this context government spending financially helps the private sector by injecting cash flows, providing liquid assets and raising the net worth of some or all private economic agents. In contrast to today’s budget deficit “Chicken Littles”, we maintain that speaking of government budget deficits as far as the eye can see is ludicrous for the simple reason that as the economy recovers, tax revenue rises, the deficit automatically reduces. That’s the whole reason for engaging in deficit spending in the first place. Any projections that show the deficit continuing to climb without limit is misguided — the Pete Peterson projections, for example, will never come to pass. As we near and exceed full employment, inflation will pick-up, which reduces transfer payments and increases tax revenues, automatically pushing the budget toward surpluses.

In the 220 year experience of the United States there have only been a few years when we’ve not had deficits and each time the surpluses were immediately followed by a depression or a recession. History shows that we can run nearly permanent deficits and that when we do, it’s better for the economy. The challenge for our side of the debate is to expose these voluntary constraints for what they are and explain why the US is not a Weimar Germany waiting to happen.

Print Friendly, PDF & Email


  1. Vespasian

    And here I thought we’d all agreed on “Deficit Errorist” as the accepted pejorative term for Keynesians to use, as some of us — especially ones professionally engaged in identifying & defeating real-world violent terrorists — take umbrage at being labeled “terrorist” for our principled, non-violent stance that deficits are to be avoided, even at the cost of a deflationary spiral, higher unemployment, and increased social anxiety/pain.

    We deficit-hawks don’t wish the economic pain evident in deflationary spirals on anyone … but we recognize the wound is already inflicted, it’s now just a matter of how the pain gets spread around. Besides, if gov’t shields people from painful natural consequences they’ll never reform their, or their gov’t, behavior.

    1. boot boy

      “even at the cost of a deflationary spiral, higher unemployment, and increased social anxiety/pain.”

      Pretty much sounds like terrorism to me, particularly if there’s no real cost to doing the opposite.

        1. boot boy

          The pain gets a lot worse if the deficit hawks (i.e., deficit terrorist) proposals are followed.

          1. RPB

            Sure boot boy. . .

            massive stimulus coupled with a mercantilist export policy has really helped japan solve its economic problems. twenty years of keynesian idiocy has not helped them out of their troubles even with the largest world economy engaged in a massive spending binge.

            now their misspent capital and massive stimulus program has left their aging population without enough savings to weather retirement. how will we be different in a more challenging export environment?

            how long will the fed have to/be able to keep rates low as it is scalped on its unhedged interest rate portfolio? right now they lose about 1.5 billion per basis point rise in interest rates. and now that it has shorted vol to infinity, when the vol returns with the increased issue of gov’t duration, how much money will they lose (lucky they dont MTM)? how many more years of forced low yielding savings will the boomers be forced to endure at the hands of the fed? how many more people will be fleeced in speculative markets trying to find enough yield to enable them to retire?

            how many more farcical QE programs will we see that reward the banks with free money? how much more ‘chosen’ winners in the private sector will the gov’t pick when it holds the power of the purse. how much more stimulus will continue to end up in the hands of constituencies and cronies? how much more perversion of risk in the mortgage/insurance/corp bond/health care market will we endure?

            bueller, bueller, anyone???

            keep stimulating, i am a professional trader, i trade the debt.

          2. boot boy

            rpb If you think what Japan has done is massive stimulus, you haven’t been paying much attention. It’s essentially been the same as here: poorly targeted spending and bailouts for the financial system. Predictable results. Keep shorting the debt so I can keep making money off suckers like you who don’t understand the monetary system.

          3. RPB


            You are assuming two things that have proven empirically to be false or uncertain:

            1. The government can effectively and without bias select areas to target industries in order to encourage economic growth

            2. The multiplier of the stimulus is greater than 1.0

            These are two paradigms we have seen to be false or unproven; Japan being the best recent example. Japan, with debt levels nearing 2x its yearly GDP would be an example of a massive stimulus. I am not sure how much stimulus you would assert as ‘massive’ but that certainly qualifies to me considering they have the 2nd highest amount of public debt in the world.

            To imagine that politicians are able to effectively select industries by which to properly encourage growth is a joke. We have seen what both parties have done over the past 20 years; aid constituencies. To imagine that the return to stimulus would be more than 1.0 does not take into account the extraordinarily levered consumer. Of all the research I have seen, both accounting for a multiplier above 1 or below 1, I have never seen any real analysis done with respect to private debt levels. And there is certainly more reason to believe the multiplier would be below 1.0 rather than above in our current private debt/solvency crisis.

            Furthermore, forcing an inverted yield curve and driving down interest rates through QE is the only way the Fed can effectively enable the Treasury to continue to float record amounts of debt at reasonable prices (its also how they feel they can get housing fixed). This is fact. If need be they will even buy On-The-Run Treasury notes/bills and MBS paper directly from the BDs. That too is fact. The Fed has done and will continue to do all it can to repair bank balance sheets at the expense of anything else. Also fact. This monetization of the debt both extracts volatility from the market (as they do not hedge duration/convexity risk). This also results in driving down yield across the curve and perverting risk premiums. We saw the perversion of risk premiums and the drive for yield contribute to the housing crisis. With risk frees at lows the banks can effectively lend low enabling anyone to obtain cheap funds. As a result this penalizes savors and pension funds with targets for yields in order to meet retirement obligations. This necessarily drives them into speculative markets (though with substantially reduced Vol due to the Fed purchase programs) where they enter into investments they do not understand.

            Essentially, when you break it down, stimulus works against economic growth in two ways: it penalizes savors and does not necessarily provide a return of 1:1 in terms of an economic growth for capital spent. In fact, if the economic return on the government spending in the economy does not equal the cash flow of the bond throughout its entirety, than the return is negative for the capital and everyone loses. It would be quite a grand bargain if it did work that way, but this has not been properly researched with respect to our current situation. And if it did work that way then it would pave the way for a centrally planned economy. Thus, it is a gamble and a tremendous monetary experiment.

            This is the problem with stimulus. This dilemma is coming to a head in Japan: stagnation (despite an aggressive export regime and lots of debt issuance to encourage growth) and now a savings crisis. Japan too inverted their yield curve, held down rates, engaged in debt fueled stimulus and depressed their currency in order to repair balance sheets and increase exporting (and fueled a carry trade). The results speak for themselves. Inverting the yield curve and massaging rates are actions that are done in concert with government stimulus in order to cheaply fund debt. This is how it is done. The Japanese got lucky that their populace was both in a demographic sweet spot to save, had a culturally high propensity to save and that much of the world had a voracious appetite for their products.

            You must be realistic with expectations to both the selected stimulus industries of the legislature and what must be done in order to cheaply ‘move’ that debt. Congressmen are not economic masterminds, rather, they are parties with vested interests to do the most to get re-elected. They will never chose an optimal stimulus program (even if that were possible or the return would make up for the negative consequences or even be ‘economically profitable’). And in order to reasonably price debt, a country’s central bank will enact policy that will enable its treasury to do so.

            With regards to being *short* debt, I never said I was short anything. I noted that I was a professional trader. The more repurchase programs, the more debt issuance, the more fiscal uncertainty; the more pieces of paper I can put my hands on and the more volatility I can scalp around. This benefits me enormously. It benefits few others.

  2. jake chase

    All talk of ‘controlling the deficit’ is hogwash, as is all talk of the Fed’s ‘exit strategy’. Yes, the Euro is on its way to $.85, but it has been $.85 before and the world didn’t end. Why is it that nothwithstanding universal fiat money, so called authorities keep blathering about the ‘sustainability of deficits’?. Perhaps for the same reason these same authorities insist it is impossible to tax the rich or the corporations? What we face is a political problem, not an economic problem. If every banker were stripped naked and floated out to sea the only consequence would be a reduction of leverage.

  3. Gary Anderson

    I don’t know Marshall. Seems to me that Europe with even more massive deficits is in a bad situation. Our repayment on the national debt is something I wish you would look into. I think it will be enormous. And bubbles aren’t held in check when we have this spending and inflation. Look how much gasoline has gone up.

  4. Marshall Auerback


    In deference to your delicate sensibilities, I promise not to use the term, “deficit terrorist” again. I do not wish to imply that “deficit hawks” (let’s use your term for the sake of comity) wish to inflict pain on everybody. I’m simply extending the logic of a financial balances approach. We hear politicians and the media arguing that the current federal budget deficit is unsustainable. I have heard numerous politicians refer to their own household situation: if my household continually spent more than its income year after year, it would go bankrupt. Hence, the federal government is on a path to insolvency, and by implication, the budget deficit is bankrupting the nation.
    That is a fallacy of composition. It ignores the impact that the budget deficit has on other sectors of the economy.
    How does this work in practice? If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output are likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies – that is, unless creditors are generously willing to renegotiate existing debt contracts en masse. Which is why any particular nation in these circumstances must either run an external surplus on its current account, or experience a rising government deficit or some combination of the two.
    Of course, given the prevailing levels of government deficit hysteria in the US right now, one can see the political appeal of focusing on export led growth, along Asian lines, since a sufficiently large trade surplus will facilitate the government’s ability to cut spending and run public sector surpluses. The problem of course comes from the fact that it is impossible for all governments (in all nations) to run public surpluses without impairing growth because not all nations can run external surpluses. There has to be another nation willing to become a net importer. For nations running external deficits (the majority), public surpluses have to be associated with private domestic deficits, which is inherently constraining in a way that government deficits are not.
    Historically the US private sector has spent less than its income—that is, it has run a surplus, whereas the government has run deficits. From a straight national accounts identity, then, the paradox of private sector thrift is that it is facilitated by public sector profligacy. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector.
    Of course, the opposite would also be true. Assume we have a balanced foreign sector and that the government runs a surplus—meaning its tax revenues are greater than government spending. By identity this means the private sector is spending more than its income, in other words, it is deficit spending. The deficit spending means it is going into debt, and at the aggregate level it is reducing its net financial wealth. By extension, a country which runs a large trade deficit (as the US has persistently done for the past quarter century), needs an even greater degree of government fiscal expenditure to offset the potential “deficit” spending by the private sector.
    Unless you think the US is going to become an export superpower, what you’re telling me is that the elimination of government deficits is more important than the elimination of unemployment. That’s a political position. But how do you get there, given the fact that the deficits are largely endogenously determined? I’m really asking you to sketch out the logic of your position, as I’m making an operational point about government spending, not an ideological one.

    1. shrek

      Its hard to argue with idiot savant academics and other clueless politicians. All you have to do is read Cicero to learn about war and debt. The modern world is losing wisdom and no one understands that knowledge is subtractive. We know from history what not do.

  5. eric anderson

    Excuse me if this is not an exact figure, but the projected deficit for the current fiscal year is what? $1.6 Trillion? Back of the napkin calculation: 12% of GDP? Wow, that’s real austerity. That’s Grecian austerity. Projected $1 Trillion deficits as far as the eye can see, assuming a return to normal growth rates. Where is this Obama austerity of which you speak, Mr. Auerback? Mr. Obama occasionally mouths the words of austerity and deficit control, but they’re only words. He proposed controlling spending in a small slice of the government spending pie, not addressing about three quarters of the rest.

    As a deficit terrorist, but one who can be reasoned with, I would like to ask if you can provide any historical examples of a nation already as deeply in debt as we are (400% of GDP) who proposed to run the kinds of deficits we are planning to run for at least a decade into the future, that has experienced any kind of a strong recovery and return to normalcy. Otherwise, you are asking us to accept government-spending-without-revenue as a remedy on faith.

    “Faith is the evidence of things hoped for, the substance of things not seen.” (Hebrews 11:1) Or, as the NIV translation puts it, “Now faith is being sure of what we hope for and certain of what we do not see.”

    In this matter, I would prefer to rely on history rather than hope.

    1. Gary Anderson

      Hi Marshall,I agree that the sky is not falling, but it all depends on economic growth. We were a growing society back in the 1800’s. Not sure we are today, nor that we can act the same today. What if rates go up as investors get nervous? It is happening in Greece.

  6. Marshall Auerback

    With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. Has any household been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837? As discussed above, there are firms that grow their debt year-after-year so it is conceivable that one might be found with a record of “profligate” spending to match the federal government’s. Still, the claim might be that firms go into debt to increase productive capacity and thus profitability, while government’s spending is largely “consumption”.

    Fourth, the United States has also experienced six periods of depression that began in 1819, 1837, 1857, 1873, 1893, and 1929. Therefore, every significant reduction of the outstanding debt, with the exception of the Clinton surpluses, has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative private-debt fueled euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might yet suffer another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, as we will show below, our less serious downturns in the postwar period have almost always been preceded by reductions of federal budget deficits.

    1. a

      I don’t think you do your case any good by this use of history.

      “; from 1823 to 1836 it was eliminated (Jackson’s efforts);”

      So for thirteen years the US was running a surplus and in 1837 the U.S. went into a deep depression. Thirteen years sounds like a pretty good run. In fact it sounds like the surplus years had nothing to do with causing the depression. Maybe depressions happen periodically for other reasons than the government running a surplus (or not running a deficit), and once the depression hit, tax receipts collapsed causing the end of the surplus years.

      1. boot boy

        Well, it’s now about 13 years since the last time we started running surpluses. We’re 2 for 2 now.

  7. Kiste

    In what way is Germany’s economic policy mercantilistic, which always implies protectionism? Having a highly competitive industrial sector that build things the world wants to buy = mercantilism?

    1. boot boy

      Germany pursues full employment through exports and restraining domestic consumption. Then gets angry at other countries like Greece, etc., that must run deficits to create full employment. As Marshall explained, not every country, by definition can have current account surpluses. If Germany’s going to create its jobs by being competitive, less competitive EU countries will have to do it through building leverage in the private or govt sectors. If another country were to replicate Germany’s approach, Germany would be the one needing larger govt deficits. In other words, some country will be less competitive and will need govt deficits. It’s just accounting.

      1. Detlef

        How do they “restrain private consumption”?

        I don´t know of any German law that says that German households have to maintain a savings rate of 11%. :)

        If they had followed the US and UK example consumption certainly would be higher. But would it be a good idea?

        Likewise credit card debt is almost unknown in Germany.
        Also no housing bubble.
        So without a lower savings rate consumption probably won´t reach US levels.

        1. boot boy

          You’ve answered your own question. For the record, I don’t think ‘restraining domestic consumption’ is necessarily a bad thing. It’s a choice, and it has worked well for Germany overall. But if Germany’s going to be successful at it, some other country or countries must do the opposite, by definition, or else none of them will have full employment. That is, Germany needs some country to buy its exports, and the workers in that country need their own jobs to enable them to buy Germany’s exports. Given a German trade surplus, the other country can’t do this without either private dissaving or government deficits. It’s just accounting.


      2. Kiste

        Ok, a few remarks/questions.

        Germany exports goods and services, which creates domestic jobs. Germany also exports capital (and quite a lot of it), which reduces domestic demand and investments, i.e. it costs jobs. By the way, Germany has not seen full employment in many decades.

        It seems to me that a current deficit doesn’t have to be a problem. Countries could take German capital, use it to buy German-made capital goods and put them to productive use and thus create economic growth and jobs while running a trade deficit. It appears to me that the problem isn’t the influx of foreign capital, it’s the malinvestment of it.

        Furthermore, I am still not quite sure what exactly it is that Germany is doing to “restrain domestic consumption”? What exactly are you referring to? Germany’s refusal to deficit spend like there’s no tomorrow? Is 6% of GDP not enough? How big a deficit should Germany run, in your opinion? Would another country joining the ranks of 10+% deficit spenders really be a viable long term solution?

        Or maybe you’re referring to real wage stagnation? This is certainly true for Germany, as it is for the USA and many other countries. That’s the just the reality of a globalized economy, especially when Poland and the Czech Republic are your next-door neighbors and even lower wage countries are just a few miles further to the east of these.

        What exactly is it that you want Germany to do? Make its industry less competitive? Ok, jobs would vanish to Eastern Europe and Asia, budget deficits would rise and then?

        I fail to see what Europe could possibly gain by yet another country going the UK route of de-industrialization and then going on to spend money you they don’t have in order to maintain a level of wealth they’ve never earned. Banking on the creation of a service industry, most prominently financial services, has turned out to be a rather bad idea, I’d say.

        I also fail to see how a trade deficit necessitates a state budget deficit. After all, the USA managed to run a budget surplus in 2000 while having close to full employment and a trade deficit of 400 billion USD.

  8. DragQueen Capitalism

    “The President should be using his position of influence, and his considerable powers of oratory, to change public perceptions and explain why these deficits are not only necessary, but highly desirable in terms of sustaining a full employment economy.”

    There is no such thing as a “full employment economy”, and if there were, the Fed (and consequently Central Banks all over the globe, specifically, the ECB)has been actively promoting a monetary policy completely at odds with full employment, which they cogently refer to as anti-inflationary.

    So what Mr. Auerback is suggesting is that the President should jettison any scruples he has and simply come out full-bore with complete lies.

    What the financial crisis and its relatively benign effects on the Asian economies should be teaching the West is that industrial mass-production is now completely at odds with industrial mass employment and engenders suppressed wages via cross-border wage-arbitrage. Both India and China have huge, (as measured in hundreds of millions) of forced-labor, poverty-stricken, homeless waifs working 12-hour days and mired in interminable hopeless poverty and life-crushing endless toil, human energy reserves. This is the New Economy the Neo-Liberal regime has fostered and, behind closed doors, as they face the specter of peak-oil production, embraces.

    It should be abundantly clear, from both the actions of the Fed and the Health Industry debates, that the radical Capitalism advocated by the Friedman School of economics that has driven the West for the last generation has no room in it for housing, Health coverage, nor education for a middle-class society. All the dynamics of the so-called innovative Neo-liberal regime are toward ensconcing a self-appointed elite class over the rest of society whilst draining their output into their own off-shore, tax-free bank accounts.

    This is what Mr Auerback believes the President should indenture our children to preserving by “using his position of influence, and his considerable powers of oratory”.

    That futures so bright, I gotta wear shades.

  9. Dave Sanders

    “Unless you think the US is going to become an export superpower, what you’re telling me is that the elimination of government deficits is more important than the elimination of unemployment. That’s a political position.”

    Mr. Auerback… Have you explained this to your grandchildren? I’m sure they’ll understand why it’s in their best interest to pay for your BMW and diapers while they live in a favela, right?

    Do you have any idea how much bad debt is out there?

    It must be paid off, haircut or DEFAULTED. You seem to feel that default is untenable… But it’s not. Just ask all the people eating at the Olive Garden who’ve skipped their mortgage payments for a year or two. You want me to pay for that with my earnings and savings? I’ve got two words for you… The first is a verb.

    I’ve been on the losing side of every election since I stated voting in 1985. I have ONE outstanding loan – my mortgage. My DTI is under .20. I’ve been self employed since I was eighteen, have been married to the same woman for twenty-two years and have raised two sons to adulthood. I’ll be damned if you Keynesians are going to destroy my savings. Mr. Smith and Mr. Wesson may well assert themselves in the very near future if this crap continues.

    It’s time to rip this bandaid of bad debt off the festering wound that is the U.S. financial / political system. The slower you guys pull it, the more pissed off we get. Time to fish or cut bait.

    I don’t make money with leverage… I make it the old fashioned way… I WORK and SAVE. THEN, I get to go buy stuff that pleases me. I’m not your debt slave.

    I guess I’m just an anachronistic old crank in your brave new world of hyper-leverage. Maybe you and your cohorts should just come on over and machine-gun me into a ditch and cover me with lime.


    Dave Sanders, Orange County, California

    1. carol

      “I WORK and SAVE. THEN, I get to go buy stuff that pleases me.”

      Dave, this might summarize your disagreement with Marshall.

      From this posting, as well as previous ones, it is clear that Marshall does not like savers, as they contribute to what he calls ‘the spending gap’.

      1. Marshall Auerback

        Disagree. I don’t mind savers. But remember the fallacy of composition. When you or I save, it’s fine, but if we all try to do it, then the economy in aggregate declines. Who will pick up the slack in that kind of situation? Either the external sector (unlikely) or government deficit spending. No other way. Let me say that I love private savings so much that I urge government profligacy to facilitate it!

        1. carol

          “But remember the fallacy of composition.”

          That’s why I wrote ‘savers’ (from your writings it is clear that you do not mind ‘a saver’, but collectively ‘savers’).

          “Let me say that I love private savings so much that I urge government profligacy to facilitate it!”

          That assumes that savers do want to buy government bonds. Not all savers see that as a right destiny for their savings. E.g. many Greeks have moved their savings out of Greece (mostly to Cyprus and Switzerland), instead of lending it to their government.

          1. MacroStrategy Edge

            Sorry, Carol, Marshall is making no such assumption.

            Households cannot net save en masse unless another sector (or combination of sectors) deficits spends.

            It is the fiscal deficit spending that makes it possible for the household sector to net save without income imploding.

            Governments with a sovereign currency (not convertible on demand into a fixed number of units of another currency or a commodity) never need to raise funds/issue bonds to pay for products or assets they acquire. The money you use to pay taxes or buy government bonds comes from…the government deficit spending or the central bank net buying assets from the private sector.

            Investigate this for yourself. You cannot print money. Your employer cannot print money. Both acts are deemed counterfeiting. The money the private sector uses to pay taxes and buy bonds comes from the government itself.

            But we’ve written about this hundreds of times so I won’t go on with this – best to track through Marshall’s prior contributions on NC, or go straight to billyblog or New Economic Perspectives to get this clear in your mind. You could also order Randy Wray’s Understanding Modern Money from Amazon, which many people have found especially lucid in such matters.


            Rob Parenteau, CFA
            MacroStrategy Edge, sole proprietor
            The Richebacher Letter, editor
            The Levy Economics Institute, research associate
            The Roosevelt Institute, Braintruster

    2. Evelyn Sinclair

      I don’t like the destruction of my savings either.

      I too tend save up money for later; I have no debt. I built up businesses I worked hard in all my adult life. Now I see the threats to the value of my savings, and I can find no place safe to put it that pays anything like a recognizable interest rate.

      It’s Morning After in America.

      What happened over the past 8 years was a binge of Borrow & Bomb warmaking. We were told that our foreign invasions wouldn’t cost us anything. We put it on our War Credit Card.

      Remember when Dick Cheney said, “Ronald reagan proved deficits don’t matter?”

      Greenspan’s big bubble was growing like a cancer all during those years. The deregulated financial sector burrowed into our pension funds, our retirement 401s; it sold it’s toxic derivatives to the whole world. They created a derivatives Zeppelin. A hindenberg that finally blew up in 2008.

      We are living in the aftermath of all that.

      The financial sector and the military are still dismembering the corpse of the U.S. financial system. But basically, the major crimes were committed long before the current administratin took over.

      Blame where it is due. The Keynsian economists may not appeal to you, but if you want to go gunning for someone, may I suggest picking a target who was in a position of power during the 8 years leading up to the revellations of 2008?

    3. Sid Finster

      “working” and “saving” are only for communists.

      Real Capitalists Borrow! and Spend!

  10. Dan Duncan

    “How big can these deficits go? Easily to around 10-12% of GDP or higher (versus the current 8% of GDP)…Possibly even higher.”

    You are treating the composition of the GDP of 2010 the same as that of 1960.

    Does the composition of the GDP matter?

    For example, what if the $14 trillion GDP was the result of a fictional ponzi scheme…and was really “achieved” from a delusional debt binge on the part of the private sector…

    Is that a “traditional” GDP?

    Furthermore, what if the government stepped in to backstop the delusional debt binge to prevent a massive implosion? What if said guarantees were conveniently treated as “off-balance sheet” items and not included in overall debt calculations?

    What if the government was in a position whereby 100% of its budget was spent on interest payments? Would these payments actually add to the overall GDP? If so, would you still maintain 10% deficit spending makes perfect sense?

    Finally, what if the 10% deficit spending was incurred at a time when said deficit spender made HUGE promises to deficit spend in 5, 10 and 20 years time? What happens to the future government’s ability to deficit spend? Do we owe any obligation to reduce our spending to help pay, or do we get to ALWAYS rely on Deficit Spending=(.1*GDP)?

  11. Jerry

    I need some help….everyone seems to think it is incorrect to be protectionist…I understand that from a corporate point of view…more profits when I move manufacturing to China and labor rates are $3 per day ….But how does that benefit the American worker whose job has moved overseas….AND how does that benefit the corporation in the long run as the American unemployed workforce that is no longer working cannot afford the corporate product..Would it make more sense to allow for each county to protect a certain level of its manufacturing to sustain its economy rather than make economies like the US now which is mostly low paying service jobs …

  12. ActrFshr

    Errr. Gary,

    Please don’t forget the issues with commodities as well as the closure of the “Bank of the United States” in 1836 as well as the methods of reaching a budget surplus.

    Blaming a balanced budget for a drop in the economy isn’t fair when there are so many factors.

    103 years later Roosevelt tried to reduce the budget deficit but did so by raising taxes. That sank the economy.

    In 1921 Harding called for drastic spending cuts. At least in that case it worked. Yet I have seen almost ZERO politicians calling for spending cuts (only tax cuts).

    The biggest problem with budget deficits is that the debt required to maintain them bleed capital away from (1 employee as well as 1,000 employee) corporate debt facilities. That decreases their ability to expand, delaying job creation. :(

  13. Marshall Auerback

    Dave Sanders,

    In answer to your question:

    “It is often said that when we go to war, we pile up huge debts for our children to pay, in the form of interest and principal on government bonds. But there is no way whatever for the world to pass on its war debts; they are paid day by day, hour by hour. The sunken ships, the wasted food, the exploded shells, the hours of labor, the mangled bodies, will not be supplied by future workers. Everything that is consumed has already been produced. Any one nation, to be sure, can postpone paying its war bills, in so far as it makes external loans; but when a country borrows only from its own people, it pays for the whole war out of past and current savings. The Liberty Bonds issued by the United States were not devices for making future generations pay for the War. These bonds transfer obligations, not from one generation to the next, but from some people to other people.. when the two billions of the First Liberty Loan are paid, two billions will be taken
    from some people and paid to others. Some of these people will pay in taxes just about what they receive for their bonds; others will pay less, others more. The whole country will not be a dollar richer or poorer than before the two billion changes hands; and not a dollar of that money will be used to pay for the war.”

    Money, Foster and Catchings, Third edition, revised, 1930, pp. 59-60

  14. Marshall Auerback

    Dan Duncan,

    New CBO report says that deficit in 2011 ex TARP to be $1300b + so if you assume $15T GDP that is around 8.5% of GDP. I was thinking of the nominal # still over $1T. Of course GDPcould disappoint and then the number goes over 10%. As I said, I wasn’t applauding this, but merely indicating that this was a likely fallout, should the euro’s external value decline rapidly and thereby engender a huge increase in exports to the US. I’m merely applying a financial balances approach to a scenario that I think is highly likely given the current conditions prevailing in the EMU.

  15. Marshall Auerback


    Embracing a fiscal austerity model, which essentially precludes the expansion of domestic demand is tantamount to a form of mercantilism. But the problem for Germany is that the major markets for her exports are within the EU. So if domestic demand deflates in Greece, then Spain, Portugal, Italy, and spreads inward to France, then to whom will Germany sell its goods? Germany’s policy makers fail to recognise that they are in a roach motel as well and that the problems of the PIIGS are ultimately a problem for the entire EMU. Again, it’s a classic fallacy of composition mistake Germany is making. If an entire currency bloc is forced to undergo an “internal devaluation” a la Latvia (or Ireland) then where does the demand come from to buy German goods?

  16. Dave Sanders

    “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

    Thomas Jefferson

    This country is finished. I’m just counting the days, sir.

    1. colinc

      Great comments, Mr. Sanders, meaning both of the above AND the 1 below! Since I possess a degree in Mathematics I also concur with your “Math always wins” statement save for 1 caveat. As any statistician, and probably most any “banker,” can demonstrate, a set of equations and functions can be constructed to “demonstrate” almost anything regardless of their basis on fallacious assumptions or suppositions. As long as the following formulae remain consistent with those initial “beliefs,” the math will “prove” their point, whatever it is. Deducing the errors of the initial arguments is the rub and, often times, that’s easier said than done.

      1. Vinny

        Indeed. As the old saying goes, “numbers don’t lie, but liars use numbers to lie all the time.”


      2. Dave Sanders


        Yeah – true enough. I’m obviously betraying my ‘engineer head’. We don’t use numbers to cheat, but rather to quantify safety margins. I concur with your elaborations with regards to statistics.

    2. Marshall Auerback

      Well, Jefferson is always a good person to invoke, but he was also responsible for a HUGE increase in executive powers (his actions in regard to the Louisiana Purchase were profoundly unconstitutional) and his attacks on Chief Justice Marshall reflect a profound lack of respect for the very constitutional liberties that he claimed to invoke. It’s hard to listen to lectures on liberty from a man (Jefferson, not you, Dave Sanders; I’m sure you’re a very nice person) who was also a slave owner (and one who by all accounts liked to bang them up). I would prefer to invoke the wisdom of Alexander Hamilton, who had a much greater appreciation of public reserve accounting and who understood the benefits of a national debt.

      1. Dave Sanders

        Touche’, Mr. Auerbach on the Jefferson points of history! you’re quite correct, TJ had some foibles!

        Sorry for my previous combative tone but, as a saver, this whole ‘inflate to infinity’ thing really chaps my hide. You can understand that, right?

        I get punished because I refuse to get leveraged.

        That’s what really gripes me. Here’s a huge example; The ‘Cash for Clunkers’ thing. Sure, .gov will give you some of your tax dollars back IF you’ll go get MORE levered up. That’s a mild extortion as far as I’m concerned. That’s a crime.

        It should be none of Tim or Ben’s business how leveraged I am… They should stick to maintaining a stable currency that I can save for future needs. I plan to die broke… That means one day, of my choosing, I’ll be loosing hundreds of thousands of dollars into the economy. I earned it, and I should be able to exchange it at roughly full-value sometime during my lifetime at my own discretion without having it devalued. I don’t think that’s too much to ask. Granted, I do not take on any risk, so I cede my opportunity to seek rent on that savings. BUT… by the same standard, I should not be penalized for avoiding the risk of rent seeking by the very entities that control the volume and /or quality of the currency. That’s all I’m saying. You don’t see the inherent abuse I endure under the debt-based curreny paradigm you endorse?

        A society needs to reasonably accomodate a wide spectrum of risk tolerances to remain stable. It needs to be able to reward risk / rent seekers, while protecting capital ‘heatsinks’ like myself. As much as money managers hate to admit it, they need me just as badly as I need risk seekers. If deflation were allowed to occur in any proportion even near to previous inflation, I would be damn quick to ride to the rescue with money to spend. And we’d begin the next cycle.

        I’m totally written out of your world.

        1. boot boy

          You can’t seriously be comparing cash for clunkers garbage to what Marshall’s proposing? That’s just ridiculous. And “inflate to infinity”??? Who ever said that? Again, straw man here, red herring there.

    3. Greg

      Dave you’re right! And along with private banks you should also include private financial markets as well. If you follow Marshall’s and Bill Mitchell’s,Randall Wrays and Warren Moslers thinking over the last few months, if you’ll read everything they’ve written they definitely are not in favor of private money creation. In fact their whole argument is for govts to reassert their dominant position over financial markets and not be cowtowed into paying higher interest rates. I agree with your sentiment and I think Marshall does as well.

  17. Swedish Lex

    Regarding the first scenario for the euro. France would immediately abandon the euro if Italy does so.

    1. Marshall Auerback

      Swedish Lex (always enjoy your work, by the way),

      You could well be right. I suspect this is one of the reasons why France is not wholeheartedly backing Germany’s agenda. Note the comments made by Christine Lagarde recently where she said “it takes two to tango”. She understands the destructive nature of Germany’s obtuseness here.

      1. Swedish Lex

        It is correct that France has a difficult role to play. One one hand the “good” Europeans by being the only last major EU founding state that is pro-actively working to support the euro at a political level, on the other hand elections coming up in 2012 which will force politicians in all camps to drive a “France first” policy.

        As regards Italy, one has to keep an eye on how Italian manufacturing communicates. Should Italian industrial leaders, or their organisations, begin to complain about their difficult situation vis-à-vis their German counterparts, it could be a telling sign.

  18. Dave Sanders

    One last thing and I’ll retreat to my cave… (which I’m sure you’re envisioning presently).

    Have any of you ‘economists’ or ‘fund managers’ ever had lunch with a group of physicists? You might want to give that a try… See what they think about your ‘constant, escalating debt service’ model. I’ll bet they’d just bust a gut laughing. The Math always wins.. Always.

    You guys have a serious problem.. an infinitely escalating monetary system on a finite planet. You want perpetual growth? Better get behind colonization of the next available planet (that’d be Mars). I’d be first in line to sign up for the trip… Which I’m sure would please the typical broker / banker / politician to no end. I’m just goddamned tired of trying to swim upstream against you guys, and would really prefer an honest battle of wits against the elements… Where it’s heads or tails, win or lose. This ‘extend and pretend’ stuff is just mental masturbation, which is apparent since it takes reams of paper and endless volumes of books and newsletters to describe it’s function. The aforementioned physicists would explain Occam’s Razor… Then you’d kind of see what I’m getting at.

    The Age of Discovery is what finaly broke us out of the feudalism of the Middle Ages. We’ve reached that knee point again. Think about that. There’s no more cathedrals to build… every city’s got one, now.

    Good Day.

    1. boot boy

      Yes, the math always wins. that’s why you’re wrong. where’s the constant escalating debt service in Japan?

      1. boot boy

        should be “constantly” not “constant.” Actually, probably should be “exponentially.” A simple typo may have been the crux of the issue here. but, restating my point, where’s the exponentially increasing debt service in Japan?

      2. Detlef

        I´ve read that up to now Japanese federal debts were mostly bought domestically. But that a major Japanese buyer (pension funds?) has now announced that they will scale back their buys of Japanese debts. Because the aging Japanese population will now need their savings when they retire.

        It´s entirely possible that Japan at some point will need to sell more bonds to foreigners. And at that point debt to GDP ratios might matter.

        1. Marshall Auerback

          Whoever owns the bonds is irrelevant. Whether foreigners or Japanese own Japanese bonds, it’s just an income transfer from the government to the private sector, whether it be an external holder of bonds, or domestic. What the bonds do, as stated below, is alter the distribution of income for future generations. And it also qualified it regarding external loans, not specifying whether this was for domestic currency funding or external currency funding. In the context of a gold standard or some other fixed fx policy it’s all the same, which perhaps is why, in 1930, it wasn’t specified. Today’s critics, of course, notoriously including Rogoff and Reinhart, lump them together and raise concerns about the US securities held by non residents, both from a funding dependency and from a solvency/payback point of view.

    2. Vinny

      Sorry Dave, but I already claimed Mars for myself. But you can have Europa, assuming you can get past HAL first… :)


      1. Dave Sanders


        LOL!! Yes… well, Dave Bowman DID ultimately defeat HAL.

        But hey… that’s a raw deal… God said we can’t have Europa, didn’t he? I could go to Titan and become an oil tycoon, though…. hmmm…

    3. Keith Newman

      If you think the arithmetic matters, the ”debt burden” depends on the yearly deficit, the rate of growth of the economy and the interest rate paid on the debt. With current interest rates close to zero, as in Japan, the ”burden” is small indeed, and will largely disappear once the growth of the economy resumes.

      In fact the arithmetic is irrelevant since what matters is the availability of real resources. If your fear is of currency debasement, this is unlikely under current circumstances. Public spending could trigger inflation if it pushes up demand for resources that are already employed. However the United States is the most deflationary situation it has been in for decades as tens of millions of unemployed workers and low industrial capacity utilization reflect vast unused resources. Government deficit spending will not compete for fully employed resources, especially if spent on employing workers, and hence will not be inflationary.

      1. Dave Sanders


        “If you think the arithmetic matters, the ”debt burden” depends on the yearly deficit, the rate of growth of the economy and the interest rate paid on the debt.”

        Agreed… But somehow we never quite catch up, do we? It never ‘pencils’.

        “With current interest rates close to zero, as in Japan, the ”burden” is small indeed, and will largely disappear once the growth of the economy resumes.”

        Twenty years of misery and counting.

        “In fact the arithmetic is irrelevant since what matters is the availability of real resources.”

        Absolutely. We could inflate a whole bunch we accessed and increased pool of resources. Thus, my proposal for a long trip on a short rocket.

        “If your fear is of currency debasement, this is unlikely under current circumstances.”

        For the moment, yes. I figure I’ve got about 50 years left before St. Peter rings my bell. Think I’ll come up even? History tells me, “Not so likely”.

        “Public spending could trigger inflation if it pushes up demand for resources that are already employed.”

        Public spending? Frankly, I’d rather spend it myself. Granted, we need government to provide some services, but not nearly the things they bankroll presently. I think we may have a fundimental disagreement about the role of government… A different discussion entirely.

        “However the United States is the most deflationary situation it has been in for decades as tens of millions of unemployed workers and low industrial capacity utilization reflect vast unused resources.”

        Yes, for now. And about those resources… We’ve nearly exhausted the oil. Noble metals are at a trickle. We’ve got a lot of coal, but it’s hard to utilize legaly. We’ve turned our back on nuclear power. I’d say there’s a lot of poor judgement being exercised.

        “Government deficit spending will not compete for fully employed resources,”

        Right… and it shouldn’t try to, either.

        ” especially if spent on employing workers, and hence will not be inflationary.”

        They’ve already ‘paid’ for billions worth of garbage mortgages with money raised with even more debt. What happens when that money gets loose?

        They want a game where the risk monkeys don’t lose. That’s a slap in the face to the prudent, like myself. I gets me a little indignant.

        1. Keith Newman

          Dave; I rest my case on government spending today not being inflationary under current circumstances since we agree. You believe it will overspend in the future and cause inflation. This is possible but people will have to deal with that issue when and if it arises. For now unemployed resources are the problem.
          With respect to Japan, the government there didn’t spend enough to get the country out of its stagnation but did spend enough to prevent a depression. It is political pressure by deficit-phobes that prevented sufficient spending for the country to resume reasonable economic growth. In fact it looks very much like the US is going down the same road. Needlessly I might add.
          With respect to government spending versus private spending, many services can be provided through government much more efficiently than privately. Health care is the obvious example.I agree this is a different debate and a diversion from the topic at hand. However you might try reading the following, entitled America:The Grim Truth, much of which which jibes closely with my observations as well:

        2. Greg

          First I’m not sure calling Japan painful is accurate. Unemployment is relatively low, inflation is low and most are still net saving and not in a great amount of debt. No their GDP is not what it was but they are far from “hurting”

          Your reference to Argentina is specious. The US is nothing like Argentina nor is the Eurozone although the Eurozone is much closer than we are.

          I disagree that Marshal wants a game where the debt monkeys dont lose. We are currently in a system that lets the “debt monkeys” hold govts hostage forcing them to pay higher interest on their debts and enter into austerity packages with their citizens. If you really study what the MMT/Chartalists are advocating it is a spending without debt issuance type govt AND central banks which control the yield curves on their bonds the way they are capable.
          Bond markets will get their safe investments but they will not hold govt currency issuers hostage. The current arrangement is one that your Jefferson quote was referring to, not what Marshall, Bill, Warren and Randy advocate.

  19. Kiste

    The estimated German budget deficit for 2010 is 6% GDP. The total amount of German state sector debt (including states and municipalities) stands at 71% of GDP. That’s certainly better than most, but it hardly qualifies as fiscal austerity.

    1. Marshall Auerback

      So Kiste what you’re telling me is that Germany is also violating the self imposed limits of the Stability Pact and also the Maastricht Treaty. Why are they then imposing additional fiscal austerity on Greece? Or Ireland, or Spain? At present, Greece runs a huge trade deficit with Germany. Prior to the crisis (2008) Germany exported around EUR 8.3 billion worth of goods and services to Greece. In return it purchased Greek goods and services to the value of EUR 1.9 billion. Germany is Greece’s largest trading partner and has been for some years.

      Greece is also one of the main places Germans go for holidays.

      The Germans have been flogging old Leopard tanks to the Greek government for millions of Euro whilst they are forcing austerity measures on them (which also prevents Greece from buying other German goods).

      One wonders whether the moves by BMW to further penetrate the Greek market will also come unstuck in my austerity plan.

      1. Kiste

        Yes, Germany is violating the Stability Pact limits. So is pretty much everyone else. The Stability Pact has been watered down in recent years, so allowances can be made under certain conditions.

        Why impose austerity measures on Greece? Because their level of deficit has become unsustainable. What else is there to do, except subsidizing Greek deficit spending? What would be the point of that? Funneling money through Greece’s corrupt, rotten government so that Greeks can continue to buy BMWs?

        Have you ever considered that the Germans may very well be aware of the fact that budgetary austerity in Greece will result in less German exports to Greece? Have you ever wondered why they still insist on Greece getting its deficit spending under control, even though it might end up hurting Germany?

  20. Kiste

    Oh, and by the way, I am still not sold on the idea that running merely a modest budget deficit, instead of a ballooning budget deficit, is a form of mercantilism.

    Imagine for a second that the whole world runs a budget deficit of 3% of GDP. Then a few countries decide to run a 12% budget deficit. Would that make everyone who doesn’t follow suit mercantilistic?

  21. Siggy


    What the government spends it must fund by either, Taxing the populus and anyone or thing that can be taxed; or, if the government has a sovereign currency, the debasement of the currency.

    The debasement of the currency, the willful reduction of its purchasing power makes the entire country poorer, not just those who have borrowed more than they can repay. It is, effectively, a theft, an endorsement of profligacy.

    Our contract for a government calls for a Federal Republic having legislative, administrative and judical branches. It is a contract for the government of, by, and for the people. What has failed us has been our government. In that failure it has been people, not the concept of government that failed.

    Our representatives and Senators and Presidents have failed to adequately represent our best interests. Paramount in this failure has been the debasement of the currency. This debasement has been accomplished by easy money sponsered by the government and implemented by the Federal Reserve System, a government chartered cartel.

    Mr Auerbach, what is the amount of interest on the national debt in relationship to GNP, or GDP? That is the relationship that needs direct attention. Is it a small or large number? And, at what point does that number dictate that the government repudiate outstanding debt?

    Can you answer those questions?

    1. boot boy

      How much was the currency debased during WWII when the national debt increased to 125% of GDP? At any rate, your overarching point is incorrect, as what actually matters isn’t the price level as much as the standard of living. If the average person has to pay more in nominal $ for something than before, but also can buy more of them with the average income than before, then the average person is better off.

      Interest as a % of GDP is a bit below 1.5% as of FY2009. It was over 3% during the Reagan/Bush era.

      1. Detlef


        Surviving as the only major industrialized country without any destruction probably did help a lot. Not to mention that the debt then probably was held domestically (war bonds?).
        Look at the UK pound. Some destruction and debts to the USA. As a result it lost value.

        And of course today quite a few trillions of your debt are owned to foreigners.

        And the interest rate?
        Unlike you assume that the Fed will leave the rate near zero indefinitely, that “interest as a % of GDP” probably will rise.

        1. boot boy

          UK pound was in a fixed exchange rate. Apples and oranges.

          Debt held by foreign investors is of no consequence for the currency issuer under flexible exchange rates if the debt is in the domestic currency. If foreign investors sell the bonds, this raises the trade balance and either reduces the deficit and/or raises domestic net saving.

      2. Siggy

        The price level is your standard of living.

        Circa 1945 it took one income and a college education for a family to be upper middle class. Today it takes the same college education plus a masters and possibly a doctorate and two incomes. The middle class is being erased.

        From 1945 to the present there has been an approximate 75% loss in purchasing power of the dollar. Since 1945, we have been losing purchasing power at the rate of 3.25% compounded annually.

        My point is that despite what Mr. Auerback might believe, government debt does matter. It especially matters when you have a fiat currency. The fact that the government can monetize its debt thru the Federal Reserve System makes matters worse. That 3.25% burden is what drives the markets and individuals to chase yield. It is the engine that evokes avarice and fraud.

        The relationship of total national debt service to nominal GDP is very important. There is a certain percentage of government expenditure that goes to government services and entitlements. To that we add the amount that is paid in interest on the debt. That total expenditure has to come from the population as taxes and/or the debasement of the currency.

        Please describe to me how Modern Monetary Theory can create the cash flows required to operate the government and our entitlement programs and pay the interest on the money that the government has borrowed. Even if you simply print the money, or create electronic 1s and 0s that signify money, you are either borrowing and/or debasing that which we call our money. Either way, the citizenry is made poorer. Increases in government debt require increases in output.

        The repayment of debt with dollars of lesser purchasing power is, effectively, a theft from the lender, unless, of course, the loan was priced to account for the probable loss in purchasing power that the future dollars are expected to command.

        The trouble in the Euro Zone is all about the fact that the governments in Europe have a hard time increasing their taxes while the costs of providing their social services keep rising. Note that those increase are not due to improvements in the value or utility of goods and services, the increased prices are the result of loss in purchasing power.

        Now that circumstance arises because so much of the reserves that back the Euro,the Pound and other currencies happen to be Dollars. You could ask Chales DeGaulle about this. Since the Bretton Woods agreement we have been inflating the world’s currency. Nixon took us out of that agreement and currencies floated and that made it even easier for us to inflate the world’s price structure.

        No, it is not the Euro Zone that will infect us, it we who have infected the Euro Zone.

    2. Marshall Auerback


      I think you misunderstand the nature of taxation in a fiat currency world. Taxes exist to regulate aggregate demand, not raise revenue per se. Interesting that Warren Mosler and Bill Mitchell have uncovered some voices from the past in support of this idea. In the last year of World War II, the then Chairman of the Federal Reserve Bank of New York, one Beardsley Ruml addressed the American Bar Association.

      You can access Guide to the Beardsley Ruml Papers 1917-1960 at the University of Chicago Library.

      Historical records suggest the speech was a non-event and “attracted then less attention than it deserved”. In January 1946, the speech was published in the periodical American Affairs and you can see the full text HERE.

      The title of the speech (and article) was Taxes for revenue are obsolete and I bolded this to make sure it resonated in your consciousness for a little time. Read it again – taxes for revenue are obsolete.

      The Editor of American Affairs at the time wrote that Ruml’s:

      … thesis is that given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences. The paragraph that embodies this idea will be found italicized in the text. Mr. Ruml does not say precisely how in that case the government would pay its own bills. One may assume that it would either shave its expenses out of the proceeds of taxes levied for social and economic ends or print the money it needs. The point may be academic. The latter end of his paper is devoted to an argument against taxing corporation profits.

      I would urge all of you to read the balance of Bill Mitchell’s excellent post on this:

      1. Siggy

        I just read it and it has a nasty little dead fish in it. Changes in taxation cause my purchasing power to change. Taxes go up, purchasing power goes down. That is the government attempts to control aggregate demand by way opf the tax code.

        That gets us back to my premise. How shall this burning bush of Modern Monetary Theory pay for the direct costs of my government, its entitlement programs and and the interest on the national debt?

        As we are increasing the national debt, I expect my taxes to increase, because, after all, I need to be made poorer so that we can fund the operation of the Federal Government.

        Now please answer me this why does the Federal Government want me to be poorer? Does the Federal Government not appreciate that the Representatives and the Senators can be voted out? If enough of the citizenry is made aware that it is the Federal Government that has made them poor; what then will be consequence?

          1. Siggy

            Please guide me to the material that would answer my silly questions. If Modern Monetary Theory is going to save my bacon, just how is that going to occur.

            Mind you, I do not want to be poorer because some twit in government feels that it is the role of government to be the determinator of what level of aggregate demand is appropriate for the nation and quite possibly the world.

    3. Marshall Auerback


      Of course debt matters. But you have to distinguish between private and public debt. The former is inherently constraining. The latter is not. during the Clinton years the federal government acted in a manner which would have pleased the greatest Victorian scolds amongst us, running the biggest budget surpluses the government has ever run. This was celebrated by virtually every mainstream economist (much as most decry today’s “explosive” deficits), because it meant that the government’s outstanding debt was being reduced. Of course, in reality what these economists were celebrating was history’s greatest private sector debt binge. Naturally, they didn’t see it this way because they failed to understand the accounting implications of these budget surpluses, which meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds, which were being liquidated to offset the resultant loss of private sector savings.

      With a few brief exceptions, the US federal government has been in debt every year since 1776. And the cumulative stock of debt which eventuated was not a Sword of Damocles hanging over the heads of future generations of taxpayers which in some way constrained their future freedom of action (or else how did the US become the wealthiest economy on the planet?). Rather this stock of debt issuance simply reflected an accounting expression of the aggregate budget deficits that have been run by the government in past years. The “intergenerational theft” line now trotted out with nauseating regularity is completely bogus. As Professor Jan Kregel has noted, we cannot simply engage Doc Brown to allow Marty McFly to fly “back to the future” to make the required payments on behalf of the prodigal grandparents. On the contrary:
      “If the debt is incurred today, but it is to be resolved in the future, the future resources to pay off the debt would have to be transmitted back to the present in order for there to be any burden in terms of lost consumption by the future generation! If it cannot be time-transmitted then it stays in the future, unless our grandchildren decide to engage in a gigantic potlatch and burn the resources and declare the debt to be extinguished.”
      In fact, talk of “trillions of dollars of unfunded liabilities” due to retirements of the baby-boomers is meaningless unless it is compared to the cumulative size of GDP over the same length of time – another instance where our deficit hawks compare apples with oranges.

      1. Siggy

        I remember that fella Clinton. I remember that some fella from down east sold the Congress on a balanced budget. I remember all that easy money that funded all that debt that the private sector took on. I remember the debacle of the S&Ls. I remember the legislation that opened the door for the S&L profligacy. And then came the correction of the tax code and of course all those government induced real estate tax avoidance schemes were invalid and of course all the tax avoiders mailed the keys to the lenders and of course we had to create the RTC.

        Now easy credit is the ideal method for debasing the currency, especially if its a fiat currency and you have a fractional reserve banking system that is a government chartered cartel controlling the supply of credit. Curious thing about credit to the initial recipient its a loan. Once the proceeds of that loan are paid to others, it’s money to them.

        It matters greatly whether the aggregate level of debt is owed by the government or by the private sector. It matters even more as to what that debt has been used for. If that debt has been used to fund consumption you then have a serious problem.

        Most government have repudiated debt incurred during wars because the debt was used to purchase things that go poof. On the other hand when debt is used to fund the application of capital to production you get a return to the effort. All that is needed is that the return to the effort be greater than the cost of servicing the debt.

        Your differentiation between public and private debt is off the mark. What matters is what has the incurred debt been used for. Has it been used to augment the capital applied to production; or, has it been used for final consumption.

        Mortgage equity withdrawals became prevalent during the Clinton administration because there was all this money out there with no place to go. The curious thing about that period is that prices were generally trending flat to slightly down. But then the stock market was on a rip and there was this thirst for investments that would protect purchasing power. We began to experience a new form of inflation, the asset bubble. The great search for yield was beginning.

        It strikes that what you are advocating is that the government can simply spend and spend and eventually we will have prosperity. This kind of thinking is making me poorer by the day. I don’t like it. While you and I will probably at best agree to disagree, I urge you to reconsider.

  22. Dave Sanders

    Boot Boy,

    “should be “constantly” not “constant.” Actually, probably should be “exponentially.” A simple typo may have been the crux of the issue here.”

    Yes, you’re quite right.. I happily stand corrected.

    Anyhow, to your question..

    Per :

    Japan National Debt 192% of GDP 2009 (est) and:

    “Notes: Japan’s Public sector debt is very high. However, Japan has a high savings rate which makes it easier for the government to finance the debt. 90% of Japanese debt is owned by Japanese individuals. US has a low savings ratio and 25% of US debt is owned by foreigners. Nevertheless the National Debt of Japan is a real burden for the economy”

    It would seem in Japan’s popularly acknowledged state of ‘deflation’, they just can’t seem to slay that beast… Right? Also, I wouldn’t call Japan a ‘vibrant’ society. Pretty dismal, actually.

    They’d be a lot better off long-term if they just defaulted. Their debt is a total albatross. I don’t want to live like that. The only way they service the interest is by borrowing MORE credit money into existence. And their own citizens just bend over and take it (buy it)! They’re complete fools to abide that crap.

    Jeez!!!! Can’t anyone balance a checkbook anymore without resorting to plastic?????? Sorry to raise my voice, but man.. This just irks me to no end. It’s just WRONG.

    By the way, I’m refering to inflation / deflation of money and credit when I use the terms inflation / deflation.

    This engaging… Darn it. I should be working!

    Thanks for the discussion.

    1. boot boy

      so, Japan defaults and who’s better off? Not the private sector, as now their savings invested in govt bonds are worthless. very bad idea.

        1. Dave Sanders

          “I should be working, too.”

          Yeah! … I’ll catch ya’ another day. Thanks for the great conversation, boot boy.

      1. Dave Sanders

        “so, Japan defaults and who’s better off? Not the private sector, as now their savings invested in govt bonds are worthless. very bad idea.”

        Oh hey… I didn’t say ‘painless’ anywhere. Yeah, they’d experience a bone-crushing real deflation, no doubt about it. That’s what’s required. They’ve tilted the table, already. Their score board has been flashing “GAME OVER” for twenty years.

        Same with Greece. Time to start over.

        Argentina has done this a few times. They never seem to get it right… One day they will. At least Ken Rogoff thinks so! (Nations tend do default less over the term of their sovereignty)

        One day, these elite dynasties of ruling families will learn their lesson, and not let it happen again, OR… they’ll see the wisdom of interplanetary travel as a ‘valve’ for the members of society who have the speculative personality that is so damaging here, in our finite system.

        We need to decide. I believe the human species was ‘short circuited’ when we ended the Apollo missions without moving on to the next delivery system, which was Mars-bound. That was the greatest mis-judgement in human history.

        There’s a whole lot of energy out there being poorly focused at fixing the economic symptoms of a financial Malthusian meltdown disease. The answer to debt is always MORE debt.. and more!! It usually works for about 80 years, then it resets with varying severity. This time, we’ve got clever actors trying to stand in the way of the business cycle, and the longer they kick the can, the heavier it gets. One day, it’ll be filled with concrete.

        Think about it… I could build a Frank Lloyd Wright Usonian home on an acre of land for a about 1.5 times an average professional’s annual income in 1936. Today, the same feat would cost you at least 4 or 5 times that same guy’s annual income. It’s totally nuts, man. Savers get utterly screwed in every orifice. It’s WRONG.

        For decades, people bought homes for 2.5 or 3 times income (homes of steadily declining quality, but increasing features). That’s totally sustainable with mild inflation. I’d settle for that. Could we just ratchet back to that???

        Sorry to digress

        1. boot boy

          I favor liquidating much of the financial sector, certainly the zombie parts, but to do that while not protecting the real sector from the collateral damage is irresponsible, even a form of deficit terrorism.

  23. Kiste

    What would be even more interesting to know: what is the amount of interest paid on national debt in relationship to the current budget deficit?

    Ever increasing debt means ever increasing interest payments. In the case of Germany, the amount of interest paid on existing national is larger than the budget deficit.

    What are the implications of this?

    1. boot boy

      “Ever increasing debt means ever increasing interest payments”

      Not if the interest rate is lower than the growth rate.

    2. Detlef

      “Ever increasing debt means ever increasing interest payments. In the case of Germany, the amount of interest paid on existing national is larger than the budget deficit.”

      The situation could be even “badder”? :)
      If we had to borrow money to pay interest AND had to borrow additional money to finance budget items, we´d be in real trouble.

      Keep in mind too that every year some German Bunds mature and have to be paid back. If your statement is right then it means that we pay back old loans and even some interest on existing loans out of the federal budget. And not with new loans.

      And given the low interest rates right now the situation might even improve a bit…
      Depends on the interest rates of existing German Bunds of course.

  24. SP

    “In the 220 year experience of the United States there have only been a few years when we’ve not had deficits and each time the surpluses were immediately followed by a depression or a recession.”

    Uh, we almost went into a depression in 2009… and may still.
    Marshall, where is the fiscal surplus that “caused” that?

    When you prescribe permanent deficits as a matter of policy, and “informed” politicians see the light and pursue that, what will stop them from more industry giveaways and more wasteful spending (with low jobs per dollar results)? I am willing to bet that we could eliminate our ENTIRE deficit if we cut a lot of the corporate welfare and unnecessary subsidies.

    More fundamental problems that need to be addressed I think stem from the excessive wealth and income inequality. There seems to be too much concentrated wealth solely chasing bubble returns (and not investing in job-creating enterprises). Corporations are now so cash rich, but still not investing? Tax them! I think our economic structure is sick, and we won’t see strong growth ever again unless we address the _real underlying_ problems.

    I’m afraid that prescribing permanent deficits “until we reach full employment” just glosses over the real problems, and risks furthering our underlying imbalances (as our dear politicians just give away more to the corporations as we continue to witness with current and recent legislation). Deficits are a total red herring. We won’t get out of our situation by the magically assumed “growth” coming right around the corner. Just looking at macro level balances tells you nothing about the underlying causes of our sickness and the real solutions to what ails us.

    Note that I do agree with extra spending on unemployment, etc. But we can and should then cut back on military and wasteful medical spending. We need constraints to impose discipline, such as making such choices. Every govt dollar does not equate to the same amount of effective demand. Unfortunately, politically we won’t make any tough decisions until it is far too late. Why run up more debt, while dragging out the inevitable adjustment?

    1. boot boy

      Fiscal surplus that caused 2008 problems was 1998-2001. Day of reckoning was put off in 2001 by private sector’s move to build another leverage-induced bubble rather than deleveraging, which just makes the current deleveraging that much worse. But it was in 1998 that the private sector started to net dissave, through 2001, then the stock crash and some fixing of balance sheets for the firm sector. Many of us thought this was the beginning of the end, but the real estate bubble came along and the household sector took the deleveraging to a new level, until it stopped in 2008.

      1. boot boy

        You’ve answered your own question. For the record, I don’t think ‘restraining domestic consumption’ is necessarily a bad thing. It’s a choice, and it has worked well for Germany overall. But if Germany’s going to be successful at it, some other country or countries must do the opposite, by definition, or else none of them will have full employment. That is, Germany needs some country to buy its exports, and the workers in that country need their own jobs to enable them to buy Germany’s exports. Given a German trade surplus, the other country can’t do this without either private dissaving or government deficits. It’s just accounting.

    2. colinc

      “I am willing to bet that we could eliminate our ENTIRE deficit if we cut a lot of the corporate welfare and unnecessary subsidies.”

      I have no objection to any of that. However, I think it would be vastly more intelligent to end the wars in Iraq and Afghanistan, close all 730+ of our global imperial “outposts” and completely “restructure” DoD and the Pentagon. Now you’re talking about “conserving” nearly a TRILLION dollars per year, if not more, as I’m sure Mr. Auerback can attest! Of course, let’s also do some major reformulation of the “banking sector.” A recent(?) report at the Institute for Policy Studies found that in 2009, might have been for ’08, the “top 50 hedge-fund managers” _EACH_ received more than $500 million in compensation!!! If that’s not f–ked-up, I don’t know what is.

    3. Marshall Auerback

      The answer to your question is that we had huge levels of private debt and the only reason we DIDN’T go into Great Depression II was because the public sector’s releveraging facilitated private sector deleveraging. But the causes for the debt build-up came largely as a consequence of the cumulative government surpluses built up from 1997-2001, combined with the toxic combination of financial deregulation, which facilitated the growth of the predator capitalism we see dominating our financial markets today.

      1. Dave Sanders

        “combined with the toxic combination of financial deregulation, which facilitated the growth of the predator capitalism we see dominating our financial markets today.”

        Yes, that is quite true. BUT.. it only cost the tax payers money because WE had to PAY or BORROW to bail them out. If these big IB’s had been allowed to simply fail, like they should have, then everything would be fine (I’m perfectly willing and prepared to endure a few years of hardcore deflationary times – The Fates favor the prepared), and certain people would learn a valuable lesson. As it stands now, we’ve just cranked up the moral hazard machine. That’s just plain dumb. Souls go to Hell for that sort of thing.

        1. MacroStrategy Edge

          Sanders –

          You are talking trash if you think this nation would have survived two years of outright debt deflation, which no doubt would have gone global. This place is well armed, poorly informed, and not very well organized. Countries do descend into Lord of the Flies under such conditions. Hope you have room in your bunker for all your kin. Argentina pulled it off only with a massive depreciation and a debt repudiation. US is too big to pull off the former, especially since it has earned global buyer of first and last resort over the years.


          Rob Parenteau, CFA

      2. SP


        Why must you equate a govt surplus as “taking away” from the private sector? As I recall in the late 90s, we had a “New Economy”, surging immigration, unemployment down below the “natural rate”, salaries going up and surging stocks (meaning lots of capital gains tax), very good GDP growth.

        Why isn’t the 90s surplus simply an indication that tax growth grew faster than the govt could increase its budgets to catch up. Isn’t high growth in tax receipts exactly what you’d expect in an economic bubble? So I think you are confusing cause and correlation in this case. The bubble and human behavior behind it was the cause, NOT a fiscal surplus. The private sector was hardly hurting at that time! And if the govt had decided to spend all the extra taxes–do you seriously think that we would have avoided a recession? The dot com bust (and layoffs and recession) was inevitable, regardless of any govt spending. That should make the true cause very clear.

  25. Dr. Dim Wit

    boot boy, isn’t the difference with Japan the fact that their debt is mostly domestically held? Doesn’t that mean it’s “just money that Japanese owe each other”? The Japanese taxpayer is paying taxes to the Japanese govt so that the Japanese govt can pay interest payments on the debt… which is income that goes back to the Japanese taxpayer who is holding that debt, and round and round she goes. And with high Japanese savings and continual Japanese appetite for Japanese debt, they can keep this up for a long time.

    Is not the US debt ‘worse’ in a sense because so much of it is foreign held, thus taking on a more sinister character – resembling more the true nature of debt (money owed to somebody else)?

    I ask this honestly; I’m relatively clueless about these matters.

    1. boot boy

      that’s the commonly held view. US and Japan both have large deficits. Japan’s is held domestically. US has large percentage held internationally. They are 2 ends of the spectrum, as those are the only two possibilities. In both cases, though, the interest rates follow monetary policy (and expected monetary policy), not the deficit. And if international investors ditch the $, current account balance improves and US sector balances breakdown starts to look more like Japan. So, I think the commonly held view is incorrect, and mostly based on inapplicable gold standard-based understanding.

  26. craazyman


    by Benjamin Compson
    Oxford, Mississippi

    Can’t think through this stuff to solid Ground.

    If you mow your own lawn with an old rotating blade push mower, there’s no economic growth. Just sweat and exercise.

    If you mow your neigbhor’s lawn and he mows yours, that’s neighborly of you both. But there’s no economic growth.

    If you pay your neighbor $50 to mow your lawn, and he pays you $50 to mow his, that’s $100 revenue toward GDP. But the final reality is the same as if you mowed your own lawns with no change in GDP.

    If you pay your neighbor $50 and he pays you $40, he’s just made a $10 profit and you are losing money, destabilizing GDP through a form of composition if there are enough of you, and of him.

    Same two guys, same two lawns. No physical change in reality.

    Money makes it weird. Money disconnects it from reality. Money becomes its own reality, a wave/particle kind of reality, an uncertainty principle sort of netherland.

    No wonder the parasites invent clever ways to manipulate it. They don’t want to mow lawns or sweat. Money has some real advantages that relate to force and protection of the individual from the pyschopathic priests of the grain god, but these can also be eroded into disadvantages as we now have experienced. Everything brings forth its opposite and this must be the navigational point.

    I struggle with all this, trying to imagine the “origination point” for economic growth and whether a large economy can somehow grow with monetary expansion without increasing deficits and/or more favorable trade balance — on its own, “sui generis”, within itself so to speak. And whether such growth would be only a monetary pheomenon or whether it could produce rising living standards. This seems to be the heart of the issue. No doubt this is a well worn path in economic thought. I’m just channeling it, but it seems to me that the whole ensemble is more complicated than the usual algebra.

    1. MyLessThanPrimeBeef

      Craazyman, if all the waiters and waitresses develop slippery fingers and break a lot of dishes, the economy would be booming, well, at least in one industry.

      Unfortunately, people have decided it’s fashionable to not cut their hair…ever. So, the growth in pottery industry is cancelled out by the hugh contraction in the barber, sorry, hair stylist sector.

      Do you now see how vulnerable, how fragile the economy or at least its GDP is?

  27. PJM

    This text and comments show the crude reality: debt adicted and monetary ilusion.

    The American Empire is dying and I only want to know who will be Nero, playing his harpa and dancing through the smokes Washington.

    Poor american decadence and without solution except cheating others. Even his own soul.

    Best regards.

    PS Enjoy as you can:

  28. Jerry

    To me a bigger questions is what do we want our global world to look like if we have to stay global and I’m not sure that is in everyones best interest…..but say it is in everyone’s best interest….then at what standard of living can we invision all peoples to live at without destroying the world…..look at all the world resources the US and China are using……when are cultures going to reign in having more than 2.1 children per couple…

  29. Bearster

    How many high school students of economics debunking this fallacy will it take before the myth finally goes away??

  30. Tehanu

    It is likely true that America (in the short and medium term at least) will be able to run deficits without any worries about inflation or collapsing currencies. However that is only true because the American dollar is the reserve currency and it has a dollar hegemony.

    This is in some ways the “tribute” the Americans receive from the rest of the world.

    That is the only reason that Americans have been able to do this in the past and will be able to do this in the future is because the rest of the world is compelled to buy US dollars. People ain’t buying US dollars because of the compelling story of massive economic growth in America and its strong financial position you know.

    I am actually betting on the US dollar holding up while other currencies collapse around them so this goes well for me because I will make lots of money. Eventually I am betting on the US defaulting too, but that is still a whiles away. Its the same thing in the end – stealing from the rest of the world.

    I just find it ironic that left-wing types are using the American Empire (which is ultimately founded on its military power) as justification for their economic policies. In the past one could say that the dollar buying countries got something from it (big export market) but going into the future America will not be a big consumption market so it will become very clearly one-sided. A system set up to benefit America only while starving everyone else of funds i.e. naked imperialism, diversion of resources from the borders to protect the core. The most ironic thing is it is not the neo-con right-wing types formalising this arrangement but the left-wingers. This is seriously funny guys.

    The real danger is this. This arrangement has been in place for decades. Everyone knows about it but few people talk about it, because as everyone knows, America does not have an Empire or exact tribute. And as I said, before dollar buying nations could say they were getting something out of the deal. Now however, that which should not be said is now openly being said and at the same time dollar buying nations are not going to be getting a good deal as previously (esp. if the US implements trade barriers too). Once the world, esp. the developing world, realises this, you can bet their hatred of the US will increase greatly. A lot of the developing world is already suspicious of a lot of American activities because of past experience with colonialism and blatant looting by European powers. When the end finally comes (notice I didn’t say I thought America could maintain this in the long term) America will get the blame.

    1. Kevin de Bruxelles


      I agree with where you are going with these ideas but let me just twist them a bit.

      First, America is not an empire; that would mean they have direct sovereignty over their colonial subjects. Instead, the US is trying to become (or is) the global sovereign – but only on the international level–that is nation to nation. There are only a few nations (Iran, North Korea, Cuba, etc) who do not openly submit to US international sovereignty.

      Up until now the global historic process was of a larger and larger percentage of the world’s populations living within states. These states became close to ubiquitous after decolonazation movement in the 1960’s turned most of the Third World into states. From the birth of the modern state with the Treaty of Westphalia up until the end of the Cold War these ever increasing number of states existed within a form of international Anarchical Society. Now, through American sovereign power (dollar, Navy, consumption, etc) the US is very close to creating a Monarchical Society on the international level. Iran will be invited within a year to join this society or face the consequences. It has nothing to do with left wing or right wing. It is just the way things are right now.

      You are correct that the rest of the world will continue to send tribute to the US. But this is not only because of US dollar hegemony. Two other critical services that the US supplies to the government of other nations is our absolute Naval control of international waters (over other states) and access to US markets. This last point is critical in order to understand where we are heading.

      American power is derived in a large part from the conspicuous consumption of US consumers. People who listen to Obama’s rhetoric on the deficit are deluding themselves if they think he is serious. That talk is only there to set the conditions to privatize social security. Instead of tightening US belts, just the opposite will occur. There will be debt forgiveness on a massive scale in the US. All those dweebs and losers who played by the old rules and lived within their means will get pounded and it will be they who will bailout the Kool Kids, those who took out three mortgages, maxed-out their credit cards, and are now sitting in McMansions, living for free, since they stopped making payments and started taking exotic vacations a year or so ago. Along with this foreign nations in search for markets to dump their excess production will continue to send tribute to the US in the form or Treasury purchases that will never be repaid.

      So while some are calling for policies that lead to full employment; what policy makers in the US are really aiming for is full consumption. And no these are not the same thing at all. Employment is so 1960’s. Nowadays, consumption is fueled by “credit” or more correctly termed international tribute plus the fines imposed on those economic dinosaurs who still believe in personal fiscal prudence.

      With the next downturn just around the corner look for huge amounts of internal US debt relief financed by foreigners and US savers.

      1. PJM

        Dear Kevin and Tehanu, I agree in some things that you wrote. Especially this by Kevin:

        “So while some are calling for policies that lead to full employment; what policy makers in the US are really aiming for is full consumption. And no these are not the same thing at all. Employment is so 1960’s. Nowadays, consumption is fueled by “credit” or more correctly termed international tribute plus the fines imposed on those economic dinosaurs who still believe in personal fiscal prudence. ”

        However I dont believe that the traditional allies of USA will close the eyes at this american critical moment. A lot of allies are feeling betrayed by USA and are getting upset even they dont say openly.

        let me show my personal view.

        When USA used lies to atack Iraq, me as a lot of portuguese were side-by-side with USA because wu trusted in USA and we choose allways an Ally agaisnt other cowntry, especially because USA is a Democray too. Portugal autohorities were with USA because we felt that USA needed help to fight americans aenemies, like some dicatotorships enad terrorists. However, after the invasion and the process to colonize Iraq, because the blalant lies by oficial american authorities, we feel betraed. USA only wanted iraquina oil and pipelines in Afghnistan. Democracy and freedom was betrayed and USA in fact is dominating these two countries.

        This personal feeling is more deeply in others opinions, in the minds of formers believers in USA. I felt betrayed by USA. Not by mr. Bush, but by USA. Mr. Obama is the same face of the strategy of mr. Bush.

        Now we are concerned with a complot by americans to atack the euro. A lot of people think thats a american complot to destroy the euro and even in governments a lot of people think teh same. No only bankers, as today one gave an short interveiew in portuguese newspaper as yesterday an portuguse hovernment member had an opinion similar.

        If secret services will find clues about american operation to fight and destroy the euro because traditional allies are selling their dollars this will damage serious european relationshis with USA.

        Isnt secret that in Japan they are moving towards a change in the relationship with USA. Brasil is having problems with american proteccionism. And some africans countries are having problems with american proteccionism too.

        This is a big problem for USA. USA inst a reliable ally as we felt before.

        Now we have this situation. USA cant live printing money. Inflation or a deeply depression is inevitable. And americans consumers cant have this behaviour forever. USA will cant be the firt importer of world anymore.

        If americans think that these allies will concede their support because american consumption wre wrong. Firt of all, China will surpasse american imports shortly. Secondly, a lot of new players are entering in this game, like Brasil, ASEAN, Africa, and so on.

        So, even if USA have a strong militar power, even if will bet in import more from the World, both cant sustain in long term. So americans will stop their militar power because they dont have money to suport these expansive power. Portugal had the same power in the pasdt and to suport a big empire around the world, the people stood poor, because its was very expansive to suport this militar power.

        In this situation, the militar power depends of strong economy and USA cant have both. Even cat sustain american levels of comsuption. So, the dollar will fall and with the dollar american militar power.

        The allies of USA are getting tired of some things that USA think that can sustain. The worst thing is the atack to cicvil liberties by USA. The old american example of freedom, democracy and civil liberties were destroied by the “fight against terrorism”. And this change in american policies, where a child can be arrest in front their mates, in a school, is destroying the good image of USA around the world. I think the movie Strip Search is a good example what USA become lately.

        With these assumptions, I believe USA will loose his political power. USA is cheating the world, is atacking their allies and will loose his position, because looks an rogue state and not an reliable ally. USA inst a normal democracy anymore. American politics are controled by money and legal corruption and the american people is the last betrayed by americans oligarchs.

        USA will loose economic power, when the dollar will fall and no more confidence we will put in this currency. With the fall of economic power will be the fall of militar power. Ant with these falls, american political power will fall to a level of one Russia, Turkey, Brasil or even Indonesia.

        1. PJM

          I would to like to sorry about my bad english and lack of format because Im wrihting and working at same time, and the markets is bus now. ;)

          I would to notice a simple simbolic fact. one these days I read in on popular blog, something like that:

          “GS cheated with CDOs and idiot german bakers took them.”

          It wanst these words but close.

          As a European and portuguese citizen, I think: well, they cheated half the world and they laught? And even say that others who trust in americans are idiots?

          Si I remember the invasion of Iraq and the lies. But I sill remeber that portuguese soldiers are fighting in Iraq and Afghanistan. Why? Are we portuguese the idiots figting others wars? To suport others empires? Are we idiots too?

          Do you see, these kind of simbolic words expresses american way of thinking. Cheating others and call them idiots.

          The same aplies to politics, economics, miltar relations and so on. Are we, the world, cheated by americans? And they think that were idiots?

          The samme aplies to the dollar. The real problem here. Are the world cheated by americans when the say that the dollar will still strong? In China, mr. geithner was humiliate because nobody believes in that. Why? because the USA is changing is image in the world: a rogue state and a cheater.

          Do you think that we must believe in the american economy? His authorities? And the dollar?

          well, maybe were idiots but we dont like to know that by who cheats us. ;)

  31. ImperialStormtrooper

    What is a economy supposed to do ?
    Create Jobs, Services and Goods.
    Why ?
    Cause thats what we as people all want and need to LIVE LIFE.
    Also it wouldn’t hurt if your OWN Economy does that because you might want your Kids to know how a computer chip is made too or otherwise all technically knowledge ends up in China.
    Now sure, you can also create allots of money and you can create huge Casinos to play with it.
    But when your 80 and die with millions of chips on your account you will have not lived your life.
    Your Kids will inherit Chips -little blue plastic ones -not computer or potato chips.
    Could this completely STUPID assumption that economy’s like Germany and China that decided to focus on CREATION rather than
    money printing are to blame for those who decided to play Casino Royal STOP ? PLEASE?
    Seriously, Germany didn’t twist anybody’s arm to buy there products.
    People here are literally saying Economy’s HAVE TO make credit to buy from Germany. What are the Germans selling? CRACK ?
    No. They DIDN’T HAVE TO -they decided to do so. They could have decided to just not buy what they couldn’t afford.
    That alone would have reduced Germany’s trade surplus. Thats how a market not distorted by Financial Monopoly’s work.
    Furthermore -the German Mentality not to CONSUME on credit is completely a no Brainer.
    When you make credit it should only be to INVEST because only a INVESTMENT into something that CREATES MORE VALUE can achieve the Profit you need to pay back the credit PLUS THE INTEREST.

    Albert Einstein (a German) once said about the Financial System “It takes a Genius to receive 100000$ from a Bank and pay all that back plus another 100000 $ for Interest. The Problem is there arent that many geniuses.”

    CONSUMING through credit is stupid because you will always pay more than the value of your Consumption. The average Greek retires at 57, the average German with 61. Who is living above there means ?
    So now that so many countries did exactly THAT stupidity and can not pay back there 100K with interest they blame the only Guy’s who were actually smart enough not to do so. WOW. I feel sorry for the Germans , the EURO is going to become Versailles 2.0 for them.

  32. Kevin de Bruxelles

    Any prediction that the Euro will drop to parity with the dollar has to take into account China. The Chinese are already concerned about a tiny change in Yuan / Dollar exchange rate; do you really think they will just sit back and let the Euro depreciate without putting up a fight? Europe is China’s second largest export market and it would be a disaster for China for the Euro to sink much more than it already has.

    On the other hand many in Europe would be happy with a lower Euro.

Comments are closed.