Martin Wolf Continues Attack on Fiscal Austerity

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Martin Wolf, the Financial Times’ esteemed economics editor, launches another salvo against misguided austerity measures today. It’s also noteworthy that he argues from a Modern Monetary Theory perspective.

Wolf first stresses that yields on government bonds show that inflationsitas are all wet:

I have a question: do we believe that markets are unable to price anything right, even the public debt of the world’s largest advanced countries, the best understood and most liquid assets in the world? I suggest not. Markets are saying something important…

On Monday, the yield on 10-year government bonds was 1.1 per cent in Japan, 2.6 per cent in Germany, 3 per cent in the US and 3.3 per cent in the UK (see chart) Based on yields on index-linked securities, real interest rates on borrowing by these governments are very low (1.2 per cent, or less, in the US, Germany and UK). Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation.

Wolf next establishes that the private sector in countries all around the world is saving. The OECD forecasts that savings in advanced economies will be 7% of GDP, or roughly $3 trillion. In theory, these savings could go to investments in emerging economies, but the private sector in those countries is projected to be saving too. The Institute for International Finance anticipates a total of $300 billion for 2010.

Wolf then explains how this all plays out:

According to the IIF, the net flow of private funds from advanced countries to emerging countries will be close to $700bn this year. But that will be almost entirely offset by an official outflow, in the form of foreign currency reserves, of close to $600bn. These huge official interventions prevent the emergence of large net capital inflows into emerging countries. Instead, the private sectors of the advanced countries accumulate net claims on the private sectors of emerging countries, while the governments of emerging countries accumulate offsetting claims on the governments of advanced countries.

The bottom line is clear: there exists, at present, a gigantic net flow of funds into the liabilities of the governments of advanced countries. Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries.

These flows of funds consist only of identities. So what are the causal factors? Maybe, the collapse in private spending in the wake of the financial crisis was caused by terror of the fiscal deficits to come. Maybe, the moon is made of green cheese, too. There is also next to no sign of crowding out in capital markets. The plausible hypothesis, then, is that the fiscal deficits were a response to the collapsing desire to spend of the crisis-hit private sector. Fiscal policy could have been tighter. But the result would have been a depression.

What then of the future? Suppose there is no significant change in policy in emerging economies. Then if a fiscal contraction in advanced countries is not to cause a slowdown, even a second recession, it must be accompanied by an upsurge in private spending.

The argument must be that improved confidence in the long-run sustainability of public finances would lead to greater private consumption and investment spending now, even if there is no significant effects on interest rates or the exchange rate. I am highly sceptical of this argument (see “Why it is right for central banks to keep printing”, Financial Times, June 22, 2010). But grant that this is true. Then the best policy is to slow the long-term growth in spending on age-related programmes. This comes out clearly from the discussion of long-term fiscal trends in the excellent new annual report from the Bank for International Settlements.

Yves here. So Wolf, and the Bank of International Settlement (hardly a bunch of socialists) think keeping old people from having to subsist on pet food would be good for economies around the world. I’d love to see Wolf up against the Social Security fear mongers from the Peterson Foundation. Fur would fly.

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  1. a

    “do we believe that markets are unable to price anything right, even the public debt of the world’s largest advanced countries,”

    Unbelievable that the esteemed economics editor cannot even get his quantifiers correct. One can believe that the markets are sometimes able to price something right. But from (there exists x)Fx one cannot conclude Fb, where b is some particular (such as Treasuries). In order to conclude Fb, Wolf needs first to claim that (for all x)Fx, i.e. that the markets are able to price everything correctly. And that, clearly, is not true.

    “Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation.”

    Yes they are, precisely because investors see the austerity policies being put in place. On the other hand, if the U.K. had elected a government which had said it was going to have deficits of 15% of GDP over the next 10 years, gilt interest rates would be sky high.

    You can’t logically argue that, because interest rates are low, one can change course from what the market expects, because then the market could well price interest rates somewhere else.

    “Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK.”

    Good, Wolf’s logic is at least correct there. But similarly, it is quite wrong to argue that the difficulties of a Greece of a Spain entail that there are not difficulties ahead for the US, or even the UK. “Entail,” as in logical necessity, is quite a strong condition, so strong that it makes Wolf’s assertion utterly vacuous. Water freezing at 0 does not entail that water boils at 100, and so on.

    “The opposite is far more likely: flight from risk entails flight into something less risky.” Yes it does. The 64000 question is what is less risky. U.K. debt looks less risky *at the moment* because the government has set itself on austerity; it would look a lot more risky if the government had set itself on deficits of 15% of GDP over the next ten years.

  2. attempter

    The experiences of Iceland, Latvia, and Estonia, all good obedient little austerity flunkies, already proves that “austerity” is a Big Lie. We already know for a fact that it doesn’t help one with “the markets”, and that this whole line of argument is a lie. That’s a proven fact which the criminals are denying in plain sight.

    (Meanwhile the renegade Iceland is doing considerably better than those places.)

    The advocates of austerity are robbers, common criminals, plain and simple. They’re a racket simply out to steal property the people have already paid for, now that the Bailout won’t be able much longer to siphon off enough “new” loot.

    Meanwhile a cadre like Krugman doesn’t disagree on the basic criminal enterprise, rather he supports it. He’s just having a dispute with his fellow thieves over tactical tempo. That’s why in piece after piece he gives convoluted explanations for the austerity mindset, chalking it up to ignorance or even strange psychology, but he explicitly ruled out the obvious truth:

    That the austerity advocates are consciously, systematically waging vicious class warfare.

    That’s because in general, as we saw with his astroturfing for the health racket bailout, Krugman himself is that same kleptocratic criminal.

    They are criminals. They are criminals.

    What’s the right way to respond to any thug or idiot who argues for “austerity”?

    1. Anyone who implicitly says the Bailout, the war, Pentagon budgets, corporate welfare in general, are affordable, is saying everything is infinitely affordable, so any decent person should refuse to argue further on “austerity” with any such person. That’s the one and only response.

    2. If they agree those things too aren’t affordable, then the political position is: Get rid of ALL those things, and THEN we can talk about whether Social Security and the like are affordable or not. But only then, and I’ll refuse to discuss it until then. Until then the position must be, the banks and weapons rackets are still getting theirs, so we demand to still get ours. Period.

    No expenditure in all of history has been more expensive and more worthless than the Bailout. Decent people shouldn’t be willing to argue a single head of a pin beyond that. It’s the very defining line between humanity and vile criminality.

    1. Doug Terpstra

      Thank you. As always, your distilled logic is inarguable.

      It’s farcically-‘funny’ how the question of affordability is constantly raised so shrilly for programs like Social Security, which are in fact entirely self-funded, but not, as you say, for the net rat-holes like war, and corporate tax and liability evasion. The blatant double standard is too obvious to hide much longer.

      1. Rodger Malcolm Mitchell

        Federal taxes do not pay for federal spending. If all taxes were eliminated, this would not affect by even one dollar the federal government’s ability to spend.

        Similarly, if FICA were eliminated, this would not affect by even one dollar the solvency of Social Security. See: ELIMINATE FICA.

        Unlike the state, county and local governments, and unlike the PIIGS, the U.S. federal government spends by creating money, which it can do endlessly. It has no need for taxing or for borrowing.

        Rodger Malcolm Mitchell

      2. attempter

        It’s long been a general rule (which I first noticed years ago when I followed environmental issues) that the more rationally and morally defensible a policy or program is, the more it’s expected to live up to severe “cost-benefit” assessments, while the more insane, worthless, and/or larcenous something is, the less it’s expected to justify its cost in any way.

        Now in a sense it’s obvious that if a policy’s intended to steal from the public for the benefit of gangsters, the same power system which enacts it isn’t going to turn around and demand a rational accounting.

        But it really seems to go even beyond that. It seems that to people in general, the more obviously crazy or wicked something is, the more they’re willing to give it a pass on every level, while the more something’s expected to actually be useful and healthful the more it’s expected to live up to every kind of rigorous standard.

        It’s like a broader version of Hitler’s “Big Lie” theory.

        There’s no other way to explain how, even if you rule out every kind of kleptocratic cadre, you’d probably still find people expecting Social Security, or environmental and safety regulations, to “earn their keep” in a way they’re far less likely to demand of the obviously insane and evil and worthless Bailout.

    2. sgt_doom

      Ditton on the thanks!

      The only group which should experience any austerity programs is the group of debt-financed billionaires (and a few debt-financed trillionaires).

      They caused the problem, they profited from the problem. They must be the solution to the problem.

      1. attempter

        The proper course of action:

        You say we need austerity? OK, we’ll first get austere on your ass.

        And once we’ve dispensed justice to the criminals, restituted all they stole, redeemed democracy, and restored the rule of law, all of that a no doubt very austere process at times, then we’ll see what further austerity is needed.

        Or as I’ve previously said in response to the weight loss metaphor: Whether or not you do need to lose weight, first you must take a flame to the giant leech burrowing into your jugular.

  3. michel

    Yves, you are prescribing remedies for places you know nothing about, and if implemented they would have effects very different from what you imagine. You want to understand this stuff, go to Glasgow, Newcastle or Merseyside, and go with Frank Field or Ian Duncan Smith.

    What has happened in the UK is public sector looting. If government spending is increased, the result will simply be more public sector looting.

    Jobs, wages, retirement benefits in the public sector will rise. There will be more working poverty as a result (because the working poor are taxed to provide the money for this). There will be ever more complicated arrays of benefits for more and more people, which the public sector unions will administer, which will pass back some of the raised taxes, after taking their cut. There will be more and more bodies which regulate all kinds of economic activity and make it impossibly expensive to hire staff. It will pay fewer and fewer people to work, and more of them will reluctantly stop and go on benefits.

    People like you, looking at this from 20,000 feet, will then be astonished that investment falls and savings rise.

    Meanwhile, there will still be old people in poverty. Those silly enough to have saved, invested in their small bungalows, and have pensions which while very small, take them just over the welfare threshold. No amount of increased government spending in the present climate will do anything for them.

    And no one thinks that “keeping old people from having to subsist on pet food would be good for economies around the world”.

    If you think this is what the UK debate is about, you are not on planet Earth. The UK debate is about whether benefits can be maintained at double or more the median wage for qualifying out of work families. Its about whether the state should pay housing costs for the unemployed which vastly exceed those the working poor can afford. It is about whether you should be paid by the state for having more children, when your income is £60k a year. Its about whether it can possibly make sense to have a quarter of the population receiving some sort of benefit. Or whether a state sector employing 6 million people in a country the size of the UK is desirable or affordable.

    It is actually about questions like this: why are local government bodies producing free newspapers, with expensive and expensively officed staff, instead of giving the money to the old and poor?

    Its because its more fun. Its called public sector looting, and what you and Martin Wolf want to do would produce more of it. I know that is not what you are advocating, but here on Planet Earth, this is what your prescription would result in.

    1. dearieme

      Good point, Michel. Is there a long-term solution, other than removing the franchise from public sector employees?

      1. Captain Teeb

        Tough question. Democracy doesn’t work as advertised if once a critical mass of public dependency is reached (not only public employment, but also transfer payments, government-funded industries (think defense), etc.). That’s where we are now, and it’s not likely to change in the current ‘democratic’ systems in place in the developed countries.

        When there is no cure for an illness, one is wise to be especially vigilant about prevention. The gold standard was often a drag (and often railed against), but it served its purpose of providing a yardstick for stable money. Any standard would do as well as gold, as long as it kept purchasing power constant within a band. Any standard that did this would be attacked as anti-growth, anti-poor, and anti-all-things-good. It would substitute small, frequent crises for large, infrequent, cataclysmic ones.

        Stable money meant that could not borrow indefinitely without repayment (or at least that the bill would come due sooner, before things were out of hand).

        But I suspect that the problem is a flaw in liberal democracy. It is our nature as individuals to prefer ease and enjoyment in the short term over the long term. The short time-horizon of elections embeds this preference firmly in the political system, and by now it’s doctrine. I fear that only a lot of pain over a long period of time will engender the cultural shift needed to counteract a century of expanding government and debt-based finance.

        I would appreciate a weigh-in from Richard Kline on this, if he’s got the time.

        1. Yves Smith Post author

          You might want to study up on the gold standard era. It’s romanticized by goldbugs. Contrary to popular presentation, you saw highly variable rates of inflation AND deflation under the gold standard. You might have “stability” over long periods, but the swings from inflation to deflation NOW would make corporate planning (setting appropriate NPVs for investment) an absolute nightmare and would wreak havoc for savers and investors too.

          The assumption is that gold standard era = zero inflation is a widespread misunderstanding.

          1. Captain Teeb

            Hi Yves,

            I’m not saying that the gold standard was Shangri-la, only that it provided a limit, easily ascertainable by the common man, on the ability of the political system to buy support by increasing the size of the public sector. This is the issue raised by the poster to whom I was trying to reply.

            Concerning price stability, even Keynes, no friend of the gold standard, acknowledges in “Essays in Persuasion” that that era was one of price stability. It was also a great time for savers; we learn in “Lombard Street” that UK consols paid 4-5% and that the BoE itself was paying 7% dividends. All this in a time of (average) low inflation and no income tax. What rate of interest would it take to produce that benefit for the savers of today?

            But back to the essential question: how does one reconcile liberal democracy with ever-expanding dependency on government? Our imaginary voter, thoughtful and informed, weighs a number of diverse issues and casts a considered vote. But if a voter depends on the government for a livelihood, that single factor likely trumps all others. The scary part is that this element of the system short-circuits our ability to reform the system (or even to avert disaster) at the ballot box. Do we have to wait for something to break so badly that the system is swept away?

          2. RueTheDay

            The Great Depression happened when the US (and almost the entire rest of the world) was on the gold standard. As did the numerous panics and depressions that occurred in the years leading up to the Great Depression. The advocates of hard money always seem to forget about this.

          3. RalphR

            The data seems to support Yves. You had deflation of as much as -4.4% and inflation of as much as 5.1%. The reason Keynes speaks favorably of the gold standard is it looks great compared to WWI. But you need to look at all the war policies, you can’t look at the abandonment of the gold standard (due to the inability to ship gold around during the war) without also considering all the other effects of the war too.


          4. Matt T

            “Contrary to popular presentation, you saw highly variable rates of inflation AND deflation under the gold standard. You might have “stability” over long periods, but the swings from inflation to deflation NOW would make corporate planning (setting appropriate NPVs for investment) an absolute nightmare and would wreak havoc for savers and investors too.”

            This would imply that we saw terrible economic stagnation in the USA from 1870-1913. Of course, it was exactly the opposite.

        2. Progressive Ed

          Professor Kline is out buying cheese for some new friends he made over the 4th.

      2. Captain Teeb


        I told you it is a tough question you ask. If liberal democracy cannot adapt to its new circumstances, where are we headed from here? The question looms over us all, acounterpart to the hideous undersea golem of the oil spill; we all know it’s there, but we don’t know where it will lead.

        Notice how none of the replies attempted to answer your question, choosing instead to pick on a possible solution I tossed out instead.

        1. sherparick

          Actually, the last 35 years have seen a gradual retrenchment and cut back of the welfare state, particularly in the U.K.and the U.S. The last Labour Government, particularly after Blair’s last election and the lap over to Gordon Browne, had horrible Fiscal and economic policies during a period of growth, and like Clinton and Rubin in the U.S. with the dollar, allowed sterrling to be much to strong to detriment of British manufacturing and the benefit of British Finance, who pretty much sank the whole ship. Both the U.K. and U.S. bet that financial services was the coming national star that would drive their economies over the last 40 years and have punished manufacturing to benefit it, much like manufacturing punished shipping and agriculture in the U.S. during hte 19th and early 20th centuries. Unlike that bet, this one has not worked out so well.

          As this is a topic on Gold, I guess I should say something about it. Like all good myths, it is about the discontent with the present messy reality (much like Milton Friedman’s myth about the how beautiful a floating exchange rate between Fiat currencies would work in era of fixed exchange rates – when his ideas were finally implemented, pretty much the result o necessity, they promptly also became very messy and caused much discontent). So the goldbugs tell how we will have economic nirvanna if we go on to the gold standard, ignoring both the messy history of the whole gold standard era, and in particular the disasters after WWI, eventually resulting in the the Great Depression, when the major economies went back on the Gold Standard and two countries in particular (the U.S.A. and France) ran a chronic current account surpluses accummulating Gold surpluses that threatened inflation (and probably did set off the great 1927-29 stock market bubble an example of asset inflation), while causing chronic deflation in the current account deficit countries of the U.K., Germany, and Japan. In the current economic regime, that would mean China and Germany would piling up gold, and raising their domestic interest rates to sterilize the inflationary increase in their Gold balance (since in the Gold standard Gold = money supply and and as money supply increases to chase a given amount of products and services, inflation results at full production of goods and services). Meanwhile, the U.S. and UK and the PIGS would have raise interest rates to keep Gold in their countries, despite deflationary pressure of declining money supply as gold would continually leak out to cover the trade deficits. Economic activity would have to be suppress until exports finally exceeded imports. For the elite capital and property accumulators in society, this might not be so bad, provided they can hire enough guards they can trust, but for the wage and salary earners in society, would be talking about mass unemployment and profound reductions in the standard of living. Societies like this can work, they just joint work to well. Examples exist all across Latin America, the Middle East, and Africa.

          Finally, there is a reason that the working poor vote Labor, and not Tory or Liberal Democrat. Despite all the fine words about not taxing them and how they lose out in the welfare state, they note that the beneficiaries its dismantling, and their increase insecurity is not them, but the elites of society represented by the Tory party. And of course the big tax increase to in the U.K. is the VAT, a tax that falls on the poor, working class, and middle classes while taxes on capital and the banks are being cut and rescinded and Sterling is being strengthen once more to the detriment of British manufacturing and benefit of same people who brought the U.K. “Northern Rock.”

          By the way, do none of you folks shop for cat food? It is expensive these days (five cats equals half my grocery bill).

          1. Doug Terpstra

            Great response, sherparick, to dearieme and more:

            “…the last 35 years have seen a gradual retrenchment and cut back of the welfare state, particularly in the U.K.and the U.S. …like Clinton and Rubin in the U.S…who…bet that financial services was the coming national star that would drive their economies over the last 40 years…this one has not worked out so well.”

            The only unsustainable growth in welfare has all been on wall street and pentagon mercenaries. Kevin Phillips debunks the same myth of uncontrolled welfare growth quite clearly in his book “Bad Money” among others others. The meteoric rise in financialization is measurable and undeniable—moneychangers ‘making’ money as opposed to productive investment creating real wealth—as a perecentage of the economy. There is a clear correlation to the collapse we are suffering today in financialization, war and corporate, not the mythical growth in welfare. As stupid or dishonest as the latter is, it’s surpising how many people still trot it out with (apparent) sincerity.

            Austerity to choke PRODUCTIVE public investment and Main Street’s small-business engine of wealth creation is exactly wrong, intuitively AND empirically. Although decades of rule by neo-cons, neo-libs, and neo-classists has done much to prove that gov’t “can’t” work, we don’t have to look much further back to a time before these pirates, to see clearly that a concerted effort in smart commonwealth investment can indeed yield enormous dividends, even to the unenlightened parasitic capitalists that want us all to wear sackloth and ashes to starve our way out of a depression.

            The logic is inevitable and it will prevail in time. To paraphrase Churchill: “America always does the right thing…after it has exhausted all unworkable alternatives.” We must be close to that tipping point.

        2. Raging Debate

          Evolution. The decentralization has begun. A global union is not possible with only the monetary portion (insiders) considered. The best we can do is mitigate the coming losses during the process. No doubt we will centralize once again and so it is worthwhile to discuss what we want after as the current paradigm won’t continue.

          The investment community funds the working class to spur political change when there is no growth opportunities. We are at that point. It is likely war will finish off the global monetary union that is collapsing as we speak.

          “Competition is a sin; therefore we must destroy it.” John D. Rockefeller.
          Here is something to ponder. Was Teddy Roosevelt a great American hero or was he simply going with the flow of the investment (or lack thereof) cycle I mentioned?

    2. briareus

      Though I’ve long enjoyed and learned much from her blog, I sense Yves migrating from economics to partisanship. I lament this development, but I suppose the Krugman approach is where the money is at.

      1. Yves Smith Post author


        This isn’t partisan (recall I savage Obama on a regular basis), and it isn’t Krugman (f you’ve read my book, I criticize Krugman for some of his analysis). This is based on Modern Monetary Theory. As I said just above, it is based on how monetary operation work in modern economies plus sectoral funds flow accounting identities.

        If MMT doesn’t work, then neither does double entry bookkeeping. The conclusions you reach now, that fiscal austerity measures are a disastrously bad ides when the private sector is deleveraging and you don’t have a huge level of exports, is actually pretty obvious once you take the time (not long) to master the basics.

        And this is being proven NOW, empirically. Ireland has gone down this path, its GDP has fallen 12% in real terms, 19% in nominal. Nominal is what counts for servicing debt. So austerity has led to a WORSE debt to GDP ratio, it is producing the outcomes the exact opposite of its expressed goals. Ditto Latvia. Fitch downgraded Spain because it expects its austerity programs to make its ability to service debt worse too. So you are telling me Fitch is partisan too, in reaching the conclusion that austerity will make debt burdens worse?

        Ambrose Evans-Pritchard, who is a monetarist and of an Austrian bent, a notable conservative writing for the Torygraph, um, Telegraph, is also calling out loudly in just about every column he writes about how bad an idea austerity is. And his columns cite economists who aren’t in academia, as in they advise investors (as in they can’t afford the luxury of being “partisan”, they need to be right), and they echo the same concerns.

        Saying austerity is a terrible idea now isn’t partisan (although the people who are pushing it may be).

        1. An angry saver

          Saying austerity is a terrible idea now isn’t partisan (although the people who are pushing it may be).

          What the hell those countries that are called for austerity did produce during all these years:
          – Real estates bubble of historic proportions,
          – Financial industries (sic),
          – A gigantic retail-consuming sector,
          – A lousy and un-productive “service sector” that is basically living on the three above-mentioned sectors.

          And you want to avoid austerity. The gain without the pain. Good luck. Krugman is a fool. And Wolf has alas just a penny more credibility.

          This display of self-assurance of economists originating from countries that do not produce anything except wheapons, value consumers as if consuming was a value-per-se, talk disdainfully of “manufacturing” (instead of industry) should listen to Andry Grove instead of calling on exporting countries nutty savers to consume the great output of, say, Southern Europe, UK and continental US:

          And pay attention to REAL economy (not econometric model that are bordering to ridicule):

        2. briareus

          I did read your book. I bought it the day it was available.

          And I have been paying attention to Ireland. I also note that the likes of Irish central bank governor Patrick Honohan saying “Everybody’s feeling quite sick at what happened because things were going so well for Ireland, but we don’t have the flexibility to do a spending stimulus now. There’s no one who is even arguing for it.” No one even arguing for it! Except perhaps here and Krugman’s blog and places of the same stripe. That Pritchard agrees means little to me; one can read his style of writing over a long time and easily discern more than a hint of hyperbole. (Note I am not saying he is wrong either, but I get a sensational feeling from his approach.)

          And I never said austerity is a good idea at this time. I see the possibility of a Hoover-style moment right in front of us. But I think the commenter I replied to above has a legitimate point. My company is having huge problems with regulation, and it’s not a lack of regulation. In fact, there’s a poorly designed subsidy designed to ‘help’ my industry that is currently exploding so predictably and terribly that it is taking companies down in the very industry it is aimed to support (renewable energies). I have little expectation of reactionary policies being helpful. So here you are, proposing policies from what appears to be the relative comfort of a theory, the meat of which seem to me aimed at eventually expropriating whatever wealth I have left from me, and I’m none too excited about it.

          I’m one of those who saw this coming. I avoided the real estate bubble long before it was being popularly discussed as such, let alone bursting. No sooner than I sniffed effects that would wipe out 401k, I scrupulously avoided that casino (avoiding huge losses had I been there), and put those inputs towards precious metals and other investments that as of today have me quite well Up in this crisis environment, at a time when virtually everyone I know in my personal life is down, and I didn’t have to hold my nose for a single moment or a single investment to do so. I am no expert, but I’m an effective weatherman.

          I am carefully saving these funds and improving them while I draw talented engineers and thinkers into my circle to start offering solutions when the timing is right, and i trust my sense on when that is more than I trust you, so forgive me if I read with disappointment and dismay your proposals that I feel confident would sweep away a good portion of what I have been carefully and successfully nurturing.

          And I’m sorry to say that It feels like you propose this in such confidence of your theory that you may miss thinking of real world effects it may have on people like me. I feel like my finances are a pawn in your increasing notoriety.

          1. Captain Teeb


            The problem with modern economists is that it’s always a good time tax (maybe) and spend (definitely). It doesn’t matter whether things are going fine or we’re in a crisis:
            Going fine: don’t stop now, you’ll hurt the economy!
            Crisis: don’t stop now, the sky will fall! (Wolf)

            It’s like the guy with a hole in his roof. He can’t fix the roof when it’s raining, but when it’s sunny there’s no water coming in, so why bother?

            For a straight take, try Joe’s new post:

          2. craazyman

            You’ve done well. So I respect your opinion. What’s your best 10-bagger in the renewables area? How about AMSC? Or COMV? I own COMV, but only enough to vacation in Paris, not live there. I want to live in an absinthe bar in Paris where I can float around inside my head and forget the world.

        3. RalphR

          angry saver,

          In all honesty, you want us to take economic advice from a site that has Pat Buchanan as its LEADING ‘featured contributor”? Honestly, you just completely discredited yourself.

          And if you were asleep, NC featured the Grove piece prominently, was one of the first to do it.

          Your comment is really confused. The loss of manufacturing was the doing of free market economists, particularly the Chicago school. They also pushed deregulation. And Reagan, who followed them, ran massive deficits, as did Bush.

          People are already trying to save, the point is having the government save now too is a bad idea, unless you can export a lot more. One country at a time can increase exports, but if a lot of countries try to increase exports at the same time you are likely to get protectionism. And the US is not very well positioned now to increase exports, much the less achieve a trade surplus. We might get there, but Grove type policies will take time to implement and bear fruit.

          Do you really want a depression? That is basically what you are asking for. We will probably have a contraction regardless, but trying to impose government austerity now will make it much worse. That will kill the value of your investments, which seems to be your big beef.

    3. gigi

      Clap, clap, clap.

      If we go down the path Yves is advocating (apparently an MMTer herself now), we will usher in communism 2.0, where government will control all spending, all resources, and we will then wonder how it came about.

      The worst actions are committed with the best of (stated) intentions. Communists did not take power claiming to impoverish everyone but the contrary. Our privacy was stolen to protect us from terrorists. The banks were not bailed out to protect the bond holders but to “support lending”. Government support will be for grandma to keep her from starving but will do no such thing. MMT will protect us from the harsh reality of an economic depression. Color me skeptic.

      “Those who desire to give up freedom in order to gain security will not have, nor do they deserve, either one.” Ben Franklin

      I for one will not give my freedom to succeed or fail to the prophets of MMT. When I give someone the power to eliminate the consequences of my failure I also give them the power to eliminate my success. And as Franklin so aptly put it, I have already lost my freedom.

      There are no messiahs, there are no magic bullets, there is no way to circumvent reality. Face it or face a worse fate. The choice is ours. And unfortunately it seems we have collectively decided for the worse.

  4. Diego Méndez

    I’m very confused at the austerity debate, can anybody help me?

    On the one hand, I understand Krugman’s and others’ demand-side proposed policies. It makes perfect sense to increase public spending at a liquidity trap. No one has been able to put forward a reasonable case against that.

    At the same time, there are many supply-side policies that could be taken to rise living standards in the medium term, especially in some European countries. These reforms are not been considered on most countries, which is a pity.

    On the other hand, I cannot reconcile those solutions (increase demand, improve offer) with the real inefficiencies that have brought about the crisis: namely, financial crooks and other well-connected sectors getting privileges from government: laws permitting them to get rich just before bankrupting the whole system, subsidies to the wrong sectors (as recently explained in this blog), a trade policy fostering de-industrialization and low-income wages, etc.

    Those internal Western inefficiencies (financial crooks, oil crooks, real-state crooks) and stupid policies towards dictatorial, export-subsidizing China have resulted in the largest capital misallocation in history.

    If those are the causes, why are solutions completely unrelated to them? Can anybody help me?

    1. michel

      Here is an effort to help a bit. There are two issues, deficits, and state sector spends.

      Yves, Wolff and Rob P take a view which it is hard to summarize without parody. Roughly, state sector spending is stimulative, and you don’t have to worry about what the spending goes on. Deficits don’t matter.

      When you look at this more closely, taking some particular country as an example, you find that you do have to worry about what the spending goes on, because a lot of current spending is on activities that actively prevent economic recovery.

      When you look at the conditions under which deficts don’t matter, you find that what they mean is that defaults are impossible as long as (1) you run your own currency (2) you do not borrow from foreigners (3) your currency is not convertible. This is very true, and as you would expect from a proposition deduced from an accounting identity, it is a tautology with no implications whatever for policy in the real world. An autarky cannot go bust as a country. True. But a government of such a country can rob its citizens blind in favor of the state sector. It can grind its way into subsistence poverty. Spain did it under Franco. Ireland could do it today, so could Greece. All they have to do is default, establish their own non-convertible currency, and be self sufficient. And carry on with public sector looting.

      What has really happened in the last 10-20 years has been special interest looting. This has been done by the public sector and by the finance sector, in the main, with collusion and encouragement by government. The result of this looting has been to create an environment in which investment is unprofitable. Accordingly, the private sector has not invested.

      Yves and Co now propose that the remedy for this is to mandate investment in activities which will still be unprofitable, just less unprofitable than the alternative of holding the funds, given the swingeing taxes they favor on uninvested funds. This will, of course, make the problem worse. It will just lead to more looting by those benefiting from the directed investments that will result.

      All this is based on myths about what supposedly happened and worked in the thirties. The myth is that the heroic Roosevelt did a 180 turn from the policies of the despicable Hoover and thus turned the economy around by huge deficit spending. What really happened was that Roosevelt continued Hoover’s policies of price support and encouragement of cartelization and union power. The result was stagnation. What turned the economy around was that in 1936, the government finally started to implement IMF type programs, trust busted again, and growth reappeared once barriers to investment profitability had been taken down.

      1. Diego Méndez

        Thanks for your answer.

        We’re f***ed up if, 80 years after the Great Depression, we can’t agree yet on what happened and how we could get over it.

      2. Skepticus Maximus

        Very interestingly put. I think you’ve pointed out the weak point in the argument of the stimulus crowd: Where does the money go?

        Specifically, we’ve had a lot of stimulus over the last couple of years. It’s not clear how much of it was useful. My sense is that a lot of it was wasted. Actually, more than just wasted, my sense is that a lot of it was counter-productive, keeping in place a system that was inherently unbalanced and thus delaying and making more expensive the eventual rebalancing.

        In the abstract, large government stimulus spending during a depression-level crash seems like a logical idea. The problem is that people feel that much of the stimulus money basically ended up stolen, often by the same people blamed for the mess in the first place.

        So it’s not a matter of economic theory. People are upset because of what happened when theory met reality.


      3. Barnyard Taylor

        Australia engaged in massive stimulatory spending in 2008. The projects included “free insulation for homes” and “building our schools” among others. This was to stave off a recession. Most of us remember the scary scenario we were facing, so there was not really much questioning of the projects engaged; nor was there really any oversight of what went on.

        The results have been disastrous. Through the project, Australia’s wealth has been re-allocated to electricians and construction workers from efficient industries such as mining. The libraries and assembly halls constructed for the schools were never needed, and were hugely overpriced. The pink bats were installed by shoddy Johnny-Come-Latelys, the subpar workmanship of which has led to several deaths from house fires sparked by electrical faults.

        Points to remember whenever we seek the Government to come to our aid. I for one will never look for a politician to save the day.

        1. michel

          This is a common but mistaken idea. The turnaround happened before either the war or rearmament.

          1. Progressive Ed

            But the stock market (and the real market based economy) did not return to pre-Depression levels until the early 1950’s (thanks to the birth of the baby boomer generation resulting in a massive increase in private sector based demand).

      4. Flimflamman

        “Yves, Wolff and Rob P take a view which it is hard to summarize without parody. Roughly, state sector spending is stimulative, and you don’t have to worry about what the spending goes on. Deficits don’t matter.”

        That’s neither summary nor parody; it’s misrepresentation.

        Yes, state sector spending can be stimulative, but the point MMT emphasises is that such spending is supportive. It supports private sector net saving when the net export position is unable to do so, and it supports full employment when the private sector is unable to (which is always). Stimulation is secondary.

        I have yet to read any article by an MMT proponent stating that it doesn’t matter where the spending goes.

        And finally, it’s one of the central points of MMT that deficits do matter. They matter in terms of what the government can achieve in supporting the economy, and yes, they matter in terms of inflation when real economic capacity is exceeded.

        “(1) you run your own currency (2) you do not borrow from foreigners (3) your currency is not convertible. This is very true, and as you would expect from a proposition deduced from an accounting identity, it is a tautology with no implications whatever for policy in the real world.”

        1: OK, although ‘issue’ in place of ‘run’ would make things clearer.
        2: Should read “you do not borrow in a foreign currency”. Borrowing from foreigners is fine provided that borrowing is in your own currency.
        3: OK.

        Robbers rob people. That’s a tautology too. No policy implications?

        The accounting tautology makes clear what will happen given particular government policies. No policy implications?

        “Yves and Co now propose that the remedy for this is to mandate investment in activities which will still be unprofitable, just less unprofitable than the alternative of holding the funds, given the swingeing taxes they favor on uninvested funds.”

        The proposal Rob and Yves have made is to stimulate capital investment; the real one: investment in productive capacity. It does not imply that the investment would be unprofitable, just that it would be less profitable – in the short term, and to specific players – than the existing cash hoarding. It is also simply one proposal to deal with one problem, not a panacea. Other problems will have other solutions.


        1. Doug Terpstra

          Well put. What we cannot afford any longer is to have those arguing for austerity, spend-thrift warmongers, or anyone else directly involved in getting us into this mess so far (and that includes Obama and his Rubinomics team), having anything whatsoever to do with with the targeting of productive public investment going forward. We need leaders with vision who understand the long term job-creating value of domestic investment—education, energy, science, health, transportation, sustainable urbanism, etc.

        2. Anonymous Jones

          I can’t believe you took so much time to refute someone who literally seems to believe the argument “is hard to summarize without parody.” Nevertheless, it was a nice response.

          We should all fear unintentional self-parody, especially those who are prone to writing something like what Michel wrote above.

        3. michel

          “Robbers rob people. That’s a tautology too. No policy implications?”

          No. Tautologies have no policy implications. They are true by definition.

          1. Flimflamman

            And what about the paragraph below that one?

            The sectoral balances will always sum to zero, no matter what policies are adopted. Yes, the accounting balances are a tautology, but the policy implications are built into that very fact. It’s the nature of the economy that produces the sectoral balances that’s most important, not the balances themselves.

            Policies that don’t take into account the existence of the tautology are in danger of failing.

            Policies which require the tautology not to exist are guaranteed to fail.

            Policies which are based on an understanding of the tautology can – and here’s the clincher – arrive at said tautology within an economy that is of greatest benefit to the greatest number of people.


      5. sgt_doom

        Wow, revisionism gone wild!!!!!

        No, what happened was that Roosevelt and his gang put a hold on securitization — the name didn’t exist then (not until the ’90s, I believe) — but the process was the same.

        Along with trust busting and reining in the JP Morgans and Goldman Sachs’ types.

        The problem is that Keynes recommended government spending to TWEAK economies, not as the end-all and be-all.

        But, over the past thirty to forty years — in the USA (America) — the economy was dismantled, cannibalized and sold off by all those members of the debt-financed billionaire class. There remains little actual economy to be tweaked.

        And therein lies the problem. And the head poster is correct as to the criminality involved.

        1. sgt_doom

          With regard to Ireland: its economic growth was achieved primarily by the dissolution of corporate taxes and Ireland became a valuable tax avoidance shelter to a host of multinationals by way of profit shifting:

          they would claim the majority of their profits in Ireland to avoid taxation, then claim their expenses elsewhere where the tax brakes on expensing were the best.

    2. DanB

      “Austerity” and “stimulus”, whatever else they are and political motives they disguise, are tactics to restart grwoth. If we’ve reached the limits to growth -oil being the first but not the only constraint- then the debate is futile. A new paradigm is needed to both redefine and solve the problem.

    1. Yves Smith Post author

      You’ve obviously never seen Wolf speak. And this isn’t a Keynesian argument, even though at this point in time the conclusions resemble those advocated by Keynesians. This is based on Modern Monetary Theory, which is based on how monetary operation work in modern economies plus sectoral funds flow accounting identities. If MMT doesn’t work, then neither does double entry bookkeeping.

      So you seem to be operating with less that a full view of the terrain on several fronts.

      1. Viator

        Nice ad hominem attack..

        Maybe this is a case of Keynesians in MMT clothing? I don’t expect left wing economics to go gently into that good night after being in the drivers seat for almost a century. But does it strike you that things have been working out very well? Of course not. But curing an addiction with the substance that caused the addiction doesn’t seem to be a very good plan either.

        1. Yves Smith Post author

          First, it is not an ad hominem attack to point out that your argument has not considered key issues. That is substantive.

          Second, I have written a book on the crisis which goes into considerable detail, far more than any book to date, on the root causes, both in economic theory, market practices, and institutional dynamics. Finance professionals in particular give it very high marks. I suggest you read it as to why the crisis happened.

          1. Viator

            I expect, Yves, we both want to get to the same place – resolution and prosperity. You have done yeoman work in helping to understand this whole mess. But in this world of too many two handed economists the question is how to return to prosperity. Do I want to give GS a free hand to cheerfully corral every last dollar of wealth on the planet? Of course not. On the other hand (there we go again) is even more intervention and regulation the cure? Many think so. From my perspective as a capitalist grunt a little more of that will finish off the small business person (responsible for a large portion of all job creation) in this country. I think we will work through this mess at very great cost with pragmatic (and only secondarily theoretical) solutions, the kind that really count in the end.

            One of the problems I see in all this almost endless discourse is fundamental confusion regarding the role of sovereigns and private enterprise in wealth creation. Without wealth you simply starve to death, which is what people did routinely a thousand years ago and still do on parts of our planet. There are many people who think wealth is created by sovereigns so there is little need for private enterprise. Does history and experience bear this out?

        2. sherparick

          Viator, really, you believe that “left” wing economics has been in the “driver’s seat” the last century. Perhaps there was a moment, from 1944 to 1970, where this was true, since Reagan and Thatcher and Greenspan? Admittedly, when terrified and looking at the abyss in the autumn of 2008, policy makers grabbed the rope of traditional Keynesian to keep the status quo afloat, but now that it is just “little people” suffering, we can go back to “orthodoxy.”

          If people read Krugman, you realize that he has gone off the free trade orthodoxy of his profession and realizes that with China, and also with Japan and Germany if true be told, U.S. manufacturing is not competing on an even, but a currency tilted playing field. Read that whole Bloomberg magazine where Grove’s article appears and you read how manufactures are arguing for massive investment subsidies in the U.S. to invest here because that is what the Chinese give them ( although as some are finding out, the Chinese bait and switch once the factory is built and since ball is played in the Chinese courts, they don’t have much recourse.) Why would you build a plant and train employees in the U.S. at your own cost,a then have to compete at a price disadvantage because of the currency peg when you can invest in China and have those advantages?

          Viator, if you want see what a real left wing, non-Marxist, economist is saying, here is a paper by Steve Keen, who along with John Quiggin, represent the Australian, as opposed to Austrian, school of economics.

          Finally, I love the “virtue” of the libertarians on this blog. They really do adopt the code of Ayn Rand and believe that they are where they are by their own individual genius and hard work, ignoring the ample social, as well as often monetary, capitalt they inherited from their ancestors. So in their world, even poor houses are to much for the losers of society who need to be on their toes and beware of ill fortune because they are on their own.

          I also “like” the way they refer to the Founders as their authority for this view. The Founders were a rather polyglot group of men (and a few women) who often vigorously disagreed. I guess I like Franklin the best, and he actually disagreed with himself over time because, like Keynes, when the facts he knew changed, he changed his mind. So from British Imperialist to arch-revolutionary for instance. Late in life, he also wrote this to Roger Morris in 1783 (in the context of the new United States not wanting to tax themselves to pay for the Revolutionary War, apparently a national character fault we have inherited), the following: “All property is necessary to a man for for the conservation of the individual and the propagation of the species is his natural right, which none can deprive him of; but all property superfluous to such purposes is the property of the public, who by their laws created it, and who may therefore by other laws dispose of it whenever the welfare of the public shall demand such disposition….He who does not like civil society on these terms, let him retire, alive among the savages.” Music to my ears when I think of libertarians and their love of ferocious government (up to in and including debtor’s prisons now – see Mr. Robert Walker of the Peterson bamboozle) when it comes to the defense of property which is all that the mean when they say “freedom.”

          1. Viator

            “(European) Public policy since the 1930s rested on a broadly unquestioned ‘Keynesian’ consensus. This took for granted that economic planning, deficit financing and full employment were inherently desirable and mutually sustaining.”

            from Postwar: A History of Europe Since 1945 by Tony Judt, noted liberal European historian.

            And of course the parts of Europe that weren’t “on a.. unquestioned “Keynesian” consensus” were Marxist. Most of Asia – China, India, even the Tigers (the Tigers earned that sobriquet because they transitioned so successfully from a planned economy to a more capitalist economy) – have only recently begun to throw off the yoke of Socialism and Communism. Anywhere else in the world under the Soviet sphere of influence was probably Marxist or under Marxist influences including parts of Africa and South America.

            One only has to have visited Washington, DC over a number of years to see the burgeoning federal Leviathan spread out across the countryside of Maryland and Virginia. The expansion of the US federal government measured in dollars, laws, regulations, employees, bureaucracies, is well documented. As is the incestuous relationship between Leviathan and big business.

            So, you can see, a majority of the world has functioned under planned economics for almost a century until relatively recently. A result of that transition is that more people have removed from poverty in the last 25 years than occurred in the entire prior history of the world.

            As the rest of the world moves away from planned economics we are moving towards it.

        3. Doug Terpstra

          Viator, like sheparick, I choked and sputtered when I read your wierd assertion about “left wing economics…being in the drivers seat for almost a century.”

          We clearly live on different planets…no, alternate universes. One of us has been drinking too much rigged-market, arms merchant, bankster Kool-Aid, and I’m pretty sure it isn’t me.

        4. Anonymous Jones

          It really is amazing how many people still misuse “ad hominem attack.” We’re on the Internet, for goodness’ sake. It takes ten seconds to look up the words and phrases before you use them to ensure you’re not unintentionally making a fool of yourself. Seriously.

        5. sgt_doom

          It isn’t liberal economics, but neoliberal and neocon economics which have been so devastating.

          The drawback to MMT is that debt really isn’t considered in the equation….

      2. Captain Teeb


        I notice that you frequently equate the monetary identities with double-entry bookkeeping, but is it really that simple?

        Double-entry works for my business because I am money-constrained. But if I could alter the unit of measure (money) itself (creating new money from nothing, expanding my interest-bearing assets through fractional-reserve lending, market intervention, and lowering the real value of my liabilities through devaluation), I’m not so sure that the double-entry system would still be airtight. It would be more like a hall of mirrors where cause and effect are no longer distinguishable.

        1. vlade

          It does and it doesn’t. It does in that the accounting identities are important part of both. Where it splits is that DEB is used to monitor the state of finances, and not to make any sort of policy preferences, unlike MMT.
          The main problem I have with MMT is that (as a vast majority of economic theory) it ignores the first order behaviour effects – something that DEB doesn’t care about at all (it’s a monitoring, not predictive tool, remember?).

          For example, with perfectly rational and informed population, you could print indefinitely as MMT says w/o much effect. With the population we have right now, there’s a boundary over which you slip into inflation/hyperinflation due to the (ofen irrational) expectation of the actors.

          To me MMTs idea of “print as much as you want” (in extremis) is the same as austerists idea of “we will all get out of this by having net exports”.

          MMT is great for showing some simple truths about how saving is not morally superior to borrowing – but we as humans are condtioned to believe so (simply by the fact that hoarding non-monetary stuff is in general good for surviving). In the battle between truth and preception/bias perception/bias always wins short term (truth may long term).

          1. Captain Teeb

            Hi vlade,

            Thanks for the explanation.

            “not morally superior to borrowing – but we as humans are condtioned to believe so (simply by the fact that hoarding non-monetary stuff is in general good for surviving).”

            Not to mention a long line of injunctions against borrowing in religious traditions and popular proverbs (“neither borrower nor lender be”, etc.)

            We definitely don’t want people to stop borrowing, do we?

            And as far as lending goes (have you looked at savings-account rates lately?), ‘hoarding’ (itself a morally-charged term) non-monetary stuff is looking like an ever-better alternative.

      3. Dan Duncan

        “If MMT doesn’t work, then neither does double entry bookkeeping.”

        And what happens to double entry bookkeeping in the event that austerity is imposed? Does this mean that if austerity DOES work that double entry bookkeeping has been a fiction for 600 years? Does double entry bookkeeping break down in the event that governments begin to exercise restraint?

        The very tone behind the MMT thrust has an infantile thrust to it.

        “If MMT doesn’t work, then neither does double entry bookkeeping.”

        What, are we in the 3rd grade here?

        “Nah uh”

        “Yah huh”

        “Nah uh”

        Tell you what:

        I call your “600 years of double entry bookkeeping” bluff and raise it to the 1st Law of Thermodynamics: Energy cannot be created (or destroyed), even in a fiat monetary world.

        Thus, if MMT DOES work, then Newton, Maxwell and Einstein were all wrong. Our entire conception of physical reality will be obliterated. We will all be traveling faster than the speed of light and E will no longer equal m c(squared). No, E now equals “p i (squared)”, where p=paper and i=ink.

        And I stand before you at a chalk board with disheveled hair and a whimsical expression:

        E=p i(^2).

        And in one fell swoop, Dan Duncan received the Nobel Prize for not only Physics and Economics, but the Peace Prize as well. For his revelation brought perpetual peace and prosperity to all the Hobbits, Humans and Elves of The Kingdom.

        [Postscript to this MMT Fantasy: The ring was never thrown into Mount Doom. It’s on my finger. My middle finger to be specific. You may kiss it.]

        1. craazyman

          Dan nobody understands this stuff. I Kant believe all the confusion. Even the measuring the speed of light is a quantum observation, which has its own probability cloud. In 10 million years it might be different.

          I call the stimulus economics crowd “Viagrans”.

          But not out of cynicism. Sometimes you really just have to give it a good hard thrust to spark some action. Austerity never begot children.

          boo ahahahahah

        2. Anonymous Jones

          “The very tone behind the MMT thrust has an infantile thrust to it.”

          But see, that’s the thing. Every single reductive theory about the economy has this “infantile thrust” to it. It’s almost *everyone* on this comment thread who is making an idiot of himself/herself. No one understands what is the “best” way to structure a society or an economy. There can be no “best” way because all the individuals have different, often conflicting, goals. You all think you know so much, but you have all fooled yourself. It is beyond you. Try some f*cking humility pills for a change. Yes, we should try our best and promote those ideas that we *think* are more likely to effect the change we want to see, but stop convincing yourselves that you “know” what is “best” and that everyone else’s theory is idiotic. Everyone else’s theory is no more idiotic than your own. Especially when you all may have conflicting goals!!! Contrary to what is usually seen here, it is possible to politely disagree with other people (unless your opponent is not willing to be polite, then by all means, let’s strip off the f*cking gloves…). This politeness comes much more naturally when you begin to recognize the limits of your own knowledge and your own intellectual capacity (talk about scarcity!).

          1. anon

            Where’s the irony here? Sounds like sincerity to me. If you haven’t been humbled at some point reading this blog, you haven’t been reading, nor thinking critically enough. If your bout with humilty hurts and you’re an adult, you;ll reealuate your certainties, then come back to argue your new insight with a different passion. That’s a good thing.

          2. traderjoe


            Someone that calls nearly everyone on this blog an idiot, and then asks for more humility = irony.

            Swearing/angrily asking for politeness = irony.

            “You all think you know so much, but you have all fooled yourself. It is beyond you. Try some f*cking humility pills for a change.” = irony.

    1. Scarecrow

      Uh, DeLong believes the Keynsian argument is correct, and all of his posts say so and provide both the theory and it’s genesis in previous theory and cite the facts in support of the Keynsian view. When he says the “argument is lost,” he means that despite having the correct analysis and the supporting facts, the argument is not winning with elected officials. To suggest he now concedes the argument is wrong is a serious misreading of dozens of DeLong posts.

  5. Viator

    Keynes & Co. have lost the stimulus argument
    “With the nation mired in unemployment, liberal economists have been pulling the fire alarm with increasing urgency. But the fire department isn’t coming.”

    “the White House’s broad approach… is to emphasize how much improvement there is, rather than how much needs to be done. That makes political sense.” But it also “makes it difficult for the White House to run around with its hair on fire about how bad things are and how necessary it is that Congress doesn’t abandon the labor market in order to pretend to care about the deficit.”

    Brad DeLong

    1. sgt_doom

      Citing Brad DeLong…..that’s so rich and humerous.

      LOL to the max! I’d cite Lady Gaga before I would mention that DeLong clown….

  6. RueTheDay

    I just love how so many people (and yes, it’s mostly folks on the right, though the insanity is starting to bleed into other groups as well) are willing to declare the stimulus a failure ad advocate austerity.

    We had collapse in asset values and resulting financial system panic that was on par with the Great Depression. During the Great Depression, unemployment reached 25% and GDP fell nearly 30% over the course of 3 years. This time around unemployment rose to 10% and GDP fell by around 6% on an annualized basis for two quarters. While government intervention (including the stimulus) this time around was not perfect, it was a smashing success compared to the Great Depression. If the fiscal austerity know-nothings get their way, the results will almost certainly be like 1937, the last time they got their way. They can slam Keynes all they want, the facts prove that his economic model maps to reality much closer than any of the nonsense the Austrians and other austerity advocates have ever come up with.

    1. Piero

      You don’t actually believe that unemployment has only been 10%, do you? Back in the days of the great depression there was a quaint honesty to even government statistics. If a person was unemployed they categorized him as unemployed even if he had been out of work more than 6 months.

      Real unemployment has probably been around 18% or so. It’s hard to say exactly. Like the consumer price index, which doesn’t count housing so much when the bubble is forming then counts it more when the bubble is popping, the government has preferred that these statistics be soft lies rather than hard truths.

    2. sgt_doom

      While I agree with the overall gist of your thought, there are some discrepancies which ache to be pointed out.

      Unemployment rose to at least 33% or greater during the Great Depression. That prevailing 10% hovering figure of unemployment in the present (regardless of the increases in poverty, homelessness, and jobs losses, it never seems to go above 10%!!!!!), completely different statistical measures are ostensibly being used.

      If the same measurements were used as during the Great Depression, America’s real unemployment would be between 28% to 34% today.

      If one closely examines the insolvent unemployment insurance funds of those 32 states, and compares and constrasts numerically against the extrapolated unemployment stats, it is obvious that there is almost no correlation.

      To correlate the data, an estimated 28% to 32% unemployment figure must be realized.

      Also, this stimulus program has skirted jobs offshoring, with a number of waivers issued by the Department of Commerce, along with other workarounds to continue to include (unnecessary) foreign visa workers (to the exclusion of American workers), and a host of other dodges.

  7. sc721

    “If MMT doesn’t work, then neither does double entry bookkeeping.”


    You are using this statement a lot without really explaining it (I assume you do elsewhere and have grown tired of retyping it).

    If that is the case, I would ask that you cut and paste a fuller explanation of what you mean exactly at least once per thread.

    No re-typing need be involved – just cut-and-paste or post a link to a page with a more complete explanation.

    Without this level of detail, the statement comes off as a bit of a mantra/claim to authority that cannot be evaluated independently.

    I’m sure you have many readers (compare unique visitor counts to number of commenters) that only dip in and out of your site periodically – shorthand quips really don’t do it for them…

  8. homedad43

    It’s helpful when arguing to define what you mean by austerity, an awfully broad word.

    In the American case, I define it as moving beyond benefits payments and going to a widespread restructuring of what we believe to be worthy of payment. Continuing the bank/financial largesse while slashing benefits for the unemployed past 99 weeks? Continuing to pay for empire duties in far off lands while our states are unable to provide for the basic services such as roads and police/fire?

    Before you get bug-a-boo about the concept, define what you mean by it.

    1. RueTheDay

      Austerity is generally taken to mean deliberate attempts to reduce the budget deficit through a combination of spending cuts and tax increases.

      1. Jackrabbit

        I think it means for government to “live within their means” – as an ordinary person would. Thus, it calls for governments to reduce or eliminate deficit spending.

        Taxing is a separate matter, but those who favor Austerity generally also do not want their taxes to go up.

  9. Viator

    Economist Alberto Alesina argues that austerity triggers growth

    “Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won’t be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes. The Madrid paper, a summary of his views, was influential enough to be cited in the official communiqué of the EU finance ministers’ meeting.”

    Notice the nice pro-Keynesian, MSM spin in the article by Business Week

    1. bs23

      There’s three points made in that quote, and maybe it’s not particularly representative of Alesina’s work, but I gotta take issue with at least the first two.

      First, how much lower can interest rates really go? If lowering interest rates were enough to spur enough investment to grow out of this mess, wouldn’t that have already happened?

      Second, it’s certainly at least conceivable that stimulus today and cutbacks in the future lead to a better economy in the future than austerity today and growth tomorrow. Therefore, if some investors take that position seriously, wouldn’t austerity today have a very non-calming effect? The point is the inference about investors current behavior based on future assumptions could go the other way. And just brings us back to whether we think stimulus/austerity is going to work.

      1. Viator

        Interest rates are low for certain people, like GS or Citibank, but very high for others. For example, credit card rates in the US are from 12-20% compounded. I wouldn’t call that low.

        Alesina was, I think, referring to sovereign and bank rates, which in Europe, currently are quite low for Germany, for example, but rising and very high for Greece and others or even impossible to obtain. In fact, presently, in Europe many banks, sovereigns and companies pay very high rates or cannot borrow at any price. They have had to institute special regimes through the ECB and IMF to provide liquidity.

        I agree that we all cherry pick our economics to fit our politics. That is the problem. Every political persuasion or tendency has their own pet economist on a leash they can bring out to bark at the other side. In Alesina’s case the
        EU finance ministers thought enough of his work to cite it.

        1. bs23

          Ok, this part of the austerity argument might then apply to Greece, for example, but certainly not to the US or UK whose bond yields are currently very low. That these low yields might be due to a flight to quality doesn’t really matter—the money is there to be taken if it is deemed useful to do so.

  10. ella

    How about the disbelief in corporate/government accounting? A simple look at the fraud in accounting is enough to keep your money out of equities. Example, off book transactions, dark markets that can affect the value of any corporation, tier 1, 2,and 3 capital, counter party risk, hidden unsafe practices and products (deep water drilling) government borrowing that hides debt (Greece), inflate projections for revenues, tax breaks for the ubers, central banks hiding their injections and the quality of collateral and on and on.

    No one can trust the numbers anymore because 2+2 = whatever they decide.

    1. sgt_doom

      You nailed it, ella, with all those SIVs, SPEs, SPVs, SPCs, offshore finance centers, SPACs, STACs, etc., etc., ad infinitum, who the bloody hell knows the true valuation of anything?

      With holding companies existing to hide true ownership, and the SIVs and SPCs existing to both hide the true debt and hide the true extent of capital, its anybody’s guess.

      And the trivia questions for today:

      (1) Name the top share holder in Northrup Grumman?

      (2) Name the top share holder in JP Morgan Chase?

      (Hint for #1: family name begins with B)
      (Hint for #2: family name begins with R)

  11. Captain Teeb

    “keeping old people from having to subsist on pet food would be good for economies around the world. I’d love to see Wolf up against the Social Security fear mongers from the Peterson Foundation. Fur would fly.”

    Yes, AIG’s counterparties and bondholders will be paid off at 100% (as will Greece’s), but the aged will count themselves lucky to have dog food, and ordinary folks to have a mininum-wage job. Politicians routinely break promises to voters, but think twice before double-crossing their financiers.

    This is the fundamental dynamic at work in our policy choices. The way to bet is that it will not modify itself of its own accord.

  12. call me ahab

    “But the result would have been a depression.”

    it appears that is the scary thing we have been trying to avoid the last 10 years-

    thank god for the welcome reprieve of the “housing bubble” to make it appear everything was going to be OK-

    the USG trying to finesse its way through so things “return to normal”-

    have we considered an economic model based on ever increasing consumption financed by debt as “not normal”?

    maybe a depression is inevitable as the population becomes disenchanted w/ the idea of consumerism as a life goal-

    just a thought

  13. Friedman's Ghost

    “Yves here. So Wolf, and the Bank of International Settlement (hardly a bunch of socialists) think keeping old people from having to subsist on pet food would be good for economies around the world. I’d love to see Wolf up against the Social Security fear mongers from the Peterson Foundation. Fur would fly.”

    I personally am beginning to grow tired of the idea that little old ladies will be eating Alpo if we do not do something. I have spent some time in Europe albeit little. I have some very close friends in Italy and France. They will not eat dog food. Nor will American elderly be forced to eat dog food.

    My fear is more a global baby boom generation of which most have never really had to do with out anything their hearts desire deciding to sacrifice young blood to ensure they can continue to hit the boats and casinos.

    1. sgt_doom

      Why don’t you make any sense?

      I recall an NPR interview back in 1999 with a Duke University soon-to-be liberal arts grad who received a beginning job offer of $66,000 (during the dot com “boom”) — later withdrawn, BTW.

      Today in America, ANY grad receiving ANY job offer should consider themselves infintely lucky, and the potential for non-grads remains infinitely worse……

  14. PityTheBankers

    Hilarious stuff:

    “Austerity triggers growth”


    retirees hitting “the boats and casinos”

    You can always count on the right wing lunatics-the free market/libertarian/Austrian true believers-to bring the comedy. The comedy and the stupidity. They spew their garbage despite being proven wrong again and again. Religious belief trumps rationality; what else is new?

    1. call me ahab

      “right wing lunatics . . .[their]religious belief trumps rationality”

      so tell me- what was said that can be classified as lunacy?

      and then please clarify if you feel only those thoughts that you agree with qualify as “rational”-

      not that anyone gives shit

    2. sgt_doom

      thanks, PithTheBankers, the next proclamation I fully expect to hear:

      Ditch diggers elbow out JPMorgan derivatives traders at Maxim’s bar.

  15. Viator

    Stimulus Surprise: Companies Retrench When Government Spends

    “The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees. In the House, the average is around 20 percent. For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.

    We began by examining how the average firm in a chairman’s state was impacted by his ascension. The idea was that this would provide a lower bound on the benefits from being politically connected. It was an enormous surprise, at least to us, to learn that the average firm in the chairman’s state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

    The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending.

    Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

    Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.”

  16. Jose L Campos

    Stimulus means spur but for a spur to be functional a horse is necessary. We have no horse to stimulate and the horse that we need is need itself, not a need for this gadget or the other but that need that is the fear of obliteration. Need precedes technology and industry. We cannot create jobs. First we need that need, the material one, that will force us to imagine and thereby create and then preserve.
    A problem in analysis is that categories like debt and credit and contract are being used. My view is that money has been transformed into a natural resource like air or water and has no price. Only scarcity of money might return some value to it, but what is money nowadays? Shouldn’t the dollar and euro be at par? After all both are imagined somethings, I don’t know what they are.
    Reality is always limited, something without limit is not existing and an unlimited creation of money results in complete absence of money, though police power may enforce some behavior.

  17. Perfect Stranger

    I like to read, formally left-wing approach to this depression. However, he, as far as I can see, is closer to Dick Cheney’s “Deficit doesn’t matter”. I’ve not seen that he is advocating some kind of industrialization policy. Instead, I’ve seen he is saying that “government need to be employer of last resort and pay the minimum wage to employees.”

    After the reading of this:

    Pavlina is offering somewhat better explanation of MMT.

    But, Cui bono? where the money will go?

    Where it will go is explained here:

    Without dismantling/removing the swindlers and looters – in above link described system – from the power, no theory will ever work, there will be no recovery and no jobs. There is no future. Therefore all this discussions are pretty useless, regardless of your favorite theory: neocon, liberal, or some of so-called progressive’s.

    In my mind it is not even the theory. The theory is scientific category; and there is no a bit of science in economy. I am comparing “modern, advanced economics theories” with “intelligent design theory”. It is religion, rather, used by ruling/privileged class which they use it as pretext or as ideological hogwash for looting.

    Warren Buffett famously said, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

    As for so-called economic theories Paul Ormerod says:

    “Contemporary orthodox economics is isolated. It is isolated from its roots in the late eighteenth and early nineteenth centuries, when economists were by no means afraid to theorise, but did so purely to illustrate
    and understand the great practical issues of the day. Its method of analysis is isolated from the wider context of society, in which the economy operates, and which Adam Smith believed to be of great importance. And its methodology, despite the pretensions of many of its
    practitioners, is isolated from that of the physical sciences, to whose status it none the less aspires”

  18. Tom Crowl

    I’m just an explorer here.

    I’m not an economist. So allow me to wander through some speculations in hopes that I may someday soon reach firmer ground.

    There’s an ongoing debate between the ‘hard money’ side (gold, commodity-based systems, etc.) vs ‘fiat’ systems (sovereign issuance of currency directly and/or the creation of debt through Central Banks or similar systems…)

    BOTH can do no more than seek to direct a significant part (but not all) of the social energy* of the society with which it’s associated.

    *social energy refers to the individual and collective decisions which (quite literally) result in the product you see as a civilization. A decision here is defined as an idea + an action.

    The total available social energy then within any society has a physical limit. But within that limit it may be highly variable.

    In other words, what a society actually has available is NET social energy: A sum of decision vectors never actually in complete harmony.

    E.g. A nation in the midst of revolution has a whole LOT of energy… but very little ‘net’ social energy until a new social contract can arise and begin to better align these decision vectors.


    Both systems are bound up with this ‘social energy’ variable.

    Now given that the above way of viewing a social organism could have some value, it may have some worth in some of the discussions taking place here.

    The health of a society has much more to do with the nature of the ‘distribution’ of a currency (which is better viewed as a storage and allocation mechanism for social energy) than current theories seem to recognize.

    BOTH fiat and hard money systems have inherent problems related to bias in the creation of their currencies. And that’s whether the bias arises accidentally, intentionally or even subconsciously…

    (Here I’d suggest that the metastasizing of the financial sector is a result of the ‘subjective’ bias inherent in the current Central Banking system… even if well-intentioned with at least some of them believing it was for the greater good. The idea that the FED can be ‘neutral’ is inherently false. Frankly, as it’s now constituted it’s biologically impossible. But ‘hard’ money systems are subject to biases connected to ‘accidental discoveries’ or crop failures, etc.)

    There is no perfect solution here that I see…

    Other than to realize that constant attention to how currencies are distributed across the social body is critical…

    As are the systems of incentives and rewards.

    The ‘net’ social energy issue also clearly suggests that there is a limit to the degree of imbalance in ‘social energy’ distribution (related to concepts of justice… look up ‘Ultimatum Game)…

    Further, well-recognized network effects TEND TOWARDS INCREASING CONCENTRATION at whatever nodes attain early dominance within a persistant network (this is no different than galaxy formation, frankly).

    Which suggests that some limit on wealth accumulation (tax progressivity, death taxes, etc.) are essential for a healthy social organism… see Aristotle for some very early background on this.

    I’m no economist. And I don’t know accounting. But from my perspective… MMT has some good ideas for improving the situation and arriving at a more healthy balance.

    Politics AND Economics are Decision Technologies.

    They both have serious underlying problems.

    Ending with a question, a hypothetical:

    If, in significant numbers, people began to self-organize and say, form neighborhood farms… let’s say they tore up their very un-ecological, water-wasting lawns…

    and started gardens for vegetables, or even raising their own neighborhood chickens and fish…

    Would that raise or lower the GDP? If so why? Does that suggest any re-thinking regarding the metrics used?

    Where are incentives driving civilization? What are they doing to that net social energy?

    I believe rational mechanisms for better decisions in both politics and economics are possible… though there seems little interest by those currently steering our careening globalization train.

    P.S. How much ‘social energy’ do we put into addressing our decision systems?

    P.P.S. What happens when too much ‘social energy’ is in hands that most value the control of even MORE social energy?

    What happens is this… the ‘Net’ energy drops precipitously.

    Anyway, just an unemployed Commons-entrepreneur out exploring. But sometimes explorers do find things of interest.

    1. Captain Teeb

      Nice post, Tom.

      “Politics AND Economics are Decision Technologies.”

      Yes, and intertwined at that. In my earlier post I suggested that our political systems are deadlocked into their current courses and are thus useless for guiding us out. Your post makes me realize that the same is true for the economic system, to the extent that the political system can control it.

      “…and started gardens for vegetables, or even raising their own neighborhood chickens and fish… Would that raise or lower the GDP? If so why? Does that suggest any re-thinking regarding the metrics used?”

      Metrics, another good thought. I was born in the 1950s. On my block all the moms were at home, taking care of us kids, cooking, washing, teaching us good grammar, etc. These efforts did not enter the GDP. Now the moms are working and hiring out the old housework. Money changes hands, hence GDP goes up. But are we better off?

      In the film “The Yakuza”, two friends from WW2 meet in the 1960s. One asks the other “have you been successful?”, to which his friend (Robert Mitchum) answers “It depends on how you measure those things”. His answer was truer than I realized.

      1. traderjoe

        Captain, Tom, Dan, Stranger, etc. – nice posts. Good reading.

        Yves falls back on the assertion that MMT is a fact of accounting. Sure, in it’s money market operations. But that does not go on to imply its implementation is anything more than a collection of political ideologies. It seems that MMT offers the (implicit) promise that because money can be created without cost (no debt or interest), with inflation being the only bounds, then it should be created. And therefore its creation and allocation will be benevolent. It relatively ignores the question of where it should be “spent” and allocated – and assumes the government planners will act in a socially positive manner. That’s where the ideology comes in.

        Even the question of austerity typically ignores the question of what to cut and what to tax. The real question that we can’t seem to grapple with is (because it is unfortunately impossible to agree on), what do we want the resulting society to look like?

        These are the questions that economics cannot prove will result in certain results – x leads to y. And that relatively reasonable people can disagree about the allocation and division of scarce resources and the terms of the exchange. And therefore politicians, pundits, citizens plead for their own self-interest (as economics would suggest they do). MMT tries to suggest that resources are boundless (money can be created with no cost), but not only is this not true (as Dan points out so well above), most often the most relevant question is the relative position of the parties. Which is politics.

        And one more thing about MMT – it views everything in the aggregate, because planning is central (around the creation of money, taxes to slow inflation, target rates for various metrics, etc.) it does NOT solve the question of long-term mis-allocations in economies, which are inevitable (a product, service, etc. will be unsuccessful, or become obsolete). It would simply create more money in order to ‘compensate’ the downtrodden, thereby diluting the value of the successful. Snarky: there’s never a recession in MMT (but see Dan’s comment above).

        And I agree that all economic theories seems to have “growth” as their targets, with output measured in units of product and/or exchange. I personally believe we are reaching the parabolic limit of productivity/growth/advancement of the developing world. Does the iPhone 4 really offer much marginal utility to our society? And that we have used tremendous leverage and borrowing to advance ourselves only a little bit over the past 30 years (and created unsustainable expectations). Now the problems is that we will disagree over how to allocate scarcer resources going forward – because macroeconomics is not a science, but a series of theories molded around political ideologies on limited resource allocation.

        And does the 3rd world ever get a chance to reach some level of relative wealth, and how?

    2. Raging Debate

      ‘Where are incentives driving civilization? What are they doing to that net social energy?’

      Into decentralization which is a phase of evolution. That was the thinking of a global order, make nations irrelevant right? The results on the ground are the opposite of that thinking and pushing people out of the supply chain.

  19. Tom Crowl

    Thanks Captain Teeb!

    If we don’t start getting serious about measuring our ‘social metabolism’ in ways more inclusive than those I see on CNBC (and similar) every day… we’re doomed.

    That’s why Yves and the work here are so important.

    Those who get upset when it strays beyond ‘strict’ economics… don’t understand economics.

    1. Raging Debate

      No, not doomed. Mankind will re-centralize later. Don’t be a afraid to enter one of the best periods of mankind’s history. Be prepared to collaborate out of necessity during the short decentralization period.

  20. Wyndtunnel

    In a completely unfettered economy a good number of people would not be able to earn enough to cover the cost of staying alive. Where to place the “quality of life” bar of “welfare” for these people is the measure by which a people should judge itself. What it is with over-productive type-A personalities that they hold so much scorn for the less productive members of society. Lending them money so they can pretend to be rich? It might have done them a lot of good (that 1% at the top that is) but it sure as hell didn’t do very much for the vast majority of people who are more than willing to enslave themselves doing something they are not particulariy keen to do in the service of the exploiting class also know as business people. I once overheard a conversation in a restaurant where a very loud and arrogant duffus was basically sharing with the whole place that “business WAS his business”. THAT is the root of the problem.

    The citizenry of the West has been DEPRESSED in larger and larger numbers since the inception of the USD as world reserve currency. Coincidence? The necessity for double incomes and the ever quickening pace of living and the evern mounting stresses of struggling to keep up have finally gotten to a point where the collective pshychology of the regular people who are the backbone of any economy cannot take it anymore. Those are the problems that must be addressed if “growth” is to resume. How about we focus on shifting our economy to personal growth instead of GDP growth? Market mechansims are a very important “technology” used to allocate capital. But the contsructive role Government must play in people’s lives and in giving the economy a moral dimension has been ignored for much too long. Increase taxes on activities we don’t want. Decrease taxes on activities we DO want. Cut wasteful spending. Focus on the basics. The U.S.s intractable War addiction is a huge part of the problem and is not easily remedied. But if the people and their elected representatives can’t get their act together, forces that are well beyond the ken of man will impose their order in due time. The World is facing a massive environmental crisis… Global Warming is a red herring.. All those problems with good old fashion pollution and resource depletion I grew up with in the 70s have barely been delt with and THAT is where collapse is coming from. I would go so far as to say that the current financial pickle we are in is a collective neurosis about the fact that while our future is unknowable, we know enough about where things are trending to know that our current path is unsustainable.

    As Jake Chase says above “What turned the economy around was WWII, the ultimate command economy”. I have a hard time believing that nothing but a “temporary” command economy could conceibly clean up the mess we are in. Do Americans not remember conscription and food and supply rationning in WW2; all part of their patriotic duty to support the Nation in the fight against the Totalitarian enemies of freedom? The Bush Administration clamped down as much as it could on civil rights in the name of the fight on terror but more and more I think Americans will come to believe that the real fight was against the middle class at the expense of the super elite. At least now if the fight was against the corruption of Wall Street and the re-imagining of the American economy as a place where people are free to follow their dreams…dreams that go much further than simply earning more money than thy neighbour and having one’s house featured on MTV’s Cribs or on the cover of some hoiti interior design magazine.

    What is life about? We seriously need to be examining that question in depth if we are to live long as a Nation and prosper.

    1. traderjoe

      Which Government will have this magnificence to determine how 300 million people would be more happy? The government we have now that is beholden to the Crony-Capital/Lobbyist/Bankster/Military Industrial complex? And is reported on by a MSM that is owned by what 5 rich guys? Where government workers can watch porn 40 hours a week at the SEC while Madoff steals billions? The same government that subsidizes agri-business corn to the detriment of small farmers and legions of minority children with Type 2 diabetes?

      Are you and I going to agree what activities are beneficial and which are not? What is the bar for “quality of life” and what is the bargain to get there?

      I’m being a bit flip because you assume that others disagree with you, but they might not disagree with you about the need for a quality of life, but in who determines it and how you get there.

      In my book, the government is in bed with all the wrong people, and will inevitably make decisions that favor them in the short term, and not focus on the long-term society impacts or costs of such actions. It’s all about the next news cycle, the next election, the revolving door between regulators and business, etc. and trying to convince the people that the parties are really all that different.

      1. Wyndtunnel

        I completely agree with the frustration that arises when trying to address these issues… It gets back to Plato’s assertion that Democracy is hopelessly messy and that the best system would be a benevolent dictatorship under the guidance of a Philosopher King. I doubt that any such system would like evolve anytime soon. But there is a need for a lot of deep, unconventional thinking right now. Assuming our current system of civilization does not collapse under the weight of it’s own self-importance I really think that the issue of personal happiness has to be addressed.. In a world where all the necessities where somehow provided by the collective(at a level that mostly everyone could agree as basic but comfortable) there would always be people who are not satisfied with being idle and simply living a life of leisure. Humans want recognition. That, combined with opposable thumbs, has allowed us to transform the world into what it is today. But let’s not forget that the process is mostly fuelled by violence. For when recognition is not forthcoming our frustrations manifest themselves through destructive behaviour. Historically, until very recently (as in say, post-Vietnam) our societies would sooner risk destruction than give in to the designs of the other. But perhaps this drive for total victory between polities has been curtailled by the dissemination of information technology..not to be confused with knowledge..just information..tons of it. So while the populace has more access to information, it is increasingly difficult to get the majorities on board required for effective collective action, be it to conquer an enemey nation, invade a neighbour to steal his resources, refrom healthcare, stop the banks from destroying our economies or stop a hole from gushing oil at the bottom of the Gulf of Mexico. Data overload has led to the debasement of classical education and public service leaving only money as a status indicator that anyone can agree on. When being President of the United States of America has become more a badge of ridicule than honour…you know something is rotten in the system. The three branches of government have become utterly neutralized by the fourth and only truly effective branch of government: Money. It is very difficult to imagine a 2nd Revolutionary scenario for America that doesn’t reek of Hollywood scriptwriting but how else could a serious political meltdown end up in the U.S. other than violently? It is what the Hollywood Entertainment machine has been hammering into the collective unconscience for a hundred years.

        I’m a lot better at pondering the messiness of the situation than offering solutions…but ponder I do…constantly…it’s all I’ve ever really do these days to be honest. Very little t.v…no movies.. hardly any music..just thinking about the pile of crap that we are sitting in and wondering how the hell we can get out of it. One thing is for sure. If we manage to pull it off, we will need a shower.

        1. traderjoe

          Good post. I spend a lot of time thinking about this stuff too, not because I think I am going to solve it, but because I think the sh*tstorm is coming.

  21. eric anderson

    When Yves starts talking about the elderly eating cat food, this is over the top. It damages her credibility. Pete Peterson used to recommend a system of putting progressively more burden on people for their own medical care and necessities as their income increases. Is his new plan that different?

    1. Yves Smith Post author


      You need to get out more. Seriously. One of my friends (thank God he was well off) had parents who WERE eating pet food, they were too ashamed to tell him, he found out only via an unannounced visit. I know of people who have elderly relatives (couples) who couldn’t afford the medication both needed to live. They had to decide who was going to go without and die. A guy in his early 60s who used to support himself (he worked at a local fishmonger) is now homeless in my neighborhood. My uncle is below the poverty line, if he didn’t have medical care and access to a nursing home thanks to being a Korean War vet, he’d be dead now.

      All this will get much worse if we cut Social Security and Medicare in any meaningful way soon. It does not take much to tip people who are on the edge into distress.

      You act as if distress and grinding poverty among the elderly is a fantasy. You clearly lead a very privileged life.

      1. michel

        If anyone is eating cat food in the UK, it is not because they need to. If they are doing without drugs it is not from lack of personal funds. It might happen because they do not know how to access the benefits they are entitled to. Lack of drugs might happen because of care rationing by the state monopoly care provider. But its not lack of money that will do it to you. Just think about what is provided in the UK by:

        State pension
        Disability living allowance
        Pension Credit
        Attendance Allowance
        Winter Fuel Allowance
        Housing benefit
        Child Benefit
        Carer’s allowance

        Not to mention the National Health Service, basically free (general taxation funded) medical care.

        It is not being argued that all these benefits are a bad thing at all.

        The disagreement is about what happens in a situation in which they exist, where there are 6 million rather well paid and pensioned and unionized state employees, when the government spends more by deficit spending in the name of stimulus. What has happened in the UK in recent years is that it does not go to the new needy class, those who have just enough private income or assets to fall outside the range of these benefits. It goes to creating more local authority non-jobs which benefit no-one. It does not go on making more drugs available. It goes on creating more ‘managers’ in the NHS, or funding artwork in hospitals, or paying the administrative class higher salaries, or funding ‘alternative’ treatments like acupuncture or homeopathy.

        In the local authority it pays for jobs doing stuff like promoting diversity awareness, or going into competition with the local press by publishing free newspapers.

        It matters where it goes. The problem with the solution being advocated is that 20 years experience in the UK shows that when the government spends it, over a certain level it does not go to the places it is needed. It enriches those fortunate enough to be in a public sector union who then spend their time trying to ration access to benefits.

        Now obviously Yves being a sensible person would not advocate doing this as a matter of policy. But what people need to come to terms with is that this is what actually happens when you try to implement stimulus by raising government spending in an environment where we already have huge state deficit spending. This is a fundamental problem with the idea.

  22. Jackrabbit

    Instead of arguing for one extreme or another, we should recognize the core of the problem and find common ground for fixing what is broken.

    Economics has a clear answer for our current troubles: STIMULUS. However, the austerity folks have pointed out a fundamental political problem.

    The politicians have been irresponsible. The have given their constituencies too much: corporate welfare, tax breaks for the risk, lenient regulation, cushy government jobs with nice pensions, promises of future health and welfare benefits to all.

    Much of the 2009 Stimulus was wasted. Tax breaks (especially one-time) don’t provide much stimulus. Corporate welfare doesn’t provide much stimulus (much is siphoned away to uneconomical pet projects, executive compensation, and shareholder profits, etc.), Aid to states which only delays the inevitable is transitory “stimulus” at best. None of these things leads to self-sustaining growth. The magical “animal spirits” never materialized.

    We need government that works for the country, not the wealthy and well connected. We need an industrial policy, not a fire brigade. And we need a Stimulus that is effective but doesn’t break the budget. This means putting people to work directly (instead of paying corporations and wealthy to do so) and funding via a combination of tax increases and government deficit.

    1. Jackrabbit

      Note: Many economists said that the 2009 Stimulus was too small to begin with. And many complained at the time that much of the Stimulus would be ineffective. So rational people would expect that the economy would run out of steam and thus would not bet too much on “recovery” (ergo the lack of corporate investment that Yves has complained of).

      Ultimately, we need fundamental political reform. I have the sense that that is coming only as a result of the disaster that has and is befalling us all. A disaster enabled by a divided and apathetic public and the unconstrained greed of the crony capitalists.

      The path of Austerity risks Depression, but sometimes I wonder if that wouldn’t be a blessing in disguise as it could hasten (and may be the only way to) fundamental political reform.

  23. kevinearick

    To synthesize the as-is:

    The banking and credit system rewards addiction to multinational products, and penalizes abstention. We already create much more food, clothing, and housing than we need, on top of all the frivolous stuff. Most work is make-work, and we are poisoning the environment to complete it.

    The pyramid corporations have more than enough to reduce working hours and hire the unemployed, to re-ignite final demand for effective diversification, and that final demand would provide the transfer mechanism for government to private employment, but they will not do so, because the interests that control these pyramids breed on the control parameter. Money is a derivative. They have more than they could ever spend.

    Now, this is the part many do not like, evolution:

    The multinationals are a natural economic feedback mechanism, resulting from community failure to protect individual liberty. An attack on the liberty of one is an attack on the liberty of all. A majority may not be contrived to make that attack and expect constitutional protection, except at the cost of economic self-destruction, and the sin of omission, allowing it to happen, is much more costly than the sin of commission, due to the scale, interest and penalties associated with loss of transparency.

    Individuals have choice of community. That was the point of the Internet, and the Internet is no longer required for that purpose. And one never knows who has the key to the future, so it is in the selfish and community interest to protect the liberty of others.

    Neither debt (government argument), nor austerity (corporate argument) will solve the problem. An economic revolution is required to pick that $500T load.

    Some debt and some austerity may be useful in lubricating the outcome, but the digital economy will completely replace both government and multinationals on its current course. They simply cannot catch up to curve of algebraic reduction, which is about to reach the tipping point.

    The digital computer seeks to make the fewest possible number of moves, with pointers to virtually group. A digital computer does not act randomly; it cannot. What appears to be random acts are test computations to incease the ultimate efficiency.

    1. kevinearick

      An A/D compiler uses pointers to the names in the source, and connects those pointers to mimic their relationships, then it performs algebraic reduction on the relationships, seeking the least number of moves required to produce the target program. Efficiency gains in peephole reduction pays for pattern reduction, which pays for scale reduction. It’s the breeder. The D/A compiler is biochemical.

      1. kevinearick

        Imagine Barney Frank or Immelt determining the specifications for an enterprise system, based on the advise of Rubin, Summers, and Greenspan, rolled out across Cisco with Microsoft.

        1. kevinearick

          Did we ever talk about the computer industry make-work program?

          un-f——believable. The blind paying the blind to be blind, in a recursive loop.

  24. Jan

    Will someone in this forum please admit to just a little uncertainty?

    No? OK, I’ll do it on your behalf.

    No one knows whether another round of Keynesian spending would jump-start the economy. Because the economy is not a closed system, no one knows the multiplier. More important, no one knows the complexities of human psychology.

    So public spending might amount only to kicking the can down the road. No one knows just when that road would go over the cliff. (Rogoff and Reinhardt have some historical data on the cliff but not enough.)

    But, hey, we’re faithful optimists! We had faith that Malthus would not come home from Asia. And we had faith that free trade, even unilateral free trade, is always win-win.

    Oops! And oops!

    And, hey, perhaps this time the optimists are right. (“Cliff? What cliff?”) So let’s spend!

    One thing for sure, in spending we have a comparative advantage.

  25. Viator

    Keynes vs. Hayek: The Great Debate Continues
    Newly discovered letters from two great economists shed light on today’s discussion of economic ‘stimulus.’

    I) “On Oct. 17, 1932, the Times published a lengthy letter from John Maynard Keynes and five other academic economists. Keynes, et al. (Keynes for short), made the case for spending—of any kind, private or public, whether on consumption or investment.

    “Private economy” was the culprit that impeded a return to prosperity. If a person decides to save, there is no assurance that the funds “will find their way into investment in new capital construction by public or private concerns.” They cite a “lack of confidence” as the reason that savings is not intermediated into investment. Accordingly, “the public interest in present conditions does not point towards private economy; to spend less money than we should like to do is not patriotic.” They conclude by endorsing public spending to offset unwise private thrift.”

    II) Two days later, on Oct. 19, 1932, four professors at the University of London responded to the Keynes letter, and one of the signers was Friedrich A. Hayek who more than 50 years later would win the Nobel Prize in Economics.

    Hayek, et al. (Hayek for short), identified three areas of contention. First, they correctly identified Keynes’s argument about the futility of savings as actually being an argument about what has classically been known as the dangers of hoarding, i.e., the potentially pernicious consequences of an economy-wide increase in the demand for money that is not met by a corresponding increase in the supply of money. “It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.”

    Second, the London professors disputed that it mattered not the form spending took, whether on consumption or investment. They saw a “revival of investment as peculiarly desirable,” as do today’s proponents of supply-side economics. They distinguish between hoarding of money and savings that flows into securities, and reaffirm the importance of the securities markets in transforming savings into investment.

    Their third and greatest disagreement with Keynes was over the benefits of government spending financed by deficits. They demurred. “The existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt.” This was not the time for “new municipal swimming baths, &c” (Keynes’s example). In our contemporary context, no stimulus.

    Finally, and importantly, they offered a way forward. Governments world-wide, led by the U.S. with the destructive Smoot-Hawley Tariff of 1930, had turned to protectionism and restrictions on capital flows. Hayek argued it was time “to abolish those restrictions on trade and the free movement of capital.”

    1. Matt

      In regards to Hayek’s loathing of hoarding of money.
      In the day, security markets meant bonds more than IPOs or secondaries? Today the biggest stock offering is from China. And rather than lend money to the economy the banks have stashed a trillion at the FRB for all of a 0.25 percent rate. I wonder what Hayek’s prescription for hoarding would be today.

  26. LeeAnne

    There is an urgent need for job stimulus.

    Serious looting is still going on. Privatization is accomplished with secret deals, concentration of wealth, propaganda and outright lies by the likes of Pete Peterson and his psychopathic determination to have his way.

    Privatization will only INCREASE exponentially if the current financial climate of 40% Wall Street and FIRE is left intact with the corporatocracy on the backs of more than 40,000,000 US people on food stamps, presumably unemployed or under employed and certainly underpaid.

    Austerity supports privatization by increasing the pain of the people until they are politically helpless; as in, the people completely demoralized with indebtedness, unemployment, threats of same, lack of housing, and choices in life for themselves and their children that can only lead to massive desperation with all the horror that entails.

    And no reform has occurred in finance. There is some correlation between the 40% of the economy being extracted by the finance sector and the current jobs depression. JOBS DEPRESSION. They caused it. They must be DOWNSIZED by all means possible and taken OFF BANKERS WELFARE; their taxpayer backup funds transferred from banking back to the taxpayers for jobs. Call it deficit spending; its a good thing. What do you call banker welfare?

    The finance reform bill, if passed, will paper over fraud. Then we’re sunk. There can be no FINANCE REFORM without a VERY active JUSTICE DEPARTMENT.

    1. traderjoe

      What stimulus do you support?

      For instance a payroll tax holiday, and/or unemployment benefits? A jobs program?

        1. sgt_doom

          I would call them Greenspan, Paulson, Rubin, Summers, Bernanke, Geithner, Greenburg, Cayne, and most especially, Peterson…..

        2. traderjoe

          An honest question to find out a little bit more about someone’s opinions and policy prescriptions is met with a glib and not so informative response. I haven’t heard anyone defending the banksters on this website.

  27. JTFaraday

    The (now expanding) catfood commission is back again, I see.

    I think it’s interesting that so many seem to think that this corrupt government cannot be trusted to enact a stimulus plan due to its gangster ties, but apparently it CAN be trusted to reform social security.

    Apparently it can also be trusted to bail out the failed banking sytem, and the cost of that deficit, record bankster bonaz included, doesn’t matter.

    Why not be intellectually consistent and have doubts about its ability to do all three? I do.

    It’s the one sided nature of these objections to government spending and modern monetary policy that is so *offensive* to people.

    Permanently impoverishing the unemployed in response to the failure of a specific, highly problematic business sector is offensive.

    Meanwhile, your freaky scary MMT isn’t going to go away just because you screw the public–and neither is the deficit.

    It just makes you a useful idiot, with fewer useful compadres to help you pay the bill. (Which means you weren’t useful to yourself).

    1. traderjoe

      I don’t know who your comment is directed towards, but what is your solution?

  28. F. Beard

    If one applies a little moral reasoning to fractional reserve lending in a government enforced monopoly money supply, one sees that it simultaneously loots savers via suppressed interests rates and also drives borrowers into mortgage debt that is greater than the value of their homes. The solution is then obvious: A bailout of everyone with new legal tender fiat. This would:

    a. enable underwater home owners to pay down their mortgages to market price levels.
    b. compensate savers for years of artificially suppressed interest rates.
    c. Fix the banks in nominal terms.
    d. Fix state tax revenues.

    Inflation risk? Maybe, but if banks were put out of the counterfeiting business via a 100% reserve requirement then the only source of new money into the system would be under government control, the Fed and US Treasury.

    Long term solution? Allow liberty in money creation, usage, and acceptance. Government money should be legal tender for government debt only (“Render to Caesar …”) while private money would be allowed to serve the private sector.

  29. Jamisia

    For no particular reason I googled “bookkeeping + tautology” and found this paper: .

    Of interest, I think, are 1)
    page 4: “…law is a tautology or analytic: a precondition of our attempting to apply it is our knowledge that it applies successfully.” and 2) page 22: ”
    A tautology is based on conventions adopted for the sake of convenience, and in economic science the convenience is either that of offering explanatory economic hypotheses, or that of testing such hypotheses.”

    So, in our attempt to apply [knowledge] we have the precondition that we know that it is applied successfully. Why then, in what’s supposed to be the heyday of neo-liberalism, did governments go straight for Keynes, when they, governments, were faced with a crisis? Isn’t it, like, obvious when governments actually consider monetarism dead & buried and and supposedly-dead-Keynes tried & true? A paper on Alea (I quickly read the summary) claims that the crisis is more to blame on the failure of government policy. Do you translate that as ‘vested interests’? Well, maybe. The best you can say about it, is that policy should have been reformed before applying the stimulus.

    As for solutions, DIY. There are so many interesting initiatives: Flattr, EmpireAvenue, even the guys behind ‘The Money Masters’ who send a letter to Jon Gnarr, a comedian who is now the new mayor of Reykjavik. In any case, if the top doesn’t want to reform, DIY.

  30. Jim

    It can be argued that throughout most of the last 110 years of American history the market and the state have worked in partnership.

    I would hypothesize that, taken the history of this partnership, it is an illusion to visualize either the market or the state in a future emancipatory role.

    The business historian, Alfred Chandler, has shown that the Federal Governments most significant role has been in shaping markets for the goods and services of the modern business enterprise.

    This partnership seemed to emerge when American capital, near the end of the 19th century, realized that the state was the only political institution with the power to unite the diverse regions, classes and industries which existed at that time.

    Near the turn of the 20th century, the regulatory services of the State co-ordinated the concentration of capital, the technical reorganization of labor and the more centralized management of schools and families.

    Between 1890 and 1920 the supposed innovations of the New Deal has already been prefigured

    In 1900 General Electric opened the first corporate industrial laboratory in the apply scientific investigation to the business of production.

    By 1913 Henry Ford had installed the continuously moving assembly line, made possible in part by Taylor’s contributions to “scientific management.”

    By separating planning from doing and thought from action Taylorization helped strip the American working class of their skills which aided the emerging adminstrative regime of Federal bureaucrats and corporate managers (by supposedly legitimating their talents).

    Thus, the partnership between the market and the state was already largely solidified prior to the New Deal.


  31. molecule

    Fine. Make the accounting identities balance by sending everyone monthly expiring spending cards as long as public sector employees don’t get any. No austerity here, money has to be spent or it disappears. Also no dreaded saving, money can’t be saved.
    There are thousands of ideas but somehow the money always has to go the the government sector or the cronies(banks). Always..else we all die. How convenient.

  32. Sundog

    Historian Stephen Mihm had a short piece on Hyman Minsky published in the Boston Globe last year. (Yves has recently provided an excellent example of how one newspaper editing process worked; we can only guess at what Mimn originally intended to appear.)

    The preferred mainstream tactic for pulling the economy out of a crisis was – and is – based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor – by building a new high-speed train line, for example.

    IMHO this sort of stimulus spending today results less in wage payments than in preventing firms from defaulting on loans and leasing arrangements for machines, in other words it props up the FIRE sector. I haven’t re-read them, but my impression at the time from reading Krugman’s columns and blog posts was that he pretty much tied himself up in knots in order to get to the point that he supported the 2009 stimulus package.

    Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government – or what he liked to call “Big Government” – should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars.

    I respect Niall Fergeson and applaud him in his recent talk at the Aspen Institute for calling us to appreciate the historical moment, which I also believe is significant.

    My take on the Mess at this point is that the velocity of money is what’s jamming things up, and Minsky’s bottom-up approach would be the best way to un-jam it. Combine this with a serious attack on health care costs, a carbon tax, and a VAT. Can “Minskian Bartlettism” work as a bumper sticker?

  33. S Lee

    What you and Martin Wolf are arguing strikes me as very much one of the central points made by Richard Koo for many years, but from the opposite angle – that when the private sector starts saving (which includes repaying borrowings) and hence private sector borrowing shrinks, governments must step in as borrowers of last resort.

  34. Matt

    While sovereign debt policy is debated between the MMT, the stimulati, and the FRB/IMF clique, bubble manias do not require a sovereign, they only require leverage. Towit the FRB reports that total household debt versus wage income has gone from about 0.83 in 1981 to 1.75 in 2009.

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