Auerback: News Flash– China Reduces US Treasury Holdings, World Does Not Come To an End

By Marshall Auerback, a portfolio strategist and fund manager who writes at New Deal 2.0

In a post titled “China Cuts US Treasury Holdings By Record Amount,” Mike Norman makes the excellent observation that while China is moving its money out of Treasuries, interest rates are hitting record lows. In other words, the sky still isn’t falling. So, Mike wonders, “Where is the Debt/Doomsday crowd?” He rightly concludes: “They’re nowhere to be found because they can’t explain this. This is a ‘gut punch’ to them. Their whole theory is out the window. They just don’t understand or don’t want to understand, that interest rates are set by the Fed…PERIOD!!!”

Mike is right, but that won’t stop the doomsayers. They will tell us that we should thank our lucky stars that another source of demand came in to replace China. Even when confronted with facts, the “China will sell off all their treasury holdings and destroy the US economy” brigade is not dissuaded.

As my friend, Warren Mosler, has noted many times, “It’s just a reserve drain, get over it!
And if you don’t understand that, try educating yourself before you sound off.”

Also of note today: Tokyo’s Nikkei QUICK News reports that the #309 10-year Japanese benchmark government bond, the current benchmark, traded to a yield of 0.920% Tuesday morning, down 2.5 basis points from yesterday’s close. This is the lowest yield since August 13, 2003. This, from a country with a public debt-to-GDP ratio of 210%!

The idea of shorting JGBs on the grounds of Japan’s imminent national insolvency has been one of the most “obvious” trades for years, but it’s never worked. And it won’t work because the Bank of Japan, like the Federal Reserve sets rates, not “the markets”. The “national insolvency” brigade doesn’t understand basic public reserve accounting. Plot the rise of Japanese public debt against the fall in Japanese bond yields (the latter which can be seen here since 1985 – Where’s the causality?

The problem, as Bill Mitchell has repeatedly noted, is that the credit binge that preceded this crisis has left a lot of private consumers and investors in diabolical straits with too much nominal debt and declining values of the assets the debt backed. The need to remedy this problem led to a widespread withdrawal of private spending as the pessimism of future growth spread and the expenditure multipliers reverberated this pessimism across the world economies. The offset to that has been a rise in public sector debt to facilitate this ex ante desire to save on the part of the private sector. Absent that, you get Fisher style debt deflation dynamics a la the 1930s.

These are facts. Inconvenient for those who like to perpetuate the lie that the US or Japan faces imminent national insolvency as a means of justifying their almost daily attacks on proactive fiscal policy. Yes, doomsayers no doubt will argue that it’s only a question of time before Japan or the US incurs the “debt disease” and becomes another Greece. Laurence Kotlikoff, a Boston University economics professor, has kindly notified us that the US already is bankrupt. Someone please tell that to the buyers of our debt! The reality is that the “national insolvency” doom mongers have been predicting the end of the world forever. The Y2K bugs were predicting it then and the gold bugs were predicting Weimar-style hyperinflation by the end of 2009 and…well, we can go on and on. It would be nice to see these guys demonstrate a modicum of humility when the facts on the ground seem so at variance with their ideology (theology?), but that’s probably about as likely as the Concord Coalition calling for increased Social Security benefits.

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  1. austin

    US banks have stepped up to the plate in the last few months, to buy bonds offsetting the decline from “others”.

  2. Marshall Auerback

    But even if the banks hadn’t stepped up, Austin, it wouldn’t have affected the government’s ability to spend. government operating in a fiat monetary system, may adopt, voluntary restraints that allow it to replicate the operations of a government during a gold standard. These constraints may include issuing public debt $-for-$ everytime they spend beyond taxation. They may include setting particular ceilings relating to deficit size; limiting the real growth in government spending over some finite time period; constructing policy to target a fixed or unchanging share of taxation in GDP; placing a ceiling on how much public debt can be outstanding; targetting some particular public debt to GDP ratio.

    All these restraints are gold standard type concepts and applied to governments who were revenue-constrained. They have no intrinsic applicability to a sovereign government operating in a fiat monetary system. So while it doesn’t make any sense for a government to put itself in a strait-jacket which typically amounts to it failing to achieve high employment levels, the fact remains that a government can do it.

    But these are voluntary restraints. In general, the imposition of these restraints reflect ideological imperatives which typically reflect a disdain for public endeavour and a desire to maintain high unemployment to reduce the capacity of workers to enjoy their fair share of national production (income).
    Debt is issued as an interest-maintenance strategy by the central bank. It has no correspondence with any need to fund government spending. Debt might also be issued if the government wants the private sector to have less purchasing power.
    There are a few people who understand this. One of them is Warren Mosler, who is running for the US Senate as an Independent. If you want to see DC full of more politicians who actually understand basic monetary operations, you might consider supporting Warren:

    1. nilys

      Even if money are just digits in the computer, what happens when there are too many of them. I can absolutely see how a government/central bank in a fiat system can fund all its needs by typing in digits in computer files we call accounts. But we forget that money is only a medium of exchange of things and services, and thus money must facilitate production of more, better quality things and services. What good are money if it does not accomplish that purpose.
      What would happen if the government/bank types in numbers year after and the amount and quality of things and services does not change. I guess we, or at least some of us who “pocketed” the most of digits, would be fabulously wealthy in digits, but in reality we all would be poor. This is not to say that we should use “budget deficit” as pretext to deprive elderly and poor of assistance. This is to point out that “typing in digits” by the government/central bank or a private banking system (which is perfectly capable of doing the same to a large degree) should not be taken lightly.

      1. jake chase

        In fact, this has been happening since 1971. The issue is not the volume of dollars created but rather how the dollars are distributed. For the past forty years, the effect has been serial asset bubbles. Persistent unemployment, job migration, union decline have limited wage gains. Electronic dollars have floated to the top, largely in the profits of speculators and usurers (banks) and the bonuses siphoned off by controlling employees and managers.

        Interestingly, the latest asset bubble (real estate) created private debts of a magnitude that can never be repaid without a quantum of wage inflation that will never materialize for institutional reasons. Nevertheless, the authorities refuse to allow real estate prices to fall. The inevitable result is stagnation. Why? Because real estate is the major employer responsible for continued high unemployment. Mr. Auerback and his ilk would substitute government leaf raking and paper shuffling and pork for private real estate development. With enough of this boondoggling we might get the wage inflation that would validate all the bubble debt. Of course, the casualties will be private savers, the elderly, productive workers, all those who lived prudently and whose nest eggs are now being vaporized to preserve the profits of the looters and the sinecures of Washington insiders.

    2. Bates

      Mr Auerback…I have a question. What happens when the debt service of US Gov debt (including all gov debt) is greater than the US Gov revenues? Does the Fed print more to continue paying all the bills plus all the interest? Is this your solution?

      How do you know who is purchasing US Treasuries when a very large portion are reported as sold to obscure sources?

      Is your point of view ‘it’s different this time’?

      Give it to me in a couple of sentences please…thank you.

      Here is a longer than normal video from CNBC that you might find interesting. It was recorded today and Marc Faber was the host. Guest was Kyle Bass of Hayman Capital and he has some interesting comments. Hat tip to Zero Hedge and CNBC…

    3. MyLessThanPrimeBeef

      Voluntary restraints – that’s the Midieval part about faith, worship, etc.

      As many miracle workers in the Roman Empire would tell you, it is important not to conjure up too many miracles; otherwise, you might be exposed. You have put on a good show and limit your claims to be believable.

      When people lose faith you will, care to or can protect their hard-earned money, the game is up.

      Nothing to do with accounting identities.

      1. MyLessThanPrimeBeef

        How are you going to get people to work hard so they can have money to spend if money can come out of nowhere for some entities?

        It’s like telling us that we can all go to heaven without being good.

      2. aet

        Nonsense: the belief in miracle kept in full vigor until the rise of modern science, about the tme of the American revolution.
        Those early miracle-mongers never met an alleged miracle
        they did not adopt: and you cannot prove me wrong.

        And I for one have yet to notice any great loss of faith, even in actual miracles, even among Americans.
        A most religious society.

        Why the skepticism about the currencyof the richest freesest and most technologically advanced country in the world?
        Just spend enough out of the Treasury, by directly hiring people, to give them all enough to buy things.
        Surely you don’t need amn actual war for your government ot spend enough to get everyone to work: in WW 2, that spending was devoted to destruction: cannot you spend now, in a similar manner, but instead devoted to building further and better, rather than destroying Germany, or japan, for instance?
        Or is war the only politically acceptable form such spending must take?
        And why would that be?

        I prefer to ask questions, rather than to throw insult, and invective.

        1. MyLessThanPrimeBeef

          What is not making sense and not asking enough questions is to assert that the Treasury should spent enough by directly hiring people so they can have enough to buy things.

          Here are some questions – do you have the Treasury do this with unemployment at 20% only, or 10%, 8%, 5%, 2% or 0.5%? What kind of work do they do for the Treasury? Would working find it more suitable (maybe more flexible working hours, job security or proximity to family) to quit and be unemployed so as to be hired by the Treasury?

          But I think I will stop here. Enough insults, invectives and nonsense, coming and going, around all of us.

          1. skippy

            The mountain is just a composite structure. The observer view point changes as they dismantle its structure only to see once again as a composite ad simplicity that one must walk up-wards too.

    4. Costard

      Are you seriously – seriously?!! – going to make the argument that nations with high inflation are workers’ paradises, and those with a firm currency are repressive? How many history books must you burn to believe such a backwards thing? My goodness, how do the 19th and 20th centuries not keep you up at night?

      If you do not understand the implications of inflation – the effects upon debt, saving, capital and investment, and ultimately the functional economy – then that is fine; you can be educated. You have the example of countless failed rulers, peoples and nations. But perpetuating your ignorance under the guise of some “new idea” is a grave disservice. Were it not for people such as yourself, who believe that by renaming a thing they have changed it, such fallacies would have been retired long ago.

      1. anonny

        Intellectually dishonest straw manning, big time. Do we have inflation now? Not even close, massive slack in the economy. More important, what evidence do you have that creating more dollars leads to inflation? Friedman’s monetarism has been disproven by monetarist experiments under Reagan and Thatcher.

        The MMT people say loud and clear that inflation is the constraint on central bank printing. But their position is that the central bank needs to accommodate what the private sector and ex/im sectors are doing. With the US having private sector deleveraging and big trade deficits, if you don’t have fiscal deficits, you will get wage and price contraction, which makes the overhang even worse in the new current GDP terms.

        This isn’t that hard to understand, but you refuse to understand it because you find it offensive for some reason.

        The big US inflation episode was due to budget deficits when the economy was already running in high gear, when labor had bargaining power, so it could become embedded, plus an oil price shock on top of that.

      2. aet

        “Firm currency”?
        Over what period of time? The Roman Republic subsisted 900 years…that long?
        Or longer? Or less?
        Perhaps you could provide a historicalexample of such a firm currency, and over what time period it remained so.
        But from what I’ve seen ,such historical comparisons of the strength of currencies are very difficult to do at all…so where do you get your data, sufficient to base your conclusions?

    5. Mark T.

      I completely agree with the Mosler plan and MMT. In fact, why not take the concept to its logical conclusion: instead of not taxing, why not introduce a negative tax, a stipend giving everyone the means to cover their living expenses and pusue work or leisure as a volontary choice. All goods needed can be imported from abroad and payed for from the stipend. Inflation should not be a problem either: Most likely at least some of the people currently employed will choose other endeavours, thereby reducing capacity utilization in the economy. No requirement to work, all goods provided for from abroad. I really like MMT!

  3. Joe Firestone

    It’s a clear refutation of their theory, alright. But their theories have been getting refuted almost daily in a very visible way since before the Crash of 2008. I think one can tell a decaying society by seeing whether the people who are wrong about the way the world is get to take the consequences of their mistakes in prediction. In America today, the people whose predictions never work out, but who never make any waves are rewarded or fired, while the
    people who have been right either continue to be ignored in decision making circles, or are condemned for pointing out that the nakedness of the Emperor and his advisers.

    There’s only one person in American politics today who understands that it doesn’t matter whether China or anyone else buys our debt, except perhaps, that it may be best for us if no one buys it, or if we never issue it, and that person is Warren E. Mosler, Independent Candidate for US Senator from CT. Please check out this link:

  4. Jimbo

    There’s more to it than just the Fed setting LT rates. Otherwise, how do you explain the US issuing 17% 10-year bonds in the early 80s.

      1. aet

        Yes, the inflation caused by the runaway spending of the Vietnam war came home to roost, and destroyed the value of the cash holdings and pensions of those of the “greatest generation’ who neglected to buy stocks, or real property.
        somewhat unsurprisingly, to me, the boomers who bought real estate and stocks are now the one’s losing their pension power.

        Seems like each generation, in seeking to avoid what hammered the previous generations savings, set themselves up for the opposite play, by those with longer memories, and more experience.
        Oh well, that is the way it goes with the dumb money….

  5. don

    Mosler says he knows how to fix the economy in 90 days. To back his case, he mentions this, among other arguments:

    “It is an indisputable fact that when the Federal government taxes, it doesn’t actually get anything; it just changes numbers down in our bank accounts. And when the Federal government spends, it just changes numbers up in our banks accounts and doesn’t ‘use up’ anything. This may sound like a wild notion, but it was confirmed by Federal Reserve Chairman Ben Bernanke under oath as recently as May of 2009 in a public interview. When the Chairman was asked where the dollars came from that he was spending, he replied that the Federal Reserve just uses its computer to mark up numbers in bank accounts.”

    Two immediate thoughts:

    1. When I send in a check to cover my taxes I was under the impression that that money was then deposited. Fact is, it shows up in my bank account as having been paid. Guess I was wrong, about the first part, but it still seems as if the last is still true, after all, I’m certain money left my account.

    2. Mosler makes an interesting switch in his logic in the above paragraph, where he begins by talking about the Federal government — which then becomes the Fed, as in Central Bank, which electronically ‘prints’ money that until then didn’t exist.

    Being that I’m not the sharpest knife in the drawer, I came away thinking: that sounds like magic, so I guess no need in my sending out a tax check next year. Heck, I guess all taxpayers, individuals and corporations, need not bother in paying taxes, since the Central Bank can just ‘print’ money.

    1. aet

      In your #1, nothing ‘left’ the account physically: a stroke of a pen, is all that really occurred.
      We live in a physical world, but book-keeping is all notional.
      Until it becomes time to “settle up” with a counterparty.
      But does that last step ever really occur with an entity such as a Soverign state?
      And if it is a gold-standard, then must not the Government own all gold production within its territories, to maintain its powers over the currency’s value?
      AND control rigorously all transactions involving bullion?

  6. purple

    If Americans themselves weren’t so personally indebted this type of fear-mongering abut public debt wouldn’t work. There is a good deal of conflation that goes on in people’s minds with this issue.

      1. wunsacon

        That is, good point about the conflation. Nevertheless, I oppose running huge deficits to overpay public workers and bondholders who should’ve chosen to invest their money more wisely. Massive printing to pay these people makes life difficult for private workers (employed or not) who have been excluded from Uncle Sugar’s rolls.

        1. aet

          The industrious ought not to be made to support the idle. That seems elementary.

          Yet I feel that some opposition to State spending is a hang-over from the long ages – and i suppose this condition may yet obtain in some parts of the world – where the State was the sole property of a Ruling family.

          An increase in State pending which is plainly and immediately felt as a benefit by the population would be supported.
          the population seems to be getting propagandized into believing that any such increase of spending – in a democratic state like the USA! – will only go to the “Ruling Class”.
          Well, it has so far, but so far, the $$ has pretty well only gone to the bankers…who used to be, and seem to be again, the primary voice which would deny the american people the primary benefit of not having a State which out-right belongs to a Ruling family: that state spening not benefits only the ruling house, but the broad mass of the people themselves.

    1. aet

      Absolutely agreed.
      The State or Republic is a rather special sort of entity, is it not?
      Not just merely another corporation.

  7. traderjoe

    Is this a bunch of MMT drivel? I get the “we can create as much credit as we want” MMT-view (with inflation the constraint), but we are not in a MMT world at the moment. We issue bonds which have an interest rate. Interest payments are made. Interest payments crowd out other government payments. Gov bonds will crowd out other investments.

    I’ll tell you why interest rates are going down. The Fed is monetizing our debt both overtly and covertly. Can anyone tell me why the UK (or an account based there) has been such a large buyer of gov debt? You think the UK government actually has money to invest? How about the size of the “other” holders? The Fed is telling PD’s what bonds to front-run in QE Lite.

    I do think the sky is falling. Is it today – no. But we are sewing the seeds of our own destruction, either through massive interest payments (to the privately held Fed) or the massive inflation that will result from the Fed debt monetization.

    All the commenters and the article above will be like Greenspan’s “Great Moderation” comment or BB’s “sub-prime is contained” comment. It’s too early to claim victory…

    1. aet

      I see no evidence of “crowding out” whatsoever.
      that weird theory seems very bogus, no matter how seductive the imagery it uses.
      I do not see the governments demand for funds preventing or increasing the costs of funds to anybody else at the moment.
      And “the cost of funds’ IS the interest rate, is it not?

  8. PJM

    Im seeing the called self dellusional belief about the american reality.

    According some public data, in December 2009, about 2/3 of american federal debt was bought by Federal Reserve.

    According their own oficial statements, FED is buying again and China is taking this oppototunity to run away from american debt.

    USA is exporting inflation but looks that this inflation doesnt exists. But exists. Even in USA.

    Today, for me, the american oficial data has the same value as the russian data before the colapse of communism: nothing. If I need to do some analisys to american economy I must to have caution as I have with chinese figures and data. You name one american economic indicator and I have deeply caution about that oficial data. Inflation, unemployment, GDP, productivity and so on. You name it. USA oficial data and figures has the same value as in the past the data and figures from communist Russia or URSS. Who believes in american statistics? ;) Look the unemplyment. Do you believe that american unemplyment is only 9,5%? lolololol

    What is most fascinating about american situation is how americans become self delusional. They believe that they still are the best, with the best government, institutions, Rule of Law, and so on. But american system is so decadent that they dont see what others are seeing: the final stage of american colapse.

    Is amazing how this is happening in one cowntry who was the world leader until some years ago.

    Everybody around the world is seeing the USA in economic coma, living with drugs to survive, but americans cant do what they say to others to do, to avoid the economic meltdown.

    USA today is in the same situation as Germany was during Weimar Republic: nobody believes in the economic system and the government to solve their crisis, except german authorities by self. In these days everybody is trying to avoid american risk. The american risk of colapse. Why? Because only the dollars created by FED sustain american debt, the government expenditures and, at some extension, the dollar itself.

    But I never saw an economy to survive when almost 50% of one currency unit spent is delivered by the central bank print machine. Maybe I should too take more economic history lessons from who arent seeing the economic problem of USA.

    Maybe some argue that dont see inflation, but deflation. Maybe theyre right and we should believe in the oficial figures. Maybe we should notice the credit contraction inside USA and think that is deflation per si, as if inflation/deflation is only money and his velocity in the economic system. But as I look to history books to find some similar situation as the present, I cant find. Maybe I should to try to read only americans books and not eventually others, to learn.

    But what I see is simple: hyperinflation is the future of USA. Maybe not tomorrow, next week or even next year. But this american situation isnt sustainble. Only fools can think otherwise. Because, the monetary base is increasing multiple times and, one day, the velocity will show that money inside the american economic system took control of prices. Maybe not tomorrow, next week or even next year. But that money will will show his face when the velocity starts forward again.

    Currently USA is exporting inflation. To China, to India, to everywhere. To commodities, to food, to energy and so on. One day that inflation will return to USA. When? Maybe not tomorrow, next week or even next year. But when that inflation return, americans will see how they fooled themselves.

    Enjoy the trip, my fellows americans. But not one single dollar is credible. Except inside USA. Keep the faith and not look the facts. Maybe is the best thing to do when the society is falling apart and the decadence is increasing quickly.

    Best regards.

    PS I Still enjoy the €uro. Didnt fell as the americans authorities wanted. We read national secutiry policies documents too. We understand some english too. So, figure out.

    1. Psychoanalystus

      “But as I look to history books to find some similar situation as the present, I cant find. Maybe I should to try to read only americans books and not eventually others, to learn.”

      It looks a lot like the situation in the European Union, now, doesn’t it?

      Now, talk about European self-delusion…LOL


      1. PJM

        My dear Psychoanalystus,

        Yes, I believe in the €uro. Yes, I dont invest in gold. I dont trade gold some years ago. My personal investments are in portuguese stocks and european bonds.

        Why I believe in the euro? Because is the only currency that resembles the famous currency wished by some countries who cry for a “new world currency reserve”.

        The euro is the only currency where in his core has the desire by authorities to cut the public debt and are ruled by free markets. The ECB doesnt manipulate his currency as others.

        The euro is the only currency where the governments are learning to survive without using the trick of fatal spending. Even today Greece is cuting hard his fiscal defcit to pay his bills.

        The euro today and their members are doing almost the sames as some years ago when the scandinavian credit crisis blew and they learned to cut fiscal deficits and public debt. The europeans are learning the crude lesson: living in debt, by debt an to debt is craziness. How can we asure that productivit will rise enouph to pay our debt? The europeans are learning the hard lesson. And were changing our mindset. Of course Germany is the leader of this movment.

        Gold never will replace the paper currency. Only folls believe in that. Otherwise they believe that my salary will be paid with one gram of gold and I will use nanogold to buy my milk and eggs. Foolish. Money isnt only a value reserve but much more of that. Money is used to trade and replace bargain. Maybe economic books should reserach the past, to understand what is money, after all.

        If gold or other physical thing will never replace currency paper units I must to use money with the warrnty of Rule of Law. And I will choose the best value reserve that is less manipulated by governments and politciians. Because all the governments and politicians extend their power behind their legitimicy. So if I need some currency as reserve of value I chose the best of all. Francs, euros, and so on. No a single dollar.

        Do you see, goldbugs dont understand one little thing: gold doesnt give any return but only apreciation against something. Gold is for speculators and for who needs to move without paying too much when running away from somewhere. But we can use gold as precious stones, jewllery and so on. But for an investor gold is trash as any other currency who is created above some level of rate. I rather choose to hold a farm than gold. I dont have afraid of my authorities and I dont live in one political regime that opresses their citizens. So I rtaher choose real assets with real returns than gold. I rather choose land, stocks, bonds or else than gold. In the last 200 years gold only could fight inflation but didnt gave any real returns above inflation. Goldbugs are deluding theirselve. lololololololol

        As I said. If I have some money to protect is better to bet in assets denominated in the euro than in the rotten dollar or the gold.

        Kind regards.

        1. aet

          I like the cut of your jib, PGM.
          But the Americans are perhaps savvier than you may think.
          And they are harder-working and a whole lot smartedr as a group than some on this board care to admit – and they’re Americans themselves!
          I’m a Canadian. We know what happens to people who don’t squirrel away enough nuts for the winter.
          And we also know what happens if you refuse to let people share the fire, and shut the door in their face, in the dead of winter.
          The economic crisis is one of over-production.
          Better IMHO than one of under-production.

          1. PJM

            My dear AET, of course americans work hard. And too much hours. Does imply that they work very good? No. Means that they work a lot but they produce less than should.

            Are americans retarded? No. But as a group or colectivily are only puppets of the oligarchs. Its a cultural thing.

            You asked before, “how to fight corporatism”. I tell you: give the real picture to the people, tell them the truth, tell them that american dream turned to american nightmare, tel them that the american empire is rotten. Tell the people the truth.

            Or tell to them: look, lobbying is legalised corruption. Lets stop that activity or put some kind of restrain.

            How much it costs an senator, in USA? Too much money. So limit their activities, limit the power of politicians and the power of civil servants. Limit the amount of money that one politician can spend during the campaigns. Limit who can provide funds to candidats of public posts. Put all the secret services, police and public attorneys looking for the corruption. Put all these expensive services fighting the crime. The white color crime.

            How many years took to stop mr. Madoff? How many Madoffs are controling the american politics and politcians?

            Of course americans arent retarded but the system is corrupt, and the Rule of Law is being manipulated to protect the oligarchs. I dont need to tell you. Some american voices are telling that. But, the american political system is rigged. The money is the only thing that rules american politics.

            look mr. Obama. Some months ago he declined to meet with europeans. The arrogants americans sell the idea: europeans dont talk in one vice. Who will Mr. Obama meet to discuss with Europe? Europe doesnt deserve the Emperor attention and time! WOW!

            Now mr. Obama comes to Lisboa to meet the same europeans that he didnt care some months ago. To discuss what? Oh! The war in Iran and the economic crisis. But some months ago, when some american investment banks were trying to knock down the €uro, mr. Obama didnt had time to discuss anything with europeans. Is that Emperor whoe comes to Lisboa and convice europeans to help the next american war? Bullshit. The Emperor has no clothes, my fellows americans.

            Who think is mr. Obama? The Emperor of the world? Now that russians are protecting Iran and their nuclear facilities and USA is alone to make the war against the Iran, he comes to discuss with us, troglodites europeans? Maybe he will discovery that we, europeans, arent puppets of the american master voice. Maybe he will discovery that war on terror is only american plunder using his allies to justifiy the American Empire sucking others resources and lifes.

            Of course americans dont like read this. Is too hard to swallow. Isnt it? But that is the reallity. USA thinks that still rules the world after the colapse of URSS. USA thinks that can rule the world alone an make europeans only puppets at the service of the American Empire.

            Americans dont like to read that they need to change their behaviour. In Iraq, in Afghanistan and other places. Americans should pay more attention to others when they talk. And not pretending that mr. Obama is the Napoleon of XXI Century.

            Americans should listening more and be less arrogants when they wnat to teach others, how to fix their problems. Some months ago a lot of great americans gave a lot of advice to europeans, to greeks, to portuguese, to german and so on. But today they discovered that american economy is in poor shape and worst that european economy. Maybe americans should go to Berlin and ask for some advice. Or even to Benjing. Why not? Americans pretend to know better than others how to rule their own houses, but maybe its time to americans ask for some advice too. Or is hard to grasp?

            USA, the cowntry has lost his soul. Isnt not anymore the leader and the benchmark. On the contraire: we must take USA as the bad example to avoid.

            USA betrayed their allies in Iraq and Afghanistan. USA made the economic warfare agaisnt the euro. Pretending to be the only ruler empire. Now its over.

            The good old school of americans must to remove the generation who made the Sixties and put the cowntry in the black hole. An enormous black hole. Because its true. The generation of Bushes, Clintons an Obamas are only fools in comparation with the Eisenhowers, Trumans or even Roosevelts. These kind of new americans leaders are only puppets of the oligarchs and the american ruling elite. Not of the people and for the people. Mr. Obama, today, is the same as Humpty Dumpty of internacional politics. A poor fool swwimmning in his own oil and lack of skils to be a really great leader. Its a parrot.

            Americans must to be more low profil. Not to pretend to be the masters of universe and teaching others lessons when inside USA the emperor has no clothes. Americans must to look very deeply inside their core political system and realise that this system isnt a good one. Is a modern version of fascist system.

            Maybe Im wrong. Maybe not. But is what I see. And I dont see any will to change that system. Americans are like rabbits facing a strong ligth in the dark of the night: are in panic, paralised and in dispair. Soon they will pray to god, to help the old strong and powerful cowntry getting out of the black hole that the americans oligarchs puted USA.

            I wish to see the old boys again leading the cowntry. But theyre very old or dead. The generation who smoked marijuana and made a lot of free sex is worst than the generation that they figthed in their youth. Oh irony that USA is giving to us, outsiders. The same generation who figthed and replaced their fathers is much worst than them.

            A great lesson to the world. A new great lesson that Im learning with USA.

        2. Psychoanalystus


          To begin with, gold is a good hedge against inflation. In recent years it was also an excellent investment. I don’t consider myself a “goldbug”, but gold has made me a nice profit these past few years. I fact, it was my best-performing investment.

          Regarding your dissertation about the USA. Throughout my life, I have lived equally in the US and various countries in the EU. I also hold multiple citizenships (US and several EU). In some areas the US has some advantages, while in others Europe does. However, “Europe” is a hard term to define. The US is a more evenly developed nation, while Europe remains largely feudal and is comprised of nations that vary greatly in their level of development. For example, while Germany is a highly developed nation, countries like Portugal or Greece are quite undeveloped (almost resembling African levels of development). So, Europe is harder to quantify.

          You wrote that the US political system is corrupt. Indeed, indeed, it’s terribly corrupt. Rotten to the core! However, I was curious if, in your opinion, you think it is more corrupt than the political systems in Greece, Italy, Ireland, and most of Eastern Europe? Just curious…

          Now, regarding America’s role in the world as a superpower. I agree. The US is a terrible world leader, and as you say, Obama a failed emperor. As such, I think the EU should immediately drop out of NATO, and sign military treaties with Russia and China. While at it, the EU may also want to change the color of the 12 stars on its flag to a bright RED. Or, as an alternative flag design for the EU, I propose one sporting a bright red background with 12 beautiful sickles and hammers holding hands and dancing happily under the watchful eye of Prime Minister Putin…

          As far as Europe being America’s puppet. Well, my friend, Europe IS America’s puppet. I realize that this situation may be intolerable to most proud Europeans, and indeed it should be. Nonetheless, Europe is weak, so it needs protection while turning tricks behind the dumpster of globalization. Kind of like a prostitute needs a pimp to protect her. However, just like a prostitute may freely choose her clients, I also think Europe may freely choose whose puppet to be. For example, if Europe does not like being America’s puppet, then it may choose to become Russia’s puppet. I am sure Mr. Putin would make a wonderful puppet master. Similarly, it may choose to become a puppet of the Muslim world, in which case Europe would likely have to bow down (or possibly bend over) before nations such as Turkey or Iran. In fact, since Turkey is doing so well economically, it may not be an entirely bad idea for Europe to start making preparations to join the up and coming OU (short for Ottoman Union). Thus, since being America’s puppet has obviously become unbearable to so many Europeans, I hope proud and frustrated Europeans everywhere start learning Russian and Turkish as soon as possible…


          1. PJM

            Dear Psychoanalystus,

            Now we can see what is behind your true ideology. Thats allways a surprise when some people feels the pinch of the critics.

            Americans arent to use to read critics to their leaders and cowntry, right? Imagine others cowntries when they read some american opinion makers and thinkers.

            Let me just say some words.

            “To begin with, gold is a good hedge against inflation. In recent years it was also an excellent investment. I don’t consider myself a “goldbug”, but gold has made me a nice profit these past few years. I fact, it was my best-performing investment.”

            Are you sure? Absolutely sure? Have you checked the figures througout the time? Or are you only looking of the last seven years? Do you see, in the last 18 moths, americans stocks made the best investment opportunity in the last several years. Are better or worst than gold? ;)

            Nevermind. I dont like to discuss investments and trading in blogs. I just wish you luck.

            Concerning your ideology, this is most important to discuss with you. From example. Do you hate muslins? And jews? No?

            “Similarly, it may choose to become a puppet of the Muslim world, in which case Europe would likely have to bow down (or possibly bend over) before nations such as Turkey or Iran.”

            Do you think muslins doesnt deserve to be good allies? Are they retadrded? Are they subhumans?

            Do you see, is this kind of american behaviour that annoys others around the world. Some americans think that others peoples, religions or maybe colors are the same “barbarians” as the old romans thought about others outside the empire.

            Do you hate muslims? I dont. But I hope that you dont hate jews also. Because I love jews too. Do you see, I dont have religion but I know the great contribution to our civlizations by these kind of religious people. And I respect others religions.

            But let me ask something, concerning this:

            “before nations such as Turkey or Iran”

            Do you know that Iran has some things that are the same in the USA? For example. In Iran, the politicans, before choosed by the people, in the elections, are choosed by the clerics. In USA, in stead crelics are choosed by the oligarchs. How? With the money. A poor guy who doesnt sell his future position to oligarchs has a lower probability to be elected, in the current american political system.

            Do you see? Between Iran and USA, the political system isnt so much different. The elections are rigged even before the people can choose their leaders. In USA money buys and chooses first. Later the people. And I dont need to remeber the problem between mr. Gore and mr. Bush and what happened in Florida, some years ago. I let you think in that problem for me. But for me this isnt Liberal Democracy. Maybe is to you.

            Concerning this:

            “The US is a more evenly developed nation, while Europe remains largely feudal and is comprised of nations that vary greatly in their level of development. ”

            Do you know what is the meaning of feudal? I sugest to go next time to wikipedia before these kind of observations. look, is in the USA that the oligarchs controls the political system not in Europe. Ok. Not all Europe. ehehehehehehh

            “Now, regarding America’s role in the world as a superpower. I agree. The US is a terrible world leader, and as you say, Obama a failed emperor. As such, I think the EU should immediately drop out of NATO, and sign military treaties with Russia and China.”

            Are you sure that this will not happen in the future? look to USA and Russia. Are very different? Not so much as you think. But one day China could be a great european ally. If they change the regime and turn democratic, in my personal opinion, is a good ally. As Others asian democracis. Like Japan, Korea and so on.

            But the problem is, mey good friend. My fellow citizens are figthing in the iraq and Afhganistan because the USA lied to me and others portuguese and european. Is this the great Empire? Creating Death Squads like nazis? or communists? Is this USA? Is this the leader of free world? Bullshit. This isnt my fellows allies. I dont give any support to murderes and killers of child, women and elders. is this the new USA? The new Great Empire? This is disgusting and nobodu cares in USA. Who cares in USA what is happening in these countries ruled by americans, using and cheating their OTAN allies?

            Look, my friend. USA cant do the same things as does the worst dictatorships in the world. And what is disgusting is preting to be the leader of free world and western civilization using the same methos as dictators like Sadam or even Pol Pot or Hitler.

            If americans wnat respect from their allies must to control their soldiers. Must to use militar laws against these Human Rights.

            But, hey, you can call europeans reds or even pimps, whores, what you want. But in Europe were want to have some self respect and fight some violations of Human Rights. looks to me, for the majority of americans, others lifes (barbarians, right?) doesnt matter. Its onlye american lifes that count, right?

            Well, my friend, I absolutely sure that a lot americans doesnt have the same ideology as you. I have an american neighbour that doenst support these american errors. But he knows that isnt good to use these kind of milutar tactics against enemies or “civil causalties”. This cowboy way of doing things isnt aproved in europe. And we know what is doing these kind of errors. But we developed a advanced european civilization that doesnt aprove death squads by our allies.

            The others things that you wrote doesnt matter anymore. Your words are very clear. You dont like muslims and you dont mind to have death squads killing child in the name of, what were the words of mr. Bush?, Democracy, Freedom and Human Rights?

            Come on, dear Psychoanalystus, is this the great american leadership and civilization? If it is, I rather choose to have no these kind of allies.

            Try to read again your text. And think if is this what others americans think. If it is, please, ask to your leader and make an alliance with North Korea. lolololol Not europeans. Were more advancded than that. ;)

          2. PJM

            I just wnat to sorry for my bad english and to be a lot of tired to wright a good text. Im really sorry.

            And your text doesnt deserve more that telling you that USA isnt as used to be. Now its a shame to be ally of USA. I dont need to say much more. Just remembering all americans that fighting terrorism (and we had a lot of terrorism inside our borders and experience but we never had death squads killing civilians) isnt killing child, elderly, women or other civilians. And is disgusting to know that inside USA, authorities are more concerned to prosecute the poor boy who revelead the americans methods than the murders of civilians in Afhganistan.

            But this is another symptom how decaying is USA.

            Kind regards to all.

        3. Psychoanalystus


          In reference to your post (the one beginning with “Now we can see what is behind your true ideology”), I honestly would not know where to begin… Yet, I humbly suggest you cut down on that tasty Vinho do Porto a bit… unless, of course, you’re willing to send me a few bottles too, so then we can both be on the same “wavelength” here… :-)

          Anyhow, I might as well say that Europe is not very important in today’s world. Or perhaps I should say that out of Europe, it’s Germany and the UK that truly matter. My friend, nowadays it is China, India, and the US that matter most. And they do matter.

          And by the way, if Europeans aren’t racist, please enlighten me about why is there so much opposition to granting Turkey EU membership? Or, why are the Gypsies still being discriminated so widely across the continent? Or, why is it so hard for France-born blacks to find jobs in France? Or, for southern Italians to find jobs in northern Italy, for that matter?

          Oh, that age-old European demagoguery… what are we going to do about that, my friend?… :)


          1. PJM

            My dear Psychoanalystus,

            Some criticism that you made are very good questions, today in Europe.

            First and above all, in fact exists racism, xenophobia and others serious questions inside Europe. Yes, nobody deny this fact. But what seems to you a generalised behaviour inside Europe, in fact that isnt true. The majority of political parties in Europe fight these kind of misbehaviour. And that is the real advance in our European Civilization. We try to fight these kind of misbehaviour and we believe in the right everyone to live free, no matter color, religion or even ideology. Thats why we have communist parties inside our political systems even they are very ambiguous about the Democracy, Freedom or even Human Rigths. Living in Democracy implies some risks. Even the risk of loosing our liberties when we aloud or enemies playing our democratic game.

            But some criticism that you wrote isnt thrue. For example, this:

            “And by the way, if Europeans aren’t racist, please enlighten me about why is there so much opposition to granting Turkey EU membership? ”

            A lot of Europeans, like me, dont acept Turqkey in our “great aliance” or EU because they dont acompply our Acquis communautaire and dont garantee that Democracy and our institutions should prevail in the future, inside Turkey. That is the problem. I wish them inside Europe (theyre, above everything, our allies inside the OTAN) even if Greeks dont aprove that. But before they can come to our Uninion they must acomply certains conditions and garantee these conditions in the future. And Turqkey must to cut the risk to have an fascist islamic authocracy inside our Union. These are the real questions that we discuss a lot in Europe. Is Turkey an political regime that garantees our conditions to be member of EU?

            That is another problem, my friend:

            “Or, why are the Gypsies still being discriminated so widely across the continent? ”

            Because they deny to live as others in our society, because they deny to acomplish our Rule of Law. Of course we understand that they have a long tradition to be nomads. And to be nomads in our societies isnt very well understood. But the real problem is the subculture inside the Gypsie Culture that we dfont acepto. Ill give you a good example. Is an old tradition of some Rom families (or Gypsies) to arrange marriages between them, even when the groom and the bride are small child. That isnt acepatable in our civilizations or societies. Other problem is the compulsary education. Can the Rom families asure our societies that their children have a normal education in our schools as the others children? This is a fulcral question in these days. Isnt easy to us to give the normal education that every child has the right and at same time to give the right to be nomade.

            Do you see, isnt easy to conciliate Liberty and Human Rights and garantee them to Gypsies. They must acomply some things, like acept our courts and dont make Justice inside their group.

            Of course that problem isnt easy. Gypsies are very special and we cant aloud some things that they do and are very fulcral to live in our societies. Like to respect women and give them the same rights ans men. And Gipsies tend to treat women worst that are alouded by ours laws and even Human Rights.

            So, I admit that some racism exists agaisnt them. But the Rom Culture is a great problem of our times and isnt easy to conclitites their rights and culture with our Rule of Law. Maybe you should teach us to do. maybe we should make like USA: large indian reserves or like “concentration camps”. Is this the good way that USA can give us as example?

            “Or, why is it so hard for France-born blacks to find jobs in France?”

            That probem inst onlye French. That problem exists also in Portugal, for example, even in minor sclae. Isnt easy to answer that. But we know that a lot of racism exists but doesnt explain everything. What we tend to believe is that our societies arent doing the best to acommodate the problem of “Second generation” in our system. The Second generation is very hard to integrate because they lack of integration in the new society and they share others behaviours from the society of their fathers. The problem is: that generation is divided between the culture of the new society and the culture of their fathers society. And they cant live in one society with the culture and traditions of another society. That same aplies to black as others imigrants. Like, for example, the portuguese imigrants inside France. That face a lot of problems even they share a lot of french culture. The second generation faces an cultural shock that isnt easy to them to manage.

            But, my dear Psychoanalystus, are problems of our days. Isnt exclusive on Europe, or even USA. Is a new problem created by the globalization and more freedom to choose the place to live. In the past the migrants lived in Ghetos and with special rights and obligations. Inside our societies and even in others societies. For example, the jews or the muslim in Portugal, during our long History. Or even the portuguese migrants in India or japan or even Nederlands. In the past, about five centuries ago Portugal was the first cowntry to try to mix the differentes cultures. In India, Afonso Albuquerquee our Vice-Roy, made something that was new: give special rights for who married with indians. Men and women hade special rights to asure a better integration betweem europena culture and indian cultures. That didnt worked well. But this is a old problem that isnt easy to face it. Even USA today faces the cracking of their famous melting pot, that isnt working well as we thought before. Inst that true?

            My dear Psychoanalystus, the fact is: your ideology isnt good. Is the ideology of the american cowboy, arrogant that thinks that lives in the best cowntry of the world. Thinksd that americans are special, very smart, advanced and so on. But this is typical of imature societies that have some material leadership in some point of the history. This is the typical of decaying empires. As Romans in the past, portuguese, spanish and so on. But in the end, that imature society, very advanced technological, will face the true challenge: how to survive after the colapse of this empire. Is USA survive after the colapse of American Empire? No. My opinion is: USA will split and end as Cowntry. American is to much imature and to much cultural violent that will not survive after the colapse of the American Empire. USA isnt ready to be a true mature cowntry and to face the colapse of his power and material leadership.

            I will not explain much about my idea. Only saying this: when one society look to others peoples, societies, cultures and civilizations as barnbarians that dont deserve the same rights as the pretense advcanced society, is because didnt evolve as mature society.

            Kind regards.

        4. Psychoanalystus

          “Try to read again your text. And think if is this what others americans think. If it is, please, ask to your leader and make an alliance with North Korea. lolololol Not europeans. Were more advancded than that.”


          OK, I just reread my “text” and then asked ALL Americans if that’s what they think as well. As they ALL replied affirmatively, I have just written to Obama asking he allows North Korea into NATO. He immediately replied by Tweeter saying that he shall do so “pronto” (he really did use that word, I swear!). So now it’s settled… North Korea is now an American ally. Thanks for making that so easy, PJM.

          Have a nice day! And please do hurry with those bottles of Vinho do Porto — I’m getting dry here…lol


        5. Psychoanalystus

          Hey PJM,

          Just wanted to mention that I really don’t give a crap about the USA or Europe for that matter. I have lost respect for both a long time ago. As far as leaders go, Obama and José Manuel Barroso are both about as low as they come.

          In the end, who cares! The world goes on. But I enjoyed responding to your messages :)

          Have a great day!


  9. mezcal

    Someone please tell that to the buyers of our debt! The reality is that the “national insolvency” doom mongers have been predicting the end of the world forever.

    With all due respect I just don’t get your point, Marshall.

    Granted, there’s an enormous long-lived bull market in Ts.
    So what?
    Do you really believe that this particular bull market, unlike every other bull market in history, will NEVER end?

    What, pray tell, is our exit strategy if Tim & Ben go all-in with this and it turns out to be wrong?
    It’s no small wager as I presume you’d agree.
    You only get to destroy the dollar once.
    There will be no do-overs.

  10. spectator

    This is the same crap that clueless bulls spew for every bubble – the world has not ended. When the treasury bubble bursts and puts another nail in the coffin, this clown will be on some other schtick. Never ceases to amaze how so many can be so wrong and still get a hearing.

  11. smells like chapter 11

    I have lived very close to the economic edge for all of my professional life. I have seen many people fall over it and a few come back. Because of what I do, I have a predilection to believe that the whole world is very close to that edge all of the time and at any moment is ready to fall off it. I have lost so much money shorting this and that in the belief that the end is imminent. A few times I have been right like in 2006 when I sold my house, most of the time (over 75%) I have been wrong.

    What I have learned over the past 30 or so years is that we somehow muddle through, not very nicely mind you, but somehow we manage to get through things. That is my bet today. That’s not to say, that we should not keep an eye on our debt, we should. That’s also to say that maybe we need not lose sleep over it either. Should the dollar collapse for example, that collapse will present opportunities and someone will figure out how to take advantage of those and the system will adjust. Our capitalist system has adapted to numerous severe crises over the past 250 years that it has been around, it will adapt to this one, too. That is its profound strength. How and in what manner it will adapt, I do not know. Maybe, we end looking more like China. Who knows? Most likely, we will tinker with the process until the ship begins to right itself. A good discussion of this adaptive process is in Anatole Kaletsky’s new book Capitalism 4.0. Then, I imagine someone who happened upon the correct answer will be anointed the next Keynes or Friedman.

  12. MyLessThanPrimeBeef

    Modern money is faith based. They invented it like they invented religions.

    The fewer people know the fact the better.

    This is like Enlightenement never happened.

    1. MyLessThanPrimeBeef

      God created the world out of nothing – creatio ex nihilo.

      The Fed can create money out of nothing.

      It’s amazing how they share the same belief…they probably went to the same school.

      For it to succeed, it needs lots of believers.

  13. MyLessThanPrimeBeef

    Some people are better suited to be founders of religions.

    Why they bother with the mundane tasks of making money is beyond me.

    1. anonny

      This isn’t a matter of religion, and your comment may sound clever to you, but honestly, it simply demonstrates ignorance and faith based thinking on YOUR side, that the government has to operate under the same constraints you do.

      You have to pay your taxes in dollars, remember? So that makes dollars an accepted currency, you need to find some way to come up with those precious dollars to pay the taxman, a not inconsequential point you choose to omit.

      1. MyLessThanPrimeBeef

        The voluntary restraints are volunatare and are there so people don’t lose faith in this faith based system.

      2. MyLessThanPrimeBeef

        It is a religion if its fellowers defends it with fervor and fanaticism against what they perceive to be ignorant.

        1. wunsacon

          Anonny doesn’t sound fanatical. Instead, you look like you’re trying to qualify for “So, You Think You Can Dance”.

      3. MyLessThanPrimeBeef

        I never aim to be clever.

        I’m reminded that the cleverest of the Homo Not-So-Sapiens Not-So-Sapiens is still ‘not so sapiens.’

        Those into clenverness don’t like my calling humans Homo Not-So-Sapiens Not-So-Sapiens. It puts a limit on how sapiens they can be.

    2. steve from virginia

      Okay … first; sovereign deficit/funding is ‘Econ 101’. What MA sez is identical to anyone who spends some time and thinks about economics. Also agreed to by Krugman, Steve Keen, Rob Parenteau, Michael Hudson, James Galbraith and innumberable others. It is what it is, the government never runs out of (its own) money.

      Second, at some point the counting function (which is what any deficit is) becomes absurd. Even if the US government can fund a ‘bazillion, gazillion- trillion dollar’ deficit it would make that same government look like an ass.

      The finance authorities can gin up limitless funds but what are they? Claims against real output; the authorities cannot lend energy, water or topsoil into existence. Consequently the claims against real output multiply while the effects of the claims simultaneously reduces output. If China sells all of its Treasuries it will effect employment as it would be a cash drain.

      If anything, Marshall is being as intellectually dishonest as his critics as the real issue is spending to reduce unemployment not deficits. It’s not an option; the obligation of any nation is to provide support for its least citizens. It’s not an option or charity but essential to the survival of the nation itself. I would personally rather see Auerback (who I wind up disagreeing with quite a bit) frame the deficit issue this way rather than by function mechanics. The failure of the establishment is not bond market follies but the failure to provide support to the bottom of the economic food chain directly.

      Another establishment failure parallel to fiscal policy actions has been to NOT restructure bad loans and triage insulvent banks.

      Finally, the cash drain scenario is beginning rather than ending. This is the outcome of a dollar pegged to crude oil making the dollar a defacto hard currency. As dollars become the means to petroleum the clamor for cash will increase. What happens when all around the world are selling dollar- denominated derivatives of all kinds to gain cash?

      It’s coming and it will be ugly. The BPOC is just pretending to be the ‘smart money’ which has long been out of the dollar- short markets. All of them, including treasuries.

      Don;t listen to me, I am an idiot .. but if you are caught in a dollar- denomicnated derivatives position don’t blame me!

  14. aliena

    Yves, aren’t you tired of these rude commentators?

    Thanks for posting MMT work, I discovered it here and I’m grateful to you.
    Keep up the good work! :-)

    1. Yves Smith Post author

      I’m tired of the fact that they don’t bother understanding MMT, they simply reject it. This is a classic example of psychological projection, they accuse Marshall of operating out of religion, when their attacks are fully in keeping with someone who is defending THEIR religious belief. Amazing, but sadly predictable.

      This just proves Kuhn, that people won’t give up the paradigm they learned when they were young, no matter how strong the evidence against it is. But people who are using this post as cause for violating comments policy are losing their comments privileges.

      1. MyLessThanPrimeBeef

        Not Marshall of operating out of religion, but the faith that money can be endlessly created out of nothing for some entities while you and I have to work for it.

        And what happens when people lose faith and start hoarding tangible properties while still paying taxes with money?

        It all goes back to faith.

        1. aet

          Would those “tangible properties” be for consumption, like food, with spoilage and storage problems, or for trade?

          Did we not invent money for this purpose?

          We created money: not “God”.
          But the industrious ought not to support the idle…but our “industrious” are now machines, which can produce tirelessly what it once took thousands of people much labor to make….so what is the problem?
          Simply tax the rich, that is , the relatively rich, ..

      2. PJM

        Dear Yves, that is good to read:

        “This just proves Kuhn, that people won’t give up the paradigm they learned when they were young, no matter how strong the evidence against it is. But people who are using this post as cause for violating comments policy are losing their comments privileges.”

        So that applies to Mr. Marshal too. Or not?

        Let me understand some point of views.

        Some say: FED only buys assets so the money in the system is the same. But this is craziness. Ill give you an example:

        One day four guys decide to play a simple game. They will trade an asset but never will want it for real. Just trading and realize who will make more money in the end of the game.

        These guys trade some gemstone. They trade and inflate the price of that stone. The game starts with 100 dollares in the first bid. Afterwhile the game put the price of the bid in 1000 dolares. They traded a lot and the stone reaches 1000 dolares. But suddently the traders realise that no one will take the stone to home. They must only have money and the sum of their trading skills. The guy who is biding 1000 dollares realise that is too much. And lower the bid. The seller realise that the biders are lowering. He starts lowering the ask agressively. But nobody wants to buy the stone. Suddently the FED comes and buy that gemstone by 1000 dolares, because the lack of liquidity.

        One gemstone started with 100 dollares value and stops with 1000 dollares. Because the FED put money in the game where others didnt want it. Did the FED created money and inflation? If the FED took that asset, the gemstone, from the game, we could think it: the FED puted 1000 dolares but took off 1000 assets from the game. So, the FED was neutral using simple accountant point of view. But that isnt true. In fact it was the trading activity, the economic agents that created the ilusion of value. And the FED created the money and puted in the game. So, in the end, 900 dollares were created from nothing. Even the accountant says: look, the gemstone was out of the game and the FED only rebalanced the value. Is that correct? Is this true? Didnt the FED created money and puted money in the pockets of the traders?

        The same applies today. When the FED buys assets inflated by credit is puting money where shouldnt be there. The houses were the gemstone of the game. The traders puted prices of houses in high value because the game is on. They used credit to make the bids. And when the inflated prices of the houses blew, the FED comes and buy the houses. Puting hard money in the pockets of the gamblers.

        Thats this situation that created the bubbles in the real estate markets. And others markest.

        But this situation created another bubble. But just few understands. Government spending depends of the level of the game. The governments started spending because they believed that the game is producing real value. So as the game is on and dont stop or the bubble blows, the governments lived in the money that is only virtual. Until the bubble blows the government spend becuase arent their money. Is good to be politician. You use others money to buy votes and ilusions. And they did. But sudently the game is over. And the FED starts printing money and “buying” assets that doesnt value what the FED pays. And try to inflate the gemstones again. But the game is over because the looser of that game dont want to repeat the error: buying gemstones with money borrowed.

        Thats the problem today that USA faces. The game is over. You can print money but the gamblers dont want to play the game again. You put money in the pockets of the gamblers and they choose others gemstones. No more houses. No more buying things just because the bank opens the pipelins of credit.

        But the government depends of the funny game to taxe and spend. The government grew as the bubble grew. Suddently the government doesnt have gamblers to taxe. And the money created by the FED instead helping the real economy is trying to find anothers bubbles: bonds, shares, gold, oil and so on. But the money doesnt creat jobs. The companies know that the gamblers are in debt and dont create enouph value to pay their debt and incresing their consummation. So government is broke. Cant taxe gamblers enouph to sustain his spend. Government is broke and spending is an ilusion. Can avoid excessive break in the consumattion in the near term but cant avoid the lack of gamblers to taxe. Because these gamblers cant creat enouph value to pay the debt and increase the bills.

        This isnt rocket science. Is common sense. The thing that a growing number of economists lack. They live in one world that is only faith and to much ideological wishfull thinking. Economics isnt science. Its only filosophy and ideology. I never heard talking about right medicine or left engeneering, I never heard labeling some physics as left or right, liberal or con and so on. In economics is the normal way of life: that economist is liberal, that one is conservative. But this isnt science. Is ideology or filosophy but not science. Who are the liberals scientists in physics? In medicine? In others real sciences? lolololololol

        The plain truth is this. USA cant produce enouph goods and services to pay their bills and debt. Is that. No more, no less. USA cant produce things that others countries wnats buy to justify the current level of consummation. Period. USA is broke. And the government too. The FED can give money to the people, to the governments to the oligarchs (well, in fact the FED is working for the oligarchs) to anyone in USA. But this money cant sustain the economic system because USA lacks of competitivity and produtivicty to sustain the current level od debt and consummation. Thats why USA has a huge trade deficit: americans cant compete with the world and even with more money in the pockets, the americans needs to import to satisfy the current level of consummation.

        USA is broke and their people needs to work better to sustain the current level of consummation. But I mean working better not more. But this problem is another one that I shouldnt talk now.

        Yves, USA is broke and their people too. The oligarchs took the american system to the black hole of bankrupticy. The government can spend what he wants with money from thin air but the people will live worse and the poverty will increase. No matter how money mer. Bernanke create and put in the pockets of the oligarchs. USA is broke, their government is broke and american economic system today is more like the old nazi economic system or italian fascist economic model. This is the real truth tha americans are trying to deny but is the real system. How much it costs one senator? 50 millions of dollares? 100 milions? I read somewhere that the health care sector is buying democrats and the republicans are bought by defense industry. Is the american way of corruption: lobbying. Wich means: legalized corruption. That the american system today. Economic fascism bought with money from the oligarchs and the corprations. (By the way. Do you know the name of the portuguese economic system during the fascist dictatorship? Corporativism. lololololol )

        Kind reagrds.

        1. aet

          Ah, but how is “corporatism” to be overcome or dismantled?

          And at least, you present arguments, kind of:not just insults.

      3. i on the ball patriot

        So … the MMT corner loan shark has endless money to loan, so what, he’s still the corner loan shark charging usurious interest, bleeding the community dry, and funding societally bad projects.

        Its not about structure, its about the policy that determines the structure, who benefits, and trust in controlling that policy. Its not a matter of fully understanding the remedial plan, its a lack of trust in implementing ANY remedial plan.

        The policy makers are corrupt and the trust is gone, and yes, it is a ‘religious’ belief of many. That is MMT’s first obstacle.

        Deception is the strongest political force on the planet.

        1. aet

          I have not noticed any starving people streaming out of the US, so you guys must be doing some things right,eh?
          On the contrary: as a group, you guys seem righer than you have ever been before.
          As a group.

      4. Bates

        Yves…I do not understand how MA, or anyone, can refute the overwhelming evidence presented in ‘Eight Centuries of Financial Folly, This Time Is Different’ by Reinhart and Rogoff.

        Perhaps MA can rest his arguement on the singular fact that the US Dollar is the world reserve currency to support his belief and encourage all to believe along with him? After all, when has a fiat currency been used for most of the world to denominate most debts? If so, his ‘theory’ sounds more like a religion, and nothing based on economic history.

        Monetization of US Dollar denominated debt will lead to commodities, especially oil, to skyrocket in price. This is not rocket science. The world as we know it is based on oil…without access to oil a country slides back into banana republic status.

        China has sold a tiny amount of it’s accumulated US Debt and here we have this hysterical post ‘China sells US Debt and the world did not end’. Well, no, of course it didn’t. Mr Market is the arbiter in all things financial and Mr Market moves in time to the collective belief and wisdom of all participants…The power of the Fed, Treasury and dollar denominated debt can influence Mr Market for a period of time is certainly true. That the dollar reserve status has been abused for many years is also true. With privilage comes responsibility and it’s the responsibility part that no one or no government wants to adhere to.

        BTW, threatening to ‘take away posting privilages’ of your readers/posters is not the way to win points for MMT. No matter how frustrating it becomes when some do not agree with a pet theory, kicking them out of the debate will end badly. Besides, if this site becomes THE PLACE for MMT believers to gather and promote a single economic belief you are going to lose lots of visitors and posters.

        1. i on the ball patriot

          Regarding this …

          “Mr Market is the arbiter in all things financial and Mr Market moves in time to the collective belief and wisdom of all participants…The power of the Fed, Treasury and dollar denominated debt can influence Mr Market for a period of time is certainly true. That the dollar reserve status has been abused for many years is also true. With privilage comes responsibility and it’s the responsibility part that no one or no government wants to adhere to.”

          Yes, Mr Market moves in time to the collective belief and wisdom of all participants … but Mr Global Propaganda has now co-opted and controls the collective belief system that moves Mr Market … and Mr Global Propaganda is intentionally throttling back the system to eliminate participants and reduce consumption.

          Mr Global Propaganda is owned and controlled by the wealthy ruling elite through the Fed, other central banks and global financial institutions.

          Wresting control of Mr Global Propaganda away from the abusive and intentionally trust destroying wealthy ruling elite — who have now created a global dysfunctional family — is key to any positive change.

          It is always difficult to take down the head of an abusive family made more so by the allegiance of the abused family members.

          Deception is the strongest political force on the planet.

      5. lergoguetrader

        Yves, that is not quite what Kuhn said, and its anyway not an argument for any particular hypothesis.

        I understand that comments critical of MMT are irritating to you, because you are strongly convinced of it. However, you are letting acres of truly off the wall stuff through, while banning anything critical of it, and its destroying your blog, its basically making the comments section a series of content free rants.

        Like it or not, people dissent from MMT on perfectly rational grounds. Or in my own case, they simply cannot make any sense of it. They cannot set down in simple terms exactly what propositions it asserts clearly enough to be able to compare them with observations. They read all the links, carefully, and it still makes no sense. There are a few key assertions about accounting identities which occur over and over again, then we seem to move briskly to some policy prescriptions which do not, and could not, follow from accounting identities, which are just matters of definition. And these policy prescriptions seem to be both reckless and irrational. Well, that’s how it looks from here.

        I have learned over the years that when I really could not grasp something in business or economics or social theory, there turned out to be less there than its advocates alleged, and fear that this is true of MMT.

        But whether this is so or not, banning any postings critical of it, while allowing your blog to become dominated by wild rants is not doing either the cause or your blog any good. In fact, it rather confirms ones doubts about MMT, and starts to raise them about the blog.

        1. Yves Smith Post author

          With all due respect, your comment, even if you mean well, contains numerous distortions.

          First, the wild rants are by the opponents of MMT, not its proponents.

          Second, I am banning people because they engage in bald faced abuses of comment policy, in particular spewing obscenity-laden vitriol at MMT writers without offering a shred of substantive criticism (a manifestation of the point 1). This has to do with unacceptable, abusive comments (and on this post, I banned one person who was a repeat offender here and has been out of line previously; a second person was using this post as an excuse to spam for another blog) and not though policing, as you incorrectly insinuate. There are plenty of critical comments in this thread, or did you somehow miss that?

          And let me further inform you that I correspond and/or speak with others who operate high traffic blogs; they are all FAR more aggressive than I am in policing comments and recommend strongly that I become less tolerant.

          Third, you admit you don’t understand MMT, and you are on thin grounds in attacking it. I will admit it is counterintuitive in some respects, but so is relativity compared to Newtonian physics.

          If you read the comments against MMT, virtually without exception they are thin to non-existent on rational, informed objections. They basically contend that MMT says you can “print” without limit, when MMT says absolutely no such thing. So how do you deal with arguments where people get heated, and say, “I hate the fact that you wear jeans to nice restaurants” when you have never and would never do such a thing? MMT proponents politely try pointing out where they have misrepresented MMT, and get yelled at.

          This is not rational, it isn’t polite, yet you and others accuse me and MMT proponents of being bad guys basically because this is a different framework for looking at things you haven’t done the work to understand it. Have you read Randy Wray’s book, Understanding Modern Money? If you haven’t, you can’t claim to have made a real effort to understand MMT.

          How can you deal rationally with people who keep making straw man arguments, or simply try to shout people down?

          This is projection, pure and simple. And if you don’t like MMT, please find another blog. I’m not going to stop writing about it to cater to reader prejudices. As Barry Ritholtz advises, “Embrace the churn.”

  15. ds

    Noone here is disputing Auerback’s point. The government is the monopoly issuer of reserve notes. Because of this it can control the price of these reserves — i.e. the interest on federal debt. The “market” determines bond yields only inasmuch as the government allows it to.

    The fed is indeed “printing money” but at the same time it is taking away assets from the private sector. When the fed does QE it takes bonds off the balance sheets of the private sector and adds reserves in place of the bonds. The total amount of assets held by the private sector remains unchanged.

    Many commenters make the fallacious assumption that inflation is simply a function of too much cash relative to other assets. Inflation really has nothing to do with this, but at the very least it is certainly not true in today’s economy. The counterargument is to then say that although there is no inflation today, sentiment can change instantly and bring inflation out of nowhere. But fiscal and monetary policy can also change just as quickly. If the excess cash all of the sudden sparks inflation, the fed can take it away as quickly as it put it into the system in the first place.

    1. aet

      Two big ongoing wars, heavy deficits, oil above 70$ a barrel for years, and no inflation …why would that be?

      1. traderjoe

        I hope you are not defining CPI as “no inflation”. See for how the CPI calculations have changed over time to lower stated inflation – geometric weightings, home rent deflators, etc. How about tuition, health care, and oil (over time) as great examples of inflation. My local college has raised prices 14% TWO years in a row. I do not believe in the aggregate indexes. Shadowstats has inflation in the 6-7% range.

        Off on another note, what I haven’t read here is the issue with a privately-held central bank with a monopoly money/credit printing franchise purchasing UST’s with credit created from thin air. So, essentially, the Fed PROFITS from QE, as it buys interest-bearing assets with “free money”. A privately held company siphons money from the US taxpayers, AGAIN.

  16. craazyman

    In the old days they used to settle these debts with women or cattle. If your tribe owed the other tribe and you couldn’t pay, you’d have to come up with a few dozen women or a few dozen heads of cattle or horses.

    Now, let’s say there’s no money. Then we’d have to give China something as a payback for all the crap they’ve sent us. Now they don’t think it’s crap, so they expect something good. And all their dollars are a big call option on “something good”.

    We know that anything economicaly produced is a combination of nature, capital, labor and imagination (NCLI). So to clarify, we have to give them some combination that represents — to them — the NCLI equivalent of what they’ve sent to us.

    There’s really not much C or L we can give them. We can give them California, which would be N (by this point it might be N minus C and L, so it might be negative, which would be a big joke on China LOL). Or maybe Hawaii. Or we can give them hundreds of TV shows and Hollywood movies or Next Wave Pop Rock and Roll songs, which would be I, but they would copy these so there would be very little multiplier effect on the original I. Or we can teach them English and how to play baseball and football, which would be I and some bit of L.

    It’s hard to imagine all of this adding up to the NCLI equivalent of what they’ve given us. Therein is the problem.

    So the MMT idea is that by taking the Viagran approach to monetary stimulus, which is to Stir It Up:

    . . . we can stimulate the I by relaxing the strains on L and send the Good Vibrations through the I so that N is converted through I and C and L into NEW THINGS that China wants or NEW THINGS that the rest of the world (ROW) wants, for which it will give us things that we can then monetize at the value of USD at time t=0 and send to China.

    This is a short form explanation of how economies work through the stimulation of C, L, N and I.

    Now all this clearly depends on social cooperation, which sometimes (like in China and many places in the world) is enforced through force and threat of violence. This can lead to a total breakdown of I and is anticipated in the basic equation. Now this concept is not the sort of thing that simple math, like algebra, calculus, probability or differential equations, can model. It’s more like the totally discontinuous results of combining colors or waves. -QED

      1. Marshall Auerback


        If you come out here to Colorado, where I live, there is no need for me to pass a bong over to you. All you need do is acquire a “caregiver” certificate and you can buy all of the medicinal marijuana you like at your local dispensary.

        Best regards!

      2. aet

        Oh it’s Mr “perception is reality”‘ again.
        Tell me why only the people who mine gold ought to get to issue currency….

    1. anonny

      See my comment earlier. You need to pay taxes, therefore you have to have dollars, like it or not. So that makes dollars an accepted currency, you need to find some way to come up with those precious dollars to pay the taxman.

      This isn’t a matter of religion, this is how the modern world works. But you’d rather apply stone knives logic to contemporary warfare. You all are implicitly using gold standard thinking, and it’s irrelevant.

      1. MyLessThanPrimeBeef

        You can print all the money you are technically capable of. It works if you keep it quiet. The downfall will be if you brag about there being no limits. Being humble -that’s how faith works.

        And that’s also why Zen masters counsel humility. Be humble and know your limits.

    2. aliena

      Exactly! You’re getting it! It was ancient time without fiat money.

      Now, the Chinese can buy anything in the whole world with their hard earned USD, not just American women and cattle.

  17. CingRed

    It seems to me that what is being said is that a 2.5% reduction in holdings of just one party who represents far less than half the total outstanding is proof positive that such a “massive” sell off is proof that an even larger sell off will not affect yields/prices of Treasuries. That the Fed is in control of interest rates, not the market, and that any country with a central bank to control its interest rate and create all the money it wants can never default on its debt.

    So tell me what happens tomorrow if tonight both Japan and China put in an order to sell all Treasuries? They will be purchased to be sure. However, they will not be purchased at the same price as the Treasuries were selling for today unless the Fed prints up magic dollars to buy them with and floods the world with a massive quantity of dollars as it takes in the Treasuries and attempts to hold the yield down and the prices up. Now the Fed is sitting on an additional 2T in Treasuries and there is 2T in new dollars chasing the same amount of goods that were out there today.

    Yeah, I see how that would all work out just fine.

    As for educating myself, I apologize that I only have a Masters in Finance where we are forced to deal in the real world stuff.

    1. aliena

      the money to buy these treasuries was already “printed”
      tsy = USD + interests
      when these treasuries are turned back again in USD, they become reserves in the US banking system and lower the fed fund rate.

      “in a fiat currency system the government does not need to finance spending in which case the issuing of debt by the monetary authority or the treasury has to serve other purposes.
      Accordingly, it serves an interest-maintenance function by providing investors with an interest-bearing asset that drains the excess reserves in the banking system that result from deficit spending.
      If these reserves were not drained (that is, if the government did not borrow) then the spending would still occur but the overnight interest rate would plunge (due to competition by banks to rid themselves of the non-profitable reserves) and this may not be consistent with the stated intention of the central bank to maintain a particular target interest rate.

      Importantly, the source of funds that investors use to buy the bonds is derived from the net government spending anyway (that is, spending above taxation).
      The private sector cannot buy bonds in the fiat currency unless the government has spent the same previously.
      This is a fundamental departure from the gold standard mechanisms where borrowing was necessary to fund government spending given the fixed money supply (fixed by gold stocks).
      Taxation and borrowing were intrinsically tied to the government’s management of its gold reserves.

      So in a fiat currency system, government borrowing doesn’t fund its spending. It merely stops interbank competition which allows the central bank to defend its target interest rate.”

      Gold standard and fixed exchange rates – myths that still prevail

      1. Costard

        You realize that, quantitatively and qualitatively, there is absolutely no difference between a government spending what it hasn’t taxed or borrowed, and a government printing money? That however much you avoid the word, what you are talking about is inflation? And I do so hope you realize that inflation is not some newfangled, post-gold standard idea, just waiting for intelligent minds to employ it for the benefit of mankind.

        1. Anonymous Jones

          The religious fervor Yves talks about is so strong. Look at what Costard just said, “That however much you avoid the word, what you are talking about is inflation.” Of course, this is *demonstrably* untrue. Easily refuted. MA talks about the latest big example of this — JAPAN!!! Yes, sometimes there is price inflation when the government borrows or prints. And sometimes there is *not*. What is so difficult to understand about this? There are hundreds of examples. Why must you insist on embarrassing yourself? This is a complicated, interconnected system we have. There are international preferences for saving that sop up the extra “cash” and there are national output gaps that sop up the extra “cash.” If your point is that sometime in the future there will be price inflation, let me just quote someone a lot wiser than I, “In the long run, we’re all dead.”

          Oy, and those comparing a Treasury bubble to the tech bubble or the real estate bubble. Sometimes analogies work and sometimes they break down. Are you sure you’re right? Are you sure a fiat currency controlled by a central bank will behave the same as a speculative fervor in tulips, homes or stock certificates? Are you sure printing a few extra trillion is the same as printing a few extra *hundred* trillion? I’m not…

    2. anonny

      “As for educating myself, I apologize that I only have a Masters in Finance where we are forced to deal in the real world stuff.”

      Oh, I see. You aren’t a real professional, like lawyer, who is required to stay current to keep his accreditation. You have a degree in finance, which is basically a trade school + employment agency. And last I checked, all that finance theory you learned in school blew up the global economy. So much for how well your “real world stuff” works in practice.

      So you clearly didn’t bother reading the link. You’d rather be a flatlander and insist that if we sail our ships far enough we will go off the edge of the world, we just didn’t go far enough to prove it yet.

      Aline did a nice job of pointing out you just put your foot in mouth and chewed as far as your understanding of monetary operations is concerned. And your “China and Japan dump all their Treasuries” is silly for another reason, they’d be selling dollars massively and send their currencies to the moon, something neither country is willing to do.

      1. CingRed

        anonny says “Oh, I see. You aren’t a real professional, like lawyer, who is required to stay current to keep his accreditation. You have a degree in finance, which is basically a trade school + employment agency.”

        Yes, that’s basically it. I’m right in there with all those holding degrees in economics. Please keep in mind that education and certification alone mean nothing. My apology for my education was just a satirical way of saying that and a slap to those who hide behind their PhDs and other degrees while their policies continue to destroy the economy.

  18. AmericaninChina

    “Someone please tell that to the buyers of our debt”.

    Dear financial oligarchy: thank you for now subsidizing our massive public debt that we’re using to pay-off the massive toxic private debt that you created. Hell, it’s the least you can do. Unfortunately, it seems that we really haven’t beaten the deflation bug, as foreclosures, personal and small business bankruptcies continue to run rampant – not to mention the big govt layoffs that are soon coming. Fortunately, our resiliant corporations have been able to boost profits by off-loading their deflation thru layoffs and salary cuts. We’re all excited here just waiting for our own verion of Japan’s lost decade..if we’re lucky.

  19. Edwardo

    “Someone please tell that to the buyers of our debt!

    -I would, except no one really knows exactly who they are. This ought to concern you.

    The reality is that the “national insolvency” doom mongers have been predicting the end of the world forever.

    -TEOTWAWKI? We’re there, but, strangely, like Wile E. Coyote, who after running off the cliff remained suspended over the great canyon for far longer than anyone outside of cartoon land could imagine, our “national insolvency” will become manifest beyond your ilk’s ability to (extend and) pretend otherwise.

    The Y2K bugs were predicting it then and the gold bugs were predicting Weimar-style hyperinflation by the end of 2009 and…well, we can go on and on.

    -I’m not aware of any gold bugs who penciled in 2009 as THE YEAR, but if it pleases you, by all means keep on with the straw man arguments.

  20. psychohistorian

    After reading the posting and all the comments it sure seems that there is a lot more heat than light on the understanding of international economics. I don’t profess to know anything and have old fashioned education and beliefs but have some real problems with the religion of MMT. As other comments have said, any sort of fiat monetary system requires faith. The theory is that if that faith is lost that the end is nigh. In my mind there is no question that internationally faith has been lost in the current monetary system but because of the structure of the monetary system and the US dollar’s position as the Reserve Currency the socio-political momentum to change the system is large/huge/significant.

    I would love to read a posting by someone who could lay out the “rules” governing the current international monetary system and a succinct but comprehensive description of the architecture and where statistics are available to watch the flows and balances. I believe that pressure is building within this system that will force change within the next few years. During the transition and the crisis that precipitates the structural change (assuming continued fiat currencies but balanced and integrated differently)I believe that commodities and “precious” metals will act as interim stores of “wealth” that will be converted back into the new monetary system as it stabalizes.

    I smoke nothing but the best…..pass the popcorn.

    1. MyLessThanPrimeBeef

      If the government can print all the money it needs, why does it require you and me to labor hard to come up with something, as tax payment, that emerges out of nothing for some entities, except to keep you and me busy spinning the wheel?

      Theoretically, with MMT, a modern government can exist without tax-paying people…after they have been long gone.

      Whom does it serve them?

      1. aet

        Productive machinery: automation has knocked a lot of people out of work, and now you call them lazy? Idle?
        they are not the ones who decided to replce themselves with machines.

    2. Doug Terpstra

      At last, a comment I can understand, even if it offers little comfort: “I don’t profess to know anything…but have some real problems with the religion of MMT…any sort of fiat monetary system requires faith…if that faith is lost that the end is nigh. In my mind there is no question that internationally faith has been lost in the current monetary system but because of the structure of the monetary system and the US dollar’s position as the Reserve Currency the socio-political momentum to change the system is large/huge/significant.”

      Marshall seems to be saying all is well, don’t worry, be happy; we can print all the fiat money we want; it will never lose value, the world will always accept it for whatever we need that we don’t make; and we can indefinitely fund mitlitary quagmires with magical printing presses. This sounds more like a stock broker; all we need is more debt leverage. I must admit I don’t understand a derivative, securitized word of it, but then I never understood Greenspan or Bernanke either. Is this more of the same?

      1. aliena

        “Marshall seems to be saying all is well, don’t worry, be happy; we can print all the fiat money we want”

        Marshall never said that.
        MMT absolutely never says to print all the fiat money we want.
        You are saying it.

    3. aet

      Things are only worth what others will pay for them,. that includes your little pile of metals.
      Will you accept other metal in exchange?
      or would corals, or cigarettes, or chocolate bars, or army scrip be sufficient?

      1. Bates

        China is pushing for a basket of currencies to act as a world reserve currency. We are a long way from reaching that sensible goal but I believe it is what will eventually prevail. No single soverign currency should be the world reserve currency.

        Andy Xie has an interesting article today on Bloomberg detailing what happens when Bernanke prints… “China Swallows Obama Stimulus Meant for U.S. Economy” This article highlights the very complicated mess the US Economy finds itself in.

        “Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama.

        Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

        Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

        Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.”

        Full article here…

  21. Bruce

    I am not seeing what the big deal is about MMT (“Chartalism”?). It is just a theory of how fiat currency is created, basically suggesting that “the government” prints it when they spend it. I assume that by “the government”, Chartalists are collapsing the Fed and the Treasury into one unit, in which case Chartalism is just saying why bother having a central bank, since all it does is act as an extra unnecessary step in creating money.

    I think Chartalism is saying that Treasury bonds somehow “sterilize” deficit spending, since all the deficit spending ultimately (once it goes through multiple ecpnomic transactions, and net of taxes on each) ends up owning
    treasuries, or FRNs, which are one in the same except for time preference in terms of when they can be used for private party economic exchanges ( ie we don’t buy groceries with treasuries).

    Then I think a Chartalist would say that when someone sells one of these Treasuries, they must receive FRNs, or some other Treasuries, with “they” being the one who is willing to hold the FRNs. Ie, the Chinese may sell all their Treasuries, but when they do, they will receive FRNs, so maybe they spend those to buy a mine in Africa or something. Now the African gvt has these FRNs, and they don’t love the US, so they exchange the FRNs with a Swiss bank for Swiss francs and deposit those francs with the Swiss bank. The Swiss bank in turn, now long dollars, swaps those dollars with a Swiss company for Swiss francs. The Swiss company uses the dollars to then go and buy a US fertilizer company. The us shareholders are mightily pleased, but after they pay their cap gains tax, having nothing better to do they park all their cash in tbills. And voilà, the sale by the Chinese of treasuries ends up as ownership of tbills.

    But notice a few things, and I think this is where people get all cross-eyed about chartalism. First, in a perfectly closed system with no fx to worry about, the more frrns that were chasing a particular good, the more one would expect the price of that good to rise. The flip side of this is that when you a lot of frns not chasing goods, prices fall. And this shift in demand for goods will have a corresponding effect on the “price”of holding longerdated treasuries, ie the interest rate. At some point, there will be a market perception that goods are cheap enough to chase and/or there are so many of them better trade them for hard assets that treasuries will be
    Liquidated and interest rates will spike. Second, when you do have fx to worry about because your frns are being used to buy oil, then you have to convince the seller of this oil to not sell their frns, because if they do each and every time, the value of the frns for the purchase of oil will soon become worthless.

    So this is all a very longwinded way to say that it doesn’t really matter how the us monetary system works. What matters is that those who partiicipate in the system stay confident that that the purchasing power of the unit of account isn’t going to spiral downward due to greshams law.

    This is the meta-issue:how do frns retain their purchasing power if more of them are created? For now, this additional creation is not tipping the scales to rapid spending. But it could, and At some point of course would have to. I just don’t know where that line gets crossed. Ie, if the gvt sent 10,000 tax rebate checks to every taxpayer, would we have inflation? Would it make 10y treasury holders a wee bit nervous? Might they sell, driving up interest rates? What about 100,000 tax rebate checks? What happens then?

    1. Doug Terpstra

      “…this is where people get all cross-eyed about chartalism.” I thought you meant ‘charlatanism’…oh…. never mind…

    2. aet

      No inflation until the cash supply outstrips production of demand goods.
      Simple, really.
      As a group, we’ve gotten very very good at producing all kinds of stuff.
      We need to keep enough cash moving around out there for people to buy it up, and for the producers to therefore want to produce more.
      To keep the production going: that’s why we print the money.
      Deflation is the real problem, because we’ve become, as a world, much better at producing things.

  22. EmilianoZ

    The Iranians stopped accepting dollars for oil. Maybe those guys are foxes in clerics’ robes.

  23. Steve S

    Marshall Auerback says:

    The reality is that the “national insolvency” doom mongers have been predicting the end of the world forever. The Y2K bugs were predicting it then and the gold bugs were predicting Weimar-style hyperinflation by the end of 2009 and…well, we can go on and on

    Auerback is right so far. Many doom mongers are wrong. But once in awhile, they are righ.

    In 1930, no one knew the depression was coming. In 1932, things looked not so good, but most belived, things would get better soon. Hindsight is wonderful.

    The debt crises is not over. Can the USA muddle along like Japan for 20 years? This is a great experment today. Flooding the market with cheap dollars, keeping bankrupt banks alive.

    This goes against everything I learned in economics. Those who created the problem are being rewarded. The taxpayer is screwed. So many good jobs lost, never to return.

    Who will pay for the eldery and retired, when social security runs out? Who will pay for medicare ? Who will finance the military, to defend America ?

    We are broke. The stock market stays above 10,000. Bonds trade above par, because the government is buying its own debt. The ponzi scheme could last for years and years. The laws of economics will prevail someday. Maybe a long time from now. I do not know the time frame.

    The Feds have a huge printing press, and have the worlds reserve currency. The ponzi scheme could go on and on for a very long time.

    People though the Tech Bubble would last forever. People thought real estate would go on forever. It didnt, it came crashing down. One bubble after another.

    The debt bubble will be the last bubble. It is the largest by far. Bonds lose money? 30 year bonds lose money ?

    Many are amazed at the fact, the 10 year bond yields are so low. If the government can keep yields low, the status quo will continue.

    Need more bond buyers ? Tank the stock market 2000 points. Shareholders will sell stocks and buy bonds.

    The future will be interesting. Glad to have blogs to keep things in perspective.

    1. aet

      “Who will pay for the elderly and retired, when social security runs out? Who will pay for medicare ? Who will finance the military, to defend America ? ‘

      Social security will not run out, you fearmonger.One of these things is way more costly than the other two, at about 750 Billion $$$/year, for now. Another result of fear-mongering.
      What rash and foolish action are you trying to scare people into, with these terrors you draw…so unconvincingly.

      But really, who do you think?
      We will, just as we have throughout the generations. We always have, because these are things that we need.

      1. aet

        And we can easily afford them.

        We have nothing to fear, but fear itself.
        A great and courageous sentiment, for which i am indebted to an American.

      2. Bates

        So if someone agrees with you what are they called?

        We already know if someone makes a comment you do not like they are a ‘fearmonger’…

        You could leave off with the name calling if you want to be taken seriously. Thanks…

  24. Bill

    Bonds schmonds – If this Fed nutshell game is working according to you economic dismalists, WHY are we heading into a double dip again? They can print pink unicorn arse candies as far as I am concerned . The point is MOOT . Doing this that they are IS NOT HELPING the economy down here where J6P lives . Low interest is for business and corporations , and they are not borrowing . Big moot point . USA is contracting – Period . Can you say hyperinflation ? How many dollars can one spend ( borrow ) until they are bankrupt and the collection / repo agencies show up . Big question – whom will repo the USA – one nation , unlikely – collective nations possibly

    1. aliena

      “Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment.
      It is based on the erroneous belief that the banks need reserves before they can lend and that quantititative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates.”

      “So I don’t think quantitative easing is a sensible anti-recession strategy. The fact that governments are using it now just reflects the neo-liberal bias towards monetary policy over fiscal policy.
      What will motivate consumers to borrow if they are scared of losing their jobs? Why would a company borrow if they expect their sales to be depressed? The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy. Overall, you can only take a horse to water ….!

      There are also those that claim that quantitative easing will expose the economy to uncontrollable inflation. This is just harking back to the old and flawed Monetarist doctrine based on the so-called Quantity Theory of Money.

      This theory has no application in a modern monetary economy and proponents of it have to explain why economies with huge excess capacity to produce (idle capital and high proportions of unused labour) cannot expand production when the orders for goods and services increase. Should quantitative easing actually stimulate spending then the depressed economies will likely respond by increasing output not prices.”

      Quantitative easing 101

  25. LQ

    So, the US consumer is retrenching (deleveraging). It then follows that USD flows into China should wane as well.

    Thinking of the big picture flows of the past decade or so, what really happened is that US banks created loads of deposits via home and consumer lending. These deposits flowed ultimately to Chinese exporters. From there, those dollar claims flowed to the PBoC in exchange for newly-created Renminbi reserves. Finally, those dollars flowed to Treasury and the GSEs via China’s purchase of notes/bonds. GSE funding was simply recycled. UST funding clearly was all spent as Treasury ran an operating deficit each year of the past decade. So, those dollars made it back to US banks via new deposits which could subsequently be relevered and lent.

    This is just a minor permutation of the typical fractional reserve credit creation game. Now, if China is slowly falling out of the loop, either they need to be replaced or simply jumped over. Not sure who is replacing or who will replace if at all. If they are simply jumped over, Treasury then borrows from domestic sources directly or indirectly. Treasury borrowing from the banks who are leveraging their pool of unencumbered reserves seems to be the likely response?

    Marshall, two things:

    1) Is my admittedly simplistic flow of funds sequencing above accurate? If not, how so? If so, then:
    2) You seem to advocate for replacing private sector debt with public sector debt to restore financial balance. This is where I continue to scratch my head. Why isn’t the replacement of private sector debt with Federal Reserve Notes (monetary base) the solution?

    I think we all agree that the financial instability of the global economy today is a direct function of too much leverage (aka the ratio of total debt to reserves is out of kilter). If you don’t agree with that, I guess my comments are meaningless to you. However, if you do agree, how can you rationalize the perpetuation of too much systemic leverage via the substitution of public debt for private? And, I can’t for the life of me understand how you can advocate such a prescription which ultimately serves to perpetuate the profitability of the rentiers? Unreserved credit is the lifeblood of the parasites, don’t you agree? Further, it is the foundation for myriad sequential asset bubbles (which ultimately rob from the poor and middle class to line the pockets of the wealthy and their enablers). This is the underlying bastardization of a pure capitalist system. I think we can all connect the dots here.

    Lower and lower sovereign rates seem to me to flow from more and more leverage. We know that real rates are negative out the curve and therefore USTs are guaranteed losers for unlevered savers in real terms. Not so for carry traders. With a wink and a nod, Bernanke has given the green light to our banking system to provided unreserved funding to Treasury. Why are we allowing the banks to profit in this manner? There are clear alternatives to deleveraging the system without providing a windfall to the rentiers. Why is deleveraging seemingly so taboo? I find the lack of discussion among professional analysts/advisors in this regard very disconcerting.

    Unreserved leverage leads to asset inflation which, given aggregate demand and discretionary income of the masses, leads to a distortion in the relative pricing of the factors of production in my view. My corny analogy of the Main Street shopkeeper closing down because he can either afford his inflated lease payment or his payroll doesn’t seem too far-fetched these days. Asset inflation concentrates wealth while wage inflation distributes it. The balance today seems wayward to me. Less systemic leverage system wide means a contraction in the ratio of asset values to wages. This will put folks back to work (at institutions other than banks).

    We need more money, not more debt. It’s time for the Fed to monetize Treasury’s gold stock. This will simultaneously deleverage the banking system and reduce the public debt. A bone shall be thrown to all (excepting you unlevered bondholders and currency hoarders of course – foolish vestiges of the gold standard systematism to which Marshall alludes above).

  26. nmtdoc

    Nothing seems to stir passions quite like money, religion, and politics. All are on full display in today’s posts. Any of you who really care to educate yourselves about how our monetary system operates should spend several months reading professor Bill Mitchell’s blog No one does a more thorough job of discrediting the religion of neo-liberal economics.

  27. pebird

    China isn’t buying Treasuries because they do not have any excess dollars to buy them with. Our economy is slowing down because of the lack of spending (private and/or public) – did you hear retail did not hit expectations in July? So we aren’t buying as much Chinese stuff and so they have less USD to buy Treasuries. Oh, and they are letting their exchange rate against the US rise – that means not buying up all the USD at a fixed rate – so the Chinese government has less USD to buy Treasuries. More USD circulating in China relative to what the government normally sucks up = a weaker USD in relation to the RMB – so their exchange rate rises. Senators can now go to sleep soundly.

    This is not rocket science, and it is not the end of world, either. Get yourself educated on MMT – it is an accurate description of how the monetary system works – the system can be used for good or evil, depending on who is running the show. Or you can continue to believe that the guvmint is going to bankrupt all of us. When I was a kid, I had a neighbor in 1970 who was 85 years old and told me how the guvmint had been destroying the world for the last 50 years. No doubt he was right. Some of you will be around in 50 years slinging the same old crap.

    1. leroguetradeur

      pebird, one understands that if China stops buying, this in itself will not be a disaster. One also understands that if the US stops buying goods from China, there will be no dollars to recycle.

      But is your argument that everyone can stop buying US bonds and the US can continue to run deficits? I am having trouble grasping what the scenario is that you are saying is perfectly possible.

  28. leroguetradeur

    It would help me a lot in trying to understand MMT if Marshall would simply tell us, in regards to the case of Greece, what exactly they should do, were they not in the Euro.

    The Spiegel article suggests that Greece is indeed in a deflationary debt spiral. It seems that the economy is tanking, whether in response to the government spending cuts and the tax rises, or coincidentally. The result is that tax revenues are falling, and so debt servicing costs are rising as a percentage of GDP and of tax receipts.

    The combination of tax rises and economic slowdown means that disposable income falls, which in turn depresses employment.

    One sees that, and it is not pretty, and it seems likely to get worse. However, if I understand MMT correctly, if Greece were still on the drachma, or were to go back to it, there would then be something, what exactly I don’t grasp, that it could do differently.

    Could Marshall please explain in simple terms what exactly that would be? It apparently is not to default on the debt service. It seems to be that in some way I do not understand, the government increases its deficit spending. Is that right? If so, how? Does the new drachma, as it does this, float? If so, does it retain its value? Does the currency remain convertible?

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