Greenspan’s Switch to Debt Scaremongering

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Stephanie Kelton provides two video clips to underscore the point that until quite recently, Greenspan made the point that MMT types do: that the US as a currency issuer, can always pay its debts (it might incur too much inflation, but with the economy having as much slack as it does, that’s far from a pressing worry).

What I found striking was the clip of Paul Ryan pressing the man formerly known as Maestro when he was still the Fed chairman to agree that private retirement accounts would be more stable than a government sponsored program. That’s such a Big Lie I’m amazed anyone can peddle it with a straight face.

And Greenspan reiterated his position that the US can always meet its obligations late last year:

After 20 years of demonizing government debt and pushing for government in miniature, billionaire Pete Peterson and his allies have managed to get the public fixated on their message rather than their motives, and the Ryan con job serves as a useful reminder.

One long-standing effort has been to “privatize” Social Security, so that Wall Street could charge fees for managing the money. Note that some countries, like Australia, mandate that a big chunk of wage payments be invested in superannuation accounts (I’m not current on the law, but when I lived in Australia, it was 9% of pay, and I believe it has risen since then. The ATO’s pages on this are too layered to get a quick answer). And even if they don’t get a mandated contributions regime, merely reducing Social Security payments will force people to save and invest more, and will similarly enrich the brokerage and investment management industries.

But the other rationale is more basic: the rich want taxes lower, period. They want to roll the clock back to the 1890s. If you visit the “cottages” that the wealthy built in Newport, Rhode Island, it isn’t just the scale that is striking. It’s the amount of ornamentation. It took God-only-knows-how-many hours of work by skilled craftsmen to produce the woodwork, the masonry, the gilding. And you can afford that kind of ostentation only if there is a gargantuan chasm between the pay levels of the super wealthy and everyone else. This is our future unless ordinary people wake up and oppose it. Not surprisingly, Greenspan, who was never on the side of little people, has officially cast his lot in with it.

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  1. Mary Bess

    The Third Way is out there with a vengeance. A local forum on “where the economy is going” featured presenters, who have been employed in the financial services industry for decades, flogging–what else?– debt reduction and reduced “entitlements.” They seemed as clueless about how the economy works as Todd Akin is about how rape affects conception.

  2. Can't Help It

    Yesterday or maybe 2 days ago, a director of BlackRock made a huge purchase of the company’s stock amounting to 90 something million dollars. Adding one and one together makes me think that privatizing Social Security is a done deal.

    1. The Rage

      They “Privatize” social security, this country will blow up and bodies will hit the floor in all directions.

      First Wall Street imposes the Gold Standard on Main Street while they get free money, now they leech into national retirement savings? Asking for trouble.

    2. nonclassical

      Blackrock has already taken over Washingtion State’s retirees investment fund..
      last year, to be precise..

  3. David Lentini

    Wasn’t Greenspan the guy who said that the Clinton surplus was dangerous too? Why does anyone take him or his fellow hacks seriously? Does anyone in the press have a memory (or brain)?

    1. jake chase

      One cannot avoid the feeling that financial journalists worry about nothing but keeping their own jobs by pleasing the bosses who employ them. Press toadying has reached an all time high.

      Newspapers can be useful so long as you don’t read them. Television provides excellent sports coverage. For everything else, particularly information, you need sharp eyes and a nose for bullshit. I wonder if it has ever been any different?

      1. craazyman

        Journalism is the art of explaining to others what one doesn’t understand oneself.

        I am unable to understand how a man of honour could take a newspaper in his hands without a shudder of disgust.

        Journalism largely consists in saying ‘Lord Jones Dead’ to people who never knew Lord Jones was alive.

        Literature is the art of writing something that will be read twice; journalism what will be grasped at once.

        Facing the press is more difficult than bathing a leper.

        To a newspaperman, a human being is an item with the skin wrapped around it.
        FRED ALLEN

        I believe in equality for everyone, except reporters and photographers.

        Being a newspaper columnist is like being married to a nymphomaniac. It’s great for the first two weeks.

        I usually get my stuff from people who promised somebody else that they would keep it a secret.

        Lies in newspapers are like rat droppings in clear soup. Not only disgusting but obvious.

        If Moses had been paid newspaper rates for the Ten Commandments, he might have written the Two Thousand Commandments.

      2. nonclassical

        e-mailing even the most meaningless of newspaper media “economics” Sunday flacks (McClatchey) brings ridiculous levels of denial, when something so simple as “MERS” is raised as an issue-this after Washington State Supreme Court itself determined “MERS” illegal basis for foreclosure..

        witnessed same, Vietnam era…paralleled by end of bushit administration escape from responsibility=”surge”=Guantanamo prisoner hidden releases of nearly all…supposedly “the worst of the worst”…

        bushitters literally snuck out of town…

    2. Aquifer

      Well, actually, if understand MMT properly – the surplus WAS a bad idea – let’s see if i have this correct; gov’t (public) surplus means more taxes than spending which means more money is taken out of the private sector than put into it, which means that to make up the difference the private sector has to spend more which means going into debt. So the sector, public (gov’t) v private, that spends more than it takes in winds up in debt. The private sector can do this just so long before it collapses, but the gov’t (public) can do it indefinitely ’cause it is the issuer of the currency …

      So, if you want the private sector to be able to spend more – you need gov’t to either reduce taxes and/or spend more so that end result is gov’t. spends more than it takes in, i.e. deficit, this produces surplus in private sector (have to figure in trade deficit too ,,) which is supposedly what drives the economy ..

      Bottom line, SOMEBODY has to be in deficit for dynamic to continue and it is better for public sector than for private one to be there …

      Now i am sure i don’t have this all down properly – I am practicing trying to explain it in terms i understand – but I think this is the gist of it – Please somebody correct me if i am wrong ….

      1. Hypothetical_Taxpayer

        There is really nothing to understand. Better that way actually. The USG can print all the money it wants so it can give it to the military, defense contractors, corporate welfare, AND social programs and not have to fully tax for the cost of government. We just need to understand that there will never be a problem with this, and we all live happily ever after.

        Now the other interesting variant is the Soddy School-“Chicago Plan” approach talked about here sometimes. Soddy was an engineer-chemist apparently and he discovered the economy is really a Steam Engine. Seems Steve Keen is moving in this direction too with his Unified Thermo-Banking Econometric Model.

        This idea is gaining traction because economists left banking, credit and debt out of their models and everyone knows steam engines need water to run and the water-to-steam-to-water-again-phase change means we might know the math to handle the part about how banks are always changing credit into money into debt and back again.

        Steve is of course a pretty sharp guy and he knows that if you told an engineer to design a 4 cycle steam engine that the lazy engineer would use a crankshaft to synchronize the cylinders, thereby balancing the engine and making it run smoothly. But economists can’t use any expedient like that to maintain “sectorial balances”, so the math gets much more complicated, and that’s why economists have to do it.

        So that’s all you need to know and people do these things for us so we don’t have to.

        1. Aquifer

          Shucks- i guess i thought Keen was actually making an attempt to include the economics of the real, physical (as opposed to artificial, theoretical) world, but i get the impression from your post that his use of the laws of thermodynamics are for analogy purposes only, and have nothing to do with “reality” as physical beings know it, but only as a way to illustrate his new banking model ….

          Shucks, if that is the case, then i am considerably less impressed – think i’ll stick to Daly ….

          1. Hypothetical_Taxpayer

            I’m sure I was over-simplifying Steve’s new project. I only saw the short video presentation he gave that was posted here a few days ago.

            I think he really is trying to kill both birds with one model – better math model that includes banking and also tied into the physical world somehow, because he did mention something about tying into some sort in physical inventory databases, if I caught that one little sentence correctly.

            But IMHO, it’s time to go outside and see how big the world really is….and we already have a Sim City game program. And why try and model a broken, corrupt, unnecessarily complicated banking system (with $600 trillion in derivatives out there so far). Engineers put constraints on things first, then model something that works(hopefully).

          2. Aquifer

            Ht – methinks MN has already established the constraints. so wouldn’t it be best to learn what they are and then incorporate them in to our “models”? (I know engineering is historically a male profession – wonder if that is why MN’s constraints have so long been ignored :))

          3. Hypothetical_Taxpayer

            I’m not familiar with you abbr. “MN”. Need explanation?

            But there is no need for a Unified detailed math model of how the world works, even if it were possible to do.

            Like, if you know it would be good to require gas mileage to go up 30%, and after some diligent fact finding you determine it is possible, then “make it so” as Captain Picard always likes to say. Likewise – fix the banks. We know how – whittle them down to utility banks.

          4. Aquifer

            Ah, HT, maybe that is the problem – perhaps it is time to stop fearing her and learning to embrace her …

        2. Hypothetical_Taxpayer

          OMG, just reread my post and noticed an egregious typo. I said “4 cycle steam engine” when I meant “4 cylinder steam engine”. We need a cylinder to sector analogy obviously.

          Also, I lumped together Soddy and “Chicago Plan”, so I get the feeling I should clarify that Soddy likes steam engines, but the Chicago Plan doesn’t have anything to do with modeling, per se, but more to do with where do we get the water now, since we seem to have run out.

        3. Don Levit

          Hypothetical Taxpayer:
          Your belief that the federal government can print all the money it wants, there will never be a problem, and we will all live happily ever after sounds like a fairy tale to me.
          I was raised to believe that the full faith and credit of the US government depended on its ability to tax. And, this ability to tax must bear some minimum relationship to expenditures for the full faith and credit to have real “teeth” behind its backing.
          How does that belief not make sense to you? It seems to conflict with your belief.
          Don Levit

          1. Aquifer

            Hmmm – OK, for the sake of argument, the full faith and credit of the Gov’t. may depend on it’s ABILITY to tax (subject for another time) but that is not the same thing as its NECESSITY to tax – or are you using the terms interchangeably? …

          2. TK21

            “I was raised to believe that the full faith and credit of the US government depended on its ability to tax.”

            Taxation is very important. Since the government only accepts taxes in dollars that gives Americans a big incentive to have dollars. That’s one meaning of “full faith and credit”: the US government has to accept its own currency.

        4. nonclassical


 run a steam engine burn rate properly (like Wall $treet) you need the correct

        5. readerOfTeaLeaves

          Engines are mechanical.
          The economy is not.

          It is closer to a complex, biological organism; always adapting. New things emerge; others die away. It morphs.
          The notion that it is a mechanical contraption or engine causes no end of mischief.

      2. TK421

        Adding, during the late Clinton years, when the government had a big surplus and the economy was growing, he tried to cut Social Security. So of course now those who say we have to cut that program because of government deficit (many of them the same people as then) have no credence. Or should have none, anyway.

        1. Aquifer

          Surplus – based on the tax revenues from the the fake dot com boom and the gutting of welfare in the name of “reform” – so gutting SS would have produced even bigger “surpluses”! Yeah, wasn’t he just wonderful! He liked “feeling our pain” so much he decided to increase it so he could “feel” even more!

          1. TK421

            Yeah, the surplus we did end up with worked out so well, didn’t it? The economy and job market have been so wonderful since then. And the surplus money went to such good uses, too!

      3. Ol' Bill

        At the risk of drawing eye-rolling from all the smarties, I have a simple, dumb question about this model, which I otherwise understand. You say, “…which means that to make up the difference the private sector has to spend more which means going into debt.” Why do they “have” to spend more? (simple words, please) Is there some sort of equilibrium created by all the private and public money flowing, that must, or should, be maintained?

        1. Hypothetical_Taxpayer

          Yup. GDP must never go below 2% real growth. (measured in dollars)

          Betcha ya didn’t think the answer was that simple, huh?

        2. TK421

          That isn’t a dumb question at all. Think of it this way: there are two and only two holders of money, the government and the private sector. And, there is a finite amount of dollars in existence. So there is equilibrium in that if one of the two builds up a big amount of excess money, that means the other one will have an equivalent amount of ” missing” money, or debt. One side’s surplus is the other side’s debt, kind of like a tug of war.

          So in the 90s the government side cut spending and built up a surplus, leaving the private side to have to step up their spending to make up, and hence go into debt.

          It sound too simplistic, but when you match private surplus to government debt or the other way around over the past 20- odd years, it’s a near-perfect relationship.

          1. Aquifer

            Hmm – OK now you have me confused – i thought the argument was there was not, in theory, a “finite” amount of dollars – that the gov’t could print as much as it wanted. But however much it put out, it was going to have to be “recycled” in some way – if it brought too much back via taxes > spending the difference was coming OUT of the private sector, if spending > taxes, it stayed and circulated IN the private sector as payments to real folks. The amount could, in theory, be ANY, including infinite, amount – the decision as to how much to leave in circulation would depend on how much was for sale, such that if there were too many buyers and not enough supply – putting too much out here would produce inflation. The problem these days is that there is too much “supply”, in the sense of productive capacity and not enough demand, which is why we have to put more dollars in folks hands – to increase demand – which, theoretically would induce business to make more product and themselves make more jobs …

            But my simple brain is asking, in the absence of demand – why do we not see deflation – why are prices rising? If this is because of manipulated markets then we must make this VERY clear, because most folks, methinks, think that we, in fact, are paying higher prices because of all that money the Fed is throwing around – which makes it a hell of a lot harder, ISTM, to make a favorable case for MMT ,,,

            Now i realize that i am exposing my ignorance here – but hey, methinks it is in a good cause, because i think that my thinking, muddled as it is, is reflective of a good many folks out there – who, let’s face it don’t read NC but who DO vote for the folks that make the economic policies that run the show …

          2. TK21

            “i thought the argument was there was not, in theory, a “finite” amount of dollars”

            You’re exactly right again, the government can create more money if it wants. But if they don’t, then what I described in my little comment (which was a gross oversimplification) will take place: a monetary tug-of-war where gains by one mean losses by the other.

          3. joebhed

            @ TK421

            Isn’t that struggle just exactly what happens in any economic bust – where too little money is available relative to what is needed to pay down all the debts?
            While it seems a logical settling out from too much money, some people gain or lose their bets, and some gain or lose their wealth, however precious little of it they may have.
            As in: Wealth, Virtual Wealth and Debt.

          4. nonclassical

            yes…and in 2000, privately held $$$$ “circulation” by Wall $treet=”financial sector” amounted to around 19%…but by 2007, 41%…guess what that means for the REST of private sector economics..(as Michael Hudson notes, “paper debt”)..

            but that’s where public bailouts meet private sector “MBS” being bought back,
            QE3, at taxpayer expense…how does that interaction amortize within the model…?

      4. Don Levit

        On one level, this formula does make sense.
        If so, say, the federal government ran a $1.4 trillion deficit last year.
        How was the surplus divided up among the private sector?
        I think it is naive to make the case that government surpluses are bad, for they produce deficits in the private sector.
        I think back to Biblical times when Joseph interpreted the dream of Pharoah, in which 7 fatted calves and 7 lean calves appeared. This revealed to Joseph that Egypt would experience 7 years of feast, followed by 7 years of famine. Joseph encouraged Pharoah to store surpluses for 7 years to deal with the upcoming lean years.
        Does that story make no sense in today’s economy? Should we not store up surpluses in good times to deal with deficits in lean times?
        Does the enticement of debt make our decisions a no-brainer?
        Don Levit

        1. TK421

          I see what you mean but it’s not a perfect comparison between crops and money. For one thing, a country can always create more money out of thin air, at will, whereas it can’t will more food into being. in an emergency (the Civil War, the crash of 2008) the US has easily created more money for needed spending. Also, if a country plants a little more, works a little harder, eats a little less to build a surplus of food that doesn’t take food away from another sector of the country. If, on the other hand, a government builds a surplus of money, then that money is not out there for the rest of the country to use for its benefit.

          1. nonclassical

            to the chagrin of Archer’s-Daniels-Midlands, Monsanto..who wish to monopolize seed crop on an entirely different basis..

        2. Aquifer

          I think this is a great discussion! Because Don, I think you and some others here, including, hopefully, myself, are asking questions that make “common sense” to non financial folk, to which honest replies, using the analogies that make sense within our own experience, such as you make, will go far in helping us to sort this out and not be easy prey for the “deficit monster” types which thus far have been permitted to rule the roost ….

          I say this because – in my experience in medicine, in order to deal with a disease you have to remember that this “disease” is actually occurring inside a patient (golly, whoda thunk ..) so it is not only “useful” but actually necessary to have the patient be part of the process (another epiphany …) To do that one has to try to explain what the problem is to the point where the patient understands it. Lots of technical jargon sounds good – and the person may actually nod when you say “do you understand?” or says “no” if you say “do you have any questions?” – but that is often because the person is so totally flummoxed that they don’t even know what questions to ask and/or don’t want to sound really dumb, the end result being they just go along. A simple way to discover if they understand is to ask them to then tell you, in their own words, what the problem is and what his/her options are …. and then go from there …

          So I don’t mind looking dumb – shucks it won’t be the first time, nor the last, because 1) though i might not be the brightest bulb in the room, I know i ain’t a total blank and 2) if i can give voice to questions others might have, and get good answers, then it is, IME, worth it … Because this disease we call an economy needs some pretty good treatment lickety split and we are the persons suffering from it …

          My questions may seem pretty dumb, but believe it or not, within the context of my above observations re patients, represent considerable progress – I am at the point where i THINK I know at least some of the questions i need to ask to help me fill in the blanks to make sense of this stuff ….

          Make no mistake – this discussion re “economics” is every bit as much a battle for “hearts and minds” as any other – how we make out will depend on who wins the “battle” ….

          So, Tk421 – thanx for engaging – this stuff about surplus and deficit at first blush does sound like the the fat and lean argument – it is, after all, “common sense” – which is why it has to be shown that, like the “household budget” analogy, it is not really “on point” here – as you say, we oft have no control over the lean years, MN does, so we do need to lay some by in the “fat” ones, but we DO have control over our money supply …

          1. TK21

            I’m glad to take part. Economics isn’t something I’m trained in, so helping people understand it helps me solidify my hold. Heck, just a few months ago I was one of those asking questions like this, so naturally i don’t think they are dumb questions ;)

      5. zygmuntFRAUDbernier

        All the government debt produces income for
        some people. Even after a net surplus over
        two 4-years terms, that won’t reduce the
        Public debt to zero.

        If the times are good, I think it would make sense tackle the public debt a bit at a time. In bad times, Keynesian stimulus is the way to go, I think.

        Also, Debt Jubilees can be good overall. But it’s a tough sell to those who make money on interest on the debt, Secondly, the “markets” might go berzerk like it’s Armageddon Day or Alien Invasion.

        1. TK21

          Exactly. One person’s debt is another person’s asset. The flip side of me owing you $1 is that you have a legal claim to $1.

          Rather than think in terms of “lean years” and “fat years”, I believe we should think about problems that need to be addressed. If people need help, let’s help them the best way we can, whether the economy is strong or stagnant. Let’s not talk about saving for the hard times if, for many people, times are already hard.

          1. TK421

            Whoops, I had to switch computers for a bit and failed to enter in my full user name. Feel free to laugh at my foolishness. Sorry for the confusion.

          2. zygmuntFRAUDbernier

            So, I was thinking about annual interest payments on a public debt of $15 trillion. One percent of that is $0.15 trillion or $150 billion. At a hypothetical average rate of 2% interest a year, interest on the public debt is then $300 billion a year. If the public debt were 10 times greater, interest payments would be $3000 billion a year or $3 trillion a year. For example, Greece is in deep trouble because they have a lot of debt compared to GDP and the interest on their debt is much higher than 2% a year. The debt pile isn’t going down fast.

            I don’t really believe in Bush tax cuts acting as a job creator. I want proofs!

        2. nonclassical

          “In bad times Keynesian is way to go”…

          not really-I favor William K Black-ACCOUNTABILITY for economic destruction..
          how can anyone believe, IF “too big to fail” WERE in fact, without accountability
          (criminogenic accounting control fraud) they will (fewer, bigger than ever) behave any differently than that way which caused Wall $treet economic disaster…

          I am continually surprised people can’t follow the $$$$….to where it sits-how much. Robert Johnson did=2007, “derivatives” held by banks (now transferred to FDIC taxpayer bailout auspices) amounted to over $600 trillion…up from under $2 trillion, 2000. Here’s Robert Johnson’s testimony to Congress-cut off after fewer than 5 minutes:

          If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it. On that day, the House Financial Services Committee hosted a panel on reform of the market for derivatives, the financial instrument which played such a notable role in the country’s economic meltdown.

          Everyone rational knows that there is an enormous need to seriously reform the derivatives market, but the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions. They included Jon Hixson of Cargill, James Hill of Morgan Stanley (on behalf of the Securities Industry and Financial Markets Association), Stuart Kaswell of the Managed Funds Association (which, through one of its lobbyists, has delivered significant “bundled” donations to Frank) and Christopher Ferreri of the Wholesale Markets Brokers Association.

          In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation – the night before the hearing was held — to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson — a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee — apparently constituted sufficient balance.

          Predictably, witnesses at the hearing trotted out positions urging caution in regard to the matter of reform. Derivatives and other exotic financial devices have reaped the finance industry vast profits, but for Hixson of Cargill the common man and woman would be the real losers if Congress were to act too severely. “We offer customized hedges to help bakeries manage price volatility of their flour so that their retail prices for baked goods can be as stable as possible for consumers and grocery stores,” he told the committee’s wagging heads. “We offer customized hedges to help a restaurant chain maintain stable prices on their chicken so that the company can offer consistent prices and value for their retail customers when selling chicken sandwiches.”

          Johnson, who came last, offered the only serious critical viewpoint, saying that the American public had been “quite demoralized by…the bailouts that we experienced last fall.” After about five minutes of his testimony, Congresswoman Melissa Bean – another industry-funded committee member who chaired the hearing because Frank was absent – had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.

          Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.

          “I do need a final comment,” Bean interjected seconds later.

          That put an end to Johnson’s testimony. “I was just called to this hearing last night, so I will provide detailed comments on your bill and a statement for the record that will finish my comments,” he concluded.

          Here is Johnson’s entire testimony on “derivatives” impact upon financial sector-economy:

  4. John McElroy

    Dear Yves & Staff,

    I would like to contribute to Naked Capitalism, but would prefer to do this offline. Would it be possible to contact me at my email (to get my address) and send me a remittance slip? I really value the work being done here as it has transformed my worldview and changed my professional trajectory.

    Thank you again,

    John McElroy, Ph.d, CFLE
    Assistant Professor
    Western Michigan University
    Family Consumer Sciences

  5. charles sereno

    “Not surprisingly, Greenspan, who was never on the side of little people, has officially cast his lot in with it.” (Yves)
    I hope we get a clarifying comment from Yves before the comments get chaotic. A majority of NC readers know who the “good” people are. The cognitive dissonance here is first showing (bad) Greenspan, sometime back, being led by Ryan to agree with things he’d rather not say himself but likes, then (good) Greenspan more recently grudgingly endorsing an MMT view on debt to save his intellectual reputation. As an optimist, I trust he’s sincere, no matter the damage he’s been responsible for. This is a rough picture of the historical record. This post (uncharacteristically) is confusing in terms of the sequencing of the videos and the position NC takes on Greenspan.

    1. diptherio

      “confusing in terms of…the position NC takes on Greenspan.”–charles sereno

      Why should NC take a position on Greenspan, the person? Isn’t the question whether or not the US is, or can go, broke? To the extent that he admits that the US cannot go broke, he is “good,” if you insist on the label, and to the extent that he contributes to deficit scare-mongering and did the banker’s bidding during his chairmanship, he is “bad.” Good enough?

    2. Aquifer


      methinks both clips, if you listen to them, have Greenspan actually debunking Ryan’s contention that private acct.s are safer, and the second clip that is quite clear. I think Yves “it” that Greenspan now is clearly endorsing is the “deficit’s bad, gotta fix entitlements one” that is obviously contrary to those clips ….

      What would be interesting, ISTM, is cornering Greenspan and asking him to reconcile the 2 seemingly opposite positions ..

      I can’t help wondering if AG actually knows that this “deficit” stuff is bunk – i.e. does indeed understand the intellectual bankruptcy of the approach, but also knows/understands quite well the political expediency of it …

  6. diptherio

    One interesting thing, to me, about our current situation, is that the Congress/President and the Federal Reserve appear to have reversed their traditional places. My understanding of economic history in the US leads me to believe that before Clinton, it was almost always the Administration and the Congress trying to ease up economic conditions and prime new growth, while the Fed typically refused to accommodate and kept interest rates higher than the government would like. Since Clinton though, it seems like it is the Congress and the Administration that are trying, through fiscal policies, to restrain economic and employment growth, while the Fed tries desperately to goose the economy into action.

    Maybe it’s just me, but this clip seemed rather strange ( ), seeing Ben Bernanke apparently begging for fiscal accommodation of his loose monetary policy, rather than doing the typical Fed Banker thing and playing the “stern adult,” warning Congress about spiking the punchbowl and sounding ominous about inflation.

    This is not to say BB is a wonderful chairman, by any means, any more than Greenspan was. I was rather appalled to see this chart from Ben: [skip to 1:30 for said chart], which shows that all QE and the bailouts have accomplished is to greatly increase the size of banks’ reserve accounts. Whoopee!!

    1. zygmuntFRAUDbernier

      With quantitative easing, I guess treasury has more money (more chips) to play with. It all depends on what use is made by these new chips by the Federal government. They could reduce taxes for those earning less than $40,000 to zero. But unlikely.

  7. The Dork of Cork.

    When a state produces a high ratio of greenbacks relative to private money (and keeps greenback taxes high) there is no reason why the free banks of the 1890s can be very small modern affairs.
    It obvious now the private banks should be kept as far away from the halls of sov goverment as is possible.

    Which means no CBs.

  8. Brooklin Bridge

    Democrats and Republicans are definitely in collusion over this. It is just too theatrical, too many choreographed postures and poses by both parties, too much consistency by virtually all the the tribal media outlets, all meshing perfectly to obscure the enormity of what’s going on. The betrayal is bottomless. The scum in Washington have no more empathy for the harm they are doing to senior citizens that have worked all their lives for this than they, the scum, would have stepping on a bug. Just look at how Pelosi is drooling to go along with Obama’s cat-fud fantasies betrayal as long as she gets some token tax hikes on the rich in return. In return? Dismantling the safety net in return for what, tightening a few loop-holes that can be re-opened by a few dozen lawyers and twice that many lobbyists throwing money to the right people in the House and Senate?

  9. Brooklin Bridge

    Note also, and it is no conincidence, the amazing proliferation of sophisticated crowd control and other enforcement, ahem, tools that are being invented left and right on the back of our technological revolution. Every one knows that we will have drones of all sizes – from huge down to the size of a humming-birds – flying everywhere by 2020 thanks to miniaturization of computer chips. The small gadgets, though, are the most insidious because they will be the most ubiquitous. The most recent one I’ve heard about is a small device (about the size of a flashlight) being made for cops and military that can emit a blast of heat that will melt a half inch of steel in less than a second. The sum total of these things is starting to really add up. For the first time in years, I picked up a copy of, “Popular Mechanics” the other day, (that magazine has become – or always was – a veritable house of worship of authoritarianism via gadgets), and was aghast at all the insidious cop loving little trinkets it was extolling.

    And…, we are not going to protest such things, nor the motivation behind them, any more than we protest judicial process free assassinations, or the destruction of our planet by wanton uncontrolled exploitation of fossil fuels, or any of the other myriad “game changing” horrors going on around us, such as Israel going in and slaughtering huge swaths of people simply for practice exercises, but there is going to quickly come a point at which we will have little ability to do so anyway.

  10. Ep3

    Good post yves. Recall in the bible about vanity. Heck, the bible created one of its ten rules on this.
    ‘thou shalt not covet’. Ppl think it’s some sort of adultery of the mind or about keeping up with the jones. Which it partly is. But it’s also about the other person. The person who creates that envy. The person who lives in gated communities then makes others jealous of him. He basks in that glory of being more important than another person.
    And in America, our culture is all about that. We are narcissists and egotists. Even the head fry cook thinks he’s better than the burger flipper. And that is used as a prime motivator for productivity in our society. Ppl think that with the right amount of sucking up and a mask of supposed hard work (with the high unemployment, ppl think that they are valued by their employer for a job well done, when their performance is only marginally better than the next guy), they will be just like the jeffersons. The hard work only lasts as long as the human body can sustain itself on less sleep and a poor diet mixed with increased stress. And the sucking up, that is just bad for the mind. That’s when the drugs come in. Ppl begin to look at their lives and find that it’s all been based upon a fantasy. They aren’t really friends with Alan. And what has Alan done for them? Sure, he got you a membership to some social club. But you owe him for that favor. You didn’t earn it on your own. And is Alan part of the club? Well, he shows up from time to time. But he’s in another social group. The real group. The one that you are always one step away from. The one you can’t be a part of.

  11. Jo

    MMT is an utter crock of bs.

    Just because something is theoretically possible doesn’t mean you should do it, or indeen will get away with doing it.

    And believe me, you won’t get away with doing it.

    Love n peace.

    1. Aquifer

      I think MMT is interesting because it changes the dialogue immensely in the sense that it turns it on its head – we go from “we can’t afford anything!” to “we can afford everything!”, and changing the dialogue is what, IMO, we REALLY need to do right now – what construct we wind up with is another story, but at least it debunks the TINA BS of our current “system”

      I also think that it is valuable in the sense that it suggests a real “authentic” way of considering the idea that, after all, money IS an artificial construct, being whatever a particular society says it is …

      So, being the pragmatist that i am – i am curious as to who wins and who loses under each system … that is where i would like to see the discussion go – because, in the end, it seems to me we will have whatever economic system we decide to have (within the limits MN dictates) and ISTM that the parameters for that decision should be based on how does it further/retard our well being …

    2. Yves Smith Post author

      Sounds a lot like the reactions of the people who were told the earth revolves around the sun. Just because it offends your prejudices does not mean its wrong. I note all you do is fulminate. You can’t even offer an objection, let alone a credible one.

    3. Doug Terpstra

      MMT is only a crock officially when applied to the social safety net. OTOH, it otherwise works flawlessly for Wall Street bankster bailouts, zero-interest casino reserves, arms manufacturing, perpetual unfunded wars, toxic asset purchases, jobs outsourcing credits, and general corporate welfare. It’s critical to define the limits of MMT correctly.

    4. TK21

      “Just because something is theoretically possible doesn’t mean you should do it”

      MMT is more of a description of how economies work than a direction for how they should work. It’s like saying “applying high heat to water will cause it to boil” doesn’t, of course, mean you should go boil some water. And boiling water can be used for good (the steam engine) or bad (making broccoli for dinner).

      Aquifer: “i am curious as to who wins and who loses under each system” MMT and a more traditional system can make anyone win or lose; they are tools, like boiling water. I believe Hitler used a form of MMT to fuel his country’s war effort; on the other hand, Abraham Lincoln used a form of MMT to finance the US Civil War. The USA used non-MMT in the 50s and 60s to make the rich losers and everyone else winners by heavily taxing the rich; now it is the reverse, where rich people’s income is taxed more lightly than everyone else’s.

      But you are right: new tools mean new possibilities. “we go from “we can’t afford anything!” to “we can afford everything!”” is right.

      I wouldn’t encourage the government to print money just because it can but there are real emergencies out there that could be alleviated with more money, egregious human suffering from hunger, sickness, and homelessness that calls out to be addressed.

      1. Aquifer

        Hmmm – both of the examples you use are the use of MMT to finance war – i suppose one could argue that one was a “good” war ….. But that is what concerns me a bit …

        In the last election the side that i was on (Greens) argued that we couldn’t afford war, we had too much to take care of domestically – and that is what I am wondering – what will be the result if we decide we can afford “everything” ….

        See i think we decide on the systems we use not based on the “logic” of any “iron laws” of nature, but on whether and for whom those systems facilitate advantages. And though i realize one cannot foresee all potential consequences (Rummie’s unknown unknowns) ISTM that it would be best to try to do so as much as possible … So i can foresee situations in which it would be a great boon to not “be able” to do something because we could “not afford it”…

        If we can, indeed, choose our system, methinks it is best if we choose wisely – so how do we pick one that facilitates giving us the most of what we want and the least of what we don’t – and once we decide what those things are, how do we build the strongest case for the system that will provide them?

        1. Aquifer

          TK – see, wouldn’t you, e.g., rather have a way to make it more difficult to use steam for making broccoli for dinner? LOL

          1. TK421

            No more broccoli would be fine with me!

            We should definitely choose an economic process that will best let us achieve what we want. I think understanding MMT opens the door to a better way. If I knew of an economic system that would prevent war, I’d share it. It sure looks like the people running things will have their wars no matter the cost, but when it comes to good things they tell us there’s no money for it. Understanding how money works can level the playing field between, say, eradicating hunger and blowing up other countries.

            Think of oil. You poke an oil reserve and oil shoots out, so it’s easy and cheap to turn into energy. Of course, it causes wars too. If we built wind turbines and solar plants it would mean less need to battle for oil, but that way isn’t cheap or easy like oil wells are. If enough people realize that we have it in us to finance a new way of energy, they might demand an end to oil and the wars it brings.

        2. Hypothetical_Taxpayer

          All the USG has to do is announce that we have bought the world and all our problems are solved.

          See how simple that was?

        3. nonclassical


          please, aqui, read Naomi Klein-“The Shock Doctrine-Rise of Disaster Capitalism”, as some of us lived south and central american history-know it’s true..truly not a matter of “able to afford” what neo-feudalists have in mind..

  12. JustJokes

    Greenspan has been getting around lately. He was on Cspan with volcker yesterday pushing the dangers of the debt and the need for “entitlement” reform. Both were asked about the effects on the economy of increasing taxes on incomes over $250k. Volcker: “zero”. Greenspan: bla bla bla

    I get that we can’t go broke no matter the size of the natl debt because we can monetize through quantitive easing, and since we have deflation it wouldn’t cause inflation, but what about the effects of the 0 interest rate on savers and the bubble effects on the stock market since Bernanke is purchasing their junk to do the easing? Those are the other issue often mentioned.

    1. Doug Terpstra

      Yup, “bla, bla, bla”. MSM commits egregious malpractice when it inflicts discredited crisis-architects like Greenspan on the public. As with Benjamin Shalom “there is no subprime crisis and no housing bubble” Bernanke, every time Greenspan jiggles his verbose jowls in public, a few of his most absurd and uncharacteristically brief statements must be posted as well:

      “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” Greenspan said.

      “I found a flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak … I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

      “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity are in a state of shocked disbelief.”

      And to prove who is still firmly in control of the planet, this same man, who praise the innovation of subprime predation and destroyed the global economy is still given a microphone.

  13. Doug Terpstra

    I found a fundamental flaw in Wall Street’s choice of Greenspan as gigolo. His cartoonish Randian worldview is so loquaciously incoherent, and his long term performance is so abysmal, that his sheer animal magnetism simply can’t compensate.

  14. Paul Niemi

    Greenspan’s murmurings aside, Social Security does have a new problem, which must affect the system math. It has to do with the social safety net, as it is constructed, and unemployment. Man loses job. His first alternative is unemployment insurance. After that runs out, he can live on student loans while attending the community college. Still without a job and needing to eat, he applies for disability, and more frequently now than before the financial crisis, he can get it. In essence, we are choosing to avoid temporary welfare programs by giving needy persons recourse to permanent disability pensions. How do we know this? Consider the frequency of lawyers going on television to run ads claiming they can get you “the disability benefits you deserve.” This is new; it is a recent phenomenon. The point is that when Social Security taxes were adjusted during the Reagan administration, it was not anticipated that at some future date applications for disability would start being accepted with greater frequency for a variety of disabling conditions, and this must affect the financial balance of the system. Presently we will have to face this, but yet there is no political rationale for privatization. I think persons like Ryan, who are discussing privatization, are staking out unreasonable positions with the aim of avoiding the issue. They can stand to the side, while more responsible legislators take the heat for facing the problem squarely.

    1. Hypothetical_Taxpayer

      SS disability and SS retirement are two completely separate programs and separate accounts within the SS Admin, so there is no reason they can’t be dealt with separately.

    2. Don Levit

      If we can ever get a cash flow surplus again with Social Security, we need to “wall off” that surplus, so that it is used for what it was intended for: the beneficiaries of the SS program. In my mind, privatization is a way to do that, so that the Treasury will not get its hand on the surplus FICA taxes to pay for battleships, etc.
      Otherwise, if we continue on the same plan, we are not saving the fatted calves of surplus for the lean years of negative cash flow, in which the trust fund surplus is needed to make up for the difference.
      Don Levit

      1. Paul Niemi

        I think you have a valid point, and it is a concern shared by a lot of people. The fact is there is no pile of cash saved: a dollar collected as FICA tax comes in and goes right back out; if it is spent on a battleship, then an IOU is left behind called a T-bill. The system invests the surplus in treasury certificates by law, because they are assumed to be the world’s safest investment, backed by the full faith and credit of the US government. Should the surplus be invested in riskier assets? I think the federal government could guarantee some other assets, such as municipal bonds, as an acceptable alternative investment destination for the surplus in the trust fund. That way the dollars you pay in could be put to work in your own community, invested in rebuilding the infrastructure, for example. I like seeing my tax dollars at work doing useful things near at hand, because otherwise the size of the federal budget is incomprehensible to me.

      2. PunchNRun

        So, you think they ought to “wall off” the FICA trust money. In that case, when a dollar is received by FICA trust, What would you suggest be done with it? Invest in the safest capital preservation instrument available, right? And that would be what, a bag of bills buried under a mountain somewhere? Correct me if I’m wrong, but it is my understanding that the safest investment available right now is something backed by the full faith and credit of the US Federal government. So, buy a T-bill, right? So if you have an alternative please suggest it, because I’m stuck.

        1. Aquifer

          I agree – “privatizing” means putting it into the hands of WS, one way or another and all i have to say to that is “ptui!”

        2. Don Levit

          I don’t really have a preference as to where to invest the excess FICA taxes. I strongly support those excess taxes be invested, and not loaned to the Treasury. Currently, because of the loans, the Treasury securities are not bought with cash, so they are not paid-for, intact investments compared to you or I buying the same securities.
          I think gold could be a possibility. I do know that annuities were discussed at the time SS was being established. Fixed-indexed annuities are pretty interesting, conservative, and can offer decent returns.
          The main point is to conserve the excess FICA dollars and invest it in something that will be paid-up and intact to be liquidated when needed.
          Don Levit

    3. JTFaraday

      “Social Security does have a new problem… It has to do with the social safety net, as it is constructed, and unemployment. Man loses job. His first alternative is unemployment insurance… Still without a job and needing to eat, he applies for disability, and more frequently now than before the financial crisis, he can get it.”

      I don’t know if this is true or not, but if it is, it is just a temporary bridge over the real problem with tying old age pensions to employment history.

      The real problem is that in an unstable job market with lots of unemployment and underemployment, people don’t accrue benefits under social security or they watch them start to evaporate through periods of unemployment.

      Funding old age pensions in this manner really doesn’t jive with the current economy. For all too much of gen x, y, and z, social security is looking like catfood.

      Turning social security into another 401K plan just highlights the ways in which it already resembles every other employment based pension plan out there, as opposed to a real government safety net.

      I know, I know. We don’t want it to look like a “welfare program” so it comes under attack, etc etc. Political expediency over actual social needs at all times.

      Don’t worry. I got it.

      1. Hypothetical_Taxpayer

        SS sort of combines aspects of a pension fund and social insurance fund in that you accrue benefits rather quickly, then they cap out. So someone that did have low income and many years of sporadic unemployment does get more than they paid in. Higher lifetime earners get less than they paid in.

        So this is much “better” than a 401K plan (which we are supposed to have and fund ourselves anyway – to avoid living on only $1000-$1500/month) from the standpoint of providing some lower level safety net in old age for all workers, assumming they were able to rack up at least 20 or 30 years in total. But years 50-67 can be problematic. 68-70 even more so.

        1. Hypothetical_Taxpayer

          Unless you get the Fed Chief job, in which case you can drool and mumble till you drop….

  15. joebhed

    Sorry, but I don’t necessarily see the direct contradiction among his statements.
    The first two seem clear that neither insolvency nor system failure were of concern when it comes to both debt-repayment and social security – it being always governmentally possible to either print money or commit adequate resources.
    His latter point is not necessarily contradictory. He lays out a belief-system scenario that is much akin to that professed by the Bernank – it addresses economic growth.

    The private sector needs both money(savings) and confidence in order to bring about another investment cycle, and therefrom, the investment cycle is what brings about prosperity. Thank goodness !
    Bernank sees QE as a means for enhancing “the markets” – to build up asset and commodity prices, therefrom returns, therefrom investment…. etc,
    Mr. Peterson is surely thankful for either Chairman’s remarks.

    The difference I see is one between insolvency and failure of public systems – here we stand protected, and how and whether we can have economic growth with what the Peter-heads see as excessive taxation – when that taxation is absolutely essential to feed both the children and the wars.
    What is NEEDed should be obvious – Debt-free money creation – thereby denuding the taxation rhetoric.
    It is ultimately available through a Bill presently before the Congress as HR 2990.

    It’s true that solutions are hard to come by.
    This one supports the G-Span wisdom on the first two,
    and solves for the latter.

    For the Money System Common

    1. Marley

      You mean to tell me that trillions worth of QE and interest rates near zero aren’t enough to wake up the Confidence Fairy?! Maybe they idiot CEO’s who have been making the rounds get that it would be economic harakiri for them to invest when there are so few people to buy whatever sh** they’re selling … but to see them yapping to the talking heads on Bloomberg/CNBC/CNNfn about the importance of deficit reduction is to understand that they are truly clueless beyond redemption. Thanks again Dr. Kelton for showing us why.

  16. Paul Walker

    … the US as a currency issuer, can always pay its debts (it might incur too much inflation, but with the economy having as much slack as it does, that’s far from a pressing worry)

    Looks like fools gold is about to discover its a barberous relic too

  17. mac

    Every time I hear this line about how the “rich” are doing something to the “poor” or the “middle class” I reach for my wallet and checkbook as I know some group is intent on getting them in the name of saving me. Stop with the rich-poor nonsense.

  18. Bud

    Long ago, I recall a Congresscritter was quoted as cycnically commenting: “the nice thing about Social Security is that it’s never been actuarily sound.”

    Investing in more government rather than investing in more private economy doesn’t, off-hand, seem the wiser choice, but economists would know better based on their well established record of accurate forecasting.

    1. different clue

      Who was the Congresscritter who said that? When was it said? Quotes? Proof? Links?

      And would an actual actuary have agreed with that statement at the time it was made, if it can be proven to have ever actually been made by an actual provably quotable Congresscritter?

    2. zygmuntFRAUDbernier

      There are annual reports on SS.

      Last I looked (2010 report approximately)
      sometime soon outlays would surpass monies
      going into one of the Trust funds.

      What’s happening is that from US demographics,
      the cohorts (people born in 1900 + n),
      for `n’ from 0 to 112, are small
      with the millenials and even earlier,
      when compared to the size of cohorts
      of the Baby Boom years (it was a boom
      in babies, many children per woman on

      As the Boomers reach retirement age, they
      take their dues ob SS fund, but
      compensation by payroll SS deductions
      on the millenials’ paychecks (about now)
      will mean a slow drawdown, so SS fund
      is getting smaller.

      For the pension type SS outlays, they’re
      ok till 2030 or something (solvent).
      For workers disability, they’re solvent
      until about 2020.

      There is NO extreme urgency. You could
      take a year or two to debate it.
      December 31, 2012 is just a
      date pulled out from a place I dare
      not mention …

  19. different clue

    I am glad to see the discussion above about Soddy and other attempts to created a physical-reality-based analysis of economics, money, credit, debt, etc.

    I am just a layman so my words have no rank or authority aside from any value that the words themselves might contain.

    It has been many years since I read and tried understanding my little Soddybook. I believe I remember his understanding and explanations being more deep, detailed, and nuanced than just the economy is a steam engine. I think there is more there than that.

    I also read and struggle with other books by other authors way back then. I got (and still get) a paper called Acres USA in which Charles Walters and others wrote many hundreds of thousands of words about economics, money, credit, debt, value, etc. A lot of what they wrote still seems to exist in a parallel universe little known and little heard of by many people here. Yet it was common national knowledge until the early 1950’s, apparently. What do we monetize, debt or produced wealth? If we monetize wealth, how do we match the amount of money emmitted by the money emmission authorities with the amount of purchasable wealth and wealth-supported work flowing downstream through the political economy starting from its point of first extraction? If we monetize debt, how do we restrain the amount of debt emitted and monetized to some relation with the amount of buyable-sellable work and materials to be bought-sold with the monetized-debt money?

    I believe it would be a worthwhile project for some safely tenured professors or other economists who are immune to political or career reprisal . . . to invest their next sabbatical spending the whole year at the Mothership Offices of Acres USA and the National Organization For Raw Materials (and other organizations which the senior staff experts of those two organizations could suggest) . . . and invest that Sabbatical Year studying all the books and papers, both published and unpublished, from the economists which both Acres and NORM
    knew/know about and draw their analyses and data from.
    The Professors on Sabbatical could find out just who, what, and why were Charles Walters, Carl Wilken, “Red” Paulsen, Erhard Pfingsten, Vincent Rossiter, and others whom I either don’t remember or never even knew.

    What professors might be even interested in such a project of re-discovery? Perhaps the reality-based economists struggling to one sort or another of Ecological Economics might be interested in all these deeply forgotten people and their deeply forgotten material.

    1. Hypothetical_Taxpayer

      Just having a little fun with Soddy and his Steam Engine.

      But these are the views of someone from the 1920s, and I think much of it has been assimilated into our thinking nowadays. At least the ones that make biz investment decisions, or actually do real scientific and technical work, and maybe even a micro-econ specialists here and there. It’s just not apparent when we hear the constant blather at Econ 101 level blasted around in the press.

      But it’s just a well known fact that biz self interest and the public good don’t always align so well, and that’s when the government needs to flex it’s muscle. But in our neo-libby world that sometimes necessary adversary relationship seems to be missing nowadays.

      And if we wait for economists to develop the Unified Theory and Computer Model of Thermal Banking, the human race will be long extinct before the software gets to beta testing.

      1. different clue

        But do toDAY’S ordinary people know or remember even a shred of what people knew and remembered from the 1920s through the earliest 1950’s? I don’t think so. Project “Cone Of Silence” has been very successful from a public knowledge-prevention/knowledge-removal standpoint. If a critical tipping-point massload-worth of general public members knew about these facts and theories and history, they might have a better idea of what to try extorting out of “their” government. They might also have a better idea how to build personal and community Survivalism in the meantime in the teeth of the all-surrounding Neo-ClassiCon fluxfield-forcefield in which we all live.

        1. zygmuntFRAUDbernier

          About: Project “Cone Of Silence”.
          In the last few days, I read about a memorandum written in about 1970-1972 in the circle around the U.S. Chamber of Commerce with a plan to use the mass media to present the business point of view. It was anti-labor union, capitalist, and so on. The article said this memo was widely circulated in business circles, like a good blueprint.

      2. different clue

        Also, we don’t need to wait for anyone to re-invent the grand unified theory of biophysiconomics and run it on computers. Lesser theories of biophysiconomics were advanced, researched, applied decades ago. The datasets exist, the history exists. It was especially written up and written about by Charles Walters Jr. and Vincent Rossiter decades ago.

        That is why I will keep re-mentioning the Lost Planet Economists from time to time on these threads.

        1. Hypothetical_Taxpayer

          Likewise, I think mining companies are quite capable of converting credit to debt to marketable minerals and such which in turn generate a money stream which will stabilize or reduce their debt over time!

          1. different clue

            In fact, since these economists were part of planning and
            building and guiding a better future than the future we now have . . . a future which existed for a while but which was then forcibly taken away from us as described in Charles Walters Jr’s book Unforgiven . . . I may start calling these economicsts the Lost Future economists.

            Maybe I will interchange the words Lost Future and Lost Planet from time to time.

            Commander Walters and the Lost Planet Economists.

  20. Jeff N

    I wanted to share that clip of Greenspan talking about always being able to pay debts, until the Ron Paul logo BS at the end, grrrr

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