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America’s strength is an illusion created by foolish borrowing

10 October 2012

Summary: Our slow recovery, especially compared to Japan and Europe, has boosted America’s sense of exceptionality and general awesomeness. So our Presidential candidates speak of new foreign wars (lots of potential in Africa and the Middle East), new domestic programs, and tax cuts — plus vague assurances that the deficit can also be cut.  Today we see the one graph that destroys those illusions.

This is the first in a series. Other posts are:

(2)  Prof Black blasts back at yesterday’s post about the US debt, 11 October 2012
(3) Ed Dolan talks to us about modern monetary theory. Can it save us?, 12 October 2012
(4) Ed Dolan Asks What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives, 30 November 2012

A fundamental measure of a nation’s financial condition is the structural primary budget balance. AKA the cyclically adjusted budget balance.  As in this graph from “By One Key Budget Indicator, the Structural Primary Balance, Even Greece Is Doing Better Than the United States. Why That Should Worry Us.“, Ed Dolan (bio here), Roubini’s Economonitor, 8 October 2012.  For an explanation read his article, which is important, clear and detailed.

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Ed Dolan, Roubini Economonitor, 7 Oct 2012

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What does this chart tell us?

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The message is clear: our recovery results from government borrowing on a scale other nations either cannot or choose not to do.  Our structural deficit (before interest cost) is deep into the danger zone, and has been for four years. We are borrowing and in effect burning the money, leaving behind little but a rotting infrastructure and memories of better days.

Obama has a program for slight reductions in the borrowing, contingent on dreams of a quick recovery.  Romney offers madness:  he promises a lower deficit through large tax cuts, unspecified spending cuts, an expensive military build-up — and a bellicose foreign policy that risks even more foreign wars.

Meanwhile the deficit-fueled slow growth since 2009 removes any public pressure for reform. That’s unfortunate, since we have less debt and superior demographics vs. most of our peers. Our most serious structural problem is our dysfunctional, ruinously expensive health care system — and our peers have tested and perfected many successful alternatives (see here for details).

We should be on top of the world. Instead we’re sliding because of our broken political machinery. We all see the problem.  It’s endlessly discussed. But nothing changes, as we saw after the deficit-obsessed 2010 campaign.

Our politics appears locked, polarized. That might be an illusion; if not — and if it continues — then the consequences could be severe.  We can learn how this works from the classic example of avoidable and painful political failure is the English Civil War (1642–1651; see Wikipedia).

In this respect we are like the other major developed nations (perhaps China, also).  The US, Japan, and EU all suffer from dysfunctional policies that will bring certain ruin if not changed. All suffer from political paralysis.  Only a change of mind by their ruling elites or mass protests by their peoples will avoid very hard times.  This is the The unseen but perhaps decisive grand alignment of the nations, the major geopolitical factor of our time.

None can say with certainty how this will all end.

For More Information

  1. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
  2. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
  3. Government economic stimulus is financial heroin, 28 December 2009
  4. The limit to America’s power is our ability to pay for it, 18 April 2011
  5. About America’s economic recovery: the good news and the bad, 1 May 2012
  6. The Titanic’s lessons for us about the coming economic crisis, 4 June 2012
  7. America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
  8. US economic update. Everything that follows is a result of what you see here., 8 June 2012
  9. The important but unmentioned thing you must know about today’s jobs report, 5 October 2012

What lies ahead:

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200 Comments leave one →
  1. Pluto permalink
    10 October 2012 12:10 pm

    “Only a change of mind by their ruling elites or mass protests by their peoples will avoid very hard times.”

    The ruling elite will not change their ways because they believe that they personally are benefiting from the current situation. Mass protests by the people are unlikely until the very hard times hit and premature protests are likely to be roughly handled like OWS.

    The only rational things to do at this stage are to hope for the best, prepare for the worst, and do everything you can to stem the tide without endangering yourself.

    This is a long slow struggle against economic momentum (slow to move, hard to see, but incredible power when the moment is right) and human stupidity and vanity (against which the gods themselves contend in vain)

    Like

    • 10 October 2012 12:58 pm

      I agree with Pluto, unfortunately. However, I suggest one more thing to the list: working to understand how we got here and what is happening (diagnosis) — and how to repair or replace our current political regime (prescription).

      This might involve changing our values, and perhaps expectations for each other and the State (normatives).

      Hence my belief that we are, in a loose sense, where the Revolution was in the early 1760s. Their response was to form the Committees of Correspondence — a powerful apparatus to do all of these things.

      Like

    • anobserver permalink
      10 October 2012 1:35 pm

      I have mixed feelings about this:

      “do everything you can to stem the tide without endangering yourself.”

      For one, with the growing criminalization of everything vaguely resembling dissent, this means that even anodyne actions can increasingly be construed as “support for terrorism” or “action against national security”.

      Besides, I harbor the feeling that no-risk actions probably are inherently ineffective as well. Notice that getting arrested seems nowadays to imply being systematically roughhandled and left for hours, if not days, in rather insalubrious cells.

      Like

    • 10 October 2012 1:59 pm

      Wow, that’s a powerful cautionary note. Unlike the Revolutionary era, most so today cannot afford arrest records. Professional accreditions, licenses, and employer requirements all make arrests difficult risks for people supporting families.

      And our debts and low savings make us very dependent of steady employment. There are reasons were are such a docile people.

      Like

  2. WTF permalink
    10 October 2012 1:41 pm

    The english civil war, and its “Cousins Wars” the American Revolution and Civil War, were about a paradigm shift from medieval values (feudalism, mythic conformism/dependency, aristocracy and ecclesiastic rule) to modernist values (individual achievement, scientific rationalism, independence, capitalism and democracy).

    The current conflict (and dysfunction) is about the unsatisfied coherence needs of postmodern and holistic culture.

    Modernist values can not satisfy those coherence needs. The political and economic expressions, forms and structures that arose from modernist values can not fully satisfy the functional needs of a Holistic age. Holistic and Integral values (e.g. global interdependency), and their expressions in new political, economic, religious and cultural structures and forms are necessary.

    On a lighter note: PBS, which Romney wants to cut from the federal budget, does a better job explaining Republican foreign policy (the good and the bad) than Romney himself: Thomas L. Friedman interviewed on the Charlie Rose Show, 8 October 2012 (contain video)

    and David Sanger (NY Times) & Richard Haass (CFR) on Foreign Policy, Charlie Rose Show, 8 October 2012.

    Like

  3. Gaiasrequite permalink
    10 October 2012 2:42 pm

    I find so often someone else has said it better.

    When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

    We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.–Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

    Now just start our new list of greivances, and we will sign it, then deliver it to what ever puppet the 1 percenters put in office this time around.

    Like

    • 10 October 2012 2:56 pm

      The vital to remember about the Declaration is the date: 1776, after 12 years of discussion and building a consensus among the minority of the American public that wanted independence. What were the grievances? What were the remedies?

      We cannot write this document today because we have nothing close to such a consensus, IMO.

      Like

  4. Gaiasrequite permalink
    10 October 2012 4:13 pm

    “The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States.”

    This was their step one, their problem was a govenernment structure that placed absolute power into the hands of a single individuale, whos’ rule was gaurenteed as a birth right.

    Their soulution, to establish a govenment which granted power of the people, into the hands of the people.

    We are the benifactors of that government. Yet, as many of FM’s posts point out, there has been a gradual transitioning of power from the hands of the American people, into the hands of the government (or the one percent of American’s who hold the majority of America’s wealth and there for the majority of it’s power)

    We might then say our step one is, figuring out a solution to redistribution of America’s wealth.

    However, I believe the greater issuer lies in the 99 percent. As americans we are faced with a complex government structure. Ours is not so easy as,” Hurrah the king had a son we have our next leader.” Americans in my generation have a severe lack of understanding as to how our government works, beyond go vote. When I was in my late teens there was a news group that went around asking teens and young adults basic questions about their government such as “name the three branches of government.” I kidd you not some of the people questioned became dazed, and said things like “you mean like tree brances” or “ummmm oak, elm ummmm” they were clueless as to what they were being asked. I believe this is the result of things such as ” No child left behind” and other such legislation which has sytematically “dummed down” the public education system in this country.

    I think a big first step Americans need to take is not only rejuvenating the standards of their public education system. But, we need a way to give the general public a “crash course” if you will, on the very basic princeples of their government. For example, WHAT is a Republican, WHAT is a democrate and why do you, as a citizen, vote one way versus another. Then too, reminding them that beyond voting, you also have the responcibility of seeing to it that the representives of those partys are indeed standing for what they represent. And if the parties them selves are failing to represent the needs of the general public, new parties need to be formed. I am a person who says however, if you buy new furniture you need to throw out the old before the new is delivered. I believe the simpler you keep the government, the easier it will be to keep the people involved.

    Like

    • 10 October 2012 5:35 pm

      “We might then say our step one is, figuring out a solution to redistribution of America’s wealth.”

      I disagree. Stop people on the street (together a diverse sample from your town). Ask what are America’s 3 top problems. I doubt many will mention inequality.

      Offering solutions is a waste of time to people for whom that’s just one of a jumble of many concerns.

      Like

  5. roger erickson permalink
    10 October 2012 5:43 pm

    Oh my lord, Fab. If you claim to grasp the concept of situational awareness then you have to go back and ask yourself why you’re ignoring the fundamental change in our currency situation since 1933, when we transitioned from a gold-std to a fiat-currency-std. It’s quite a fundamental change, with trivially obvious consequences. Anyone not at least looking into that situational change is doing their country a grave disservice.

    Would a military deploy soldiers who were not able to fully disassemble/reassemble their personal weapon in the dark? Similarly, you shouldn’t try to talk about currency operations without learning at least the simple rudiments of how they actually work.

    On a fiat currency regime, there is no “national debt,” there’s no REAL function of “balanced fiat,” and it’s plain ignorant to directly compare the budget of currency users (e.g., Greece or, say, Nebraska) to currency issuers (e.g,. USA, UK, Sweden, even the ECB [european central bank]). Countries using the “euro” are not sovereign masters of their own currency. Comparing them to sovereign currency issuers like the USA is worse than comparing apples & oranges, it’s more like comparing predators & prey.

    1) “Fiat” means there’s no static metric that a unit of account (currency) is convertible to upon demand. Rather, the unit of account is backed purely and only by the initiative of the public issuing the currency.

    2) Fiat currency isn’t obtained by anyone, hence there’s no one to “pay it back” to. The goal reduces to maintaining currency supply within tolerance limits, neither too much (contributing to EXCESS inflation) nor too little (contributing to EXCESS deflation, what we have rt now in the USA).

    3) The concept of currency revenue is obsolete for a fiat currency ISSUER. In 1933, the entire function of taxes changed, from obtaining currency revenue from gold-hoarding plutocrats, to managing net aggregate demand and shaping it’s profile (i.e., taxes as deterrents for specific transaction types).

    http://www.curiousevidence.com/(S(cnekbxjj3y4xwimbw2sg12vj))/samples.aspx?id=21

    4) You’re completely conflating the concepts of foreign currency (Fx) reserves, Treasury bonds, and fiat-currency “deficits.”

    a) Countries who export to us are paid in $US, THEY HAVE ALREADY BEEN PAID IN FULL! Their payments are sitting in accounts at the US Federal Reserve bank – as Fx Reserves. We DO NOT BORROW OUR OWN FIAT CURRENCY FROM ANYONE ELSE! It’s actually impossible, since the US Treasury is the monopoly issuer of $US.

    b) As part of the double-entry accounting process for acknowledging currency creation (i.e., an accounting entry w/o a corresponding debit), we use TTL Accounts & T-bonds to drain banking-reserve notation from the accounts of private banks at the Fed. T-bonds are just a habit left over from the gold-std days. They’re simply a policy decision to spend more fiat, not to borrow fiat.
    “The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public.”
    Treasury tax and loan accounts and Federal Reserve open market operations

    http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf

    c) A fiat-currency “deficit” is purely an accounting term, denoting the growth in net currency supply used by a growing nation. The fiat deficit is the difference between currency created by Treasury spending and that amount clawed back a federal taxes. The cumulative, so-called, “public debt” is also net private savings, to the penny. Given a monopoly currency issuer, a growing economy can only accumulate net savings (credits) if the issuer commits to net issuance (debits) – they’re simply the accounting terms necessary to manage national currency supply.

    If you want to at least learn the rudiments of fiat currency operations and reserve banking, here’s a Dick&Jane level primer.

    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    After that, please read up on Marriner Eccles, the Fed chief who oversaw our transition from the gold std to our existing fiat currency.

    Marriner S. Eccles and the Federal Reserve Policy, 1934-1951

    http://www.econ.utah.edu/activities/papers/2006_04.pdf

    Marriner Eccles – HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE

    http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf

    DIRECT PURCHASES OF GOVERNMENT SECURITIES BY FEDERAL RESERVE BANKS
    Marriner Eccles, 1947

    http://fraser.stlouisfed.org/docs/historical/house/1947hr_directpurchgov.pdf

    Can Taxes and Bonds Finance Government Spending? – Stephanie Kelton

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128

    Like

    • 10 October 2012 6:10 pm

      I am continually baffled by people who give views far outside the mainstream, and insult people with conventional views — as if these non-consensus views were obvious and widely accepted by most experts.

      That does not mean they are wrong. Sometimes — although rarely — very fringe theories become accepted (ie, some of today’s views were once on the fringe, but few fringe views become widely accepted).

      After scores of fruitless debates with such people, I concluded that this attitude tends to characterize ideologues, people with an idée fixe. That does not mean that they’re bad, or wrong. It, in my experience, means that debate with such people is a waste of time (ie, a rule based on a generalization).

      A secondary reason for passing on erickson’s comment: it’s too fundamental a challenge to basic economic theory. As has been listed here several times (& will do so again on request), there are many excellent websites run by economists — people who have both the ability and (perhaps) the interest to take up such a challenge.

      Some of erickson’s points are included in modern monetary theory. There are many experts debating that both in the professional economics literature and on websites. Several times I have listed good sources of info about MMT, and will do so again on request.

      Like

  6. roger erickson permalink
    10 October 2012 5:47 pm

    #2, meant to say the “a fiat currency issuer doesn’t obtain fiat currency from anyone, it simply issues it, without anything in return save for the dynamic public initiative that requires issuance of the currency”

    e.g., whatever the USA sets it’s public mind to do, the currency supply automatically follows, and simply denominates all the transactions in all the transaction-chains triggered by the public initiative.

    Like

  7. Thomas More permalink
    10 October 2012 5:58 pm

    It’s important, I think, to distinguish twixt types of debt: America went deep in debt from 1933 to 1945, but with that money it built tremendous amounts of infrastructure such as the Grand Coulee Dam which produce 3.5 gigawatts of hydroelectic power and supplies power to 3 different states (Oregon, Washington, Idaho) and part of another (the dam sends power to California during peak summer usage periods). The Hoover Dam, the rural electrification projects, the Tennessee Valley Authority — huge amounts of debt, but to finance enormous investments in America’s future which paid off handsomely in the 1950s and 1960s.

    By contrast, today America has gone deeply into debt mainly to finance speculative casino capitalism involving condo-flipping and losses from Wall Street high-frequency stock trading, and to piss away fantastic amounts of money on military boondoggles like the 2003 invasion of Iraq and the occupation of Afghanistan — using weaponry that is often literally not even wanted by the U.S. military. Consider, for example, the latest headline: “Army to Congress: Thanks, but no tanks,”> 9 October 2012. In this case the U.S. army says it has all the tanks it needs and doesn’t want any more, but 173 members of congress are now urging defense secretary Leon Panetta to buy more tanks.

    No one is sure exactly how much money America’s national security apparatus spends per year, but estimates run in excess of a trillion dollars per year. Yet all too much of this spending is a pointless waste: “Senate Says Counterterrorism Data-Sharing Centers Are Useless.”.

    If America had gone deeply into debt post-9/11 in order to rebuild our cities to accommodate mass transit like electric rail so as to eliminate our dependency on foreign oil, and to finance a Manhattan-Project-style revolution in transportation efficiency, and in order to massive upgrade America’s K-12 and higher education system, and in order to fund apprentice job training programs that would teach Americans valuable skills like numerical machine tooling or molecular genetic lab work procedures, it would have made good sense for America to go so deeply into debt. As in the 1930s-1940s, such in investments would surely have paid off a thousandfold in economic productivity gains and better jobs and more Americans employed.

    But it makes no sense for America to go deeply into debt to finance military spending and spying on our citizens, because studies show that national security spending produces the fewest jobs and the least economic growth of any kind of government spending:

    “Contrary to the assertions of the arms industry, maintaining military expenditures at the expense of other forms of federal spending would actually result in a net loss of jobs. This is because military spending is less effective at creating jobs than any other form of federal spending.” [Wililam D. Hartung, "Military Spending: A Poor Job Creator," Center for International Policy, January 2012]

    Like

    • 10 October 2012 6:27 pm

      “It’s important, I think, to distinguish twixt types of debt: America went deep in debt from 1933 to 1945, but with that money it built tremendous amounts of infrastructure such as the {dams}”

      More goes to the heart of a point I ( and others) made at the start of the crisis — based on the warning of Japan’s experience. Long-term deficit spending has different effects if funding consumption (eg, domestic such as the military, or foreign such as wars) or investment (eg, GI Bill, infrastructure).

      The spending from 1933 – 1945 was overwhelming military and foreign wars. But even the relatively small fraction that went into infrastructure gave large paybacks.

      “today America has gone deeply into debt mainly to finance speculative casino capitalism involving condo-flipping and losses Wall Street high-frequency stock trading”

      I don’t believe that is true. First, those things refer to private debt, not the massive increase in public debt.

      Second, most of the increased private debt was household debt, used to build excess homes (mtgs) or fund consumption (eg, credit cards, cash-out mtg re-fis). There was a buildup of bank debt, but that was an intermediary, most of which funded the household debt.

      There was a bubble of speculative capital, but a small fraction of the total.

      Like

  8. joe permalink
    10 October 2012 6:21 pm

    Of course the US does NOT borrow money. All US dollar denominated net financial assets originate from the government. Every dollar you earn is a dollar someone else spent. So if you want to earn more than you spend, some other agent MUST spend more than they earn. It is impossible for every agent in the economy to earn more than they spend simultaneously. The federal govt’s deficit is equal to the private sector’s surplus, to the penny.

    Stated another way, the private sector can only accumulate savings, as a whole, if the govt has a deficit. The ‘national debt’ is literally the private sector’s savings. If the federal govt is in surplus, that means the private sector is in deficit.This explains it nicely Recent USA Sectoral Balances: Goldilocks, the Global Crash, and the Perfect Fiscal Storm“, New Economic Perspectives, 19 June 2011.

    We’re not broke, we’re by far the wealthiest nation on the planet.

    Like

  9. 10 October 2012 7:12 pm

    Howdy! A friend asked if I would add to this discussion. I am happy to. I’m been an economist for 25 years and have to say that there are few issues more poorly understood than the debt. Here are a couple of my articles on the subject {at Forbes’ website}:

    I apologize for only tossing in links. I’m afraid I’m desperately trying to get some work done at the moment, so that’s the best I can manage.

    Like

    • 10 October 2012 8:16 pm

      Thank you for posting links to your articles at Forbes!

      John T. Harvey is a Professor of Economics at Texas Christian University. Here is his web page, with links to his CV and published works:

      Like

    • Todd Guthrie permalink
      10 October 2012 11:59 pm

      I read through John Harvey’s article, which seems be essentially a Keynesian argument for proactive government economic policy, using the Federal Government to make-work all the unemployed, financed by debt monetization.

      Harvey states the fallacy of comparisons between the Federal budget and an individual family’s budget. I would say the comparison is not entirely invalid, just usually misapplied.

      To compare a country to a family might work. You could say that Mom is the government, Dad is manufacturing, Grandpa is the banking sector, little Billy is the tech sector, little Sasha is the military, etc. They all work together to make sure everybody has what they need, nobody has a job outside the household, although they occasionally trade with the Joneses across the street, or they import food from one of the next-door neighbors whose grass is greener. Little Billy asks Dad to build his computers. Mom issues currency to everyone, and then borrows it back from Grandpa. She uses it to pay Sasha to stand guard at the front door to the house.

      See, you can totally compare a family budget to the Federal budget.

      Like

    • 11 October 2012 12:37 am

      Prof Harvey gives a good introduction to the situation. Unfortunately, the vital complexity lies in the details. Here is a look at the two poles of the end-game of our debt (assuming we don’t grow out of it):

      Like

  10. DAB permalink
    10 October 2012 7:29 pm

    Erickson may come off sounding a bit too impatient but… though there are fundamental differences and problems listing monetarily sovereign and non-sovereign countries on the same list.

    I for one can’t see how the government is crowding out the private sector. If China or anyone else wanted to buy 1000 tractors or couches from Pottery Barn with their Fx reserves I doubt that offering them 0.5% interest on a treasury is stopping them. So the demand created from the government can only be helping at this time.

    Like

    • 10 October 2012 8:21 pm

      The question of fiscal multipliers has been fiercely debated during this downturn. Now, after 4 years, the data is in — with a clear result. There has been no “crowding out” in the developed nations, and the multipliers were quite large. Both as predicted in 2008 and 2009 by the mainstream economists.

      The latest of the reports showing this was published by the IMF. See this for a brief explanation (via Krugman’s NYT article today: “What explains poor growth in the UK? The IMF thinks it’s fiscal policy“, Jonathan Portes, 9 October 2012.

      Portes is the Director of the National Institute of Economic and Social Research. Previously he was Chief Economist at the UK Cabinet Office

      Like

  11. roger erickson permalink
    10 October 2012 8:49 pm

    someone pointed out that the link to M.E. & Fed. Policy paper has changed; here’s an updated link for those ideologues who don’t accept that situational awareness means changing keeping up with feedback as situations change.

    A Hands-off Central Banker? Marriner S. Ecclesand the Federal Reserve Policy, 1934-1951“, Matías Vernengo (Assoc Prof Economics, U of Utah), 1 January 2006

    Like

    • 10 October 2012 11:58 pm

      “for those ideologues who don’t accept that situational awareness means changing keeping up with feedback as situations change.”

      Astonishing as it seems, you didn’t get the point of my critique. Your theory might be right or wrong, but as I explicitly said that’s not the ponit. Rather, it’s that you don’t have any basis to declare the vast majority of economists wrong. Your claim to do so resembles that typical of crackpots.

      Like

    • 11 October 2012 4:08 am

      This is addressed to FM’s comment:

      “…you don’t have any basis to declare the vast majority of economists wrong. Your claim to do so resembles that typical of crackpots.”

      It may be a surprise to you if you have not looked at the research which has established that mainstream economists did not foresee the Great Financial Crisis for the very simple reason that the basic theories generally accepted for much of the last 100 years are fundamentally wrong.

      What is astounding about this is that the leaders in economics research have known this for much of the time. They have not kept it secret but have instead found ways to assume away the defects in their theories. The vast majority of those with university training in economics, especially at the undergraduate level, but not excluding many with advanced degrees, have accepted the “education” that has been provided with trust that the assumptions upon which their instruction has been based are valid, that they are the best the top thinkers could have made. Unfortunately, much of the economics taught in the 20th century was based on simplifications derived from theories founded on defective assumptions.

      At the risk of leaving something out let me list the sources of the biggest problems:

      • The failure to accept uncertainty as an essential factor of economic theory;
      • The rigorously enforced principal of macroeconomic activity being driven by rational agents as representative of a macropopulation;
      • The assumption that money and debt are exogenous to macroeconomic function – that they are simply “lubricants” of economic processes and do not influence them;
      • The economy exists in an series of equilibria and perturbation of any equilibrium results in immediate adjustment through market forces to restore equilibium;
      • Since the economy is almost always in an equilibrium state, variation of economic variables over time is not a worthwhile study for the most part, except for the purpose of tracking progressive states of equilibrium;
      • The only times when equilibrium is not restored occur when some exogenous shock occurs that can not be foreseen – like the Great Depression and the Great Financial Crisis.

      There have been economists that have avoided the mainstream trap but, because they were not part of the “club” their work has been largely marginalized. Some names that are on such a list of “outcasts” include Schumpeter, Irving Fisher (work after the mainstream theories led to his impoverishment in the 1929-32 crash), Keynes (what was used from Keyenes was that which could be fit into the neoclassical assumptions and the important part of his work about uncertainty was ignored), Minsky, Wynne Godley and Steven Keen. I have left out quite a few other names that belong on this list, but if you read things that cover the work of these six you will see a consistent pattern of recognition of time variability of economic functions, the critical importance of including money and credit in macro models and the essential factor of disequilibrium in describing the macroeconomy.

      One particularly informative article was written in 2009 by Dirk Bezemer in Europe that described the absence of money and credit accounting in macroeconomic models as the reason that “they couldn’t see it coming.” I have written a couple of reviews of Bezemer’s work; those exercises first opened my eyes to the existence of fundamental flaws in mainstream economic theory.

      I can understand why a bioengineering / systems engineer like Roger Erickson can intuitively detect that there must be some flaws in the economic theory pronouncements he sees. He comes from a discipline where systems are recognized as dynamic, constantly evolving and never static (unless dead – and even then decay sets in so things continue to evolve along a different set of pathways).

      The best source of collected research history that I know of is “Debunking Economics” by Steve Keen. There is a first edition (2000) and a secnond edition (2010). You want to make sure you get the second edition because it is considerably expanded and strengthened from the first edition. I am reading the book for the second time and this pass I am taking all the notes I neglected to take the first time through. Hopefully I can write a worthwhile critical review of the book in a few weeks.

      John B. Lounsbury Ph.D. CFP
      Managing Editor Econintersect.com
      Senior Contributor TheStreet.com
      Highly ranked author Seeking Alpha

      Like

    • 11 October 2012 4:44 am

      FM: “…you don’t have any basis to declare the vast majority of economists wrong. Your claim to do so resembles that typical of crackpots.”

      Loundsbury: “It may be a surprise to you if you have not looked at the research which has established that mainstream economists did not foresee the Great Financial Crisis”

      That’s not relevant. Every science has its current boundaries, beyond which reliable predictions are not yet possible. That doesn’t mean that the cognitive space within (ie, working theories) is invalid, nor that we should accept every crackpot who comes along with grand theories of everything.

      “for the very simple reason that the basic theories generally accepted for much of the last 100 years are fundamentally wrong.”

      Prove it and you can clear a space on your shelf for the Nobel. Einstein did it for Newtonian Physics, a classic paradigm shift. I’ll continue to rely on the mainstream professionals until then.

      Like

    • piedmonthudson permalink
      11 October 2012 5:32 am

      FM – – –

      Please read the economists I referenced (and I believe no one will call them crackpots). I believe you will learn some things that will stand you in good stead. Or you can continue to follow the mainstream and end up like Irving Fisher did by 1932.

      You should write more articles like this one. It has brought out a great comment stream.

      John Lounsbury

      Like

    • 11 October 2012 5:41 am

      “and I believe no one will call them crackpots”

      Correct. I did not call them crackpots. My statement was quite clearly not referring to economists.

      “Or you can continue to follow the mainstream and end up like Irving Fisher did by 1932.”

      These things under discussion are on the fringe of what economists know, and hence under debate. If you have some definitive proof, then publish it and collect your just honors. Otherwise such statements are IMO just chaff, suitable more for the gypsy fortune-tellers at carnivals.

      This is the subject of a future post, the growing anti-science attitude in America. People root for “their” team in economics (or climate scientists), like football teams. And they insult opposing scientists in a wide range of despicable ways. It’s superstition returning in a new form, perhaps due to the dumbing-down of the American mind that has been reported in many ways for so long.

      Like

    • 11 October 2012 6:01 am

      Typo (since corrected): “I did call them crackpots.” should say “I did not call them crackpots.”]

      I’m tired.

      Like

  12. Gaiasrequite permalink
    10 October 2012 8:51 pm

    “Romney Will Increase Military Spending By $2.1 Trillion” This and other statements like it seem to be infiltrating the web with the election just around the corner. This statement does not make a lot of sense to those who have not spent a lot of time with politics or economy. ( I personally slept through high school government, and passed college government by efficiently regurgitating facts I had no intention, at the time, of downloading onto my personal hard drive). I read the first of the two links rommeldak posted, and here is a short section of the article by John T. Harvey.

    Say it takes an unemployed worker and makes him a soldier. As already explained, paying him requires neither a borrowing nor additional taxation (indeed, the latter would be counterproductive, just as cutting expenditures is right now). The government could create new money and the result would be an increase in income for everyone, including those in the private sector.

    Is this the plan behind Romney’s Military Spending increase?

    Like

    • 11 October 2012 12:00 am

      I suggest that Gaiasrequite read Milton Friedman’s work about the nature of inflation, for which he won the Nobel Prize. And some of the excellent work that’s been done by economists since then. There are no such simple solutions.

      The increased popularity of such ideas is commonplace during periods of social stress (they were a dime a dozen during the Great Depression), and are one of the mechanisms by which a society’s decision-making process (eg, its OODA loop) can break down under stress.

      Like

  13. 10 October 2012 9:13 pm

    Actually, the chart tells us something else. It tells us that the two largest powers on it, the U.S. and Japan, are still able to maintain their status, despite seemingly large amounts of debt, while Italy, at the top of the chart, actually has a small surplus but is in danger of bankruptcy. Why? Well, because the U.S. and especially Japan, which is essentially funded by a public bank, with the public buying ultra-low yield bonds for their safety, are more monetarily sovereign then any of the Euroland countries, who have all given up their monetary sovereignty to a Central Eurobank.

    The most sovereign country of all isn’t even on this list, but was considered a bankrupt basket case just 3 years ago, yet is now growing faster than any of these countries. That country would be Iceland, where they jailed their corrupt bankers, threw out the government in favor of another, and let their sovereign currency – the Krona – devalue.

    This is important: Fiat Money is not a thing you can run out of. That is a good thing, not a bad thing.

    Further, a truly monetarily sovereign nation need not borrow money at all, but can simply create it, within reason so as not to cause inflation (or, alternatively, claw back some of the excess through taxes). In the U.S. we even have it enshrined in our constitution, Art. 1, Sec. 8, clause 5, where Congress – not a Central bank – is allowed to “coin Money” and no, “coin” does not mean to make actual Coins (capitalized elsewhere in Art. 1 Sec. 10 to mean actual Coins – see Natalson, Robert G. paper on The Coinage Clause). Lincoln did it to fight the Civil War and it was continued for 14 series through 1972. There are still about $250 million in U.S. Notes, from Treasury – debt-free money – in circulation today. See Wikipedia entry on “US Note”.

    Like

    • 10 October 2012 10:16 pm

      No. The constitutional power to coin money means what it says, the power to coin coins. The Articles of Confederation authorized Congress to “emit bills of credit” (paper money) and that phrase was purposefully struck from an early draft of the Constitution. A Constitutional dollar specifically means a coin containing 371.25 grains of pure silver.

      THE ROAD NOT TAKEN“, Dr. Edwin Vieira, Jr., 8 November 2011

      Like

    • 11 October 2012 12:58 am

      “A Constitutional dollar specifically means a coin containing 371.25 grains of pure silver.”

      Wow. This thread has lots of amazing statements, quite far out. But this is the winner.

      Like

    • DAB permalink
      10 October 2012 10:48 pm

      It also says that congress only has the power to punish the counterfeiting of coin!

      I’m going to start making some bills tonight!

      Like

    • 11 October 2012 1:10 am

      Not quite. Article I Section 8 says that Congress “The Congress shall have power … to provide for the punishment of counterfeiting the securities and current coin of the United States …”. This authorizes Congress to create the Secret Service to catch counterfeiters.

      Like

    • 11 October 2012 12:43 am

      The number one topic requested on this website is articles about the economic crisis. I hate writing about them, because the comments always get mired with people debating Economics 101. In this one, people seem quite oblivious about inflation.

      “This is important: Fiat Money is not a thing you can run out of. That is a good thing, not a bad thing.”

      Too much a good thing is bad (Mae West was not an economist). Too much money creates inflation or hyperinflation.

      “Further, a truly monetarily sovereign nation need not borrow money at all, but can simply create it, within reason so as not to cause inflation (or, alternatively, claw back some of the excess through taxes).”

      Within reason. That depends on many variables, many not clear in advance. It’s a dangerous game, to be played carefully.

      Like

  14. 10 October 2012 9:48 pm

    “Modern Monetary Theory” is preposterous, absurd and utterly dishonest. It starts with the obvious fact that a government which can create its own monopoly fiat money can purchase goods and services with that new money and without directly taxing the citizens first. The purpose of this process is to swipe purchasing power from those holding the existing money without them understanding what is making them poorer because the government fears they would strongly object to paying a tax of which they are actually aware. This is how governments fund wars and pay off their supporters. This process results in a massive shift of wealth from poor and average people to the financial elite, which is one of its primary objectives.

    MMTers then make a baseless assertion that because the government can create unlimited amounts of fiat funny money that it is unconstrained by unpayable levels of debt and unfunded obligations, no matter how gargantuan. Contrary to MMTer mythology, a government budget is just like a family budget, except that when the government runs out of resources, it can attempt to steal more. The economic laws which apply to both are exactly the same and at some point, the government is going to run out of resources available for it to steal.

    Like

    • 11 October 2012 12:54 am

      Modern Monetary Theory: that the government can print almost unlimted currency without ill consequences. It is the mirror image of the austerian (not Austrian) obsession with gold and inflation. They are bookends, in a sense. It is evidence of great social stress when such nonsense — fringe economic and political theories — become widely accepted. Afterwards, when the seas are calm again (as they will be, however horrific the storm), people look upon these as symptoms of the madness caused by the stress. But they seem logical at the time.

      On the other hand, there are economists who advocate this theory. Such as my fellow author at Roubini’s Economonitor L. Randall Wray (Prof Economics at U of Missouri-Kansas City); see his articles here.

      For a clear if somewhat long and technical explanation of Modern Monetary Theory, see “Understanding The Modern Monetary System” by Cullen O. Roche (professional money manager). It’s a complex theory.

      Here are two clear explanations of MMT by Paul Krugman (also not a fan of MMT):

      1. Deficits and the Printing Press (Somewhat Wonkish)
      2. MMT, Again

      Like

  15. Schofield permalink
    10 October 2012 11:08 pm

    Bob Roddis where do you think the “existing money” you write about in your comment comes from?

    Like

    • 10 October 2012 11:24 pm

      I didn’t think the following which I wrote above was particularly obscure or ambiguous:

      “It starts with the obvious fact that a government which can create its own monopoly fiat money can purchase goods and services with that new money and without directly taxing the citizens first. The purpose of this process is to swipe purchasing power from those holding the existing money without them understanding what is making them poorer because the government fears they would strongly object to paying a tax of which they are actually aware.”

      Like

    • 11 October 2012 1:35 am

      “without them understanding what is making them poorer because the government fears they would strongly object to paying a tax of which they are actually aware.”

      This is called unanticipated inflation, such as that done by the US government after WWII (reducing it from 108% of GDP in 1946 to 25% in 1975). Unfortunately, it’s not possible today, as I have written many times. Most recently in What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!, 17 September 2012:

      There are two limits to central bank’s ability to manage inflation. First, the nation’s currency. The central bank can expand the money supply without limit — with effects varying depending on its internal circumstances. But it will depress the value of the currency. A weak currency can boost exports, beneficial if not offset by the increased cost of exports (eg, China and Germany have done this successfully). At some point, however, a currency collapse comes — with horrific consequences.

      The second limiting factor: it requires marks — people unaware of the coming inflation and its consequences. That was so in Germany and Austria after WWI (in the early 1920’s), just like Americans in the late 1960’s and 1970’s (our first peacetime inflation). Next time we won’t be so easy to fool. Inflation was the formative economic experience of the boomers. Like “survivors” of the Great Depression, they have waited their entire lives for a repeat of this formative experience — what would be their greatest opportunity to gamble and win!

      The more people prepare for inflation, the less the government benefits from it. Consider the situation (exaggerated for emphasis) in 2 years (to pick an arbitrary number), when (if) the recovery comes. Everybody (including elderly widows in Smallville) will own only hard assets, inflation protected securities, or short-term debt. The average maturity of the Federal debt will be 2 weeks (vs. about 4 years today). Under these circumstances the government must avoid inflation, as the resulting increase in its interest cost would be lethal. Just like Japan today, with its debt of 2x GDP and of a short average maturity.

      Like

  16. 10 October 2012 11:10 pm

    Roger Erickson is correct. The US in not “going bankrupt,” or running out of money” operationally.

    The only way the US can “run out of money” is voluntarily through policy ignorance or to force a particular policy. This has nothing to do with operational capacity but rather knowledge and will, just as it is a strategic decision to whether and how to use a weapons system in a particular context or at all.

    The only contraint an issuer of a non-convertible floating rate (“fiat”) currency faces is availability of real resources in the present and future. see this short clip of Allan Greenspan testifying to Paul Ryans budget committee to this effect on YouTube.

    .

    .

    However, there is admittedly an nominal inflation constraint if policy (or bank credit, which is endogenously driven) results in effective demand exceeding the capacity of the economy to expand to meet it. This can also influence the fx rate. However, this only becomes an issue when an economy is operating near full capacity and full employment. Recent US inflations have generally been related to supply contraints, usually related to petro price, rather than aggregate demand exceeding capacity due to policy.

    Nor is there an intertemporal governmental budget constraint on fiscal sustainability. The IGBC is a bogeyman. See Scott Fullwiler, “Interest Rates and Fiscal Sustainability“, Journal of Economic Issues, Vol. 41, No. 4). Here’s a link to a working paper that is a free download.

    Myth-based debt and deficit hysteria has been promulgated by Pete Peterson for years and he has enlisted austerians like David Walker in support of these myths. He wrote a book on it back in 1993. It’s an anti-government political agenda rather than an economic policy that would serve the country.

    Like

    • 11 October 2012 1:23 am

      “The US in not “going bankrupt,” or running out of money” operationally.”

      I have never understood this point of view. The US government is like a massive ship in that it’s course cannot be changed rapidly. Also, rapid changes are disruptive (economic impacts are largely a function of the rate of change).

      So while we are not near bankruptcy — or the needs for large-scale monetization (the two poles of debt management) — when should we start to worry? We have a net debt of 75% of GDP, we’ve run a deficit of over 8%/GDP for four years, we have a structural primary budget deficit of 6% — and ugly demographics for the next several decades from the aging of the baby boomer.

      We not facing imminent disaster, but the longer we wait the more difficult the necessary adjustment will become. It’s not too soon to start thinking about these things. We now have relatively simple solutions (eg, moderate tax increases, means-testing social retirement benefits, reform of defense and health care systems). But time inexorably closes options.

      Like

    • 11 October 2012 2:26 am

      So while we are not near bankruptcy — or the needs for large-scale monetization (the two poles of debt management) — when should we start to worry? We have a net debt of 75% of GDP, we’ve run a deficit of over 8%/GDP for four years, we have a structural primary budget deficit of 6% — and ugly demographics for the next several decades from the aging of the baby boomer.

      The correct question is not when we should start to worry but why we should start to worry. It is taken for granted that some criterion is operative that should make us worry. The criteria that are either adduced or assumed to be self-evident have been shown to be bogus by economists such as James K. Galbraith, who describes himself as a “Galbraithian,” MMT economists, circuitists, and other Post Keynesians — the proponents of increasing effective demand through increasing the fiscal deficit when there are significant idle resources in the economy.

      There is a very clear rationale for this in terms of sectoral balances and offsetting increased savings in a period of deleveraging when exports cannot make up for it. The US now experiencing lagging demand from both private domestic saving and the KAS that necessarily corresponds to the a CAD as an accounting identity.

      In OODA, “orient” includes examining cultural traditions and new information. The “why” we should worry derives from the conventional wisdom that has become a cultural tradition, However, this conventional wisdom has been pushed by vested interests for advantage, e.g., to reduce the footprint of government in the economy other than for military spending. Do these advocates ever consider that austerity should be extended to the military. Of course not. Only to domestic programs that the proponents of austerity want privatize for increased profit.

      There is new information available that contests this position as untenable and, in fact, dangerous economically (it’s contractionary), politically(it’s divisive), and socially (it results in a two-tier society). Why should there be there resistance to considering new information from experts in the relevant fields that show these views to be mistaken?

      Like

    • 11 October 2012 2:49 am

      “The criteria that are either adduced or assumed to be self-evident have been shown to be bogus ”

      This is one of our problems today: people take sides in technical disputes like their baseball games. Climate science and economics are among the worst affected.

      This statement is grossly exaggerated. There is a debate, but it’s still a debate. The majority of relevant experts still disagree with the MMT view of sovereign debt. That’s no surprise given the lessons of history. Eventually they’ll sort these questions ok, although it might take years. And of course this cycle will teach us much, as we see the results from the different national experiments being done today.

      Public policy should be made on conservative assumptions, not untested new theories (no matter enthusiastic their cheering sections) — esp about existential matters (ie, those affecting the survival of the State).

      Like

    • roger erickson permalink
      11 October 2012 4:32 am

      “untested new theories” ?

      Fab, did you look at the links to the “tests” carried out by Marriner Eccles & FDR – 80 years ago – and commented on by Beardsley Ruml? These are certainly not new theories, just actively resisted old, well proven examples. You can find quite analogous observations & experiences written down & lived out by Ben Franklin and Abe Lincoln, and many others in between and after. The ideas are neither new nor untested.

      The fundamental fact is that a fiat CURRENCY ISSUER manages a real-goods/real-capabilities budget, and uses fiat currency strictly for internal accounting. CURRENCY USERS, on the other hand, use that same fiat currency as an accurate proxy for their local real-goods/real-capabilities budgets.

      Small, staid economies get away with confusing static & dynamic values, and can use a commodity currency standard. With size & complexity, however, the demands for agile policy require transition to a fully fiat currency, which is backed by dynamic public initiative and coordination capabilities, not any particular static asset.

      This is all obvious after any consideration of any system science, yet understanding it hinges on appreciating the difference between static value and dynamic value.

      ps: the supposed public “debts” run up during WWII were simply fiat currency volumes our public decided to spend into existence. We owed the supposed debt to ourselves, and it hardly mattered whether we ever pay off our imagined debt to self – and it still doesn’t. It’s entirely a matter of broken semantics. Not every formal deficit figure in double-entry accounting methods translates to an objective debt in real terms. You’d understand that implicitly if you’d simple read Warren Mosler’s excellent little book, or similar writings by Ben Franklin, or various analyses of Abe Lincoln’s Greenback Dollars.

      This is NOT an academic argument. It is a fundamental question of whether a sovereign people may or may not denominate whatever transactions are dictated by any goal they set for themselves. Yes, currency is a useful tool invented and used by human cultures, but it is – more generally – the UNIT OF ACCOUNT information incidentally thrown off by any and all organized systems, whether particles/photons in a plasma, adenosine/other resource molecules inside cells, or oxygen/resource-molecules in the various circulating inter-cellular media of physiologies (blood or hemolymph in animals, sap in plants). Don’t lose track of that simple point.

      Like

    • 11 October 2012 4:39 am

      You’re not getting the point I made, despite my repeating it several times. It’s nice that you have set yourself up as God for economists, ruling what theories are or are not true. Please excuse the rest of us if we don’t pay attention to your verdicts.

      Current events are and will continue to provide much new information. Experts will debate these things, and eventually come to a new consensus. I’ll wait for them to do so.

      Like

    • roger erickson permalink
      11 October 2012 2:42 pm

      Verdicts? God? Fab, your behavior here is bristly and baffling.

      You started out with a verdict stating that fiat accounting deficits were foolish. I responded with the most concise statement that I could manage, summarizing the evidence from multiple economists, bankers, non-economists and even former Federal Reserve Chiefs that your verdict was operationally unfounded – and I provided the relevant references.

      Since then you’ve repeatedly stated that any dissent is a claim that “all economists” are wrong, despite the supplied references showing that a steady stream of economists were always in dissent to what you claim “everyone knows.”

      We have the testimony from Julius Caesar that “creating is better than learning” and that “doing” things that matter is better than “being” noted as a learned expert. (source: BrainyQuote)

      Yet you as the modern channel of Fabius Maximus are now stating that creative options can only be explored after we wait for permission by learned experts! John Boyd must be turning over in his grave.

      Like

    • 11 October 2012 3:00 pm

      “You started out with a verdict stating that fiat accounting deficits were foolish. I responded with the most concise statement that I could manage, summarizing the evidence from multiple economists, bankers, non-economists and even former Federal Reserve Chiefs that your verdict was operationally unfounded – and I provided the relevant references. Since then you’ve repeatedly stated that any dissent is a claim that “all economists” are wrong, despite the supplied references showing that a steady stream of economists were always in dissent to what you claim “everyone knows.””

      I don’t believe any of that accurately represents what I have said here. Note that I almost always respond to specific quotes to avoid this problem. If you believe one of my replies mischaracterizes the quote I gave, them please cite it. Like I’ll do now:

      “You started out with a verdict stating that fiat accounting deficits were foolish.”

      I don’t believe I said anything remotely like that.

      “Yet you as the modern channel of Fabius Maximus are now stating that creative options can only be explored after we wait for permission by learned experts! John Boyd must be turning over inhttps://fabiusmaximus.wordpress.com/wp-admin/edit-comments.php?comment_status=all#comments-form his grave.”

      I have not said anything remotely like that.

      Like

    • 11 October 2012 3:06 pm

      About Roger’s use of quotes

      (1) He says: “despite the supplied references showing that a steady stream of economists were always in dissent to what you claim ‘everyone knows.'”

      You put “everyone knows” in quotes. I never used those words in this thread. Please don’t do that.

      (2) The Julius Casesar quote

      I don’t see a source for it. My guess (guess!) is that its a fake quote, or misattributed to him. Lots of the quotes at Brainyquote are like that.

      Like

    • roger erickson permalink
      11 October 2012 5:26 pm

      It started with the title of this post, Fab.

      Ok, I understand now. You’re a smart, useful guy, but incredibly thin skinned if anyone challenges one of YOUR verdicts.

      Good to know. If you know what buttons to push, you can work around anyone’s limiting vs useful attributes, and leverage whatever contribution they can offer, ’til a better one comes along.

      Like

    • 11 October 2012 5:53 pm

      I suggest trying to reply to what people say, don’t mischaracterize what they say, and don’t bother with evasions to factual rebuttals like “thin-skinned”. Then you will get a more positive response to your material.

      I don’t believe you’ve provided much if any substantive response to what I have said — which was directly addressed to your words. That doesn’t give readers much confidence in your views.

      Facts are facts.

      Like

  17. 10 October 2012 11:36 pm

    Let’s reduce the heat. The argument that began the discussion relies on this fundamental assertion:

    “A fundamental measure of a nation’s financial condition is the structural primary budget balance. AKA the cyclically adjusted budget balance. As in this graph from “By One Key Budget Indicator, the Structural Primary Balance, Even Greece Is Doing Better Than the United States. Why That Should Worry Us.“, Ed Dolan.”

    He is a very conservative scholar as you can see from his blogs and his associations with George Mason University and Cato. Dolan’s piece includes the admission that our present deficit

    • is largely the product of the Recession and
    • during the recovery from the Great Recession fiscal stimulus acts as an “automatic stabilizer,” i.e., a “counter-cyclical” policy that speeds recovery and reduces the severity of the recession.

    Note that the world has provided a “natural experiment.” The EU responded to the Great Recession with austerity, a pro-cyclical policy that makes the recession more severe and longer. Moreover, EU and ECB leaders’ mantra is “there is no alternative” (a phrase that should send warning chills up any veteran’s spine) — because nations that joined the Eurozone gave up their sovereign currency they no longer have the ability to adopt rational automatic stabilizers. (More precisely, they crippled the effectiveness of their automatic stabilizers through the limitations of their “Stability and Growth Pact.” Note that this has not prevented budget deficits from occurring but it has greatly reduced fiscal stimulus.

    The result has been a gratuitous Eurozone recession and Great Depression levels of unemployment in Spain and Greece. Nations like Spain, Iceland, and Ireland did not run significant budget deficits in the lead-up to the crisis. Indeed, they often ran surpluses. Their “debt crisis” is a result, not cause, of the Great Recession (and dropping a sovereign currency). (Please read my colleague Stephanie Kelton’s work on why a nation in a severe recession cannot simply “choose” to end a budget deficit — the austerity measures that are purportedly put in place to reduce deficits can actually increase the deficit by throwing the nation back into a recession.)

    Dolan argues, however, that once fiscal stimulus helps us recover from the Great Recession the U.S. will need to face a “structural” deficit problem that is not the product of the Great Recession. The structural deficit argument is that we face a spiraling, untenable deficit because of the interactions of tax cuts and increases in costs for social security/medicare/medicaid. He argues that if the national debt increases as a percentage of GDP it must become untenable and he discusses three means of preventing the national debt from increasing as a percentage of GDP.

    He chooses Chile as his exemplar for the first means: “Chile has achieved excellent fiscal health by following the cyclically neutral pattern.” I begin with the preliminary observation that his example shows the grave limits of his concept of “excellent fiscal health.” Check out the Chilean statistics on unemployment, poverty, and inequality under Pinochet and the improvements under his socialist successor. A low budget deficit does not translate to a healthy economy or, from a military perspective, a stable economy.

    Then back up to Dolan’s fundamental assertion. In fact, the U.S. deficit has frequently increased as a percentage of GDP and it has never had such a ruinous result. Indeed, the increasing deficit typically had the opposite effect — it is associated with increased GDP growth in subsequent years. Conversely, every sharp, sustained drop in deficits and debt has been followed by a depression (or in the current case, a Great Recession). (See the work of my colleague Randy Wray.)

    Dolan writes:

    “The chart shows a healthy surplus of the structural primary balance—1.7 percent of GDP, on average–from 1994 to 2001. Over that period, net government debt, by the OECD’s measure, fell from 54.4 percent of GDP to 34.6 percent. Countercyclical considerations could justify the sharp reduction in the surplus during the brief and mild recession of March to November 2001, but after that, things went badly off course.”

    His terms betray his “moralization” of finance in a manner that impedes sound fiscal policies. Note his use of the term “healthy surplus.” A budgetary surplus is supposedly “healthy.” A deficit, implicitly, must be “unhealthy.” The problem is understandable — everyone’s first instinct is to generalize from the only budget we really understand and live with our entire adult lives: the household budget. One of the commentators asserts that a government with a sovereign currency is exactly like a household — except it is a thief. The commentator does not see how much his inaccurate gibe discloses. Who is the government “stealing” from when it creates a national currency? It is, of course, a trick question for their is no “theft,” but it is a question that will force the commentator to come up with a series of assertions that will share a common characteristic — the government is not like a private household.

    Try the following as a thought exercise. Governments are also not “just like corporations,” but the corporation is at least a less obviously inappropriate comparison. As least corporations share the characteristic with government of being organized almost invariably for perpetuity. Why aren’t the deficit hawks demanding that U.S. corporations eliminate their debts? Why isn’t corporate debt viewed as “immoral?” Why is a corporation that has no debt not viewed as “healthy” by investors and corporations with substantial debt (e.g., the vast bulk of corporations) disdained by the financial markets as “unhealthy?” Why don’t potential CEOs campaign for promotion by promising to end the corporation’s debt and never borrow again?

    That was just a thought exercise to try to end the autonomic response we all have on the basis of our experience with household debt that government debt must be bad, unhealthy, and immoral. Please read Randy Wray’s brief piece on why the government is nothing like a household. It’s concise and analytical. You may disagree with aspects of his analytics, but you will no longer find yourself making the mistake of simply extrapolating from your experiences with your household budget.

    Back to Dolan’s “health surplus” language about the budget deficit. The Clinton/Republican grand bargain did produce a budgetary surplus. Indeed, go back to the transcript of the Lieberman v. Cheney VP debate on October 5, 2000 and see Lieberman’s statement:

    “Al Gore and I are committed to balancing the budget every year. In fact, the paying off the debt by the year 2012, when by our calculation our opponent’s economic plan still leaves America $2.8 trillion in debt.”

    The point is that running large surpluses and having as a goal “paying off the debt” is not in fact a “health” policy, particularly for a nation whose currency serves as the global reserve currency. Indeed, the policy can be downright unhealthy.

    Moving forward. Modern Monetary Theory (MMT) is in large part a description of how sovereign monetary operations actually function. That is one of the reasons that MMT has so many supporters among financial participants. The other reason is that MMT proponents have shown far greater predictive strength than other paradigms. MMT also leads to excellent policy recommendations that large numbers of Americans support.

    Here are some of the things MMT’s academic proponents do not believe. They do not believe that national budget deficits inherently have no effect (for good or ill) on the world. MMT scholars emphasize the real economy and whether shortages are being created or assets allocated improperly as a result of fiscal flows. MMT scholars, and reality, have shown that nations with (a) sovereign currencies, (b) with freely floating exchange rates, and (c) that borrow in their own currency are not vulnerable to the “bond vigilantes” and have run deficits for decades that neo-classical economists have claimed were unsustainable without triggering high interest rates or hyper-inflation. MMT also stresses that it is possible for a government to adopt policies that produce hyper-inflation. Note that MMT isn’t a partisan issue. There are conservative, liberal, and libertarian supporters of MMT and we criticize or support politicians because of their policies rather than their party affiliations.

    We can strengthen the nation now by adopting a jobs guarantee program that provides jobs to those willing and able to work. Unemployment represents a massive waste of resources and the psychological and social harms of unemployment to the household are often devastating. It is obscene that returning veterans who wish to work are left without jobs. Unemployment has long been known to be one of the triggers of male suicide.

    We have tremendous areas of common ground. I’ll close in my areas of expertise.

    It is the anti-regulatory policies of Cato and George Mason scholars that have been dominant since the start of the Clinton administration. The “competition in regulator laxity” with the City of London produced the inevitable “race to the bottom.” Consider what kinds of people will stay in a regulatory agency run by leaders who refuse to enforce the law. How many vigorous “troop” do you think will stay in a unit where the CO studiously avoids all contact with the enemy?

    The result has been the removal of effective “regulatory cops on the beat.” When cheaters prosper, market forces become perverse and produce a “Gresham’s” dynamic in which “bad ethics drives good ethics from the marketplace.” Many military officers have substantial experience with this dynamic and how it harms military missions because they have served in nations where the Gresham’s dynamic is endemic (or in DOD procurement). They have seen the intersection of public and private sector “control fraud” — “crony capitalism” — and how destructive it is to commerce, ethics, and government. If you are interested in our research on these issues pleas check my pieces on New Economic Perspectives (or SSRN for more classic academic articles).

    Thank you for reading and considering such a long post.

    Best,

    Bill Black

    Like

    • 11 October 2012 1:46 am

      Thank you for posting this detailed reply. I’m lifting this to become a post of its own, in order to get greater exposure.

      William K. Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City. From his faculty bio:

      Professor Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

      His book, The Best Way to Rob a Bank is to Own One (2005), has been called “a classic.” Professor Black recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management.

      Like

    • 11 October 2012 5:53 am

      Out of all the posts here, the only one I think is worth responding to is Bill Black’s. It ought to be obvious to any objective observer – that is, one who doesn’t base his view of economics on a misguided notion of “immoral spending” and “moral savings” – that government spending to promote the social good is, well, good (unnecessary wars, tax cuts for the parasitic rentier class, etc. are bad).

      On the other hand, most of what Professor Black describes as good policy is really the SPENDING by government, not the creation of DEBT. I think we need to separate these two and ask if they are really necessarily connected or if we have the option and is it desirable to do so.

      Government can, does, and has, created money without debt. It does this currently every time it produces physical coins, and has done so since 1792, under the original coinage act. Now of course, coins are a miniscule part of the money supply, but we’ve had $50 coins, and there are serious writers who suggested paying off much of our debt with trillion dollar coins. There is no constitutional or economic reason why we couldn’t do so, though it might seem counter-intuitive. It’s not even inflationary unless that money is then spent into the economy in some other way. Paying down the debt alone would not raise inflation, it would actually be neutral in the case of a trillion dollar coin, or, much worse, deflationary, in the case of the Austerian (not to be confused with Austrian) solution.

      But a better, more productive solution would be to inject new money into the economy by government to produce public works jobs (we are still living off the great public works produced by FDR). The thing the MMT folks miss, and I think why their theory has so much trouble being accepted, is that we need not do this by supporting a whole new generation of rent-seekers in the form of Treasury bond buyers.

      In fact, as even Warren Mosler admitted to me in an email, we do not need a Treasury market at all. It is an anachronism. Government – and by government, I mean Treasury, not the MMT version, which is the Central Bank – could just produce money, debt-free via Art. 1, Sec. 8, Clause 5, by “coin(ing) Money” (and no, the phrase “coin Money” capitalization the original, does not mean to produce physical Coins (capitalization of “Coin” also in the original. See Prof. Natalson’s seminal and heavy sourced paper on this here: “The Coinage Clause in the Constitution“, 1 April 2010.

      Congress used this power originally under Lincoln (1862) to produce $450 million to fight the Civil War (THAT public works project worked out well, didn’t it?), and continued reissuing about $361 million for about the next 100 years, until 1972, and even today there are still about $250 million in U.S. Notes still circulating (Wikipedia entry on US Notes).

      Of course, excess money production can lead to inflation (gee, that would NEVER happen under a private banking system would it? ;) ). That’s why we (should) have taxes, not to raise revenue, but to control inflation (ideally, this should mostly be land value taxes to prevent speculation and monopolization of land, but that’s another discussion). So, why not split the difference? Have government provide more money when needed, but do it in a way that doesn’t increase the debt.

      Double entry accounting, an accountant friend of mine assures me, is not a God-given law, or something without which financial economics cannot function. This is no reason to stick with a system that MUST produce debt every time it produces MONEY. We CAN split debt and money. Lincoln did it. Franklin did it. The Mint does it.

      Like

    • piedmonthudson permalink
      11 October 2012 6:09 am

      Scott – – –

      I think one reason why we might want some government debt is to satisfy citizen demand for low risk savings.

      Otherwise I applaud you great comment.

      John Lounsbury

      Like

    • 11 October 2012 7:06 am

      I suggest reading the Randy Wray article cited by Or about the limits, as seen by MMT, to monetization (aka printing money). Avoiding inflation and currency collapse are hard limits, but in practice devilishly difficult to manage.

      Think of a very fast car. No matter how powerful the engine, a prudent driver will not drive faster than visibility allows. Similarly, the money supply (result of past activity) must be managed as circumstances change. Monetary velocity, capacity utilization (esp labor and plant), capital flows — all of these can vary so that an appropriate money stock becomes too large (or, as during the 2008-09 crash, too small).

      Although too-often exaggerated, Weimar offers many lessons. Such as the rapid change in monetary velocity (although the data on this is sparse, it’s quite stunning).

      The more aggressively monetary policy is used, the more difficult and essential its management becomes — and the more serious the inevitable policy errors.

      Central Bankers are a slow, reactive, conservative breed. Natural selection has breed them so, to suit the needs of the job.

      Like

    • 11 October 2012 7:45 am

      From Dying of Money: Lessons of the Great German and American Inflations by Jens O. Parsson (1974), chapter 17:
      .

      .
      He notes that monetary velocity is a “a volatile and psychological phenomenon” — hence difficult to predict and subject to sudden large changes. The Weimar government responded poorly to this mysterious dynamic. Now we know better how to deal with past problems, but might do no better with new problems.

      This is not to say we’re at risk today of inflation, let alone hyperinflation. Instead it’s a warming about the importance of humility and conservatism when working the controls of our economic machinery. We probably don’t understand it as well as we believe we do.

      Like

    • 11 October 2012 8:06 am

      I will offer one more comment and hope it receives kinder consideration than others have.

      The Weimar Republic hyperinflation problem is a very poor analogy to any condition that exists in the world today, except possible some Latam countries whose debt is denominated in dollars (if that is still being done?).

      The Weimar Republic had a huge war reparation debt denominated in foreign currency or gold. That simply is not what we are dealing with today for the U.S. Japan, UK, etc. It doesn’t even apply to the Eurozone because there is the ECB which does have an ameliorating effect on the euro distress that results from the absence of direct fiscal control.

      John Lounsbury

      Like

    • 11 October 2012 1:23 pm

      Absolutely. The Weimar hyperinflation provides a warning to us about one of the macroeconomic boundary conditions. The Great Depression provides the other. Both to a large extent result from policy errors. If we learn to be more humble about our abilities and knowledge, then we have gained much from them.

      Like

    • 11 October 2012 8:06 am

      There is a good bit of evidence from Zarlenga and others that the German Weimar experience had more to do with private short-sellers devaluing the reichmark than with the government putting out too much money; it was actually the government that finally put an end to the over-printing by the private banks and stabilized the currency. See Wikipedia entry on the German Rentenmark, but this is just a start.

      In any case, the $16 trillion created by the Fed (according to the audit last summer) and given to the banks for essentially worthless mortgage paper, and the $29 trillion in rollover loans (according to Randall Wray), makes every government stimulus to date seem puny by comparison.

      It is the private sector, not the public one, that causes the bubbles and crashes (by withdrawing credit).

      As for predicting market tops, that is the wrong question to ask. We CAN have an economics that is worthy of the appellation “science” if we go back to classical economics basics, most especially including the role of land in producing bubbles every 18 years or so for the history of capitalism going back to the 1600s, with very few interruptions. I am indebted to Mason Gaffney’s work in this regard, and hope to have an illustrated chart of the periodic booms and busts over history at some future date. In the meantime, you may want to read his “The Great Crash of 2008” {his website, 17 August 2008} to understand this better, or Homer Hoyt’s earlier analysis 100 years of Land Values in Chicago, 1833-1933 {1933}.

      Like

    • 11 October 2012 1:46 pm

      (1) “There is a good bit of evidence from Zarlenga and others that the German Weimar experience had more to do with private short-sellers devaluing the reichmark than with the government putting out too much money”

      Can you give us a citation on this? Not Wikipedia, please.

      (2) “In any case, the $16 trillion created by the Fed (according to the audit last summer) and given to the banks for essentially worthless mortgage paper”

      Can you give a citation for this? It looks very wrong. The entire US mortgage market was $14.7 trillion at the end of 2008, and commercial banks hold only $3.8T of that (source).

      (3) “the $29 trillion in rollover loans (according to Randall Wray), makes every government stimulus to date seem puny by comparison.”

      Again, this looks wrong. The total of US commercial bank assets (everything) is < $13 trillion (source). The US Government’s public debt is only $13T (source)!

      (4) “It is the private sector, not the public one, that causes the bubbles and crashes (by withdrawing credit).”

      (a) Investment bubbles and crashes are different phenomena than the inflations/deflations we’re discussing here.
      (b) Investment bubbles and crashes can occur without credit. The tech bubble involved little excess credit, for example.

      Like

    • 11 October 2012 2:16 pm

      I was hoping I wouldn’t have to do all this re-research; these blogs can become timesinks. However,

      (1) Stephen Zarlenga’s chapter 21 in his The Lost Science of Money: The Mythology of Money - the Story of Power {The American Monetary Institute, 2002} is entitled: “Germany’s 123 Hyper-Inflation under A Private Central Bank.” He has 47 cites ate the chapter’s end. He says

      “…as in other caes, when the monetary cases are actually examined it becomes clear that those private banking elements were deeply involved in the speculation that helped to bring down the Reichsmark. This was not stopped until the government repeatedly took decisive action against them.”

      Then he goes onto describe these actions in detail. It’s complex, but well worth reading, as is his 700+ page book, for any serious student of monetary history and theory.

      (2) The Fed’s $16 Trillion Bailouts Under-reported“, Tracey Greenstein (“I write about travel, ecotourism, ecofashion and business ethics”), blog of Forbes, 20 September 2011.

      (3) Randall Wray looks at the $29 trillion he and his 2 Phd students uncovered, here: “Bernanke’s Obfuscation Continues: The Fed’s $29 Trillion Bail-Out Of Wall Street“, Huffington Post, 14 December 2011.

      (4) No, deflation occurs when money (credit money, or just plain money, it doesn’t matter for this point) is withdrawn, while demand remains the same, or higher. Inflation occurs when too much money is produced to chase too few goods. You can have BOTH inflation and deflation…in different sectors, as we do now. Deflation in housing (until recently, now that the 18 year land cycle has restarted, right on cue, in 2009, albeit with fits and starts), and inflation in assets like stocks and bonds.

      The tech bubble was caused by over-leveraging and over-investing, and over-borrowing. All of these things involve too much credit. Older readers may recall the Fed (Greenspan) provided extra liquidity due to fear of Y2K, then withdrew it in the Spring of 2000, when the crash began (March) 9/11/01 didn’t help either. I was an I.T. Manager in 1999, and we were encouraged to replace anything and everything, even 2-year old PCs that didn’t need it, for Y2K. There was a lot of wasted spending.

      I can’t keep responding in depth to this blog – I have too many other demands on my time, but I do realize what happens when someone makes an unsubstantiated claim, so there it is.

      If you really want to see how irrelevant the size of the GDP or mortgage market is, take a look at the 1.2 quadrillion derivatives market: “Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP“, Daily Finance, 9 June 2012. (ok?), or my article with lots of cites, showing how $100 trillion could be saved or re-allocated, here: “America Is Not Broke!“, Scott Baker, HuffPo, 21 September 2012.

      It’s Red Pill/Blue Pill time, Fabius. Right now, you’ve scratched the surface, aghast at the common wisdom that says debt is terrible, terrible, terrible, and will drag us all the monetary Hell.
      As Bill Black and others have pointed out, things are not always as we’ve been told, or seem intuitively. Now, you have to decide whether you will challenge your own assumptions. I know I have. I believe almost nothing I believed about economics, or even politics, that I believed just 5 years ago. This is what life’s all about, challenging assumptions, learning, and growing.

      Like

    • 11 October 2012 2:49 pm

      Scott,

      This is a complex subject, and not well-covered in the media. And many of these issues take us to the edge of the known. So I see where you are coming from. However, many of the facts you give are wrong.

      (1) You said “In any case, the $16 trillion created by the Fed (according to the audit last summer) and given to the banks for essentially worthless mortgage paper”

      In support of that you cite a Forbes blogpost saying “over $16 trillion was allocated to corporations and banks internationally, purportedly for “financial assistance” during and after the 2008 fiscal crisis.” That doesn’t support your original statement. First, that sum includes much more than mortgages (and most of those mortgages were not “worthless”). Second, the $16T is not all money (“created by the Fed”); most of it was in the form of guarantees. The Fed guaranteed much of the US financial system (eg, in effect, most money market funds).

      (2) Ditto with the HuffPo article by Randy Wray. The $29T includes, as Wray explicitly says, “committments” — the vast fraction of which were never triggered (the entire sum couldn’t be used, excluding a nuclear war). Also, that includes the same sum counted multiple times as its rolled over (like saying the Federal debt is $30T, because 90-day T-bills roll over 4 times per year).

      (3) “You can have BOTH inflation and deflation…in different sectors”

      This is a common mistake, caused by sloppy use of precise terms. Inflation and deflation are changes in the general price level, and distinct from sector prices rising and falling (eg, prices of homes and stocks, food and energy). They are monetary dynamics. Energy prices rising is not inflation (in fact, as I said in early 2008, it can cause deflation).

      (4) “There was a lot of wasted spending {on tech}”

      You are confusing credit and spending. There can be a lot of spending in a sector without credit expansion. The tech bubble (spending for Y2K) both predates and was unrealted to Greenspans monetary expansion in 1999.

      (5) The derivatives market is largely unrelated to the issues discussed here. It’s a cash market. It might have macroeconomic effects to the extent that banks, as middlemen, suffer losses from counterparty failures. That’s a potentially serious problem, but not monetary in nature.

      Like

    • 11 October 2012 2:52 pm

      Note: from the HuffPo article, Scott Baker is President of the Common Ground-NYC, and Coordinator of the NYS Public Banking Institute.

      Like

    • 11 October 2012 3:35 pm

      Fabius – I should clarify that I am the New York State Coordinator for the Public Banking Institute, which is national, not that there is a NYS PBI (Huffington Post allowed little in their min-bio until now, so I just corrected that).

      #1 There are many, many cites on the $16 bailout/guarantee – Bernie Sanders was screaming about it, to largely deaf ears, apparently, over the summer. Much of that money went to European banks, where it apparently did little good. Without the guarantees, the banking system would have imploded. And no one was willing to buy the mortgage securities in late 2008, post-Lehman collapse, so yes, they were, in effect worthless at the time, until the Fed stepped in and essentially created “worth” by its actions (then, and ongoing). So much of the FIRE sector is based on confidence, and it often is a Ponzi scheme, because money itself is not wealth, only the underlying assets are.

      #2 I’m aware of Wray’s stipulation. I believe I said rollover loans in my original post, but if not, I certainly never said anything to disagree with that. The fact is though, that without these rollovers, the banking industry would itself, have rolled over.

      #3 You can have inflation in some commodities – food, gas, etc. – and deflation in other things, like houses (really, land). That is distinct, as you say, from whether the money supply itself is inflated by over-supply, or deflated by withdrawal. In recent practice, I’ve found the former measures more useful than the latter, broader one. It helps explain why people’s wages can go down even while the price of things goes up, as well as why the wealth gap keeps increasing.

      #4 The derivatives market, as Warren Buffet said, somewhat disingenuously, but accurately, is a market of mass destruction. It can blow up banks and entire economies, if it is allowed to continue. I like my solution, now also Paul Craig Roberts (he may have come up with this on his own, though the wording is strikingly similar to mine) to simply zero out, make null and void, any derivative bet where EITHER party cannot realistically be expected to pay.

      See here: http://www.opednews.com/articles/A-necessary-addendum-to-Pa-by-Scott-Baker-120606-371.html These bets are fraudulent and must be abrogated, even retroactively.

      #5 Where I worked, we both spent and borrowed (it was a large university, with lots of real estate holdings, which, as you may know, are untaxed). The steepest part of the tech bubble was the end of it, when credit was expanding, as was the money supply, from Greenspan. Both would prove the market’s undoing. Post-2000 would have been a great time, then, as now, to introduce debt-free money, but not for wars and tax cuts without putting people to work. Then you get Zimbabwe.

      Like

    • 11 October 2012 6:42 pm

      I don’t understand most of Baker’s reply. Most of my comment concerned simple matters of fact.

      (1). His specific statement was incorrect that the $16t was money printed to buy worthless mortgages. Yes, the sum of the total guarantees was $16t or more, but little of that was actually spent, only some of *that* was spent on mortgages, and only some of *that* was buying mortgages on which the Fed took losses.

      The article he cites was quite clear on this point, and gave numbers.

      (2). Baker said there were $29t in “rollover loans.” The article about Wray’s research says otherwise. They were “commitments”, mostly guarantees. Not loans.

      (3) Changes in specific prices are not inflation or deflation, although they’re commonly discussed in those terms. It is a significant technical error to do so, and quickly leads one’s thinking into the sand traps.

      A rise in prices ( eg, food, energy) can initiate debt deflation and lead to full-scale deflation. That was one factor in the 2008 crisis. I have written several posts about this, with citations.

      (5). Yes, derivatives might prove to be bad. That was not my point. They are not a monetary phenomenon, and hence not directly relevant here.

      (6). Most of Greenspan’s y2k monetary expansion was cash, and did not fuel a credit bubble. There were few banks impaired in the tech crash, another indicator that this was not primarily a credit event.

      Most of the tech over expansion was financed with cash, either from investors or companies.

      Like

    • geerussell permalink
      11 October 2012 3:56 pm

      In contrast with the characterization of hyperinflation as (monetary and/or fiscal policy errors) there’s a view of hyperinflation put forth by Bill Mitchell that comes at hyperinflation from a different starting point. Hyperinflation as a symptom of real supply shocks. Here he applies that framing to both Weimar and Zimbabwe.

      “Zimbabwe for Hyperventilators 101″

      http://bilbo.economicoutlook.net/blog/?p=3773

      Like

    • 11 October 2012 4:43 pm

      I would like to suggest a new “rule” in economics:

      All those who mention Wiemar and/or Zimbabwe as examples of what could happen to the U.S., mark themselves as economically ignorant. Perhaps we can create a “WZ” badge to send to these people.

      Like

    • 11 October 2012 6:02 pm

      I sympathize with Mitchell’s view, having written several posts with the same theme.

      But let’s remember the Lady, baby, and bath water story. These episodes do have valuable lessons for us, even if not directly relevant.

      Like

    • 11 October 2012 6:24 pm

      Geerussell raises an important point, ESP from a policy perspective.

      Although both monetary phenomena, inflation and hyperinflation (drawing an arbitrary line somewhere in the growth rate of general price level) often have different causes.

      Nations get inflation for many reasons, sometimes deliberate and sometimes not. So Friedman said “inflation is always and everywhere a monetary phenomenon.”

      That’s not usually true for hyperinflation, which is often described (in a catch but not totally accurate way) as “everywhere and always a fiscal phenomenon.” Nations resort to hyperinflation as the least-bad choice when bills must be paid. During wars is a common example. Weimar, facing military occupation if its war reparations were not paid. And so forth.

      Like

  18. Ikonoclast permalink
    11 October 2012 12:32 am

    I want to preface my remarks by saying I mean no disrespect to the USA or its people. I believe the world needs a strong USA but also a USA which genuinely respects freedom and can return to the higher moral ground it held at about the close of WW2.

    At one point you say “We (the U.S.) should be on top of the world.” This statement can be construed in at least two ways. It could be saying “we have the people and resources to have a healthy domestic economy”. Or it could be saying “We should be the world economic and military hegemon”. If you mean the former as in “we should have a healthy domestic economy” then I agree with you. If you mean the latter as in “we should rule the world” then I disagree with you.

    The two issues are linked and it is the old “guns or butter” argument. If you have read Paul Kennedy, particularly the Rise and Fall of the Great Power” and understood his well supported position on geostrategy and great powers then you will accept that operating in a posture of Imperial overstretch and military over-reach involves too many costs, too few benefits and is antithetical to a nation’s best interests.

    The US needs to retrench from its position of attempting to be the world economic and military hegemon. Nothing will break a nation’s economy more surely than military over-spending and a series of ruinous wars. Such a retrenchment need only be back to the position of being one of the 2 or 3 great powers rather than being the sole superpower of the world. The US can remain a Great Power for a long time yet. It needs to retrench to the position of a Great Pacific Power, equal partner of NATO and final guarantor of the survival of Japan, Sth Korea and Israel. On the face of it, this might not sound like much of a retrenchment but in detail it is.

    The survival of Japan, Sth Korea and Israel can be guaranteed without boots on the ground even perhaps in the case of Sth Korea. The U.S. simply has to note quietly to the possible belligerent parties, excluding China who are too big to be treated this way, that realistically any serious or existential threat to any of these nations would possibly have to be met by a limited nuclear response from the US. It ought to be clear that this limited response could realistically mean (if the provocation were great enough) that the belligerent parties would cease to exist as recognisable nation states.

    On the Taiwan issue, the USA should cede to China’s view that Taiwan is properly a Chinese province and that it should ultimately revert to China. If the USA (Unionist Cause) had the right to keep the southern states in the Union then China equally has the right to reincorporate seccessionist Taiwan. What is needed is a “roadmap” (though I dislike that jargon) or plan of about twenty years duration to (hopefully) peacefully return Taiwan to China. Utlimately if this generates a war between China and Taiwan then it is a civil war and a Chinese matter. No good comes of other countries interposing themselves in civil wars.

    The division of Korea is quite different. Without Chinese help North Korea is never going to conquer South Korea except perhaps via a pyrrhic victory laying it waste with chemical and a few nuclear weapons and then being laid waste in turn by a limited US nuclear response. In the Middle East and Afghanistan, the US should pursue the policy of no boots on the ground. But it should act as final guarantor of Israel’s safe existence as outlined above.

    With regard to keeping the Strait of Hormuz open (against hostile action by Iran), the US clearly needs a permanent carrier group in that region. However, the US needs to be in full alliance with the Nato nations and India for that purpose and probably is so already. Iran needs to know (and it has probably already been told) that any attempt by it to close the Strait of Hormuz will see the complete destruction of its navy, air force, nuclear facilities and any or all supporting infrastructure (like ports, airfields, fuel and supply facilities). There is no need for significant US boots on the ground in any part of the Middle East, ever. The US should withdraw as quickly as possible from Iraq and Afghanistan and never make such forays again. The US can use its naval and aerial stand-off capacity which is where its great comparative advantage lies.

    Provided the oil flows (under fair market conditions) and Israel is permitted a safe existence then the US has no need to involve itself in any way in the Middle East. All such involvement is a quagmire and no benefit to the US or its allies.

    By retrenching to a more rational geostrategic footprint, the US can begin addressing its very considerable domestic problems. Military over-spending can be curtailed and social and infrastructure spending increased. These are the areas crying out for attention in the US and which if addressed will revive the US economy and make it stronger overall. Ultimately military power rests on economic power.

    With respect to the Modern Monetary Theory issue it can be useful to think about it like this. Stripped of some of its more quaint and seemingly paradoxical assestions, MMT is essentially Keynesian counter-cyclical economic theory updated to account for the end of the gold standard and the rise of fiat currencies and free market exchange rates. Viewed in this light it is not at all bizarre except for some of its fringe contentions which are not central to the main issues at hand. Simply put, MMT proponents like Keynesians argue that governments should deficit spend to boost aggregate demand and avoid deflation in slumps and accrue surpluses in booms to moderate demand and prevent significant inflation. This is not controversial unless you are a strict Friedmanite and Monetarist. So in American terms you can say being an MMT proponent or a Keynesian roughly aligns you with John K Galbraith rather than with Milton Friedman. Without providing the extensive proof here in a blog, I will assert that the empirical data supports the Keynesian camp and refutes Friedman and the Monetarist position.

    Like

  19. Gaiasrequite permalink
    11 October 2012 2:47 am

    It is becoming appallingly clear that the human capacity for mindless memorization and regurgitation, has surpassed its ability of critical application.

    Out of boredom and lack of sufficient information in the fields I normally pursue, I decided to challenge my self to become better informed on one of the two subjects I have never had much interest in. The first choice was math, for its practical application to a fuller understanding of both quantum and particle physics. The second, Government and politics, for as things go, when I turned 18, I vowed I would not be an uninformed voter. Subsequently I have never voted in an election of any kind. I chose the latter, for the hint of guilt I felt at having these past 16 years been negligent to the duties of American citizenship. I have found blogs and forums to be a great way of informing ones self as well as quickly finding quality articles, books and other channels of information you seek. The web is full of bloggers especially political ones, so by chance alone I fell rather ignorant and uninformed into the lap of Fabious Maximus and the band of arguing intellectuals who follow his blog.

    But alas, though I know my time with you all has been short, I fear I have learned the only two things there really is to know about American politics;

    • All things great and small, here in this physical world, must come to an end. That includes great nations built by brilliant men.
    • That politics truly are for those who prefer arguing a good excuse for bad policies, to finding a solution for the outcomes of those policies.

    So I will leave you with a quote, written by a man who amidst the contempt of his peers, had the courage to abandon facts and reason for imagination.

    “I don’t know half of you half as well as I should like; and I like less then half of you half as well as you deserve.”
    — J.R.R. Tolkien (said by Bilbo at his farewell banquet in Fellowship of the Ring)

    Like

    • 11 October 2012 2:59 am

      I hope someone cheers up Gaiasrequite, for it looks like he’s in a dark place.

      (1) “All things great and small, here in this physical world, must come to an end. That includes great nations built by brilliant men.”

      True, as Gertrude says to Hamlet. But life itself is a dare against the forces of entropy. Every day we keep civilization going, every child we create and raise, every new energy source we tap — all these things are humanity’s response to the greater darkness. To do otherwise leads to despair, nihilism, or even insanity.

      Thou know’st it’s common; all that lives must die,
      Passing through nature to eternity.
      — Queen Gertrude to Hamlet (Act I, scene 2)

      (2) “That politics truly are for those who prefer arguing a good excuse for bad policies, to finding a solution for the outcomes of those policies.”

      In my experience AND reading of history that is certainly false. In the real world we search for workable solutions, for perfection is found only in Heaven.

      Like

  20. Gaiasrequite permalink
    11 October 2012 4:17 am

    Fabius Maximus….. really?

    GAIA-s-requite “for it looks like he’s in a dark place.” She most certainly is not! I have found your posts to be very well written and informative. I was absolutely honest when stating I wanted to further my understanding of the more technical workings of our government. But, to tell you the truth most of you are speaking Greek to me.

    So I am moving on in my quest for knowledge and truth. Perhaps I will return to pondering questions like “does consciousness exist if so what are the implications?” or “will the discovery of higgs boson give us means necessary to futher our space program?” or “is that possibly how the advanced human civilization that existed during the Eemian interglacial moved the stones to build the megalithic structure that still boggle minds today?’ You know the easy stuff….I may however drop in from time to time asking some more uninformed question (which I will thank you for taking the time to respond.)

    “all these things are humanity’s response to the greater darkness.”

    And thanks for this I was hoping some one would get the point of my choosing a Tolkien quote at my closing.

    Like

  21. 11 October 2012 1:12 pm

    The federal government became Monetarily Sovereign on August 15, 1971. At that moment, it gave itself the unlimited ability to create dollars. Given this unlimited ability, the government has no need to ask anyone for dollars.

    Federal finances are not like personal finances. You and I are not Monetarily Sovereign. We cannot create dollars at will. We often need to borrow dollars. The federal government does not.

    What erroneously is termed federal “borrowing” in reality is nothing more than the federal government issuing investment securities. Here is how the U.S. government “borrows,” say from China:

    • China deposits dollars into its checking account at the Federal Reserve Bank.
    • China instructs the FRB to transfer those dollars from its checking account to its T-security account, also at the FRB. The process is identical with you transferring dollars from your checking account to your savings account.
    • Then, to “pay back” the mythical debt, the FRB merely transfers dollars from China’s T-security account to China’s checking account.

    That is why, federal “debt” is a meaningless concept, and debt/GDP is a meaningless fraction.

    Additionally, GDP is a one-year measure and so-called debt is a life-of-nation measure (the total to outstanding T-securities ever issued). It’s the classic apples/oranges measure.

    Because federal debt is the total of outstanding T-securities, Federal “debt” is no more a burden on the federal government than a savings account is a burden on a bank.

    Federal “debt” is the single, most misunderstood concept, in economics. You can learn more about it at: “To understand economics, you must understand Monetary Sovereignty. Most economists and politicians don’t” {at ROger’s website, 7 September 2009} http://rodgermmitchell.wordpress.com/2009/09/07/introduction/comment-page-2/#comment-30083

    Rodger Malcolm Mitchell

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    • 11 October 2012 2:03 pm

      (1) “What erroneously is termed federal “borrowing” in reality is nothing more than the federal government issuing investment securities.”

      “Nothing more”? All lending is issuing securities. My IOU is a security.

      (2) “That is why, federal “debt” is a meaningless concept, and debt/GDP is a meaningless fraction.”

      No, it’s not. As has been repeated many times in this thread, and is a core concept in Econ 101, a money supply that is too large or too small damages the economy. Too large will depress the value of a currency, cause inflation, or both.

      (3) “Additionally, GDP is a one-year measure and so-called debt is a life-of-nation measure (the total to outstanding T-securities ever issued). It’s the classic apples/oranges measure.”

      It’s a comparison of a stock (debt) to a flow (income). Many such ratios are used in credit analysis. They’re used by credit analysts because centuries of experience have shown them to have predictive power.

      Like

    • 11 October 2012 4:16 pm

      Fabius, Your IOU is a security backed by your money. You owe it. To satisfy you IOU, you must take dollars from your bank account and transfer them to someone else’s bank account.

      A T-security is backed by the owners own money, as I explained above. It is identical with a savings account, which is backed not by the bank’s own money, but by the account holder’s money. To “pay off” a T-security, the FRB transfers the owners money from his T-security account to his checking account.

      Not understanding the difference between a Monetarily Sovereign government and a monetarily non-sovereign entity, is the source of virtually all economic ignorance.

      You said, “As has been repeated many times in this thread, and is a core concept in Econ 101, a money supply that is too large or too small damages the economy.” But we were not talking about money supply.

      We were talking about federal “debt” and the debt/GDP ratio. Federal “debt” is not the money supply. It’s the T-security supply. We could triple the money supply while simultaneously eliminating all T-securities.

      Similarly, we could triple the outstanding T-securities, without adding a penny to the money supply. Sadly, Econ 101 doesn’t explain that, since it is a “new” (since 1971) concept.

      Your so-called ” comparison of a stock (debt) to a flow (income)” is bogus. T-security accounts simply are savings accounts at the FRB. Comparing the size of these accounts to any one year’s Gross Domestic Product makes no sense whatsoever. Two unrelated measures. How do the total of savings accounts at the FRB affect GDP or vice versa?

      The belief that debt/GDP predicts anything became obsolete in 1971, when applied to Monetarily Sovereign nations. You do understand the differences between Monetary Sovereignty and monetary non-sovereignty, don’t you? It too is not explained in Econ 101.

      Rodger Malcolm Mitchell

      Like

    • 11 October 2012 6:17 pm

      I think we have gone as far as feasible in this discussion about the issue’s Mitchell raises, to the limits of comments. Mitchell works too far from a conventional frame of reference to make brief replies meaningful. That doesn’t make him wrong, just that the limitations of this venue give us too little ability to grapple with these deep issues.

      One note: I didn’t say that a personal IOU was the same in all ways as a government bond, just that the distinguishing statement Mitchell gave did not in fact describe a difference between the two.

      This does illustrate the level of detail necessary for this kind of debate. It’s more suitable for a specialist website — or better yet, journals (ie, longer, footnoted articles).

      **** This is just my opinion, and not intended to limit or prevent anyone from carrying on in any way! *****

      Like

  22. Derryl Hermanutz permalink
    11 October 2012 2:00 pm

    Fabius wrote,”Similarly, the money supply (result of past activity) must be managed as circumstances change.”

    You are correct that the money supply is the result of past activity. Commercial banks create the money supply every time they make a loan or purchase a government security. As a matter of statistical fact about 70% of all bank lending is mortgages, and because bank deposit money comprises almost 100% of the circulating money supply (cash in circulation, i.e. cash that is not held in bank vaults, comprises 2-4% of the total money supply: because the US$ is used as currency of choice by global criminals, and US$ cash is used in many “dollarized” economies and is also used as “hard” currency in basket case money systems, cash is a larger percentage of the US$ money supply than for other currencies), mortgage lending creates almost 70% of the total money supply.

    Banks create money on their balance sheets by creating a deposit in the borrower’s deposit account and a debt in the borrower’s loan or mortgage account, and this bank deposit money is NOT ‘matched’ or otherwise ‘backed’ by paper dollars or reserve balances or any other kind of more ‘substantial’ money, though bank deposit balances can be “converted” into paper dollar “cash” at the ATM or teller window so banks have to hold enough vault cash to satisfy their depositors’ demands to convert their deposit balances into cash (and the US system still nominally uses a “statutory reserves” requirement that compels banks to acquire cash or central bank reserve balances as some fraction of the deposit money they have created). Governments do not create the money supply by “issuing” money and spending it into their economies. Commercial banks create the money supply by creating deposits/debts on their balance sheets and “lending” the money into the economy.

    I agree with Scott Baker that governments “should” issue money debt free, rather than get their deficit spending money by auctioning interest bearing Treasury debt through the primary dealer banks and from there out into the other banks and/or into the economy. But at present the primary dealer banks create, as debt at interest, the money they use to purchase new issues of Treasury securities, and taxpayers pay the interest, and rentier bankers receive the interest payments as their income. Loan repayments and bond redemptions by borrowers to banks merely extinguish loan balances on bank balance sheets so the repayment money and the debt cancel each other out. Bank lending creates money, repayment destroys that money. Principal repayments are not “income” to banks. Interest payments are income to banks.

    In the 1930s Irving Fisher argued that the US government should “nationalize money” (not nationalize banks) by creating its own money and lending it to the banks at 0% interest. This would create a “permanent” money supply that is not inflated by bank lending into asset bubble frenzies and not deflated when those bubbles pop, inflated asset values collapse, and banks call in loans to get solvent. This is Fisher’s “100% Money” proposal. Kumhof and Denes have recently revived this idea with their “Chicago Plan”. Anyone who somehow still believes that “the government issues the money” should wonder why Fisher and others over succeeding decades have proposed the nationalization of money as a “solution” to the problems caused by our actual system where private commercial banks create all the money and governments who seek to deficit spend have to “borrow” money from the banks by issuing debt securities.

    Because real estate is by far the largest asset class of every economy, and because banks create loans against “collateral” assets such as real estate (the collateral on government bond debt, favored by Medicis and other bond merchants of old, is the government’s power to tax its citizens to repay the principal and pay the interest), “inflation” happens when private banks are procyclically lending into real estate bubbles (or the tech bubble in the 1990s, or the stock bubble in the 1920s). Once real estate becomes the asset class that is being inflated, your money system has reached the vertical part of the exponential debt curve that is required to keep this Ponzi system afloat, where all the money is issued as debt at interest.

    Governments and central banks do not “cause” inflation (unless, like Weimar or Argentina, the debt is owed in a foreign currency and domestic money supply inflation erodes the fx value of the domestic currency). Private banks cause inflation by lending into asset bubbles, the “asset” being whatever class of asset the banks are accepting as collateral against the loans they are creating. In that light, some argue that US Treasury securities (high price/low yield) are currently the asset bubble of choice.

    Like

  23. 11 October 2012 4:15 pm

    Let’s be clear. MMT is based upon a dirigisme central planning ideal which completely ignores the self-evident 20th century lesson that socialism leads to mass poverty and totalitarian rule. MMT starts with the phony and false assumption that socialism can and does “work” and that there is nothing to constrain the government’s benevolence and omniscience but antiquated notions such as “socialism doesn’t work”. In fact, even scarcity is not a problem for MMTers because the government, as part of its complete benevolence and omniscience, can never run out of fiat funny money “dollars”. However, the “monetary theory” portion of their proposals is actually secondary to their baseless confidence in central planning. It is pointless to argue minutiae with MMTers if one does not focus upon their long disproven dirigisme assumptions.

    Like

    • 11 October 2012 4:29 pm

      Actually, MMT is not about central planning.

      MMT merely is the antithesis of austerity. MMT (and its sister, Monetary Sovereignty) preach increased money supply as a solution to slow economic growth. The federal government can (and should) provide more dollars to the private sector, but that does not imply directing the economy.

      You can see the “Nine Steps to Prosperity” at http://rodgermmitchell.wordpress.com/2011/10/07/nine-steps-to-prosperity-a-short-message-to-occupy-wall-street/.

      The first 8 steps have nothing whatever to do with central planning, and the 9th step may or may not involve central planning.

      And by the way, “socialism” is not government spending; socialism is government ownership. People who don’t understand that always cry “socialism” whenever the government spends money. For example, Medicare and Social Security are not socialism, though the military is.

      Rodger Malcolm Mitchell

      Like

    • 11 October 2012 6:06 pm

      Thanks for the added color about MMT as public policy.

      And ESP for the rebuttal to charges of socialism. Socialism is a form of collective action through government, but not all such action is socialism — and certainly it is not all bad.

      Many of the Founders, such as Madison and Hamilton, imagined large futures for government action. Many of these dreams were implemented during the Jacksonian era, our big wars, the New Deal, and the great post-WW2 infrastructure boom.

      Like

    • 11 October 2012 5:24 pm

      The fact that people are nominally left with a sort of title to their property while its use is directed by the dirigisme central plan does not really change my analysis of MMT. And there is nothing wrong with “slow economic growth” that requires “stimulation” by the dirigisme regime. Economic activity artificially stimulated by squirts of fiat funny money is about as sustainable as a person being stimulated by meth to not sleep for 4 days in a row.

      Like

    • 11 October 2012 5:56 pm

      Roddis makes an interesting point, one which I and many others have also said. To use a medical analogy, morphine is a powerful tool for first aid — but becomes problematic if used to mask symptoms and so avoid treatment.

      Japan has fallen into this trap and languished there since 1989. They may be the first test of the theory that deficits –and growing sovereign debt — don’t matter.

      Like

  24. Lisa permalink
    11 October 2012 6:15 pm

    Ok, I just have an earnest request. Has anyone changed his mind during this entire discussion? Fabius, is your position exactly the same as when the discussion started? Ditto anyone else? Are there any firm conclusions?

    Fabius, would you kindly, at this point, restate as concisely as possible, the essential point you are trying to make as against the MMT proponents, and could Prof. Black or someone of his stature in the MMT community concisely state theirs? This out of mercy to your less tutored readers and mentally exhausted readers.

    Like

    • 11 October 2012 6:54 pm

      I was pondering the exact same question this morning.

      My point was a simple one: our structural fiscal deficit is a serious problem, and we should start some serious thought about how to solve it. There are no easy solutions, and the Democratic and Republican parties are offering mostly nostrums (but not equivalent ones: the D’s is inadequate, the GOP’s destructive).

      The MMT theories were introduced as an alternative, in the sense that deficits don’t matter. I don’t believe that represents what actual MMT-economists believe (as has been pointed out here), and is IMO delusional.

      An analogy (FWIW) is how Keynes (believer in counter cyclical deficits, but a balanced budget over the full business cycle) has been mis-stated (by both parties) as an advocate of constant large deficits.

      The two economists on this thread were responding to each other, not really to my simple point.

      My guess that I will be adding this post to the websites’s successful predictions page. Perhaps in 3 years, perhaps longer.

      As for changing minds, I don’t believe anyone changes minds writing comments. I find that discouraging, since most of my comments concern simple errors of fact — and more rarely, logic.

      Think of this like a political debate. It’s staged for you, the readers. Has anyone reading this changed their mind?

      Like

  25. Lisa permalink
    11 October 2012 7:14 pm

    Thanks very much!

    So, would you agree that what you are also saying–that our structural fiscal deficit is a serious problem–is a statement of fact, rather than a theoretical assumption?

    If so, would you agree that if someone were to demonstrate that this structural fiscal deficit is not problem in fact, and that the framework for conceiving it as a problem is flawed, would that make a difference in your mind?

    Conversely, if those opposing you were unable to give a convincing demonstration of their framework for conceiving that it is not problem, would that be grounds for supposing that should make a difference in their minds?

    It seems to me, in any case, that the adage, “facts are theory-laden,” is very apropos here.

    Like

    • 11 October 2012 8:57 pm

      Good point. The question of “serious problem” relates to Monetary Sovereignty, which despite being the basis for all economics (including MMT), is not well understood by the mainstream.

      While a deficit indeed can be a problem for a monetarily non-sovereign entity (state, county, city, business, person or euro nation), it is a necessity for a Monetarily Sovereign entity (U.S., Canada, Japan, China et al).

      By definition, GDP = Federal Spending + Non-federal Spending – Net Imports. An increased federal deficit results from increased Federal Spending and/or decreased tax collections (which in themselves tend to increase Non-federal Spending.)

      A monetarily non-sovereign nation can borrow to increase its GDP over the short time. But eventually, because the nation does not have the unlimited ability to create its sovereign currency, its debt becomes unmanageable. This is what has happened to our states, counties, cities and the euro nations.

      By contrast, a Monetarily Sovereign nation, which has the unlimited ability to create its sovereign currency (that’s what makes it “sovereign”) can pay any debt, and in fact, does not even need to borrow.

      U.S. “borrowing” is a relic of pre- Monetary Sovereign days (ended in 1971), when the U.S. did not have the unlimited ability to create dollars. Today however, the U.S. does not borrow in the commonly understood sense. It merely provides savings accounts, that are misnamed “debt.”

      When you “lend” to the U.S., all you are doing is instructing the Federal Reserve Bank to remove dollars from your own bank checking account and to deposit them in your T-security account at the FRB. The process is identical with your transferring dollars from your checking account to your savings account.

      To pay back its “debt,” the FRB merely transfers dollars back from your T-security account to your savings account. At no time does the U.S. Treasury ever receive your dollars, so the government does not “owe” you dollars.

      To begin to understand Monetary Sovereignty, I suggest: http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/

      It takes less than 10 minutes to read, and can open a whole new understanding of economics.

      Rodger Malcolm Mitchell

      Like

    • 11 October 2012 9:28 pm

      Lisa raises some fascinating questions!

      (1). “would you agree that what you are also saying — that our structural fiscal deficit is a serious problem — is a statement of fact, rather than a theoretical assumption?”

      No, but that’s an incisive & complex question. The rising debt is a fact. It’s future effects are difficult-to-make forecasts. But there is another element.

      The definition of “problem” is something regarded as harmful or undesirable. This is a common social science dynamic, where the perception itself has effects. A bank might be strong, but can spark a run (deposit withdrawals) that bankrupt it. An action might be strong, but fears can spark capital crisis that brings a crisis. Inflation might be unlike or even impossible under current conditions, but fears of inflation can destabilize an economy.

      So the deficits are a problem in this sense (widespread and growing concern is a fact), but of uncertain magnitude and timing. My assertion that its a serious problem. This post, like most, will eventually end on the successful predictions page, or the smack downs page.

      That is the sense in which I said MMT is an alternative solution, but not discussed in the thread. First, how might the government adopt MMT and convince people that the deficit and debts can grow? Second, using a MMT analysis, at what point do they create objective adverse economic effects (ie, other than psychological)?

      “would you agree that if someone were to demonstrate that this structural fiscal deficit is not problem in fact, and that the framework for conceiving it as a problem is flawed, would that make a difference in your mind?”

      Yes. Note however there is ample evidence that the deficit is already considered a problem by a significant and influential body of people — including the ratings agencies, NGOs (eg, BIS, IMF), politicians, and many in the investment community. So we are discussing magnitudes and growth rate of the problem. As you said above– is it serious? Not if it exists.

      “Conversely, if those opposing you were unable to give a convincing demonstration of their framework for conceiving that it is not problem, would that be grounds for supposing that should make a difference in their minds?”

      Speaking of MMT specifically, it might remain on of the many social science theories that remain untested but with believers. In fact, even real applications and failures often do not convince people. There are still gold bugs and communists. There is the “no true Scotsman” view, believers that the results of the tests were not conclusive , were operationally flawed, or there are improved versions of the theory that would work. Sometimes they are correct.

      “It seems to me, in any case, that the adage, “facts are theory-laden,” is very apropos here.”

      These dualities — fact-value, proven-theoretical, etc — are just operational simplifications we make to facilitate communication. General semantics, warnings about reification — these serve to remind us of this reality.

      Some day humanity will evolve so that we telepathically exchange 12-dimensional Gestalts, perhaps with the assistance of AIs. Until then we muck around as best we can, and try to stay out of the philosophical sand traps.

      Like

  26. Jim permalink
    11 October 2012 9:15 pm

    Given the operational facts of our currency system as described by MMT, the very serious problem is the abuse of the system. Instead of the government spending on productive projects, it spends wildly for the armaments industry and at the Pentagon’s 1,000 bases, endless wars and international interventions, funding the “national security state,” for bailing out multi-national “banks” like G-Sachs and JP Morgan, who then use those countless dollars resulting in driving up asset prices there, etc., etc. Truckloads of abuses and terrible international, and not merely national, consequences. Deficit spending should have full employment in view. Our tax system, rather than trying to achieve some semblance of economic equity and private citizen purchasing power has aided in immensely and dangerously concentrating wealth and political influence and leading to debt peonage, and leading even to police-state features. These are the great dangers, and not the deficit. To focus on the deficit is to commit the same disastrous error that the Europeans are currently making, it detours attention from the essential and, along with the abuses just mentioned, will contribute towards the destruction of this country,

    Like

    • 11 October 2012 9:46 pm

      Right, Jim,

      The Europeans (specifically the euro nations) are monetarily non-sovereign, so are forced into austerity. The U.S., being Monetarily Sovereign, is not forced into austerity, but our leaders don’t seem to understand that.

      So we have endless and unnecessary wrangling over deficits, simply because the populace doesn’t understand the difference between a federal “deficit” and a personal deficit. It’s like the difference between a Tom cat and a Sno Cat. One word; two completely different meanings.

      The federal “deficit” merely is the net number of dollars the federal government creates each year.

      By the way, did you realize it is possible to have federal “deficits” without federal “debt,” and it is possible to have federal “debt” without federal “deficits”? This too is not understood by the mainstream.

      (Let me know if you’d like to learn how it is possible)

      Rodger Malcolm Mitchell

      Like

  27. Jim permalink
    11 October 2012 9:29 pm

    This: “who then use those countless dollars”

    Should have been “who then invest many of these countless dollars abroad…”

    Like

  28. Jim permalink
    15 October 2012 6:02 am

    As FB states, his point is very simple. It is also simply wrong-headed. Why? Because MMT is not a theory in essence, it is a description of the nature and workings of the currency system. Think of it as a mechanic’s manual of how your car engine is put together and how it runs; or as how a textbook would explain how accounting figures provide a description of how your business is operating.

    Everyone seems to understand–at last–that the US is the sovereign monopoly issuer of the currency, hence it cannot “run out of money,” or “go broke,” Logically, then, they should understand that the US does not need taxes in order to spend, that is, buy services and goods from the private sector, since the dollars coming back to it from paid taxes were issued by the government in the first place. The private sector, however, needs dollars to pay taxes, hence it also uses dollars for its private commercial and productive activities. The more productive and strong a private sector is, the more its currency is worth. Government spending should normally cooperate with the private sector, furnishing “natural monopolies” like infrastructure and utilities so as to facilitate the productive activities of the private sector.

    The key distinction here is that between the issuer of the currency (the federal gov’t) and the user of the currency (the several states and the private sector).

    The entire system is a tax-driven accounting spreadsheet system. The dollar is the unit of account. Dollars are spent into the system–i.e. private bank accounts are credited–to outfit the government. The government deficit is therefore necessarily equal to the penny to the private sector asset quantity. This is the basic accounting identity of the entire system. Government spending is essential to the extent the private sector wishes to save and to the extent there is no full employment. As the economy approaches full capacity, government spending tends toward being inflationary, hence it becomes necessary either to tax–or remove dollars–from the system or cut back government spending of dollars into the system, or a combination of both. When the economy is recessionary, deficit spending is the only thing that will cause it to leave that state, along with reducing taxes to the consumers. It is all obvious and straightforward. As Kelton explained, it works pretty much like the thermostat in your home.

    Obviously, this monopoly power is a very great one and it is liable to abuse and corruption: government can spend stupidly or intelligently, but it cannot “run out” of money. Taxes can be structured to achieve general prosperity and equity or it can favor special interests and undue concentration of wealth and power. As with an automobile, it can be used well or recklessly. Government can be made larger or smaller, and so on. These are all political decisions regarding the public purpose and the public weal; therefore they entail question that are philosophical and possibly even religious in nature, since they involve human values and purposes. This political-philosophical aspect is quite apart from the question of how the financial system actually operates, and this distinction is absolutely fundamental. One thing is how the car works, quite another where we are going to drive it. Of, one thing is how your heating system and thermostat work, and another is the discussion as to where the room temperature is to be set to try to please everyone in it. MMT proponents vary in their prescriptive ideas, but they are unanimous in their descriptions regarding how the system works. MMT describes very accurately how money is “created,” how the banking system works and the like; it is also able to discriminate between operational realities and ignorant resldues: concepts and policies that result from thinking as if the US were still using a convertible currency, thus flawed policies and endless pointless discussions and fears.

    Like

  29. J. Dom permalink
    31 October 2012 9:19 pm

    How do we ‘pay’ for Hurricane Sandy?“, Marshall Auerback, Pinetree Capital, 31 October 2012 — Opening:

    “As the costs of this once-in-a-generation storm mount for America’s east coast, there will invariably be cries that the country is bankrupt, and will therefore be unable to ‘pay’ the cost reconstruction. Even now, as the news has been unfolding the mainstream neo-liberal ideologues have been out in force preaching that the US government was now facing a major fiscal crisis and its capacity to deal with this event was severely limited. Imagine the reactions of the people in shock after the event to hear the news bulletins telling them that their government was crippled and unable to help. It certainly didn’t go down well after Hurricane Katrina.”

    No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models“, Dirk J. Bezemer (Groningen University), 16 June 2009

    ‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof of Economics, Groningen U), VOX, 30 September 2009 — “Did economists not see this crisis coming? This column says that analysts who used models featuring a distinct financial sector issued fairly detailed, well reasoned, and public warnings of imminent finance turmoil. It argues that mainstream models missed the crisis because they use a “reflective finance” view in which financial variables are wholly determined by the real sector. “Flow of funds” models may be the way forward for anticipating finance-induced recessions.”

    Inequality: The silly tales economists like to tell“, Dean Baker (Center for Economic and Policy Research), al Jazeera, 30 Octover 2012 — “Some economists don’t get paid to know about the economy, but to justify the trickle-up of wealth.”

    Like

    • 31 October 2012 9:29 pm

      Is Sandy an opportunity?
      Seen in another way, Sandy is an opportunity to finally enact public works projects, rebuild our infrastructure, and finally put the lie to the idea that money is finite and even has anything to do with wealth. Money is not wealth. Proof? We lost some $30 – $80 billion in damage and lost productivity, depending on who you listen to. Yet, not one dollar of that was actual money destroyed. Even if a bank has blown over, the dollars in the vault scattered to the winds, the FDIC would have replaced it, and if the FDIC didn’t have it, the Treasury would have “loaned” the FDIC the money.
      On the other hand, money can, has, and is, produced every day, out of nothing, just in the process of making loans. Contrary to popular belief, loans are not made from deposits.
      So, government could produce an equivalent amount to replace the wealth lost, put it into infrastructure projects, without asking for either principal and interest to be repaid, ever. This would build wealth, true wealth, for future generations. Lincoln provided debt-free money in the form of U.S. Notes during the Civil War ($450 million), and we had U.S. Notes for 14 series thereafter.
      Remember: banks’ only product is debt. They must convince us that money is scarce or we would not pay them interest for the use of it.

      Like

    • 31 October 2012 9:37 pm

      I don’t understand what you are telling us. Can you restate it?

      “the US government was now facing a major fiscal crisis and its capacity to deal with this event was severely limited.”

      Who is saying that we cannot pay for Hurricane Sandy? That’s daft. While a case can be made that a fiscal adjustment must be made soon, there is zero evidence we’re in a fiscal crisis today — or even experiencing fiscal stress.

      It’s too soon to say, but based on available analysis it seems unlikely that Sandy is in the top ten most expensive disasters (as a % of real gdp) in US history. Even in terms of only hurricane damage (ie, not including inland flooding) it might not be in the top 10.

      Like

    • 31 October 2012 11:03 pm

      Further, now that the U.S. government is Monetarily Sovereign (since August 15, 1971) it can pay any bills of any size. All the hand wringing about the federal deficit, debt and fiscal crisis is based on a misunderstanding of the difference between Monetary Sovereignty and monetary non-sovereignty.

      Those who don’t understand (or won’t admit to understanding) the difference, simply do not understand economics.

      Rodger Malcolm Mitchell

      Like

    • 1 November 2012 12:24 am

      It’s a fringe theory in economics. That you dogmatically assert it as certainty does not change that fact. Enough said.

      “Those who don’t understand (or won’t admit to understanding) the difference, simply do not understand economics.”

      Statements like this about fringe theories are perhaps their defining characteristic, in the sense of flagging or identifying them. Bombastic, grandiose. Perhaps even megalomaniac.

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    • 1 November 2012 12:34 am

      Fair enough, Fabius. Thanks for not being bombastic. Now tell me, do you understand the differences between Monetary Sovereignty and monetary non-sovereignty? In the unlikely event you do, prove it by telling everyone. But if you don’t, I expect you’ll provide a good excuse. Waiting . . .

      Like

    • 1 November 2012 2:26 am

      There are three posts on this subject, which are quite clear on both sides of the debate.

      You will note that neither I or the participating professionals make any statements like Roger’s — for example, that people that don’t agree with his controversial theory “don’t understand economics”. Which group includes most economists. That is an objectively bombastic statement.

      Like most theoretical debates in economics, this will eventually sort itself out. As with so many debates in science today, it has attracted a large crowd of cheering by-standers — most of whom don’t understand the complexities being debated.

      Prof Dolan patiently explained many elements of this debate, to a crowd most of whom treated this like a football match. Fortunately they have the same effect on the professional debate as they do on public policy: none.

      Like

    • 31 October 2012 10:01 pm

      Follow-up: Hurricane Sandy was probably not a “once in a generation” event in terms of damage. Based on preliminary reports, it was not close to Katrina,

      For comparison, the 1906 San Francisco earthquake was far worse. These things are difficult to determine with much precision, but if it were to repeat today the damage would exceed $100 billion; some estimates run 3x that.

      Like

  30. Sam permalink
    1 November 2012 2:33 am

    I think you’re unlikely to see anything of substance as a reply from FB, Roger. He cannot and will not admit that even the very title of this article is meaningless in the post Bretton Woods system.

    He is a military person. Don’t expect him to be open to anything that is true but outside his purview unless he gets “orders” from “credentialed,” but “not fringe” elements. A military man always covers his backside so as to be able to fall back on the “just following orders” routine. He asks Ed Dolan for “expert” point of view on MMT–Dolan, who is so expert in the material as to think that Krugman espouses the MMT perspective. But how about FB himself actually getting off his duff and making the effort to study–you know, study, not scan–the material himself: the intro. material by Mosler, then his Soft Currency Economics; then the material by Bill Mitchell and R. Wray, not to mention past experts like Godley, or even further back, Vickrey and F A. Mitchell Innes. No, that would be to expose his rear without proper orders from above. Well, Joseph Stiglitz is said to be coming around quickly. Presumably a Nobel Prize winner’s opinion will suffice to cover FB. Mosler’s decades of hands-on experience isn’t enough, even though he’s made millions; Auerback’s decades-long experience managing funds isn’t enough; so he’ll probably wait for a Nobel prize winner to tell him it’s ok to proceed. Then he can pontificate how all reasonable people, who base themselves on “facts” and only listen to properly credentialed people rather than amateurs should find it evident that MMT’s descriptions of the currency and banking system are accurate. The fact that all the MMT people saw the economic crisis coming and that none of the “non-fringe” elements did can just be safely ignored. As Dean Baker (another merely fringe economist) has noted: “…economists are not rewarded for studying the economy. That is why almost everyone in the profession missed the $8 trillion housing bubble, the collapse of which stands to cost the country more than $7 trillion in lost output according to the Congressional Budget Office. (That comes to around $60,000 per household.)

    Few if any economists lost their six-figure paychecks for this disastrous mistake. But most economists are not paid for knowing about the economy.”

    Like

    • 1 November 2012 2:54 am

      “He is a military person. ”

      Like most of your comment, it’s just guessing. Like this statement, it’s wrong.

      Like

    • 1 November 2012 5:23 pm

      Sam, in line with your comments, I gave a talk at the University of Missouri, Kansas City, in which I said, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”

      The date of the talk: June 5, 2005. I wonder what the mainstream was predicting back then (Actually, I don’t wonder. I know. They were extolling the virtues of the euro.) You can see the entire speech here.

      Like

    • 2 November 2012 1:10 am

      Rodger,

      You clearly know a great deal about economics. Yet almost everything you say is factually incorrect. Quite odd. I’ve never seen anything like this.

      “The date of the talk: June 5, 2005. I wonder what the mainstream was predicting back then (Actually, I don’t wonder. I know. They were extolling the virtues of the euro.) ”

      Opposition by economists to the European Monetary Union (as designed) was strong from when it was first discussed in the late 1980’s. This post from July 2008 gives a sample of the hundreds of articles by prominent economists from 1990 (by Krugman) onwards forecasting disaster for the EMU. I’ve shown just articles written for a general audience, not the those in the technical literature.

      Like

  31. roger erickson permalink
    1 November 2012 3:11 pm

    My original comments simply asked FM to read Marriner Eccles (a long time Fed Chairman) and Beardsley Ruml (a long time Fed Governor). Their testimony is far more relevant – and logical – than anything offered by Dolan. For reasons unknown FM refuses to read & comment on Eccles or Ruml – and labels everything that flows from their operationally successful approach as “fringe.”

    There’s a dichotomy here. One can either adequately sample all available feedback about a context, and display the courage to make a logical conclusion, or one can obsequiously pursue “being” successful by bowing to whatever squeaky wheels are currently clamoring to be labeled “experts”, no matter the real damage such experts do. The root damage to country in FM’s approach is that he openly & admittedly encourages citizens to defer to “experts” instead of using their own critical faculties.

    The problem is that there’s always a huge spectrum of experts to choose from! Demand for natural selection is still inescapable. Following the recent noise from squeaky wheels is historically a reliable way to run a country off the rails. Here’s a simple rule to counter the defeatist outlook of people like FM: “EVERY PROCESS is too important to be left to the presumed process owners.” That, as a simple point of logic, is the ONLY known way by which complex organizations evolve & adapt.

    Do you have the courage to start at the beginning, FM? Or will you show your colors by continuing to hide behind currently popular “experts,” so that you don’t have to actually think?

    HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE, Marriner Eccles – Later Chairman of the Federal Reserve

    Taxes for Revenue are Obsolete“, Beardsley Ruml (Chairman of the Federal Reserve Bank of New York), American Affairs, January 1946

    FM, the ball is still in your court. This is a simple point of logic, not a question of allegiance to so-called experts. Sample the entire spectrum of feedback, and then have the courage to follow logic, not just the latest populist wave of experts.

    Like

    • 1 November 2012 3:27 pm

      Roger, it is a simple matter of fact. MMT is a fringe theory in economics. As I stated so many times times, that does make it wrong or right. It’s just where it is today.

      As such wild rants that MMT is truth are factually incorrect, and tell us more about the people making them than the current state of the economic science.

      My preference in these things is to focus on the professional literature. My experience with climate science has strengthen this.

      That’s pretty much all I have to say, and the extent of my interest in MMT. When there is a consensus on the matter (again, not the same as being true), the first sign of suitability of MMT for use in public policy, I’ll revisit the matter.

      Of course, I’ve said all this before. Probably you’ll ignore it again. Rant on!

      Like

    • 1 November 2012 3:33 pm

      Yes, unfortunately this is the tactic of the Status Quo – they can sit smugly in their comfortable position, sure that they are right, until all Hell breaks loose and topples them from their perches.
      My personal experts lean more towards Hudson, Zarlenga, Gaffney, George, and even Stiglitz when he’s in a Georgist mood. And I have much more respect for Lincoln as an economist than anyone who came after him in that office.
      I have to disagree with you as to monetary sovereignty, which evidence shows we do not fully have, though we are closer to that then to the abysmal non-sovereignty of Euroland. If we had true monetary sovereignty we would not owe money to anyone, we would just make it as needed, debt-free, and taxes would just be used to control inflation and to prevent resource/Land monopolies.

      Like

    • 1 November 2012 6:17 pm

      scottonthespot,

      (1) Michael Hudson (Prof Economics, U MI – Kansas City) is good example of the nature of fringe science. His work is incisive and widely admired, but its political foundation puts it on the fringe.

      To use Thomas Kuhn’s description of science, which nicely describes many of these dynamics, the ruling paradigm exists for many reasons other than purely intellectual/scientific reasons.

      Another perspective on this is that of Stephen Jay Gould. His books show the powerful social and political factors that guide the course of science. Science is a social “behavior”, done by groups of people operating within a larger context of their place and time. It’s not conducted by philosophers in the clouds.

      (2) “unfortunately this is the tactic of the Status Quo – they can sit smugly in their comfortable position, sure that they are right, until all Hell breaks loose and topples them from their perches”

      That happens, of course. Many of the big events in history result from this, such as the French & Russian Revolutions.

      But the real significance of these events is IMO their rarity. Usually elites manage their society sufficient well to maintain their wealth and position. Sometimes the lower classes suffer, but they can look forward to wonders in Heaven after they die.

      Most often, to generalize, societies suffer severe upsets from forces beyond their control (including inevitable errors of judgement). Natural forces, invasions, poorly managed political or technological decisions, etc.

      Conclusion: a commonplace view seen in these comments is “wait for the great crash to bring down the temple”. Then the righteous will build a better world. That’s a dream IMO, much like finding solace in Heaven.

      Like

    • 1 November 2012 5:02 pm

      Fabius, if your definition of “fringe theory,” merely means Monetary Sovereignty is in the minority, I agree. Sadly, the world is filled with cement heads who equate majority with right and minority with wrong. That goodness Galileo, Einstein, Planck et al never felt that way.

      Since all you seem to know about Monetary Sovereignty is it’s not the majority theory, you’d be wiser to stop commenting on it until you learn about it. Until then, your comments make you look foolish.

      Like

    • 1 November 2012 5:44 pm

      Rodger,

      Nice of you to agree on the meaning of “fringe theory”, esp given my repeated explanations. Sad that it took you so long. Even sadder is that you still don’t understand what it means. It doesn’t mean “not widely believed but true”, since most fringe theories die a quiet death.

      Also, Galileo’s work was not “fringe theory”. It was widely accepted in the scientific community (such as it was circa 1600). The Church opposed it — but was not a scientific authority (although GG has advocates in it as well, such as Pope Urban VIII).

      Neither was Einstein’s work on relativity (which was a part of a major theme in physics at that time, along with Lorentz etc) fringe science. It was controversial, but quickly sparked experiments to test it, and won acceptance as experimental evidence came in (as science is supposed to work).

      Ditto Planck. He proposed his theory in 1901, refined it during the next decade, and received the Nobel in 1918.

      I’d love to continue this line by explanation of simple facts about these things, but the universe will end in heat death before I can work though MMT at your pace. Long before then economists will have sorted this through to a conclusion.

      Like

    • 1 November 2012 8:24 pm

      “most fringe theories die a quiet death.” Also, many mainstream theories die, but it’s a noisy death.

      Anyway, if you go along with the mainstream, you go along with austerity, i.e tax increases together with spending decreases, as a way to stimulate the economy. That is what the mainstream wants — deficit reduction — and that would be stupid if it were not motivated by greed.. It never, ever, ever has stimulated an economy.

      Every depression, including the Great Depression, has followed the mainstream’s deficit reduction, and most recessions have followed deficit growth reduction.

      Bottom line: Believing something solely because the majority does, and not because of any specific facts, surely is ignorant.

      But wait, you’re not ignorant. So you must have some facts at hand. However, like Romney, you refuse to reveal them.

      Like

    • 1 November 2012 8:53 pm

      Rodger,

      “Anyway, if you go along with the mainstream, you go along with austerity, i.e tax increases together with spending decreases, as a way to stimulate the economy”

      Can you provide evidence that this is “the mainstream’ economic theory? Certainly its not the standard view in college textbooks. Nor that of many leading academic economists in the US, where some form of Keynesian theory rules.

      Austerity was not the policy recommendation of leading Democratic and Republican economists during and immediately after the 2008-2009 crash (I documented this in several posts in 2009 & 2010, with names and links).

      The various forms of Austerity-ism are together a strong minority theory, so far as I can tell. Largely due to the large subsidies provided by business and private interests, for whom it serves a valuable political purpose. Economics has been, is, and probably will always be a handmaiden to powerful political forces.

      I’m impressed that the profession has so well resisted the temptation to be totally bought.

      Like

    • 1 November 2012 10:57 pm

      And here I thought both party’s unremitting effort to reduce the federal deficit, backed by the vast majority of media and economists, was austerity. I’m pleased to know that you disavow this foolish notion and instead of reducing the deficit, you want . . . well, what exactly is it you want?

      Oh never mind, I’ve had my fill of Romneyesque double-talk for the day.

      Like

    • 1 November 2012 11:54 pm

      Rodger, I feel sorry for you. You’re not responding to anything I’ve said, or anything happening in the real world. You’re just making stuff up. It’s sad. I’ll try again, however futile.

      “And here I thought both party’s unremitting effort to reduce the federal deficit”

      Please explain what either party has done to reduce the deficit since the Bush tax cuts in 2001 and 2003. Big talk does not count; promises to do big things in the future does not count. The deficit has been running at roughly 8% GDp since 2007.

      “backed by the vast majority of media and economists, was austerity.”
      Please provide evidence that “the vast majority of economists” want immediate austerity. I have not seen any surveys, but read quite a bit a current economists’ opinion — and believe that is quite false. It was certainly false in 2008 – 2010.

      “I’m pleased to know that you disavow this foolish notion and instead of reducing the deficit, you want . . . well, what exactly is it you want?”

      I’ve written dozens of posts about this. Since you will not read them (or, apparently, anything) I will not both to post links to specific posts — but you can see some of them listed here. My recommendation is a mainstream one (there might not be one mainstream opinion at this time): use the deficits more wisely for investments to produce long-term economic gains (eg, infrastructure instead of foreign wars and useless military gizmos), and prepare a long-term plan to guide the deficit down. Krugman and DeLong, among many others, have advocated this since the crash.

      “Oh never mind, I’ve had my fill of Romneyesque double-talk for the day.”

      You have not shown any “double-talk” on my part, and have consistently refused to respond to any of the points I have raised in response. As I said, I feel sorry for you.

      Like

    • 1 November 2012 10:31 pm

      Rodger,

      “Also, many mainstream theories die, but it’s a noisy death. ”

      What is your basis for making these statements?

      There is a very large literature on the history of science. I don’t know what you mean by “noisy”, but most theories just evolve as part of normal science. Sometimes continuously, sometimes with jumps (discontinuities).

      It’s like I said about the big revolutions in history (eg, France and Russia). These make a big impression on people, so they assume this is typical in history. In fact they’re big events in our minds because they’re rare events.

      So it is with the scientific revolutions. Thomas Kuhn describes the paradigm-driven changes. More common are instrumental-driven revolutions (eg, telescope, microscope, x-ray defraction). Neither are typical process by which theories change — even the big ones (eg, continental drift, where new evidence more-or-less smoothly produced a new consensus — with relatively little fighting).

      Like

    • 1 November 2012 5:56 pm

      Follow to Rodger’s note:

      (1) “Fringe science” is not “my definition”. It’s a standard one in the history and philosophy of science, the folks who study how science can and should operate.

      (2) Operationally to designate something as fringe science has consequences inside the profession of science. But those effects are not relevant to this discussion, IMO.

      That a theory is fringe science — or, more broadly, the size and intensity of commitment to it among relevant professionals — is of extreme importance when deciding its utility in the making of public policy. Which is a subject of interest on this website.

      For comparison, look at drug approvals by the FDA. Research validation for a drug used to treat children must be higher than research validating a theory about biochemistry for purely academic use.

      Like

    • roger erickson permalink
      1 November 2012 8:09 pm

      FM says: “For comparison, look at drug approvals by the FDA. Research validation for a drug used to treat children must be higher than research validating a theory about biochemistry for purely academic use.”

      Most of the references referred to as either MMT, monetary sovereignty, or just currency operations, are simply pointing out that fiscal and monetary policy decision processes are nowhere near as objective as the double-blind, clinical-trial, objective review process invented by the FDA. In fact, MMT is basically calling for a more objective, “operational” approach to fiscal policy – with less theory. Nothing we haven’t been working on since ~1726, albeit too slowly. {Ben Franklin published his 1st article on the operational success of colonial fiat currencies, ~1726.}

      It would be more germane, FM, to compare existing economics to pre-FDA regulatory policy development, i.e., totally inadequate. Just as the FDA was finally launched after multiple, self-inflicted public health disasters, we’ve had 4 great currency reform periods in the USA, each following self-induced economic health disasters.

      1) the Revolutionary War itself, as a rebellion against British currency hegemony, and & the initial, abortive attempts at fiat currencies for individual colonies & the newly formed USA;

      2) the Greenback Dollar of Lincoln, the 2nd, abortive attempt at a fiat currency;

      3) the Great Depression, where circumstances finally made fiat currency inevitable, again despite the dire warnings of any & all “mainstream” economists;

      4) our current attempts to unwind the New Deal, and go back to policy based on “balancing” fiat, whatever that means.. [Note that there's again no shortage of "mainstream" economists supporting a return to pre-BenFranklin, gold-std based economic policy. http://economistsforromney.com/ ]

      Like

    • 1 November 2012 8:25 pm

      That might be true, but is missing the point I’m making — and have made so many times throughout this thread. I’ll make it one more time, then give up.

      Public policy is made by non-technicians who rely on technicians to provide expert advice. This has been described in great detail by political scientists (among others) during the past 30 years. The climate science wars have brought the question to a boil again — see the recent work of climate scientists Roger Pielke Jr and Judith Curry on this.

      In brief (oversimplification), decision makers rely on the expert consensus for guidance as the best available method to choose expert advice. The FDA, being more careful than most due to easy attribution of their errors in judgement, take extreme care to purify the noise of research into a useful signal.

      That doesn’t mean that the experts on the fringe are wrong (see Michael Hudson’s work, for example). It’s like democracy, a least-bad system to make decisions. It’s good for beginners (which we are).

      This process runs to some extent distinct from the academic research world (the pursuit of truth, rather than immediate policy guidance).

      I have no idea why this is unclear to so many. People probably have their own ideas how things work, but this is the current reality.

      Like

    • roger erickson permalink
      1 November 2012 8:17 pm

      There should be a pattern evident to any who wish to see. “Mainstream” consensus is always, by definition, grossly behind the times, and always scrambling to explain operations that have already been explored by those in the trenches. There’s no adaptive value in FM denigrating what mainstream Luddites refer to as “fringe.” As repeatedly suggested, the only rational thing to do is to help accelerate the selection process. I’ve been wondering, since day one, what part of “Adaptive Rate” FM doesn’t understand.

      Since every process is too important to be left to the presumed process owners, our civic duty is to utilize our brains to accelerate the selection process, not to wash our hands of it. With co-citizens like that in an adaptive race, who needs enemies?

      Like

    • 1 November 2012 8:27 pm

      He’s perfect for the U.S. population. “I believe it because everyone else does.” Why do you think there are so many fools in favor of austerity?

      Like

    • 1 November 2012 10:38 pm

      Rodger,

      Austerity is zombie economics. As so many people, including Krugman, have explained — politically useful economic theories are difficult or impossible to kill. They’ve laid to rest deep in the ground, then after forgotten are brought back to life.

      People — non-economists — believe these theories because they are advocated by people or groups they trust, and explained in a plausible manner.

      Beliefs, especially in the New America, are to a large extent markers of tribal identify. This is part of the “decline of the state” as described by Martin van Creveld: decrease in group identity as Americans, increase in solidarity of identification to sub-groups.

      I understand the impulse, but doubt that calling them “fools” helps us in any way.

      Like

    • 1 November 2012 10:47 pm

      But austerity is mainstream, and you like mainstream. You aren’t going to “do a Romney” are you.

      Like

    • 2 November 2012 12:21 am

      “But austerity is mainstream, and you like mainstream.”

      Rodger, that’s a child’s reply. It’s not a worth response.

      Like

    • 1 November 2012 10:47 pm

      I don’t understand any of Erickson’s comment, and wonder if he has any supporting information for his large assertions.

      “Mainstream” consensus is always, by definition, grossly behind the times”
      Evidence?

      “always scrambling to explain operations that have already been explored by those in the trenches.”
      Evidence?

      “There’s no adaptive value in FM denigrating what mainstream Luddites refer to as “fringe.””

      “Fringe” is a technical term. That Erickson is ignorant of its meaning, and has not bothered to look it up despite writing so many comments about it, is sad. But it’s beyond our ability to help. The reference to “luddites” is daft; reflecting some god-like sense of an ability to decide who is right and wrong in a highly technical debate.

      “As repeatedly suggested, the only rational thing to do is to help accelerate the selection process.”

      Remarkable self-confidence. Perhaps Erickson could write up a submission to an economics journal or professional conference. My guess is that they’d not be impressed. There are few activities where non-experts can take the field with pros. Not football, not economics.

      “Since every process is too important to be left to the presumed process owners, our civic duty is to utilize our brains to accelerate the selection process, not to wash our hands of it.”

      Roger stay away from my town’s electrical grid, sewage disposal, and other technical systems! Delusional confidence in one’s ability to tinker with every sort of system is dangerous. Please exercise your omnicompetence only at home, preferably when the family is away.

      Like

    • 2 November 2012 1:26 am

      Roger,

      “Do you have the courage to start at the beginning, FM?”

      This is silly. The span of human knowledge is great. Nobody can start at the beginning and recreate it (in the sense Roger means) in a dozen lifetimes. Anyway, why would you want to do it?

      Life is short. It has to be spent on high value pursuits.

      Like

  32. Marvin permalink
    1 November 2012 5:48 pm

    “My preference in these things is to focus on the professional literature.”

    Are you saying that the academics who write within the MMT paradigm are not professional? Or that they are second-rate professionals?

    Like

  33. John permalink
    1 November 2012 7:15 pm

    Hmmm. I think Sam nailed it, even though FB isn’t a military man. MMT isn’t mainstream economics, therefore at this point that dog won’t hunt, politically; so ignore it, stick with what will hunt. Truth is not relevant.

    Like

    • 1 November 2012 7:23 pm

      Re: John’s comment.

      Anyone want to bet that when it comes to a subject John cares seriously about, like treating his child, he’ll have more regard for mainstream consensus? The doctor’s “it is an experimental drug that most experts believe will have net ill effects” might seem more convincing than an advocate’s enthusiasm.

      As for the search for truth, John appears not to have read anything I have written. That search takes place among economists every day. Lay cheerleaders are irrelevant. It will eventually sort itself out.

      It’s sad that science has such great importance in our society, but — as the MMT threads show — is so poorly understood even by many educated Americans.

      Like

    • 1 November 2012 8:14 pm

      Fabius likes the majority — the mainstream — the people who recommend deficit cutting (aka austerity) as a treatment for economic problems. When people finally understand Monetary Sovereignty, and it becomes the mainstream, Fabius will be there, trailing along, adding no new thinking, just agreeing with the majority.

      Like

    • 2 November 2012 12:30 am

      Rodger,

      “Fabius will be there, trailing along, adding no new thinking, just agreeing with the majority.”

      There is no point to this discussion, as you have no idea what you’re talking about. I’m not an economist, an leave professional discussions to those with the training and experience to do them.

      That might be a simple statement beyond your ability to understand. Which is sad.

      Like

    • 2 November 2012 12:56 am

      “I’m not an economist”

      Of course you’re not. That much was clear.

      I am an economist. If you had showed even a modicum of desire to learn economics, I’d have been glad to teach you. But, no more. You are solely interested in proving yourself right, rather than in learning — teacher’s nightmare.

      Like

    • 2 November 2012 1:21 am

      Rodger,

      I have given highly specific replies to your comments — almost none of which have describe economic issues. Mostly simple matters of fact, such as the degree of economists’ support for the EMU at inception. The degree of scientists’ opposition to the theories of Galileo, Einstein and Planck. The meaning of “fringe science” in the philosphy & history of science literature. And dozens more.

      You have not only ignored these factual rebuttals, but in turn you have made up stuff — such as my views on austerity and the utility of fiscal stimulus (both of which are contradicted by my many posts on these subjects).

      There are 25,072 comments on this website, probably most from people with less education than you. A large fraction are from people displaying more integrity in their conversations. It’s not an impressive record, no matter what your degree or degrees.

      Like

    • roger erickson permalink
      1 November 2012 7:47 pm

      The argument here is about two camps who each, in their opponents view, harmfully overstate their case. One argues impatiently that consensus is always wrong, since things must change, and it’s only a matter of when. The other camp is seen as having too much, even blind, obeisance to mainstream consensus, and will sit idly by as Luddites until mainstream adopts one of the competing newcomers.

      Adaptation is always finding the survival path between these two tolerance limits. We should be SELECTING survival paths, by exploring proposed options, not by sitting idly by arguing over obvious tolerance limits.

      I return to my thesis that FM is doing his readers a disservice by being too willing to wait for others – the so-called experts – to tell him what to believe. Business, biology, and reality always force rapid, novel decisions based on the slimmest of new evidence. This is reflected in DoD Officer Training programs, which ALL select in part on a “bias to action.”

      The glory really does go to those who recognize a better way …. sooner. Your country simply doesn’t have time to wait for your supposed experts to agree on the obvious, FM. You should join the silent majority telling any/all experts to hurry up and present ALL evidence for all to see, rather than meekly waiting for present experts to hold on to favored positions by admitting the obvious once blindingly obvious. We need speed, not allegiance to authority.

      Like

    • 2 November 2012 12:26 am

      Roger,

      “The argument here is about two camps who each, in their opponents view, harmfully overstate their case. One argues impatiently that consensus is always wrong, since things must change, and it’s only a matter of when. The other camp is seen as having too much, even blind, obeisance to mainstream consensus, and will sit idly by as Luddites until mainstream adopts one of the competing newcomers.”

      That’s not even a cartoon-like summary of the situation. Bizarrely inaccurate as a description of the professional debate. There are probably people with such views among the fans in the crowd, but few of them have any real understanding of the debate — it’s a waste of time even listening.

      Like

  34. roger erickson permalink
    1 November 2012 7:35 pm

    more input from the ancient fringe

    Like

    • 2 November 2012 12:49 am

      Roger,

      “more input from the ancient fringe”

      Why do you say that? These are neither “fringe” nor “ancient”.

      • Psyll’s observation is IMO quite obvious, and cannot be too often stated.
      • Thompson’s is an opinion piece. Daft, IMO (typical columnist bs) – the sequestration provisions were meant as an punitive alternative to a debt reduction strategy — not AS a debt-reduction strategy.
      • Alan Blinder’s statement about the budget is totally true in a limited sense: as a statement about national aggregates. It overlooks the more granular economic and political effects of government debt (ie, it’s owned by “the people” but not held by “the people”; we do not “owe it to ourselves”).

      Like

  35. John permalink
    2 November 2012 12:54 am

    “Anyone want to bet that when it comes to a subject John cares seriously about, like treating his child, he’ll have more regard for mainstream consensus?”

    Au contraire, mon frere. I have a deep-seated distrust regarding big pharma and the medical industry, surgery aside. However, you’re right in one respect: my preference is for well-trained, and usually very brilliant people. Sort of like MMT, but in the medical field. In diet, in cancer and auto-immune treatment, and others, I would tend to pay not much attention to big pharma and conventional medicine.

    Like

    • 2 November 2012 12:57 am

      John,

      OMG! Thanks for sharing, however horrific the feedback. I’ve seen several such cases. Hopefully a Court will intervene should such a situation arise, before you allow your child to die.

      Like

  36. John permalink
    2 November 2012 4:30 am

    Relax, FB. I don’t have in mind whatever your fevered imagination seems to have produced. I’m not an idiot, and the people I refer to tend to have doctorates in biochem and neurology and such esoteric fields. They just aren’t the usual dolts in the field — analogous to those who drove Semmelweiss to suicide, or those happy to be among those who terrify poor women, making the fat fees, and producing the alarming percentage of unnecessary hysterectomies each year. The list is long.

    You seem to be quite ignorant of these matters, hence your hysteria. But whatever floats your boat. Typical that you would have a court deal with the matter. Why not burn the parents at the stake?

    Like

    • 2 November 2012 5:10 am

      John,

      (1) Your comment is interesting — but strange.

      I asked: “Anyone want to bet that when it comes to a subject John cares seriously about, like treating his child, he’ll have more regard for mainstream consensus?”
      You replied: “Au contraire, mon frere. … my preference is for well-trained, and usually very brilliant people.”
      Then followed up with info that “the people I refer to tend to have doctorates in biochem and neurology and such esoteric fields.”

      (a) I don’t believe many people would read your first statement to imply that you routinely consult a team of PhD’s for your family’s illnesses. Congrats to you (& you appear to have enjoyed the joke), but this puts you in the top few percent of American; the rest of us don’t have (or even imagine having) that kind of access.

      (b) You reply hardly warrants the “au contraire”, IMO. How often do these PhDs recommend treatment outside the “mainstream consensus” in medicine? Esp the neurology PhD, which is usually taught as part of the Medical Sciences. Certainly sometimes during a lifetime, but it seems unlikely to me that this would happen often.

      (c) How often do you consult someone with a PhD in biochem & neurology for illnesses in your family? My sympathy if you do have that level of illness, often or chronically.

      (2) “You seem to be quite ignorant of these matters, hence your hysteria. ”

      That’s a guess, and it’s an incorrect guess. I have real world experience in this area. I’ve heard people say things similar to those in your previous comment, and I’ve seen the consequences. Ask a pediatrician about this (ie, families consulting what they non-medical “experts”, getting non-consensus treatment) and you’ll probably hear stories that will chill your soul. Not one in a thousand (perhaps not one in ten thousand) of them are consulting people with PhDs in “biochem, neurology and esoteric fields”.

      Like

  37. 2 November 2012 5:55 am

    Rodger,

    That Prof Wray (a fellow author at Roubini’s Economonitor) asked you to speak at UMKC says much about you: it’s a strong recommendation as to your knowledge of economic theory. But that’s not been the core topic of this discussion. We’ve discussed epistemology, the nature of science, the conduct of public policy, and history (including recent history).

    You are a responsible person, so I’ll take the time to explain this. Here are the problems with your comments, as I see them.

    (1) You’ve said many things which appear incorrect to me. Mostly simple matters of fact. I’ve stated my objections and requested evidence, and you’ve ignored both responses. Perhaps with reason, but it is not conduct which increases my faith in your credibility. Here are a few:

    1. You implied in a jumbled way that Galileo, Einstein, Planck were doing “fringe science”. False.
    2. “”I wonder what the mainstream was predicting back {2005} Actually, I don’t wonder. I know. They were extolling the virtues of the euro. ” {I gave cites of widespread and long-standing opposition by economists}
    3. “both party’s unremitting effort to reduce the federal deficit, backed by the vast majority of media and economists, was austerity.” {multiple errors: there have been no “unremitting efforts” to reduce the deficit since Bush tax cuts; austerity is not supported by “vast majority” of economists}
    4. Repeated misunderstand the meaning of the term “fringe science” {a standard term in the history and philosophy of science fields}
    5. “Anyway, if you go along with the mainstream, you go along with austerity, i.e tax increases together with spending decreases, as a way to stimulate the economy” {not “the mainstream view”, probably not even a majority view, among US economists}
    6. “Every depression, including the Great Depression, has followed the mainstream’s deficit reduction” {False. Eg, not true of all the 19th C depressions}

    (2) We have discussed the participation of non-experts in technical discussions. I don’t understand the basis for your objections, as you’ve never stated them. Your rebuttals are just mockery. Again, you might have cogent reasons — but you unwillingness or inability to state them does not boost my opinion of your credibility. For example:

    “Fabius will be there, trailing along, adding no new thinking, just agreeing with the majority.”

    I don’t see the problem with this. It’s the kind of personal viewpoint upon which people will differ, but you have not explained why my opinion warrants your mockery. Nor why your mockery is a rational response in this discussion.

    (3) You have incorrectly stated my views. IMO this is more than a venial sin, as it poisons the discussion.

    (a) “Fabius likes the majority — the mainstream — the people who recommend deficit cutting (aka austerity) as a treatment for economic problems.”

    Not only is this false, but you had no basis on which to make such a statement. If you checked you’d see dozens of posts since 2007 saying the opposite.

    (b) “But austerity is mainstream, and you like mainstream. You aren’t going to “do a Romney” are you.”

    This is a twofer. Not only is it not my view, but there are many mainstream economists who do not believe austerity is an appropriate policy for the US at this time. Such as Krugman, DeLong — and many others. It’s a daft statement.

    (4) Last, many of your comments are IMO unworthy of someone with your education and capability. Like this, which strikes me as delusional — and (guessing) not something you would say before your peers (red emphasis added).

    Further, now that the U.S. government is Monetarily Sovereign (since August 15, 1971) it can pay any bills of any size. All the hand wringing about the federal deficit, debt and fiscal crisis is based on a misunderstanding of the difference between Monetary Sovereignty and monetary non-sovereignty.

    Those who don’t understand (or won’t admit to understanding) the difference, simply do not understand economics.

    Like

  38. John permalink
    2 November 2012 4:57 pm

    OK, hang it on the wall to exhibit with other “strange replies to my blog.” Bye.

    Like

    • 2 November 2012 5:54 pm

      John,

      25,000+ comments so far, but yours is among the most interesting. It’s a reminder that America is one nation, but its people live as if on different worlds. Some have little access to medical care. Others rely on advice from a team of “PhDs in biochem, neurology, and esoteric fields.”

      Please check back with us after you talk to your pediatrician (or the PhD team you use instead) for stories about more typical families relying on non-M.D.’s for medical advice — and share your reactions.

      Like

  39. Henry permalink
    2 November 2012 6:24 pm

    I didn’t read John’s post at all the way you did. I guess I resonated with it because I read a lot of superb blogs in the health field, often precisely by people with advanced degrees in medical-biological fields. What John wrote made perfect sense to me. Alternative medicine does not necessarily mean quackery. The field of nutrition is particularly exemplary in this regard.

    Like

    • 2 November 2012 7:08 pm

      Henry,

      My comment was specifically about treating his child for illness, using methods outside the mainstream of medical practice.

      That does not, IMO, in the usual sense include nutritional advice (although that might sometimes be a part of it). In fact, that reading strikes me as quite a stretch.

      It’s the opposite of what John said about real world experience, IMO. People having *actual* experience with parents disregarding mainstream medical advice are not going to recall John and his team of biochem & neurology PhDs — or even someone sensibly guiding his child’s diet in opposition to their doctor’s advice.

      They’ll remember sad cases, often with dark endings. Illnesses due to unvaccinated children. Children severely undersized, sometimes with cognitive or emotional disabilities, due to malnutrition from exotic diets. Often these are intelligent parents following what they consider expert advice, upon which basis they disregard their doctor’s advice.

      Like

  40. Henry permalink
    2 November 2012 6:39 pm

    To continue, I think one needed to read a bit between the lines. I doubt John meant that he literally lifts the phone to call his team of Ph.D.’s when he has a medical issue. I think he probably meant that he would look for doctors who are aware of the issues that are discussed in more cutting-edge circles. Again, the nutrition field is a good example: more and more people are reading the bloggers who are trained to read and interpret the best new science research showing that the so-called food pyramid put out by the government is deeply flawed, and partly because of corporate pressures from corporate agriculture. Too bad he probably won’t return to say whether I’m right or wrong regarding his view, because I gather he left uninterested in continuing to argue the matter.

    Like

    • 2 November 2012 7:13 pm

      Henry,

      As per your previous comment, I think nutrition is not — in any usual sense of the term — an illness.

      Furthermore, even there I wonder how many times parents disregard mainstream medical advice — which is quite broad in nutrition — with good outcomes. As in the cases I described.

      It’s a serious matter. I wonder if you and John realize how serious. My guess is “no”.

      Like

    • 2 November 2012 7:17 pm

      This thread touches on one of my major shocks from the comments on the FM website: the degree to which my bland, mainstream views (with which most people will agree) are fiercely attacked as if they were extraordinary violations of common sense.

      That’s not to say that the mainstream is always correct (something I’ve repeatedly said during the past few such threads). But rather that people with non-mainstream views about science, health, and the conduct of public policy consider their views as obviously correct — or even sacrosanct. It’s this inversion, of sorts, that I find so astonishing.

      This is (guessing) part of the dysfunctionality I see “infecting” America, which I describe as a broken OODA loop. Our increasing inability to clearly see the world and act accordingly.

      I’ve attempted to document this, insofar as its possible to do with such an abstract and large-scale thing, in dozens of posts. It might be our most serious problem. It might even be terminal, for no nation — however powerful — can remain seriously out of phase with reality and survive.

      Like

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