America’s strength is an illusion created by foolish borrowing

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 thoughts on “America’s strength is an illusion created by foolish borrowing”

  1. FB, I know nutrition is not an illness. Again, a little intelligence expended on your part would have led to recall that there are many illnesses that are the result of faulty nutrition and can be cured by proper nutrition, and that nutrition and diet are a part of the medical training and profession and of healing generally. Read Weston Price, for instance–and that is going back decades! But nutrition assuch was hardly the subject of my reply.

    I see that you tend to underestimate your readers when they don’t agree with you–they are not “serious.” Underestimation of others and its companion, overestimation of oneself, is pride, which is the faithful companion of stupidity. I said pecifically “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.” Doctors. With M.D.’s. But just not mediocre M.D.’s, but brilliant and exceptional ones.

    Frankly, having visited your blog now for a few days I am rather disgusted with you. I think you display the characteristics of a know-it-all, and of a vain and pompous individual. You lack both intelligence and generosity of spirit, and are interested not in potentially fruitful dialogue nor in understanding another person’s position, but in endless quibbling, obtuse and petty contradiction, and having the last word. Therefore, I, like John, and other disenchanted people I’ve recently read here, bid you farewell.

    1. Reply to Henry’s comment:

      (1) “I know nutrition is not an illness. Again, a little intelligence expended on your part would have led to recall that there are many illnesses that are the result of faulty nutrition and can be cured by proper nutrition, and that nutrition and diet are a part of the medical training and profession and of healing generally.”

      Wow, that’s quite a harsh reply to my statement:

      “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).”

      I’m unclear as to the nature of your objection to what I said. Or, what provoked such a strong reaction to what appear to be my mild words. Also, the specific story I gave about effects of diet show my agreement with your view.

      (2) “I see that you tend to underestimate your readers when they don’t agree with you”

      Again, I don’t understand the basis for that statement.

      (3) “they are not ‘serious.'”

      You put that in quotes. I didn’t use that word in this thread; I don’t believe I said anything like this.

      (4) “I said specifically ‘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.’ Doctors. With M.D.’s. But just not mediocre M.D.’s, but brilliant and exceptional ones.”

      You were quite clear. But that’s not what John said, IMO. I explained why. I hope we can differ on this kind of interpretation. Again, I’m unclear why you find this kind of disagreement to be so upsetting.

      (5) “Frankly, having visited your blog now for a few days I am rather disgusted with you.”

      That’s sad. But there’s not much to be done about it. You appear to find disagreement with your views to be unpleasant, and reply not with rebuttal — but with personal insults.

      “Underestimation of others and its companion, overestimation of oneself, is pride, which is the faithful companion of stupidity. … I think you display the characteristics of a know-it-all, and of a vain and pompous individual. You lack both intelligence and generosity of spirit”

      This suggests to me that you also might address your critique to the man in the mirror.

      Whatever my faults, and they are many, I don’t reply to disagreements with personal insults. I address the facts and logic, not the person or style. This obviously does not suit you, but there are thousands of websites where your kind of argument is welcomed.

      1. Follow-up note to Henry’s interesting comment, about discussion threads.

        To see a different kind of discussion, look at the threads in the three posts about modern monetary theory (MMT). Lots of technical discussion liberally intermixed with insults and personal smears.

        http://fabiusmaximus.com/2012/10/12/43944/

        It quickly went over my interest and expertise, so I let Prof Dolan run the debate (adding some requests to play nice). It was interesting to watch. I’ve not allowed that level of personal animosity in threads, except when directed at me (which is always fair game here).

        Perhaps comments like that — and Henry’s — are the way Internet discussions should run. Why bother with just facts & logic when you can just call the other guy bad names? Is this what people want?

        Perhaps I’m moderating too tightly.

        Comments and suggestions on this welcomed!

  2. and: part of the medical training and profession and of healing generally

    should be part of medical training and of healing generally.

  3. yet another reference you may be interested in, FM. Press Release from Charles Darwin U:

    A world-renowned employment and equity expert has joined Charles Darwin University and hopes to assist with capacity building in remote Indigenous communities and in Timor Leste. Professor Bill Mitchell has travelled the world with the Centre of Full Employment and Equity (CofFEE) and has landed in Darwin for two years as a Professor of Economics with the Faculty of Law, Education, Business and Arts at CDU.

    World famous “fringe” OpenSource economist reducing unemployment in Australia Northwest Territories.

    1. Roger,

      I am patient with the “just make stuff up, no matter how wrong” school of debate, but really … So I’ll say this one more time. Please read carefully.

      Fringe science is a term used by people studying the history and philosphy of science. The usual meaning (from Wikipedia, which entry is quite good) is a theory “in an established field of study that departs significantly from mainstream or orthodox theories, and is classified in the fringes of a credible mainstream academic discipline.” It does not mean wrong or bad or whatever else you seem to imagine.

      “World famous ‘fringe’ OpenSource economist”

      First, there are fringe theories. There are not fringe scientists. Second, celebrity tells us nothing about the validity of one’s theories. Many advocates of pseudoscience (distinct from fringe science) became very famous. Mesmer. Velikovsky (Worlds in Collision). Erich von Däniken (Chariots of the Gods).

      Is it really necessary for me to explain these things? Repeatedly. That’s so sad.

      1. Roger, pay no attention to his disingenuous remarks. He knows full well why he used the word “fringe,” and it wasn’t with the bland innocence he professes.

        He’d rather agree with the majority, than address the factual the differences between Monetary Sovereignty and monetary non-sovereignty, Yes, today MMT and MS are not the majority hypotheses. So? What has that to do with the economic facts? All ideas began as “fringe.”

        In a few years, today’s mainstream will be the minority, at which time he will do a “Romney” and tell his readers he always knew MMT and MS were right.

        Meanwhile, here are his remarks, right back at him:

        “You implied in a jumbled way that Galileo, Einstein, Planck were doing “fringe science”. False.”
        No, true. None were believed by the mainstream until evidence became overwhelming. Ask the Pope about Galileo. New ideas are “fringe” before they become mainstream.

        “”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}
        There was such “long-standing opposition” that the euro was adopted with widespread approval, and even today, the mainstream believes instituting monetary non-sovereignty among many countries can succeed. I said it in 2005; I say it now. The euro is a bad idea. What does the mainstream no say?

        “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}
        Oh, really? Please point out the “vast majority” who do not favor deficit reduction (i.e. austerity).

        Repeated misunderstand the meaning of the term “fringe science” {a standard term in the history and philosophy of science fields}
        Disingenuous. You know why you used the term. Stop acting so innocent. The context of your comments shows you used it as a pejorative.

        “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}
        Austerity, very simply, is cutting deficits, and this is what the mainstream wants.

        “Every depression, including the Great Depression, has followed the mainstream’s deficit reduction” {False. Eg, not true of all the 19th C depressions}

        All? Is that your response? All? Since “depression” doesn’t have specific criteria, I suppose you’ll re-define some recessions as depressions, but the point is clear. Deficit reduction depresses the economy. Always has. Always will.
        See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/
        1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
        1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
        1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
        1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
        1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
        1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        Further, almost every recession since we became Monetarily Sovereign in 1972, has begun with decreases in deficit growth.

        Because GDP=Federal Spending + Non-federal Spending – Net Imports, there is no mechanism for reduced deficits to stimulate GDP growth. Algebra.

        But those are just “fringe” facts. Sorry.

      2. Rodger,

        I reply to a few of these, but that’s it. You’re not someone worth discussion with, with your refusal to provide supporting data and general bs attitude towards facts. Life is too short.

        (1) “He knows full well why he used the word “fringe,” and it wasn’t with the bland innocence he professes.”
        You don’t know any such thing, and can shown no evidence of that. Are you pretending to be Prof Xavier?

        (2) FM: “You implied in a jumbled way that Galileo, Einstein, Planck were doing “fringe science”. False.”
        Rodger: “No, true. None were believed by the mainstream until evidence became overwhelming. Ask the Pope about Galileo.”

        You, as usual, ignore what I said — and basic history. “Fringe” science concerns what the mainstream is working on — not if the theory is consider proven or “believed”. If the mainstream considered it proven, it wouldn’t be a subject of research. That Planck was mainstream is shown by the brief period between when he first proposed a draft of his theory in 1901 — and receipt of the Nobel in 1918, only 17 years later.

        Also, Pope Urban VIII was a supporter of Galileo.

        (3) Rodger: “Every depression, including the Great Depression, has followed the mainstream’s deficit reduction”
        FM: “False. Eg, not true of all the 19th C depressions.”
        Rodger: “All? Is that your response? All? Since “depression” doesn’t have specific criteria, I suppose you’ll re-define some recessions as depressions, but the point is clear. Deficit reduction depresses the economy. See my website“:

        1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
        1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
        1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
        1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
        1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
        1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        Rodger has made multiple errors.
        (a) An Econ 101 mistake. He said “deficit reduction”. In support he points to reduction of the debt. Two different things.
        (b) The US government ran small surpluses between 1866 and 1892, the largest being 1.5% in 1867, and 1.2% in 1802 and 1882. There were no deficits, and hence no “deficit reductions”.
        (c) Rodger was probably attempting to say that increases in the fiscal balance (less deficits, more surpluses, etc) are contractionary. Which is, of course, correct.
        (d) But the small movement in fiscal balances before the two long depressions of the late 19th century did not “cause them” (though that helped).

        (4) “I suppose you’ll re-define some recessions as depressions”

        Wrong, yet again.

        (5) Rodger: “both party’s unremitting effort to reduce the federal deficit, backed by the vast majority of media and economists, was austerity.”
        FM: “multiple errors: there have been no “unremitting efforts” to reduce the deficit since Bush tax cuts”
        Rodger: “Oh, really? Please point out the “vast majority” who do not favor deficit reduction (i.e. austerity).”

        Please point to the “unremitting effort by both parties”. Effort means actions, not campaign talk.

        Rodger, a staggering fraction of your statements are incorrect — and we’re talking about simple facts, not economic theory. You don’t support most of them, and when you do it’s false. The rest of your comments are silly mockery. I’ve tried, but this is a waste of my time.

        I’m done with you.

      3. You complain about lack of data. I provide graphs and data; you provide none. But you are good at weasel words and sophistry. Your statement that there has been no effort to reduce deficits (“effort means actions, not campaign talk”) not only is nonsense but intellectually dishonest.

        Then there is your sophistry of “There were no deficits, and hence no “deficit reductions.” Truly sad.

        And your statement “the small movement in fiscal balances before the two long depressions of the late 19th century did not “cause them” (though that helped).” Really? Which of these debt reductions: 29%. 99%, 59%, 27% and 57% do you consider to be “small”?

        You still haven’t addressed the issue of how deficit reduction could stimulate GDP, but oh, I forgot, You’re done with me. Conveniently.

      4. (1) “Then there is your sophistry of “There were no deficits, and hence no “deficit reductions.” Truly sad.

        Professionals speak in precise specific terms. You don’t. There is a syllogism here, but I’ll leave it to our readers to complete.

        (2) And your statement “the small movement in fiscal balances before the two long depressions of the late 19th century did not “cause them” (though that helped).” Really? Which of these debt reductions: 29%. 99%, 59%, 27% and 57% do you consider to be “small”?”

        A change in the deficit from 0.4% of GDP to 0.2% of GDP is a 50% decrease, but still small in its effect on GDP. Levels are important, too. Econ 101.

        (3) You still haven’t addressed the issue of how deficit reduction could stimulate GDP”

        I said the exact opposite: {you said changes} “in the fiscal balance (less deficits, more surpluses, etc) are contractionary. Which is, of course, correct.”

        As I said, an astonishing fraction of your statements are false.

      5. FM, it gets funnier and funnier. You said, “Professionals speak in precise specific terms.” Then you said, “A change in the deficit from 0.4% of GDP to 0.2% of GDP is a 50% decrease, but still small in its effect on GDP.”

        But the figures I gave you were DEBT reductions, not “deficit-as-a-%-of-GDP.”

        Anyway, there is a bottom line to all this, which the mainstream never addresses: The mainstream says large federal deficit reduction now could send us over the “fiscal cliff” (true) but small deficit reduction is advisable now, and especially later when we recover from the recession (absolutely false).

        There is only one time when deficit reduction is advisable, and that time never has occurred in the 41 years since we became Monetarily Sovereign: That would be when inflation cannot be controlled via interest rate control.

        Meanwhile, it is mathematically impossible for deficit reduction ever to be stimulative, and continuing deficits always will be necessary to grow the economy. Deficit reduction, aka austerity, is a bad idea for a Monetarily Sovereign government. Period.

        (The euro nations and our states, counties and cities require austerity, because they are monetarily non-sovereign — another difference the mainstream doesn’t seem to get.)

        As I’ve said, much to your irritation, “Those who don’t understand the differences between Monetary Sovereignty and monetary non-sovereignty, don’t understand economics.”

      6. Rodger – this comment of yours “But the mainstream economists wish to reduce, or even eliminate, the federal deficit, and the only ways to do that are to cut federal spending and/or to increase federal taxes – both of which reduce federal and non-federal spending” is simply wrong, and no doubt goes a long way towards explaining why FM (not just F) doesn’t see things your way. There is, as I’ve said repeatedly here, another way to decrease the debt without decreasing spending OR increasing taxes (you could even increase spending AND DECREASE taxes). That way is through direct issuance of dollars, debt-free, from Treasury. Lincoln did it first with the original legal tender laws (I’m leaving off American Colonial experience and European experiences prior to American’s founding here, though they are relevant too). We had 14 series of Greenbacks form 1862-1972, and not fully phased out by Treasury until 1996 (i.e. the United States Notes were burned).

        This debt-free money was used to fight the Civil War, could be used today for multi-trillion dollar public works programs (current Transportation Secretary Ray LaHood tried this when he was a Congressman in 1999 with a bill to inject $360 billion into transportation infrastructure – HR 1452, though this was not “pure” in the sense that the principal, but not the interest, would have to be repaid. Still, saving on interest can save up to 50% of a typical highway construction project!

        I haven’t heard FM counter this. I have heard him counter your argument that we need to increase the debt, and do so quite well. Until you see the difference between debt and spending, you will not make headway, because these are two different things.

        And no, as I’ve said repeatedly, we are NOT monetarily sovereign. If we were, we (at the Federal level) would not need to borrow money at all, from anyone, including our own Central Bank. This is not a mere technicality, it is an issue of seigniorage, and a major source of drag on economic performance – as are all those idle economic rent collectors living off Treasuries, whether in China, or the U.S. Only productive activity contributes to economic wealth. Rent collection is a minus, not a plus to economic growth. BTW, if we stopped paying interest to the Chinese, they would not be subsidized and so would have to earn more off their exports, making their products more costly, and ultimately helping our balance of trade by making the U.S. more competitive, a great result for us!

        Inflation can be controlled by proper taxation (I favor Land Value Taxes and possibly tariffs – our country experienced its greatest growth when we protected out industries, and is a net debtor roughly since we started free trade; this is no accident, but inevitable, but I digress…)

      7. Scottonthespot raises some interesting points. I’ll leave the pros & cons to those interested. Here are two notes of background information to help readers understand.

        (I) What happened during the Civil War? From the US Treasury website:

        In 1860, the year before the American Civil War started, the U.S. Government debt was $64.8 million. Once the war began, debt grew quickly. The financial cost of the war was significant, totaling an estimated $5.2 billion. The Government had to come up with new ways to pay for this expensive war. Two ways the Government accomplished this were:

        (1) The Legal Tender Act (1862) which allowed the Government to:

        1. print paper money known as greenbacks
        2. sell $500 million in bonds to raise money

        Before the Legal Tender Act, each bank could print its own form of paper money; paper money had value because it was backed by gold. This means that there is an amount of gold held by the Government that’s equal to the value of the paper money. The money printed by the Government after the Legal Tender Act was not backed by gold because the Government did not have that much gold at the time. The “greenbacks” could, however, be used to pay taxes and buy items from stores.

        (2) The National Bank Act (1863) allowed for the creation of:

        1. a nationwide banking system that loaned money to the Government to pay for the war
        2. a national system of paper money and coins

        By the end of the war in 1865, Government debt had exploded, reaching $2.6 billion. That was more than 40 times what it was only five years earlier at $65 million.

        (II) My opinion on the debt and deficit during the current economic cycle

        IMO, which I believe is within the current economics and US political consensus (of course, that doesn’t make it correct), is that:

        1. we should follow Keynes’ advice, to run a balanced budget over the full business cycle during peacetime,
        2. deficits are a powerful tool during a crisis,
        3. debts can have bad effects, both economic & political (we do NOT owe it to ourselves).

        Furthermore I have what I beleive is a widespread if inchoate belief among the the public — but not common among economists — that deficits should be used wisely. They’re an opportunity to rebuild America, borrowing at low rates and build at low cost. Squandering the money, as we’re doing now, is a tragic error. As Japan has done.

        Last, deficit spending has sustained the US economy from the full effects of the global financial crisis. But IMO it had an unexpected result: this eliminated the pressure for necessary reforms! This is another aspect of the lost opportunity of the past four years.

      8. “Squandering the money, as we’re doing now, is a tragic error.”

        One can spend money wisely or poorly, but “squander” implies using up a scarce resource. Dollars are not scarce to our Monetarily Sovereign, U.S. government, which has the unlimited ability to spend.

        “we should follow Keynes’ advice, to run a balanced budget over the full business cycle during peacetime”

        Keynes’ advice does not apply to a Monetarily Sovereign government. Because the U.S. runs a $500 billion (approx.) trade deficit, a balanced federal budget would remove $500 billion from the economy every year — an economic disaster — and provide no basis for economic growth.

        “debts can have bad effects, both economic & political (we do NOT owe it to ourselves).”

        Federal debt is nothing more than the total of T-security accounts at the Federal Reserve Bank. These are akin to bank savings accounts.

        To buy a T-security (falsely called “lending to the U.S.”), you instruct your bank to debit your checking account, and you instruct the FRB to credit your T-security account. To “pay off the debt,” you merely tell the FRB to debit your T-security account and credit your checking account. The process is identical with telling your bank to transfer dollars from your checking account to your savings account and back again.

        When you buy a T-security, the FRB (not the U.S. government) owes you the dollars in your T-security account. The FRB could eliminate all so-called federal “debt” tomorrow, simply by debiting all T-security accounts and crediting checking accounts. No problem.

        There also is the “platinum coin solution,” which if you’re interested, I’ll be glad to explain.

        Anyway, federal “debt” is nothing at all like personal debt; it simply is savings accounts at the FRB, and neither is a burden nor a risk to the U.S. governement.

        As always, not understanding the difference between Monetary Sovereignty and monetary non-sovereignty = not understanding economics. On August 15, 1971, the entire world of economics changed, and sadly, the mainstream has not yet adapted to that change.

      9. Rodger reminds us that these things appear very different from an MMT perspective. That is, of course, the nature of a paradigm challenge (per Thomas Kuhn, in The Structure of Scientific Revolutions). New paradigms provide new perspectives on the world. Even if the dominant paradigm beats back the challenge, scientists can learn much from the debate and associated research.

        What we’re seeing with MMT is science in action. In these threads in which people (eg, Prof Dolan, warrren mosler) describe the issues about which it revolves. Perhaps Dolan or another will write again about this important clash of views, and we’ll see how it has evolved.

      10. “New paradigms provide new perspectives on the world. Even if the dominant paradigm beats back the challenge, scientists can learn much from the debate and associated research.”

        Now there, you are right on target. Excellent.

        But, so far, I’ve not seen specifics from the mainstream, that counter the specifics supplied by Monetary Sovereignty and MMT. Perhaps, you can begin with an explanation of how federal deficit reduction (or even a balanced budget), can grow GDP, always remembering that:

        GDP = Federal Spending + Non-federal Spending – Net Imports.

        Perhaps one of the mainstream economists can explain this simple concept.

      11. Scott,

        I said, “But the mainstream economists wish to reduce, or even eliminate, the federal deficit, and the only ways to do that are to cut federal spending and/or to increase federal taxes – both of which reduce federal and non-federal spending”

        You said “(that) is simply wrong, and no doubt goes a long way towards explaining why FM (not just F) doesn’t see things your way. There is, as I’ve said repeatedly here, another way to decrease the debt . . . ”

        See anything wrong with that? I spoke of deficits, and you responded about debt.

        I agree with you that federal debt is entirely unnecessary for a Monetarily Sovereign nation. In fact, all federal debt (which is nothing more than the total of deposits in T-security accounts at the Federal Reserve Bank), could be eliminated tomorrow. Simply debit all those accounts and credit the holders’ checking accounts.

        The federal government does not need to issue T-securities, but it does need to run deficits.

        There is no necessary financial connection between federal deficits and federal debt. We can have deficits without debt, and we can have debt without deficits. I discuss this in several posts, one of which is at http://rodgermmitchell.wordpress.com/?s=%22deficits+without+debt%22

        Gaining an understanding of Monetary Sovereignty is important for understanding economics.

      12. “But the figures I gave you were DEBT reductions, not “deficit-as-a-%-of-GDP.” ”

        Since Rodger didn’t tell us that’s what the numbers referred to, only our Prof Xavier could determine what he meant (ie, the annual deficits varied by similar amounts). His original statement referred to deficits, which was what I discussed. Professionals speak in precise and specific terms. This is what makes science possible, and more than debates in bars.

        As for monetary sovereignty and MMT, I am confident that professional economists will work to a conclusion. I have discussed at length the reasons I believe it is not ready today to influence public policy. Rodger replies mostly with mis-statements and bold statements. Neither interest me.

      13. “Since Rodger didn’t tell us that’s what the numbers referred to, only our Prof Xavier could determine what he meant.”

        These are the exact data I provided to you. They also can be found at: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/

        1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
        1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
        1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
        1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
        1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
        1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        What does the Professor Xavier say about them?

        “Rodger replies mostly with mis-statements and bold statements.”

        I agree to the “bold statements,” but so far, have not seen your evidence of “mis-statements.” Which of my statements was “mis”?

      14. Rodger,

        I explained all this in my previous comment. At length. With exact quotes of your words. This is a simple matter of words and facts, not opinion or economic theory.

        These matters are small compared to the larger questions about the validity of MMT. They are IMO useful only as testing your accuracy on small details gives guidance about the validity of your larger statements.

        That you prefer to ignore rebuttals — pretending they don’t exist — does not increase my confidence in your analysis. Also, doing so leaves no further basis for discussion.

      15. I supply data. You respond with, ‘You don’t supply data. You tell me I didn’t say what numbers I used; I show you how I DID tell you what numbers I used.

        I address your rebuttals, which invariably are generalities; you accuse me of ignoring your rebuttals.

        In short, your so-called rebuttals can be summarized as: “You’re wrong. I’m in the majority, so there!”

        Have you no shame?

      16. There is no point to this bickering. Readers will have to make up their own minds about your statements. I’ve given quotes, and my responses. I’m no longer interested in reading your comments. You can post away for others. There are no closed doors here, except for personal attack & such.

        The larger and more important issues about economic theory will be decided elsewhere.

      17. Understood. From complexity evolves simplicity. You have but to consider one question:

        GDP = Federal Spending + Non-federal Spending – Net Imports

        Given the calculation of GDP, how can reducing federal deficits stimulate GDP growth?

        If you can answer that one very simple question, you will have gone a long way toward resolving all the differences between MMT/MS and mainstream economics.

        I’ll even take the first step. My answer is: Reducing federal deficits cannot stimulate GDP growth.

        Now, what’s your answer?

      18. “I’ll even take the first step. My answer is: Reducing federal deficits cannot stimulate GDP growth. Now, what’s your answer?”

        That’s not an answer. It’s a statement from Econ 101. Rodger keep repeating it like a sophomore who has had his first intellectual epiphany.

        As for actual answers, I’ve written about the need to use fiscal deficits since 2008, to stabilize the economy and rebuild America. Just to mention two of the many posts:

        My current recommendation fiscal deficits to stabilize the US economy, continued ZIRP, aggressive domestic and international financial policy reform, and starting development of a more stable global currency regime. All white bread ideas. See a list of these posts here.

      19. Sounds good, FM.

        If you agree that “Reducing federal deficits cannot stimulate GDP growth,” then some guy has been using your name to write such nonsense as: “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.”

        Into what “danger zone” is the deficit?

        And is “we are borrowing” identical with “people are depositing dollars into T-security accounts at the Federal Reserve Bank”? If so, why is that a problem?

        And “burning the money”? Really? How does a Monetarily Sovereign nation “burn” its sovereign currency, and even if it did, why might that be a problem for a nation with the unlimited ability to create its sovereign currency?

        And then there was this howler, “A fundamental measure of a nation’s financial condition is the structural primary budget balance.” What do you think this guy means by “nation’s financial condition”? GDP growth? Poverty?

        And would a balanced structural budget improve the “nation’s financial condition”?

        Sorry for the questions, but the guy who wrote that stuff really seems to be on the fringe.

        .

        Oh by the way, regarding your gratuitous nitpick about reducing the debt vs. reducing the deficit: The way to reduce the debt is to run a surplus, i.e to run a negative deficit. So yes, even when the deficit is zero, one still can reduce the deficit.

        Rodger Malcolm Mitchell

      20. Oops, in my previous response, I neglected to point out this evasion: “aggressive domestic and international financial policy reform.

        People use the word “reform” to obfuscate. I know that’s not you. So, specifically, what would your “reform” consist of? Increased deficits? Reduced deficits? For how long?

        Let’s try to get down to specifics.

      21. There is a teachable moment here! Let’s replay the tape, and see how this could have played out in a useful form! Bold emphasis added.

        Rodger: “Every depression, including the Great Depression, has followed the mainstream’s deficit reduction”

        FM: “False. Eg, not true of all the 19th C depressions.”

        Rodger: “All? Is that your response? All? Since “depression” doesn’t have specific criteria, I suppose you’ll re-define some recessions as depressions, but the point is clear. Deficit reduction depresses the economy. See my website” … “Then there is your sophistry of ‘There were no deficits, and hence no “deficit reductions.’ Truly sad.” “Have you no shame?”

        How would an economist of note have responded? Such as (guessing) Profs Dolan or Wray. Or Mosler.

        Economist: Saying “deficit” was a slip of keys. I meant to say “every major depression — including those of the late 19thC — followed periods of debt reduction. MMT shows that this has contractionary effects on the economy not accounted for in mainstrem economic theory.

        FM reply, in this alt universe: Thank you for the explanation. That’s a major gain from new paradigms, no matter how they play out: they give new perspectives on the world!

  4. Rodger –

    Deficits (the difference between what we take in and what we spend), under our current system, lead to debt (what we owe to the holders of the debt, overall) eventually. I actually am calling for an end to double-entry accounting on the Federal Level. As you point out, it is a fiction anyway to say that we are “in debt” when the Federal Government can simply “coin Money” as per the constitution and TRUE monetary sovereignty. So, why not end the deliberate confusion and just stop pretending we can’t do what we can do? Well, of course, there are those who hate the government so much that they would rather the country be poor (and themselves), just to preserve a eco-religious ideology. I’m not sure you can ever reach them.

    But for the rest, I believe it makes more sense to talk about sensible spending for the common good, under a debt-free money creation system, than to pretend that a whole class of people living off Treasuries instead of working does not matter to ultimate productivity, or doesn’t contribute to our continued dependence on the banking elite. By firmly establishing that government can, does, and should, “coin (its own) Money” we can REALLY establish the Monetary Sovereignty you and I aspire to have for America. We’re better off than Euroland, not quite as well off as Japan – which produces its money opaquely through a Public Bank – but nowhere near as well off as we ought to be.

    I don’t want governemnt off my back, I want my government back.

    One way to do that is to finally sever the mutual ties between governemnt and the banking elite, and truly sovereign money would be a big step in that direction.
    As for simply crediting holders of T-securities, I’m not sure why we ought to do that, nor how that will end the next cycle of indebtedness. Indeed, politicians, once they see how “debt-free” we suddenly are, might go on a spending spree, putting the debt right back up again. Remember how the banks started to panic when Clinton left office and there was a tiny surplus? They want us to be in debt too, which we really have no need to be, IF we produce debt-free money. The fact that the bankers want us to be in debt is enough right there to indicate we ought not to be.
    Monetary Sovereignty Now!

    P.S. Where did you get the information for the chart on debt reduction and depression? I may want to use it in an article I’m writing, but it is for a journal, and they will need a more scholarly source than simply your blog.

  5. In response to Fabius’ comment on the exploding debt during the Civil War:

    Yes, it is true that the debt exploded. In fact, while it was explodING, the NYC banks wanted 24-36% on risky loans to the northern government. That’s what prompted Lincoln to find another solution in the first place, by printing U.S. Notes directly from Treasury – after obtaining Congressional approval. And yes, it is also true that later Supreme Court Legal Tender Cases, specifically Julliard vs. Greenman, said that the ability to print U.S. Notes was a funciton of the government’s constitutional right to “borrow” money, not to “coin Money,” but I, and asome scholars like Robert F. Nattleson, and Stephen Zarlenga, and Henry George, simply disagree with that interpretation by then-SCOTUS. SCOTUS reversed itself, led by none other than previous Secretary of Treasury, Salmon Chase, under whom U.S. Notes were produced in the first place, who essentially made illegal his own action, in earlier decisions, until Julliard basically overturned the earlier decisions, with new members of the court.

    I could point you to earlier arguments, going back to the Constitutional Convention – the founders were well aware of both the promise and the dangers of having government be able to “coin (its own) Money” (capitalization in the original constitution). They put that option in anyway, after much rancorous debate.

    In any case, we can produce (‘coin’ – lower case ‘c’) our own, sovereign money. We don’t need to borrow it, tax it into the Treasury, or “pay it off” to have it. The MMT folks are right about that part. Where they are wrong is to say that we have monetary sovereignty NOW; we don’t. And to say that debt doesn’t matter – essentially – because we can always “make more;” it does. But debt matters less because of the money we owe, than because of who we owe it to, and how that influences society to become a society of debt-collectors instead of workers and entrepreneurs. There’s a reason we have a sluggish, if at all, recovery, and it can be laid at the feet of the debt-based monetary system.

      1. More info on Julliard vs. Greenman:

        It is clear that, after some rulings, and reversed rulings, but culminating in Legal Tender case Julliard vs. Greenman, (1884) that the Federal Government does have the power, albeit under the borrowing clause of the constitution, to issue paper money. From the opening of the court decision:

        “Congress has the constitutional power to make the Treasury notes of the United States a legal tender in payment of private debts, in time of peace as well as in time of war.
        Under the Act of May 31, 1878, c. 146, which enacts that when any United States legal tender notes may be redeemed or received into the Treasury, and shall belong to the United States, they shall be reissued and paid out again, and kept in circulation, notes so reissued are a legal tender
        ….
        MR. JUSTICE GRAY delivered the opinion of the Court.

        The notes of the United States, tendered in payment of the defendant’s debt to the plaintiff, were originally issued under the Acts of Congress of February 25, 1862, c. 33; July 11, 1862, c. 142, and March 3, 1863, c. 73, passed during the war of the rebellion, and enacting that these notes should “be lawful money and a legal tender in payment of all debts, public and private, within the United States,” except for duties on imports and interest on the public debt. 12 Stat. 345, 532, 709.

        The provisions of the earlier acts of Congress, so far as it is necessary for the understanding of the recent statutes to quote them are reenacted in the following provisions of the Revised Statutes:
        “SEC. 3579. When any United States notes are returned to the Treasury, they may be reissued, from time to time, as the exigencies of the public interest may require.”
        “SEC. 3580. When any United States notes returned to the Treasury are so mutilated or otherwise injured as to be unfit for use, the Secretary of the Treasury is authorized to replace the same with others of the same character and amounts.”
        “SEC. 3581. Mutilated United States notes, when replaced according to law, and all other notes which by law are required to be taken up and not reissued, when taken up shall be destroyed in such manner and under such regulations as the Secretary of the Treasury may prescribe.”
        “SEC. 3582. The authority given to the Secretary of the Treasury to make any reduction of the currency by retiring and canceling United States notes is suspended.””

    1. The so-called federal “debt” is merely the total of deposits in T-security accounts at the Federal Reserve Bank. Thus “we” don’t owe it; the FRB owes it, just as any bank owes its depositors the dollars deposited in bank accounts.

      T-security accounts essentially are savings accounts. Yet I never hear worrying that banks have too many dollars in their savings accounts. In fact, banks boast about their savings account balances, and actively seek depositors.

      So, why all the concern about the size of T-security accounts at the FRB?

    1. Hoexter’s article is excellent. The vast sums spent by Peterson and his allies have created the impression that the “austerians” are the majority among economists. Rodger, among many others, believes this.

      I have not found a survey on this, but none of the professional economists (ie, paid to do economics) that I know believe it to be correct. IMO it’s just another demonstration that propaganda works well in America today.

  6. You are so full of crap, FB. What you don’t realize is that there are actually people who understand things better than you do. Non-mainstream can be incorrect, but it can also be corrective of a mainstream view. It happens all the time. It’s not that your views are being attacked, it’s your character, your pig-headedness, and more. It’s your character, FB.

    1. (1) “Non-mainstream can be incorrect, but it can also be corrective of a mainstream view”

      Thank you for your comment, esp as it is a nice summary of what I’ve been saying on the FM website for many years, most frequently concerning climate science and economics.

      Look at economics, where I wrote in January 2008 — one month after the US recession started, 8 months before the crisis — that economics was entering a paradigm crisis. Now that’s a commonplace observation.

      I am confused, however, that you believe your comment is a contradiction or even rebuttal to something I said on the FM website. For example, I said something similar to your statement 7 (seven!) times in the recent threads about MMT. The most recent:

      “Rodger reminds us that these things appear very different from an MMT perspective. That is, of course, the nature of a paradigm challenge (per Thomas Kuhn, in The Structure of Scientific Revolutions). New paradigms provide new perspectives on the world. Even if the dominant paradigm beats back the challenge, scientists can learn much from the debate and associated research.

      “What we’re seeing with MMT is science in action. In these threads in which people (eg, Prof Dolan, Warrren Mosler) describe the issues about which it revolves. Perhaps Dolan or another will write again about this important clash of views, and we’ll see how it has evolved.”

      (2) “You are so full of crap, FB.”

      Can you point to a specific statement which shows “I’m full of crap”? If so, and it’s more than trivia (ie, more than the run-of-the-mill comment screw-up), I’ll add it to the “SmackDowns” page (on the top menu bar). It’s a long list, and will only grow longer with time.

      (3) “it’s your character, your pig-headedness, and more. It’s your character”

      I agree my character is quite defective. Perhaps you have a sterling character, better than us sinners in this broken world. If so, you have my congratulations.

      A cautionary note: in my experience (26 thousand comments served to date), these kinds of personal attacks tend to come from people who can make no defense of their logic or facts. Those that can do so, do so. Those that cannot, respond with schoolyard insults.

      That’s just a thought, and might not apply to you. But, like everything on the FM website, it’s free. So we can guarantee you don’t overpay!

      Thank you for taking the time to comment.

  7. Here’s something that’s not a bad expose, cobbled together from existing parts, no matter how fringe.

    http://youtu.be/11J_914RZ-o

    vs Credentialism, for Credentialisms sake

    Today’s debate: a passionate defense of credentialism. State your view!, 23 October 2012 — “Is that a bad thing when discussing matters of vital public policy? When discussing treatment of your child’s illness, are you interested in the healer’s credentials, and degree of expert approval of the treatment used?”

    Of course, I too have no basis for reiterating aligning existing feedback from our co-citizens. Yet it has to be done, whether some will or won’t accept illustrating snowmobiles with existing used parts.

    1. “vs Credentialism, for Credentialisms sake”

      Roger,

      You keep alluding to this. Can you point to somebody who believes in “credentialism for credentialism’s sake”?

      If you cannot provide an example, we’ll assume you’re deliberately using a Straw Man fallacy, a cheap rhetorical trick.

  8. William Richardson

    The following Rodger Malcolm Mitchell quotes are interesting;

    http://www.economist.com/user/3282629/comments

    “Contrary to popular wisdom, there is no historical relationship between U.S. federal government deficits – even huge deficits — and recessions, depressions, inflations, deflations or stagflations. There is, however, a proven historical, positive relationship between federal deficit growth and GDP growth.

    The U.S. has had 6 depressions in its history. Every one of those depressions followed a series of federal surpluses. All were cured with deficit spending.

    1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
    1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
    1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
    1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
    1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
    1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

    The U.S. has had 9 recessions in the past 50 years. Each of those recessions came on the heels of deficit growth declines, and each recession was cured with deficit growth increases.

    Despite all the hand-wringing and dire predictions, there is absolutely no evidence deficits cause any negative economic effect, or that large deficits are “unsustainable” or must be paid for by our grandchildren. There is a mountain of evidence that deficits are necessary for economic growth, and the larger the deficits the faster the growth.

    Anyone with any data to the contrary, please send it to me at rmmadvertising@yahoo.com. Until then, I will continue to assume the “debt hawks” rely not on science, but on religious faith, with “faith” being defined as belief without”

    “Regarding federal debt:
    If a reporter were to come to his editor with a proposed article titled, “President Obama is gay,” the editor would demand supporting evidence, before that article ever saw daylight.
    However, if the same reporter submitted an article titled, “Federal deficit is too high,” history says the editor would ask for no supporting evidence, nor would the article contain any. The media merely assume, as a matter of faith, that revenue neutrality is more prudent than deficits.
    Economics is rare, perhaps unique, among sciences, most of which demand evidence for their hypotheses. Only in economics can intuition, faith and popular wisdom obviate facts or even the desire for facts. Thus, I have had editors, columnists and reporters tell me it is “obvious” that large deficits are unsustainable, lead to recessions, depressions, inflations and hyper-inflations. When I ask for evidence to support these views, I seldom hear from them again, probably because they feel scientific evidence is unnecessary in a science, but more importantly, they don’t have any.
    Even the Concord Coalition, an organization that for seventeen years, has collected vast amounts of money to preach for federal deficit reduction, unashamedly offers no evidence to support its views. Check its website, http://www.concordcoalition.org, or write to them and you will see.
    Because our leaders parrot the economic beliefs promoted by the media, lack of evidence has contributed heavily to government actions that yield repeated recessions. Until the media learn to ask, “What is your evidence?” we will continue to suffer periodic, economic traumas. These traumas may seem inevitable and unavoidable, but in reality they are caused by beliefs lacking evidence.

    Rodger Malcolm Mitchell
    http://www.rodgermitchell.com

    1. FM takes great pride in being aligned with the mainstream, not the “fringe.” Here is what a mainstream newspaper, the Florida Sun Sentinal, says about mainstream economics:

      “Agreement also must be reached that our nation’s soaring debt poses a severe threat to our national security. To rein in spending, the president must address the future costs of Medicare and Social Security. Indeed, spending must be reined in across the board, including at the Pentagon.”

      This short paragraph of unrivaled stupidity is the mainstream, and it is with what FM agrees — and also is the single greatest threat to America. The Taliban only wish they could do as much damage to America as does the mainstream.

  9. Pingback: O PATO ALGEMADO – XXIII – Edição especial dedicada à Economia – por Sérgio Madeira | A Viagem dos Argonautas

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