I was examining the latest US Federal Reserve Flow of Funds data the other day. This data comes out on a quarterly basis with the latest publication being March 8, 2012. Other related data from the US Treasury (noted below) fills out the picture. The data reveals some interesting trends in terms of US federal government debt issuance over the last 12 months. It shows that the dominant majority of federal debt issued in 2011 was purchased by the US Federal Reserve. Some conservative commentators have expressed horror about this trend. As a proponent of Modern Monetary Theory (MMT) I simply note that the trend demonstrates the nearly infinite capacity of the US government to spend.
I get a lot of queries about the difference between fixed and flexible exchange rates in terms of the options that each present a sovereign, currency-issuing government. I considered this question several times in the past. Many of those questions are pitched in terms of the basic macroeconomic framework for an open economy that appears in most mainstream macroeconomics textbooks, particularly those written in the 1970s, 1980s and 1990s. I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.
Yesterday (March 18, 2012), the Cleveland branch of the US Federal Reserve Bank released their latest estimates of US inflationary expectations. This data estimates what the “public currently expects the inflation rate to be” over various time horizons up to 30 years. The data shows that the US public “currently expects the inflation rate to be less than 2 percent on average over the next decade”. The ten-year expectation is in fact 1.38 per cent per annum. In the light of the massive expansion of the US Federal Reserve’s balance sheet and all the mainstream macroeconomic theory is predicting that such an expansion would be highly inflationary, how can the public expect inflation to be so low over the next decade? Answer: the mainstream macroeconomic theory is deeply flawed and should be disregarded. Modern Monetary Theory (MMT) correctly depicts the relationship between the monetary base and the broader measures of money and explains why movements in the former are no inflationary.
There was a Wall Street Journal article (March 5, 2012) – The High Cost of the Fed’s Cheap Money – which is full of statements like “could eventually lead to an economic calamity” etc. The WSJ article basically rehearses a confused form the old supply-side tradition of the pre-Great Depression era where the claim was that “supply creates its own demand” (so-called Say’s Law) which was shorthand for the proposition that flexible prices and interest rates would ensure that whatever was supplied would be purchased. The same sort of arguments were used in a recent lecture to Harvard EC10 students by the Director of the US Congressional Budget Office. It is extraordinary that these myths, which were part of the body of economic theory that led the world into the current crisis, still have currency. They should start by understanding what Keynes meant when he said “Look after the unemployment, and the budget will look after itself”.
Today, I was reading the latest report from the US Congressional Budget Office – CBO’s Estimates of ARRA’s Economic Impact – which shows that the American Recovery and Reinvestment Act of 2009 (ARRA) has been successful in increasing real GDP growth in the US and reducing the rise in the unemployment rate. Some simple calculations reveal that in the absence of the ARRA US economy would still be in recession. That is, taking a European trajectory. There is also evidence that the Obama administration were presented with analysis that showed that a much larger stimulus than was chosen was necessary, yet this information was suppressed in final documents that were the basis of the fiscal intervention. It seems that the neo-liberal ideologues within the Obama camp deliberately undermined the fiscal intervention and so its impact, while positive, was far less than was required. I also read an interview with the ECB president, Mario Draghi today. The ECB is now pushing fiscal austerity as the only way out of the Euro crisis. In juxtaposition to the US experience, the Europeans remain fixed to the view that saving the flawed institutional structure (that is, the EMU) is a higher priority than insuring that people prosper. The lesson for the Europeans is that the US fiscal stimulus continues to work.
Eurostat published their latest National Account estimates for the Eurozone on Wednesday (February 15, 2012) – Flash estimate for the fourth quarter of 2011 – which allows us to complete the picture for the 2011 calendar year. Overall, the results are appalling. Many nations are now double dipping and even the European powerhouse, Germany contracted last quarter. Over the Channel, the British economy also contracted in the 4th quarter 2011. None of this should come as any surprise. An economy cannot grow when the private sector is deleveraging and is in constant fear of unemployment and the public sector deliberately refuses to step in and provide fiscal support. It is even worse when the government further undermines the capacity of the private sector to spend (by harsh cuts in pensions etc) and cuts its own net spending into the bargain. As one commentator noted yesterday “it makes no sense to drive an economy into recession where it stops people from working and thus paying more taxes” if the goal is to reduce budget deficits. The political leadership in Europe and the UK is deliberately sabotaging their economies. The same mentality is gathering pace in the US. Spare us!
This week I seem to have been obsessed with monetary aggregates, which are are strange thing for a Modern Monetary Theory (MMT) writer to be concerned with given that MMT does not place any particular emphasis on such movements. MMT rejects the notion that the broader monetary measures are driven by the monetary base (hence a rejection of the money multiplier concept in mainstream macroeconomics) and MMT also rejects the notion that a rising monetary base will be inflationary. The two rejections are interlinked. But that is not to say that the evolution of the broad aggregates is without informational content. What they paint is a picture of the conditions in the private sector economy – particularly in relation to the demand for loans. In this blog I consider recent developments in the US broad aggregates and compare them to the UK and the Eurozone, which I analysed earlier this week. But first I consider some fiscal developments in the US, which, as it happens, are tied closely to the movements in the broad monetary measures. The bottom-line is that the US is growing because it has not yet gone into fiscal retreat and the broad monetary measures are picking that growth up. The opposite is the case of the European economies (counting the UK in that set) where governments have deliberately undermined economic growth and further damaging private sector spending plans.
Recent data releases suggest that the current economic experience on the two sides of the Atlantic is very different. The latest data shows that the UK economy is now contracting and unemployment is rising as fiscal austerity begins to bite. Conversely, the latest US data shows that growth is on-going and the unemployment rate is finally starting to fall. This may be a temporary return to growth because the political developments that may occur later in this year could see some serious, British-style fiscal austerity being imposed on the US economy. At present though, my assessment of these disparate trends is that fiscal austerity is contractionary if non-government spending is insufficient to offset the decline in public spending. However, some observers are trying to hold out the US experience as vindicating those who believe in the notion of a “fiscal contraction expansion”. But the data tells us clearly that the US is not an example of this mania.
Mike Rhodes reported from California in Homeless attacked in Fresno that in February 2004, a “a coordinated multi-agency attack on homeless encampments earlier this month, the City of Fresno destroyed tents and other shelters used by the homeless … the Fresno Police Department … has returned to the tactic of not allowing the homeless to build any permanent structures. With thousands of homeless on the streets in Fresno, and homeless shelters able to provide only a couple hundred beds, a majority of the homeless have been turned into criminals. If you are homeless and can’t get into a shelter, you are breaking the law if you try to sleep anywhere in this city. This new policy penalizes the homeless and criminalizes poverty … There have also been public service announcements telling the community not to give money to the homeless … ”
In the New York Times, December 27, Brent Staples explains – Why Some Politicians Need Their Prisons to Stay Full – and outlines how public spending can clearly be a tool for essential job creation underpinning regional development. The problem is that it seems the Americans haven’t quite got it right.