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Sad day for America

I followed the US mid-term election campaign as best I could – being an outsider. Sometimes the level of debate appeared to be below that which I imagine the primates engaged in back then. I don’t intend to become a psephologist (not qualified) but I am interested in exploring why these witless conservatives have made ground. In Australia’s recent national election where the so-called progressive Labor Party (not!) lost office in their own right the swing was to the Greens rather than the conservatives. This does not appear to be the case in the US. So there are two questions I am interested in. First, what role did the neglect of the unemployed play in the election results? Second, do the result really amount to an endorsement of the neo-liberal economic approach? But the reality is that the US political debate has become so divorced from reality – which in my parlance means that it has totally failed to provide a vibrant debate about the options that the monetary system offers government to improve the lives of the citizens. Instead, candidates who have no understanding at all have been elected on the basis of a pack of lies and only demonstrate total ignorance when it comes to informed debate. In that sense, the mid-term elections have foisted a number of very dangerous individuals into office. Sad day for America!

With 96 per cent of the Senate vote counted in Connecticut, I can confirm that 10,888 (1 per cent) of the voters demonstrated good judgement (voting for my mate Warren Mosler). That is not many. They prefer to elect a person who cannot tell the truth about his background but more importantly doesn’t understand how the economy works over someone (Warren) who actually knows how the monetary system operates and has a solution to the current crisis. Okay, their choice.

But this result was magnified throughout the states – with big swings to candidates who by their public statements similarly demonstrate a gross ignorance of the way in which the monetary system operates and the potential that government has to reduce the impacts of the current crisis.

We would never put a person who couldn’t fly in charge of a plane – why do we entrust positions of government to those who cannot possibly make the correct decisions especially at a time when government has to make the right moves or else millions more will lose their jobs.

Over the course of the campaign there have been so many classic statements by these nonsensical conservatives. The Democrat candidates have mostly been no better by the way. I have no truck for either side of politics in the US. A complete clean sweep of the Democratic party machine is required to purge it of its conservative ignorance.

For Australians, I would advocate the same purging of the Labor Party and the neo-liberal inspired Greens. Please read my blog – Neo-liberals invade The Greens! – for more discussion on this point.

Some of the statements made by the t-party candidates sum up the malaise that the US polity is now in.

For example, on October 10, 2010, the New York Times carried the story – In Pennsylvania, Anger Fuels a Race for Senate
– Republican tea party candidate Pat Toomey said:

These guys in Washington are creating an environment that is having a chilling effect on small businesses and medium and big businesses, as well, and that’s a big part of why we don’t have the job growth that we badly need … They are creating a staggering amount of debt, debt that is eventually going to have much higher interest rates, probably lead to very high inflation … It’s a very worrisome combination, and we have got to get on a new track.

He was then asked what that new track might look like and he struggled. He supports making the “Bush-era tax cuts permanent for all Americans” (including the rich) but simultaneously wants to cut the deficit and balance the budget.

But the best part of the article was this interchange:

Mr. Toomey says he favors making the Bush-era tax cuts permanent for all Americans — which would add $700 billion more to the deficit over 10 years than the plan advocated by President Obama to let the lower rates expire for the rich. But he also expresses a desire to reduce the deficit.

At the ironworks shop, Mr. Toomey brushed aside a question from a local reporter who pointed out that real income for American workers dropped after the Bush tax cuts, saying he did not believe the data.

So this brand of conservatism has learned the lesson I was taught by a right-wing professor when I was a student once. When it was clear that the theoretical models he was propounding had no correspondence with the data of the real world he told us that “the data was simply wrong”.

Okay, measurement area and other statistical bewilderments can clearly occur but the data put out by the national statistical offices is typically of a very high standard. But still if the message of the data gets in the way of your pet theory then the answer is simple: the data is wrong. I think that is called blind ideology – or religion.

Another gem from the mid-term elections was the lesson in macroeconomics offered by another extremist Rand Paul who spoke to CNN after he was successful yesterday. Here is the video snippet of what is a most extraordinary interview where he declares there is no poverty in America – just interlocked consumers and producers.

As you can see he wants a balanced budget and wants to get there by spending cuts. This section of the interview was particularly revealing. He was asked what he would say to those who wanted to reduce the deficit by stopping the Bush-tax cuts for the highest income earners and he replied:

RAND PAUL: I would say that they must be in favor of a second American depression, because if you raise taxes to that consequence, that’s what will happen in this country. Raising taxes in the midst of a recession would be a disaster for our economy. And anybody who proposes such a policy really is, I think, unfit to be making decisions.

CNN: What if they just raised taxes on the richest, those making more than 250,000 dollars a year?

RAND PAUL: Well, the thing is, we’re all interconnected. There are no rich. There are no middle class. There are no poor. We all are interconnected in the economy. You remember a few years ago, when they tried to tax the yachts, that didn’t work. You know who lost their jobs? The people making the boats, the guys making 50,000 and 60,000 dollars a year lost their jobs. We all either work for rich people or we sell stuff to rich people. So just punishing rich people is as bad for the economy as punishing anyone. Let’s not punish anyone. Let’s keep taxes low and let’s cut spending.

Anyway enjoy the video. If it wasn’t serious you would think this was a comedy skit. But presumably, a huge government order of all the products that the rich make would help the economy, no?

The progressive side of politics is to blame for this debacle. It was clear in the weeks after Obama was elected that their economic policy was lost. The Democrats and the President’s administration have perpetuated all the deficit terrorist myths that the t-partiers have now crucified them with.

They allowed unemployment to persist and white-ant peoples’ lives and undermine the continuity of local communities. Obama’s economics team has been culpable in that regard but given their New Keynesian slant it was no surprise that they would ignore a quick fix for the unemployment. The economics paradigm that rules in the White House doesn’t understand the basis of mass unemployment.

I thought this retrospective (October 20, 2010) written in the New Yorker was interesting. The related articles from 2008 are – The Fall of Conservatism and The New Liberalism.

The writer Tom Perriello had previously postulated that:

… after decades of ascendancy, the modern conservative movement had run out of ideas and talent, with no serious answers to the central problems of our time. For all the right wing’s noise and energy and apparent momentum going into this year’s midterms, these points are no less true today, and the Tea Party provides nonstop proof. There are no new conservative ideas, only the old ones presented in their most extreme form. Government is still the problem, tax cuts and deregulation are still the solution, liberal élites are still the enemy. All that’s changed is the level of vituperation, ideological rigidity, and anti-intellectualism.

I think that is a very insightful summary of what has happened. I am looking into the results a bit further and I am conjecturing that the agony of unemployment has led people to fall prey of these popularists who really just wheel out slogans that bear no relation to the reality they seek to address.

I believed that the crisis would see the end of neo-liberalism and a major re-appraisal of the dominant economic theory. I naively held onto that belief in the early months of the crisis. I soon realised that there was not going to be any major paradigm change this time around.

The election results in the US yesterday clearly demonstrate how the moribund conservatives can still command electoral appeal – aided and abetted by the corporates (media, health care companies, Wall Street bankers etc) – without having any understanding of the problems at hand.

Perriello noted Toomey’s data denial. He said (remember this was written on October 20, 2010):

But if a candidate deals with core economic realities by asserting his right to his own facts, that’s not a sign of a vibrant political creed, however good his poll numbers …

That is the problem. Politics has become divorced from reality. The media onslaught funded by the top-end-of-town (who have done very well out of the fiscal interventions) has played on the insecurity of the unemployed. Never mind the facts – it is all emotion and positioning.

Perriello’s insight is interesting. He said that despite the 2008 US election being a vote “against conservatism”, there has been no “self-reform or self-purification”:

Instead … conservatives have resorted to saying the same thing louder (much louder). It will happen again in 2012. The grassroots zeal on the right has been astounding. The party’s refusal to make any effort to help the Administration solve problems created under Republican rule has been shrewd (and deeply irresponsible—I’d say unpatriotic). These things will benefit Republicans next month. Over the longer run, they will help marginalize the party.

We have endured nearly three years of the conservative screaming. As a macroeconomist I have seen total falsehoods paraded out each day by so-called experts on the financial channels and radio shows. The politicians have just picked those lies up and broadcast them far and wide. The harvest has been an unbelievable distortion of reality … and persistently high levels of unemployment.

That real damage will worsen if these characters – who have now taken over the US government – actually implement their promises. The problem is that the “progressives” will chase them to the right – as you can see in Australia with the Labor party. They are not more right wing than the long-standing post WW2 conservative government.

Perriello also reminisces about the the progressive failings in the US. He says:

We’ve seen several pieces of landmark legislation, including the most important social reform since the Great Society, health care, which is also the first significant blow to economic inequality since the trend started in the late seventies. But there’s no new or revived ism to sustain the values and ideas behind these achievements … F.D.R. had the labor movement; L.B.J. had the civil-rights movement. Obama had Obama for America. His campaign was based on the man more than any set of ideas or clear vision of the future. Everyone knew what Reaganism stood for. No one knows what Obamaism means, which has allowed his enemies to fill in the blank.

I actually see it as being worse than that. From the perspective of my expertise (economics) the Obama Administration and the Democrat politicians chose to perpetuate all the major mainstream macroeconomic myths about budget deficits, interest rates, and debt.

When the US president announced to his nation on December 3, 2009 that the – The US government has run short of money – it was game-over syndrome for the progressives.

He got to that point by appointing a host of neo-liberal economists who made some “progressive noises” about deficits but ultimately continued to fuel the deficit terrorists.

Where were the papers from the Council of Economic Advisers pointing out the way the monetary system operates and the opportunities that the national government had to resist the private spending collapse? Why didn’t the US government take advantage of its early political popularity and implement a huge FDR-style public job creation program?

Such a program would have reduced the immediate severity of the private spending collapse, bolstered the housing market, reduced the bad debts that the banks were forced to carry and led to an earlier return to economic growth. It was an obvious policy option – for anyone not imbued with the years of mainstream macroeconomics logic that eschewed the use of fiscal policy.

Perriello notes in this context that:

Skepticism of government’s ability to improve people’s lives runs deep. The White House designed the positive effects of the stimulus bill (there have been plenty) to be undetectable to the naked eye. Americans’ economic circumstances have gotten harder, not easier, since Obama took office. Arguably, the same could have been said of F.D.R. in 1934 (the midterms that year went his way), but back then people were more desperate and less informed, meaning less likely to convince themselves that they shouldn’t “believe the data.” And conservative, pro-rich populism didn’t exist. The Liberty League, unlike the Koch brothers, had no Glenn Beck.

One of the failings of the progressive movement over the last three decades is never more obvious now. I refer to my long standing beef that the rise of the “think tanks” has been a largely conservative innovation. These institutes and lobby institutions have proven to be a spectacular success for the conservatives and have assailed the public with a massive quantity of propaganda dressed up as science.

They have been able to muster massive funding sources and have developed excellent media presences. Daily they can wheel out “experts” to advance the deficit terrorist cause.

The progressives have been very unsuccessful and even loathe to follow suit. I agree that the tie in to the corporate dollars has been easier for the conservatives and so the progressives have less capacity to raise funds to underpin the creation of these institutes etc.

But the progressive institutions that do have funds – for example, trade unions – have propped up political parties and their machines which have been steadily moving to the right. They have declined to support truly progressive organisations that could have been capable of presenting a truly alternative viewpoint.

We get what we sow!

Anyway, the media is now full of talk of liberty and balanced budgets and reducing debt slavery and all the rest of it.

But very little of the commentary or statements by those coming into office bear any semblance of an understanding of the problem facing the US or its solution. Ultimately, whether you like it or not, the solution has to be found in manipulating the monetary system. The policy directions now being espoused are exactly the opposite to what is required.

US Sectoral Balances

One of the things that always amuses me about public commentary from conservatives (and progressives too) is that they make statements that cannot possibly be true. It is clear they make them not realising that all the propositions they advocate are impossible to achieve. Whenever I hear these sorts of statements I conclude that the person does not know how the macroeconomy works and is thus a danger in public office.

I have always urged my macroeconomics students to understand the national accounts and the summary sectoral balances as one of their first tasks in dealing with macro-level reasoning. For many students this is an unattractive option – not very exciting – “we didn’t enrol in accounting!”. But a failure to really grind this framework into one’s understanding leads to persistent errors of reasoning when things get a bit more interesting …. and complicated.

Recall that aggregate spending and income (Y) is comprised of consumption spending (C), investment spending (I), government spending (G), exports (X) and imports represent a leakage from the expenditure stream. The external sector contribution to demand is measured in net terms as Net exports (X – M). So:

(1) Y = C + I + G + (X – M)

This income is distributed ultimately to households who either consume it (C), save it (S) or pay taxes with it (T). So from the perspective of uses of national income (which is just another way of looking at the aggregates) we write:

(2) Y = C + S + T

Bringing these two perspectives together we get:

(3) C + S + T = Y = C + I + G + (X – M)

And we re-organise that to get the familiar sectoral balances accounting relations which are depicted in the following graph:

(S – I) = (G – T) + (X – M)

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

Typically we express these balances as percentages of GDP to scale them accordingly.

Another way of saying this is that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

All these relationships (equations) hold as a matter of accounting and are not matters of opinion or debate. The interpretation of the causality can form an interesting debate but not the result that has to hold at all times.

So think about the statement – debt is enslaving us – and so we want government to reduce it debt and balance the budget. Under certain conditions that can be achieved.

What about the US at present? It has a large external deficit (X – M < 0) and that is not about to change anytime soon. Even if they persuade the Chinese to revalue their currency, this will just shift the external deficits between countries not increase American exports in any significant way. Further, there are no signs that there will be a significant revival of US exports or a significant decline in imports. From a Modern Monetary Theory (MMT) perspective that just means that the US is enjoying the real resources of the rest of the world at very favourable real terms of trade (that is, they are sacrificing less of their own resources to get more of the foreign real resources). They should enjoy that while they can for it may not last indefinitely. Anyway, for the purposes of discussion, we should assume that the external deficit will persist over the next decade or so at least. Logically, under these conditions, if you want the government to balance its budget (G - T = 0) then you must simultaneously be endorsing a private domestic deficit equal to the external deficit. That is tantamount to endorsing increasing private sector indebtedness. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process and eventually the house of cards collapses under the strain of servicing this debt. It is clear that one of the major problems at present is the level of private debt. The credit boom foisted massive levels of debt onto households and business firms (in some countries). The banks (many partly or fully nationalised) are carrying some of the burden of the debts that went sour. But it still remains that the private domestic sector in the US and elsewhere is carrying very heavy debt burdens. One of the reasons there is a reluctance to borrow and expand credit again relates to the debt burdens. A sustainable growth path will require the private domestic sector overall to reduce its debt levels. That means the sector as a whole has to start saving and keep saving for years to come (in net terms). So if you want to reduce the "private debt slavery" what does that imply about the conduct of fiscal policy? Answer: it is glaringly obvious. Given our assumption of an on-going external deficit, then if the nation is to provide the capacity to the private domestic sector to net save, the government sector has to sustain deficits.

That is not my opinion! It is a fact that emerges from a thorough understanding of the way macroeconomics works in the real world.

It might soothe the voters for a candidate to scream that he/she will bring down all debt (public and private) but given the reality it is impossible to reduce both private and public debt levels as a percentage of GDP.

Further, the relationship between net public spending (deficits) and debt-issuance is entirely voluntary under a fiat monetary system. There is no necessity at all for public debt to rise $-for-$ with net spending. The institutional arrangement that renders that outcome inevitable has no grounding in the operational reality of the monetary system.

It is a political construct designed by neo-liberals post the collapse of the Bretton Woods convertible currency system (1971) to limit government activity. It is a mindless constraint on government because it serves no productive purpose.

The opposite cannot be said for the private domestic sector. Its deficits (S < I) has to be financed by increased indebtedness (ultimately). The difference between the two sectors is obvious to anyone who understands the nature of a fiat monetary system.

A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. The household, as the user of the same currency, is always revenue constrained and has to “finance” every penny they spend (either by earning income, running down savings, selling assets or borrowing).

The following graph shows the US sectoral balances from the first quarter 1952 to the third quarter 2010. The balances are expressed as a per cent of GDP. Thanks to my mate Scott Fullwiler for the data.

You can see that there is a close relationship between the private domestic balance and the government deficit. The current situation is characterised by a strong desire by the private domestic sector to net save and that is being “financed” by the public deficits given the external situation. I use the term “finance” here to denote the fact that the public deficits are maintaining most of the economic growth in the US at present which is generating the national income growth that private saving requires.

If the deficit was not moving in this direction, the US economy would have collapsed (worse than it has!) and the private sector would have been highly constrained its obvious desire to save. Yes, the collapse would have reduced the leakage from imports but not by enough to “fund” the private saving ambitions.

It is also clear that with US economic growth languishing and unemployment still persisting at ridiculously high levels, there has to be greater deficits right now to support the direction of private domestic saving and stimulate further growth.

The t-party conservatives have demonstrated no capacity at all to understand any of this. That is why they will be highly dangerous once they get their (ignorant) hands on the steering wheel.

The latest announcement of the US Federal Reserve Bank that they will expand their assets purchase program by $US800 billion should inform all of us that there are no “financial” constraints on government spending. The bank is, after all, a component of the consolidated US government when viewed from a monetary perspective.

All the politics in the world and rhetoric about central bank independence cannot cover the fact that from a monetary perspective the central bank in a fiat currency system is as much a part of government as the treasury is. Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.

Anyway, the US Federal Reserve Bank said (November 3, 2010) that:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

So where are they going to get the “money” from? Answer: nowhere. They can create non-interest bearing claims on government without limit anytime they like. The central bank and the treasury (finance department) can issue unlimited claims denominated in the currency that the government issues under monopoly conditions.

They can always pay their bills and honour their liabilities.

They never have to tax to pay back debt or service the interest payable on that debt.

They can bail out any private company/bank should they see that to be in the interests of the public.

Readers might enjoy a flashback to September 1997. The then US Federal Reserve Chairman (Greenspan) made the following comments to the Jackson Hole Economic Symposium:

Let me begin with a nation’s sovereign credit rating. When there is confidence in the integrity of government, monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.

Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.

Very prescient! Where will you find that understanding expressed in the modern macroeconomics textbooks? Which of the t-party candidates understand that? Which of the conservative commentators understand that? Ask your macroeconomics lecturer whether they understand that?

Clearly, if the government expands aggregate demand beyond the capacity of the economy to absorb that then there will be inflation. Deficits always involve inflation risk and that risk has to be judged according to the prevailing spare capacity (correctly measured) in the economy. There is no issue that there is an inflation risk.

But there is no such thing as the government running out of money or a government having to impose debt slavery us or higher taxes (to reduce the debt slavery) if it runs deficits.

If there is an external deficit, then the government has to run a deficit to allow the private domestic sector to reduce its debt level and to net save. Get used to it!

By trying to run budget surpluses to get the public debt levels down the government will undermine the capacity of the private domestic sector to restructure its balance sheet (that is, to reduce its debt).

The resulting short-fall in aggregate demand will reduce national output and income and reduce national saving (which is a function of income). It will also most likely drive the public balance into larger deficits as economic activity falters and tax revenue shrinks. We are seeing that result occuring in Europe at present as the austerity drives undermine economic activity.

Keeping vigilant – on the lookout for that inflation outbreak!

As regular readers will know I have upped my sense of responsibility as a citizen lately and now provide a frequent “inflation watch” service. The RBA tells us that inflation is going to rise soon despite it actually falling at present. So we all better be on our toes.

Today, the Australian Bureau of Statistics (ABS) released two pertinent data series: (a) Retail Trade which tells us whether consumers are running riot or not in the goods market; and (b) International Trade in Goods and Services which tells us whether our so-called once-in-a-hundred years export bonanza is flooding the economy with so much demand that all labour, capital, housing and other real resources are soon to be fully utilised.

What did the data tell us today?

1. Retail sales are stagnant – rising modestly only. The ABS report that “the seasonally adjusted estimate for Australian turnover rose 0.3% in September 2010 following a rise of 0.3% in August 2010 and a rise of 0.7% in July 2010”. This is also consistent with the flat credit demand. So no consumer led boom. The last surge in retail trade figures coincided with the fiscal stimulus effects. Since then the growth has been very muted.

2. Net exports – Exports of rural goods fell by 8 per cent and exports of non-rural goods (including minerals) fell by 3 per cent. So notwithstanding the booming terms of trade, overall exports are down and the trade surplus narrowed.

Conclusion: Still waiting for the signs that our economy is dangerously overheating.


Mid-term elections? Sad day for the truth. Sad day for America. Sad day for the unemployed who desire liberty but require a job to enjoy it.

Data request

If there are any keen psephologists out there that have compiled the US mid-term election data by state for the House and Senate in terms of the party votes, proportions, seat changes, and swings since 2008 I would love to get the data.

I can do it myself but because it is not core research for me I am reluctant to spend the time. I want to write a blog investigating whether the swings to the conservatives are related in any way to the movements in unemployment by region since the crisis began. My conjecture: we should find a very significant relationship.

If so, the solution for the Democrats is easy: create some jobs immediately and target the creation by region. The best place to start is with a Job Guarantee. Then start building up from that.

But I will gratefully receive any aggregated data and acknowledge the effort. If anyone is keen to help you can get semi-aggregated data with incomplete information from the UK Guardian (excellent coverage by the way) – HouseSenate. That would be a good place to start if you have some time to organise it more simply.

That is enough for today!

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    This Post Has 221 Comments
    1. Andrew,

      “My over arching point however was that a bank does not do anything particularly different to what any individual is capable of doing in a community of people.”

      That’s pretty vague as well as uncontroversial, at least when properly interpreted.

      To my knowledge, that has nothing to do with MMT per se.

      Of course private credit can come from a “community of people”.

      Is such a mild statement really the source of a hundred posts?

      Here is how I interpret your point; I don’t think that Scott would disagree too much. I don’t think that you would disagree too much.

      If I lend you $100 on credit, you can pay taxes with it. The problem is that unless your IOU to me is liquid, then I am out $100 until you repay. I can’t spend that money, so it is a transfer, and therefore if I was planning on spending the money, then the tax will have suppressed aggregate demand. If I wasn’t planning on spending it, then the tax would not have suppressed AD. See, I am trying to bring the discussion back to a consideration of the economic effects of the loan, rather than the mechanisms behind the loan.

      The relationship between deficit spending and Aggregate Demand is complex, because it can be attenuated by private sector debt growth as well as private sector savings desires.

      On the other extreme, if everyone is always willing to pay $100 for the IOU, then my consumption opportunities are not reduced. I can sell the $100 to someone else whenever I want to spend, therefore the IOU becomes equivalent to $100 of cash — not operationally equivalent because you need the additional step of first selling it, but we posited that would always occur. So now, add expectations of repayment by “community of people” into the mix.

      In that case, the taxation of the $100 would not affect AD and the IOU is a perfect substitute for cash, at least until the assumption of perfect liquidity breaks down. Obviously if the government keeps draining, at some point it will break down. So Scott is arguing that cash (either currency or reserves) is needed for settlement of a tax liability, whereas as you are arguing that a “community of people” can grant credit to effectively settle the liability.

      Honestly, I don’t think that there is a lot of substantive disagreement here. The disagreement seems to be more whether emphasizing one effect is “misleading” because it does not emphasize the other.

      But I think MMT acknowledges private credit when they argue that if the government doesn’t deficit spend enough, then either the economy will contract or there will be private sector debt growth. So I don’t think MMT is misleading here.

      MMT proponents do not say “if the government doesn’t deficit spend, then the economy must immediately contract in all cases“.

      Bill/Scott can correct me if I am wrong, but the statements about lack of deficit spending forcing a contraction are assumed to apply to the current situation (in which the private sector has debt revulsion), or to the general case but over the long term, with an assumption that the private sector response will be unsustainable debt growth, rather than sustainable debt growth.

      If anything, I would like to see more elaboration of the latter assumption, hopefully with some numbers. If the private sector demands $2, and the government deficit spends only $1, then must this always result in ponzi borrowing or contraction? Why and what are the rules of thumb, if any. There seems to be a lot of factors at play here — how “rigid” are the savings desires, regulation, expectations, etc.

      But in light of current events, it’s understandable that Bill’s target is preventing people from flagellating themselves to death with household budget analogies. Spreading the word about that is much more important at present. It’s natural that he would harp on the need for immediate deficit spending in the current environment, and consequently emphasize that savings is not a pre-requisite for spending.

      I was personally shocked at the degree to which deficit mania has taken hold; comments by the world bank chief that we should go back on the gold standard; Obama saying “we are out of money”; prominent senators saying that government employees need to suffer because the private sector is suffering, etc.

      It’s depressing.

    2. Some Guy,

      Thank you for the +/- or debit/credit, asset/liability lesson — it clarified things. After reading several more blogs in the archive, some of it is actually beginning to sink in.

      If anyone would answer, I have a question about banks’ reserve accounts at the central bank. I understand that the required balance that each bank needs to maintain is some fraction of the loans it has outstanding, and that to keep that minimum balance positive, banks borrow and lend among themselves depending on whether they have more or less than they need in their accounts at the end of each day, or they can borrow from the Fed’s discount window. So far so good I think.

      Q1: When people talk about “reserves” at the Fed, are they always referring to these reserves I just described, the commercial banks’ reserves? Or does the central bank itself also have reserves of its own, apart from the banks’ reserves, and is that what the banks would be borrowing from at the discount window?

      Q2: In the quantitative easing the Fed recently announced, I understand that the Fed is basically causing money that is currently being saved in the private sector in the form of bonds to be converted into cash, which will be reflected in the banks’ increased balances in their reserve accounts. So no new money is entering the private sector in this action. The bonds are, in effect, being redeemed, paid off – a perfect example of the government paying some of its debt ‘out of thin air.’ This is not considered “spending” in terms of the budget, right? The deficit does not increase as a result?

      Q3: As those bonds get paid off, they are no longer outstanding debt. So does that mean government debt will be reduced by $6bn now?

    3. Barbara

      Q1. Reserves in commercial bank Federal reserve accounts are the same thing as the commercial banks earnt banknotes/cash/FRN notes where these 3 are the same thing – green folding stuff. Reserves are, however, only deposit records or numbers in a book. When the commercial banks get reserves from the discount window, the reserves are simply produced out of thin air in exchange for collateral. The feds do not keep these reserves in ‘storage’.

      Q2. When bonds are bought from the government the government gets one lot of existing money, and the buyer has less of the existing money. Net the same amount of money exists. If the feds buy the bonds then the government has one lot of existing money and the previous bond buyer has newly created money. So net the government just spent that money into existance in the economy, unless it balances it with taxes then it seems to me to be deficit spending. All the ‘feds’ had to do was print up a bond and create the money. The treasury and the fed is one government. They are money ‘printing’

      Q3 The government can pay off the entire national debt by printing money. 6 billion today every day. The question is then what consequences that will have. buying bonds with newly created money need not be inflationary in a globally present massively deflationary period. And those bonds can be sold again to vacuum up the excess money whenever that is required, if it is required.

    4. Andrew,

      Regarding your answer to Q2, QE is an asset swap. They are *NOT* money printing. That doesn’t make QE a good idea though.

    5. RSJ

      if you get shop credit then you can spend in the shops and owe the money

      If you get bank credit you can spend in the shops and owe the money and also the bank owes the money.

      >>If I lend you $100 on credit, you can pay taxes with it.

      So this is a ‘hard money’ loan rather than what i would call bank credit.

      But i can give you 100 credit to buy some things where i am only owing you the money and then i come to arrangements with you or others later when it is time to settle. This is what i meant by a private financier working in the community. I am not sure you understood my meaning.

      Anyway you also said:

      >>”I was personally shocked at the degree to which deficit mania has taken hold; comments by the world bank chief that we should go back on the gold standard; Obama saying “we are out of money”; prominent senators saying that government employees need to suffer because the private sector is suffering, etc.

      It’s depressing.”

      The situation of the UK is one of a high deficit but very good repayment schedule horizon for government debt where the average maturity is 14 years. In the USA the average maturity is now 5 years. In order to be able to use bonds as part of monetary policy, people have to believe the government will honour the debt without creating higher inflation.

      A government can always deficit spend by borrowing from the future but the consequences of that are not clear. What does seem clear is that America has been living beyond its means for decades rather than just in this crisis.

      MMT is clear that deficit spending can lead to inflation. At the moment since the government wants to prevent deflation that is not so dramatic a problem however. The problem comes later and this is what people are concerned about.

    6. Jeff65

      >> QE is an asset swap. They are *NOT* money printing. That doesn’t make QE a good idea though.

      The government prints a bond out of nothing. It gets bought for money. The Bond holder has a piece of paper. The government has the buyers money

      The government then buys the piece of paper and hands the paper holder newly printed money.

      The government now has the paper back and the economy has more money

      The governent swapped something printed up out of thin air with something else printed up out of thin air.

      Asset swap? Technically we can agree it is so

    7. Andrew,

      I agree completely except you’ve left out the very first step: you neglect where the money came from for the private sector to buy the bond. You just say: “It gets bought for money.”

      In order for the bond to be bought by the private sector, the government must have previously spent the money used to purchase it. If any inflation occurs it is at this point of initial government spending.

    8. Jeff65

      Ordinarily the government is not massively spending ‘out of thin air’ because it borrows and taxes.

      That is not inflationary. That spending just equals what is taken from the economy.

      So you have 1 trillion spent or whatever and 1 trillion received and whatever inflation was created was a one off
      then you spend one trillion and receive one trillion
      then you spend one trillion and receive one trillion

      There is no ongoing inflation

      Then the government comes along and buys the bonds with created money.

      now you have one trillion plus the bond purchase price which could be inflationary

    9. Dear Andrew (at 2010/11/09 at 22:14)

      You say:

      Ordinarily the government is not massively spending ‘out of thin air’ because it borrows and taxes.

      Please read today’s blog to disabuse yourself of these fallacies about the link between spending and the accompanying monetary operations. You should also go back and read all the posts in the Debriefing 101 category of my blog and ask questions if you are uncertain rather than make these unsubstantiated and incorrect statements.

      best wishes

    10. Bill

      Mosler says that government spending causes asset accumulation and bond sales are used as part of monetary policy.

      Perhaps you can direct me to the specific part of todays blog which can correct my understanding.

    11. Andrew: “MMT is clear that deficit spending can lead to inflation. At the moment since the government wants to prevent deflation that is not so dramatic a problem however. The problem comes later and this is what people are concerned about.”

      And just why are they concerned about it? Perhaps it is because they still have a job and their stock portfolio is up nicely.

      Since I am cynical, I think that most of the avowed concern is fake, a rhetorical ploy for political purposes. Those harping on potential future inflation are content with current low inflation or deflation, and with the widespread suffering caused by the financial crisis and recession. Whose ox is being gored?

    12. Jeff65, I couldn’t have said it better myself, it’s frustrating and pointless to respond to this guy anymore. Well said and exactly to the point.

    13. Andrew:

      Saying that a government spends out of taxes is not a good way of saying things, but it makes some sense. Saying that it is not spending out of thin air when it deficit spends & “borrows”, or that it borrows from the future, makes no sense, and contradicts what you say earlier about exchanging two things created out of thin air in QE. Something is being “printed” out of thin air when deficit spending, whether it is associated with “borrowing” or not. Whether currency or bonds are being printed is immaterial on the first analysis. And in depressionary, low interest rate conditions, the ultimate difference is negligible. “That spending just equals what is taken from the economy” neglects that the economy gets the spending, and the newly printed bonds, while only the $ for the bonds are being taken from it. Deficit spending is then a 2 for 1 deal increasing net financial assets, the only way that this can happen, with possible inflation occurring at the point of spending. A later QE, or if one skips the bond sale in the first place, is less important. Building bank reserves is not inflationary. Mainstream macro has become obsessed by monetary policy. MMT realistically downplays its effect on the economy.

      Some readings posted here before in Teaching macroeconomics students the facts relevant to much of the prior banking discussion are James Tobin’s Commercial Banks as Creators of Money and Marc Lavoie’s A Primer On Endogenous Credit-Money ( partial finished version, at google books).

      Schumpeter’s History of Economic Analysis Part IV Chapter 8 §7 Bank Credit & the ‘Creation’ of Deposits, is very interesting on the (pre)history of this Post-Keynesian, MMT theory of banking & credit, founded by MacLeod before Keynes was born.

    14. Some guy

      if you lend me 100 and you get a valueable receipt you can use as money, like a bond or a spendable bank deposit, then money was just printed. Obviously i have money too. There are now two claims to one amount of money.

      The nature of borrowing is that it creates spendable claims. Increasing the number of spendable claims appears to me to create a one time inflationary pressure that has to be dissipated by other factors.

      If the government just spends by borrowing from the future it is doing no different to when it finds a creditor. If it spends by borrowing from the future the creditor is itself.

      We all agree that in a deflationary situation that inflation is not important

      But if meanwhile you create more claims to the available resources and dont dissipate that inflationary pressure by other factors then once deflationary forces have gone away you are going to get an amount of inflation.

      The issue here is one where we ask a question like ‘did something just happen to the economy like we all got a bit tired and it created deflation that more money can work against, so that when we go back to the same economy as before and we are more active, we can just remove the extra claims for the same price pressures’ or ‘did something happen to the economy that created a permanent deflationary force that we can permanently work against with a one time stimulus of new money.’

      As i see it, it is all about the power of multiple claims to the same resources and the influence that must have if other things are equal. Fairly obviously each new act of credit money creation has the power to increase demand. Borrowing from the future does the same thing.

      You guys are all fundamentally arguing that government can spend money wisely and i just dont see any evidence for that. Governments that believe they can spend money from the future inevitably spend it on pet projects and projects for their mates. Where their mates are the elite or the workers. To argue otherwise is to argue for communism.

      And judging by some of the comments here if a person does not agree with you guys then they are ‘neocons’, ‘asserting’, ‘lacking the correct understanding’ and just plain ‘annoying’.

      At the end of the day i am assuming MMT will be shown to be wrong by rising inflation, austerity, poverty and general unhappiness. It would be nice to be shown that i am a complete fool to believe that however.

      What would it take for you guys to see that inflation is rising and people in aggregate are no richer if that were to eventuate?

      What would invalidate the theory?

    15. Hi Andrew,

      ” money from the future ”

      Can I use your time machine some weekend? :) Recommend some caution here, remember this is all just about the accounting for the conduct of real transactions that occur in the present. ‘Borrowing’ to me is just establishing/committing to a liability at present, so that you can presently enjoy the use of an asset, said asset must exist in the present to be able to be enjoyed in the present.

      Settlement balances that may be provided to two transacting parties in the future have nothing to do with things going on in the present.

      I think Ive read what it seems you are drifting into termed as the fallacy of “intergenerational accounting”. Suggest try to search it up here at Prof Mitchell’s he’s probably already shredded it. Resp,

    16. Andrew, people get richer if real economy is growing faster than population. That is on average. How you get away from average is defined by political process. Money, amount of money, inflation, deflation, taxes, etc do not make people poor. They are just ways to distribute wealth. Do not like current distribution? Then change it. But please stop spamming and flaming here.

    17. Matt Franko

      “Recommend some caution here, remember this is all just about the accounting for the conduct of real transactions that occur in the present. ‘Borrowing’ to me is just establishing/committing to a liability at present, so that you can presently enjoy the use of an asset, said asset must exist in the present to be able to be enjoyed in the present.

      Settlement balances that may be provided to two transacting parties in the future have nothing to do with things going on in the present.”

      You are seeing it from the borrowers viewpoint.

      The lenders viewpoint seems very similar

      ‘lending’ to me is just establishing/committing to a liability (you might not get repaid) at present, so that you can presently enjoy the use of an asset (loan asset or repayments) , said asset must exist in the present to be able to be enjoyed in the present.

      But does it exist or is it an illusion created by inflation of asset prices?

      The savers or the creditors who sell to the borrower are then the losers unless the tax payer is the loser.

    18. Andrew from what I can see currency expansion is being absorbed by bubbling asset prices. I totally agree with you that currency expansion has to go somewhere. It clearly is not being absorbed by consumer price inflation and wouldn’t be expected to since median wages are not going up much if at all and new machines etc work better than old ones leading to idle capacity. It isn’t being absorbed by growth in the real economy because again people who used not to be able to afford piano lessons or whatever are not now able to afford them. Instead the extra money is going to the ultra rich and they use the money to push up asset prices because if someone is very rich they will already be spending as much money on piano lessons etc as they can be bothered to. Guessing which assets where in the world will bubble next has become the primary industry that employs the best and the brightest. Governments are in thrall to and in the pocket of the FIRE sector.

      “The savers or the creditors who sell to the borrower are then the losers unless the tax payer is the loser.”
      Some losers are the small scale savers who have small amounts of cash squirelled away and have the value of their cash eroded be subinflation interest rates. Other losers are those who need to buy houses or farms or whatever at bubble inflated prices. Also everyone loses because bubble economies lead to malinvestment meaning that houses are built that are never going to be sold or gold is mined just to sit in a vault rather than benefical work being done or free time enjoyed. Probably the biggest loss is the waste of talent and resources tied up in the pointlessly over-expanded FIRE sector.

    19. Andrew

      I doubt anyone here is arguing that govt spends wisely. But income has to equal expenditure; don’t you accept that govts need to accommodate, rather than fight, private desire to save, or else GDP will tank?

      Govts can easily ‘dissipate’ inflationary forces once the output gap shrinks, by increasing tax or bank reserve requirements.


      1. Remind me, why are you so sure the asset bubbles now result from QE, when the asset bubbles in 07-08 pre-QE were even bigger?
      2. Wasn’t the Japanese carry trade based on people borrowing in JPY and going long USD or AUD etyc? If so, how does this relate to the JPY private sector asset build-up which you deplore?


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