Ex-IMF official still lost in the incredulous void

Sometimes ex-IMF officials shed the burden of having been associated with that institution and make a creative contribution to the public debate. More often they do not and continue to perpetuate the errors that underpin almost all of the IMF’s output. If there was ever an institution that has passed its use-by date it is the IMF. Today, ex-IMF Chief Economist Simon Johnson (now at MIT) claimed that the way to assess fiscal sustainability is “whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets”. You can imagine what I thought of that criterion! Not much but it is too late in the year to get really flustered and I have been listening to some pretty good music this afternoon. So for all those readers who have written in saying “doesn’t Johnson have credibility” and “therefore is what he is saying sensible” I have three words – No and No.

In a Bloomberg opinion piece (December 23, 2010) – Tax Cutters Set Up Tomorrow’s Fiscal Crisis – Johnson claims that the recent tax decision pushed through the US Congress by a beleagured president:

… moved us closer to a fiscal crisis, just as the euro zone now is experiencing.

Did it? Answer: definitely not!

The policy to extend the Bush tax cuts including for the top income earners was not the best way to advance the US economy in my view. A greater stimulus would have been provided by direct government spending and with the unemployed not “participating” in the benefits of the tax cut I would have preferred to have seen more legislative focus on job creation and income support for the most disadvantaged.

In saying that it was never a trade-off between more government spending and lower taxes. The government could have chosen both given that it is not financially constrained.

Johnson is only one step away from this madness – Social Security’s future at risk with new tax deal – which appeared in the Palm Beach Post (December 22, 2010).

The author’s of that fine piece of nonsense claim that:

Under the radar screen, the new tax deal is threatening the livelihood of America’s present and future seniors – to line the pockets of millionaires. If made permanent, a new Social Security “payroll tax holiday,” reducing the “match” employers pay from 6 percent to 4 percent of salary, will drop the solvency of the program 14 years, from 2037 to 2023, according to the Congressional Budget Office. At the same time, Congress agreed to increase high-end loopholes in the estate tax, exempting 39,000 estates worth as much as $5 million.

This bill puts in motion two devastating policies: lowering taxes for the rich and destabilizing the financing of Social Security. Without sufficient worker and employer matching money, which has kept Social Security solvent for 75 years and helped millions of Americans live out their senior years in comfort, the program could be doomed. Congress and the White House say they want to “protect Social Security’s solvency,” but this action does just the opposite.

It almost makes a grown adult weep reading this inane sort of “non-analysis”. Please read my blog – Social security insolvency 101 – for more discussion on this point.

There is never going to be the risk that the US pension scheme will become insolvent on financial grounds. Stupid US politicians might start cutting benefits thinking it might “save” the system from bankruptcy. But the reality is that the US government will always be able to meet any pension (or other obligations) that are denominated in US dollars – read – always!

No senior citizen in the US will have to endure “extra working years and reduced benefits” because of the tax cuts.

By the way, these commentators (Weiner and Battaglia) are actually trying to argue a progressive line. How one weeps!

As a related issue, many readers write to me asking whether tax cuts and government spending are equally expansionary. The answer is that on an equivalent basis – government spending is more expansionary than a tax cut because part of the tax cut is saved before it enters the expenditure stream notwithstanding that the multiplier is higher if tax rates are lower.

So imagine that the government increases spending by $100. All of this spending goes into final demand and then the multiplier process amplifies this stimulus. In the case of a tax cut, disposable income changes first and some of that change is consumed and some is saved. So even if the tax cut was designed to expand disposable income by $100 at the time of the stimulus, the extra spending would be less than this by an amount determined by the marginal propensity to save. So even though the multiplier is higher a much lower initial stimulus is being multiplied.

So if the plan is to stimulate growth, government spending is a more effective way of doing it (for an equivalent initial stimulus) than cutting taxes. I would only support tax cuts as an exclusive stimulus measure if there were sufficient public goods and services being provided and the economy required further fiscal support.

Anyway, Johnson considers that the day that the US government is unable to “fund” itself – hence the Eurozone analogy – is approaching. My short response – no it is not! Which should be the end of the blog but explanations are better than assertions.

Johnson wrote:

The central conceit behind official thinking about fiscal policy on both sides of the aisle is that investors will buy almost all U.S. government debt without blinking an eye or increasing Treasury yields … What it should do is force us to think about how much the world has changed and how antiquated such ideas are today. The U.S. is steadily losing its global economic and financial predominance. To be sure, we offer the largest amount of government debt on the market, but investors have plenty of choices around the world, both in terms of debt and other assets. The idea that our Treasury market will be buoyed by captive investors, whether the Chinese central bank or anyone else, is quaint and at odds with today’s reality.

The only antiquated idea which still has influence is that US government has to “fund” its spending at all. In 1970 it had to because it was committed to a convertible currency system with fixed exchange rates. But in 2010 going into 2011 the US government is as free as a bird to spend as it likes as long as there are real resources (and goods and services) available for sale in US dollars.

And as we say in yesterday’s blog there are millions of idle workers who would love to be working as we going into the holiday period. Those workers command zero bid in the private labour market (that is, no one wants to hire them). They are also producing nothing and therefore their productivity is zero.

It doesn’t take much imagination to conceive of activities that this huge workforce could be hired to perform which would generate output and productivity above what they are contributing now.

So there is plenty of purchasing capacity for the US government if only it had the political will to use it.

It might be that the US economy gathers strength and bond yields rise (as demand for public debt gives way to more diversified and risky portfolios reflecting a renewed state of optimism). So what? Will that cause the US government a headache? Why should it?

What would happen if the bond traders decided to stop buying US government debt? First we should ask if this has ever really happened before. Answer: no! So what does Johnson mean when he claims that the capacity of the US government to place its bond tenders on an on-going basis is “odds with today’s reality”? I think that was just a throwaway line to make his case seem more potent than it is.

What reality? He doesn’t say and I don’t know.

But we might encounter a situation where the US government would not be able to sell all its available bond tender.

What would happen then? Answer: not much except you can guarantee that the US government would not jeopardise any spending plans and, instead, would start to relax some of these voluntary arrangements which involve bond issuance. In the first instance, the central bank would start buying debt and also controlling yields in targetted segments of the yield curve.

Then you would see administrative and finally legislative action.

The US is never going to hit a Eurozone-type crisis because it runs a totally different monetary system. The former is fiat and totally controlled by the US government while the Eurozone system is a monetary union with no member state having currency sovereignty. You cannot compare the two in any coherent way. It is a shame that Johnson even attempted this ploy. In the last year those who conflate the Eurozone with other monetary systems are among the worst of the deficit terrorists.

As an aside, it is true that US is losing ground in global terms and I agree with Johnson on that score. But the US budget deficit is not the reason for the loss of traction.

You cannot go around shooting up places illegally; engaging in wars that actually make the world less safe; treat your own people like dirt by forcing them into joblessness for extended periods; tyrannise and torture prisoners of war in illegal detention camps; and more … and then lecture the rest of us about how wonderful and free and dynamic your nation is. The rest of the world (bar the Eurozone) is moving on and is smarter than that!

Johnson then “excels” himself with this gem of misinformation:

The key to debt sustainability isn’t how much revenue the government can raise relative to gross domestic product or some other economic characteristic. It’s whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets.

This is where Greece and Ireland were found wanting in 2010; we’ll see how Portugal, Spain, Italy, Belgium and perhaps even France do in 2011. Then it will be the U.S.’s turn.

To help you digest this, consider this beautiful set of meanderings which was sent to me by a reader (thanks Roger! – I laughed):

1. “Spain is not Greece” – Elena Salgado, Spanish Finance minister, February 2010.

2. “Portugal is not Greece” – The Economist, April 22, 2010.

3. “Ireland is not in ‘Greek Territory’” – Irish Finance Minister Brian Lenihan.

4. “Greece is not Ireland” – George Papaconstantinou, Greek Finance minister, November 8, 2010.

5. “Spain is neither Ireland nor Portugal” – Elena Salgado, Spanish Finance minister, November 6, 2010.

6. “Neither Spain nor Portugal is Ireland” – Angel Gurria, Secretary-general OECD, November 18, 2010.

I agree with all statements. The only thing that these nations have in common though is that they are part of the same monetary system which required them to surrender their currency sovereignty upon assuming membership.

The US is not part of that monetary system. Indeed, it controls its own fiat monetary system.

The difference? The US is a sovereign government and is never revenue constrained because it is the monopoly issuer of the currency. The Eurozone nations are always financially constrained because they do not issue their own currency.

Meaning? The US can never be held to ransom by the financial markets. The Eurozone countries serve the financial markets. Please read my blog – Who is in charge? – for more discussion on this point.

So the key to debt sustainability is issuing your own currency and only issuing debt denominated in that currency. That is all there is too it. It is not complex and doesn’t rely on any revenue-raising capacity at all. In that sense, the US government is continuously and forever solvent in its own debt.

If the financial markets try to get uppity with a sovereign government I will run a book and provide very generous odds to anyone who think the former will win! In fact, I would just give you my bank account number for an immediate transfer given how obvious it is that anyone betting against me would lose.

Johnson tries to argue that the rising yields in recent weeks in the US are a sign that the US government:

… has only a limited ability to finance its growing debt at very low interest rates.

Note the slippage here – the qualification to the claim. He is not saying they have limited ability to finance its growing debt. Rather – at very low interest rates.

Not even that is true. The US government could determine that short-term interest rates were to remain low indefinitely (via changes to the arrangements that delegate such things to the central bank) and instruct the central bank to stabilise rates in certain segments of the yield curve. A simple statement from the US Federal Reserve that it stands ready to buy any 10-year Treasury bonds at some fixed yield would be sufficient. Please read my blog – Operation twist – then and now – for more discussion on this point.

Overall, the US government has infinite ability to service its outstanding debt. There is no question about that and I am surprised someone on Johnson’s standing wants to toy with this notion – which is tantamount to getting down in the dirt with the mindless ones.

He ends by positing three scenarios which I found tangential and uninteresting. Apparently, all three will see fiscal policy “flounder”.

His prognostication of what the resurgent Republicans might do is more realistic and worrying irrespective of whether we think they know what they are doing or not. Simple truth is they haven’t a clue but will do it anyway.

If Dennis Kucinich can propose a mad-Austrian-type bill (see yesterday’s blog – A full employment bill – sort of!) – then what will the T-party lot inspire the GOP to come up with.

Johnson indicates that the “starve the beast” strategy (strategic deficits that Reagan used) will become a central tactic. He thinks the big problem with this strategy is that the “U.S. government doesn’t take in much tax revenue” and “doesn’t spend much except on the military, Social Security and Medicare”. The upshot will be that “older Americans are going to get squeezed, while our ability to defend ourselves goes into decline”.

That will probably be the case if the deficit terrorists get control of government. Although I would argue that the Obama Administration and his Democrat congress colleagues are also members of that camp.

But before the seniors find it hard to pay rent, the unemployment queues will continue to swell and America might just see another revolution.

Conclusion

It is a lovely sunny December 24 here in Newcastle, Australia. The birds are singing in the warm summer day and all the native trees are flowering.

I am reading an interesting Swedish detective book (Henning Mankell) along with all the other stuff and listening to Antibalas Afrobeat Orchestra. Specifically, their 2007 album Government Magic. I thought that was an appropriate point to call it quits today!

Move with the groove as they say and let all this negative Johnson-stuff flow out – it is worthless trash and doesn’t warrant retention although I hope that my analysis helps readers who have asked me about it (seemingly thinking that Johnson retains some credibility).

And … then have a look at Rat Race by Antibalas – a very hot section!

Saturday Quiz

A special North Pole Saturday Quiz will appear sometime tomorrow. I am also sick of readers boasting how well they are doing so there will be no gifts tomorrow (-:

And happy holidays everyone – I now take two days off – Saturday and Sunday!

That is enough for today!

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    33 Responses to Ex-IMF official still lost in the incredulous void

    1. Neil Wilson says:

      “So for all those readers who have written in saying “doesn’t Johnson have credibility” and “therefore is what he is saying sensible” I have three words – No and No.”

      Was the third word unprintable in polite company? ;-)

      Merry Xmas to Bill and everybody who comments here.

    2. Vassilis Serafimakis says:

      The consensus amongst those whom Bill Mitchell calls “deficit terrorists” is spreading. CNN carries a report by its Business Anchor Maggie Lake, titled “US Deficit ‘A Dagger Pointing At Heart of Economy’, which begins with the rhetorical “What does it take to get a conservative politician, liberal economist and billionaire businessman to agree?” The answer seems to be the budget deficit and the “massive debt problem.”
      http://business.blogs.cnn.com/2010/12/23/u-s-deficit-a-dagger-pointing-at-heart-of-economy

    3. bill says:

      Dear Neil Wilson (2010/12/24 at 18:03)

      No and No = 3 words. I always print!

      best wishes and thanks for all your input.
      bill

    4. mahaish says:

      “Eurozone system is a monetary union with no member state having currency sovereignty.”

      hey bill,

      arnt the national ncb’s(national central banks) responsible for euro issuance. couldnt they just give the finger to the ecb(european central bank) mandate and mastreicht and keep issuing euro’s, and break their deficit rules.

      its happened allready hasnt it,

      i mean whats the worst that could happen, they could get kicked out,

      they should be so lucky ;)

      “As an aside, it is true that US is losing ground in global terms and I agree with Johnson on that score. But the US budget deficit is not the reason for the loss of traction”

      the geo political dog wags the economic tail,

      ever since the yanks kicked out the british, they have lurched from one foreign policy disaster to another,

      if you ever want a good laugh, read up on william walker, the 1850′s answer to george bush and don rumsfeld

      our global economic future hopefully wont be de railed by some miss guided william walker resq figures who have little or no understanding of history.

      as for their future rivals the chinese, well they have played this game before and lost. last time around it was with the british and now its the yanks.

      exchanging opium or even worse someone elses currency for the product of ones hard work, is bus ride to hell me thinks for them eventually.

      lets hope the chinese have outgrown their curse, where just about every dynastic change in the middle kingdom has brought with it a civil war

      how long will the current mob last, i wonder.

      its 60 years last august and counting , the yanks got to 80 plus years since nationahood, before they had their little internal spat

      history is cyclical, everything old is new again.

    5. Agog says:

      Simon Johnson is a senior fellow at the Peterson Institute for International Economics. Say no more…? Just that name ‘Peterson’ gives me the creeps these says (apologies to other Petersons out there…)

    6. Richard1 says:

      Bill

      Many thanks for your blog. I have learnt a lot since I discovered this website earlier this year.

      Your efforts are much appreciated and I wish you all success in 2011.

      I hope you and your family have an enjoyable time and thanks to your family for allowing the time for you to produce this blog.

      A Happy Christmas and prosperous New Year to you all.

    7. PghMike says:

      Good point, though I think you’re a bit hard on Simon Johnson, who’s written a lot of sensible stuff about perverse incentives in the banking crisis. I think you oversimplify a bit, though it doesn’t hurt your conclusion. Most of this is from Krugman, BTW.

      First, way before the US would be unable to sell its bonds, it would have to raise interest rates on those bonds. But those interests rates are very low historically, so we’re clearly not pushing the envelope too far yet.

      Of course you’re right, the Fed can always print money to buy up T bills and just keep them. It could literally eliminate the entire Federal deficit in one day. Of course, doing this over and over will eventually lead to inflation, where the US$ can’t be used to buy resources from outside of the US, and even in the US, prices would rise significantly. But again, we’re nowhere near that place today.

      Nice explanation about why tax cuts are a worse way to stimulate the economy compared to direct government spending. But tax cuts that trigger hiring may well actually help more, since once someone’s been hired, the employer has some incentive to avoid wasting the training and integration costs by laying them off again.

      Anyway, this is a perfect time for the US to spend more — there’s high unemployment, very low inflation, and no trouble selling treasury securities (low rates).

    8. anon says:

      “the US government would not jeopardise any spending plans and, instead, would start to relax some of these voluntary arrangements which involve bond issuance”

      Precisely the operational contingency that I suggested should be made more explicit. MMT depends on this operational assumption.

      Progress!

      P.S. make sure Ramanan has your bank account number.

    9. Ramanan says:

      anon,

      ?

      What do I owe Bill ?

    10. Roger Expat says:

      The IMF was originally formed to force former colonies which got into trouble to drop their pants for Western banks and corporations. That’s all they know how to do. They’ve even admitted (after the 1997 crisis) that their advice/requirements aren’t always the correct thing to do to repair the economic damage. Obviously, Simon Johnson has forgotten the reasons for his training. The purpose of imposing austerity is to increase the suffering so the U.S. and European megabanks can come in and loot the country. I often wonder if these deficit terrorists, as you call them, really believe what they say, or if they are like the commentators on Fox News who spout talking points that they obviously know are bogus.

      Incidentally, and off topic, here in Thailand one of the reasons former Prime Minister Thaksin Shinawattra became so popular was that he paid off the IMF early and got them out of here. Although the elite later turned against him, the loathing of the IMF is still universal. Poverty-stricken farmers in the Northeast, who barely finished the fourth grade fifty years ago, execrate and despise the IMF. No government could ever again go to the IMF for funding and survive.

    11. anon says:

      Ramanan,

      I think the invitation for you to place your bet is implicit.

      :)

    12. Michael M. Thomas says:

      “And as we say in yesterday’s blog there are millions of idle workers who would love to be working as we going into the holiday period. Those workers command zero bid in the private labour market (that is, no one wants to hire them). They are also producing nothing and therefore their productivity is zero.

      It doesn’t take much imagination to conceive of activities that this huge workforce could be hired to perform which would generate output and productivity above what they are contributing now.”

      OK; if it doesn’t take much imagination, how about using said imagination to name a few?

    13. Matt Franko says:

      @Mahaish hi,

      “arnt the national ncb’s(national central banks) responsible for euro issuance. couldnt they just give the finger to the ecb(european central bank) mandate and mastreicht and keep issuing euro’s, and break their deficit rules. its happened allready hasnt it,”

      I for one agree with your first point, but dont agree with your second point as far as the two countries (Greece Ireland) have hit their knees to the forced austerity to a great extent.

      I too believe there is nothing operationally to prevent the high deficit countries from using fiscal to support incomes/output in their countries by issuing Govt bonds within their own countries, like you say the rest of the Union would have to kick them out to stop it. The political leaders of these countries are getting some bad advice. For instance I saw in an interview that the US economist Stiglitz (deficit dove, former Whirled Bank official, Ignoble Prize winner) was advising Greece (I assume for a fee) earlier this year when that situation heated up on how they could get their deficit down over time, etc… seemingly ignorant of the sectoral balances effects. I would much rather see Prof Mitchell and crew over their advising Greece and Ireland, or at least have these country’s officials hear Prof Mitchell’s side of it.

      These deficit coutries perhaps should continue to use fiscal to support incomes while I could see some MMT experts helping to put together a very compelling legal case (there has got to be a court of jurisdiction somewhere in the EU to hear it) to show with T-account diagrams,etc how the sectoral balances work (very simple arithmetic) to foist a legally unfair economic result on the deficit nations. IOW, any contract has to contain consideration for each party for it to be legal/binding, I dont see the legal consideration for the deficit countries in the EMU contract they entered into. With a favorable court ruling then the EMU could move forward to make some much needed revisions to the current arrangements.

      I would envision an opposition political party or a newly seated opposition government as the plaintiff and the financial sponsors of a group of MMT economic consultants assisting their lawyers in building the legal arguments…. One can at least hope for a better 2011!

      Resp,

    14. joebhed says:

      Bill,

      We can either back into the removal of our bevy of “self-imposed constraints” one at a time in our annual responses to Peterson-induced fiscal crises, or we can accomplish the entire transition to full monetary sovereignty via the adoption of Congressman Dennis Kucinich’s very recently proposed National Employment Emergency Defense(NEED) Act of 2010.
      http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf

      You may disagree with his proposal for the transition from the privatized Fed control of national monetary policy and the money system into a public money trust under the Department of Treasury with all new monies issued as part of the Congressional budgeting process. But I am hard pressed to see a better alternative that takes care of all the fiscal fear-mongering that perpetuates our nation’s indebted servitude to the private masters of the non-Federal reserve.

      If there’s a better proposal for reform out there, please say what it is.
      Thanks for all you do.

    15. Stephan says:

      I gave up commenting on Johnsons site long ago. He belongs to a group of economists I would categorize as hopeless cases. But as a political commenter he’s worth reading. His Atlantic piece “The Quite Coup” how an oligarchy hijacks the state was one of the best reads of 2009.

      ___http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

    16. Paul Andrews says:

      Bill, you are missing something. You have a blind spot. There’s no need to weep. Take a step back and have another look. Of course a country could just create currency units without debt backing if it wanted to. But what would it then be able to buy from other countries with those currency units? I dare say very little. Such a country would not become a US, a UK, a China, or an Australia for that matter. Strong economies are built on the fiscal discipline that the central banking model brings. It’s not perfect, and there has been far too much private credit creation, but it’s the best we have yet to see.

    17. Billy, you said, “In the case of a tax cut, disposable income changes first and some of that change is consumed and some is saved.” (Subject: Spending is more expansionary than a tax cut). That is what I term the “first-use” myth. It has to do with the definitions of saving vs spending and with the movement of money.

      All saving, except for the purchase of T-securities, evolves to spending. A “saved” dollar never stops. It moves hand to hand virtually every day, being defined sometimes as saving and sometimes as spending. A dollar spent by the federal government may be saved or spent by the recipient. Either way, the next recipient will save or spend it. And on and on and on. I discuss this further at Tax cuts vs spending.

      Rodger Malcolm Mitchell

    18. DavidW says:

      Bill,
      While I take comfort in reading your analysis and shredding of the neo-liberal economic myths, sadly these myths continue to drive the economic decisions and actions of our government. So while the reduction in my payroll tax will give a little extra spending cash – and we know that this will not limit the U.S. government to spend on social security – this point of view is ignored or dismissed as rubbish by the media and political class. And so, our deficit terrorist president & his allies in both deficit terrorist political parties will move forward to gut social security based on their false claims of insolvency & the masses will concur due to the manufacturing of consent. So while the reason given will be totally mythical, the myth will be accepted as truth. The result is an attempt to gut social security based on insolvency claims when the truth is the U.S. government can never be insolvent.

    19. NKlein1553 says:

      I’m in the same boat as Stephan. I used to comment over at Johnson’s blog all the time; not so much anymore. Actually, it was in the comments section of the Baseline Scenario that I was first introduced to MMT. I got into a pretty heated debate with Zanon, a regular commentator over at Warren’t blog, who was at the time criticizing Elizabeth Warren’s lack of understanding of the modern banking system. After some back and forth I realized Zanon was making good points I really had no answer to. So I decided to check out some of the articles Zanon recommended I read by Warren and Winterspeak. The very next day in the comments section of the Baseline Scenario Tom Hickey, a regular contributor to Billy Blog, introduced me to Professor Mitchell’s writings. And here I am today. Ironically, Zanon and Tom are probably as far apart on the liberal/conservative ideological spectrum as is possible, and, judging from some of their interactions here and at Warren’s website, don’t seem to get along very well at all. I think it is extremely interesting that two such ideologically different individuals could manage to embrace the MMT world view. It speaks to the essential truth of the monetary operations MMT describes. Anyway, if either Zanon or Tom are reading this, I just want to extend them a special thanks during this holiday season for introducing me to the MMT literature. You two probably agree on more than you think. My being here is testament to that.

    20. valeriobrl says:

      Have a great 2011 Bill!!

    21. Ed Beaugard says:

      Dear Mr. Mitchell,

      Thank you very much for this post, this is roughly what I’ve been thinking about Simon Johnson since I started reading Baseline Scenario about a year ago. That is, he’s really a deficit hawk with very conventional, academic views about economics. Further, since mainstream academic economics is entirely discredited in every way possible, well…I don’t bother reading Baseline anymore. Why Johnson was invited to the inaugral conference of INET is a bit of a mystery, at least to me.
      By the way, you’re the only one I know of who’s written anything like this.
      Have you thought about the whole Too Big Too Fail idea? That was another of Johnson and Kwak’s hobbyhorses. I think it’s entirely mistaken, their view that a bank’s size automatically makes it dangerous. But I would be interested in reading what you have to say about it.
      This was an excellent article, thanks again.

      Sincerely,
      Ed Beaugard

    22. sidchem says:

      Bill

      I am not sure that it is undesirable for a sovereign currency issue monetary system to issue bonds at the time of issuing more currency.

      If the US did not issue bonds would this make the dollar less desirable to hold because it could not be converted into a zero risk return thus making it less competitive to other currency and weaker? I understand that bonds are a form of corporate welfare, but when you are trying to sell something (fiat currency in this case) you sometimes have to offer a free toaster (or interest) to keep up with the guy down the street.

      On the other hand there will always be greater demand for risk free return or bonds if more currency is issued so the idea that the bond vigilantes will rise if the US spends more doesn’t make any sense unless they can find someone to pay them for holding their dollars with no chance of default (don’t give them Bill’s account number)

      Best of holiday wishes to all.

    23. joebhed says:

      To Paul Andrews at 1:19

      “”…a country could just create currency units without debt backing if it wanted to. But what would it then be able to buy from other countries with those currency units?”"

      If a country created all of its monies debt-free in adequate quantity as to achieve its GDP potential without inflation or deflation, even to full-employment, then why would any country not accept its currency.

      In 1939, just such a proposal was made by six prominent economists under their “A Program for Monetary Reform”, which was publicly backed by over 400 econmists.

      http://www.economicstability.org/history/a-program-for-monetary-reform-the-1939-document

      The primary function of money in the national economy of any nation is to provide the means of exchange to accommodate the potential production and consumption of goods and services. Why have debts in order to have money?

      Thanks.

    24. sidchem,

      Federal bonds have no purpose for funding the government, so your question has to do with “risk-free” bonds increasing the value of the dollar. True? The value of the dollar (aka “strength”) is affected by many factors, but they all boil down to supply and demand.

      Supply is obvious. Demand is based on risk and reward. For T-bonds, default is not a risk, but inflation is. So, most T-securities are not really risk-free. The reward for owning T-securities is interest.

      That being said, T-securities became useless in 1971, the end of the gold standard. The federal government can control the value of the dollar by manipulating interest rates, which affects all dollar-denominated debt including business debt, bank accounts, money markets, etc.

      Rodger Malcolm Mitchell

    25. Tom Hickey says:

      NKlein1553: Anyway, if either Zanon or Tom are reading this, I just want to extend them a special thanks during this holiday season for introducing me to the MMT literature.

      I remember that time at Baseline. Glad to see that you followed up.

      I’ll pass the thanks along to Ramanan, since I happened by chance to read one of his comments and through following up on his references, I was first introduced to MMT — although I’ve forgotten where it was.

    26. Glenn says:

      “In saying that it was never a trade-off between more government spending and lower taxes. The government could have chosen both given that it is not financially constrained.”

      Given that the government and the people who have faith in the judgment of that government, nonsense or not, the economic behavior based on the consensus belief of future consequences of actions is limited without regard to the failure of that belief system to correspond to reality. The system retains its integrity by eliminating those who would challenge its foundational dogma without regard to the consequences to those outside of the system.

    27. bill says:

      Dear Michael M. Thomas (at 2010/12/25 at 0:16)

      You asked:

      OK; if it doesn’t take much imagination, how about using said imagination to name a few?

      You might like to read this report – Creating effective local labour markets: a new framework for regional employment policy – which was the result of a three-year research study we did and which was funded by the Australian Research Council (the Australian equivalent of the US National Science Foundation). While it is an Australian study the parallels with any country are obvious.

      There are an infinity of useful jobs available which could be funded.

      best wishes
      bill

    28. Glenn,

      Wow, a sentence with 10 prepositional phrases. Trying to figure it out.. Did you mean the leaders kill the non-believers?

    29. mahaish says:

      “Of course you’re right, the Fed can always print money to buy up T bills and just keep them. It could literally eliminate the entire Federal deficit in one day. Of course, doing this over and over will eventually lead to inflation, where the US$ can’t be used to buy resources from outside of the US, and even in the US, prices would rise significantly. But again, we’re nowhere near that place today.”

      hi pghmike, merry xmas

      “eventually leads to inflation” since when,

      the money aint going anywhere, its not being lent out. its just an assett swap between the fed and the banking system,

      reserves build up , and the composition of liquidity changes,but thats about it,

      and banks dont need reserves to lend, they need credit worthy customers, so unless the proceeds of all this monetisation end up in non bank private sector balance sheets, we dont have a inflationary problem.

      the fed can do precious little to inflate the economy, except to muck around with yield curve on money, and reduce the debt service burden on the economy.

      and beside, as you eldude to , interest rates have nowhere to go in terms of stimulus, when they are hovering around zero

      atleast we in oz still have the luxury of 475 basis point to play around with

      shouldnt really be blaming benanke for his inability to fix there mess, he doesnt really have the tools mto do it me thinks. or the tools he has are well past there use by date.

      think the yanks are still looking at a deflationary hole rather than a inflationary nightmare. total level of government spending over and above the effect of autpomatic stabilisers is the only way to get an inflationary outcome, and there doesnt seem to be much of that, given the unemployment rate

      and besides if we are worried about the US dollar becoming worhtless to foreigners in some hyper inflationary nightmare, congress ought to get off its arse and start spending in a way that improves the nett worth of their citizens. start employing more of its citizens so they have more demand for their currency and hence start paying taxes.

      if they are worried about the external demand for their currency, they ought to try and generate more internal demand for their currency, by trying to make a sizable dent on their unemployment rate.

      congress need to get off its arse, put on their santa suites, and put a rocket up the reindears, and start dropping bucket loads of money directly into the bank accounts of the poor and homeless,

      if they want a strong currency

      cheers

    30. Panayotis says:

      Dear Bill,

      Happy Holidays and good health!

    31. Mahaish,

      You said, “Of course you’re right, the Fed can always print money to buy up T bills and just keep them. It could literally eliminate the entire Federal deficit in one day. Of course, doing this over and over will eventually lead to inflation . . .”

      You need to understand the process. When a person or a nation buys a T-bill, he (it) deposits dollars with the government. Those dollars are exchanged for a T-bill, a less liquid form of money. (T-bills are in a category of money called “L,” one step above M3). Then when the government redeems the T-bill, the person, in essence “sends” the T-bill back to the government, which returns his dollars, plus interest. In short, T-bill redemption does not add money to the economy other than the interest on the T-bill.

      Rodger Malcolm Mitchell

    32. Sorry Mahaish, you actually were correcting pghmike.

    33. Min says:

      “But we might encounter a situation where the US government would not be able to sell all its available bond tender.

      “What would happen then? Answer: not much except you can guarantee that the US government would not jeopardise any spending plans and, instead, would start to relax some of these voluntary arrangements which involve bond issuance. In the first instance, the central bank would start buying debt and also controlling yields in targetted segments of the yield curve.

      “Then you would see administrative and finally legislative action.”

      Hope springs eternal! ;)

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