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Just speak to the truth …

The title of today’s blog comes from a speech given on January 12, 2011 by Richard W. Fisher, boss of the Federal Reserve Bank of Dallas – The Limits of Monetary Policy – which carried the sub-title – Monetary Policy Responsibility Cannot Substitute for Government Irresponsibility. It is a speech littered with ideological assertions parading as sensible public commentary. It will resonate with the deficit terrorists and reinforce the policy agenda that will only make the situation in the US worse not better. The ideas were echoed elsewhere in the world in the last week. Japan is considering hiking tax rates “because they want more private growth and less public net spending”. The (un)truth brigade have thus been out in force in recent days – spreading a litany of lies and falsehoods which only aim to perpetuate their irrational obsession that government economic activity is bad. I only wish they would just speak the truth.

The speech was sponsored by the Manhattan Institute and e21 who Fisher claims are “powerful proponents of the free-market capitalism that made our country the richest and the most successful democracy in the history of humankind”.

One day, I might write a blog about this claim that the US is the “most successful democracy in the history of humankind” which Americans are often heard to say but which evidence might suggest otherwise. I can think of several nations that are more “successful” than the US in terms of things that I consider matter. But that is for another day.

Fisher told his audience that when he first took the job as the boss of the Dallas Federal Reserve Bank he met with the then US Federal Reserve boss (the failed) Alan Greenspan who told him that he “could best serve the System” (of reserve banks) by adopting the following:

Just speak to the truth …

I don’t think Greenspan was a model in that regard. And it seems that Fisher didn’t take his advice if this speech (and previous public utterances are anything to go by.

Fisher claims in his speech that he intended to “speak to the truth as I see it”. Yes, the old “as I see it” from a position of being blind (ideologically blinkered) and ill-informed.

Here are some of these “truths” which as you will appreciate are in fact unmitigated lies.

First, he talks about the need for the new US administration staff “have their work cut out for them” because:

You cannot overstate the gravity of their duty on the economic front. Over the years, their predecessors – Republicans and Democrats together – have dug a fiscal sinkhole so deep and so wide that, left unrepaired, it will swallow up the economic future of our children, our grandchildren and their children. They must now engineer a way out of that frightful predicament without thwarting the nascent economic recovery.

Yes, their work ahead is enormous. There is nearly 10 per cent of the workforce unemployed and look like being that way for some years to come. Long-term unemployment is reaching record proportions in the US. Employment growth is flat and hardly keeping pace with a very slow labour force growth rate. The broader measures of labour underutilisation suggest around 6 or 7 per cent of the available labour is also idle but not counted among the official unemployment statistics.

Meanwhile, income inequality is rising and approaching the proportions we see in poor developing countries.

And further, very little policy development has been evident which addresses the underlying causes of the current crisis that has generated all this real damage. The reforms to the financial sector inasmuch as there have been any are superficial and that sector (courtesy of some very generous government aid early in the crisis) has bounced back as if nothing has happened.

So yes, it is hard to overstate the gravity of the situation the US government is facing at present on the “economic front”.

But I am unaware of any “fiscal sinkhole” deep or shallow. This is an oft-used analogy – water flowing down the drain – public net spending wasted down some hole. Many commentators erroneously talk about the growing hole in the budget bucket. This is presented as some sort of “truth” that we should all be worried about.

I live in a very dry continent and we are very cognisant of water usage because droughts (and government-imposed water restrictions) are common, notwithstanding the record floods that are ravaging the country from north to south at present.

But in a fiscal sense, there is no hole because there is no bucket. To explain this we need to understand what happens when the sovereign government runs a budget surplus.

It is often argued that the surplus represents “public saving”, which can be used to fund future public expenditure. However, public surpluses do not create a cache of money that can be spent later. At all times, national governments spend by crediting a reserve account in the banking system. That spending doesn’t come from anywhere, as, for example, gold coins would have had to come from somewhere.

It is accounted for but that is a different issue. Likewise, tax payments to government reduce reserve balances. Those payments do not go anywhere but are merely accounted for. A budget surplus exists only because private income or wealth is reduced.

In an accounting sense, when there is a budget surplus then base money and/or private wealth is destroyed.

In terms of fiscal policy, there are only real resource restrictions on its capacity to increase spending and hence output and employment. If there are slack resources available to purchase then a fiscal stimulus has the capacity to ensure they are fully employed. While the size of the impact of the financial crisis may be significant, a fiscal injection can be appropriately scaled to meet the challenge. That is, there is no financial crisis so deep that cannot be dealt with by public spending.

Which brings us to understand what a budget deficit constitutes.

As noted above, every day the government is crediting private bank accounts (directly or via cheque issuance) to pursue its socio-economic program and debiting private bank accounts (collecting tax revenue or writing receipts over counters to payees). The tax revenue does not support the spending.

A deficit arises when the spending exceeds the revenue and the net result is an addition of net financial assets (bank reserves). In achieving this outcome, the government hopes that its spending will boost aggregate demand (“finance” the leakages from the income-expenditure system), and, hence maintain high levels of employment and material prosperity.

The only hole I can see is one that needs to be filled – that is, the spending gap – the leakages from the income-expenditure system – that are created when there is an external deficit and/or a desire by the private sector to save overall.

Budget deficits should aim to fill that hole in and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses. As the fiscal policy “fills” that gap the real problems facing the US economy will be reduced.

Please read my blog – We are in trouble – squirrels are falling down holes – for more discussion on this point.

The related (un)truth (that is, lie) is the intergeneration claim – that the deficits “will swallow up the economic future of our children, our grandchildren and their children”.

The only “frightful predicament” that the youth and future generations face in the US is the real one of having insufficient job opportunities and/or diminished and degraded infrastructure (including health and educational services). These are real problems that might impoverish people in the future economically and/or intellectually.

There are no financial burdens that the future generations will bear as a result of today’s deficits. Please read my blog – Our children never hand real output back in time – for more discussion on this point.

Fisher continued that the expansion of the Federal Reserve’s balance sheet (aka QE2) has meant that the Federal Reserve has:

… run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. Last Friday, speaking in Germany, [European Central Bank President] Jean-Claude Trichet said it best: “Monetary policy responsibility cannot substitute for government irresponsibility.”

First, the fiscal nonfeasance that the US government stands accused of is being too conservative and allowing unemployment to rise and remain at 9+ per cent for several years.

The US government has been bullied into running deficits that are clearly insufficient to underwrite real economic activity in the US given the trajectory of private spending. The government should be held culpable for refusing to exercise its fiscal responsibility to ensure everyone who wants to work can find a job whether it be in the private or public sector. When the private sector will not provide enough jobs then there is only one sector left to fill the breach – the public sector.

The Federal Reserve is complicit in this policy failure for holding out that monetary policy was the best tool to counter-stabilise the collapsed demand. The efforts to stimulate private spending by easing monetary policy and buying a mountain of financial assets (and adding to private bank reserves) has failed. Why? Answer: because it was never going to work in the first place – it applied erroneous mainstream economic theory to a situation where that theory was inapplicable.

The inability of the monetary policy initiatives to do anything more than stabilise a very shaky financial system was always clear from the outset if you understood what the problem was. There was not a shortage of credit nor were interest rates punitive with respect to intended borrowing. People didn’t want to borrow because the economy was collapsing and they were carrying too much debt anyway. Please read my blog – Quantitative easing 101 – for more discussion on this point.

The exercise clearly demonstrates the capacity of the central bank to target and control interest rates but it was never going to stimulate demand in any significant way. Please read my blog – Operation twist – then and now – for more discussion on this point.

The mainstream macroeconomics idea of a money multiplier operating has also been categorically exposed as a falsehood. Please read my blogs – Money multiplier and other mythsMoney multiplier – missing feared dead – for more discussion on this point.

Trichet, another serial liar actually said this last Friday:

That being said, monetary policy responsibility can not substitute for government irresponsibility. Excessive government borrowing by some Member States led to a seizing-up of the market for government paper. This market plays a central role in our financial system and constitutes a crucial element in the transmission of monetary policy to the real economy. Fire sales of government bonds imply a sharp deterioration in banks’ funding conditions.

This will be the topic of another blog. He interprets what happened as “excessive government borrowing” – I interpret it as economies melting down due to a collapse in private spending and the automatic stabilisers attenuating the subsequent real collapse.

But the point is true that “monetary policy responsibility can not substitute for government irresponsibility” – but, of-course, how we construct the “irresponsibility” of the latter is what it all turns on. Once again that issue can only be considered in relation to the state of the real economy and meagre reliance on some public deficit figure (or rate of change) is meaningless and missing the essential point of what role fiscal policy should play.

The irresponsibility is in fact the reluctance of governments to support aggregate demand at levels that ensure adequate employment growth. In the case of the EMU, it is the imposition of stupid and arbitrary fiscal rules that then promote destructive pro-cyclical fiscal policy changes at a time when the government should be increasing its net spending.

But, of-course, Trichet and Fisher and the rest of them miss this point entirely.

The rest of Fisher’s speech is a rehearsal of many more of these (un)truths and I don’t have enough time today to unpack them all in detail. But they are just more of the same.

Government spending and taxes choke the great entrepreneurial spirit … etc ad nauseum. My only question is what “great entrepreneurial spirit” – it is the same energy that got us all into this mess after its principles hectored governments for years to deregulate and free the space for their so-called self-regulating market-led nirvana?

On the question of these invented “truths” I also read a statement (January 15, 2011) from the new Economy and Fiscal Policy minister in Japan.

Kaoru Yosano claimed that the Japanese government had to cut borrowing because “long-term interest rates will inevitably rise and hurt Japan’s global credibility”. Why is that?

At a time when the Japanese economy is still limping along he is advocating tax rises (5 percent sales tax rate hike) which is exactly the opposite to what is required to ensure the economy doesn’t take a 1997-style nose dive back into recession. There is still above average unemployment and no inflation problem in the economy so austerity is not indicated.

Apparently, a major concern which is being used to justify the tax hike argument and to “cap bond sales and spending” is that it is expected that:

… new bond sales of 44.3 trillion yen ($536 billion) to exceed tax revenue of 41 trillion yen in the fiscal year starting April 1, the second year in a row for issuance to surpass revenue.

This is another one of these (un)truths that now seem to be touted in public debate – that somehow there is a problem if bond-issuance is higher than tax
revenue. These financial statements that have no meaning when considered alone – this one stands alongside rules such as the Rogoff 80 per cent public debt ratio threshold; the Maastricht 3 per of GDP fiscal balance rule; the Maastricht 60 per cent debt ratio rule; the balanced budget over the cycle rule and the rest of them.

These “rules” have no meaning as they stand. They are arbitrary contrivances introduced into the debate to support the conservative position that small government is better than large government. Why is that? Purely because these characters adopt the ideological position that they do not like government activity.

When I read that new bond sales were likely to be 44.3 trillion yen whereas tax revenue would be 41 trillion the only thing that told me was that the former was 1.08 times the latter. Does that mean anything? Answer: nothing of any import.

Where did this concern come from? Answer: it is just an arbitrary concern. What is the basis of it in economic theory? Answer: there is no basis for it at all. It is purely an ideological statement that has zero economic content – like many of these rules.

There is no informational content at all that will help inform the public debate.

Yosano also said:

It’s important to pursue an economic policy that can spur the real strength of Japan’s economy, and not simply depend on the government’s fiscal spending or excessively rely on the BOJ’s monetary policy to overcome deflation …

Yes it is important to stimulate and maintain real economic growth (which is environmentally-sustainable!). But the next point “not simply depend” on public policy to do so is nonsensical in the context of the reality facing Japan at present. If public net spending was cut then the economy will falter. Clearly, stimulating private spending can be a strategy to replace public spending.

But tax hikes aimed at “reducing the deficit” will harm private spending. The logic again is inconsistent.

Progressives also perpetuate these misconceptions.

To see the way in which Modern Monetary Theory (MMT) constructs the argument in a way that is different from the “run-of-the-mill” progressive viewpoint we only have to consider Paul Krugman’s latest Op Ed in the New York Times (January 13, 2011) – A Tale of Two Moralities.

The topic is about the divide in American politics at present which he considers is paralysing sensible policy progress in the fact of the major crisis still confronting that nation. Krugman says:

One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

On the first position, the reality in a modern monetary economy (such as the US) is that the national government does not tax to raise revenue despite the appearance that it is doing so.

A major role for taxation – other than to create a demand for the fiat currency (which has no intrinsic value) is to serve as a fiscal policy tool via which the national government can regulate nominal aggregate demand growth to keep it in line with the capacity of the real economy. Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

So it the idea of progressive taxation in MMT is not that “society’s winners are taxed to pay for a social safety net” so that “the affluent to help the less fortunate” but rather that society’s winners (identified in terms of income-earning capacity) take a greater share in maintaining price stability and providing real space for the government to pursue its socio-economic program.

A national government can choose whatever social safety net it thinks is appropriate without recourse to its revenue-raising capacity as long as the real goods and services consumption implied by this safety net (both public and private) are feasible in terms of the available real resources. If the consumption that is implied exceeds what is available in real terms then the government has to make a choice.

Either cut back the real standard of living defined by the safety net or reduce the purchasing power capacity of other groups in the society to ensure that the real resource demands are compatible with the capacity of the economy to produce (in real terms). That is the role of taxation in this context and progressives should always argue that the high-income earners should bear proportionally more of the brunt of such taxation than low-income earners.

Sadly, progressives typically do not understand this point and continue to justify progressive taxation in the erroneous way that Krugman does above.

Secondly, the conservative position that taxation amounts to theft really defaults to a position that everything private is good and everything public is bad. At least, until the elites who mostly propagate this position are in need of public assistance and then with mouths closed and hands out they quietly take the cash, wait until the dust settles and resume their anti-public sector role.

Many of the same also are among the most martially-oriented of Americans and do not blink when the government outlays billions of dollars on equipment whose only purpose is to kill and maim. Their concept of liberty is highly skewed in other words and is not defensible.

The whole concept of “free choice” which is embedded in the conservative rhetoric is nonsensical when you step back and think about it for a moment. The capitalist system they extol relies on continuously growing consumption and without it the economy grinds to a halt with damaging losses of income arising from the resultant unemployment.

We are thus coerced into being in the first place – consumption units. Our sense of welfare that the capitalist advertising industry pushes down our throat every day becomes dependent on us continually spending. That is coercion. Then more disadvantaged citizens are made to feel bad because they cannot have as much as the better-off members of society – a second stage of the same sort of coercion.

Capitalism offers only the chimera of freedom.

In relation to the political differences, Krugman correctly notes that:

… what we’re talking about here is a fundamental disagreement about the proper role of government.

As noted above the right say that small government (focusing on law and order and national security) is only barely tolerable until it is their turn to benefit. Then it is all hush-hush, hands-out sort of territory.

Those who see a broader role for government usually do not make the essential points regarding the nature of the government transaction with the non-government sector.

In a modern monetary system there are consequences for the non-government sector in choosing a particular government policy stance (here I am talking about fiscal policy). The “cut budget deficits” gang may think that they are supporting the freedom of the people to spend what they earn but in many situations are actually undermining that aim.

It is common for conservatives and progressives alike to advocate positions that do not make any economic sense – which means they advocate policy and other aspirations without understanding the macroeconomic constraints and behaviours that will follow.

For example, a classic error of logic is to argue that the US government and the US private sector should be reducing their debt levels which is impossible when the country is also enjoying an external deficit. Note the use of the descriptive term “enjoying” in relation to the external sector which is also counter to what most of the commentators think. A current account deficit is beneficial to domestic residents.

But more broadly, if the government does seek to “cut” its deficit when the private sector is seeking to save overall (and the external sector is in deficit) all that will happen is that economy will contract and national savings will fall thwarting the private sectors capacity to not only reduce debt levels but also to “spend what they earn”. The unemployment that results from this sort of policy advice is a tyranny in itself.

Given that unemployment falls disproportionately on certain demographic groups, what the conservatives are really advocating is a “freedom” for some (the privileged) at the expense of a “tyranny” and denial of liberty for others (the unemployed).

When I hear people (and some appear as commentators here) say that we have to cut government net spending to reign in the external deficit because otherwise the exchange rate will fall, I immediately relate to those statements in terms of imposing unemployment in return for cheap foreign ski holidays and cheaper imported cars. That is, assuming that the exchange rate might be lower when the economy is expanding faster (due to the impact of the higher income levels on imports).

If that is the case then I find the argument that you have to have unemployment to keep the exchange rate higher to be an immoral one. Moreover, the extra outlays required for the trip to St Moritz or the BMW car are usually very small (in the normal ranges that exchange rates fluctuate in advanced countries) whereas the losses arising from unemployment (to the economy overall and the individuals in particular) are enormous. There is no comparison between the two “costs”.

Further, that outcome is not always evident – that is, there is very no discernible relationship between currency movements in foreign exchange markets and budget balance outcomes. While we read regularly among the comments on this blog that the foreign sector is a constraint on fiscal policy, the evidence does not support that notion. Exchange rates do not follow a systematic inverse relationship with budget deficits.

Meanwhile … vote him out

The ABC News reported today that the Irish PM calls confidence motion on leadership. Apparently, he will see a “motion of confidence” from his party at “next Tuesday’s parliamentary party meeting”.

My advice – dump him and elect someone that is committed to restoring national sovereignty and will start by targetting domestic employment creation. What does that require? Answer: an immediate exit from the Eurozone and the re-establishment of the Irish currency.

Conclusion

I will be back tomorrow on the topic of inequality I think. I have been reading some interesting material in recent days on this topic.

For now – when a conservative says “lets speak the truth” in relation to macroeconomics – we should make sure we are in a position to understand that they are usually lying! I hope my blog helps advance that purpose.

That is enough for today!

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    This Post Has 25 Comments
    1. I believe fisher is the same worthless idiot who was going on and on and on about a wage-price spiral was about to occur right before the crisis hit.

    2. thanks for the excellent work, bill.

      quick question: say i wanted to turn people on to MMT–which of your blogs would you recommend linking for them first?

    3. “Fisher claims in his speech that he intended to “speak to the truth as I see it”. Yes, the old “as I see it” from a position of being blind (ideologically blinkered) and ill-informed.”

      “You cannot overstate the gravity of their duty on the economic front. Over the years, their predecessors – Republicans and Democrats together – have dug a fiscal sinkhole so deep and so wide that, left unrepaired, it will swallow up the economic future of our children, our grandchildren and their children. They must now engineer a way out of that frightful predicament without thwarting the nascent economic recovery.”

      As some economists like to remind me, for every borrower there is a lender. So, should that be it will swallow up the economic future (I’d rather call it the retirement) of many of our children, many of our grandchildren and many of their children but be owed to the very few children, very few grandchildren and their very few children. There is some wealth/income inequality.

      Wanna bet fisher and his “spawn” will be the ones owning the debt?

    4. “The only hole I can see is one that needs to be filled – that is, the spending gap – the leakages from the income-expenditure system – that are created when there is an external deficit and/or a desire by the private sector to save overall.”

      IMO, the spending gap or some other gap should be filled with currency from the currency printing entity not with debt. However, I believe the way the system is set up now, all new medium of exchange is demand deposits created from debt. Both gov’t debt and private debt can cause issues related to timing and wealth/income inequality.

    5. When I hear people (and some appear as commentators here) say that we have to cut government net spending to reign in the external deficit because otherwise the exchange rate will fall, I immediately relate to those statements in terms of imposing unemployment in return for cheap foreign ski holidays and cheaper imported cars.”

      Someone can make this observation – that governments step in to control demand depending on the external sector. It cannot be assumed that the person making this observation is recommending the same.

      While we read regularly among the comments on this blog that the foreign sector is a constraint on fiscal policy, the evidence does not support that notion. Exchange rates do not follow a systematic inverse relationship with budget deficits.”

      Not sure who said that running budget deficits lead to depreciation of currency. The story is too complicated to be summarized this way.

      As far as evidence on constraints due to the foreign sector goes, there is a law which says growth depends on the growth of exports and inversely on income elasticity of imports and there is evidence for it.

    6. Studentee, Good question. What we need is a thousand or two thousand word “introduction to MMT” to be on the internet. Bill Mitchell churns out excellent stuff, but I’m not sure whether he has done a “brief introduction”. I had a go at an introductory article here:

      http://ralphanomics.blogspot.com/2010/05/functional-finance.html

      In re-reading it, I think I should have made the point that MMT is not that different to Keynes’s ideas. Economics advances at a glacial pace. MMT is just a small improvement on Keynes. That point should at least make MMT more acceptable to Keynsians.

    7. Hi Bill!

      IMHO this is exceptionally well stated:

      “So it the idea of progressive taxation in MMT is not that “society’s winners are taxed to pay for a social safety net” so that “the affluent to help the less fortunate” but rather that society’s winners (identified in terms of income-earning capacity) take a greater share in maintaining price stability and providing real space for the government to pursue its socio-economic program.”

      And let me add, perhaps ironically, that with their lower propensity to consume that would mean higher nominal taxes than otherwise to sustain desired levels of aggregate demand. Maybe even a federal surplus, if that was the only group taxed!

      Also, on the notion that taxes are ‘theft’, that implies the public sector is not entitled to any real goods and services except those donated on a voluntary basis, which of course, has been tried many times in history and has always been dysfunctional, at best.

      Warren

    8. Bill et al.
      I have come across this BBC Magazine peice which in a light hearted way demonstrates how both the media and politicians use statistics to lie to ordinary people:

      The Myth of Record Debt – http://news.bbc.co.uk/1/hi/magazine/7733794.stm

      Take any number of pounds that’s bigger than it was before: the price of a hotel room, the size of the health budget, whatever, but particularly at the moment, government borrowing.

      Shout: “It’s a record!”

      Apportion blame or praise, as desired. The game is fatuous, but don’t let that stop you. After all, it doesn’t stop them.

      ….

      Records of this type come round almost like the calendar because economies grow, and there’s almost always some inflation. We might as well report that the date, 2008, is a record number of recorded years. More than in any other year since records began 2008 years ago. Beating by one the record held only last year, of 2007. And that if the trend continues we will see another record number of years recorded in the year as early as next year.

      It seems now in 2011 we have used up a record breaking number of years again – so many infact it’s time to live within our means – I blame the government!?

      Kind Regards
      Charlie

    9. Re the Fisher point quoted by Bill above about “free-market capitalism that made our country the richest and the most successful democracy in the history of humankind”, I see French output per head has recently slipped ahead of that of the US. Yes FRENCH!!! Those cheese eating surrender monkeys with their large and effective health service. Republicans, plus the Peterson Foundation etc etc will be sobbing on their pillows over this bit of news.

    10. studentee, here are some intro MMT links. Most are accessible to non-economists.

      Major MMT Blogs:

      Marshal Auerback

      Scott Fulwiller

      Bill Mitchell

      Warren Mosler

      Winterspeak

      L. Randall Wray

      There are also a number of working papers by these and others writing in the field that are available (free) at:

      The Levy Institute

      Center for Full Employment and Price Stability

      EPIC

      Frank Ashe:

      A kindergarten guide to modern monetary theory

      Mathew Forstater:

      Functional Finance and Full Employment: Lessons from Lerner for Today

      Scott Fullwiler:

      Modern Monetary Theory – A Primer on the Operational Realities of the Monetary System

      Bill Mitchell:

      Barnaby, better to walk before we run

      A simple business card economy

      Some neighbours arrive

      A modern monetary theory lullaby

      Functional finance and modern monetary theory

      Deficit spending 101 – Part 1

      Deficit spending 101 – Part 2

      Deficit spending 101 – Part 3

      Stock-flow consistent macro models

      Warren Mosler:

      7 Deadly Innocent Frauds

      Mandatory Readings

      Cullen Roche:

      Understanding The Modern Monetary System

      Neil Wilson:

      How the government’s super-platinum credit card works

      Winterspeak:

      Post Keynesianism in a Nutshell

      L. Randall Wray:

      Understanding Modern Money: The Key to Full Employment and Price Stability (1998)

      The Federal Balance Sheet Is Nothing Like Your Household Balance Sheet, So You Shouldn’t Freak Out About Debt

      Not MMT, but contributory to it:

      Irving Fisher:

      The Debt-Deflation Theory of Depressions

      Wynne Godley/Marc Lavoie:

      Prolegomena to Realistic Monetary Macroeconomics:
      A Theory of Intelligible Sequences

      Monetary Economics Palgrave Macmillan (2007)

      Abba Lerner:

      Functional Finance and the Federal Debt

      Hyman Minsky:

      The Financial Instability Hypothesis

    11. Tom Hickey says:

      these links seems to be outdated:

      Irving Fisher:
      • The Debt-Deflation Theory of Depressions
      Frank Ashe:
      • A kindergarten guide to modern monetary theory
      Wynne Godley/Marc Lavoie:
      • Prolegomena to Realistic Monetary Macroeconomics:
      • A Theory of Intelligible Sequences
      Abba Lerner:
      • Functional Finance and the Federal Debt
      Hyman Minsky:
      • The Financial Instability Hypothesis

    12. Very interesting blog, Bill. MMT is completely new to me, I have just started reading up on some of the basics (Barnaby, better to walk before we run). What I have read so far is very straightforward and (I would have thought) uncontroversial. The question this raises is, if MMT is so obvious, why doesn’t everybody accept it? Is it a case of most economists simply being unaware of what MMT says? Or are there substantive arguments against it? If there are, where would I find them?

    13. Alex Heyworth:

      I know what you mean – it seems so straightforward, so obvious in hindsight. Yet a complete inversion of previous notions I’ve held. It was very eye-opening for me.

      If you want counter-arguments, there’s plenty in the comments sections! Ramanan and Ray can usually be counted on for this. Also check out Paul Krugman’s reply to MMT:

      http://moslereconomics.com/2010/07/19/paul-krugman-blog-nytimes-com/

      As for why this isn’t generally accepted, I suspect there’s two camps. One is just people who don’t know the basics, and just think of the government as a household. The other camp is most economists, who know this stuff but assume a whole bunch of things that they reckon prove government spending is somehow bad in the long run. Some of these ideas are the Quantity Theory of Money (printing money->inflation), Ricardian agents (government spending scares everyone into investing less, saving more due to anticipated tax rises), money multiplier (you need bond sales or else excessive bank lending leads to OMG Zimbabwe hyperinflation) and various stuff like that.

      It’s basically like an acknowledgement that yes, governments aren’t technically fiscally constrained, but we have to act as if they are or else horrible things will (allegedly) happen. So then it becomes a “necessary myth”.

    14. PLS, Tom H:

      Winterspeak is not a “Major MMT Blog”.

      He is an amusing, but amateur, commentator on MMT.

      That’s unfair to the other professionals on the list. Dilution.

    15. “One day, I might write a blog about this claim that the US is the “most successful democracy in the history of humankind” which Americans are often heard to say but which evidence might suggest otherwise. I can think of several nations that are more “successful” than the US in terms of things that I consider matter. But that is for another day.”

      Whether US is the “most successful democracy in the history of humankind” is questionable, but in my view it sure is more democratic than Australia.

      Here is why I think US is more fair and more democratic than Australia.

      – For a start unlike Australia, USA is a republic. In the US outsider’s don’t get to decide how the country should be governed. Personally, as an Australian citizen I am ashamed that the union jack is still there in the Australian flag and the fact that the Queen is the head of Australian state. USA kicked the British out more than 200 years back. The head of US state is an American citizen.

      – US abolished slavery after the civil war. But the constitution of Australia still discriminates against aboriginal Australians. US has shown that no matter what one’s background is, any citizen can become the President of the country. I can bet that in the next 50 years Australia will not have an aboriginal Australian as it’s PM. Even the law discriminates against the aboriginal Australians. Example: An aboriginal Australian named Doomadgee who was allegedly murdered by Sergeant Hurley. The investigator instead of conducting a serious inquiry were having beer and meals with Mr. Hurley (http://www.news.com.au/friends-of-police-officer-led-doomadgee-probe/story-e6frfkp9-1111112714727).

      – Australia’s immigration policy is very discriminatory. Even in this century it still prefers (covertly) European migrants over other migrants. This is not the case with US as it welcomes immigrants all across the world without any special preferences like Australia. Further, USA treats undocumented immigrant much better than Australia. Australia throws most of the non-European undocumented immigrants into the jail.

      I could go on, but for now I will stop here.

      Cheers,
      Sriram

    16. FedUp,

      You said,

      IMO, the spending gap or some other gap should be filled with currency from the currency printing entity not with debt. However, I believe the way the system is set up now, all new medium of exchange is demand deposits created from debt. Both gov’t debt and private debt can cause issues related to timing and wealth/income inequality.

      Beowulf had a very good idea to circumvent this.

      If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good… If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”
      Thomas Edison,
      quoted in NY Times, Dec. 6, 1921

      If you think about it, it does seem odd that the US Government is the monopoly supplier of US dollars and yet our politicians go through life thinking the government will run out of money unless it can borrow more. Of course that’s not true, the coins in your pocket are legal tender and yet were not issued against debt. They’re minted by the US Government, backed only by the gilt-edged credit of the American people, no one is paid interest on it and they don’t add a penny to the statutory debt. What’s more, the use of coins as legal tender is scalable, they could replace the use of Tsy debt sales. No, you wouldn’t have to carry more coins in your pocket. Nothing would change except Tsy would be credited by the Federal Reserve for the sale of interest-free Treasury coins (presumably of large denominations) instead of interest-bearing Treasury bonds.

      The two great powers of a sovereign state are the monopoly of violence and seigniorage, the profits from the creation of money. If the federal deficit (that is, expenditures in excess of tax receipts) were funded by seigniorage revenue, not only would there be no debt service owed on the money, there’d actually be no deficit. Seigniorage (whether generated by the Federal Reserve or by the US Mint) is supposed to be booked by Treasury as “miscellaneous receipts”, since the funds can appropriated for other govt uses, it actually reduces the deficit dollar for dollar. Looking into it, I found that while Federal Reserve profits are counted as a revenue source (larger than estate taxes and customs duties combined), US Mint profits are not.
      .
      .
      .
      .
      The point is, in section 5136, Congress characterizes the exchange of coinage produced ex nihilo by the US Mint for the face value equivalent in Federal Reserve notes (or more typically, by marking up the balance in Tsy’s reserve account) as a “sale”– “Provided further, That the Fund may retain receipts from the Federal Reserve System from the sale of circulating coins at face value for deposit into the Fund“. What’s more, the statute also says, “at such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts“. Unless Congress intended “receipts… from the sale” to not mean exchange revenue and for “the public”, “miscellaneous receipts” and ultimately “seigniorage” to have each have two different meanings depending on whether we’re referring to the US Mint or to the Federal Reserve System, my suspicion is that Mint seigniorage and Fed seignoirage were intended to be treated the same for budgetary purposes.

      If, in fact, Mint seigniorage is legally indistinguishable from Fed seigniorage as miscellaneous receipts revenue, it does offer an escape hatch (or more like a subway tunnel really) if Congress refuses to increase the statutory debt limit this spring. The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit.

      Nothing a few dozen $10billion coins will not fix!

    17. Grigory Graborenko, thanks for your reply. I read the Krugman link, and I’ll continue the reading as per the list provided by Tom Hickey and follow the comments here.

    18. Grigory Graborenko:

      Well there is a third possibility, not everybody work with the intent of what’s best for society as a whole. The present system serve some powerful parts of society very well, their share of the aggregated welfare that society produce have with the present neo-liberal system cut a portion that now well exceeds the beginning of the previous century. To “buy” intellectuals as mouthpieces for their interest don’t cost very much, hardly more than what probably is lost in miscalculation.

      I’m constantly amazed in discussions on vital and central issues för society as economics that people always presume that those who rule our societies always have the intention to see that everything turns out for the best for everybody and society as a whole. And when it doesn’t they have med “mistakes” and “blunders”.

    19. “most successful democracy in the history of humankind”?

      Um, I would have thought Switzerland is the “most successful democracy” in the world, given it is the ONLY democracy in the world – in how many countries could ordinary citizens pass legislation, at a federal level, and thus create the best transport (‘Zurich model’), health and education (Le Rosey etc) infrastructure the world has ever known? NONE! That and it also produces stuff (unlike Norway, it doesn’t rely on oil to feed its weath), doesn’t have a fetish in real estate speculation enriching a rentier class – oh and it hasn’t been to war since the 1800s.

    20. Thanks, Frank. I updated the link in my master list for future reference.

      @ /L, the Fisher, Godley/Lavoie-Prolegomena, Lerner and Minsky links worked for me when I clicked on them above. Anyone else having a problem with these?

      Anon, winterspeak’s blog is a judgment call, I’d say. Folks interested in MMT can come to their own conclusions about following. For me, a big reason for winterspeak’s blog being significant is his references to discussions into which MMT enters on non-MMT blogs. People knowledgeable about MMT often engage other economists there. It’s interesting to see some debate going on. It would be difficult to find this stuff on one’s own unless one cruises those blogs regularly.

    21. Bill: “People didn’t want to borrow because the economy was collapsing and they were carrying too much debt anyway.”

      Federal Reserve Bank of SF figures it out:

      Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery

      The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery. King (1994) provides a detailed discussion of how differences in the marginal propensity to consume between borrowing and lending households can generate an aggregate downturn in an economy with high household leverage. This idea goes back to at least Irving Fisher’s debt deflation hypothesis (1933) and has found empirical support in several studies (Mishkin 1978, King 1994, Olney 1999, Eichengreen and Mitchener 2003, Glick and Lansing 2010, and Mian and Sufi 2010). Our view is that the depth and length of the current recession relative to previous recessions is closely linked to the tremendous rise in household debt that preceded it.

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