I have received several E-mails over the last few weeks that suggest that the economics…
There are no better or worse deficits
I have been travelling today and so haven’t had much time outside of my commitments. But I did read some truly astounding articles today. As the conservatives take control of the political processes in the advanced nations they are revising history faster than we can read about it. Meanwhile they use the TINA claim to implement policies that damage the well-being of the average citizen and set up dynamics that will manifest as the next crisis. And we say we like it – because we have been bluffed into the TINA lie. The fact that the public believe all the conservative dogma and go along with it astounds me. Economics is not that hard. If no one is spending then output will fall and unemployment will rise. But somehow the public believes the opposite. They have been conditioned to believe that a rising (large!) budget deficit is bad and a falling (small!) deficit is good. The reality is that there are no better or worse deficits.
But first, in this Bloomberg article (March 4, 2011) – Gillard Concern at Aussie Gains Shows ‘Dutch Disease’ Risk – there is discussion of how exchange rate movements can promote unbalanced growth across sectors within a nation (a continual problem in Australia). Many readers have asked me about the Dutch Disease concept and I plan to deal with it next week sometime. The policy response is as you will guess not the one the current Australian government or conservatives advocate.
But today I consider two UK Guardian articles from smug conservative politicians that were published in the last week that show how far reality has been lost in the current period. The first was from the British Chancellor George Osborne (February 28, 2011) – Labour’s reality deficit.
If you copy the text around the photo of the article and paste it into a text editor you will see that the Guardian is still referring to his as “Shadow chancellor George Osborne” (in the alt text for the image dated 20/8/2008). I think that would be a better option – the fact that this rabble was able to win office and have Osborne running economic policy is a statement in itself.
It also shows how bad the Labour Government was and that is what the article is about.
According to Osborne who seems to think he is now wiser than wise:
Ed Balls has not learned the lesson of our 13 years in opposition: the need for a credible alternative.
That made me laugh – the “credible alternative” part. There is no credibility in the current British government’s economic policy strategy. The fact that the British voters have ratified the policy (by electing them) just tells me the public education system in Britain has failed (some years ago) and it has produced xxcxwx.ts.
Osborne spills the beans on the previous government who claimed there was no criticism of their fiscal strategy over the last decade. Osborne says that there were warnings about the “”structural” hole in the public finances”. Apparently, the British Treasury “under Ed Balls’s guidance”:
… attempted to silence IMF criticism of the UK’s structural deficit. You can’t attempt to silence something that doesn’t exist.
The fact that the former British government tried to silence the IMF is about the best thing that it did in office. Plaudits go out to them. The IMFs concept of a structural deficit is heavily biased towards calling a true underlying surplus a deficit. So they pressure governments to run balanced budgets which are in fact deep surpluses (that is, very contractionary).
This is a technical argument and I explain it in common language in this blog – Structural deficits – the great con job!.
But once you get over the bias in the measurement, the IMFs notion of a structural deficit (as essentially bad) is nonsensical and should be ignored anyway.
Please read the suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for more discussion.
Also please read – The IMF continue to demonstrate their failings and Bad luck if you are poor! and IMF agreements pro-cyclical in low income countries – for more discussion.
Osborne also suggest that the OECD is a reliable witness and judge. He says:
And you can’t silence the OECD, which said that the UK’s structural deficit went from second best in the G7 in 2000 to the worst in 2007.
There is no such thing as a budget – structural or otherwise – being “best” or “worst”. These are measuring and relative concepts that have no meaning when applied to what a budget actually is.
You can have the best unemployment rate – because we know that a low unemployment rate is unambiguously a good thing to achieve. So you can also have the worst unemployment rate either in time comparisons or across nations/regions/cohorts.
But no such clarity exists when talking about budgets.
Is a large budget deficit bad and a small budget deficit good? Answer: it is a meaningless question.
The previous link – Structural deficits – the great con job! – goes into detail about how the recorded budget outcome can be decomposed into the component that automatically varies over the cycle without any change in government policy (automatic stabilisers) because tax revenue and welfare payments are cyclical.
The remaining component reflects the discretionary government policy choices and so if the government aims to conduct an expansionary policy stance (adding to aggregate demand growth) then the budget outcome should move towards or into deficit and vice versa.
So you could get a final budget surplus outcome while the discretionary stance was expansionary and other obvious configurations. I explain in the blog above how this ambiguity is resolved – the ambiguity is in interpreting the dual components of the total outcome.
But the standard mainstream economics way of resolving the ambiguity uses potential output levels that are biased towards accepting higher than necessary unemployment as the full employment benchmark. So a structural deficit published by the IMF or the OECD are typical surpluses in reality meaning that attempts to get the structural deficit (that component reflecting discretionary choices) into balance actually push fiscal policy into contraction. The bias is to impose fiscal drag on the economy.
That is why we have had persistently high unemployment in most countries for the last few decades.
But measurement issues aside, the budget is not a valid policy target. It is largely an artefact of private sector spending decisions. If private spending is strong then the budget deficit will be lower (if not in surplus) irrespective of what government decides. The opposite is the case.
Governments should worry about the well-being of the community which involves high levels of employment and real wages growth. The budget balance has to be whatever it takes to achieve these real goals. So you might get to full employment with strong productivity growth with a low deficit, a high deficit, somewhere in between or even a surplus – depending on the spending decisions of the private domestic sector and the state of the external sector (net exports).
The correct way of appraising government fiscal effectiveness is to ask about community well-being. On that benchmark the British government is running a failed state and its deficit is too low.
The only sense you can make of a good and bad deficit is in relation to what the real economy is doing. If there is a spending collapse, the automatic stabilisers will ultimately close the spending gaps because falling national income ensures that that the leakages equal the injections – so sectoral balances hold.
But the resulting deficits will be driven by a declining economy and rising unemployment. I would call these deficits bad
Fiscal sustainability is about running good deficits to achieve full employment if the circumstances require that.
You cannot define fiscal sustainability independently of the real economy and what the other sectors are doing.
Osborne the suggests that the Labour Opposition is misguided by claiming:
… it would stick to Alistair Darling’s plan to halve the deficit in four years, but day after day it opposes the spending cuts that requires.
I agree that is misguided. The plan to impose a sort of light fiscal austerity (relative to the Conservative plans) was a poor choice and reflects a deficient understanding of the opportunities that a sovereign government such as in Britain has. As I noted above, the British government should be running a much larger deficit at present to stimulate employment which would see the deficit fall over time.
But at no time should any government set some budget outcome. It will typically fail to achieve it but in the process will likely cause untold damage to the private sector.
Osborne then claimed that:
Labour’s leadership claims we are dealing with their deficit for ideological reasons, but funnily it doesn’t accuse the organisations who support our approach of a similar motive. The pace of the government’s plan is backed by, among others, the G20, OECD, IMF and European commission – and at home, the CBI, IFS and two of the three main political parties. That doesn’t look like an ideological line-up to me. Quite the reverse: it is close to a domestic and international consensus.
That really made me laugh. All of tehse institutions and organisations advance a neo-liberal ideology and rehearse the mainstream macroeconomics which extols the virtues of so-called “self-regulating” private markets and failed to see the crisis coming. The types of policies that the mainstream economics framework consider to be appropriate would have turned the recession into a depression.
All these organisations are part of the problem. They are part of the Washington/Brussels-Frankfurt consensus. The fact that they dominate the public debate (the “domestic and international consensus”) just shows how successful the ideologues have been in consolidating their hold on the intellectual debate.
It also shows how weak the progressive alternative is.
Then I read the article by British business secretary Vince Cable (March 3, 2011) – Vince Cable promises to take ‘vigorous, targeted action’ in the budget.
From bad to worse!
His article was a sulking, whining piece that attacked anyone who dare criticise the current British government’s policy stance.
He was quoted as saying he was feeling “exasperation” with commentators who:
… expect that the government can somehow guarantee an immediate, miraculous, return to rapid economic growth.
The reality is that governments cannot guarantee private spending is strong enough to ensure “rapid economic growth”. But what governments can do is create “public activity” with 100 per cent certainty. They can implement direct public sector job creation to ensure that anyone who wants to work but cannot find a job in the private sector has work.
That is 100 per cent certain. The government could eliminate all but frictional unemployment if it wanted to. Once the private spending decisions are made the resulting unemployment rate is a choice of government.
Once the private sector has made its spending based on its expectations of the future, the government has the capacity to ensure that total spending in the economy is sufficient to sustain full employment.
Non-government spending gaps over the course of the cycle can only be filled by the government.
The national government always has a choice:
- Maintain full employment by ensuring there is no spending gap – that is run budget deficits commensurate with non-government surpluses.
- Maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible.
That is a political choice. It is not based on any financial constraints. The government can always pursue the first option. There is at least enough work for everyone to be gainfully employed. So it is not a shortage of jobs but a shortage of funds to ensure workers are paid.
The national government can always “afford” to fund enough jobs to ensure everyone has a job.
So Vince Cable and his colleagues in government are culpable as was the previous Labour government for taking the second political option – the NAIRU option – that is, deliberately ensuring as a result of their net spending decisions that millions will be without work.
The self-congratulatory Western press is talking about Gaddafi committing crimes against humanity (and I don’t disagree) but a government that deliberately keeps people out of work (by refusing to ensure total spending is sufficient) fits my definition of a crime against humanity.
The rest of the Cable article is mindless conservatism.
Conclusion
Rushing now. So I will be back next week.
Saturday Quiz
The Saturday Quiz will be available sometime tomorrow as usual.
That is enough for today!
More depressing stuff about the UK.
However the most important item that has been taken over by the ideologues is Her Majesty’s opposition, or worse the social democrats who think setting up investment banks and joining the Euro will solve the UK’s problems.
We need another political party.
@Neil Wilson: I don’t think another political party is the best way to go – they’re just going to be marginalized by the existing mainstream consensus. At least that is the German experience (not that Die Linke has a clue about MMT, but I don’t see why an MMT party would fare any better that Die Linke did so far). Better to try to influence existing “progressive” parties from within; they should be relatively receptive to what MMT has to offer, and they’re already inside the political system.
In the UK at the minute inflation seems to be mainly from imported raw materials (oil, grain, metals etc). Perhaps spending directed at reducing waste of raw materials (eg support for electric trains, insulation etc) would actually be the best way to reduce inflation.
Question for Ramanan (or anyone else): Ramanan made a comment at Nick Rowe’s place in 2009: “The fundamental error in monetarism argument is that it is not stock flow consistent”.
Does anyone know where this idea is fleshed out in more detail?
I’m taken by what may be an interesting connection between MMT and monetarism: both would say that the private sector’s propensity to spend (consume/invest) in any given period is partially related to the beginning of period balance sheet, albeit that MMT focuses on NFA whereas monetarism focuses on money holdings.
Bill
You mentioned the TINA excuse. The reason it is accepted by almost everyone and they believe it, is that their only experience of economics is that of the household. There is little of any substance published that they might come across in their daily lives. Add in the appalling standard of economics education and there is little to gainsay the TINA excuse.
I have tried talking about MMT ideas. Perhaps it is me, but the moment a discussion starts, their eyes glaze over. Any thought that the country’s economics might be different from that of the household is instantly rejected! Why? Because Margaret Thatcher made the comparison many years ago and if you are of the right age, it is remembered. Most youngsters just dismiss it; its like talking to people back at the start of the 20th Century about time dilation in physics! Its out of their experince so its not real or true.
Simple articles in clear english are needed to explain the concepts to everyone. Few do this in concerted way. You do, and thank you. But it needs to be covered in the tabloids, on television and in school; properly and eventually in depth. The neo-liberal lies might then be exposed.
“they should be relatively receptive to what MMT has to offer, and they’re already inside the political system.”
Unfortunately not.
The top of the so called ‘progressive’ parties are suffering from corporate capture the same as the more conservative wing. Certainly in the UK nearly all the top politicians of whatever colour followed a near identical line into politics – most via a single politics and economics education at Oxford, and then funded on in their career by the same corporate lobbyists.
It’s quite clever really – capture all sides of the mainstream political debate and allow them to exercise their ‘differences’ in a strictly limited arena that doesn’t affect the cash flow.
Your point about new parties is well made of course. It’s a near impossible edifice to climb.
Neil – why should the wealthy / corporate interests be intrinsically opposed to MMT?
I would have thought all sides should want GDP to rise first of all; the distributive battle over redistribution should be secondary.
I would have expected the Labour Party to be ripe for conversion to MMT in a bid for some relevance at the present time.
Anders on 5 Mar at 0:46
I’ll leave that to R. to detail, but the big difference is that MMT avoids the use of “money” and is specific about what it means, e.g., “net financial assets.”
Secondly, monetarism is theoretical, i.e., assumption based. Inconsistencies arise out of flawed assumptions about “money.” On the other hand, MMT is accounting-based, which maintains stock-flow consistency.
However, the fundamental difference between monetarists and critics is that monetarists hold that it is the money supply that directly determines outcomes while critics hold that it is demand that determines outcomes, not quantity. If this was not clear previously, it has been settled empirically in a definitive manner by the Fed’s complete flop: Increasing the base money is not connected to demand for funds in the form of increased loans, even at ZIRP; there is no direct transmission mechanism as monetarists suppose through a money multiplier effect. In monetarist terms, the Fed’s policy is as stimulative as possible, and but banks are not lending, owing to lack of demand for loans, and CPI reamins stuck in the doldrums even with an inflation target of 2%.
I don’t see that it is stock-flow consistency that is the issue. It just an erroneous assumption about the so-called money multiplier being an ex ante transmission mechanism when what it expresses is only an ex post accounting result. We’ve had the empirical test and monetarism flunked. Ramanan was probably answering something more specific about monetarism in bringing up SFC.
Tom, do you think that if instead of having the Fed swap bonds for reserves with primary dealers, the Tsy had given them new reserves created out of thin air, demand would have picked up?
Hi, Bill-
“But at no time should any government set some budget outcome.”
I find this curious. Suppose inflation became a problem and the economy was overheating. Wouldn’t a prudent government seek a certain surplus outcome to exert a countervailing effect, perhaps raising taxes or cutting spending? At this point, the unemployment rate, which is the principal metric in depressed times, become unavailing, because low is low anyhow you slice it. Inflation then becomes the controlling metric, and how better to address that than through some conscious manipulation of the sectoral balances? At some point, attention to the macroeconomic situation might require certain budget aims to be put in place. Even now, governments might well aim at particular deficits in order to address the prime metric of unemployment.
I would have thought all sides should want GDP to rise first of all; the distributive battle over redistribution should be secondary.
Scarcity thinking. These people think that government is crowding out the private sector, in the sense that funds and real resources allocated to government are unavailable to the private sector. Therefore, the push for “small government,” i.e., limiting the government’s size of the pie.
By definition, “smaller government” means lower GDP. So there is more to it.
The cry at the top is that taxation is not only redistributive but “punishes success” and is a disincentive that weakens capitalism. Moreover, government bidding up the cost of real resources in competing with the private sector for scarce resources disadvantages the private sector. Private sector business sees itself in competition with government and wants to limit its competitor.
Moreover, business is wary of government in a capitalistic environment because government’s cost of capital is a lot less than the private sector’s cost. There is a lot of talk about government being inefficient but private sector business knows very well that government can drive them out of business easily if it choses to compete with them. So they want to hobble government.
They just don’t get that 1) as currency issuer government isn’t crowding anyone out, and 2) as user of resources, government can do significant things that the private sector is either unable or unwilling to do, which not only advances public purpose but also enhances private sector business, like the highway system.
They don’t seem to appreciate the tradeoffs or if they do, they are just looking for handouts that favor special interests. There is a lot of application of influence involved politically in a system that feeds on money for expensive campaigns. That’s why now there is only one party with several different names.
Tom,
According to the Fed’s own H.8 report, total loans and leases in bank credit has collapsed from 6.778T in November when QE2 started to 6.689 in the latest release, a drop of 89B in just these few months. They are blind.
Link_http://www.federalreserve.gov/releases/h8/current/default.htm
Resp,
MamMoTh: Tom, do you think that if instead of having the Fed swap bonds for reserves with primary dealers, the Tsy had given them new reserves created out of thin air, demand would have picked up?
When government “spends” into nongovernment, nongovernment net financial assets increase. When nongovernment NFA increase, then demand can be expected to respond.
However, crediting bank accounts without a corresponding exchange is “spending,” i.e., fiscal, not monetary, and the Fed doesn’t have this power. Treasury cannot do this on its own either. Government spending requires appropriation by the legislature with the approval of the president in the US, carried out through the designated agencies. For example, when Sec. Paulson wanted Chairman Bernanke to handle TARP through the FED, Bernanke refused, saying it was fiscal and had to go through Congress.
The Fed is permitted to increase liquidity almost without limit under its emergency powers. However, it is not permitted to increase or decrease the quantity of nongovernment NFA, which is a fiscal operation, hence, lies outside the mandate of the cb. Bernanke saw TARP as affecting solvency rather than liquidity, so he declined.
There is a proposal on the table to give cb’s that power, but I think it is a non-starter in the US. I very much doubt that Congres would ever relinquish its control over appropriations by delegating that power to the Fed under any conditions.
See Plan B: Deflation, debt, and economic stimulus – Richard Wood
Anders,
Don’t know what mood I was in when I wrote that … but Monetarists seem excessively obsessed with the money stock. When they grew powerful (during the 70s), they forced central banks around the world to release data on the money stock, which came to be also known as the money “supply”.
During this time – as Tom’s comment hints – there was a debate on how to define money and all that. Hence we hear about M1s and M2s and M3s and M4s which probably didn’t exist before the 70s.
Keynesian theories of different kinds, on the hand stress on the importance of income. In the simplest mental model, income is consumed and whatever is left is allocated into money (cash for transactional purposes and deposits) and other financial securities.
This Monetarist obsession with the money stock and refusing to talk about flows such as income, wages etc is what I might have thought when writing the comment.
Anders,
“I would have expected the Labour Party to be ripe for conversion to MMT in a bid for some relevance at the present time.”
You’d think so, but from my exploratories it looks like the Will Hutton’s of the world are still pushing their Euro dream along with some kind of supply side investment nonsense. You can tell none of these people have ever run a business (other than into the ground). They are far too much big group hug socialists to see the benefit of an inward focus on UK domestic demand.
There are one or two around who seem mildly receptive, and there is a possibility of aligning with the Land Value Tax lot, or the Full Reserve people (as long as they are not hidden Austrians).
Perhaps it just needs a bit of drilling elsewhere.
“I would have thought all sides should want GDP to rise first of all; the distributive battle over redistribution should be secondary”.
Do they really.. To me, it often seems that relative advantage matters more than absolute advantage, at least to many people.
So, think about the very rich guy in a very rich country, where full employment is a fact, the workers are well paid, and health care and infrastructure are of top quality. So the top guy earns 1000 times more as ‘average joe’, he has a 15 x more expensive car than ‘AJ’, and 10 of them instead of one, but he can’t drive faster, his luxury estates cost a lot, but ‘AJ’ can rent a hotel room in many of them same places as well, and both have about the same life expectancy, (~85) asf. So, Rich guy nowhere has 1000 x more utility from his income..
Now, imagine the same in a country where civilization has broken down… ‘Rich guy’ can still have a nice house, he might be one of the few people that still can afford some kind of car, while everyone else rides on horseback or has to walk. Population has much declined (most of the former ‘middle class’ has died off), life expectancy for ‘Rich guy’ is still around 70, while ‘AJ’ barely manages to get past 40. There are large numbers of personal guards, servants (and slaves) available… So the RELATIVE utility of the top position for ‘RG’ is vastly superior in the totally unequal society where most people live in misery.
And therefore, the self styled ‘elite’ has (at least psychologically) a vested interest in misery and poverty of the masses…
Tom Hickey said: “I’ll leave that to R. to detail, but the big difference is that MMT avoids the use of “money” and is specific about what it means, e.g., “net financial assets.””
Can someone define “net financial assets” and/or the types?
Tom, thanks but i was asking about what do you think the consequences would be if the tsy or the fed or whoever had given new reserves created out of thin air to the primary dealers instead of swapping their bonds for reserves as in QE. I know it is not possible under current institutional arrangements, as Warren loves to say. Do you really think that would create additional aggregate demand?
Paul Krugman wrote a very good article today. How to Kill a Recovery – http://www.nytimes.com/2011/03/04/opinion/04krugman.html
Fed Up,
Net financial assets are non physical assets such as securities, certificates , and bank balances – to name a few.
Cheers
I have never seen a Budget that couldn’t be balanced. Its the accruals (outcomes) that is the problem.
My MMT starting point is Zero each year. That is there is NO surplus or deficit to carry forward.
The Gov then is free to maintain full employment by stimulating or De-stimulating the economy as needed to maintain full employment.
With no deficit to confuse Policy Makers energy and creativity can be directed at the real and difficult problem of balancing the sectors to produce full employment. Zero carry forward is something to write a book about and be famous. Go for it wonks. Good luck. Cheers Punchy
MaMoTh, creating reserves out thin air and giving them to nongovernment “for free” increases nongovernment net financial assets and could be expected to increase aggregate demand through consumption if target that way. If reserves were just handed out to the primary dealers, would they spend it? Probably not. They would likely save it by leveraging it in the latest hot thing. Look at who the PD’s are.
This is a bit like Bernanke saying he would drop money from helicopters to prevent a depression, suggesting that the Fed would provide “free money.” The Fed has no authority to do that. If it did, and it dropped sacks of cash from helicopters onto mall parking lots on weekends, would NAD increase? I would expect so. But the Fed cannot do that legally, and the Chairman knows it.
Now if there really were a sudden depression from an external shock and the Chairman decided to do it to “save the country,” would he get away with it? Probably. Bernanke did som marginal things during the crisis, and although some people screamed about it, he was never even called on the carpet.
BTW. George W. Bush got a bill through Congress directing Treasury to credit bank accounts for $250 gratis. Did NAD increase? Yes. But that was fiscal and handled through the established channel.
Fed Up, when government spends into the economy, no nongovernment liability is created, and the net assets added by a deficit are nongovernment net financial assets. The other way money is created is endogenous credit extension (loans create deposits), which nets to zero. Nongovernment credit extension does not materially affect net financial assets, even though it affects the stock of money.
The different types of money are based on the ways in which money is created and stored, i.e., reserves and paper currency are functionally the same, but they are stored differently. Reserves are digital and paper money is physical.
There is no clear definition of “money” that is universally accepted, and the term is used ambiguously, so MMT’ers avoid this ambiguity by being specific. In the US, the reported categories are base money, M1, and M2. M3 is no longer reported.
I don’t understand why there is so much importance attached to criticizing deterioration of the budget/fiscal balance. As if deterioration has no meaning.
The openness of economies and increase in globalization has made imbalances grow and there is a definite innuendo here that its “not a problem”.
If the world was united into one nation, many of our problems could have been solved because of an institution called State. The The whole is less than the sum of its parts!
The view that “money is credit” is not exactly the view here. Instead one hears of “pieces of paper” and “not debt” as if one cannot redeem them.
Okay enuf of lecturing. Lets jump into the law straight! (Its said here than something changed here after 1971 – I don’t think so – the international and credit nature of money then and now are almost the same and the lack of precision has led to many problems and interpretations).
Articles of Agreement of the International Monetary Fund (site_http://www-bcc.imf.org/external/pubs/ft/aa/index.htm) says:
The strategy to provide infusions to compensate for the hemorrhage of demand due to current balance of payments deficits doesn’t work because the problem of trade weakness is not solved and there is more deterioration.
The Chinese won’t ask the US Treasury and/or the Federal Reserve to redeem the dollars acquired because its not in the self interest of themselves. However the deflationary environment created leads to other members of the IMF becoming more and more competitive and they can certainly ask for redemptions through the IMF at some point in the future.
Another example … A nation can sell zillions of goods to Pakistan get paid in Pakistani Rupee and demand to be paid in its own currency through official channels via the IMF. The only way for Pakistan to prevent this from happening is by becoming a net exporter. Doesn’t matter too much if the rupee is fixed or flexible.
How are government issued financial assets liability of the government? What does it mean? Liability to what? Is it explicit or implied liability? Or just an another empty phrase?
I would say they are assets to some, liability to none.
Ramanan, I think that the issue is being stated backwards. The actual problems are real rather than financial.
The issue is real terms of trade. In the final analysisI, imbalances are real imbalances. Countries with persistent trade deficits have an advantage in real terms. In the past, the US was consuming 50% of the world’s energy resources with only 6% of the world’s population. The oil producers were happy to accumulate savings in USD, state of the art military equipment, and US assets, the bounty of which they minimally distributed.
Deficit countries like the US are over-consuming the world’s resources, including labor, relative to other countries and enjoying a disproportional standard of living. What is underpriced is over-consumed. Over-consumption means that the USD is too high relative to other currencies. If the invisible hand of the market exists, which Joe Stiglitz thinks not, it seems to be crippled.
The imbalance is a master-vassal relationship that vassals eventually perceive as an unfair exchange. Historically, this can only be continued by exploitation and suppression, and it is no accident that the US has the world largest and most powerful military with nearly a thousand bases around the world. On the other hand, if the playing field is not level, then such an outcome would be expected.
Situations like this have led to real conflict in the past, ending in wars and revolutions. For example, some geopolitical analysts are viewing the current rebellions in the ME and the Maghreb as revolts against neoliberalism > neo-imperialism > neocolonialism. The real imbalances we are now witnessing are in the areas of food, water, and energy. These imbalances are resulting in real problems. Real problems call for real solutions one way or another. When real problems are not addressed, the real solutions tend to be violent ones.
The US is torn right now between supporting democracy and protecting the flow of oil as the life-blood of the modern economy. Guess which is most likely to prevail.
PZ, it’s an accounting thing. “Liability” means the entry occurs on right hand side of the balance sheet. Assets are recorded on the left hand side. Expenditure is recorded on the right hand side of the income statement, and income on the left.
These are accounting conventions (definitions), and everything that gets recorded has to conform to this format. Just because the format is the same doesn’t imply that the meaning is too, Just as one word is used to mean different things, so that ambiguity results if the meanings are not kept straight, so too if government finance is confused with nongovernment, general confusion results. This is the basis of the false government-finance-is-the-same-as-household-finance analogy. As the currency issuer, government cannot be “in debt” in the conventional sense, nor can it have conventional liabilities in the sense the currency users do.
“Debt” and “liability” as applied to government are technical terms divorced from the ordinary meaning. So don’t take it seriously. If you are not an accountant, the ordinary meanings associated with accounting terms are ambiguous and confusing, too.
Bean counters speak a different language, which is quite technical, and you have to study it like you would any foreign language to know what it means in specific cases and contexts. That’s why there are CPAs. Reserve accounting – what they do at the central bank – is its own arcane practice with which few are familiar, as is what happens behind the veil at Treasury.
All the public sees is the published reports. The manuals detailing this procedure may not even be publicly available if a government chooses not to release them. Even Congress had to act specifically to gain access to the Fed’s books to see what happened during the rescue operations. The Fed refused an informal request.
The picture we paint of government accounting is simplified to magnify the basics. In practice a lot of accounts are involved to achieve the result. See Stephanie Bell Kelton’s post illuminating this. For example, in the US there are political restraints that have to be met. Without such restraints, the record of financial operations under the present system might be quite different, e.g., Treasury could run an overdraft at the Fed, which it is currently prevented from doing.
Moreover, “debt” has a different meaning in international accounting. A country “owes” other countries all ownership claims they have against it. It’s just a way of speaking that is unrelated to ordinary discourse.
“Ramanan, I think that the issue is being stated backwards. The actual problems are real rather than financial.”
YES and NO!
A trade imbalance is about inherent weakness of some nations compared to others. It is CRITICAL that this point be understood. Instead the innuendo here is that foreigners are a bunch of fools. Thats the real part.
If you read Anthony Thirlwall, you will hear about nations having resources but not being able to grow because of balance of payments constraints.
Scarcity is a pseudo-intellectual construct. Doesn’t mean that there are infinite resources and one can abuse the environment no end. Demand creates its own supply is not an exaggeration. There is no finite amount of industrial capacity. As demand increases capacity also increases. Instead, supply-side dynamics enters the picture when demand may increase faster than the supply etc.
I am afraid there is a a lot of confused causalities floating around here!
Which country is enjoying. The US is bleeding with troubles with the external sector and not being able to use fiscal policy to the maximum. A statement such as the US enjoying with real terms of trade is a joke – describes a hypothetical world.
Anyway my comment was to prove that statements such as foreigners not being able to do anything with their export payments is an incorrect claim.
I can export to your country and enforce you to become indebted in my currency through official channels. In reality is doesn’t happen that way but the “accommodating item” is the deflation of demand.
I am afraid no nation has been able to grow faster than what the exports (and inverse of income elasticity of demand) have allowed it to grow. Exception – the United States but with unemployment of 9.5% changing just 0.2% from the previous year.
The whole story has to be seen dynamically instead of providing supply-sider arguments. Things have improved over the past 40 years (supply side) and we see a demand-drag. If one starts with “not debt” arguments, one can have a completely different view of how economies work.
Tom, Ramanan, Neil – thanks for the engagement.
Re: monetarism: I agree with Ramanan’s characterisation of monetarism vs Keynesian in traditional terms, but MMT (despite being in the Keynesian tradition) is surely also quite focused on private sector balance sheets (of which the broad money supply is a key constituent). Scott F’s piece “Sector Financial Balances Model of Aggregate Demand” (whose key final chart which I am frustrated not to have seen worked up in more detail since July 09) shows this – MMT’s emphasis on private sector propensity to run a surplus can only really be explained in terms of private sector balance sheets.
I agree that narrow money, and the money multiplier as a transmission mechanism, has been shown to be irrelevant – and so the narrow money form of monetarism which seems to have been dominant in the early 1980s has been roundly defeated. However, Tim Congdon and his old gang at Lombard St Research also reject narrow money yet remain monetarist, focusing on broad money instead (M4 in the UK). These guys agree with MMTers that exploding reserve balances have had no impact on the real economy. I’m trying to see if there is any validity to their obsession with monitoring broad money, so if there is a gaping stock-flow inconsistency then I’m keen to understand it.
Re: the wealthy’s position towards MMT:
Tom you say “They just don’t get that…government isn’t crowding anyone out, and…government can do significant things…which…enhances private sector business…” Agree with this, but I can’t see any reason (barring cognitive dissonance) that the rich shouldn’t get this if it’s explained to them. Isn’t this analogous to the Henry Ford insight – that paying workers more would actually make him richer in the long run? Also, smaller government is consistent with MMT – hence Warren’s preference for tax cuts vs Bill’s preference for spending increases – so a preference for small govt shouldn’t necessarily make one anti-MMT. To be specific – I feel sure that there’s some combination of tax cuts and spending freezes which would be palatable to the rich.
Good Habit: interesting point. So first off, yes relative advantage (eg vs peer group) does seem to be important to individuals’ happiness. And I’d agree that most wealthy people are trying to push for institutional arrangements (private education, limited inheritance tax) that help to grow the ol’ Gini index over time. However, there is a trade-off: if you offer a rich person to increase their real net worth by 20% with everyone else also getting 20% richer, I do think they would choose this over an alternative where they got 5% richer and everyone else stayed flat.
Arguing against what I’ve just said, perhaps the rich are terrified of unemployment falling too far – and, as a concomitant, median real wages rising – because it might make it harder for them to remain at the top of the pyramid (ie increase the risk of downward social mobility for them). If this is correct, then there really is no hope of MMT ever catching on with the rich – it is destined to be accepted only by the minority of the wealthy (presumably including Warren) who are either sufficiently confident in their own genes not to fear greater social mobility, or else are relaxed about their offspring ending up in a lower spot in the socioeconomic pecking order.
Neil: “from my exploratories” – sounds as if you have actually tried to make some progress, so hats off to you. But a depressing result: Will Hutton sounds the sort of reasonable person I would have hoped would engage.
Monetarism has many different versions and Keynsianism can be thought of in several different versions as well.
Therefore trying to compare one with the other is a little bit too vague.
What versions of Monetarism and Keynesianism are we comparing ?
Afterall, the bulk of Keynisanism is derived from the worl of Hicks and Hansen which is an entirely different beast to what Keynes proposed.
And then what Keynes proposed seemed to be all but forgotten by himself within a year or two of the General Theory being published.
Hence, pointless even bothering to make comparisons. Monetarism in all it’s versions (including RE) is a failure and so to is the bastardised version of Keynes evolving from Hicks and Hansen.
The Post Keynesians whom supposedly derived their programs from the General theory have not faired so well either in that they are far too closely linked to the past (gold standards….)rather than the now.
MMT to me is not Monetarism, and it is not Keynesianism.
For me MMT is the only plausible explanation of how a modern money economy works.
And at the end of the day that’s all that matters to me.
Being a fan of Post Keynesian Economics, makes me write something on this. What is Post Keynesianism is debatable but I believe this is a gross misrepresentation of PKE.
Firstly Post-Keyenesians were the first to point out the shortcomings of the General Theory – in particular the exogenous nature of money assumed in the text. Keynes himself corrected it after writing it (and before it as well!). PKEists have written at length about how the banking system works since the past 30-40 years, the endogenous nature of money and the tremendous power of fiscal policy including the accounting approach.
And Gold Standard … or institutional setups before 1971 … if you assign an exogenous view of money in those setups (with a sidenote of sorts “it was slightly more complicated”), then it opens up a new line of debate. PKEists have also written on how institutional setups worked before 1971 and the credit nature of international money in that period.
“sounds as if you have actually tried to make some progress, so hats off to you. But a depressing result: Will Hutton sounds the sort of reasonable person I would have hoped would engage.”
Will’s a paid up member of the Bug Hug club and doesn’t appear to have a lot of time for Floating Exchange rates. His reasonableness is a clever PR front for the ‘social democratic’ agenda, or so called Third Way – which as far as I can tell is boils down to “Throw a few more scraps to the plebs to keep them quiet”.
The exploratories I’ve made have just been pushing at a few doors to see if any open. Nothing substantial.
Anders: I’m trying to see if there is any validity to their obsession with monitoring broad money, so if there is a gaping stock-flow inconsistency then I’m keen to understand it.
Monetary economics has to consider all forms of money/debt in aggregate in relation to stock/flow. See the complex models in Godley & Lavoie, Monetary Economics for modeling an economy. Monetary aggregates aren’t just numbers separate from the exchange of real stuff in the real economy. They relate to each other integrally and affect each other reciprocally. Looking at aggregates alone is misleading; what is important is understanding the connections. This involves some disaggregation in order to see what is actually happening in terms of stock-flow and sectoral balances.
The problem with monetarism is that it treats money as essentially separate from the real economy, connected only through the interest rate, rather than not only representative of the real economy and also integral to it as a vital part of it. Post Keynesians have known for some time that ignoring the vital role of money, banking and finance as an economic factor is myopic, and ignoring this factor is what led most economists into missing the onset of the GFC. Most even believed that such a thing was impossible if monetarist principles that supposedly led to the Great Moderation were followed, because their models told them so. They were so focused on interest rates and inflation instead of sectoral balances that they didn’t see the elephant in the room. “Inflation low and controlled, everything A-OK.” Famous last words, when consumer debt had become unsustainable, which they missed entirely.
What happened through monetarist policy was essentially wagging the dog’s tail. They got causation backwards if they saw any, and the completely missed the role of changing levels of amount and quality of private debt, ignoring the build up of Ponzi finance, or else brushing it off as irrelevant – remember Greenspan’s “froth.” They didn’t even get it when Bear went belly up, and Lehman actually caught them by surprise. What they saw as risk spreading through financial innovation turned out to be risk concentration and under-pricing. The imprudent leveraging that resulted blew up the system, taking down the largest institutions, when days before the people in charge were saying that everything was fine.
Most of the mainstream economists still don’t get it and are busy explaining the GFC away as caused by some exogenous shock like – are you ready for it – too much government heavy-handedness resulting in artificial distortion of natural working of markets, or a savings glut swooping into the US from Asia. Now the same people are recommending deficit reduction to inspire business confidence, which they think will encourage increased investment, at a time when demand is lagging because consumers are deleveraging and building up savings, and the country is also running a CAD. More myopia, which if enacted will end in more tears.
The moral of the story is that you have to be looking in the right direction and also be able to recognize what is before your eyes.
Anders” Tom you say “They just don’t get that…government isn’t crowding anyone out, and…government can do significant things…which…enhances private sector business…” Agree with this, but I can’t see any reason (barring cognitive dissonance) that the rich shouldn’t get this if it’s explained to them. Isn’t this analogous to the Henry Ford insight – that paying workers more would actually make him richer in the long run? Also, smaller government is consistent with MMT – hence Warren’s preference for tax cuts vs Bill’s preference for spending increases – so a preference for small govt shouldn’t necessarily make one anti-MMT. To be specific – I feel sure that there’s some combination of tax cuts and spending freezes which would be palatable to the rich.
Agreed, if the debate is rational and empirical rather than ideological. That is asking a lot, and for some, too much. Cracking through rigid ideology is a tough sell.
Henry Ford is the classic example, and we should use him. “It’s the demand, stupid.” However, now the rich are looking at the international marketplace and they see the growth coming from emerging nations rather than the developed ones. Most of these people are not patriots when it comes to money.
Tom – much of the criticism you level at Monetarists certainly seems valid insofar as they fell into the same traps as other mainstream / neo-classical schools. But to be fair to them, some of those guys do (ostensibly) focus on the Sector Financial Balances approach which suggests they’re at least on the right lines.
I do struggle to see how broad money growth can possibly cause nominal GDP growth, or be a useful leading indicator of any kind, but I’m interested in delving into it all the same.
Anders, basically they are trying to work through inflationary expectations when the problem is lagging demand due to demand leakage. Offsetting that leakage, chiefly deleveraging and building up drawn down savings, is fiscal. Monetary policy is powerless to do this, except indirectly through the wealth effect by the Bernanke put, and if it were not, Bernanke & Co would have done it already. They can’t even create credible inflationary expectations, except among the goldbugs. Yes, commodity/energy prices are rising and if this persists, costs will be passed on, but that is not causally attributable to the Fed. Even Bernanke has been shouting softly that it is fiscal. Maybe the wealth effect is having some influence, but it would seem to be cancelled by the double-dip in housing that is developing. A much more credible explanation of the green shoots that are sprouting is the large deficits the government has been running, which offset the increased desire to save.
Alan Dunn posted:
“Afterall, the bulk of Keynisanism is derived from the worl of Hicks and Hansen which is an entirely different beast to what Keynes proposed.
And then what Keynes proposed seemed to be all but forgotten by himself within a year or two of the General Theory being published.”
Thanks for making that point…I was about to make it when I refreshed my viewer and saw your post. In fact, I have (coincentally) been spending the last few days re-reading an old copy of Axel Leijonhufvud’s “On Keynesian Economics and the Economics of Keynes” which, I believe, is the definitive discussion on these points. Any help on pronouncing his last name would be appreciated!
Speaking to an earlier post (perhaps from MaMoTH?) about the intended or potential results of Fed’s QE, Keynes was particularly concerned that traditonal central bank monetary operations focused on the short rate would not quickly work through to impact the long rate (a “sticky rate” he said in his Treatise Vol II). The elasticity of investment spending, he postulated, was driven by falling long term interest rates relative to the expected marginal efficiency of capital. So, although Bernanke has, to my knowledge, never explained it this way, perhaps in the back of his mind he had remembered something in all his education about Keynes’ concern of moving the long end of the yield curve down more quickly to help spur investment. In my opinion, it is a shame he didn’t stick with it …instead he backed off (maybe fear of Ron Paul assuming the Fed oversight committee chair) and didn’t really drive down benchmark 10yr Treasuries…in fact he apparently let them rise about 50 bps over the few months following the QE announcement.
Tom Hickey: always enjoy your posts (and hat tip for poiinting out Stephanie Bell’s website posting with her new last name), but a minor quibble from an “old timer” bean-counter who worked many decades ago with Ernst and Ernst … that name alone may date me…compiling by hand “trial balances” with two-coloured red/blue mechanical pencils in multi column sheets. Here’s the correction: Expenditures in the income statement, which are debits, are on the “left side” (same side as assets, which are also debits) and income, which are credits, are on the “right side” (same as liabiliities, which are also credits). But what does that matter anymore given today’s computer accounting programmes, QuickBooks, and Excel?
Nice discussion from all, a pleasure to read compared to some of the sites where fanatics and egoists scream at each other. Thank you all.
@ William Allen
I am left-handed and always get things involving hands mixed up. Knowing this, I checked what I had written and still got it wrong. Oh well. 🙂
I guess I can take comfort in the fact that President Obama is left-handed, too.
Tom: The US is torn right now between supporting democracy and protecting the flow of oil as the life-blood of the modern economy. Sounds reasonable, but no. The US for the last 50+ years has usually acted to disrupt the flow of oil, often to suppress democracy or from insanity. Doing nothing would have yielded a smoother flow of oil. The overriding purpose of the empire of bases is military Keynesianism and wealth channeling/destruction in the US, the primary enemy being the population of the USA, not the rest of the world. It is not our brother’s enemy, but our own. (Simone Weil) The enormous advantages of the US are channeled to disgusting ends, and its people impoverished in order to tighten control.
Ramanan: Its said here than something changed here after 1971 – I don’t think so – the international and credit nature of money then and now are almost the same and the lack of precision has led to many problems and interpretations.I agree that people overdo 1971. Money always was fiat money, credit, since 4000 BC. Commodity money never existed. 1971 just removed a self-imposed constraint. Contra Tom, Government & household finance can be analogized – that accounting is integral to both is more important than the difference. Debt or liability are not technical or essentially different applied to the government than anything else. The sole (& humongous) difference is that governments have the power to impose liabilities, debts on others. Anyone can print money, IOUs. Only governments can print U-O-Me’s.
The US is bleeding with troubles with the external sector and not being able to use fiscal policy to the maximum.
The US is not able to use its fiscal policy to the max because the madmen in authority & most people are now guided by economic theories which make as much sense as 2+2 = -3 No Trump, and so-coincidentally favor the rich getting richer, the poor becoming slaves. Nothing to do with external balances.
I can export to your country and enforce you to become indebted in my currency through official channels. In reality is doesn’t happen that way but the “accommodating item” is the deflation of demand.
The key words in the section quoted seems to be “current” & “recently” – it’s about short-term liquidity, not long-term solvency in another currency monopolist’s currency, which is asking something impossible. It doesn’t happen that way because it can’t. Is the UK going to invade Iceland? Did the US invade Argentina? And even if they did, could the Icelanders and Argentinians create pounds and dollars?
“Tom Hickey says:
PZ, it’s an accounting thing. “Liability” means the entry occurs on right hand side of the balance sheet. Assets are recorded on the left hand side. Expenditure is recorded on the right hand side of the income statement, and income on the left.”
But this sort of accounting assumes that assets and liabilities are in the possession of the government. This is not the case because their ownership is in the hands of private individuals and corporations.
“Debt and liability as applied to government are technical terms divorced from the ordinary meaning.”
That’s the problem. Why use these misnomers that do nothing but confuse people? Debt is publicly issued asset of the private sector and should be called so, having a budged deficit called public asset creation and word liability has no meaning at all.
PZ, I agree it is confusing and should be changed to reflect the operational reality. “Liability” applied to government is just an accounting term to conform to convention, since government agencies do keep books to keep track of operations. But its ordinary meaning serves to confuse the issue.
As Warren Mosler observes, the currency that government issues is actually a tax credit without backing in the case of fiat currencies, which is issued by government to offset the tax liabilities that government imposes on nongovernment. Government uses those tax credits to transfer goods and service to its use for public purpose, and nongovernment accepts these credits in exchange for real resources since it needs them to satisfy its tax obligation. That is essentially it. Of course, this bears no relation to anything that goes on in the private sector wrt assets and liabilities, so using the same terms creates ambiguity.
Treasury securities are also credits that allow nongovernment to save its tax credits at interest. Government uses this to drain excess resrves from the interbank market so that the cb can hit its target rate. These credits, zero maturity and non-zero maturity, can be exchanged at the holders convenience, depending on portfolio preference. The non-zero maturity credits resemble private debt instruments in that they bear interest. But they do not involve borrowing in anything like the same sense as the term is used in nongovernment; e.g., government as the currency issuer does not need revenue to pay either principal or interest. So calling them “debt” is also misleading, as we see in the current pseudo-controversy over “government debt” being unsustainable.
If this were understood, all the nonsense would end and maybe we could wake up from this bad dream.
PZ:How are government issued financial assets liability of the government?
The government “is liable to accept its money in payment of taxes.” [Quoting Wray Understanding Modern Money p.95, note 6 – a response to this exact question]
Tom: “Debt and liability as applied to government are technical terms divorced from the ordinary meaning.”
Again, I think you are pedagogically and conceptually quite wrong here. Government debt is something owed to the holder by the government, just as household debt is something owed to a bank by a household. These words are used in their ordinary meaning.
Asset/liability, credit/debt should definitely be used of treasury securities. The thing is they should be used of dollar bills too. The problem, the confusion is that these words are not used enough, not overused or used confusingly, ambiguously or inappropriately.
Dollars are treasury securities, government debt. Anti-dollars = letters from the IRS are your debt to the government. See Mitchell-Innes’s articles and the book Wray edited on him, and the Gang of 8 website/list on “Creditary economics”. The heart of the whole matter is that all forms of money are credit/debt. Money is a social relationship, not a thing, not even a thing made by state fiat.
Ramanan is right that there is not enough discussion of money as credit/debt here. But when he says things like money is credit, not fiat, he is saying a contradiction. And the creditary nature of money does not support any position against MMT, or an argument against trade deficits.
****
Can’t resist mentioning what I recalled while quoting Simone Weil above – that I happened to have known well one of Simone Weil’s brother’s many enemies. 🙂
“Government debt is something owed to the holder by the government, just as household debt is something owed to a bank by a household. These words are used in their ordinary meaning.”
The problem is with the ordinary meaning – in particular what it means to settle a debt.
Household debt has to be settled in somebody else’s paper – which involves swapping real goods for that paper to settle the debt.
Government debt is settled in its own paper – which involves no such real sacrifice.
The nearest household analogy I can find is where you have two check accounts and write checks between the two. During the clearing period there is a bank debt but it is settled with your own paper and in the meantime you have created money.
And if your bank is daft enough to pay interest on uncleared cheques you make a profit 😉
Some Guy, I don’t dispute what you say about convention, but what I am saying is that it is confusing to the ordinary person and also confuses “experts,” or allows them to confuse others, because it reinforces the false government-finance-is-like-household-and-firm-finance analogy. Government finance is the opposite of nongovernment finance because government is the currency issuer and households and firms are currency users. Households and firms must meet their financial obligations from revenue, drawing down savings, or selling assets. Nothing like that applies to government, which simply issues currency “by fiat.”
The reason that currency has value is because it is needed to meet tax obligations. In this sense, currency is a tax credit, pure and simple. All government “owes” nongovernment for its currency is a tax credit for obligations that government has imposed on nongovernment. Anyone who doesn’t pay up in a forthright manner goes to the pokey or gets their stuff confiscated, and government has the means to enforce penalties imposed by it. That’s it in a nutshell. If you want to call that “government debt,” so be it. But let’s be clear what “debt” means here.
It is much simpler to understand currency as a tax credit than a debt or even a liability of government. Both “debt” and “liabilities” have negative connotations in ordinary language, which do not apply to government since its financial situation is completely different, and meaning is determined by context.
The fact is that words with negative connotations like “debt” and “liability” are associated psychologically with fear. This is the basis of the fear-mongering of debt and deficit hawks. Research shows that when people are afraid, they make do not think clearly and are prone to making poor decisions. Knowing this, the unscrupulous can lure them into decisions and actions that they would otherwise recognize as unreasonable and detrimental to them. This is the foundation of a lot of fear-based politics that is driving austerian policy based on debt and deficit hawkery, which ignorant and fearful people are predictably falling for. It is a primary tool of the elite to control the population and get workers to hand over their future.
Yes to all the points on accepting your own paper etc, but Neil & Tom, I am defending standard MMT (& post-Keynesian, circuitiste, institutionalist etc) & accounting terminology. To not speak of “government debt” sows serious confusion. “Debt” should be used more, not less. No one disputes the power of the government to print bonds, or thinks it will cause immediate catastrophe, but people think printing money is THE END OF THE WORLD. Understanding money as debt helps people understand this is as crazy as thinking printing a hundred dollar bill is normal and sound, while printing 100 ones is a catastrophe. It is not just a convention, but a meaningful, useful, correct and extremely, fundamentally important convention.
The point I am making is clearly seen when considering the philosophical question of “What is Money?” and considering the historical origin of money. There is a respectable literature on this – highlights are Mitchell-Innes and the volume on him. The volume “What is Money?” edited by John Smithin. Books by Geoffrey Gardiner & Geoffrey Ingham. Other predecessors going back to Keynes, Commons, Simmel, Knapp, MacLeod etc. I’ll make up a bibliography / link list, for anyone interested. Wray has written a good amount on it, the philosophical/historical/creditary aspect of chartalism.
The answer accepted by all the right-thinking types as above is that money, by definition, is assignable debt. Money is a relationship between two entities, not a thing. And the assignability indicates a third something in the background (the state, society, the community of merchants, the bank, etc) This works for all types of money, including bank credit money. Debt without credit or vice versa is a logical absurdity. Thinking of money as “fiat”, as “currency” in the way of the proposed detrimental terminological change is very confusing, even wrong. It is a step towards towards the misinterpretation of chartalism as about legal tender laws, towards thinking of money as a thing, a commodity, not a social relationship, and thus towards Metallism.
Although interesting, Ramanan is mostly wrong IMHO. His reasoning is inexplicit or doesn’t hold water – but it is wronger to not consider money as debt.
Neil:Government debt is settled in its own paper – which involves no such real sacrifice.
True for the government of course. Not true for individual actors in the US economy, of course. And because of foreign debt, not true if one combines the US government & US economy. As the Musgraves above note, it is a real sacrifice to pay off foreign debt. The only way logically possible is through exporting. On the other hand, replacing/paying off bonds with dollars is not real settling, it is just money-changing, like replacing a twenty with two tens. Dollars are convertible into real goods, are backed by commodities – by the US as a whole (the penultimate dollar debt-settler), not just the US government. And the ultimate settlement of government debt, like any other debt can only be through another debt, through sacrificing a debt going the other way, the government sacrificing its beloved IRS letters.
Tom:It is much simpler to understand currency as a tax credit than a debt or even a liability of government. It is not simpler – it is self-contradictory and therefore false. It sows confusion, while imho everything in MMT flows easily from thinking of currency as credit/debt. Yes, currency is a tax credit. To the holder. Which means it is a debt/liability of the issuer, the government.
The psychological effects ..? Thinking about psychology is outsmarting yourself here. You don’t convince people by saying things which are not true. Communicating, understanding the truth has enormous, immeasurable power. The USA has a real obligation to China, like any country has to another one that saves up its IOUs. It isn’t very big or important or something to be afraid of, but it is real. As Abba Lerner said, whether incurring such international obligations is good or bad depends on how the real proceeds are used. The US uses them to get cheap consumer goods. This is not crazy. If China sold the US guns which we used to shoot eachother with, or vials of smallpox, that would be crazy. The crazy thing the US does now is to allow the deflationary side effect to create unemployment, to use dysfunctional finance.
It [the (correct) convention] reinforces the false government-finance-is-like-household-and-firm-finance analogy You are throwing out the baby with the bath-water. The analogy is not false – the way, say, comparing government finance to playing a card game because they both use slips of paper is false, it just needs to be understood correctly. In the most fundamental respect, Government finance is like that of a household or firm. They live in the same universe – We use the same accounting, the same concepts for both. Government is just a household that has the power to impose liabilities on others.
Correct accounting makes government finance, denominated in its own liabilities, clearly the opposite of nongovernment finance. Emphasizing currency issuance emphasizes the wrong thing. As Minsky said, anyone can create money (IOUs), the problem is to get it accepted. The government solves this problem for banks, by discount window lending, or equivalently, by accepting bank money for tax payments & thus delegates to them an enormous, sovereign power, which they proceed to abuse.
Households and firms must meet their financial obligations from revenue, drawing down savings, or selling assets. Nothing like that applies to government, which simply issues currency “by fiat.” omits households meeting obligations by incurring another one – by rolling over their debt, issuing their own currency, their own money, their own IOUs, created by fiat, just as the government does. The thing is that governments and what should be their servants, but are their masters nowadays, the banks, have tricks for getting their fiat debt always accepted that the rest of us don’t have.
@ Some Guy
Let’s agree to disagree.
The problem of debt owned by foreigners in massive amounts (because this is what is assumed here) is not different from any other massive imbalance of financial wealth in the economy. Whatever can be said about China is 100% applicable to Buffet and co domestically. You simply can not separate the two.
Sergei – yes. Here’s how Abba Lerner put it:
Functional Finance is not affected by the existence of a “foreign trade industry”. Fundamentally we may say that international economic relations make no difference to the general principles we have been developing right through this book. Foreign trade may be considered as just another industry…
Fundamentally we may say that international economic relations make no difference to the general principles we have been developing right through this book. Foreign trade may be considered as just another industry…
Makes sense to me. Foreign trade is just exchanging goods like any other transaction. A CAD resulting from the decision to save in the importer’s currency is just postponing completing the trade. So what? The interest just increases the remittances portion of the CAD, which increases savings and allows more eventual spending in the currency zone.
Of course, the option is always there to either sell the currency, giving someone else the same options, or else purchase assets of the importing country (FDI).
It’s from his wonderful Economics of Employment. Took a closer look at chapters 21, International Trade and Capital Movements & 22 International Currency, or Sentimental Internationalism. There’s much more there than I thought, disguised by Lerner’s lucid arguments that use one ordinary word, when 20 technical terms would do almost as well. (e.g., he discusses austerity & internal devaluations, optimal currency areas etc without using modern terminology). He begins translating a little international trade vocabulary into parallels in domestic economics parlance, just treating the ROW as one more domestic industry. (As Bill says “I think of it in terms of the US dollar is always in America!”, and I think JKH wrote a similar explanation somewhere).
Clearly Lerner used a time machine, read the threads on international trade here, went back to 1950 and wrote a point by point refutation of Ramanan’s objections, as far as they are coherent objections. In short – functional finance naturally puts pressure on your currency to depreciate and causes rising indebtness to the rest of the world in your own currency (the way I was speaking above) alternatively, rising $ savings by the ROW, as R says. But it will make you wealthier, stimulate your own exports by depreciation & by stimulating the ROW too, better able to eventually “pay off” this rising debt by exporting. So the answer to depreciation & rising foreign debt is – So what? What’s the problem? Nobody’s ever pointed one out.
Dani Rodrik notes that one problem is “control.” A net importer can find itself with more foreign ownership than it desires (loss of control), and a net exporting country that accumulates the assets of another country can find them depreciated or nationalized (loss of control).
Don’t think these are special to foreign trade, or generally very serious, as long as the importer maintains real domestic sovereignty. I meant more – no problem like Ramanan’s mysterious instant catastrophe causing the external sector to control and impede domestic demand management.
The net exporter problem is pretty much caveat emptor – if you don’t want another nation’s currency to depreciate, don’t hoard it. A domestic firm would be advised in the parallel situation to invest in itself, rather than save so much. Lerner notes that the depreciation effect of the importer using functional finance will not impose any more loss on the exporter than the negative effect to the exporter’s economy due to its “exporting unemployment” to an importer not using functional finance.
The net importer’s loss of control to foreign ownership is like the situation of a nation confronting its domestic monopolies through antitrust laws. In the foreign case the importing nation has sovereign powers, unless they are illegitimately intimidated, which of course happens. But a medium sized or highly developed country should be safe if it just acted intelligently and took crucial domestic industries off the market (which should depress foreign desires to hoard its currency).