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Lies and deception – a central banker’s view of the world

The St Louis branch of the Federal Reserve Bank offers – FRED2 – which is an excellent repository of US statistics as well as a nifty graphical analysis tool. I use it regularly and even though it is just a collection of data available elsewhere it is very convenient. The same organisation also publishes what it calls its – PAGE ONE Economics Newsletter – (the so-called “back story on front page economics”) which is designed to be used by students as a means of educating them in economics. Any reasonable assessment of the material presented in these newsletter is that they are unadulterated nonsense. The most recent edition (published January 13, 2012) – “Choices Are Everywhere: Why Can’t We Just Have It All? – exemplifies how these major institutions choose to mislead those they seek to elucidate.

This jewel of indoctrination claims to be “(a)n informative and accessible economic essay with a classroom application”. In reality, it is a mish-mash of mainstream textbook notions that have very little if any application to the task of understanding how the system really works. In fact, it is really an ideological treatise, seeking to perpetuate the errant framework that mainstream undergraduate students are bombarded with daily by professors who are to set in their ways to see the folly of their enterprise.

The opening quote is from the Rolling Stones – You can’t always get what you want – which was a great song off one of their last truly exceptional albums – Let it Bleed.

To calm me down and put us in a better mood before I comment on the St Louis School of Propaganda offering, I thought this live performance of the band in 1973 in Brussels was worth listening to. It is exceptional because it features the best line-up of the band ever with the great Mick Taylor playing guitar and Bobby Keys the sax. Mick Taylor starts soloing at about 4 minutes. The best don’t always become the most successful. Bobby chimes in about 5:16.

So relax while I sharpen the knife.

The St Louis Newsletter begins like this:

The public debate about the best way to reduce the level of government debt highlights our difficult situation: Our wants greatly exceed our ability to pay for them. In the case of government, purchases require current revenue through taxation or borrowing; the fiscal cliff arose from a level of debt caused by wanting more (and purchasing more) than we can pay for.

If we wish to reduce debt, we must make difficult choices. One choice is to cut government spending on goods and services—but which spending priorities should be cut? The other choice is to raise taxes—but who should pay more?

I won’t mention the Trillion Dollar coin option, which was introduced by those sympathetic to Modern Monetary Theory (MMT) – follow the trail from HERE. This option seems to have been kidnapped by others who are seeking to claim glory for the idea as well as others who are apoplectic about the idea (Austrian schoolers, New Monetarists, etc).

But that obvious option aside, the students would have been better introduced to the intrinsic nature of the fiat monetary system that operates in the US and then the institutional overlays that have been put over the basic monetary system.

An understanding of the former (without the institutional constraints) leads to the conclusion that the US government is never revenue constrained because it is the monopoly issuer of the currency.

For many reasons, none of which have any solid rationale in terms of contributing to the effectiveness of the government mission in advancing public purpose, the US legislators have chosen to place a series of voluntary constraints on their governments. The constraints create labyrinthine accounting structures which force the sovereign government to issue bits of paper (treasury bonds) to the private sector, which then lead to bank entries, that are subsequently reversed when the government spends.

The fact that the funds to purchase the bonds came from the government anyway via past deficits – meaning that the government is just borrowing back a portion of its own spending and then spending it again – seems to escape most commentators.

Further, in the recent period, the US federal reserve has been buying those bonds in huge quantities anyway (quantitative easing), which just goes to show how ridiculous the elaborate institutional machinery is.

Please read my blog – On voluntary constraints that undermine public purpose – for more discussion on these voluntary constraints.

A decomposition of the federal budget in those terms would have served to demystify the appearance of financial constraints and to reveal that they are voluntary in nature and mostly irrelevant hang-overs from when the US participated in the Bretton Woods system of fixed exchange rates (the so-called “gold standard”). That monetary system was abandoned in August 1971, when the US suspended gold convertibility (with the US dollar).

The reason that these meaningless constraints – from a financial perspective – have remained is because they serve the ideological agenda of those who have been able to influence the design of public policy and administrative practice since then. If you go back through the documentation in various nations you will find references to “the need to impose fiscal discipline” etc.

The conservatives knew that by forcing these unnecessary constraints – in particular, by forcing governments to match their net spending positions (deficits) with bond-issuance ($-for-$) to the private sector, they would then be able to construct the fiscal position in terms of debt. The next devious step is to conflate public debt with private debt, and the household budget with the government budget.

That construction then means the conservatives can then trade in headlines – “debt blowouts” – “government is going to bust” – and the like which are more easily understood on an intuitive level by the general public, which them makes political manipulation of the anti-government position easier to manage.

The fact that this “intuition” is plain wrong – public debt for a sovereign government is nothing like private debt held by a financially-constrained household or company – doesn’t matter. People believe and act on all sorts of lives. The aim of the conservatives here is not truth or education but ease of manipulation to advance the ideological agenda.

Note also in the quote above the statement – “the fiscal cliff arose from a level of debt caused by wanting more (and purchasing more) than we can pay for”. I won’t go into a detailed analysis of the obvious – that the fiscal cliff was a politically manufactured farce of a non-problem. It is how an incompetent legislature creates a problem out of a non-problem.

It had nothing to do with the limits on the capacity of the US government to find resources for sale in US dollars that could be purchased.

What abomination of reality is it that a nation that according to the US Bureau of Labor Statistics – Alternative measures of labor underutilization – has 14.4 per cent of its civilian labor force and marginally attached idle of which 12,206 thousand are official unemployed – could be said to be “wanting more that we can pay for”?

There is also a large amount of idle capital that might also be brought in to productive use if the US government chose to purchase the services of these idle souls and put them to work.

There is no sensible way in which one can argue that the US economy is living beyond its means. Could the US government purchase the services of these idle workers? The answer is that it could do so any day that it wanted to.

The “financial” constraint that is immediately in front of the government is artificial and could be altered by the legislature today if they had the will. But they prefer to leave massive amounts of productive capacity idle to massage their own sense of (perverted) ideological satisfaction.

Then they try to justify the obvious – how can it be sensible to waste the productive capacity of millions of your citizens and incur not only the immediate income losses but also the plethora of associated pathologies that accompany unemployment and societal alienation – by inventing false dichotomies.

For example, the UK government is now running a line that in Britain there are either strivers and shirkers, which is just a remake of the deserving and undeserving poor distinction, which pre-dated the introduction of more sophisticated approaches to the Welfare State.

In Australia, the conservatives like to talk about cruisers, job snobs and bludgers.

It is all part of the same vile approach to defending the indefensible and turning citizens against each other so that they don’t unite and turn against the government.

So that is just the first paragraph of the St Louis Newsletter. We are in for a long evening! But I will cut to the chase.

The next section is about “Personal and Household Spending” and there we receive a lesson from a mainstream microeconomic textbook about opportunity cost and scarcity. This helps the author explain the budget constraints that households and people face.

So the standard line – we have to make choices because we don’t have infinite cash available.

All of which is fine (although loaded away from asking questions about income distribution etc). But MMT embraces the notion that users of the fiat currency are financially constrained and have to earn income, run-down savings, sell assets; or borrow in order to spend. A private household can only deficit spend for a finite period by borrowing (after their savings and stock of assets) run out because the debt has to be paid back.

So a household might bring forth spending now in excess of their income – for example, to purchase a house – but that will mean they have less income in the future they will have “less income in the future to buy goods and services”. All true.

Then the sleight of hand enters as the St Louis Newsletter attempts to apply that micro private user of the currency analysis to the federal government.

We read:

In many ways, the government faces these same choices.

In no way does the government, which issues the currency face the same choices. I know people will say that the elaborate accounting structures are financial constraints and the Republicans are proving the debt ceiling matters. The answer is that neither retort is sensible.

A household cannot, at its discretion, alter the fact that it is financially constrained. That is intrinsic. A currency-issuing government can at any time there is the political will change the regulations within which it operates.

Even within these voluntary constraints, all sorts of ad hoc work-arounds occur when the politics dictate.

The Swedes changed rules during the crisis to allow its central bank to maintain liquidity. The ECB has flouted the spirit of the no-bailouts clause in the Lisbon Treaty by running a sequence of standing facilities and security purchase programs, all of which effectively allowed governments to spend.

The US federal reserve can facilitate government spending any time it likes and has been buying up massive quantities of federal debt under the masquerade of quantitative easing.

I could go on listing examples.

As to the US Republicans, well they have proved that they don’t have the bottle!

To advance its myth, the St Louis Newsletter tells the students that the government’s:

… ability to satisfy our society’s wants is constrained by the level of government income, which is generated primarily by taxing workers and companies. Just like individuals who make spending choices, when the government chooses, there is an opportunity cost. If more money is spent on national security, the result might be less spending on health care. It is possible to raise taxes to provide additional income for the government to allocate, but that imposes further budget constraints on workers and companies who pay taxes—so, this policy choice also has opportunity costs. Of course, the government’s spending is not limited to tax revenue. Just as families can, the government can use debt to pay for some of its goods and services.

The household-government budget fallacy is thus complete.

In reality, a household has two constraints – the financial noted above and the real – which pertains to the availability of real resources that are for sale.

Government spending is only, at the intrinsic level, constrained by the latter – what is available for purchase in the currency that it issues. Which means that the statement that if the government spends on X it cannot spend on Y is false. That is only the case in the world of these voluntary constraints where the government spends to a fixed budget.

There is sense to the budgeting process as long as the aim of the net spending contribution (positive or negative) is such that the economy achieves full employment. At that point, the notion of an opportunity cost for the government binds (which is just another way of saying there are real constraints on government spending).

At full employment, if the governments wants to command a larger proportion of real GDP than it currently is commanding, then it has to squeeze non-government spending, principally via taxation.

But if there are idle resources, like 12 million unemployed, then the opportunity cost of deploying those productive resources in the public sector is next to zero and doing so doesn’t reduce the capacity to spend on health care, pensions or “national security” for that matter.

The St Louis Newsletter then asked the students to consider:

What is the downside of government debt? Using debt to buy goods and services today means the government is borrowing future income (that is, tax revenue)—which means less income in the future for buying goods and services then. In addition, there is a limit to how much credit lenders(or investors) will extend to a country; they will avoid lending beyond the government’s ability or willingness to repay the loan or will do so only at very high interest rates.

A private currency user has to forego current consumption to pay back debts (once their saving and/or other wealth stocks are exhausted or stable). A currency-issuing government never had to operate by that inter-temporal constraint.

There is a sense that such a government pays back debts but never pays them back. The first sense, is that debt instruments are maturing all the time and the holders of the debt redeem the funds on maturity. From the government’s perspective this is just shifting some numbers from one account (debt) to another account (reserves) in the central banking system.

In the second sense, the government can continuously roll its debt over at its desire (notwithstanding political gymnastics from time to time – such as debt ceilings).

Further, if the private bond markets decided they didn’t want to enjoy the corporate welfare (which is effectively what public debt provides – a risk-free, interest earning asset, which can be used to benchmark the pricing of other riskier assets) then what would happen?

Not a lot is the answer. The spending would still occur and the central bank and treasury would cook up a way to get around any voluntary constraints and clean up the accounting. For example, while it is often thought the Bank of Japan cannot directly “fund” Ministry of Finance spending, the reality is that deep down in the regulations the capacity exists (because that capacity is intrinsic to the fiat monetary system it operates).

Finally, the scare of “very high interest rates” would prompt any thinking student, who hadn’t been dulled by the years of mainstream macroeconomic indoctrination to ask the lecturer – “Could you please explain the Japanese experience for us? Haven’t they had the higher debt to GDP ratios and relatively large deficits and virtually zero interest rates and deflation to boot?”

Yes, if you ever have the unfortunate experience to be having dinner or drink with a neo-liberal (I assiduously avoid it) then have some fun watching them squirm when they try to explain Japan.

The reality is that the central bank and treasury can control the yields that accompany the debt the government issues to the private bond markets any time they so desire. It is all tied up in liquidity management and bond issuing practices.

But the even greater reality – which the trillion dollar coin fiasco is revealing – is that the government never has to issue debt to the private markets in a non-convertible fiat currency system.

The reason that reality is obscured by the the likes of the St Louis Newsletter and its ilk, is because the private bond markets like being on the public teat. They hate the most disadvantaged citizens receiving even the modicum of income support. But for themselves they love it and that is why the government is in charge.

Please read my blog – Who is in charge? – for more discussion on this point.

Finally, in its glossary, the St Louis Newsletter defines “Government debt” as the “sum of accumulated budget deficits”. It might have been better to have started there and explain how positive net public spending (deficits) add to the wealth of the private sector and that the stock of wealth held in the form of the public debt (and the related income flows) would not be available if the government had have avoided deficits.

But then they would have to engage in a detailed analysis of the damaging impact of budget surpluses when the non-government sector is intent on running a surplus itself – that is, the government fiscal position cannot be determined independently of the spending impacts of the external and private domestic sector.

At times, a budget surplus might be sensible. That will rarely be the case and cannot be the case for all nations given that some will have to run external deficits so that others can run external surpluses.


The St Louis Newsletter concludes by saying that:

An understanding of scarcity and opportunity cost is crucial to making good economic decisions. Remember that scarcity describes the condition in which our wants exceed the resources necessary to satisfy those wants. Scarcity requires us to make choices and choosing involves an opportunity cost—the value of the item given up when a choice is made. So, making wise (and sometimes difficult) choices requires considering the opportunity costs.

Note the confusion about resources. Are we talking about financial or real resources? Which sector?

A sovereign government has no scarcity of capacity to issue its currency. That is not to say that it should expand deficits in an infinite direction.

How much the government should net spend is determined by how much the non-government spending is short of that required to ensure all the productive resources are productively engaged.

Financial resource scarcity in this context has no meaning for a currency-issuing government

This document should be electronically pulped as soon as possible so the Martians don’t get wind of it and realise we are more stupid than they originally thought – their initial assessments are that we are very stupid!

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    This Post Has 17 Comments
    1. “The fact that the funds to purchase the bonds came from the government anyway via past deficits”

      The underlying assumption is that government borrowing is the active action and that the funds to allow that are passively supplied.

      When of course the opposite is the case. It is the non-government sector saving in excess of investment that is the active action. They are desperate for somewhere safe to save.

    2. Irish economic mismanagement goes back a long way.

      Although if we go back just a bit (1980s)

      “During the last fiscal crisis of the 1980s Irish sovereign spreads ballooned out
      also. But that was for local currency denominated debt. Eurobond borrowing by
      the Irish Government remained at fairly tight spreads despite the high overall
      debt ratio (higher than today), and the fact that almost half of the national debt
      was denominated in foreign currency”

      Did not realize the extent of this – I presume this was in Sterling (?)
      Which was very strong (North Sea?) for much of the 80s

    3. You can see in this Y2003 document that the Punt post 1979 was never really a national currency.

      It was a mere bridge towards EMU & the Euro.

      See page 13
      We were bought and not only that …..we were cheap
      See page 13 & 14

      The Irish requested 650 million pounds of grants from zee Germans & French
      We got a low interest loan of 225 million
      By 1980 the country began to enter into a wage deflation phase……………

      Our “leaders” are rotten to the core.

    4. Oliver Reed recounts the famous George Bernard Shaw line which has some meaning for Hibernia as she was always a dirty Aul whore.

      Starts at 7.00m

    5. I just wish some Australian PM had the guts to say:

      “Bugger it, we’ll try MMT. Either it will be a spectactular success and we will govern 5 terms plus. Or it will be a spectacular failure, they chuck us out, we retire and grow orchids. So what? In the long run we are all push up daisies anyway!”

    6. Ikonoclast,I appreciate your sentiments, but if wishes were horses beggars would ride.
      I doubt if Australia has seen a PM with “guts” since Curtin and Chifley.
      Nothing much will change until a sufficient number of the herd realize they are being had and organize to put a stop to the scams.
      I won’t be holding my breath waiting for that.

    7. I always say;

      “If wishes were fishes I’d have fins instead of hair;
      If fables were tables I’d dine in Leicester Square.”

      It’s part of a humerous gibberish poem I composed in my head some years ago. No doubt even these first two lines and the general idea are very derivative. For example, one does not have to search far to find;

      “If wishes were fishes we’d all have a fry.
      If bullshit were biscuits, we’d eat until we die.”

    8. If I may, let me please have some further explanation about MMT.

      As I read it, MMT tries to use monetary policy for the sole purpose of managing the economy in order to achieve maximum utility. Is that a fair statement to say?

      As of now, we had a mixed system over the past 100 years of continuously reducing the value of currencies on one side (unregistered and lawful theft) and on the other hand the system of redistribution via taxes. Once it would become obvious that the purchasing power of money will suffer as an official policy, I doubt that anyone would be interested to keep their savings in the concerned currency, especially if interest rates are manipulated to be below any loss in purchasing power. Partially we have had this situation already and it produced the well-known bubbles of the past 20 years. At one point, I foresee, the population would loose confidence in the currency and look for alternatives for their savings. Loss of confidence in a currency is essentially hyperinflation.

      Where do I go wrong with my line of thought?

    9. It seems an appropriate point to throw this in;

      “Bullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early or primitive form of mercantilism. It was derived, in the 16th century, from the observation that the English state possessed large amounts of gold and silver, in spite of the fact that there was no mining of precious metals on English soil, because of its large trade surplus.” – Wikipedia.

    10. Hyperinflation is the result of war or some other devastation of productive capacity, and budget deficits that run up to 50% of GDP, happens very rarely.

    11. @ PZ

      I agree that hyperinflation tends to occur in times of war as it is during such times that the political will to intentionally dilute a currency in order to finance war efforts is formed. Even if two items usually go hand in hand, it is wise to reach the conclusion that there is causality between the two.

      There might indeed exist other reasons for forming such a political consent.

      The biggest mistake in this context may be the idea, that the level of confidence in a currency can be manipulated at will by decision makers.

    12. Linus Huber,

      The inflationary dangers of MMT are no worse than those of conventional policies. E.g. having government borrow and spend (fiscal policy) followed by QE comes to the same thing as having government print money and spend it. Numerous ignoramouses were screaming “inflation” when QE was first mooted. They’ve all been proved wrong, of course.

      MMTers tend to favour merging monetary and fiscal policy, i.e. just having the government / central bank create and spend money when stimulus is needed. To repeat, that comes to the same as “fiscal followed by QE” and the latter did not produce hyperinflation.

    13. Thanks Ralph, so I got the drift right.

      The term inflation is used in different ways but most people associate it with the rise in prices measured by the consumer price index. We may not have major “inflation” under that index at the time being, that is a correct statement you make. Looking however over the longterm, e.g. 30 years or 50 years, one can easily recognize how the value of the currency is continuously reduced. Stable prices, as some commentators consider to be the norm, are a complete illusion but we rather have a policy of ever slightly increasing prices as a result of a gradual devaluation of currencies. Real stability in prices is achieved by not inflating money supply (base plus credit volume) in excess of economic growth, resulting in some years have rising consumer prices and in some years have falling prices.

      We do not face major increases in prices because private credit volume is being reduced while public credit volumes are being increased. Furthermore, banks have difficulties finding good credit risks and many potential borrowers have difficulties finding profitable investments, and this despite the fact that the cost of credit (interest rates) have been very low. So most of the newly created credit is put back into the central banks as reserves and not really deployed resulting in a reduction of velocity.

      Well, I could continue to explain the whole complex situation but those interested can make up their own conclusion.

    14. Bill your political bias clouds this article. You focus on the actions/influence of conservatives yet the entire political spectrum adhere to these insane beliefs. Every member of the australian parliament, including the nutty greens, believe this stuff (theoclassical economics).

    15. Thank you, Bill, for the typically succinct and educational article – and thank you for the Rolling Stones videoclip. Both vey much needed respites from the nonsense around us.

      Vassilis Serafimakis

    16. Neil Wilson said:

      “The fact that the funds to purchase the bonds came from the government anyway via past deficits”

      The underlying assumption is that government borrowing is the active action and that the funds to allow that are passively supplied.

      When of course the opposite is the case. It is the non-government sector saving in excess of investment that is the active action. They are desperate for somewhere safe to save.

      You are completely failing to recognize that the private sector does not have the capability to permnently create money. All money created through private credit must be retired with repayment of the liability.

      The only money that is permanently created (ie, without a requirement for retirement) is money created by the government, unless it removes more money through taxation than it creates through spending (sovereign budget surplus).

      You are very correct that the private sector desires the safety of zero risk bonds for savings in excess of investment. But those excess savings were not with money that was permanently created in the private sector; money expansion in the private sector (through bank credit) is always temporary – private credit issued must be retired or defaulted by contract. Over long time periods there is a zero sum for private sector money if no additional sovereign money is created.

      Thus the statement by Bill Mitchell that was criticized was done so entirely in error. The good professor was exactly correct.

    17. Bill – long time reader first time poster :)

      Firstly thank you for providing so much energy/ passion & dedication to your field it serves as a inspiration for us all and is an amazing work output!

      you mentioned a hijacked term “cruisers” in the job market that I thought I would just pad this out a little because I’m from the company that helped develop the term! and we’re actually rolling out the same employment model in Saudi Arabia (which has a completely different set of issues!) at the moment which is why I’m now a bit involved in it.

      The term has evolved from a micro perspective on behavioural change to get people into employment – e.g. can we provide these people with a set of tools/ help to enable them to get a job & what need to be done to get them into employment (cruisers were a specific segment with specific attitudes towards employment & job seeking) – and across cultures the difference is remarkable – Thus the term has been hijacked to kick members of society in the guts rather than actually helping people to contribute to society further that appearing on today tonight…

      I acknowledge your perspective is maco and plays a massive part but I also feel that human behavioural policies & practising also need tweaking (after all it is the micro that make up the macro!) my feeling is that one just stuffs up the economy quicker! and we need more jobs! – in my field – statistics the issue is not lack of work it lack of people willing to pay for it & qualified people to do the role.

      I will leave you with one philosophical question to blow you mind which is like if a tree falls in a forest and there is nobody there to hear it…

      – Does the ATO have to pay roll tax?

      please let us know when you band is rocking out Melbourne again.


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