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Fiscal sustainability 101 – Part 1

Greetings from Amsterdam where I am spending the next few days talking about what drives spatial changes in unemployment at a Tinbergen Institute regional science workshop. The spatial econometric work that I am outlining tomorrow provides the conceptual framework for the construction of the Employment Vulnerability Index, which received a lot of press earlier in the year. But while I was flying over here I thought about the concept of fiscal sustainability which is now getting a lot of press. So this is the first of a multi-part series on what constitutes a sustainable fiscal policy. Its that time again. Time to debrief!

My motivation for focusing on the topic of fiscal sustainability – although most of my blogs are about this in one way or another – came from the National Journal, which is a discussion site where experts are invited to debate a topic over a period of days. The current topic for debate is “What Is Fiscally — And Politically — ‘Sustainable’?” While the debate on the site is very US-centric, the basic principles apply to all sovereign currencies – that is to any fiat monetary system so it is worthwhile having a read to see the opinions that are expressed. The only qualification that I would make is that most of the discussants are anything but “expert” in this field if their utterings are anything to go by.

In recent weeks the concept of fiscal sustainability has increasingly entered the economic debate again as public deficits rise in response to the spreading real economic crisis. In the US, the central bank chairman Ben Bernanke has defined the concept of fiscal sustainability as:

… as achieving a stable ratio of government debt and interest payments to gross domestic product, and setting tax rates at levels that don’t impede economic growth.

The National Journal claims, however, that “fiscal sustainability is also a political concept. How would you define it? Should federal revenues be expected to stay near historical norms even as government programs bear the brunt of an aging society? Does it matter whether the societal costs of aging are borne publicly or privately?”

So first I thought we should work out what the economic concept of fiscal sustainability is all about. The political concept might be slippery and ideologically laden but in economic terms, when applied to a fiat monetary system – there are some fundamentals that define what constitutes fiscal sustainability, that are typically lost in the hysteria. In fact, the public debate is littered with statements that conflate the political with the economic and all but render the latter construction of the term meaningless.

Sometimes, this conflation is a deliberate device to blur the debate and to allow the proponent of a particular viewpoint to push a line that a full understanding of the economic concepts would not permit. Other times, and probably usually, the conflation is a reflection of plain ignorance.

So what is this concept of a “stable ratio of government debt and interest payments to gross domestic product” about? How is setting “tax rates at levels that don’t impede economic growth” enter the picture? I encourage readers to review my blogs – Size of deficit 101 and Gold standard and fixed exchange rates – myths that still prevail – which provide some of the basic tools for this discussion.

You will soon see that both elements of Bernanke’s definition reflect his lapse back into gold standard reasoning when convertible money and fixed exchange rates were the defining features of the monetary system. Those days are over for most of the world economies and you simply cannot continue to apply the reasoning that was relevant to the former monetary system, which placed clear “financing” restrictions on the national government, to the current fiat monetary system which is characterised by non-convertible currencies and flexible exchange rates.

One of the respondents to the National Journal debate, Gene Steuerle, VP, Peter G. Peterson Foundation, which is a lobby group that seems obsessed with the irrelevant – deficits and debt. If I was the billionaire that set the foundation up in 2008 I would would have donated the money to medical research in search of a cure for cancer or HIV. I am sure the world would have received a better return on the dollars!

Anyway, the commentator immediately reflects his failure to understand that the monetary system has changed. He appeals to the household-government analogy from the outset. He says that a firm or household would never “decide how to spend every additional dollar it planned on making over the next 100 years” meaning that you shouldn’t commit your future revenue until you know what it is. He says:

Bottom line: sustainability is a minimalist goal; we need slack in the budget, measured as future revenues well in excess of today’s commitments as to how those revenues will be spent.

Obviously nonsensical. A sovereign government is nothing like a non-government private sector entity. One issues the currency (under monopoly conditions) and the other uses that currency and cannot get it before the government net spends. Further a sovereign government is not revenue-constrained which means that its future revenue is as irrelevant as its current revenue for decisions about spending. Government spending comes from nowhere. As I noted the other day – spending funds spending – spending funds itself – because the government can always credit bank accounts and add to bank reserves whenever it sees fit.

Hint: Saying a government can always credit bank accounts and add to bank reserves whenever it sees fit doesn’t mean it should be spending without regard to what the spending is aimed at achieving. I will come back to that but it is a clue as to what “fiscal sustainability” means.

A fellow at the neo-liberal American Enterprise Institute, Desmond Lachman, also cannot come to terms with the essence of a fiat monetary system. He told the National Journal that:

The OECD usefully defines a country’s fiscal policy to be sustainable if one can judge that the government might be able to continue servicing its debt without an unrealistically large future correction to the balance of its income and expenditure. Judged by that definition, it would seem that the Obama budget proposal is now raising major issues of fiscal sustainability for the United States.

Note: the US unemployment rate is above 9 per cent and rising. While the expanding deficit is starting to put a floor in the US economy it is still way to small relative to GDP to seriously advance public purpose by reducing unemployment. Where is the mention of this in the conceptualisation of fiscal sustainability?

Hint: advancing public purpose is another component of what “fiscal sustainability” means. You cannot define it in its own accounting terms – some given deficit size relative to GDP or whatever.

But back to Lachman. A sovereign government faces no solvency issues. It also does not have to go through the logic that restricts a household – that logic runs like this – if we spend more than our income now, we have to borrow. To pay the loan back we have to ensure we have revenue (income) in the future. If we borrow too much we will face major corrections in our balance of income and expenditure and we may have to seriously forgo spending later.

That is the logic that the users of the currency have to consider every day. They have to finance every $ they spend and so planning is required to ensure they don’t “blow their credit cards”! But that logic doesn’t apply to a sovereign government. They can spend now (even if they simulataneously issue debt – which I remind you has nothing to do with financing the spending). They can also spend later as well as service and pay back the debt without compromising anything.

Could the debt stocks get so large that they would no longer have any “room to spend” on other things? Note the question is not whether they would no longer have the capacity to spend on other things. The claim is that the debt service payments would become so large that there would not be any further “room” to spend (presumably because the spending gap is full!). First, the leakages from the expenditure system will prevent this from happening – taxes, saving and imports. Second, if for some reason the government didn’t like the position it was in it just stops issuing debt! Full stop.

Lachman goes on to list four “separate but inter-related issues that should now be raising red flags about fiscal sustainability as an issue” in the US. The same issues are raised by deficit nazis everywhere. They are:

  • The trajectory of the deficit: How far will the deficit rise and how long will it take to return to surplus?
  • The level of the public debt: What percentage of public debt to GDP is acceptable? Conservatives often cite the Maastricht criteria (which forms part of the ridiculous Stability and Growth Pact (SGP) which underpins the Eurozone and guarantees the Euro governments will force persistently high levels of unemployment onto their hapless citizens – all in the name of fiscal prudence mind you. Anyway, Lachman cites the criteria – debt/GDP below 60 percent as the “prudent limit for the public debt”.
  • Further major long run budget challenges: the intergenerational furphy which tries to tell us that the “aging of the baby boom generation” will force huge unsustainable deficits and public debt levels onto the future generations and threaten the solvency of the social security and health systems.
  • The high proportion of foreign budget financing: Lachman says “It would seem foolhardy to expect foreigners to indefinitely fund large budget deficits especially when they are already voicing concerns about sustainability issues”.

These are the four major issues that define the public debate about the conduct of government fiscal policy. They are all “gold standard” head-in-the-sand conceptions of the alleged constraints that are faced by the sovereign government – whether it be the US or Australia or Japan or most nearly anywhere else.

First, the SGP is a voluntarily-imposed rule imposed on formerly sovereign governments by themselves as a way of garnering the introduction of the Euro. You might like to go back and read my blog – Social security insolvency 101 – to understand the Eurozone dilemma better.

If they were so obsessed with a single currency and a single central bank (ECB) and, therefore, a single monetary policy, then the Eurozone countries should have also voluntarily ceded their fiscal capacities to a single unified body – perhaps the European Parliament. Whichever entity took responsibility for fiscal policy is a separate issue and there are different views about it. The point is that the arrangement they ended up with where the countries retained individual fiscal responsibilities while ceding monetary policy capacity to the ECB was a nonsensical outcome. They then had to artificially constrain their individual fiscal capacity for fear that Italy or Spain would go wild (actually helping their citizens avoid unemployment and poverty but whatever!). That is why the SGP was pushed by the stronger European economies (Germany).

But this 60 per cent rule has no foundation at all in economic theory. It is an arbitrary ratio devoid of economic content. It cannot be represented as “prudent” in any way given its ad hoc nature despite the authority that most economists will claim for it. It is an invention! Moreover, any target public debt/GDP ratio misses the essential point – and that is to ask the question – what is the public purpose being served by net government spending? And why would a government issue debt anyway given it is not revenue-constrained?

Hint: we won’t find a definition of “fiscal sustainability” conceptualised by some level of the public debt/GDP ratio.

Second, to understand the “trajectory of the deficit” you have to understand why the budget balance changes. Two things can drive these changes: (a) the automatic stabilisers work against the dynamics of the business cycle for given policy settings – so when economic activity is plunging downwards, the automatic stabilisers provide stimulus – falling revenue and rising welfare payments – and take the edge of the downturn. The opposite happens when the economy strengthens. Much of the shift in the budget balances around the world at present – that is the shift to large deficits (or in Australia’s case the shift from surplus to deficit) reflects these stabilisers at work; and (b) changes in discretionary policy parameters will also alter the budget balance when the accounting is done. So increasing spending programs neglected by the neo-liberals obsessed with surpluses will increase net spending on top of the impacts of the automatic stabilisers.

Should we be worried about these disretionary changes? It all depends. If the economy is at full capacity (2 per cent unemployment and zero underemployment) then it would not be sensible for the national government to increase its net spending any more and do nothing else because the extra nominal demand will certainly push the economy beyond its real capacity to respond. You then get – you know what (don’t say it too loud – inflation!).

Note I qualified this by saying “and do nothing else”. The national government might decide that it wants to expand the importance of the public sector relative to the private sector in the fully employed economy as a political goal. That would be a perfectly reasonable goal – to expand public goods and services at the expense of private goods and services if it reflected the political sentiment of the day. As an aside, this would be a political choice. There is nothing at all in economic theory that tells us about the desirable size of the public sector in the overall economy despite what the small government lobby would have you believe. Repeat: nothing at all! The optimal size of government is always a political decision (and choice).

Well in that case the government could continue to increase net spending – to command a greater share of the fully employed resources – but at the same time it would have to increase taxes to drain some spending capacity from the private sector. Note the tax rises are not funding the extra public spending which is not revenue-constrained. Rather the taxes are one way the government can take spending capacity from the non-government sector so that it can command a greater usage of the finite resources available.

Note also that this scenario is largely irrelevant if the economy is operating below full capacity.

Hint: fiscal sustainability is directly related to the extent to which labour resources are utilised in the economy. The goal is to generate full employment.

Third, as we have rehearsed previously – see my blog – The Future Fund scandal among others. This search will bring up a number of my blogs on the topic.

The point is that there is no economic intergenerational crisis unless we run out of real goods and services and the future population is forced to live with less of them. There is no financial constraint on a sovereign government providing adequate social security and health care to future residents. It may be politically difficult to do so if say the younger generations want more reall resources for themselves which would preclude making them available for hip joint replacements. But that is not an economic issue nor a question of public solvency.

Hint: the concept of fiscal sustainability is not defined in terms of any notion of public solvency. A sovereign government is always solvent (unless it chooses for political reasons not to be!).

Fourth, the foreign issue is totally irrelevant. The Chinese government might hold a lot of USD at present and also US Treasury debt instruments. Where did they get the dollars from? The US government! How did they get them? They sold stuff to the US (exports) in greater quantities than the US sold stuff to them (imports). Who gained? US citizens put less (gave up) real goods and services that they could have consumed themselves onto ships and sent them to China than the Chinese put onto ships and sent to the US. More real goods and services net went to the US. Sounds like the US is doing well out of that.

We have to always remember that exports are a cost and imports are a benefit not the other way round! The Chinese (and any foreign entity) wanted to hold US dollar-denominated financial assets as a voluntary choice. Mostly this is to keep the value of their currencies down because they think exporting a lot of their wealth (resources) is good. Well as long as they think giving more real goods and services away net is good they will keep desiring to accumulate USD and other foreign currency financial assets. When they decide not to do that then they will stop exporting as much and the US currency will drop a bit in value and the Americans will have to ship relatively more real goods and services net than they did in the past to China. In other words, the party will be over for the US but this just means marginal adjustments in the scheme of things. The sky will not fall in on the US folk!

Further, how can we say that the Chinese are “financing” the US government spending? The US government, last time I looked (just now!) spend in USD. The monopoly issuer of USD is the US Government. The Chinese Government does not issue USD. It requires the US Government to spend USD before it can get them. It is plainly nonsensical to think otherwise and just goes to show how twisted the neo-liberal logic is.

Conclusion: Lachman doesn’t get it at all.

Hint: the concept of fiscal sustainability will not include any notion of foreign “financing” limits or foreign worries about a sovereign government’s solvency.

End of Part 1

Well that is it for today. Tomorrow, in Part 2 (unless some major data issue strikes!) we will see what others think about this question and move towards a definition of fiscal sustainability that is ground in a thorough understanding of the way the modern fiat monetary system operates.

You can see I had a very nice journey to Europe with my new portable computer battery that lasts 9 hours – seems to be true so far!

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    This Post Has 22 Comments
    1. Bill,
      I am amazed that the key point you repeatedly return to, ie. that govt is sovereign in its own currency, is so widely misunderstood/ignored. I am struck by your comments above (eg. “a sovereign government is not revenue-constrained which means that its future revenue is as irrelevant as its current revenue for decisions about spending. Government spending comes from nowhere. As I noted the other day – spending funds spending – spending funds itself – because the government can always credit bank accounts and add to bank reserves whenever it sees fit.”), because they seem to point to the idea that a healthy society can afford socialism. Once the cost-factor is sidelined, so to speak, the implication is that political argy-bargy then has to be ethico-moral, ie. about what constitutes good things to produce/promote and what we should do do secure those.

      Do you think that it is the cultural/ideological norms of economists and commentators that prevent them from grasping the point about sovereignty in currency and its implications? Or perhaps they do understand the implications but just can’t believe it because it implies a world they can’t imagine themselve into?


    2. Dear Kim

      Nice comment. I have long tried to craft a definitive answer to your questions with many different answers being plausible. Any answer needs to start with the fact that the current genus of mainstream economic theory (which I just call neo-liberal for convenience) emerged in the late C19th as a counter to the spiralling popularity of Marxism, which was threatening the property relations of industrial capitalism. Industrialists even financed academics (as they do now) to come up with a theoretical structure that “made capitalist distribution” look fair – to overcome the idea of surplus labour and expropriation. So marginal productivity theory was invented with all its mathematical niceties which said that profits was derived from the contribution of capital to production just like wages reflected the workers’ contributions. All fair and square – you get back what you put in. At that point there was no macroeconomic theory. Any macro statements were just aggregates of the micro – individual-based theory. It was the 1930s that ended that game by showing the fallacy of composition would lead to spurious reasoning. So one firm might benefit by cutting wages (costs) because there employees would not alter aggregate spending much (demand). But if you try this on a macro scale (that is apply micro to the whole economy) you get a meltdown because costs and incomes would fall and in balance aggregate demand would likely fall – it was not a cure for unemployment. But the struggle went on to keep this conservative defence of capitalism intact. The major resurgence of the “micro” reasoning followed the disruptions accompanying the OPEC oil price hikes in the 1970s and that led to monetarism etc. All told there has been a very ideological element in the evolution of neo-liberal macro.
      It was very convenient to operate in a gold standard mentality because it gave them the capacity to argue for limits on government spending.
      Once that world terminated – generally around the early 1970s – they didn’t update their text books much – and certainly behaved as though we were (and are) still operating in a gold standard world. Some (probably the majority) of economists believe that – they studied that in their graduate classes and have no incentive to abandon it. The system of voluntary constraints that governments place on themselves reinforces the lack of incentive for them to search beyond their limited knowledge. Also many just get lost in the trivial nature of most economic research which sort of goes like this – pose a stupid problem like why do men and women move from hand holding to kissing; use maximising calculus (the basis of most orthodox theory) to write a mathematical model assuming costs and benefits change with transitions in petting; impose a change behaviour; observe agents kissing, qed! Trivia – conclusion follows assumptions. Publication successful, Promotion. Status. Who needs to know anything about the real world especially when the textbooks are negative about poverty and suffering.

      But there are also those who do know how the system operates who choose in public statements to make political statements to the contrary. It is because they want promotion and to be considered successful by their peers who all are orthodox economists.

      I think your point about not being able to imagine themselves in any other world is excellent. The training economists receive at graduate school is stifling of creativity and generally a poor way of developing higher order aspirations about human kind. It suppresses debate and diversity and prevents lateral thinking. I was continually vilified throughout my studies but just worked out that as long as I knew their stuff as well as them I could get very high academic results and jump their hurdles and then have time to work on alternative thoughts and actions.

      I am stylising here of-course. It is a very complex web of deceit, power and ambition that keeps the paradigm chugging along even though it is bereft of any semblance of reality and applicability.

      best wishes

    3. A government that publicly revealed the truth that it did not have to tax in order to fulfill all it’s spending commitments plus anything else might well be in danger of complete destruction at the next election. “We need to tax you people because if we don’t, the currency will be worthless” might not cut it with the public.

      How much could they reduce taxation before they started to seriously compromise the value of the currency?

    4. Hi Lefty,
      I find this fascinating but incredibly challenging to comprehend. I can’t help seeing parallels with your comment in the University sector (where I taught for several years — not in economics, obviously!), where there has been enormous cost shift to students, not because they can’t fund the costs of providing very good education, but just so that the Universities don’t have to manage that expenditure. It has no real basis in practical necessities; it is convenient to make someone else pay, and they can get away with it.

      I confess to observing the truism that if you have a difficult problem, an effective way to deal with it is to make it someone else’s problem. That’s what government looks like to me these days.

    5. Hi Kim

      Ever watch “Yes minister”? They were constantly referring to how to turn something into an S.E.P – Somebody Else’s Problem.

    6. “How much could they reduce taxation before they started to seriously compromise the value of the currency?”

      Bill? Can’t remember if I’ve asked this question before. Significantly reducing taxation would automatically put them in deficit unless they cut expenditures as well. But if the value of the $AUSD is driven by taxation, how far can taxation be reduced without interfering in it’s value?

    7. Dear Lefty

      The question is impossible to answer because the currency has a life of its own once the taxation has created a demand for it. Now people find it convenient to use for all transactions not just those that address their tax obligations. So reducing taxes will not alter the intrinsic need to get hold of the $A. Clearly, if the Australian government lost its capacity to levy taxes entirely then other currencies would appear in usage more often. We are not close to that happening.

      best wishes

    8. Lefty, you’ll note that I called it a truisim. I was talking about real government (seeing as there is so much cynicism cheaply available I try to avoid producing it myself). There is a real practical moral question about why, historically and currently, actual governments staffed by actual human beings with actual moral values, beliefs and inter-personal and social attachments, make (or fail to make) the intellectual commitments they do.

      Bill’s answer points to something very interesting about us all, at a personal and institutional level, namely, that our relations to our actual conditions of existence are partly imaginary.

    9. Dear Kim

      I really do consider that “our relations to our actual conditions of existence are partly imaginery”. I have a view that the power elite has various connections including with the criminal underworld. Together they stitch up all sorts of dirty things that provide them with material advantages over the rest of us. They generally leave the bulk of us alone to do our own thing – the chimera of freedom – as long as we don’t step into their territory and threaten their power or operations. When we do that – there is retailiation in all sorts of ways depending on how significant our threat is. This system is more or less brutal depending on the cultural traditions that have evolved alongside it. So in Australia we don’t bump off our rivals too often whereas in other nations it is common.

      Reinforcing this system is a world of make believe. Marx certainly saw through the “exchange relations” that hid the class relations into the “surplus relations” that clearly defined the source of profit. I think the macroeconomics debate is akin to that sort of make beleive. We appeal to appearances using intuitive logic and modes of imagery that we can understand …. household budgets need to be financed …. taxes and debt issuance accompany spending so must be causal …. etc For the most part of it, an anti-intellectual society accepts this “closure” as a way of saying we know what is going on so that we can avoid really thinking about it and get on with our football tipping competitions etc. The make believe of-course is designed to reinforce the power relations.

      best wishes

    10. The following is a quotation from The Big Sweat an article on Government debt in the current (June 13) edition of The Economist:

      “The sheer scale of their fiscal burdens may tempt governments to lighten their loads by inflation or even outright default. Inflation seems increasingly plausible because many central banks are already printing money to buy government bonds. To fiscal pessimists this is but a small step from printing money simply to pay the government’s bills. Adding to their worries, many economists argue that a bout of modest inflation would be the least painful way to ease the financial hangover.”

      Notwithstanding the use of the term “printing money”, one which grates with you Bill, I know, comments as this lead me to suspect that the Economist and others fully understand the flexibility that fiat currency gives Governments to spend without requiring debt. To me the difference in thinking doesn’t lie so much in a misunderstand of the nature of modern currency, but rather a different perspective on the point at which monetary expansion becomes inflationary. There is almost certainly a political dimension to this, if only subconsciously, because inflation is (up to a point at least) good for borrowers and bad for lenders. Broadly speaking, poorer classes tend to be borrowers and the wealthier are lenders (i.e. investors).

      Politics aside, it seems to me that an extreme case of Government spending by “printing money” would be inflationary, but no major developed country is anywhere near the extreme case where the inflationary effects become clear cut. At more “normal” levels, it is far from clear what the relationship between Governments “printing money” and inflation really is, if any. Moreover, to the best of my knowledge there is no modern historical experience that can give us meaningful insight into the question. The well-known and well-studied cases of hyperinflation (Weimar, Argentina, etc) all involved gold-standard or convertible currencies as well as significant amounts of sovereign debt that was not denominated in the domestic currency. I do not know much about Zimbabwe and it’s financial system (what’s left of it), but I think it’s safe to rule it out as a political rather than an economic problem. So, to the best of my knowledge, there are no cases in modern times of a country with true fiat, non-convertible currency with all sovereign debt issued in the local currency where there was a case of hyperinflation, let alone one that can be attributed to Government spending or borrowing. Economic history is not my forte, so I am happy to be corrected on that!

    11. “Lefty, you’ll note that I called it a truisim. I was talking about real government (seeing as there is so much cynicism cheaply available I try to avoid producing it myself). ”

      Hi Kim. From the perspective of a member of a union engaged in endless dialogue with a government department, my impression is that there can be a great deal of truth in truisms. Example: we reached a clear agreement that some important longstanding issues would be resolved. They agreed that the situation was in need of reveiw. While everyone at the table clearly understood that the agreement was that the issues would be reveiwed then addressed, our negotiator failed to word the document in 100% watertight terminology. Six months later when nothing had happened and we asked how it was progressing, their negotiator, with a smirk that would have done Peter Costello proud replied “oh yes, we agreed to reveiw it – and here is the reveiw”. Pretty typical stuff.

      I share Bill’s veiw of the power elite.

    12. Bill, I see you’ve responded in your latest post. So, Japan is the only example of sizeable monetary expansion in a modern fiat non-convertible currency and of course there was no hyperinflation there, far from it! So, it sounds like the hyperinflation that the more extreme commentators fear is without any historical precedent. No surprise there I am sure.

    13. Hi Lefty,
      think we are in agreement. Truisms are definitely true (as far as that concept goes). I was just objecting to the appeal to fiction as an adequate (but not necessarily untrue) representation of the complexity of real life and decision-making.

    14. Biil: I am fairly new to your blog. How do you define a sovereign currency?Is it something that is freely traded in the market. If a sovereign government can never default on its debt since its issued in its own currency, why dont more countries in the world resort to deficit spending to increase employment?

    15. Dear Vinodh

      Welcome to my blog and I hope it serves you well.

      Sean has already pointed you in the right direction.

      In reply to your second question – “why don’t more countries in the world resort to deficit spending to increase employment?” – most countries right now a doing just that! But the point you are making is important. Most sovereign countries have allowed unemployment to remain at unacceptably high levels while at the same time running surpluses or attempting to run surpluses. Why? the dominance of the neo-liberal ideology which sees government intervention as the anathema of efficiency. In defining efficiency, they just forget to count the millions who are unemployed and the natural environment that is being damaged. If probed about the unemployed they say that the jobless are making voluntary, optimising decisions to engage in leisure rather than work – that is, a supply-side driven maximisation of real income. It is “pixies at the end of the garden” sort of stuff but the majority of my profession propounds that sort of nonsense and receives handsome incomes for doing so.

      In a few thousand years, humanity will look back on this sorry lot and wonder what their ancestors were on for so long!

      I would suggest you keep reading through the archives and I hope you will gradually gain an understanding of what a modern monetary theorist thinks and how that thinking is applied to every day life. One of the strengths of modern monetary theory is that it is about the real world and requires very few simplifying assumptions for analysis. That is very different to the “competitive neo-classical” model which requires so many unworldly (plainly ridiculous) assumptions to get the analytical results it trades on.

      best wishes

    16. I didn’t understand this part:

      > Well as long as they think giving more real goods and services away net is good they will keep desiring to accumulate USD and other foreign
      > currency financial assets. When they decide not to do that then they will stop exporting as much and the US currency will drop a bit in value and t
      > the Americans will have to ship relatively more real goods and services net than they did in the past to China. In other words, the party will be over
      > for the US but this just means marginal adjustments in the scheme of things. The sky will not fall in on the US folk!

      What will make the currency drop in value? Relative to the Yuan? Inflation? Since they have accumulated USDs they have tremendous power to buy dollar dominated assets.

      Yours was one the THE single most valid perspectives printed nationally on the subject (The Road Not Taken-D. Brooks)
      I could go on to stroke your ego but instead, I challenge you to write a piece that has the same weight & relevancy concerning the lack of employment in the USA & how BOTH parties have abrogated their responsibility in the creation of ANY meaningful number.
      The time wasted in debate with a Box-O-Rocks GOP & their agenda of destroying the 2 party system for their OWN benefit has cost America more than the interest on the debt.
      This morning you raised the bar for intelligent debate, NOW raise it again for yourself and finish you piece with Part II, the cost of debate & the lack of jobs that resulted from the false distraction of the Norquist lap dog ideology…..

    18. Bill,

      You said:

      “If the economy is at full capacity (2 per cent unemployment and zero underemployment) then it would not be sensible for the national government to increase its net spending any more and do nothing else because the extra nominal demand will certainly push the economy beyond its real capacity to respond. You then get – you know what (don’t say it too loud – inflation!).”

      By the standard of 2% unemployment, the US has never been even close to full capacity during my lifetime (1950), and yet there has been continuous inflation.

      If this has not been caused by excess deficit spending and money creation, then how has it happened?

      Also, during the late 1990’s we had Federal government surpluses and simultaneous high employment (by historical standards, not yours) and GDP growth.

      How did we manage to have growth and inflation while running surpluses that should have cause recession and deflation?

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