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Hyperdeflation, followed by rampant inflation

The title of the blog is a little misleading but was too good not to use. I get to that five-year forecast (2010-2015) later in the blog but the first part is material that sets the scene. Yes, I am writing about deficits and debts … again! But new nuances come out in the public debate which need to be addressed. The conservative assault on government support for their economies at present is multi-dimensioned and is being pushed along by two main journalistic approaches. The manic Fox new-type approach which I realise is influential but is so patent and ridiculous that I don’t care to comment on it often. Then we have the approach adopted by journalists in so-called credible media outlets such as the UK Guardian. They dress their deficit terrorism up in arguments that the middle classes, who think they are far above Fox new rabble intellectually, will find convincing. But when you bring both approaches down to basics – rubbish = rubbish.

The UK Guardian seems to be going more to the right. I guess it is because Murdoch bought the Times and it moved even further to the right than it already was. Anyway, its major commentary pieces of late confirm my suspicions that the Guardian is buying into the whole deficit hysteria agenda – on the side of the terrorists but in an “oh-so middle class and aren’t we being reasonable” manner.

Yesterday (March 16, 2010), there was an article – My fiscal nightmares by one Paul Collier which carried the sub-title – “Our political choices are unpalatable, but unless they are honestly faced we could end up like Greece”.

Collier propositions his readers as if he is an expert on fiscal policy and macroeconomics in general. The reality – by what he chooses to embarrass himself by writing – is that that he is neither – he is just another mouthpiece for the conservative lobby.

The conservatives are out of their comfort zone at present and based on their almost non-existence understanding of what is actually going on and what brought us to this point they seek to return to their comfortable ways by continually chanting one phrase statements about the evils of deficits and the national debt explosion and you know the rest.

That is the benign interpretation. A more realistic interpretation is that the power elites fear that their party is over if governments return to supporting higher levels of employment and more equitable transfers of national income including a sensible (and necessary) realignment of real wages and productivity growth. They also fear that a new regulative environment might force them to work a bit harder for their living and stay within the law more often. This elite controls much of media and has its lobbying tentacles right into all major governments. They are not shy to spend big money bribing officials and cheating the “markets” – which they hold up as the pure form of freedom and entrepreneurship.

If if wasn’t so dire it would just be a joke.

The British government could do its citizens a favour by assuming absolute power and suspending the national election for three years. Then the need to match budget surplus aspirations with the Tories (sort of like the macho contests young boys play with their d#$#@) would vanish and they could actually do what they were elected to do and that is ensure employment growth is strong so people can actually earn an income and take care of their families.

Anway, back to Collier. His article is a response to the “leaked warning from the European commission on Britain’s debt” which he claims has:

… has returned fiscal prudence to the forefront of political debate. Grim arithmetic guarantees that it will stay so through the coming decade. Yet so far the debate has demonstrated that the key concepts are not even understood, let alone properly measured.

Reuters apparently got a copy of the memo yesterday that is circulating around the EU in Brussels. I tried to get a copy of it overnight (from my spies in Brussels) but they were all asleep! It will be released today apparently.

But Reuters quotes the EU as saying:

The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced … A credible time-frame for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned …

The achievement of the consolidation forecast by the UK authorities, is further clouded by the likelihood that the macroeconomic context could be less favourable than envisaged by the authorities, as well as the uncertainties relating to the banking sector loans and investments insured by the government.

First of all the EU, dominated by the EMU nations, cannot even run their own region properly. They have established a system which cannot deliver prosperity to its nations and which allows the bullying Germans to run the show in favour of the welfare of their own privileged classes.

Last time I looked the unemployment rate was averaging around 9.5 per cent across the EU (Source) and was even higher in the EMU segment of the EU. Even Britain has a lower unemployment rate than that. So who are the EU to be casting judgement on anyone?

But the content of their warning … that Collier is taking so seriously … is without any substance or applicability to a sovereign nation such as the UK.

What is a “credible time-frame”? What is a sustainable fiscal position? Why would you tighten fiscal policy when there is very flat private demand and youth unemployment is still rising?

And as you see, they have the facts staring them in the face – “the macroeconomic context could be less favourable than envisaged by the authorities” – which is referring to the inflated forecasts for economic growth that the British government has been putting out. But given that and given that inflation is falling, interest rates are near zero, why would anyone of any sound mind and who understood how macroeconomic systems function – tell the fiscal authority that they need to contract their support – the only support that is keeping some lid on unemployment.

It doesn’t bear thinking about how maliciously stupid these fxxxwits are.

But our Guardian expert Collier is running scared. The EU have spoken.

He writes(just mouthing EU mantra):

Fiscal prudence has conventionally been measured by the ratio of debt to gross domestic product and the fiscal deficit. Famously, the commission set the threshold for prudent debt at 60% of GDP, and for a prudent fiscal deficit at 3%. In normal circumstances these are reasonable benchmarks: nominal GDP should increase by about 5% a year, so for a country with a debt ratio of 60%, a 3% deficit is sustainable.

I would have used the term infamously to depict an appropriate level of opprobrium. The rules that the EU made up and then imposed on the EMU via the Maastricht Treaty’s Stability and Growth Pact were not based on any coherent models of fiscal sustainability or variations that might be encountered in these aggregates during a swing in the business cycle.

The rules are biased towards high unemployment and stagnant growth of the sort that has bedevilled Europe for years.

At least Collier recognises that these rules may not be applicable because “we are not in normal times” and that:

For Britain, Greece and some others, the fiscal numbers are mesmerisingly far from these thresholds. They measure the wrong things in terms of economic fundamentals, and in terms of political superficials they will divert attention from the important choices.

Barring the invalid conflation of Britain and Greece, at this stage, I was thinking he would launch into a full-blown account of the need for governments to pursue public purpose and ensure people have jobs and incomes and access to first-class education and health care in an environment where the social and natural systems are being nurtured.

Was that expecting too much?

It was! He then clarifies what fiscal prudence means:

The fundamentals are not complicated: prudence is about the balance between assets and debts. A prudent government increases assets by more than debts. Neither the level of debt relative to GDP nor the fiscal deficit need have much bearing on this balance. Britain would surely have functioned better had we adopted the higher, French, level of debt relative to GDP, using the resources to improve our transport infrastructure to French standards.

To which I said “bloody hell” which is a lie because the bloody was actually a word starting with F with the g on the end truncated (in Australian fashion).

First, there is some truth in what he is saying. I interpret this as a statement about “good” and “bad” deficits which is a central concept in Modern Monetary Theory (MMT).

A bad deficit is what happens when the automatic stabilisers drive the budget into deficit because unemployment is rising and tax revenue is falling as private demand falters. Then we have very little to show for the deficit position. A good deficit is when the government uses discretionary fiscal policy to ensure that demand is sufficient to support high levels of employment and private saving. They spent on first-class education and health care and other infrastructure which supports private social and economic activity.

So in that sense, the trend to fiscal austerity over the last 20 years (although not always practised as carefully as the rhetoric would suggest) has starved economies of high quality public infrastructure and undermined private employment.

Given the government issue debt to match their net spending, then this implies high public debt ratios although growth would have been a lot higher throughtout the advanced world and so it is questionable that public debt ratios would be higher.

Second, I would not have held out the French as exemplars in fiscal prudence. After all they signed their fiscal sovereignty away and have had persistently high unemployment as a result and decaying standards of living in their cities.

Please read my blog – Debt is not debt – for more discussion on this point.

But a prudent government would not even issue debt. While public spending should be carefully executed to ensure that public purpose is being increased which means the quality of assets is as important as the volume that are created by net spending, the idea that the government is somehow constrained by some balancing act between assets and liabilities is mainstream nonsense.

The liabilities that a sovereign government such as the UK have are not at all like the liabilities that a private company or a household carries. The latter have to service their liabilities by sacrificing consumption (or investment) because they are revenue constrained.

The former – the sovereign government is not revenue constrained and so we have to conceptualise their “liabilities” differently. Yes they have to repay the debt they issue and service it along the way (according to whatever arrangements are in place in that regard). But that does not compromise their capacity to spend elsewhere except where the economy is at full capacity. And even then the government can just reduce private purchasing capacity (via taxation) if the interest servicing payments plus its desired primary net spending would push nominal demand beyond the real capacity of the economy to absorb it via real output increases for a given level of private spending.

So this implicit representation of an asset-liability offset is inapplicable and plays into the hands of the mainstream.

Collier says he has “two fiscal nightmares”: (a) the deficit terrorists force the government into “slashing capital spending” which would erode public assets; and (b) “the government concocts spurious measures of changes in liabilities and assets that permit it to duck politically costly spending cuts”.

The first nightmare is one we all should be having. It is happening – it will result in real damage to long-term growth rates and the living standards of most citizens (but not the elite and the high income earners) and it will backfire in a financial sense because ultimately the fiscal stabilisers will drive those financial ratios that are such the focus of the debate (erroneously) towards the sky.

Only growth will reduce the financial ratios and growth requires fiscal support now in large volumes and later in smaller but positive volumes assuming the nation is not Norway and the non-government sector desires to save in the currency of issue.

But on the second nightmare, Collier cites the work of God (Goldman Sachs) which “helped the Greek government to mislead its citizens by earmarking existing revenues to new debt which did not count as a liability” etc. Yes, they did and so Britain should outlaw hedge funds – which I note Brown is reluctant to even buy into limiting their scope at present.

But really the second nightmare is just an extension of the first and reflect the skewed debate that exists at present. The British government should just show leadership and reject all these nonsensical claims about debts and deficits and seek to educate the public about the true nature of these financial aggregates inasmuch as they apply to a sovereign government.

I know the political constraints. But they have grown over time and are not immutable. During the Post-War period when governments supported full employment with continuous (and relatively small budget deficits) the political debate was quite different. The same attacks that occur every day now would have been laughed at. They would not have front-page headlines day in and day out.

So the point is that politicians themselves have a choice – allow the policy debate to be ruled by opinion polls and the ruthless uninformed media riff-raff or to actually take some leadership positions and influence the agenda through education and action.

Why hasn’t Gordon Brown highlighted the fact that interest rates are not going through the roof (even long rates are low and influenced by the short-rates anyway). Why doesn’t he go on TV and tell the electorate that anyway, even if the bond markets tried to push long rates up that the Bank of England can control any segment of the maturity (yield) curve that it wants – any time that it wants.

Why doesn’t he explain to the British people that inflation is pointing south yet the mainstream economics position is that it should be going out of control right now given the growth in the monetary aggregates? Why doesn’t he educate them that the monetary aggregates are irrelevant?

Why doesn’t he explain that he doesn’t even need to issue debt to the private markets? But as he does, why not explain that this is private wealth and provides the private sector with a risk-free interest bearing asset?

And all the rest of it. Why lie down and let the agenda be run by a gathering of clowns and vested interests?

They are the questions that Collier as an influential journalist should be asking.

All he can say – as if he is being reasonable – is to claim that the British government has to be prudent while running “a large fiscal deficit” … “by drastically changing the composition of public spending”. How might that manifest? Well according to Collier it requires that the government only “commit spending far into the future” (to match the benefits with the alleged debt-burden).

And this means, that the government should:

… reduce entitlement spending: benefits and pensions … [because] … all our options are unattractive. But a strategy that rebuilds Britain’s economy is preferable to those that would further undermine it.

So at the end you realise he doesn’t get it at all. He is actually worried about the financial ratios and not the people. With recession causing havoc for the living standards of the most disadvantaged the government should be increasing entitlements and pensions to redress some of this disadvantage and ensuring the unemployment doesn’t render a person impoverished. A better alternative would be to introduce a Job Guarantee but that would be a wider credibility tightrope to walk.

The point is that recession requires attention to various temporal dimensions. The short-term focus should be on the people who bear the brunt. So you would never want to cut entitlements. The longer-term focus should be on ensuring capital spending is focused on productive outcomes which will deliver benefits for years to come.

The latter concern though has nothing to do with matching the benefits with the alleged debt-burden on future generations. There is no burden on future generations. As long as deficits deliver growth and employment now and future productive public infrastructure each generation wins out.

In all of Collier’s focus on assets etc he didn’t mention the British people once. His recommendation that the British government cut entitlements was a subtle reference but an implication that people do not matter that much – that bringing down debt ratios is more important.

But an economic system should be about enhancing the prospects for the people. What other reason would there be to organise production and work in the way we do? That is actually the nub of all this ideological debate. The mainstream is not about people – the people are just “factors of production” (as they are referred to in the mainstream microeconomics textbooks) and are there to create profits.

Until we get a public debate about how economies have to be tailored to the people and that means all of us – the poorest up – then we are not going to get very far.

In this context, the last thing a government should be doing to “fix the deficit” is to start cutting back on education which is the only durable investment into the future.

Today I read that in Britain between “at least 50,000 more sixth-formers with good grades will fail” to get into university this year compared to last as competition increases (yes, always in a recession) in the face of the number of places being cut by 6,000 due to fiscal austerity.

The British government is clearly keen to reduce productivity growth over the next twenty years!

Meanwhile, Bank of England Deputy Governor Charles Bean (one of the LSE neo-liberal mafia) has also claimed in a speech he gave at Cambridge that:

The fiscal deficit is unsustainable in the medium term and creates a difficult balancing act. Cutting spending and/or raising taxes is likely to result in lower domestic demand, though a failure to do so may lead long-term interest rates to rise, also hitting demand.

He also claimed that the depreciating sterling “appears to owe something to heightened fears about the UK’s fiscal prospects”.

But in the same talk he said the road to recovery also required an improvement in the trade position (I disagree) which makes the sterling weakening a benefit!

Of-course, none of these discussion papers or speeches or memos or whatever actually articulate in detail what the “medium-term” or what “unsustainable” actually is. They just toss these terms out there without defining them and knowing that the audiences have no clue at all about what the concepts might mean much less the system dynamics that underpin deficits and public debt.

If you want a full account of what fiscal sustainability means please read the following blogs – Fiscal sustainability 101 – Part 1Fiscal sustainability 101 – Part 2Fiscal sustainability 101 – Part 3.

Which brings me to the next point.

2010-2015 – hyperdeflation, followed by rampant inflation

That is the forecast from Societe Generale’s so-called strategist Albert Edwards. I often wonder why they call these characters strategists which implies a modicum of sense.

In the right wing Australian corporate rag Business Spectator, the columnist decided to devote her whole column – Beware the deflation quicksand – to these loony ideas today (March 17, 2010).

Apparently, Edwards reports that “total credit in the US economy is collapsing, despite the central bank’s money printing efforts”. And who in their right mind would have thought that the US central banks policies to increase commercial bank reserves would stimulate lending anyway? Just the use of the terminology “printing money efforts” gives the game away and tells you that the “strategist” is locked into erroneous mainstream thinking. Or should I say lack of thinking!

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

But it is true that credit is not growing in the US at present and why should it … the place is in a mess.

Edwards is quoted as saying:

Most shockingly … the household sector shrank its borrowing for the seventh quarter in a row – the minimal signs of any abatement to the process. Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row.

Well what else would you expect. There is a severe deflation going on in the US – it is called 10 per cent unemployment (17 per cent if you count those who have given up looking) and that has come on top of a long period of suppressed (almost non-existent real wages growth) and a huge build-up in private indebtedness.

And on top of all that the US government crippled by its mainstream economics ideology, a dysfunctional legislature, and a growing chorus of idiots who parade as conservatives and progressives alike who do not understand what they are talking about but take succour from putting up so-called national debt clocks on the Internet and then watching the JavaScript counter tick over before their eyes.

They then think it is useful to write blogs about the debt clocks and encourage others to use up their scarce free time starting at their computer screens watching the counter while they also get more angry as each precious minute passes about the so-called move towards socialism. Then they all go and watch Fox television and read the Washington Post.

If they only knew that all they were watching was the build-up of non-government wealth in the form of US Treasury bonds. That is, presuming they calibrated their JavaScript correctly with the official data.

The public debt is increasing because of the nonsensical voluntary restrictions governments put on themselves – such that they have to match $-for-$ their net spending with debt issuance, as if the latter is “financing” the former. The truth is that the former funds the latter – a sovereign currency-issuing government just borrows back what is has spent!

But the public debt is rising because deficits have increased. They have increased because private spending has collapsed. Note Edwards uses the term collapsed to describe the return by the household sector to safer debt levels. As if this behaviour is something odd. The fact is that the debt binge was the outlier – normally (over long historical periods) the household sector is a positive saver – for many sound reasons not the least being to maintain some personal risk management capacity with scope to cope with the downside.

So all Edwards is reporting is the necessary process of household deleveraging … which is a good thing given how far out of whack the aggregates have become over the neo-liberal years.

All the usual historical aggregates have been skewed during this period – real wages growth virtually zero but still solid productivity growth; a massive redistribution of national income to the profit sector; huge corporate salary increases; massive build-up in household debt ratios (to income etc) and governments prone to running surpluses.

All of the these recent movements in the aggregates have to be unwound and that is why the fiscal and monetary response has also “overshot” the normal swings in these aggregates.

If we had truly learned our lesson then everything would settle down in a few years as growth returns to the Global economy and governments settle into the task of supporting aggregate demand and hence non-government saving. The problem is that all the signs are there that there is a retreat back to the recent orthodoxy … although that retreat itself is somewhat confused.

This confusion is showing up in the public commentary of characters like Edwards, who a few years ago was fiscal conservative and all for the deregulated financial market environment that his company presumably prospered from.

But now things are not so clear because they are seeing deflation before there very eyes as public net spending positions have swung very signficantly into deficit and monetary policy has gone where none of us have ever been before.

So Edwards realises that with little credit growth and “an unprecedented plunge in labour costs” inflation is heading south not north. And this is causing households to reassess their debt positions … and together all this adds up to a deflationary environment that will need sustained and increased fiscal support.

The confusion for these commentators then is that their knee-jerk reaction is to provide fuel for the deficit-terrorists who just trade in single phrase statements that they put together in no particular order and with no particular consistency of logic. So we constantly get barrages of “the private sector has to save” and “governments need to run surpluses” when they are referring to economies that structurally do not and will not run (any time soon) external surpluses.

Both statements appeal to the terrorists sense of warmth – the saving sounds right for citizens (evils of debt etc) and the government is a hated entity and “should get out of our lives” (except when there are specific handouts that we eagerly privatise!). Getting out of our lives by running budget surpluses is a curious concept in itself – because it means that these characters are endorsing a systematic eroding of private purchasing power (and wealth).

But the commentators like Edwards have to know that these emotional responses are inconsistent because they are seeing it on their trading screens as credit dries up and inflation rates fall and unemployment rises. They have to realise that the only thing keeping the show vaguely on the tracks is the fiscal support.

Their predilection is to think that monetary policy saved the day because as good neo-liberals they have been seduced into the inflation-targeting primacy of monetary policy and the ineffectiveness of fiscal policy. But even then they have noticed that with interest rates at zero and huge reserve adds going on – nothing is happening from that quarter.

Anyway, these commentators cannot seem to let go of their ill-informed prejudices that they probably learned from studying macroeconomics using Mankiw or some other similar book of lies and half-truths.

So even though the facts are staring them in the face and the expected inflation spike and spiralling interest rates (given the fiscal and monetary policy shifts) have not eventuated, they just cannot help themselves.

Edwards is no exception. In this deflationary environment, he “predicts that governments will respond to their own massive debt burdens by printing massive amounts of money and that will push inflation rates into double digits”.

But in “the near term … he expects developed economies to be sucked into a deflationary quicksand” and over the “next five years” the developed economies will experience:

… hyperdeflation, followed by rampant inflation, with a smattering of stagflation thrown in for good measure.

You can see that it is too troubling for him to let go off the nonsensical textbook charades even though the reality which points to the contrary is staring him in the face. He needs help to get him through this problem. Please provide it to him if you are near to him.

I sent Edwards an E-mail today asking him whether he would resign in 2015 if this prognosis was incorrect. No reply as yet but some of the World is still asleep.

A kernel of an austerity plan for Greece

I have been working on my austerity plan for the Greek Government and I have some ideas mapped out already. Given that German politicians and their sycophantic economic commentators have been criticising Greece for spending too much in recent years I thought we should take a look at some of that spending.

At present, Greece runs a huge trade deficit with Germany. Prior to the crisis (2008) Germany exported around EUR 8.3 billion worth of goods and services to Greece. In return it purchased Greek goods and services to the value of EUR 1.9 billion. Germany is Greece’s largest trading partner and has been for some years.

Greece is also one of the main places Germans go for holidays.

Then if you delve a little further you realise the Germans have been flogging old Leopard tanks to the Greek government for millions of Euro (playing on the Greek fears about Turkey). See also An “Economic Guernica” for Greece

So the Greek government should start by cancelling all contracts of this type with Germany. They should also stop procuring any German-manufactured goods for public purposes. I would also sent E-mails to all tourist operators instructing them to levy extra charges on all Germans and not tell the WTO about it!

I wonder what the Germans would say about that.

One hopes that the moves by BMW to further penetrate the Greek market will also come unstuck in my austerity plan. With far fewer sales going into Greece, it would also mean that BMW would not have to get embroiled in scandals over its advertising campaigns in Greece. A few years ago, its used car division put out its controversial You know you’re not the first advertising campaign aimed at Greek men looking to purchase in the premium car market. As an aside: the age of consent in Greece is 15 years). So my policy might also ease the pressure placed on young teenage girls in Greece from sleazy BMW-driving Greek males on the prowl. Win-win!

Any other ideas welcome … we need to get something to the Greek government before the bond markets close it down!


Time to go and play in my band. That will refocus my head again into a better space.

Note also I have added another category called Hyperinflation which will make it easier for people to find my Zimbabwe and Weimar blog which should head off some queries.

So …

That is enough for today!

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    This Post Has 52 Comments
    1. good post as always but you really need to write the blog explaining 70’s stagflation from a chartalist perspective. it’s the main anti-keynesian/post-keynesian/chartalist/[insert description of economic thought here] talking point after ramblings about individual freedoms and hyperinflation.

    2. > The British government could do its citizens a favour by assuming absolute power and suspending the national election for three years!

      Struth Billy, I never thought you’d be advocating another Pinochet!
      (by which I mean someone who ignores democracy and human rights in order to deliver questionable economic benefits)

      Fortunately it is with the Queen, not the PM, with whom ultimate power rests.

      Gordon Brown has been incompetent from before he became Chancellor. Hes always been more concerned with how his actions appear rather than the actual effects of them, and has pursued every false economy to that effect, while neglecting infrastructure and putting up economic barriers to prevent people improving their own economic status. As PM he’s overseen further erosion of civil liberties, and his mismanagement of the financial crisis is one of the things that prevented an effective rescue of the wider economy. And after the election, if he gets back in, billions of pounds will be wasted building another Heathrow runway – admittedly this will be private money, but that still diminishes Heathrow’s potential as a source of tax revenue.

      If his party gets wiped out at the next election it will be a case of good riddance to bad rubbish, even if Britain does have to put up with slightly worse economic conditions for a while. Sooner or later they’ll realise that cuts don’t have the desired effect and they’ll have to start investing in the nation’s future.

      Also, you seemed not to have noticed that the election will be a three horse race. The Liberal Democrats have better economic policies than Labour or the Tories.

    3. Aidan: The libdems are also on the bandwagon. From…

      “We need to bring about the biggest fiscal contraction in post-war political history.
      This will mean enormously tight spending rounds for many years to come.
      Liberal Democrats will be setting out in advance of the election a full plan for £15bn a year of savings that can be delivered by 2012…
      Assuming the economy is in a strong enough position by then to bear this level of fiscal restraint.
      But we are the first to admit that our plan does not yet go far enough.”


      Bill: Seeing as you are a big fan of his, I thought you might like to check out Richard Layard\’s proposal for a job guarantee in the UK, obtainable through his webpage . You will also note that his areas of expertise include wellbeing and happiness. Nice :)

    4. Paul Collier isn’t, as you say, a journalist. He is, believe it or not, a professor of economics. Here is an amusing evisceration of his best known popular work, which gives some idea of his general point of view on economics.

    5. Dear Aidan

      It was a joke! Respond to absurdity with the same type of joke.

      The Liberal Democrats are about as bad as the others from what I have read of their policy positions in the area of macroeconomics.

      best wishes

    6. Thank you very much, Professor Mitchell. The section on the UK and the deficit hawks who are dominating the public debate here was particularly interesting.

      I have a clarificatory questions which I hope you or another commenter may be able to help me with.

      I understand the MMT conceptual point regarding a government “financing” spending (that such a notion does not make sense when it is the monopoly issuer of the currency). I also understand how the issuing of government debt is a choice made by government, generally under the erroneous assumption that it is “financing” its spending. So my question is, given that governments do choose to issue debt rather than simply crediting private accounts what other impacts does this have? I suppose what I am asking is that if a government voluntarily builds up an increasing public sector debt (even though it does not need to) does the existence of this debt have any knock-on implications for government activity?

    7. frolix22, in short not much apart from the fact that interest paid on government debt is part of government spending (budget) which goes as tax-free income mostly to the wealthy part of private sector

    8. “A prudent government increases assets by more than debts.”

      Yes, please. I wish the US could increase my assets by spending more so I can reduce my debts.

      Not only have public infrastructure investments been slashed, over the last generation public assets have been systemically liquidated (transit, education, health care) masking the private sector’s inability to produce net income for itself. The physical balance sheet assets of most western governments are in severe deficit positions.

      The last remaining asset with sufficient wealth to be tapped are public pensions and public social security funds. The media positioning to soften the public so they don’t scream while their pockets are picked should not be surprising, but is still obscene.

      “Most shockingly … the household sector shrank its borrowing for the seventh quarter in a row”. That has to be some kind of sarcasm. The US household borrowing grew prior to the crash in large part due to subprime lending. The unemployment rates for these types of borrowers is well beyond 10% – which is far from shocking (other than the human impact) – what do you expect from subprime borrowers during an economic crisis – they will borrow more?

      This guy is a professor of economics? Shocking!

      “A national debt, if it is not excessive, will be to us a national blessing.” – Alexander Hamilton

    9. hey bill, I’d also advise caution on the suggestion, tongue in cheek or not, that public leaders should ride roughshod over the democratic process regardless of the reason.

      It just gives ammunition to rightwing ranters.

      Also I’m still looking forwards to the blog on cost push inflation. That should be a good party!

    10. Many, many thanks to you Billy for this blog. I discovered Billyblog in Jan this year and have been fascinated. I’m learning more than I did in my PhD studies back in the late ’80’s when we were indoctrinated into classical and monetarist nonsense and told Keynesianism didn’t make sense. I am a teaching prof at a US community college (most of my students transfer to get BS in business at some state university) and have been teaching for 8yrs. Prior to that I was out of the field (doing private biz consulting), so I’m fascinated by all this MMT stuff, most of which is new to me. The best part is it explains the things I was always uncomfortable with from mainstream.

      I have a question, though for you or any of the commenters. Could someone please point me to some articles, sources, etc. that might provide a bit of “history of economic thought” regarding the development of MMT? I take it that most of this theory and work has developed since the 70’s (which is partly why it hasn’t reached principles textbooks yet – the principles book is always 30 years out of date). Understanding the HOET and evolution of a field, including who the key thinkers were, always really helps me.

      THANKS AGAIN. BTW: If anyone is working on supplemental materials or diagrams (re: MMT) to be used in a Principles course, contact me. I’m willing to participate/help.

    11. Dear Bill,

      Your ideas tend to disclose information regarding public policy which is either hidden and/or held hostage by the following factors. First, by the market power of private interests whose aim is to exploit economic rents as they short this policy. Their external action brings a public agency reaction which is a voluntary policy discipline( for example, fiscal discipline). Second, there is an illusion entropy of impression that brings an internal reaction which is an involuntary public policy discipline. For example, they constrain fiscal policy perceiving an imaginary leverage capacity (fiat currency regime) or real leverage capacity (EMU or currency board). In these cases, are your ideas effective? They are only in a CRISIS as the situation weakens the market power of private interests and it breaks the hold from the illusion entropy reduced by the decline in complexity.

    12. Frolix 22: You ask what the effect of government financing its spending by going into debt is. Government spending is reflationary and government borrowing is deflationary. Thus at first sight they might seem to cancel out.

      However the consensus (which I don’t have much faith in) seems to be that given high unemployment, the net effect is reflationary, i.e. the reflationary effect of the spending is more than the deflationary effect of the borrowing. Indeed, Keynes’s big wheeze for dealing with high unemployment was “borrow and spend”.

      In contrast, in an economy near capacity, the consensus is that the reflationary and deflationary effects cancel out. The phenomenon via which the deflationary effect cancels out the reflationary effect is called “crowding out”. The latter occurs because government borrowing pushes up interest rates, which suppresses private sector borrowing and spending.

      Sergie in answer to your comment said that interest on government debt is tax free. Having owed small chunks of govt debt at various points over the last 30 years, I can attest that this is not true. First, (in the UK at least) the income is, as they call it, “taxed at source”. I.e. tax is taken off before interest recipients get paid. Also, this interest is treated (at least in the UK) just like any other form of income: its lumped together with all other forms of income and people pay tax on this total depending on a variety of factors: total income, marital status, number of children, etc etc. If their tax liability is nil, then government repays them what was “taxed at source”.

    13. Bill Mitchell:

      I do not know why you say the problems in current economy are all right-wing. Obama’s stimulus put pennies in the pockets of households, while shelling out millions to unions and other government workers. The transfer or purchasing power from private sector to public sector, especially public-sector unions, is left wing. You complain about right-wing “gutting schools” but please go to any school in US and show me how right-wing has gutted it. The idiot “black-african-gay-women’s studies” departments that plague the university are left-wing phenomena, as are the “you-are-all-Gods-special-snow-flakes-so-you-donot-have-to-learn-addition” nonsense that riddles schools. And since all these guys are unionized, you can sexually molest student and still not be fired (I believe there are about 400 such individuals on LA school district payroll).

      You are clearly left-wing, which is your perogative, but there is nothing left or right wing about MMT. If people saw deficit spending benefit them, then maybe they would be less concerned about the deficits. But they just see same old left-wing special interest groups, and bankers! (who, like MMT, stand above mere right and left) cash in while they lose their home and job.

    14. Ralph:

      I do not think Government borrowing is deflationary or reflationary. It simply changes asset composition, not quantity, and thus I do not believe has any effect on AD or inflation. Whether or not interest income is taxes has no impact on this.

    15. William K. Black sums up the problem in five main points in, What do our nation’s banks owe us now? Here’s the nub of it:

      Fourth, when finance seems to be working well in the modern era it is working badly.  Finance is a “middleman.”  Its sole function is to allocate capital to the most useful and productive purposes in the real economy.  As with any middleman, the goal is to have the middleman be as small and take as little profit as possible.  Finance has not functioned that way.  It has gone from roughly 5% of total profits to roughly 40% of total profits.  That means that finance has, increasingly, become wildly inefficient.  It is a morbidly obese parasite (in economics terms) that drains capital from the productive sectors of the economy.

      The other four points are just as damning. Presumably this is going on worldwide, since the US financial sector is claiming that it cannot be regulated and remain competitive. They argue that regulation would weaken the US economy comparatively, with the implication that this would adversely affect national prosperity and national security. Parasites all.

    16. Zanon, I think you bring up a constructive point, which I take to be that “left-wing” and “right-wing” are political terms not useful in economics or policy-making, since the latter are concerned with fact-based argument about how to accomplish public purpose effectively and efficiently relative to domestic and foreign challenges.

      As cognitive George Lakoff notes, the highly rigid ideological groups on left and right are relatively small. Most people are multi-conceptual instead of dogmatically uni-conceptual. And even libertarians of the right and radicals of the left are in agreement about keeping government out of private affairs, for example.

      The objective should be to balance and harmonize public purpose with domestic and foreign challenges based on realistic policy. Right now, this not happening because of political posturing and interest politics, as well as ignorance.

      We need coalitions of multi-conceptual people to work on viable public policy solutions that meet current challenges instead of arguing about politics. There isn’t the time for that given the magnitude of the challenges that the world is facing. National solutions are not going to be sufficient. We also need international cooperation.

      Humanity is going to be able to self-organize, or not. If not, it’s future is in question, given developing shortages in real resources and increasing externalities. Clean air and potable water used to be considered free goods because they were abundant. Even this is no longer the case with city living dangerous to health and water sources either becoming dangerously polluted or drying up. The stakes now are survival, not merely quality of life.

      Surely, people of good will can come together to address the growing challenges that transcend politics. Of course there are disagreements among different factions, but MMT provides common ground on which to intelligently discuss what is possible, based on facts and accounting principles, instead of failed theories built on non-empirical assumptions. We can argue values in terms of different rationales, but the facts are decidable on evidence, and accounting identities are tautologies (hence, logically necessary by definition).

      Representational politics is by nature constituency-based. Therefore, constituents need to be educated in their best interests, not only individual interests, but also in relation to the efficient and effective functioning of the whole relative to public purpose. This is the definition of enlightened self-interest, since the public is influenced by the functioning of the whole. Politicians also have to be educated in how to educate their constituents and help them recognize the specious arguments of special interests that try to convince them to act against their own self-interest.

    17. econprof: Take a look at L. Randall Wray, Understanding Modern Money (1998) for an excellent summary of the history and development of MMT from its roots in Chartalism. Lots of references in the notes.

      As far as the macro basis goes, see Wynne Godley and Marc Lavoie, Monetary Economics (2007). MMT is based on Godley’s development of stock-flow consistent macro models.

    18. Dear Bill,

      Regarding Greece. I have said it before and consulted some politicians with no effect. First, Greece should attempt to borrow internally as the tax avoiding private sector has plenty of savings which is held and “hidden” in banking accounts in Greece and abroad(about 300 billion euros) and with a tax holiday they can be invested in Greek bonds. The external debt share should be decreased urgently. Second, the austerity program should be thrown out of the window and apublic investment program should be implemented using the 20 billion euros in the EU assistance programs coming to Greece but not utilized because of bureaucratic procedures in Greece and the EU. Third, the Greek government should start a serious campaign using electronic records to reduce the serious tax evasion (about 40% of GDP goes unreported) mainly from wealthy households and firms. Fourth, renegotiate the maturing debt, extending the period of repayment at the existing rates or even a haircut and threatening that otherwise it would default, causing the euro to drop and foreign banks (German etc.) to take a severe loss. Greece has more bargaining power than the voluntary/involuntary position of fiscal discipline the government imposes on the people. Fifth, if this is not followed and down the road, Greece should reintroduce the drachma parallely to the euro, convert all debt to drachma denominated debt and carry on fiscal policy in drachmas (sovereign currency) keeping euro accounts for those who want to keep them. Allow the drachma to free float and see Germans loose thet exports!

    19. Nathan Tankus: you really need to write the blog explaining 70’s stagflation from a chartalist perspective. it’s the main anti-keynesian/post-keynesian/chartalist/[insert description of economic thought here] talking point after ramblings about individual freedoms and hyperinflation.

      Warren Mosler: “The US has never had a serious ‘inflation problem’ that wasn’t oil driven.” Link

    20. Dear zanon

      Thanks for your comment. I agree that it is not so black and white and that there are left-wing elements that have influenced policy outcomes. I would suggest that the vast bulk of the US stimulus package has not gone to workers though – at least 10 per cent of them are bearing the brunt not to mention those who do not show up in the data.

      But the point I would make is that the “black-african-gay-women’s studies” departments (I think using the term plague discloses your prejudices but that is an aside) do exist – but how many of the graduates become economic policy makers? The reality is incontrovertible – mainstream economics in the university system is maintains and fosters a right-wing ideology. The whole basis of mainstream economics thinking is right-wing in orientation. And the dominant journals and other ways in which economics information is disseminated is controlled by mainstream ecnomics. These are the characters that control economic policy. In the balance of impacts on societies, some social policy maker advocating for better treatment of blacks, gays or women has a much smaller impact than the treasury boffins who graduate out of economics departments.

      I also continually make the point that you have to separate my values from the fundamentals of MMT. You clearly have been able to do that.

      best wishes

    21. Dear Ralph and Econproph

      As one of the modern developers of MMT I would argue that it started with Marx – if you read Theories of Surplus Value you will find very sophisticated treatments of what we now call the theory of effective demand and the distinction between notional and effective transactions. This was all a precursor for Keynes and Lerner even if the latter would not attribute their work to Marx. The Polish economist, Michal Kalecki was also very influential and he was a contemporary of Keynes.

      Among the group of MMT theorists – there is some who would hold my view on Marx and Kalecki with a lesser emphasis on Keynes, while others are more favourably disposed to the importance of the contribution of Keynes. All of us agree on the contribution of Lerner though.

      best wishes

    22. Dear Panayotis

      Your rescue mission design is excellent. I agree on all the points. The Greek government has all the cards in its hands but are being bluffed by Brussels and Frankfurt (and German politicians).

      There are clearly structural reforms needs as you note but the urgent things they can do more quickly is to renegotiate all external debt and float a newly introduced drachma. The “constraints” would diminish dramatically in that context.

      best wishes

    23. Hi,

      I have a question about government bonds – but not directly related to this post.
      When the US federal reserve buys back a Treasury bond from the private market in its day to day oeprations to control the money supply, this bond then goes onto the Fed’s balance sheet as an asset.

      But what happens when the bond matures?
      Does the Treasury pay the Fed the principal back? Does the Fed receive yield payments from the Treasury on the governemnt bonds it holds as assets?

      Can someone (anyone) explain this to me?

      Also, what percentage of total government bonds are bought back by the Fed and never re-sold?


    24. Tom Hickey: You and I have sparred over that fraud George Lakoff before. I have no wish to do so agains. I find ridiculous your notion that left or right have nothing to do with “economics or policy-making, since the latter are concerned with fact-based argument about how to accomplish public purpose effectively and efficiently relative to domestic and foreign challenges” and so will anyone else who has slightest exposure to actual policy making in this democracy of ours.

      Bill: You and I agree that vast bulk of stimulus package has not gone to workers, and I would add that the small number of workers who HAVE got it are Government employees and unions. Why is that? Right wing ideology?

      When I called out “black-african-gay-women’s studies” departments as left wing I was merely stating fact. If you claim that this is NOT left wing phenomenon, then you are displaying your prejudice, I am afraid.

      Economics departments tend to be libertarian, which does place them to the far right by university standards. But it is interesting, liberal economics began its life as very Progressive, far left, phenomenon. Do you know who called economics “dismal science” and why? The historical origins are eye-opening.

      We have situation here were Progressive president has passed “stimulus” package which went to banks and unions. Regular people see 10% unemployment and conclude stimulus does not work. They hear higher taxes are in their future. They see other public unions get 3%-8% raises, or retire for 100% of final year pension. They read story about how public pension are massively underfunded. Why in gods name would they want more of this? It would be easier to call out mainstream economists error if people actually got money in pocket and saw it helped them. Right maybe saying “don’t help” but left is only helping their allies. What is common man to do?

      Even left-wing economist like Krugman says deficit spend now, but shrink deficit later. Do you know how the deficit will be shrunk later? Let me give you hint, it will not come from cutting public sector, it will come from higher taxes on private sector. To the extent that fiscal problems shrink bloated public sector, it may be rational, and not right-wing, for private sector to suck-up 10% unemployment for a few more years to avoid paying 60% taxes to keep government unions in clover.

      This is why I like Mosler payroll tax holiday. Very equitable. Yet I have never heard any left wing or right wing economist suggest it.

    25. Bill,
      As a reader and listener who has only gotten a 4 once and average only 3.5 on an ongoing basis, I want you to know that I appreciate your comments here at least as much as reading on the fallacies of the upcoming extremely steep V in our economic business cycle.
      Thanks for all of it.

    26. Bill Wrote:So all Edwards is reporting is the necessary process of household deleveraging … which is a good thing given how far out of whack the aggregates have become over the neo-liberal years:
      OK everyone, I am fed up with hearing about UK USA EU CH etc. There are enough commentators in the world to fix these countries on a daily basis.
      What I need help in is understanding what the Australian Aggregates are pointing to. When we talk about other countries household deleveraging should we expect the same here?
      Also how do you stop a country turning into a welfare state if you simply expand the public service and its services to take up the slack in an economy. Or as we did last year give everyone $900 for producing nothing. The Chinese tried it mid last century with a famine caused because the farmers got fed 3 meals a day whether they produced grain or not. The farmers went to the fields and had a snooze and hung out with friends. Not enough grain caused a famine that killed millions of people. This is the result of no incentives to produce. The same will apply to any economy that takes the need to produce from its workers. A la Greece perhaps. My Greek friends told me last week that the Public Service in Greece is huge and the wealthy doge tax in the extreme. The Greek Gov could learn a lot from the ATO, they don’t miss much at all!

    27. Food for thought. Similarly to the thrift paradox, there is a current account surplus paradox triggered when all countries attempt simultaneously to achieve such a surplus via austerity programs leading to a lower GDP for all! Are the Germans and the Chinese listenining?

    28. Zanon, if I did not make it clear enough, I intended to say that labels like “left” and “right” are diversions from intelligent debate of issues on their merits. As long as we continue to call each other names, we are unlikely to make progress addressing the serious challenges that affect nations and world.

      While we can disagree about values, in policy debates we are called upon to provide a intelligent rationale for the values we espouse, if we are ever to understand each other and perhaps find common ground for compromise.

      By “politics,” I meant the current state of political “debate,” which is about gaining advantage by hook or by crook, typically by demonizing the opposition.

    29. Andrew: But what happens when the bond matures? Does the Treasury pay the Fed the principal back? Does the Fed receive yield payments from the Treasury on the governemnt bonds it holds as assets?

      These are accounting adjustments, not “payments.” Nothing actually changes hands. Entries get marked up or down so that the books balance. This gets reflected in the budgetary balances and size of the national debt.

      Also, what percentage of total government bonds are bought back by the Fed and never re-sold?

      Generally speaking, the Fed only holds sufficient Tsy’s for its interest-rate management operations. This is only a fraction of the total national debt, so it’s rather immaterial. The Fed has greatly expanded its balance sheet lately through QE, but that is in response to the crisis, and they are already talking about reducing it.

    30. Tom Hickey: What you say is all very well but then you have this billy blog where “intelligent debate on its merits” are filled with continual invective against right wing neoliberal. We all know that MMT is neither right nor left, but I do not see you wagging your finger at bill. I wonder if you would be so calm and happy if he was going on and on about the crypto-communists who are using this crises to complete their conversion into socialist hellhole.

      I am last person to defend academic economists, but it must have be obvious to even your notice that these people are simply clueless. moron academic economists do not understand how bank reserves work for gods sake, something that is nothing to do with politics at all. the “neo liberals” are advocating what they are because they think we are still on gold standard, not because they are “right wing”. If they understood MMT they would be advocating for massive tax cut, and I don’t hear any of that.

    31. Zanon, this is Bill’s blog and I am obviously not going to tell him how to run it. I am just saying that I think we would all be better off if we focus our energy objectively instead of getting overtly partisan about it.

      I am all for going after neoliberalism as an economic theory (ideology, actually, since much of it is non-empirical), because it is demonstrably wrong-headed. The fact is that Larry Summers is a neoliberal, and President Obama is following his line, in saying, for example, that the US is running out of money. So this cuts across political lines. Similarly, Paul Krugman is a New Keynesian and supposedly progressive, or at least liberal, but he apparently doesn’t get monetary economics either, or at least is not letting on.

      I don’t think the entire situation in the US can be ascribed to the “right-wing” when a Democratic administration and congress are now in power and continuing many of the policies of previous administrations that got us where we are. Similarly, Bill Clinton’s economic policy was managed by Robert Rubin and Larry Summers. So we can call them all out on the illogic of their neoliberal policies, confirmed by disastrous results, irrespective of party affiliation or what they call themselves.

    32. Last Mile update: Roger Erickson recently pointed me to a post by Robert Parenteau at Naked Capitalism, saying to read the comments, too. I just got around to that and found that Yves is on board. She even mentions billy blog (3.16 @4:40 am).

    33. LOL!

      Well, Bill asks how he can make his posts shorter. One easy way is to “focus energy objectively instead of getting overtly partisan about it.”

      One objective statement is that Bill insists on blaming current problems on neoliberal theory, when there is nothing neoliberal about monetarism, just as there is nothing neoliberal (or progressive) about MMT.

    34. zanon:

      I would hazard a guess that unions and government workers are better organized than non-union private sector workers, so they have been able to negotiate a better deal. I don’t know if that is left-wing, right-wing, or pragmatic-wing. Banks are pretty well organized too, I don’t necessarily call them right-wing, and I don’t imagine they are left-wing.

      This wing thing is not winging it for me – I think we need new categories.

      How does the saying go … “So far left I must be right”?

    35. Questions from the debt is not debt post.

      Near the end it says:

      “For a modern monetary theorist, private debt is not remotely like public debt. Private debt is required to “finance” private spending in excess of income, asset sales and saving. It has to be paid back by consuming less in the future.”

      What if the “entity” is experiencing real earnings growth into the future?

      “Public debt doesn’t finance anything and doesn’t constrain the capacity of the sovereign government to spend in the future.”

      I’d like to think about it like this. With public currency, an economy mostly “worries” about price inflation. With public debt denominated in its own currency, an economy mostly “worries” about price inflation and interest rates. With public debt denominated in a different currency or private debt, an economy “worries” about price inflation, interest rates, and debt defaults.


    36. from the debt is not debt post in the comments:

      “Roger says:
      Thursday, July 9, 2009 at 4:29
      Thanks Bill, always great to read your analysis. Warren Buffett has stated that the most important question to ask about economics is “And then what?” Obviously, this can be done ad infinitum.

      Thus, while it is obvious that a govt with a fiat currency faces no constraint on spending, what are the considerations for the foreign net saver of that public debt? Like all savers, they are making assumptions about the strength of those savings for deferred purchasing power. To that end, they will be concerned about the level of the currency and the real purchasing power in that currency.

      It seems that this can be unstable itself, as there must be a point at which the exporting country would prefer to make goods for domestic consumption. I imagine that a great deal of your writing is to articulate concepts that out-of-paradigm analysis have not considered. For those of us completely in paradigm, I’m hoping that you will walk through some of the “and then what” situations that can happen throughout the world economy that might upend the current relationships.

      In particular, I wonder how long the tradeoff can exist between exporting nations wishing to keep their real wages low enough to run a trade surplus, versus the desire of current account deficit countries like the U.S. wanting to correct their severe unemployment and underemployment situation.

      Does this mean that in a global economy that this must somehow eventually correct to where the marginal labor input for goods and services are relatively equal across countries? And yet we are so far from such an equilibrium now. The world has had less than a century on a fiat currency system, and has had even less time with less developed countries producing competitive manufactured goods. How might this all look in another 50 or 100 years?

      Thanks again for all your insightful writing!”

      Good questions.

    37. pebrid:

      I assure you, private and public union (these days mostly public union) are left wing. banks simply own the Government entirely. The redistribution is from private sector TO government sector.

    38. “the bullying Germans ”

      The Germans pay for the EU and always have. Everyone else (except Holland) takes more than they put in. Without Germany there is no EU, the others are not productive on a net basis.

      If I refuse to pay your overdue bills which you racked up while partying, does that make me a bully?

    39. Andrew and Tom: Andrew asks “Does the Treasury pay the Fed the principal back? Does the Fed receive yield payments from the Treasury on the government bonds it holds as assets?”

      I’m not the world’s expert on this, but I think the answer is “yes” to both questions. Plus at the end of the year the Fed pays its “profit” back to the Treasury.

      I wasn’t 100% happy with Tom’s answer to Andrew’s question. Tom seemed to suggest that book keeping entries take place to reflect the above (e.g. the repayment of principal), but that “These are accounting adjustments, not “payments.””

      My answer to that is that when you make out a cheque to someone, or do a credit card transaction, that is simply an instruction to commercial banks to make book keeping entries. These entries involve a very real transfer to purchasing power: dollars, yen or whatever. To that extent, the above book keeping entries at the Treasury etc involve a transfer of real dollars.

      But, and this is a big “but”, money for a government that issues its own currency is very different to money as viewed by citizens or firms. Plus, just to add to the complexity, governments and central banks can be regarded as one entity, or they can be regarded as separate entities.

      So we are very much into things abstract here. That’s the fascination, for me anyway. I think my answer is better than Tom’s, but he’d probably give me a rap over the knuckles for saying so!

      That’s enough for today.

    40. The Germans pay for the EU and always have. Everyone else (except Holland) takes more than they put in. Without Germany there is no EU, the others are not productive on a net basis.

      Heh. That is the difference between macro-economics and micro-economics.

      In microeconomics, you don’t care about externalities. If you can lower the wages of your workers, you will do so and not suffer a decline in sales.

      Only in the macro world does that come back to bite you — suddenly, people don’t earn enough money to buy your goods. You have a mysterious demand-shortfall that the economists conclude must arise out of wages being too high. LOL.

      The micro-world is fine with disequilibrium, but the macro-world has to take everything into account.

      In the case of Germany, it is an extremely productive nation only in the micro sense (e.g. output produced per hour worked).

      They are extremely *unproductive* in the macro-sense (e.g. standard of living achieved per hour worked).

      At the end of the day, the purpose of an economy is deliver goods to you in return for your labor. Any economy that requires you to build 10 cars but only allows you to use 9 of them is an economy that throws away cars — an inefficient, unproductive, out-of-balance economy.

      If the Germans were to become more productive — in the macro sense — then they would stop throwing away either cars or labor and only produce what they consume — they would be in balance. In the macro-sense — which is the only sense that matters over the long run — the Germans are the most inefficient economy in the EMU.

    41. RSJ, are you suggesting they should work fewer hours and/or retire sooner?

      That is economic heresy to the spoiled and rich, most of their economists, and the bankers. I like it.

    42. Yo RSJ,

      I like it too. Underwriting the EU has been a kind of potlatch for the Germans; they throw money away on EU boondoggles instead of consuming it. Indeed, Germans, consume as much as you produce, and let the other EU countries pay their own way. Christine LaGarde (the French minister, whatever her name is) should be careful what she asks for in asking Germany to consume more.

    43. Fed Up,

      It’s not for me to say whether Germans should consume less in general, or consume more of their trading partners’ goods and less of their own, or consume more of both, etc.

      Sometimes I think that the Germans (and also the Japanese) view a trade surplus as a measure of national virility. But the fact remains that such a system is wasteful. Regardless of their urge to produce, they ought to obtain validation in a way that is less disruptive to their neighborhood.

      If they had their own free-floating currency, then German products would become so expensive and their neighbors’ products so cheap, that the market would clear and each nation would produce as much as it consumed, over the long run. Then there would be no dead-weight losses due to price-ceilings.

    44. Panayotis says: Food for thought. Similarly to the thrift paradox, there is a current account surplus paradox triggered when all countries attempt simultaneously to achieve such a surplus via austerity programs leading to a lower GDP for all! Are the Germans and the Chinese listenining?
      Thursday, March 18, 2010 at 12:02

      Interesting. We have an international contest to see how many nations can produce a surplus all at the same time. Everyone wants to be Germany or China. Odd though that the Germans dont look too worried about loosing Greece as an export market.

      80% of steel for delivery by ship in the world comes out of China. Thats just not sharing the jobs around. No wonder the deficit countries are upset! They have no way to join the party unless someone gives jobs up at home. Should this be tolerated or ignored by MMT as the world is getting the steel and all the Chinese get are a few more USD or Euros.

    45. Could be time to revisit this one as the 5 years are up.
      Perhaps the overcapacity in everything everywhere has started a hyperdeflation starting mid 2015.
      In Australia we have an exchange rate crash of over 30% but not 30% inflation in imported goods. Who is picking up the TAB for that?
      Cheers Punchy

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