A FEARSOME HERD OF TYRANNOSAURUS REX APPROACHES
Does the USA need to fear those dreaded bond market vigilantes?
“Remember the bond market vigilantes, that frightening band of financial marauders who once roamed the earth like a fearsome herd of Tyrannosaurus rex? They were so scary that in February 1993, as President Bill Clinton struggled to reduce the federal budget deficit, James Carville quipped that he wanted to be reincarnated as the bond market so he could intimidate everybody.
Well, they’re baaack! Not in the United States, though. Here, the Treasury Department continues to borrow brobdingnagian sums of money at extremely low interest rates—about 3.5% for 10-year Treasurys and under 1% for two-years lately—even though everybody knows that the federal budget deficit is on an unsustainable path toward the stratosphere. (Could it be that not everybody knows?)”
Can you hear it? That drum beat? I can. It’s growing louder. It’s those evil bond vigilantes and they are on the attack. They’ve attacked Greece, they’re attacking Portugal, they’re attacking Spain and the USA is next on their radar. As Paris Hilton might say – “we are, like, so totally screwed”. Or are we?
There is an earth shattering shriek coming from a certain group of market participants. The hyperinflationists are at it again. They’ve been undeniably, horrendously, atrociously wrong for 25 years, but this is their day in the sun. It’s finally coming. Hyperinflation is on the horizon. And that means the bond vigilantes are going to attack the USA and bring the great American empire to its knees once and for all. We will be crushed for our reckless behavior! All of this “money printing” and reckless deficit spending is the end of us. It’s time to call up the funeral parlor and make an appointment. Uncle Sam has one foot in the grave and the other is being tugged on by a bond vigilante.
The only problem is, there is no inflation. In fact, we’re on the verge of a deflationary relapse. Also, there are no bond vigilantes in the USA. Interest rates keep dropping like a stone in water. So what is so wrong here? Why are the hyperinflationists wrong again? Peter Schiff says the dollar is done for. Nouriel Roubini has been saying for almost two years that bond yields could spike as “unsustainable” deficits get attacked by the bond market. Alan Blinder, (a former vice chairman of the Federal Reserve and Chief Economic Advisor to Bill Clinton) says we are on the verge of becoming the next Greece as our debts pile up and drive us towards eventual extinction. All three men have been and continue to be fantastically wrong. Why are Peter Schiff, Nouriel Roubini and Alan Blinder and the other “bond vigilante” fear mongerers so wrong? In large part, because they don’t understand how the monetary system works. Roubini was recently quoted saying:
“if [the US government] maintains large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.”
Those damned “borrowing” rates. Unfortunately for Mr. Roubini, the United States government doesn’t fund its spending via the bond market. NOT ONE PENNY. China is not our banker. Neither is Japan. And neither is the private sector. The government bond market is a monetary tool. A remnant of the failed gold standard. Nothing more. It funds nothing. I’ve shown this ad infinitum in recent months (regularly readers probably hate me by now – I apologize profusely for putting you through this), but I can’t stress how important this fact is.
Commentators like Mr. Roubini and Mr. Blinder are obviously very influential people. Unfortunately, their understanding of the monetary system is antiquated neo-liberal hogwash and it is helping to drive this country and the global economy into ruin. We are not Greece. Not even close. If anything, we are Japan, who coincidentally, has met with NOT ONE bond market vigilante in 20 years despite persistently high deficits.
I’ve repeatedly shown how there is no solvency risk in a country who is the issuer of the currency in a non-convertible exchange rate system. I’ve also shown how large budget deficits are unsustainable (anyone who thinks I am optimistic about the economic outlook is not a regular reader). But most importantly, the only real risk of large deficits is inflation. But I’ve also shown that there is no risk of inflation in the current environment. Consumers are still deleveraging, there is ZERO wage growth, very low borrowing demand, low capacity utilization, high output gap, climbing unemployment, low aggregate demand, low cost push inflation – not exactly a recipe for inflation. In fact, not even close (Japan should be coming to mind once again). So, is the high deficit a concern? You bet. Is it going to be the demise of our country? Only if we misunderstand it (which is the path we are currently on).
It’s time for someone to stand up and silence these men who are nothing better than ignorant fear mongerers. Half of them are broken clocks and the other half have made a life out of scaring people. In the meantime, they’re on an endless campaign to convince the population of the United States that we are all bankrupt and the country is about to get flushed down a New York City urinal. The facts say they are undeniably wrong. They keep saying inflation is right around the corner and it keeps on not showing up. If your portfolio has been positioned for inflation in recent weeks you’ve been crushed just like you were in 2008 – despite this (supposedly) “different” return of the credit crisis.
If we want to become Greece I recommend that the Obama administration continue taking advice from men who have failed to revive this economy and have done nothing to increase aggregate demand or reduce unemployment despite nearly TWO FULL years at the helm. If we want to become Greece we should impose harsh austerity measures and raise taxes. Sounds great doesn’t it? The Greek citizens obviously love it.
Please pardon my unusually unreserved temperament here, but we are talking ourselves into a second Great Depression. We are confronted with an enormous task ahead of us. I still believe most investors are underestimating the gravity of the situation here. As I’ve hammered on for two years now, the credit crisis never actually ended. The private sector never fully recovered. The government was never ready to hand off the baton. The recent turmoil in Greece will only exacerbate our problems.
Even worse, I now highly doubt that President Obama will survive the Great Recession. This is a great tragedy in my opinion as it has the potential to crush the hopes of millions (and this is coming from a registered Republican!). Hope is fading as we are talking ourselves onto the ledge because we don’t understand the fundamental differences between the highly flawed EMU and our own monetary system. We cannot talk ourselves into a second Great Depression just because of the ignorance of influential economists and politicians. It’s time for someone with some confidence to stand up and show the American people that they understand our monetary system. And it’s time for the fear mongering hyperinflationists to sit down, close their mouths and stop attempting to scare everyone into believing that the United States is the next Greece. Nothing could be farther from the truth.
The Tyrannosaurus Rex is extinct. It’s time to put this neo-liberal economic thinking into extinction as well. If not, it will be the extinction of the once mighty USA that young Chinese boys and girls read about in the history books.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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96 Comments
How about you advise treasury? You’ve been right. You seem to understand this stuff.
I hope that’s a joke.
In all seriousness though, if we are going to get the cure right we must first properly diagnose the patient. The path we are on will potentially further weaken the patient….
Hi TPC,
Why don’t you write an opinion for the times. Seriously, as a well-known blogger, it’s not impossible that they publish it. I’m not saying it’s likely, but why not open up the dialogue. Maybe get a couple of other bloggers to talk about it…
Here’s my question, because I don’t entirely understand why you’re right. If it’s true that the bond market doesn’t fund the US gov, then why the increasingly large quantities of borrowing?
before you go any further ask yourself why has your question been left unanswered?
I don’t see all the questions, that’s why
But I always try to answer people’s questions. I never mean to ignore anyone….
Why the increasingly large amount of spending? We borrow nothing. Borrowing has not increased. Pass a few trillion $ stimulus bills and anyone’s deficit will increase….
TPC I am sorry but you don’t seem to understand how the US monetary system works. The government absolutely needs the bond market to financing. The government in the US does not have the power to print money! So please stop repeating that.
Categorically false.
Paul: the government is absolutely funded by the bond/bill market. The system was designed in such a way that the government does not control money supply so it needs to get the money from somewhere. The entity able to print money in the US is the Fed. Now you could in theory just have the government instead of selling the paper in the bond market go to the Fed and sell the bonds to them directly. That would, however be so called debt monetization. Governments and central banks try to avoid it because it results in increasing the money supply, which in theory may result in either inflation or debasement of the currency. At the moment it probably would not cause inflation because the velocity of money is extremely low (banks are increasing their reserves and not lending the money out) but in a few years the picture could change.
100% inaccurate.
Sorry to make an example of you, but this is very important. You have shown your cards (and misunderstanding) thru the use of your gold standard jargon. The govt does not print money. Nor does it monetize debt. Debt monetization is in fact impossible. It is a gold standard term from the gold standard era and is often misused these days.
For those who aren’t familiar, debt monetization is misconstrued when the treasury borrows from the Fed via a direct bond purchase. Bond issuance is a monetary tool to target the FF rate. If the Fed actually monetized as some say, it would drive the FF rate to zero (we’re above that though marginally now). If the Treasury spent this $ it would be excess reserves. This would force the Fed to sell en equal issue of bonds to hit the FF rate. The Fed would just be buying from Treasury and selling to the public. There is no “monetization” there.
The term is being used very loosely to fear investors into thinking that the govt is just firing up the printing press. It’s ridiculous and anyone with an understanding of monetary ops can see this.
TPC is correct here. The one exception is quant easing – when the FF is AT zero and the needed inflationary impact is not occuring. In this case, the Fed literally creates money from nothing by purchasing goverment and corporate bonds. However, its not actually printing money – simply electronically creating credits in its own account and using such to purchase debt.
This is basically the last tool in the Fed’s arsenal and generally signifies a very bad situation. The Fed did this for a short period on a relatively small amount of debt ($300 bln) after Lehman went belly up. Considering all the Fed tools working simultaneously, it’s hard to guage what the true impact of this action was – but generally the market felt it paled in comparison to the impacts of TARP, TALF, and setting the FF at zero.
Class ajorned
Thanks TPC, and In Banking. JT, I don’t think I agree with you, either. Sorry. I just want to understand better what the bond market is for, if it’s not for funding the govt. If it’s for controlling the FF rate, that makes sense. I’m not in finance, so I’ve been trying to wrap my head around this issue.
Why then does someone like Roubini get this so wrong. If it’s a basic banking concept, why isn’t it entirely the common understanding of the matter? That seems baffling.
I’m going to cut TPC off here because I think I’ve memorized this response verbatim (haha):
Debt is issued to:
1. Control the Fed Funds rate. As this drifts upwards during a deflationary credit freeze cycle, more debt is issued to bring the rates back down to levels that the fed is targeting
2. To put USDs into the hands of other countries. This debt can only be paid in USDs so buy issuing debt, we are tying them (ie. China) to our currency system which we are the sole issuer of. For example, when we buy lead laden plastic toys from China, we pay them in dollars (we don’t hold any Reminbi currency). China now has dollars which are valued basically at what we decide they are valued at (and in general, this is “expensive” as its usually losing value). So, we balance out the trade by selling them debt that has a certain percentage yield (US Treasuries). This debt yield is paid in – you guessed it – dollars. So they are now effectively tied to our currency. This is how the USD has become the world’s reserve currency.
Now MUNICIPAL debt is a different story. This is state/city level debt that IS issued in order to finance projects (ie. road repair, bridge building, etc). However, its important to remember that its all the same currency at the end of the day, so its essentially the same system of paper which we control.
How’d I do?
Very useful. Thank you!
example of me
Please this is real fun. Rather than saying that i would gladly see you recommend some economic articles or books where i could read more about this theory of yours, which i guess is some form of Neo-Chartalism (and please not Mr.Mitchell from Newcastle in Australia or Mosler). On my side i would recommend Mishkin’s “The Economics of Money, Banking, and the Financial Markets”. Unless obviously you think that Mishkin doesn’t understand the aformentioned problems. Not to overdo the issue this is my last post on the subject so i will not bore everybody to death.
The same Mr Mishkin who said Iceland was in “excellent” financial condition just months before its spectacular collapse?
http://www.vi.is/files/555877819Financial%20Stability%20in%20Iceland%20Screen%20Version.pdf
Very good post, I couldn’t agree more. By the way: I’m long T-Bond for a medium term (6 months) trade
Surely though TPC once all this ‘money’ has to end up somewhere? I mean, seriously, where has it all ‘gone?’
If there’s an extra few trillion dollars in the world, do you not think that one day those trillions will be essentially distriuted throughout the economy, thereby resulting (in simplicity) with everyone having a few extra dollars to spend and (at the turning point) all of them chasing too few goods due to lack of supply caused by the lack of investment/exploration/production that is occuring as business err to the side of caution during the crisis?
Surely money is merely a commodity of which so much has never been ‘produced’? Thus I (perhaps wrongly) would assume it cannot be worth as much.
If that’s the case, gold (the relic) trumps fiat (I know this wansn’t about gold, sorry) and treasuries get murdered by inflation.
Look forward to the flaws in this argument being pointed out….that’s what makes a market!
(GREAT WEBSITE MATE).
Is there too much money though? All I see is global slack, global deflation, global high unemployment. Is that a sign of too much money? Or not enough?
Global slack? Tick. Global unemployment? Tick. Deflation? Tick. Tremendous amount of wealth that was destroyed in the markets these last few years? Tick.
Now for my question! WHERE DID ALL THE MONEY GO?
It does not get burned, shredded or thrown out, right? (please tell me I’m right) so surely it has merely been ‘redistributed’ in which case it is ‘out there’ and will ‘do the rounds’ eventually.
And if the supply of goods is not what it used to be, due to lack of investment caused by fear and/or prudence, then what, no inflation?
Too much money,too many houses,too few jobs,and last of all still way too much debt how far can you stretch the debt rubberband before it snaps
Don’t forget about the tremendous amount of wealth that was destroyed in the markets these last few years. If you had $10 dollars and invested it in the market at the top in 07 it is now worth $7.50. Where did it go. Up in smoke.
This is 100% false…. somebody else got those $10 when you invested. There is no value creation/destruction, only redistribution
True…..but now when I sell I receive $7.50. What happened to the other $2.50?
Assuming, for the sake of simplicity, the buyer is now the same that sold you something the first time around… he is the one keeping those $2.50!
Wrong.
If the market is trending up, and people are selling to each other, no one is losing money.
If the market is trending down, and people are selling to each other, everyone is losing money.
The only time there is a zero sum game where someone makes money where others are losing is when it’s stuck in a zone.
Nope… you are wrong
the total amount of real resources/cash available to buy and sell securities is not changing with the market trending up or down.
Again, there is only redistribution of wealth in financial markets…
Focusing on money, as jedwards does, leads to incorrect conclusions.
The key is to focus on wealth, as gonzalito does.
Over time, as the market value of financial assets go up and down, the overall wealth of the economy will likewise go up and down. As this occurs, the real resources/cash in the system simply get redistributed among investors as financial transactions get settled.
In a simplified economy exhibiting no economic growth in the aggregate, while the market value of financial assets may fluctuate, the value of resources/cash available to purchase financial assets should remain static.
I agree the the comparison between the U.S. and Greece is flawed, but I’m wondering if the U.S. is so much different from the EU.
For the sake of argument I’d compare Greece to California and the U.S. to the EU. The ECB has the monopoly of creating the EUR as well as the U.S. has the monopoly of (as you put it) ‘button pressing’ the USD. I’m living in Europe so I have no feel of if or who would bail out California, but obviously the U.S. states have as much financial leeway to ruin themselves as the EMU members have. Over all I don’t see much difference between the U.S. and EU (or EMU) when it comes to financial situation and need to print money.
One fundamental difference which I see is of course the trade balance. If printing money does not cause inflation (and I agree with you that the current situation does not cater to that), it will ‘merely’ affect the currency in relation to others. Assuming that that the current EUR/USD trade range (let’s say between 1.20 and 1.60) reflects the relationship of the two economic areas (EMU vs. U.S.) as long as neither seriously adresses their problems in a fundamentally different way (besides printing comparable amounts of money), it one vs. the other will remain in that range for a long time.
However, if the above holds, both regions/currencies together may of course fluctuate related to the rest of the world (vs. China India, etc and most of all (speaking of inflation) vs. countries with natural resources), Europe will be better off because the EU as an export heavy area it will benefit more than the U.S. from a weaker currency. Correct me if I’m wrong (and I most likely am missing something because my understanding of macro economics is woeful), but the U.S. is more prone to eventually importing inflation through a money printing and an eventually weaker currencty than the EU.
I must say that in this case, I’ve been forced to relent and what appeared as a short term inflationary trend was merely a facade.
There is a fundamental flaw with this argument – States have to balance budgets, the Federal Government does NOT. Congress simply votes to raise the deficit cieling and presto – the Federal Government is not cash restrained. I can’t remember a time when Congress has said no to “raising the roof”. What makes it even less comparable to the EMU is that the Federal Government can then “bailout” the states to some degree. Of course, no state is going to get a $40 bln deficit bailout without “austerity measures” put in place (ie. cutting of government jobs, increasing taxes, dropping pork projects and entitlement programs, etc). But there is latitude here.
The fundamental difference is that by charter, the EUR cannot print currency that exceeds a woefully low inflation peg (3%?). Thus they must find other means – pulling a Robbin’ Hood, taping the markets by debt issuance, and oh yeah – borrowing from the US which has no such peg in place. TPC’s argument is that the US literally cannot default on its debt – its a constitutional amendment! EMU countries can – and in doing so, evaporate trillions of dollars of debt holdings and setting massive amounts of money ablaze – hence causing massive deflation for the rest of the world who drank the koolaid in thinking a simulated gold standard was somehow going to overcome the problems we had with the gold standard. The EMU members have very different views on this and it can literally tear the place apart with contagion spreading across global markets like a modern plague.
That being said, the government will face a massive inflationary period but not for at least another 2-4 years. This will be troublesome but in trying to prevent that we will actually cause it to happen – poetically fatalistic
Now here is where I must throw in my .02 (which actually costs .04 cents to produce – sorry couldnt help it). I think TPC is a bit to idealistic in some regards when it comes to financial regulation. If you argue that tax increases and debt issuance decreases could be disasterous – what exactly do you think imposing a breakup of investment banking from commercial banking will do?? It would literally evaporate 10s of trillions overnight as banks have nowhere near enough capital to cover their holdings and would cause a global sell off that would insure the Greatest Depression imagineable. Further, the idea that a $50 bln fund or even a $150 bln fund (created by financial firms) could suffice is absolutely preposterous and a complete waste of capital. The top 3 beleagured firms already have consumed more than that and we all know the dominoes never fall independent of each other! Perhaps the only thing more laughable than that is the notion of an “orderly bankruptcy” – if such were possible, why aren’t we doing it now? Why does the Fed need to step in and back EVERY failing firm to the order of billions?? Finally, this wouldn’t destory the evil derivative products – it would simply shift to other locales making US markets less competitve while allowing completely unregulated trading in these products to occur outside of Uncle Sam’s reach…
Even the politicians see the problems here (or have their crib sheets telling them what to say). I agree that some forms of regulation are necessary but it must be a phased approach – perhaps starting with a scheduled increase of capitalization ratios over the next few years, thus forcing the banks to hold more cash and delever in a more orderly fashion. Finally, rather than creating even more red tape – how about we actually enforce the EXISTING rules? We want the FED and Treasury to do this….the same people who denied any systemic flaws right up until Bear Sterns collapsed??? Yikes. Throw rules and money at a poorly defined problem solves nothing….
The difference between the EMU and USA is that we are unified. One treasury, one rule of law, one central bank, etc etc. They will never have that.
And don’t forget, we have more guns
And bigger ones. Much bigger.
I’m still wondering in what regard California state bonds and USD are different than Greek bonds and the EUR (besides the fact that the Greek managed to run up their debt a lot higher). California can’t print dollars, neither can Greece. And if California busts, the Washington or the FED (or whatever agency) will probably bail them out for fear that some NY banks are carrying a bit much of those in the same way the Europeans are doing that now.
They are only different in that the EMU is not truly unified.
As an American (and a patriotic one at that) I would never accept the failure of a fellow state. NEVER. If we are going to bailout anyone the states are deserving. I think most Americans would agree with me on this (or I could at least easily convince them). And this is coming from someone who is generally anti any bailout.
The situation is totally different in EUR. Europe has the buffer to write a check, but the moral hazard in doing so (and the potential price instability) is too great for Germany to allow. They can’t allow it. That same mentality would be defeated here in the USA.
They need one constitution, one rule of law, one treasury, etc. But thousands of years of history will never let that happen.
Isn’t a key difference the requirement that states have a balanced budget?
Hi TPC,
I’m a little confused by your article. My current view is that the US debt levels aren’t yet high enough to cause a serious problem on the bond market, and that deleveraging and deflation will continue for a long time yet. But the US is on an unsustainable fiscal trajectory, and if nothing is done bond yields will start increasing enough to cause trouble. The Government should try to slowly reduce its debts, and hope that there’s enough time to grow out of the problem.
Do you disagree?
Do we really have all these “debts”? Or are hey merely savings accounts at the Fed?
TPC,
does this change the “substance”?
You give money to somebody and expect to get back the original amount + interest. Calling it “debt” or “savings account” does not really make any difference to me…
huh
As always, TPC, one of the clearest and most honest expressions to be found anywhere.
But I don’t fully understand the relationship between the Obama admin. and the bond vigilantes, that seems implied above.
Looks to me like the U.S. gov’t actually IS trying to become Japan, what with interest rates so low for so long. I can appreciate that critics yell that it will cause hyperinflation, but it’s not the administration that seems worried about that. Roubini and Binder don’t speak for Obama or for the Fed.
What we have, of course, are two political parties both doing evil things. Republicans say they want to cut the deficit (not really! Republicans always explode the deficit) by reducing spending; and Democrats say they want to keep spending in check (not really!) by raising certain taxes (basically taxes on Republicans). And both sides–the Bush and Obama administrations–have put us on the road to state capitalism.
But I don’t see the connection between the vigilantes and Obama.
(I’m a very liberal Democrat; a passionate Obama supporter; and yet a believer in the Austrian school: so, I was praying for a complete, cleansing collapse in Fall, 2008, and praying against it at the same time.)
The Obama comments were NOT directly related to bond vigilantes, but more a digression in reference to Obama getting advice from men who have no idea what they are talking about. Summers, Geithner, Bernanke, etc….
I certainly agree with you on that, TPC.
To be fair to Obama, he had absolutely no economic knowledge or experience (neither did McCain, who well might now be trying to balance the budget; the only president with economic experience that I can think of was…Hoover!). So, suddenly confronting a near-depression, Obama reached out to the Clinton folks, thinking they had done the right thing because of the enormous prosperity under Clinton (but not realizing that the seeds of what we are today suffering from were sown then).
I’m an academic, and yet the idea that Bernanke knows anything about treating a deflationary environment in the real world because he happened to write a PhD thesis on the Great Depression and taught the subject to 15 graduate students/year interested in getting “A’s” in his seminar simply blows my mind.
You hit the nail on the head here. Bernanke is pushing on a string. The monetarist approach has failed. We can all see that in the borrowing data.
And yes, the seeds of this were sown in the Clinton days. Some of the smartest people I know believe the Clinton surplus was the cause of the current debacle.
I would even argue that the seed was laid earlier than that when Greenspan became Fed Chair. But Summers, Rubin and Greenspan really perfected the whole mess….
TPC,
In your opinion, who DOES understand the monetary system? It’s been a real education here over the past year or more, but it’s dismaying to note that I don’t see anyone else who seems to get it. All I hear or read from politicians are variations of “we’re going broke.” Many investment advisors, columnists voice the same thing. So, does ANYONE get it?
There are people who get it. Joe Stiglitz, William Black, James Galbraith, Warren Mosler, etc. They are out there…..As for the politicians – I don’t know if any of them get it…..
That’s what really bothers me. Our political class is nothing but fools and charlatans. They will be the ruin of us all.
We basically have a bunch of lawyers and professors running the economy. Its like putting a bunch garbage men in charge of the emergency room.
Stiglitz and Galbraith? All Keynesians.
Come on TPC…
Looking for bond/stock/gold/REIT/EM vigilantes? Look in the mirror. What are the world’s baby boomers going to do? The Japanese have chosen their path … just look at their household asset allocation and their immigration policies. As WWII showed, they will follow their leaders down no matter what. When was the last time you heard of a protest by the Toyko Tea Party?
Fiat money is a great experiment (like the EU curr) that has never confronted (and passed!) the great test of demographics and resource constraints (peak XXX). The problem is paper money was never intended to be a store of value, but progressively became a short term IOU to longer-dated IOUs. The problem is longer-dated means relying on the faith and morals of another generation. In our ADD US society, I don’t think there is that inter-generational trust. As well, the declining fertility rate means boomers will be more concerned with taking care of themselves rather than relying on the future, or leaving anything for the future for that matter.
Americans are more trigger happy than Argentinians, Thai’s etc. As soon as they smell a rip-off, look out capital flight. People forget that it was illegal to buy gold not too long ago. The only constraint will be laws (capital controls, illegal gold buying, nationalization of infrastructure as all the pension funds rush to buy in, or refusal in Asian countries to allow foreigners to own infrastructre).
America and Argentina = apples and organges.
I’m not saying that the countries are the same, but that the people are more similar than we think. I don’t think Americans will be as inward looking, as “patriotic” or blind followers as the Japanese. If they see their government ripping them off via excessive currency debasement then they will act.
As noted earlier by “Paul” … “Why don’t you write an opinion for the times.”
I agree. You give ample evidence of thorough understanding, and obviously possess the requisite passion surrounding your views.
Go for it, good soul.
But don’t limit your target to the “Times” (presumably “Paul” was referring to the NYT).
Pursue publication at all major business and economic outlets, such as WSJ, Economist, Financial Times, etc. … why, even USA Today since lots of influential people read it over their “complementary breakfasts”.
Once again, go for it.
i agree PC, we can’t hear them coming…..they’re hiding in the grass with the rest of us(ignore them for now).
but they will come, they always do…..down the road
gold is a poor investment in a deflationary FALL(march 09-nov09 and last week to present) and a low(normal) inflationary enviroment(i believe like IB, december to april-tho real low or flat).
gold is an exception investment in a EVEN deflationary period(nov.09-dec10) and even better in a higher inflationary (those ty-rex’s coming down the road).
cullen, i know your browe furrows at the mention of gold, but take a deep breath please, and just listen to the next sentence with an open mind as i have learned to do with you, especially you.
from the above observation, on a bi-weekly averaged i believe the price of gold is THE best way to measure deflation/inflation….the CPI and PPI?…….the CPI has been slowly manipulated to cheat the old folks out of a SS raise…..doesn’t include food…what?
i know correlation does not necessarily imply causation(i have 2 bach. of science degrees evidenced by my lazy spelling)
i have the charts all around, maybe i’ll work on that.it’s probly do to reverse couple to dollar, but i’m not going to be a 3x leveraged forex trader…u can’t do that and use a fly rod at the same time.
your post great
I disagree. I like TPC’s Big Mac Index much better than gold as inflationary measure. Look at the price of gold from 1988 to 2007 vs. any one of the big three indexes. Gold (valued in dollars) increased about 55% percent while S&P moved up over 320%. Crude oil was closer with around 200% increase in price during this period.
I think Gold is a really terrible trade – its takes a up a lot of capital for a long period of time and the returns simply don’t justify the investment. That’s just my opinion though. Frankly, I think I could make more money buying a Peanut cart and paying some guy to sell them on the corner than I could investing in gold.
How convenient to select 1988 to 2007 to reinforce your argument…
Gold is not an investment, it serves as a storage of value when currencies are being debased in a deflationary environment which will lead at some point to inflation, but we are far from there yet.
The monetization of US government debt does not create new money. Money is created when any debt, public or private is created. If the total supply of public and private debt increases – that’s inflationary, while if the total supply declines – it’s deflationary. Private debt is shrinking…and it is true that the government’s deficit is adding to public debt which tends to offset the decline in private debt and thus tends (in the short run) to mitigate the deflationary tendency, because the total of public and private is shrinking less. HOWEVER, (in the long run) the total supply of debt that must be serviced with real production is too high – and mathematically unsustainable. The government’s attempt to slowly decrease the total debt level over decades (instead of over a year or two)to real-production-sustainable levels would be nice. But we will run out of private production to commandeer for servicing total debt before total debt itself can be reduced to servicable levels. Putting off the decline of total debt back to sustainable levels is just making the future pain worse.
sorry JD but technically your first sentence is incorrect – debt monetization does increase money supply.
give this a read…
“This is what mainstream economists call “printing money”. However, it is an erroneous conception in terms of the monetary system. To monetise means to convert to money. Gold used to be monetised when the government issued new gold certificates to purchase gold. Monetising does occur when the central bank buys foreign currency. Purchasing foreign currency converts, or monetises, the foreign currency to the currency of issue. The central bank then offers federal government securities for sale, to offer the new dollars just added to the banking system a place to earn interest. This process is referred to as sterilisation. In a broad sense, a federal (fiat currency issuing) government’s debt is money, and deficit spending is the process of monetising whatever the government purchases.
It is actually rather obvious but all government spending involves money creation. But this is not the meaning of the concept of debt monetisation as it frequently enters discussions of monetary policy in economic text books and the broader public debate. Following Blanchard’s conception, debt monetisation is usually referred to as a process whereby the central bank buys government bonds directly from the treasury. In other words, the federal government borrows money from the central bank rather than the public. Debt monetisation is the process usually implied when a government is said to be printing money. Debt monetisation, all else equal, is said to increase the money supply and can lead to severe inflation.
However, fear of debt monetisation is unfounded, not only because the government doesn’t need money in order to spend but also because the central bank does not have the option to monetise any of the outstanding government debt or newly issued government debt. In Part 3 I will show that as long as the central bank has a mandate to maintain a target short-term interest rate, the size of its purchases and sales of government debt are not discretionary. The central bank’s lack of control over the quantity of reserves underscores the impossibility of debt monetisation. The central bank is unable to monetise the government debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to any support rate that it might have in place for excess reserves. We will consider this step-by-step in Part 3.”
http://bilbo.economicoutlook.net/blog/?p=352
Brilliant! See my comment above as well. Professor Mitchell hits a home run here….
Interestingly, here is a website where this theory (“taxes give money its value” ) is brilliantly challenged
http://chartal.blogspot.com/
@voltrader and Gonzalito
Thanks a *LOT* for those links …
On the contrary, using commenter vol-trader’s definition of monetization – when the FED buys debt, paying with its own credit, there is no net new money created – The FED simply exchanges its credit (debt) for the existing credit (debt) it wishes to buy (monetize). The point where new dollars were first attached to real goods and services was when the original debt was first created not when the FED buys it.
See Steven Keen “Debunking Economics”
Jd thanks; although i very much differ with your views i really appreciate you opening my eyes to new thoughts. For some reason I never read the book but just ordered it and will do it as soon as it arrives
Again, please read John Hussman for what I think is the clearest discussion of the inflation/deflation debate. As long as deleveraging continues, deflation will occur due to depressed velocity of money. Once it is over, by 2015 according to Hussman, inflation will reign supreme. Even the greatest deflationist Bob Prechter agrees.
Comparing US to Japan is comparing apples to oranges. Japan can borrow at low rates because they are internally financed. Japanese are biggest savers in the world, US is just the opposite. TRex is just in hibernation.
No offense to the great Dr Hussman, but he hasn’t exactly nailed the economy over the last few years.
Japan’s savers don’t “fund” anything so yes, comparison is more than appropriate and not apples and oranges.
While this is technically accurate and is essentially what MMT talks about, I’d question whether MMT proposed policies will actually work in practice. Adding govt stimulus and printing more $ sounds like a great policy if it can be channeled productively. Alas, it won’t happen – the system and bureaucracy and vested interests will siphon away most of this to a small section of the economy and/or even if it reaches the rest of the economy, it will be used a proof positive that govt printed money can always save the day and therefore lead to sloth and decay among citizens (why “work”, blow asset bubbles and live off them, if they collapse, govt will just print $ and ride to the rescue).
MMT is a serious and good theory, practically it is mostly useless. There HAS to be serious consequences of over leveraging – debt has to be destroyed, if not, the country will decay abd eventually fail.
As I have said a number of times earlier, my belief is that MMT proponents while technically correct and also with the right belief, do not have a good policy prescription.
A little bit of Austrain debt destruction combined with very targeted MMT policy prescription (like a jobs program) might be the only real way out. A pure MMT polocy prescription will end up as being hugely inflationary and will only create asset bubbles.
So, US is certainly not Greece, it IS like Japan and Japanese polocy is nothing to be proud of and follow, notwithstanding Koo’s repeated missives to the contrary.
We agree on a lot Haris.
“A little bit of Austrain debt destruction combined with very targeted MMT policy prescription (like a jobs program) might be the only real way out.”
You nail it. I would throw in a tax cut while we’re at it.
I would also add that it is vital we diagnose this correctly. We are more Japanese than Greek. If we misdiagnose this the outcome will be disastrous. At least by understanding we are Japan we can begin to understand the problems they confronted.
Unfortunately, we are making many of the same mistakes (such as propping up failed banks)….
Well, I disagree with your opinion that no inflation was around the corner.
Inflation can be created by central banks if money supply exceeds the volume of transactions of goods and services in the long run. Central banks worldwide buy national debts by printing money, leading to higher prices in assets, oil, commodities, imports etc.
Inflation is to come and it is likely to be like in UK with an inflation rate of 3,4% and an interest rate near zero. The real term rates are negative 2,9%.
The bond markets don`t work any more as seismograph of inflation as long as central banks intervene on the markets with purchasing programs to keep interests low at any cost.
The housing bubble in US bursted with spiking interest rates and the central banks nightmare are interest rates to soar that will lead countries directly in default as seen in Greece. Thus, the FED will combat interests to rise by all means and the US administration can fund their deficit with ultra low rates and high inflation to reduce the deficit the easy way.
Another “problem” with the US is the huge asset disparity, where the top 10% own 80% of the assets. Monetary inflation will be used to counteract wage deflation. The difference is the rich people with the assets won’t want to see their store of value inflate to save Joe Mechanic. In an open economy and investment flows, Mike Bloomberg will be buying nuclear power plants, gold, commodities, asian currencies, Chinese labor camps .. anything that will never go out of fashion. Governments will tolerate it as long as blowback is tolerable. This isn’t economics; it’s classic human selfishness.
Admittedly, I may not know as much about this as you, TPC, but there are a few things I wonder about.
First, I understand your point that the Fed’s alterations of credit accounts will most probably not lead to near-term inflation given the deflationary pressures caused by an extremely over-leveraged economy. The contrary argument is a mechanical gut reaction many people seem to have in comparing the US’s current situation with the likes of the Weimar Republic and other more recent hyperinflationary economies such as those in Latin America over the last few decades.
But hyperinflation or no hyperinflation, do China and many other governments and corporations continue to hold dollar reserves or not? Is the existence of the dollar as a reserve currency tied to the underlying value of the US economy or not? If so, then I would think that, given the incredibly inflated and fraudulent so-called value that the US economy is represented to have, and given the real underlying value that China’s and Germany’s economies seem to have, wouldn’t it be rational for investors to begin shifting their reserves out of dollars in favor of more valuable currencies? I think so. And I think that this is part of a global shift in wealth and potentially political power from West to East. The speculative bubble we are currently in is, I think, one of the last attempts to extract wealth from a society in long-term economic decline. Part of this speculative phase, I believe, is also the short-term attempt to preserve the dollar as a reserve currency because it is, for now, the only stable asset. To argue that the long-term implications of this are the demise of the dollar is not premised on the argument “printing money=hyperinflation,” but instead on the fact that investors do not see attractive investments in the US anymore because we have sold off much of our industry and the industry that remains is uncompetitive. There will be no reason for investors to hold dollar reserves because there will be nothing valuable to buy from the US except fraudulent and inflated derivatives. These securities are for those short-term speculators who are bent, not on making socially useful investments, but on making sure they make a short-term profit and are not the last ones left holding the dog shit that has been spray-painted gold. What people seem to be missing is that there is no solution to this situation in “free-market capitalism.” Even if we wanted to, we couldn’t build a high-speed rail system across the country because the banking oligarchs do not see a substantial short-term profit in that. Besides, once we get into these kinds of questions, it inevitably offends the libertarian sensibilities of the entire “investment community.” The reason World War II was so good for the US is that the country converted auto-factories overnight to socially useful investments: tank factories. And how was that done? Because the government mobilized the country around nationalistic war-fervor. I’m not advocating this, but it is the truth.
But the rest of your argument seems to be political more than economic. Reading over the comments, your answer to the question of why the US and California are different from the EU and Greece, seems to be that the US has a strong state apparatus with guns and the power to make laws and politically override those of the states. The qualitative difference here is the existence vs. non-existence of a state. The quantitative difference is the strength of the social fabric binding these two political formations. The US’s social fabric is stronger than the EU’s. But there are strong decentralizing and even secessionist political forces that seem to be rising to the surface in both societies. It’s clear in the EU, but in the US, while it is not as developed, many in the Tea Party movement represent (consciously or unconsciously) these decentralizing forces in the US. Politics is polarizing and the worse things get, the more people will be willing to accept and call for radical solutions, whether that means populism, devolution of power to the states, fascism, New Dealism, socialism, etc. What will result is impossible to tell at this point. But the question is, do you think that the rest of the country really feels the way you do about bailing out California? The more the US goes into debt, the higher the probability we default: there is a limit to everything and to say otherwise is to promote the same blind euphoria that has propelled the bubble economy. Many people are saying that it’s different for the US, but that’s only if you think that the US economy is fundamentally strong. It’s not and the big investors are realizing that.
For this reason, I do think the austerity measures are coming our way, whether the bond vigilantes bring it about or not. The main question becomes whether US civil society can handle such pressures on the social contract as Greece is being forced to handle. What has been holding things together here is the ubiquity of consumer credit, but we all know that has to run its course as well.
Both the EU and Eastern developing nations represent a blip in time and are right now showing their true flaws. The status of the USD as the world’s recovery is two fold:
1. We have a long term proven history of evolution and change that fosters stability. This is an essential component of anything held as a “reserve currency”. The fact is, it isnt the cotten and linen notes that we print that world believes in – its the government and ideaologies that it represents as well as the hurdles it has overcome over 2 centuries despite massive changes to monetary and fiscal policies over that time period. The Tea Party movement is nothing compared to the internal strife we’re witnessing unfold in Europe – opening multi-century old cultural conflicts. As for China/India, well there are enormous social hurdles that must be overcome. We’re talking about 1/3 of the planet’s population that lives in abject poverty making less than $2 a day. At the market peak in 2007, there was a standing “army” of hundreds of thousands of dissatisfied Chinese citizens protesting and being oppressed. This “army” has now swelled in ranks to 10s if not hundreds of millions of individuals. India faces similar issues.
2. US is still the largest economy in the world and will likely remain as such for the forseeable future. As such, keeping the USD as a reserve currency will also be a requirement for any country that intends to fully participate in markets and international commerce.
The blanket statements about derivatives are honestly, populist nonsense. The vast majority of derivative trading is for the purposes of flow trading and is a low risk stable income business (in fact, many banks frequently place these groups under the umbrella of “fixed income”). Make no mistake – THIS IS A CLIENT DRIVEN business, it is NOT speculative and provides an ESSENTIAL service to a very broad range of industries (from Energy companies to financial companies to emissions and even WEATHER – yes, we have weather derivatives). It’s a bit tiresome to hear this populist nonsense bandied about when clearly very few people know that what is most often reference is similar to the portion of the iceberg that one can see and neglect the 90% of it which is out of sight. Its on par with saying that all the auto industry does useless unproductive work simply because Toyota has recently been caught delaying recalls on known faulty models. Painting with such broad strokes is just silly.
I know I sound defensive but it gets a bit old hearing “armchair economists” constantly berating an industry which I work in 60+ hrs a week along with armies of others like me insuring that your house is heated/air conditioned, your car can be filled with gasoline, your shower provides water, your sugar jar is full each day and your lights turn on when the sun goes down. It’s a 24/7/365 operation with incredible amounts of infrastructure and technology that most people have absolutely no idea about. And FYI, no one here retires at 50, we don’t have FOUR people in the entire country quoting 1 million plus salaries for tax purposes or 400 out of 16,000 people saying they have a pool.
Oh and btw, I work for a European bank with a global reach into 160 countries worldwide. This isn’t a romper-room where people are spraying eachother with Crystal champagne and holding down the BUY button all day long.
Both the EU and Eastern developing nations represent a blip in time and are right now showing their true flaws. The status of the USD as the world’s recovery is two fold:
1. We have a long term proven history of evolution and change that fosters stability. This is an essential component of anything held as a “reserve currency”. The fact is, it isnt the cotten and linen notes that we print that world believes in – its the government and ideaologies that it represents as well as the hurdles it has overcome over 2 centuries despite massive changes to monetary and fiscal policies over that time period. The Tea Party movement is nothing compared to the internal strife we’re witnessing unfold in Europe – opening multi-century old cultural conflicts. As for China/India, well there are enormous social hurdles that must be overcome. We’re talking about 1/3 of the planet’s population that lives in abject poverty making less than $2 a day. At the market peak in 2007, there was a standing “army” of hundreds of thousands of dissatisfied Chinese citizens protesting and being oppressed. This “army” has now swelled in ranks to 10s if not hundreds of millions of individuals. India faces similar issues.
2. US is still the largest economy in the world and will likely remain as such for the forseeable future. As such, keeping the USD as a reserve currency will also be a requirement for any country that intends to fully participate in markets and international commerce.
The blanket statements about derivatives are honestly, populist nonsense. The vast majority of derivative trading is for the purposes of flow trading and is a low risk stable income business (in fact, many banks frequently place these groups under the umbrella of “fixed income”). Make no mistake – THIS IS A CLIENT DRIVEN business, it is NOT speculative and provides an ESSENTIAL service to a very broad range of industries (from Energy companies to financial companies to emissions and even WEATHER – yes, we have weather derivatives). It’s a bit tiresome to hear this populist nonsense bandied about when clearly very few people know that what is most often reference is similar to the portion of the iceberg that one can see and neglect the 90% of it which is out of sight. Its on par with saying that all the auto industry does useless unproductive work simply because Toyota has recently been caught delaying recalls on known faulty models. Painting with such broad strokes is just silly.
I know I sound defensive but it gets a bit old hearing “armchair economists” constantly berating an industry which I work in 60+ hrs a week along with armies of others like me insuring that your house is heated/air conditioned, your car can be filled with gasoline, your shower provides water, your sugar jar is full each day and your lights turn on when the sun goes down. It’s a 24/7/365 operation with incredible amounts of infrastructure and technology that most people have absolutely no idea about. And FYI, no one here retires at 50, we don’t have FOUR people in the entire country quoting 1 million plus salaries for tax purposes or 400 out of 16,000 people saying they have a pool.
Oh and btw, I work for a European bank with a global reach into 160 countries worldwide. This isn’t a romper-room where people are spraying eachother with Crystal champagne and holding down the BUY button all day long.
Both the EU and Eastern developing nations represent a blip in time and are right now showing their true flaws. The status of the USD as the world’s recovery is two fold:
1. We have a long term proven history of evolution and change that fosters stability. This is an essential component of anything held as a “reserve currency”. The fact is, it isnt the cotten and linen notes that we print that world believes in – its the government and ideaologies that it represents as well as the hurdles it has overcome over 2 centuries despite massive changes to monetary and fiscal policies over that time period. The Tea Party movement is nothing compared to the internal strife we’re witnessing unfold in Europe – opening multi-century old cultural conflicts. As for China/India, well there are enormous social hurdles that must be overcome. We’re talking about 1/3 of the planet’s population that lives in abject poverty making less than $2 a day. At the market peak in 2007, there was a standing “army” of hundreds of thousands of dissatisfied Chinese citizens protesting and being oppressed. This “army” has now swelled in ranks to 10s if not hundreds of millions of individuals. India faces similar issues.
2. US is still the largest economy in the world and will likely remain as such for the forseeable future. As such, keeping the USD as a reserve currency will also be a requirement for any country that intends to fully participate in markets and international commerce.
The blanket statements about derivatives are honestly, populist nonsense. The vast majority of derivative trading is for the purposes of flow trading and is a low risk stable income business (in fact, many banks frequently place these groups under the umbrella of “fixed income”). Make no mistake – THIS IS A CLIENT DRIVEN business, it is NOT speculative and provides an ESSENTIAL service to a very broad range of industries (from Energy companies to financial companies to emissions and even WEATHER – yes, we have weather derivatives). It’s a bit tiresome to hear this populist nonsense bandied about when clearly very few people know that what is most often reference is similar to the portion of the iceberg that one can see and neglect the 90% of it which is out of sight. Its on par with saying that all the auto industry does useless unproductive work simply because Toyota has recently been caught delaying recalls on known faulty models. Painting with such broad strokes is just silly.
I know I sound defensive but it gets a bit old hearing “armchair economists” constantly berating an industry which I work in 60+ hrs a week along with armies of others like me insuring that your house is heated/air conditioned, your car can be filled with gasoline, your shower provides water, your sugar jar is full each day and your lights turn on when the sun goes down. It’s a 24/7/365 operation with incredible amounts of infrastructure and technology that most people have absolutely no idea about. And FYI, no one here retires at 50, we don’t have FOUR people in the entire country quoting 1 million plus salaries for tax purposes or 400 out of 16,000 people saying they have a pool.
Oh and btw, I work for a European bank with a global reach into 160 countries worldwide. This isn’t a romper-room where people are spraying eachother with Crystal champagne and holding down the BUY button all day long.
“The vast majority of derivative trading is for the purposes of flow trading and is a low risk stable income business”
You make me laugh…
How much banks lost in 2007 and 2008 in Flow trading (flow credit trading was hammered…)?
Ask Ken Lewis ex Bank of America CEO:
“I’ve had all of the fun I can stand in investment banking at the moment.”
in 2007 as a reminder:
“Bank of America admitted losses of $527m (£258m) on complex debt products, whose value ultimately rests on mortgages taken out by low-income Americans. In total, trading losses were $1.46bn in the three months to the end of September, much worse than anyone had been predicting, and a stinging reversal from the $731m profit posted in the same period last year.”
Do you call this kind of results a “low risk stable income business”?
)) Do you call this kind of results a “low risk stable income business”? ((
It’s certainly low risk and stable income for those who invent those derivates or those who package and sell them off to someone else.
The whole view (being entrenched in the financial industry world view) reminds me of this link:
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/
Thanks for the link, very interesting article.
I wouldn’t judge a BUSINESS model based on what KEN LEWIS says – or BofA for that matter. This was a company that was sinking BILLIONS into Countrywide as the market was tanking (and was ultimately forced to buy the business entirely).
You can laugh all you want. Do you know what FLOW TRADING is???? Please clarify that you understand this concept – because the inherent purpose of flow trading is to make consistent income on client broker/clearing services by creating a spread which is instantaneously hedged.
I like your choice of flow credit trading – the worst of the bunch. Any idea how big the IRS derivatives market is? How about commodity derivative? How about profits before 2007 and after 2008??? This is once again, populist disinformation from people who are travelling 5 miles above the industry and get their knowledge from Michael Moore movies….
Yes actually I do know what flow trading is, thanks for asking, much appreciated! I worked in the sell-side on a trading floor for some years
If you read my comment AGAIN, BOA lost 1.46 billions USD in trading, not on CFC. CFC was acquired at a later stage and did not impact the results at this stage in 2007. Be kind, rewind…
Yes I do know the IRS and commodity market, what’s your point?
“because the inherent purpose of flow trading is to make consistent income on client broker/clearing services by creating a spread which is instantaneously hedged.”
Yeah….right…but sometimes it just doesn’t work, you cannot be 100% hedged, sometimes it doesn’t work, pure and simple:
From BOA news room in October 2007:
“Contributing to the loss in Credit Products was a $607 million trading revenue loss due principally to the breakdowns in traditional pricing relationships, which made hedges ineffective,and the widening of credit spreads.”
When markets break down, you can forget your “rosy easy to hedge low risk stable income business”.
I’d gladly relive the last 24 months if it guarantees that Obama doesn’t make it back to the White House. Short term pain, long term gain.
Reading you pounding this point time and again, TC, where you challenge the economic competence of so many reminds me of a good Scottish tale when the Brown family are watching the troops march past. “Why are they all out of step except our Jimmy ?” asks Mrs Brown, and the whole family marvels about how only Jimmy is keeping step.
You make comparisons with the gold standard as though economic history began in the 19th Century. But how do you account for the facts that fiat currencies that have been attempted in the distant past (eg in China) have all failed, and the collapse of all previous empires has resulted from imperial overstretch (cf 800 US bases around the world) and eventual economic collapse?
Have they been right or have they been wrong?
In thinking about monetary policy everyone tends to hide behind and argue for one theory vs. another. If we all go back to Krugman’s example of a real micro-economy … the Whitehouse babysitting pool … one can see that there can be many outcomes, some of which depend highly on trust/mistrust and group psychology. If you’ve never had the experience of having 6 roomates share household chores than you may go on thinking that such an arrangement works perfectly; the toilets are always clean …! Think back to other micro-economies you have been involved in … neighbourhood cleanup, a club with shared facilities, etc. it went pretty smoothly, right …?
If real economies are so simple, why do we need financial regulation, wage and price controls, bans on gold sales, capital controls, up tick rules, collateral, ratings agencies, tax lawyers, tiered tax regimes, …
Heavyweight post & comments.
I would second the opinion that MMT is a much more technically accurate framework of the current monetary/fiscal state than is the balderdash that is taught in textbooks.
That being said, MMT’s proponents tend to imply,( or state directly) that GOVT spending can save the day. This is where MMT loses it foothold with the masses.
Given that a sole issuer of currency is never “revenue” constrained, when liberty loving Americans hear that the already bloated and inefficient GOVT can continue money creation (and in fact must continue money creation to create demand) all hell breaks lose in the Austrian camp. That a “central bank” should create money – seems unAmerican, but alas, that is where we are.
Austrians hate MMT not because they know it to be an inaccurate portrayal of how its done, but rather because they don’t want a GOVT operating on carte blanche, just because it can.
So inevitably the argument devolves into the MMT guys hiding behind the science of modern money, and the Austrian guys hiding behind the morality of a fixed Gold Standard.
In reality, the MMT guys need to brush up on the morality of the current system, and the Gold Standard guys could use a little info on the science of how it works. Then they can resume their talks.
Excellent blog Mr TPC!! Everyone should read above post by Haris07!
Nice work. Do you have a link to the “I’ve also shown how large budget deficits are unsustainable”. Agree with it but want to understand your thoughts/the dynamics behind it. Is it because
a. You crowd the private market so their borrowing costs are higher
b. Government does make some good investments and overall we cannot expect government to come up with all the innovation/competitiveness of the private sector.
c. At some point, the only way to get out is via inflation?
Some smart money is betting on Japan to start paying more for its debt? What are your thoughts on that? Is that just another foolish attempt?
Also why do you ever think inflation will rear its ugly head. Especially with the amount of debt, wouldn’t we follow the Japanese path.
Good comment above that the fix for America (any maybe Japan) was a little MMT policy prescription with debt destruction
InBnak…the banking system as it now stands has collapsed. THis POPULIST URPRISING
InBnnk and TCP…the private banking system and the fiat currencies have collapsed. Only the the full faith and credit of the government ie the willing citizen’s to be taxed stand between s currencies value a zero.
As bankers attempt to sweep their intellectual and physical austerity measures across the globe they will find that the common man is far superior in intellect and will. Your pompous attitude will be swept away by waves of history.
You are a pompous ass…it is not bankers who provide the livelihood of the citizne.s but instead the sweat and toil of the citizen’s labors that allow you to your utility bill!
This intellectual bs concerning how monetary policy is executed either through a elected government or the BANK controlled FED is mute. While I agree that monetary policy and the velocity of money needs to be controlled to build capital stock…most of this string is intellectual masturbation.
Quark,
The name calling isn’t gonna fly around here. I won’t warn you again. This isn’t a playground.
Thanks,
TPC
Good article. I’m a new reader but so far so good. Most people apparently don’t understand that with our infernal money-for-debt scheme no debt = no money supply. Also, the government backed counterfeiting cartel creates the principle but not the interest when it lends money thus requiring ever increasing amounts of debt. Not to mention negative real interest rates that drive folks into debt-slavery.
Deficits are not good but they sure beat a non-existent money supply.
understood…i’ll keep it civil going forward. In Banker I apologize for my comments. I found your comment concerning the public’s misunderstanding of the role of bankers a bit much and symptomatic of the ills the are eroding societies bonds.
The markets have been transformed from an vehicle created to aid in the formation and protection of capital goods and services to an entity that is bent on destroying both and in so doing ripping apart the fabric of society. This is under appreciated in to many circles of influence.
While laying off risk through interest rate swaps is a normal interest rate hedging strategy for banks to neutralize risk and protect the income from their loan portfolio, speculative trading is not. To attract capital for the formation of business there needs to be a semi stable interest rate environment where cash flow models are not crushed.
The markets have proven to lack discipline and markets left to their own devices fail. Someone tell me why each generation needs to be taught this lesson. Discipline in monetary and fiscal policy coupled with markets performing their function as a entity for capital formation is critical for economic growth and a prosperous society. The government must assure the roles of all participants in the marketplace carry out their role for the benefit of society through HEAVY hand enforcement of their regulatory duties by restricting and punishing any one person or entity that breaks regulations. Neither the bankers nor the government have fulfilled these roles. Bankers are despised instead vs respected, governments are incompetent vs competent and the madness of speculators now control the economies destiny.
No worries. I just don’t want the comments to devolve into food fights. We’re all just trying to find answers here to very complex questions so the comment section should only be used for productive debate. Plus, I really don’t want to be the internet police so as long as we all understand that we’re adults largely looking for the same things (answers) we don’t need to worry about slinging mud at each other….Thanks.
Yes, and this is the typical response of someone who is NOT involved in finance. It’s populist unrest. I’ve spent THOUSANDS of hours in this business on the front lines – where do you get YOUR information from?
It’s funny how NOT being a banker somehow gives you insight into how people perceive us. I get invited to client dinners, exclusive events, and MANY charity events. I guarantee I’ve donated a greater percentage of what I’ve made to good not-for-profit causes than the VAST majority of people who are angry at finance without looking into the mirror or the government as equal participants in this mess. I also have an enormous circle of collegues, associates, friends and family members who display no form of malice towards me – quite the opposite in fact. Yet liberal media and this “progressive” administration have encouraged what is the one exception to Freedom of Speech as regarded both on a philosophical and legal level – Freedom of Speech can be withdrawn in those cases where one is aiming to INCITE a mob. Do you REALLY think the millions of people in finance worldwide are all conspiring to ruin your world? If that’s the case, well no amount of logic, fact, or reasoning will change your mind.
But I won’t swim upstream. Believe whatever you choose – that is your right. I prefer to work off of truth and knowledge – not the words of others much less informed.
I fully agree with you about depression and, therefore, no risk of inflation at all.
BUT I am not so sure that this is enough to avoid a default.
If you decide to print money, at last dollar will be abandoned as international currency. Why to mantain my assets in dollars if I can’t trust in it?
…and you cannot continue to cumulate debt without penalize your economy.
What I want to say…at last, this game will end.
Compliments for your blog.
azimut72 (an Italian fan)