ALAN GREENSPAN SOUNDS THE BOND VIGILANTE SIREN CALL
The lead story at the Wall Street Journal is an absurd diatbribe from none other than the U.S. central banker who has been wrong about just about everything over the last 25 years. Alan Greenspan has officially joined the legion of deficit terrorists and flat earth economists who believe the U.S. is on the verge of imminent collapse at the hands of the bond vigilantes.
Alan Greenspan has been more than discredited over the course of the last 10 years. This is a man who helped deregulate the financial sector while also believing that he controls every twist and turn in the U.S. economy via his interest rate press releases. Of course, the last 18 months have proven the monetarists terribly wrong. The Enron banking system has also proven that deregulation substantially contributed to our current predicament. But don’t take it from me. The man himself admitted in 2008 that his models were “flawed”:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
Nonetheless, he remains a reliable and important adviser on monetary and fiscal policy in the United States. Now he is helping rally the troops in an attempt to implement 1930′s style austerity.
Don’t be fooled by today’s low interest rates. The government could very quickly discover the limits of its borrowing capacity.
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.
Borrowing? What borrowing? The United States budget deficit is not “borrowed money”. We fund our own spending internally. We do not borrow one penny from abroad. China is not our banker. Japan is not our banker.
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Inflation has remained remarkably subdued? Yes, this has surprised only those who fail to understand how the monetary system works. The inflationists and monetarist hyperventilators have failed to understand that excess reserves do not necessarily result in inflation. Mr. Greenspan (like Mr. Bernanke) honestly believes he can sell more apples if he stocks the shelves with more of them.
The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy. The very large contraction of private financing demand freed private saving to finance the explosion of federal debt. Although our financial institutions have recovered perceptibly and returned to a degree of solvency, banks, pending a significant increase in capital, remain reluctant to lend.
This is unbelievable. Mr. Greenspan still believes this is a banking problem. The banks have largely recovered. We’ve seen a v-shaped recovery in banking profits yet they won’t lend. Why? Because there is no private sector demand for loans. Mr. Greenspan utterly fails to grasp this concept. Like Mr. Bernanke, he thought he could implement the ultimate form of trickle down economics by fixing the banking system. Of course, this strategy has failed spectacularly as the U.S. consumer remains very weak, consumers continue to deleverage and DEMAND for loans remains weak.
Beneath the calm, there are market signals that do not bode well for the future. For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public. But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.
The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.
So he seems to at least grasp the fact that the United States has ZERO solvency risk. But he seems to fail in understanding why our borrowing costs might increase. Mr. Greenspan doesn’t seem to connect the dots between the lack of solvency risk and what might actually cause higher interest rates – inflation. But as he admitted above, Mr. Greenspan can’t understand why there is no inflation (just like he can’t understand why stocking the the shelves with more apples doesn’t result in higher sales).
I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.
Mr. Greenspan entirely fails to understand that this is a balance sheet recession. The private sector is deleveraging which is resulting in deflationary pressures and general economic weakness. Rates will remain low as long as there is low demand for debt in the private sector. This is a direct result of a lack of velocity of money in the economy. The Fed can “print” as much money as they please, but if it doesn’t actually get into the economy it might as well be sitting on a dark wet floor at the NY Fed (which is exactly what most of it is doing effectively).
In the 1950s, as I remember them, U.S. federal budget deficits were no more politically acceptable than households spending beyond their means. Regrettably, that now quaint notion gave way over the decades, such that today it is the rare politician who doesn’t run on seemingly costless spending increases or tax cuts with borrowed money. A low tax burden is essential to maintain America’s global competitiveness. But tax cuts need to be funded by permanent outlay reductions.
The U.S. government is NOT a household. The comparison is not remotely accurate. The federal government does not fund its spending like a household or state must. Much like an alchemist, the Federal government simply walks into the basement and presses a button that results in money. This might sound like semantics, but it is of vital importance in understanding the monetary system and what our future economic risks are and how we should respond to them.
The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees.
Spending has been very poorly allocated in the last few years. We have allocated billions in funding to bailout bankers, prop up housing prices and stimulate loan growth via absurd programs like “cash for clunkers”. In the meantime, the Federal government has failed to stimulate the private sector via job growth and/or reduced tax burden while also promoting loser capitalism and substantially increasing moral hazard.
We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)
Borrowing from abroad? Mr. Greenspan – you should be ashamed of such comments.
Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.
Now we can’t afford Medicare? No, greater government spending might result in higher taxes down the road (to offset potentially higher inflation), but the United States will never not be able to afford it Medicare or Social Security payments. It is operationally impossible for the United States to be unable to fund its spending.
With huge deficits currently having no evident effect on either inflation or long-term interest rates, the budget constraints of the past are missing. It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.
I disagree. Inflationist hyperventilators (all of whom have been wrong for years) and fear mongering is driving the price of gold higher. In addition, the worries in Europe (which is ironically, a single currency system like the gold standard) has resulted in mass worries over fiat currency. Such thinking is entirely misguided and will ultimately be proven wrong when gold never becomes a reserve currency and fear mongerers around the world are crushed under the continued shocking trust in fiat money.
The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.
I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced. The current spending momentum is so pressing that it is highly unlikely that any politically feasible fiscal constraint will unleash new deflationary forces. I do not believe that our lawmakers or others are aware of the degree of impairment of our fiscal brakes. If we contained the amount of issuance of Treasury securities, pressures on private capital markets would be eased.
No new deflationary forces? If that is the case then why do we continue to see deflationary price action in the markets? The Fed is pushing on a string. They have been unable to increase lending. Our fiscal operations have been largely targeted on the same markets – the lending markets. Unfortunately, the crux of this problem does not reside at the banking level, but rather the consumer level. Thus far, fiscal policy has done little to alleviate pressures on Main Street. We continue to funnel money into banker’s pockets while ignoring the real crux of this issue – the U.S. consumer.
Fortunately, the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response. That response needs to recognize that the range of error of long-term U.S. budget forecasts (especially of Medicare) is, in historic perspective, exceptionally wide. Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint.
We are not Greece. We do not have an even remotely similar currency system or economy. The comparison is not remotely fair.
History has not been kind to Mr. Greenspan. This article effectively puts the cherry on top of his remarkable career of being wrong. Unfortunately, his plane is crashing and burning and he’s trying to take us all down with him.
TPC, with high respect to your work and opinions, it’s not a question of deficit nor inflation, it’s a matter of perceived safe haven and assets where money flows can go.
Greenspan is such an embarrassment.
TPC: You say: “Borrowing? What borrowing? The United States budget deficit is not “borrowed money”. We fund our own spending internally. We do not borrow one penny from abroad”. Explain to me , then, those trillions of dollars in Treasuries that the Chinese, Japanese, and other central banks hold in their balance sheets (hint: who finances the U.S. current account????)
Excellent column TPC! So the former bankster-in-chief wants to cut off medical treatment for the old?! How low must bankers sink before they question their own moral sanity?
TPC: You say: “Borrowing? What borrowing? The United States budget deficit is not “borrowed money”. We fund our own spending internally. We do not borrow one penny from abroad”
I would also appreciate more clarity on your views about foreign borrowing? Are you suggesting that as we rollover debt in future auctions that we need not rely on foreign purchases? Is it sustainable to continue relying on US household purchases and QE (buying our own debt)
Do you suggest that it would be impossible for the US to have a failed auction resulting in higher rates without inflation being a factor?
Chas & Greed:
We do not finance our spending via the bond market. Taxes do not finance spending either. We issue bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation. Not a fiscal financing operation. We issue bonds to maintain the Fed funds target rate and control excess reserves. People think this is govt debt because that’s how the system works in Europe and under the gold standard. This thinking has never changed despite the dramatic changes in the monetary system after the Nixon shock. I am quite certain that Bernanke understands this (or at least partially), but I am also quite certain that most other people in power do not.
Let’s understand a few things first:
1. foreigners do not fund our spending. That is a fact.
2. The bond market is a monetary tool. NOT a fiscal financing tool.
3. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply.
I’ll use the example I often use. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:
I start a productive economy/country and invite my 5 friends to become citizens. Rather than forcing all of us to trade with heavy gold I issue TPC notes. Now, in order to create real demand for these notes I create a tax. This makes you beholden to me via the TPC notes. You MUST have them in your account on April 15th of every year. I’ve created instant demand. This is what the US government does. In return, they spend money on public works, create jobs, supposedly spend money on furthering our nations prosperity (in theory at least) and protection of the nation (a military).
How do I enforce your use of the TPC notes? I create jobs via a military and a police force and pay them well. Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….As long an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you.
I do not borrow from governments or tax to spend as I would if my currency were backed by gold. Interestingly, I can’t TAX you until I’ve credited your accounts with TPC notes. There is no money to be taxed otherwise. So, in effect, I have to SPEND in order to TAX (counter-intuitive to what you have been taught). Taxing debits your accounts (saps liquidity) and crediting is government spending. On my island, I am never revenue constrained. If you don’t pay your taxes I will throw you in jail and confiscate your money. But that doesn’t mean I can spend more when I tax. What do I care if you send me your TPC notes? I can just press a button and credit my “spending” account right after I shred your tattered looking cash. This is what the government actually does. Taxation is essentially a form of maintaining control of private sector spending. Pay your taxes in cold hard cash. The IRS will shred those dollar. They don’t put them in a bag and mail them to the Treasury so they can’t go “spend” it. The only reason they might keep the dollars is if they are pretty and in good condition so they can go back out into circulation.
So what’s the bogey here? What’s the catch? The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, etc. Thus, govt cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. Thus, it’s important to understand that govt cannot just spend recklessly.
In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating massive inflation). Today, we effectively control the value of money in the banking system via bond issuance (a pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of government spending because a treasury bond is basically a savings account. Contrary to popular opinion, QE is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit. QE is a term that used by people who want to scare you into thinking that the govt is being reckless with their money. The reality is that QE is just an asset swap. Nothing more. Debt monetization is another tool of the fear mongerers who don’t understand that debt monetization is actually impossible so long as the Fed has a target rate. It’s operationally impossible.
The US government is never revenue constrained. They are not like a household or state government. We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services. They can either hold that money in a checking account at the Fed OR they can do what they wisely do and invest those pieces of paper in what is actually a savings account at the Fed. We also don’t need taxes to spend. The budget deficit is in direct inverse correlation to private sector savings. TO THE PENNY.
This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts. Just ask yourself what would happen if the govt imposed a one time 100% asset tax?
Many financial theorists actually believe the Great Recession (and the Great Depression) was caused by account SURPLUS. You’ll notice that both events were preceded by great periods of “fiscal competence”, ie, budget surpluses. In reality, the govt had debited too many accounts and forced investors to use too few dollars to chase too many goods. This results in full blown deflation and excessive debt levels (because you borrow what you can’t actually get your hands on). I think the cause is a bit more complex than that but the fact that we are grossly overtaxed and the govt spends very inefficiently is a large contributing factor.
Hope that helps.
TPC, Thanks for the explanation. I understand it better each time. It has been eye opening for me.
TPC, I agree about the current deflationary environment induced by balance sheet recession, a concept very well introduced and described by Koo. But i think you are missing an important point: actually, the government CAN NOT press a button and fill its current accounts. the government HAVE TO collect taxes or issue Treasury in order to have money to spend. This is a fact not an opinion. The only istitution that can press a button and create money from thin air is the Central Bank, and the central bank is independent from government.
Given the lack of borrowing demand for spending and investing (we are in an oversupply deflationistic world) the only way the central bank can create inflation is by distributing money to families for free (this would be very nice!!), do you remember helicopter ben? and this could be a meore efficient way to allocate money that give it for free to banks…
Another way to create inflation is by reducing supply (high level of protectionism, massive defaults/restrusturations, etc..)
The Fed could simply monetize assets like 10-20 trillion in foreclosed real estate, and then hold those assets as rentals for the next 50 years until the buildings deteriorate and need to be torn down. This would take the real estate off the books of the banks, and help to clear out the dead wood that is holding back bank lending. Buit there is a downside. Property owned by a federal agency is constitutionally exempt from state and local taxes, and this loss of property tax revenue would crimp the budgets of local governments much more than now. Some entire cities would end up being owned by the Federal Reserve.
The only problem (if you want to call it that) is that China and others can use their massive hoard of credits to purchase US assets like real estate, farm land, mines, etc. and you can wind up having foreigners owning good portions of the US’s assets, not the citizenry, and that, I believe, cannot be good for our country’s long-term prosperity.
If the US government prevented Chinese corporations from purchasing US listed oil assets, I don’t think that foreigners will be able to rotate into actual US assets. Plus they need the money because most international transactions are USD denominated. There is a different fight coming up… resource access.
TPC I have been waiting for you to update your inflation versus deflation numbers you posted, where you cherry picked the dates to show we were having deflation versus inflation. Oil is ramping back, stocks ramping, gold ramping..etc.
The inflation vs deflation debate has been won. With the dollar surging and government bond yields tanking there is little doubt what kind of environment we are in. The lending markets have not recovered so the velocity of money has not increased. There is no inflation. You inflationists like to argue that commodities have increased since March 2009, but has this “inflation” not been more than offset by the increase in household net worth during the same period? Regardless, commodities are still 65% from their highs. That is hardly a case for inflation. The numbers just don’t line up in favor of the inflationists.
Thanks, you saved me a lot of typing.
Me too. Thanks Dan. The whole inflation argument is now reaching levels of absurdity. If you haven’t noticed, these inflationistas are all resorting to this argument:
“Well, what will now happen is that the govt will respond to the NEXT big crisis with even more spending which will result in inflation this time. I promise! It will happen. Just you wait. They are coming. The bond vigilantes are just taking a nap!”
When you’re wrong you’re wrong. Just fess up.
Since when did household net worths increase during deflationary environments?
Since March 2009 which is the point that all inflationists use as evidence to prove their point. Prices are down across the board over the last few years. We’ve been in a deflationary or disinflationary environment for 3 years now. NOT an inflationary environment.
Dan you really need to look at 1, 5, and 10 year charts of oil, gold and other commodities, because oil declined 50% from a parabolic move does not change the long term trend in oil prices. Compare current oil to 2000, 2001, 2002, 2003, 2004, 2005, 2006 and you will see prices are inflating. Dan of course I can pay my taxes in gold, all I have to do is cash in my gold whenever I feel like it, people are begging to turn dollars into gold as evidenced by shortages in coins. However, my taxes look alot cheaper once my gold is converted back to fiat, any fiat for that matter. You sound a little angry, did this last ramp shooting oil up 10%, stocks up 7%, and gold at new all time highs catch ya on the wrong side. Maybe you should stop reading Prechters work, his track record is spotty at best.
Dan, the dollar is not surging, see a 10 year chart of gold, just because other currencies are worse by no means is the dollar surging.
Eric, that is how a floating exchange system works. When one currency falls another rises. And yes, the dollar has been rising in comparison to all other currencies. You can compare the dollar to gold all you want, but that won’t change the fact that you can’t pay your taxes with gold bars.
Personally, I can’t wait for this stupid balance sheet recession to be over with because gold prices will crash and all these stupid fear mongering idiots will lose their asses when the US economy rises from the ashes again and we all realize that the world isn’t ending.
TPC….while I generlly am 100% in line with most of your fundemental assumptions and highly respect your point of view. I feel your one flaw at certain times is you underestimate the potential negative consequences of un tethered monatry policy.
Consumer balance sheet resession not a lending issue: YES 100%
Generally a deflationary environment: YES 100%
Credit risk of us govermnet is non exisitent : YES
Inflation by defintion based on increased moeny supplied by the fed and running printing presses: Not going to happen.
Loss of of purchasing power and economic ruin becasue of change in perception of asset worth and a global decision to move away from the dollar…. VERY POSSIBLE.
See inflation is the loss of purchaing power becasue of supply side issue. And we can control that as much or as little as we want even if it is pushing on a string.
The other side of that is no matter what the fed dose, a decrease in dollar demand will severly hurt dollar puchasing power thus creating a larger bruden to to consumers and hurting business cost and the economy as whole.
So the idea that we cna print $ to our hearts content without consequences are slightly overblown if not fundementally real.
“This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts”
“We just spent a trillion dollars. How much more do you want to consider SOME?”
While you may not want to compare us to greece, is it not true that we are in the same exact situation as the UK?” (not making a comment on their situation, just tryign to establish a baseline for further discussion)?
The UK, Japan, etc. Yes, all non-convertible floating exchange rate systems. The EU is not similar at all. They have multiple economies, multiple legal systems, multiple treasuries, one central bank and no true floating currency between them. They are on a single currency system that is not unlike the states in the United States. Our states are suffering the exact same problem Greece and the EU is. Fortunately, we are truly unified and recognize that govt can and must allocate federal funding. Nonetheless, we appear to still be trying to drive many of our states into BK which is beyond insane.
Make no mistake. We really are Japan. You can spend and spend, but until the excess debt is removed and the losers have lost the system will not be cleansed. I have referred to myself as an Austro-Keynesian in the past. I fully believe we must still make the losers lose or we will suffer the same consequences as Japan – a very long workout period….
TPC,
Could you kindly help me to understand your money theory. While not arguing with your assumptions:
1. foreigners do not fund our spending. That is a fact.
2. The bond market is a monetary tool. NOT a fiscal financing tool.
3. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply.
I do not quite comprehend how it translates to US economy (as I am not really sharp, the “friends example” does not help…). So, could you kindly walk me through several scenarios/developments:
Lets assume that at certain point we have failed treasuries auction (meaning, in this case, that at given rate there is no buyers other than fed).
- what would happen to market rates? (libor, prime)
- how the foreign holders of the treasuries would behave (if it’s important at all…)
- what would happen to international trade and domestic economic activity?
- if you do not believe a failed auction can ever happen, please explain me why.
Thank you in advance,
BK
BK,
I’m about to hop on a plane. Send me an email. Otherwise I will forget to respond. Thanks.
You can learn more about it by searching around the internet for “Modern Monetary Theory”, “chartalism” or “chartalist theory”.
I personally don’t agree with the overall concept, although I do agree with some of the details. It is an interesting take on things and it’s quite a bit more accurate than anything that you’ll find coming from the goldbug camp that has gained in popularity on the internet.
It’s not a theory at all. Operationally this is exactly how our system works. I think where TPC differs from MMT guys is in it’s application (which is theoretical). Am I right TPC?
It’s not a theory at all
No, it is a theory, and it’s a heterodox (read: non-mainstream) theory at that. Most economists do not agree with MMT.
So you believe in the idea that banks are reserve constrained and the theory of the $ multiplier? If so you are wrong. MMT explains how our monetary system actually works. You might think it’s theory but it’s the textbooks and mainstream economists who are wrong. The “theory” is in MMT’s application.
So you believe in the idea that banks are reserve constrained and the theory of the $ multiplier?
Yep. I do find myself in the majority sometimes.
You might think it’s theory but it’s the textbooks and mainstream economists who are wrong.
It’s fine to be on the mainstream, but simply arguing that “everyone else is wrong”, as you have, isn’t proof of anything aside from the fact that you personally believe it.
Don’t confuse the passion of your convictions with the truth or accuracy of the theory. MMT is just a theory, and it is not a mainstream theory. Most economists do not agree with it.
Banks are not reserve constrained. This is an operational FACT. Banks lend to credit worthy customers and then find reserves if they need them.
The myth of the money multiplier is thus proven wrong. The textbooks have lied to us. They have taught us a gold standard monetary system in a floating exchange system. It is wrong and it is largely to blame for Greenspan and Bernanke’s miscues over the last few years.
Much like EMH, the textbooks have not been applicable to the real world. The banking system is no different.
I say this with great respect MBA – abre los ojos. Think outside the box. Reject the textbooks.
“Banks are not reserve constrained. This is an operational FACT. Banks lend to credit worthy customers and then find reserves if they need them. ” TPC
Thanks TPC. You have the patience of a great teacher. May the Lord bless you. Please keep it up.
Yep, the phrase “fractional reserve lending” is a misnomer and a red herring. Mish Shedlock calls it fictional reserve lending. A phrase I prefer now is “new money in exchange for a promise to repay it with interest”, interest which btw may not even exist in the absence of continual lending.
Much like EMH, the textbooks have not been applicable to the real world.
Being that I tend to follow behavioral economics myself, I’m not exactly in the mainstream in many respects. But that doesn’t mean that I buy, or that I need to buy, chartalism.
I see quite a bit wrong with MMT. I agree with some of the details, but the base conclusion — that tax rates determine the value of money — is very much off the mark.
Money is ultimately a function of economic output, with tax rates are only tangential to that, and the value of money is akin to a FICO score. It is the market that creates economic output, and it is the market that sets the FICO.
Money is fundamentally a product of, and driven by, the market — government can only try to manage it, it doesn’t really create it. At the extreme ends, those (few) governments that follow Weimar-type policies can’t get away with it because they create an amount of money supply that is completely disconnected from the level of current or likely future output — attempts to create money out of thin air will be punished by the market. (In contrast, the US could engage in QE to the extent that it has during this financial crisis because there will be future economic output to support it.)
Government can manage the market to a point, but ultimately, the market is the customer and constituent of government and gets to calls the final shots, so government must react and respond to the market. Government can’t just arbitrarily assign values or simply push a tax button to determine value, but it must placate the market. Most of the time, government raises and lowers rates not because it is managing the market, but because the market is managing government, with government merely responding to the market.
In other words, chartalists seem to have a tremendous amount of faith in the absolute power of fiscal and monetary policy, whereas I see government as just one player in the marketplace that is stuck with obeying many of the market rules that a business would have to follow (although a powerful government that presides over a large economy, such as the US, will have more latitude than most.) Governments are more like a business than they are like a household — whereas households mostly consume, governments and businesses both generate output and do support a money multiplier (which does exist).
Government has to intervene when times are bad because it’s the only one left standing, but that doesn’t mean that the government can magically fix everything at the drop of a hat on its schedule, and a weak government will have fewer options than a strong one. When you express your unhappiness with Bernanke, this is why I caution you that (a) monetary policy is far more effective in fighting inflation than in combating deflation — deflation is a different animal from inflation, (b) the failures to date have been mostly regulatory, beyond the control of the Fed and (c) regardless of the policies, the market needs time to clear and fix what’s broken — it cannot happen overnight, no matter what.
No theory is perfect. And I am not a pure believer in MMT. Just like I am not a pure Keynesian or Austrian. It always “depends” on the situation. But MMT’s explanation of the way in which the monetary system works is indeed not a theory at all. The only “theory” here is in its application.
If you believe banks are reserve constrained or that the money multiplier is truth then it’s clear you haven’t read enough MMT and it’s also clear that you don’t understand reserve accounting, which in my opinion, makes you unqualified to judge the theory to begin with.
MMT’s explanation of the way in which the monetary system works is indeed not a theory at all.
No, the belief that taxation determines the value of money is a heterodox, non-mainstream view held by very few people. Not only is it a theory, but it is an unpopular theory.
“…abre los ojos.” TPC
I knew you were a Mexican!!! THAT JUST MADE YOUR BLOG TEN TIMES BETTER TPC. (CMC!!)<—Spanish acronym
DUDE THANKS FOR THE AWESOME POST..KEEP UP THE GREAT WORK!!
Thanks Angry MBA. I agree about the goldbugs. They might be worse than bankers. Their cure might be worse than the disease if they try to impose a government gold standard.
You might also try:
http://bilbo.economicoutlook.net/blog/?p=4870
the spreadsheets are in there too
Thanks!
Ha I notice there’s a new BK reading TPC. Might need a new name soon.
As for Greenspan – TPC, you have hit the nail on the head. This should be obvious but given the huge debate here then I can see exactly why its still worth reminding people. I would have given up long ago.
On another point – surely, to be Chariman of the Fed you have to understand the monetary system. How is this allowed to happen?
An absolute disgrace in my opinion that he is allowed to even utter another word in the public domain
BK – sorry, i did not know you are already using BK name. From now on I will be KB…
TPC
Another great one! Way cool!
Please tell me that this was a cut & paste operation (o/w this is the 107th time you have had to retype it (grin))? At least you didn’t do the island story (lol).
I am usually smart in other areas, but I am definitely dumb in economics and currency/monetary systems (Keen’s debtwatch #31 is making my head hurt). But your honest efforts are beginning to sink in my dense skull.
Here is where something (finally) clicked: “We fund our own spending internally. We do not borrow one penny from abroad. China is not our banker. Japan is not our banker.”
And we have no yuans or yens sitting in those vaults, ahhh, now I get it.
What we do have is a lot of savings accounts (Tsry’s) from folks abroad and checkbook accounts (reserve accounts). Need to pay interest on the savings account? Just credit the checking account! Push of a button. There done!
This was also very helpful: “So he seems to at least grasp the fact that the United States has ZERO solvency risk. But he seems to fail in understanding why our borrowing costs might increase. Mr. Greenspan doesn’t seem to connect the dots between the lack of solvency risk and what might actually cause higher interest rates – inflation.”
If Greenspan understands we have no solvency risk, then why oh why does he push the fear-mongering switch that we are Greece? This is worse than stupid – it is downright illogical! That’s talking out of both sides of your mouth (at the same time)!
I had only 1 minor disagreement with you. You state the crux of the problem is the private sector debt (balance sheet recession). I think a real big problem out there is also the inability of the banks to meet capital requirements (to be clear not pedantic: which is against the asset portion of the balance sheet and concerns their loan portfolio).
I think one could show that banks are essentially broke or close to it.
Also, congatulations! Your post on gold made The Daily Crux yesterday! Bye.
TPC:
Doh! You DID tell the island story! (hahahahahahahahahaha)
But who says “policeman Joe” can force other countries to accept TPC notes as payment for their goods and raw materials regardless of how many TPC notes are created?
Be realistic. Will OPEC tell its largest customer they are no longer accepting their currency? The very thought it just absurd. This is the last resort argument of the inflationistas. It is simply not even remotely realistic.
If OPEC were to shut us down and stop accepting our currency it would result in economic mayhem. We would not resort to “Officer Joe”. We would resort to General Petraeus and put shock and awe to shame. We would shut OPEC down in a matter of weeks. But this would never happen because OPEC would never spit on our toes like this.
Greenspan and Bernanke are liers and pretenders.The sucesives bailouts are transforming private debts in public debt. The succesion of enormous fiscal deficits will expand the public debt without. How the politicians will pay these bills?.One posibility: they will print the dollars.And you want store your financial wealth in paper assets?.Good luck
Thanks again. Starting to now see the bigger picture.
TPC,
Private sector deleveraging, fiscal stimulus, quantitative easing, zero interest rates, the gold standard, fiat currencies, fiscal deficits, US govt solvency, inflation, velocity of money….all interesting stuff, but too theoretical for most people to get a handle on.
At the end of the day, doesn’t this mess we’re in boil down to one thing: JOBS. This economy simply cannot produce enough full-time, high quality private sector jobs to give consumers the income to service their debts and buy up the excess slack in the product and service markets. The govt is able to create jobs to be sure, but govt-created jobs have no net effect on the the country’s output. Instead of arguing about inflation v deflation etc, we should focus on the crux of the probelm: how in the hell can we create 8 million + new jobs without unleashing inflation?
I agree. TPC has said this before. The private sector won’t begin hiring aggressively until the deleveraging is done. There is still too much debt in the system. What the government should have done was create jobs rather than save bankers. They should also cut the Corp tax rate to alleviate balance sheet issues and free up capital for labor expenses.
“Instead of arguing about inflation v deflation etc, we should focus on the crux of the probelm: how in the hell can we create 8 million + new jobs without unleashing inflation?” Jack
That’s easy. People won’t spend because they were driven into debt via the counterfeiting cartel. Also, savers were cheated by suppressed interest rates by that same cartel.
So, and I’m getting tired of repeating this, just have the US Treasury create a sufficient amount of new legal tender fiat and just give an equal amount to every US adult. To prevent inflation just forbid the banks from creating new credit. They should not need to with all the new genuine money in the system to honestly lend.
Oops! Moral principle were used to solve an economic problem. Too bad! Live with it.
Hey TPC,
Could you post or create a spreadsheet model that shows how money really works? I’m tempted to try but am afraid I might worship my own model.
In case you missed it up above:
You might also try:
http://bilbo.economicoutlook.net/blog/?p=4870
the spreadsheets are in there too
Oh Wow! That’s some meaty stuff. I can’t be bothered with getting rich right now but I know a math genius who might be interested even though he is already rich.
Wow, I’m clearly a minority here… I thought Greenspan’s article was excellent… and the comments from TPC nonsense. As for medical rationing, it’s obviously coming…. Europe has it, and we will too.
Regards,
Michael
Michael,
Ask yourself how an economy can go from prosperity to depression virtually overnight with no physical damage to the economic base. It doesn’t make sense.
Because all the foreign skilled workers go home and take their productivity with them? Didn’t Zimbabwe’s inflation result partly from their big farmers being evicted, resulting in a need to pay for imported grain with foreign currency? This is always my question when TPC says the Fed can always fund Medicare.
I suppose this is true if Medicare is simply X dollars per person per year, but my understanding is that the many foreign doctors who were attracted to practice in the US in the past are increasingly going home or staying home as changing circumstances allow them to earn a higher standard of living at home than in the US.
I agree that dollars will always have value inside the US to pay taxes, but it must be possible that the US economy may not supply anything that holders of dollars demand. Medicare doesn’t demand SUVs, empty houses or financial services.
There are other forces at play here. “If” there is a shortage of doctors, it is because the number of residents is highly regulated by the AMA. How else can they drive up doctor salaries? Supply and demand. Medicare is exactly that – a dollars per person – issue.
If you don’t want to wait 25 years to make new doctors then you’re gonna have to import them which will involve foreign exchange. There’s nothing (not yet anyway) stopping the expensive AMA doctors from moving abroad to maintain their standard of living either.
At some point being right has to count for something. Greenspan has been so wrong about everything that it’s hard to trust anything the man says any longer.
Honestly, I still don’t grasp everything TPC says when he talks about the banking system (I’m a lowly engineer), but he has been remarkably right about his macro outlook and as you said – that’s what counts in my book. At some point, you have to wonder why some people are right and others are so wrong. It usually has to do with a superior understanding of the facts. That’s how it works in engineering at least.
“At some point, you have to wonder why some people are right and others are so wrong. It usually has to do with a superior understanding of the facts. That’s how it works in engineering at least.” SS
There is nothing lowly about engineers. They are the best people and have the prettiest daughters.
Engineers would not have created the mess that is our current system.
TPC,
Excellent material constantly although I am wondering why not see Greenspans message for what it is. Marketing.
He is carrying out Bernanke’s filosofy on creating inflation EXPECTATIONS. Ben thinks this was crucial factor on how to create inflation on a deflationary environment. Even if you do not have wage inflation or capacity constraint it is still possible (according to Ben) to create needed inflation by boosting expectations. This Greenspan message is nothing but one of the many efforts to increase inflation expectations.
I should expect they know all the economic facts far better than they let us believe…
Inflationist will be wrong about the price of general goods and services.
Deflationist will be wrong about gold price and land price.
Technology is deflationary, globalization is deflationary, China’s ever growing USD reserve is deflationary for U.S.. People expecting a typical hyperinflation will definitely be disappointed, but that doesn’t change the fact there’s too much money floating around the globle and people are losing confidence in fiat currency.
10 – 20 years from now, both gold and land prices will be up significantly and for sure will beat whatever number you see about inflation.
Inflationists have been wrong for many years. Gold haters have been wrong for many years. The simple fact is that they are both wrong and they will stay wrong.
I didn’t go through TPC’s entire example above outlining his view of how the government manages the money supply. But it does seem to me that TPC confuses monetary and fiscal policy. It’s important to remember that fiscal policy (tax and spending) is separate from monetary policy (money creation) at least in principle anyway. To the extent the central bank remains independent, the government is like a household that can only borrow so much before running into problems. Now, of course, the central bank can step in and bail out the fiscal authorities by monetizing the debt (i.e., print money). Keep in mind, however, that this “trick” of printing money to repay debts has its limits. It’s a great way to wash away existing debts. But who going forward would lend to the government if they believed the government would repay little in real terms? The focus on money and paper creates a lot of confusion. It’s better to focus on real stuff and not paper. The bottom line is that our government most likely lacks the REAL resources to meets all its future REAL commitments (mainly entitlements). Social security beneficiaries, government employees, etc. can’t live off a bunch of Bernanke supplied monopoly money. They are going to need real stuff. Where does that stuff come from? It has to be produced domestically (and then taxed) or borrowed from abroad. That is the reality. And no amount of money printing is going to help if and when the government lacks the real resources to meet its commitments.
Seems this is not a fiscal/monetary policy issue. Rather, a productivity one. While you’re right that too few workers could (will) crimp the standard of living of an increasingly aged (non-producing) population – it has nothing to do with dollars and cents. “Printing” money won’t cause my loaf of bread to be “more expensive” – rather, not enough bread to go around (or at least not enough for me to continue to live fat on). The current crisis is not one of too much/too little money, it isn’t about “wealth destruction”, rather putting our standard of living in line with our output. We thought we were producing more than we really were/are.
But it does seem to me that TPC confuses monetary and fiscal policy. It’s important to remember that fiscal policy (tax and spending) is separate from monetary policy (money creation) at least in principle anyway.
MMT theory disputes that view. It isn’t confusion, just a difference of opinion.
Again, I don’t personally agree with the theory, but you have to understand what its premises are before you can debate it on its own merits.
“Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.”
How is that working for you California?
his comments, (other than the slurs against those who buy gold), are dove tailed with the queen, cut cut cut(now that my buddies at the banks and military has theirs..Making lame excuses to cut, esp those who do not have much, and a retread of attack the seniors and their Social Security/medical.
i found this a odd slam and dis connected quote: “But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.”
those of us who lived then can remember WHO was in charge, VOLKER whose man handling of interest rates to “wring out too many dollars” and stop inflation, lead to a depression(and the election of Lord Regan) and no jobs either, inter rates went to 18% and NO one could do any borrowing at such a usury VIG, most companies exist on profits less than 20%!
VOLKER is still standing behind OBAMA, scares me badly.
But this fear and repeat of the Queens demands, a ukase of cut cut cut, already played out via Sir Murdock’s other medias, (constantly), and here again, in the wsj.
nothing new ‘cept WHO is repeating this nonsense.
The Chartalists theory is totally wrong….
In a Fiat Money Regime It is not the State that can create money, it is the Central Bank; It is not the State that allocate money via deficit spending,it is the banking system via credit creation; it is NOT government deficit that allow private saving, but the demand of capital for INVESTMENTS GOODS (in order to increase production)
These are FACT and non OPINIONS. We have learnd something in the last 200 years of economics and economic history studies…
No, these are YOUR opinions. Anyone who has banking experience knows that the Central Bank and Treasury talk every morning before they auction anything. The Fed is not independent. Not even close. They work hand in hand with the Treasury. Literally. The financial crisis made this more than clear. The Fed is a branch of the US govt. The “independence” is nothing more than a facade to give them the appearance of having no conflicts. Anyone that believes this is fooling themselves.
The state most certainly does create money. You might argue that the banking system creates money at the horizontal level, but it is a closed system – a zero sum game. All liabilities at this level net to zero. That is FACT. Only the state can create money at the vertical level and increase the money in circulation. That is also fact.
When i say tha the central bank is independent i want mean that is the central bank tha have the power to print money ante the government have to ask to the central bank (or idirectly to the banking system) for borrowing, just in the case the market does not want buy treasuries.
In this way, the deficit spending via treasury issuing is credit creation in the “horizontal level”, as you name it.
all liabilities net to zero because balance sheet rules tech us that ASSETS must be equal to LIABILITIES. Government LIABILITIES are equal to government ASSETS. Government assets are infrastructures, public services, defence, justice, and generally speaking its economic and social system and its capacity to be taxed…
Even central bank liabilities (money issued) must be equal to its assets (treasuries, foreign currencies, gold and other financial instgruments.
As i said previously, in the world we are now, the only way the central bank can be effective to reflate the system is by giving money to families for free, without pretenting repayments in the future. this would be a real increase in money without any liabilities attacched….
“As i said previously, in the world we are now, the only way the central bank can be effective to reflate the system is by giving money to families for free, without pretenting repayments in the future. this would be a real increase in money without any liabilities attacched….” giuliber
Excellent! Nice to know that I’m not the only one who has come to this conclusion. Is it the elephant in the room that everyone is trying to ignore?
ok, TPC and Beard, we are telling the same thing in different ways. Even if we use different theoretical frameworks, we arrive to same conclusions.. the only difference is that TPC is persuaded that to overcome this mess the central bank have to finance (directly with QE or indirectly via banking system) with newly printed money government deficit spending, knowing that that money will never be repayed (but simply rolling treasuries at maturity). Beard and me are telling that a more transparent, efficient and not distorting (on decisions of economic actors) way to reflate the economy is to give newly created money directly to families (not to politicians) and explicitly telling them that money will never be required to be repaid.
People should decide how to spend the new money created by central bank, not the government. Like other political and economic public institutions, in a democracy the central bank is created to serve citizens not the politicians. Even from an economic point of view, this solution is more efficent as long as private decisions and market prices are not distorted by government intervention.
This would be a real reflationary revolutionary shock for the economic system. People in financial stress would be alleviated, people without debt could increase consumption, state finances would be able to collect more taxes, corporate investments would increase in response of increased demand,etc.
Agreed!
I love the fact that TPC has had the time to answer to all queries except the one by BK. He simply had to get on a plane and fly off once he read the questions!!!
Oh btw… some of you need to read “8 centuries of financial folly” before you open your mouths ever again…
cheers n have a great weekend spending $$$$
I’ve ordered the book but I won’t keep quiet. This is too much fun.
Really? You loved it? Do you also love the fact that I responded to him via email like I told him I would?
Guys and gals, I try really hard to answer every question. Some of them get past me. I am not just sitting around fielding questions all day and writing a website. The popularity of this site was a total accident and added a layer of work that I never intended to have. It is fantastic and I am glad people are enjoying it, but it’s also not my full-time job so please be a bit more understanding. I am honestly here to help and educate in any way possible so cut me a little slack when I get behind in my work and please understand that I never intend to miss a thoughtful and important question.
Thanks,
TPC
Don’t let one knuckle-head ruin your day. For that one, there are many more like me who – head swimming – appreciate the effort and insight. So much to learn, I’m never sure where to begin (aside from PhD in econ/finance) – I have learned so much from this site. Thanks!
TPC- [the pragmatic chartalist.. (joke)]
The yields on Treasuries (unlike corporate, unlike muni) is always about purchsing power – never about solvency.
That is, if you lend your money to the United States – you WILL get it back.
But what will it buy? What will those dollars be worth? Thats the million dollar question?
Thus, a deflationary/disinflationary environment, with dropping tax reciepts/coporate revenues implies HIGHER yields for anyone with solvency issues (i.e. companies/cities/states) and implies LOWER yields for the US Government, as no matter what, they will pay you back – and in an environment with alot of defaults and increasing purchasing power(deflation) – they are the lone safe haven. They can print it.
As long as those dollars can buy goods, why wouldn’t you lend to the the GOVT?
So keep your eyes on inflation… that’s the elephant in the room. But so far nothing to see here…
INFLATION ARE U FO-REAL, HOW THE HE** are we supposed to look for inflation in the enviorment we are in. DUDE STOP WATCHING TV ITS NOT GOOD FOR YOU!!
THANKS AGAIN DAN
The inflation vs deflation debate has been won. With the dollar surging and government bond yields tanking there is little doubt what kind of environment we are in. The lending markets have not recovered so the velocity of money has not increased. There is no inflation. You inflationists like to argue that commodities have increased since March 2009, but has this “inflation” not been more than offset by the increase in household net worth during the same period? Regardless, commodities are still 65% from their highs. That is hardly a case for inflation. The numbers just don’t line up in favor of the inflationists.
SO MUCH FOR YOUR SMALL ELEPHANT!!
Scharfy READ MORE TPC.
I do not believe any of them. You only get lies and the run around because no one is held accountable for any thing they say or do. We (the people) are the ones left holding the bag and having to pay the bills, while they stuff their pockets with our money.
“So keep your eyes on inflation… that’s the elephant in the room. But so far nothing to see here…”
“But so far nothing to see here…”
“But so far nothing to see here…”
Do I sound like an inflationista? I spent the better part of the last two years selling Treasury puts and put/spreads, thats not an inflation mongering strategy.
But the deflationistas haven’t been absolutely and overwhelmingly correct either. CPI has been running +1-2%, up slightly for the better part of a decade. (last two years included) ANd corporate profits are on the move. S&P will likely do 85$ this year. So we are not Japan -yet. Probably won’t ever be – because we aren’t Japanese. We like to spend,spend,spend and our demographics, population and mindset won’t ever be. Further, we aren’t the exporter (net/net) we were heading into the 1930′s, our economy is MUCH different. So drawing identical analogies to Japan is dangerous.
So all in all i’ll stick with “But so far nothing to see here…”
And I like to read TPC
” Japan’s CPI is identical to what is was in 1994 – identical!”
US cpi looks like this for the last decade.
2010 216.68 216.74 217.63 218.00 218.17 NA NA NA NA NA NA NA NA
2009 211.14 212.19 212.70 213.24 213.85 215.69 215.35 215.83 215.96 216.17 216.33 215.94
2008 211.08 211.69 213.52 214.82 216.63 218.81 219.96 219.08 218.73 216.53 212.45 210.22
2007 202.41 203.49 205.35 206.68 207.94 208.35 208.29 207.91 208.49 208.93 210.17 210.03
2006 198.3 198.7 199.8 201.5 202.5 202.9 203.5 203.9 202.9 201.8 201.5 201.8
2005 190.7 191.8 193.3 194.6 194.4 194.5 195.4 196.4 198.8 199.2 197.6 196.8
2004 185.2 186.2 187.4 188.0 189.1 189.7 189.4 189.5 189.9 190.9 191.0 190.3
2003 181.7 183.1 184.2 183.8 183.5 183.7 183.9 184.6 185.2 185.0 184.5 184.3
2002 177.1 177.8 178.8 179.8 179.8 179.9 180.1 180.7 181.0 181.3 181.3 180.9
2001 175.1 176.2 176.9 177.7 178.0 177.5 177.5 178.3 177.7 177.4 176.7 177.07
2000 168.8 169.8 171.2 171.3 171.5 172.4 172.8 172.8 173.7 174.0 174.1 174.0
“They have been unable to increase lending. Our fiscal operations have been largely targeted on the same markets – the lending markets. Unfortunately, the crux of this problem does not reside at the banking level, but rather the consumer level.”
True, and while I prefer tax cuts and small business targeting (if the government has to have a hand), I am afraid no one or no group can force this economy to spark for some basic reasons:
1. Too much capacity across all aspects of real estate. Not changing any time soon. We overbuilt for a gold rush that was only here as long as some bubble (any bubble) stayed in place. Pop.
2. Since 1995 two bubbles (dot con and real estate) gave everyone the belief that they could get rich overnight. That motivation was huge! It’s gone. What could possibly get the animal spirits of millions gearing up again to get rich? What new bubble? Time travel? Life extension? It sure as h*** is not alternative energy.
3. Our greatest invention, the internet, is arbitraging away typical ‘jobs’ at breathtaking speed. Can’t stop it. Genie is out of the bottle.
Now what? No central planning from whatever group can fix what ails us and if you are waiting for a fix — you are going to lose many years off your life. In terms of getting ahead, it’s every man for himself — whether we admit it or not.
“What could possibly get the animal spirits of millions gearing up again to get rich? ” Michael Covel
Well, we could try ethical money creation, free banking, if you like. With widespread computer usage and modern communications any number of alternative monies might be doable. We need to stop thinking of people as animals but as rational beings in an irrational system.
“Now what? No central planning from whatever group can fix what ails us and if you are waiting for a fix — you are going to lose many years off your life. In terms of getting ahead, it’s every man for himself — whether we admit it or not.”
No, you are wrong. We are suffering something that would be very easy to remedy; a shortage of real money as opposed to debt; debt that was ratcheted up via the government backed counterfeiting cartel.
I would bet that Ellen Brown’s solutions will work based on what little I have read of them. However, they are based on further, dangerous, government centralization. I say let’s use government to bail US out and then abolish the government backed counterfeiting cartel.
“No, the belief that taxation determines the value of money is a heterodox, non-mainstream view held by very few people. Not only is it a theory, but it is an unpopular theory.” Angry MBA
Then let’s avoid that argument all together. Let government issue its own money backed by its taxing authority and let the free market develop its own private monies. Let US render to Caesar only what is Caesar’s.
Private money supplies might not eliminate the boom-bust cycle but at the least they should limit and localize it.
Heterodox does not = wrong. People used to think the earth was flat….Now we live in a world ruled by banker for bankers and 99% of them have no idea how the monetary system works….
“Well, we could try ethical money creation, free banking, if you like. With widespread computer usage and modern communications any number of alternative monies might be doable. We need to stop thinking of people as animals but as rational beings in an irrational system.”
People, when it comes to money and markets, are not rational. Free banking? Uh…ok.
People, when it comes to money and markets, are not rational. Free banking? Uh…ok. Michael Covel
Well, personally I think our money-for-debt scheme is insane. Have you ever heard of the tragedy* of the commons? Well, now consider that we are all required to transact in a common money supply.
As for free banking, a truly free market should keep it in check. The power of the banksters is government privileged. For instance, FRNs are legal tender for all debts.
And if people are not rational then who do you propose should rule over them?
* http://en.wikipedia.org/wiki/Tragedy_of_the_commons
Heterodox does not = wrong.
As someone who believes in behavioral economics, I would be the last person to claim that a lack of orthodoxy is necessarily bad.
However, heterodox does not necessary = correct, either. Just because something is outside of the mainstream does not mean that it is true.
As noted, I see a lot of problems with MMT. Personally, I think that it confuses some of the processes that government uses in its attempts to manage the system with the government’s real-world ability to actually achieve what it is attempting to accomplish.
MMT wants to pretend that the market isn’t particularly meaningful, just so as long as it keeps the faith. What that misses is that the market has to have sound, logical reasons for keeping the faith, and that government can’t just arbitrarily use tax rates to increase the demand for money.
The market is actually bigger than the government, so it’s the market that dominates and ultimately calls the shots. There are times when government can serve as the economic tow truck by pulling the market out of the mud, and there are degrees to which governments can use fiscal policy to create beneficial projects that feed a multiplier.
But for the most part, governments have to respond to the market just as the rest of us do. As is true with the laws of physics, the laws of economics are often more powerful than either us or our institutions. Government can do more than we can, but it can’t do just anything and everything that it feels like.
Well, I would agree with almost all of what you say. This site wouldn’t be called pragmatic “CAPITALISM” if I thought the govt could solve all our problems. But what MMT does beautifully is show that govt can and does spend money necessarily and in good ways. It shows that the world is not as black and white as many wish to believe. And most importantly, it shows you how the monetary system actually works as opposed to these myths that textbooks and the gold standard have taught us for years. There are certainly flaws in it, but that is theory for you. No financial theory is perfect. But from an operational perspective MMT is very very solid. Its application is more debatable.
But what MMT does beautifully is show that govt can and does spend money necessarily and in good ways.
I personally think that neo-Keynesianism does a better job with that aspect of this.
It shows that the world is not as black and white as many wish to believe.
I agree with you here. It was the first step toward getting us off of the gold standard, which was one of the best things that could have happened for the US economy.
it shows you how the monetary system actually works as opposed to these myths
MMT shows us how the financial accounting works. But it provides a horribly misleading analysis with respect to how real-world market value is determined. Give MMT an inch (acknowledge that it does well with the accounting practice), and it takes a mile (assumes that accounting practice matches the real world practice of how markets determine the price of money, and the nasty implications if the markets decide that they don’t like what they see.)
I just cracked open Ellen Brown’s Web of Debt. It looks pretty good. BTW, an Austrian site accused me of being a Brownian even though I had scarcely heard of her. It’s interesting how folks are coming to the same diagnosis of the problem but with different proposed solutions. This may be the generation that scatters the banksters good. At the same time is the danger of further progress toward the Mark Of the Beast (666) horror.
Wow…..They do not?
As a foreigner if I chose to convert my currency in to US Dollars and lend it to the US Government by purchasing a US Government Bonds I am not funding the spending and best of all the US Government does not have a debt toward me and the money in a checking account at the Fed. Merry Christmas.
If so we need to change the word Treasury Bonds for Slow and Progressively Defaulting Bonds. The only difference with such a bond and a defaulting bond is that the issuing country is able to perpetuates the illusion for a little longer period.
This sound like a new 21st century Romanomics theory.. Avoiding reality.
The way out of a depression cause by excessive credit is to pay your debt, deleveraging Individual, Corporations and yes the Government. The faster the better.
Forget your credit score.A credit score is a bait for more credit addiction.
What is important is your cash score.
“The way out of a depression cause by excessive credit is to pay your debt, deleveraging Individual, Corporations and yes the Government. The faster the better.” first
Excellent idea! The fastest way to deleverage is for the US Government to mandate 100% reserve requirements to eliminate the cause of our problem, credit creation (otherwise known as legal counterfeiting), and to preclude hyperinflation and then just GIVE every US adult a sufficient amount of new legal tender fiat. This would:
1. Allow underwater homeowners to pay down their mortgages to market price levels.
2. Compensate savers for years of government suppressed interest rates.
3. Fix the banks.
4. Fix state tax revenues.
“foreigners do not fund our spending”
Wow…..They do not?
“On my island, I am never revenue constrained”.
If there are no fish around your Island you soon will.
F. Beard
What you are suggesting is a transfer of wealth.
Its probably better than taxes. Haaaaaaaa.
At least we would know where its going.
“What you are suggesting is a transfer of wealth.” first
It might seem that way since there is no free lunch. But what I think it is instead is a prevention of the destruction of wealth by deflation. Please inform where the transfer of wealth is?
F. Beard
Money can only be a claim on things, Sending free money to every one will debase the currency by the same ratio that it is produced. If you have no debt and you have savings you will lose valuation in that same ratio than the free distribution. That is a real but invisible transfer.
F. Beard
In more than one way that is what most governments if not all do all the time except that they mostly feed there friends. Don’t you think ?
“If you have no debt and you have savings you will lose valuation in that same ratio than the free distribution. That is a real but invisible transfer.” first
But savers would receive an equal distribution too. Again, I think this is not a transfer of wealth but a prevention of the destruction of it. The only losers I see in real terms are the bankers who caused the problem in the first place. Poetic justice, I say.
In more than one way that is what most governments if not all do all the time except that they mostly feed there friends. Don’t you think ? first
1 Samuel 8:10-22 (New American Standard Bible): http://www.biblegateway.com/passage/?search=1%20Samuel%208:10-22&version=NASB
F. Beard
Interesting.
Appreciate your comments it’s getting a bit late in my time zone I hope we can continue this later. I am still new to this site and I like TPC but it’s so different from what I am use to. That’s what makes it special. I am still not sure of what he is talking about.
If the chairman(s) of the Fed do not understand ho is supposed to?
Did they create a system that they did not understand? God Help us.
Some how I suspect that they do .
Have a good night.
Really, with only a few exceptions, this is one of the best discussion threads going.
TPC, thanks for keeping it going! Not sure I exactly understand what you are talking about w/ MMT and chartalism, but I may eventually get it thru my old school head.
Totally agree that there is an shortage of demand to borrow, at least at mutually agreeable terms. There seems to be a marked unwillingness of banks to lend, as well, preferring to add to their cash reserves (yeah, I’d like that too!).
And so, the private sector deleverages…but how the heck DO we keep Americans working productively, (and relatively happily) during this process of deleveraging?
That should be the focus for the Feds. It’s the jobs, stupid!
FBeard…while it sounds tempting, and more just, for the Fed to send money directly to households instead of filtering thru the bankers, how would your plan get people back to work, doing productive stuff? I get already that it would incent them to buy flat screen TVs and such, but those are largely made outside the US.
FBeard…while it sounds tempting, and more just, for the Fed to send money directly to households instead of filtering thru the bankers, how would your plan get people back to work, doing productive stuff? Roger Ingalls
Well, the distribution of new legal tender fiat is merely to prevent wealth destruction. To create wealth, particularly with an aging population, we need to attract genuine capital into the country; talent, work ethic, skills, etc. We could do that by allowing genuine capitalism in the US including and especially in money creation. That would require the abolition of the government backed banking cartel which created the mess in the first place. Ellen Brown would have the government create interest free legal tender but I prefer free market solutions such as common stock as money and government monies that are legal tender for only government debts. If we wish to out comptete the world, which has adopted pseudo-capitalism, then we need to move on to the real thing.
Interesting commentary. Unforunately TPC referring to QE, as conducted thus far, as an asset swap is simply wrong. The “assets” that the fed vastly overpaid for were not interest bearing to any real degree. Mostly 1 trillion plus of severly impaired mortgages. In essence, the Fed paid real dollars for assets worth pennies on the dollar. If vasly overpaying for nearly worthless assets (to the tune of nearly 10% of GDP) isn’t inflationary nothing is.
“If vasly overpaying for nearly worthless assets (to the tune of nearly 10% of GDP) isn’t inflationary nothing is.” Wally Stevens
Potentially it is; if the banks start lending again. I presume you are speaking of price inflation.
At what point do we put all the technical analysis and theories aside and just finally wake up and say to ourselves that this is in fact, wrong.
Printing huge sums of money, giving it to bankers – or whoever, really – and then putting future generations on the hook for paying it back is completely unethical and immoral.
And who in their right minds says that we aren’t on the very precipice of collapse? Isn’t that why, to this day, we keep spending billions we don’t have over and over again? If we aren’t in mortal danger of a huge calamity here, then why take such dramatic steps to “save” our system.
I think the owner of this blog is engaging in cognitive dissonance.
“Printing huge sums of money, giving it to bankers – or whoever, really – and then putting future generations on the hook for paying it back is completely unethical and immoral.” JON
Actually a new legal tender distribution of legal tender to both debtors and savers (everyone) is completely moral under our current system of government backed fractional reserve banking in a government enforced monopoly money supply. As for debt to future generations, a distribution of new legal tender would not add to debt.