AMERICA, WE HAVE A SERIOUS PROBLEM
That is the headline on CNBC at the moment. And I fully agree. We do have a serious problem. We have a group of leaders who have zero experience in monetary theory, little to no financial background and those that actually do tend to be descendants of a line of thought that has largely been proven wrong in recent years.
Alan Simpson, the co-chair of the deficit reduction committee says we have a serious problem with our debts and deficit. And we should believe him, right? Why? Because he has ZERO background in the financial industry or in monetary operations. He is a law grad, served in the US Army and a lifelong politician. Certainly an admirable resume. But where is his background in the financial world and why in the world is he discussing the deficit and its impacts on the economy?
It’s not fair to single Mr. Simpson out. After all, he is just the CO-chair of this committee. His partner in crime is Erskin Bowles. Now, Mr. Bowles is no stranger to the financial world. He worked at Morgan Stanley and helped found his own successful financial firm. He went on to become Bill Clinton’s Chief of Staff and was instrumental in helping the Clinton administration substantially reduce the national debt. That all sounds great until you realize that Mr. Bowles is simply another case of Mr. Obama rehashing the Clinton administration and hoping for the same results. Yes, the same results that helped lay the foundation for this very financial crisis.
In a press conference earlier today Mr. Bowles said that he is initiating an important discussion. According to him it’s an:
“adult conversation about the dangers of this debt”.
Yes. America has a debt problem. We have a very serious household, municipality and state debt crisis that is in many ways similar to what is going on in Europe. What we absolutely don’t have is a federal government debt problem. After all, a nation with monopoly supply of currency in a floating exchange rate system never really has “debt” unless that debt is denominated in a foreign currency. He says this conversation is the:
“exact same conversation every family, every single business, every single state and every single municipality has been having these last few years.”
There is only one problem with this remark. The federal government is NOTHING like a household, state or municipality. These entities are all revenue constrained. The Federal government has no such constraint. We don’t need China to lend us money. We don’t need to raise taxes to spend money. When the US government wants to spend money it sends men and women into a room where they mark up accounts in a computer system. They don’t call China first or check their tax revenues. They just spend the money.
The size of the deficit is merely a reflection of the amount of money that the US government spends money on some public purpose or need. It’s important to note that the efficiency or allocation of this spending is debatable. I have had very serious problems with much of our spending in recent years. Cash for clunkers and housing tax credits come to mind….But the size of this spending is never constrained.
It is best to think of the deficit like a barometer of the economy. When the economy is running cold the deficit can afford to be higher. When it is hot the deficit should be lower. Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation and with record low inflation rates there is no fear of the deficit resulting in hyperinflation which would be a pseudo form of default.
This is not to imply that the US government can afford to spend recklessly, drop money from helicopters or pump money into bank vaults so bankers can pay themselves higher bonuses. It merely shows that, by accounting identity, the US economy will sink into recession if the government sector stops spending at a time of balance sheet recession: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets. But again, because inflation is the bogey here we must recognize that deficit reduction is not a concern at a time when inflation is at record lows.
Mr. Bowles continues by saying that the discussion is:
“about making tough choices. Any time you have limited resources you have to make tough choices”.
Mr. Bowles again makes the mistake of assuming that the USA is revenue constrained. That’s an absurd and dangerous notion. He will certainly make tough decisions. Of course, they won’t result in bankers losing their jobs or Congressman seeing lower wages, but they most certainly will involve fewer jobs for Americans.
In addition, the USA is certainly suffering from a lack of resources currently. A lack of resources that are being put to work. The US government has no lack of resources. Like an alchemist, the US government can NEVER run out of its primary resource. It could dilute this resource by producing money in excess of the country’s productive capacity, but it can never run out of it.
Mr. Bowles continued:
“Al and I couldn’t be happier with where we are in the process.”
Of course they’re happy. They’re going to ensure that the unemployment rate remains extraordinarily high all so they can report back to their lawyer friends in Congress who think they’ve accomplished something by avoiding a sovereign bankruptcy that was never even a concern.
The bigger problem here is, Mr. Bowles is far from alone in believing this nonsense. He said:
“I don’t think there is a soul left in America who doesn’t understand this debt and deficit is like a cancer. And it will destroy this country.”
I beg to differ. There is a very small group of Americans who understand how our monetary system works, have diverse backgrounds in the financial world and are well versed in monetary theory, operations and reserve accounting. And we all understand that this debt and deficit is not a cancer. In fact, in a balance sheet recession it is a great benefit to this economy. And we certainly understand that it will not destroy this great nation.
Mr. Bowles finished his press conference by saying that the American people get it:
“There is one thing I am absolutely sure of. If nothing else, I know deep down the American people get it. They know this is the moment of truth”
The American people most certainly don’t get it. And how can you blame them? When a supposed financial expert like Mr. Bowles can’t grasp these concepts how could we ever expect the average American to understand it? It’s time for an adult conversation to begin before this misguided conversation regarding the future bankruptcy of America sends us towards our own “moment of truth” – a 1937 moment.
May be we don’t have a problem in a monetary sense but we do have a problem in wasting resources and producs of labor sense. After all, this is what money is meant to represent – the resources and products of labor. We waste a lot of labor and a lot of resources on beauracracy and unnessary wars, we don’t use our resources efficiently. In the end, resources are finite even if money is infinite. We should just cut out the whole monetary discussion and talk in terms of resources. Money is nothing but a facilitator of transferring resources and wealth from one pocket into another.
That’s what happens when you promote a system by the banks and for the banks. The financial industry has probably caused the greatest misallocation of resources in the history of the world. And we continue to prop these fools up as if they are a necessary component of the economy.
Thanks for nothing Milton.
spot on!
Excellent work.
Now, could you craft in the form of a letter, or even simplify it, so that we can all send it to our federal representatives?
It is vitally important that they do get it.
Tried that. The Fed actually responds. No one else does.
Point is to enlist thousands of people to emulate your form letter. One alone never helps. Politicians & media listen only to numbers.
TPC
I think Roger hit the nail right on the head.
Generate a form letter (sort of what you got there already). Post in on your site. We can cut & paste it in to a MSWord doc real easy.
Give us a least 3-8 addresses to send this letter to.
I’ll definintely send the letter out w/ my signature on it!
I would bet that a lot of people would do this (1000+). I could get my work mates to do it too!
Iluv
A quibble, and correct me if I am way off.
1994-2000 was a Democratic President and Republican Congress. During that 6 year window there was a massive stock market bubble. Are we still paying for that bubble today? Big time. What did Greenspan do after the Dot-com bubble popped? he pushed rates to 1% in 2003, which in turn gave us another bubble (read: real estate). Think we are all in agreement there.
If that is the case then isn’t it wrong to give Bowles credit for 1990s debt reduction? The tax dollars spun off inside the Dot-com bubble made everything look rosy, and politicians in turn took all kinds of credit (and still do for that period). But wasn’t it all a mirage?
I would argue that the compression of the middle class via taxes and a credit based system helped cause this entire mess. And yes, it has been one long rolling mess since 1995 or so. The budget surplus that Bowles helped create was the icing on the cake that sapped the pvt sector of enough resources to force further indebtedness and sink us into recession.
Government bureaucrats will always mis-appropriate funds based on corruption/fraud/stupidity, so it may be the lesser evil for folks to believe that we are near bankruptcy and need to limit government spending. In the alternative, if this bankruptcy fear is removed, the deficit-spending will skyrocket, sending gobs of money into all the wrong places into various useless government programs, likely displacing productive industry, and eventually causing inflation once the gov starts adding trillions of dollars a year into the economy….
If one could get some stupid/useless government job with great pay, why would anyone do real work, thus further forcing the outsourcing of real jobs to other countries. And once all we have are government employees that generally produce nothing, and no real industries left, the dollar will lose it’s value since there’s not much useful that you could buy with it.
Tax cuts. Take the power of allocation out of their hands.
As they said in the Soviet Union: “We pretend to work and they pretend to pay us.”
It’s all a sham, a Potempkin Village which is rotting from the inside.
Which is why market intervention must be minimized and bailout fever must forever be ended.
Send this ‘perpetual motion’ proxy to anyone and you’ll end up on a ‘list’.
Seriously.
TPC, I agree that a credit based (‘everyone get their plastic revved up’) attitude was a huge issue. On top of that, or in parallel, would argue that the Dot-com bubble unleashed the belief in every American that they could legitimately get rich — very fast. That attitude, that psychology, is still hanging around.
Absolutely.
BTW, about time to start that first book of yours!
Yes and we fund the book now with monopoly currency and the book come later.
The Game is Rigged.
The financial affairs of this country via tax and regulatory laws determine the success and failure of our industries in this country. Money flows through the avenues of least resistance. Our business leaders have failed the public and rig our economy to reward their incompetence while punishing those workers who cannot afford to pay off politicians.
This has been an arms race measured in money contributed to either the democratic or republican party and the arms manufacturer is the business community of this country. The politicians can’t help themselves, they believe it is a game where either you compete for the money or die and they are competing by giving big business everything it asks for. Old industries are paying big money to stave off regulation in order to survive and the financial industry is paying big money to shed regulation originally passed to protect the majority of citizens from the minority of citizens whose greed exceeds that which benefits the country as a whole.
The ultimate beneficiaries of this arms race are the individuals who run big business, not the rank and file employee’s, not the middle class and certainly not the low income group but individuals who are officers of these corporations. They bought off politicians to get 15% tax rates and 10 year deferrals on the 15% tax, they slashed capital gains taxes and personal income taxes for the upper income class effectively shifting more of the countries operating expenses onto the backs of the middle and lower classes while refusing to invest their tax benefits into the country, but instead investing in manufacturing facilities overseas all in the name of trickle down economics and competition. They refuse to invest and our primary and secondary education system yet complain that it is not educating our children. They ship jobs overseas that citizens of this country were encouraged to strive for because these were promising industries. Citizens borrowed 10′s of thousands of dollars to gain a degree in these disciplines only to see these jobs transferred overseas and then told to go back and borrow more money to remain competitive in the workplace.
One could go on and on about the inefficiencies of this country but everyone is busy trying to address the next immediate crisis. We have been lulled into a nation of shortsighted nitwits.
The problem was not so bad until Ben decided to bail out the banks. So far he has spent 2.4 T on worthless papers, why?
From what I’ve read the Bowles/Simpson plan is more about tinkering with who pays than anything. They want to cut the top income tax rate, eliminate deductions, etc. And if you don’t like it, that’s because you’re greedy!
To think CNBC is talking about leaders that don’t know what they are doing? I,m with you, I agree with CNBC on that, but my question is: does anyone at CNBC know what they are doing? First, I want to apologize because I at one time voted for Erskin ‘Bowels’- a mistake I would never ever make again. But, anyone listening to CNBC would know that probably 98% of those jokers live in a different universe. Sorry about any mistakes I made spelling names.
One of the front page stories today in the local newspaper was about the Catfood Commission. It began with a statement about the need to deal with our “crippling” debt and deficit. There was, of course, no explanation needed for why the current level of deficit and debt are “crippling.” It is conventional wisdom, a truism of commonsense, if you will.
Democrats by and large are under this illusion, as well as the illusion that under President Clinton they exerted financial responsibility and returned the country to a budgetary surplus. This is consider one of the great Democratic successes, rivaling the New Deal, Social Security, and Medicare. Democrats wear it as a badge of honor. President Obama is one of these and his advisors are, too.
So don’t look for any help from the Democrats about fiscal sanity in the coming session of Congress or the last two years of the this administration. The question now is just now fiscal austerity is to be imposed and how deep it is to be.Given the debt overhang, any recovery that economy tries to make will be hamstrung by weak demand unless the President can turn the nation into a net exporter rather quickly. The goal is to double exports in two years. This is not only unlikely but virtually impossible on the scale required in that timeframe given the state of the world in which everyone is trying to export their way out of difficulty.
So why the numbers may be indicating some “green shoots” in real economy again, I would not get too enthusiastic. Not only does the politics have government negatively positioned for growth, but also there are still some big shoes to drop in the financial sector and real estate. The GFC is still in the early phase of its development. This is a bear market that began in 2007 and it is going to be years before the inefficiency of malinvestment and dead weight of debt are wrung out. There will be plenty of opportunity on the short side for those with the stomach for it.
Agreed. Even if exporting was to explode, all we’d have is a3rd world economy making things for other countries.
That’s not going to happen unless the dollar tanks – which it won’t as long as our DoD survives – and WalMart reverses it’s logistics chain so that we work for China instead of them for us.
Who, besides GE, is going to be buying all those Volts? State & Local Public workers?
You’ll see your granddad washing windshields on the corner before that.
So where is my 10 million dollar stimulus check?
Create something worth 10 million dollars and it’ll be in the mail.
I have some CDOs containing foreclosed properties that I don’t have the title to which has AAA ratings that I could sell (pawn off) on you — signed JPaulson
Perfect
won’t high deficit impact dollar credibility in the world?
Could. Would that be all bad though?
One good example about fiscal deficit is China. It looks very effective, but Chinese inflation is concentrated on food, transportation, and house. Because the fiscal deficit addressed the employment, but it didn’t resolve the underlying problem, the disparity of income. So there are widely criticism in China about the fiscal stimulus and anger among common people is great. Same thing could happen in America too. If we just talk about fiscal stimulus, but don’t address the income and tax structure, it may just become another short term bandit, instead of forcing the country to face the real problem.
American economy is not in vacuum. The fiscal deficit is inflation. It will drive down the foreign dollar reserve value at the same time. Then we may have a serious imported inflation. We often refer to WWII fiscal effect, but WWII at the same time destroyed world capacity and created huge demand lately. Right now the situation is not the same.
I’m afraid the continuing deficit stimulus could shake the dollar confidence and cause a sudden unwind on American debt. The fiscal stimulus must go with income distribution, tax structure, and world wide re-balance. Emphasizing one solution without combination with others may not have the desired result but rather have negative impact.
Fin,
A fiscal deficit will only lead to inflation if the economy is pushed beyond full employment (full capacity). That does not exist at this time. Any decline in government spending will result in equal or great declines in GDP (spending = income).
As far as a decline in the value of the dollar relating to import inflation… actually our massive trade deficit requires an equally massive federal deficit to keep the economy from collapsing. Think of it this way, savings is income not spent. A trade deficit means foreigners have extra US dollars which is kind of a savings. If spending = income and savings means less spending then when we buy excess imports we have excess savings via foreigners. To make up that loss spending requires a federal deficit OR falling incomes until there is no savings.
Now will and should the dollar massively decline? That’s a whole different ball of wax that relates to 40 years of trade deficits and other international imbalances that may or may not change anytime soon.
That’s way too pessimistic. The outcome is that we’d have to go back to really working together, and for one another. It would break WalMart, which would be a good thing.
Would probably also solve the current obesity crisis. People would have jobs to go to instead of sitting on their couches eating potato chips.
If it does impact dollar credibility, isn’t this what we want? If we want to reduce the trade deficit we need to impact dollar credibility. Our trading partners are now happy to trade us real stuff for pieces of paper.
No,no, no, no … we do NOT want to decrease the trade deficit! We just want to employ our own people doing insanely great new things with all the time made available.
Asset allocation extends seamlessly to Public Purpose allocation, through labor & R&D allocation. The OutPut Gap can never be closed without full employment and max education. There’s always more potential to chase.
Diverting excessive resources to clueless accountants, lawyers & politicians is rewarding the wrong skill sets. It’s suicidal, like a drunken weekend that stretches out the rest of your short life. The population that isn’t bored with intoxication will survive & rule.
meant “The population that first to be bored with intoxication will survive & rule.
“
Every fiat currency include DOLLAR based on confidence. If USA debt keep on growing with this kind of speed, will american and foreigner trust DOLLAR for next 10 years? for 20 years? for 50 years? for 100 years? for ever?
No one empire in history last longer than 500 years, can USA be the stongest country for good?
No one is saying we should run perpetually huge deficits. But during a balance sheet recession it is almost imperative.
“No one is saying we should run perpetually huge deficits.” ?
Maybe not but the reality is it as been going on almost perpetually year after years and the bigger they get the worst it seems gets.
size of a nominal “deficit” and “debt” should be dictated by context;
A classic rule of statistics is that “data without context is meaningless”.
Fear of Deficits is no different from fear that protons will ever run out of photons. Every entity in the universe spawns it’s own bookkeeping metrics as & when needed.
As long as there are more transactions waiting to be denominated, the currency supply will have to expand. Anyone who is alarmed by that is a Luddite, by definition.
Honest citizens don’t let citizens worry about anything except real Output, national capabilities, and national security.
As long as other populations see us as more stable than their government, we’ll have a stable currency and be a net importer. When that respect goes, we’ll have squandered our advantages.
TPC, I am trying to understand what you are saying. Why don’t we just reduce taxes as opposed to increase gov outlays in this recession.
In other words, wouldn’t that do the same thing.
What if we reduced gov spending but reduced taxes even more such that there was an even larget net spending.
You say inflation is the only worry for gov spending in excess and that there is no sign of inflation. Can they really stop on a dime if inflation begins to heat up.
If I understand you correctly, the US is not near to default because we are the world’s reserve currency. If we were not, would we be more like Greece etc since we would be revenue constrained.
Your website is very helpful to a novice like me.
I am a huge advocate of tax cuts currently.
Prime Wolf, I agree that tax cuts and increased govt spending have very similar effects. The main difference is that the effect of increased govt spending is more CERTAIN. To illustrate, if taxes are cut by $X, the proportion of that money which is saved as opposed to being spent is not entirely predictable, thus the number of jobs created is not predictable. In contrast, if govt decides to spend $X on Y additional bureaucrats in one month’s time, then Y additional jobs will be created, no more and no less. (That of course ignores the secondary or “multiplier” effects of the Y jobs).
But the above is NOT a good argument for increased govt spending. The decision as to what proportion of GDP is spent by govt is a purely political decision made the electors at election time. When TPC (or anyone else) is wearing their economist’s hat, I don’t think they should express a view on this. An advantage of not expressing a view on this political point is that you’ll get support from a wider range of the political spectrum.
All discussions here flow from Cullen being a student of the Monetary Operations community. Answers to these questions have been discussed thoroughly, for years, at
http://bilbo.economicoutlook.net
http://neweconomicperspectives.blogspot.com
http://moslereconomics.com
Quick answer: currency supply should be adequate for waiting transaction demand;
any rapid change in currency supply confuses bookkeeping accuracy
So the moment of adaptive pressure is to right size currency supply TO UNPREDICTABLE CONTEXT with minimal latency. Public spending creates currency, taxes withdraws currency, and interest rates set the price of use. Our task, as citizens, is to devise some permutation of those tools that allows the fast currency supply kinetics. So the real answer to your question comes down to the requirement to place intelligent, responsible people in management & policy positions. That, of course, just requires an intelligent, informed, responsible electorate.
PrimeWolf,
It is not just that the Dollar is the reserve currency (although that does convey additional advantages), but rather that the US is the monopoly supplier of Dollars. We are sovereign in the dollar and can create it at will. Greece, on the other hand, is not sovereign in the Euro. Greece cannot create Euros but must instead rely on the European Central Bank (ECB) for creation of euros. The UK and Australia, for example, are two more among many other non-convertible (i.e. Fiat), floating exchange rate currencies. Non-convertible, floating exchange currency is the key to monetary sovereignity. Hope that helps.
History has proven that supply side economics is a dismal failure irredardless of what Laffer and Kudlow prophecies.
While it’s a great shell game to start when interest rates are making a multidecade peak it has proven to be a complete failure…why do you think Bush kept the Iraq/Afghanastan wars off the gov’t books…now I get it the supply side argument…don’t recognize the expenses until the revenues come in and as long as you continue to cut taxes you’ll never be forced to recognize the expense
When economic growth is good supply siders can point to all the increased tax revenue generated by redeploying investment purely on animal spirits. It is of course the reduced tax rates which fuels economic activity and if the government reduces interest rates to 0 then you get CS = GNP/(1-tax rate). These supply siders don’t have a problem looking red faced as they cry for government bailouts.
I make no secret about me being financially ignorant, but the hypocrisy of you financial “experts” is just becoming too much for me to bear.
Whose fault is this financial mess we’re in? It’s the financial “experts” who were making a killing in any way they possibly could. And now, this blog claims to know exactly what to do. IT WAS YOUR KIND WHO GOT US INTO THIS MESS.
It doesn’t take a financial genius to know that too much money was spent, too much money was borrowed, and too much profit was had. And now we’re going to have to suck it up and pay it back. That takes time and work. And until then, you can take all your fancy theories of why such and such is and is not and stick ‘em where the moon don’t shine.
The bottom line is that you need to have every one to believe in the United States monetary system or else it’s not going to work. No beliveeee – no workeee. Good luck, we need it.
Interesting. So, my arguing against Greenspan and Bernanke’s policies all these years has somehow contributed to the mess? Did I make bad loans? Did I promote imprudent lending? Did I promote market manipulation? Did I speculate on housing? Did I feed the bubbles?
You’re either a new reader or someone who knows nothing about me. I haven’t helped to cause any of this. In fact, most of what I stand for would have helped prevent this all.
The accusation certainly is very unfair. I have learned tremendously from your website. Please don’t get discouraged by this kind of comment.
TPC, I believe Troll is frustrated with everyone standing on a theory as absolute and going back and forth promoting their economic theory as the accurate theory. It would be helpful for Troll to understand that economics and market analysis does not fall under the “Physical Sciences” but instead falls under the “Human Sciences” and such is governed by the laws of human emotion ie there aren’t any laws. It is as accurate as the Efficient Market Hypothesis!
TPC:
You are a brilliant guy and I have your blog on my daily read list.
Although I agree technically with your argument, its spectacular failure lurks in this sentence: “It’s important to note that the efficiency or allocation of this spending is debatable.” That is in fact the whole enchilada.
The Japanese have spent considerable sums building an enormous amount of incredibly useless infrastructure to counter their balance sheet recession. It hasn’t really really helped.
What you must acknowledge is that down the path of machine-generated wealth lies currency collapse.
I acknowledge that any govt built on corrupt govt spending will ultimately fail. So why don’t we remove the spending power and put it into the hands of the people via tax cuts?
I agree with you that all of the doomsday rhetoric about short-term spending is out of hand for the reasons you cite. However, you and other bloggers enjoy patting themselves on the back for being part of “a very small group of Americans who understand how our monetary system works, have diverse backgrounds in the financial world and are well versed in monetary theory, operations and reserve accounting.”
The reality is that the debt commission or anyone else that seriously addresses the long-term impacts of the large unfunded promises we’ve made at the federal level (e.g. SSN/Medicare) is a good first step. Those obligations must be restructured because we won’t grow ourselves out of things this time (especially by creating temporary jobs or consumer demand that prevent credit-sensitive assets prices to reach a lower equillibrium). Who cares if the politicians rhetoric is not technically accurate?
It’s not technically wrong. It’s operationally wrong. People wonder why this economy is such a mess.
I’m only saying that the actions of this commission matter far more than the words used to sell them to the public. I’m hoping the actions are: shallow short-term spending cuts (or even a little short-term spending) while changing our entitlement and tax system to reflect longer-term realities… actually, forget I said that. What’s disappointing to me is that I know this won’t happen because our political leaders haven’t tried to sell any degree of bad news in decades.
The biggest failure of the Bi-Punitive Commission is that they are proposing random responses to patently irrelevant question.
When your truck engine isn’t working, discussing whether to rip out the seats or remove the wheels is irrelevant to the increasing need to produce & transport goods. It’s totally out of paradigm.
Only sane thing to do is replace the idiots distracting us & thereby delaying reasoned discussion & responses. Right now we have cargo-cult economic policy.
http://en.wikipedia.org/wiki/Cargo_cult
“No one is saying we should run perpetually huge deficits. But during a balance sheet recession it is almost imperative.”
Nice article and comments, but I’d sure like to replace “almost” with “absolutely” in your comment above.
Consumption + Business Expenditures + Govt Expenditures +/- Net Imports/Exports = GNP
If consumers are restructuring, and business has no reason to expand, and State budgets are contracting… then the Fed Govt HAS to take up the slack or we face a terrible recession…..that’s not a prediction, it’s an accounting certainty.
But what should we buy? It does matter.
“Stimulus” may stimulate now no matter how we spend, but the debt service is a drag on future growth. We trade more growth now for less growth later. Even with tax cuts.
Unless….
There are projects we could build now that pay for themselves over time.
I don’t mean mere “infrastructure”. Much infrastructure spending is nice to have, and often necessary, to live in the kind of country we want to live in… but even the “non-boondoggles” don’t pay for themselves, they’re dependent on the shoulders of the over-burdened taxpayer.
Except…
America is surely a blessed place. For hundreds of years we’ve been blessed with a fertile, resource-rich land, inventive and hardworking population, protected by vast oceans and weak neighbors.
And now we benefit from being blessed by the stupidest pseudo-environmentalists in all history.
While other countries built nuclear power plants, we haven’t started a new one in decades. We get 18% of our electricity from a hundred 1970′s nuc plants, vs. 80% in France. Even Japan, a country ravaged by two nuclear bombs and plagued by earthquakes gets more of its electricity from nuclear power than us.
So we have an incredible opportunity.
Want to rebuild the middle class and work our way out of our problems? Borrow (or just print, as TPC points out) a couple of trillion dollars and build nuclear power plants. Sell some bonds and let the resulting electricity revenues pay them off.
Create a giant new industry to rival the automotive industry in size, with good jobs and good paychecks…then when we’ve built enough plants to cover our next decades electricity growth, and then enough to retire our aging coal plants, we re-invigorate the auto business by building enough to power a new plug-in hybrid car industry that cuts our trade deficit to size by minimizing oil imports.
All paid for with the money we would have sent overseas for oil.
Then, in twenty+ years we’ll need a new idea….
Nice comment Alan. But remember, Congress thinks we’re going bankrupt so further stimulus is off the table. If Obama were smart he’d play right into the R’s hands with a tax cut. It’s politically feasible at this point and a tax cut such as the payroll tax holiday would be the equivalent of about $1T in stimulus.
I attended a lecture by Christina Romer today, and for fiscmal stimulus, she advocated a huge payroll tax cut in tandem with letting the the Bush tax cuts expire only for those making over $250,000 (keeping the lower incomes).
Exactly. There’s a demanding future to face.
First, step: cease, FOREVER, the useless phobia that required transactions cannot be denominated (currency is transaction bookkeeping, nothing more nor less; get over it; get that distraction out of the way so that we CAN turn CPU cycles to what do to, not whether we can afford to do what must be done; the more important deficits are the deficits in public thinking, discussion & experimentation)
Second: generate enough interaction to
adequately sample contexts
adequately analyze contexts
generate & test adequate ranges of responses
RAPIDLY converge to what works (found by competitive trial & error)
The crime of the Deficit Terrorists is that, by being Luddites in Chief, they are blocking all adaptive evolution at stage 1, so real problems aren’t even being discussed, not by the Bi-Punitive Commission, or in Congress, or by this Administration, OR IN THE ELECTORATE AT LARGE! aaaauuugggghhhhH!
It makes you want to scream in frustration, and then cry for your country. It’s freaking tragic.
Alan,
I like your idea. Without a doubt energy is the best place to spend. The USA should be using existing (dwindling) fossil fuels to research and develop alternative energy sources. Pure nuclear isn’t my preferred option but it should no doubt from a part of the future energy supply.
Since we’ll one day need cars that don’t rely on liquid fuels, developing electric cars goes hand in hand with developing alternative energy sources.
The USA has the ability and opportunity to become the world leader in alternative fuels and electric vehicles but from what I can tell, too little is being done by the government to promote this most important agenda.
I get the feeling governments and bankers are hoarding all the wealth they can so that they can pay their armies to protect their interests (remaining oil). All while sacrificing the poorest of their citizens.
Madness.
It may be a couple of decades before battery technology advances enough to give us decent full-electric replacements for our cars, but plug-in hybrids are technologically ready now.
The problem with full electric is you have to drag around a heavy, much larger battery that’s rarely used, in order to have range for the times you do need it. A plug-in hybrid with 30+ miles of range coming from the battery charged overnight is effectively an electric car for most daily use, and has gasoline range after that.
But you want nuclear to provide the battery charge. The sun doesn’t shine overnight, the wind doesn’t blow reliably (and both are way costly), and coal is filthy.
Wish it was that easy.
I’ve been for tax cuts and more efficient government all my life, but this is a new world. In a balance sheet recession too little from tax cuts gets spent and of what does get spent, too much goes overseas.
I also doubt Obama has any intention of cutting any taxes if he can help it. The man has big government plans for the money and still doesn’t understand the tightrope he’s walking.
As for “stimulus”, I agree that the kind of pork-barrel slush fund and liberal dreamscicle programs we last saw are dead…. but a big industrial program that unions will love….financed with debt that pays for itself that Republicans can accept?
On the multi-trillion dollar scale that we need, I think it’s our only hope of getting out of this without having to wait a decade for entrepreneurship to dig us out.
Just my best shot…
A crisis wasted. We could have done some truly great things in the last 2 years.
At this rate we’re almost certain to muddle along until something happens that gets people’s attention again…..
Alan:
I support your idea, but with one prerequisite: Decide what to do with the existing nuclear waste, and then do it.
This should have been implemented after 9/11, when it became abundantly clear that we were financing our attackers, and continue to do so to this day, with oil purchases from countries hostile to us.
To Roger Ingalls on Nuclear Waste…
The simplest way to solve the nuclear waste problem is to change the name.
Nuclear waste isn’t “garbage”, it’s “5% spent fuel”….fuel that’s lost 5% of its power and thus is too weak to power our 1970′s technology reactors. Either reprocess it (re-concentrate it to it’s former level) and burn it again, or put it in a more modern, efficient design and add it into the fuel cycle there.
Even if we want to store it for a while (reprocessing currently costs more than new fuel), France has gotten 80% of its electricity from nuclear power for decades and all the “waste” fits in a single building the size of a basketball arena.
We’re a bigger country so perhaps we need 5 arenas. Big deal.
Pseudo-environmentalists screech nonsense that nuclear “waste” takes 50,000 years to degrade to safety. Of course it takes 50,000 years if you let it sit there, but they leave out the part that in 20 years all that 5% spent fuel will be one of the most valuable resources on the planet as new fuel for more modern power plants.
But that isn’t scary…
(sorry for the double post)
Thanks for bringing up the pink elephant in the room.
There’s no way 5% depleted fuel should be more expensive to process than raw uranium ore. That’s only because of existing policy, driven by lobby graft.
And we’re going to cut social security benefits instead? Where do we find these people? This electorate will do anything in it’s power to avoid thinking.
Thanks for pointing out my incomplete explanation. The reason reprocessing costs more than new fuel is because a great deal of new fuel is currently from downgraded weapons material rather than upgraded raw uranium.
Either way, the cost of the fuel is pretty inconsequential to the cost of the eventual electricity. Just trying to point out how little space it takes, and how the whole perspective of the storage problem changes when you realize you don’t have to store garbage for 50,000 years, just treasure for a dozen or even less.
The pseudo-environmentalists sure know their propaganda tricks, though.
Thanks for the additional explanation. Nuclear waste=partially depleted nuclear fuel.
I live in Washington…quite a bit of the old stuff stored in Hanford…from the earliest days of low tech nukes.
What happens when we run out of converted weapon fuel?
I agree with the author that cutting the deficit at this juncture would bring more hardship to the American peoples. Nevertheless, the authorities are thinking about something else far beyond the vision of the author of this article. The authorities are working toward their strategic goals, and the American peoples will suffer in the name of “national interests”.
Just curious your thoughts on long term entitlements. Based on MMT we can apparently promise the moon because there can never be bond vigilantes in the US.
Put another way aside from tax cuts what about a promise to quadruple SS benefits for all americans announced tomorrow? Or quadrupling Medicare spending because after all money is just an accounting identity.
While not as efficient as tax cuts it is the same idea.
Or what about simply doing a Bush rebate to the nth degree. Everyone is sent 250K in the mail and can pay off their debt and for 90% of americans their mortgage. Your balance sheet recession is over and national debt surges but it does not matter and in fact is encouraged under MMT during balance sheet recession.
Problem is you have trained americans to act like bankers and take any risk they want because we have the ability to issue rebate checks to offset all their household debt. Hence please go out and buy houses at any cost and everyone can shop at Nordstrom because we can just send them more money.
MMT doesn’t promise the moon. It is not a free for all. It gives you a very specific set of rules.
The currency issuer *must* at all times offset the net-savings of the non-government sector unless you want the economy to deflate. That is why all Western nations run a permanent deficit.
It’s the savings, stupid.
When people save in aggregate, that is exactly the same economic effect on current spending as raising taxes. They are saving, not spending. So an increase in saving means that some inventory somebody was expecting to sell doesn’t get sold. That signals a decline in demand and you get a cut back. Eventually somebody gets laid off if that happens enough.
So you either ban private sector savings, or the currency issuer must deficit spend. Pick your poison.
Somehow I do not understand this equation, although it appears so simple. I do not understand why it holds technically. What forces it? Is it the fact the government is the monopoly issuer of money? Does it hold on a resource basis?
that equation simply describes what occurs, as an accounting identity; a consequence of 500 years of double entry accounting
it hold because of existing relationships
does it hold for resources? it all depends on the metrics used; it holds for the current std currency system used to denominate the resources moved
there’s a deep point at the bottom of this rabbit hole; currency doesn’t ever represent resource value in any physically accurate way;
rather, in a given context, currency carries the ability to carry “energy-of-activation” between successive transactions; currency is an invented metric that has to follow unpredictable context rather than try to dictate it
Well, it’s not a matter of whether we can afford it. It’s a matter of whether we should promise every American all of these entitlements. We’d have to get very granular here and breakdown each program piece by piece. The point is that we can afford it. Whether we should do it is a totally different question. There are lots of programs that we waste money on. There are lots that are beneficial.
Also, I think the area I tend to focus on is the psychological effects of many of these programs. What happens when you tell an American you’re going to pay his benefits for the rest of his/her life? Most economists just look at the numbers and ignore the societal impact. That’s a huge mistake.
TPC: “What happens when you tell an American you’re going to pay his benefits for the rest of his/her life?”
Lets see. Universal health care + decent pension at age you can no longer be productive = no need to save = increased worker mobility and economic output maximization.
pretty great actually. Of course the taxes have to be higher to be able to pay for those things.
There is no need to reform US. You just have to move to an advanced country (both economically and socially). like Sweden, or Denmark or .. any northern European country . A place where social inequality is not at the same level as Zimbabwe.
And no, everything that is not capitalism is not socialism.
The point is that Marx was right in that capitalism will evolve into corruption and a series of financial crises if it is not allowed to work. If the system turns into one big public handout then it will eventually break down.
The handouts were not to every American. The average Joe was not bailed out. He lost his house , his job, his live (e.g. Arizona, organ donor fiasco).
Yes, that was in fact my problem with the initial stimulus. It went to the wrong people in most cases!
“need to save”
Humans didn’t get through the last 200K years by IRAs & savings accounts.
The best savings plan is to educate yourself and invest in your children’s capabilities. What fool invests in “fiat”?
Currency is not wealth. Real assets have longer value persistence, but even they have no persistent value across a generation. Value is always dictated by the next context, so the ultimate savings plan is to accrue ability to respond. It’s called accruing adaptive ability.
More specifically, the highest cost in any social aggregate is the cost of coordination. Corollary? Highest return follows investment in coordination. Your best investment? Being a US citizen, and doing your part to maintain the intelligent power of that preserve & platform.
Most profitable investment ever was creating the US Constitution. Dwarfs all other investments.
The store of value is irrelevant. To save is to postpone current consumption, right?
It does not matter if you do so while keeping your “savings” in fiat, gold , real estate, stocks or bonds.
Dimm
“To save is to postpone current consumption, right?”
Sure, but that misses the deeper point. The adaptive value of consuming tracks the value of the selection. No amount of boozing makes you more likely to live past next year.
First pass is consuming, something, anything.
Second pass (right on it’s heels) is to shape consumption patters to ROI.
That’s why surviving bacteria exhibit chemotaxis.
And why surviving humans, cultures & markets exhibit “resource-taxis”.
Consumption alone is a necessary start, but not for long. Selection demands never end. The only value in savings is to provide enough time for careful selection – which may not be long at all. It’s often obvious & immediate.
sorry, thought I was still signed in;
“resource-taxis” post by roger erickson,to Dimm
If the USA ever becomes worried about bond vigilantes, for whatever fanciful reasons, we can always just forgo the pretense of selling Treasury bonds.
see The beginning of US currency:
A sovereign government can “be [tricked] into [pretending to] borrow “money’ instead of creating it”?
[Yes. Ours was] http://www.monetary.org/briefusmonetaryhistory.htm
Why do we even bother pretending to “sell” T-bonds? Why not just halt the pretense of debt-related money supply?
ONLY because bank lobbies pressured our Congress into passing a law requiring all currency creation to be matched, to the dollar, with Treasury bond sales. Why? Primarily to deliver a steady business in handling fees! Is there ANY utility in Treasury Bond sales? Perhaps some in managing short term inter-bank interest rates, but those reasons are grasping at straws, and could be better managed through other methods.
NO NEED TO ISSUE TREASURY BONDS
http://neweconomicperspectives.blogspot.com/2009/06/professor-l-randall-wray-responds-to.html
Funny i read this one rigth after reading a comment elsewhere about China commanded economy that resulted in misallocation. And now people complain about evil government The problem is not about evil govt but about the REAL system/power that is going on hidden behind the concept called govt. Bank/lobbyist system that resulted in MASSIVE misallocation both from a production capacity and wealth distribution perspective. Now don’t get me wrong both system have their pros and cons, both are subject to corruption yet commanded economy do have more of the long term view in their management (rare earth ressources management in US versus china is an example).
Another topic : i think that tax cuts are less efficient than govt spending. I was happy now that i ‘ve just finished Koo book to see that he, also, say that tax cut are less efficient than govt spending.
The bulk of people that are underwater and need to repair their balance sheet are probably unemployed. So tax cut will partly serve to people that do not really need them to save and invest in financial economy. On the other hand govt spending if properly targeted (i.e job creation) will allow to have unememployed people.
I also think it would be better than extending unemployement indemnity since the work that could be do by hiring through govt spending could at least be useful Useful, at least from a social perspective : healthcare, education (since USA will never be able to compete with china in terms of low value added work and also since inflation that will happen in China and other Em countries will reduce the benefit of having low cost product for no educated people (which was the only reward they got from globalisation whereas educated people made money))
High revenue tax cut are a pure and simple waste of cash at beast but i view them as counterproductive.
That’s my view, some may find it is political yet i do think that from a pure economic perspective, 100$ spend through a govt program aiming at hiring people will have those people spending the whole 100$ back in the economy whare as tax cut will have a big part saved (Mauldin published a note 1 or 2 month ago with figures on taht, you posted it TPC, figures were bad like 60% saved)). Once govt realised that it is inefficent it will have to push to pump out saving from bank account into the economy via bonds and …. pay interests !
“100$ spend through a govt program aiming at hiring people will have those people spending the whole 100$ back in the economy whare as tax cut will have a big part saved (Mauldin published a note 1 or 2 month ago with figures on taht, you posted it TPC, figures were bad like 60% saved)).”
There’s a fairly obvious solution to this. If you need $100 of stimulus then you either deficit spend $100, or if the political environment requires that you do it via tax cuts then you deficit spend $167 in tax cuts. The results are then the same, and the cost is the same – nothing.
imho, both solutions are different:
1. i d’rather use the less debt creating solution in order to have the US prentending they are concerned about deficit and care about their currency (do not forget credibility factor)
2. but most importantly, govt spending will reach people that pay nearly no tax due to their situation so both solution are NOT equivalent (they would be in a world where all citizens do have the same economic/wealth situation ie using assumption of an average citizen but we all know that when its comes to economy there is no such thing such as average agent etc). Said differently tax cut effects are non linear: some agents, especially the one you need to act on, won’t be reachable through such a canal whereas the effect on other, the wealthiest, will be zero. This non linearity is summarised in my 60% figures YET it would be a mistake to use this “beta/linear” approach to scale the program (unless you had some correction to model elasticity effects). Anyway let’s not get too complex when we do not need to.
just ot precise when i say ” whereas the effect on other, the wealthiest, will be zero” i refer to effect as being positive in terms of spending/repairing balance sheet.
I completely agree with you.
TPC is convinced Koo is right. Every other post is about the balance sheet recession (Koo’s term as far as I know) , yet he completely dismisses Koo’s opinion on tax cuts. I went through the Holy Grail of Macro economics as well and here is what Koo says about tax cuts and I quote: “waste”
Towing the traditional Keynesian party line….I highly respect Koo, but you can’t convince me that a person who has too much debt and receives a tax cut has just received “waste”. That’s simply not true.
Totally agree TPC, but you cannot convince me that A millionaire will impatiently wait for his tax cut and go and spend it instantly
Agreed Dimm. Which is why we should not lower taxes for the wealthy. The tax cut should be primarily focused on those that need it and I think a payroll tax holiday does a good job of targeting those most in need.
Tax cuts vs gov spending is a spurious argument. If it’s about right sized currency supply, then the solution is always a dynamic balance of currency distribution (spending) vs recovery (taxing).
Japan also showed that it doesn’t matter how much public spending occurs if taxes aren’t kept low enough to leave extra cash for use by citizens.
This is no different than the right hand putting cookies on a plate and the left hand removing them. All that matters is the relative activity, not the absolute rate of either.
I’ve never said the govt doesn’t misallocate funds….And I have railed against the banks for years and years…..
No offense TPC, i was not refering to your post but to some comments made by readers. As a regular readers i know who you are bashing and most of the time i agree with you.
Anyway i was more curious to know why you are advocating tax cut since i feel, as i have tried to poorly explained, that govt spending aiming at creating jobs would be more efficient.
Mainly because it is politically feasible. I am just trying to be realistic. I’d like to see us build lots of things, but I know that the people in the house of reps won’t go with it….
TPC,
You claim that the people on the committee “have zero experience in monetary theory”, although later you acknowledge that one of co-chairmen was a successful financier. Than you claim that you understand monetary theory, and, more than that, you know and understand the right one! Great!!!
I do not want to argue about the theories now. I am concerned about the different subjects – how do you know they do not know theory? how do you know you know the right one? why do you think they should act on the basis of some “right theory” and not on some other basis?
First, about the theories. There are many monetary theories out there. You claim you know the right one. Why are you so sure? Economics is not math or physics – we can not come to uniform agreement by performing agreed set of experiments. Other economists claim their theories are correct. How we should judge? By predictive power? Other schools of thoughts claim their theories predict events as well as yours or better. By explanatory powers in scientific dispute? Normally it looks similar to medieval scholars discussing how many angels can sit on a needle. By practice? Then we should listen not to you but to the the most successful investor (by returns? by longevity?) or a panel of such… Do i need to explain you what we would hear from them? And then we should agree that any investor more successful than you should have more weight in this discussion….
Secondly, what should be the basis for such a committee mandate? Knowledge of some theory? Then we should comprise the committee (not advisory, but one with decision power) with the best educated academics who pass the test of knowledge of the “right theory”. Or with the most successful investors (but then Bowles is the right choice)? Any other approach?
Let me make a humble suggestion. We have a certain constitution here, which states that fiscal and monetary powers belong to congress, good it or bad. And congress should base their decisions on the will of the citizens. And the will is being bent recently towards deficit reduction. The congress and government should follow. The approach might sound primitive and outdated, but i believe its the best out there.
Well, it’s not really accurate in my opinion to say that I am using a theory. I am looking at the operational reality. We do not finance our spending via bond auctions as most people would have you believe. So, when you compare a household to the Federal govt you’re starting from an incorrect premise.
I only claim to understand the operational realities of the US monetary system (and no, Bowles has no experience in monetary theory or systems – if he has written extensively on this or does have experience then please correct me). The theoretical application of this is a different story.
Well, everybody is looking at “operational reality”. What we use to describe the reality is called a theory or axiom. If you think your description is axiom…….
Concerning publications criteria – so, it seems your approach is to go with academic criteria, and to measure understanding of the “right theory” by number of relevant publications and academic recognition?
Again, the purpose of my post is not to discuss which view on operational reality is right, it is to understand your approach. And, as i understand, you claim that the committee is incompetent because they do not adhere to you theory, and should be replaced with appointed(?) academics who are proven(?) to know and understand it. Do you have any congressman in mind who you think has the same views on the monetary theory as you do?
See, I disagree. I do not think everyone is looking at operational reality. For instance, we’ve been working under a federal reserve for 25 years that fully believes banks are reserve constrained. The monetarists have poisoned this economy via deregulation and flawed theories for 25 years. Yet, we continue to use their theories in our everyday work.
http://pragcap.com/resources/undertanding-modern-monetary-system
Ok, let’s say a physicist develops a theory based on the principle that things on earth don’t fall to the ground but stay were they are (no gravitation). You would consider this is a no-go theory from the start because it contradicts rational observation of the real world and would never use it to invent machines etc.
This has nothing to do with comparing economics with maths or physics.
You cannot just say bonds (or even better China) finance the US or the US is revenue constrained or QE2 is money printing etc. (which is a pure observation of the real world) if it isn’t the case at all and built decisions on these wrong principles that affect many many people.
Rodger M. Mitchell, Warren Mosler and L. Randall Wray and of course Cullen understand the basic principles, see here:
http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/
http://moslereconomics.com/2010/11/26/european-debtgdp-ratios-the-core-issue/
http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/
“(which is a pure observation of the real world) if it isn’t the case at all”
should read
“if it isn’t the case at all (which is a pure observation of the real world)”
you left out Bill Mitchell
http://bilbo.economicoutlook.net/blog/
he says the fastest growing segment of his monetary operations blog [arguably the largest such site worldwide, by FAR] are mathematicians and physicists, finally intrigued enough to inquire about real operations, regardless of theory
Thanks Roger!
This site has been an education forum more valuable to me in the past 2 years than my 25 years on Wall Street. Amazing how little you are taught here.
Anyway, my only issue here TPC is that this seems to be little more than an academic discussion. It has little or no immediate impact(or intermediate that I can discern) on the markets. The fact that there might be 1000 people in the world who understand how the monetary system works (and none of those 1000 inhabit positions of authority) seems to have little bearing on the fact that we wake up every day and the market goes about it’s business of completely ignoring this discussion. If the market “knew” how horribly we were allocating capital, would we be flirting with 2 year highs in stocks? When we’ve done absolutely nothing to prevent a repeat of what happened then? And ACT II of this farce seems to be unfolding in Europe as we speak? The only thing that “saved the world” was the removal of mark to market accounting? Really? That’s all it took?? A change to an effing accounting rule???!!!
So while this is a valuable and worthwhile discussion to have, I’m still struggling with how to utilize this new found knowledge of mine in practical ways. It seems we will lurch from crisis to crisis every few years, with those who invested high getting crushed and those with the courage to put it all on the line when there’s blood in the street get rich. That hasn’t changed since Rothschild said it long before MMT was even an idea, much less the reality.
How does this help me become a better investor? We’ve completely blown the opportunity for substantive financial reform, and at the same time I’ve watched the most stunning 2 year rally I’ve seen in 10 years mostly pass me by. I’m not trying to be a sarcastic sob. I’m serious. So our government is run by fools for the benefit of bankers. Ok. Got it. Hasn’t it always been so? Today it’s the bankers benefiting. But there has ALWAYS been some other robber baron or plutocrat that enjoys the benefits of “owning” government. That’s been the case since long before the Roman Republic. In the meantime, I still have a family to support, and my investment portfolio, which though modest by most standards, is not chump change (to me anyway), sits mostly in cash or a few blue chips, ETFs, and some funds that have done reasonably well. But mostly I’m scratching my head these days wondering WTF to do with a not insignificant pile of cash. Do I be bold and ignore the facts in front of my eyes? Because that’s what the market seem to do most of the time. Or, do I continue to play it safe, and as a result, mostly tread water.
Frustrating times.
Yes. Unfortunately my moral compass tends to lead me to write about what I think SHOULD happen with policy and perhaps I don’t focus enough on what is reality. I try to talk about the markets often, but with all the suffering in the world today I just don’t see how I can ignore the ignorance of the leadership that is contributing to so much of this pain.
My comments were a reflection of what I see around me (up 200 today, for instance), not what you write. Never intended it otherwise ans sorry if it came across that way. It just sometimes feels that though I know so much more than what I knew 20 years ago, I’m not sure it’s made me a better investor, merely more aware of my own level of ignorance.
Well, what makes the market even more confusing is that the ideas and myths that many investors make their investment decisions based upon are totally wrong (at least in my opinion).
John,
What you see is simply the effect of herd behavior and seasonality. also today is the first of the month which typically is bullish. I am bearish and think an IT top is in and we are about to have an echo top. For me right now I am divesting out of long positions and holding cash to short once I see the rollover. We probably are going to meander between 1150-1220 until the end of the year. Our cyclical bull market (roughly 17-24 months) is getting long in the tooth. Unlike some who post on here, I do not see a secular bull market developing yet as everything is still liquidity-driven and not fundamentally driven. And as TPC alluded to, if we implement austerity measure, all that liquidity is gonna be drained fairly quickly.
Mike,
I would tend to agree, but the herd has taken the market a very, very long way. Money flows are indicating (for now anyway) an exodus from bonds which tends to be bullish for stocks. Maybe the secular bull is ending, but how much downside is there to justify a large cash position? I don’t believe for one second that our politicians will institute true austerity measures. They don’t have the balls for that, but I don’t mean that in a good way. They’ll end up doing the right thing (continue spending) for the wrong reasons (to get re-elected and control who gets goodies). And if the economy picks up and employment upticks a bit, as it inevitably will and has in fact been doing,(remember the Depression porn in August?) no one will hold their feet to the fire to demand spending cuts.
The wild card is housing. On the bright side, we’re back to pre-bubble levels here in the Northeast, and while there’s not a lot of activity, there is some and prices seem to be holding up. If prices go down another 10%, will that matter? Especially when we know the Fed is going to backstop the banks? We’ll just have a few more people walking away from mortgages but remaining in their houses for 18 months, spending the money they’re saving by not paying their mortgage. And if they ever get around to it, I bet the powers that be forgive the debts rather that put families in the street. Especially in light of the shenanigans that have brought on mortgage-gate. NO ONE wants that to come to light because it will mean big prison sentences for big fish. The big fish will let foreclosers off easy rather than shine a light in THAT closet. People like me with 70% equity in my 2002 purchased home will get screwed by that, but hey, it’s for the greater good right?
On a less sarcastic note, the resilience to the market is stunning. At every point in the last six months when it appears on the verge of rolling over, we get one of these “gap and go” days out of nowhere to take us back above the key moving averages. That’s not the sign of a tired bull. Faber has a letter out that discussed the amount of money held by wealthy individuals who are getting antsy about missing the move from March 09. They could provide fuel for another 10% leg up.
I’m deliberately playing devil’s advocate because for every bear case there’s an equally compelling bull case. It may indeed be the herd, but standing in front of a stampede screaming “You fools! You’re making a mistake.” is not making the market go down, not giving me restful nights of sleep, and not making me more wealthy.
Agreed. Most practical post seen here in the months I’ve been reading.
Only super long Investing trends are driven by fundamentals (and you have to be informed to see them).
Short & even moderate term outcomes are primarily driven by political, not fundamental mkt data. In short, mkts are grossly over-meddled with.
You can try to guess what the herd will do, but you have to track what the monkeys on their back might do too.
TPC,
In ref to your statement about only a handful of people understand economics. Could you please Name some names? Give us say 10 people you know who have the same brilliant analysis of the situation that you do?
Preferably these will be people in some positions of relative power, as otherwise what ‘good’ could they do, even if they do speak out.
One other question: Tax cuts result in common folks saving more. This is ‘bad’. What do they do with the ‘savings’? Most common folk that I know put it into the Bank of America or Wells Fargo. Don’t the banks recirculate that money? It’s not like common folk are sticking it under their mattresses or burying it in the back yard. Although, given the current interest rates of 1/3 of 1 percent currently paid by BoA on CDs they might as well.
Now you might state that the banks aren’t lending any money. But can you tell us why?
juan
Juan:
1. What proof or studies do you have that “people” will only save the tax cut? I would venture that different economic strata will behave differently. Those that have more than adequate income vs their expenses will likely save, those that have less than adequate income will likely spend. So, it depends how it is structured. I believe a payroll tax would result in the greatest spending boost.
2. Banks are not lending (or have reduced lending, would be more accurate) for many different reasons; A need to shore up their capital for future losses, a lack of creditworthy borrowers, and creditworthy individuals who do NOT want to add to their debts. It is safe to say that all banks are attempting to act in their own self interest.
http://bilbo.economicoutlook.net/blog
http://neweconomicperspectives.blogspot.com
http://moslereconomics.com
TPC, you have done an incredible job about DESCRIBING how the current “Fiscal-tary” system works under a fiat currency regime. Likewise, you have made some very interesting and practical suggestions about what to do in the context of the current environment.
One thing that I have not seen that I think would interest some here would be your overarching judgements about the fundamental MERITS of the current system. Yes, this is how things work right now, but if you could build your own fiscal and monetary system from scratch, would you create a fiat currency regime? Would you back money with something tangible (gold, oil, land, etc.)? Would your system include explicit constraints on the ability of government to spend during certain times, but mandate spending during others?
Just think hearing your thoughts about a “tabula rasa” fiscal and monetary system would be interesting perspective for some readers who seem to get so upset about you simply explaining HOW things work. Give us a more fundamental judgement call about the way things OUGHT TO be, so we can really have some ammo to get ticked at you
Check the UST historical National Debt data.
The national debt increased each and every year under Clinton.
What reduction? What balanced budget?
Never happened.
The national debt has increased every year for over 50 years.
Of course the UST could be wrong….
“won’t high deficit impact dollar credibility in the world?”
TPC: “Could. Would that be all bad though?”
Hi TPC,I would have a question on this issue: does your answer would change if the USD wasn’t the reserve currency, the currency used to trade globally?Thanks
reserve status is a function of being the largest economy by far. Is that changing soon?
Yes I agree with you, reserve status is a function of USA being the largest economy. What I am trying to say is that the event that USD loses its credibility, because of deficit or central bank QE, is not a problem to the extent USD is the reserve currency. I mean, for a normal country, even monopolist issuer of its own currency and with a monetary system like the USA, deficit and QE would normally be a problem.
To Roger Ingalls on Nuclear Waste…
The simplest way to solve the nuclear waste problem is to change the name.
Nuclear waste isn’t “garbage”, it’s “5% spent fuel”….fuel that’s lost 5% of its power and thus is too weak to power our 1970′s technology reactors. Either reprocess it (re-concentrate it to it’s former level) and burn it again, or put it in a more modern, efficient design and add it into the fuel cycle there.
Even if we want to store it for a while (reprocessing currently costs more than new fuel), France has gotten 80% of its electricity from nuclear power for decades and all the “waste” fits in a single building the size of a basketball arena.
We’re a bigger country so perhaps we need 5 arenas. Big deal.
Pseudo-environmentalists screech nonsense that nuclear “waste” takes 50,000 years to degrade to safety. Of course it takes 50,000 years if you let it sit there, but they leave out the part that in 20 years all that 5% spent fuel will be one of the most valuable resources on the planet as new fuel for more modern power plants.
But that isn’t scary…
amazing that we (I for certain) have never heard that part of the nuke story. All we ever read about is the Yucca (?) mountain horror stories
Alan,
Sorry to reply on this offtopic issue but as a French that do not support nuclear energy i can’t refrain from doing so.
Nuclear waste are split on several parts:
- 95% of low radioactive uranium (sitll radioactive) unusable (only 10% can be “recycled” in usable uranium). Areva, biggest power plant company here is blatantly lying to everyone by saying 95% of nucleear dump are recyclable. Yet several reporters showed that 80% of low radioactive uranium were sent in Russia and stocked there (in big holes dug in the ground and not even covered or made hermetic. Dump Can just lie on the grind. France has generated over its life 20 000 TONS of such waste (not all are in Russia of course).
- 1% plutonium : the most radioactive substance in the world. Used for weapons and some satelites program. French are trying to work on next generation plant using plutonium (very costly and will create highly radioactive dump).
As of today to use plutonium (aprat from selling it to non very nice people that handle it for you) they mix it with the 12% x 95% of low uranium they “recycle” in usable uranium to create what’s called MOX that can be used to fuel nuclear plant. After use this mox generates the same quantity of waste but NONE is reusable/splitable or whatsoever. It is very radioactive, solution could exist to work out something but they are too costly and will only create another more radioactive waste. as far as using pure plutonium a plant was built in france (superphenix) but closed after a few billions cost with NO results.
- 4% of ultimate waste, can’t be used for sure, it is vitrified and stocked in France (with 173 000 tons of total radioactive waste (173 kilos of plutonium)). No one wants it.
So where to put all that:
- highly radioactive waste are in specific place in France since no one wants them,
- the rest is recently starting to be put in russia (dictatorship also likes to get cash to store waste)
- or, not a joke, they are working on burrying it in several place in france 400 meters under the ground. They are trying, not a joke since it is actually a very good question, to decide wether they should built stuff on the ground to indicate there is something but some people argueed that it would tease future generation to dug the ground instead of keeping them away…remember we are talking 50 000 years.
Now we could wage a war on some far country to use bullets containing low uranium dump (as US did in irak). Or as it was recently discovered in Italy (where a big chunk of dump handling is related to the mafia) : they simply throw the radioactive dump can in the sea near somalia and ethiopia. Not a bad idea since befeore greenpeace actively campaigned against such a practice, radioactive dump were simply thrown in the oceans (100 000 tons estimated) ! Funny thing is that a law was passed to forbid throwing nuclear waste from boats so what our elite has done (banking lawyer spirit style) they built a building near the sea and a pipe to throw nucealr waste in the sea (which was ok since law only said it was forbidden to do it from a boat).
France has relied on its scientific elite and the classical human error : “let’s go on we’ll find a solution later”. You propose to continue like that when 60 years after first nuclear plant in the US (that contaminated a whole river) no solution have been found apart burying it underground ! What a progress !
Another scam is that radioactive significancy thresholds are mesured using an exposition model that rely on Hiroshima data i.e strong BUT limited in time exposure where as the place where most of the waste are stocke in france diffuse PERMANENTLY radiocativity in the aire (that can be measured as far as in nederlands, switzerland etc !!!). Some industrials tentatively tried to have a law passed to allow to put in goods such as bike/car parts, a very small portion of low radioactive waste (not a joke!). Nothing crazy but intention was there.
We are playing with something that will affect future generation, we are talking about time horizon where we do not know if the world will be as stable and scientifically evolved as today. Additionnally when something goes wrong price to pay is VERY high. Tchernobyl being the most well known example but there was another thing like that in russia end 40′s begining 50′s: waste were stocked under the ground but they reacted together and wiped out a region with a big kaboom !
Societey is not even able to deal with its banking system and simple things such as securitisation…but that’s just money…man is a short term minded beast…will it deal properly with highly toxic waste that last several thousand years !
NO
Look it has been recently discovered that the parking of the Guingamp stadium (a french city) has radiocative waste under it…guess what ? The company that did that did not exist anymore, its affiliate says it’s too expensive to remove and asks cash from the govt to do it! A natural park was created south of france but they discovered that a part of it (they built an aera for kids to play rigth there !) has radioactive waste under the ground : no one knows why it is there.
I forgot to say that the cans to put nuclear waste in were built in France until recently to resist to a 50 km/h shock (throw a plane on them and BOOM). About the cans thrown in the see before the law was voted to forbid it, they were supposed to resist for 500 years. Examination based on sample shown that a significant portion started to break 29 years after !
In the river near my parents use (near the pierrelatte plant) the plant accidentally drop 70 kilos of low radioactive uranium ! An investigation showed it was due to a problem detected by alarm systems 3 days before but since there are always alert ringing all day (highly cautious system) the staff did not act before (true !!!!! that’s what the staf said !!!!) since 99.99% of the time alert rings and there’s nothing wrong (just checks to make).
Apologize one more time for this post but when i read a goold old “science will deal with that in 20 years from now i’m getting crazy given the amount of proofs.
More than anything else pragmatic behavior are required here.
Send the wastes towards the sun and the problem is solved.
Have a Columbia like problem…boom…everything falls back on earth and the problem will be magnified…
When you look at the succession of human failures about Colombia, i wouldn’t be surprised if it happens again…
Interesting and kind of scary.
I hope we don’t have to stop drinking those good Bordeau.
Thank you for your voluminous attempt to help me see the light, goodfriend, but I’m just not getting it.
In the forty-odd years of French commercial nuclear power generation, how many people have died, been injured or sickened? In the US it’s zero. Isn’t it the same in France?
How big a deal are these contaminations you describe? Isn’t this the contaminated stadium? http://www.flickr.com/photos/9185949@N08/1438881189/
It’s in use this weekend, isn’t it? Was the contamination even from nuclear power waste, or did someone improperly dispose of medical x-ray or industrial waste?
There are costs to everything, but the anti-nuc lobby never will admit that their efforts COST lives. Aren’t more people harmed at anti-nuc protest rallys than at nuclear power plants?
And what if their anti-nuc policies had been implemented in France. Wouldn’t the air be dirtier from the coal burning, the population sicker? China loses thousands of coal miners a year. Even in the US, coal mine deaths are sufficiently common that a collapse with 20+ deaths only lasts in the news for a day or two. How many French would die every year, be sickened or injured by working coal mines, or sickened or die prematurely from just breathing French air if not for the decision to use nuclear power?
And, forgive me if I”m misreading your post, but aren’t the “tons” of scary low-level nuclear waste you describe just uranium ore that’s LESS radioactive since having much radioactivity removed to create fuel? Why do you find it a controversy to put it back in the ground under some earth? Put it back in the original mine if you like.
Can this material be disposed of poorly and corruptly? Of course, and perhaps France has. But it’s not more dangerous than hazardous waste from other industrial practices. If France really is disposing of it as you describe, shame on them. Better stop all French industry immediately and investigate every bit, as surely the same corruption exists in other materials.
After all this we are left with the actual spent nuclear fuel my post was originally about. It fits in a building. One building in France. If you are right and all technological progress stops then it will sit in that building a very long time.
More likely it will become the most valuable building in France as technology continues to devise ways to get the energy from that fuel. Forget 50,000 years from now, imagine just 50. The world isn’t going to stop…. progress progresses…. but we can save ourselves a lot of middle east wars, polluted skies , deflated economies and sick people if we’d trade some fossil fuels for nuclear power.
In any case, I’m pretty unhappy with so many people willing to sacrifice so many of their countrymen to poverty, death, injury and disease merely to maintain a fiction about nuclear power generation that makes them feel “green”.
TPC:
Thanks for providing good explanation. But, do you think the govt talks about federal monetary limitation otherwise people may start to believe that if there is no limits to how much credit can be created then why not go all the way. You see, I think US population is like a spoiled-teenager — they just want to be rebellious to whatever the parent (US govt in this case) is saying. So, to be safe it is better to tell US population that yes there is a federal monetary limitations.
AK
There is a limit though. The limit is inflation which destroys our standard of living. If you asked people if they’d like their standard of living ruined I think most would say no. So, we should target price stability and avoid creating bubbles and tinkering with the market in a way in which it creates distortions and disequilibrium.
TPC
Not knowing as much about monetary theory, can I ask what happens if we do the following?
Let us say the U. S. is self sufficient (i.e. a closed economy, or no need to depend on trade). The federal government can then issue 10% more debt (or deficit spending) each year than the one before. Deficit spending translates into consumption, without any productivity gains. In other words, we improve our quality of life without working harder or smarter.
Isn’t this the ultimate solution?
The government doesn’t give a currency its value. That is determined by the public’s output. Printing up paper money without the output to back it is pointless. The point now is that much of our output is idle so we can afford to buy it up.
TPC,
I saw your comment on twitter yesterday about covering the dollar short becuase you were worried about a upside surprise in PMIs. Does that mean you’re now long stocks? Thanks.
Sold USD before China PMI. Wish I’d gotten long stocks. Oh well.
“a nation with monopoly supply of currency in a floating exchange rate system never really has “debt”
Sure it can print it’s way back to 2008 and then what ?
Its not how to solve the recession, Its the recession that should have happened a long time ago and was postponed and postponed artificially until we got where we are now.
A recession is simply “excess credit and paying time”.
To argue that its not good at this time to cut deficit spending is misleading. An economy needs to be something else than GDP on steroids.
Deficit spending is almost like artificial interest rates it’ Postponomics.
One side is a credit but the other side as no debit.
That sounds more like counterfeiting. It’s like eating your vegetable before planting them. Issuing credit before production as its limitation.
It worked real well did it not ? Lets all consume and have the Chinese produce more for us.
Pres. De Gaulle use to send the US dollar spent in France back to the US to get Gold in exchange. The US got the message and stopped backing the dollar with Gold at $35.00.
There are a lot more Dollars floating around all over the world to day. Even if it’s painful it would be much better in order for the US to maintain its place and credibility (which it definitively can) to fix its fiscal and credit addiction problems instead of postponing it again with more deficit spending.
Totally agree with the original post and the rationale for continuing to spend growing the deficit during the balance sheet recession. However, the cure for the ailing economy will not come through spending reductions and tax cuts – these certainly need to be considered for a sound fiscal policy moving forward, but the 800 lb gorilla in the room is the huge level of private debt that has amassed over the last couple of bubbles fueled by a financial system run amok. Yes, team Obama could have taken a high ethical road of leadership and reformed the financial system by ridding it of the organized criminals to restore a National Banking system in support of the greater societal need, but he blew that opportunity with the bailouts and by leaving the executives and powers to be in place.
The financial crisis left in its wake a huge private debt bubble and now the monetary policy of the FED with the cheap money and hope that the market will somehow excite the economy to recovery. What is happening is another asset bubble being pumped, using leverage (essentially free money) to invest into speculative investments instead of productive assets. When this new bubble deflates it will add to the debt level burden making the next crisis even bigger than that of ’08. The public debt (deficit spending) is supporting the GDP because the private sector debt can’t. Without the $T’s in gov’t support we would still be in recession; by covering it up and fueling speculative bubbles I fear the next step is depression. Private debt restructuring in the $T’s is the pain that needs to be absorbed and it seems the $T’s in transfer of wealth to the upper 1% or .1% of the population is the only place where there is any more hair for haircuts occur.
TPC — Thanks for the response. I understand inflation is the limit. However, like I said general population is like a spoiled-teenager who will listen to what matters to them i.e., selective-listening. So, they will listen to unlimited credit creation part and completly ignore the inflation as a limit part.
You and I understand that private-debt is an issue. To reduce private-debt we need to set up an example and I think US govt may have to pretend like they are reducing deficit to encourage general public to do the same.
Why not be honest with the public? And regulate the banks in a way that keeps them from spoiling the teenagers?
TPC,
Cant thank you enough for all the info. Ive learned an incredible amount in the past couple years reading your stuff, and following comments, and links.
Couple questions for you guys on these topics…
How can it be that nobody in government et al knows any of this stuff?
1. Help me understand how this plays out and connect the dots – I understand the basic points of MMT, and that the government can create money to pay for things. Please explain…isnt this inflation? when they create a dollar doesnt it make my dollars worth less?
2. Is it off set by what they collect in taxes? But if they collect taxes at a rate that congress decides (i.e. not what they need to take out to keep inflation in check) how do we not get inflation?
3. The answer is to cut money creation and cut taxes?
4. At what point do we get inflation if they just keep spending? and maybe define inflation better?
thank you!
Wikipedia:
“In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. …”
The price of goods and services depends on supply and demand.
Until demand returns inflation will be lower than usual.
Mainstream economics disregards (fresh water economists) the demand side (notable exceptions: Koo, Krugman, others). Basically they say: “The demand is always there. The demand is not a factor. Increase the supply. Problem fixed.” Notable examples: Tax cuts, deregulation, sudden laziness of the unemployed, etc. Being mainstream does not mean you are right. Unfortunately as TPC’s post states the policy is set my mainstream minds. The results are obvious.
“define inflation better?”
An increase in the amount of currency chasing to same or a less amount of goods.
Problem is that the money is not going at the right place so the money supply in the economy is not really increasing. Look at the money supply charts no change. When it starts to go up watch out.
Thats my two cents.
Yes, but there is this thing called “inflation”. I hate to break this to you but many countries have tried to pretend like “reality” does not exist. It ends in hyperinflation, ruin, and fascism.
I’ve been hearing the hyperinflation story non-stop for years and years. They’ve just been horribly wrong.
TPC:
Slightly off topic, but have you looked at this data dump about how foriegn banks got a great deal of bailout money from the US? Seems to have failed to rise to the top of the news.
Thoughts?
http://www.housingwire.com/2010/12/01/bailing-out-the-big-banks-and-taking-europe-with-it
Don’t forget the IMF funding for all these bailouts. That’s essentially USA funded.
I admire your clear description of our economic problems. What I have not found is a realistic way our political/ financial system can be made to function with correct effect. We have a dishonest system of elections, by an ill-informed electorate abused by a greedy “ruling class”. Marx was trying to create a system with a better distribution of wealth without allowing for our genes for selfishness. Lets face the fact that our government is often incompetent, and I see no sign it will improve. If you know a way to improve the way our government/economy works, THAT CAN ACTUALLY BE DONE, you are a genius and please speak up. Revolution left or right is the historical effect of a really broken economy. I don’t think we will get to that stage, but a lot of people will suffer.
“reserve status is a function of being the largest economy by far. Is that changing soon?”
USA is not only the largest economy but also the largest debtor.
May be USA is the most military power is the more important reason if USA invade Iraq was to stop middle east countrys to sell oil in Euro instead of DOLLAR.
reason $US is the reserve currency is because everyone prefers it over other, less trustful, currencies
ditto for “debtor” status; reason countries keep large reserves with the USA is because:
they’re frantic for $US, so will export anything we’re willing to give them $US for
Warren Mosler has repeatedly made a killer point; it matter little what currency is used for transactions, and far more what currency people prefer to save in ($US still the most stable currency; always the target when flights to safety occur)
http://moslereconomics.com/2010/11/26/china-russia-quit-dollar-for-transactions/
Jim Rogers : “Any economy which saves and invests and works hard always wins out in the future over countries which consume, borrow and spend.”
How’s that working out for Japan ?
To be honest, that Jim Rogers quote just above me is a ridiculous comment. What is needed is a society where people work hard, spend a lot, the government uses appropriate policies, and resources are not chanelled into speculation but rather beneficial production.
I think invest in Jim’s mind is invest in real economy such as infrastructure, factory, education…instead of invest in financial products.
http://jimrogers-investments.blogspot.com/
Interesting to bring up the American standard of living as being threatened by inflation…would the greater threat be that it is just an unsustainable way to live…i mean there are numbers out there that say as 5% of the worlds population we are using 25% of the worlds resources to live the way we do…even with the biggest military in the world there is no way we can keep that up long term
As,
I’ll take a stab…
1. Help me understand how this plays out and connect the dots – I understand the basic points of MMT, and that the government can create money to pay for things. Please explain…isnt this inflation? when they create a dollar doesnt it make my dollars worth less?
This line of thought is based upon Monetarism and says money creation 1:1 leads to higher prices and not higher output. Without going into the mechanics of why this is faulty theory it requires 2 key assumptions – the economy is fully employed and that the velocity of money is constant and = to 1. If you believe that is true right now then yes money creation will create inflation. At the very least I don’t call 9.8% unemployment full employment.
2. Is it off set by what they collect in taxes? But if they collect taxes at a rate that congress decides (i.e. not what they need to take out to keep inflation in check) how do we not get inflation?
Inflation isn’t some rocket science that people make it out to be. Just assume you’re a business owner and you’ve got orders pouring out the door and you can’t keep up with demand. A smart business owner knows that some of these people are willing to pay a higher price. He’s got so much demand he can raise his prices and still be at full capacity. Do that across a broad spectrum of the economy and you have general demand driven price inflation. The government can directly influence that buy cutting government spending (demand) and/or raising taxes (cutting consumer demand).
3. The answer is to cut money creation and cut taxes?
Always remember, spending = income. If the economy is not fully employed then there is room for added demand by increased government spending and or lower taxes (increased consumer demand).
4. At what point do we get inflation if they just keep spending? and maybe define inflation better?
See above. Note, there are sources of inflation not associated with demand, but with supply. For example the 2 oil shocks of the 70′s drove inflation by cutting the economy’s ability to supply output. Policy responses to supply shocks are not as clear as demand inflation.