BERNANKE: BUDGET DEFICITS ARE UNSUSTAINABLE

It’s hard to be optimistic about the economy given the Fed Chief’s comments today.  He said:

“Under these assumptions [by the CBO], the budget deficit would be more than 4 percent of GDP in fiscal year 2017, assuming that the economy is then close to full employment. Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable.” (emphasis mine).

But let’s look at the facts.  Since 1952 the government’s budget deficit has averaged 2.6%.  Not quite the 4% level that Bernanke cites, but certainly “in the red” according to the way that we are all taught (wrongly) to think about a government budget deficit being analogous to a household’s budget.    Not surprisingly, Paul Ryan was fueling much of the heat on the deficit today.   The odd thing is that under the Republican’s hero Ronald Reagan (from 1980-1988), the budget deficit averaged 4.8%.   You can clearly see the sea of red in the government’s deficit since just about the beginning of the chart:

The government always runs a budget deficit!

So if it’s “unsustainable” then we could have had the exact same conversation in 1982 when the budget deficit was 6.3% (right before an epic economic boom).  The confusion of course is surrounding why this is unsustainable and that’s where Dr. Bernanke’s comments were most alarming.  He said:

“…Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. “

Dr. Bernanke doesn’t explicitly mention Greece and Europe, but he certainly alludes to Europe.  And of course, he’s entirely misinterpreting the difference between being an autonomous currency issuer and being a currency user (like European nations).   An autonomous currency issuer doesn’t “run out” of money.  Their true constraint is inflation (and we always inflate, but notice that living standards haven’t collapsed since 1950!).

Thankfully, someone close to Dr. Bernanke knows the difference.  Paul Krugman has recently been highlighting the importance of being a currency issuer.  Let’s hope he invites Dr. Bernanke back up to Princeton to clue him in on this important fact….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Right? Almost unfathomable. To me, this is unequivocal proof that he doesn’t understand the monetary system. The fact that he could allude to Europe is unthinkable….

  2. Bernanke isn’t a big fan of our social safety net–Social Security/Medicare, etc. I’m quite certain he sees their trajectory as unsustainable, which is what I believe, when all is said and done, is what he is driving at here. There is no way he doesn’t understand our power as a currency issuer. He’s riding an ideological, Bowles/Simpson, cut the social safety net to the bone train on this front. Simple as that.

  3. Well, he’s worried about the debt and not the deficits. If you keep running $1.5 trillion deficits then eventually it becomes a problem. He’s looking at the unfunded liabilites out there (Social Security, Medicare and Medicaid) and sees that spending is going to rise no matter what. Read between the lines — he says that under CBO projections (wink, wink, like full employement and a rollback of the Bush tax cuts) that deficits are 4 pct, meaning: Folks, if that doesn’t happen, it going to be a lot higher.
    I’m not defending him by any means. He has the look of a man who is pressing the buttons and wondering why the car won’t start.
    But you know, even MMR proponents admit that too much debt can lead to inflation — at what point do you begin to worry? 200 pct of GDP? 300 pct? If it’s 300 pct, maybe it’s just the realization that we’re going to 300 pct that causes the crisis.

  4. Eventually becomes a problem? Is this necessarily so? When exactly does the SHTF?

  5. Yeah, but he’s not worried about inflation. He’s worried about us becoming Greece….He says: “we expect inflation to remain subdued.” If he understood the true threat then he wouldn’t contradict himself like that. But he doesn’t. He’s worried that the interest rates he controls are going to spiral against him.

  6. This is not 1982, unfortunately. In ’82 debt/gdp was less than half of what it is now. In ’82 a large crop of baby boomers was just entering the job market, fueling the growth of the 80’s and 90’s. Now the baby boomers are beginning to retire.

    Also, Bernanke’s “unsustainable” comment was referring to the trend after 2017, not to the 4% projected for 2017.

  7. Maybe worried about Greece is the sense that what if Treasury yields go to to 7 pct?
    Also, I don’t know if the Fed is really printing money or issueing bonds — but if it’s the former and he comes out and says that it could create a panic among the public that see printed money as counterfeiting. If it’s the latter, then rates certainly could rise.

  8. Why would rates go to 7%? If the economy booms or if inflation gets out of hand (maybe due to oil which would be recessionary anyhow). The only reason rates in Europe soared was because the bond owners were worried they wouldn’t get paid. The USA doesn’t have a “can’t pay” problem….

  9. Bernanke was explicitly referring to a loss of investor confidence in the economy. Yes, investors will get re-paid their dollars, but exactly how much value will these dollars retain if investors no longer perceive their is much worth and the currency is debased.

    The real threat is not that the US will not replay dollars owned, but that these dollars will have substantially less value.

    Europe is a completely different animal for sure as they owe in somebody else’s currency, but the effects of a loss of confidence in an economy are evident and do not augur well for any nation for whom little hope exists that they can and are willing to repay their debt by growing their economies and bringing their fiscal deficits under control, and not simply by “printing” money.

  10. Any chance Chopper Ben is giving us the okie-doke here? I mean the guy has written about the psychological double-think required to set off rampant inflation expectations. He’s fighting deflationary pressures. He know’s that our production is way under capacity. Hasn’t he been an advocate for the idea that people need to be scared into thinking that rampant inflation is on the way – as a means to kick start consumer spending and jump start an economy? Maybe I’m over thinking this… but there’s no way the Chopper could be so clueless… I really think he want’s Joe Average American to buy into the idea that rampant inflation is right over the horizon. Because in his mind he thinks it’ll jump start the economy and he can cool it down before it overheats. Any takers?

  11. That’s the old hyperinflationist productivity argument. Yes, Zimbabwe proves that this is a legitimate concern if a govt comes in and reallocates resources inefficiently, but that’s not even close to what’s happening in the USA. If that were going to happen 2008 would have been the time for output to utterly collapse. But if you don’t want your dollars to buy things then let me know. I can give you my address so you can mail them to me. :-)

  12. There are any number of scenarios that could push rates to 7 pct, right? Rates have been higher than 7 pct in the past certainly.
    If I felt I was going to be paid back in lesser value I would not pay par for your 2-percent Bernanke note.
    We *could* have rapid expansion and inflationary growth. Seems unlikely, but 99 percent of what happens in the economy appears to come as a shock to most people.

  13. What is going to be driving the deficit if we’re at ‘full employment?’ The size of the deficit currently is almost entirely due to 1) automatic stabilizers and 2) discretionary fiscal stimulus that should disappear once the economy recovers. In other words, once the economy improves, the deficit should go back to ‘normal.’

  14. Yes, but …
    a) The non-discretionary spending on Medicare, Medicaid and Social Security is going to explode as the boomers retire and ObamaCare kicks in …
    b) A lot of the discretionary stuff like infrastructure has been put on hold in the past 10 years because of defense and entitlement outlays. Eventually, that stuff has to be purchased.

  15. CR, can you point me to some good information on how the Fed swap lines actually work? I’m still struggling with the Triffin Dilemma. I get the idea that the counter parties give us back more dollars than we give them and that serves to reduce the CAD (although tangentially my first instinct is to be reminded of the Zeitgeist, fractional-reserve-banking-equals-debt-slave, anti-fed argument that anarchists and zealots often bring up). My issue is with my own gut… which is telling me that there’s no way the use of swap lines 1. Could reduce the entirety of a 4% CAD or even half of it. 2. Even if they could, it seems like a temporary measure. In the long run aren’t the swap lines just a band-aid?

  16. Primary dealers cover at least 100% of the Treasury auctions according to their operating policy. Investors can lock on their interest rate costs through interest rate swaps (which are currently under 2% for 10Y). Please provide an arbitrage scenario where yields on US Treasuries are much larger than corresponding swap rates.

    The US Treasury was even talking about allowing negative yield bids the other day!

  17. Hate to keep repeating myself but the biggest threat to our economy is the people running it. Balance the budget and it’s 1929. After the elections watch out. Yes, they really are that dumb.

  18. What are the investment implications of Congress taking Bernanke’s warning seriously? If the Republicans win control of the Senate in November, then we could see very deep budget cuts in 2013, maybe even deeper than in CBO forecast. It’s possible the budget deficit drops so much that we get growth of less than one percent in 2013, and maybe recession by 2nd half of 2013. Investors may start discounting the effects of austerity both here in US and in EU, causing a selloff in equities, and even lower yields in US Treasuries when this is seen as being likely.

  19. In 1945, Europe and Japan were in ashes. Russia was very badly mauled. The US was the only major industrial economy left untouched by the war. Lack of competition made the US the preeminent economic power in the world and lead to a 20 year postwar boom that allowed us to quickly grow our GDP and shrink our debt ratio.

  20. Correct me if I am wrong – but this statement:

    “He’s looking at the unfunded liabilites out there (Social Security, Medicare and Medicaid)”

    is just as wrong as saying the US will run out of money.

    Social Security does not need to be funded like that of your IRA account.

  21. It just seems hard to believe that Bernanke does not understand the reality of modern monetary operations given he is the most influential money authority on plant earth ! Why in heavens name is there such confusion by so many supposed learned people. If the system is so complex that he does not understand it something is definitely wrong with this form of money operations.
    Who is talking to him and making him believe these wrong concepts and what do they have to gain by having him believe this? I have been trying to understand this stuff and maybe I am at the near awakening stage because often things get totally confusing just before clarity dawns as one finally pulls everything together. But I sure wish the sun would rise soon because I just can’t believe or don’t want to believe that there is no understanding by Bernanke. It has to be him trying to manipulate someone. Are money managers his target? Are they the lemmings he wishes to drive in herd fashion his chosen direction.
    Cullen is convinced he is correct, the Austrians are convinced they are correct, and the present in power operatives like Bernanke and Larry Summers know they are correct.
    I thought keeping out of debt and savings were best for me and would offer capital for society to invest in productivity but the gift one gets for this is 0% interest or forced into speculation and then watch as your neighbor who borrows and spends what he can not repay gets offers to have debt forgiveness not to mention bankers
    Let us assume Bernanke knows damn well what is what. The question is why push in current direction?

  22. “If I felt I was going to be paid back in lesser value I would not pay par for your 2-percent Bernanke note.”

    You, nor the bond vigilantes, nor the market sets the rates in America.

    The Fed does, and the rest of the duration follows suit over time.

  23. and that might be the best thing about being a PragCap reader…. we’ll see it coming from a mile away and be some of the few to profit from a coming collapse. Let’s hope it doesn’t come to that…. but we all know that if our gov chooses austerity, look out below. The gold bug hyperinflationists just know hyperinflation is right around the corner…. but if it ever does get to that point it will be predicted and thoroughly dissected on this blog well in advance. Cullen likes to say “being right matters”. Put another way “knowing how things work matters”.

  24. For f’s sake. The idea that a “currency printer” is somehow this magic man who can avoid the f’ing basic economic realities is insane. How long will this drivel continue?

    Look, we are not Greece/Europe. Yes, we get that.

    But how f’ing long do you think this is going to go on. Indefinitely?

    I again ask you, come up with a number whereby the debt and interest on the debt becomes unsustainable, or at least a relationship whereby we know we are in the serious danger zone.

    Otherwise, MMT is a joke.

    BB was talking long term, which is when all the shite is really going to hit the fan. The idea that he is not aware of the difference between us and Greece is laughable.

    We should stop kidding ourselves that fancy acronyms are going to allow us to avoid the nightmare that always, AND YES I MEAN ALWAYS, lies ahead of this situation.

  25. “Who is talking to him and making him believe these wrong concepts…”

    Nobody! Ben and Co are mostly trained economist who have been taught a philosophy that describes beautiful economic models that occasionally represent our economy, but have no operational relevance to our economy. Nobody is filling his head with garbage because he, and nearly everyone out there, left college with it already full of garbage.

    You yourself even said, “I thought keeping out of debt and savings were best for me and would offer capital for society to invest in productivity…” but you’ve been around here long enough that if you really look at the details to banking/monetary transactions and operations you know that’s not really how it works.

  26. My post didn’t come on here, but I assume this is a joke.

    The idea that BB is not aware of the difference between us and Greece is laughable.

    Please tell me this post is meant in jest.

  27. How about debt to GDP at 1,000%. How about 10,000%. The former will certainly happen in 20 years based on current trajectories.

    Why cannot MMT tell us what the danger zone is? Exactly how much debt and interest is too much? If MMT cannot come up with a figure that it believes is too much spending, then it’s pretty worthless in my book.

    Yes, we are a currency issuer. I get that. And I can’t pay my taxes in gold. I get that too.

  28. Well of course that since we are a currency issuer and the reserve currency, the money printing, central planning elves will tell us how much we should be spending and we will supply it indefinitely, with Big Brother’s endless checkbook.

    There will be no ramifications for reckless policies, whatsoever…

  29. LRM – ironically your savings is good for you, but it is not good for the economy. The more people save, the greater the need for new money to enter the economy. So private sector success at productivity and savings REQUIRES ever greater amounts of Gov debt. The irony seems to escape the Pauls.

    Meanwhile, many of today’s politicians say give more wealth (tax breaks) to the wealthy so that they invest and create jobs. But there is irony here as well. People only invest if they see a profit opportunity. So if they are successful with their investments, they end up having even greater savings than before, which results in…. ta da…. the need for even more Gov debt.

  30. One more comment. TPC’s quote is as follows: “The odd thing is that under the Republican’s hero Ronald Reagan (from 1980-1988), the budget deficit averaged 4.8%.”

    ARE YOU KIDDING ME??? How many times does it have to be explained that the Reagan budget was pretty much neutral/balanced.

    Guess what killed it. Volcker’s ludicrous policy of setting interest rates at 15%. Talk about misguided to say it politely. This genius also sold all the nation’s silver for 90 cents an ounce. Thank God he didn’t get the gold.

    Riddle me this batman, apply a 10% coupon to the nation’s debt currently, and tell me what the Obama budget would look like. And yes, the national debt has increased roughly 30-40% in less than 4 years under Obama, but blame Bush if you have to as well.

    Shudder the thought. But keep adding the mountain of debt, and we’re going to see what happens.

  31. I will be eternally grateful for what I have learned here. I don’t really expect them to balance the budget any time soon but I do think there will be some deficit cutting (wrong time for that, too) shortly “because it is the right thing to do” regardless of who wins. I’ll try not to hate them; they don’t know any better although they should.

  32. How about “I’m out of tricks. We aren’t running out of money and Americans desperately need your help so please cut their taxes substantially even if it adds to the deficit.”

  33. I’m guessing that if we were paying 10% there would be a lot more money being added into the economy and maybe we would be much further along in the recovery.

  34. Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable.

    OR….

    Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural household savings gap increasing significantly further over time and the ratio of household income to household spending rising rapidly. This dynamic is clearly unsustainable!

  35. prescient11 – where does money come from? How do people get their hands on it? Can you help me with this? If the Gov doesn’t print money, and put itself into debt, then how do we get our hands on it?

  36. prescient11 – what is the solution to the economy? How would you get it going again?

  37. PC is right for highlighting the logical inconsistency in his argument, but maybe “transparency” isn’t what it use to be, it’s undergoing deflation as well.

    One gambit for jawboning a “deficits” warning may be simply
    – tempering public sector union demands.

  38. Reagonomics had everything to do with deficit spending so that we could “grow our way out of debt”. Volker was re-appointed in 1983. I could point out that balanced budgets have ALWAYS caused recessions and/or (usually) depressions. Or that the WWII debt was much worse than now. That got us out of the depression didn’t it? Or despite our reckless spending no one will walk past a dollar bill on the sidewalk. Wasting my time aren’t I? Sure. Can’t make you drink… We’ll just have to take your money.

  39. The checks have to be sent out. The deficit spending required to send checks to all those retirees and pay for their health care will require large, continued deficits — which would have to be paid for in the form of reduced living standards in the future. (Is that how it’s phrased?)

  40. He should be telling people:

    1. The U.S. government’s so called “unfunded liabilities” are merely unfunded for no other reason than they haven’t chosen to fund them. We can very easily fund these liabilities via money creation.
    2. Money creation will not cause harmful inflation unless done in excess.
    3. The U.S. does not currently need to worry about too big of a deficit; it needs to worry about too small of one. As part of this he needs to explain that a deficit for the Federal government does not necessarily = debt (it doesn’t = borrowing because it doesn’t need to borrow to fund its spending).
    4. Our current economic environment calls for money printing, tax cutting, whatever will get more money into the hands of people who will spend it, so that the newly created demand can create a need for jobs so that businesses will hire.

    He needs to explain the big picture: there is a distinction between the paradigm of the currency user (entities which cannot create money) and the paradigm of the currency issuer (entities which can create money), and that budgeting is entirely different for both entities in their respective paradigm.

  41. It’s too bad cutting taxes is all we have left. The bottom 50% is hardly paying anything and they’re the ones most likely to actually spend the money. Maybe just mail them a check? We badly need to build infrastructure, that’s dead-in-the-water for another year at least.

  42. @ Adam1

    Yah, I know but was just feeling a bit POed today because “if I had of Known then what I know now ” kind of got to me. I have been looking at a job after being retired for 3 years because I guess obviously I did not save enough given that I did not project low interest rates for so long and listened to the best bond guy in Canada tell us that rates are definitely going to rise.
    Now I have little trust for any money manager and should fire myself from the job soon too!!

  43. Easy. Get more money into the hands of people who will spend it. This creates demand. Demand creates jobs.

    How do we get more money into the hands of those who will spend it? Create money and send it to people as a stimulus check, give those in the middle class a tax cut. Alternatively if a home is underwater, the gov can force refinancing on home mortgages where banks have to write off their losses on the difference between a home’s current value and it’s purchase value if purchased within say the years 2001 and 2008 (this will reduce monthly payments on millions of home owners, thereby freeing more income up for spending on other items in the domestic economy). The money creation will work wonders and not require any bank losses.

    How do we afford to do this? Money creation. We don’t borrow it, we don’t tax for it, we simply poof it into existence ex nihilo. Or in the case of the banks, they simply eat losses.

    But what about inflation? Won’t happen unless money is created and distributed in excess resulting in too many dollars chasing too few goods, and we’ll know that based on CPI and unemployment figures (meaning that as the UE drops and we get closer to full employment, the CPI should start to heat up). And it can be corrected pretty easily via increased taxes if the economy runs too hot.

  44. Yeah, lots of policy options are off the table unfortunately. Hell, you know the world is a mess when you’ve got a Democratic President fighting for tax cuts and the Republicans stonewalling him….

  45. 1. ‘Unfunded liabilities’ is admittedly an awkward term. Promised payments or something might be a better term. Right now they are coming out of tax dollars. Do you want to pay for them with printed money? If so, if you print money to pay for one class of people, then other classes will also demand you print money for them.
    2. and 3. At what point does it become excess? Cullen slapped somebody down in another thread by saying 100 percent deficit spending would be hyper-inflationary — so if 4 pct is no worry but 100 pct is a problem when does it become a problem? And if you do not worry about balancing a budget, what kind of discipline do you have for not triggering inflation?

  46. Did you bother reading beowulf’s very exact answer to what kind of deficit we should *currently* target? You seem to not be familiarizing yourself with the mechanics we are basing our arguments on.

  47. Cullen
    This is madness and there is far too much at stake.

    Is there a way where we can force these guys to confront the way the are misrepresenting the situation?
    Can we come up with a series of plain language questions?
    A first attempt at one:
    If the economy grows at 3% and inflation is at 2% and all else being equal (saving, loans, imports, exports) then the amount of issued money in the economy must have increased by a value equal to 5% GDP, say $500b – as the issuer of currency then would not the governmen have seen its ‘debt’ increase by this amount?
    If not, where did the extra money in the economy come from?
    Is this increase in the deficit bad, or is it simply a reflection of the growth and inflation rate?

    Maybe even this is not direct enough – but a series of basic questions, somehow we need to expose their fraud.
    Anyway keep up the good fight.

  48. Maybe you’ve addressed this before, but…

    Isn’t the big problem a balance of trade issue (primarily with China),allowing goods to enter the country, produced at a cost that we either cannot or will not match, and hence have very little job growth in manufacturing?

    Why not impose an import tariff to make American manufactured goods appeal more to the American consumer?

    I may be spouting heresy, but if the fed is “out of tricks”, some heretical thinking may help.

  49. “1. ‘Unfunded liabilities’ is admittedly an awkward term. Promised payments or something might be a better term. Right now they are coming out of tax dollars. Do you want to pay for them with printed money? If so, if you print money to pay for one class of people, then other classes will also demand you print money for them.”

    We are already doing this. This is the beautiful thing, we are already doing this! I mean this really could be the greatest economic irony of our time. Our deficit spending is money creation. You protest, “No it isn’t, we are borrowing the money to deficit spend!!” To which I pose the following question: from whom or what entity is the government borrowing this money? In other words, who is buying the treasury bonds? The Fed. That’s what QE was. The Fed is a part of the Federal government. So the Fed is lending the Treasury money. One arm of the government is lending the other arm the money to spend. And where’d the one arm doing the lending get the money to lend??? “In the beginning, the Federal Reserve said, ‘Let there be…’ ”

    Anyhow, with that said let me say I do not have a problem with a baseline retirement program being funded with printed money (as needed; taxes will do funding as well, as needed) extended to every American. This applies to every American, and so there is no class distinction. Are you concerned about a battle of the ages? The youth might get more inexpensive schooling. If they don’t, they will receive their benefits when they are older, like everyone else.

    Big picture, what we need to be concerned with are real problems, not ones created because we don’t understand the monetary system. I’m not saying an accurate understanding of the construct and mechanics of our monetary system is going to be problem free. Any policy choice is going to have a set of potential problems with it. It’ll be a different set of problems however, a set based on reality, all of which can be addressed as needed.

    “2. and 3. At what point does it become excess?”

    When inflation becomes problematic.

    “Cullen slapped somebody down in another thread by saying 100 percent deficit spending would be hyper-inflationary — so if 4 pct is no worry but 100 pct is a problem when does it become a problem?”

    We don’t have to know at what percent it will. We have to know that at some point it will, and then watch the data as monetary injections are made. We can start conservative, learn from the data (unemployment figures, CPI, etc.), and formulate an answer to your question.

    “And if you do not worry about balancing a budget, what kind of discipline do you have for not triggering inflation?”

    Consequences encourage discipline. If discipline isn’t used, the consequence will be harmful inflation which tends not to go well for politicians and reelection.

  50. So after reading the FAQ I realized that the answer isn’t in the FAQ, right? I think I stated the answer in my question w/o realizing it (light bulb going off)… The swap lines aren’t sustainable. They shrink the CAD in the short term by some amount; but ultimately, they drain dollar reserves from the foreign sector economy as the counter party central bank must repay the dollars it obtains w/ interest (I knew I heard some semblance of the fractional reserve = debt slave argument in there somewhere). Doesn’t this create the exact same effect as we’re talking about w/ the Triffin Dilemma vis a vis a reduction/ reversal in the CAD? Whether we’re sucking dollars out of the foreign sector by reducing/ reversing the CAD or we’re sucking dollars out of the foreign sector by charging interest on our swaps… the sectoral balances theory applies to each of the sectors equally right? Isn’t the fact that the dollar remains the world’s GRC what’s leading to the sectoral imbalances in the first place? WE HAVE TO RUN A DEFICIT TO SUPPLY THE WORLD WITH DOLLARS! You said the CAD is bleeding us, right? But we don’t have a choice as long as we remain the world’s GRC. Isn’t that what will lead us to balance? Abdicating our role as the GRC?

  51. I read that China’s GDP is projected to exceed the US’s in 2016. And China still has plenty of room to grow for decades after that. Its military spending is expected to surpass the US sometime in the 2020’s.

    Plus India, Brazil and a host of other countries are growing much faster than the US.

    The American Century is over. We are going to have competition like we have never seen before.

  52. I don’t believe it. He’s there with the data in front of him every single day. He interacts with the people who conduct the process. How can Bernanke NOT know the government isn’t borrowing and therefore has no potential debt issues to confront? I just can’t get my head around it.

  53. If yields were somehow to elude the Fed’s control all we’d have to do is stop issuing debt. It’s not like we need it.

  54. I should point out that that GDP projection was based on purchasing power parity, not nominal GDP.

  55. I’m sorry — I don’t see Beowulf’s answer to what type of deficit we should be targeting.
    I did link to the Top Gun video, though. :)
    Seriously, I am trying to familiarize myself with the concept. And I’m not the only one who wants to know how much debt is sustainable. Even Bernanke is alarmed!

    I’m going to be a smart ass here and maybe say that we need to run deficits until the non-government entities have enough savings (and spending) so that everybody is working, the roads are repaired, Al Qaida is eliminated and everybody gets free health care …. or until we get inflation and then we start running surpluses to take money out of the system.

  56. “Why cannot MMT tell us what the danger zone is? Exactly how much debt and interest is too much?”

    The debt is not an issue because it’s just savings accounts for the private sector. As for the interest, it becomes a problem when payments spark unacceptable levels of inflation; based on the current deficit and the output gap, I’d say at current GDP we’re probably a couple trillion dollars per year short of that. It’s a problem to deal with later down the road.

  57. Everyone here seems to confuse money with currency. The government
    Can create currency but it cannot create money, obviously. This is why the threat to the modern system of a counterfeit currency is always hyperinflation. The modern monetary system is nothing new, it comes and goes throughout history every time a society advances to the point they feel they can cheat nature. At this moment they again begin to confuse currency with money. Currency being a marker on all money existing, once the marker outnumbers the amount of monies in the system, the game unwinds as nature seeks to match the two. MMT is not something Bernanke does not understand, it takes a high school diploma to understand. He just knows that it is bullshit due to the inherent flaws in its inability to understand that currency is not money.

  58. @Prescient11

    Look at the recent CBO report. In it the committee recommends accepting negative interest rates on future bond sales. What that means is U.S. bonds are in such high demand the bond market is willing to PAY A PREMIUM for the opportunity to buy more. The government will actually make money by selling bonds under such an arrangement and the buyer take a loss. In the short to medium term the cost of servicing the interest payments is simply not an issue.

  59. I’m thinking you don’t know the difference yourself. But stiff upper lip, do keep trying.

  60. OK, I understand that you would reduce deficit spending when inflation becomes a problem.
    Practically speaking, though, your program guarantees $5 trillion deficits and resulting inflation. Graph the rise of promised entitlement spending and then figure out the accompanying deficits — they would trigger rampant inflation within 10 years, I would say.
    You would counter by turning off the deficit spending — cutting benefits to seniors?
    Well, good luck with that, politically speaking — and even if you could, well, gee, thanks a lot — you’re spending printed money now on seniors but will reduce spending on me later!

  61. If you want to get really technical, money can be just about anything. MMR is very specific that money is not wealth and that the money of the govt is always the sovereign’s currency. So yes, we understand the concept perfectly well.

  62. They shrink the CAD in the short term by some amount; but ultimately, they drain dollar reserves from the foreign sector economy as the counter party central bank must repay the dollars it obtains w/ interest…

    By definition, a CAD must be filled in the present year (since its measured on an annual basis). As for swap lines… If you were a borrower and your bank really really didn’t want you to pay back the loan anytime soon, imagine how long they could extend the note and how low they could set the interest rate. Now double it and double it again! (just kidding, that’s a line from Flight of the Conchords).

  63. I think prescient11 is hitting on a really important challenge here for MMT to address:

    “come up with a number whereby the debt and interest on the debt becomes unsustainable, or at least a relationship whereby we know we are in the serious danger zone.”

    I also find this to be a missing feature…I am guessing we would target a specific inflation number? But which one, and why?

  64. So then, if we’re just injecting (virtually) interest free dollars directly into the foreign sector so as to maintain liquidity; wouldn’t it save everybody a lot of hassle if they just didn’t need dollars? Unless the Fed is gonna start setting monetary policy for the entire globe then shouldn’t the other countries’ central banks be doing this work themselves? I mean, as long as everybody but the US needs dollars to do business, aren’t they all revenue constrained to some degree? Everyone but the US? I thought we were in favor of sovereign nations autonomously controlling their individual monetary systems here? Why the H do they all need dollars? And so what of the dollar’s value then? Is it thus based on the productivity of the population of the planet? If the position of MR is that the CAD is problematic b/c it’s a drain, then I say MR’s only looking down from the top of the drain… on the other side is a GIANT STRAW that the dollar thirsty global economy is using to suck us dry. We say it all the time, we don’t ask China to lend us money by buying our debt… THEY FREAKIN NEED OUR DEBT! They need our Dollars… wouldn’t it be better if they didn’t? It was in our benefit to flood the world with dollars after WWII and it served us greatly… I’m thinking maybe the law of diminishing returns is catching up with us…

  65. Cullen

    I agree that it is unfathomable, and intellectually indulgent, that Bernanke doesn’t understand the advantages of being not only the sole issuer of the currency, but also the advantage of US dollar’s status as the world’s reserve. Surely the strategy of government and the fed is to play dumb. Appeared to be concerned by deficits so that the rest of the world continues to load up on dollars. Wait until the point when there are no more suckers and then start sending $10,000 cheques in the mail to every household and business. Devalue everyone (US and non US holders), but focus spending domestically. It’ll be the biggest and most rapid transfer of wealth to the US in history. It will also wipe out private sector debt and devalue the currency, invigorating exports. Sure it’s a one trick pony, it’ll piss everyone off and set back world trade 50 years. But there will come a time when it is the least disagreeable option and Bernanke knows it.

  66. One other thing that I would like to point out is that if you look at inflation in the years immediately following 1945 you find (surprise, surprise) that they were pretty high:

    http://inflationdata.com/inflation/inflation_rate/historicalinflation.aspx

    1946: 8.43%
    1947: 14.65%
    1948: 7.74%
    1951: 7.88%

    That works out to a loss in purchasing power of over 30% in the 6 years following 1945. So it appears that those patriotic Americans who bought victory bonds to help win the war got shafted big time after the war ended. Maybe this contributed to the Democrats loss of the presidency in 1952.

  67. And real GDP:

    1947-01-01 -0.9
    1948-01-01 4.4
    1949-01-01 -0.5
    1950-01-01 8.7
    1951-01-01 7.7
    1952-01-01 3.8
    1953-01-01 4.6
    1954-01-01 -0.6
    1955-01-01 7.2

    Avg: 3.8%. Not too shabby, eh?

  68. If Bernanke went to congress and told them – spend all you want, because we have a printing press, you’d enter an age of the politics of entitlement and freebies. More welfarism, free cars and homes WILL lead to a currency crisis. Looking at policy through absolutes isn’t particularly productive.

  69. I love when people cite a past period that has nothing to do with today. Like the 80’s, Cullen, which was a time when the corrupt capitalism culture was still young. The baby boomers were approaching their prime. The computer revolution. The post-MAD nuclear world lack of large-scale ground wars. All these effects are fading, rapidly. I hope you’re right, but I”m pretty sure you’re not :)

    Respec’

  70. So Bernanke is lying to congress for the good of the country. Just like Oliver North!

  71. “An autonomous currency issuer doesn’t “run out” of money”

    That just doesn’t help much once external creditors loose faith in this currency, for instance if they see that a too fast rotating printing press devaluates their investment.

  72. THis is one of the holes of MMR. Politics.

    MMR exists in a beautiful vacuum (ivory tower) of a petri dish and not in the real political world. I am snickering when I read these worries of deficit cutting “after the election”. Even getting rid of ethanol subsidies is something that takes years upon years, since every subsidy/handout/loophole has a constituent. And each of them vote. So there will be no mass taking away of anything despite rhetoric.

    But the bigger issue is MMR application (not the description) requires disciplined political class. And a citizenry willing to give something up, or taken away from them. Neither of which this country nor many (perhaps the Swedes or Swiss are exceptions) have.

    Politically I cannot imagine an era ever in America where the politicians go on TV and say we need to cut back your services by 8% this year because we gave you too much the previous 3 years and its causing inflation. So expect healthcare cuts, tax increases, and SS benefit decreases in the next 2 years. That would be political suicide.

    So all real world applications of MMR/MMT will lead to inflation. Not hyperinflation unless it gets really crazy but inflation. Periods such as now when tax cuts and/or increased spending will be embraced because “everyone wins” – everyone gets a goodie. But when the time comes when inflation bubbles and these goodies must be taken away – there is no political reality for this even if politicians were fully educated on the monetary system. They have jobs to keep and I cannot even imagine the town hall meetings.

    I am sure the answer will be a simple “well you have to educate the populace”. Again laughable – this is a population where 50% could not locate Iraq on a map 5 years into the war, and 7 out of 10 would look dumbfounded at you if you said the word Bernanke.

    Outside of a petri dish, systems are not so elegant.

  73. What kind of value will there be in their investment after the government balances the budget and drops the country into a depression.
    Let’s be honest though. All those U.S. dollars that foreign central banks hold aren’t investments. They are the necessary tools for manipulating their own currency. And they’re never getting back into circulation in the American domestic economy on anything other than American terms.

  74. Michael Schofield said: ” I’ll try not to hate them; they don’t know any better although they should.”

    I’m not so certain about that. Having read commentaries & rambles by old policy makers & politicians makes me believe that they know perfectly well how it all works. Do you think when Nixon blew up the gold standard didn’t know what he was doing?

    They could be playing games to limit growth and consumption & impose perpetual unemployment but avoiding the system to completely collapse. They know very well what they are doing, in all of the OCDE. Now the IMF & other neoliberal institutions are leaning towards more ‘accommodating’ & interventionist policies because they fear other sort of system risk, political and social unrest. And that’s the same reason why deficits won’t be cut fast & hard.

  75. I love it when people refuse to accept the lessons of history simply because the present is never an exact facsimile of the past. And as a result endlessly repeat the same mistakes.

  76. Sam,

    The U.S. does not borrow from foreign creditors or anyone else. Furthermore I challenge anyone to demonstrate the dollar is being “devalued” in some unusual or unprecedented way. Inflation continues to mirror the post-WWII average.

  77. Hi leverage. Judging from the questions and answers yesterday I would have to say there is not much understanding. They could be playing games with liberal and conservative theories of money which may be better than mindless acts but I would gain little confidence from those. Risks abound, with present deficits insufficient, any cuts will have negative consequenses IMO. I’ll stand by my core argument- our leadership is the biggest threat to our economy. The path we have to navigate is narrow, very little room for error.

  78. The priest stands up in church every Sunday and gives a sermon–I don’t listen to him either.

  79. There is no way that The Bernank doesn’t know how the monetary system really works. He probably won’t tell you in a public forum what he is really worried about, though. He is probably worried most about (1) political risk (including the risk to his job), (2) oil price shock, (3) some kind of mass herd animal behavior in the markets. He understands that perception can become reality once the herds start stampeding, and the last thing he wants is a sudden and precipitous drop in the dollar vs foreign currency. Remember, his term runs out 1 yr after the Presidential election, and The Bernank wants to stay in power too.

    I saw a great groundhog day cartoon of Bernanke on Zerohedge

    http://farm8.staticflickr.com/7148/6805526989_da5af87a02_b.jpg

    enjoy

  80. I’m sorry, but is your argument that the US dollar will not come under massive pressure and be devalued substantially if investors perceive that the US will not repay it’s debt in kind?

    Seriously, what do you think would happen to the dollar if the Treasury/Fed announced that they will continue to “print” money and moreover continue to run fiscal deficits (at close to current levels) to boost Private sector savings and to offset the current account balance for as long as unemployment remained above 5%? How pragmatic are you?

  81. Don’t concern yourself with Congress taking very much seriously, least of all anything Bernanke says. Congress is most concerned with their next election day. Especially in an unsettled year like this after a redistricting. Everything past that day is far future to them.

  82. Of course it is Ben. Why deal with it now? Have a few more years of fun at the expense of the rest of the world before the party comes to an end.

    You should all trust ‘government’ to continue to make the excellent decisions it has made to date, build some more roads, dig a few holes, build some bridges, fill in a few holes. Truly, government borrowing will deliver the economic growth you require. Also, Ben Bernanke knows exactly what he is doing, and you can definitely trust him to keep prices stable and deliver full employment (just don’t look at the workforce participation rate).

  83. I think the current course is “unsustainable”, but for reasons that have nothing to do with the monetary system. All the deflationary pressures we are seeing, and any possible future inflation, are nothing more than symptoms of a global economy that is energy constrained. We have run out near the limits of exponential growth until new energy sources can be exploited. But I don’t think Bernanke is thinking about energy or anything as long term as the next decade. He wants to ingratiate himself to the Republicans so he has a non-zero chance of being reappointed in 2013 in the event Mittens becomes President, while still having a good chance for reappointment if Obama is reelected. He is walking a tightrope to stay in power beyond next year.

  84. Cullen,

    I understand that the United States is a currency issuer and can never run out of money. However, I also agree with Bernanke that the total debt does matter and that the amount of debt in this country is becoming unsustainable. The debt to GDP ratio for this country is now above 100%. If in 2017 the budget deficit is still above 4%, even with the unlikely assumption that full employment has been achieved, then the total deficit to GDP ratio would be at least 130% by then. Further, Bernanke is arguing that the structural budget gap would thereafter be increasing significantly.

    The long term deficit becomes unsustainable when the rate of growth of the deficit exceeds the rate of growth in productivity. If we have a budget deficit of above 4% and prospects thereafter of ever higher deficits, those deficits are unsustainable.

    In 1945 the debt to GDP ratio was 130% and while we had significant, unemployment, it was, except possibly for 1947, far below the current level of unemployment. The current 8.5% unemployment would be much higher if calculated in the same way as it was done in 1947. There are three big differences between the economy of today and the economy in 1947 in that 1) the life expectancy of our population is so much higher, 2) we have far greater commitments to entitlements, and 3) we have much greater competition from foreign nations.

    Even Keynes called for deficit spending to only to stabilize the business cycle, but that also meant reducing spending when the economy recovered. Money creation is not something to do forever.

  85. “Yah, I know but was just feeling a bit POed today because “if I had of Known then what I know now ” kind of got to me.”

    I have those moments all the time. I have a graduate degree in garbage, I mean mainstream economics. My world got turned on its head in 2008/09. What really burns me is how so few economists actually did the work of trying to understand how it could have been all so different from expectations. It’s not like the empirical evidence doesn’t exist or hasn’t been written about – it’s just been plain ignored out of arrogance.

  86. A very noobie question but…

    So I wondered, why is it that we always inflate? What is the purpose of growing the money supply? Is it simply that more people in the population means we need more money to spread around? Or is it because the government has to grow to pay for more public services so it leads to more spending and therefore a larger money supply?

    Why is it that the government’s general natural state is a deficit?

    Everyone seems to complain that we’re in inflating, and that debt is unsustainable etc etc, but why grow the money supply?

  87. Cullen,

    It is simple why he is worrying. If you cannot finance government expenditures through the markets via bond issuing then you must print cash and generate inflation. This will in turn make the cost of financing the deficit higher and the government will be forced to print more money. In principle, there is nothing wrong with that because US has the right of printing money. But in the longer term the cost of doing business in the US will increase due to rising interest rates and the economy will get into a serious recession.

    Thus, you are right in that US can never default like Greece but deficits cannot grow forever because this will lead to high inflation and interest rates that will kill economic activity.

  88. The government’s natural state is deficit b/c the dollar is the global reserve currency… we must be net importers of goods so that we can be net exporters of dollars to supply the ever growing foreign economy.

  89. How do you guys type in italics on here? do you write in Word then cut and paste?

  90. Two ways to look at it I guess. Why not push the burden on proof on the claim “its unsustainable”? If so, there must be some math behind that tells us when the sustainability goes splat?

  91. “In 1945 the debt to GDP ratio was 130% and while we had significant, unemployment, it was, except possibly for 1947, far below the current level of unemployment. The current 8.5% unemployment would be much higher if calculated in the same way as it was done in 1947. There are three big differences between the economy of today and the economy in 1947 in that 1) the life expectancy of our population is so much higher, 2) we have far greater commitments to entitlements, and 3) we have much greater competition from foreign nations.”
    These are good points.

  92. You are nearly there NG.

    All I would add is that US will NEVER willingly give up its exorbitant privelege of free stuff from abroad, it will instead by actions by other players that will take the reserve function away from the dollar.

    Some recent examples:
    –Iraq choosing to sell its oil for Euros in 2002
    –Gaddafi moving to establish a gold/oil linked currency for oil trades
    –Iran arranging bilateral trade deals with India and China without using the dollar.

    But the dollar is dying in front of our eyes, the Fed is just papering over the cracks with swaps/QE/Tarp/GM/all of that shit! Gold is the canary to watch.

  93. Are you talking about base money or credit money?

    Do you know the difference?

    Have a go at explaining the difference, and you’ll see we don’t need government borrowing to create money. Good luck.

  94. 1. Perhaps the Ben Bernank knows something the MMT folks don’t know ?
    2. “”Issueing money is left to the whims of the issuer. But credit is an entirely different animal”. Source: Robert Prechter.

    And credit (excluding student loans) is contracting. The FED issued lots of new money after 2008. But that money didn’t turn into too much new credit.
    3. Yes, the US can issue a lot of new money. When (not IF) interest rates rise then those interest rates rise it raises the benchmark for the private sector as well. Corporate loans, mortgages etc. And then the US private sector is toast.

  95. Actually, that sounds like a great plan. Investor confidence would be bolstered by the concomitant increase in GDP growth that would result.

  96. Negative interest rates on 3month money. I wonder how many would see that as a good thing, to pay an entity to hold your ‘wealth’, because you are scared to hold it in a bank, or longer-term money?

    This is the problem when interest rates are not set by a true market. Capital does not form. It just cowers in a dark corner.

    I wonder whether money might migrate to other assets that have neither a negative or positive yield, but just are. More solid assets.

    I wonder.

  97. 4) We were coming off of the enormous fiscal stimulus known as World War 2 with full employment. With price controls, rationing removed, and pent up demand coming to fruition, the economy was clearly growing at a much faster rate it is today. Plus, lots of babies.

  98. How come all the examples you gave are our enemies? I’m not with you… I’m with MR… I just think that if it’s the position of MR that the CAD is problematic, then MR should advocate for the dollar to abdicate it’s role as the global reserve currency. I’m definitely no gold bug…

  99. Maybe Little Ben is talking about the pressure deficits put on the banking system. And maybe it would be disastrous when the banking system picks up lending on top of the massive deficit accumulation causing incredibly high interest rates and mass inflation?

  100. Good discussion indeed on here. But again, we must all know that BB realizes we are not Greece.

    As far as Krugman goes, he has become more of a political shill than anything else.

  101. Rick:
    If the printing of money causes the cost of doing business to rise and interest rates increase, why would we have a serious recession?
    What we need IS increasing interest rates. It will help savers, by increasing their income and allowing them to spend more, and still save.
    IF the U.S. can poof money into existence as Robert Rice said, then we’ll just poof enough money to cover the increased interest.
    Voila!
    What about the debt principal?
    Oh, don’t be silly!
    Don Levit

  102. I think one VERY IMPORTANT thing that MMT’ers have to get accross to the skeptics is that for all the deficit spending since 2001 or so, NOT 1 YEAR from 1997-2008 was our fiscal deficit higher than our trade deficit, meaning we were net-purchasing more stuff from overseas than we were gaining in new savings.

    This is why our balance sheets still managed to be in such disrepair after/during 2008.

    Deficit spending HAS to be looked at in context of foreign demand for our currency… Yes, they could send it back to us in demand for our goods, but that doesn’t sound too shabby at this point… and then and ONLY then we could raise taxes and our safety net spending would naturally significantly decrease.

    The other thing is to stress that greenbacks AND treasury bonds are both simply two different forms of fiat government medium of exchange… one is simply more geared to being a savings instrument, while the other is more liquid.

    I know this has been discussed, but I think those two things are really what’s causing a lot of confusion.

  103. Pierce, interesting article, if a little dated. For example:

    ‘Astronomic value

    How much is Eros worth? Today’s trading price for gold is about $250 per ounce or about $9m per tonne.’

    (so, why is gold so much more valuable today I wonder? Nothing, nothing to do with the massive expansion of the global monetary base I am sure. Just mad gold bugs).

    Really, I am no expert on gold, perhaps you should try asking the world’s central bankers why they choose to hold 31,000 tonnes (and growing)?

    My guess would be the don’t trust your Yankee funny money that can created by a bearded chap at will?

  104. Nope, didn’t think I’d get an answer, just another MMT single-trick pony.

  105. Assume the US gives up its reserve currency issuer status (or more likely as is already happening, the rest of the world forms regional trading blocks), what happens to all of those trillions of dollars out there. Where are they headed?

    Back home to play with all of their brothers and sisters. Will be quite a party.

    Ask yourself: what don’t I know about gold’s evolution as a monetary wealth reserve? The answer will be quite a lot I suspect. Perhaps you will go and do some research? Or just turn the other way and ignore it?

  106. Sorry dgc but this;

    “The debt to GDP ratio for this country is now above 100%. If in 2017 the budget deficit is still above 4%, even with the unlikely assumption that full employment has been achieved, then the total deficit to GDP ratio would be at least 130% by then. Further, Bernanke is arguing that the structural budget gap would thereafter be increasing significantly.”

    is an utter FAIL!

    The most important factor in the debt/gdp ratio is gdp. If we are running budget deficits of 4% we will see rising gdp. If GDP rises 50% over our current level (not unheard of if we dont enter an austerity fetish phase full bore) then debt to gpd ratios will plummet.

  107. If one were to take any ‘thing’, and dramatically increase the number of those ‘things’, then each one would become less valuable.

    Kinda like what happens when new base money is created out of thin air you know?

    So far, I don’t believe man has worked out how to mine asteroids? Has man ever worked out how to debase money? You bet he has.

  108. Why should the value of money be based on a finite resource like gold; and not on a foundation that can increase to support the increased demand for liquidity necessitated by an exponentially growing (and increasingly productive) population? What happens when the demand for liquidity outpaces the availability of the base resource? How come we had at least 5 depressions in 200 years before fiat currency? How come we managed to stave off depression this time? How come every time we balance our budget we go into recession? How come the one time Andrew Jackson paid off the national debt we plunged into depression?

  109. But you see the point I’m getting at? There is nothing inherently special about gold. Gold in and of itself does not equal wealth. That’s where your logic gets all twisted.

  110. Also, if trillions of dollars come flooding back home 1. It would extinguish the current account deficit, allowing for the domestic non government sector and the federal government to run a surplus at the same time (or even simply reduce the CAD to a manageable level below the rate of inflation) A side note to that is the fact that, in order for dollars to come flooding back to the US our exports would have to be booming! 2. To the extent that too many dollars are sucked out of the foreign sector it is the role of the Fed to drain those reserves…

  111. I agree, nothing special.

    It just so happens it was often found in anciant times in its pure form, is not that rare, so there’s enough of it to go round, but not a significant abundance. It is durable, lasting millenia without degrading, and comes in handy sizes. Also, very pretty to look at.

    You can dispute it til you’re blue in the face, but mankind has for thousands of years chosen to use it as a store of his wealth, and sometimes as actual money. And still does to this day.

    Good eh?

    PS, want to explore the murky history of the US Govt’s war with gold (which it lost in the 70s?), then have a look here:

    http://anotherfreegoldblog.blogspot.com/2012/01/us-gov-one-memo-60-paper-prepared-in.html (things for all MMPT guys to ponder if they dare).

  112. Yeah, you need to go read about freegold, I gave you some links.

    We ain’t going back to a fixed gold standard.

  113. Not paying anything? I suppose but I noticed on the CBO wwebsite that total individual taxes were $1.1 trillion and social insurance taxes were $818 B and corporate was 190b or so. (these are from memory so they could be off a bit) So the $818b is not nothing.

  114. I would have thought Ben knew that until he said our debt was unsustainable. He lost me there. Least he could have done is tell us when it goes over the edge and why.

  115. Does anyone know where we can find data regarding how many of the dollars lost to the trade deficit are used to buy assets in the U.S. and find their way back into the real economy?

  116. Greg,

    A 50% rise in GDP would be wonderful, but it is impossible. The GDP is more likely to remain relatively unchanged between now and 2017.

    Lakshman Achuthan predicts a significant recession beginning in April which would reduce GDP. Cullen predicts that we will muddle through the next few years, but notes that we are still in a balance sheet recession.

    If Israel bombs Iran it will be difficult to maintain our current GDP. If Greece defaults, as is likely, and problems continue to worsen in Europe, it will be difficult to maintain our current GDP. Who knows what will happen in the Presidential election and afterwards?

  117. I agree absolutely. The postwar era was a great time for the US economy.

    Of course, part of that GDP growth was due to increases in the size of the labor force rather than to productivity increases. Birth rates up through the end of the 20’s were much higher than now. And in fact even in the depths of the depression, birth rates were still significantly higher than now.

    http://www.infoplease.com/ipa/A0005067.html

    That is one more reason why we are unlikely to duplicate the postwar real GDP growth rates any time in the next several decades.

  118. But Charles – without understanding MMR – which is just to say – without understanding how the system actually works – we end up in the mess we’re in now. Politics can screw up anything – but if the politicians and the populace understand how the system works, they are far more likely to make decisions that are better then the ones that have led to massive inequality and a Global Financial Crisis.

    Additionally, a lot of spending does get cut when things improve – namely unemployment benefits and food stamps – and we can easily raise taxes, or let other tax breaks end. It is only hard to not let them end when everyone is screaming that they are necessary because the economy is in the dumps. What excuse would they have for something like the Bush tax cuts if the economy was booming????

    Either way – it is better to risk the decisions of those working under an accurate paradigm

  119. Wow Gary – rude much? You answer my question with a question? Then expect an immediate response. How long should I wait before I treat you as rudely?

    As for your request to differentiate btwn money the private sector can create and money the Gov issues – I fail to see where that will lead other than to the point that I was going make had you, or prescient, chosen to answer my question.

    But let me break it down for you – the private sector created trillions of dollars – presumably the credit money you are referring to – yes? That money has already been spent. You are crying over spilt milk. The malinvestment, the waste, AND THE INFLATION have already been realized. So you tell me, when the private sector delevers, and lowers the credit money supply, and they do it by paying parts of their paychecks that would otherwise go to spending or savings, thereby reducing economic activity, how is the economy supposed to maintain the current level of economic activity without the other source of money going up to replace the crimes of the PAST?

  120. read this story online; yeah, in terms of jobs guarantee, my guess is that it’s a no-go.

    An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

    The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

    After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

    The second test average was a D! No one was happy.

    When the 3rd test rolled around, the average was an F.

    As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

    To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

    It could not be any simpler than that.

    These are possibly the 5 best sentences you’ll ever read and all applicable to this experiment:

    1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

    2. What one person receives without working for, another person must work for without receiving.

    3. The government cannot give to anybody anything that the government does not first take from somebody else.

    4. You cannot multiply wealth by dividing it!

    5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

  121. A 50% rise is impossible? All the forecasts you cite are based on current trajectories with current policies. 50% rise would be likely with a payroll tax cut to 0% (on both sides), 500-1000$ percapita distribution to all states (Mosler plan). In fact it would likely double form its current anemic level. A doubling of GDP would cut the dreaded ratio in half with NO reduction in debt levels.

  122. When you say the federal debt is unsustainable, exactly what do you mean? Japan’s debt is well over 200% of their GDP, and despite incredible natural disasters, their economy is far more successful than that of the PIIGS.

    In fact, federal debt (which is nothing more than the total of outstanding T-securities) is entirely unnecessary. The federal government could have huge deficits (the difference between taxes and spending) with zero debt, merely by not issuing T-securities. This became possible on August 15, 1971.

    All of this is discussed by the branch of economics called Monetary Sovereignty. Those who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty do not understand economics.

  123. Your professor did not understand Monetary Sovereignty. He thinks money going to the poor must come from the rich. Absolutely false. Federal spending is not supported by federal taxes (though state and local spending are supported by state and local taxes.)

    So your professor, ignorant of economics, took money (grades) from the rich (high scorers) and gave it to the poor (low scorers), demonstrating he still is mentally operating in a monetarily non-sovereign economy. But the U.S. has been Monetarily Sovereign since August 15, 1971. Time for your professor to catch up.

    Those who do not understand Monetary Sovereignty do not understand economics.

  124. Hello, I have 2 quick questions:

    -would you say the same for a currency issuer whose currency is not the international reserve currency?

    -the Eurozone, globally, could be a currency issuer. What are precisely the operational reasons for which it is not?

    thank you for your daily comments, MMT is always helpful for the understanding of the US situation, but is not always as easy to use for others context.( I would take any comments from you on this last statement).

  125. Cullen, you probably know there is an ongoing POLITICAL debate in Europe right now, some people are saying that european governments have just to monetize the debt over the long term, and that it does not hurt to have public debt covered by the central bank,so at least the tax payers would spare the interests or would have them back under the form of revenues in the budget.

    Do you thing there is some compelling elements against this conception? I would thing that in due course the absence of slack in the economie would turn all the money creation from the state into inflation and that the anticipation of agents would take over and fire a strong inflation, if not hyperinflation.

    What do you think?

  126. The last time gov debt/gdp was this high was in the 40’s. We were able to grow our way out of it, but I don’t think household or business debt/gdp was anywhere near the levels they are today. It appears from looking at charts of total credit market debt over the last 100 years that gov debt/gdp shrank from 1940’s until the 1980’s…..but at the same time household and business debt/gdp rose.

    Total credit market debt/gdp (public and private) has declined in the last few years. Private debt has shrunk more than public debt has risen. We still we have been able to grow slowly though. Can it last?

    This chart is scary….

    http://www.creditwritedowns.com/wp-content/uploads/2011/09/Total-Credit-Percent-of-GDP.png

  127. I am not predicting doom and gloom as my last post might suggest. GDP did grow from 1933 to 1952 at the same time that total credit market debt shrunk from around 300% down to 130%. So we can grow while overall debt contracts. Now I need to look into how we did it…..

  128. I’m sorry, but that’s an extremely common argument that really sucks. In that time period, trade as a percentage of GDP mattered less than at…like, any time in our history. Even today the United States is a relatively closed economy, but that was even more true of 1945 America. The notion that Japan, Germany and the rest of Europe being totally screwed helped the US economy boom is completely bogus.

  129. But I’m pretty sure that the same hedge funds and dark pools that killed other currencies in the past will shoot at the dollar immediately. So the dollar could devaluate a lot and oil prices will go up and so most of the other goods which are essentially “priced in oil” and so on. This web site was very useful to me but it still too timid regarding the destructive effect of financial speculation. Action number one is not adopting MMT but regulating banks with Glass-Steagall and more, and action number two is breaking up the monopolies that have killed capitalism (in energy and health care above all). The main force in economy is corruption in the broadest sense while all economic models simply dont’care about. Will you fly on an aircraft designed without taking care of air friction ?

  130. Now I need to look into how we did it…..

    A very large public works project that left a lot of people flush with cash. I think monetary policy also involved directly targeting yields on government bonds of various maturities.

  131. There was massive inflation in the housing market. There has been inflation in the energy markets. My weekly grocery bill — same basket of foods — has gone up in the past year. Health care costs have skyrocketed. The cost of tuition for education has skyrocketed, even at the parochial level (Catholic schools used to be for working class ethnics; now a year of Catholic school costs 10k). Taxes that impact working people — property taxes, sales taxes, fees — have gone up.
    The government monkeys with the inflation numbers by telling us that computers are cheaper.
    To maintain the standard of living, the Fed is trying to jack up the prices of assets in order to get more dollars in the system, while figuring that technology, cheap foreign labor and other efficiencies would keep consumer costs low.
    That has worked for people with assets like stocks, and worked in the ’00s for people who could leverage their escalating real estate, but when the real estate bubble burst the working class took a huge step backward in their living standards, especially when the jobs market collapsed.
    I have retired clients on fixed income, with maybe 100k in fixed income assets. Bernanke strategy to re-inflate the asset bubbles is not working for them. It might work for those who own stocks and commodities. For example, the price of silver skyrocketed when QE2 was introduced — good for the wealthy who can take those gains and maintain their standard of living. Not so good for those who are trapped in investments like savings accounts and CDs and trapped in houses that they should foreclose on.

  132. Sorry, no intention to be rude. You wrote:

    ‘So you tell me, when the private sector delevers, and lowers the credit money supply, and they do it by paying parts of their paychecks that would otherwise go to spending or savings, thereby reducing economic activity, how is the economy supposed to maintain the current level of economic activity’

    The economy won’t of course, it will shrink. That is a natural adjustment to a debt-fueled bubble economy. Mistakes are painful when they are realised, as Greece/Spain/Portugal/ireland are finding out. America wants to avoid the pain, and the Feds HAVE to paper over the credit money, as otherwise the system is doomed. But its doomed anyway, as they will literally kill the dollar…

    http://www.youtube.com/watch?v=7K-R7VSmQRM

    You think the solution is for Govt to replace the failed bets, and in fact they are trying to do that by replacing the failed credit money with new base money: that leads to currency collapse eventually (it also crowds out new enterprise in many ways). But don’t take my word for it, here is a question from a well-known billionaire:

    ​’Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.
    Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.
    We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.’

    I suggest that eventually that $100 trillion in zero-maturity (soon to be negative real interest rate) money will simply flow out into the real physical world, and there’s your hyperinflation.

    It’s so obvious to anyone with their eyes open where this is headed.

  133. Having the world’s reserve currency is going to have an affect on how you operate your currency, but it doesn’t fundamentally change much. The government should not only be looking at deficit spending, but how much of it is leaving our shores in terms of trade deficits. A country with the world’s reserve currency is going to have had a lot of years, previously, of trade deficits.

    Eventually that money may come back and our trade deficit will reverse. At that point, our government won’t need to run NEARLY as large of deficits to have a growing economy.

    I’m not exactly sure what you mean by your Euro question, but the fact that they have a monetary union without a fiscal union wrecked the currency before it even got off the ground, for the same reason that countries went off the gold standard during the 1930’s.

  134. Gary,

    The link makes some decent observations and points, but overall it’s pretty juvenile. The idea that people are over-protecting themselves from deflation, and not inclucing inflation protection (debt & a home) is a bit of a straw man. Further, when the fed “prints money” it’s trading one form of fiat money (cash) for another form of fiat money (bonds). Think of govenment bonds as blue money that spits out green money every 6 months.

    It’s deficit spending that truly creates this fiat purchasing power, not QE. Think about it, when the gov’t spends, only then is it really changing the financial balance sheets of the nation. Swapping cash for bonds is a non-event.

    If the author doesn’t understand that, then he’s already WAY off the mark.

  135. Any chance next time Gary that you link something that its a serious article and not an advertisment for someones investment course (that no doubt you pay for in fiat money) thank you

  136. Texan,

    Because we have purchased so many things from other countries, much of our dollars have left our balance sheets and gone to theirs. A society needs enough base money (M0 + treasury bonds in my definition of “base money”… yes, bonds are money) to operate efficiently. Ours doesn’t. Our economy is like a motor with an oil leak (trade deficit) that makes throwing a quart in (high deficit spending) every month necessary. This is incredibly cheap compared to letting the engine run with too-little oil.

  137. Greg,

    The current GDP of the US is $14.58 T. You are saying that by cutting the payroll tax to 0% and by making a per capita distribution of up to $1000 ($307 billion) that we would see an additional $7.29 trillion in growth? Presumably, you also believe that the elimination of the payroll tax and this distribution could be done by creating the necessary funds without harming the economy?

    To answer you rhetorical question … a 50% rise in GDP is impossible. The highest GDP growth rate achieved since 1970 was about 7.3% in approx. 1984. The average GDP growth rate over those 40+ years was about 3% and the average since 2000 is much less.

  138. Hi Dan hope you’re enjoying your Saturday. Saw your above post on CAD. Is it possible that money is still here for the most part but is parked in low velocity investments? That would require an increase in the federal deficit to make up for the ineffiency of the foreign owned dollars? I can’t say for sure just a thought.

  139. Rodger,

    Let me make a few remarks about Japan. Japan’s current annual government income is about $90 B. Its tax revenue is about $45 B. The rest of the annual budget is funded by sale of government bonds. Japan is starting to have difficulty raising enough money through further debt sales. A significant portion of their national budget is already spent paying the interest on their debt.

    Suppose Japan monetizes their debt. Such action would tend to cause the yen to lose value, which is problematic to Japan’s trading partners. Moreover, the financial assets of the older generation in Japan have significant financial assets, invested to a large extent in government bonds. Monetizing the Japanese debt would tend to reduce the wealth of these people and would also tend to inhibit future sales of government debt.

    Likewise, if the interest rate on Japanese bonds were to be increased by just 1%, this would be a disaster in that it would cause an addition annual interest expense of $20 B.

    Kyle Bass of Hayman Capital, a well-known analyst, expects the Japanese economy to deteriorate significantly over the next few years due primarily to its excessive debt.

    I believe that your comments on monetary sovereignty refer to the ability of the US to monetize its debt, after all, the US is a money-issuer and can always fund its debt. While CR is far more knowledgeable than me concerning monetary sovereignty, most economists believe that it is not a good idea to outright debase your own currency.

  140. If you take money from the rich and give it to the poor, normally it will end up again in the pockets of the rich who control production. This is not the problem of the US and the reason that socialism in the US won’t work is because if you take money from the rich and give it to the poor it will end up in China.

    Case closed.

  141. where are you getting $100T? and how, why and where would it flow into the “real economy” if it isn’t doing that right now, nor is it happening in Japan?

  142. Google the quote to see where the $100t came from.

    And these things always end the same way, confidence vanishing will cause money to flee to the real world.

    Cos you do know, all that debt isn’t anything real don’t you?

  143. snoops outed this bogus economics “lesson” quite some time ago – this was just a clever story to fool the idealogues with no brain to continue to give tax breaks to the rich (let the A students be handed the answers beforehand AND given extra credit so they can score more than 100%) while making the exam too confusing for 60% of the students to ever possible get a grade better than a D.

    all one has to do to not be fooled…. 5 minutes worth of investigation

  144. So the only people who should have money are the rich and the Chinese? Does it make sense that a poor American should support capitalism if he has no stake in it? I don’t think “Give everything to the rich” would be a very successful campaign slogan.

  145. Japan – improving life expectancy, improving public infrastructure, a state-of-the-art manufacturing industry, a trade surplus, enormous foreign exchange reserves. Yet supposedly Japan is floating on the edge of economic disaster. If only all the world’s economies could be in such a terrible state.

  146. actually that’s not what i meant, i mean that there’s a psychology behind the story that is worth thinking about when we think about implementing things like jobs guarantee.

  147. The internet bubble was Fool’s Paradise version 1.0. The real estate/debt bubble was Fool’s Paradise 2.0. The current federal deficit/Treasury bubble is Fool’s Paradise version 3.0. That being said, Japan’s Fool’s Paradise has lasted for over a generation. The inflationists in the US have been wrong since 2008 because they do not understand that the debt bubble created many trillions of dollars that went into inflating asset values (rather than CPI inflation) that the Crash of 2008 has been trying to destroy and that the Fed is trying to prop up by creating yet more trillions of dollars. Once equilibrium is reached on asset values via the Fed’s money creation efforts, substantial inflation is the long term bet if money creation and 10% GDP deficits persist, and that is what I think Bernanke is getting at.

    Right now, we have inflation in what we need and deflation in what we own, which is leaving us with about 2.5% CPI despite very strong current deflationary pressures on asset values. High single digit CPI inflation is one oil shock away. Inasmuch as such inflation will destroy debt, I wouldn’t be surprised if the current government welcomes it. There will never be another Paul Volcker; the US is a different country than it was in 1980.

  148. The Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). This index peaked at an intra-day high of 38,957 on December 29, 1989. Its recent minimum after almost 20 years was 7,054, a loss of 81.9% of its value. On March 15, 2011, the market lost 1015 points to finish at 8,605.

    In 2009, Japan’s government debt was listed at 197% of GDP, its nonfinancial business debt at 95%, its household debt at 69%, and its financial institutions debt at 110% for a total of 471%, which at the time was the world’s highest (sorry about the link).

    http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html#axzz1lTf2dyHr

    It would not be a good thing for all of the world’s economies to “be in such a terrible state.”

  149. Or create an economy in which there are no rich (i.e. one in which money can only be acquired through working and not by having money).

  150. And so what do you propose we do about an oil shock if OPEC simply uses their power to hike prices?

  151. No, you are correct. I do not mean to imply that our GDP would go to 20+ trillion only that our current growth of around 2-3% could easily rise by 50 or 100%, which would lower the ratio as well.

  152. I do not have an answer. The Fed’s answer will be even more liquidity, which will make things worse.

  153. I’llHaveADouble,

    “A very large public works project that left a lot of people flush with cash. I think monetary policy also involved directly targeting yields on government bonds of various maturities.”

    I agree, but it was surprising to see gdp cut in half from 1929 to 1933 as total credit market debt doubled and then see gdp grow from 1933 to 1950 as credit market debt was cut in half.

    I have naively assumed until now that US growth was more dependent upon credit growth than it actually is.

  154. ‘Japan’s debt is well over 200% of their GDP, and despite incredible natural disasters, their economy is far more successful than that of the PIIGS.’

    So, have you read about Japan’s looming demographic problems? And how they are now faced with companies reducing jobs, and relocating overseas? I think you can rewrite your statement as ‘was far more successful than the PIIGS’.

    The problem with your argument is that you assume the situation in Japan and the US can just continue for ever. Sadly, reality bites eventually, and as gradually the world realises that no-one is buying JGBs and USTs but their own central banks, just watch what happens. Your beliefs will be shattered.

    I’m sure you MMTers will find a way to alter your position as the bubble bursts and currencies collapse, but right now, as many can see it coming, you all deny what is plain as day.

    Anyway, Japan will be a fun lesson for you all.

    If only we could all be Norway eh? Healthy budget surpluses, GDP growth, and somehow (God only knows how) the population manage to save! (I hear they save in fishbones though, as clearly there is no governmetnt debt available. Odd eh?

  155. But that’s why credit market debt as a percentage of GDP doubled – GDP contracted by much more than credit market debt.

    Healthy credit markets are important, but that’s not the same as suggesting the ratio of outstanding market credit to GDP needs to keep increasing – virtuous circles of increased income and increased spending should do the trick. It’s very compelling that the ratio’s explosion after 1980 coincides with the wealthy taking most or all of the new income being earned.

  156. Gary, man also believed the earth was flat for a very long time. Or that gods cause natural disasters. Or that the earth was the center of the universe. Your myth of gold is no different. If an alien species came to earth they would find no use for gold. What would they likely find “wealth” in? Labor. Resources of utility. Animals. There’s nothing about gold that makes it a form of wealth. It’s probably one of the greatest myths man has ever propagated and it confuses money and wealth leading to highly destructive beliefs. The primary one being this absurd notion that a man should covet rocks and not his own productivity. If you asked me 100 times whether I would rather buy gold or start my own company I’d pick my own company 100 times. Think about that. I believe you run your own firm, right? You should know this….Real wealth is not in pieces of paper or rocks. It never will be.

  157. Hey Cullen, you should probably refer to “the Eurozone” or “the Euro Area” rather than ‘Europe’. There are countries in Europe that don’t use the Euro and still have their own currencies.

  158. This is a really basic question, but are you certain that governments only borrow, spend and tax in central bank money? No commercial bank credit involved?

  159. I’m not clear why the fed would want to make anything worse, or what even they would or could do. I suppose they would want to stave off a recession and maybe that means more easing.

  160. Here I am breaking my vow not to interact with you after just, what, 1 day! Good to see you step in to attempt to rescue a floundering disciple though.

    Tell you what, if you see an alien, or indeed if I do, maybe we can prove your point. In the meantime we’ll have to rely on humankind’s judgements won’t we.

    You MMTers, it’s either aliens or asteroids! Gives me a chuckle though.

  161. Bamks create money when they make loans in modern banking. The note is the bank’s asset and the borrower’s liability, and the deposit created is the borrower’s asset. It’s sterilized money creation and not government spending.

  162. From the link to Bernanke and things he has said recently, the reason he thinks that the “structural deficit is unsustainable” is so-called unfunded health care commitments and the impending retirement of the boomers. He apparently thinks that the supposed IGBC will prevent the government from funding these obligations even though it has the capacity to do so. So it is not exactly that he does not know what he is talking about. However, the premise of a putative IGBC is mistaken.

    As far as the bond vigilantes go in provoking a “fiscal crisis,” he apparently didn’t get the message from the bond market when there was a good chance that the US renege on the debt at the time of the debt ceiling kerfuffle. There was not even a shrug, in spite of all the hand wringing from experts like Bill “who will buy the debt?” Gross.

    It’s magical thinking about bogeymen under the bed resulting from misunderstanding of the fundamentals of monetary economics. Pretty shocking for a Fed chair.

  163. I find it strange that a financial ratio (200% government debt to GDP) is supposed to trump real bricks and mortar economic performance in the case of Japan. Choose any “real” conomic variable and Japan is doing as well, and in most cases better than the rest of the developed world. Financial disaster has of course been predicted for decades. It hasn’t come. Even in the face of a genuine 5-alarm nuclear disaster the Japanese currency and bond markets stayed rock-solid. Seriously, how many more years until collapse – 5, 10, 50, 1000 ?

    The other point to make is that 200% of GDP divided between JUST the 29,000,000 Japanese who are over 65 right now comes to only $360,000 each. Hardly a massive amount of money to spend over 20 years of retirement. The point is that if you expect the citizens of a rich country to personally save for their retirement, where else but in government bonds can the money be arked. Obviously the financial industry would like it to go into real estate and stocks, but s that realistic ? Apart from the risk to the retiree, aren’t the sums of money involved just too vast ? Japanese real estate prices have just returned to historical norms. The total market c ap of the Tokyo Stock Exchange is only 75% of GDP. Prices would have to triple to represent a n equivalent dollar value of retirement savings. And needless to say I see no benefit to anyone but financial rentiers in encouraging permanent bubble prices in asset markets.

  164. If budget deficits are not sustainable then neither is an over-leveraged Federal Reserve.

  165. Tom:
    Regarding unfunded health care commitments, let’s take Medicare Part D as an example.
    25% of the premiums are paid by beneficiaries, and 75% by general revenues.
    This 75% is an immediate expense, and reflects on the budget.
    Do you consider these current and future obligations as fully funded?
    Don Levit

  166. The current GDP numbers, same with the Job numbers are just good reference numbers.
    All you have to do is go look around, do some business, talk to people to get a feel for the real economy. The idea of just keep saying recovery or better numbers, isn’t going to work anymore.

    http://www.dailyjobcuts.com

  167. It is not about inflation it is about interest rates. Household and even financial companies need stable and low interest rates. The government must stay away; cut spending and raise taxes over time. A budget in check and in surplus allows for further credit expansion and the so called price stability Bernanke talk about.

  168. so your answer is take money away from the private sector so that the private sector takes on even more debt? yikes.

  169. I’ll remember that important little parable when someone ACTUALLY proposes averaging a company’s wage bill over the entire workforce. Until then ….