In case you missed the news from Friday night, S&P: downgraded the USA’s credit rating. And further undermining their credibility they apparently made a substantial math error in their calculations (via Reuters):

“The Obama administration attacked the credibility of the analysis underlying Standard & Poor’s decision to downgrade the United States’ top credit rating on Friday, saying it had found a $2 trillion error.

S&P was forced to remove the number from its analysis after Treasury officials discovered that the rating agency’s estimates of the government’s discretionary spending was $2 trillion too high, sources familiar with the discussions said.

There was evident dismay, and some anger, within the Obama administration at S&P’s decision to downgrade U.S. debt despite the errors officials said they had found in the calculations.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said after S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits. For more on S&P decision.”

This has reached the point where the ratings agencies are essentially meaningless.  Not only is it ridiculous that we are rating the ability of the USA to pay liabilities denominated entirely in a currency they can print, but between the credit crisis and this latest folly it’s hard to make an argument that these companies matter.

And it’s no longer just MMTers who are making this argument about currency denominated in USD’s which renders the solvency discussion a moot point and makes inflation the true focus.  Warren Buffett was interviewed on Fox Business after the ratings downgrade and sounded as though he’s been reading some of the MMT content (via Fox Business):

“I don’t get it,” Buffett told FBN late Friday night. In fact, Buffett reaffirmed his belief in the quality of the United States’ credit telling FBN, “In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I’d give the U.S. that.”

…”We just filed our 10Q and we have $47 billion in cash and cash equivalents. Well over $40 billion of it is in short end T-bills. (Tonight’s S&P downgrade) doesn’t tempt me to sell. We’ll stay right there.”

…”Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”
Buffett…pragmatic as always.  Unfortunately, these ratings agencies wield a big stick.  While downgrades could lead to forced selling and a potential short-term overreaction, I think Buffett has the exact right perspective.  This downgrade is 100% meaningless and any panic that could ensue would be a buying opportunity….

You can see more from Fox Business here:

Source: Fox Business


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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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  • Michael McGillicutty

    Monday morning is going to be a gong show….

  • baychev

    You are missing something: ratings are not just based on the ability to repay, but on the ability to repay in paper but in a currency that somewhat preserves it value.
    And what is $2 trillion? Merely 1 year of deficit spending over the following 10. That shall serve as no excuse for S&P though. Waiting on a downgrade of the whole EU and Japan to come as well, they gotta start bringing some sanity to the markets.

  • SS

    Cullen, given the incredible accuracy of your market calls and broad macro understanding I wouldnt be one bit surprised to learn that some very high profile people read your site.

  • Jo

    Buffet the Obama shill – yeah, we care what he says.

    Incredibly good decision by S&P to highlight that the USSA is bankrupt.

  • F. Beard

    Incredibly good decision by S&P to highlight that the USSA is bankrupt. Jo

    Every nation that borrows its own money supply at interest is bankrupt since it must continually borrow just to pay the interest.

    The US should start exercising its seigniorage right and call the ratings agencies’ bluff. Investors would soon be BEGGING for the privilege of lending to the US.

    Government should NOT exist to provide a risk-free return to investors. That is bogus. The sooner that stops, the better.

  • F. Beard

    Actually, based on interest rates, they are already begging.

  • Walter_R

    Just when I thought your comments couldn’t possibly become any more stupid, you go and top yourself, Jo.

  • baychev

    As Japan proves it, imperfect credit rating does not translate into increased borrowing costs as long as you are holding your creditors hostages and they have nowhere else to go. Seriously, where else can you put $14 trillion given all markets are operating with leverage on top of that?
    And what about the China/Japan vendor financing model we are having? Do you think they want to see that other externality called unemployment?

  • Max

    I expect treasuries to open lower on Monday, but then reverse and close higher. Some people will reflexively sell, but fundamentally a downgrade is a positive since it reinforces the austerity madness. Yes, we are officially Japanese now!

  • F. Beard

    ZSome people will reflexively sell, but fundamentally a downgrade is a positive since it reinforces the austerity madness. Max

    Excellent point to a point. Eventually though, the US will wake up and say “Why the heck do I care what my credit rating is when I can create money at will?”

  • Dylan Johnson

    Well Cullen, its this simple, you study behavioral finance as your profile says…i guess we will see which direction the herd runs on monday….a massive sell off based on irrational and un-informed bearish panic, or a green shoot based of belief that this is a massive buying opportunity at new support levels.

    This whole friday night downgrade reminds me of the WAMU federal seizure on a friday night back in 2008. I think monday may be a a grim day…so what do you think….long SPY or Long SDS (short s&p)?

    Your answer to this is what will set you apart from talking heads on CNBC.

  • beowulf

    Unforced error.
    The federal govt should file felony criminal mischief criminal charges over this (and if they won’t prosecute, NY’s attorney general should). What’s more, the President could step in and reverse S&P’s ruling by brute force. Congress has given the President emergency powers under both the International Emergency Economic Powers Act and the Defense Production Act to basically order a private company to do whatever he determines national security requires it to do.
    Federal charges

    NY state charges (other state attorneys general could pile on too)

    Emergency powers (at link, I accidentally cut “Emergency” from Act’s title).

  • Dylan Johnson

    Yea and while were at is lets just demand oil companies set gas a 1$ a gallon, and also force traders and investment banks to do nothing but pour money into equities to force index’s up. See how the markets respond if obama or the NY attorney general do any of what you posted champ.

  • Atbed


    I agree with you on most parts, except one part I am not sure about. I don’t know how badly the downgrade could hurt Spanish and Italian binds in the near future. The 50-70 bp S&P mentioned as a possible increase in US rates could be enough to push the countries near the 7% boundary, we have been warned about.


  • beowulf

    Sorry Dylan that’s a no go but I like how you think! Below market gas prices would require also implementing a gasoline rationing system (during WWII, doctors and farmers excepted, most civilians were only rationed 3 gallons a week). Even under the otherwise broad as a barn Defense Production Act, the President has go back to Congress for additional authority to do that.
    50 USC 2075. Presidential power to ration gasoline among classes of end-users unaffected
    Nothing in this Act [sections 2061 to 2170, 2171, and 2172 of this Appendix] shall be construed to authorize the President to institute, without the approval of the Congress, a program for the rationing of gasoline among classes of end-users.

    Errr, what was your point again?

    But what does gasoline have to do with anything?

  • Atbed

    Have you all sat down and read it? Its actually a well-balanced piece. But I wonder how recent revisions will effect “trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.” Such reasonable downside risks add strength to the article.


  • critical tinkerer

    It’s not ratings that is crushing Italy and Spain as much as CDS price on their debts. It is mostly banks that are causing their defaults, and mostly US banks are underwriting their debt. Spain had no debt until recession and Italy had high level of debt since forever.
    Since US bank are demanding high price on CDS for debt, that’s pushing up the interest rate and compounding the problem, you could say that US is crashing the Euro in order to have low int. rate on their own debt. Flight to secure debt.

  • http://macronomy.blogspot.com Martin

    A downgrade of Germany, France, and Italy as well could render the EFSF obsolete and very short in cash, and not in the position to bail out more countries.

  • critical tinkerer

    And since S&P ratings failure to curb the bubble by criminally defunct ratings of derivatives and failed banks bonds caused the recession, they carry the partial blame for such high US deficits and such projections of ability to pay it off, they really have no credibility about ratings. Recession, that would not be there if rating agencies did their job on rating derivatives on mortgage loans and bank bonds, brought the need for stimulus and also brought low tax revenue and high expenditure for safety net.

  • critical tinkerer

    If i could, i would ask Obama: how is your “Look forward, not backward” mantra working for you now? Leaving criminals, as political as financial, free to repeat what they did before?

  • baychev

    You have entirely missed S&P’s point: this is not about some measly $2 trillion, it is about another 16-20 trillion new debt on top of the 13-14 trillion that already exists. This pile of debt is unrepayable in money with remotely similar purchasing power of even a today’s dollar!
    To repay it, banknotes have to be made in rolls, like toilet paper rolls :)

  • Dr. Oliver Strebel

    Well, I dont understand the excitement.

    Italy had a very loose monetary policy before the introduction of the Euro. A cup of coffee in a bar was 500 Lira as of 1981, while it was 1000 Lira as of 1991. This yields roughly 7% annual inflation, when measured in cups of coffee in a bar *G*. Therefore AFAIK Italy had no AAA rating during these times, allthough they never failed on their debt (AFAIK).

    In the past decade the US had also a loose monetary policy. So a downgrade is IMHO simply overdue.

    Moreover I think this loose monetary policy will help the US to stay competitive in the world market. A strong dollar would strangulate the US economy like the strong swiss franc is strangulating Switzerland right now.

  • Anonymous

    i think warren buffett would look kind of cute in a cheerleader’s outfit

  • James

    Inflating the currency is a form of default. You are right the U.S. can’t ever officially default, but ask Warren Buffet why he won’t buy 30yr bonds right now and hold them for 30yrs…probably because he knows his company (he will be dead) will LOSE money.

  • Paul Andrews

    “The US should start exercising its seigniorage right and call the ratings agencies’ bluff. Investors would soon be BEGGING for the privilege of lending to the US.”

    Why would they be begging?

  • Paul Andrews

    “Actually, based on interest rates, they are already begging.”

    Not necessarily. It depends on whether there is deflation. It may turn out that real interest rates are higher than the nominal rates.

  • Paul Andrews

    “Seriously, where else can you put $14 trillion”

    There is over $4 trillion traded daily on currency markets, so I guess people could put it all into other currencies fairly quickly.

  • Kb

    For the MMT crowd;

    Someone please explain Japan to me and is it good or bad? How about Argentina as well. Finally, if I am on a fixed income pension and the hamburger I bought is now 30% more, is that good or bad?

    These are serious questions and I think I understand the theory. It seems sound enough but it also seems to suffer the same flaw as a lot of economic theory in that it does not account for the real actions of people in response to some theoretical prescription. Yes a fiat currency govt can print at will, but it doesn’t control velocity, it doesn’t control confidence in its currency and it doesn’t control foreign exchange monetary flows. In the US we get to defy gravity bit because we are so large.

    Request someone address the above…no you just don’t understand/you gotta be a true believer stuff please.

  • Anonymous

    huh? is this same cullen shouting out “what a week, I am bullish” just a little while ago? incredible indeed.

  • Max

    beowulf, that kind of reaction would only lend unwarranted legitimacy to the ratings agencies.

  • rvm

    I am sure he most likely didn’t read it, but I sent him a letter by USPS with all the necessary MMT links and names a couple of months ago. :-)

  • Anonymous

    So what is new, water is wet? this is just common sense. Your unlimited revenue do not come without a cost. government has to take every citizen hostage by imposing income tax or inflation tax to back up their privilege to print money. If you guys called tea party terrorist by taking government hostage, I do think Marxist, Maoist, and tyrant would be fair exchange.

  • baychev

    it is to be expected given the liberally sprayed guarantees to spendthrifts.

  • baychev

    a misnomer: 95% of currency trading is speculation, most of it closed out by the end of day, leverage is above 10 times as well.

  • Calvin

    What are you talking about? Please cite your source / link. Cullen is 100% cash just before this 10+% correction started, as far as I know.

  • Greg

    S&P bringing sanity to the markets? Thats rich. These are the guys that rated as triple A securities which lost NINETY FIVE PERCENT of their value just 3-4 years ago. These guys need to STFU about anyones credibility.

    Japan was downgraded repeatedly through the 2000s and they ignored them and their rates kept falling and falling and falling.

  • Mediocritas

    I’m with you on this baychev. It isn’t about the binary case of the US repaying or not (0 or 1). This is analogue, it’s about the infinite shades of grey in between black and white. Getting repaid with money that has half the purchasing power of what it had when you lent it is a grey default, no nominal loss, but a real loss. Such a scenario does not warrant a AAA rating.

  • http://kiddynamitesworld.com Kid Dynamite

    @Baychev: you wrote : “ratings are not just based on the ability to repay, but on the ability to repay in paper but in a currency that somewhat preserves it value” but is that actually true? because I looked for something like that in S&P’s methodology and couldn’t find it.

    In fact, I think that what Cullen is missing is what S&P wrote in their downgrade report about WILLINGNESS to pay. There is no doubt that we can afford to pay our debts, but if our Congress is so Partisan/stupid/stubborn as to choose not to, then we can default. In my opinion, THAT is why S&P downgraded the US: our Congress has proved their disfunction already.

  • Mediocritas

    And to preempt any response that the market will naturally set high yields to take into account devaluing paper. No it won’t, not with the Fed jacking every auction out there. The US bond market does not, in any way, reflect economic reality. It is simply a plaything for the Fedury and the Primary Dealers, a way to fool the world that there is some token of accountability.

  • Greg

    You highlight with your comment that which is a large source of our problems. This notion of constant purchasing power.

    Seems to me its quite unreasonable, past a certain point, for anyone to expect that their savings will retain purchasing power. If savings is thought of as foregone consumption, which many people like to think of it as, why do we necessarily believe that what I choose not to consume today (or its future equivalent) will be available when I want it? That seems quite odd to me. It might be the case, especially if one takes some of their own money to insure the production of said product, but it also might not be the case. And it shouldnt be the primary purview of the economy to MAKE SURE that everyone who saved money today will get their exact equivalent (or more in fact) in10,20 o 30 years from now. The longer one delays the consumption the less likely you are to achieve the equivalent it seems to me.

    Think of it this way. Suppose you are 21 and you decide not to marry your 21 year old sweetheart, foregoing the chance for present marital bliss to a beauty. If you wait til 31 should she still be there? Looking exactly as she did, loving you just the same?

    The moral of the story is if you want it get it now, there are no guarantees in the future and more importantly, some government didnt rip you off if in 30 years you DONT have the purchasing power you hoped for…….thats life …. real life.

  • Mediocritas

    Quite right, a downgrade is overdue, but, I believe the primary reason for the excitement is the threat that further downgrades pose to capital adequacy as defined by the BIS. A change in rating threatens to alter the risk weighting of US debt, which is really not good timing right now.


    In response, TPTB have quickly stated that they will ignore this downgrade and continue to consider US debt as AAA for risk-weighted calculation purposes. In other words, just ignore the Basel Capital Accord (yet again).


    The downgrade isn’t the issue here. The effect on capital adequacy is.

  • JJ

    Hope and Change has become an economic nightmare

    70 years of AAA rating destroyed under a presidency that is anti-business , anti-jobs , anti-manufacturing , anti-$

    Congratulations to Paul Krugman who keeps on enabling Obama’s social programs and wasteful spending

  • Anonymous

    Your Cullen was 100% cash before crash? My god. Is this same Cullen favors lazy portfolio management? or new day trader Cullen? Is this same Cullen calling silver bubble in 20s and 30s and finally say he had been long silver? Do you believe anything he said? After straight up no volume sucker rally by end of June, he was “still” bullish. Just slash what-a-week and see his insightful comment #3

  • wh10

    Cullen, as I said with Warren, this is largely a non-event for markets, but this is a meaningful event for US politics, policy making, and the future of our nation.

  • Cullen Roche

    Anonymous – try to keep up. I’ve explained my approach several times here. If you want to come by once every few weeks then that’s fine, but at least familiarize yourself with my approach before you go on anonymous rants without any evidence. Regulars know my model signaled a sell signal 10% higher: http://pragcap.com/abysmal-jobs-report/comment-page-1#comment-63168

  • Silalus

    First, talk of the rating having anything to do with the value of the US dollar seems somewhat absurd. By that same logic all bonds traded in US currency should be downgraded at the same time, because they all face exactly the same inflationary risk.

    Creditworthiness is mostly about the willingness and ability to make good on commitments. MMT illustrates through rather iron-clad math that ability to pay is not an issue. Willingness, however, is another thing…

    There is plenty to argue about in the statements by S&P but one inarguable point, in my opinion, is this:

    “…the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned…”

    All other criticisms of S&P aside (some of which I agree are valid and important), this point alone makes them dead on in their overall decision. Our system of choosing leaders via brand marketed parties with simplistic dogma about how the economy and government spending should be managed has brought us to a place where we in the US should be somewhat ashamed. Our government, which we have collectively created and are all fully responsible for as citizens, has reached a point where we are incapable of producing leaders that can compromise and make pragmatic, intelligent decisions- let alone explain those decisions to a public accustomed to vitriolic sound bites and vacant hyperbole.

    As the producer of the only viable reserve currency in the world we have almost unimaginable economic power. Yet our government is so utterly broken that, whether because it is a reasonable path to re-election by their own market segment or due to genuine belief in their own uncompromising dogma, our leaders might at any time simply choose not to pay.

    I agree with the assessment that we are now a little bit less of a sure bet as a borrower. After all, I would think twice about lending money to or working for even the gold-creating alchemist of Mr. Roche’s eloquent metaphor if he sometimes threatened not to pay what he owes.

  • F. Beard

    Inflating the currency is a form of default. James

    Is mining gold under a gold standard a form of default?

  • clayton

    How about some predictions of how equity markets will open and trade on Monday?
    Is this a non event or do the markets get even more killed?

  • gf

    You really have to ask yourself a few questions here.

    1) What aren’t these S&P guys already in prison?

    2) What are people like Jo and Baychev so afraid of?

    It is pretty obvious. They are afraid the right will lose its exclusive lock on government handouts. That is the only reason that makes any sense. They just cannot get over the fact that if the truth gets out they may be forced to share government profligacy with someone other than corporate fraudsters and the MIC.

    Comical really.
    As to receiving money back that is worth less, well than is a total canard has nothing to do with ratings. Corporates are not rated on if 20 years are returned as worth less than they were at origination, the god damn yield takes care of that.

    This is getting silly.

  • baychev

    This is a fallacy of accident error.
    As I said it earlier, Japan’s route is what I am expecting the U.S. to go along with. The rating does not matter, if China/Japan want to stay employed, they will be buying the debt. So goes for any other country with a trade surplus.
    This does not change the fact that the debt is unserviceable even at the present level with the present level of tax collections and when you have lower revenues than expenses, you are on the way to bankruptcy.

  • F. Beard

    Think about it. Suppose you owned a gold mine with an infinite amount of easily mined gold. But instead of mining and spending your own gold you borrow from someone else at interest. Are the lenders doing you a favor or are you doing the lenders a favor?

  • N

    About two years ago I wrote that anybody who relies on a conflicted rating agency to tell them whether to invest or not their money in a financial asset is a moron who deserves to lose everything. Do your own analysis and make up your own mind. If you are a money manager, why should I pay you a dime for deferring investment decisions to a third party that is not qualified to tie their own shoes, let alone rate something that they simply don’t understand?

  • baychev

    So, if we follow your logic, all gov’t debt in its own respective currency is AAA grade?
    After the establishment of EFSF or whatever they want to call it, the PIIGS ought to be AAAs as well?
    I just have other things to do to rather than digging into S&P’s methodology, the notion behind lending is to get all your principal back and some interest to compensate you for the risk and opportunity cost. Looks like gov’t debt in your opinion is nothing more than currency debasement, it just saves the hassle to print money in smaller denominations.
    I would say the willingness is there, what was happening was pre election posturing, because the ‘change man’ needs a change… of jobs :)

  • Mountaineer

    Your questions are very broad, so I apologize beforehand if I don’t properly address them.

    Japan has monetary sovereignty and therefore can always meet its obligations, provided they continue to be issued in Yen. The nation has considerable government debt, and yet issues 10 year paper at 1%. Solvency isn’t an issue. What is an issue is a rapidly aging and declining population combining with recurring bouts of fiscal retrenchment. This has led to a continual battle with deflation, which has now become imbedded within the Japanese mindset. The private sector has been de-leveraging for over a decade. The situation has been prolonged partly by recurring bouts of government austerity, and partly by the sheer magnitude of private debt the nation accumulated during the 1980s. Aforementioned demographics haven’t helped.

    Argentina was not a monetarily sovereign nation; they pegged the Peso to the dollar in the early nineties as a crude method of addressing hyperinflation. The CB also guaranteed “convertibility” of the Peso into dollars at will. Therefore, Argentina faced material constraints on the issuance of their currency; both fiscal policy and the Peso’s forex rate were controlled by external factors. Finally, effective tax collection was hindered by rampant corruption.

    Obviously inflation wreaks havoc on anyone living off a fixed income. If you’re implying that MMT is somehow inherently inflationary, or that its proponents are “hyperinflationists” then I disagree. MMT is a lens through which we can intelligently analyze the economy. The potential policy actions that are derived from this study range from “socialist” job guarantees to tax cuts so deep and wide they would make a libertarian blush. MMT is a framework; it can be utilized in a manner that is inflationary or deflationary, stimulative or restrictive, but most importantly it is the most rational and pragmatic tool I’ve found for properly examining the economy and evaluating policy.

  • baychev

    Exactly, the Fed has mopped all new issues for the past 2 years and then some more. Some will say it ain’t so, but they bough 1.25 trillion of GSE debt at the onset of the crisis and created a run into the treasuries, because it was obvious they will be the next intervention target.
    Money still gets saved somewhere in the economy, not everyone is debt broke and repaying, and that money is crowded out by the Fed from the UST market. The price action is not determined by free market supply and demand, but by politics. And I do not expect the ‘bull run’ in treasuries to end anytime soon, the interest cost would skyrocket if rates go up, expect like in Japan to see rates as they are for quite some years all the while the currency loses purchasing power.

  • Paul Andrews

    Gold would be worthless if there were an infinite supply, unless the government agreed to restrict the release of it according to some process acceptable to private parties.

  • Coolidge Low

    Agreed. This is a report card on how the Obama administration has performed. Obama gets a “D” for a grade.

  • baychev

    You sound like a communist :)
    Seriously, money is unit of account, medium of excange, and (only by definition) store of value. If no one saves and the gov’t pumps money at will at 0% rates, you are talking about a pure communist society, that you may have not seen working and failing to fully appreciate the complete decadence of central planning.


    PIIGS cant print money, they don’t decide how much Euro to print. Germany and France(?) have to save them… that’s my understanding.. so no AAA for them

  • pebird

    If the US debt is unservicable, which for a sovereign government can only mean the currency will lose value, how is it that ANY bond denominated in USD could be rated higher than what the US is rated?

    There should be no debt denominated in USD rated higher than AAplus by S&P.

    The rest of us should downgrade S&P.

  • pebird

    Then any corporate bond payable in USD shoukd also not be rated AAA.

  • SS

    And it doesn’tbode well for the direction of economics. One can only hope that Warrens and Cullens influence grows. The people learning MMT have no idea how important they are to the future of this country.

  • F. Beard

    Gold would be worthless if there were an infinite supply, unless the government agreed to restrict the release of it PA

    Agree with whom? Whose business would it be how much gold that government spent? The value of the gold would depend on how much was released and how much was demanded by the private sector and the tax-man.

    according to some process acceptable to private parties. PA

    Our present system has not prevented excess growth in the money supply but it has gifted a risk-free return to the rich and bankers.

  • baychev

    They can’t indeed, but the ECB is doing it for them, this is how: Greek banks buying Greek worthless bonds then post them as collateral with the ECB and get 90% of the face value, rinse and repeat.

  • Different Chris

    Cavuto’s a numpty.

  • baychev

    Fair question, just like why there is a CDS market at all for U.S., Japan, UK, Australia debt. I guess we need idols, and that explains it all :)

  • http://marketthoughtsandanalysis.blogspot.com/ binve


    There is no doubt that we can afford to pay our debts, but if our Congress is so Partisan/stupid/stubborn as to choose not to, then we can default. In my opinion, THAT is why S&P downgraded the US: our Congress has proved their disfunction already.

    Agreed. The raising of the debt ceiling got riders attached this time (political), the debate that ensued was political, the statements that Social Security checks might not go out on Aug 1 was political, etc. This is all a political sideshow. This is agenda pushing while arguing about a point that doesn’t matter: We can always afford to service the national debt. Always.

    Best to just do away with the US Government bond system altogether, because it doesn’t ‘fund’ anything, nor does it ‘do’ anything that couldn’t be done with far easier policy implementation. Bill Mitchell is right, [Federal Government] bonds are corporate welfare.. Let’s just get rid of them and preemptively avoid these political shenanigans the next time around: See this post

  • http://www.arpllp.com Niels

    I suspect you are all missing the bigger picture. The downgrade of US sovereign is NOT irrelevant because it will force S&P to (a) downgrade JP Morgan (as the sovereign stands behind the banking system, you cannot have a bank rated higher than the sovereign), and (b) downgrade several European sovereigns, most notably France. Once France get downgraded, several French banks will get downgraded. It will then spread to other countries, and we have the potential for another crisis, so don’t underestimate the significance of this.

  • SD Winkler

    I still think there is a flaw in the “print at will” concept. The US political system doesn’t easily allow the “will”.


  • baychev

    Please, do not pass silly analogies. The whole idea of increasing money supply, gold backed ot fiat, is to keep it up with economic growth and avoid outright deflation that would occur if all other goods availability increases faster than money.
    Where things got skewed up is FRB and private money creation that allows big banks to mint money and obligations (aka derivatives) out of thin air.

  • jt26

    Two comments:

    (a) saying a country can print money is not MMT; it’s been done for thousands of years.

    (b) as someone mentioned above, anyone have any thoughts on whether there are any real regulatory impacts? My guess is not, as AAA has been a declining part of the public and private debt (esp private) universe for decades. I’m not sure if even a downgrade to BBB+ would have any regulatory issues. (Someone mentioned above, that it might affect bank ratings, but given the pathetic status of those banks, I’m not sure it matters.)

  • http://www.pragcap.com Cullen Roche

    Great point Niels. I hadn’t thought about the fact that this could actually impact Europe. That makes the rating downgrade appear that much more reckless….

  • baychev

    Peter is late to ‘educate’ you, so I will step in instead of him. First, you have a fairly good grasp of what is going on. Now to the point:
    USD is backed by the full faith and credit (means ‘faith’ in Latin) of the U.S. gov’t. What Peter will try to persuade you is that this faith means nothing, money is purely an accounting identity. In order someone to save, the gov’t has to print it, in order for someone to get a wage, the gov’t has to print it, in order someone to borrow, the gov’t has to print it. So the gov’t prints it for your own and everyone else’s good.
    When you say your burger costs 30% more, puhleaaase, just thank the gov’t because it has helped you to have the buck in the pocket and have the burger shop in place, otherwise you will be growing food yourself… or maybe you will be trading your skills for food and you will experience no inflation, but either way you have to work. With the help of gov’t you can not be working and still receive money, the suckers that work and accumulate money are subsidizing you ;)

  • baychev

    Hey, gov’t debt looks like a con game, it works like a con game, what is it?

  • http://www.pragcap.com Cullen Roche

    Not to be a stickler, but being a latin buff in another lifetime I have to point out that credit comes from the latin word “credere” which means “believe”. If you haven’t read my paper on hyperinflation and “belief” in the currency then you might want to sneak a peak. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

  • baychev

    Gov’t debt never worked like a private debt instrument: borrow, pay interest along the way, repay.
    Why shall we pretend it deserves a divine status when it is in fact covert money printing?

  • baychev

    Please be precise: believe like hope it will happen, or believe like expect honesty?

  • Carl

    I believe the point of the ratings agencies was that they are granted access to data that the public doesn’t have. So the “just do your own analysis” meme doesn’t really apply.

    I think S&P is in a tough position. They know that they were caught with their hands in the cookie jar with respect to their MBS (etc.) ratings, and would like to re-establish their credibility. They threatened to down-grade if certain conditions weren’t met, they weren’t, so they down-graded.

    I wonder what this will do to the modern portfolio theory calculations?

    I think it will play out the same way the old airline pricing did: oligopoly; one actor raises prices, the others follow or he quietly retreats.

  • F. Beard

    Please, do not pass silly analogies. baychev

    Yes, gold is a very silly form of money; I agree. However, to claim all money creation is a form of default is absurd which I attempted to point out with the gold analogy.

  • Mountaineer

    Could end up being the most important consequence of the downgrade. In a world where the creditworthiness of Europe is being questioned on a daily basis S&P just marked down the global benchmark for “risk-free” assets. If this leads to further downgrades in Europe then we could see another 2008 level liquidity crisis in the short-term funding markets. Euro banks are already stressed from selective funding in dollars.

  • MTM

    Buffet… hmmm, probably not the best one to evaluate a financial crisis… As I recall BH held no defensive strategy and had over a 40% drop the year after the financial “crisis” in 2008. Inexcusable… Stimulus bailed them out one time… we shall see…

  • http://macronomy.blogspot.com Martin

    I commented above Cullen that the ramifications of the US dowgrade implies that additional dowgrades on France will basically render the EFSF powerless, given the EFSF is in fact a gigantic CDO.
    If the EFSF wants a AAA to issue bonds to fund the oncoming bailouts, it will need to overcollateralize to 120% and maintain a cash buffer. It cannot lend against backing of troubled nations. The more countries in trouble, the smaller the pot available for bailing out countries in trouble, simple as that.
    The whole structure is in trouble.
    Also the reserves held by the EFSF needs to be invested in AAA paper.
    The EFSF game is well summarised by Dr. Constantin Gurdgiev:

    “Now, any sovereign with an once of sense now will know that a race to tap EFSF is on. The faster you get to it to borrow from it, the more likely you’ll arrive to the borrowing window before the limits are reached. Portugal, Spain and possibly even Italy are in the race.

    This is why the markets have never been easy about the entire EFSF – they know that Ireland tapping into EFSF simply does two things:

    It delays the inevitable restructuring of the massive debts accumulated on the Irish economy side – either sovereign or banks or households or any two or all three. EFSF does not remove the need for such a restructuring. It simply delays it.
    It signifies an exponential increase in the probability of EFSF acting as a conduit for contagion from the PIIGS to the rest of the Euro area.”

    Also on the subject:

    Please respect FT.com’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article – http://www.ft.com/cms/s/0/081efd02-c9b1-11df-b3d6-00144feab49a.html#ixzz1UGeWfgvQ

    Wolfgang Münchau to conclude:

    “And finally, the whole edifice would collapse if France was downgraded. This is a non-zero probability event, to put it mildly. Without France, Germany would be the sole pillar of the system, a role Germany would probably not accept.”

    If France is dowgraded following the US dowgrade it is game over for the bail out plan Cullen.

  • Anonymous

    Look at that response Kb, if you did not know what MMT is, you know now. The whole purpose of MMT is to back up progressive agenda, make government and government spending sacred. You guys are slave of government, because you depend government to live. as member of free society, fighting this agenda, these people everyday is your own responsibility.

  • jazzman

    Will the banks be downgraded if only S&P downgrades the U.S. or is the downgrade of banks triggered when all or the majority of rating services downgrade? I understand that some pension funds have to divest their govt bonds if the majority or all of the rating services downgrade the bonds. So they can sit tight for now.

  • Greg

    0% Govt rates only determine what rate you get on GOVT BONDS. One can still save in private corporate bonds, gold, real estate etc. Its not communist to not give a saver risk free income from savings, in fact the more interest you give someone on govt bonds the less you are asking them to work for their money and the more communist you are becoming.

  • baychev

    you never knew what communism is and that you are a communist??? :)
    communism is not about getting money without working or extracting high interest rates, au contraire, it is about providing money to endeavors with complete disregard of profitability and risk. in a communist state banking is centralized and the gov’t dictates who gets how much and when. communism as well gives a right to credit to everyone and discourages anything but symbilic interest rates.
    a founding principle of communism is: from everyone according their means, to anyone according their needs. so EU as well, isn’t it?

  • Dumb Ox

    Looking like a non-event right now in the futures market, as many of the MMT proponents here have predicted.

  • Roderick Beck

    Hi Baychev,

    Federal debt service burden is $200 billion a year. It is not large relative to total government spending or the US economy as measured by real GDP.

    The con game I see is the fear mongering by guys like yourself.

    Despite all the fear mongering investors flocked to US government debt during the weeks proceeding August 2.

    The reality is that there is no good substitute for US Treasuries. No competing market big enough and liquid enough to pose a threat. Neither gold nor German bonds or …

    If the US had undertaken in 2008/2009 a fiscal stimulus package of the same size relative to GDP as the Chinese undertook, the US economy would be much stronger and the deficit much smaller today.

    It was fiscal timidity that led to the current econmic stagnation, which frankly is the main driver of the deficits.

    I don’t dispute the S&P downgrade; however, it is irrelevant. US Treasuries are the go to asset. Given their huge export surpluses, the Chinese have to buy Treasuries.

    Let me add that US Treasuries are one of the few assets that has a strong negative correlation to commodities and equities.

  • http://macronomy.blogspot.com Martin

    S&P could follow up and downgrade US banks, this what happened with Greece, Ireland, Portugal and Italy. Sovereign countries were first dowgraded then financials followed.

  • DH Dell

    On Monday the s&p will release their report on affected institutions and related structured agreements. I am unclear how ratings of one agency affects binding agreements reliant on AAA holdings. I guess we will find out… When we first were discussing the dent agreement months ago, I worried about the rating agencies attempting to overcompensate for past failures; now, I wonder if s&p’s actions will force reevaluations from moodys and fitch, although I would assume they are under enormous pressure from the govt to maintain. I would bet that officials will at least offer tacit support to those agencies that play along with them. Competitively speaking, it would be understandable that they do, given the flack they received in the past and now given s&p’s decision to bring the ire of gives upon themselves. I wish I knew how conflicting ratings affected pensions and other institutions and agreements which rely upon triple A ratings one way or another… With respect to Niels thoughts, I don’t know what power one rating has or why it must be assumed that s&p will now target France; never heard the s&p talk about France before. And I think authorities will castrate them before that happens…

  • MacroTrader

    i see nothing wrong with downgrading on willingness to pay…

  • Brian

    Exactly, everything comes with a cost.

    The basic problem with any economy is that there are always trade imbalances. Not everyone produces/consumes an equal number of goods at all times. This leads to imbalances and debt/credit is the product of these imbalances as one person “saves” while another “borrows”. Ultimately these imbalances must be resolved at some point in time. Unfortunately it is almost never the case that the “saver” ends up buying more goods or services from the “borrower”. If that was how the world worked we wouldn’t have any economic problems. If you can build me a world where all trade is balanced I can show you a place that has no inflation or deflation and complete price stability.

    The question becomes how do we end up resolving these imbalances, and how big do we let them become in the first place? The bigger the imbalance the more painful recovering from it will be. And no matter which way you choose to resolve it, there will be no free lunch. Providing government stimulus has consequences, and so does having no government stimulus. But one way or another those built up imbalances will be resolved.

  • baychev

    Why is debt servicing so low? Because the Bernank has purchased some $2 trillion since late 2008.
    Investors flocked to UST? The Bernank has bought this year alone more than the entire net issuance of the UST.
    Indeed there is no substitute to UST and from that are and will be suffering all countries running large trade deficits with the U.S.

    Oh, now the stimulus was way too little? It is above 10% of GDP for 3rd year running, soon 4th as well, but that is just not enough. How much is enough for you, please toss a number. We have had before good discussions about the impossibility to sustain a bursting bubble into the economy, sadly you missed them. If money was a cure, everything would have been cured long time ago, sadly, the problems have become structural and deep.

  • Effem

    I assume everyone who thinks the US cannot default is selling US credit default swaps? Free money.

  • El Viejo

    So the Ratings agencies are now on top of it. Ha!
    If you ride a motorcycle you know what ‘high siding’ is. You make a mistake one direction, panic and over correct to the other direction and come off the bike on the high side. Believe me it hurts.
    Many years ago at the Summer Olympic Games a judge made an obvious bad call. The news commentator suggested that the Olympic committee needed to hire judges of equal quality or better than the atheletes.

  • El Viejo

    Maybe Russia is selling some.

  • El Viejo

    Sorry, should have read: Maybe Russia would buy some.

  • Nils

    Some banks are already thinking about charging for large savings accounts because the bond yield doesn’t even cover FDIC insurance.

  • F. Beard

    How much is enough for you, please toss a number. baychev

    That depends. How much credit is paid off each month in the US? The deficit should at least equal that and be distributed equally to the entire US population. Also, the banks should be forbidden to issue any further credit till all US private debt was paid off to prevent them from leveraging the new high powered money.

  • baychev

    So you want the gov’t to monetize all debt and have it sit with the banks who would not be able to lend it but to the Fed and possibly the UST? You essentially want to convert all private debt into public and create a communist state, don’t you?

  • Anonymous

    Fear? Please tell me whether calling those who do not agree with you “terrorist” is fear tactic or not. You guys invented this, now congressman and maybe vice president are using the same line against tea party. If MMT gained any meaningful attention, there you go. Congratulations.

    I don’t necessarily buy everything tea party has proposed, but I absolutely agree with them on fiscal discipline. Your unlimited revenue is not a free lunch, it will burden society with heavy taxation and/or inflation sooner or later.

  • F. Beard

    So you want the gov’t to monetize all debt and have it sit with the banks who would not be able to lend it … baychev

    The banks could engage in honest lending; it would be credit creation they could not engage in. And since the bailout checks would be metered to just replace existing credit as it was paid off the total money supply (base money + credit) would neither shrink nor grow.

    You essentially want to convert all private debt into public and create a communist state, don’t you? baychev

    No. I am not a Communist. I am a libertarian who is tired of banker fascism.

  • Gerald P

    JJ, if you actually read Krugman you would know he has been viciously criticizing Obama and his policies for over a year now.

  • baychev

    Is it more practical to tell banks how much they shall be lending rather than let them lend based on how much they can attract as capital & deposits and their ability to judge risk? Your suggestion does not make them work to earn money, they would be getting it with a decree of some sort.

  • Gerald P

    gf, you are right, and I have lost patience with the “silly” and I will close down.

  • Anonymous

    If you want to solve a problem wouldn’t be reasonable to ask root cause. The current efforts of many governments to resolve imbalance = terms “kick the can” and “cover up”.

    So what caused imbalance? is it all bankers’ fault?

  • F. Beard

    Your suggestion does not make them work to earn money, they would be getting it with a decree of some sort. baychev

    Bank capital would not be affected; rather all deposits would eventually be backed with 100% reserves.

    Of course a universal bailout would help the banks by greatly decreasing loan defaults.

  • Nils

    The beauty about government debt is that it doesn’t need to be paid back.

  • ChickenLittle

    Uhhmmmm futures don’t begin trading until Sunday night.

  • B Ferro

    I have a question here…how is this not one of the most important decisions ever in the history of Finance and markets??

    Has not S&P basically just challenged and uprooted the most fundamental underpinning and theory in all of Finance – that being the idea that any and every “risky” financial security can be priced off of the 10 Yr treasury rate, which, it was assumed, could always be considered a “risk-free” benchmark for pricing given the most holy of holy assumptions that the US would never NOT have a AAA credit rating?

    Does this not mean that every college text book on finance I ever had to study needs to be rewritten? Does this not blow up the CAPM model? Does it not also blow up every global financial institution’s computer, risk and pricing models on Monday?

    Seriously, can we use the word “unprecedented” and the phrase “this time is different”, for the first time ever in the context of financial markets?

  • jeff

    Doesn’t the S&P rating violate the 14th amendment?
    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned

  • http://www.pragcap.com Cullen Roche


    First of all, do you mind if I call you that? Or would you prefer to hide behind this new anonymous name of yours?

    When someone acts like a fearmonering fool they deserve to be called out on it. Is “terrorist” a harsh term. Yes. But if you push a political agenda based on outright lies you deserve to be dealt with harshly.

    You’ve spent over a year here trying to push your agenda of fear based on outright wrong economics. If you want to live in a world of delusion and flat out lies then be my guest. But don’t try to scare other readers into believing your BS just so you can try to spread your ideologies. Not here.

  • http://www.pragcap.com Cullen Roche

    That’s like saying that you want to lose 10 pounds so deciding to cut off your head is a good way to achieve it. Defaulting by choice would be catastrophic and absurd. Now, Russia chose to default in the 90’s but they were in a VERY different scenario. There would be no acceptable circumstance for the USA to default now. So the entire “could default by choice” argument is unrealistic.

  • http://www.pragcap.com Cullen Roche

    Are we really going to choose not to? I mean, we have to be somewhat realistic here. As I said prior, I could choose to lose 10 pounds by cutting off my head. That doesn’t mean it’s a good way to lose weight.

  • beowulf

    Remember the motto General LeMay chose for the Strategic Air Command, “peace is our profession”. The best defense, after all, is deterrence.

    If S&P’s general counsel had been quietly reminded by the Attorney General of the United States that people have been to sent to prison for far less than for impairing “the credit of the United States, an unqualified power, a power vital to the government, upon which in an extremity its very life may depend”, do you seriously think we’d be having this conversation right now?

  • Greg

    Again, your premise is false because you started out saying “if no one saved” as if that is a definer of the difference between capitalism and communism. People can save in lots of things besides govt bonds. Just because the govt has 0 interest on its FFR and doesnt issue securities doesnt mean a bank cant loan at 4% or that the govt is simply transferring everyone free money. Your jumping to unwarranted conclusion. The presence of a positive interest rate from the federal reserve is not a necessary component of capitalism.

  • beowulf

    Yes, this novatownhall post explains it quite well.

    Rep. Paul Ryan (R-WI) said that, if we do not bring down the public debt,  “We will have the riots in the streets, we will have the defaults, we will have all of those ugliness problems.”
    It is that “we will have defaults” phrase that raises red flags. This could very will be a statement that violates the Constitution. Unbeknown to most people, our right to free speech, secured by the First Amendment, is not absolute. We all know that slander, libel, and shouting “fire” in a theater are not protected speech (unless there really is a fire). But the truth is not an absolute defense. This is the exception. [the writer is assuming there WILL be defaults. His point is even when saying that is true, it still violates the constitution].

    When constitutional amendments are passed, they supersede whatever the constitution said before that amendment. The First Amendment says, “Congress shall make no law… abridging the freedom of speech.”
    However, the 14th Amendment overrides the First: “The validity of the public debt of the United States, authorized by law… shall not be questioned.”


  • Paul Andrews

    “Whose business would it be how much gold that government spent?”

    The receivers of the spending, i.e. the providers of the real wealth.

  • james

    warren buffet is a bottom feeder. AA+ is too kind.

  • F. Beard

    That’s a mighty suspicious clause of the 14th Amendment; something a banker would sneak through.

    But why do MMT folks defend the National Debt since US Government borrowing is not even necessary?

  • Anonymous

    Call me whatever you want. I couldn’t care less. Ban me if you want. But you can’t keep my mouth shut. Just look at what you have just said, I was from communist ruled country, and quite familiar with this rhetoric. Sorry reality hurts but it just showed everyone who you really are and what you do want.

    As an investor I found this site. I am open minded. Many people on the left made good points and I am willing to listen. only things I can’t stand are lies. Months ago I just block your site from my browsers because reason above. Your site is only one on my restriction list. But since mmt lies keep popping to my eyes from many other sites I visited, I have to come back to tell people truth. LZ wanted to be TPC’s friend with different opinion. But that is not possible because of same reason. So I am here to tell people

    1. you and others mmters are political motivated liars.
    2. MMT has no chance to stand reality check.

    Those are all my agenda. call me whatever you want but I will always speak with brutal honesty.

  • Anonymous

    Fact is only thing judge who lies. You started the war against deficit hawk last year by rolling out inflation/deflation portfolio in order to prove your thesis. Why don’t you just man up to keep updating it?

  • beowulf

    Cullen, he was sent a book from “the other Warren” earlier this year, so I don’t think you’re imagining things.

    rvm, concerning this comment:
    I am sure he most likely didn’t read it, but I sent him a letter by USPS with all the necessary MMT links and names a couple of months ago. :-)

    Oddly enough, we’ve already hashed this one out. Good news! The consensus view is that Buffett DID read your snail mail. :o)

  • Anonymous

    You and your gang promote fear of baseless deflation more than anybody else. But I wouldn’t call you terrorist. the definition of terrorist is tied with violence act.
    You haven’t done that. I did not do too. So calling me terrorist just prove you are politically motivated.

  • jeff

    Does anyone know if sovereign issuing its own fiat currency ever had a bond debt default?

  • jeff

    I was actually wondering why the gong ho tea partiers are not commenting on why the S&P rating is unconstitutional. Where is the zeal – imagine if this was a challenge to right to bare arms.

  • hamish

    Cullen, it could be the case that Buffett has worked some of this stuff out for himself. Once you find out that a sovereign entity like the US government literally creates money out of thin air, it’s not a big step to realise they can’t go broke in that currency. Doesn’t mean he’s full MMT, but it does suggest he’s at least part way there.

  • http://kiddynamitesworld.com Kid Dynamite

    “So, if we follow your logic, all gov’t debt in its own respective currency is AAA grade?”

    this is why Cullen has noted that it makes no sense to rate such debt for ability of the creditor to repay. The ability to pay is never in doubt.

  • http://kiddynamitesworld.com Kid Dynamite

    are we really going to choose not to what? to pay our debt?

    if you’re asking me if there’s a non-zero chance that Congress could do something so stupid as force a default, I say “absof’nlutely.” Partisan politics is a killer. And THAT, I think, is the real nexus for the downgrade.

    look Cullen, you’ve complained that the President and Chairman of the Fed don’t understand the monetary system… you’re going to expect Congress (who are several floors down on the intelligence scale, compared to BB and B.O.) to do the right thing? We can only hope…

  • mpr

    I’m slightly disappointed that only S&P downgraded and not all three.
    If it had been all three, then after no discernible reaction in the bond market
    the agencies would have been stripped of their last shreds of credibility.

    Now, people will say ‘well its because other two still have a AAA rating.’

    In any case, I dont know why MMT types would be upset about this; when nothing happens it will be another nudge away from the idea that the US can be insolvent.

  • Mediocritas

    They can be AAA if yields are allowed to reflect the reality of currency devaluation. The problem with Treasury debt though is that this is not the case.

  • Cahn

    “This downgrade is 100% meaningless and any panic that could ensue would be a buying opportunity….”

    Cullen, does this “buying on panic” logic apply only to treasuries or it applies to equities as well? Thanks.

  • Mediocritas

    Not *all* of us Niels ;-)

  • JWG

    The First Amendment is first for a reason; it is the bedrock constraint on federal power. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

    Do you really think the Fourteenth Amendment section dealing with federal debt not being questioned is more than a remnant of Civil War finance and the Emancipation Proclamation? “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

    MMTers, please be careful with the Constitution and the right of free speech; even “commercial speech” is protected. Do not associate yourselves with silly ideas that will impair the credibility of your core insights into monetary and banking operations, which are valid and need to be heard.

  • http://www.pragcap.com Cullen Roche

    What have we lied about? Rather than just come here and say things why don’t you make an argument? I am all for it. Maybe you actually have a point. Bring some facts to the table. Then maybe someone will listen to you. I am all ears.

    PS – Use “LZ” (rather than hiding behind an anonymous name looking like a troll) so I can actually find you. I am getting hundreds of comments on the site every day and it’s impossible to filter thru all of them if you want a response….

  • http://www.pragcap.com Cullen Roche

    I think they would never be so foolish….that’s all my point is. It doesn’t matter what you know about the monetary system. A default by choice would be a nightmare.

  • http://www.pragcap.com Cullen Roche

    This is a Tsy specific comment. I should have been much more clear about this. As Niels mentioned above, this does have the potential to cause some other problems. But I don’t see any reason why this should effect US bonds.

    I should have said:

    “This downgrade is 100% meaningless TO US BONDS and any panic that could ensue would be a buying opportunity IN TREASURIES….”

  • Anonymous

    I can not help to write this

    Quote Cullen Roche

    “You’ve spent over a year here trying to push your agenda of fear based on outright wrong economics. If you want to live in a world of delusion and flat out lies then be my guest. But don’t try to scare other readers into believing your BS just so you can try to spread your ideologies. Not here.”

    Wrong economics, hmmmm.

    I assume Cullen Roche and mmters believe mmt is only “right economics.”

    First of all, i don’t mind people call me fool but I would be mad if people call me economist.

    I only know commonsense such as there is no perpetual motion machine.

    And there is no free lunch.

    As matter of fact, there is no science like economics, making endless mistakes still be considered science.

    There is no economics, like mmt which left so many holes to be filled yet challenged.

    Consider this, to make you believe that US will never go bankrupt Cullen Roche used to say “Government’s money is like alchemist’ gold. Can alchemist run out of gold? ”

    Are you serious? You can’t make this thing up. As their “right economics” is so right, it has to throw alchemy in to bridge their fantasy and reality.

    As the other day someone want Warren Mosler to be candidate of Noble Prize it just make me rolling on ground. Is this 21st century and what planet do we live at?

    Yeah, tomorrow I will declare that I found a “Modern Physics Theory” and I made a
    perpetual motion machine. Hey all haters, you don’t understand physics and your argument is straw men.

  • http://www.pragcap.com Cullen Roche

    Your comments include no facts….

  • Y

    You are missing something: ratings are not just based on the ability to repay, but on the ability to repay in paper but in a currency that somewhat preserves it value.

    Nothing about current US deficits suggests that this would be the case. They’re the result of a currency that has been manipulated from abroad to trade higher than it would otherwise (not a slam to the manipulators – to some extent, it was the unintended effect of a desire/need to amass dollars) and an economic crisis that decreased revenues.

  • Y

    A balanced budget amendment would be equally foolish, and I think a huge number of congressmen and senators would vote for that if the proposed bill wasn’t full of other things that are anathema to their party. My guess is that there’s no deep analysis that underpins the broad rejection of a default and the broad support for a BBA – the lobbyists just screamed really, really loud when some flirted with the former.

    Spooky thought.

  • Y

    You can see if this is true in real time. Check out the TIPS and nominal Treasurys.

  • Y

    expect like in Japan to see rates as they are for quite some years all the while the currency loses purchasing power.

    This is quite likely what’s going to happen.

  • Y

    If by “currency devaluation” you mean loss of purchasing power, they do. It’s the spread between Treasurys and TIPS.

  • Y

    Why shall we pretend it deserves a divine status when it is in fact covert money printing?

    But…but that’s exactly why they have special status. Because they’re really just savings accounts with the central bank.

  • Y

    Here’s something I think is sort of funny. S&P’s release expresses concern about the U.S.’s projected rise in debt-to-GDP from 74% now to 85% in 2021. The average ratio of liabilities to income for the remaining AAA American firms is 392%. When we take out the outlier, it’s 146.6%.

  • Y

    That is not S&P’s point. They could have made that point, but they didn’t. Their models and the downgrade decision are based on our medium term debt-to-GDP ratio. These models explicitly make the exogenous assumption of ~2% inflation as a baseline and ~1.5% in a downside scenario.

    They want us to lower our deficits over the next ten years, which is a spectacularly stupid idea. They say that our policy making apparatuses are basically broken, which is a legitimate complaint. But the evidence of this brokenness that they provide is that we have no credible way to lower our debt-to-GDP ratio over the next ten years, which, as stated above, is a spectacularly stupid idea.

  • Y

    Crap, I was responding to baychev’s original post:

    You have entirely missed S&P’s point: this is not about some measly $2 trillion, it is about another 16-20 trillion new debt on top of the 13-14 trillion that already exists. This pile of debt is unrepayable in money with remotely similar purchasing power of even a today’s dollar!

  • baychev

    Please do not pass this ‘someone else *** in my pants!’. When was the last year economic growth exeeded money growth? When was the last year economic growth exceeded deficit spending, 1999?
    Hopefully you understand this was in the making for much more than 10 years, if we ignore, it will come down on us like an avalanche.

  • Y

    “Please do not pass this ‘someone else *** in my pants!’”

    The trade deficit is large and persistent. The trade deficit literally cannot be this large and persistent without dollars being gobbled up by governments and sat on or redirected to US capital markets. This leaves us with a negative capital account, and government spending and/or spiraling private sector debt is pretty much the only way you can have economic growth. Which is what we saw.

    “When was the last year economic growth exeeded money growth?”

    Which measure of money? By itself, it’s not a really compelling indicator.


    “When was the last year economic growth exceeded deficit spending, 1999?”

    By itself, what makes this a compelling indicator?

    “Hopefully you understand this was in the making for much more than 10 years, if we ignore, it will come down on us like an avalanche.”

    Dude, not really. The sectoral balance models I play with don’t show anything particularly disturbing about our current deficits – except that they’re too small. In the long run, something will be done about Medicare and Medicaid, because the status quo just isn’t feasible; we’ll either have real cost controls like other countries have embraced, or we just won’t have those programs. I think the latter is more likely, as it’s in keeping with our crumbling infrastructure, poor education and general jaunt toward developing nation status.

  • baychev

    you call ‘savings’ a note that takes your money and repays you with piece of paper that you just have to roll over and when you want to sell it on the secondary market, you recoup cash with lower purchasing power. that is debasement, not savings IMHO.

  • Roderick Beck


    You don’t know what you are talking about. US government yields fell before QE1 as investors flocked to the security. The dramatic decline in government yields proceeded QE1. Since the end of QE2, government yields have plunged.

    There is very little evidence from either the Japanese or American experience that quantitative easing lowers yields. Indeed, the Japanese invented quantitative easing because Japanese yields were already close to zero. In other words, quantitative easing was originally designed to pump money into an economy when lowering interest rates was no longer effective because nominal yields were close to zero. It is a way of stimulating money supply growth when lowering interest rates is no longer an option. Given that the Fed funds rate was zero, Bernanke was forced into quantitative easing. Conventional ammunition was depleted when the Fed Funds rate was reduced to a range from .1% to .3%.

    Nor is it true that the Federal stimulus package equaled 10% of GDP for three consecutive years. In fact, the government stimulus package under Obama was 787 billion dollars over three years and 212 billion of that figure were tax cuts, not government spendding.

    Given that US GDP was 14.7 trillion dollars, your claim implies a stimulus package equal to 5 trillion dollars, not 787 billion dollars

    So you are only overstating the stimulus package by a factor between 6 and 7 times.

  • Bastiat

    MMT is a strange, cultish belief system with totalitarian implications. The alchemist analogy is a good example of the MMT thought process. I’ve seen others like the one comparing the score of an ongoing sporting match reported on a stadium scoreboard with the creation of monetary units by government.(The contest is meaningless aside from the scores reported!) What the MMT folks are describing may be an accurate portrait of a fiat ‘system’ but more importantly, they unknowingly make the case for why it is wrong, harmful and must be changed.

  • baychev

    The trade deficit does not exist per se or per the sheed demand for dollars, it has many economic reasons behind it, the most apparent ones: cheaper labor elsewhere, huge oil consumption that cannot be satisfied by domestic production, competitive disadvantages in a number of industries.
    But the first two apply to Germany, Switzerland as well, but they are making up with hugely some competitive sectors, not on price though, mostly innovation, intelectual property rights, etc. To say that the trade deficit exists because others want dollars is simply sign of not understanding economics.

    Money is everything you can buy ‘stuff’ with, including private credit. M3 has been growing at around 17%, way above the GDP growth rate, that is why we have inflation in consumables. Jobs growth and wage growth are the 2 most important components of real and sustainable economic growth, without them there will be now way to dig out of this hole and peppering the economy with cheap money and deficit spending cannot possibly help, money is not economic growth, it is the ‘measure stick’ and we are pretending we are having ‘growth’ by shortening it. An old saying goes: when you are cheating, you are cheating yourself.

  • baychev

    Seriously, I do not know and you do know?
    Who pumped 1.25 trillion into GSE debt, where would have the money come from to purchase the UST debt if the Fed did not provide this money in the absense of economic growth and falling asset prices? If the Fed did not backstop with a few more trillion in guarantees other money bad debt what would have happened with the UST in the absense of money? Guess what, the same as with gold: it fell 30% because everyone had a margin call on everything in this overleveraged system.

    As I already pointed in another comment under this article: money is not economic growth, it is the measuring stick of economic growth. When you increase the money supply, you effectively shorten the measuring stick and make it look like you have grown in measurement units, in fact you are deluding yourself. This is precisely why the Bernank said that ‘the recovery just won’t feel terrific’.

  • luigi

    totalitarian implications?

    If you live in USA, you live in a country that think to be the bully of the world. It’s like an empire, full of propaganda
    and bullshit everywhere, deception, fiction and others ways to impose your thought, like “export democracy” or “land of freedom”, and you talk about MMT like a totalitarian thought?

    really? I mean, to say that a government can guarantees a job, healthcare, education and other services, is totalitarian?

  • f

    Dear Cullen,
    Do you think the yield of 10/30 UST will be up or down in 3/6/12 month time frame?

  • Mediocritas

    Exactly. It’s the global cascade caused by downgrading ratings that poses the threat here. US debt, being all pervasive, threatens to trigger the equivalent of margin calls as risk weighted contribution diminishes, or worse, triggers forced mechanistic sale due to AAA-only policy. The Fed saying “just ignore it” doesn’t change reality. Unless everyone else in the world plays the Fed’s same game, we have a potential problem here.

  • Paul Andrews

    “You can see if this is true in real time. Check out the TIPS and nominal Treasurys.”

    TIPS use the CPI, which does not include asset prices. JGBs have been great value over the past 20 years, despite the low interest rate, and even with only slight CPI deflation, because asset prices have dropped by much more than CPI.

  • http://kiddynamitesworld.com Kid Dynamite

    I guess we can only hope that you are right. From what I’ve seen from Congress recently, nothing would surprise me.

  • first

    “You are missing something: ratings are not just based on the ability to repay, but on the ability to repay in paper but in a currency that somewhat preserves it value.”


    Is this not what he his saying”
    “Now if you’re talking about inflation, that’s a different question.”

  • first

    If you do not like the credit rating of a agency don’t pay attention to it, there are other agencies that still maintain AAA rating on the US Gov but if you expect the Government to be the only judge of its credit rating you are asking for monopoly on unaccountability.

  • first

    The answer is “no” unless they find significant quantities all at once. Gold production increases at a rate of about 2% per year so this is not inflationary.

    P.S I am not a gold proponent for several other reasons but Gold could not exceed production by 12% as we have it with paper at this time.

  • first

    “money is not economic growth,” Correct its “Demand replacement.”
    an Illusion that allows cheaters to be bailed out at the expense of the public total production. If there was ever a master case of “what you see and what you don’t” this is it.

  • F. Beard

    What the MMT folks are describing may be an accurate portrait of a fiat ‘system’ … Bastiat

    If you would think about it, fiat is the ONLY ethical government money form. Should it be legal tender, one way or another, for private debts? Certainly not but that’s another issue.

  • first


  • first

    This is the very beginning of the road toward new world reserve currency.

  • Scott

    If the US continues as it has, as some point, other countries will denominate trade in something other than USD. Mr Buffett said “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will.”

    Considering the central status of the USD in world trade, the S&P downgrade is appropriate.

    As an aside, George Sorros is considered a brilliant investor as well.

  • baychev

    This is NOT what he is saying, although on the technical side it looks so. Debt is not a given, a divine shrine that we ought to worship.
    The idea behind debt is: you borrow, pay interest, repay. What almost all gov’ts mean by debt is: borrow, borrow more to pay interest, roll over. When you have no intention to repay ever, you are not good credit, but you are not in a technical default either because you are making payments on time. The intention to ever repay is what is missing from your analysis.

  • baychev

    We ought to deficit spend trillions a year just to pretend the bubble economy GDP level was not bogus? To whose favor would that be?
    I discussed it here and other posts: the 2007 GDP level is the normal economy + a huge housing bubble baked into it with all its externalities. You cannot inflate the rest of the economy with planning and stimulus to balance the economy (proven after 6 trillion of stimulus and federal guarantees). If that were ever possible, we would have been inflating the whole economy all the time through planning and deficit spending rather than leave anything to the market. Look, we can’t even inflate again only the burst bubble part of it.
    Einstein defines madness as repeating the same thing over and over again and expecting a different result. This is what the Fed does.
    We have to clean up the housing mess so the economy can grow on its own in other sectors, now the litter all over it does not let anything else see the sun. There is plenty the gov’t can do ti stimulate other sectors of the economy, but meddling with handouts and creating ‘demand’ is not amongst the good choices.

  • baychev

    I think your suggestions require moral and honesty that far exceed what exists at any bank and thus render them unworkable although good in principle. Much like the Eurozone self imposed and self controlled budget deficit cap :)

  • f
  • Peter D

    Mediocritas, Is it certain that printing more currency would lead to devaluation? No. Did S&P show any of their models for taking the risk of devaluation into the account? No. Did they show any of their models for “willingness to pay”? No.

  • Peter D

    It is quite possible that if we deficit spent enough in the past, with the correct regulatory and tax structure (tax rent, not labor), we wouldn’t have had such severe bubbles in the first place.
    Here is a quiz. Suppose the workforce grows from period to period. If all the currently employed people are to earn the same wages as before, and the new addition to the workforce is to earn, say, the minimum wage, where can the money to pay them come from? The answer: it could come from credit expansion – that is, the private sectors NFAs stay the same or it could come from increased govt deficit (net injection of FAs in to the private sector) or some combination thereof. If you rely on credit expansion, you’re basically blowing a bubble in the long run. In this simple scenario, the govt has to deficit-spend a minimum amount each year just to support current wages and the growth of workforce without pushing the economy into the unstable credit expansion territory.
    Now, as anybody who’s familiar with MMT understands, the debt – the cumulative deficit – is a political, not operational constraint. This shows, I think, that ever growing cumulative deficit (operationally equal to ever growing debt) is a necessity if we want to at least accommodate the growing workforce+current level of pay.

  • Peter D

    Warren Mosler touched on this recently:

    Looking back at past cycles it seems the support from private sector credit expansions that ’shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.
    So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

  • Mediocritas

    Printing more money won’t necessarily lead to inflation if it can’t keep pace with deleverage, however, long term, unless we all take it on the chin and accept a Great Reset, then the only way out for the world here is to print. There was never any other option long term. We can kid ourselves, short term, that we’re not in a race to the bottom, but we are.

    The reality of this world, as well described well over at the automatic earth, is that the financial sector has hidden inflation by creating multiple claims to each resource, which they get away with so long as claim holders remain ignorant of the fact. When the truth comes out, there are only two options, physical war or printing to admit the honest truth. That’s it in a nutshell (20 year view). From that perspective, I endorse S&Ps new rating, however their timing is terrible.

    The timing demonstrates the real motivation, that S&P did this as a political statement. Nothing more. This is S&P bitch-slapping DC to let the politicians remember who’s *really* in charge. Ratings agencies shouldn’t be playing politics, but this is S&P we’re talking about here, right down the bottom of the barrel when it comes to professional ethics. AAA subprime MBS anyone?

  • Mediocritas

    Buffet just got downgraded by S&P. Anyone surprised by that?

  • Mediocritas

    My bad. Outlook to negative. That’s what you get for slagging them off WB.

  • baychev

    Just rewind to the prior crisis of 2001 and the subsequent slump in 2001-2002. Did we not do exactly what you are describing to prop up the economy with tax insentives, levering up of GSEs, innovative bank lending practices, very low interest rates, relaxed credit standards which ultimately lead to expansion of employment and the perception of wealth. How does it feel now, like a grand illusion? It is not a matter of quantity or quality, if gov’t spending does not generate profits, it eventually becomes a drag on the economy.

  • Peter D

    baychev, feels like you didn’t read my comment. I said “with the correct regulatory and tax structure (tax rent, not labor)”. And yes, the deficits might have been too small, given the other factors, for the credit bubbles not to occur.

  • baychev

    I am finding these ‘too small’ or ‘too late’ deficits qualifications just too hilarious :)
    Does MMT work in Zimbabwe? They have taken it to the extreme, you cannot say it is too late or too little there :)

  • Peter D

    you wanna be childish – fine. comparing us to zimbabwe is the most puerile thing you could say here. I’m done with you.

  • baychev

    It is just not nice to block comments, sensorship is soooo communist :)
    Zimbabwe is deficit spending, creating agggregate demand in the economy when the nation has lost any faith in its currency and transacts in the black market in foreign currency. You have not experienced hyperinflation, I have, it felt just like a highway robery. And I wish you do not abandon your MMT stance the hard way by going through what I have and many others have been. If money would solve problems, we would have long ago lost memory of all ours…

  • Dumb Ox

    Huh. Isn’t that interesting? So the government treats its debt differently from the way the private sector treats its debt. How is that possible? It’s almost like government “debt” REALLY IS a different thing than private sector debt.

    Kind of like MMT has been saying all along…

  • baychev

    That we have come to the same conclusion does not mean that we agree why. I was musing over it today: gov’t debt actually is a liability. No one sane would ever hold it, there is no intention to repay it and it sertainly loses purchasing power over its life. This is why it mostly gets stuffed in pension plans and insurance companies for annuities and the like, banks who borrow from the Fed to earn a spread on it, it is just a way to enable grand scale, legalized Ponzi schemes. :)

  • baychev

    Man, please chill. I like your blog, you pick really good topics most of the time, this is why I am reading it, there is just no Reply button under some posts, I suppose it is purposeful.
    I have listened to Koo long before I found your blog, it does not pass the common sense sniff test. And if you ask me why I do not agree with you, the shortest answer would be ‘because monetary policy is a proven failure in infuencing the economy, money is second derivative of economic activity’. It is like a game with ever changing rules: if you constantly change the rules to advantage yourself and disadvantage me, I will be looking for ways to protect myself and/or stop playing with you. Guess what happens if players stop playing with the monetary game? If you want a lecture here it is:

    You need to understand how human nature treats money. When you increase the money supply (credit as well), you create inflation. Inflation is not a neutral to the economy event, it destructs demand measured in units of production, least so because it encourages hoarding and that ties up capital. You can only create inflation in the goods with inelastic demand though (if we adjust the CPI to what people are actually consuming than an arbitrary basket, inflation would be above 5%). The first beneficiaries of the new coinage are best off, because they have the money and no one else have felt its abundance. Once this money starts circulating in the system, it first goes to necessities: food and energy, then to anything else. Increasing the price of food and inflation reduces your discretionary income and from there spending (in units, not in money). Lower consumtion in units means more slack in the general economy. It impacts taxes as well, in most places, food has lower VAT rates than other goods, it is a low margin business as well so do not expect much of an increase in corporate tax receipts. More money leads to higher prices, not to increased production (and from there employment) because it is an overt attack on resource owners who by default have most money: what is the incentive of a oil producer to produce more if you are debasing his savings? What is the incentive of a farmer to produce more when he makes more by doing the same work? To work more to make even more? Seriously, we work to achieve a lifestyle, not to amass money and work more. The best way to preserve your savings is to put your money in things the gov’t cannot touch and cannot increase the supply of. Back to the loop. Lower discretionary income means lower level of services consumption, durable goods and further duress for debtors. When your liabilities are lower than your assets, you HAVE TO cut your spending, there is no way through money printing to have someone offer you more for your house than your loan is when there are millions of unoccupied and ready for sale houses or when there are millions of unemployed builders ready to build one for you for less. You just have to resign to the idea that you will consume much less for years to come… or default, strategically or not. You are smart enough to build upon all this and come to the conclusion that inflation is recessionary when induced by monetary policy and expansionary when by private credit. But you cannot induce the latter when there is ongoing credit contraction due to difficult serviceability, just no way.
    So, beyond the fanciful, abstract term ‘aggregate demand’ MMT and Keynesian theory just do not work, they do not address the problem, DEBT and its ability to be serviced, they do not take into account what drives us to work, that our labor for a long time is not skill-less commodity, that skills sometimes require many years to be acquired. If it was as easy as printing money to fix the situation, we would have done it long ago. These are just book theories, but they might be working somewhere… like in vacuum, but not on planet Earth, not thus far :)

    And when I am commenting that the U.S. deserves lower rating (as France does, Italy, Spain), I mean that we have to be perfectly clear that these countries have no intention to do anything but cheat us out of the money and return us less (in purchasing power). This makes such a debt liability to its holder, it has no place anywhere as an asset class, yet these liabilities are stuffed in grand Ponzi schemes like pension plans and any socially responsible citizen needs to cry foul about this crime.

  • baychev

    One more thing: please make clear distinction between ‘private demand’ and ‘government demand’, these are 2 different beasts and cannot be lumped together as ‘aggregate demand’. It is one thing to buy another house because you see yours and your neighbor’s appreciating and thus creating economic activity along the way, it is another thing to see a gov’t with perpetually overstretched finances spend even more to create transitory economic activity, then you act defensively unless you can frontrun it. in the real world there simply isn’t such a thing as ‘aggregate demand’, this is why MMT theory falls apart in practice, nevertheless, the Bernank will continue trying it, because his job (as Sarkozy’s) is to keep himself busy.

  • Peter D

    Printing more money won’t necessarily lead to inflation if it can’t keep pace with deleverage, however, long term, unless we all take it on the chin and accept a Great Reset, then the only way out for the world here is to print. There was never any other option long term. We can kid ourselves, short term, that we’re not in a race to the bottom, but we are.

    I’ll need you to elaborate on this. This is all too cosmic for me, sorry, I don’t know what you mean.

    You’re saying you endorsing the S&P downgrade, but I guess it’s more like you’d endorse a stopped clock showing the time correctly twice a day – right for the wrong reasons. S&P don’t have a model for willingness to pay, AFAIK, and I bet they don’t have the same cosmic view that you tried to outline in your first two paragraphs.

  • Mediocritas

    Correct, I’m saying S&P are right for the wrong reasons and correct, there’s no way on earth that they have my macro view as a dominant motivation. They’re doing this for much more animalistic, short term motivations.

    To ground my “cosmic view”, I’ll try a new angle. We’re all in a game of musical chairs, when times are good we dance around enjoying the music and all think that we have a chair waiting to support us when we go to sit down. In truth, no we don’t, and we’re going to find that out the hard way when the music stops.

    Unless new chairs are suddenly created, we’re going to fight, push, scrape, scratch, scream and tear to fight over the last chair.

    Example: social security. Our system has created multiple claims on a lesser resource and the participants don’t see it yet. Not until they go to claim will they find out the hard way that they’ve been misinformed.

    When the music stops (economic growth, credit expansion slows / stops / reverses), we all try to sit down and discover our guarantee of a chair was a lie. When that happens, wars break out at every level over the final chair(s). The only way to retain calm is for more chairs to be created, but seeing as there’s no material to create new chairs with, that material will have to come from existing chairs. In other words, we all end up sitting on smaller chairs. Taking this back to social security or US debt repayment, ever dollar demanded will be received, but those dollars will buy much less (nominal maintenance, real loss).

    That’s the way it goes. Either we have deflation and conflict, or we have inflation. I believe we will ultimately have the latter (having learned lessons from the Great Depression), meaning that many more downgrades are deserved.

  • Peter D

    This is all under assumption that the music has to stop. I agree that it has to happen when we run against the wall of finite resources, such as natural resources or space. It emphatically does not have to happen when we run again the wall of an imagined final resource such as money.
    The music has been stopping because of Minsky moments – when private debt bubbles grew too large. This could be avoided with correct regulatory structure, correct tax structure (tax rent, not income!) and correctly sized govt deficits. As I like to paraphrase functional finance + sectoral balances (aka MMT):

    Govt deficit should be accommodating the non-govt sector’s (domestic+foreign) desire to save currency + the growth of the economy. Any part of the govt spending that is not saved or does not result in growth (and thus does not pay for itself) has to be taxed away or inflation will occur

    This, by the way, means that under normal circumstances the govt cumulative deficit should be growing if only to accommodate growing population.

    Second, as we know, the cumulative deficit equals the govt debt only because of a political constraint. The govt could deficit spend debt free and as long as it did so not in excess o the above factors (or taxed away the excess) it could achieve price stability and maintain saver’s purchasing power.

    But I still don;’t see why we need to have inflation any time soon resulting simply from our current debt level. The SS that you mention is really such a small issue – most estimated talk about shift 1 to 2% of GDP to the seniors – that I would hardly mention it. Healthcare is a more serious problem. This is indeed a case of hitting a wall of finite resource. But our health care costs are as high as they are not because of Medicare but in spite of it!

    As a side note, I’ve been thinking recently that maybe the govt could switch to issuing only inflation adjusted debt. That is the rate would be the inflation rate (that would mean basically 0 real interest rate as opposed to 0 nominal rate from Mosler’s proposal.) The advantage is that savers are always guaranteed to preserve their spending power (up to one period adjustment) even if the govt inflates its debt. The disadvantage is that indexing itself may cause inflation. But this I think might be a small concern if the inflationary effect from indexing is less than 1 (because it will go to zero with time) which seems to me a reasonable assumption. What do you think?

  • Dumb Ox

    Do tell. Which one?

  • Dumb Ox

    Is there really any doubt? The Oracle of Omaha understands the realities of MMT.

    7/8/11: http://www.bloomberg.com/video/72153912/

    8:20 “The United States is, we’re a very special place, there’s no question about it, and we will pay our debts in the end, so it is not like if we don’t pay, we can’t pay. We’ve got the right to print our own money, that’s the key. Greece lost the power to print their money. If they could print drachmas they’d have other problems, but they would not have a debt problem. And seventeen countries in Europe gave up the right to print their own money. That’s enormously important. And we’ve got the right to print our own money, so our credit’s good.”

  • Mediocritas

    This is all under assumption that the music has to stop. I agree that it has to happen when we run against the wall of finite resources, such as natural resources or space. It emphatically does not have to happen when we run again the wall of an imagined final resource such as money.
    The music has been stopping because of Minsky moments – when private debt bubbles grew too large. This could be avoided with correct regulatory structure, correct tax structure (tax rent, not income!) and correctly sized govt deficits. As I like to paraphrase functional finance + sectoral balances (aka MMT):

    Always enjoy conversations with you Peter. You have a highly functional brain. Shame you had to waste it on finance! :-)

    I’ll abort a more detailed conversation because your first paragraph brings up one of those “fundamental difference” situations that must be clarified before any further conversation can really be had. (Failure to do so means talking past each other).

    In short, I don’t believe this is just a matter of numbers in the ether. We have a fundamental, physical problem.

    Fifteen years ago, I was active in disucssions regarding matters such as energy resources and population with some very bright and well-read people (such as Paul Chefurka, Nicole Foss, Jay Hanson, Nate Hagens, etc). These people spent a lot of effort scientifically analyzing the factors that provide the foundation of an economy and concluded that we had an imminent problem based, primarily, on diminishing accessibility of cheap, high-quality energy per capita. They predicted economic, social and political turmoil with accuracy, more successfully than any economist I’m aware of. Having tracked their work, I am influenced by it and share their common conclusion: that the music has already stopped and the rush for chairs is on.

    If you don’t share this view, then our downstream opinions on matters will likely be quite different. Not a problem, just nice to know why.

    Eg, as I see it, the Minsky moments we are seeing are consequences of a weakening Ponzi scheme, itself a consequence of a degrading foundation. Nothing busts a Ponzi scheme open more quickly than declining growth (exhaustion of greater fools / fresh meat), and it is this challenge to exponential growth that we now face as we run up hard against the planet’s carrying capacity / net primary productivity. Like any high-level organism, an initial exponential growth phase is healthy, but at some point, a transition must occur from growth to maturation and stability. Failure to do this, eternal growth, leads to premature death as physical limitations are hit. Our world society has already passed the maturity trigger thanks to an economic model that is evolved in a feedback loop during the growth phase but is lagging in transition. It’s time for a new (mature) model, that doesn’t require exponential resource consumption, and a way to transition to it with tolerable disruption (the teenage years).

    Therefore, I see MMT / chartalism (in combination with horizontal constraint) as a good candidate to provide a foundation for constructing the monetary component of a new (sustainable) economic model. Given where the world is now, it’s more practical to talk about damage control rather than cures at this stage.

    I will consequently reject any suggestions (MMT or otherwise) that aim to return us to a growth-centric economic model. This puts me fundamentally at odds with most economists who know no other concept than growth and haven’t considered the possibility of stasis.

    This failure to recognize a need for transition is what is keeping an obsolete philosophy in place and causing damage. The longer it goes on, the more painful the transition will be and the more likely nations will start dropping bombs on each other. Being in damage control mode, I see the only peaceful way out here as inflation.

    On your final paragraph, my thoughts are coloured by physics, particularly thermodynamics. Economists are not thinking outside the box and it shows. I can’t locate the post, but as I’ve said elsewhere on this blog, I consider inflation to be an essential attribute of money. Money *must* lose value in order to ensure adequate velocity. The trick is finding the sweet spot (2-4%). If it devalues too slowly, it will be hoarded, velocity will slow, the economy will suffer and a deflation spiral may begin. If it is too high, confidence will be lost, traders will reject the currency and trade will be impeded. The problem is that economists always insist on achieving monetary degradation via inflation, meaning continually growing denominations.

    Just use physics. Essentially, what we’re talking about is a decay rate, 4% inflation means a 4% decay of purchasing power, so why not do it in a way that keeps prices stable? Being the modern world, we can safely eliminate paper and metal currency and more to 100% electronic transactions, meaning that no currency can escape the system. Make use of the fact that everyone has a smart phone and use phone phone 2 sided authentication to validate and conduct transactions. If people don’t have phones, have the government provide them cheaply (enable infrastructure). No cards necessary. Eliminate the hundreds of various currency outlets and nationalize to a single provider. Hell, let Google run it, why not.

    At the end of each day, dock all money on deposit by a small percentage, set by the central bank / treasury, representing entropy / decay. Consequently, we get adequate decay to ensure velocity (as we do with inflation), but, unlike inflation, prices stay stable. There is no need to have price variation as nominal values need never change because inflation is not occurring. Any shift in prices is an indication that the dock % is not correct so either adjust it up or down to return prices to the proper level. It is also possible that the daily dock could be negative (a credit) if necessary.

    Using an entropy model like this, you would achieve your concept of stable money (retained purchasing power), by ‘freezing’ money. Defining an account in which the daily dock did not occur.

    I prefer implementing monetary entropy this way as it produces much less confusion in the market and heavily constricts the ability to live by trading as it will be much less possible to exploit information differences regarding price discovery (prices will be more stable and more people will know what those proper prices should be).

  • Peter D

    Mediocritas, thanks for your comment. I am not sure I am able to absorb most of it at the moment. For example, when you’re saying that the music has stopped, I can see where you’re coming from and, lacking sufficient knowledge myself, assume that your view is correct with high enough probability. Do you then mean that the already existing claims on the finite energy and food resources out there are outstripping supply? Because this is one mechanism for inflation to occur. Again this could very well be the case. Now, what I was trying to say is that there are other ways for inflation to occur as well (yeah, as if I am discovering America…) If our currently idle resources are not utilized – let’s assume that we have those – then increasing money supply in conjunction with velocity will cause inflation, as we know from the good old formula (MV=PQ). We should be concerned with preventing this component of inflation while focusing on full employment; both of which are just the proxies we have for the ideal of maximizing happiness. I agree that MMT seems like the best tool for that.
    I am totally with you that we might need to abandon the economics of growth for growth sake. In aging societies like Japan this seems to be working pretty well in first approximation (who cares about growth if everybody is employed and happy?), but in growing societies we need to keep up with population growth at least, right? Again, it might not all be sustainable in the long run.

    I see the only peaceful way out here as inflation.

    I need to wrap my head around this. I guess you’re saying that under the circumstances inflation could be the necessary (but not sufficient) condition for the “peaceful way out”.

    Essentially, what we’re talking about is a decay rate, 4% inflation means a 4% decay of purchasing power, so why not do it in a way that keeps prices stable?

    Isn’t erosion of purchasing power by definition an increase in the price level? Or maybe you mean something else by “keeping prices stable”? Such as non-accelerating inflation? I read your comment a couple of times and admittedly did not spend enough time thinking about it. Maybe if I do I’d understand better what you’re saying here. Otherwise it looks fascinating and I would appreciate any further elaboration. Maybe with a toy example?

    Thanks for the nice compliment and stimulating discussion, back to wasting my time and brain on finance :)