DEBT MATTERS!
There’s been a raging debate among mainstream economists over the last few weeks regarding government debt and whether it matters or not. The issue was highlighted in today’s NY Times in an article by Steve Rattner. He writes:
“WITH little fanfare, a dangerous notion has taken hold in progressive policy circles: that the amount of money borrowed by the federal government from Americans to finance its mammoth deficits doesn’t matter.
Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.
Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off.
If that doesn’t seem to make much sense, don’t be puzzled — it doesn’t. Government borrowing is still debt that must eventually be paid off, just as we were taught in introductory economics.”
Most introductory economics is wrong. Debt always matters. But it impacts different entities in different ways. For a currency user (like a household, business, state government, or European nation) debt always involves borrowing dollars from someone else and eventually having to repay debt. In order to service this debt you must obtain dollars to meet the repayments over time. Therefore, these entities are always constrained in their ability to pay back debt. They have a real solvency constraint.
This is not the situation for an autonomous currency issuer. The USA for instance, has no constraint in its ability to issue US Dollars. It doesn’t call China to borrow money first. It doesn’t check tax receipts. The USA, with its printing press, just adds dollars to the economy when it wants. It can help to think of the USA like a scorekeeper at a football game. They don’t have a pile of points sitting around waiting to use. They just credit and debit the scoreboard when they want. But they never take points from one team in order to give them to another team. That’s just not how autonomous fiat currency systems work.
The USA doesn’t repay the debt as Rattner says he learned in econ 101. There’s simply no such thing. That’s why your grandmother never says “I wish Uncle Sam would pay off the national debt so I could get rid of these damn savings bonds!”. If you think about that for a second, you quickly realize that grandma’s savings is the government’s debt. The governments deficit is the non-government’s surplus. This is an accounting identity. If the US government creates no money then there are no dollars for the private sector to use. If the government spends $100 into the economy then the government has a $100 deficit and the non-government has a $100 surplus (excuse the simplicity of the example here). Remember, as the currency issuer, the US government has to make US Dollars available before anyone can use them. It doesn’t borrow first to then be able to issue US Dollars. In fact, if the US government made no dollars available to currency users then there would be no dollars in existence to buy US government bonds in the first place. So the mainstream has the entire concept backwards. Rattner is comparing a household to an autonomous currency issuer when the fact is they are apples and oranges.
So what’s the bottom line – debt matters! For an autonomous currency issuer, debt doesn’t create a solvency constraint. After all, there is no such thing as the US government “running out” of US Dollars. That’s impossible. So it can always service its debt needs by creating more dollars. But what it could cause via the issuance of too many dollars is very high inflation. Some will argue that inflation is a slow default, but that’s simply not true. For instance, we often hear that the US Dollar has fallen 90% since 1913. But that’s highly misleading. What people always fail to note is the fact that living standards have soared in the USA since 1913. So, while the CPI rises almost every year and the money supply grows with time, there’s no factual evidence for the idea that inflation destroys lives. The last 100 years thoroughly disprove this notion. What could happen with time is that the US government could print dollars in excess of our productive capacity and generate a sort of negative feedback loop perhaps leading to lower living standards and even hyperinflation. This would surely be disastrous for the USA, but that’s a very different phenomenon than benign inflation or default….
Now if only Krugman, Sumner and Rowe would read this. It’s really not that difficult to understand.
Here is Yahoo taking a weak stab at the truth:
http://finance.yahoo.com/blogs/daily-ticker/no-fed-does-not-print-money-just-explain-150433185.html
The most revealing part is the misinformed comments section in the the link.
Yes the standard of living in the US is higher today than it was in 1913. One reason is because in 1913 only one parent worked outside the home. Today BOTH parents must work outside the home to maintain a standard of living equal to that of their peers. When inflation increases in the future (due to the government printing money) how is the average household going to maintain the standard of living they are accustomed to (I.e. The kids grew up with)?
The household with fewest children (i.e. Expenses) will be able to achieve the highest standard of living (not necessarily quality of life), compared to it’s peers. Most young people do not realize that it costs an average of $225,000 to raise a child. The household with no Children will have a $900,000 purchasing power advantage over the household with four children, and that number does not include the opportunity cost of the $900,000 over time ( remember that the more money the government prints the more inflation increases).
There are only X amount of resources on the planet to provide a Y standard of living to everyone. As the number of people on the planet goes up, the standard of living that everyone can achieve (Y) goes down since X is a constant,and/or the inequality between different groups of people sets in. And as inflation increases this inequality increases. For example It is NOT POSSIBLE for every household on the planet to have two cars (there is not enough oil on the planet) and an IPhone for every member of the household.
So which households get the two cars and which households do not? The households that have the fewest expenses (e.g. Credit
card debt) and the highest income (think education) get the two cars.
Bottom line is that government DEBT MATTERS because it causes INFLATION and inflation exacerbates INEQUALITY between households.
Lol, who woulda thunk: Of all people, it’s the MMTers having to emphasize that “the debt matters”
Exactly. Similar to how people are always surprised when the first come to understand the MMT view and believe MMTers think that deficits don’t matter…..
Perspective is reality.
Karl Denniger, predictably, would beg to differ:
http://market-ticker.org/akcs-www?post=200908
LOL.
Sure debt matters, but isn’t his fool’s take a bit over the top:
http://market-ticker.org/akcs-www?post=200908
LOL.
I believe that debt matters too, but not for the reasons laughed at above. I don’t spend much time at all worrying about solvency and I find the debt limit raising arguments in Congress to be an utter waste of time. As if, incredibly, we didn’t raise the limit and decided not to pay our bills. Good grief, we have a very painful BSR here, and we’re wasting time on that?
Where I do beleive debt matters is the (MMT-only?) topic called “debt sustainability”.
Jamie Galbraith has an excellent starter paper out there at the Levy Institute that is really worth a read (in it is the statement: “It is the interest rate, stupid”). Now he uses Buiter’s formula in it which I still can not derive.
He references Scott Fullwiler’s paper as well which I am studying. Scott uses a different debt/GDP metric than Buiter’s that may be more accurate.
But if we are going to have a really serious discussion about debt mattering, I think our focus needs to be on the 2 papers above.
I’d start off by giving a mathematical definition for “debt sustainability” which really doesn’t exist (1 version, debt has a limiting value of zero, other defn, debt/GDP has a non-increasing limiting value, i.e, it is a constant).
I think it’s important to distinguish between debt stock and deficit flow.
“So it can always service its debt needs by creating more dollars.”
This says debt doesn’t matter (very much).
“But what it could cause via the issuance of too many dollars is very high inflation.”
This says deficits matter. A lot.
Rattner’s column in the Times was focusing on the debt stock, the big scary number that “must be paid off” as being the problem.
The point is that debt for a currency issuer doesn’t create a solvency constraint as it does for households. As in, not being able to meet a payment. But that doesn’t mean it can’t cause high inflation….They’re different issues. Like arguing about what a patient is dying from and saying he’s dying of cancer or AIDS. Totally different diseases, have totally different causes and totally different cures.
I understand the point about the absence of a solvency constraint and I’m on the same page there.
What I’m driving towards is clarity about Rattner’s argument in the Times. He’s saying that deficit flows are bad specifically because they add to debt stock. That debt stock being a threat because it has to be serviced and/or paid back.
He’s saying look at that big number, be afraid and every penny added to it should make you more afraid. Why coddle him by saying we’re really concerned about the size of that debt stock too when the truth is that from an MMT perspective, as long as coherent interest rate and deficit spending policy are maintained the size of that debt stock really does not matter much at all.
Sure, debt service could cause high inflation if the government chose to have a sustained period of interest rates > growth but what matters there is policy competence not the size of the debt stock. The debt service side of Rattner’s fearmongering is just as weak as the “must pay it back” side.
I agree with geerussell. The debt stock doesn’t really matter that much. QE demonstrates that, as sovereign government “debt” and money are the closest of substitutes. “Debt” is the savings account balance. “Money” is the checking account balance. Moving debt to money or vice versa doesn’t make much difference. The deficit flows are more signficant, as they affect employment and inflation at the time incurred, whether “financed” by money or debt…
IN the USA how much debt outstanding is held by private parties and how much is held by the government (USA) itself? If the latter possesses the lion’s share or even if it doesn’t then how exactly is this a problem, as Denninger intones?
Technically, the US government could pay off the national debt, but that would simply remove a huge amount of private sector savings instruments which serve the private sector and the payments system in various ways. We know this following QE2. Theoretically, the Fed could have QE’d all the bonds up and swapped them for reserves. The Treasury could have stopped issuing bonds and spending would have continued as our scorekeeper continued to put points on the board. The net financial assets in the private sector would have remained the same (remember, QE is just an asset swap) and life would have gone on. Of course, there would be problems involved in removing all the US bonds, but that’s a separate issue. There’s this myth floating around that the only thing that reduces the solvency issue is the fact that US residents own much of the debt. China doesn’t have to buy US bonds. They choose to. We don’t need them to buy our bonds to “finance” the USA…. http://pragcap.com/does-china-fund-our-spending
Cullen,
I hear the Denninger’s of the world lamenting the recent deficits as unsustainable–viz, mathematically impossible. Do you see it that way? In fact could we not even double the deficit this year, next year too, targeting it to the private sector as a form of, say, direct consumer stimulus, and still have relatively little inflation to boot, but certainly no catastrophic inflation event?
It’s only unsustainable to the extent that spending reduces our living standards and leads to hyperinflation. Denninger wrote a post about me a few months back. He has made no differentiation between a currency user and currency issuer. He’s not even close to understanding the macro dynamics at work here. He’s just pushing the neoliberal position. That’s why he constantly resorts to screaming, name calling, and emotional terminology. The facts aren’t on his side, he knows it so he uses political tactics that work on people who don’t know any better or don’t care for the facts….
Just to prove how little he understands about a currency user vs issuer, I should point out his statement that we are the next Greece. Over a year ago he said :
http://market-ticker.org/akcs-www?singlepost=2139527
Any time someone compares us to Greece you need to just stop reading them. They don’t know what they’re talking about….It’s a simple tell that gives away how much someone understands about the monetary system….
Thanks Cullen. Denniger just can’t let go of his fiction. Fear sells I suppose.
Anyway, he goes on a moral rant to say this about a currency issuing, debt profligate country, which I hear many of the Austrians parrot:
“The reason is that when you emit more “money” you are increasing the denominator of currency in the system. When you increase the denominator the value of every unit of currency decreases. That is, you are directly and immediately taxing everyone in the economy that uses that currency by stealth — an intentional and malicious act of fraud.
You are stealing from each and every one of those people and when a common man does such a thing we call it what it is: Counterfeiting.”
Austrians never point out that inflation hurts savings – and 65% of Americans don’t have any savings. And helps debtors, and we have a household debt problem. So their fears, if realized, would help, at least until we’ve substantially lowered household debt.
Exactly. Inflation would actually help us right now… It would only hurt the rich or the exceptionally prudent.
Aggregate price inflation will not occur until we are in the neighborhood of full production. I’d be happy to trade the worries involved with the environment of full production versus those current.
see: http://blogs.wsj.com/economics/2012/01/23/whats-going-on-with-debt-in-u-s/
and the source:
http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth
Good piece Cullen
Ill just add that the debt that REALLY matters is private debt to banks.
As that grows out of proportion to incomes, there will always follow a massive debt deflation………….unless those with surplus dollars in the private sector OR the govt, via a fiscal operation, supplies more dollars to pay down the debt.
Yes, I should have emphasized that more. Thanks.
At some point the tax base won’t be able to keep pace with the debt. Anyone out there know where that point is? Not trying to sound an alarm, just asking cause I’m not smart enough to figure it out myself.
Given our already massive debt being some $15 trillion it looks as if the tax base has long ago lost the keep up game. Apparently doesn’t matter much, at least around the Chicago area.
Well if government debt doesn’t matter, let’s just eliminate all taxes!
Next up: mainstream economists debate existence of Santa Claus.
If we eliminated taxes the spending would cause catastrophic inflation. As I said, this matters. Best to think of the money supply as a bath tub. Taxes drain water. Spending is the faucet. The goal is to keep the tub from overflowing. Your “eliminate all taxes” would cause the tub to overflow and result in massive inflation….
I was being sarcastic. It wasn’t a serious suggestion (unfortunately).
Oh. Sorry.
The problem I have with this analogy is that as population at constant productivity increases and/or as productivity/real wealth increases the money supply should increase (and vice versa). MMT always resorts to saying that when you reach full employment (whatever that is?) or inflation heats up, then you have to start destroying money. The problem is, the theory does not manage hysteresis at all. Studies have should that it’s the second order effects (acceleration) in inflation timed with accelerating/decelerating spending/taxation/deficit that really drive things.
I’d like to see an equation that tells us what level of money and level of increase in money is optimal for a given set of economic conditions. I just don’t see that equation forthcoming other than very simplistic ones.
MMT isn’t about mind control. I’m not sure we should encourage any economic theory which is. How else do you propose to control hysteresis? Sure, if the players in the economy do something totally crazy, MMT isn’t going to ride in on its white horse wearing its savior suit. I’m not sure that has anything to say about whether the theory correctly describes the monetary system or whether the theory correctly prescribes how to generally manage the economy, eradicate inflation, recover from recession, etc. I’m not sure it needs to manage crazy to be a functional and factual theory.
Out of curiosity, which economic theory do you know that currently proposes to manage hysteresis?
“I’d like to see an equation that tells us what level of money and level of increase in money is optimal for a given set of economic conditions. I just don’t see that equation forthcoming other than very simplistic ones.”
I have an easier route than trying to model the entire economy in a single equation from which to generate predictions: why not recognize qualitatively, increasing the money supply and distributing this effectively to the people who will use it for spending will have the effect of creating demand and therefore jobs, et al (this should be without dispute; if you give money to people, they as a rule will spend it which creates jobs). With this accepted, politicians and central bankers can cautiously commence in increasing the money supply and the rate at which this is distributed. Deciding on a figure I can’t imagine would be too much difficulty. These observations can lead to confirmation of the theory and provide the opportunity for any needed adjustments.
This is a statement without a basis in fact. You certainly don’t know that severe inflation would result if taxes weren’t collected. The 2012 budget is 3.7T with 2.6T covered by revenue. The deficit, 1.1T doesn’t seem to be juicing the economy enough to do squat. Would another 2.6T really lead to inflation? It probably depends on where that 2.6T goes. If it’s going to the rich, or quickly to foreign entities, it seems unlikely to cause inflation at all. And besides, inflation is a great way to redistribute wealth from creditors to debtors.
But the point is that we don’t know, and we shouldn’t make decisions based on suppositions. Perhaps taxes should be reduced until we see undesirable effects. One could even figure taxes based on some formula (like the Fed apparently does in it’s policy setting).
It’s tough understanding the sarcasm of this, because there are a lot of people who do in fact say this with all seriousness to try to take the MMT approach to the extreme.
Just like… “Why don’t we just give everyone a million dollars”!!
just giving everyone a million dollars is probably a good entry point to explain it…. first, the US could give everyone one million dollars tomorrow. We dont need China’s help to do that. And we won’t break the government’s back doing it. However, the cost of everything will rise dramatically the very next day, and continue until one million dollars buys you about $5 or $10 of today’s goods.
So we can do it. But we shouldn’t. On the other hand if we made all education free the debt would go higher, and there would be a huge payoff down the line.
Productive spending, vs. non-productive.
Good words again.
As your comments implied, if wages rose proportionate to rising prices and at the same time as the rising prices, the net net would be nothing. Real wealth would be unaffected. The harm in inflation is more subtle. It can render trade by means of the state money impractical, it can completely disincentivize lending through the devaluation of debt (debt would certainly have to be restructured to account for this new norm), and so on.
The government’s deficit is the non-government’s surplus.
If that was the case, then the books of public and private accounting would be balanced each year.
When the government creates dollars out of thin air, how is the private sector’s savings increased?
Please walk us through it on a step-by-step basis.
Michael:
You ask a great question.
What percentage of tax receipts going to pay just the interest (not the principal)of the debt would put us in the danger zone?
By the way, for you to suggest, even if accurate, that the U.S. government has advantages that Europe does not possess does not make sense, emotionally.
While the European nations are having to cut back, we can keep partying on? I don’t think so – from a subjective point of view, even if objectively, it made sense.
Don Levit
Interest is about 1.5% of GDP. Not a lot. That’s a myth certain people love to push. Japanese bond traders have been dying over that myth for 20 years now….”just wait til the rates rise!”….But the rates are controlled by the Fed, ie, connected to the rate of inflation, ie, connected to the rate of economic growth., ie, connected to our spending relative to productive capacity….If you’ve followed my bond market calls over the years you’ve made a boatload of low risk money. That’s not me being some bond market guru. It’s me understanding the system and its basic functions. The point is though, the interest rate surge idea really relies on a massive cost push caused by oil (which would likely result in recession and deflation), a massive economic recovery (in which case debt becomes a secondary concern), a massive increase in spending relative to productive capacity (which likely results in economic boom), or a collapse in output (which would be a real catastrophe).
Europe is made up of currency users. They’re like US households. They can only take on so much debt before they reach the solvency ceiling….The party always ends at some point for those who are solvency constrained….
When the US govt spends money, they credit bank accounts. That increases your income. So, the govt credits the bank account of an employee at the DOJ. He now has $100 more than he did before. If he wants to save some of that then he might buy some bonds. It’s a simple and stupid example, but govt deficits create net new pvt sector financial assets….
Hi Cullen,
“”But the rates are controlled by the Fed, ie, connected to the rate of inflation, “”. This seems to imply that the Fed will automatically and voluntarily fight inflation whenever this one appears?
Recent history suggests that Fed can impose negative real rates, and ignore cost push inflation..Could you elaborate on what you mean by rates “controlled “and “connected ” ? It’s not very clear to me
“The government’s deficit is the non-government’s surplus.
If that was the case, then the books of public and private accounting would be balanced each year.”
That is the case and they do balance.
http://www.levyinstitute.org/multipliereffect/wp-content/uploads/2011/11/US-Sectoral-Balances_Berlin.png
“When the government creates dollars out of thin air, how is the private sector’s savings increased?”
If the govt creates dollars simply to credit a govt account (a third of the national debt is intergovernmental), nothing. However if dollars are created to spend per appropriation warrant, then when the govt draft is deposited (or direct deposited) by the recipient– whether a federal employee or Social Security beneficiary or a defense contractor– the spending instantly increases private sector savings.
“If the govt creates dollars simply to credit a govt account (a third of the national debt is intergovernmental), NOTHING.(???) However if dollars are created to spend per appropriation warrant, then when the govt draft is deposited (or direct deposited) by the recipient– whether a federal employee or Social Security beneficiary or a defense contractor– the spending instantly increases private sector savings” – beowulf
The way I see the accounting, when the government creates new money by issuing bonds it can only replace existing money with an equal amount of bonds so net DOLLAR assets can’t increase although net FINANCIAL assets and thus “savings” does increase.
If this were the only way money could be created we would still have roughly $75 Million in NET dollar assets in the economy (assuming a closed economy) based on the National Debt at the beginning of the Republic in 1776 (not including credit money which does not add to NFA’s). I would say zero net dollars but there may have been some conversion of scrip existing that happened at the formation of the Republic.
Thus, the only way I can see the number of NET DOLLARS (not NFA’s) increased is inter-governmental borrowing:
Fed increases bank reserves/banks use reserves to buy bonds giving Treasury dollars/dollars spent into the economy increase NET DOLLAR assets/Fed swaps reserves for bonds held by the banking system/Fed ends up holding bonds.
In my mind the government lending to itself is the only way to increase NET DOLLAR ASSETS in the non-government sector.
Am I wrong?
How are the books of public and private accounting balanced – just because you say so, or the formula says so?
From a logical perspective (and we must face reality as best we understand it)), how can anyone in their right mind think that with all this debt created, even out of thin air or digitally, particularly over the last 3 years, there are corresponding savings?
Don Levit
What do you think causes a recession/depression in the first place?
Don, I have seen you comment at this forum for what seems to be at least a year. Are you serious with these very basic questions? Do read Cullen’s posts?
…”how can anyone in their right mind think that with all this debt created, even out of thin air or digitally, particularly over the last 3 years, there are corresponding savings?”
The magic of accounting – pretty simple actually.
Money can (and does) exist apart from a government producing it. If I give you a written promise to work, say 10 hours in exchange for you giving me your cow, I have in fact created money. (Subject, of course, to my continued well being and integrity.) This is because the former cow owner might choose to exchange the promise for some other good or service.
Governmental issuance of currency is simply the most convenient arrangement since it includes all members of the national society.
If government manages money creation irresponsibly, people and associations will convert to non governmental forms of money.
This is the ultimate constraint on government money creation and spending. Usually, but not always, governments grasp the need for discipline before extremes are reached. Violence is among the probable consequences when they do not.
Because corrections are unpredictable and unpleasant, governments can bend the rules substantially before being held to account.
The monopoly power of government money issuance exists only as long as the populace consents to it.
One example of US currency avoidance is the widespread practice of employer provided medical insurance, which came into being during wage controls during World War II.
That private component of endogenous money creation is certainly a major factor. So long as people are willing to accept something as money, it becomes money. But that bank deposit is not simply an exchangeable bank credit like it sometimes was back in the day before the creation of central banking. The bank is creating liabilities for dollars when it issues those loans. The dollar is the official medium of exchange and unit of account in a public monetary system controlled and operated by the national government – acting as the representative of we the people. The possessor of a demand deposit in dollars is legally entitled to demand the equivalent of value in a form which is an explicit liability of the government.
The creation of additional deposits through lending drives the creation of additional bank reserves after the fact. The banks are members of the Federal Reserve System, and so its broad dollar creating powers are subject to whatever rules we have, or have not, put in place regarding reserve requirements, capital requirements and other regulatory requirements. They operate as profit-making branches of a government-run franchise.
I think the coercive monopoly myth might hold some fact though. Unless I am missing the meaning of what you are referring to, the IRS criminal division is still a pretty coercive force. We are not free men. We are forced to get our hands on what the government determines money to be, in order to extinguish our debts they impose. I can try to barter with the grocer for food, but in the end, we need to exchange our bartered goods for dollars to pay the tax man.
Am I missing the point?
Of course that’s the case now. We live in a time of extraordinary peace. But the history of hyperinflations and currency demise shows that taxation alone is not enough to hold a currency together when other exogenous factors reduce the power of coercion. The problem in a hyperinflation or even a high inflation is the development of social unrest, black markets and tax evasion as currency users realize they can drastically reduce their taxes by waiting a few months to pay….This has played out hundreds of times throughout history. Granted, most cases of hyperinflation are not even remotely comparable to the USA currently and I’m not calling for hyperinflation or currency collapse, but I’d be a fool to claim that it could never happen here….Taxes alone are not enough to maintain a currency’s sustainability. And I argue they’re not even the most important driver….
I think nothing short of a revolution would cause that. My guess is we are pretty far from that….. hopefully.
Taxes are a buffer against that, and the threat of prison is huge. Also – interest rates that the Fed controls should be another active buffer against debasement or hyper-inflation. I haven’t done the research, but do you know what happened to interest rates in Zimbabwe or Weimar? My guess, without looking, is that the market set the rates since they borrowed in foreign currencies, not their central bank/government. Did they have the ability to lift rates in those situations to protect their currency? Anyone? Please save me from the google vortex!
So what we need to do is Tax the Corporations and not the individuals to restore individual sovereignty… yes, they will pass it on, but the user will have the capacity to pay the tax passthrough without their own taxation… net/net zero.
Besides, Taxation has nothing to do with Monetary Policy, it has everything to do with Command and Control however.
Some (all?) MMT’ers stance that fiscal policy can be used as a proxy of monetary policy is foolish and ignores a good deal of real problems. You just can’t raise or low taxes or change the tax structure that easily as it’s a social issue which affects the different economic actors.
You would never be able to do it in time before trouble and it wouldn’t be flexible enough and it would ignite sociopolitical debate. You only need to see debates right now. Monetary policy can’t be conducted through taxation no matter how you spin it and probably never will.
This is not the situation for an autonomous currency issuer. The USA for instance, has no constraint in its ability to issue US Dollars. It doesn’t call China to borrow money first. It doesn’t check tax receipts. The USA, with its printing press, just adds dollars to the economy when it wants.
Well, given that the US possesses currency sovereignty, that’s the way it could work, and perhaps should work. But under current institutional arrangements, the US Treasury can only spend if it possesses sufficient balances in its various accounts. And it can only acquire those balances from tax revenues and debt issuance. These constraints are voluntary creatures of law and custom, so they can be changed. But those are the rules we have now. The treasure of the US can’t just credit accounts willy-nilly.
Since the Fed buys up some of the the debt that is issued, and will likely to continue to buy up that debt so long as it uses open market techniques to manage interest rates, some of the “debt” is an accounting fiction that effectively represents a liability of one part of the government to another part of the government, and can always be “rolled over” by just adding to that intra-governmental liability. Unfortunately, the operation has to be mediated by the private dealers, which enables them to take a cut out of what should be a purely intra-governmental operation, and could conceivably give them an unwelcome veto point at some time in the future.
However the mechanisms might be devised, it comes down to this: If, during any time period of interest, the government is determined to spend $X, but only wishes to inject $Y of liquid money into the economy in accordance with the price stability policy constraint, then it needs to extract $(X-Y) of money through other operations – by some combination of taxing during that same period or borrowing from the private during that period. Some % of the borrowing never becomes a Treasury liability to the Fed, but remains a Treasury liability to the private sector. That means it is a commitment for a future injection of dollars, and might require a compensating removal of dollars to manange the price stability constraint.
I would be much more comfortable with a system that streamlined the fiscal dimension of monetary policy by permitting some degree of direct borrowing from the Fed … or even better, a system that permitted direct credits from the central bank to the Treasury when we need to expand the “deficit” – the gap between spending and tax revenues – without creating government liabilities for future payments to private bondholders.
This whole business of only allowing deficit expansion by the issuance of more private sector debt – even if the Fed then buys up much of the debt – creates semi-bogus debt liabilities on the government books that bamboozle the public about the nature of the underlying operations, and allow opponents of public sector demand management to turn these operations into a political football.
Dan,
Is there any operational reason why the mechanism you offer can’t be employed? Are there strict statutes governing the process constraining what you desire?
Beowulf is the person who seems to understand all of the statutes involved. But as I understand it, right now:
1. The Treasury department is not permitted overdrafts on its Fed accounts.
2. The Fed is not permitted to buy government paper directly, except in tiny amounts.
As Beowulf and Scott Fullwiler have shown, the Treasury does possess coin seignorage powers under current Congressional authorizations that allow the Treasury department, in principle, to exercise monetary authority on its own outside the ambit of the Fed.
But it seems to me that such a move would be politically tricky to say the least. The government has to maintain confidence in its currency, and confidence is a slippery thing that involves taking account of the attitudes of even people who do not understand the currency system very well. Creating a one trillion dollar coin and depositing it in a Fed account to license one trillion dollars of additional spending is really no different than issuing some massive amount of new debt that is then vacuumed up by the Fed and perpetually rolled over through joint Fed-Treasury agreement in a way that creates one trillion dollars of additional federal spending and net dollar creation. But psychologically, I believe the public impact of reading in the newspaper that the government is now producing large coins whose spending power is almost pure seignorage would be more shocking than the debt issuance games that are played instead. Most people don’t have any understanding of our monetary system and the role seignorage plays in it routinely. The coin business would freak them out.
The key point on a Tsy auction is that the Fed provides the reserves to settle the auctions. This is done n large part through repos to ensure there are enough reserve balances to settle the day’s transactions. This is why the reserve forecasters at the Fed are constantly in contact with the Tsy. They’re working in tandem to make sure the auctions never fail. It’s not a financing operation even if you buy the old overdraft rule….
It’s a semantic point though. The Fed is the Tsy’s fiscal agent. This is the issue in Europe now….The ECB is a foreign central bank whereas the Fed and Tsy are operationally two pockets in the same pair of pants….
Right, the best way to think of the Fed is the fourth branch of govt. Just as the FBI has to ask a federal judge to issue a search warrant, Tsy has to ask the Fed to adjust monetary policy.
The reason no one ever explains Fed operations like this is because the Constitution mysteriously stops at only three branches. The Fed is on rather tenuous ground legally (since the Constitution recognizes no source of executive power independent of the President) so the Fed is usually in sync with Tsy since the last place the Fed wants to be is in the middle of a constitutional crisis. If the President went to the Roberts Cort to compel the Fed to follow his direction, he’d unquestionably win. Better to go along to get along.
beowulf, do you have a link to your explanations regarding the legal status of the Fed? I’ve heard from others that the Fed has been established as an independent agency and that the Chairman can only be replaced “for cause” by the Executive Branch, which basically means matters of policy are not sufficient grounds for the President to intervene. This of course doesn’t preclude action from the legislative branch.
Section 10 of the Federal Reserve Act states:
“Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. “
My interpretation is that the Treasury Secretary is ‘senior’ to the Fed Board of Governors. Beowulf could certainly correct me if i ‘m wrong.
In terms of federal law that provision can be thought of as the “ties go to the Secretary” clause. However the Supreme Court has been moving in the direction of the Team Scalia “the unitary executive” theory of presidential power. That is, the President’s executive power can’t be constrained by Congress (or Courts) limiting when and why he fires executive branch officials.
Here’s an insightful blog posting about the Fed and the unitary executive doctrine as well as an interesting appeals court opinion from last year (written by DC Circuit Judge Brett Kavanaughm a likely future Republican Supreme Court pick). His opinion is about the Nuclear Regulatory Commission and never mentions the Fed but it will be of critical importance to the Fed when the Supreme Court (before or after Kavanaugh gets there) gets around to adopting his line of reasoning.
http://volokh.com/posts/1207512634.shtml
http://www.leagle.com/xmlResult.aspx?page=5&xmldoc=In%20FCO%2020110701130.xml&docbase=CSLWAR3-2007-CURR&SizeDisp=7
Beowulf, thanks. Can you expound on what you mean by the Tsy must ask the Fed like the FBI asks a judge? What is the Tsy asking in the real world, and if they aren’t really asking and the Fed is going along, how is it going along? Do you mean that it has to provide enough reserve balances for tsy auctions to settle? But is this really going along with the Tsy? The Fed has to provide reserve balances at some price…
Also, since ‘tie goes to the Tsy,’ does that mean the President could indirectly work through the Tsy to get what he/she wants from the Fed? This seems to be a key provision the President doesn’t have with respect to other independent govt agencies, no?
In reality you do not see such conflicts. The Fed operates almost as a 4th branch of government. The Fed can make or break Presidents. Volker broke Carter, for instance. He raised interest rates to kill the inflation of the 1970s, and he killed the reelection of the guy who appointed him. Why do you think the Fed Chairman only has a 4 year term? That is to prevent the Fed from having almost total political independence. And on this note, I think all the Republican candidates have made a grave strategic error. They have all vowed not to reappoint Bernanke, and this means that if Bernanke wants to stay in power (he does), he will have to engineer the reelection of Obama The Magnificent. This means Obama’s rumored and long awaited super mega automatic refi plan that will refinance trillions of dollars worth of underwater mortgages is a go. Count on it.
But is the monetary authority of the US properly an aspect of executive power, or is it a power of Congress that Congress has delegated to an agency it created? I always thought it was the latter.
Dan, there are a few congressional agencies (like the CBO or GAO) that provide reports for Members of Congress. They are hired by Congress and can only be fired by Congress (as personified by the House Speaker and the Senate Majority Leader).
The Fed does more than provide reports, it exercises executive power which is clearly in the President’s wheelhouse. What’s more, the Board of Governors is appointed to fixed terms by the President. Every agency and cabinet department was created by Congress, there was no Treasury Department until Congress created one in the 18th century and soon after delegated its coinage power to its Secretary.
Hi Cullen – interesting article. What is your estimate of the rate of growth in the productive capacity of the US economy?
I think 3% a year is a reasonable guess. Therefore, the US Government can print dollars on average at around 5% a year to maintain price stability or benign (i.e. say around 2%) inflation.
However, my worry is that as government debt approaches 100% of GDP, the government will have to print around 4-5% just to meet interest costs. This doesn’t leave much room for deficit spending if there is an adverse shock to the economy in the future. If they did print more it would cause higher rates of inflation, which as you say, can lead to a negative feedback loop.
Given that the US will approach 100% debt to GDP in the next few years, do you not think they are sailing a bit close to the wind, and that high levels of future inflation are a serious worry?
thanks
PG
I would also like to hear the answers for your questions, PG. My concern is that debt is increasing significantly faster than productivity, and there is no end in sight for that problem.
Ben
beowulf wrote:
If dollars are created to spend per appropriation, the spending instantly increases private savings.
Well the person has more money to spend, and he may spend all of it – resulting in no savings.
In that case, we have an ongoing debt, but consumed resources in which to pay for it.
“Well the person has more money to spend, and he may spend all of it – resulting in no savings.”
Unless he spends his money on postage stamps, net private savings remains the same. The private sector buyer’s savings goes down and the private sector seller’s savings go up.
)
Savings can be shifted from account to account like with commercial transactions and they can be shifted from a demand account to a term account by buying Treasuries.
The only way to destroy net savings is for the govt to tax it away (or sell you a lot of stamps).
Right – its best to think of the economy as a “closed system”. Someone has “savings” in the bank. If they do spend it all, those savings are not destroyed in any way they are only “destroyed” from the perspective of that individual who now has no savings!
For example, an individual pulls their savings from the bank and buys a new car. Then guess what – those savings end up as “savings” in the car dealer’s bank account. They will then pull some of their “savings” to pay their supplier … and the “savings” end up in someone else’s bank!
In summary, savings/money are not destroyed through being spent – they just get passed around the “closed system” that is the economy. Its not possible for everyone to simultaneously “dis-save” – someone has to sell the goods/services and be the saver. Its the same for this stupid logic that every country is going to become healthy running a German-style trade surplus – someone has to run the deficit….
Yes, but the dynamic matters too, a lot. How the money flows and how stocks are accumulated or spent matter. It’s not just like the Krugaman’s of the world say: “for each debtor there is a saver and hence debt in aggregate does not matter”
It matters a good deal, the dynamic of money and debt affects demand and supply, including demand and supply of credit (leveraged fiat money by the banking system) which in turn feeds into the economic activity and again (it’s a loop) into the supply and demand of money.
Don, as I understand it, “savings” here refers to the total net change to private sector monetary stocks. If the amount of money entering the private sector during some period exceeds the amount of money leaving the private sector during that period, then the private sector is adding to its monetary stocks and is thus net saving during that period. If the person spends the money in the private sector, then it is moving from one private sector account to another, but making no net change to the monetary stock.
But I think I agree that total private sector monetary savings is hardly the the only quantity of interest here. The same level of monetary savings is compatible with different kinds of activity with real non-monetary goods. Those goods might be hoarded as stocks, used up in “consumption”, or used up in productive processes that add value to the total stock of non-monetary assets.
Going out on a limb here but one question I have over debt issuance is that with the current deficit levels, the government is effectively adding over $1T per year to the economy. That is a very significant amount of money, equivalent roughly to 6% of the US GDP. My assumption is that this new money should increase the money supply and therefore produce a devaluation of the currency equivalent to the difference between the amount of new money to GDP and GDP growth (~6% – ~2% = 4%)
First I thought that the debt implosion was destroying money as well, but for what I know from MMT only the government can create new money, and therefore I would assume that only the government can destroy old money. In consequence, the debt implosion does not destroy money – unless the FED took the losses and these were not compensated by future deficit spending…
So the question is, what happens in the long term? Public deficit above the rate of GDP growth has to be compensated at some point with public deficit below GDP growth, to keep the value of the currency (including whatever inflation rate is desirable?) That, I would say, is the real impact of deficits.
Can’t we just say that every time the government spends a dollar – either as a direct transfer “gift” or as payment for some good or service – it creates a dollar, and every time it collects a dollar – either as a direct tax, or in payment for some asset or service – it destroys a dollar?
Dan, you are absolutely correct, but when the government uses public debt to spend, it precisely means that it is creating more money than what is destroying with taxes.
If the amount of money created meets the growth of the economy, we are OK, if it doesn’t you either have deflation (a $ is worth more now than before if the growth of deficit is smaller than GDP growth) or inflation (if the growth of deficit is larger than GDP growth.) These can be non-correlated for a certain amount of time, but in the long run they should be somehow related. I know that I am ignoring the money supply and that may be why my post is wrong, but I think I need help on that matter.
Dan, you are absolutely correct, but when the government uses public debt to spend, it precisely means that it is creating more money than what is destroying with taxes.
Not in the immediate term. The debt it issues is purchased by someone in the private sector. So if its additional spending is matched by its borrowings that means that what it the government spending into the economy the same number of dollars it is extracting from the economy via the bond sales.
But the debt represents a commitment to insert dollars back into the private sector in order to pay off the bond. Whether the whole operation amounts to a net increase in dollars depends on what other operations the government undertakes when it makes those payments. If it chooses to match its debt service dollar for dollar with taxes, then its a wash.
Hi Dan,
Thanks for the follow up. I see your point, but even though the government sells bonds and therefore takes $$ off the system, I believe that we are in agreement that bonds and $$ are pretty much equivalent. The Fed will take those bonds as collateral for loans, so in effect the $$ could return to the economy at any time before maturity. And the interest on the bonds is inflationary as well…
Money is also destroyed when the Private Sector deleverages. If you have mortgage defaults equal to 4% of GDP, then the 4% of GDP extra deficit spending just disappears into a black hole.
Andrew P, that is my understanding too…. but isn’t it also true that money is created by the banks when they lend, and is also destroyed when the borrower pays it back? So it isn’t just a default that destroys money. If I’m understanding the operations correctly, then during a deleveraging period there is a substantial amount of money being destroyed.
By the way, speaking of inflation fears and money printing – aren’t the Chinese just printing untold sums, totally malinvesting it, and are considered an economic miracle? Why aren’t people comparing our spending to theirs?
“and are considered an economic miracle”
Well, only by some people which usually is looking at one part of the equation (“now”). How much value is adding and real economic wealth is creation is a different matter altogether, or do you think that exponential grow in private leverage is sustainable and that wages not being able to keep up with cost raising and inflation is wealth creation?
You have to look further.
Andrew,
Thanks for the follow up. I was thinking about that too, but as far as I know, the banks do not create money, that is a fractional reserve banking myth. They need collateral to provide a loan, another issue is whether that collateral can keep its value. In any case, if the loan goes sour, no money is destroyed, the guy who sold the goods and got the money of the loan, has it. The bank just does not recover that money, and it has a loss, but no money is created and no money is destroyed – unless the Fed ends up involved. That is my understanding from MMT…
A bank creates money when it lends. Money is destroyed when loans to a bank are repaid. It has nothing to do with collateral. If someone defaults on a loan, there is no change in the money supply.
No, the government is not the only entity which can create new ‘money’. This depends a lot on your definition of money, the private system is the generator of most money or pseudo-money in the system. Through leveraging and re-hypothecating what you call “money” (o HPM, or fiat, bank reserves with CB’s) the private system can create assets which can function as some sort of quasi-money: from the ‘highest’ quality (credit money, which for most people is identical to fiat, as it has the same nomination and market value) to ‘lowest’ (MBS), financials instruments created and leveraged throught the shadow banking system.
All these can create inflation, propel economic activity etc. but with a cost to the private sector balance sheet and sustainability, in that differs from the public created pure fiat money, and that’s why it’s important to understand the difference. But that pseudo-money destruction (or ‘devaluation’ in case of, for-example can very well affect the economy.
Cullen,
Serious concern for me after reviewing much on MMT these past few days. I recognize the accounting relationship involved with fiat currency but it appears to be merely semantics to me. Fiat currency is purely an IOU and that loses all value in the eye of the holder if the issuer truly does not have the conviction that it will pay the bearer not just the nominal value, but the “real” underlying value capable of exchange for equivalent goods & services. More precisely, if the markets believe that the US or any other issuer of currency will just print money/electronically credit accounts without the constraint of intending to balance the nation’s books so that revenues approximate to expenditures over time, the currency will quickly lose value and essentially become worthless (eg Zimbabwe in the extreme). I suppose I am inquiring if this is it your contention that this would be ignored by the markets?
When Obama says “running out of money”, he seems to be acknowledging the imperative of ensuring the currency of the US Govt maintains real value that will quickly be erased if that relationship is broken in the markets eye. So, is there not the genuine political constraint of Congress not approving spending for fear that the markets will erode all value in the dollar over time if it comes to believe that it does not have to balance the books?
I might be reading into your comment wrong, but you seem to be feeding the old dollar devaluation myth. That’s this idea that a rising CPI and dollar devaluation has ruined living standards. But that’s not true at all. Over the last 100 years the CPI has soared, the money supply has soared and so have American living standards….I’m not saying that this couldn’t all reverse, but it would most likely be due to a collapse in output and not just a monetary phenomenon. Maybe see my hyperinflation page for more. It’s under tools and resources.
Cullen, no, sorry I was clumsy in my use of language. Thanks for your reply. I am not saying that a rising CPI or dollar devaluation has ruined living standards. The markets throughout that period of rising CPI have always believed that the issuer of currency (be it US, Japan, UK etc.) will repay it’s debts and recognizes the relationship between the balancing of public expenditures with revenue.
However, let’s assume for the moment that Warren Mosler or Randall Wray were announced as US Treasurer tomorrow. Do you not think that markets would crush the US dollar as they have crushed Greek Sovereign debt, if they believe that Congress would now ignore all debt ceiling constraints and permit the “printing” of money and truly sever the relationship/need to offset those “expenditures” with revenues?
Cullen,
Thanks again for taking the time to reply.
I agree that rates and output would not immediately tank, but I believe the currency would be crushed and inflation would would be considerable as the cost of imports exploded. I think the interest rate curve would then steepen sharply.
The markets would perceive that their dollar denominated assets have significantly less value. For me (and many market participants), it is the implicit understanding that the issuer will offset expenditures with revenues and not just “print” (as it is commonly understood).
John Hussman made a similar argument about QE2 when it was first rolled out. He said the dollar could crash. I refuted it in real time:
http://pragcap.com/say-it-aint-so-john
I don’t deny that the markets could overreact to money printing or the potential for it, but there’s very little real evidence showing that this results in a sustained trend that impacts the real economy. The truth is that the market doesn’t wield its will over the US govt. As the currency issuer, the US govt holds the cards and misunderstanding the way the govt’s operations impact the real economy usually lead to really bad bets or misunderstandings. Now, it Warren actually came into office and rained down 15T in new money in a year then we would have a serious problem, but that’s not what he’s proposing (although I disagree with his job guarantee idea)….
Maybe you should cozy up to Newt Gingrich, and teach him the ins and outs of MMT. He is a smart guy who learns things fast.
“American living standards have soared…” What the heck does that mean? I think you think it means much more than it does.
I agree that the government needs to follow policies that don’t cause significant price instability. But I don’t think this is a matter of balancing the books.
If you think of the dollar as an informal proportional “claim” on the productive output of the nation, then the crucial thing should be that people are able to predict with reasonable accuracy the future purchasing power of the dollars they acquire, and that the purchasing power of the dollar is never declining so rapidly and in such an unpredictable way as to make it impossible for people to save prudently and manage expenditures over time in a way that allows our society to produce and grow, rather than just consume what we have. But the economy is almost always growing, and thus the total number of dollar claims needs to grow accordingly, just to maintain price stability. So the government’s net creation of dollars should probably always be positive. Government surpluses have historically been followed by real economic contraction.
The real beef I have with this “running out of money” business is that the power of the public sector always comes from the real goods and services it is able to avail itself of in order to generate the public goods and services government is particularly well-suited to dispense, and those input goods and services come from the public. Money is just a financial instrument for the organization of transactions and processes in the real economy. We can always create the financial instruments we need to do whatever productive things we want to do with them. So the real question is always what the public wants to do with the real, non-monetary private assets in existence. Does it want to leave them all in private hands, or does it want to convert some of theme to public use for public purposes. There will always be pro and con arguments for some proposal for an expansion of public enterprise and investment, or a publicly supervised redistribution of private goods. But being “out of money” can never be the reason not to do it.
Dan, Thanks for reply.
I am struggling to come to terms with the notion that while “Money is just a financial instrument for the organization of transactions and processes in the real economy”, that said money will not lose real value if the markets perceive that the issuer really has no intent of “repaying” at full value…namely that Govt revenues will come to match expenditures over time, and that budget “deficits” do not move inexorably higher & higher.
I fully acknowledge that the issuer can always credit accounts, but the markets will discount the value of that transaction.
The markets are a guessing game. They’re just placing bets. What drives the direction of the economy is real output. That’s why the QE2 trade blew-up in a lot of people’s faces. Traders assumed the operation was stimulating the economy through money printing. But it was doing no such thing. It was only altering the composition of net financial assets. It swapped checking accounts for saving accounts. Nothing more. The market made big bets and the trend in real output is what ultimately guided the end result of the program. Since it didn’t change anything in the real economy the markets eventually corrected. What they missed in the meantime was the real stimulus via the large deficit….
It seems to me that the confidence factor all pertains to predictability. Suppose that there were an absolutely stable, completely predictable daily inflation rate that amounted to 20% inflation rate per year. That’s high. But if it were indeed completely predictable and completely regular, every one-year loan contract would just contain a 20% inflation premium, with no bearing on real interest rates. Banks would provide a 20% annual interest on savings in addition to the real interest rate they provide, and charge their loan customers a 20% premium as well. The Fed would run higher target interest rates, the Treasury would pay out higher yields, and the Fed would be pumping much more money into the economy as it paid the 20% higher prices for Treasuries. If everything goes up together, in synch, like clockwork, it makes no functional difference.
Just don’t take your money out of banks and put it under a mattress in currency form!
But in the real world, you couldn’t have an inflation rate that high without having a lot of discontinuities and volatility. There would be big winners and big losers, and ordinary transactions would have too much of a casino aspect to them. Price stability means that the volatility in the price level oscillates around in a much smaller window, so the country can do its ordinary business without too much of the casino effect gumming things up.
High inflation is also a problem if a government must index its bonds for inflation, as the UK typically does. If everything is inflation indexed, even a currency issuer can hit the event horizon – when a finite digital computer memory simply cannot hold enough exponents to maintain units of account.
Take your point
but wouldnt say the UK “typically” does it, I believe its around 25% of the gilt market? correct me if im wrong. You say “must” but we dont have to, wasnt it originally designed for the pensions industry where it would make sense to have them?
Cullen,
I’ve always taken issue with you on your consistent argument that because we can do more things in less time, it “…..is the fact that living standards have soared in the USA since 1913″. I’ve taken issue with you, not because I’m certain you’re wrong, but because you seem to cherry pick measures that support you view and ignore others that disagree. Simple ones that quickly come to mind are the need for two incomes required to meet expenses now when one income used to, and those two incomes are required despite the fact that family size is on average less than half what it was even one generation ago, let alone 90 years ago. If the second income earner in the family now has to spend all day outside the home it seems to raise questions about a claim of having so much more time on our hands and a vastly improved standard of living.
But rather than belabor the points of our disagreement, I’m interested in your views on a couple questions. For argument’s sake, if I conceded your point that our “…living standards have soared in the USA since 1913…”, then…..
1. Is it your view that the 90% devaluation of the dollar since 1913 CAUSED the improved living standards, or the devaluation was NECESSARY to achieve the improved living standards?
2. If the answer to either is “no”, couldn’t it then be argued that, while living standards may have improved since 1913, without the 90% dollar devaluation our standard of living would be even higher?
Thanks in advance! krb
A lot of this is subjective. What are living standards? To some, it involves universal healthcare. To others it involves a large military. To others it involves no govt. I’m not the judge and jury of that. What I generally argue is that we should seek to maximize innovation and productivity so as to generate an environment in which people are able to obtain more time to do that which is important to them. It could be going to work. It could be spending more time with your kids. It could be playing more golf. To each his own. But what I know is that it is innovation and productivity that give us time. The key is finding the balance between social needs (like a military) and productive output. I don’t have some magic answer for you there and neither does anyone else. What I do know is that a human being today lives a much fuller life than one did 100 years ago in the USA. This can be helped by govt, but it’s mainly due to pvt sector gains in innovation and productivity.
Thanks for the reply Cullen, I appreciate it.
I agree on your point of the definitions being as numerous as there are people and opinions. What I want to get more understanding of is what role did dollar devaluation play…..did it cause, or was it required for, our improved standard of living?
If a mutual fund took 50% of my account size as an exit fee after having grown my account from 25k to 100k in 15 years, would you agree with them if they argued that the fee was reasonable because I still doubled my money and I’m richer now than I was when I first came to them? Of course not, while I’m richer than I was when I entered the fund, I’d be even richer still had their fee been reasonable.
In the same way, if the increased productivity and innovation happened independent of dollar devaluation, then all the fed and other govt activity that caused the 90% devaluation has in fact harmed our standard of living…….we’d be living even more enjoyable lives had our dollars maintained more of their buying power. The only people who would feel otherwise are the banking, early access sectors that benefit most for the dollar-destructive fed and treasury activity.
Bottom line, did dollar devaluation cause, or was it required for, the improved productivity and innovation that has occurred and may support claims to better standard of living? krb
I would have to disagree with the statement that it takes two incomes now when it only took one income before. If you want to live the 1913 or 1970 lifestyle you can easily afford that with one income. The problem is peoples wants have grown through this time. Families now want TWO cars, and not two junkers, two new cars. They want computers, tvs, cell phones, vacations, a big house, send their kids to college, healthcare, insurance, retirement, etc, etc.
If you want to live a modest lifestyle, you can easily afford it on one income, just like most families did in the days you are comparing to. If you want everything else that is offered in 2012, you will need either more income yourself, or dual income.
I would disagree with your disagreement. Studies by such people as Elizabeth Warren show that “stuff” is actually cheaper now than it was 40 years, and people today spend less of their income on it. What’s much more expensive are middle class basics like housing, health care, and education. And wages have largely remained stagnant. Families need two incomes just to live in an area with decent schools, and quickly run into trouble if one of those incomes is lost.
Beowulf wrote:
The private sector buyer’s savings goes down, and the private sector seller’s savings goes up.
The private sector seller’s savings goes up by the amount he is able to save from what he sold to the private sector buyer.
Meanwhile, the debt created to energize the private sector is still owed at 100% of its value, while the savings that corresponds with this liability is a mere pittance.
Dan wrote:
If the person spends the money in the private sector, then it is moving from one private sector account to another, but making no net change to the monetary stock.
Remember, Dan, we have a creditor and a debtor here, of equal value in the beginning.
The government loans $100 to the private buyer. He consumes the $100 by handing it over to a jeweler for a $100 watch.
The jeweler makes a $20 profit, which he can spend in its entirety. or maybe even save 10%, for a total of $2.
The original $100 of loan, which is still outstanding in its entirety, has generated $122. One might say, what’s wrong with that?
The problem is that the only reserves that actually match with the long-term debt of $100 is $2!
Everything else has either been consumed, or we are left with a depreciating asset (a watch) in our attempt to have enough money to pay back the $100 loan.
Don Levit
Don Levit
Cullen,
I agree that QE only has marginal impact on the currency, but I also think its effect on commodity prices (gold etc) are somewhat ignored/understated by MMT’ers as those now with freshly minted dollars shift into fixed assets.
QE is also but a timid tremor compared to the massive seismic shift that would be occur were it to be understood that an issue would not attempt to “balance the books” in the more traditional sense and just “print”. It’s that scenario that that truly troubles me wrt to MMT.
Thanks again.
I discussed the Fed and its impact on commodities quite a bit during QE2. http://pragcap.com/qe2-and-the-ensuing-disequilbrium
Well, it pretty much destroy many lives in the 1970′s. Unless you were at that point in life where you already owned real estate (asset values up real debt down). If in fact the government pays me back in 10 years with dollars that won’t buy the same number and quality of items it would buy when I lent them the funds….that’s a default. The question is what would the $100 I lent the Federal Government in 1913 be worth versus something else that benefited or would benefit from inflation. Our standard of living today is much higher than it should be because it was acquired with debt. In summary I don’t buy Cullen’s very weak arguments.
Our standard of living is not acquired with debt. It is acquired through real productivity, innovation, creativity and a willingness to sacrifice a certain level of inflation in exchange for things that we as a society value (like a military). I don’t deny that govt can and is incredibly inefficient in many ways that directly reduce potential living standards. I’ve complained about a lot of govt programs over the years. But that doesn’t mean all govt spending is bad….And it certainly doesn’t mean we’re defaulting….
I do agree with one thing that Rattner said, “Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics.” Supply-side economics is bogus.
Debt DOES matter because 98% of the voting public does not understand National Monetary Economics (NME) or MMT. When voters view national debt the same a private debt – debt is debt and its BAD. That matters in the upcoming election as voters are being frightened by many candidates seeking to swing voters with fear, perhaps the most powerful human emotion. But look at this graph below. In out entire 235+ years of existence, the US has ALWAYS had debt – even when we were on the gold standard.
The US has ALWAYS had debt and ALWAYS will. However, debt today is not what it was in the past with commonality money or a user of the curency.
Another useful point is that there have only been 7 rare exceptions that we have actually paid down the national debt. So debt is normal for the US. See graphic below.
Courtesy of The Skeptical Optimists, Steve Conover, PhD
So as you can see, running budget surplus and reducing the national debt is NOT in our best national interest, especially in light of the sub-prime mortgage meltdown and resulting great recession. This is why the Congress can’t figure out what to do politically. However, this does not stop politicians and political operative from lying to the voters about the debt; telling the voters than we must reduce our debt or even balance the budget, neither of which is in our best interest at this time.
How does one drive home the message; personal household debt is NOT the same as national debt.
Jobs, not debt, are our most important economic issue.
“Jobs, not debt, are the most important economic issue.”
Gotta disagree with this. Jobs are the most important political issue. Realized vs potential productivity (and therefore demand) is the most important economic issue.
Thoughts?
Hi DCA. My opinion- jobs are pretty important bc a lot of people could lose faith in our system if they don’t have one. I agree with what you say for the most part though. Somehow these two ideas have to be squared.
Michael,
I don’t disagree, I think that perspective is important, however. Loss of faith in the system in this context is best exemplified by Zimbabwe which is not even remotely comparable to the current state of the US. And one could make the argument that even in Zimbabwe the MASSIVE unemployment would have been prevented if it weren’t for other underlying factors.
Said another way-
How does unemployment get to levels that can cause loss in faith in the system without massive declines in productivity (for whatever reason) first?
Got another question. Has the balance sheet recession brought the velocity of money down, is that why the government deficit needs to be run? I’m guessing wealth destruction ain’t it.
Most definitely brought M1 and M2 velocity down. M1 velocity is down almost 30%.
http://research.stlouisfed.org/fred2/series/M1V
TPC,
(1) one side of the debate you touched upon, but didn’t fully flesh out is the fairness of the spending (creating federal debt):
- intergenerational (e.g. country with increasing average age and generous senior benefits
- wealth distribution: federal spending creates a common good through creating working capital for the economy, but concentration of wealth tends to decrease this public good, when taxation does not counter-act this. Of course, some would argue there is a fine line between win/lose capitalism and crony capitalism and regulatory/political arbitrage.
(2) re:your point about currency users creates the currency value … do you think it is a political problem that not all USD users are subject to US law?
Love reading this stuff. Thanks for all the work Cullen.
Could you also agree that “System D” matters? It seems more and more of the world is moving to an underground economy that does not pay taxes. Estimates are it is around $10 trillion. If people are not paying taxes then the government’s ability to make its currency valuable can fail, they can get hyperinflation.
http://www.econmatters.com/2012/01/forget-china-system-d-is-worlds-second.html
True. It’s not really an American phenomenon though.
Why do you think the EU issues a E500 note? To give the Euro a competitive advantage over the dollar in the underground economy, of course. They were very clear about this intent back when the Euro was created.
Seems the best estimate of the underground economy in the USA is around 20%. I think it is much bigger than most people realize and growing. If you are earning cash money and not reporting it then you can get welfare money also. This helps make underground work extra profitable.
http://mpra.ub.uni-muenchen.de/30353/3/MPRA_paper_30353.pdf
http://www.foreignpolicy.com/articles/2011/10/28/black_market_global_economy?page=full
Debt matters when it points outside of your legal system. For example, the triangular flow of inter-ally debt after WW1. The U.S. put its allies on the debt hook for war loans. This repayment was government to government, and the French and English owed American’s escalating payments due to usury on the principle. The “allies” in turn squeezed Germany through the Versaille treaty. The U.S. in turn put up tariff barriers so Germany and the allies could not acquire dollars to pay inter-ally debts. In the end, Germany and the allies gave up gold and their savings. Germany borrowed from commercial “credit” money banks in the U.S. to fund their municipalities (muni bonds). So, the debt hook was set deeper in Germany’s mouth. They borrowed from private banks in the U.S. in order to acquire dollars, which then vectored thru central banks, and made their way ultimately to the U.S. Government by way of the Allies. This Triangual flow of debts could not be sustained, and ultimately busted out Germany with hyperinflation. (Pressure on the Mark to convert to dollars to pay the debt loads.)
When debt points within your legal system, you can do a jubilee and cancel it. We effectively do the same when we erase the liability side of the ledger during depressions. When debt points outside of your system, it is tangled legally, and almost always leads to force, or war.
Aristotle noticed that civilization goes from Democracy, to Oligarchy, to Tyrants, to Kings, and then back to Democracy. The mechanism of societal movement to Oligarchy/Plutocracy is spreading debt.
That said, Government spending (fairly cheap debt derived money) if spent on the public commons, will return more than its costs, and it employs people in the interim. Government spending on welfare is destroyed with consumption, and leaves no wealth superstructure behind. So, the real answer to the question about debt is: 1) Make sure your debt points within the legal framework, because money is a legal construct 2) Your path, or flow of money, should be spent into productive enterprise. In this way, the debt money can generate wealth, paying back the cost of the money while leaving improved commons.
The flip side of debt and money is taxation. If unnatural accrual of money allows society to sharpen into oligarchy, then debt is a very big deal. The oligarchs own the productive lands, and the money power, and hence vector the surplus output of their serfs to themselves. This is the essence of the last days of the Roman empire, which devolved to dark ages. Debt allowed feudal lords to own the lands, and control their serfs.
Today, we see something similar in Europe, where commercial banks and their CDO counterparties ask for real assets and austerity of the PIIGs. This is neo fuedalism, and it is a function of debts pointing outside of the legal framework. For example, Greek bond debt points to Commercial banks in Gemany and Holland. When the real asset transfers from Greece to a Banker, then that is Oligarchial forces at work caused by the spread of debt. It is the type of debt and where it points. Debt and money must be discussed in a system context.
It is certainly debatable whether “Government spending (fairly cheap debt derived money) if spent on the public commons, will return more than its costs.”
from the NYTimes article: “Here’s the theory…. To the extent that the government sells its debt to Americans those obligations will disappear as aging folks who buy those Treasuries die off.”
Really, who is stating that “theory”? I’ve never heard of it before. Certainly MMTers aren’t saying this, even the most ill informed of us. This seems like a completely made up tale in order to have something to sell to the NYTimes.
There are some profound inaccuracies about our currency in this article.
-You state that the US government creates currency. This is incorrect. The Federal Reserve, which is not a government agency, creates currency.
-You state that US government debt is never paid off. This is incorrect. It is paid off at the end of the term of the note or bill and rolled into new debt. There is no net reduction in debt but the instruments themselves all have a defined term.
-You state that the US government “doesn’t borrow first to then be able to issue US Dollars.” This is incorrect. US government borrowing from the Federal Reserve is what creates money.
Also, you seem to conflagrate the idea that the money supply should grow with the economy (say, a 2% pa growth in money supply), which is viewed by all schools of economics as a no-brainer, with true inflation which is a growth in the money supply in excess of the economy’s ability to absorb it. True inflation is exactly what you say it isn’t: a slow default on obligations brought about by creating money faster than sound economic policy dictates. It is very damaging and insidious and does indeed destroy lives – just ask the Greeks, Italians, Spaniards, Irish, Icelanders or Portuguese.
“You state that the US government creates currency. This is incorrect. The Federal Reserve, which is not a government agency, creates currency.”
——————
He didn’t say the Govt creates currency. He says the Govt credits our accounts.
“You state that US government debt is never paid off. This is incorrect. It is paid off at the end of the term of the note or bill and rolled into new debt. There is no net reduction in debt but the instruments themselves all have a defined term.”
——————
He was referring to the net national debt.
“You state that the US government “doesn’t borrow first to then be able to issue US Dollars.” This is incorrect. US government borrowing from the Federal Reserve is what creates money.”
——————
By law the US Government is not allowed to borrow from the Federal Resreve.
You really should read the information before making comments.
1. The Fed is very much part of the US govt. If you’ve fallen for the myth of independence then might better understand some facts on the Fed. For instance, they turn 95% of profits over to Tsy at year-end. They were formed by an act of Congress and could be destroyed if the people wanted. Their operations are intricately intertwined with US Tsy. Independence is a total myth….
2. Semantic point on the debt never being retired. They roll it over after it matures. It stays on the books. Same difference.
3. Where do the dollars come from at auction? They come from money already spent into the economy by Tsy. Fed ensures settlement by maintaining proper level of reserves in the banking system mainly via repos. Again, this is done via bonds already in existence.
You compare the USA to the European nations even though none of them have the ability to print Euros….European nations are all currency users. Hence why they’ve all suffered solvency crises….The ECB is essentially a foreign central bank unlike the Fed….
Not sure why I can’t see this post – so I will try it again:
Hey Cullen – do you know if any MMT guy has studied the effects of velocity of money on the need to create ever more assets?
If the government spends $100 into existence with Private Co. A, then PCo. A has a net $72 after taxes. PCo. A then spends $72 with wages and Private Co. B, who also pay taxes, leaving PCo. B and the employee with net financial assets of $51.84. After ten transactions like this, there is only $4 of net financial assets in the economy. The faster that money gets spent, the more dollars that are needed to be created in order to maintain $100 in net financial assets in the economy.
Not sure if this even matters, but as the economy booms the velocity of money increases, won’t the government be required to spend more quickly to replace the assets they are taking out via taxes?
Not sure where I’m going with that. Just a random thought late at night. Feel free to tell me to shut up and go to bed.
That’s an interesting point. I’ve often thought that the govt should tax velocity. Since it would be at such a low rate (a fraction of 1%), it’d be more or less painless to the consumer, it would certainly kneecap inflation (if P = MV, you’d be draining M and V) and could be adjusted by Tsy or the Fed countercyclically. Edgar Feige proposed an Automated Payment Transaction tax to the Bush Admin tax reform panel that was fairly awesome.
http://www.scribd.com/doc/25299549/Feige-APT-Presentation-to-Tax-Reform-Panel-2005
thanks beowulf….. looks like I have some good reading ahead.
By definition all debt can be made govt debt. So debts don’t matter after all. The govt can simply ‘create enough points on the scoreboard’ and hand it to currency users. This was done largely to the states in the $787B stimulus.
So up to the point of hyperinflation there is no debt that cannot be taken care of by ‘scorekeeping’. WHich frankly is sort of a dangerous concept if currency users and their politicians every “get it”.
I think that is a myopic view, Charles.
If the “currency users and thir politicans ‘get it’” they will, by definition of having ‘gotten it’, understand the very danger you’re attempting to point out…
To follow up, the scorekeeper could tomorrow create enough points to the private debts of every American in the country. Of course there are inflationary considerations but if you take this to its logical conclusion all private debt can be extinguished by the scorekeeper who can create currency at will. Hence, private debt doesnt matter up to the point that extinguishing it all creates hyperinflation.
I love the key argument of this NYT article: a call to “fiscal responsability”…
Still i think the MMT discourse must go in hand with calls to clean up FIRE sector and capital misallocation (both at govt and private sector BUT bearing in mind the role of govt in some specific cases). On top of ensuring proper capital allocation, those calls would add a “let’s be careful with that great public good that is money” touch…a touch that would make people less fearful about all this.
I would pretty much agree that debt does matter just not as a solvency constraint, but you know we have to tackle that over simplification.
If the government spends $100 into the economy then the government has a $100 deficit and the non-government has a $100 surplus (excuse the simplicity of the example here).
The government could spend $100 a give it to somebody who will bet it on a horse race in China through a chinese booky and loose. China could then decide that inflation was running a bit high with all the money those chinese bookies are making and reduce the money supply in China by $100. Your fiscal multiplier is then close to zero.
My point is that the $100 does not neccesarily go into the US economy initially and only returns to the US if foreign government policy does not remove it out of existence. The non-government area of the economy can also be outside of the US. Debt becomes a problem when the fiscal multiplier of government spending is too low as I think it is now. Interest on debt can also act to reduce the fiscal multiplier, if you don’t print the money to pay for it.
There is a valid argument I think that debt does not matter providing wage growth consistently exceeds inflation. The assumption of central banks is that wage growth always causes inflation (it should be above and below at various times not consistently below for the average person), has been a major root cause of inequalities, mis-allocated investment and the reason why the fiscal multiplier has often dipped too low. Debt in my book plays second fiddle to what the debt is spent on , what the relative currency value is,wage growth and the fiscal multiplier.
China can’t “remove” US-dollars right?
If they decide to reduce money supply (yuan) they tax people in yuan. The bookie has to exchange his dollars for yuan before he can pay his taxes. Thus the dollars end up somewhere else. Where we don’t know?? How do these dollars help the US eventually??
This is what I have been struggeling with in MMT, Cullen/someone enlighten me please..
Whoever ends up with those dollars has the same choices the Chinese guy had. Buy something for dollars, save it for later, hoard the cash (or burn it to light his victory cigar), or exchange it for another currency.
By importing lots of stuff, we know lots of dollars go to foreigners. We get their stuff for pieces of paper. Their choices are limited. If you think this is helpful to the US, than trade with other countries is a benefit.
It was with great sadness that I read an article about Obama in this week’s ‘New Yorker.’ It seems that Obama is not being thwarted by Congress or by the Republicans but rather by his own economic advisors who tell him that the U.S. does not have the money for the programs he promised in his campaign speeches. Programs that would improve infrastructure and create jobs and be green, etc, etc, etc. At one point there was even an extra $35 million sitting around that he was advised to use to pay down the deficit rather than to fund a new project. Frustrating.
E.O. Wilson has a great critique of Economics in his book Consilience. I commend it to you. Basically, he says Economics as it is today is like descriptive biology in the 19th Century. Let’s start there…Economics can’t claim to be a Science. It’s tempting to joint the debate about the ether but…
If Economics could claim the scientific method, repeatable etc. we wouldn’t have a bunch of theorists out there , like yourself, who use the common media (last time I saw a real scientific advance in the journalistic realm was…) as strange way propping up Economic orthodoxies about the debt. Don’t get me wrong, not sure you’re all messed up here but I’m certain you are far too confident given the state of the field and several unfortunate squiggled in the data.
Let’s pretend Economics was a science, then people who theorize about the nature and meaning of debt would have to answer to the data. I’m not saying I think your ideas are fully punk but I think they’re far too narrowly-grand.
Here is some data that needs to be addressed:
–Countries that CAN repay their debt chose not to fit their children with hairshirts and buckle-down and repay it. So they don’t. Debt… interesting thing.. The ether is an accounting identity?. (R&R)
–Countries that reach a certain level of debt/gdp or (better) external debt/exports then have a Confidence crisis, then default (R&R).
–Heavily indebted countries do NOT GROW out of debt. This is probably the most dangerous Economic fantasty that’s propogated by Journalistic-Economists. (R&R)
–Sovereign defaults happen in correlated-waves and, unless history has ended, they will happen again.
–Look at the level of mathematics that Prof Bernanke used in his work on the Depression. The work is weak for two reasons: a) the data set is poor because records and so forth are thin on the ground and b) who thinks elementary regression analysis accurately describes a complex banking/economic ecosystem? Only a Professor with burning ambition to speak the truth to the ages could feel it was satisfactory upon which to base radical speeches and policy.
–On a recent survey of the academic literature on corporate defaults, it was high-frequency-volatility of the issuer’s stock that carried the highest correlation to default. It wasn’t macro factor set, micro-company factors…
–R&R = Reinhardt & Rogoff.
All words, no substance… I’m smelling a Libertarian
yeah, thanks Nick, but the science is happening here, while you’re posting the non-science from elsewhere. Try reading Cullen’s primer on modern money. As for R&R I’ve read recently how everyone is misusing their data, and misquoting them to try to prove whatever their political agenda is. Like everything else in the mainstream media you need to check the source yourself if you have any hope of knowing the truth.
Still peddling the usual nonsense/MMT myths:
1. Countries in the Euro zone don’t borrow in USD !!! Neither does the UK or Japan. They borrow in their own currency, in EURO, GBP or Yen. Like the US Treasury (BTW: a curreny user, the only currency issuer in the US is the FED, and even the FED has to find someone who wants to hold that dollar note) borrows in USD and the UK government borrows in GBP.
Did TPC ever see a german T-bond denominated in USD ?
And the ECB always can issue more Euros as well.
2. Because the Treasury is still able to service its debt(s) the loony left still thinks that the total amount of debt doesn’t matter. But in that regard all beneficiaries of government spending share this ridiculous notion.
At this point I have to conclude you are misrepresenting things on purpose.
No one is saying that Euro countries issue their ‘sovereign’ debt in USDs.
ah but the question is will the ECB?
‘The governments deficit is the non-government’s surplus.’
Unless the private sector chooses to deploy its hard-earned capital in either productive assets, or perhaps in something yellow and shiny, rather than in a ‘promise to pay’ in a depreciating asset, i.e. the dollar (which has lost 94%, yes, 94% of its purchasing power since 1933).
Go Granny, make Uncle Sam happy, he’ll gut your buying power my dear.
Or buy some gold, and sleep well.
Granny got slaughtered in bonds last year. All the way to the tune of a 35% return. Ouch!!!!
can someone explain this to me as ive never quite got this one
put it into productive assets… fair enough, or invest in gold but isnt that completely the opposite thing?
1933. Those were the good old days. If only we could go back there. Unemployment of 25%. Hitler opened the first concentration camp. Drought in the midwest. Bank runs and failures.
Cost of gas was only 10 cents per gallon. Chances are you didn’t own a car, and if you did, you couldn’t even afford the 10 cents per gallon.
Today a Starbucks coffee, and bottled water cost SIGNIFICANTLY more than a gas per-gallon, yet we’re chugging both down instead of making coffee at home for a few cents, and drinking our safe and clean tap water.
Yup, times are tough now. Bring back 1933 when the avg 6 to 10 year old boy could look forward to WWll while he watched his parents struggle to put anything at all on his plate. Good stuff. Looking forward to the gold bubble bust so we can be done with this kind of nostalgia
Cullen,
PG had a intersting question above, which you missed to answer! It would be mst appreciated if you did.
Thanks
Cullen,
Please consider replying to my questions from yesterday. I thought they were stated respectfully and relate directly to your views about dollar devaluation and standards of living over the last 90 years. Thanks, krb
Cullen, I want to ask you a question.
There’s an organisation in the UK called Positive Money that claims that if everyone paid off their debts (to banks) there would no longer be any money in circulation.
True/ false ?
I opted for the latter.
You’re right Phil. It’s a silly notion. It’s like saying that when you change your bank account from a savings account to a checking account that the money disappears. Tsy bonds are just savings accounts. If the Fed QE’d them all up and Tsy stopped issuing bonds then no one would have bonds. But that doesn’t mean there wouldn’t be any money. There’d still be a lot of checking accounts out there! Make sense?
I think what they mean is if ALL debts were paid off, not just govt debt, there would be no money in circulation (i.e. the idea that all money is debt and that banks create money as debt). This strikes me as wrong because even if all private debts were paid off the banks would still hold reserves and govt bonds. I’m just not sure whether anyone else would still have a bank account or money in their name. I think they would I just can’t figure it out.
All government debt being paid off as Cullen says means there will be no bonds
so the banks wont have any to hold either (not to mention the pension industry etc which rely on gilts)
If you assume that banks lend on the strength of the reserves (which if you read the primer here, or any MMT/MM articles whatever or any flavour of this type then that is not true) then the banks wouldnt be able to lend so in effect there would be no money/credit being created which is what they are getting at…make sense? its one of those hypotheticals though that are a bit silly though
and should also say all money is debt, then all debts paid off everywhere, governments,banks, households etc then no there wouldnt be as we know it
All the money in the form of reserves or bonds can only be destroyed if the govt taxes it out of existence. All the commercial bank credit money might cancel itself out but there would still be reserves in the system equal to whatever current levels are plus total outstanding govt debt and cash. So if everyone paid off their debts there would still be money left over – it’s just that some people would probably have to default on repayment because the total quantity of debt obligations exceeds the total quantity of money. So everyone paying off their debts at the same time is impossible, but doesn’t mean that there wouldn’t be any money left in circulation.
Phil I did say I thought it was silly hypothesis, cant and wont happen
you are still missing the point on 1 thing though, when they say all debts they are including government debt, Government bonds are debt so if the BOE in this case bought all the gilts back there will be NO bonds for the banks to hold, the government do not “tax” to get their bonds back they mature or in the case of QE the BOE bought them, make sense?
I love free markets and I love the discussions thereof herein. Unfortunately, as stated above (in so many ways) one can not underestimate the sheer power and control of the FED. It’s exactly why I trade REAL markets, from both sides, as in Base Commodities, financials and currencies. Although they all from time to time, are manipulated, eventually the TRUTH will prevail (and set you Free $$$). The difference in the manipulation of commodities, financials and currencies is that the “control” is for short lengths of time, in comparison. However, in the case of the U.S. national debt, as in all markets, no matter how long it takes, THERE IS NO FREE LUNCH. There will be a price to be paid, period!
What happens when no one outside US wants to hold dollar anymore because so much has been printed by the issuer?
If they want to sell the U.S. things and create employment for their citizens in the process, they’ll keep taking USD.
Dear Cullen,
In general people belive Trs and Fed is seperated. If they are not, why do they want us to believe that is the case?
Why is Trs selling bonds externally at all, wouldnt it be more conveniant to sell to FED only?
Governments still talk about what they can and can not afford, like they were constrained. Do you think they really belive in the myth, or they have other incentives?
You are writing ” What could happen with time is that the US government could print dollars in excess of our productive capacity and generate a sort of negative feedback loop perhaps leading to lower living standards and even hyperinflation” Is this measurable, or do we only know afterwards if we printed too much?
Why do FIAT regime countries enter recession at all. The Government can always compensate via spending for the shortfall of the private sector?
Why is rep. and dem. arguing about taxes. Its just a simple mechanism in a system were solvency never is a problem?
Sweden (FIAT system) is paying off their public debt, and the finance minister is very proud doing so. Does misunderstand the entire system?
During the 70/80´s Sweden was running budgetdeficits and built up a lot of debt, and finally went into deep recession in the early 90´s. We had a couple of harch years when we balanced the budget and paid of debt. After that we have had stellar performance. It doesnt make sense to me, that high debt and deficits should constrain growth?
Ok, it takes a while before you really understand the idea with MMT, but it is not impossible to grasp if you spend a couple of hours. If you are right, why does a majority of academics, heads of CBc, financeministers etc doesnt get it? Or could there be any other reasons explaining why they want us to believe how the system works?
What happens if M1 grows significantly faster than GDP in the long run?
You are saying US does not depend on the Chinese, I agreee. What would happen in the long run if NO foreigners would be buying a single US sov trs paper.
Japan has a FIAT currency system. They had no growth in the past 20 yrs, why didnt the gov spend them into growth/inflation?
You talk a lot about inflation, I see two different types of inflation. Asset inflation and CPI. We could have Asset inflation and in the same time low CPI. Does it matter for MMT?
For the MMT theory. Does it matter how big public debt/GDP or budget deficit is? Or is it totally irrelevant as long as spending is NOT excessive over productice capacity? Productive Capacity vs inflation is the real, and only, constraint?
Sorry for bothering you with all these questions!
and Many thanks for a fantastic job with Pragcap and spreading the idea of MMT
BR
/Jonas
Cullen,
Check this out from yahoo: http://finance.yahoo.com/blogs/daily-ticker/no-fed-does-not-print-money-just-explain-150433185.html A video clip of how the Fed does not print money and explanation. Good start yahoo.
So balance sheet wise, a treasury bill/note is nothing more than a loan. So does this mean that the Govt “borrows” from banks just like we borrow from banks? So hypothetically the national debt is just a loan that is continuously recycled?
When someone buys a U.S, bond, the buyer’s bank disburses some of its reserves to the government’s account at the Fed. But the Fed is the monopoly supplier of bank reserves, which means the government is “borrowing” its own money. In my opinion this means the debt is actually a fiction and the government is only simulating borrowing. Others prefer to think of it as debt, but a form of debt which never need be repaid.
I agree with your analysis, as far as it goes, but you fail to emphasize how hard it is for the federal government to actually spend money in ways that improve our productivity or even safeguard our savings. We can probably all agree we don’t want the federal government to put a large part of our national savings in tulip bulbs. However, it was far less obvious, for example, that Japan was going to have a problem with nuclear energy. Nuclear energy lowered their energy costs and improved their productivity for 40 years, until they had an epiphany of an earthquake and tsunami. Now they are afraid to use 30% of their installed generating capacity. What prudent citizen wants to put his savings into an asset bubble? Who wants to give their savings to a banker to speculate with?
@thomj
…”but you fail to emphasize how hard it is for the federal government to actually spend money in ways that improve our productivity or even safeguard our savings”. …
In the context of this discussion I don’t think Savings means what you think it means. Savings is income not spent, the resting “state” of financial assets. Savings is a stock, spending is a flow. The net change in savings over a time period is a flow.
You are (kind of) implying that government spending has no value to the economy beyond the first transaction, i.e. the entry point. You fail to acknowledge that subsequent transactions will create the incentive for businesses to compete for that cash and thus will have to produce something useful. I’m not saying that even the first transaction shouldn’t be targeted but I don’t know that anyone could agree on what that would be. Mr. Market will take over there regardless.
On the other hand if the money is spent on rich people the first transaction has a good chance of also being the end of the line – Savings.
…”What prudent citizen wants to put his savings into an asset bubble? Who wants to give their savings to a banker to speculate with?”
Banks don’t use your savings for anything really. The money banks lend is created from thin air and destroyed when the loan is extinguished.
National Savings is involuntary – when the government spends it creates an increase in the stock of financial assets (dollars and bonds) unencumbered by an offsetting liability within the non-government sector. Someone in the non-government sector MUST end up holding that wealth as a matter of accounting (unless they burned the money as cash or something silly like that).
Please allow me to rephrase my concern.
It seems helicopter Ben has found out that getting money to Everyman is a fiscal not monetary operation because he can’t get the banks to make the drop for him. Let’s assume congress picks up the ball and authorizes federal spending such that each congressman must pay each of his constituents an amount equal to the constituent’s mortgage in exchange for the constituent shining the congressman’s shoes. The congressman isn’t allowed to play favorites and we don’t want the constituent to think he got something for nothing. Sounds like a modest proposal. The housing problem is solved and, not to worry, the deficit was a boogeyman. The sovereign can always pay his debts because he makes the money. I don’t think so. I think it matters what the sovereign buys, but I don’t find a discussion of this issue except in the extreme cases of Weimar Germany, Zimbabwe, and shoe shines. If the economy needs more federal spending and the deficit is not a problem, how should it be done?
“Let’s assume congress picks up the ball and authorizes federal spending such that each congressman must pay each of his constituents an amount equal to the constituent’s mortgage in exchange for the constituent shining the congressman’s shoes.”
Let’s be serious.
…”The sovereign can always pay his debts because he makes the money. I don’t think so.”…
This is always true for a sovereign by definition. The danger is too much inflation but we are a long way from that point. Hyperinflation results from entirely different causes than just money printing (spending).
I think it matters what the sovereign buys”…
Make your case. I don’t think it matters all that much and I stated why.
We could start by suspending the entire FICA tax on the worker and employer. Then the government could make fiscal transfers to the states, closing their budget gaps so they could start re-hiring teachers and funding education. Infrastructure projects would be a next step.
Put money in the hands of spenders to increase demand.
Take a look at the Total Consumer Credit data on the federalreserve.gov web site. The data shows a pretty nice exponential growth curve from 1944 to 2008. Exponential growth curves that measure something real or are proportional to something real can not continue forever. That would imply an infinite amount of some physical thing, which contradicts the fact that we know the world to be finite. Take a look at the pictures of earth taken from space. In 2008 the curve changed shape. It is no longer exponential. This had to happen; it was just a matter of time. Is it reasonable to expect the consumer to resume this exponential growth curve, from where it left off, for an extended period of time? I don’t think so. The slope of the curve is just too steep. The consumer can not make the annual increases in debt needed to maintain the shape of the curve for very long. To the extent that our economy is dependent on consumer spending leveraged by debt this is a problem. This situation is similar to the effect the slowing sales growth of a mature product has on a companies growth. It is futile to spend large amounts on the mature product. The market is saturated. The company has to develop new products. In a similar way, I think it is mistaken to believe that deficit spending to increase consumer demand will do much for our economy. We need a new product. Developing that new product does not get enough attention. Many companies have exhausted themselves trying unsuccessfully to develop new products. Witness Kodak. On a much larger scale and on a much longer time frame I believe it is possible for a country to exhaust its resources. Hence my concern about how the sovereign spends his money even though he controls its creation.
You are confusing consumer debt with public debt. The money consumers need to obtain to pay off consumer debt can only come from deficit spending. Unless you think that we (consumers) have something that wealth-holders need. That doesn’t seem to be the case. The money the wealthy hold now may as well not exist.
Every dollar created by government spending ends up on a balance sheet in the non-government sector. That creates new wealth in the form of dollar assets. Competition for that wealth creates the products we need.
If you can explain in a logical manner how removing wealth from the economy will make us all richer by all means do so.
My view, updated:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/01/robert-waldmann-and-others-on-dean-baker-and-hence-paul-krugman-and-the-burden-of-the-debt.html?cid=6a00d83451688169e201630035f0b9970d#comment-6a00d83451688169e201630035f0b9970d
Capitalism is marked by bad money, poisoned credit, insolvent banks and insolvent nations. The European Financial, EUFN, are insolvent banks, brought back to life by the ECB zombification maneuver. Strong risers have included NBG, and IRE. The PIIGS are insolvent nations, yet Italy, EWI, Spain, EWP, and Ireland, EIRL, were all zombified by Bernankeism and rose through the Fed’s announcement of ongoing policy action. The death of fiat money, the failure of credit, banking insolvency and sovereign insolvency are bringing about the death of capitalism. Debased currencies, insolvent banks and insolvent nations cannot support growth and profit. These are diseases destroying democracy and capitalism.
Ron Paul relates The Problem Is Corporatism and Fiat Money, Not Free-Market Capitalism! Alas, freedom and free market capitalism will never, ever, see the light of day.
Capitalism is going to be replaced by true socialism. Wikipedia relates true socialism is an economic system based on direct production of utility rather than on the capitalist laws of accumulation and value. Wikipedia also relates Immanuel Wallerstein, writing in 1979, maintained that “There are today no socialist systems in the world-economy any more than there are feudal systems because there is only one world-system. It is a world-economy and it is by definition capitalist in form. Socialism involves the creation of a new kind of world-system, neither a redistributive world-empire nor a capitalist world-economy but a socialist world-government. I don’t see this projection as being in the least utopian but I also don’t feel its institution is imminent. It will be the outcome of a long social struggle in forms that may be familiar and perhaps in very few forms, that will take place in all the areas of the world-economy.”
Please consider that bible prophecy is being fulfilled in our times. The Sovereign Lord God, Psalm 2:4-5, has ordained current events, as a means of reveling the sovereignty of His Son, Revelation 2:6-7.
Joseph Schumpeter coined the term creative destruction; “A process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.
The credit based fiat system known as Neoliberalism is entering a debt deleveraging cycle. Out of a credit bust, creative destruction will bring forth a diktat based system, that is Neoauthoritarianism, where a Federal Europe will be one component of a ten toed kingdom of regional global governance, as foretold in Daniel 2:31-45.
Fate is operating to replace the Banker Regime with the Beast Regime which is rising out of the profligate Mediterranean Sea nations of Italy and Greece. This monster of statism has seven heads, which will come to occupy in all of mankind’s institutions, and will rule in all of the world’s ten regions, Revelation 13:1-4.
Despite the stated intentions and stated monetary policies of US Federal Reserve to maintain inflation, as reported by Binyamin Appelbaum in the NYT article Fed to Maintain Rates Near Zero Through Late 2014, the global debt economy is deflating, as is seen in the chart of world government bonds, BWX, international corporate bonds, PICB, world stocks, ACWX, VT, VSS, EWX, EEM, EEB. The rise accompanying the Fed announcement is likely the final rise in Neoliberalism’s death rattle rally.
Democracy is giving way to diktat. Out of a soon coming financial armageddon, that is a credit bust and global financial collapse, stemming from a Greek Default, a New Constitution and a Deep Restructuring will produce a New Europe. EU leaders will meet in crisis summits and announce regional frame work agreements to establish a United States of Europe, that is a Federal Europe, with the ECB or Bundesbank empowered as Europe’s Bank, and a Fiscal Union to oversee dramatically reduced government spending. A New EU Policy Infrastructure, will feature monetary cardinals, that is regional stake holders, appointed to work for the region’s security and stability. These will provide credit to grease the wheels of economic action and provide coordination of structural economic policies.
The dynamos of growth and profit that powered Neoliberalism, will give way to the dynamos of regional security and stability, that will empower Neoauthoritarianism. Regionalization is the Clarion Call of the 300 elite who met in 1974 at the Club of Rome. Their Call is clear, distinctive and ringing for regional global governance to replace democracy, at a time when destructionism replaces inflationism, as the global dynamic of political and economic activity. Ten regional blocs will coalesce to form a ten toed kingdom of regional global governance, characterized by a miry mixture of clay democracy and iron diktat, featuring dollar restriction zones, and un-dollar transactions, such as bartering and the exchange of local currencies as is communicated in the Robert Wenzel Economic Policy Journal, Marin Katusa, Lew Rockwell, article The Demise Of The Petro Dollar. The global hegemony of the UK and the US will soon be history.
Revelation 6:1-2 relates Look! And See! God has sent the First Horseman, riding on the white horse; he has a bow without any arrows, to effect a coup d’état and pass the baton of sovereignty to new sovereigns, that is the EU ECB and IMF Troika, giving them sovereign authority over all of the Euro zone. Fate, not any human action, will also soon open the curtains, and onto the world’s stage, will step the most credible of leaders. A seemingly Little Authority, Daniel 7:24-25, will come to be known as the Sovereign, Revelation 13:1-4, and together with his banking partner, The Seignior, Revelation 13:5-10, will change our times and laws, Daniel 7:25. By working in the schemes of regional framework agreements, they will make sweeping economic and political changes. Their word, will and way, will replace the rule of law, and provide the seigniorage of diktat, replacing the seigniorage of neo liberal credit. In the supra national Europe, diktat will serve both as currency and credit. They will lead Germany to become preeminent in a type of revived Roman Empire.
You’re silly.
cullen, i am a new(3 weeks into it) but hugely interested student to mmt few questions
you are sure your description of what happens at treasury auctions(as described herein and in more detail in other posts that i have read) is on point….just not what i thought…don’t think i know better……
treasury debt is 15 T,(understand the fed debt is currency issuer debt) state and local govt debt is 3 T, state and local govt unfunded pension liabilities is another 3T, household debt is say 10 T, non bank corporate debt is say 12T……balance of trade is negative and a fed that spend alot on mal investments,and very destructive level of unemployment/underemployment all going on in a $14T gnp…isn’t all that debt a huge problem….if not why not
what’s your call on bonds now and how do i follow your call
This argument is so misleading it belongs up there with “I will pull out before it happens”. To say debt does not matter because we inflate and destroy savers is utterly ridiculous.
It’s like when Sundance says to Butch that he’s afraid of drowning and Butch comes back with: ‘Drowning. Hell, the fall will probly kill you.’
..
‘You’re worried about solvency! Hell, the inflation will probably kill you.’