IN CASE YOU THOUGHT THE WIZARD UNDERSTOOD HIS MACHINE….
Warren Mosler sent me some comments by Ben Bernanke in early February at his Congressional hearing. Dr. Bernanke said:
“Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”
There’s little doubt in my mind that Dr. Bernanke is a genius. But it confounds me how he has not connected the dots on a few things. As the man in control at the Fed he should know that the Fed is the supplier of reserves to the banking system. This is not a small power to harness. It is a colossal power. But Dr. Bernanke does not understand the depth of his own powers.
You see, as the supplier of reserves the Fed can control the yield curve. That’s right. There are no bond vigilantes in the USA. There is no time when the Fed has to buckle to the demands of the bond markets. If the Fed wants to set rates across the entire curve they will simply say so. They could buy back every outstanding bond there is at a specific rate of 0%. This would essentially flatten the curve. You could bet against the Fed’s actions, but as the supplier of reserves the Fed will never lose this fight to a bunch of arrogant Wall Streeters. After all, the bankers are currency users. The Fed is part of the currency issuer.
Now, some will say that the Fed will have to raise rates when we become insolvent or when inflation surges. This is true, but only to a certain degree. An autonomous currency issuer like the USA cannot “run out” of money. The USA has a printing press. As long as our debts are denominated in the currency we can print at will it is silly to worry about us defaulting on our debts (assuming our politicians don’t choose to default!). Dr. Bernanke alludes to Europe in this case, but the European nations are all currency users. They do not create the currency their debts are denominated in. So his analogy displays a clear misunderstanding).
But what about inflation? Yes, it will rise one day. But the most likely cause of rising inflation will be surging oil prices via a supply shock (which will likely cause recession when the price shock hits consumer wallets) or will arise from the fact that consumers have spending power and the economy is booming again (a problem Dr. Bernanke would love to have right now). So yes, inflation is always our concern. And if inflation surges due to a strong economy the Fed will be right in raising rates.
So yes, be very afraid. But not because of bond vigilantes. But because the wizard doesn’t fully understand the machine he’s in control of.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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125 Comments
Well, that would certainly help spur consumption. I don’t know what effect, if any, it will have on reducing excess capacity.
I am not even sure what excess capacity is?
The bottom 50% pay something like 4% of the income taxes.
The top 10% pay around 70% of the income taxes.
Who are you going to decrease taxes for?
Is your idea of reducing taxes extending the Bush tax cuts?
From what I understand, that is a sizable tax reduction in itself.
Don Levit
You’re looking at taxes in the wrong way. A suspension of taxes for the bottom 50% (even if they only pay 4% of total “revenue”) would have a material impact on improving their balance sheets and kickstarting an uptick in demand.
Heck, make it the bottom 75%. Or just decrease them proportionately to their tax bracket.
The bottom 20% don’t have jobs. The bottom 65% don’t have savings. The top 35% should pay 100% of taxes (that doesn’t mean their taxes should go up), and those taxes should be designed to spur productive economic activity, rather than lower them on the least productive things – like stock market gambling, house profit deductions, etc. Of course this is pie in the sky thinking as it will never happen, especially as people like to point out that flat broke people who can’t find jobs don’t pay taxes so they must be losers (not that you said that, but that’s how it is usually meant)
most of the “who pays the income tax” crowd forget the $800B (or 25%) of the gov’t revenue generated by the payroll (FICA) taxes. The gov’t could provide an immediate 6.2% relief to the working class (don’t need to worry about the top 1% or .1% because they stop paying at 110K anyway).
Well played.
I agree with most what you’re saying . However… How would the USA pay for foreign goods and services if no one wanted our coupons, I mean dollars.
Reply 04/18/2012 at 2:14 PM
Cullen Roche Cullen Roche
Well, you have to understand why foreign countries demand dollars. China for instance, imports dollars because they get real benefits – domestic jobs, investment, production, skills, etc. So the equivalent of not wanting those dollars is not wanting all the real benefits that come from the trade relationship. Could the Chinese just stop wanting all these real benefits? Sure. But don’t bet your life’s saving on it.
Cullen.. Pas point I believe explains Bernanke’s approach. Whether you agree with it or not is another point.
The moves re the currency are always marginal. All landslides and cascades begin with just a small slip. In this regard Niall Ferguson’s recent remarks should be at least noted by everyone.
The Chinese have begun slowly to divest themselves of Treasuries. You can see that from the stats. In Aus we are dealing with some big Chinese money that really seriously wants out of the ‘paper USD’ they hold in exchange for resources. In addition they are wanting to trade in Yuan (or even A$) rather than USD.
These are simple facts. So maybe Bernanke isn’t a total drop-kick!
Just a note
From being a staunch opponent of MMT, I’m a ‘convert’ to MMRT although what anyone thinks is modern about it I have no idea. I reckon I’ve been following those principles in my thinking for nearly 50 years. However, as here, consistently you revert to a straight MMT approach, which is demonstrably wrong.
Printing paper cannot override reality in the final analysis. There are physical realities in the world, including the Chinese demographic and prosperity situation, that mean that the US is gradually but surely painting itself into a corner.
You’re using the foreign sector as an argument that my approach under MMR is wrong or that it’s “straight MMT”. But it’s one of the core disagreements between MMR and MMT. MMT says a current account deficit can just be papered over and poses no long-term problems. MMR says the opposite and that a structural current account deficit represents much larger and more dangerous trends that should not just be papered over with govt spending. But this is different than bond vigilantes. My point on the danger of the CAD is very specific in that it represents a potential decline in competitiveness. But Bernanke’s point appeared different if I am reading him correctly. Perhaps not??
So I believe you’ve misinterpreted my position because this is one of the key places where MMR and MMT are VERY different….See section 3 in the following. Being Australian you might relate a bit more than Americans do. http://monetaryrealism.com/how-is-modern-monetary-realism-different-than-modern-monetary-theory/
Cullen Thank you for your reply.
Example here you have completely ignored the external account. Or are you arguing that zero interest rates don’t affect the external account?
On the face of it your argument SEEMS to be …well we’ve got away with all this printing for decades so we should just keep doing it?
Everything Bernanke (or the Govt) does affects the external account. So does fiscal policy.
In the article you reference which I did read last time and have few arguments it emphasises the external account as a major difference with MMT. Like you I believe, from a theoretical viewpoint in these arguments the Govt and the central banks are one as far as sectors go.
Yet most articles I read here do not even think about the effects in the external account.
You’re right, but I can’t discuss every sector in every article. It’s hard enough just to distinguish between the domestic public and pvt sectors….Either way, I don’t believe printing money has no negative impacts or that current accounts should just be papered over infinitely….
Me thinks the FED are the arrogant bankers when they think they are the treasury.
But thats the beauty of MMT from the bankers point of view……….their on your side….
Of course since the US treasuary is owned by the NYFR what does it matter.
Its a sick system Cullen……….. you know it deep down.
Its wrong on so many levels.
Ironically, it’s why I’ve split from the MMT crowd. The banks are the fulcrum of power so focusing all our time and energy on some supposed money monopolist or the vertical component as MMT likes to describe, is silly 90% of the time. The banks make this system go round. It’s a system of perpetual horizontal expansion….
Most of the bank credit that I have seen in action is a form of accelerated entropy , it seems to be just a matter of destroying wealth before another can destroy it.
It does not go around anything……on a long enough line it goes into a pit.
I am thinking of living in a cave to be honest , but my slave masters never thought me the skills to survive more then a few weeks in the bush.
http://www.youtube.com/watch?v=TMIHXPa5bBE
Steve Keen’s youtube video “debunking economics” does quite a good job of showing Bernanke’s “genius” and the ludicrious things taught in Econ 101 that all of the other geniuses use as the foundation for everything else they do. High IQ doesn’t mean you’re not wrong. Bernanke, who is a supposed expert on the Great Depression, obviously isn’t one.
Cullen, I think he understands it, but he cannot explain it they way you do, especially to feckless politicians, as he does not want to give them a free pass, or look like he’s an inflationist in the eyes of the public. The man is genius. He gets it that the whole point of money is to maintain a steadily increasing level of aggregate demand, and therefore the quantum and cost of money is less relevant than it’s application and consumption.
Cullen -
It is difficult to take you seriously when you repeatedly take _public_ statements by _public_ figures at face value in order to conclude that they don’t really understand how the monetary system works. That is incredibly naive. Are you that naive? Or are you just taking cheap shots?
Bernanke understands the monetary system just fine. What you do not understand is that the gap between what a policymaker says in public and what they believe in private is necessarily large.
Bernanke cannot go in front of Congress and say that there’s no need to worry about controlling rates b/c he can just issue more currency to buy any debt the Treasury issues. For 20 different reasons HE CANNOT SAY THAT. Words != Thoughts. Understand?
I just don’t buy this notion that he understands, but can’t say what he wants. After all, he’s basically said all of this before. He constantly misunderstands things implying the notion of crowding out or that govt debt takes away from pvt saving or that the national debt is a burden, etc etc. Here are just a few whoppers from past comments:
“To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt.”
No, there is no “financing”. Why mention it?
“A large and increasing level of government debt relative to national income risks serious economic consequences. Over the longer term, rising federal debt crowds out private capital formation and thus reduces productivity growth.”
No loanable funds. Sorry.
“As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.”
Again, comparing us to Europe….Wrong.
“Although historical experience and economic theory do not show the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory is moving the nation ever closer to that point.”
Could he be more specific for you?
“Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point.”
Good thing we don’t borrow to fund spending!
There’s a lot more than that out there. After all, this is a man whose bet his whole policy agenda on an asset swap! Come on. You really think he gets all of this????
Cullen, I think you’re the best. The effort you put into answering all our questions is huge! Question–What if there are actually THREE Fed mandates (1) control inflation (2) jobs (3) convincing the public that the fed knows what to do. The last mandate is constrained by focus groups that the Fed and the President must use these days, that say we don’t get MMR/MMT. The only choice our “genius” Dr. B. has is to say one thing and do another. I have read lots of reports published by the Fed and these mostly seem to be written by folks that know all about MMT and MMR. He understands. But what if he says what he knows? I think he’ll be run out in 10 minutes.
see http://www.federalreserve.gov/pubs/feds/2011/201126/201126pap.pdf
Grasping for a ray of hope, I choose to think he put the unnecessary adjective “perceived” ahead of “risks” as a hint that the risks are overestimated.
If investors lose confidence in the ability of government to manage its fiscal policy, what might you envision happening?
What may happen if the masses felt that way?
Don Levit
A good talk from Steve Keen up on his website
http://www.debtdeflation.com/blogs/2012/04/16/inet-presentation-minskian-perspective-on-instability-in-financial-markets/
They don’t understand the machine, eh? Well, maybe they forgot, but it looks like they did in 1951.
http://www.zerohedge.com/news/who-lying-federal-reserve-or-federal-reserve-and-why-stalin-lost
See punch line number 1
Four time Fed Chairman Marriner Eccles: “As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)… [We are making] it possible for the public to convert Government securities into money to expand the money supply….We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it….We have not only the power but the responsibility….If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)”
The Fed’s goal is 2% inflation per year. Uncle Sam needs to inject that amount of moola into the economy so that the people/companies can pay the interest on their loans, otherwise we are going to run out of money. Where’s the interest going to come from? http://wherestheinterest.com/ Ever since CR chose to include horizontal creation of USD into our monetary system (eg MMT-> MMR) now I get what I was missing before. The MMR fits very nicely with http://wherestheinterest.com/2009/07/12/money-as-debt-ii/
The Fed’s goal is 2% inflation per year. Uncle Sam needs to inject that amount of moola into the economy so that the people/companies can pay the interest on their loans, otherwise we are going to run out of money. Where’s the interest going to come from? http://wherestheinterest.com/ Ever since CR chose to include horizontal creation of USD into our monetary system (eg MMT-> MMR) now I get what I was missing before. The MMR fits very nicely with http://wherestheinterest.com/2009/07/12/money-as-debt-ii/
“People who will never turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the people who supply all the material and do all the work. This is the terrible thing about interest…but here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charge at the hands of men who control the fictitious value of gold. Interest is the invention of Satan.” -Thomas A. Edison