MOSLER: A BALANCED BUDGET WILL CAUSE “THE WORST DEPRESSION IN WORLD HISTORY”
Great commentary here from Warren Mosler:
“Warren Mosler, Independent candidate for US Senate, former Tea Party Democrat, and frequent speaker at Tea Party rallies, lashed out today at the political movement for its ill-thought demands to balance the budget which he contends is based on abject ignorance and counter to true Tea Party values. “The Tea Party’s demands to balance the budget and reduce the Federal deficit aren’t merely misguided, but dangerous, and would cause the worst depression in history,” stated Mosler, a financial expert with 37 years of experience in monetary operations. “I have been, and continue to be, a strong supporter of the core Tea Party values of lower taxes, limited government, competitive market solutions, and a return to personal responsibility. However, their proposals to balance the budget are the same suicidal policies that caused the 6 horrible depressions in the U.S. over the past 200 years. At the worst possible time to take money out of the economy, the Tea Party’s proposals would remove an estimated $1 trillion and cause the worst depression in world history, destroying tens of millions of jobs and ruining our children’s future.”
A Brief Explanation of the Modern Monetary System
Modern money, after the demise of the gold standard, is akin to a spreadsheet that simply works by computer. As Fed Chairman Bernanke explained on national television on 60 minutes, when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce. The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything. To better understand this, think about when a football team kicks a field goal; the number on the scoreboard goes from 0 to 3. Does anyone wonder where the stadium got those 3 points, or demand that the stadium keep a reserve of points in a “lock box”?Moreover, government deficits ADD to our savings – to the penny – as a fact of accounting, not theory or philosophy. This means the Mosler payroll tax (FICA) holiday will directly increase incomes and savings, thus fixing the economy from the bottom up. For example, if the Mosler tax cut amounts to $20 billion per week, that will be the exact increase in income and savings for the rest of us as anyone in the Congressional Budget Office will confirm. For the Federal government, taxes don’t serve to collect revenue but are more like a thermostat that controls the temperature of the economy. When it is too hot, raising taxes will cool it down. And in this ice-cold economy, a very large tax cut is needed to warm the economy back up to operating temperature.
While Mosler fully supports the Tea Party desire to cut taxes, and recognizes the need to cut wasteful and unnecessary spending – in fact, his economic proposals will save the government hundreds of billions of dollars of unnecessary interest expense – he also recognizes, that tax cuts have to be much larger than spending cuts in order to ensure that less money is taken out of the economy, and not more as the Tea Party is currently demanding.”
I like it.
Thanks very much, TPC. I wonder if the Tea Party is not funded by those who are waiting for a depression to buy assets on the cheap?
The Tea Pety is not funded by by those who are waiting for a depression to buy assets on the cheap it is funded by those who keep housing expensive to save the banks.
The Greatest Depression in World History will not be caused by an attempt to balance the budget. Rather, it is destined to occur as a result of decades of excessive sending and promises. Isn’t it amazing that those who spent and promised continue to sing the same tune; spend more and promise more. They can no more prevent the chaos of debt deleveraging that they can stop the tides. The Tea Party, fed up with it all, is about 75 years too late to stop what Roosevelt put in motion and others since have fine tuned.
VJ
The last 75 years have been pretty good to America. It’s the last 10 that have sucked and that’s because we deregulated the housing market to the point of near total collapse. If people like you had it your way the free market would rule everything. Anyone and everyone would be allowed to get a loan. The bankers would kill us all with fees and loans to even the least creditworthy customers. You blame this on spending and the Dems yet you seem to ignore the fact that both Reagain and Bush were running massive deficits throughout their Presidencies. You can’t have it both ways.
Yes, Captain Makesitup, I got exactly that out of what VJ typed. In fact, Democrat is in there, so is the part about everyone getting a house. Man, you read perfectly!
Turn the political dogma off and brain on. And please quit putting words into another’s mouth. It makes you look like a silly little ass.
Is the name calling necessary? Are we all children today or what?
Buying housing on the cheap is not going to happen for several years. Bubble do not repeated them self in the same class of assets. Internet stocks did not come back, when gold was in bubble mode in the late 70s early 80′s it took 20 years to get back in to the present illusionary mode. Real Estate did not do much from 1929 until the very end of the 50′s.
I think we can forget this notion of buying housing on the cheap. A two bed room condo will not sell for a million dollars with $50,000 maintenance fees and ridiculous taxes simply because you can look at the ocean from the a window. This game is over, dead and will not come back any time soon. We are in a long term over supply and deleveraging adjustment.
Mobile home, rentals, and camping grown will do well and possibly staying in your home for free until your bank decides to adjust your loan from non performing to default.
We have had unbalance and dangerousand budget for so long and look where we are now.
I will take my chances on sanity and balance budget.
A balance is a desirable point between two or more opposite forces.
Thanks TPC – for the advisement on the Tea Party .
If money can be created out of thin air, then why does Mosler acknowledge that wasteful spending even exists? If the government can create money out of thin air, then why doesn’t it do a 2T dollar bailout? 3,4, 100T? What would be the consequences? None? The government can just spend it right? It’s the monopoly supplier of money isn’t it?
Common sense tells me that you can’t create value out of thin air and it seems to me that this is what this theory purports to be true. I don’t buy it. Sorry.
Additionally, for all the people calling for tax cuts, please tell me why this didn’t work when Bush enacted them? Why are we finding people saying keeping them is extremely important to get out of recession? Why are we even in a recession? Based on the argument on cutting taxes, we shouldn’t be having this mess to begin with?
Haven’t actually read much of my content have you Uformula? No one has ever said you can just spend and spend and “create value”.
And contrary to popular opinion the economy was quite robust under the Bush administration. Too bad he countered it all with his silly deregulation of the housing market that resulted in the biggest bubble in modern US history. Not to mention a love affair with Wall Street that was merely the icing on the cake. This idea that tax cuts don’t work because of Bush ignores the facts.
The US is not paper broke since the government can create money but it can not print too much but surely enough to prints its way out. If it does Good Luck it will be too much and devaluation and if does not Good luck it will be reality.
Modern money needs to be a claim on goods there are no miracles.
Is English your second languange?
I have TPC, but the idea of “not costing anything” to produce money which can be used to generate something of value just doesn’t make sense to me. It is essentially creating value out of nothing.
Additionally taxes as a whole have been coming down since the 80s according to data directly from the Treasury department.
http://www.huffingtonpost.com/2010/04/15/tax-day-2010-protesters-i_n_538556.html
Listen, we can argue all day and night. But I’m just looking at it from a common sense perspective. Money was created as a substitute for barter because there was perceived value in the paper money, which could replace the tangible thing. You telling me that the US government is the monopoly supplier of money (completely true) doesn’t mean that they can just create money and pull the government out of recession.
Please answer these questions for me. Why does Mosler acknowledge that there is such a thing as wasteful spending if the government can just create money? (it wouldn’t be wasteful, just misallocated right?) And if there is such a thing as wasteful spending, why is it wasteful? Can the government say “My bad, do over.” and just spend another trillion? Is there an end game to wasteful spending, or can it continue in perpetuity? Finally, Japan’s debt is unrivaled in the world, will they ever pay it off? Why can’t they just “create” a positive “asset” and pay it all off? It wouldn’t cost them a thing.
I’ve answered all of these questions in previous posts, but here’s the short version. Govt spending can be very inefficient. For instance, when you have a household debt problem and your create an incentives program that gives automobile buyers a credit if they take on a new auto loan (cash for clunkers).
Endless spending can result in inflation if it is in excess of productive capacity.
I’ll go read your stuff again and try to make sense out of it.
No hard feelings I’m just trying to see it in a common sense way and after reading your posts over and over (don’t assume I haven’t read your stuff), it just doesn’t make sense.
On the last statement, we have a very big deficit and no doubt the government spent a good deal (inadvertently) on the creation of the housing bubble (via policies and tax credits for homeowners over the years)..this has resulted in excess capacity in housing ….but we are experiencing deflation, not inflation.
Uformula
You wont be able to make any sense of it, the whole theory is a FREE LUNCH.
The whole theory boils down to……..
The government has a printing press and can create wealth out of thin air.
The rest of it is academic economic mumbo jumbo so confusing and impenetrable it would make Alan Greenspan cry……and Al invented economic mumbo jumbo.
The mumbo jumbo and gobbledygook is deliberate and designed to obscure the fact that we are talking about a FREE LUNCH.
There are no free lunches
“Modern money..” and it should stop there for the intelligent reader but no it goes on and on and on the titanic.
“Endless spending can result in inflation if it is in excess of productive capacity”
Thank you.
Endless spending of real money will bankrupt you.
Excess money creation will dilute you.
Amen.
Does anybody else have my wavering of faith in our monetary system? Seriously, think about the following statement: “A balanced budget could bring on the worst depression that has ever been seen”.
A. Does this mean that a “balanced budget” is no longer an operative statement in our monetary system?….OR….B. Does this mean that our monetary system is so far over the edge as to be non-savable?
Answer A is not logical.
Answer B indicates the Keynesian end point is nearing. (And providing caveats to answer A just means that the answer is B).
good, lets have the depression
Letting a depression happen (continue) may be hard on us now, but it’s the only way to build our childrens future.
He’s got it backwards.
He’s got it bassAckwards. The only way to allow any future for our children is to allow the depression and bite the bullet now….for them.
“The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything.”
If this is true, why then is the government borrowing money from China?
The US is NOT borrowing from China. China wants to peg the yuan to the USD is therefore FORCED to T-bonds, T-bills etc. And as a result interest rats in the US are pushed downwards.
Mosler is completely right. Balancing the budget, as the TEA party movement demands, will cause a severe recession/depression as well.
But the US has run out good choices. Either the US voluntarily reduces spending or the bond vigilantes (I know TPC hates this word) a.k.a. the bondmarket WILL FORCE the US to reduce spending. But when I look at what’s coming out of Washington D.C. then the chances of voluntarily reducing government spending are very slim.
And then the bond vigilantes WILL force D.C. to curb its prolifigate spending.
There are no bond vigilantes. The Fed can control the entire yield curve through open market operations if it so chooses. You need to learn more about MMT.
The MMT is just that, a theory. Mr. Steve Keen has a better alternative. He calls it the Money Circuit Theory. Also a theory but it makes much more sense.
http://www.debunkingeconomics.com/Papers/Money/KeenCircuitEndogenousMoney.pdf
You have to keep in mind that an investor/speculator only borrows money when an asset class goes up in price and it seems that the bond market is about to collapse. Too many people have flocked into the bond market in the last, say 18 months. Didn’t you watch a number of bond funds/ETFs on e.g. http://www.stockcharts.com ? Tickertape symbols: IQI, LQD, HYG, JNK, CYE, $TNX, $TYX.
Yes, the FED can perform QE 2 or any Open Market Operations but it can NOT control where that money is going. If the price of bonds are going down the drain then investors/speculators won’t use that money to speculate/invest in bonds. An investor simply won’t invest in a losing situation like a tanking bond market. Then all that money WILL flow into T-bills. And then e.g. the 30 year bond rate could collapse. So, once the bond market has topped, and is on its way down then the FED is “”pushing on a string”". And then interest rates on the long end WILL go up.
The bond market doesn’t look like it’s collapsing to me. Maybe yields are collapsing, but prices sure aren’t. And let’s be clear, banks with excess reserves have two choices. They can hold cash or they can hold Treasuries. So long as they hold the Treasuries to maturity, the Treasuries are always the more profitable choice as long as the yield is positive. Since excess reserves = deficit spending, there will always be cash available to buy Treasuries (on banks’ balance sheets) even if investors/speculators head for greener pastures.
Of course, if you understood MMT at all, you’d know that MMT already completely incorporates the circuit. We know all the top circuit researchers (Keen is not one of them, actually, or at least they generally don’t claim him) and we are all basically using the same model. Keen doesn’t know that, either, because he also doesn’t understand MMT.
Depressions are a natural part of the economic system. They are absolutely necessary to bring the system back into balance after decades of excessive debt and declining work and value ethics. To try to avoid the pain of depression only exasperates the moral decay that rewarding irresponsible behavior creates. Nikolai Kondratiev a Russian economist discovered a cycle now called K waves or long waves explaining this. His work so threatened the soviet system that he was executed in 1938.
Bubbles and depressions are not and economic phenomenon, they are a result of human behavior. Behavior that is influenced by times of prosperity and of poverty. Unless people experience the consequences of irresponsible behavior, they will not learn the lessons necessary to create the next period of prosperity. To attempt to avoid the natural corrections of economics and human behavior shows a basic lack of understanding of both.
The Tea Party has it right. We need to balance our budgets. We did it 1992 without creating a depression, in fact it helped the economy. Economics is not a scoreboard on a football field. It is an interactive supply of money and goods that must be kept in balance. There are always consequences for excess in everything. Debt is no exception
the backbone of the tea party movement is smaller government, not a balanced budget. government involvement in every facet of our economy has exacerbated the bubbles. Housing would have busted a long time ago without all of the artificial stimulus, and the bust would have been manageable. Now here we are with more government fixes, spending money from the top down. Put money in my hands and those of my neighbors (aka taxpayers)- the central managers got their chance at 800 billion and squandered it. It’s our turn.
for those arguing for bush tax cuts expiring – you are arguing for pain. Target expiration perhaps, but a blanket expiration would be curtains for the economy.