TALKING OURSELVES OFF THE EDGE OF THE CLIFF
Yesterday’s WSJ MarketBeat blog took David Einhorn to task for his op-ed in the NY Times titled “Easy Money, Hard Truths“. They make the argument that Einhorn is simply pushing his massive gold position. I fear Einhorn is doing something much worse – helping to scare us all into continued recession.
First off, I have no problem when someone talks their book. In fact, I almost prefer for people to talk their book. There’s a certain trust in someone who is willing to “put their money where their mouth is”. It’s the primary reason why I believe the hedge fund business is such a wonderful advancement beyond traditional mutual funds – the manager’s interests are generally aligned with those of the investor. If you can find a manager who is not only intelligent, but has a sound moral compass you’ve wandered upon quite a gem. From all accounts David Einhorn appears to fit the mold. But I take very serious issue with his recent comments which I believe are filled with half-truths and propaganda that we continually hear from the inflationistas (all of whom have been terribly wrong thus far in terms of their macroeconomic outlook) who are driving the country towards the edge of the cliff.
Einhorn is a great investor and clearly a brilliant man, but for two years I have watched policymakers and fear mongerers misdiagnose the problems that we confront and this is, in my opinion, why we are still wrangling with these issues. In 2008 I wrote a letter to the Federal Reserve saying that this was a classic “balance sheet recession” with problems rooted in the private sector – specifically the consumer. I told them that saving banks was not the solution and that monetary policy would prove as fruitless in the U.S. as it has in Japan. I was shocked to receive a friendly response to my letter but not shocked to see Mr. Bernanke implement his Friedman-like monetarist campaign of “saving the world”. Obviously it hasn’t worked (unless you’re a banker) as we sit here two years later still discussing this wretched credit crisis and the ranks of the unemployed continue to climb. If we cannot properly diagnose the problems we cannot find a proper cure. Thus far, we have failed.
In yesterday’s op-ed in the NY Times Mr. Einhorn wrote:
“I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors.”
This gets right to the crux of the issue that the fear mongerers and inflationistas keep beating on. The United States is a supplier of currency in a floating exchange rate system. Greece is not. This is vitally important to understand because the United States issues no foreign denominated debt. Aside from a few Fed programs (such as the Euro swap lines) the United States has zero foreign debt risk. We have no creditors. No one funds our spending. Our spending is 100% internally “funded”.
Investors wonder why Japan has been able to run-up such massive deficits over the course of the last 20 years while the bond vigilantes sat idly by, got drunk and ignored them. Why is this? Because Japan has the exact same currency system as the United States. The bond vigilantes can’t come knocking on Japan’s door because there are no bond vigilantes to knock on their door! China is not our banker. Japan is not our banker. The United States is our banker and as Mr Bernanke recently stated – the United States cannot go bankrupt unless we decide to! It will sound odd to those of you with a traditional economics education, but the US government balance sheet is not like that of a household or state.
Mr. Einhorn continued:
“The current upset in the European sovereign debt market is a prequel to what might happen here.”
No, it absolutely is not. The irony here is so thick I am nearly choking on it. What Greece has essentially gotten themselves into a single currency system akin to the gold standard. There is no flexibility within such a currency system. There is no floating exchange between economies. So while Mr. Einhorn talks up his positions in gold he is actually justifying his actual portfolio composition without realizing that the piece of metal he is so heavily invested in is effectively the cause of the Greek crisis! This is exactly the kind of crises the world used to confront under the gold standard when there was no currency float. As I’ve previously explained, trade deficit nations (such as Greece) are at an inherent disadvantage in such a system because there is no room to devalue or utilize fiscal/monetary policy to alleviate pressures. Because they are not the issuer of their own currency they are forced to beggar thy neighbor and turn to the bond markets to “finance” their spending. The great irony here is that the Greek crisis is not a condemnation of the US dollar or the British Pound (though the Brits clearly think so) or any fiat money system. If anything, it is a condemnation of the gold standard.
Mr. Einhorn continues his rant while evoking the ageless fear mongering visualization of “money printing” and “debt monetization”. Both terms are not truly applicable to a monetary system in which the sovereign nation is a supplier of currency in a floating exchange rate system, but believers in the gold standard like to invoke these images because they give the appearance that the government is simply creating money out of thin air and being totally reckless. Einhorn says:
“Some believe this could be avoided by printing money. Despite the promises by the Federal Reserve chairman, Ben Bernanke, not to print money or “monetize” the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics….That the recent round of money printing has not led to headline inflation may give central bankers the confidence that they can pursue this course without inflationary consequences.”
This paragraph is loaded with false claims. First, the government doesn’t actually print money (at least not in terms of money creation). They simply press a button on a computer that changes accounts up and down. It’s not like they find a gold miner and print up a note and “monetize” anything. The government is not constrained in the same way you or I are. They simply change accounts up and down as they tax and spend. So what does the Fed do? They target the Fed Funds Rate via monetary operations with the belief that they are the grand wizard behind the whole operation. The Fed’s interest rate mandate or target of “price stability” actually means they can’t monetize the debt. In a Q&A session last year Mr. Bernanke admitted as much:
“As far as the Fed is concerned, we will not monetize the debt. We will maintain price stability.”
Now, this is generally the point in the conversation where the inflationistas begin talking about the “effective default” of the USA via dollar devaluation. The problem is, each time the crisis flares up the price action in markets makes it abundantly clear that there is no inflation, but rather continuing deflationary fears. Einhorn’s comments regarding inflation are no different than the other inflationistas who continue to scream “fire” in a crowded theater despite no signs of fire. Of course, there has been no inflation because there is none. The inflationistas have made the same error that Mr. Bernanke made when he supposedly “saved the world” in 2008. Mr. Bernanke assumed that banks were reserve constrained while Mr. Einhorn assumes that adding to reserves is inherently inflationary. But as we see very low levels of borrowing (due to the private sector’s lack of debt demand – caused by the continuing balance sheet recession and de-leveraging) we see zero signs of inflation.
The essay continues with a subtle jab at Keynesianism:
“Modern Keynesianism works great until it doesn’t.”
I am not sure why the world is so black and white to most. I refer to myself as an “opportunistic Austro-Keynesian”. I never pigeon-hole myself. Not in my investment strategies (which is why they are multi), not in my politics, and certainly not in my economics. Each economic environment is its own unique situation. Economists and portfolio strategists should view each economic scenario like an ER doctor – never expect that the exact same surgery will work on every patient. But for some reason certain economists prefer to claim that all government intervention is bad and others prefer to claim that all government intervention is good. The truth lies somewhere inbetween.
In terms of government spending (or blanket Keynesianism as most doubters prefer to call it) it’s largely an accounting identity. Private sector deficit is public sector surplus. If government never spends private sector funds are slowly drained. Just imagine a one time 100% asset tax. What would happen to the economy? It would die of course. Contrary to popular opinion, government must spend before it can tax. Not vice versa. Therefore, a certain level of government spending is necessary. The recent CBO findings show that government spending was the primary reason why the economy didn’t sink into a black hole over the last year. We also know from borrowing data and bank conditions that monetary policy has failed entirely. Of course, I have argued that the government spending has been very poorly targeted and resulted in more malinvestment and ineffective output than should have been the case, but that shouldn’t surprise anyone when you allow the bank lobbyists to control legislation. Spending is not the answer, but we must understand that spending at the government level also isn’t the enemy. Regardless, these blanket statements that government spending is always bad is flat out wrong.
Like most inflationistas Mr. Einhorn justifies his inaccurate macroeconomic outlook by claiming that it is a big government conspiracy to conceal the facts. He says the inflationistas haven’t been wrong (even though the markets vehemently disagree), but that the government is just lying to us all:
“Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times.”
Now, I don’t entirely disagree here. No one should rely solely on the government for all of their facts but in defense of the government, they do confront these exact questions on the BLS website. And second, there are plenty of sources for unbiased inflation data. The first and foremost is the market itself. US bond yields continue to tick lower despite these supposedly increasing signs of inflation. Any investor who has been positioned for inflation (even the uber bearish ones) have been terribly wrong.
Mr. Einhorn then takes the credit rating agencies to task. This is the point where the article really begins to gain some traction. These companies have proven themselves mostly useless over the last few years. Unfortunately, he takes issue with the AAA rating of the United States. Luckily for us, Moody’s recently affirmed our Aaa rating – whew! We really dodged a bullet there. Of course, Moody’s doesn’t exactly understand the monetary system either as they view our “foreign debt” (of which there is none) as a potentially crippling fiscal hurdle. The very fact that this ignorant institution can even impact the trust in the national currency should be viewed as a national security issue.
Mr. Einhorn continues his essay by stating that easy money has not solved the crisis. Of course it hasn’t. In a balance sheet recession monetary policy becomes useless. I’ve been beating on this dead horse since well before Bernanke initiated his insane “trickle down” monetary approach. Mr. Einhorn said:
“EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.”
Truer words have never been spoken. The Fed has been pushing on a string for two years while encouraging the speculators and punishing the prudent. But no level of Fed herding into risk assets has saved the economy. Bernanke saved the banks and ignored the people that actually needed aid – Main Street. Despite stronger bank balance sheets they still don’t lend. Why? Because there is still very low demand for loans. Thus, the root of the problem persists – the consumer and thus the private sector remains weak. In fact, based on employment (in my opinion the only true gauge of economic health) the country is worse off than it was two years ago.
I don’t write all of this because I am trying to make any particular person look bad or make myself look good (which is virtually impossible), but because I have a keen understanding of the current economic conditions and thus far have called them with a fair amount of accuracy. My greatest fear now is that we are talking ourselves into a depression and articles like this only compound that fear. It’s clear in my mind that the Europeans are already talking (and forcing) themselves into recession because they have failed to grasp the true underlying causes of their own crisis. It’s also clear that the British have allowed themselves to be scared into harsh austerity measures which will substantially increase the odds of a downturn there. The recent austerity measures in California are the first sign of the same occurring here in the states. We cannot allow ourselves to be convinced that the United States is this bankrupt fragile nation which is sitting at death’s doorstep. If we allow this fear mongering to grip the nation Richard Koo will certainly be correct and the second downturn will be substantially worse than the first.
TPC,
How is it possible to educate the masses and/or the authorities about this? I’d be willing to help you if I knew the answer to that question.
In my view, I think Bernanke secretly already knows this. Unfortunately, he appears to be morally and politically bankrupt to be able to do what is right. He knows how to “press the button” as you would say.
Therefore, if the U.S. and the rest of the developed world talks itself into another recession, the next best thing to be done is simply to profit from it. If no one else is listening then the potential gains to be made will simply be easier. Crude I know but you can beat your head against the wall only so much….
All great questions!
Your fellow Aussie Prof Mitchell makes me look foolish in taking Einhorn to task. This one is a must read. Too bad no one in the media will call Einhorn out for his ridiculous article:
http://bilbo.economicoutlook.net/blog/?p=9956
He also rips Clinton who was clearly the luckiest politician of all-time as opposed to some sort of economic guru….
Yeah that is a great read. The Liberal Party announced a few weeks ago that they would cut $46b (or thereabouts) from the budget if they took office later this year. Virtually bankrolling a recession. We are not immune from the craziness!!
smoking weed is he again dear Mr.Mitchell from Newcastle? By the way isn’t it interesting that we have so few people with so deep understanding of the monetary theory. First is Mitchell from the famous university in Australia, then a bond salesman with a BS in Economics from the UConn ,running by the way for the Senate from the islands, then Auerbach and TPC, oh sorry lets not forget your friend always so busy writing new derivatives contracts so “..we can have heat and electricity..” (according to him at least) “ourmaninnewyork”. Have you really read all that “scientific”stuff TPC and do you see it as cohesive and comprehensive? But I guess you do!?
ELABORATE FOR US ALL. IF YOU WILL SIR?
> How is it possible to educate the masses and/or the authorities about this?
Masses don’t even understand why too much debt is bad for them. Some do, but a lot of them don’t. To them debt like a free money, they’ll worry about repayment later. They literally don’t think even one step ahead.
And you are thinking about educating them on how fiat monetary system works? It is hopeless. Unless you can come up with a very simple analogy from everyday life.
OK rather ambitious i know!
Ambitious is an understatement.
Brilliant TPC. Just brilliant. Einhorn is in way over his head on this debate. Can we nominate you for treasury secretary?
Please don’t….
TPC
(first of all sorry for my english, it’s not my native language)
I agree and disagree on some of your points
I tend to agree with you on the short term (1-2 years) but I don’t see how the debt will be repayed. I don’t get your solution.
at the end “printing” is the only solution and I don’t see how that will not lead to inflation?
We do have a balance sheet recession now, but what next? the equilibrium is so fragile an goverment action so reckless that a hyperinflation outcome could be here pretty soon.
There is inflation in the UK, (the GBP has lost value) I’m pretty sure there will be inflation in Europe next year if the EUR keeps worsening.
anyway , thanks for you great blog and articles, I really enjoy reading it
What debt?
You start your article with ” … I fear Einhorn is doing something much worse – helping to scare us all into continued recession “. Your fears are quite unfounded. Einhorn is not God that he can scare us into recession. Markets are generally much bigger than any individual (whatever his views may be); and like water would eventually find their level irrespective of the views any one person may hold.
Sorry I have’nt read the rest of the article yet .. just had to express my dissent with the first paragraph of your article
I am not afraid that Einhorn alone will destroy the world. But his beliefs are becoming mainstream. As other commentators have stated here before a fiat currency is based on trust. If we misunderstand and allow these beliefs to become mainstream we will walk ourselves off the edge….
TPC, I believe that the printing presses can continue to monetize debt until interest on that debt takes up the vast majority of revenue (taxes). Japan is not that far away from this paradigm and I think we will watch Japan for clues about the timing of that happening here. It won’t happen here for a while but it could in Japan.
This is my take but I’m not sure anybody knows how it will play out.
They never ‘monetize’ the debt. That’s the point. And federal taxes are NEVER a source of revenue for the federal government. That’s operationally impossible.
I always find it tough to figure out where you stand on this issue.
To some degree I feel like you’d like to have your cake and eat it to.
Clearly, as the Japanese experience shows, and as you frequently retort, the inflationist argument is incorrect in assuming that massive government spending is l-t inflationary.
That said, we’ve seen what that form of stimulus has gotten that country over two lost decades. Say what you will about a lack of consistency in applying the stimulus across different Japanese administrations, but at the end of the day, they continue to fight deflation and generate below trend line Economic growth.
So what do you want TPC? Would you prefer lost decades or would you prefer we restructure the system today by allowing it to purge itself more expediently by removing the buffer of heavy gov’t spending?
It remains to me a “damned if you do” and don’t type situation. I’ve never figured out what you’d personally like to see happen.
I recognize that some level of “workout” is inevitable. I pushed for taking our medicine back in 2008 as opposed to bailing out banks. Now that’s clearly not an option. I pushed to regulate them more harshly, but that has also been fruitless.
This is still capitalism without losers and as long as we have that we’ll have problems.
I’ve pushed for controlled demolition of the banks (losers lose), tighter regulation, and tax cuts. The only option left on the table now is tax cuts and that’s clearly not going to happen because everyone is afraid it will bankrupt us….
TPC,
Einhorn beat you to the Times op-ed piece punch. I think you should go big-time with this. I think you should draft a rebuttal, point by point and start circulating it around. Maybe team up with the economist whose blog you linked to. It’s not that hard. Go for it, man! Get P. Krugman on board. I’m sure he’d be happy to take it to Einhorn.
Not sure when you say U.S is internally funded. Our savings rate is near zero may be a little higher. Nearly 4T of our treasury securities are held by foreign countries notably china and japan. How do you make the assertion that we are like Japan….
Well, “funded” at all is not accurate. We don’t “fund” anything. Not internally and not externally.
These countries hold these securities because we have a trade deficit with them and they have extra ‘US dollars’ that they can’t eat or convert so they park them in treasuries so that they can at least earn a bit of interest on them. They don’t ‘fund’ anything. The government doesn’t take that ‘cash’ and then go spend it on some guy’s EI. The gov’t just marks up the bank account of the guy getting EI since it has sovereign control of the currency.
Nice additions Jason.
If the answer for California isn’t to stop spending more than you take in by adopting austerity measures, what is the answer?
The problem with CA is that it was too real estate dependent. The Federal govt could easily write a check for CA as opposed to firing teachers. In addition, some harsh real estate reforms (like we saw in Texas after the S&L’s) would be nice so as to try to avoid something like this in the future….
Your column is well thought out. Your assertions about CA don’t make sense though. I know you’ve heard of “moral hazard” and don’t understand why you would recommend the Feds (consisting of the other 49 states) write us a check. The state govt here has been engaging in financial hijinks for years to cover-up poor financial management and past (poor) decisions on state/local govt pensions. Bailing us out is like telling your kid to save his money for a bike, watching him decide to go to Disneyland instead, and then giving him money for his bike.
it’s not technically a ‘bail-out’ its more an admission that for too long the federal govt has obviously been taking too much tax, so here is a stimulus to balance the books. The often stated proposition by Warren Mosler is that the federal govt. apply a per capita stimulus payout to all the states.
That’s an excellent way of saying it. Of course, if you posed a tax cut to most of these deficit hawks they’d probably be all for it. Little do they know it has almost the same impact on agg demand as a big spending package.
this all gets very confusing to me. TPC accuses Bernanke of being a Friedmanite–and that’s what I always thought, too (the famous toast to the Friedmans). But then in that now well known article by Evans-Pritchard of a few days back (can’t find the link), Bernanke is accused by an accomplished economist of NOT being a Friedmanite, but rather a Keynesian. Dismal science, indeed! But, to further support TPC’s general point, recall Robert Shiller’s article in the Times last week based on behavioral economics: that we might well talk ourselves into a double dip.
All that said, I believe we’re in a depression, regardless of whether or not the numbers say we’re in a recession, and likely to remain in one for several years. There is too much deleveraging to go through and too much adjustment (which we have ignored for 40 years). Through the agricultural, pharmaceutical, high-tech, and shipping revolutions, we’ve made products far too cheap and labor less important and haven’t found a way to replace the esteem/importance of work with anything else. So, we merely over consume.
I, for one, take exception with how the stimulus was spent and that the main focus for an entire year with this administration was health care. They spooked everyone sufficiently with calls for funding, reduced payments to doctors and a long commitment to federally fund an ill-conceived program.
Upon gaining office, this president should have focused on main street and jobs. Because of their preconceived agenda, we had to suffer through a year of lost focus while economic matters were left to fester.
The link was great. Clinton recalling her husband’s achievements when he signed the bill that ended Glass-Steagall and supported the harassment of Brooksley Born is laughable.
“The consumer and thus the private sector remain weak.” This should have been our focus all along. States don’t need bailouts if people are employed and tax revenues are up. Folks don’t go into foreclosure if they can make their house payments.
Our country is being mismanaged – that is all I know. I hope the rightful rage is directed against politicians who have supported this fiasco.
@ Vick:
Amen brother. Bilbo’s idea on those that have lost their jobs while owning homes was very interesting. I’m sure one could find holes, but it is this “crediting/debiting” of MMT that leads to some very out-of-the-box thinking.
While the only thing the ABCTs can talk about is pain, pain, pain, pain, pain.
Here is a great historical link on Ms. Born – she had it right in `98!
http://www.washingtonpost.com/wp-srv/business/risk/
Ignoring academics, has there been inflationary periods in the US both before and after the gold standard? Yes. Hyperinflation? No. Also, I think other readers’ criticisms of CPI underestimating inflation over the last 30 years is valid although you may agree to disagree. Otherwise your criticsm of Einhorn’s remarks are very valid, but I suspect, as you suggest, this is intentional … in the end he doesn’t care about economics, just investment returns. I also suspect he picked the US to “attack” because: (a) huge Eurodollar market that will rush into gold, (b) it’s a symbol … mainstreet doesn’t care about Grease, (c) he’s scared of the recent strength in the USD/Tsys.
BTW … a corollary to your debate is: why does US CDS exist?
PS This has been a really great debate BTW.
“Investors wonder why Japan has been able to run-up such massive deficits over the course of the last 20 years while the bond vigilantes sad idly by, got drunk and ignored them.”
Actually the Hedge Fund Graveyard is full of HF which have shorted the JGB over the last 15 years. It has been one of,if not the worst, trade of the last two decades.
I really enjoy your comments.
I would like to ask you one thing if possible (and excuse me if you’ve already done it elsewhere on your website):
Do a bullet points summary (with as many bullets needed) of what are your solutions to the current situation.
After reading pages and pages of very good articles on various webites, one becomes a bit disorientated.
A one line, one page summary would be wonderful. The arguments can always be developped separately
Thank you
Here is a harsh “bullet point summary” from The Daily Capitalist”
“The boom was the big problem and the bust is the cure.”
http://dailycapitalist.com/2010/05/26/why-deleveraging-is-necessary-for-economic-recovery/#more-4821
Yikes!
Thank you for your prompt response
Yes, and if look @ the blog roll there, you see the std ABCT line-up including LvM.
Pain, pain, pain, pain, pain.
Thanks for a decidedly different take on things. I expect to stretch my understanding reading your stuff. Please keep it up!
To say that we have no creditors is also to say that the US is not in debt . . . to anyone. While I find much of what you say here to be true, this aspect of your argument alludes me. Could you flesh this out?
On a related point, is it not true that what has really driven global liquidity and thus also increased global money supply is the international trade imbalances, that has generated what Bernancke refers to as excess savings (a term I detest for it suggests the US is not complicit by being a debtor), in Asia that flows to the US in the form of Treasury purchases (and formerly mortgage bond purchases). This has resulted in bubbles and weakened the effectiveness of CBs’ monetary moves and it is this condition which will determine the deflation/inflation debate.
yes, please flesh this assumption out. i really do not understand how you feel we do not have debt, and it’s obviously crucial to your arguments??? like all fiat currencies, the debt in the end may be self-funded, but it seems folly to me to brush off the possibility (even likelihood) of ‘effective’ dollar default. good heavens, the percentage of our balance sheet owned by other foreign countries, esp China, is staggering and clearly unhealthy.
excuse me for being mostly unfamiliar with your site and economic philosophies, but what are your solutions then for the current situation? The bullet-point link from Daily Capitalist you refer to later in the comment section seems like it follows your prescription with monetary policy and half of fiscal policy, but totally undermines the idea you posit that Main Street needs help.
Not to worry you will soon get the mumbo jumbo based on a famous economist Mr. Mitchell from Uni in Newcastle. And what will be forgotten is just one unanswered question by the aformentioned guru “…“do operational constraints exist as a matter of fact in a fiat system such as the US?.”
Of course TPC can speak for himself, but what he’s been pointing out is that there is a reigning misconception about what it means for the US to “be in debt.” Most discussions use the metaphor of household debt, debt we have to pay back.
Here’s how Bill Mitchell puts it:
from here: http://bilbo.economicoutlook.net/blog/?p=9956
“Why not say that historically the United States has never defaulted end of story. Why not explain how the funds that the bond markets provide to the US government under the unnecessary obsession the latter has in matching every $ of net spending with a $ of private debt – that the funds came from the government in the first place. The government just borrows its own spending back.
“Why not actually educate people about how the US dollars that China holds never leave the country and come only from the US government not the Chinese government? Why not explain how the monetary system that Greece is constrained by is very different to that which the US government runs as a monopoly issuer of the currency?
Technically, the US has no foreign denominated debt. So “debt” at the Federal level isn’t really “debt”. I know, confusing….But we need to stop thinking of the US govt as if it’s a household.
The govt never has nor doesn’t have dollars.
Here I tend to agree with the editor of another website, who says (paraphrasing) that social mood drives economic activity, so booms and busts are necessarily a matter of “talking ourselves into it” (point 4). I suppose the corollary is that social mood is a sort of Unmoved Mover. If that’s true, you may be absolutely right in your analysis, but your solution won’t work until we get a lot more Vulcan in the gene pool
You are correct when you say US cannot go bankrupt because we can create money. What I believe you fail to recognize is that the ability to create money does not necessarily control its value. Reinhardt and Rogoff made it very clear in their book. The value of Fiat currency is based on confidence. When the public loses confidence in the currency’s value they dump it for tangibles. That’s what happened in the late 70s and that is what can happen again. To keep confidence the government needs to show it is acting responsible in its spending. With government debt reaching 90% of GDP the public is losing confidence in the US currency and moving to tangibles. (And why save when the return on savings is near zero). Einhorn has a valid position.
Totally agree with that, but with the proviso that when private households owe a ton of dollar-denominated debt, that along with taxation creates a lot of internal demand for the currency. So destroying the value of the dollar to the point where people effectively don’t want it anymore is harder than it may seem. To a degree, this just represents the idea that effective money supply isn’t really expanding when velocity is shrinking (i.e., more demand for cash).
Internal demand wont mean anything when the dollar looses confidence abroad and we cannot buy the imports we require.
The world is changing and we have academics acting as if their theories will hold water in a non US dominated world.
good luck.
see this is the one question TPC never seems to answer for some reason.
Why would I answer it? The implication that the public will refuse to stop using dollars is absurd. Of course the currency is only backed by trust. But do you really think that anyone will just stop accepting dollars? As long as the US govt has a military that can defend the currency people will have no choice but to use it. Personally, I think there’s no chance that changes.
thats why my dear TPC i expect you will never be a really good investor as two most dangerous things in the investment world to say are “..this time is different..” and “..this can not happen…”.
JT,
You have to be realistic. The value of the currency is the absolute highest national security measure in the country. It’s what the secret service was formed for.
As long as we have companies that create products for which there is demand and as long as the USA has the ability to tax (and enforce taxation) there will always be demand for those dollars. There is no reason to worry about the value of the dollar in our lifetimes….
Ok last one on my part. TPC you seem to be mixing timeframes. You take one or two sentences from people with very different knowledge and understanding of the economy and you mix them together trying to show how incorrect and ignorant they are (in the past you have criticized people as diverse as Bernanke, Roubini, Mishkin or Schiff for example). I for one don’t think it’s fair as we can’t really tell what their comprehensive views are on a basis of a few sentences (Ok i grant you one – Schiff doesn’t really seem to have a clue
.
To call expressing such a concern fearmongering is just not fair.
As to timeframes. Sure there is no significant risk of inflation over the next few years as too much aggregate demand was destroyed and aggregate supply still probably hasn’t fully adjusted. Sure the risk for the bond market is not very high, we will not have problems financing, etc, etc
But to say that over the next 30-40 years the US can run 10% p.a budget deficit and we don’t have to worry about the value of the $$ is inconceivable to me! (I am saying 30-40 years because you said “our lifetime” so unless you plan to go earlier that’s what i assume). And please don’t talk about technical issues – yes we can create $$ forever, will not default, etc, etc. The issue is you and the rest of the MMT people focus so much on the trees that you seem to miss the forest and don’t realize how negative effect on the economy, resource allocation and our productivity such deficits will have. And perhaps this is what Klarman, Einhorn or Roubini mean when they say “they are worried”. Not what happens in a few years – almost everybody understands that deflation and second recession are the risks here, but what happens in 10 or 20 years of “printing” money and enormous misallocation of resources .As you like to look at Japan please do – ideal example for MMT and deficit forever advocates like Galbraith. Yes they create money, yes they run enormous deficits, yes they have no problem financing them but would you call whats been going on with their economy for the last 20 years a success, have you seen a dramatic increase in the poverty there and equally dramatic fall in the standards of living?? Why hasn’t it been a success despite the “printing” and the deficits? One of the most important reasons at least for me – misallocation of resources caused by deficits.
And i simply don’t wish the US to find itself in a similar situation in several years so i share the concerns of Klarman’s, Einhorns or Roubinis (thats not a comparison as my investment track record is nowhere near the first two
JT,
I think we probably agree on this more than you think. I am not an advocate of running huge deficits for the next ten or twenty years. I do not think govt spending is the solution. But I do believe the next 3-5 years will continue to be this very rare period in economic history where deflation is the overriding threat as debt destruction continues to weigh on the markets. That means we can afford to run higher than normal deficits in an attempt to offset some of the pressures.
Personally, I think we are over taxed and that govt spending is poorly targeted. If we could cut taxes the deficit might increase in the next few years, but would slowly come down as revenues increased and spending slows.
I fully agree that there is no free lunch, but it truly is different this time. This is a balance sheet recession of a global magnitude. This is an incredibly rare event. Once in a lifetime. And that means the response must be unique.
Does that clarify some of your concerns?
“Obviously it hasn’t worked (unless you’re a banker) as we sit here two years later still discussing this wretched credit crisis and the ranks of the unemployed continue to climb. If we cannot properly diagnose the problems we cannot find a proper cure. Thus far, we have failed.” TPC
Shucks, do you think the application of simple justice might be the solution? Consider:
With fractional reserve lending (money-for-debt) in the government enforced monopoly money supply, people were driven into debt slavery via negative real interest rates. Those who attempted to honestly save to buy a home ended up being priced out of the market. Those who did borrow in many cases ended up in overpriced (underwater) homes. Similarly, people were driven into the unstable stock market because saving for retirement was precluded by suppressed interest rates.
So, is it possible to run the FRL looting machine BACKWARDS to bailout the underwater homeowners AND at the same time compensate the savers who were cheated by suppressed interest rates? How about printing some debt-free legal tender United States Notes and just giving them to underwater homeowners to pay their mortgages down to market price levels? Also, force the banks to distribute that new money to all bank accounts on a pro-rata basis thus compensating the cheated savers too. That should halt the deflation, true? The risk then would be inflation and a return to the debt enslavement process. To prevent that then reserve requirements should be set to 100% (over time?) so that banks engaged in true money lending not money creation.
BTW, this solution would not effect bank Equity in nominal terms. However, for once the benefit of new money creation would go the public so the banks would suffer in real terms. Sounds like poetic justice to me.
When reading MMT critiques of other ideas I have some sympathy for, I feel like the slow guy in class (not something I’m used to). So maybe you or one of your other MMT oriented readers will kindly help me out.
As a baseline, let me stipulate that I get the Warren Mosler, Richard Koo, Marshall Auerbach description of the money infrastructure, and the role of government borrowing and spending in providing a de-leveraging offset in a balance sheet recession. MMT is indisputably the technically correct description of the money and debt-in-our-own-floating-exchange-rate-fiat-currency world infrastructure. I also understand and agree with the EU members = gold standard inflexibility analogy.
But there are some specific ramifications of MMT which I can’t quite work through, and which I think the inflationista camp is trying (less articulately) to get at. I also have some ideas about why they are prone to being less careful in their use of language (models are necessarily incomplete analogies whereas theory attempts a direct description — the debaters are thus talking past each other by using language in different ways), but that’s another topic.
Here’s what I need help understanding:
MMT seems to assume that if only politicians (and most economists, and fund managers, and…) were to be educated out of using a vestigial gold standard model of money, and deficits were suddenly no longer a political problem, then they would not be a practical problem either. It’s essentially a flat earth thinking problem.
When I try to imagine that actually happening though it quickly begins to look pretty messy. If it became generally understood that taxes are not needed to fund federal government spending, then I would expect that every federal public employee union would demand banker’s pay, and as there is no real underlying supply constraint and it becomes harder on the margin to negotiate. Moreover, every taxpayer would vote only for those who promised to eliminate their taxes (instead of just republicans. The democratic version might be to move all state and local government services funding to the federal level as well.). And bailouts, seem may either more harmless, or at least more often justifiable.
I end up imagining how all this might become a little inflationary (on a quantity basis). If not the immediate outcome, all of this would become the inexorable direction. I mean, it already is, and that’s without a broad understanding of MMT. If the scarcity of money dimension of our social contract were to be fully updated to a broad understanding of fiat money, who would secure the consent of the governed to allocate the means of acquiring resources or government services? The useful fiction of a limited supply of money serves to somewhat depersonalize the allocation process (or more accurately, hides it from those not being allocated to). Mosler talks about taxes really just being how inflation is kept in check, but taxing me with the justification of paying for social services is pretty different than taxing me just to reduce my purchasing power relative to people with more political influence than me. Politics would become pretty interesting while this new understanding of money worked it’s way through the body politic. It’s not clear to me that the MMT crowd has really thought through the messy social implications of their otherwise genuinely clever technocratic construct. But the social consequences of replacing an old cultural convention with a new one should not be underestimated. Given that we’re still having trouble digesting Darwin, and the experiments (eugenics, Social Darwinism) those ideas contributed to along the way….I’m just sayin’.
By this view, I suspect that MMT, however true as a description, is (fatally?) weak as a source of policy prescriptions that can readily meet the 2nd of money’s necessary attributes — a store of value. If money’s ghost of gold-standard legacy of scarcity thinking makes the final transition to being understood by all as purely political, then anyone with savings to protect may be compelled to seek that attribute in other assets. Again, an implicitly inflationary outcome, this time on a velocity basis.
The other place I get stuck is given that politics and markets currently operate de-facto as though there either are, or perhaps more accurately, should be gold-standard-like constraints on government spending, do MMT descriptions adequately address how an individual should think about preserving the spending power of their own money? For example, despite Mosler’s comparison of fiat money bank balances (as administered by a country’s CB) to sports stadium scoreboard points, is it not reasonable for an investor to assume that at some ratio of debt-service-to-tax-receipts, the bond or fx (or both) markets will lose faith in a country’s political ability to continue increasing the debt service proportion of its budget much less actually pay debt down? Wouldn’t the reasonable expectation be that they will end up monetizing on the margin? And if that concern were to take hold, might that inspire an exit from that government’s bond market (making the need for monetization self-fulfilling), and ultimately that currency as well? Even though mathematically there was never any risk of actual repayment default?
And, in general, might a sufficiently reduced currency exchange rate import trade-goods price inflation, and perhaps domestic asset price inflation as well if there are potential foreign buyers (firms, farms….)? While the semantics of price inflation which serves to destroy demand and lower living standards when labor slack is sufficient to prevent a wage-driven inflation spiral can become another opportunity for people to end up talking past each other, I think in practice a prudent investor has to incorporate the prospects of either type into his macro view.
In sum, what I’d like to understand is how does MMT being right about the mechanics of money and government debt make Einhorn wrong about what markets may do to the value of Japanese bonds, or gold, notwithstanding his butchered description of the moving parts from an MMT perspective?
Great questions. And I don’t have enough knowledge to reply. but I just wanted to add to this – already after seeing FED bailout banks with various liquidity programs that required no approval and created money out of thin air asking – why should we pay taxes when FED can always created more to cover whatever is needed.
FED understands the mechnics of money but they created moral hazard by demonstrating it so openly.
Why should people worry about what Congress decides to do, what budget they approve when FED can simply create money and requires no congressional approval to do so?
I agree that if people stop believing into scarcity of money and the need to balance the budget, then all the bets ar off.
I finally checked into Mr. Warren Mosler and I like what I hear. Surely the debt-slaves should be freed, from the bottom up as he says. That is just justice. They were driven into debt-slavery because of the government privileged banks and thus a government solution is justified. After a just reset, then all legal tender laws should be abolished and genuine liberty in money creation allowed including abolishing capital gains taxes. Government monies could be backed by their taxing authority not legal tender laws. I don’t know yet what Mr. Mosler’s position on that is.
Has he published a book? All I see is a kindle version on Amazon.
Good questions. Central to the MMT view is that the true “cost” of govt deficits is inflation. Therefore, the point is that the focus should be taken off of “affordability” in terms of “funding” and instead turned toward “affordability” in terms of the inflation impacts. That is, CBO would turn its attention to modeling the long-term inflation impact rather than the long-term budgetary impact. And note that CBO currently does EXACTLY the opposite . . . they estimate long-term deficits that arise from current spending law or proposed changes while assuming inflation will be at 2-3%. (Also, I misspoke a bit, as CBO would still have to estimate long-term deficits, but it would be the consequences of those deficits that would matter for the analysis and for policymakers, not the deficits themselves.) So, in my view, anyone suggesting that MMT’s approach would necessarily lead to inflation has really missed the core of MMT, and as such you would still have to make politically tough decisions with policy driven by MMT views, but this time your eyes would be trained on the appropriate constraint.
Excellent post, TPC!
Exactly! Thanks Scott.
Well, I don’t exactly agree with all of the assumption in terms of the application of MMT. For instance, I don’t think spending solves all our problems. Innovation and productivity make strong economies. Govt won’t spend efficiently all the time (which is obvious from the last 18 months). But a tax cut would have the same effect in this environment (at least in terms of aggregate demand).
Where did anyone in MMT say “spending solves all our problems”? I doubt you could find any MMT’er who believes anything remotely close to that.
Sorry, comment is a bit out of context. Not necessarily directed at MMTers. But that tends to be the primary response from everyone I try to explain this to: “oh yeah, just fire up the printing press!!!” People tend to invoke the idea that spending solves everything when I talk about this, but that is not the lesson here as you’ve clearly explained in your writings.
Ahh, OK. Understood. Yes, we get that a lot, too.
I have found that it is the largest hurdle to overcome when discussing this topic.
From a policy perspective, this is likely why we need a tax cut more than we need more stimulus. Despite having largely the same result, the tax cut never gets any push back from society and doesn’t invoke the dreaded “printing press” image…
We could perform some very interesting studies in human psychology on all of this….
“From a policy perspective, this is likely why we need a tax cut more than we need more stimulus. Despite having largely the same result, the tax cut never gets any push back from society and doesn’t invoke the dreaded “printing press” image… ” TPC
From my perspective, tax cuts are much preferable to stimulus since they allow the “productive” to keep their money. However, with our distorted economy, it is becoming debatable that the government might be a better spender than the uber rich who got that way via crony capitalism
I don’t know where the quote is, But Paul Samuelson said something similar: that wrong ideas about money were a “necessary illusion”, otherwise there would be no political appetite for necessary taxes or reigning in even wasteful spending. There might be something to that, but we are so far from it now that I don’t think there’s any immediate danger.
I fear Einhorn is doing something much worse – helping to scare us all into continued recession.
I wouldn’t worry about him. The consumer pays little mind to financial punditry, and has been in a long process of loosening the purse strings, which is what we need for short-run growth.
That isn’t to say that the debt shouldn’t be a concern; Einhorn isn’t completely wrong. But he forgets that economies are ultimately built on output, and the US does a fair job of maintaining sufficient output in order to maintain investor confidence. The US could never run its affairs as it does if it was a smaller economy along the lines of Iceland or Greece, but the scale and growth potential of the US makes all the difference.
You’ve previously compared us to Japan, and I’ll differ with that as well. What differentiates the US from Japan is that the US GDP growth during good times is generally well above that of Japan and is high enough to avoid deflation. Whereas you can expect the US to level out at about 3-4%, Japan’s rates tend to vary between 0-2%, feeding the long-term stagnancy that has become their trademark. The Japanese have become slaves to maintaining their trade surplus, which is good for their currency but not good for much else.
I suspect that over the next few years that the goldbugs are going to get stomped when it becomes clear that the world isn’t ending and that economic growth coupled with reduced war spending will be sufficient to pare down the US deficit. The smart ones like Einhorn will plan their exits, use trailing stops, etc. to avoid getting killed, and they’ll do fine. However, the little guy who has been hoarding his life savings is going to learn the hard way that gold isn’t a currency, after all, but merely another commodity that fluctuates in value. As usual, the dumb money is going to lose.
Well said.
It’s seems that we can’t go more than a few minutes without listening to the radio or tv and hearing an ad suggesting buying gold.
It’s almost a new cult. Multy million dollars Gold Trust are sold as new issue to the public in minutes. At this stage it’s self-fulfilling prophecy but when this music stop I would hate to be on the long side.
There appears to be an inconsistancy in your argument.
First, you say that there can be no risk of default because the US is the monopoly supplier of its currency. Ok, no argument here. But, then you say that the Fed can’t monetize the government’s debt because they have a mandate to maintain price stability.
Both can’t be true.
If there is an independant Fed which controls the quantity of the currency, and if the Fed were to refuse to assist the governement by buying its debt, then the US does indeed have a risk of default. I don’t see this as an issue because I don’t believe the Fed actually has any independance. They will do whatever is necessary to preserve the system, including buying the government’s debt if the market won’t. The Fed doesn’t simply have a mandate to preserve price stability (like the ECB), their mandate is both price stability and full employment, which in practice means that they can do whatever they want because they can always defend any action as being the best balance between the two mandates.
The crucial flaw in your argument is that you believe the bond market actually “funds” something….
Ok, help me understand, because I get lost in all the MMT sophistry. It doesn’t matter whether you are using shells, paper currency, or ones and zeros in a computer, the debits and the credits have to match.
If monetary and fiscal policy were consolidated in the Treasury, it might then be true that the bond market wouldn’t fund anything, but as you have argued, we have an independant Fed (at least theoretically) which controlls the quantity of the ones and zeros in the computer.
You can’t have it both ways. The Treasury needs the acquience of either the bond market or the Fed for the credits to exceed the debits.
TPC,
I have two question. First starting about two years ago I’ve read over and over that the Fed want a “little inflation”. That it would stablize houseing pricing, and balance sheets… So why doesn’t the governement push the buy back treasury button? Wouldn’t that add a little inflation or would that still be pushing on a string? Since this is all just balance sheet entries why they only push the number of treasuries up? Isn’t there ever a time when it would be helpful to the economy to push the number down?
Maybe related question. Why is it so bad that businesses pay off loans and start to fund growth out of profits instead? That’s what I’m doing. I’ve had it with banks I’ve paid off all the business debt and hired 4 people already this year! Why these claims that the country can only grow if we have more credit or take on more debt?
I am all in favor of paying down debt. 100%. I am all for taking our lumps. I believe consumers have done it. I think the banks should do it. That is why I pushed for an RTC entity in 2008. I wanted a controlled demolition of the banks.
As for inflation – the Fed is pushing on a string.
TPC,
I enjoy this site as the community seems to be very bright and have thoughtful and intelligent feedback and comments. I always get lots of food for thought. However, I find it interesting that you, in the past, have related to Seth Klarmen’s quoting of Robert Rubin that ‘some people are more certain of everything than I am of anything’, yet you state emphatically “No, it absolutely is not” regarding the comparison of the US to Greece simply because we can create our own currency. And this is a trait I’ve noted over time regarding your missives on the subject. How can you be so sure that our ability to create our own currency insulates us from an inflationist or default type of downside. It sounds as though you believe that the inflationist point of view has no validity whatsoever. To me, this shows a lack of humility and respect for Mr. Market and is way to one side of the boat. The inflationist outcome is possible, in any number of potential permutations, and should be considered when assessing portfolio risk and not completely dismissed as “WRONG!”
I have never said that it insulates us from inflation, but at a time when there are so many deflationary forces at work I just don’t see the potential inflation for years to come. Thus far, I’ve been pretty accurate.
I’m just tired of hearing the fear mongerers cry about inflation. Sorry that it comes off as pompous or arrogant. That is not my intention. I’m just trying to throw out some solutions and truths in what is clearly a very bad situation….
“I’m just tired of hearing the fear mongerers cry about inflation. Sorry that it comes off as pompous or arrogant. That is not my intention. I’m just trying to throw out some solutions and truths in what is clearly a very bad situation….” TPC
No, you don’t sound pompous or arrogant. The name Austro-Keynesian is pretty cool. It is true that Keynes should not have propped up fractional reserve lending but at least he understood how it worked.
What I love is how only TPC and a small cabal of MMT fok understand money wheras almost all of the rest of the world is a bunch of uneducated idiots.
TPC has said in so many words no central banker on earth understands the monetatry system …but TPC does.
None of our great investors understands money. Paul Tudor Jones shares Einhorns concerns. So does Seth Klarman. Those are 2 legends…but they dont understand money. Either does Einhorn. Either does any global policy maker. Nor any central banker.
Only Tpc does and a small cabal clucking their lips…the rest of the world lives in some drug induced stupor.
I have just one question – have these investors and our govt been right? Is there inflation? Has the govt solved the problem?
I would argue that they have been exceptionally wrong. I don’t pretend to have all the answers, but my ideas have thus far been far more accurate than theirs have….
yes i am sure. Would you share how much have you or your clients made on you being right? A few percent, more, less?
Actually, very few people understand currency systems and banking.
They are very few Rothbardians out there.
Gary North might be one of them – but his call to hyperinflation annoys me greatly (over the Fed’s massive increase in the money stock).
Know why? B/c he does NOT factor in the velocity of money.
So as he rages on about the hyperinflative event, and there that money sits on the banks’ balance sheets – going nowhere fast.
I am going to take my own hint and start learning.
But by the same token, I am not going to sit here and call myself stoopid because I don’t either.
TPC
Here we go again brother.
As always your thoughts are appreciated yet on this concept of the US Government not running into a wall I just disagree.
A couple of anecdotes and comments:
1)When you are driving your car it will eventually run out of gas. Now it doesnt feel like it will ever run out of gas until it does.
The only way to prevent this is to pull over and take the necessary steps to refuel.
2) Remember Sigfried and Roy? The Tiger was tame until he(she)wasnt. Years went by without an issue, then BAM. Bloody and almost dead.
3) To hear you discuss this issue sometimes sounds like you think we could owe 100 trillion and still not have a problem.
4) Japans ability to weather their deflationary storm and not have “inflation” has been due not only to their central banks money printing ability but also to their captive domestic demographics that were EXTREMELY favorable to purchasing govt debt. You never mention this (as far as I have seen) and it is an important point.
5) I think that sometimes the word “inflation” is misperceived. Most of the time people think of inflation as being in a high employment, high demand situation. This is where demand and growth and higher wages are stimulating things to overheat. This is, however, only one type of inflation. The other type of inflation should not be called inflation, it should be referred to as CURRENCY DEVALUATION. When a government is irresponsible to the point where it’s car is running out of gas the people start demanding more of the currency for the same transactions. And in turn the people start buying more “tangibile” goods for fear that their devalued currency will not buy as much tomorrow. The dont trust the mechanism of trade any longer. The end result may be similar but the root cause is all together different. A currency devaluation is a crisis of confidence. Confidence is a real and tangible product of an economic structure and when the government though their action or inaction causes confidence to falter then the result is a currency devaluation. This is the most dangerous type of inflation. And central bankers fear it more than any other type of crisis.
The retort is often “What other currency would we use if not the dollar?” My answer is that when a car runs out of gas we find a way to get it going again or we result to desperate measures to keep moving forward.
6) You often make comments about “talking ourselves off the cliff” and as I have said in the past when you are swiming with sharks closing your eyes doesnt make them go away. Possitive thinking is great and necessary but it only works to a point. When the lion is charging me and I am on the dinner menu, pretending he is not there doesnt change the outcome. I must act or die.
7)Lastly, and I apologise for the diatribe, I think that people in our business lose sight of the fact that the universe has Natural Laws. These laws may take a long time to sometimes come to fruition or be enforced but nature shows that eventually the law of nature prevails. Economies also have natural laws and Kondratief proved this. We sometimes think that we are so smart and creative that we can thwart those laws but in the end the seasons must change and winter must hit us so that we can once again enjoy spring. You can dress economic theory up all you want but in the end even the United States of America, the greatest county on the earth, has to make drastic changes in how it operates or it will indeed run out of gas and have to pay the piper. And indeed ole Helicopter Ben may still be printing or digitally be producing dollars at that point but if no one is using dollars any more it really wont matter. Not because I say it is so but because the laws of nature say it’s so.
As always TPC thank you
and
Be good.
Very well said P Sean.
Oh my heavens. What a fantastic retort – incorporating solid analogies and putting into plainly written words what to me seems so obvious, yet seems to be of no concern to TPC. I would love to see a point-by-point rebuttal of this comment.
Why does the Fed not just send a check to for $1,000,000 (make that $1,000,000,000) to every man, woman and child in the USA. Then everybody will be rich and all our problems will be solved overnight?
this q will remain unanswered by the MMT crowd
I have answered it several times and I will repeat again that I have never advocated a free lunch such as a blank check. But the message here is that govt can and must spend some level of money. I have always said the spending should be a targeted investment in the nation as opposed to handouts. I have never advocated bailouts and/or handouts. The social implications of such actions are unquantifiable and in my estimation extremely negative.
+1, well said.
Whilst I agree a little with the article (e.g. background of deflationary forces as credit shrinks and why bailouts not instantly creating inflation), the author doesn’t seem to think there would be an effect if these (apparently non-existent) US creditors (by which incidentally I include anyone using the dollar as currency) were to dump their holdings. Most of the world funds the US government’s incredible spending by absorbing (at least some) of their unfunded spending (devaluation), usually at the near invisible cost of blood, sweat, and tears, and always through the deceitful indirect theft you find whenever greedy men control the substance and supply of currency. I never find many statistics that measure the human side of the equation in the value of the US dollar, and the author clearly isn’t even looking.
So us Brits are being scared into spending cuts? Instead we should just spend more and cut taxes too says the advice here. Until when? Sooner or later, it’ll either be lost in the currency’s value (stolen indirectly), or taxed (stolen given what its being spent on), borrowed from our kids (that ones wearing a bit thin), or maybe we can blindly rely on never-ending growth to pay for the unfunded promises of the future since we live in an infinite… world… oh dear…. Ok, or we could find some more suckers abroad to rip off with our paper and lies (guns optional) – but we’re nowhere near as good at that as the US these days. I vote cuts, and maybe I’m just too much of a goody-goody in that, but at least I haven’t lost sight of reality.
The government is not some benevolent creator of wealth. The government is supposed to be a redistributor of wealth for the common good, but unfortunately this ideal usually gets exploited by the greedy/lazy. Why does it get exploited? We see this demonstrated simply by asking why government credit is so remarkably “sound” (can’t beat backing up repayment with the threat of jail).
There is no free lunch. The author either unwittingly defines that there must be, or neglects to acknowledge the bill.
I have never said we should spend more, but to imply that we are spending too much right now is simply not accurate. I have advocated a tax cut and a direct boost to aggregate demand.
Fiscal austerity will do nothing in the current deleveraging environment.
P Sean,
Not sure how I missed this comment.
The deficit will become a problem when the private sector is fully healed. We are far from there.
Why are the Japanese more likely to buy bonds any moreso than Chinese who acquire useless US dollars or baby boomers? Everyone enjoys talking about “internally funded” deficits. I don’t care where the money comes from. All I know is that it will not sit in non-interest earning accounts for long before it floods the US t-bond market.
Real currency devaluation will only become a long-term concern if the USA stops producing goods and services that are in high demand and so long as the US government has a military that is willing to enforce use of the currency. Until then, there will always be demand for US dollars via taxation.
A market is nothing more than the summation of its users decisions. There is nothing more destructive than negative sentiment in my opinion. It can directly lead to deflation. We are seeing it today and I attribute it to govt abuse, misguided thinking by out leaders and bailouts that were undeserved.
Please bear in mind that I recognize there is no free lunch. I fully agree that losers should lose. Homebuyer tax credits? No way. Bailouts for banks. No way. I have NEVER advocated such policies and have said these are wasteful forms of spending. There will be lumps to be taken in the years ahead. But that doesn’t mean we should just sit by idly and do nothing. There are things the government can do to alleviate the pressures and I think if they focused more on Main St and less on Wall St it would do a great deal to get us beyond this problem.
TPC,
-Enjoyed your article, but like you with Einhorn I have some observations.
“Now, this is generally the point in the conversation where the inflationistas begin talking about the “effective default” of the USA via dollar devaluation. The problem is, each time the crisis flares up the price action in markets makes it abundantly clear that there is no inflation, but rather continuing deflationary fears. Einhorn’s comments regarding inflation are no different than the other inflationistas who continue to scream “fire” in a crowded theater despite no signs of fire. Of course, there has been no inflation because there is none.”
-No inflation? Well, it would help to establish what your definition of inflation is and what your gauge is to determine the level of inflation in the system. I come from the Austrian perspective that inflation is determined by the rate of money and credit creation taking place. The Fed controls the “water” (money/credit), but not where it flows. Inflation/deflation hits different parts of an economy at different times. For instance, currently housing is deflating while oil, industrial metals, precious metals, stock prices, government pay, cotton, etc. are inflating. Even in a hyperinflationary environment there are many items/goods that lose their purchasing power (deflate), mainly all non-real or unessential possessions incur this fate. As Michael C. comments above, “Reinhardt and Rogoff made it very clear in their book. The value of Fiat currency is based on confidence.” I totally agree, where people place their confidence is where inflation will be present.
“I am not sure why the world is so black and white to most. I refer to myself as an “opportunistic Austro-Keynesian”. I never pigeon-hole myself. Not in my investment strategies (which is why they are multi), not in my politics, and certainly not in my economics. Each economic environment is its own unique situation. Economists and portfolio strategists should view each economic scenario like an ER doctor – never expect that the exact same surgery will work on every patient. But for some reason certain economists prefer to claim that all government intervention is bad and others prefer to claim that all government intervention is good. The truth lies somewhere in between.”
-The world is black and white for a reason. In order for there to be a right answer to a problem everything else most be wrong or else ideal. Getting to the root of a thought/problem and asking the right questions will reveal the truth. In this case can government intervention do a better job than the collective decision making of millions of individual parties outlaying their own capital and not someone else’s? Looking at the end result, including all parties and costs involved, not the immediate effect, do you feel the government’s capital allocation ability can trump the private sector? In your example of the ER doctor addressing each situation uniquely, government intervention is the equivalent of one doctor making the decisions on millions of cases all at the same time.
“In terms of government spending (or blanket Keynesianism as most doubters prefer to call it) it’s largely an accounting identity. Private sector deficit is public sector surplus. If government never spends private sector funds are slowly drained… Contrary to popular opinion, government must spend before it can tax. Not vice versa. Therefore, a certain level of government spending is necessary.”
-The private sector’s deficit is the public sector’s surplus so government spending is necessary? Do you truly believe this? It is only because of the productivity improvements of the private sector that our standard of living increases over the years. The private sector creates surpluses so that the government CAN exist. If the private sector only ran a deficit the government would have consumed the private sector by now, or, due to malinvestment, the government, would create a lower standard of living each and every year. It is only by the private sector’s value creation that our standard of living increases EVEN WITH the government’s net drain on capitalism. Therefore, government spending is almost never desired or necessary.
Well said Neil
Neil,
Great comment. We probably agree more than you might think.
In terms of inflation the govt has failed to actually increase the money in circulation. This has been primarily due to the Fed’s failed monetary policy. So, from a textbook perspective there is no inflation. In terms of what many would call “malinvestment” I think there is a negative herding of investors into risk assets and hard assets that drive prices, but even this has been mildly inflationary at best. At the end of the day there are still little to no signs of cost push inflation. I’ve written pretty extensively on this in the past. I just don’t see the inflation, but continuing risk of deflation instead.
I largely agree with your comments on govt spending. I prefer for there to be little govt spending. Real productivity comes from hard work and innovation. Not govt spending. The private sector must run with the baton at some point. Unfortunately, I believe we are in a balance sheet recession and the private sector will not be in any shape to run with the baton for several more years. Therefore, private sector can’t and won’t pick up the slack. We must purge the system of the losers and boost the private sector in ways that don’t increase moral hazard or bailout the losers. A tax cut would be a nice start.
TPC,
“In terms of inflation the govt has failed to actually increase the money in circulation. This has been primarily due to the Fed’s failed monetary policy.”
-The gov’t/Fed’s failed monetary policy? As an “End the Fed” advocate I am no friend of a central bank. That being said, I see the Fed’s monetary policy accomplished its immediate goal, to stop an immediate bank implosion. Citigroup, Freddie, Fannie, AIG, etc. are all “successes” of the Fed’s #1 goal. The ballooning of the Fed’s balance sheet allowed the leveraged, overnight funding required financial services industry the gift of another day. The Fed’s secondary goal was to spur additional lending from the private sector, which has proved unsuccessful so far.
No big loss when, in the big picture, Freddie, Fannie and FHA are available to do 90% of all mortgage lending, Sallie Mae for student lending, and SBA for small business lending. The Fed won their battle, not the war.
“I think there is a negative herding of investors into risk assets and hard assets that drive prices, but even this has been mildly inflationary at best.”
-The herding I see is not, I believe, into what your definition of risky assets are. I see investors moving into bonds, anything fixed income, especially treasuries, which in my definition appear to be the riskiest of all assets. You may disagree. As for mildly inflationary at best, oil moving from the low 30s to mid 70s is the equivalent of a $250 billion tax on society. This is just one expense, need I mention copper, lead, nickel and soybeans and their impact on a Chinese small business. What happens if people lose faith in the “value” of a dollar?
“I just don’t see the inflation, but continuing risk of deflation instead.”
-You agree with Ben Bernanke then. Again, I see deflation too, but you should consider the future inflationary impact that China poses. If they revalue their yuan cost push inflation will be quite visible, overnight even.
“Unfortunately, I believe we are in a balance sheet recession and the private sector will not be in any shape to run with the baton for several more years.”
-I have come to believe as you do, that we are in a balance sheet recession. Ultimately though you take the medicine now or later. Government intervention with their malinvestment record means short-term relief, but ultimately more complications later. Debt is what got us to this point and more debt will not be the answer. If Japan is the success story, with federal debt hitting 220% of GDP, two decades plus of no improvement in the citizen’s standard of living, and the very real likelihood of a eventual sovereign default which will level the citizens, the government, and the financial sector anyway, when an aging populous can no longer fund 99% of the government’s malinvested spending, because no foreigner will accept 2% interest for 20 years, I would rather take the medicine now and get well quicker, than stay sick and possibly die.
Neil
Neil
Good stuff.
Check out my comment above you regarding Gary North who I presume you know (better than me). Increases in the money supply (Autrian definition of inflation) don’t always lead to price inflation WHEN the velocity of money is ZERO.
What is frustrating is that I have heard no Austrian pick up on this.
And when banks “heal”, Helicopter Ben can just slowly unwind his positions in the banks, and poof! No inflation. I think that is what he is trying to do.
As regards black/white thinking, I think it only applies in ethics & religious thought. The so-called line in the sand.
Applications elsewhere has shown that thinking to get you into trouble more often than not. Being an integrationist is a good thing. Take the best strategies/ideas from the various fields, integrate them for the situ at hand and leave the bad.
LLuvatar,
Appreciate your comments.
“Check out my comment above you regarding Gary North who I presume you know (better than me). Increases in the money supply (Autrian definition of inflation) don’t always lead to price inflation WHEN the velocity of money is ZERO.”
-My definition (stolen from Mises) of inflation means an increases in the supply of money (fiat or commodity based like gold) and credit. Remember, inflation and deflation can co-exist. As for the velocity of money being zero, which means no inflation, please consider just one of my thoughts. When hyperinflation happens does it happen over the course of years or many months? History has shown that it happens very fast, over a weekend in some cases. Panics (a loss of faith/conviction) strike lightening fast and the velocity of money changes overnight. We should not project a low velocity of money as a sign that inflation/hyperinflation is a distant problem.
Too, what is your definition of money supply? M1, M2, fiat dollar, gold, Austrian money supply, etc. The more comprehensive the measure of money the lower the velocity of money.
“As regards black/white thinking, I think it only applies in ethics & religious thought. The so-called line in the sand.
Applications elsewhere has shown that thinking to get you into trouble more often than not.”
-Black/white labeled thinking is silly, its right and not right (or right and close, but not ideal). Economics, religion, liberty, applications of faulty thinking have always resulted is less than favorable/ideal outcomes.
Neil:
a) hyperinflative events set land speed records, we agree there (recall the ~not so funny joke in the Weimar Republic? When you got on a bus, you had to pay the fare twice. First when you got on, then the difference of what the fare had changed to when you got off.)
b) I find the risk of that fairly low (I think North’s 20-100% scenario much more likely via currency debasement). I think the Fed has a lot more tricks up their sleeve w/ our currency system than we give them credit for. Plus, last thing they want is hyperinflation – the banking cartel gets singed too!
c) I would prefer M1 since it measures what’s out there. Here is an interesting link, that I just checked:
http://pragcap.com/flation
from the FOMC’s own charts.
d) finally, a question? Have you seen any Austrians tackle velocity of money issues? I can’t find any. Holler if you know – much abliged!
I am still learning!
lluvatar,
I agree, the Fed is very crafty and has big levers at their disposal to alter the natural interest rate. Also, the government can (and will) initiate capital controls and the like to make the market work for them.
As for the link on inflation you provided, I reference info pulled from the link:
“Mr. Hoisington proceeded to prove his case for deflation beyond a reasonable doubt. As he wrote in his first quarter Quarterly Review and Outlook , “In extremely overleveraged economies, monetary policy doesn’t work. Potential borrowers do not have the balance sheet capacity to take on more debt. Currently, borrowers are loaded with excess houses, office buildings, retail space, and plant capacity.”
-Hoisington loves to “prove” their deflation theory with the over-capacity argument. For myself, logically this makes sense and history does show that overcapacity has led to falling prices. However, the question to ask is, has this always been the case? If not, then to “convince” everyone that deflation is inevitable is false or misleading. I am not convinced because historical fact shows MULTIPLE times hyperinflation has hit countries with over-capacity. For example Zimbabwe’s over-capacity and output gap are alarmingly high yet hyperinflation exists. Zimbabwe is an outlier? Need a non-African example, take the Weimar Republic that you reference above. Huge over-capacity, huge inflation. Lest we forget that hyperinflation CREATES over-capacity as malinvestment runs wild and then we a new currency is established a “stabilization crisis” happens (think massive deflation resulting from the huge over-capacity.
-M1 has its flaws.
-Austrians don’t shy away from the velocity of money, I love poking holes at it. Remember, velocity can go from zero to how cares overnight. When that happens forget looking at your velocity of money chart for direction and go spend your money on something!
-Mish Shedlock has a very good blog called Mish Shedlock’s Global Economic Trend Analysis and he has tackled velocity of money and then some.
-Your humbleness is a great virtue.
Neil:
- So, if I am understanding you correctly, both Zimbabwe and the Weimar had over-capacity (essentially production was way under full capacity) at the time that hyperinflation hit? That is very important to know! (I.e., that hyperinflation ensued after an over-capacitive event.) I re-read your post, and I also see that the over-capacity event followed hyperinflation, and that makes sense to me. But that it ensued is another thing to understand for me.
- Oh dear, I think it is time to review history to find out why they went in to the tail spin that they did.
B/c, the main reason I see an inflation risk is more to currency debasement techniques in servicing of greater and greater debt loads. What you are saying carries with it a much (much) greater danger.
- I don’t disagree that velocity of money can change rapidly – it most certainly can. But the QE and other bank balance sheet shoring-up operations have not led to (price) inflation b/c the credit markets are still seized. People can’t borrow b/c they are up to their necks in debt, and banks can’t lend and meet reserve requirements (perhaps?). I think that was the only point I was trying to make: that money inflation does not need automatically lead to price inflation, velocity is also required.
- Indeed, this may be a key source of misunderstanding among economists. Maybe Helicopter Ben was not trying to get the credit markets going again by the QE? Maybe he was pushing all that money into the banking system to just stabilize the banks, with the hope that after stabilization, the credit markets would also unwind as a consequence of a healthier balance sheet?
- But as TPC indicated, you’re pushing on a rope, because people can’t take on more debt right now. I think that is what is meant by a “balance sheet” recession.
- Now you are the 2nd person w/in as many weeks to recommend Mish! I have been reading his blog, though not on a daily basis. Lately, he supports a delationary view as well. I will search his site for velocity concepts. Is it just me, or do most Austrians ignore velocity; I harldy ever hear them talk about it (North, Addison, Daughty, etc.)? By poke “fun”, is it to say that they don’t think it’s real or worthy of consideration? That’s confusing. I am not sure I understand that.
- As to M1, sure, which measure does not? It is more to check the gross correlation that’s all. It isn’t a precision metric.
Thanks very much for your time, and all your tips (3 of them). I will check into this stuff.
Neil:
Thanks for those tips on Mish & the Weimar.
I got 3 good papers from Mish concerning the velocity of money.
Then I went back to review history on the Weimar republic which did not get into real details (war debt build-up, war reparation payments under the Versailles treaty), then I ran into this:
http://www.marketskeptics.com/2008/12/how-deflation-creates-hyperinflation.html
Is this what you were trying to convey in your post above? If so, I find the analogy of the Weimar situ to today very frightening indeed…
Thanks much for the tips.
lluvatar,
Nice find with the article from the blog market skeptics. I actually receive rss feeds from MS, but I found the site after that article was posted. By the way, the article does a great job of explaining Weimer and deflation/hyperinflation. A loss of confidence is all that it takes and extreme measures by the Fed can overnight destroy people’s confidence in the currency. A perfect example comes from no other than the stock market when, on May 7th 2010 at 2:40p.m., all confidence was lost in stocks for 10 minutes. Luckily people still believe in stocks.
One thing that others have mentioned is that people who are lending (and already haven’t been screwed) are short duration in US Tsys. This makes the gov vulnerable, as that also makes it less likely that the US Gov can inflate away, or conversely can allow holders to vote with their feet very quickly. The short duration is a reflection of confidence in the USD; don’t mistake it, there are some bond vigilantes, although they’re maybe more elementary school bullies right now (but they get meaner as they grow up). Ironically, the US gov bailout is contributing to the short duration, as they are taking on crap Las Vegas 30yr mortgages and swapping for 1 year TBills, essentially.
TPC,
Mr. TPC I sense that you are a lot more Keynesian than I originally thought. HMMMMM??? I really think that your stance on this whole US default issue is causing you to ignore the consequences we potentially face as a Nation if we continue on this drunken spending spree as well as the advancement of the democratic Socialist movement. Of which I blame both equally for many of today’s economic challenges. You are VERY right; the US technically can not default. I really think most people recognize this. The problem is that it will become VERY clear to the world that the US is servicing their debt with “worthless” paper if Ben is forced to crank up the presses because everybody decides to cut back on buying US bonds.
Having to resort to printing money will be like branding ourselves as a broke and insolvent Nation. With this, there will be many “other” negative outcomes such as foreign money fleeing our country, local people withdrawing their money from the banking system, people being forced to sell assets at fire sale prices, money market funds getting depleted and breaking the buck. TPC, you can go on and on and on here.
The message I hear from Einhorn is “Get your house in order America or the rest of the world WILL eventually force you to do so”.
Can government spending be positive for our economy? Only if monies are being spent on programs that align themselves with what our fore father originally planned for Government to be. Which in my opinion is to protect our Nation. What would happen if the US postal service shut its doors tomorrow? The free market would take over. Fed X and UPS would flourish. What if every single public school shut its doors? Wouldn’t this be great! Guess what, the tax dollars you’re currently spending would be re-directed to the private school of your choice. Low income schools would also flourish with the donations of individuals and corporate America.
You see we have been and will continue to be brain washed by the left winged liberal socialist that we, as a society, are not capable of making the right choices in our lives. This is so sad. I have to stop now. Get off your bottom America and VOTE the current fraudsters out of office this year!
I’m only a Keynesian in the sense that I understand govt spending is not ALL bad. I’m also an austrian in that I believe losers should lose. Call me whatever you want. I just interpret the system as I see it. Personally, I don’t think I really fit into a square peg under any of these labels….
Heck, the solution to all arguments about money is liberty. Let anyone create their own money and let everyone else accept or reject it. Only the laws against fraud and insolvency are necessary. All legal tender laws should be abolished. Government fiat would by backed by its taxing authority. Capital gains taxes should be abolished too to allow gold, silver and the ultimate money form, IMO, common stock to be used as money.
Its really pretty simple if we stop insisting on one size-fits-all. Liberty made this country great. It IS our competitive advantage.
I went to college, I studied economics. I’ve been an institutional money manager for 25 years, and I don’t understand every nuance of your argument, but it sounds like a load of poo. What I do know is I bought gold at $400 several years ago and it’s $1200 today. I also know I could buy a candy bar for a nickel as a kid, and the same size bar cost $1.25 now. In my book that’s currency debasement. Said differently, We’re getting Fcuked by the government.
You sound like one of those LTCM Nobel economists who thought they were one of the “smartest guys in the room”. All that intelligence, and arrogance, and they still lost billions.I know Einhorn makes money. I have no indication you do. You can spew that The deficit doesn’t matter, the Fed printing money doesn’t matter, blah, blah. all I know is the government either through taxation or inflation is stealing from me and the dollar has lost 90% of its purchasing power in th elast century and it’s on its way to 100% decline.
I own gold along with Einhorn and am making money. It sounds like you’re not.
Did you actually read the piece? No one says deficits don’t matter. No one says gold is a bad investment. In fact, I have said exactly the opposite time and time again.
As for my personal investments – I have done just fine by any metric. 17% compounded since inception. +15% in 2008 when Einhorn got smoked -22%. Sharpe ratio of 1.5. I’m no slouch when it comes to investing. I would gladly pit myself against any of these hedge fund “gurus”.
You’re making a lot of baseless assumptions here Sherman….
I agree with Sherman. Your arguments are a lot of baloney. There is plenty of inflation over the long haul and if there was none in the past few weeks or months, it means nothing. When gold was $250 an ounce a few years ago, I told everyone I know to invest in gold. They looked at me like I had two heads and now think I am some king of investing genius. The Dow 30 was about 10,000 then and it is about 10,000 now and they had all their investments in the stock market.
Inflation is a hidden tax, a way for the government to confiscate purchasing power from the dollars you have sitting in your bank savings account without forcing you to write them a check.
I am still waiting for someone to tell me why we cannot solve all of our problems by having the Fed send a check for $1,000,000 to every person in the county. Then everybody will be rich!!
“I am still waiting for someone to tell me why we cannot solve all of our problems by having the Fed send a check for $1,000,000 to every person in the county. Then everybody will be rich!!” Highway
Not a bad idea actually! The debt-slaves would be freed and the savers would be compensated for artificially suppressed interest rates on their savings.
Let’s use debt-free legal tender Greenbacks for the purpose though, not FRNs.
Also, at the same time fractional reserve lending should be abolished to prevent hyperinflation and force the banks out of the money creation business.
One cannot push on a string but one can sure pull on it.
There should be other reforms including the eventual abolition of legal tender laws and complete liberty in money creation subject only to the usual laws against fraud and insolvency.
Correction:
$1,000,000 is probably too much. To stop the deflation, the amount distributed to each household should be the difference between the average mortgage principle owed and the average market price of those homes.
To bad that candy bars do melt like money.
But at least you enjoyed that candy bar and since your income as increased at least in proportion to that candy bar you can injoye one more for probably less work.
It’s the money we saved and do not consumed or invest that is debased.
Gold is up 425% since 2000. Inflation was up 28%.
Ether Gold it to high or Inflation is on the way big time.
At this stage inflation is hiding somwhere.
Good Luck.
Gold being up that much is forecasting future inflation. Buyers are betting that their paper money will lose purchasing power in the future and are trading colored paper for something that is a better store of value. The price of gold does not care what happened today or yesterday or last year, only what is ahead.
Dear TPC: your work spreading the ancient ideas of ABBA LERNER and KALECKI is excellent.The “fiat currency” monetary system give the goverments the power to “socialize the investment” = expropiate the private wealth without restrictions(“euthanasia of rentiers”).GOLD in a SWISS BOX is the only SHELTER.
Not trying to be hostile, but what exactly do you mean when you say “the debt does not have to be repaid”? And, no, “what debt
” is very cutesy but not an answer.
People have lent money to the US government in exchange for fixed interest and repayment of principal. People also have USD-denominated assets. The US government can either choose to not repay bonds or to devalue the USD until such fixed-priced bonds are easy to repay. Either way, someone gets screwed; it will be a big wealth transfer.
Ah, I think I hear you about to type “but what do you care if your paycheck is $1000 or $10,000 as long as it can buy the same amount in real terms?” While the US does have the reserve currency – for NOW – the US is also an enormous importer. As long as the US can force people to sell us oil for worthless pieces of paper, I guess it might work out, but good luck with that — it seems to be having a hard time right now with louse-ridden hillmen much less anyone else. That military isn’t much good without oil; troops also tend to lose the will to fight unless paid adequately (in REAL terms).
Your argument seems to boil down to “things are fine until they aren’t.” I’m worried about the “aren’t” part of that.
In the short run, I am a deflationist just because I believe the current depression is far more sever than people think. It will last a long time and the US will stuck with 20% under/unemployment for decades — look at labor force participation over the past 15 years, and don’t tell me that’s because boomers have saved up so much assets and are retiring in comfort and affluence (haha). It is very difficult for governments to create inflation, even when they are trying (q.v. Japanese sushi slump) despite what monetarists think. While I agree with your policy recommendations in the comments — forcing institutions to take losses, reducing malinvestment, liquidating and moving on — surely we all know nothing like that will ever happen. At best, the US will shamble on as a zombie with no growth and deteriorating living standards in real terms; at worst, the US collapses.
In the long run, however, how can anyone not be an inflationist? What happens when US interest payments on Treasury debt exceed principal repayments? Do you loan a deadbeat money just so he can give it right back to you to pay the interest on what you loaned him last week? Probably not.
People have been making the same argument in Japan for 20 years. “That inflation is coming”. I am not trying to be “cutesy”. Just tired of typing the same answer over and over again.
The answers are all in the piece (and its links). The USA has no foreign denominated debt. I don’t know if I can explain it more clearly. Please re-read the piece.
It was certainly cutesy and snide and so is your rather nasty reply despite an honest request for a better explanation other than “things have been fine and always will be.” I did read your post. I did point out important reasons for near-term deflation, but none of them will impact the long-term. No, agreed, there won’t be a Greek-style crisis of forced restructuring by foreigner powers because there is no foreign-denominated debt. That’s not anyone’s point; it’s straw man argument. The issue is whether the US dollar loses real value.
You also didn’t bother to address what happens when interest repayments exceed principal repayments, the fact Japan has a high domestic savings rate (or a more favorable balance of trade), or what either inevitable default or inflation mean to people with either bonds or other USD-denominated assets. The US economy, lifestyle, and social stability rely entirely on importing stuff by getting people to take pieces of paper. As long as you can keep the game going, it’s great; it’s never lasted anyone forever.
Don’t bother replying; not reading this anymore.
Not sure why there is so much hostility regarding this topic. I don’t sit around and write these articles because I am trying to destroy the country.
I am trying to help. I am sorry if you didn’t understand the article. I don’t know what else to say. The USA has no foreign denominated debt. You’re thinking of the Federal govt like its a household which it is not. It’s all explained in the article and any links.
Sorry my comments came off as snide and insulting. That is the very least of my intentions….
the only thing that gets people more fired up than MMT is when goldbugs debate the merits of GLD as a vehicle for gold exposure…
They don’t. They come off as attention-getters.
Problem is (2 actually), to find out how the other shoe drops requires reading 20-30 more of your blogs and comments/posts to the blogs. It is a real research chore.
The 2nd problem is as you said. Your fingers are numb from having typed this 100+ times.
My apologies. When I started this site I never intended for it to become so widely read. The result is a poor structure in terms of layout and archives.
If I were just trying to get attention I would simply go screaming around about hyperinflation, the end of the world, Goldman Sachs, stock market crashes, etc. I have never cared if people come here to read the content, but I am sincerely interested in advancing thought and market knowledge. This site is as much for my own thought confirmation as anything else….
Sorry to send you running in circles.
No worries!
I have enjoyed the journey so far, and I still have another jar of elbow grease on the shelf.
However, I was hoping to use that on the currency papers and MMT (~1/2 thick). (Grin)
Have a good holiday!
Your site is widely read because it’s a very good site. You usually present excellent thoughts and ideas and I suspect you’ve had many readers come away more knowledgeable then they were prior to viewing TPC. If nothing else, you are making many people reconsider their prior opinions. You certainly have in my case. You’ll never get 100% agreement from all your readers but as the old saying goes, “you can lead a horse to water but you can’t make him drink it”.
Hi John. Thanks for the comment. That’s really the goal with a piece like this – to get people thinking and start a useful debate. It’s clear in my opinion that our leaders have failed us. That means something is fundamentally wrong with our approach and diagnosis of our problems. If I can spark debate that gets people thinking about alternative solutions and ideas then I think it’s a step in the right direction. I’m not trying to push some agenda here or sway people into believing everything I write, but if I can get people to think outside the box then I think that’s progress.
I really am sincerely trying to help whether it looks like it or not.
Thanks,
TPC
Over a reasonable timespan, Einhorn would out-invest you (and just about everyone else) 100% of the time. I assure you he is well aware of your counterpoints and how the monetary system “works.” He rarely goes public with opinions but as best I can remember he has been correct 100% of the time.
Here is what you are missing…
The reason we can digitally print money with modest inflationary consequences is because we have a massive store of goodwill in the US dollar from decades of generally good economic performance. The USD is still the currency of choice for savers. When we digitally print money we spend some of that goodwill – the catch is that we don’t know how much there is. Currently, only a minute fraction of global wealth even thinks about the need to to diversify outside of fiat currency.
When fiat currencies fail there is no “writing on the wall.” The probability of collapse can go from improbable to inevitable almost overnight. And that happens once you have used up that store of goodwill. Imagine if a meager 5% of global savings decided to diversify into non-leveraged physical assets – oil would be $300 almost instantaneously. There would be no time for the Fed to tighten. It could easily spiral out of control and destroy the currency within months.
The risk is we dont know where that line is. All we know is that we are getting closer to it every time we digitally print. This is a lot like the global warming argument – we know there is a line on CO2 you cannot cross but we dont know where it is. So even though the environment is just fine today we had better be VERY careful.
Einhorn knows that the Fed knows this. Einhorn also knows that the people also know this. I think the crux of his argument that the US could default is that either the Fed or the electorate will step in to stop digital printing before we hit currency armageddon.
“digital printing” invokes the same misconceptions….
“digital printing” = increasing the ratio of USD to physical assets
how can you disagree with that?
Is the money supply climbing? The Europeans have been saying this for the last year and then we find out two days ago that M3 has DECLINED. The Japanese have been saying this for 20 years and yet debt destruction continues to be the overriding factor in their economy. Deflation returned officially last night with a -1.6% CPI print.
You inflationistas keep saying we are destroying the dollar and devaluing and “printing” too much, but the facts prove you wrong.
This is akin to saying “the Earth keeps cooling, there is no such thing as global warming. Bulldoze wind farms and build more coal.”
The truth is, narrow measures of money have grown massively. The only reason broad measures haven’t is because the world is comfortable keeping savings in short-maturity USD-denominated assets. This can change overnight. If we breach that trust by pushing the ratio of USD to physical assets too far, savings would flee short-maturity USD-denominated assets and seek out non-leveraged physical assets (i.e., commodities).
You cannot use week-to-week market reaction to assess the long-term impacts of policy. That’s how Greece got in trouble – “we can borrow cheap so the market must not care about our debt level.” The size of Greece’s debt did not change materially in the last few months – the market simply changed its mind overnight. We risk the same happening in the US although it will take a different form as we can literally choose our interest rate via the printing press. Oil is our Achilles hill and the market knows that well. It just chooses not to care right this second. I don’t take much comfort in that.
The proof is in the pudding. As FXBot says, just look at today’s market action. It is classic deflationary price action and every time the crisis resurfaces we see the same price action. Bonds rise, dollar spikes, commodities get killed, etc.
Are the markets lying to us? Wouldn’t the 10 year treasury market begin to discount this risk of rising inflation?
Why didn’t the Greek bond market start to discount default 5 years ago? You clearly have no idea how markets work.
The markets are in a temporary equilibrium. Printing = risk assets rise. Lack of printing = risk assets fall.
Of course, guys like you take that to mean printing = good. I see a market that would happily rally itself right into a complete destruction of the USD as the reserve currency. In fact, if you told the bond market today that the US would default 10 years from now I bet bonds would trade just fine for 9 more years. This is exactly what happened in Greece. That Greece would have debt problems was clear as day at least 5 years ago.
Well, the fact that the 10 year Greek bond yield has been on a steady march higher for 5 years proves your point exactly dead wrong.
Regardless, the Greek monetary system is entirely different from the US monetary system so the comparison is apples and oranges.
And let’s try to avoid throwing out ad hominem attacks. This website is a place for adults to have intelligent and thoughtful economic/market debate. The hostile response does nothing to help further the debate or educate anyone….It will not be tolerated for long.
Thanks.
In May 2005 (5 years ago) the Greek spread over German bonds was 23bp. Today it is 498bp. Do you really believe the market was anticipating the (obvious) credit event 5-years forth? I would say quite the opposite – the market was absolutely, positively confident there would NEVER be any problem with Greek debt (23bp is razor thin – probably not even enough to compensate a buyer for the reduced liquidity).
Moral of the story…do not use month-to-month market movements as insights into the value of policy/monetary decisions. To do so, is a fundamental misunderstanding of how markets work.
Because there is no flight from the USD (and all fiat currency) right this minute does not mean there is a massive amount of pressure in that direction building just below the surface. And if it were to burst, there would be nothing we could do about it. I propose that policy makers stay far away from the “3rd rail.”
“The reason we can digitally print money with modest inflationary consequences is because we have a massive store of goodwill in the US dollar from decades of generally good economic performance. The USD is still the currency of choice for savers. When we digitally print money we spend some of that goodwill – the catch is that we don’t know how much there is.”
thanks MLB – i think that’s an excellent enunciation of the “intangibles.” well said.
You just stated that Greek bond yields haven’t been rising when clearly they have:
3.5% in 2006, 4.1% 2007, 4.5% 2008, 5.2% 2009, 5.7% 2010, currently 6.2%.
It is the spread vs Germany that is the most relevant metric if you are trying to assess the market’s view of the likelihood of a Greek default. That spread did not start to move significantly until mid-2008…about 1.5 years before the crisis. For years, Greek policy makers have used their low borrowing costs as a sign that the market supported their fiscal policy. They were dead wrong.
Similarly, to use rising risk assets today to conclude that a policy of printing money also runs a big risk of being dead wrong.
So we would both agree then that the market has been discounting default in Greece for almost 2 full years.
Regardless, it’s an apples to oranges comparison because the only reason Greece even has default risk is due to their involvement in a single currency system.
Comparing Greece to the USA proves nothing.
Caveat emptor – The performance of past historical data is no quarantee of present or future data performance .
““digital printing” = increasing the ratio of USD to physical assets” mlb
Not so simple. Debt repayment of existing FRL loans destroys money and DECREASES the ratio of USD to physical assets. Also, fear in the market place decreases the velocity of money. People are saving more and the money is piling up in the banks but the banks aren’t lending. If FRL were abolished, I would bet that severe inflation would become impossible unless a disaster destroyed real assets.
Quiz: The ratio of USD to physical assets today vs 5 years ago is a) lower, b) same, c) higher, d) much, much, much higher?
d) Much, much, higher. However, much of it is sitting in the banks as reserves and not being lent out. I agree that giving money to the banks stinks. If that same money was given to debtors then it would have bailed out the banks too. Of course then the savers would have howled. So some money could have been given to them too. The only losers then would be the banks and only in real terms.
And what would the banks do with those USD tomorrow if a news story broke that Saudi would no longer accept USD for oil? And how fast would they do it?
I doubt the Saudis would do that. The US military keeps them in power. Yes, it is sad our currency is backed by thuggery. We should leave the Middle East and practice free trade not looting.
Like I said, the debtors should have been bailed out, the savers compensated and FRL in the dollar abolished. Then alternative monies should be allowed so the bankers can practice FRL in their own private money supplies if they can find suckers.
You don’t really believe they can do that do you? I don’t think that’s not even remotely plausible.
You can’t shun your biggest customer. I don’t care who you are. And you certainly don’t shun a customer who has armed men sitting just miles away….
I was using that as an (oversimplified) example of a loss of confidence in a currency. I doubt it would be headline driven like that but I think the move would be just as sharp and sudden nonetheless. Not a single economist would have any idea what to do about it because there is no line for “confidence” in the econometric model.
As for Greece, my point was not that the US and Greece are in the same situation – they are not. However, I would argue both are equally vulnerable – just at different points along the chain. The point was that you cannot use medium-term market reactions to judge policy or future risks. You need to see what is building below the surface – markets wont react until it is too late for policy makers to do anything about it (in fact, that is precisely when markets like to react).
When we digitally print money we spend some of that goodwill – the catch is that we don’t know how much there is.
What you miss is that the Fed can also destroy money, by using open market operations to increase interest rates, effectively reducing the money supply.
The Fed is temporarily using QE in an effort to offset the decrease in private lending. When lending increases, the Fed can change its policies, effectively purging money from the system. QE does not equate to inflation when undertaken to appropriate degrees and during appropriate times of the cycle.
There is a fundamental error made by many laypeople that money is strictly a physical asset, the supply of which can only be maintained or increased. That view is commonly held, but it is fundamentally wrong, and it is this failure to understand what “money” actually that causes the inflationist crowd to miss the boat.
I don’t quite buy TPC’s approach, either — the market will ultimately determine the value of the dollar and will set the inflation rate, and that could eventually prove to be detrimental to the US government in the form of a lowered credit rating. But he’s far closer to the reality of what money is and how it works than are the inflationistas.
It kills them to admit it, but the inflation bugs have been batting zero with their predictions. One would hope that there comes a point when the Chicken Little routine gets old, even for them. In order for the dollar to completely fail ala Peter Schiff’s paranoid, money-losing fantasies, the entire economic engine and/or political system that support it would have to fail. Since neither scenario is likely, particularly the latter, betting on collapse is a long-shot, underdog bet that is unlikely to pay off.
So you are telling me that the Fed will succeed in walking this fine line where it stops QE just at the right time??
I can tell you that the Fed already failed since Bernanke told us that the Fed’s balance sheet will shrink to $1 trl; yet it keeps bloating up every month.
So you are telling me that the Fed will succeed in walking this fine line where it stops QE just at the right time?
The line isn’t that fine, and there is no need for “perfect timing.” The credit markets won’t react so quickly that the Fed can’t respond within an appropriate window of time.
I believe there is a distinct possibility that either: 1) employment conditions never return to a strong enough level that the Fed can justify tightening or 2) the Fed increasingly becomes a political too and therefore loses the ability to tighten.
Guys, TPC is right. He’s been right for years. Today’s market action is obvious deflationary price action. There is no fear of inflation.
This is a major hedge fund player. They don’t deal in facts. They deal in money. They have so much power and influence it would boggle the mind of any ordinary person. About 25 of them (Paulson, Soros, Einhorn, and even a few people I know well) want gold to be the go to investment, the next bubble. It will likely come to pass. Privately they will explain it this way: the public will believe gold is the go-to investment (and thus create a bubble) because it is impossible now to get deficits under control; the public SHOULD believe that corporations will get slaughtered by politicians (this is happening) and companies themselves are run by liars and thieves (not my phrase); and commodities are the only “safe” investment around. Which is better: owning Monsanto with its steadily declining share price and steadily declining earnings or owning precious metals that either go up or down, they never miss earnings estimates? I happen to own a fair bit of physical gold but I think it is an absurd investment mechanism. But of course over the last 10 years what has proven to be a GOOD investment mechanism?
Gold cannot be the next superbubble for one simple reason – there isn’t enough of it. For a bubble to really take off, the vast masses must be able to participate in it, and borrow vast sums to do it. When the shoeshine boys are hawking the bubblicious asset, you know it is time to sell everything. But there was only enough excess (not used for jewlery or industry) gold mined in the last 8 years to produce 220 million US gold eagles, which isn’t even enough for one per American. Unless a major new source is found, gold can’t become a superbubble. The price can run up and crash, but you can’t get the masses into frenzied buying with borrowed money without more supply.
Every major bubble has consisted of assets that could be made available to the plebian masses in great or even unlimited quantities.
Tulip Bulbs
South Sea Shares
DOW Industrial stocks
Florida Real estate
Nifty Fifty stocks
Dot Com Stocks
and the biggest bubble of all time — US Real Estate in 2000-2007
Precious metals had a huge runup in the late 1970s, partially caused by a Hunt Bros corner of silver and the inflationary environment. But I wouldn’t call it a bubble since there wasn’t all that much public buying with borrowed money.
ETF – ‘nuf said
HA HA HA
blame the misery that faces the US economy on people’s negative comments. Come on TPC you can do better than that. No one can “talk” the economy into recession. Recession is a result of bad decisions that have been made in the past; in this case it’s the politicians that think printing money and spending recklessly will get them out of this misery.
Psychology makes markets. Sentiment controls behavior. Would you disagree?
Sure it does but only in a short run. In the long run fundamentals direct markets. And as MLB mentioned, do not think month-to-month movements in the market are indicative of what is to come. BTW, I absolutely agree with MLB on the Goodwill part of the US currency. Well said MLB!!
My comment to TPC was going to be about “animal instincts” and the role of psychology in the markets.
My theory.
It has occurred to me that the failure in currency and road to hyperinflation begins with a simple truism, lack of faith in the government. When the citizens no longer have faith that a government will act in the interest of the people, then the people begin to pursue activities that are in direct conflict with the government; including but not limited to, distrust of the currency, hording of food and the purchasing of commodities, real property or hard assets.
Personally, I plant fruit trees. That way if the inflationists are correct, I will have food. If the deflationists are correct, I will have bird food. Either way, I win!
Just my thoughts.
I have very little professonal knowledge about finance or economics. I have never even taken a college course in either. I am in the medical profession. But I do have some common sense and it seems to me that a lot of you all out here are getting your knickers in a twist about different economic theories and philosophies. I have tried to grapple with the back and forth argument on this page but I just don’t get it – so let me put the situation in layman’s terms and I would appreciate if anyone, but especially TPC (whomever that is) could explain to me in simple language whether or not what I am saying is correct.
1) The US government spends a lot more then it receives in tax revenue.
When this becomes obvious to people, there will be a loss of confidence in the dollar since printing lots of extra money leads to the POSSIBILITY that it could end up in the general marketplace and cause an increase in prices.
2) It is able to do so by borrowing the difference. It has to pay back the money with interest.
3) The U.S. government has been spending increasingly more and there is no indication that it will be able to pare back the spending (social security and medicare for babyboomers) or that its tax revenues will increase substantially in the near future.
4) The longer this goes on the greater the percent of tax revenues will need to be spent on the interest.
5)At some point people will get concerned about the governments ability to pay back the money and start demanding higher interest rates to reward them for the higher risk.
6)At some point the cost of borrowing will be either to high, or there won’t be enough tax revenue to pay for the interest and other govenrment spending.
7)At this point to avoid defaulting on debt or to continue spending money, the government will start printing money instead of borrowing it.
9) The purchasing power of the dollar will thus be lost, while at the same time taxes will probably higher, and wages potentially lower.
Explain to me, please, how there is a way out of this other than some miraculous growth in the economy that will allow the government to increase tax revenues.
Thank you and please excuse my ignorance.
Alex,
The Federal government does not spend tax money. Taxes are used as a monetary tool to control how much money is in the economy. As TPC have stated many times, please do no think of the Federal government balance sheet like a household or even a state government balance sheet which is revenue constrain. In the case of state and local governments, taxes are revenue because these entities have to use the national currency (US Dollar) which the Federal government have a monopoly over. At any time the Federal government can repair any of the state’s balance sheet and not incur one ounce of new debt because the money comes from the balance sheet of the Federal government which is not revenue constrained.
As TPC have stated many times, when you or China, or India, or anyone else buy bonds or bills from the Federal government, you are essentially buying a saving account that will be paid back using US dollars. Remember that is not debt as the Federal government is not revenue constrained. when US government auction bonds, it is performing a monetary task. I believed bonds are use as a way to control the money (that the Federal government spent) from venturing into highly speculative investments thus producing out of control inflation. By having China and other surplus nations hold treasuries (saving accounts at the Fed) this create a natural barometer for inflation in the market. As these nations opt to chase higher yielding investments, the natural rate of bonds will move upward to create a balance.
We do not pay Federal government “debts” and interests with taxes. Although the number looks alarming huge, as long as US dollar is still in great demand, Federal government can continue to fund the account by pushing a button. Eventually when the balance sheets of state and local government as well as the private sector are repaired, the Federal government will reverse it course and reduce its spending to lessen the possibility of out of control inflation.
That’s about sum it up from my perspective of reading MMT as well as TPC the last few months. I have completely stopped being worry about Social security, medicare, etc because I know these entities can not go bankrupt. I have also stopped worrying about the national “debts” as I realized that there is no debt at all. What I worried about is how the Federal government will respond to state and local governments’ balance sheet problems. Will the Federal government stand by and force austerity measures before helping or will they understand the problems and actually spend money (unconstrained) to help these entities repair their balance sheets?
Mike,
Nice explanation. Thanks.
How about the US government paying down the debt of underwater home owners? Isn’t that the root of our problems, unmanageable debt? Without a wage-price spiral, how will stimulus money ever get to the debt slaves? And yes, they are slaves, enslaved by negative real interest rates in housing.
Of course that tips the hand of the whole crooked money-for-debt scheme (FRL). The bankers would not like it though it would bail them out too is my guess. And the savers would scream “Unfair!” unless some cash was given to them too.
Mike,
thank you for your clear explanation. It is shocking to me. Although in reality I can see how what you say holds true, I doubt whether holders of Treasury bonds, especially those with vast amounts like China, like to think of this in the same way. I think that if paying the interest on T.Bills and paying for entitlement programs was as simple as pressing a button and performing tricks with monetary policy, the stock market would be at new highs every day. The fact that it isn’t is also not likely due to “ignorance” of how the government controls money.
I can only speak for myself. I am completely out of the stock market because my sense is that the whole economy is currently a giant Ponzi scheme and WILL eventually collapse unless dramatic changes in spending take place, and honest accounting by the banks and government about their liabilities take place. You say that
“as long as US dollar is still in great demand, Federal government can continue to fund the account by pushing a button”.
But how long will the US dollar stay in great demand if it is seen by the rest of the world as merely a piece of paper created by the push of a button without any REAL value to it?
If I am missing the point somehow, I imagine there are probably a lot of other people out there who are also missing the point and similar to me are very worried about the direction this country is going in. So even if our concerns are fallacy, they are a fallacy that need addressing.
Thank you for taking the time to patiently answer my question. I can only hope you are right and that social security and medicare will be around for me when I need it. But I am sure as hell not counting on it!
Alex
Think of money in supply/demand dynamics. There is a natural demand from the taxes that citizens must pay every April 15th. Also all government transaction requires dollars thus there is always a level of demand. Also when private transactions settled, there is an element of demand for dollars there to cover the cost of doing business in the USA. multinational corporations faced the same issue because they must have dollars to satisfy their requirements of doing business in US. In order for demand for USD to wane, the confidence in the US to enforce demand for its currency is waning. Now if there is too much supply, the demand will wane somewhat because the natural and trade demand are satisfied. In this situation, inflation will start rearing its head.
As for the stock market, it is also a demand/supply situation. In this case there is also a psychological aspect. Obviously human being wants to chase yield. As money becomes more expensive to hold in cash (low interest rate environment) people will trade some safety for yield in riskier products. I don’t buy into the Fed or government intervention in the equity market willy-nilly. I do buy that in times of turmoil the Fed do step in to stabilize the market.
Our trade partners do care about the value of the dollar. However since we buy their stuff with dollar they have the option to hold that dollar at the Fed and earn some interest or to recycle those dollars to someone who needs those dollars for some other transaction (gold miners, oil producers, etc..). We have already seen that the Euro cannot be a trade reserve currency because of its inherent flaw. The Yuan could conceivably be the trade reserve currency but it is unproven. The Yen could become the reserve currency but their military is too weak to enforce trade dispute. Until we see something totally different, the USD will still be the king.
well isn’t that the whole point Einhorn is making? The US Government is not going to default since they can print or press a button for money. If you create enough money out of thin air the supply will increase relative to the demand. You say yourself that “In this situation, inflation will start rearing its head.” IF inflation occurs to a significant extent, the dollar will lose a significant amount of its purchasing power and people who are holding cash or who are dependent on fixed income from their savings will become poorer – maybe significantly so. If the inflation is bad enough it could have a devastating effect on people and ripple throughout the economy.
Alex,
Remember that the money supply is actually slowing down due to the deleveraging of the private sector. Obviously like TPC said, the “printing” has been misspent completely. Instead of the printing crediting account of the private sectors such as infrastructure spending, tax cuts, etc, the printing has been channeled into the the banks who let the money sit in the accounts at the Fed. This essentially neutralize the effectiveness of the Federal government crediting the accounts of the private sector. Until we see the private sector start increasing its demand for money, the banks really have no ways to increase the money supply thus inducing high inflation. As for cash and fixed income pensioners, they have been doing well in this deflationary cycle. Hopefully as the private sectors start to recover and can run, we will be able to rotate these fixed income and cash holders into higher yielding bonds. Hopefully their money managers will know to do so when the time comes.
I agree that we are currently looking at deflationary forces and will continue to do so for some time. But that is because we are still relatively early in the cycle. The day will come, not suddenly but gradually, after we can no longer continue to sell treasuries because confidence will be lost in them, that the printing and button pressing will begin. Eventually that will result in the inflation that will destroy us. Is that not so?
do no think of the Federal government balance sheet like a household.
Think of it as levitation.
TPC ,
Thank you for your commentary. I disagree with your analysis. It is true that we have some flexibility in our situation, whereas greece does not. However, we do not as you suggest have complete flexibility, and can be subject to a deficit and funding crisis if our International and domestic investors loose faith in our currency, which indeed can happen. Your insights are a bit black and white as far as I can tell, and you have one fragile economy if you really suggest a hedge fund manager can derail the entire recovery. Perhaps YOU are the one talking your OWN book.
As mentioned above – I am not worried that David Einhorn is going to destroy the economy all by himself. Not even close. But he is promoting a form of thinking which is dangerous in my opinion. And it’s a form of thinking which has been very wrong for a long time.
As for my own book – I’m almost entirely cash (after having initiated my first net shorts in over two years between S&P 1160-1200 as I described the current problems that the markets were ignoring in March) so yeah I guess I am talking my own book. But it’s a big boring book of cash so does that really count? I guess so since it’s a pretty deflationary position to be holding….
Why don’t you lend that cash to the Fed so they can keep spending.
Zing! Thanks for the laugh David.
I hope everyone has a nice weekend. Hopefully this was thought provoking and educational/helpful on some level.
And in all seriousness, I am trying to help (perhaps I am misguided??). Feel free to email with questions…
I am unplugging….
I don’t know who wrote this article. I am struck by the author’s epistemic arrogance. There is no free lunch. Government spending is not a form of investment, no matter how much economists wish it to be so. Macro economics is a cross between astrology, philosophy and religion. We would be further away from a cliff, if economists would admit that they have no better understanding of the economy than any other profession, and that individuals need to build strong balance sheets for themselves , so that they are better equipped to manage life’s ups and downs. The author misses a critical point in our predicament. If foreign investors decide that they do not wish to roll our debt at maturity, we will face some extremely dire consequesnces. Most notably, unpredictably higher long term interest rates. These rates will suck capital out of competing investments, e.g., stocks , wealth will fall, and well , you can imagine the rest for yourself….
“Investors wonder why Japan has been able to run-up such massive deficits over the course of the last 20 years while the bond vigilantes sat idly by, got drunk and ignored them. Why is this? Because Japan has the exact same currency system as the United States. The bond vigilantes can’t come knocking on Japan’s door because there are no bond vigilantes to knock on their door! China is not our banker. Japan is not our banker. The United States is our banker and as Mr Bernanke recently stated – the United States cannot go bankrupt unless we decide to! It will sound odd to those of you with a traditional economics education, but the US government balance sheet is not like that of a household or state.”
This is an area that has been grossly oversimplified too many times and is the area for real concern. Just because Japan has managed to avoid imploding over the past 25-30 years does not mean it will be able to indefinitely postpone reality (although they have done a pretty damn good job). At a certain point they won’t be able to just stuff all of their debt into the postal bank/pension system and if they have to pay a real market rate on their debt they are already finished. Their corporate and financial system is a total joke and remember, this is a nation that did not do credit analysis before the mid-90s. After a century of bureaucratic mercantilist rule they have exhausted monetary and fiscal policy flexibility. They do, however, have trillions of dollars of paper claims on the US government. Think about what would happen in a scenario where Japan’s bond market comes under serious pressure- the MOF’s only option would be to start selling down US debt to protect the bond market (this would be particularly alarming to the MOF due to the domestic retail exposure).
If you’re really concerned about sovereign debt apocalypse, short dollars/long yen and short JGBs.
“In terms of government spending (or blanket Keynesianism as most doubters prefer to call it) it’s largely an accounting identity. Private sector deficit is public sector surplus. If government never spends private sector funds are slowly drained. Just imagine a one time 100% asset tax. What would happen to the economy? It would die of course. Contrary to popular opinion, government must spend before it can tax. Not vice versa. Therefore, a certain level of government spending is necessary. The recent CBO findings show that government spending was the primary reason why the economy didn’t sink into a black hole over the last year. We also know from borrowing data and bank conditions that monetary policy has failed entirely. Of course, I have argued that the government spending has been very poorly targeted and resulted in more malinvestment and ineffective output than should have been the case, but that shouldn’t surprise anyone when you allow the bank lobbyists to control legislation. Spending is not the answer, but we must understand that spending at the government level also isn’t the enemy. Regardless, these blanket statements that government spending is always bad is flat out wrong.”
this is a difficult argument to be making. I don’t have the data handy, but there is very little marginal benefit to additional deficit spending at this point. Additional deficit spending and expenditures but with the egregious level of entitlements that have been built into the system. This is the real problem, especially at the state and agency level.
the only way japan, and all nations that control their own currencies and do not denominate their debts in an external currency to default is if the demand for their currencies are effectively zero. At this point US dollar, japanese yen, Canadian loonies, et al are still effectively in high demand.
The demand can comes internally (the natural demand) or externally (trade demand). The only way for Japan, et al to collapse is for all the trade partners to completely reject its currency. This may cause a serious inflationary problem for the natural demand. At that point confidence in the currency is eroded and hoarding in some other wealth store is needed. Until we even seen any inkling of this why are we worry about something that has not even registered on the radar yet. The people shorting JGBs are like Don Quixote fighting the windmill.
Japan can collapse if they can’t import or produce the energy they need. That is why they have invested so much in nuclear and solar power, and why they heavily subsidize agriculture.
Remember,
Ultimately all money is a claim on energy. Energy for people (food), and energy for our machines (gas, oil, and sources of electricity). A country that is self sufficient in both can never collapse. A country that is self sufficient in food, but imports its oil, can muddle through with extreme austerity if times get really hard. A country that is self sufficient in oil but not in food can collapse, as the USSR did. In fact, I would argue that is precisely why the USSR did collapse!!
This was a great post/blog entry TPC!
A whole lot of ideas came out in it. I also got a much better perspective on where you are coming from.
I am going to read those papers on currency systems and MMT.
When I have a firmer understanding, I may try to get back to you on specific questions/
The US government is borrowing and spending literally trillions of dollars. Your argument appears to be that the borrowing is not real, because the Fed can just move some electrons around and stamp the bills “paid”. Perhaps so, but the spending is real.
Say that you produce ribeye steaks, and I produce papers on Grievance Studies. The government pays me, and I pay you, so we both contribute to GDP. And I get some delicious ribeyes, and you get some incomprehensible GS papers. What could go wrong with a fine system like that?
Why do you all have such unwavering faith in Einhorn? He got killed in 2008 just like everyone else. What makes him so brilliant? Even TPC makes him sound like he’s some sort of genius, but clearly he has no idea what is actually going on because he has been totally wrong about inflation.
I have followed this site for almost 2 years and TPC has made some of the best investment calls I have ever seen. But most importantly, he has gotten the macro picture correct which I actually think is even more impressive. TPC says he was up 15% in 2008 which means he soundly outperformed Einhorn by almost 40%. Good investors know that it’s the bad years that separate the men from the boys. I can’t speak for the rest of TPC’s performance, but there are few people I read who match up. Including most investment gurus. I would love to see TPC vs. Einhorn. Sign me up.
Agreed. This website is like getting a glimpse of John Hussman at work every day. Thanks for the great work TPC.
TPC states: “Each economic environment is its own unique situation”….To me that sounds an awful lot like “this time is different”…whereas gold keeping keeping it’s same old relative value (or at least for the past 5,000 years or so…) after governments and their citizens once again both spend themselves bankrupt and then try to achieve an easy and quick fix …sounds like “the same old, same old…” to me…
If I have to make a bet ‘ll take “same old, same old…” over “this time is different…”…every time.
I dont think TPC is just this time is different. He’s just saying that history doesn’t necessarily repeat perfectly:
“History does not repeat itself, but it does rhyme.” Mark Twain
Wow. It’s not every day that you get to see an investment legend get dressed down. Nice work as always TPC.
In a couple of years I think the deflation/inflation debate will be over…and I’m in the inflation camp because lose of confidence in the U.S.$$
A great site…thanks
How would you lose confidence in the USD if our trade partners must take dollars for their stuff they sell to us?
They (OPEC) can decide that they won’t take dollars anymore for the only commodity that matters – oil. Ultimately, all money is a claim on energy, and the only practical source of energy for motor vehicles is oil. There was some movement by oil exporters to band together and decide that they would only take Euros for Oil, but now that the Euro has its troubles, they might as well take Dollars. Ultimately, they could decide that they will only take Chinese Remnibi or Gold in exchange for oil. The only thing truly preventing them from screwing us over this way is the vast military power of the USA. If China should ever displace the US as the world (or Eurasia regional) dominating power, the USA will build up a foreign debt very quickly. We will owe so many thousand trillion Remnibi or billions of tons of Au it won’t be funny! Since global oil production peaked in 2005, the oil producers will be in a position to squeeze us ever so slowly. It is only the Great Recession that is preventing the supply crunch from happening now. But resource depletion is inexorable, and the big squeeze is guaranteed to happen.
The Federal Reserve can print all the dollars they want, but they can’t print Oil. It must be imported.
TPC:
I might be ill informed on the subject, but doesn’t the entire argument fall apart if China wakes up one day and demands to not be paid in dollars? No matter what binding they’re under, a government entity could easily decide that this doesn’t apply to them. At that point, who cares if we are a monopoly supplier in a floating exchange currency? At that point we’ll probably be at war (well, maybe not that far).
Isn’t fiat all a big confidence issue, subject to the whims of imperfect people? I think Einhorn is taking a multi-year approach and is probably fully aware that deflation is king … for now. I think he is addressing risk, something that very few people are willing to do at this point. Your statement that we can never default is academic (and true) but not practical. Once the confidence is broadly gone, all the past money printing/button pushing will catch up in an instant. It’s easy to dismiss the scenario I presented, I know, but like Einhorn says in the article, it works until it doesn’t.
As a State government, California has no choice but to implement austerity measures. If it does not do so, it will have to eventually default. Ditto for NJ, IL, MI. NY, etc…. The Federal Government is a different matter, since the Feds print money. The Feds should not bail out CA since that would only create an unacceptable moral hazard, and all other states would demand the same largesse — in perpetuity. Also bailing out CA would eliminate any incentive for CA to reduce the size of its over-bloated government. Poorly run and over-unionized states like CA need strong incentives to become more efficient. Instead, the Feds should stimulate the private sector nationwide until the rest of the economy recovers. The best stimulus is to build public works that create additional value – like major transportation systems and nuclear power plants that take many years to build. Unfortunately, Obama’s 2009 stimulus had only 200 billion in construction funds over 2 years.
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“The recent austerity measures in California are the first sign of the same occurring here in the states. “
Not sure how TPC keeps claiming he is winning the deflation argument. Since the QE began stocks are up 50%, Oil is up 100%, gold up 20%, tuition growing double digits annually, health costs growing double digits annually. On a one year chart everything is up big, on a 5 year chart commodities are up, on a 10 year chart commodities are up. TPC are you going to claim victory over the inflationists based on 10% market corrections after monster moves from the lows and an implosion from 2008 parabolic moves in commodities.
Gee it’s hard not to talk about the cliff ledge we are sitting on 30 feet from where we fell and are here with a broken ankle. Btw we didn’t drive over the cliff we walked…
It’s not a question as to whether the economy is bad or not, it’s about whether we can drag ourselves to get to a doctor, before we dehydrate or succumb to exposure, and yes optimisim has a great deal to do with survival, but optimism is a personal trait that some people share and some don’t. Luck often has a lot to do with survival.
It seems that if we are so close to danger we can talk ourselves into a depression, well then it seems like we are relying a lot on luck.
It’s all about perception. http://seekingalpha.com/article/205908-on-our-token-economy-system
I read what David Einhorn wrote. It seems dead on. The puzzling aspect to the statements that The Pragmatic Capitalist is that they are confidently stated but absurd.
- David Einhorn is a sophisticated investor and is not stuck with gold. However much pleasure you get saying he’s “talking his book”, that’s polemic nonsense.
- You play semantics when you say the US has no creditors. Luckily main street America understands the term “debtor nation” even if you don’t.
It’s pap like this that makes serious dialogue impossible.
It seems to me that since inflation occurs because of the increase/decrease in the supply of an item, that the $US would be subject to the same principle, assuming a free market. Therefore, too many dollars will eventually lead to inflation – unless the supply is reduced to remedy the oversupply. Do you agree?
Do you agree?
No. Inflation is **not** strictly a monetary phenomenon; on the contrary, it is quite possible to print money and suffer deflation simultaneously. This reality is missed by pure monetarists and stubbornly missed to the point of absurdity by Austrians, and that disconnect is exactly the problem that is being highlighted here.
Amen!
To TPC;
I guess I just do not understand any of this.
Prior to about 1925 or so, certainly before the advent of an interventionist FED, the US govt spent very little and rarely intervened in the economy and in fact ONLY spent money they in fact had or knew they would be able to obtain via taxes or bond sales. Govt. spending was in fact minimal; the prevailing wisdom being that the private sector – that is the PRODUCTIVE sector – drove economic progress. Because of the gold standard, the govt. was very careful as to how much money was spent because they could not print money willy nilly.
Running persistent deficits and consistently increasing a nation’s debt was literally unthinkable. During this period – the 19th century and early 20th century – the US became an economic dynamo because of its productive capabilities, and the fact that govt. at all levels was very careful as to how much was spent.
Yes, the US experienced financial panics (now called recessions)during this 150 year period – some pretty severe, but most were relatively short lived and the economy “worked itself back to normal” usually within one or two years without any govt. intervention at all.
I am not suggesting this should be the case today, but recall that there was no FDIC insurance on bank deposits – as there is today – so bank runs were not uncommon which really exacerbated any economic dislocations.
Yet, by some miracle of miracle, these panics ALL worked themselves out with little or no govt. intervention and NO printing of money.
Since the advent of govt. intervention in the economic arena via manipulating the money supply, interest rates and the debasement of the currency, there has not been a diminishment in the frequency of recessions nor their severity; the Great Depression being the first large scale experiment by the govt. in matters economic, which turned out to be a total disaster.
You say the problem in Greece is due to their foreign currency debt burden. I thought is was due to the fact they spent money -they did not have- like drunken sailors. You say if their debt was in drachmas a currency devaluation would make things just fine. I do not think those Greek citizens who worked and saved would think things fine as the value of their savings simply disappeared.
You agree with the notion that as long as the US assumes ever greater debt burdens in US currency, the US can never go bankrupt. This is crazy. Do you really believe that purchasers of US debt – a large percentage of whom are not US citizens nor US based entities will simply keep purchasing paper they perceive as continously losing value without adequate compensation?? What form will this compensation take?
These investors will demand higher interest rates.
And how on earth is the US taxpayer to repay an ever increasing – EXPONENTIALLY increasing – debt load ? Sooner of later the debt MUST be repaid and as the debt load increases, the only way out will be some sort of devaluation of the US $$$.
The stagflation of the late 1970s should provide some insight into how this will turn out. I guess that I do not believe that stagflation is a good outcome.
The adoption of Keynesian and Monetarist economics has produced a belief system that debt, its monetization, the manipulation of interest rates and the money supply, and well placed govt. spending can mitigate or prevent economic disasters, or at least smooth out economic valleys and peaks.
Well, since these ideas have taken fruit and since its first imperfect implementation in the early 1930s, these ideas have literally led to one economic disaster after another. They have been shown – repeatedly – NOT to work.
What is the purchasing power of the US dollar today vs. that of, say, 1970 ??
Yet the antiquated, neanderthal use of a gold standard provided near ZERO purchasing power diminishment from about 1800 to about 1910.
Deposit insurance and the like have helped minimize economic disasters illustrating that govt. intervention can be very beneficial. Govt. intervention can be used to limit the extent of leverage utilized by certain families of financial institutions, and maybe to increase bank reserve requirements.
But it is increasingly clear that economies are non-linear, dynamical, chaotic systems (yes, I realize they all mean the same thing) that are NOT amenable to conventional analyses or control or guidance. That this is so is shown by the inability of economists to predict anything. In fact, economists have a near perfect record of not being able to predict anything.
Any science of this sort – having zero predictive ability – is not a science and it strongly suggests that its fundamental tenets must be re-examined.
Frankly, I have no idea how we need to get out of this economic mess. But it is simply common sense that spending within ones means – at all levels – would be a good start.
No, I cannot provide a closed-form mathematical economic proof of this; but 1000 years of economic experience has shown it can work real well.
The last 90 years of applying mainstream economic thinking has demonstrated that economists can talk the talk, but are incapable of walking the walk.
What I can’t reconcile nowadays in this whole debate about why the government must spend vast sums of money and make-up such a large % of GDP, prop up demand etc etc, is how did we ever survive in the past say in the 1800′s where the government made up 3% of the spending in the economy?
What I can’t reconcile nowadays in this whole debate about why the government must spend vast sums of money and make-up such a large % of GDP, prop up demand etc etc, is how did we ever survive in the past say in the 1800’s where the government made up 3% of the spending in the economy?
It’s an ignorance of history, combined with historical revisionism that ignores the degree of poverty that was once commonplace in American society.
The 19th and early 20th centuries were fantastic for modern day Americans…because we didn’t have to live through them. Upton Sinclair’s The Jungle offers just one example of how bad it could be for the working class when there were fewer regulations and more corporate abuse.
The confusion seems to be about not applying concepts correctly. You have supply and demand for anything. Money is the medium of exchange and provides a value to the supply/demand for any particular economic item. If there is an increase in money, and no change in the supply/demand for economic items, what is the effect of the increased amount of money? The answer will vary. If the extra amount of money is not used, (for example because of over indebtedness of households, banks, etc) then the increase doesn’t change prices. If the extra money is used to buy investments, assets rise. And if the medium of exchange becomes less desirable because it is less rare – it’s too easy to get, then collectors/investors will not want them and will choose a harder to get medium of exchange instead – for any number of reasons, like everybody else has tons of them or because there are so many, one anticipates that others might not value them as highly as before and a person having them will have to use more of them in trade for economic items.
It’s even possible that the increased supply meets an increased demand for the medium of exchange, and it’s value doesn’t depreciate at all so prices remain the same for economic items.
My point is there are no absolutes, but supply and demand are the most inclusive factors. You have to investigate each historical situation to determine which factors effected supply and demand the most and in which way. That is why economic history never repeats itself exactly!
A few years ago, did you think mortgage loans standards were so watered down that enough people couldn’t pay them off, and create an oversupply of inventory on the market? Or that derivatives were not valued properly by banks, etc that banks would be worthless and the government would let Lehman Bros. go bust to create a potential economic collapse to scare Congress et al so that they could create TARP and the other programs to save the system, at least temporarily? I would never have predicted it and so could not have used past economic events to predict how this one would play out.
Sorry to have rambled on…but I stand by what I have said, but would appreciate if someone would explain to me just what I have said.
Cheers!
If there is an increase in money, and no change in the supply/demand for economic items, what is the effect of the increased amount of money?
In practice, this is a falsehood because output and the base of demand are continually expanding. The economy is not a closed system or a zero-sum game.
It’s fine to talk about supply and demand in such simple terms during a first-semester econ course, but that doesn’t address the more complex real world reality that the economy is generally growing and that its output supports both the value of and the quantity of the money supply.
Again, inflation is not strictly a monetary phenomenon. Money is merely an aggregate representation of output and leverage. We have been conditioned to believe that money consists of pieces of paper in our wallets that diminishes in value as more of it is created, but that’s not at all what it is.
TPC I loved your post. But tell me, where should it or does it end? You are effectively saying the government can do the same as it is doing forever until we see signs of life…but can that really be true? That sounds too good to be true.
James,
Thanks. I think the most important takeaway here is to recognize that govt is not the enemy. Spending is not the enemy. But spending also isn’t the answer. As we’ve seen over the course of time govt spending is not always efficient and can be extremely wasteful. But govt can and does spend money on some vital and effective facets of the economy. At some point real productivity and innovation have to take over the majority of economic output. That is the only true answer to long-term sustainable growth, but at a time like this we must recognize that govt spending is not driving us into a ditch or bankrupting us. Such talk only exacerbates the problems in my opinion.
I would love to see a huge tax cut right now. It would have the same effect on aggregate demand that spending would, but would get none of the pushback from the people who don’t really understand the monetary system.
Does that clarify things a bit?
I agree with you as you know about the dollar and inflation. But I am just saying, as long as counter parties (other countries) accept the dollars, can this whole charade continue? Like what would put a stop to this system? I just think it sounds too good to be true. In event the government can spend 400% of its GDP as long as longer term interest rates don’t shoot up through the roof (which the Fed really only has a firm grip over shorter term interest rates and not longer term)?
Well, that’s the kicker. In a healthy economic period the govt could never spend as much as it does or we would suffer hyperinflation.
As the economy recovers and private sector picks up the slack the deficit will decline as tax revenues increase and output picks up. Spending will be offset by real productivity.
These are not concerns as of now though….
TPC,
While you make some good points (Euro/gold standard comparison is on point), you also make some false claims.
I’ve noticed you often point to depressd real estate and stock valuations to evidence we are experiencing deflation. At the same time, you conveniently ignore the inflation in food and energy. Fine.
You then use bond yields as objective evidence of deflation, In your own words,
“there are plenty of sources for unbiased inflation data. The first and foremost is the market itself. US bond yields continue to tick lower despite these supposedly increasing signs of inflation.”
Ok, far enough. But there’s one huge hole to your thesis. How did we have a 30+ secular bull in U.S. government bonds at the same time we had an absolute eruption in stock and real estate prices. The secular bull in bonds would be “unbiased evidence” of deflation. The rise in stocks and real estate would evidence “inflation” according to your own markers.
I’m not trying to be critical here, just trying to point out that it appears you are selectively using data to make a provactive point.
Anonymous,
Thanks for the question. It’s a good one. I don’t mean to imply that we have been in a deflationary environment for 20+ years. We have simply been in a reduced inflationary environment for 20 years running. Bonds don’t require a deflationary environment for a good ROI.
I would argue that the current short-term environment is vastly different from what we have experienced over the last 20 years, however. Therefore, assets are responding quite differently. Asset prices, however, are not necessarily the best way to track inflation.
Yesterday, Rosenberg noted another excellent unbiased resource for inflation:
“For those who have ongoing problem with how the government treats the
consumer price index, there is a metric that is tried, tested and true, which is the market-based core PCE price index (the core excludes food and energy). This
metric was released yesterday and it eked a 0.3% QoQ annualized increase
(basically flat) which was a record low for this particular data series. The YoY
trend, depicted below, slowed to an 11-year low of 1.2% in Q1 from 1.7% in Q4
and 2.1% a year ago.”
Inflationary environment? I just don’t see it in anything.
I guess the main places of inflation right now are healthcare, education, energy. Which cannot be ignored.
Why can’t our most basic needs of healthcare, education, and energy be ignored in inflation numbers? Afterall, they have been ignored in inflation statistics when convenient since the government started reporting them, so why not now? Afterall, reporting of numbers is really just an optimists game—-we don’t really care what the “real numbers” are, we just want to feel good and optimistic about the future, so shouldn’t we just report whatever makes us feel good so we can all be happy and sing kum ba yah?
TPC – I seemed to have keyed in on your earlier statement that you cannot be made to fit into any particular group because you are Austrian – losers should lose and Keynesian – government spending is not all bad.
I agree that money was spent in the wrong way. The moral hazard issue has those who followed the rules up in arms so to speak. The losers aren’t losing.
The Keynesian spending has not filtered down to main street.
I have read what you would have done in 2008, what would you do today? With the financial bill apparently being gutted, should we still push for a RTC solution for banks? Does a second stimulus bill, focused on tax cuts make sense – or is it too late?
Where do we go from here?
Higher commodities/metal prices don’t equal inflation. If you see them ramp too much due to speculation of “inflation” get ready for some huge bans on position sizes, new buying. etc.
Excess slack (manu, labor, etc) makes ordinary inflation nearly impossible.
Foreign boycotting of US debt would lead to higher interest rates, but not inflation. Likely the opposite as higher rates would kill economy.
The only scenarios I can envision above average inflation would be:
- Miraculous rapid economic recovery. Fed then lifts rates to cool economy
- Intentional hyper inflation (printing) to dilute debt (quasi-restructering)
I give the odds of the former ~1% and the latter ~5%.
Can someone layout a plausible scenario that I’m missing that may lead to inflation – READ not higher commodities or higher interest rates – NOT THE SAME THING
“Excess slack (manu, labor, etc) makes ordinary inflation nearly impossible.”
Tell that to the people of Zimbabwe
I would consider that “hyper-inflation” to put it mildly
RE: Food, energy, metal inflation
With the exception of gold (which really holds no value), there is no possibility that the govts of the world would stand by and watch oil or food prices spiral higher due to speculation while wages and economic activity stagnates.
Recall back in 2007/2008 all the sabre rattling to control the price of oil and fend of the evil speculators. This was in the face of a strong economy.
If you are a commodity uber-bull, beware of the political risk.
TPC, you wrote in your closing
“My greatest fear now is that we are talking ourselves into a depression and articles like this only compound that fear. ”
Yes and what is wrong with having a depression?
A depression may be painful, yet, a depression at this stage is absolutely essential to purge the system of all that ails it. Why is it that only the corrupt, ignorant, and blind optimists (a.k.a. people that don’t want to face the truth) are rewarded? Why is it that savers, realists, thinkers, and planners—you know, the reasonable balanced thinkers that do not use blinded optimism, are the ones punished while the irresponsible “buy now, pay later” or “use other people’s money and then get out while the getting is good”—you know, the corrupt criminals that run our institutions and the ignorant masses are the ones rewarded?
For the life of me I will never understand blind optimism. I have thought a lot about it, and I suppose if I was morally bankrupt and corrupt that I could create a business plan that sounded good, get others money (knowing full well the plan was flawed and the only person that would make money is me) and fleece others of everything I could until they figured it out and then run for the hills.
I suppose if I was morally bankrupt and corrupt I could run a company and quarter after quarter talk about “cash flow” and “pro forma” earnings while stuffing my pockets and those of my friends with whatever true profits are created thus ensuring no true value was ever transferred to the shareholders unless they were smart enough to get out of the Ponzi scheme and move on to the next.
I suppose if I was morally bankrupt and corrupt I could be in charge of a government agency that changes the reporting rules each reporting period to make things look better than they are, even when they are progressively getting worse.
In the end, the continued lies, distortions, corruption, and downright lying, cheating, and stealing from the American public is the only way to protect the economy thus avoiding “talking ourselves into a depression”. The real question is why would you want to protect a corrupt system that is based on nothing more than lies—-a system that is designed to fleece the responsible and reward the irresponsible? It truly is incomprehensible how anybody would NOT WANT a depression to purge our society of the corruption. While I recognize that you will never get rid of human nature and the natural tendency to be a corrupt optimist that fleeces the public at large, in the end, the only way to have a sustainable society is where all the participants have a fair chance and the responsible are rewarded while the irresponsible are punished. It is called capitalism and when given a chance, capitalism truly does work. The problem is nobody wants to give it a chance because those in power are corrupt and the general population is ignorant.
Clearly it has paid to be a corrupt “optimist” in the last several decades—the responsible, honest people have been punished while the powerful, corrupt, morally bankrupt, and ignorant citizens are rewarded and bailed out. Until that problem is fixed through real pain and suffering (the kind you get from a depression), the problem will only get worse. Why is that so hard for anyone to understand? After all, if you look at it from human nature’s most basic survival lens, early humans who worked hard, hunted, and prepared were rewarded by surviving, while the lazy and corrupt were weeded out. Natural selection at its finest. Since when should the corrupt, blind optimists, or ignorant be rewarded while the honest realists are punished?
Anybody who is not rooting for a depression is rooting against America because America was not founded on the principle that corruption and ignorance should be rewarded with bail-outs by a corrupt pseudo “Americanized” Socialist/Marxist government. America was designed to allow people to fail, and the constitution does not dictate that the economy only goes straight up and that blind optimism should be rewarded why realistic, responsible behavior is punished. The fact that the mainstream media refuses to tell the truth about what is really happening does not justify the ignorant masses to choose ESPN, America Idol, or Oprah over finding out what the corrupt, powerful “optimists” are doing each day to fleece the public and grow more powerful. Only a depression can fix that, and the sooner the better.
Which side you take is all depending on where you sit.
80% American have no trust in their government. That makes perfect sense considering 15% people work for government and 5% on permenant receiving end of asset inflation. David Eihorn is rare one of 5% but speaks for 80%. History will remember him as a hero but he is certainly a villain for 20% whose best interest is status quo.
If government is not an enemy of 80% they should cut income tax and inflation tax immediately, which of cause will hurt 20%. Before they do that they are. It is just that simple.
Ding! Ding! Ding! I see the light! it’s like being unchained and exiting the back of a dark cave. I did some background reading on MMT and reviewed some of your writing that was mindboggling; now i get it. Here’s some background reading that may help those still confused:
http://agonist.org/bolo/20100426/modern_monetary_theory_an_overview
http://bilbo.economicoutlook.net/blog/?p=8117
http://bilbo.economicoutlook.net/blog/?p=2562
Thanks TLC! You’re a genius
‘We have no creditors. No one funds our spending. Our spending is 100% internally “funded”.’
Patently false. Foreign capital inflows are precisely that which fund government deficits and capital formation in the absence of adequate revenues and savings respectively. Market discipline compels Greece and other non-reserve currency issuers to address and reform government budgetary practice and potential for growth, while we avoid that pain due to absence of any political will. In the absence of factor productivity growth, continued production/consumption imbalance, primarily through government deficit spending, merely transfers consumption from the future to the present. Repayment of that debt reduces consumption by like amount, with the solution of debt monetization too attractive for the political class to ignore.
Reserve currency status does not protect us from arithmetic.
Not true. The bond market funds nothing in a monetary system in which a country is the sovereign issuer of currency in a floating exchange rate system.
The bond market is just a monetary tool to control the FF target rate.
You are thinking in a gold standard world or in Europe’s case, in a single currency system world. The US bond market funds nothing.
In a world where bond markets serve only that simple function with our fiscal incontinence exceeding that of others, what are the implications for relative value of our currency v others’, and therefore national purchasing power over time?
Well, you have to ask yourself whether we are in a deflationary or inflationary period. I have argued and continue to argue that we are in a balance sheet recession where debt destruction will be the overriding theme. Weak labor markets, weak lending markets, low aggregate demand, etc will result in a continuation of this trend in the coming years. Therefore, I would argue that we can afford to run high deficits without substantial risk of dollar devaluation.
Actually that’s completely false and it implies a gold standard view of non-gold standard system with fiat non-convertible currency with flexible exchange rates. The only fear our children should have is that when it’s their time to shine, there are no goods and services available because we have driven our economy into the ground by misunderstanding the role of currency and debt on the federal level. Wealth can only be produced two ways in our economy – deficit spending or bank loans.
Good piece TPC. Nice to see someone who grasps soft currency economics. Keep spreading the word.
The spread between TIPS and treasuries implies an annual inflation rate of only 2% over the next 10 years. If anyone’s interested, we wrote about it here: http://kerrisdalecap.com/commentary/?page_id=107&pid=131
“Thus, the root of the problem persists – the consumer and thus the private sector remains weak.”
This is not the *root* of the problem, its a symptom. Dig deeper.