THE MESSAGE IS GETTING OUT – UNCLE SAM ISN’T GOING BROKE….

Is there is a dent in the deficit terrorist’s argument?  The message (and the truth) that uncle Sam won’t go broke appears to be becoming more and more mainstream.  A recent report from the Jerome Levy Forecasting Center shows that more and more mainstream economists are actually beginning to understand our monetary system and the realities that currently confront us.  Too bad they’re about two years late to the party….From the report”

“While some countries deserve to have their creditworthiness doubted, others, including the United States, do not. The United States is not another Greece, and the likelihood of default or any dire consequences from the present run-up of Treasury debt is minimal.

Nations vary sharply in their capacity to carry public debt. The United States, the United Kingdom, and Japan are all high-debt-capacity nations. All have had debt-to-GDP ratios over 100%, and in Britain’s case over 250%, without calamitous consequences.

Defaults on sovereign debt have never solely reflected high debt levels. The when and why of soaring debt matters; when a depression or great war is responsible, then high-debt-capacity nations can accumulate vastly more debt—and later safely bring the debt ratio back down—than widely believed today.

The U.S. Treasury debt is soaring because of a depression, and the budget deficits have been essential in keeping the depression contained, avoiding a disaster worse than the 1930s.  During a depression, an economy cannot absorb much if any deficit reduction. History shows deficit-slashing actions during depressions tend to be self-defeating because they
so damage the economy that revenue plunges.

A high public debt ratio in a high-debt-capacity country tends to shrink rapidly for years after the end of a major war or depression. The conditions presently causing high public debt growth in the United States and other advanced economies are not permanent and will eventually reverse, improving government fiscal situations dramatically.

High public debt does not necessarily imply inflation, especially when the debt is caused by a deflationary private economy. Historically, there has been no connection between inflation and the level of public debt in the United States, the United Kingdom, or Japan.

High public debt is unlikely to be a drag on future growth or prosperity. Future generations will not bear the burden of current deficit spending, as is widely believed. A collection of other items that some people count as public debt—including the social security trust funds and projected shortfalls for Medicare or other programs labeled “unfunded liabilities”—are in fact not public debt. Advanced funding for any such mandates and programs does nothing to ease the potential problems of meeting retiree needs in the future and could make matters significantly worse.”

Let’s hope this message continues to spread….You can read the full report here.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • POV

    Who knows what the next day will bring, we’ve been teetering on the edge of one supposed catastrophe after another with no “total destruction” to date. But that doesn’t mean something
    couldn’t do us in and the problems are getting worse. Not only financially but also ecologically with global warming and now with the released slippery oil that could cause the earth to spin faster on its axis!

  • http://www.pragcap.com TPC

    I fully acknowledge that we have huge economic problems. Solvency is not one of them – at least at a federal govt level….

  • Mountaineer

    TPC,

    This is great news, but it won’t do anything to stop millions of people from losing their unemployment checks in the coming months as congress cuts off benefits at the worst possible time! As long as this kind of inane policy is being implemented I don’t hold out much hope. On a side note, have you been following the discussion between Krugman and Galbraith recently? Mark Thoma has a nice blow-by-blow here if you want to see the entire exchange in one place.

    http://economistsview.typepad.com/economistsview/2010/07/is-galbraith-right-that-deficits-are-never-a-problem.html

  • http://www.pragcap.com TPC

    I have been following it. Unfortunately, I am traveling for two weeks so I have very limited access to internet and time (to write). But the whole thing has been rather humorous in my opinion. Krugman is basically backpedaling from years of inaccuracies. Galbraith puts him in his place. It’s sad that more people won’t listen to Galbraith and that the Krugman’s and Bernanke’s of the world absolutely dominate the economic debates….

  • mj

    Nonsense. It is exactly this type of arrogance (that the USA is someone exceptional, and immune to basic laws of finance/economics) is what is bringing down this country. The debt of the USA (both public and private) is a problem but more importantly is a symptom of bigger problems: 1.) The decay of the industrial base of the nation; and 2.) The moral degradation of the system (as signified by acceptance of fairy tale Keynesianism) that something can be got for nothing. The fact that “mainstream economists” are beginning to reject the problem of debt is a contrarian indicator. When is the last time “mainstream economists” got anything right. Sure, the Federal Reserve can continue to print money to artificially prop up the economy but that will solve nothing. The Weimar Germans (who also thought they were special) tried the same thing. How did that work out for them ?

  • prescient11

    Praise Jesus.

    TPC, let me posit something else for you as we see Obama scolding the GOP for not extending jobless benefits yet again. THIS SHOULD BE STOPPED ASAP.

    I would wager that at least 1% of the UE rate is due to people not wanting to get off their ass and GET A JOB. My brother recently interviewed 25 candidates at a job fair for a job that paid about $11/hour, full benefits and matching retirement. He said that he would guess at LEAST 20 of the interviewees were merely checking the box for their UE requirements and had no real interest in the job.

    You see it all over the country. The morons going to work everyday in skyscrapers drinking their $4 coffees have no idea that a very good number of Americans can pay the rent, basic necessities and some spending cash on their UE checks.

    So I ask you, would you rather spend two years DOING NOTHING except sitting by the lake drinking cheap beer, or would you rather work two ENTIRE years making just a little more money.

    It is obvious when you think about it. So, I know I’ll sound crazy, but I think that UE number is inflated!!!!!!!!

  • http://www.pragcap.com TPC

    You can’t even compare Weimar and the USA. They are worse than apples and oranges. You hyperinflationists keep on calling for inflation and it keeps on not happening. Have you ever wondered why you keep being wrong?

    Could it maybe be the fact that the govt is not a household?

  • making sense

    This is nonsense, and short-sighted. Even though USA can print or borrow money, that does not mean that can produce goods or increase wealth. Eventually inflation will come, even though not at the time being.

    It is people’s hard work that produces wealth. If we continue to borrow or print, but cannot create jobs, we are in serious problem (already).

  • Gunwalls Archibald

    Well put mj.

  • prescient11

    Yes, post WWI Germany had many other issues it was dealing with…

    A crappy housing market pales in comparison…

  • mj

    @TPC:

    I did not mention inflation in my post, though, now that you mention it that will be the ultimate result. It’s called supply and demand. The more there is of a particular product/service/commodity the less value it has. The more money that exists relative to products/services available for purchase, the less value the money has. Maybe not initially but eventually. Please explain why comparing the USA to Weimar Germany is comparing apples to oranges. Both have/had corrupt decadent societies. I think in the USA it is a reflection of the immediate gratification ethos of the baby boomer generation of which I am ashamed to be a part. They (in fact all those who support more government intervention in the economy) are like spoiled children who throw tantrums when their parents won’t give in to their every urge. “Mommy, Mommy I want more. Spend more money.” They see their parents stick their credit card in a slot and think that is all there is to it. They don’t know or care about what happens beyond that. Money is a representation of wealth not wealth itself. Government can’t create wealth by printing money. If borrowing/printing money and spending it worked we would not be in this problem to begin with.

  • Gunwalls Archibald

    What the “mainstream economists” are ignoring is that the US is not longer a “net producer” of goods and services. This is most likely the reason underemployment/unemployment figures continue to slowly grow as corporate “earnings” artificially recover. I say “artificially” because corporations can’t make money without some sort of “stimulas” from the Fed. Please note when “stimulus” ends (cash for clunkers, housing, etc) earnings start sliding towards pre-stimuli–recession levels.

    Bottom line is if the US doesn’t get back to being a net-producer of goods and services than deflation deflation becomes more of a reality than inflation.

  • http://www.pragcap.com TPC

    MJ,

    I don’t disagree with much of what you say, but you’re comparing the public and private sector as if they are they same thing. Nothing could be farther from the truth. The govt does not “fund” itself. It has no foreign denominated debt in the same way that they private sector does. So what has happened in the last 25 years? In a nutshell, the private sector has taken out excess debt to fund its growing needs and now that debt is being destroyed. That money is literally disappearing (as it should). The govt has attempted to inject the system with cash, but it’s not working because the public doesn’t want to borrow. So here we are still at risk of deflation. You guys keep saying that we’re “printing too much money” and that the govt is “crowding out” the private sector. Hogwash.

    We’re mired in a balance sheet recession. It will be over when the private sector balance sheet is fixed. The govt balance sheet is not the problem. At least not unless you think the US economy and US corporations are going away….Good luck with that bet in the long-run.

  • http://www.pragcap.com TPC

    The idea that the US govt “borrows” the money it CREATES is nonsense. This is more gold standard hogwash. We don’t live in a gold standard people….It’s time for the thinking to evolve with the monetary system….

  • mj

    @TPC:

    I am a regular reader of your blog and I find it of high quality. I think we just have a fundamental disagreement about the government printing and spending money. Inflation is only a small part of it. I don’t think the government should be involved in picking winners and losers, which is inherently the result of this. Badly managed, insolvent companies should disappear. Whether that is a Wall Street bank or GM is irrelevant. That is how discipline is enforced and progress made in the economy. Short term pain is involved but that is necessary. Bureaucrats should not be deciding what is and isn’t important. I’ve got mixed feelings on the UI extension. The biggest problem with unemployment benefits is that there is no stigma attached. Combine that with long term extensions and you are asking for trouble. I would much rather see UI extended, though, than aid be given to the states to prop up the government sector and I hope the Republicans hold firm on this. If the state governments are bailed out there will be no need for them to get their sh*t together and do what is necessary. There would be no need for one public employee to lose their job if the public employee unions would agree to across the board pay and benefit cuts. Instead we get unions in places like Illinois raping the taxpayers with 7% pay raises.

    Peace.

  • Mountaineer

    “It’s sad that more people won’t listen to Galbraith and that the Krugman’s and Bernanke’s of the world absolutely dominate the economic debates….”

    I think this is being reinforced heavily in this comment section right now…Keep fighting the good fight TPC. I wonder how many people if asked to name where in America is the most important and applicable economic research and instruction taking place would name NYC, or Chicago, or Boston? I wonder how far down the list you would have to go before you came to Kansas City?

    http://neweconomicperspectives.blogspot.com/

  • F. Beard

    That money is literally disappearing (as it should). TPC

    Nope. Deflation is merely the flip side of the crooked money-for-debt system called fractional reserve lending. If we are going to have such a crooked system, then the banks should have been ruthlessly liquidated to teach them a lesson about excessive leverage. But they weren’t. Instead they are being bailed out (recapitalized) with a riskless carry trade from the Fed to the Treasury in addition to the other bailouts.

    A sufficient distribution of new legal tender fiat equally to every US adult would fix everybody; savers cheated by suppressed interest rates, underwater borrowers, the banks in nominal terms and state tax revenues.

  • RSDallas

    TPC,

    Are you on the Government payroll? This has got to be the most radical views I have come across. How can you write a piece that tries to justify the level of spending that is going on in our Nation?

    The US debt level is soaring because our leaders have chosen to “give away the farm” and reward big financial businesses who should still be in bankruptcy court. The government administered Socialist programs such as Social Security and Medicare/Medicaid are breaking this Nation. This financial meltdown is allowing the effects of these Socialist programs to be seen and understood by the citizens of this Nation for what they really are. It is also becoming more and more obvious to the American people and small business that they got (and continue to get) the shaft in this downturn and that the financial institutions and government elected officials who were the true cause of the financial melt down are in fact prospering more today than before the crises started.

    This crisis is also bringing to light that our Government has been stealing from You and I to pay Peter and Paul for years and years. The American people never noticed it during the “so called good years” because it takes economic growth for the PONZI scheme to go unnoticed. Somehow, in the past, the government was always able to reflate the economy when the ponzi scheme began to break. This time, as was the case in 1929 and into the 30’s, they can’t and won’t be able to reflate the economy.

    I suggest the reason they can’t is because of the level of debt that the private and public sector is currently carrying. TPC, wake up! Our Nation is spending more money on a day to day basis than it is taking in, both in the Public sector as well as the private sector. The debt or liability is income and revenue for someone else. It doesn’t just go away, no matter what type of monetary system you have. It still has to be paid and serviced and it is obvious that it is having an incredibly negative impact on our economy at its current levels. Especially for the citizens of this nation.

    This is nothing short false propaganda. Period! You are a poor misguided Keynesian Socialist Mr. TPC, as this article so blatantly demonstrates.

  • F. Beard

    Government can’t create wealth by printing money. If borrowing/printing money and spending it worked we would not be in this problem to begin with. mj

    Then I suppose bank lending doesn’t work either since the banks create credit money as they loan it out?

    If you seriously want to ponder morality then consider the moral implications of a government backed fractional reserve banking cartel in a government enforced monopoly money supply. Otherwise you are just blaming the victims.

  • DDT

    Whoever wrote this nonsense has NOT read Rogoff and Reinhardt “It’s dfifferent this time”. The title reefers to the state of denial that has accompanied virtually every collapses in the last 800 years. People tend to think they are immune to the deterministic forces of debt deflation … They aren’t and neither are we. This essay could be a poster child for the phenomenon, and if there is a second edition of R&R, this essay could end up as the perfect example of what not to believe.

  • don

    It seems to have become the norm to refer to deficit hawks as “terrorists.” This seems like a transparent effort to discredit the deficit hawks – based not on a sound argument but by labeling them terrorists. As a result, those who argue against the deficit hawks reduce the weight of there own arguments.

    Aside from that, the usage of terrorist in this manner essentially belittles the real meaning and consequence of actual terrorism.

  • making sense

    Even though we do not live in gold standard, we still need a way to measure wealth and how wealth is distributed. Assuming one day IMF SDR replaces dollar as the authoritative ultimate world currency, which is very possible given the declining status of US dollar, the Fed would have less room to wiggle its monetary policy to the US’s favor.

  • F. Beard

    Aside from that, the usage of terrorist in this manner essentially belittles the real meaning and consequence of actual terrorism. don

    The Great Depression was a major cause of WWII which killed 50-86 million people. I am not a Keynesian but allowing the money supply to contract is clearly dangerous.

  • Lori

    Don, I would tend to agree.
    – If you believe in smaller government (Tea Party), you’re called a racist.
    – If you believe in cutting the deficit, you’re called a terrorist.
    See a pattern?

  • Sankalp Sharma

    Hmm…I’m pretty sure I’ve read such articles about America not going broke. And it’s great news. But I would really love to see more commentary on Job prospects and the phenomenon – “Jobless growth”

    Thanks again! :)

  • http://www.pragcap.com TPC

    MJ,

    We probably agree more than you think. I too do not believe govt should just recklessly spend and hire. Govt job functions should be productive and the private sector MUST carry the load. However, we also have to understand that govt can’t NOT spend….Otherwise, it is simply debiting the private sector of currency. Therefore, we must recognize that it is incorrect to characterize all govt spending as bad. We cannot and will not spend our way out of this mess. I have long maintained that position. However, convincing ourselves that solvency is a problem and that hyperinflation is down the line is incorrect and could be catastrophic….

  • JH

    This type of rhetoric reminds me of “this time is different” propaganda we were fed to excuse the mindless policies which caused this whole mess to begin with. When will people realize the simple fact that we do not exist in a vacuum, everything we do economically, has consequence. To believe we can run up the kind of deficits we are without any negative repercussions is simply ignoring reality and the wishful thinking of fools.

  • Skateman

    Under normal conditions you are right. The running of huge deficits will be inflationary. When the private sector is deleveraging on a massive scale, however, due to a balance sheet recession (like the Great Depression or Japan for the last 20 years), the math changes. Huge deficits must be run to avoid deflation, which only makes the private sector deleveraging process that much harder (because your debt level remains the same while your nominal income drops). It doesn’t have to be by increasing government spending, by the way. I advocate a multi-year tax holiday to expedite the private sector deleveraging process. But either way, your choice is this: 1) have the government cushion the downturn by huge deficit spending until the private sector is done deleveraging or 2) have the government pull the plug on the private sector, while it’s trying to heal and thus send our economy into a deflationary debt spiral where RGDP ends up down 30% instead of the mid-single digit decline we just experienced. You may have some kind of moral code where you feel retribution is required for the great period of excess we’ve been through over the past 30 years. Me? I understand that it will be the innocent average people in this country that will bear the brunt of such a policy not the ones who were mainly responsible.

  • Angry MBA

    To believe we can run up the kind of deficits we are without any negative repercussions is simply ignoring reality and the wishful thinking of fools.

    Here’s a homework assignment for you:

    -Look at the 10 year treasury rate.

    -Compare that to what the all of the inflationistas were saying it was supposed to be by now. Pause and reflect on how horribly wrong they have been.

    It’s time to rethink your position. The situation isn’t what you think it is, despite how it may appeal to your base instincts. Running a government is not like running a household, and we shouldn’t pretend that it is.

  • pc270

    TPC, that was amazing. Nice to see someone else made it past basic microeconomics.

    I was wondering about something mj posted earlier and not sure if you’ve ever addressed this at one time or another. I work for a goldbug and am sick to death of hearing about hyperinflation. The only common thread between postwar Germany and Zimbabwe would seem to be a big drop off in economic output with no corresponding decline in the money supply preceding the hyperinflation. If inflation is a monetary phenomenon is hyperinflation a production phenomenon?

  • http://blogfirstrider.blogspot.com/ first

    “All have had debt-to-GDP ratios over 100%, and in Britain’s case over 250%, without calamitous consequences.”
    No consequences?
    Japan 20 years of stagnation. A stretched out depression.
    Britain was a disaster after the war and in in the 70’s it had tax rate as high a 98% and a disastrous and deteriorating economy.

    Total income can no longer support total debt. the ability of incomes to service debt.

    $13,267,449,671,185 National Debt and counting.
    The interest alone on the $13+ Trillion National Debt is about $1 billion per day.
    The average person works 5 months per year to pay taxes and that is far from what is needed to cover the annual deficit spending.
    The economy was based on loans promoted by artificial rates. Loans increased all the way to the maximum possible lending ratio of available numbers in the interest rate chart. Now the chart is at 0 and its game over. They are stucked and if they revert rates upward it will cause the Casino to crumble. Prepare for the next big move “The helicopter drop”

  • quark

    Here comes the another stimulus package….the last rally before we hit bottom.

  • http://blogfirstrider.blogspot.com/ first

    “invite my 5 friends to become citizens” Now, in order to create real demand for these notes I Create a tax to create demand ?
    That is not demand, its a recirculation process and if any thing it reduces real demand for the notes from your 5 friends the tax payers. The tax colector wich hapen to be the sixth person would need to be paid wile not producing any goods. On a prorated basis the tax collector would reduce the value of the currency by about 16%. I think they would soon ask why is this was this called an invitation and ask that you start producing and stop debasing there currency.

    By the way so called demand from Federal tax to GDP is only about 16%.

  • TK7936

    This is more complex but you got it pretty right. The USD gets its value through hegemony, the local economy doesn’t create enough values to support the dollar so yes for any other country it would mean inflation. However dollar hegemony creates a HUGE foreign demand for USD in order to buy resources, planes, weapons and what not. Many global markets are pure dollar markets. You can buy an Airbus for example instead of a Boeing but Airbus will want dollars not Euros. The Fed exports these dollars in exchange for the foreign local currency, this dollar demand raises its value (actually IT IS the value of the dollar) and allows the US local economy to CONSUME without creating value itself. The cause of the sickness essentially.The more resources that are needed, the more dollars are needed -the more can be consumed on credit without fearing inflation in the USA. Essentially foreign Dollar demand raises the value while local money printing takes that value away again -a balancing system if it weren’t for the fact that the resource markets have hit relative limits, for example oil production cant and wont rise substantially anymore so there cant be a further value increase in the dollar which means there cant be a further deficit increase either. Of course adding Iraqi Oil to the world market might actually help for a while. The dollar has begun a decline which will continue for decades.
    New competition through Euro and Yuan is accelerating this. And China will eventually have to revalue its currency and raise wages to stop the workers from committing suicide -China will thereby export massive inflation to the US. Weimar Inflation was triggered by the outside too btw., hyperinflation usually does not come from within. It will get really nasty once world players leave the hegemony and start buying and selling more in other currencies. Thats not hyperinflation but a slow trip down a huge hill. Kinda like a snowball, starts small and gets bigger faster and faster or a Tsunami -the retrieving water creates the illusion of deflation , once the wave hits it will be to late to escape. Measured in Gold, Oil etc this inflation is clearly visible. Remember the crys at the Gas pumps in summer 2008, the recession is postponing judgment day but its coming sooner or later. TPC is right with one thing though if yet he doesnt seem to get how the dollar reactor functions, -a government cant really default -it will always print enough money no matter how worthless that money is, meanwhile the people default as a side effect of that, the government default is actually when the people had enough of it all.

  • http://blogfirstrider.blogspot.com/ first

    “QE is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit.”
    “interest bearing instrument”

    I did not know that toxic assets paid interest. I think its more like they purchased nothing and replaced it with cash that for now is sitting as reserve until the fed decides to open the gate by stopping to pay interest to the big losers. (The investment banks) Perhaps they could even have a negative rate. But first the need to recapitalize them at our expense.

    ”QE. Was the fed not purchasing new US T- Bills? How can this deflationary?

  • In Banking

    People throw about terminology here. QE is not TARP or TALF. QE WAS in effect for about 1 year and for a (paltry) $300 bln which many believe had little impact at all. This real QE could be considered inflationary in and of itself (though it could never be considered in such a manner) insomuch as the Fed was creating money ex nihilo (latin: from nothing) to essentially help banks build up reserves. The term “Quantitative Easing” refers to establishing a set quantity to ease the pressure on banks who are at or below there reserve requirements by simply giving them cash in exchange from their fixed income instruments (usually corporate bonds, but also Treasuries – which is why this is such a pointless practice). It essentially allows the Fed to not break its own rules for bank reserve requirements by following its own rules of stabilizing the economy by all means necessary. It doesn’t necessarily accomplish either, but it can make it appear as such for a short while.

    As for these interest bearing instruments, yes they do certainly pay interest. Why would massive funds like those at Fidelity and PIMCO be buying them if not? Certainly not just because they can get them at 0.70 on the 1.00. In fact, most of them have a very high yield – that was afterall the allure. The problem is that they have a high level of default. However, there are quite a few strategic investors who have been able to balance their risk with these investments and made some fairly nice returns as the non-defaulting entities in these structured products (MBS, CDO, CMO, etc) still largely outweigh the defaulting entities. Personally, I don’t like the amount of effort involved in this form of investing as you really have to be on point with the credit markets and have a very strict plan of liquidation – but some do make a very good living at it.

    TPC is fairly on point with his analysis of this swap event being closer to deflationary one than an inflationary one. I mean, imagine issuing a 10 yr Treasury bond at 2.00% and getting a 5 yr CMO product yielding 15% a year (even if this example is oversimplified)…..

  • JH

    Math changes? Where did you come up with that? Math never changes, and this has nothing to do with moral code, it has to do with reality. Economics follow the same laws of physics as the rest of the natural universe. Why do you think you can prove laws of physics with mathematical formulas? Because they follow the same laws. For every action there is a reaction. You cannot solve the problem of too much debt with more debt. There is no difference between public debt and private debt; it all has to be serviced by the working taxpayers. The real purpose of trying to slow de leveraging is to attempt to transfer as much of the toxic debt of the banks and financial institutions as possible to the backs of the working people. It is just a scam to allow the elite to steal the countries assets while at the same time transferring their bad debts to the government and by doing so to the public.

  • JH

    You are kidding right? You are using the ponzie scheme of the Fed purchasing treasuries and creating a false market to try to prove there is some kind of alchemy the government can use to manipulate economics. If treasuries were auctioned on the world market for whatever the market would pay, the interest rates would be at least triple what they are. The true measure of the success of the government’s economic policies is the demand for treasuries, which is in the toilet. The Fed now has to buy nearly half of the offerings. It’s a joke. The rest of the world does not have any where near the confidence in the governments ability to maintain the value of the dollar that you do. At this rate in another 5 years the Fed will have to purchase 100% of the treasuries because no one else will touch them.

  • Angry MBA

    You are kidding right?

    No, I am not kidding. The pundits who you have been following have been rolling snake eyes in their forecasts. They have completely blown it — they were predicting high rates today, when rates have actually done precisely the opposite. Not only were they wrong, but they completely missed the situation.

    At some point, you ought to accept the reality that strike out kings don’t tend to win games, so taking their advice won’t really help you. If facts have to be skipped or rewritten in order to make your arguments, then those arguments just aren’t worth making.

  • harold hecuba

    LOL what on earth is wrong with deflation. the only people that depise deflation are the elite and the rich since their assets are no longer appreciating. deflation is a great thing. it cuts through and destroys unproductive assets and people. most have been brainwashed over the years that inflation is prosperity. what a fckin joke. the country should welcome deflation with open arms since this is the only way to a new business upturn.

  • harold hecuba

    LOL what on earth is wrong with deflation. the only people that depise deflation are the elite and the rich since their assets are no longer appreciating. deflation is a great thing. it cuts through and destroys unproductive assets and people. most have been brainwashed over the years that inflation is prosperity. what a fckin joke. the country should welcome deflation with open arms since this is the only way to a new business upturn.

  • Angry MBA

    LOL what on earth is wrong with deflation.

    Nothing at all. I’m sure that you’d be tickled pink by a 25% wage cut…assuming that the falling output of your employer doesn’t cause you to become 100% unemployed.

    Oh, that isn’t what you meant, was it?

  • harold hecuba

    yup LOL harder than ever. wage cuts and public sector destruction are a welcome to anyone who understands what this cesspool of a country needs. you must be a public sector employee rallyiong for your pension benefits and constant raise increases. god bless the day when this lunacy stops

  • Angry MBA

    You must be a public sector employee

    Er, that would be a big fat “no.”

    You obviously don’t know what deflation is. If we had deflation, odds are good that you’d be in the unemployment benefits queue, praying to get a few bucks, not living large as you believe that you would. Deflation is lousy for workers, not good for them at all.

  • http://blogfirstrider.blogspot.com/ Firts

    “harold hecuba” Deflation is welcome when it relates to consumers good. You get more for you money and no one is losing there jobs. Just like when we pay less for a computer no one is going broke or losing there jogs.

    What is going on now is different its an asset deflating bubble caused by an irresponsible credit expansion. So when half the house on your street are for sale how don’t know where you see this as benefit. It’s a consequence that we now have to live with like it or not.

    Every one is worried about how low prices are but for some strange reason they are amnesic on how ridiculously high the where.

  • harold hecuba

    everyone is worried is a good thing. housinjg is overvalued and oversupplied and the sooner it gets to realistic prices the better. this is called capitalism and it involves econimc clesning after 25 years of froth. it’s gonna happen no matter what the incompetent one;s in gov do. short term pain will be extreme but it is sorely welcome. nothing is for free. time to pay the piper. if you can survive the storm coming in the next 5-10 years the chances for wealth are extreme. but now hunker down cause it aint gonna be pretty. THANK GOD

  • epicure3

    This article is absolute garbage.

  • F. Beard

    … short term pain will be extreme but it is sorely welcome. harold hecuba

    You first then.

    nothing is for free. time to pay the piper. harold hecuba

    You mean repay the government backed counterfeiting cartel?

    if you can survive the storm coming in the next 5-10 years the chances for wealth are extreme. but now hunker down cause it aint gonna be pretty. THANK GOD harold hecuba

    No wonder the Commies got traction if this is what we call “capitalism”, a recurrent threat to world peace.

  • AndyC

    Sophistry

  • Frederick

    TPC, you are a true warrior on this issue.

    TPC: Your “five friends” example, assumes something very great: That everyone is “in the system”. In the U.S., there exists masive flow of currency and economic activity “outside the system”. I just read a Barron’s from five years ago when they did a cover stroy on the ‘Underground Economy’. At that time they estimated the UE was at least 10% ot total, and possibly as much as 20%. My guess is its higher than 25% now. Honestly, I have no idea whatsoever if this influences your thoughts on these matters, or is at best just a tangential curiosity. You have a good mind, though, and I would be curious to see if you would consider putting together some thoughts on the “Underground Economy”, how it works, who the players are, and what it will mean if eventually 40+% of dollar based economic activity is “off grid”. Because that’s where we’re going, IMO.

    Longer term project? Does this topic interest you at all?

  • Paul

    So you’re saying that the 20 other guys were poorly motivated for 1 job based on your brother’s opinion of how desperate they were. And this proves that the unemployment rate is falsely too high?

    Let me have some of what you guys smoke, please. It must be fantastic.

  • Paul

    And if you believe in the reality of money contraction and the effects it has on the economy, you’re called a “Socialist.”

    TPC is right. The banks are not just businesses that should be allowed to go down. They are also public utilities, which is also why they need to be regulated.

  • Paul

    Thank you for explaining this simple choice to the deficit hawks here. Much obliged.

  • Alex

    Hi TPC,
    I recall that you have said before that the issue of government securities is a monetary operation, rather than a deficit funding. Can you explain why it is then that this ‘debt’ is such a large percentage of GDP? Surely, a monetary operation does not require the issue of trillions of dollars of securities…

    Either way, I disagree with the ‘the message is getting out’. If many economists and perhaps even central bankers do not fully understand the system, not to mention politicians, then what chance does the average Joe have? As long as there are anti deficit rallies, the idea that the USA is going broke will be mainstream. :(

    Lastly, can you recommend any good books about the monetary system? It seems to me that the system is so important in understanding economics, and it is quite hard to fully grasp in just a few articles. Thanks

  • Johnny`

    So he interviewed 20 people for an 11 dollar an hour job? Wow! The economy sounds great! What about the 19 people he didn’t hire. Maybe they should just get off their butts and start working at a job that doesn’t exist…
    How many people at the job fair were competing for how many jobs? My guess is that ALL of them would gladly work.
    Still, I’m sure that all 25 people or whatever would be glad to work. But only 4% of the unemployed are getting hired, based on your own admission. Should the other 96% starve and die so that you can feel better about yourself?

  • Johnny`

    If ifs and buts were candy and nuts, oh what a world it’d be.

    Why do goldbugs always think that they can predict complicated future global macroeconomic events, like a change in the reserve currency, when they couldn’t see an OBVIOUS recession coming three years ago?

  • Johnny`

    Asset prices coming to reasonable levels = deflation. It’s the natural result of capitalist cycles.

    There are two choices at this point. We can let asset prices fall to levels where they are reasonable, OR we can print money to match the asset values.
    What inflationist goldbugs seem to lack understanding of is that there is a SHORTAGE of money in the system, despite all the printing. There is not enough money to sustain previous asset prices.
    We can print money, and not even get to the peak of previous asset prices.
    If asset prices do not rise, you do not get inflation.
    Printing 2 trillion since the crisis began didn’t stop deflation, and neither will printing 5 trillion.
    You have to have asset prices going up to see inflation. Even the price of oil is down 50% from its peak.
    The only thing to go up in price is gold, because of irrational speculation by amateurs that do not understand the monetary system or supply and demand of money.
    That doesn’t mean that you can’t make money in gold, but let’s be frank:
    Gold is going up in value because of speculation. Inflation has nothing to do with it. The value of the dollar is UP since the crisis began. Anybody who can look at a USD or DXY chart can confirm this.
    People who say that there is massive inflation or that the dollar has devlaued simply do not know what they are talking about. Perhaps they don’t look at FX charts or read the newspaper?

  • Johnny`

    I agree with you Mr. MBA. Deflation is bad, mmm kay. At the same time, the best thing we can do is get it out of the system as quickly as possible so that productive companies (as opposed to debt ridden zombie companies who can’t invest) can get assets at reasonable levels and invest again.

    As for the person you’re arguing with, it seems to be amateur hour in the comments section here. It’s okay. People are entitled to their opinions…

  • Johnny`

    Sure, people knock Japan, but the unemployment rate is 5% there, and people are getting by. Here? Not so much…

  • Marty

    Johnny said: The only thing to go up in price is gold, because of irrational speculation by amateurs that do not understand the monetary system or supply and demand of money.

    Your explanation for why gold is in a bull market is simplistic, and likely is relevant to only a minor fraction of the total investment in gold. There are many other reasons for owning gold beyond an inflation hedge. One counterexample: Did you notice how gold demand increased while Greece’s debt crisis was being addressed? It certainly wasn’t because of inflation worries.

    Many very intelligent and knowledgeable people see a role for gold in an investment portfolio, one that transcends a “buy because it’s going up” rationale. Please show some humility — accept that just because you personally believe they are misguided doesn’t mean you are correct, nor does it qualify you to call them fools.

  • Stoker

    TPC, in your world view any country NOT pegged to say gold, or the USD can run US policies. By that I mean since the US owes no one anything (at the public level) and its all just accounting, why cannot every country in the world simply go to their own currency, unpegged to anything, print at (near) will, and no one work?

    I am taking it to the extreme for a very specific reason. Everytime someone argues your point you come back with the U.S., U.K. and Japan which are huge economies that are unpegged. But it should apply to every country as its “just accounting”. So I’d like to know why every country in the world cannot go to their own currency and do what the U.S. does and apparently that solves all the world’s problems.

    Or if you want a specific example let’s use Poland who has the zloty, which I don’t think is pegged to anything, it devalued sharply during the crisis in 08. If it is somehow pegged let’s assume for theoretical argument it is not pegged. In that case why cannot Poland (or any similar country, of which there are not many left with much of Euro stuck together) simply follow U.S. policy.

  • F. Beard

    There are two choices at this point. We can let asset prices fall to levels where they are reasonable, OR we can print money to match the asset values. Johnny

    Succinctly said! And if we do print money then let’s just create it debt free (United States Notes) and distribute it equally to every US adult. This would:

    a. enable underwater home owners to pay down their mortgages to market price levels.
    b. compensate savers for years of artificially suppressed interest rates.
    c. Fix the banks in nominal terms.
    d. Fix state tax revenues.

    Inflation risk? Maybe, but if banks were put out of the counterfeiting business via a 100% reserve requirement then the only source of new money into the system would be under government control, the Fed and US Treasury.

    The long term solution is fundamental reform including liberty in money creation, usage and acceptance. But the just thing to do now is to bailout every every US adult since we are all victims of the government backed counterfeiting cartel. No dangerous deflation is needed.

  • In Banking

    Any country with a few hundred years of proven prosperity could certainly attempt to run a fractional reserve floating rate currency. The problem is not that Americans are so self-centered that they prevent anyone else from playing. Rather, the rest of the world has seen many attempt and fail while the US stands the test of time.

    Obviously, having the wealthiest economy does give the US the upper hand – but there’s a reason that’s the case and I wouldn’t be so quick as to say its simply due to greed….

  • BleakoEcobomics

    Well, this got Denninger’s attention. Hyperventilation here:

    http://market-ticker.denninger.net/archives/2515-Crack-Smoking-Is-Getting-More-Popular.html

  • In Accounting

    This is basically a regurgitation of the ‘welfare queen’ meme of the 80s

  • Bubba Jenkins

    If solvency of the United States is not an issue, then WHY can’t the country pay its bills without BORROWING?

    Total and absolute GARBAGE from top to bottom!!!!!

  • Angry MBA

    If asset prices do not rise, you do not get inflation.

    This is not what inflation is. Inflation is an increase in consumer prices, not investment assets or raw materials.

    Most inflation in an economy comes from wage growth — consumers increase their demand for goods, which requires hiring, which creates wage competition amongst employers who need to lure increasingly expensive workers, which causes the employers to raise their prices that they pass on to the consumer.

    The Harold’s of the world believe that deflation is like turning America into a gigantic Costco, with bargains galore. That is a fundamental mistake and begging for correction.

    The reality is that deflation typically comes from companies cutting their prices as they dump their output, in order to convert past expenditures into whatever cash that they can get. Well, guess what — when employers are dumping goods to get cash, they’re also preserving cash by firing people and, if things are bad enough long enough, cutting the wages of the remaining work force. Deflation is not some lovely paradise of shopper’s bargains, but a downward spiral of falling prices, declining output and rising unemployment.

  • TPC

    Denninger just revealed the cards he’s holding and they are very bad. He’s just another hyperventilator who doesn’t understand the monetary system….

  • TPC

    You clearly have not read my posts or the multitude of links I provided. I have NEVER said you can just print money backed by no productivity. NEVER.

  • In Accounting

    F. Beard,
    I have seen you post this comment numerous times however I do not believe that you have fully thought through the supposed benefits.

    Regarding your point b., “compensate savers for years of artificially suppressed interest rates.”
    Wouldn’t printing and distributing, for example, ten million dollars to every citizen in the US would actually punish rather than compensate savers as the influx of dollars would reset the savings level of every citizen to approximately the same amount?

    Lets take an example of a responsible middle class saver who has saved up $200,000 over their prime working years. Is there really much of a discernible difference in wealth between this saver who now has $10.2M in the bank and someone else who had previously only had $7.63 in their bank account and now has $10M? Instead, isn’t the person who had previously saved now considerably worse off as the value of their savings is more or less equivalent to that of every other citizen?

  • V

    “and later safely bring the debt ratio back down—than widely believed today.”
    How will this be acheived?
    “and other advanced economies are not permanent and will eventually reverse, improving government fiscal situations dramatically.”
    Why will it reverse, what will provide the impetus?

    I understand the Keynesian and Austrian arguments as they are so prevalent in the media, however am struggling a bit with MMT. I’ll check out the links in your comments above, hopefully this will help.

  • In Accounting
  • V

    Thanks I just spotted those! Something to get my head around.

  • V

    One could argue the price of gold was reflecting the credit expansion since 2001, and hence the move from $250/oz to $750-$1000.
    Ultimately the credit expansion led to recession due to the poor loan quality etc.

  • http://thecynicaleconomist.com The Cynical Economist

    The problem with the economists that say the deficit doesn’t matter is that they assume that perma growth model is going to work in the future, so we will just shift the burden of ever rising payments to pay off debt to the future generation. I do not think that is the case today.
    Today our obligation as a country to the debt holders, to medicaid, medicare, social security is rising faster than what is mathematically possibly to be paid by the next generation. Thats why you will see soon rising tax rates and rising retirement age and cuts in spending.
    Another example that the perma growth model is not working is Japan. Look at their aging population and ever rising debt without any exit strategy…
    The only thing that is postponing our doomsday is the stream of immigrants.
    But who would like to come in America, if they cannot find work here?
    Also see – Within The Next Six Years, The Costs Of Serving The Debt Will Exceed The Cost Of The Defense Budget http://thecynicaleconomist.com/?p=15345
    By the way TPC even the economists at this blog (with whom I disagree) http://neweconomicperspectives.blogspot.com/ are saying that, if we continue spending like we are now, inflation may be real concern in the future…

  • F. Beard

    Regarding your point b., “compensate savers for years of artificially suppressed interest rates.”
    Wouldn’t printing and distributing, for example, ten million dollars to every citizen in the US would actually punish rather than compensate savers as the influx of dollars would reset the savings level of every citizen to approximately the same amount?
    In accounting

    The amount I have in mind is the average amount necessary to pay every underwater mortgage debt down to current price levels times two since the minimum repayment for theft in the Old Testament is double. I doubt that amount is anywhere near $10,000,000. I suspect that the amount that borrowers were driven underwater is very close to the amount that savers were cheated of honest interest rates. The only losers then would be the banks in real terms. Poetic justice, I say.

  • V

    @angrymba

    Am enjoying your commentary. However on the point of an inflation definition, why do you not define it as a net increase in the supply of money and credit? To my read this is a more sophisticated definition of inflation than an increase in CPI or wages provides. Aren’t changes in the prices of consumer commodities (in CPI) or wages merely a symptom of inflation, rather than inflation itself?

  • In Banking

    You mean transferring the bad debt back to the debtors instead of having the lenders foot the bill? Doesn’t sound as egregious as you make it out to be.

  • F. Beard

    A more elegant solution to halt the deflation would be to run the fractional reserve looting machine BACKWARDS. In other words, as bank loans are repaid, distribute the money to all bank accounts on a pro-rata basis instead of destroying it as normal.

  • Angry MBA

    why do you not define it as a net increase in the supply of money and credit?

    Because I am not a die-hard monetarist. A purist’s view of the quantity theory of money does not adequately explain what inflation is.

    In some circumstances, it is possible to print massive amounts of money without creating a lick of inflation. (Japan is a prime example of that. More recently, the US is another example.) While I would not say that the quantity theory of money has no merit at all — it certainly does at the extremes and it can be relevant during boom periods — it is also erroneous to believe that relationship to be a linear one.

    Again, most inflation comes from wage growth, which is a byproduct of excess aggregate demand. The creation of money in such circumstances is the **result** of inflation (assets are being produced, some of which are introduced to the system with credit), which then creates a negative feedback loop of rising prices. Central banks can (or at least historically could) stop the inflation feedback loop by making credit too costly for the spending pace to continue, but that doesn’t mean that they can necessarily in the inverse simply fix deflation with a larger supply of money. Inflation and deflation are not exact opposites, despite the terminology.

  • Stoker

    ok TPC you ignored my question, due to one throwaway phrase about “no one has to work”

    Let’s try again, this time with all these economies producing things they do. Poland has a functioning economy. So does Hungary. You read the Hungary news I am sure, about what the IMF is demanding. It has its own currency.

    If you were the Tim Geithner or Ben Bernanke of Hungary I would assume you tell your president to ignore the IMF, as our currency is backed by faith and Hungary owes no country a thing. When the CDS blows out, and interest rates on bonds skyrocket to double digits you tell the president, don’t worry it’s a grand illusion by millions of people who don’t understand economic policy?

    I am being very serious. Maybe Zimbabwe does not have a productive economy but there are at least 50 countries who have good productive means who could do what the US does. Why do they not?

  • Johnny`

    The Greece thing and the rise in gold was totally due to people thinking that there would be inflation, because they’d have to print money to make Greece solvent.
    As we saw, that was speculation.

  • Jon

    Does it or does it not have to be paid back, with interest?
    If that is the case, then yes, it is borrowed money. The government “borrows” it into reality, then sells treasuries to foreign buyers and itself…but mostly itself anymore.

  • In Banking

    This is the same type who would say that the world is flat because we’ve never been around it. Or who would present a long mathematical equation as to why bees can’t fly – and yet they continue flying without a worry of our physics. In his mentioning of 1923 as a turnaround (which he attributes to taking the pain pill instead of prolonging the problems, something I find difficult to prove) and it lasted for what, SEVEN WHOLE YEARS before the market hit a 90%+ sell off and put the entire globe in crisis? Please, that’s laughable…

    Granted, the debt situation isn’t something to brag about, but the point is that right now our concerns should be centered on the bigger issues we face. And though it should be considered when coming up with solutions, it should not be the absolute hindrance preventing attempts to jump start the economy. Moreover, if things were so bad and the world was jumping ship on US debt as we underwent the largest money supply increase in history, why exactly have bond yields plummeted as the dollar increased in value worldwide? These people always want you to believe what WILL happen instead of what IS happening.

  • AndyC

    “Nations vary sharply in their capacity to carry public debt. The United States, the United Kingdom, and Japan are all high-debt-capacity nations. All have had debt-to-GDP ratios over 100%, and in Britain’s case over 250%, without calamitous consequences.”

    “when a depression or great war is responsible, then high-debt-capacity nations can accumulate vastly more debt—and later safely bring the debt ratio back down—than widely believed today.”

    The gist of this is all we need is WW3 a massive destruction of industrial output and then it will be smooth sailing from here on out.

    When does Japan get to the point that they “can safely bring the debt ratio back down” its been over 20 years now and their debt keeps rising and their economy keeps stagnating?

    Japan has been able to finance their debt internally so they have been lucky to take their debt to such ridiculous heights without defaulting, we are borrowing close to %40 of our debt from foreigners and wont be so lucky

    Denninger cleaned your clock

  • Texas

    According to this article, the US will enjoy endless free lunches because we have a high free-lunch-carrying capacity.

    I feel better now.

    TPC…you’re a phony.

  • http://www.theimagefactory.com Dburn

    The socialist meme ( with exceptions) is getting tired and useless. Jumping on Medicare and social security as “socialist”, where one program funds itself and the other is a reflection of society that has decided that it is morally repugnant to let it’s seniors die penniless and without medical help is hardly socialist. Privatizing profits and forcing taxpayers to pay losses of private enterprise has socialist overtones, unless one calls it for what it really is; theft . There is nothing socialist about a system in the government that allows corrupt government officials to lavish public funds on friends, families and contributors at the expense all others along with paying their own operatives more than the private sector’s middle class worker with the private sector’s middle class worker’s , to provide services that grow every year so fast and so obscure they very few people even know they exist.

    I’m still not convinced that the trillions spent or committed to the banks averted a great depression. To the contrary, allowing them to fail and selling the assets for 10 cents on the dollars to qualified buyers and using that opportunity to forcibly deleverage the private sector to make up for the zero movement in wages in 30 years by bringing housing prices down to a level, along with rent (and losing credit cards) that any American can afford, would have done damage to paper wealth but in terms of sheer liquidity it would have been a huge boost that no government stimulus could have matched.

    “Profits is an accounting concept , cash flow is an operating term ” and “no matter what accounting system you’re on, eventually you have to answer to Jesus”. These two facts have been ignored by generation after generation who think they are just exceptional enough to disregard these two basic precepts of capitalism. Yet a the portion of the population most likely to spend money in a economy that is 70% consumer oriented would have seen that vastly increased cash flow as way to get the basics and even a few luxuries that would have brought the economy of it’s knees so fast no one would have time to have come up with the concept of a double dip and Apple would have a market cap of a half trillions dollars. They have 317,000 in profit per employee while Wal-Mart, the biggest importer of Chinese goods enjoys a lofty margin of $6,995 dollars per employee on the 2 million they regularly abuse. Yes they are working, but few of them could ever afford to take unemployment.

    The fact that there are 8000 banks in the US and 7900 of them hold 23% of the assets while the top 100 hold 77% before we allowed further consolidation at the top should be bothersome to everyone. They give us no economic advantage . They are huge “vampire squids” that do nothing but attach themselves to all levels of economic life and suck the life right out of it. The fact that 19 Banks hold 80-90% of that 77% should be even more worrisome. So why let it continue? The manufactured crisis by the misuse of derivatives is over, why have we not made radical changes ? It’s obvious production will never allow us to grow our way out of this mess, particularly if we have a system set up that parasitically takes 40% of the annual profits and distributes them to a few select people. We aren’t the first society that bankers have ruined and we won’t be the last. But never let it be said that Socialism was a cause of our downfall. It was another bad case of greed otherwise called empiritis that many before us have been afflicted with right after their leaders start think to believe basic laws of economics and commerce no longer apply because they are so exceptional and so awesome.

    In 1890 we surpassed China as the largest economy in the world. Predictions suggest they will again take the lead in or around 2015. My money is on the one with 5000 years of history even with the empty houses they have built up. Eventually they’ll have to even out the male- female population, so having extra houses built in a time of relative prosperity should come in handy. There is nothing worse than a few hundred million young men with excited hormones and no viable outlet.

    Socialism? Not even a chance. Corruption in almost every area of business and government – defiantly. It is hard to fathom why people jump up and down screaming socialism (take some meds) and point at the victims of the corrupt crony capitalistic system as the cause of something they have mis-labeled solely to take attention away from the big crime as a massive circle jerk /séance to bring Joe McCarthy from the dead. They must get their news from a emailed newspaper called “Fwd: Send this to everyone you know”, publisher and trust company.

  • Jim

    HUH ! Must be Albert Camus school of economics.

  • http://www.pragcap.com TPC

    Denninger makes some very good points in that piece, but it is also riddled with inaccuracies. If you want to believe the hyperinflationist claptrap then be my guest. We have big problems here. I have never stated otherwise. Solvency is not one of them and anyone who compares us to Greece lacks an understanding of reserve accounting. Plain and simple.

  • http://www.pragcap.com TPC

    I have never ever said we should just spend money to line people’s pockets. Where is this assumption coming from? I am simply saying that solvency is not an issue. I have specifically stated that govt spending is not the answer to all our problems. But we must recognize that a certain level of govt spending is necessary…..

  • http://www.pragcap.com TPC

    PS – guys, I am in Europe for 2 weeks so please accept my apologies for not being on top of questions….

  • TEXAS is #1

    TPC YOU ARE THE BEST! Who cares what these ‘old dogs’ who are stuck in their way of thinking say!!

    Keep bringing us the good stuff!

  • TEXAS is #1

    YEAH u are right my fellow Texan and as a result of that we are fatter, richer, and lazier!! Pendejo!

  • jack

    See Karl Denninger at Marketticker.com
    He rips you to shreds.

  • http://www.pragcap.com TPC

    Read my Einhorn piece and ask yourself if you should be taking advice from these people….Denninger thinks we have a Greek problem which pretty much proves that he knows next to nothing about the fiat currency system. No offense to him, but articles like his are pure misguided propaganda that do nothing but fear monger….

  • Kamala

    TPC,

    Hey, you have a great site. Keep up the good work.

    There are very few blogs/sites on bonds and treasuries. I view our economy/finance/monetary system two ways. How it SHOULD work, and how it ACTUALLY works.

    Your views on debt and deficits kind of remind me of some of the articles written by Ellen Brown. Are you familiar with her writing or articles on her blog?

    Thanks.

  • WonderDawg

    What Denninger understands is math, and math doesn’t lie, rationalize, fabricate, delude, or fear monger. It just is. Anyone who doesn’t understand that we are in the early stages of a severe credit contraction – read: depression – just doesn’t get it. The report even uses the word “depression” to describe the current state of the economy. Credit is contracting, that is a fact, and as a result, deflation is inevitable. We’ve already had hyperinflation, that’s the definition of a bubble. People worried about inflation now are about 7-8 years behind the curve.

  • F. Beard

    I read Denninger’s rebuttal; he talked about easy credit pulling demand forward as if demand could be exhausted. Yep, people are just plumb tired of spending and need to rest. Consumption, which is 70% of the US economy, is very difficult, ya see. No, what people are short of is money because they were either cheated of honest interest rates or driven into underwater mortgages by fractional reserve lending. A one-time, sufficient distribution of new, debt-free, legal tender fiat to every US adult would allow folks to get back to the hard work of consuming. Of course that is no long term solution. The long term solution is to practice genuine capitalism without a government backed banking cartel.

    ref: Deuteronomy 15, Leviticus 25.

  • http://www.theimagefactory.com Dburn

    In Banking? Is that before or after you took a large bonus for lending money you knew no one could afford to pay back, when you filed out bogus loan applications, packaged it up in bundles and sold it to wall street for more money to perpetuate the scam?

    The country may not be happy about taxes, but I’m sure allowances would be made, small ones, to pay for your room and board in the closest federal prison to you. We certainly wouldn’t want you to have to do anything but helicopter back to the Hamptons to dig your money out of the back yard in 10-20 years if it’s still there.

  • WonderDawg

    F. Beard, I think you oversimplify the situation. It’s not that demand is exhausted, it’s the fact that the consuming public doesn’t have the means to consume, as we’ve reached a critical point of credit capacity. The consuming public is deleveraging. That much we know to be fact. The government’s efforts to stimulate the housing market has failed to this point, as have their efforts to stimulate aggregate demand. Will more of the same change anything?

  • TPCFAN

    Hey TPC,

    I really love reading your blog. Enjoy yourself in Europe.

  • F. Beard

    That much we know to be fact. The government’s efforts to stimulate the housing market has failed to this point, as have their efforts to stimulate aggregate demand. Will more of the same change anything? WonderDawg

    The problem with stimulus is that it is an indirect and not particularly just method of dealing with unjust debt. The bankers operate a government backed fractional reserve lending cartel in a government enforced monopoly money. The moral implications of that is that both borrowers and savers were cheated. That process could be reversed with a sufficient amount of new legal tender fiat just given to every US adult. The Old Testament calls for a minimum two-fold repayment for theft so we should err on the side of generosity. The only problem then would be the danger of hyperinflation which could be eliminated with leverage restrictions on the banks.

  • WonderDawg

    “That process could be reversed with a sufficient amount of new legal tender fiat just given to every US adult.” F. Beard

    Ah, I think that’s basically what caused this problem in the first place. The policies of credit expansion over the last couple of decades has allowed the consuming public to basically use their homes as ATMs, through HELOCs and cash-out refinancing. What did it do? Created artificial demand that cannot be sustained indefinitely. How did this happen in the first place? A prolonged period of “irrational exuberance” in the collective social mood. The mood has turned, this is a naturally occuring phenomenon. To try to stop it is futile, and creating artificial demand only delays the inevitable and compounds the ultimate damage.

  • F. Beard

    Ah, I think that’s basically what caused this problem in the first place. WonderDawg

    No. What happened was that “counterfeit” money (credit, temporary money) was used to drive people into debt. To not borrow from the government backed counterfeiting cartel was to be priced out of the market by those who did. The result is that 25% of mortgaged homes are underwater. A solution then is to GIVE, not loan, every US adult a sufficient and equal amount of new legal tender fiat (United States Notes). That would enable (on average) every underwater homeowner to pay his mortgage down to current market price levels. Or one could be more elegant and attempt to run the fractional reserve looting machine BACKWARDS by distributing loan repayments to all bank accounts on a pro-rata basis rather than destroy the credit money as now occurs. That is where the purchasing power was stolen from in the first place (roughly).

  • F. Beard

    To try to stop it is futile, and creating artificial demand only delays the inevitable and compounds the ultimate damage.WonderDawg

    This would be a one time reset that should be followed by fundamental reform that would eliminate the cause of the problem. Don’t blame “irrational” exuberance. People behaved rationally in an irrational system.

  • WonderDawg

    Dude, there is a lot of truth in what you say, but your solution would do nothing but devalue the dollar. Period. However, it’s hypothetical because it is not going to happen. For an eye-opening perspective on the current state of the world, I highly recommend Robert Prechter’s book The Wave Principle of Human Social Behavior. For reasons explained therein (among other reasons), your “solution” is a folly. By the way, your last statement contradicts itself; peoples’ behavior defines the system.

  • F. Beard

    Dude, there is a lot of truth in what you say, but your solution would do nothing but devalue the dollar.

    Nope. It would merely halt the deflation. Leverage restrictions would protect the value of the dollar.

    Period. However, it’s hypothetical because it is not going to happen.

    Well, I can’t predict the future and neither can you. But there is a way out based on principles of justice as well as economic pragmatism. If this turns out to be GDII then WWIII is a distinct possibility based on experience with GDI and WWII.

    For an eye-opening perspective on the current state of the world, I highly recommend Robert Prechter’s book The Wave Principle of Human Social Behavior. For reasons explained therein (among other reasons), your “solution” is a folly.

    The definition of a fool is someone who refuses to learn.

    By the way, your last statement contradicts itself; peoples’ behavior defines the system.

    We are suffering the “tragedy of the commons” with respect to our money supply. What I advocate is just and has Biblical precedent from the days when money was actual hard currency and was not created from nothing via FRL.

    If you prefer defeatism then that is your choice; I will have done my duty.

  • WonderDawg

    I don’t prefer defeatism, I prefer reality. The reality is, there is no free lunch. Those who live imprudently, ultimately have to pay the piper. I believe your bible also says something about you reap what you sow. There is no free lunch. The “Wimpy” icon of gladly paying you Tuesday for a hamburger today is particularly poignant right now. Guess what? Tuesday is here, time to pay up.

    As far as your response to my suggestion to check out Prechter’s book, are you saying you refuse to learn? It was my suggestion that you might learn something by reading the book, not sure what your response meant. In fact, I’m not sure how any of your responses actually applied to the quotes you selected. Distraction from the essence of a point made is not a valid argument.

  • F. Beard

    I don’t prefer defeatism, I prefer reality.

    To a certain extent we create our own reality. Must we endure GDII and maybe WWIII or should we learn from experience?

    The reality is, there is no free lunch.

    What I propose would prevent the destruction of wealth not its creation. I also propose fundamental reform to achieve optimum sustainable growth.

    Those who live imprudently, ultimately have to pay the piper.

    What choice did they have? Park their money in CDs and earn negative real interest rates?

    I believe your bible also says something about you reap what you sow. There is no free lunch.

    However there is no reason to destroy our lunch. The Bible is greatly concerned about justice too. Our money system is unjust. It steals purchasing power. The Bible also commands debt forgiveness and says that if we judge without mercy we shall also be judged without mercy ( James 2:13 ).

    The “Wimpy” icon of gladly paying you Tuesday for a hamburger today is particularly poignant right now. Guess what? Tuesday is here, time to pay up.

    And what did the banks lend? What they lent was credit in OTHER peoples goods and services not their own. That is theft. Pay up to the government backed counterfeiting cartel? Fine. They would get brand new legal tender fiat. They would have no cause to complain. The banks should not be repaid in “money” more valuable than they lent.

    As far as your response to my suggestion to check out Prechter’s book, are you saying you refuse to learn?

    Must I read every book recommended to me? Prechter believes in Elliot waves, doesn’t he? I believe in free will and the Sovereignty of God.

    It was my suggestion that you might learn something by reading the book, not sure what your response meant. In fact, I’m not sure how any of your responses actually applied to the quotes you selected. Distraction from the essence of a point made is not a valid argument.

    I’m sorry you missed my points. I was not trying to distract; there is no need. Justice, Biblical precedent, pragmatic economics and the extreme wisdom of mercy are on the side of what I advocate.

  • WonderDawg

    I wish you luck in the years ahead. I’m afraid you’re going to need it. Personally, I prefer to view things as they are today, not how I wish they were. I’m not arguing with what you say about the banks, I agree 100%. It was theft and fraud and it continues today. However, the underlying cause of the the current situation is what will ultimately bring it down. You’re proposal treats a symptom, not the cause. Under the natural order of the way things work in the universe, there must be a correction. There always has been, and there always will be. Quoting selected bible quotes does not change the reality we face today. I wish you luck in creating your own reality while the rest of us deal with the reality already created.

  • YamaYama

    I have $150K in cash, another $140K in 401k, about 4X my annual post tax salary and no debt. Would I be hurt by deflation and in what way? This is an honest question, not sarcasm.

  • http://www.pragcap.com TPC

    Here’s some math for Mr. Denninger: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets.

    Now tell me the govt can just not spend any money. These blanket discussions about how all govt spending is bad are totally misguided.

  • F. Beard

    However, the underlying cause of the the current situation is what will ultimately bring it down. You’re proposal treats a symptom, not the cause.

    Yes, the injustice is a symptom of the system. I propose fundamental reform too to fix the cause.
    But the injustice is not to be ignored either particularly when it is so damaging to the economy.

    Under the natural order of the way things work in the universe, there must be a correction. There always has been, and there always will be.

    The Bank of England was founded in 1694. I suppose 300+ years could seem like forever.

    Quoting selected bible quotes does not change the reality we face today. I wish you luck in creating your own reality while the rest of us deal with the reality already created.

    One must read (and reread) the entire Bible to more fully understand what the Lord desires from us. And it is not my desire to create my own reality but to figure out how the country might be spared pointless suffering and to advocate for fundamental reform too. It annoys me that capitalism cannot be implemented better than this.

  • http://n/a Mike

    Hello. Karl seems to give fairly good detail. Your response to his commentary seems to lack detail. Would it be possible for you to provide specific feedback on which things he has stated in accurately?

  • rps

    “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” Daniel Webster, speech in the Senate, 1833
    “Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” George Washington, in letter to J. Bowen, Rhode Island, Jan. 9, 1787
    “With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Friedrich A. Hayek
    “Paper money eventually returns to its intrinsic value —- zero.” Voltaire (1694-1778)
    “I sincerely believe … that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” Thomas Jefferson
    “You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.” Andrew Jackson: To delegation of bankers discussing the Bank Renewal Bill, 1832
    “These folks are just another group in a long line of those desperately looking for a free lunch that they already ate!” Karl Denninger

    “It does not require many words to speak the truth.” Chief Joseph, Nez Perce

  • rps

    This time around US Citizens are the Native American Indians dazzled with pretty beads (foreign goods with a 2-5 year lifespan) and covered with diseased blankets (indentured servitude to debt until death do us part). Labor is the true wealth of a Nation, currency is a tool to barter services and goods. Our government’s sole responsiblity is to protect its’ wealth; labor–We The People. The signing of NAFTA and WTO and offshoring of production and jobs was a dliberate treasonous act.

  • Angry MBA

    Denninger cleaned your clock

    I disagree with TPC’s views favoring MMT and chartalism, but Denninger’s rant was almost completely off the mark. (And he really needs to go easy on the bold font, as it makes it too obvious that he is not just factually wrong, but also a bit nutty.)

    TPC is closer to the truth as to how money actually works. Anyone who believes that the US situation is directly comparable to that of Greece (or Weimar, or Zimbabwe, blah, blah, blah) simply doesn’t know what he is talking about.

  • http://- Viktor

    The Hungarian Forint has depreciated by 10% since they started their spiel with the IMF. If they insist on not paying their debts, trust in Forint will disappear, but Hungarians need to hedge their exposure to oil and all the stuff that is imported, so people will start hoarding gold, dollars, euros, real estate, whatever. It happened in Hungarian history, and this has always been done to a certain extent (>80% of households are homeowners(!)) so people have the reflexes – when it happens it will happen very, very quickly.
    Also they’re loaded up with loans denominated in foreign currency so it’s gonna bankrupt third of the population anyway.

  • F. Beard

    Mr. Denninger responds: Crack Smoking Part Deux

  • F. Beard

    Common stock is paper but it is backed by the rule of law and genuine productive assets. It would make an ideal money form. Store coupons are paper but have genuine value. Government fiat is paper but is backed by government taxing authority (guns, bullets, prisons, property seizure, etc.) in addition to being legal tender for all debts not just government ones.

    The problem, IMO, is not paper vs gold, but government backed fractional reserve lending. Let’s have true liberty in money creation without government privilege and I predict that FRL would soon be rendered obsolete or at least greatly limited in leverage ability (2-1 max?). Let government money be legal tender for government debts only and let private monies exist on a level playing field with regard to government to serve the private sector.

  • F. Beard

    Labor is the true wealth of a Nation, currency is a tool to barter services and goods. Our government’s sole responsiblity is to protect its’ wealth; labor–We The People. The signing of NAFTA and WTO and offshoring of production and jobs was a dliberate treasonous act. rps

    Liberty is the true wealth of a nation. If the US had practiced genuine capitalism instead of central bank fascism since 1913, the capital would have remained here.

  • F. Beard

    Would I be hurt by deflation and in what way? yama yama

    You might lose value in your 401-K and you might lose your job. And if things get bad enough there might be increased crime and social unrest. Deflation is nothing to wish for, IMO.

  • F. Beard

    “It is for this reason that the rate charged for longer periods of time is higher than the rate charged for shorter ones. The risks of default and monetary instability increase over time. The time value of money and the expected margin of profit are both reasonably fixed.

    Now add to this the credible threat of or actual emission of unbacked currency and tell me how you judge the monetary stability risk. You can’t, especially for term loans of material duration.

    Private lending thus ceases instantly.” Karl Denninger from http://market-ticker.denninger.net/

    That might not be such a bad thing if Deuteronomy 23:19-20 is to be believed.

  • F. Beard

    “These folks are just another group in a long line of those desperately looking for a free lunch that they already ate!” Karl Denninger

    It’s not that simple. How can an economy go from prosperity to depression virtually overnight without any damage to the economic base? The truth is that the economy is suffering because people were driven into debt by a government backed counterfeiting cartel. Turnabout is fair play. Let the bankers be repaid with new legal tender fiat and let’s start anew with an honest money and banking “system”.

  • hearditall

    I can’t believe what I’m reading here.
    If people really believe this claptrap (MMT, aka the free lunch) we are doomed.
    Please apply common sense.

  • YamaYama

    These symptoms sound the same as in any other economic crisis including the credit crunch. Given that, how will lower prices and lower 401k hurt more than higher prices and lower 401k.

  • TheMatrix

    Well empirical evidence backs it up, even if it offends your sensibilities. I started out just like you, “no way this could be true”, “if it’s too good to be true, it usually is”. Then I actually sat down, wiped the slate clean and did thorough analysis of the EMPIRICAL evidence. Most of it backs up MMT/Chartalism.

    You know KD just doesn’t get it when he tries to conflate scientific LAWS with economic THEORIES. For example:

    ” just as in thermodynamics, there is loss in economics”

    I mean, really? It’s just that simple huh?

    He also thinks that issuing more currency automatically causes devaluation of existing currency. Sure, if currency was measured by it’s own intrinsic value and not vs other currencies.

    “ask yourself why Treasury doesn’t just print up and sell the entire $14 trillion in GDP every year.”

    Uhh, well #1, it could never happen politically.
    #2, that amount would cause inflation as it would most likely saturate the economy’s ability to absorb it. Too much money chasing too few goods.

    “See, we haven’t printed anything. “QE” where the reserves created are immediately deposited with The Fed is a circle-jerk. There is no money-printing going on until and unless the reserves created enter the economy in some form. So long as they remain on deposit with The Fed it is simply a pass of a $20 bill from them to you and back to them – the net monetary impact is zilch.”

    Errrr, interest paid on reserves doesn’t count now? That circle jerk is the same as me moving $20 from my checking account to my savings account. Sure, it stayed in the same bank, but now I’m getting interest on it. The fact that Americans hold a large amount of Treasuries doesn’t count either?

    “Remember, a naked short is self-limiting because the shorted item doesn’t actually exist. That is, it is counterfeiting in the purest sense; you’re selling something you don’t have and may not be able to acquire. The important fact to remember, however, is that a naked short will eventually unwind, and when it does, the depression of price that occurred when it was created will be reversed.”

    Ummm, we live on computers now. The scoreboard at the football stadium will never run out of points. If it needs more points, it creates them out of thin air. That’s what makes the sovereign different from you and I.

    “These folks get this wrong because they believe that the government is never revenue constrained. That is, it can’t go broke. Well, how, exactly is that true, unless someone has surplus dollars with which to purchase said Treasuries? If they do not, where will those dollars come from? Remember, the act of issuance comes first before the spending, not the other way around (you can’t credit someone’s account without debiting someone else’s, or you’re cheating the books!) They are thus forced to defer back to “but the government can simply credit your account up front.” ”

    Ummmmm, the surplus dollars come from:

    1) Trade deficits. China has all of these dollars gaining no interest. Where do they get it from? Treasuries.
    2) Crediting non interest bearing reserves via gov’t spending. Now those reserves want interest. Where do they get them from? Treasuries.

    Anytime he compares Greece to the US you know he’s just lost in the wind. Greece owed debts in a currency it did not control, influence or most importantly ISSUE. The US owes debts in it’s own currency it controls, influences and ISSUES. End of comparison.

  • dis737

    Gov deficit spending is only “credible” if you issue debt against it, otherwise you face certain currency debasement and a shut down in private lending
    Though the Fed Gov in theory is not revenue constrained, in practice it is due to this fact.
    However, no one knows what the debt level tipping point is, you can do it until markets lose confidence.

  • LVG

    Karl just issued another SCREAMING retort. It sounds very loud, but it just makes him look like an idiot. This man clearly doesn’t understand how a fiat currency system actually works. He thinks we’re in a depression and that the US is just like Greece even though the currency systems are totally different. I hope TPC thrashes him appropriately. These fear mongering nitwits need to be put in their places.

    http://market-ticker.org/archives/2516-Crack-Smoking-Part-Deux.html

  • TheMatrix

    Also, don’t bother to debate KD on this. He’ll ignore rebuttals, key points and keep hammering on his talking points. Ask him why Japan hasn’t collapsed yet and you’ll hear crickets.

  • TheMatrix

    And this is just a fact right? The point that currencies are valued AGAINST EACH OTHER means nothing? And why would private lending stop if the currency issuances mean that future demand is coming from somewhere?

  • dis737

    When government’s don’t run “credible” finances (monetary expansion, fiscal spending, deficits) relative to other currencies, the currency loses value. Private lenders will be unwilling to lend at a reasonable rate $1 today if there is no confidence that that $1 they hope to receive in 5 years will be worth relatively the same.
    If it were as easy as Governments can spend at will and ignore deficits without repercussions, why are we even in this mess?

  • Cheyenne

    Japan hasn’t collapsed yet, because they are a homogeneous society that works together. America is a “melting pot”. :)

  • F. Beard

    Gov deficit spending is only “credible” if you issue debt against it, otherwise you face certain currency debasement and a shut down in private lending dis737

    The debt could simply be peoples future tax bills. And in any case, I only advocate a one-time reset via the issuance of new legal tender fiat (Greenbacks, United States Notes) to be followed by fundamental reform. Private lending under new rules (100% reserve requirement for government legal tender money?) could resume. Also, alternative private currencies could fill the need in the private sector.

  • http://www.pragcap.com TPC

    (comment deleted)

    Anyone responding with my email address or user name will be immediately banned. Are we not all adults here? Come on people….I dont have the time to play internet police….

  • Super_z

    “Also, don’t bother to debate KD on this. He’ll ignore rebuttals, key points and keep hammering on his talking points. Ask him why Japan hasn’t collapsed yet and you’ll hear crickets.”

    Actually, Karl addresses Japan’s two lost decades quite frequently in his blogs. It is interesting that bulls in the run-up to the beginning of Deflation 2007-2008 insisted that the U.S. was unlike Japan for numerous reasons, and was not in danger of Deflation (when actually those reasons revealed that Japan had been in better economic shape when it entered Deflation) and now insist that the U.S. is like Japan so things will be okay from here if we run the same playbook (if you consider economic stagnation as massive debt is run up okay).

    Also ignoring critical rebuttals seems to be TPC’s style, here especially: http://pragcap.com/talking-ourselves-off….
    which he put forward himself as a support of his position, whereas to someone honestly trying to learn the tenants of this MMT stuff his response to legitimate challenges went repeatedly unanswered.

    Yes I know now that there is no actual debt and I don’t have a real understanding of how Monetary Policy works according to the adherents of MMT. Who says it is working? Karl’s point is that the Market trumps Monetary Policy, the real world trumps academic theories.

  • http://www.pragcap.com TPC

    Mr. Denninger has exhausted a great deal of time misrepresenting my positions. If he owns CDS on USA (which he should based on his very scary writings) then I’ll just wish him the best of luck with that position. Unfortunately for the readers of his site, I think it’s probably safe to say that Mr. Denninger owns no protection against USA bankruptcy (but I am sure he has some convoluted and vague explanation for why he won’t put his money where his mouth is….) But if I am wrong and he does by chance own CDS on USA then the market shall be his judge over time. Thus far, it’s been an awful bet despite years of screaming….

  • http://www.pragcap.com TPC

    Super Z,

    What would you like me to address? Any actual questions? I thought I did a pretty thorough job answering those questions. Unfortunately, I am a busy guy and a lot slips through my fingers here at the site…My sincere apologies. Feel free to fire away….I am willing to answer any and all questions you might have….

  • Fred

    The ONLY reason the US financial system hasnt totally rolled over and died is because of its reserve currency status. As long as the world needs dollars to buy oil, the dollar will have some limited value. Ask Zimbabwe or any other country that isnt a reserve currency that creates or borrows massive credit out of thin air how difficult it is to sustain itself without long term trust in the currency. The US isnt different. We’ve borrowed continuously in a hockey stick fashion over the last 30 years, and your conclusion is that debt never has to be repaid, can be continuously rolled over at zero interest, allowing the US to continue to borrow 12-20% in excess of its productive GDP, just makes no sense in the long term, or even intermediate term. Most economist continually ignore this vital components. If we had to live within the ability to tax only, the GDP would be massively cut, and over night. So the thesis that a govt can borrow forever at ZIRP, destroys capitalism. There is no capitalism in the US anymore. The ability for the USD to be strong is a direct function of foreign faith in it. That faith is waning, fast.

    For the guy that asked why Japan hasnt died, give that credit to the US govt for allowing Japan to import all their with limited tarriffs, certainly not anything close to what US products pay in Japan. So their production continued, and because their balance of trade is positive, supported the Yen with their Zirp. That isnt true for the US. We let everyone elses crap into the country practically duty free while we have to pay large duties on our products when exported to other countries.

  • Super_z

    From that link:
    Zimmer 05/28/2010 at 10:52 AM
    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.

    Your response:

    “The crucial flaw in your argument is that you believe the bond market actually “funds” something….”

    I will credit you with a response – albeit a dogmatic dismissal. There are two sides to that coin, as I see it the crucial flaw in your argument is that the Bond Market doesn’t fund anything

    TPC Response: I am having computer problems here in Munich. Pardon my writing in your space. The commenter believes the US govt issues bonds in order to finance its spending. That is simply not the case. The govt sells bonds to maintain the FF rate. With the FF rate near zero the sale of bonds is just a way of keeping tabs on excess reserves. It really serves very little purpose as the reserves have blown out due to the Fed’s extraordinary actions. So the commenter’s question is flawed from the beginning. He thinks we are revenue constrained – that an alchemist can’t just keep issuing gold (the US govt is essentially an alchemist). He thinks the govt can only spend if we sell bonds, but that’s not the way it works in the real world. We spend FIRST and sell the bonds LATER. I would refer you to my island example above. If a soveriegn nation who is monopoly supplier of currency never spends then it is simply debiting the system via taxation. The bond market is really nothing more than a way of draining excess reserves from the system and keeping tabs so that the Congress doesn’t get scared and hide under their desks.

  • Super_z

    Zimmer’s response, which went totally unanswered:

    Zimmer 05/28/2010 at 3:32 PM
    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 Response I have long maintained that the Fed and Treasury should be combined as there is no such thing as Fed independence. This is well documented in my writings. The Fed is far less powerful than most think. This idea that its independence gives it special powers is nonsense. The comments about debt again are based on the false idea that the bond markets funds something. That’s just not true….

    Off to bed Super Z. Hope that clarified some stuff. It’s late here in Germany….I’ll try to catch a glimpse tomorrow in case you have more questions.

  • F. Beard

    I did a double and triple take of that comment and knew it could not be you. You are a classy guy and that guy wasn’t.

    TPC Response:Third reader I’ve ever banned….I really hate doing it, but impersonating me just can’t be allowed. Unfortunately, this stupid comments section makes it easy to do….But rest assured, its the fast track to being banned…..

  • TheMatrix

    The market does not trump MMT. If it did, then why isnt the market demanding higher interest rates for all Govt borrowing? Why can Japan borrow at low rates when they don’t even have a AAA rating? The empirical evidence does not support the “market trumping all” meme.

    Where I do agree with KD is that the spending needs to be targeted in areas where it will have the biggest impact. Rescuing the banks probably wasn’t that smart of a move. Giving tax cuts to rich people isn’t either. I would argue for a head of household stimulus plan that puts money back in the hands of people most likely to spend it and get it circulating throughout the system. This can be done thru a payroll tax cut or other tax cut mechanisms in addition to government spending on infrastructure which should lead to job increases. The problem is, this is where a democratic government that panders to the latest whims of the voters fails as everyone chops up these intiatives for their own benefit vs the greater good.

    TPC Response This is the key point that I try to emphasize over and over again. MMT explains how reserve accounting works in a fiat currency system. It does not provide peace on earth. In other words it’s application is very much up for debtae. I have always maintained that the private sector must do the heavy lifting, but anyone who says we have a solvency problem (aside from inflation) or that the govt should never spend just does not understand the monetary system. Sorry for taking up your space Matrix, but you made an excellent point and I am having trouble responding directly to people….

  • Super_z

    I have read your writings about there not being any debt, that the Treasury only sells bonds to maintain the Fed Funds rate. You can say the sky is red however many times you want, it doesn’t make it so. Like any dogmatic thinker, you continually think you settle arguments when in fact a rational outside observer can see that you have ignored key points. You continually assume that there can never be any loss in confidence in the U.S. dollar – posters like Zimmer, Neil, MLB continually point this out in that thread, only to be dogmatically dismissed.

    I understand your argument, I understand that Monetary Policy makers at the FED may feel as you do. I do not and will not acknowledge that these academic somersaults trump the reality of the market.

    You wrote that you favor the cutting of income taxes (to zero) and stimulus in the form of payments to states in acknowledgement that they had been overtaxed for years. This is quite convenient because the chance of that happening is actually zero, so you can never be proved wrong, but if in fact that plan was put in effect the market’s perception of the United States ability to make good on its obligations would tank the dollar overnight. Your new German friends would love this of course as it would halt the Euro’s current slide into oblivion, but the effect would be similar to the theoretical scenario put forward by mlb in the aforementioned discussion, where the Saudis refused to accept dollars for their oil.

    TPC ResponseYou’re clearly not that familiar with my positions or writings. I have never said that a currency can’t collapse. I have never said the US govt couldn’t cause hyperinflation and currency destruction. I am not ignoring these vital points – you simply aren’t understanding them. The whole point of my argument is that the bogey in our currency system is not solvency. It is price stability. We do not have a Greek problem. We are not involved in their single currency system debacle.

    I have never said I would favor a zero % tax rate. Again, that goes against everything I have explained. A certain level of taxation is necessary and good. It’s clear that you haven’t actually taken the time to try to understand my points. You don’t even understand the very basics of my positions. Auf wiedersehen!!!!!

  • Super_z

    That thought operation put forward by mlb was immediately dismissed by you as unrealistic, allowing you to again ignore the fatal assumption in your argument. That scenario was about as unrealistic as TPC island and its 5 citizens.

  • Timmcleer

    Total idiot. High debt capacity has not shrunk for many years. We have had 3 recessions, No declared War
    and our debt has gone up in a straight line. So, when did it reverse? Some say the Clinton years but he borrowed
    from the Social Security Trusts funds to balance the budget. So, actually Clinton increased the government debt capacity. Uncle Sam is bankrupt—not broke.

  • WonderDawg

    I can’t believe some of the arguments posted here. F. Beard wants to give everyone money to jumpstart the economy. Okay, what’s the amount everyone gets? And how is it distributed? If it’s a significant enough amount per person to change the financial condition of the nation, the immediate impact would likely be: spike in the CPI (temporary, until the money runs out) while simultaneously freezing the credit markets. This is all theoretical, of course, but if the credit market freezes, there will be no uptick in business expansion as business won’t have access to needed capital, so there is no change in unemployment and thus no recovery. Or the other suggestion, debt forgiveness, because it’s mentioned in the bible. I’m no bible expert so I don’t know the context, but I highly doubt the way it’s used in the bible would apply to the world economy today. But, yes, that’s the right thing to do. All the irresponsible people out there should be rewarded for their imprudence and bad decision-making. The bigger the idiot, the bigger the reward. Perhaps I’ve misunderstood you. Just to clarify, are you suggesting that someone who borrowed 500K to buy a house when they could only afford a 250K house should be rewarded by being allowed to remain in the home as owners? Is that seriously the suggestion here? That sounds like something an eight year old would suggest. Incredibly naive and unrealistic. Yes, the big bad bankers had a hand in all this mess, but I was brought up to understand that my decisions have consequences. And just out of curiousity, who is going to forgive the debt? The bank to whom you owe the money? I think not.

    Theoretical arguments are pretty much just mental masturbation. The reality is that credit is contracting, the public is deleveraging as best we can, and defaulting when we can’t, and it is having a deflationary impact on the economy. The public debt, and even moreso the private debt, is unsustainable. The Fed’s and .gov’s policies have so far done nothing to fix this and are doomed to continue to fail and make matters worse. At best, they temporarily slowed the hemagorring in the housing market, which is now bleeding heavily again. The economy is not in recovery, whatever the MSM would have you believe. Look around and note what you see every day. “For Lease” signs on commercial property everywhere. Unemployment is getting worse, not better. Businesses are contracting not expanding operations, retail establishments closing down. Look at the prices of everyday commodoties: gas is cheaper than it was three years ago, a gallon of milk is cheaper than it was three years ago, real estate is cheaper than it was three years ago, commercial rent is cheaper than it was three years ago. All of these are facts.

    I don’t have an easy fix solution to offer, because there is no easy solution. We are reaping what we sowed. When the bad debt is cleared through the natural process of purging the system, there will be a recovery. Until then, well, just take a look at Japan for a real world example that most closely fits our current environment.

    A long overdue correction is happening, and nothing the Fed has tried has worked, and they’re damn near out of bullets. That’s the reality. It doesn’t take a PhD to understand that corrections occur naturally. The correction is bound to be severe after the extreme bubble that was created. This isn’t theory, and none of the theories proposed by F. Beard will fix it.

  • Super_z

    I apologize for my mistake in attributing the lowering of income taxes to zero to you, however, my point is still valid. In reference to the idea of sending money back to the states + a tax cut:

    “jason m 06/02/2010 at 1:55 PM
    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.

    Link

    TPC 06/02/2010 at 1:57 PM
    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 would obviously have the effect described by me above, it would tank the dollar, because the market perception of the USA’s creditworthiness would decline.

    TPC Response – I can’t speak for Mr. Mosler (again you’re trying to put words in my mouth) and I do not believe that checks should simply be issued. I have never proposed that. I do believe we are grossly overtaxed (particularly at the middle class and corporate level) and it has contributed to much of our credit burden. But we have also been imprudent so we must recognize that govt will not solve these issues simply by crediting private sector accounts. A certain level of pain is necessary and inevitable to return markets to some semblance of normalcy (no McMansions, etc)…..

    I am not familiar with yours or Denninger’s position, but it sounds like you want a smaller deficit because you’re worried that the USA will go bankrupt. So we should curtail spending and try to run a surplus. I say you are wrong. I say we should spend in ways that incentivize the private sector to be productive (bank bailouts, cash for clunkers and homebuyers tax credits obviously don’t count), cut small business taxes, cut middle income taxes and reduce the size, power and influence of the financial sector. Of course, my plans would be far more detailed than this, but it gives you a taste. A time of private sector deflation/deleveraging is no time for government to throw in the towel and become scared of solvency. It will only make things harder on the private sector and THAT my friend is where we must remember the real problems lie. This is a MAIN STREET problem. Not a Wall Street problem and not a govt problem.

    And as for Greece – it’s totally unrelated. If Mr. Denninger had used Japan in an example he’d carry more credibility, but the comparisons to Greece are just ridiculous. No offense to you or him. It’s literally apples and oranges. You cant even compare them b/c the monetary systems are different (and the economies are outrageously different).

  • Wayne French

    If you think that Karl Denninger is a hyperinflationist than you have not read his blog. Where is he right and where is he wrong? Detail please.

  • Wayne

    The excess debt must be eliminated from the system. Either paid down, difficult if not impossible, or defaulted, short term pain for long term gain.

  • Wayne

    “We do not finance our spending via the bond market. Taxes do not finance spending either. We issue bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation”

    I don’t have a degree in economics but, to my mind this statement defies common sense. If the government doesn’t tax or borrow the money it spends where does come from. They can’t print it as that would cause the collapse of the dollar. Please point me in the right direction so that I can do some further reading on this point of view.

  • SS

    Is KD actually putting his money where his mouth is? This is the only question that matters. Is he shorting treasuries, US stocks and long US default swaps? He is screaming awfully loud, but if he’s not betting on these outcomes (which have all been really really wrong) then he’s worthless and should be ignored.

  • SS

    Come to think of it – Denninger is actually worse. He’s not even a gold bug which basically means he has been right about nothing in the last 18 months. Why does this guy have so many readers? Because he screams the loudest. It’s worse than Zero Hedge, but at last he pretends to be a gold bug.

  • Tom

    I would like to know what the author was smoking or drinking at the time this article was written.

  • Super_z

    SS, Karl’s record as a trader speaks for itself. It is all a matter of record at http://www.Tickerforum.org

    Secondly, what in the world is the point of CDS on the U.S. Government? In that situation all paper promises become worthless, that is the whole point, why the .gov should not be screwing around with harebrained monetary schemes in an attempt to prevent the Deflation necessary to cleanse the system. The cost of failure is too high. And if you think in that situation you are going to walk the earth covered in your gold like some 21st century apocalyptic pirate, well then there is really nothing left to say to you.

  • F. Beard

    In that situation all paper promises become worthless, that is the whole point, why the .gov should not be screwing around with harebrained monetary schemes in an attempt to prevent the Deflation necessary to cleanse the system. Super_z

    Speaking of cleansing the system, how about we cleanse it of the government backed banking cartel or is that too much cleaning for Karl?

  • Super_z

    As for Greece, TPC, obviously it is apples and oranges where Greece has debt in Euros (the issuance of which it does not control) while the U.S. has debt in FRN’s (the issuance of which the Fed controls). But it is no different from the respect that the value of their outstanding debt is determined by the market’s perception of the likelihood of repayment. An ant an elephant are indeed different animals, but in the end they are both animals, and they can both die.

    I know in your mind there is no debt, that is a sophistry which is unproven to put it mildly.

    I’ll hang my hat here: http://www.treasurydirect.gov/NP/BPDLogin?application=np

    There is debt.

  • Sigli

    Wonderdog,
    I’d like to offer a moderated response to the argument between you and F. Beard because I can see you clearly have a different perspective and don’t understand what F. Beard is saying as I understand Beard to mean.

    You are taking F. Beard’s suggestion as handing out free money at the expense of the prudent. F. Beard is arguing for giving back what is owed to those who have already earned it, but were robbed of it (or allowing those under usury a means of escape). That is not a handout, it is repayment.

    An example may help to better illustrate the line of thinking: The economy is roaring as easy monetary policy + fractional reserve girls gone wild pump the prices of housing to the moon. The common man is fooled into thinking that he must purchase a house before they become even more expensive (which the banking system will cause). He looks at his finances, a robust economy, and what he thinks is a solid job that pays well. He buys a house on credit only to find out that it was all a sandy foundation. The economy sputters and he loses his job. His house is foreclosed on. This pressures his neighbors, many who were more conservative in their financial decisions. Neighbors are facing job losses, and their financial decisions that once could have only been called ultra-conservative, are now looking to swallow them whole. Of course, if neighbor A,B, and C’s houses are all foreclosed then prices and employment will be pressured further as the cycle goes deeper and deeper.

    From my p.o.v., the argument you two are making is on who to blame. It sounds like you blame the imprudent citizen, at least more than partially. F. Beard blames the bankers, and sees the citizens as victims of a nasty system, at least for the most part. The citizens had no choice but to participate or starve. Sometimes you have to keep up with the Joneses’ just to keep going.

    Sure there were imprudent citizens who compounded the problems. But do they deserve all blame? Or is it the system that needs to be scrutinized more closely.

  • http://www.pragcap.com TPC

    You can keep calling me wrong until you’re blue in the face, but as you have cited – the markets never lie and thus far any analysis that has said the USA is going bankrupt has been terribly wrong. No, not terribly wrong – it has been horrendously wrong. At least the inflationistas have gold to fall back on. Those screaming about high levels of govt debt and USA insolvency have just been horribly wrong….So you can keep calling me wrong, but until we start seeing even remote signs that the USA is going insolvent then the markets will continue to judge you as being wrong. At the end of the day that’s all that matters.

  • TheMatrix

    First off, KD never posts his account statements. You just take it on faith he’s a super trader. Until he posts the actual trades, he’s like any other guy barking on the Net.

    KD does advocate burying the bad banks.

    “But it is no different from the respect that the value of their outstanding debt is determined by the market’s perception of the likelihood of repayment”

    And the market knows it will always be able to repay it’s debt which is why it can borrow at such low rates. Same with Japan. There will always be demand for Treasuries.

    Anyone who wants to start looking at this in more detail, needs to go thru these posts in detail, several times. :

    Fiscal sustainability 101
    http://bilbo.economicoutlook.net/blog/?p=2905
    http://bilbo.economicoutlook.net/blog/?p=2916
    http://bilbo.economicoutlook.net/blog/?p=2943

    Deficit Spending 101
    http://bilbo.economicoutlook.net/blog/?p=332
    http://bilbo.economicoutlook.net/blog/?p=352
    http://bilbo.economicoutlook.net/blog/?p=381

    It will take that many times to get your head from underneath the paradigm you operate under vs the paradigm the govt under a fiat issuing currency is under.

  • F. Beard

    F. Beard blames the bankers, and sees the citizens as victims of a nasty system, at least for the most part. The citizens had no choice but to participate or starve. Sometimes you have to keep up with the Joneses’ just to keep going.

    Sure there were imprudent citizens who compounded the problems. But do they deserve all blame? Or is it the system that needs to be scrutinized more closely. Sigli

    Thank you. You have summarized my position well. The system plays savers against borrowers when both in fact are victimized. Let’s not succumb to divide and conquer tactics. Both borrowers AND savers can be fixed with a little ingenuity based on just principles.

  • In Banking

    This who subprime borrower as solely a victim mantra has got to stop. Seriously, no one is jamming money into anyone’s pockets and forcing them to pay high interest in return, just like no one is forcing drug users to continue putting deadly chemicals in their bodies or gamblers to continue losing their money chasing rainbows.

    Was there SOME “predatory” lending: yes. However, the VAST majority of this was due to people who were hopelessly optimistic and ill informed taking out more credit than they could hope to pay back and the securities market continuing to finance this pipe dream. No choice but to participate or starve??? That makes NO SENSE whatsoever. NOT owning a home is NOT starving. You must see real people starving before you patronize a simple situation of greed and ignorance.

  • Super_z

    My warning is not about the failure of the amassment of government debt, it is about its continued success.

  • In Banking

    Well the idea would be that a credit default swap on US debt would earn someone money if the US actually were to default – so being such an astute trader as you claim, one would have to assume his strong conviction and fortitude of opinion would lead him to put on a trade and make money from such. A CDS doesn’t have to be dollar denominated by any means – he could get a EUR, GBP, AUD, JPY, etc denominated swap and make a windfall if he’s right. But are you people over there really talking about Apocalypse?? The collapse of civilization?? I think you’ve watched 1 too many sci-fi movies. However, if that’s the case, I’d then expect KD to be amassing a massive store of weapons, ammunition, seeds, canned goods, drinking water and purifiers, fossil fuels, underground bunkers and perhaps farmland – given that he’s likely to have plenty of “worthless” FRNs from all his unbelievable trading….

    I was really starting to wonder exactly what argument was being made here but I think just the suggestion of apocalypse shows the low odds of having any sort of rational discussion. Then again, I guess you guys could also check out that wrinkly old piece of paper called the Fourteenth Amendment to the US Constitution, section 4:

    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

  • F. Beard

    Was there SOME “predatory” lending: yes. IB

    All fractional reserve lending in a government enforced money supply is predatory. It:
    1) Steals purchasing power via inflation.
    2) Cheats savers of honest interest rates.
    3) Drives borrowers into unservicable debt.
    4) Is the cause of the boom-bust cycle, malinvestment and unemployment.

    However, the VAST majority of this was due to people who were hopelessly optimistic and ill informed taking out more credit than they could hope to pay back and the securities market continuing to finance this pipe dream. IB

    So we have a system where the vast majority of people make the wrong choice? So is the system defective or are most people? And if you say “most people” then how did they get that way? Socialism? Then what caused the socialism? The Great Depression? The what caused the GD? Answer: The Federal Reserve System which Ben Bernanke admits.

  • Super_z

    Matrix, his /es trades are posted in the subscriber section of tickerforum, which I have been at times a subscriber. His nightly trading video in the subscription area also contains great analysis along with short and intermediate term predictions based on market action.

    I disagree with Karl on quite a few things, most notably gold (I believe as Mike Shedlock does that gold holds its value well in the extremes of both inflation and deflation, and it is good to hold in the current deflationary environment), and do not claim to speak for him. I do know having followed his blog and forum since 2008, and having protested the Fannie and Freddie bailouts with him on the streets of D.C. in 2008, that he is very, very sharp and more importantly intellectually honest (if at times a bit excitable). So excuse me if I am more inclined to side with him than your MMT paradigm. I will read the links at the risk of my own sanity

  • Wayne

    So can we keep borrowing 1.5 trillion+ per year. Year after year with NO consequences? How much longer will it be before the service on that debt is the largest item in the budget? What happens when interest rates go up (they won’t stay at 0 forever) and all that short term debt has to be rolled over at the new higher rate? You say we’re not insolvent 13.2 trillion national debt + 100 trillion in unfunded liabilities and the only thing keeping us from going belly up is China buying our T-bills. What happens when they stop buying them?

    I’m still fairly new to all of this economic stuff so, I have to look at things from a common sense point of view and to say that the government doesn’t get the money it spends from borrowing or taxing just doesn’t make much sense to me. Educate me.

  • TheMatrix

    I was a subscriber until earlier this year so I’m aware of his investing acumen. He does not post every single trade he makes, so I take his performance with a grain of salt.

    I’ve been on his blog since earlier than that and while I used to side with him, I had to start asking the question everyone should be, which is why if the US is in such deep doo doo, how can it continue to borrow at such low interest rates? The empirical data/evidence does NOT back up his claims. He was calling for the market to raise the rates end of last year. That didn’t happen. It hasn’t happened this year. At some point, if you make a prediction you must have an actionable timeframe for it. He said so himself about the gold bugs.

    He is very sharp and intellectually honest. But his paradigm doesn’t explain the reality of how the monetary system works today. And his hatred for all things government makes it impossible for him to accept the MMT evidence even if it was staring at him in the face. He also like to act as though economics/finance follow laws of science(i.e printing leads to currency devaluation automatically, unbacked currency emission leads to private lending ceasing as though these are just automatic occurences).

    Give the posts I sent an honest review. It opened my eyes.

  • WonderDawg

    Sigli, actually, I agree with F. Beard on several points. The banks did engage in predatory lending, committed fraud and theft, and it is still going on today. I also believe that “keeping up with the Joneses” doesn’t constitute a valid defense for taking out HELOCs or cash-out refinancing to put in tile showers, granite countertops, go on vacation, or buy a shiny SUV. But to reiterate, I believe this behavior, both the predatory lending and the conspicuous consumption, is a manifestation of the underlying driving force. I am a socionomist, I’m a believer in the truth of the Elliott Wave Principle, and I believe that the boom and bust is part of the natural cycle that occurs in nature and human nature. Recessions are natural and should be allowed to occur. They keep help to keep a healthy balance in the economy. To try to stop them from occuring only exacerbates the pain that is inevitable. Those proposing an easy fix by debt forgiveness or printing and distributing money fail to take into account human nature and the rise and fall of the collective social mood. Does anyone with a basic understanding of the global economy really think that we can just forgive trillions in debt, or give away trillions of dollars of free money without any global ramifications? As the saying goes, ten miles into the woods, ten miles out. There is no way to return to a healthy economy without first purging the bad debt from the system.

  • In Banking

    FB,

    I do agree with some of the direction of SOME of your ideas. However, my opinion is that good ideas remain only ideas instead of becoming reality when the case made for them is over/understated.

    1. Inflation exists and always will. Populations expand as does the universe as well as supplies of any tangible items that we attribute value to (to some finite level, sure – but usually beyond a single or even multiple life times). To purport that this overwhelming fact of reality can be “solved” is to deny all empirical evidence before you. Furthermore, I don’t necessarily think inflation is always a bad thing (within reason). Could you imagine a finite money supply with an increasing population living in a growing civilization? How would there be any advancement if more and more people were chasing less and less of a medium to trade with each other? Won’t work.
    2. I don’t know if there is anything such as “honest interest rates”, nor do I believe there ever should be. Since when does any organism have the entitlement to work for a short while and never have to work again as his/her insignificant contribution to society becomes meaningless? Saving should not be saving for the sole purpose of perpetually accumulating. You save what you have is simply a means to provide for yourself when you’re no longer capable of producing. If you want to have your saving generate returns, then you have to be clever and take calculated risks for higher returns. Life will not support you simply because you exist – this isnt how nature works. While there should be some level of social support, beyond what’s necessary for survival is nothing more than a handout – which is in my opinion perfectly moral for those instances where some extenuating circumstances have placed hard working individuals in a bad spot but not ok as a continuous stream of support.
    3. I don’t understand how you can argue that savers should get “fair interest rates” and conflict this with the notion that borrowers should alwaus get low rates. How does that work? Don’t the two appear to have a zero sum equation at hand? Rates should be more directed by market forces than some central authority, I agree with that, but you have to realize that such a free market system will invariably lead to imbalances based on the perceived necessity of money by either party involved. In that case, would it be moral to charge a person high lending rates after they’ve lost a home to natural disaster simply because they are in dire need? Or to borrow at an unfair low rate simply because the lender needs ANY income possible while the borrower is only considering how extra money can net even more return? I think this is why we have a central authority, even if it isn’t always grounded when determining rates.
    4. Boom bust cycles inevitably happen when viewed on a broad scale. However, that doesn’t necessarily reflect the reality for many people. For example, I’ve not experienced a single bit of “bust” this time around – in fact, I’ve had quite a few opportunities to generate even higher returns through careful realistic analysis and moderate risk taking. I wouldn’t really think it would be fair if others enjoyed the same fruits with much less effort – at the very least I assume we’re all in favor of capitalism, not socialism, and this would be one of the central tenets of such.

    Frankly, the vast majority of people who want to be employed still ARE employed – anywhere from 70-80% depending on who you believe. Sure, quality of life has probably degraded a bit for a large number of people, but we’re not even remotely at the levels seen during the Great Depression. And careful with mangling my statements: I didn’t say MOST people when referring to the cause of the economic issues we are facing. Rather, I said that the vast majority of the initiators of this mess (ie. subprime borrowers, aloof regulators, some financial institutions, and some predatory scammers) have committed the folly of believing that the gravy train always churns upwards. I was fortunate enough to be raised by parents who started out with very little and forged their own way – imparting the wisdom associated with prudent financial management centered around saving for a rainy day. Sure, there were times when it was tempting to spend my hard earned money on extravagance and pipe dreams, but I knew enough to realize I knew very little – so my best bet was to listen to those who stood the test of time through boom and bust. And now I get to bask in the comfort that they were absolutely right and there is little for me to worry about in the medium term. Does that mean that it will always be that way? Absolutely not, so I continue to plan for the worst, walk the bumpy road and stop every once in awhile to smell the flowers and enjoy the scenery. Once I accept that I’m the main controller of my own destiny, it frees me from the oppressive feeling of some large entity conspiring against me. And I’ll tell you, coming out from under that burden certainly makes you respected while you walk taller.

    Ah yes, and not even considering my continuous positive returns of my carefully allocated savings, I’d still be able to enjoy a trip to Europe that I never took at a 20% discount to what I would have just a few years ago. That doesn’t exactly feel like a punishment to me.

    Peace

  • Sigli

    I just want to clarify that I was stating what I saw as F. Beard’s opinion and not my own.

  • http://NA mcdiv

    TPC,

    Thank you for this website. I am a recent convert to MMT due to stumbling on to your writings. I’m currently reading L. Randall Wray’s book, Understanding Modern Money, and I can’t disprove anything I’ve read yet.

  • Robert

    TPC. Thanks for your analysis. It is very consistent with my layman’s perspective. Since K Denninger linked over here, I have read a number of your posts. I think that you and KD agree more than you disagree. I agree with you (as I believe, does KD) that the government does not have to borrow to fund its operations. He disagrees with you as to when the borrowing occurs, but I see that as a small point. KDs argument as I understand it is not a solvency argument, it is an interest rate argument that private lending will disappear when the government does not “sterilize” its expenditures by issuing new debt. My view is that the world is so desperate for the US to over consume, that it would tolerate a lot more “printing” than KD and other deficit hawks believe.

    I suspect that were you and he to sit down over a few drinks, that you would find much in common and might well enjoy the vibrant discussion.

    I look forward to becoming a regular reader of your blog.

  • Sigli

    I mostly agree with you, but think we’ve gotten ourselves in so deep that it will take debt forgiveness in one form or another in order to clear everything out and start on a strong foundation again. The other option is for government to pick up the slack, but I’m not a proponent of that. TPC’s main support seems to be “I’ve been right thus far”. So have plenty of other deflationistas that don’t believe MMT (myself included). The best response against this line of thinking is when does it quit working? When does the law of diminishing returns take the multiplier to zero or negative? It seems MMT is saying “just close your eyes and trust us, we know best”.

    Ooh, and then there are all those government accounting rules that contradict this notion that the government doesn’t deficit spend anything. But hey, who cares about those and the currency reserve status they give stability to.

  • F. Beard

    @IB,
    Your reply seems to assume that I presume to KNOW how money and banking should be done in all circumstances. I certainly do not advocate “my way or the highway”. That is the our current system which is a government backed fractional reserve cartel in a government enforced monopoly supply. It is the current system which forces its will on US via legal tender laws, capital gains taxes on money alternatives, the IRS, etc.

    If the population could freely transact in alternative currencies on a level playing field with FRNs with regard to the government then I would have no basis for complaint. However since the current system allow no serious opposition then it must assume ALL the responsibility for our problems since people have no serious alternatives.

    My personal views on how particular alternative monies might function are irrelevant to my criticisms of the current system but you have made false assumptions about them in your reply.

  • TheMatrix

    There never was a money multiplier. Another false paradigm you need to break from. Read below.

    http://bilbo.economicoutlook.net/blog/?p=1623
    http://bilbo.economicoutlook.net/blog/?p=10733

  • TheMatrix

    “I agree with you (as I believe, does KD) that the government does not have to borrow to fund its operations. He disagrees with you as to when the borrowing occurs, but I see that as a small point”

    He doesn’t believe that at all. Go check his past Tickers, he’s still in the school that the gov’t funds itself thru borrowing which is then only backed via the power of taxation.

    When the borrowing occurs is a HUGE point and the highlights the difference between the two paradigms.

  • Stupefied

    TPC. I think most would agree that yes the sovereign can print currency to avoid insolvency, but this is a statement of the obvious more than a solution to a problem. The question is can this accomplish anything useful? In the case of the US, the sovereign is a massive net importer, most crucially of oil, so how does trashing the currency via printing it without producing something of value to offset it benefit the sovereign? If you can give a reasonable and practically applicable answer to this question skeptics like myself would be more interested in exploring your position further. The way I see it people lend to get a return, e.g. OPEC gives oil for currency. This currency is accepted based on the recipient’s expectation of receiving a future fair value in return. Naked printing of currency destroys that trust and to my way of thinking damages if not ends commerce transacted in the printed currency. Thanks in advance.

  • F. Beard

    The way I see it people lend to get a return, e.g. OPEC gives oil for currency. This currency is accepted based on the recipient’s expectation of receiving a future fair value in return. Naked printing of currency destroys that trust and to my way of thinking damages if not ends commerce transacted in the printed currency. Stupified

    Allow me to stick in my oar, if you don’t mind.

    What you say makes perfect moral and economic sense if the banks lent existing money. However, that is not what banks do. Instead they create credit money as they loan it in an exchange for a promise to repay it, often in exchange for collateral. By this means they create booms just as a counterfeiter might but with the important distinction that banks LOAN their “counterfeit” money (credit) rather than spend it into circulation as a classical counterfeiter would do. This inevitably leads to busts and unemployment. In fact, classical counterfeiters might actually cause less damage to an economy if they were moderate in their money creation since then only gentle (or no) price inflation without a boom-bust cycle might result.

    The banks are able to operate as they do because they are a government backed cartel. Thus it is not only just but poetic justice if the government bails out their victims. When 25% of mortgaged homes are underwater and the true unemployment rate is about ~20% it is safe to say the banks have created many victims who SHOULD be bailed out for reasons of justice as well as economic expediency.

  • Stupefied

    I don’t mind anyone joining in as I’m not an economist but trying to make sense of the mess that’s been made. Your answer seems to avoid the heart of my question. If there is no value behind or debt to provide future value behind the currency what good is it? I mostly understand, I think, the factional reserve system we have which is where your response seems to go. What I don’t see is how the FED can simply print enough money without creating a bigger problem for the people who are making the decision to print.

  • F. Beard

    If there is no value behind or debt to provide future value behind the currency what good is it?

    Taxes are one thing that give US currency value. Control of Mid East oil is another thing. American agriculture is a biggie too.

    But what I’m suggesting is not to add to the supply of money plus credit which would might easily cause price inflation but to REPLACE credit money with genuine legal tender and forbid the banks to practice FRL unless they do it in their own private money supplies.

  • Stupefied

    Yet again you avoid the heart of my question. As I understand it taxes are only practically useful if something of value is created by the citizenry, our current economic disposition in not favorable in this regard. Continued influence over oil is dependent upon a stable country with a functioning economy. Without a trusted currency how do you get value from agriculture and motivate the citizenry to produce it? These issues you raised score no points with me and only distract from my original question which remains unanswered.

    I understand the concept of replacing credit with currency in an attempt to maintain a stable money supply and avoid in/deflation. However two immediate problems come to my mind and I suspect that I’m missing others:
    1) How do you equitably distribute it without creating massive social upheaval and end any pretext of a free market?
    2) If the government sets the precedent of handing out “unearned” money, i.e. not backed by current or future promised production of real value, I would expect that you damage the currency in proportion to the amount you hand out. How does some one who actually produces something of value, e.g. oil, reliably transact business with such a currency or trust their savings to it? To put a finer point on this I understand that the value of fiat currencies are relative but dependency on this as a strategy is foolhardy and has limits. I am losing patience with you F.Beard as you have twice dodged providing any real answer to my question please concentrate on answering my original question with something useful.

  • http://www.pragcap.com TPC

    And my “best argument” is not “I have been right and you have been wrong”. My best argument is laid out in detailed posts that I have written. But people still don’t trust it – the most oft repeated retort is “the market will serve you up on a cold dish”, but the reality is that the inflationistas and solvency fear mongerers have just been terribly wrong thus far…..Most of their points are contradicted by the free market that they always fall back on. Denninger and other writers can scream as loud as they want, but the market is sending a clear message to these writers – if you are putting your money where your mouth is you’ve become the poorer for it…..

  • Kamala

    TPC, here are some links that may help some on this thread. You may just be fighting an uphill battle here trying to explain how a pure paper/credit system like the Federal Reserve Central Banking ACTUALLY works. Good luck.

    Tuesday, May 4, 2010 MMT: Fear of Hyperinflation An article by Edward Harrison originally posted at Credit Writedowns http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html

    MMT: Economics 101 on government budget deficits
    Posted by Edward Harrison on 13 May 2010 at 11:35 am http://www.creditwritedowns.com/2010/05/mmt-economics-101-on-federal-budget-deficits.html#ixzz0uVA725lG http://www.creditwritedowns.com/2010/05/mmt-economics-101-on-federal-budget-deficits.html

    Deficits Do Matter, But Not the Way You Think Tuesday, 07/20/2010 – 10:57 am by L. Randall Wray http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/

  • Stupefied

    TPC. I agree that govt spending is not inherently evil and useful to a point and I am no ideologue promoting an agenda. Where you lose me is the “hello more debit in the private sector” part. As I see it, the problem is not that there is not enough money to go around as much as there is not enough real production of value to support what was credited into existence.

    As I see it, when the realization point of this crisis occurred, governments were in bad shape to service more debt and private parties had made poor decisions, mainly taking or giving too much debt. The correct outcome to my way of thinking is loss and bankruptcy as necessary for the individuals involved and restructuring/resolution for the enterprises involved. Instead we made and continue to make the wrong choice of transferring these private sector losses to the public which does not deserve them. This decision chain leads us to the question at hand, the public’s ability to pay for it. I agree that the sovereign can simply print the money to pay off the debt but don’t see how they can do so without creating problems of similar if not greater magnitude.

  • F. Beard

    1) How do you equitably distribute it without creating massive social upheaval and end any pretext of a free market? Stupified

    That will take education of the populace of the inherent injustice of our current system. Then the bailout will not seem so radical. As to being equitable, I propose the equivalent of running the fractional reserve looting mechanism BACKWARDS. But in lieu of that an equal distribution of new legal tender to every US would be fair enough. As to the amount, it should be on the order of the amount that the average homeowner is underwater on his mortgage.

    2) If the government sets the precedent of handing out “unearned” money, i.e. not backed by current or future promised production of real value, I would expect that you damage the currency in proportion to the amount you hand out. How does some one who actually produces something of value, e.g. oil, reliably transact business with such a currency or trust their savings to it?Stupefied

    I advocate fundamental reform of money and banking as well as a one-time ONLY bailout of the victims of fractional reserve banking. That might damage the currency in the short run but so far the world has put up with US bailing out the villains, hasn’t it? So bailing out the victims would be a bridge too far?

  • F. Beard

    oops! Formatting error in the above comment; paragraph 2) should be in italics. (“But for a nail, the battle was lost”)

  • Angry MBA

    You may just be fighting an uphill battle here trying to explain how a pure paper/credit system like the Federal Reserve Central Banking ACTUALLY works.

    A basic flaw with MMT is that it confuses the mechanics of M1 money production with the valuation of money and how markets decide what money is worth.

    For example, Randall Wray makes this point: “As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector.”

    Yet if you look at a listing of nations and their public debt as a percentage of GDP, you can see that there is no positive correlation between government spending and economic output. Assuming that Wikipedia is right (and admittedly, I would look for a better source if I had time), the inflation king Zimbabwe ought to be ruling the economic roost: http://en.wikipedia.org/wiki/List_of_countries_by_public_debt Likewise, refer to per capita GDP figures, which again show no positive correlation between debt levels and output: http://www.nationmaster.com/graph/eco_gdp_ppp_percap-economy-gdp-ppp-per-capita

    I see Austrian “economics” for the joke that it is, and I certainly don’t buy into a pure view of the quantity theory of money as would some monetarists. I would absolutely agree with TPC that the US can create money at this stage without creating inflation, and that this is what we should be doing right now.

    However, that does not mean that MMT does a good job of explaining why it is possible to expand the money supply without creating inflation. The fact that the Fed uses debits and credits and open market operations to produce money is frankly irrelevant to how the market will value that money.

    A more cogent view of money is that it is a reflection of confidence in the management and growth prospects of the system, which ultimately means that the value of money comes from the underlying economic output of the country that produces it. That value is determined by the market, not by the government. The US can create money today without fear of inflation because (a) unemployment is too high to have inflation produced by wage competition and (b) the US should be able to create GDP growth by forcing that money through the system, and it is that subsequent growth that will give that money value in the future that prevents inflation.

    Zimbabwe can’t get away with printing money because its government and economy are basket cases that attract minimal interest from investors. We are anything but Zimbabwe, and certainly can pull it off. Being the largest economy in the world with the reserve currency has its advantages.

  • TheMatrix

    ” Instead we made and continue to make the wrong choice of transferring these private sector losses to the public which does not deserve them.”

    Jesus, get over yourself. You did not pay one extra dime to pay for any of the banks mess. If you lived your life in a prudent manner, saved, had a stash put away for a rainy day, you were just fine during this crisis. This is part of the problem, people insert emotion about “the taxpayer paying for the banks mess” when logically if you follow the actual money that’s not what happened at all. This is the propaganda that the deficit terrorists use all the time to whip up a frenzy which just removes logical thought from the process.

    “I agree that the sovereign can simply print the money to pay off the debt but don’t see how they can do so without creating problems of similar if not greater magnitude.”

    With the amount of slack in the economy that exists today, they could print a lot more than they currently are with no ramifications. This notion that printing automatically = currency debasement is not true. Always remember that currencies are valued against each other , not in a vacuum. Look at the dollar over the past 2 years. If printing money and rising debt automatically equaled a weaker dollar, wouldn’t that show up in the data? If rising debt automatically equaled the bond market demanding higher interest rates, where does that show up in the borrowing rates for Japan and the US?

    There is a limit to the government printing

  • F. Beard

    This notion that printing automatically = currency debasement is not true. TheMatrix

    Yes. In fact, if real currency merely replaced the amount of credit money that is disappearing as fractional reserve loans are repaid then there need be no price inflation. The problems would come if banks were allowed to pyramid off the new high powered money. But that is what caused our problems in the first place, fractional reserve lending.

    If only we had liberty in money creation then these arguments about money could cease. We would have government money for government debts and private monies for private debt with floating exchange rates between them to keep everyone honest.

  • In Banking

    As for the cash, not too much risk there so long as it is deposited at a banking institution that is FDIC insured and in an account (ie. not in a safe deposit box and not under the mattress). However, in the case your bank goes belly up and you’re not able to withdraw the full amount ahead of time, expect at least 6 months or significantly more (based on the size of the bank) and lots of frustration before you are made whole by FDIC.

    As for the 401k, well that’s full of question marks. First and foremost, this is not FDIC insured and the 401k provider could potentially go belly up. Second, it depends very much on where your money is invested (stocks, bonds, REITS, funds, money market etc). In a deflationary scenario, you’d want to be in money market funds and sovereign debt funds. Lastly, you’ve gotta realize this money isn’t all that accessible until retirement unless you’re willing to pay early withdrawal penalties + income tax which may certainly be the case depending on your financial condition.

    Though you may not have debt, if you have any big ticket tangibles (home, car, etc) you do still have payments to make which will certainly be higher in a deflationary environment where you may have less purchasing power. Overall, in your current state, I’d probably not worry too much about the deflationary environment posing a risk as much as I’d be coming up with ideas of how to capitalize on the turn around when it inevitably comes.

    Oh, and just a side note – you really really really never want to be posting such explicit personal financial information on public forums. There’s no such thing as anonymous these days and you dont want to paint a target on yourself. Consider asking TPC to edit or delete your previous post when possible.

  • Stupefied

    F. Beard. Thank you for the more focused response. I disagree that what you propose is equitable, I see it is a handout to homeowners who made a poor choice. The only effective education/recognition will occur via their loss. This also perpetuates the moral hazzard problem by bailing people of of their bad decisions and reinforces the notion that when bubbles form the winning strategy is to participate, i.e. you get a house your production did not justify at the expense of those harmed by the naked printing. I support your call for fundamental reform but I don’t agree you’ve given the answer. We will have to agree to disagree. Your position seems to boil down to hey the homeowner is the victim so its justified to give them free money and with all the credit that’s disappearing we can probably get away with it. Everyone is a “victim” of the fractional reserve system as it currently operates who does not have a net long financial interest in the banking system. It is not clear where the “free money” limits are, what the feedback delay is to validate the decisions made and the process is not victimless. I don’t claim to have all the answers but so far the most cogent argument is from the crowd saying let it unwind and reform the system. I don’t like where what my sense of what’s right leads so I’m eager for a better solution but I have yet to find one. Thanks.

  • Stupefied

    Please explain to me how I was not harmed by the bailout? I can see that my taxes were not raised because of it. However, I do not see how the issuance of new debt does not ultimately raise the tax burden and how naked printing does not harm my savings. I don’t believe that naked printing automatically leads to currency debasement. There are too many variables and not enough equations to provide a meaningful answer you questions. Therefore I rely on logical arguments as much or more than the data. The one thing that this mess has made clear to me is that the study of economics is anything but scientific and I’m open to be wrong but I think people see math and ascribe scientific accuracy when it is completely unwarranted. I require a logical explanation to your “no ramifications” statement which also happens to be at odds with your admission that there are limits.

  • F. Beard

    Your position seems to boil down to hey the homeowner is the victim so its justified to give them free money and with all the credit that’s disappearing we can probably get away with it. Everyone is a “victim” of the fractional reserve system as it currently operates who does not have a net long financial interest in the banking system. Stupefied

    Actually savers would get an equal distribution too and the banks would be bailed out in nominal terms as debts were paid down to market price levels. I see nothing equitable about running the fractional reserve looting mechanism backwards. However, if we can muddle through this depression without a reset that is fine with me but if it turns out we can’t then let’s not ridicule Helicopter Ben’s idea. I’d rather Ben drop FRN’s from a helicopter than risk WWIII.

  • F. Beard

    Correction: I see nothing inequitable about running the fractional reserve looting mechanism backwards.

  • http://www.symmetrycapital.net Arturo

    Even under a gold standard, some sector of the economy had to run a deficit when it came to the monetary base, which was the gold mining industry (plus the rest of the non-monetary gold sector if you want to nitpick, same idea though).

    Anyone who’s now freaking out about the Fed’s balance sheet or the (just barely) indirect monetization of Treasury debt would have had a coronary in the years after the 1896 gold discoveries in Witwatersrand.

  • http://www.symmetrycapital.net Arturo

    “I would wager that at least 1% of the UE rate is due to people not wanting to get off their ass and GET A JOB.”

    So we should punish the people who make up the 3.5% or so between, say, 5% UE, if that’s a fair estimate of “natural”, and 9.5%?

    The GOP is talking out of both sides of its mouth on fiscal issues. If they weren’t such idiots, they would propose a more effective alternative to LT UE benes, like a federal jobs program, instead of just threatening to end them. Nobel economist Ned Phelps, one of their own, has proposed such an idea, and it plays well to some smart folks on the left too.

  • http://www.symmetrycapital.net Arturo

    People are playing really fast and loose with the R&R findings. Even they don’t pretend to know what the actual limit on public debt is for any given country. And they absolutely did not account for different types of monetary systems. The book is simply not the powerful ammunition that so many debt and deficit phobes think it is.