The Most Dangerous Idea

Bob Seawright’s excellent post on the Most Dangerous Ideas got me thinking – what really is the most dangerous idea in finance and economics today?   In my opinion, this is an easy one.  The most dangerous idea in the USA is this idea that the USA has “run out of money” or that our government cannot afford to do certain things.  I’ve explained this many times before, but this is a myth that just won’t die.  Here’s my previous explanation as to why the myth of government insolvency is indeed dangerous:

“The USA has an institutional arrangement in which it is a contingent currency issuer. That is, while the Treasury is an operational currency user (meaning it must always have funds in its account at the Fed before it can spend those funds) it has the extraordinary power to tax and issue risk free bonds that the public will always desire to hold so long as inflation is not extraordinarily high. In addition, even in a worst case scenario, the US Treasury can always rely on the Federal Reserve to supply the funds necessary to fund its spending.  Therefore, the US government can be thought of as a contingent currency issuer who can issue the funds to spend.  This makes it very different from a household.”

It’s just impossible for the US government to run out of money.  In fact, the real threat in the USA is not running out of money, but creating too much money!  In other words, when politicians talk about the debt ceiling and how we “can’t afford” this or that they’re getting everything backwards.  Now, it’s important to get the context of this discussion correct.  When I say that the USA can’t run out of money I am not saying that the government can just spend money like crazy or that there is no constraint at all.  I am just saying that the US government’s printing press doesn’t ever break (which should be rather obvious).  Here’s the most crucial piece:

“Of course, this means the constraint for the government is different from that of a household or business who can really “run out of money”.  The US government’s constraint is not that it will run out of funds, but that it could supply too much liquidity to the private sector thereby causing inflation.  So the US government’s real constraint is inflation and not solvency.  This is a vastly different issue than the one the US media usually harps on with regards to the budget deficit and the US government’s ability to “afford” its spending.”

I don’t know about you, but the data seems to confirm that inflation is not very high and aggregate demand is way too low.  If anything, the government could run much higher budget deficits (for instance, by cutting everyone’s taxes) and while that might induce some inflation, it might also put more money in people’s pockets which would help generate higher corproate revenues, more hiring and a stronger overall economy.  What a tax cut won’t do is cause us to eventually “run out of money”.  But Congress sure thinks it will.  And that’s a dangerously misguided understanding of the monetary system we have.

 See also:

Stop with the Money Printing Madness

Understanding the Modern Monetary System


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • SS

    Keep beating that drum!

  • Suvy

    Again, for all practical purposes, there are limits(as you said). On top of this, the way currencies can fall apart and inflation can take off are highly nonlinear; they can take off very quickly. The way you stop such a scenario is by raising short term rates sharply, which could cause a major fiscal crisis and cause the federal government into major fiscal issues.

    I know I’ve beat the nonlinearity horse to death, but it’s really important. When you have nonlinear systems, you can do something and see no effect for a long time, then all of a sudden, everything falls apart very quickly. The feedback loops can cause everything to fall apart very, very quickly. We have to be wary of such risks; so to keep saying that we should run larger deficits and have the Fed expanding its balance sheet at its current rate is a very risky policy.

  • Cullen Roche

    I don’t say expand QE. Just cut taxes….

  • Jay

    There’s plenty of money in the system. It’s just all in the hands of the few. Cut taxes on us poor schmucks and RIASE taxes on the uber-wealthy.

  • SS


  • Tom Brown

    I think that’s a “dangerous idea” that drives the NKers and even the MMists nuts too to some extent (especially the NKers). Although the MMists are much more concerned with what they consider to be an even more dangerous idea: that it’s better to undershoot the inflation target than it is to risk “instability.” The NKers are with them on this, but the MMists really push it. That idea opens a giant chasm between MMists and traditional monetarists when AD is low and we’re at the ZLB. Scott’s got an article up today about how the “conservatives” always turn into hard money nuts and inflation hawks at exactly the wrong time, thus shooting themselves in the foot.

    The NKers would add to that list of complaints “extreme deficit hawks.”

    I believe the MMists would like nothing more than to go back to being traditional neo-liberal conservative inflation hawks with their monetarist brethren, gently targeting NGDP/inflation/whatever with just minimal Fed action. In fact Sumner says it himself in so many words (from his FAQ page):

    “20. Aren’t you just a monetary crank trying to solve all the world’s problems by printing money?

    Yes, but like a broken clock the monetary cranks are right twice a century; 1933, and today. The other 98 years I am a Chicago-trained, libertarian, inflation-hawk. Twice a century I put on my Irving Fisher super-hero suit, and emerge from my deep underground bunker.”

    And lately he’s emphasizing the points of agreement between himself and NKers Krugman and Woodford in times like these. E.g.:

    So present circumstances have made the NKers and MMists bedfellows to some extent, with the Austrians and traditional monetarists opposing them on the “hard money” “inflation hawk” side. I’m guessing the “Free Banking” people are closer to the NK/MM position, but I’m not sure.

  • Vincent Cate

    Kyle Bass uses the term, “debt bomb” for Japan’s situation. The conditions are all set for people to flee their debt and the central bank to monetize like crazy. This can happen very suddenly. When the bomb goes off you get hyperinflation. This is why your idea that the government can’t run out of money is so dangerous. It can make it so nobody wants their money.

  • Johnny Evers

    The posters in here understand that we can’t run out of money, but some of us are more worried about the inflation constraint than you — first, I don’t think a little inflation is a good idea, because inflation helps those with capital more than the laboring class; second, i don’t see how inflation leads to growth (it led to recession in the 70s); third, you have no mechanism for controlling inflation once it starts.

  • Vincent Cate

    MMT and MR just don’t see the non-linear and “out of control” problem of inflation. They think they can just dial down things a bit if inflation gets a bit too high but it is not always so.

  • John Daschbach

    Actually the individual interactions in the economy can almost all be described by linear differential equations, but the coupled set can be non-linear. A simple example is compound growth, which is linear in any period, but repeated periods yield a non-linear equation. So yes, the complete system is not just non-linear it has stochastically time lagged elements.

    However, the presence of government debt doesn’t inherently make the system less stable. Government spending is highly stabilizing so to first order larger deficits are stabilizing, and the data generally supports this.

    The Fed is a bank, and so it should be treated as a bank. The Fed balance sheet has expanded but private bank balance sheets contracted during the crisis and although they have recovered they are far below where they would be in a normally growing economy. Because the Fed is a bank, it’s balance sheet can be treated exactly the same and added to the private bank balance sheets. It’s still below where it would be in an economy growing at 3% or 4% with 2% inflation.

    The inherent problem in a developed economy without resource constraints is deflation. It’s probably impossible in the US to get off this trajectory without more government employment (direct or indirect).

  • Big in Tokyo

    Kyle who ?!!

    I have been leaving in Japan since 1992 where I have since then picked up the other side of the trade fearmongers like you advocate.
    On Japan, your lot has been wrong for 20 years and counting…

    I’ve heard your champion on TV, he’s loud but he has no clue.

  • Vincent Cate

    Perhaps you could fine an error in my Hyperinflation FAQ?

  • Geoff

    Hey, you picked the same dangerous idea as me. I was actually more specific in my comment following Robert’s post and mentioned Social Security, but it could easily be Healthcare or any other important program. Imagine high speed train service between every major city in America, or the greatest medical research facility in the world on the road to curing cancer, or a super ramped up space program discovering the secrets of the universe. We have the real resources to build all these things now. And of course, we also have the financial resources, which are unlimited.

    Let’s do it!

  • John Daschbach

    A little inflation is a good thing because a little deflation is a bad thing. Our recent housing crisis is a perfect example. When I moved a put the proceeds from my last house (which I owned outright) into the stock market and rented. I followed house prices constantly in neighborhoods where I wanted to live. When it appeared they were no longer dropping, I bought a house. As prices have moved up over the past year or more, sales have picked up dramatically. This behavior is classic, not just in housing markets, but in all markets.

    Deflation favors people putting off purchases and inflation favors people pushing purchasing forward.

    There are lot’s of mechanisms to control inflation. Fiscal ones are probably the most effective. Raising taxes and lowering government spending cuts the ability of a large section of the economy to support inflation. Inflation is unsustainable without wage/income inflation.

  • John Daschbach

    I don’t think anyone who has basic intelligence can think we can run out of money. It’s just not possible. The reason the Republicans are using the debt as a political issue comes straight out of M. Kalecki. In fact, Boehner and Cantor have made it clear that the real goal in the debt ceiling fight is to hurt people by cutting government spending, especially on programs that help the poor. I’m sure they know the government can’t run out of money, and that describing government debt like personal debt is a blatant lie. But the goal is power. Because no decent intelligent person could believe this lie and have as their goal in life hurting people they have to politically appeal to ignorant and hateful people.

    Kalecki made a extremely powerful argument on why this is the case in a capitalist system.

  • Tom Brown

    Johnny, I’m absolutely no expert on this, but I’m more comfortable now with the concept of moderate inflation when in a recession or too slow a recovery and at the ZLB (i.e. like we’ve been experiencing) than I was. People have a natural fear of inflation, and for good reason: it has gotten out of control in many different countries over the decades. But I think there are some excellent arguments about how a moderate level could help in our current circumstances. It is the hope of those that advocate policies which might result in inflation that at least some of the inflation (NGDP growth) isn’t really inflation but actual GDP growth, at least in the mid to long term.

    NGDP growth = inflation + real GDP growth

    The trouble is we’ve been consistently undershooting the Fed’s target. You’ve probably heard the balance sheet recession concept from Cullen, right? Well one idea for how inflation could help debtors has to do with the idea of stickiness of wages and prices. If I’m not mistaken, both tend to be less sticky going up than going down. Thus with inflation (like in the 70s) people experience rising nominal wages, which had the terrible effect of pushing them into higher tax brackets (according to Milton Friedman)… so it was a stealth tax in that sense. And since prices were rising as fast as wages, they didn’t get any benefit. But aside from the tax issue, if you’re a debtor with a fixed interest rate, and your wages truly aren’t as sticky going up as going down, then you get an advantage: you can pay back your loan and interest with money that’s of less value and a smaller slice of your income that when you borrowed it. That was the risk the bank took in making you the loan… and you probably paid a premium for that fixed interest rate.

    The NKers and MMists also have some good stories about how recessions start that are intuitively appealing, and which don’t necessarily rely on debt as a major component. I don’t know how closely those stories match reality, but it’s easy to see that if a dollar doubles in value (say we’re on the gold standard and for some reason people start hoarding gold all the sudden), then workers who’ve signed work contracts as so many dollars an hour are suddenly working for twice their pay. If there was no “stickiness” the story goes (and no debt I think you have to add!), then wages and prices adjust immediately: gold hoarding is no problem, even if 1 oz = $1 by definition… there’s a problem in the gold market, but one apple is still worth two oranges is still worth 5 min work, even though the price level for everything else just halved, including hourly wage rates. So if 1 oz = $1 by definition, what happens when demand for gold spikes? All other prices drop… but with stickiness those labor contracts still are for the old price and so are the orders for goods that were signed but not delivered, etc. So what does the boss do? He can no longer afford his workers so he fires half of them. What do firms do with big orders outstanding? They cancel them… they can’t afford them anymore. So even with this debt free simple scenario it’s easy to see how deflation can lead to a recession or a depression. What’s one simple fix? Revalue the dollar: make $1 = 0.5 oz instead. Instantaneous 50% inflation, but a reasonable response to a spike in demand for gold. The theory is that wages and prices are not *as* sticky on the upside. Again, just presenting a simple mainstream parable here as to how devaluation might get you out of a recession. Everybody is able to buy less gold, but all other goods are essentially the same value if their “sticky” prices don’t change.

    I think another argument is that when interest rates are at the zero lower bound, we run out of traditional ways to use monetary policy. If we can get interest rates up off the floor then monetary policy can become effective again. I think that’s a super simplified version of Krugman’s “liquidity trap” idea.

    But how do we get interest rates higher? That’s a good trick, but one way is to get inflation going. But how can that be done? Well that’s a good question. Cullen’s Fed purchases of bags of dirt would do it… but nobody would take that too seriously. This idea is similar to the “helicopter drop” concept or even the “debt jubilee.” All of those concepts are inflationary.

    Another concept is to use negative interest rates. The trouble there is the escape to cash route… why “receive” negative interest rates if you can pull your money out as cash (and get at least a 0% rate)?

    I’m just presenting you with a super simplified (overly simplified really) reading on some of the advantages that might arise from a controlled burst of inflation to get the economy off the ZLB and into positive rates territory.

    I hope I did more to clarify than to confuse. Obviously this kind of analysis is NOT my strong point… but I’m trying to get across my limited understanding of these issues as seen from several viewpoints, and why it is I believe there are worse things to fear out there than a moderate increase in inflation.

    Actually I recommend this Krugman article to give you a mainstream look at some of these concepts. Especially valuable is the chart.

  • JK


    Exactly what do you mean when you say “fiscal crisis” or “major fiscal issues” …?

    The U.S.Gov’s relationship with the commercial banking system through the Fed and Fed system insures that solvency is not an issue. What’s let is inflation? When you say “fiscal crisis” and “major fiscal issues” are you referring to the U.S.Gov. causing inflation and being unable to stop it?

  • Geoff

    CR has talked about good and bad inflation. The former is when the economy is strong and productive, and aggregate demand is surging ahead of supply. The latter is when the economy stinks and output is collapsing.

    I think inflation is easier to control in the former case. There are many effective ways to rein in overly strong aggregate demand, such as raising taxes or interest rates. In the case of collapsing output, however, there isn’t much anyone can do.

  • Tom Brown
  • Tom Brown

    Good point.

  • Johnny Evers

    ‘It is the hope of those that advocate policies which might result in inflation that at least some of the inflation (NGDP growth) isn’t really inflation but actual GDP growth, at least in the mid to long term.’

    That’s ‘hope’. That’s not a sound strategy. And Krugman’s charts don’t impress me in any way — it’s just theoretical. And the idea that if we have inflation we can stop it by raising taxes and lowering government spending is unrealistic. If you have a recession and rising prices, that just makes things worse. If you have 5 pct growth and 5 pct inflation — same thing. You’re not getting anywhere.
    I also question this idea that the economy is a car that is sputtering and that if you push it down the hill the engine will come to life. We have this idea that if we can just get a couple of good quarters then the economy will spring to life. The problems are more structural, imo.
    I’m not even sure that deflation is a bad thing, at least in the sense that prices fall. I don’t agree that people put off purchases in a deflation. People buy things when they need them, or they can afford them.
    Falling prices might even help us in the entitlement boom because we’ll be able to afford all these bills we have coming due.

  • Suvy

    Yes. That’s exactly what I mean. Or maybe we can stop it, but what if stopping the inflation requires us to take on a tougher recession than what we’re already having.

    All of our problems are structural. Rather than having the government take on more debt, why not actually restructure some of the preexisting debt?

    In this country, we have an overconsumption problem and we have to rebalance our economy to deal with it. If we don’t rebalance it, the next crisis will be worse. Also, our entitlement system is completely broken and the promises we made can’t be kept. We need to reduce our longer term fiscal debt while keeping the deficit in the short term relatively stable. The path we’re on is not sustainable.

  • Suvy

    One thing you’re missing is that you’re not looking at the right numbers. Debt/GDP is the wrong number. The correct number is debt service costs/tax revenues. Japan spends 50% of its tax revenues on debt service when their yield curves are flat.

    For the longest time(around 20 years), Japanese debt service costs were decreasing even though the debt stock was increasing because interest rates were falling. Now, the yield curve is basically flat and debt service costs will increase exponentially from now on.

    The key factor most people miss is the nonlinearities that appears when government debts are many, many multiples of tax revenues. The most obvious nonlinearity is that debt service costs move exponentially to shifts in interest rates while tax revenues move linearly to inflation(technically NGDP). I’ve built a relatively simple mathematical model of this and I’m still working on developing it, but the nonlinearities are absolutely key and very few people actually understand them. I can get into the numbers of Japan in more detail if you’d like.

    That being said, there may be a way out for Japan, but I don’t think it’s politically possible

  • Frederick

    Cullen predicted this long ago. As soon as the Republicans realize they’re dead wrong about default they’ll focus on the inflationary effect of government spending. It’s happening already in this comments section and will soon start happening at the national level as Cullen’s message spreads.

  • Tom Brown

    I understand your skepticism. Most people are skeptical. But that might just be why these things can go on so long. It’s been a long time since we hit the ZLB, so people forget how to get out of it. Look what’s happening in Europe: the Germans want wages in the PIIGS to adjust downwards so they become more competitive. That’s a tough sell too… and when they do adjust downwards, those with debt will most likely default. It’s not a free ride. Likewise Krugman argues the PIIGS could benefit from more expansive monetary policy, while that would cause the Germans some inflation, which they oppose. So they’re stuck.

    BTW, the “structural” changes you advocate… who’s going to pay for that? If you buy the inflation/deficit hawk party line, we’re broke. So the “structrual change” may be everybody’s wages adjusts downwards eventually. How does that sound for a structural change? A LOT of folks, including some PKEers, NKers, and MMists think that’s a stupid waste of resources that could be avoided…. years of unemployment, and damage to the economy that didn’t have to happen. The MMists are somewhat extreme in this regard, blaming the entirety of the Great Depression and this Great Recession on Fed policies… specifically being too loose with money around 2004-5 and too tight in 2007-8…. they think the housing boom did not have to result in this mess… and should have been a minor blip. That was Friedman’s impression of the Great Depression too. I think they are perhaps too narrow sighted of those events, but they make a good argument.

    Sometimes you hear about people in macro talk about a “fallacy of composition” meaning something like this “If I stand up I can see the game better, thus if everybody stands up we can all see the game better.” That’s kind of the thinking that’s theorized to go into a depression: “If I stop spending and save for tougher times ahead I’ll be alright” … well if everyone does that you might end up losing your job. How do you get people to stop hoarding money? You make it expensive to keep. That’s one idea.

    I don’t think you can sort these things out with intuition either way. You can see how some cartoonish models might work… but to really sort it out and say “what’s going on here” I think intuition is close to useless.

    I like to try to understand all the arguments. Some seem more plausible to me than others, but many of them are interesting. A good argument though would try to apply a model and show how the data supports it and demonstrates evidence of causality. I don’t have that for you!

    if you like to look at a variety of arguments, I think Frances Coppola does a pretty good job here of looking at the advantages and disadvantages of increasing “savings”… and how you have to be careful of an intuitively appealing word like that:

    I liked this one too on mercantilism, and the downside to it:

    This is an interesting debate:

    So take it or leave it… but the more I watch & learn about all these schools of thought the more I think the Austrians and the inflation hawks are mostly wrong about how to get out of a recession at the ZLB. Coppola takes the “savers” advocate side there a little bit, and so does Schiff in that debate. I think Schiff’s argument sounds very weak… it sounds like an emotional appeal … almost to the old mercantilist age. But again, just my opinion. I think if we followed his advice it would be exactly the wrong thing for most of us.

    One last one for you… if you’re interested… this one’s a little over the top, but it’s Sumner complaining about workers “crucifying” their employers on a “cross of gold”… until FDR devalued the dollar against gold in 1933:

    So a bit extreme, but kind of the same idea I presented earlier.

  • Odie

    Right now constraining the government in its ability to spend more due to the ridiculous fear we may “run out money” is certainly utter nonsense. Any inflation could also be quickly curbed by an increase in taxes; an adjustable federal sales tax may easily do the trick. Nevertheless, the idea we can just spend more and more is an even more dangerous concept as I already tried to point out in the original thread.

    Any fiat money derives its value from the fact that it can be used to purchase some real world good or service using price as the “exchange ratio”. Those goods and services are the things we really care about. What good would be even 1 million dollar if there is nothing to eat or live in? The premise that we can just keep increasing our money supply is based on the assumption we can always grow the output of real goods and services. As those require labor and natural resources to be produced, we essentially rely on unlimited population growth and ever increasing extraction of natural resources. I highly doubt that this idea of infinite growth will ever happen on a planet with finite resources but that belief seems to be widespread among economists:

    “ … the world can, in effect, get along without natural resources … at some finite cost, production can be freed of dependence on exhaustible resources altogether….” Robert Solow

    Think about this statement next time you munch on your dollar bills.

  • Cowpoke

    “The most dangerous idea in the USA is this idea that the USA has “run out of money” ”


    Cullen (with all due respect) Is WRONG on this.

    The most dangerous idea in the USA is THAT CASH IS DOOMED AND NOT NEEDED.

    Sorry Cullen, but once you give up Cash, you are a free society no more.

    It really surprises me how you can be so MACRObin a world economic way and yet be so posh posh poo, poo micro let the govt control the digits and removing any form of capital control from the private sector is better for the whole system.

    I think this is just flat out polianish misguided thinking.

    I like my CASH and I think the more people you ask in secrete could agree.

    Folks, letting Google and Microsoft .tell the Federal Govt what you buy on a daily basis is NOT GOOD.
    But do as you wish, it’s your own souls.

  • Suvy

    I don’t buy this at all. There was deflationary pressures in the late 90s as real wages increased, was this a bad thing? There are two types of deflation. There is deflation that comes from increased productivity, which is good. The bad kind of deflation is the kind that comes from massive liquidations, which is absolutely horrible.

    Also, the way deflation is defined is complete bogus. If some company can make the same product twice as well for half the price, that’s considered deflation. This is like labeling an improvement in the quality of life deflation. If that’s the case(and it is), where’s all the inflation going to show up? It’s gonna show up in the price of necessities like food and energy.

    Also, let’s suppose that the fiscal side is the better way to control inflation(which I disagree with, but let’s suppose so for the sake of argument). You’re trusting politicians and bureaucrats to cut spending and raise taxes at the appropriate time. Is that really a good idea?

  • Pantmaker

    Cullen- Let’s say you are playing Monopoly with me and two of our good buddies, both of whom are very skilled players. You and I are both losing badly, evidenced by our dwindling pile of paper money. I finally throw down my last $5 and sit patiently watching the game (I’m pulling for you!). But you too are playing with a quickly shrinking pile of bills and our two friends are licking their chops waiting for you to fall as well. As we pass the bowl of popcorn you casually reach into your pocket and pull out a fresh stack of Monopoly money, place it neatly on the table…your face… completely serious. We all sit there in silence for a few moments and then the three of us burst into riotous laughter. You explain (again, with a straight face) that you print your own money and are now able to buy up all of our real assets and properties on the board. We then explain to you that we no longer accept “your” Monopoly money.

  • JK

    I have no idea what you’re talking about. Everything you’re saying sounds like mainstream textbook nonsense. Maybe you can enlighten me…

    Why does government debt need to be restructured?

    What makes you think we have an overconsumption problem?

    Exactly what needs rebalanced?

    What’s broken about our entitlement system?

    Why do we need to reduce our longer term fiscal debt?

    Exactly what is not sustainable?

    All I hear a vague-speak.

  • Geoff

    Cow, I like cash, too, but I think the point is that the monetary base (aka cash) is an ineffective monetary policy tool.

  • Vincent Cate

    If you just look at Debt/taxes then people think, “oh, we just need to raise taxes”. If taxes are low enough that might be possible, but maybe not. With debt/GDP you can see where you really are.

  • Vincent Cate

    I have a post where I explain the problem of hyperinflation in 8 different ways. I think it is really fun to be able to look at a problem in so many different ways. If you understand this then can understand the non-linear nature of the problem that just printing more and more money runs into.

  • Suvy

    The stuff I’m saying is not mainstream at all; not even close. The main problem with mainstream economics(and apparently most heterodox economics as well) is that very few economic theories/economists actually understand the dynamics of nonlinear systems. I’ve developed a relatively simple mathematical model to understand the feedback mechanisms of government debt, but I’m still working on developing it.

    Most financial crises represent international imbalances that have been built up. The root of our financial crisis has its roots in Chinese mercantilist trade polices of the last decade. China has been turbocharging growth buy trying to run a massive current account surplus. The massive Chinese current account surplus has to show up as a deficit somewhere else in the world; not surprisingly, the deficit shows up in the country with the world’s most flexible financial system that ends up having the world’s reserve currency. What I’m saying can actually be explained by sectoral balances. Remember that worldwide savings=worldwide investment. So if one country tries to turbocharge growth by trying to produce more than everyone else(mercantilism) and uses a invesment and export-led growth model, other countries on the net have to consume more. This can go on until some country hits debt capacity constraints(which is what happened to the US in 2008).

    Also, please do not ever call what I’m saying mainstream economics. It’s not even close to being mainstream.

  • Suvy

    Our total fiscal debt(including off balance sheet) is around $60-80 trillion and could be even higher. There’s no way anyone can argue those numbers are anywhere close to sustainable.

    By rebalancing, we’ve consumed more than we can produce(due to Chinese oversavings). Those imbalances need to switch.

  • Johnny Evers

    You write that ‘those will debt will default.’
    Hurrah. They should. Students with debt levels their careers cannot support should default. Cities like Detroit should default. Homeowners who are permanantly underwater should walk (you’d be surprised at how many are determined to keep making payments.)
    All of those loan payments tied down the individuals and entities.
    Default would not destroy money (those deposits are out there) but it would destroy the crippling obligation to pay them back.
    How defaults would work at the bank side, I am admittedly not sure. If a student defaults on his loan, what happens to the bank? If it fails, would it take down other depositers. if so, perhaps a ‘QE’ of that nature would suffice.
    As far as structural, a lot of that would be political or cultural changes that would not cost the types of money you describe. My state used to spend more on higher education than Medicare; now it’s reversed. Which spending is more cost effective?
    We could build the Keystone pipeline — we can afford that and it would help the economy.
    We could confront the illegitmacy problem that produces too many young people with no life skills.
    We can ask lots of skeptical questions.
    One question I have: What percentage of loans these days are made so that business can create business? What percentage so that consumers can buy cars and washing machines? What percentage on mortgages? What percentage so that financial institutions can buy financial instruments?
    I would postulate that making loans to business is wise use of the power to create money. Making loans to hedge funds can buy stocks is not. And why is it a good idea that everybody have a mortgage. We used to have the mindset to pay your house down in 15 years, and if you moved, use the proceeds to buy the new house. Now too many people, even retirees, still have mortgages.

  • Suvy

    Yea, that’s true. I just don’t like debt/GDP very well because different countries can borrow at different rates and have different debt capacity constraints. Developed countries can sustain their borrowing binges for much, much longer periods of time than developing countries.

  • Greg

    Problem with your analogy pantmaker is two part really 1)we are NOT playing a game here. This is real life. Just looking at the “losers” and saying ‘Hey tough break, we are the winners here” wont cut it. There were no rules to this game we are playing, there are to monopoly. and 2) The original monopoly money was printed too. All money originated somewhere by decision of some authority that doesnt need to acquire it before it is spent. There is someone who doesnt first need to acquire money. We cant all simply be circulating something that already existed, it came into existence at some time. To assume that that amount was the “right” amount is absurd. To assume that what we have is the right amount is silly.

    That being said, I agree with Cullen when he says its not a lack of money but simply distribution. Redistribution is a dirty word in many circles but it shouldnt be. So we can EITHER support policies which redistribute (best case I think) OR support policies which simply print and distribute to those who dont have. So if you are one of the “haves” like me, you can either agree that some of yours can be redistributed to keep the players in the game or you can have someone else just devalue what you have by printing and giving to everyone.

    The game must go on. It would be better if we played nice

  • Suvy

    The most dangerous idea is thinking that we can control the entire economic system just because there’s a central bank that can expand its balance sheet. An economy is a highly complex system that isn’t like a car or a washing machine. An economy is a living, breathing, evolving system that’s extremely complex. To think we can control such a system is what got us here and if we keep thinking we can control it, we’re going to be in much more trouble.

  • Jeff Moore

    It is always fun to watch people try to be the smartest guy in the room. Printing buys time, not a future. As I tell kids, all these guys went to the same schools, what they know is what they have been told but if it fails the household budget test, it will fail. There is no money in teaching that or saying that but it is reality. Printing steals from savers and children. The rest is smoke.

    BTW, this piece is laced with caveats that make the broader point. Governments can and do fail, there is nothing that makes us immune.

  • Qcl

    Why wouldn’t anyone want Japenese YEN ??? Just look around and see that there is plenty of stuff to buy in Japan , cars , machinery , planes , weapons ,etc.

    Their economy and innovative idustries support their currency . This is how it works .

    Japan borrows exclusively in YEN and de facto holds zero FOREIGN DEBT .

    This Kyle Bass guy is supposedly running a hedge fund . How he managed to stay afloat with this kind of expertise is beyond me :)

  • Geoff

    That’s a good one.

  • Geoff

    1) Please define what you mean by “print”.
    2) I think you CAN buy a future if you spend properly on infrastructure, education, healthcare, social security, curing cancer etc.
    3) You spell your name wrong :)

  • Geoff

    I agree Kyle Bass leaves a lot to be desired, but regarding your point about the Yen, there appears to be less stuff to buy in Jpn than before. As somebody pointed out here recently, Japan is now running a trade deficit.

    No foreign currency debt is not a panacea. Balance of payments is also very important.

  • JK

    This last comments had some specifics and made more sense.

    1) Seems like you’re now conflating government debt with private debt. I agree the build up of private sector debt is not only a major drag these days, but it’s also a ticking time bomb for another disaster. The answer seems to be that government debt – deficit spending – needs to much higher (not lower, as it seems you suggest) in order to stave off the explosion. For example, even with the housing crash and financial crisis, had the U.S. responded with double or triple the stimulus (annually), do you think the crash would have been more of a bounce-off?

    2) Isn’t China’s export-led (weak currency) growth the ‘natural’ path of a developing country? Already developed countries can afford a strong currency – i.e. to be world consumers – so long as the federal government is willing to make up for the demand leakage that comes with persistent trade surpluses.

    As a Political Economy question: what do you think the U.S. can do about China maintaining the trade imbalance? Start a trade/currency war?

  • Vincent Cate

    If you think I am not being fair to MMT or MR please let me know and provide a link to something else they have on hyperinflation.

    If you know any other ways to explain hyperinflation, let me know.

  • DR

    Social Security and Medicare are unsustainable.
    Millions of jobs have left the country.
    Half of college graduates can’t find a job requiring their degree.
    Twice as many people are on food stamps as there were before the recession.
    Those are the people that we need to pay for entitlements.
    We are heading toward a 2:1 ratio of workers to retirees. If the average SS check is $1000 a month will each worker be able to pay $500 per month? Only half of workers pay any federal taxes now. Unsustainable and not vague.

  • DR

    Also, all government spending adds to GDP. Spending a Trillion dollars on foreign war adds to GDP, but it may not be a good long term strategy.
    Ideally, you would like government spending to be in some area that creates growth. Infrastructure spending creates more efficiency. So, I agree, GDP is not that valuable a term.
    Comparing debt to GDP kind of reminds me of someone looking at the income of everyone in their neighborhood to decide if they can afford a luxury car.
    For long term economic health how about comparing Economic growth to deficits: Economic growth 2% deficits 8% Debt growing 4 times faster than income. Is that what we have become comfortable with?

  • Hans

    Which would you rather have 17 trillion in assets or 17 trillion in debt?

  • Qcl

    Japan’s trade deficit is energy related I suppose , a direct result of shutting down nuclear power plants .

    Trade balance is crucial , I agree 100% .When there is no trade to support currency only other option is a military superiority .

  • Jussi

    Inflation is good for those in debt (net position), bad for working class and ugly for those owning capital. Thus I’m not buying that inflation is about defending poor people.

  • KainIIIC

    So you’re saying that the federal government is running out of something that it can create into infinity?

    Should the office of a paperclip manufacturer ever have to worry about running out of paperclips?

  • Geoff

    Suvy, what off-balance sheet items are you talking about? Technically, we could call the present value of any future budget item “debt”. If I called the property taxes I’m going to have to pay over the next 30 years “debt”, then I’m probably more than $1 million in debt.

  • Geoff

    The US govt has way more than $17tn in assets.

  • Dennis

    If the rule was you could borrow money from the game’s bank and pay Usury (say 5% each turn), would you win the game everytime? Absolutely if the other players were turned down by those same banksters.

  • Johnny Evers

    But you have income coming in to pay the property taxes; if not, you can take action to reduce them.
    We have escalating entitlement costs (SocSec, healthcare) but we don’t have the ‘income’ (taxes) to pay for them. We’ll have to borrow (print, issue NFAs, whatever your working paradigm).
    The cities are already going broke facing this dilemma. When MR proposes that we rescue Detroit, then I’ll believe the rhetoric that ‘we can’t run out of money.’

  • JK


    The only thing possibly unsustinable about SS is if we don’t produce enough to both 1) increase our standards of living and 2) produce enough surplus so that retirees can consume without producing. We can not fun out of the dollars to purchase the production.

    As for Medicare, exactly what is unsustainable? Do we not have enough doctors or medicine to take care of people?

  • Tom Brown

    For every dollar in existence, once entity is a creditor and another a debtor. No debtors, no money. That’s how our system works! Every dollar represents this relationship of creditor to debtor… if all debtors were to “pay down” all their obligations, there’d be no money at all. I think people have a basic misunderstanding of this reality.

  • Tom Brown

    I’d say that inflation at a rate higher than expected is taking from creditors and giving to debtors (working class or otherwise), and inflation lower than expected is taking from debtors and giving to creditors (working class or otherwise).

  • Geoff

    Tom, your comment could easily serve as a reply to REN in the other thread.

    Nice killing 2 birds with one stone :)

  • JK

    Come On Johnny, hasn’t Cullen made it clear MR isn’t looking to make policy prescriptions? MR is trying to lay out the institutional framework and allow others to decide what are the appropriate actions.

    At the state level things are different, but at the federal level we don’t actually need tax revenue to be able to pay for SS, Medicare, trips to Mars, etc. All we need is available real resources. “Whatever is technologically feasible is financially affordable” (for a currency sovereign)

  • Vincent Cate

    That is the theory. But in practice the government just borrows more and more and never pays down the debt.

  • Johnny Evers

    Sure, but hammering the point that ‘we can’t run out of money’ and criticizing people who want a balanced budget leads to the obvious conclusion.
    And his acolytes blow right past the inflation constraint.

  • Johnny Evers

    Even accepting that, if we print or borrow or issue a dollar through NFAs and give it to you, that means the rest of us are in debt to you.

  • Tom Brown

    No, it’s not a theory, that’s the reality. All the financial assets (NOT real assets!) add together to 0 equity at all times. People just don’t seem to understand this. They think of money as a real asset, like a house or an apple, when in fact it’s a two sided entity: debtor on one side, and creditor on the other. Loans are similar: Every loan has a creditor and a debtor in relation to it. All financial assets have this property: bonds, shares of stock, etc. People don’t see this. They think of $ like they think of apples. Apples are a pure asset, which you either have or don’t have, but they aren’t a financial asset. A financial asset is very different. Thinking about financial assets as you do apple causes people to make fundamental errors in their reasoning.

    In a very fundamental way, all financial assets are IOUs. They have no intrinsic value. They are valuable only because they represent a promise. They are manifestations of promises, and every promise has two entities it ties together as creditor and debtor.

    Only when you go to commodity money is this different. Then the money has intrinsic value. Totally different concept.

  • Tom Brown

    Who “gives” it to you? Generally you have to pay for it.

  • Tom Brown

    National Parks, coastal waters, mineral rights, highways, nuclear submarines and other military hardware, bases, national laboratories, patents, electromagnetic spectrum, airspaces, BLM land, buildings, and organizations to tax, police, issue judgements, control the boarders… it’s quite a list, that I’ve only touched on here.

    Then add in all the PRIVATELY held real assets!

  • Greg

    Printing buys time but not a future? Isnt the future time?

    The household budget test is a stupid test to apply to currency issuers.

    Do you believe that we all just agreed to start using some naturally predetermined amount of money? Someone somewhere does not need to acquire money from someone else in order to spend it. Find that person/thing. It can be no other way.

    Money is an invention not a discovery

  • John Daschbach

    Exactly! People confuse money with real productivity.

    One can imagine a system in which productivity could be perfectly measured. Conceptually a government could create money exactly equal to this measure and give each person some fraction of this and the remaining fraction distributed to people unable to be highly productive (children, the elderly, the disabled, the low intelligence, …)

    As long as we are not external resource constrained it’s human productivity that is the economy, not money.

  • Johnny Evers

    Sure, a dollar is claim on a future asset. If I have an apple (a pure asset) and you give you a dollar for the apple, then I have a right to assume I can buy another apple with my dollar.
    My dollar is portable and I can exchange it for other assets.
    If I borrow a dollar to buy seeds and it leads to the production of another apple, all is well. If the government prints a dollar and gives it to me so i can buy seeds and grow an apple, again all is well.
    It’s the quality of the loan (government or private) that is critical.
    If we’re just printing dollars so we can swap existing apples, that devalues that dollars.

  • John Daschbach

    Actually, I think the classic PID algorithm would work well on fiscal policy. In a sense this is NGDP targeting, but it’s a technique we have huge experience with in highly complex non-linear systems. Milton Friedman advocated this for monetary policy, letting a computer control the money supply.

    On the tax side you choose smooth, functions for tax rates which are progressive in some manner and adjust the whole curve linearly via the PID algorithm. On spending you set levels for different functions and scale the PID contribution by sector based upon criteria which balances core needs from more investment focussed spending. (e.g. we might choose to cut/increase police or fire or prison funding with a smaller multiplier than NIH, NIST, DOE, NASA, or NSF funding [areas that can probably both absorb cuts with less immediate societal impact but can effectively use additional funds]).

    The good and bad deflation you see are just different rates of change for the same thing. Massive liquidations are just a chaotic version of improved productivity deflation.

    The improved productivity deflation is why deflation will dominate our economy for the foreseeable future. Inflation can only arise from resource constraints on necessities (food, water, energy to a lesser extent) or wage inflation that is greater than the productivity increase. I don’t see these events as likely, especially with decreasing discretionary government spending.

  • Dennis

    I totally agree with Cullen that it is inherently dangerous that most people have no idea where fiat money comes from and thus how the world’s “money” allows people to have jobs so they can trade their work for the things they need or want. If there were no “national debt” and no private debt there would be no money. Reading the comments here, to this same post, makes my head spin:

  • John Daschbach

    Correct, you can’t just increase the money supply. But the money supply needs to increase if real productivity increases. That’s the basis of the Kalecki argument (which he argues the capitalists will never allow) that government can print money and pay people to do real work for anyone who wants a job. (of course you can’t pay them above what the work is worth).

    But as he noted, it’s about power. The power of the capitalist class derives from having jobs being scarce or paying less than they contribute. In fact, capitalism requires that the capitalists capture a fraction of worker productivity for themselves.

  • John Daschbach

    I like the invention not a discovery phrase!

    But the key concept of MR (correctly) is that banks can create money out of thin air. They don’t have to get if from someone else if the deposits that reflect the transmission of the loan end up in the same institution. When the fluctuations in where money gets transmitted to result in imbalances against required or desired reserve balances banks have to get the money from someplace else, which is mostly other banks via the Fed Funds market.

    For almost all other loan transactions, the money loaned/payed has to come from someone else.

  • Tom Brown

    I’m not terribly worried about gradually devaluing dollars. I think there can be some advantages to it. I also think that targeting level growth of NGDP (the sum of inflation & real GDP, rather than just inflation) probably is better overall than targeting a constant low rate of inflation (say 2%).
    In some respects our axiety over high inflation rates might be alleviated through better technology and customs (both legal and otherwise). If all our money were electronic say, and our own personal smartphone apps (think $iri) swept our accounts into the highest overnight yielding deposits every night, and then just enough back out again during the day to meet our needs at each hour of the day, I’m quite sure we could all get used to living with much higher *steady* rates of inflation (provided SS, and other “fixed” incomes were properly indexed to the inflation rate by the hour). As long as we didn’t have to run with our rapidly devaluing paycheck down to the bank and then the market to stock up on food before it became too expensive. I admit, that’s an anxiety producing scenario! But really it’s just a matter of technology and limited social customs. I’m not saying targeting a higher rate of inflation would be advisable, just that it’s something that we could all conceivably easily get used to with the right technology and shifts in custom (and law). Perhaps all labor contracts specify up front the nominal daily wage increases everybody gets as a matter of custom. I think inflation is a bug-a-boo because it has emotional significance more than anything else, and it has an emotional significance due to the trouble it causes (and has caused) in real life, but those troubles don’t HAVE to exist.

    Check out Marcus Nunes’ article on how the Brazilians stopped inflation dead in it’s tracks with a clever trick. It’s pretty interesting!:

    What’s also interesting is how people were starting to be able to live and function with a predictable rate of hyperinflation… they just made bigger pantries, etc. Ha!

    I think the Fed should target what makes the most sense to keep the majority of us happy. If that means NGDPLT at 5% a year, that’s fine with me.

    I think if we shoot for 0% inflation, then ideally we also do some things to eliminate “stickiness.” I have no emotional connection to 0%: I don’t think it’s necessarily any kind of magic number that we “ought” to shoot for. To make our economy less “sticky” and thus more adaptable to low inflation or even deflation rates, perhaps your wage rate changes on an hourly basis… perfectly flexible both upwards and downwards depending on market conditions… according to some predefined formula in your employment contract. (If the Spanish and Greeks would just accept a huge cut in pay, they wouldn’t be in as big a mess (say the neo-liberals)… it would help their countries to be “more competitive.” … of course they might starve for a little bit while waiting for prices to adjust downwards … HA!). Same with prices, pensions, interest rates, contracts for goods and services, etc. …and (this is the tough one) debt principal amounts. I just don’t see that working out as well though. But maybe I’m wrong! Maybe 0% works just fine with other changes.

    I’ve heard good things for a 5% or 4.5% a year NGDPLT….with essentially no other changes (the BIG advantage… no mysterious “structural” changes to worry about). I’m not convinced, but intrigued. I’d like to learn more about why those numbers are often proposed. This doesn’t provide the answers, but is kind of interesting:

    Others say a flexible inflation target is better. Still others (hard money nuts.. er I mean advocates) say 0% is the only right answer. I doubt that is true.

    Now whether or not we have the tools to hit an NGDPLT is another matter. We know we can hit inflation targets if we’re off the ZLB (which we no longer are). So inflation targeting (IT) has an advantage in that respect: it’s a known quantity… and yet it may have contributed to the disaster in 2008. Some say NGDPLT would never have let us get there.

    Broad money stock targeting has been tried and failed (late 70s and early 80s timeframe, from what I understand). Perhaps we can also say that a fixed IT has failed (2008). Gold standard seems to have failed too (Great Depression. Long Depression, and many “panics” and bank runs, and Bretton Woods: the Friedmanites make a good case for this).

    I wish some country would try NGDPLT so we can all watch and see how it works out for them: can they hit the targets? Does it help to eliminate mere monetary issues from contributing to economic instability (NGDPLT advocates don’t claim that it will eliminate true booms and busts… just “needless” recessions/depressions due to silly monetary issues that don’t have to happen). If they’re right and it’s an improvement, I’m all for it.

    But some smart people remain skeptical. Woodford amongst them. Friedman himself was not in favor (but modern Friedmanites claim he would have changed his mind).

  • Tom Brown

    Well I don’t know anybody that thinks we can control the economy via the CB… but perhaps there are policies which can help prevent monetary issued from rearing their ugly heads.

    Think of driving a car at night… putting reflectors up can help keep you in your lane and on the road. They can’t keep you from having accidents… but they can help eliminate silly errors causing devastating consequences.

    I don’t know if that’s a good analogy! But it’s plausible to me that it is.

  • Suvy

    The risks of a government debt explosion are, in my eyes, just as large as a risk in the explosion of private debt. The consequences of a government debt explosion can cause serious issues in the FX market and imports can become very, very expensive. The problem with government debt are the nonlinearities that I talk about all the time. Things can seem very, very stable; then, all of a sudden, everything just blows up in your face all at once. That’s the problem with nonlinear systems(we’ll see this with Japan soon enough).

    As for China’s growth strategy, I don’t think it’s created. The most successful period of economic growth and real wealth creation was the US in the 19th century, but the US ran current account deficits for most of that period while US savings rates were pretty low.

    As for fixes, wait until China hits debt capacity constraints, then everything will end up fixing itself. We’re about to enter a worldwide slowdown in global growth, which means those countries running mercantilist trade policies are gonna be in deep trouble. Those that don’t run those policies will benefit. We, being the US, just need to hang in there and wait. Eventually, everything will fix itself; the question is at what cost.

    I’d actually prefer it if the developed countries ran the current account surpluses to finance the investment in the poorer countries–similar to how the US financed its investment in the 19th century.

  • Suvy

    *As for China’s growth strategy, I don’t think it’s created very much real wealth.

  • Suvy

    The unfunded liabilities of Social Security and Medicare.

  • Suvy

    Good point. I like that analogy.

  • Suvy

    Yea. TEPCO really screwed everything up and nuclear power isn’t coming back in Japan any time soon. Abe wants to devalue the Yen in order to stimulate exports when Japan imports all of its food and energy. That just seems like a horrible idea. Japan is also running trade deficit and the Japanese current account is <2%. All of this is happening during a global economic deleveraging and slowdown and Abe thinks the solution is for the BOJ to come in and buy up the debt issued by the Japanese government. This only ends one way.

  • Suvy

    George Soros made the exact same comment about the Yen. If there’s anyone I’d listen to on a currency call, it’d be Soros.

  • Andrea Malagoli

    “If anything, the government could run much higher budget deficits (for instance, by cutting everyone’s taxes) and while that might induce some inflation, it might also put more money in people’s pockets which would help generate higher corproate revenues”

    Isn’t this what MMT-ers and Keynesians like Krugman advocate?

  • Hans

    Geoff, I have very grave reservations about your estimates…

    Let me restate the question, would you rather have a balance sheet with 17 trillion in cash or debt…

    Debt, at this website has been relegated to insignificance to be almost a distraction…

    It is simple, a debtor has freedom of action…

  • Hans

    Mr Brown, their assets certainly produces very little in the form of revenue…In fact, there are only four federal department which operate in the black…

    Many of the items you listed would have little value to the private sector…Sell them all and America would still have a massive federal debt…

  • Tom Brown

    “a debtor has freedom action” … yeah, they can pay or default.. is that what you mean?


    “Debt, at this website has been relegated to insignificance to be almost a distraction…”

    Absolutely not! creating and selling debt is precisely how cash or any other medium of exchange is CREATED in our system. Take a look at some of the basic examples (right hand column) on this page:

    This fact is never obscured… it’s always very clear.

  • JK

    lol you don’t think China’s growth strategy has created much wealth??? What world do you live in? I lived in China in 2004-2005 and saw the growth and wealth happening right before my eyes. The place was creating massive wealth so vast it was clearly visible to the naked eye. And that was just for a one year period. Consider their trajectory for the past 30 years.

    I apologize if I’m coming off like a jerk in a few of these comments, but you sure sound to me like one of those people who thinks disaster is always ‘just around the corner’.

    Care to give a time frame on Japan? And what do you expect to happen to Japan? Haven’t they been (unsuccessfully) trying to induce inflation for two decades? Maybe (demand-pull) inflation is a lot harder to create, at least in industrialized countries, than most people think?

    “I’d actually prefer it if the developed countries ran the current account surpluses to finance the investment in the poorer countries–similar to how the US financed its investment in the 19th century.”

    So the already-wealthy should be the mercantilists? :)

  • JK

    Sure, but money incentivizes production. That’s capitalism. Combine the fact that economic activity is financed through debt + the desire to save = money stimulus is continuously necessary unless we to experience recurrent debt deflations. Right?

  • Suvy

    Japan hits mathematical constraints in 5 years. I think they hit real constraints in 3. So I’m sticking with 3-5 years. The 5 years estimate is a really, really conservative one. Everything will get out of control really quickly. There is a way out for Japan if the Japanese government privatizes its assets, sharply raises taxes while cutting spending sharply and restructuring future liabilities. Then I take a look at Abe saying that he’s going to ramp up military spending and I burst out laughing. Abe is going to trash the Yen, just give it time.

    In China, very few of the companies are actually profitable. China has had negative real lending rates for the past decade during the booming times. That can’t end well.

  • Suvy

    The US heavily relied on external financing for investment from 1789-1900ish and that was probably the greatest amount of real wealth creation a country has ever had.

    The kind of inflation they’ll create in Japan will be a cost-push, not a demand-pull. Real demand of Japanese consumers will fall.

    Also, the total assets of the Chinese banking system are somewhere between 3-4 times GDP(higher if you assume their GDP figures are overstated, which they are) and have been expanding at a rate of 50-75% of GDP over the past few years. Picture what would happen if the US lent $20 trillion into the economy through the banking system for a second. I bet we’d reach 10% NGDP growth. There are consequences for this kind of behavior; it’s reckless, irresponsible, and can’t end well.

  • Greg

    Glad you like the phrase John.

    Saying that all banks simply get funds form other banks via Fed Funds market is still circular. We cant ALL just be getting our money form someone else. Some entity somewhere is not “revenue constrained”. Some entity somewhere simply created their funds from thin air. It has to be true, otherwise we all just discovered some supply of money that we are simply circulating amongst ourselves.
    This would be the gold bugs argument it seems to me.

    Yes we do need to find the right level of enforced scarcity on our money supply but we as humans seem to be driven by fear and other things to always err on the side of over doing the scarcity thing.

    Who does this “overdoing it on the scarcity thing” benefit? Those with the most share of the money now. They spend great amounts of money via religion and the economics profession trying to convince us rubes that they are doing all this for our own good.

  • Greg

    Sorry Hans but I think you are badly wrong on this.

    Coastal waters alone are “used” by private industries to make trillions. They never paid for that first. Its a free resource of sorts that the states and fed maintain. The revenue it fails to produce is due to the lobbying of industries using the resource to be exempt from taxation. But be that as it may, the federal govt can run in the red in perpetuity. Its not a private business that needs the revenue.

  • Johnny Evers

    He probably meant to say that a debtor has NO freedom of action. He has to keep paying that rent.
    When you pay off your debt, you have the ability to borrow money constructively, or else save that money you used to pay for interest.
    I think the forum here assumes that more debt leads to more economic activity and more income which means we can all keep carrying more debt because the percentage we pay in interest will always be stable.
    The dangerous part of this assumption is that we get careless and we start that we don’t have to make smart borrowing decisions anymore.
    We also forget that if the government borrows more, then the citizens are required to produce more. So if we have half the population not working, the other half have to work for them.
    Now if you are working for your family members, parents or children, some people may choose to do that. But once you start asking them to work for other people, it’s a tougher sell. And again, this is reasonable only if we make good use of the money we print.

  • Tom Brown

    Let me put this in a simple monetarist way (again, I don’t completely agree w/ their views, but it makes a nice simple analysis here): Why let too much demand for money (how monetarists define a recession) put people out of work? That’s bad policy, but it’s still a policy choice: one we don’t have to make. If all you’re saving yourself is a percentage point or two of inflation, that’s not a good choice.

  • Johnny Evers

    I suspect the recession and low growth are a result of mal-investment.
    Money invested in housing — and levered bets on housing — ultimately created very little value. It didn’t even create much new housing, but mostly recycled housing.
    Deficit spending is creating very little value. Whearas once we had discretionary spending on infrastructure and education, now we have entitlement spending, which is necessary but unfortunately doesn’t lead to growth.
    Lots of defense spending to keep the oil flowing out of the Middle East has benefitted China and Europe without return to us.
    I also think the median social capital has fallen. The working class has been degraded.

  • Andrea Malagoli

    You got it …

    Economists only focus on aggregate numbers and spend little time trying to understand these little annoying details of a real economy. They are more interested in proving their theories about the Phyllips curve right. They think the world is a giant lab for their academic endeavors.

  • Tom Brown

    Also, I don’t know that I’ve ever seen anybody suggest here that we don’t need to make smart borrowing decisions.

    “We also forget that if the government borrows more, then the citizens are required to produce more. So if we have half the population not working, the other half have to work for them.”

    Well that’s the paradox… the idea is to get the other half working! I don’t mean doing meaningless gov work: digging holes and filling them back up.. I mean doing something truly productive. What if the MMists are partly right on this concept: that an excess demand for money has us locked up here? It’s not *necessarily* “borrowing” in the sense you’re thinking that gets us out of it… but “easing” money. They make the point all the time that zero interest rates are a sign that money has been tight, not that it’s been easy. (Shoot I’m starting to sound like a monetarist firebrand now!)

    Actually I agree with them on that analysis to some extent… I don’t agree with them on their Chuck Norris concept for how to accomplish it. I think some borrowing will be needed to accomplish this instead. For example cutting taxes w/o increasing revenues. Even if it’s accomplished entirely through the Fed (which is doubtful) it will really be a roundabout way of borrowing in the end if the Fed loses money in the process.

    But to crystallize their view: money is a tool, and a big part of why we’re still having troubles is that tool has failed to function as well as it could. Let’s not obsess and make the tool itself the end to our means, rather lets make money into a more effective tool so the private sector can again use it most effectively. That’s where I think people like Peter Schiff get it so wrong: they think we need more pain. Pain is good! It builds character… is what I hear from him.

  • Johnny Evers

    Austerity does not equal masocism.
    I think when somebody suggests we need ‘pain.’ he is saying that when bankers abuse their power to create money, they should suffer some pain. They should also be more tightly regulated so they can’t go back to making unproductive loans.
    After all, when a borrower takes on loans he can’t afford, he suffers pain and learns to borrow more judiciously the next time.
    How do we decide as a society who gets access to money? The lending system works, if smart borrowers/lenders benefit and dumb borrowers/lenders suffer pain.
    An alternative would be a state sponsored system in which the state decides who gets access to money. Then you have to hope the state is smart.

  • Hans

    Thank you, Mr Evers, that is what I meant…

    It simply can not be contested, a debtor has LESS freedom of action…

    Mr Evers, your comments are very salient indeed..

    Debt can be productively used, however, it can also cripple one’s economic future as well…

    Those that continue to believe that a government can print endlessly or issue debt recklessly without consequences, need to only look at Zim-bab-we and Argentina as examples.

    Yes, the Central government can print all they want.
    Yes, the Central government can run in the red year after year.

    Nations that are not fiscally responsible will be judged by the world markets and the facts brought to bear…

  • Tom Brown

    I’m not talking about pain for bankers! I’m talking about it for the unemployed!

  • JK

    Suvy, riddle me this…

    Why hasn’t Japan already hit mathematical constraints in the past 20 years? Why is now different?

    And you didn’t answer part of my question: (suppose ths S does hit the F in Japan)… what do you expect to happen? A depreciation of the Yen (isn’t that what they are trying to do?) Hyperinflation?

  • Johnny Evers

    Pain makes you restructure your resume. I see it happen to people all the time.
    Going back to the bankers, you have to dis-incentivize them from making dumb loans.
    A banker can make more money swapping paper with other bankers than he can making a business loan.

  • Greg

    Good comment Tom

    I dont think the MMists are wrong in their desire to get more money into the economy either. I dont think they are wrong about an excess demand for money either, though I wouldnt use the term excess, maybe just increased but I think their theory on price level is over simplistic and I find it odd that pretty much all monetarists think wages need to fall. Its like they have one solution, cut wages in a recession. Its ALWAYS that the workers are getting too much. They call for inflation but not inflation that actually comes form workers demanding more. No no no, cant have that.
    Thats why I think they are mostly just charlatan apologists for all supply side economics.

  • Tom Brown

    Greg thanks, I agree w/ most of that, but I don’t think it’s the monetarists that think that wages need to fall. I think they recognize that wages are sticky, along with prices. I think where the monetarists are blind is in ignoring that debt matters (that the private debt is another sticky price… Steve Waldman got into this a week or so ago).

    But putting debt aside, I think the MMists just want to essentially make an end run around the sticky prices/wages by targeting higher growth of NGDP.

    It think where they really fail is in their mechanism to get us there.

    I think the people pressing for wages to go down are the ones that don’t like the idea that prices and wages are sticky… but also perhaps deny that this stickiness even exists (thus it becomes the fault of the gov and regulation and unions that this is so)… I would include the Austrians in this group and some of the folks pressing for “structural changes” … not all perhaps, but I think “structural changes” is often just a euphemism for “[nominal] wages need to fall so we can become more competitive.” Forcing that to happen, in my opinion, causes unnecessary unemployment.

    As for MMists being apologists for neo-liberalism in general… I think you are right. But they are at least realistic about the pain (unemployment) that would result in trying to force sticky wages lower. They say “better to [nominally at least] grow our way out rather than fight that.” That’s my read anyway!

  • Suvy

    The key number is debt service costs, which are a effectively a function of the debt stock and the rate of interest. Even though the debt stock was increasing for 20 years, debt servicing costs were decreasing/staying the same because the debt was being refinanced at lower rates. For all practical purposes, Japan hit a full zero at around 2011ish. It’s actually relatively easy to show mathematically, but from now on, debt service costs will increase exponentially unless the deficit is drastically cut. If interest rates move at all, Japan is basically screwed and the Yen will crash. Japan spends 50% of its tax revenues on debt service at flat yield curves across the ZLB. Any sort of shift in the yield curve would cause major issues, which would mean inflation really isn’t a solution. In Japan’s case, I actually think inflation would create a positive feedback loop of accelerating inflation due to the fiscal nature of Japan’s debt problems.

    As for the consequences, I’m not sure. I still think Japan can avoid a Yen crash if the right decisions are made, but I think those decisions are politically impossible and would require Japan to take on a very, very severe recession. It’s hard to say the severity of a financial crisis beforehand. You also have to remember that Japan imports all of its energy, so a further depreciation in the Yen could worsen its current account rather than help.

  • Vincent Cate

    Since Japan tossed the note rule and started printing really fast they seem to be increasing inflation by about 0.5% each month. Only a few more months and they will be zooming past their target rate.

  • JK


    For a federal government that is a currency sovereign, here Japan, a few thoughts…

    1) rising interest rates on government bonds is a decision of the central bank. If the central bank wants to keep rates pinned down, it can do that. So it’s a policy choice.

    2) If the central bank chooses to allow rates to rise, that will increase interest-income on those govenrment bonds. This can be seen as a subsidy for bond holders as their interest income is essentially free and created through more deficit spending.

    3) If at some point spending in the economy starts to create Demand-pull inflation, the Japanese government and tax some of that Aggregate Demand out of the economy. Until then, what’s the problem?

    It seems like you’re suggesting FX market participants are going to bail on the Japanese Yen (out of fear?) and that’s going to send the Yen crashing down. If that were to occur, I see the Cost-push inflation you’re talking about through energy. Could result similar to U.S. 1970s stagflation?

    But really, why would there be a run on the Japanese Yen? Japan is an industrilized country that sells a lot of stuff that people want to buy throughout the world. So long as there is strong demand for Japanese goods and services, then there will remain strong demand for the Japanese Yen.

    What am I missing?

  • Suvy

    You’re missing the nonlinearities involved. You’re assuming everything can be controlled and none of this actually can. The nonlinear payoffs are what actually create the “fat tails”, if you will. The worse the nonlinearities, the more of a “tail event” is created. All of this can actually be shown mathematically.

    You’re assuming that the central bank/government can control everything and will make all the right decisions through every time step while the situation while me and Vincent disagree. When you lose control, it’s game over. One wrong step and everything falls apart.

    Remember that the most important part in any financial crisis is which way the capital moves. Every financial crisis basically starts with, and I even think it is created by, the flows of capital. If the Japanese government can control that, then they’re in good shape. I don’t think they can. Also, governments have a terrible record of making good fiscal adjustments at the right time, so I think it’s fair to assume that the Japanese government doesn’t make those adjustments.

    If you look at the nonlinearity of hyperinflation, the doubling time approaches zero as time moves forward. It takes off so fast and so suddenly that you’re basically screwed. You’re not able to control anything in this kind of system. The high government debt levels are a huge part of what creates the nonlinearity and remember that US government debt during the inflation of the 70s was around 40% of GDP. Japan’s is almost 250% of GDP, any sort of inflation can’t be stopped because of the nonlinear payoffs created.

  • JK

    Ok, it’s about time for you to get much more specific about EXACTLY what you mean and are referring to when you say ‘nonlinearities’.

  • Suvy

    There are many nonlinearities. The most obvious one is the nonlinearity that develops when debts/tax revenues are very high. Debt service costs shift exponentially to shifts in rates while inflation shifts linearly with respect to inflation(technically NGDP). In the case of Japan, it would take around a 20-25% move in tax revenues to offset a 1% move in rates. So when government debts get really high relative to tax revenues, central banks are basically forced to peg the yield curve. When debt service costs take up 100% of tax revenues at flat yield curves across the ZLB, the debt has to be restructured.

    What are the other nonlinearities? One major one is how the supply chain of the country is affected(in Japan’s case, everything gets much worse because Japan imports all of its energy). How is the capital structure of the businesses in the country affected–in the case of Japan, this goes in both positive and negative directions. Basically, single response is extremely nonlinear. How does the people’s behavior to what begins to happen affect the feedback loop(in the case of Japan, this will be very, very negative since the entire country has basically come to experience deflation for 20 years). In the case of Japan, everyone is basically locked into a Yen that holds its value and JGBs that are actually worth something. So if JGBs and/or the Yen start to move further, there’s really no way out for Japan. Abe’s stupidity hasn’t made anything better either.

    There is a way out for Japan if the right decisions are made, but Abe won’t make them.

    If the BOJ isn’t already pegging the yield curve, the BOJ will be forced to peg the yield curve at some point very soon. When that happens, the floodgates open in the FX market.

  • Suvy

    I need to make one correction to my statement above. The key point is when the market catches on what the government is doing; that’s when the floodgates open.

    With Abe leading the ship, I don’t see how Japan makes it out of this without hyperinflation. Personally, I’m with George Soros and Kyle Bass on the Yen. It seems like the smart money is leaving or has already left Japan.

  • JK

    Was I correct above when I said: “It seems like you’re suggesting FX market participants are going to bail on the Japanese Yen (out of fear?) and that’s going to send the Yen crashing down.” …?

    Is your prediction that market participants are going to discipline Japan? (causing a crash in the Yen that will lead to the devastation).

    Or is there an actual transmission mechanism besides market participant irrationality?

  • JK

    maybe you’d call it market participant rationality? :)

  • Suvy

    I think the trigger will begin in either the FX market or the bond market. No one knows what the trigger will actually be.

    Also, I think the rational thing to do is to sell JGBs if you hold them. This is a country that has had almost 20 years of deflation and the guys in charge are telling you they want 2% inflation. Why would you still hold your bonds if you’re being told that you’re gonna lose your purchasing power? Japan is also heavily reliant on exports in a world that is deleveraging, which means much lower growth rates. Does that make you want to hold Japanese assets?

    It’s not about “discipline”, it’s about tryna see how people are gonna behave. No person in the right mind would move their money into Japan; it’s just plain stupid considering all of their demographic issues, structural issues, and massive debts. That combined with the idiot Abe who revoked the independence of the central bank, it just can’t end well.

  • Tom Brown

    Suvy, why don’t you go rain on Sumner’s parade next time he posts one like this:

    I’d love to see his response. Or have you already done that?

    Cowen and Nunes also have posts up apparently, and the FT.

    Lot’s of parades to rain on there.

  • Suvy

    Already did that. Got into an argument with around 20 people on the page.

    I used to go to Sumner’s page all the time to try and find out how monetary policy worked. I learned a little bit, but you guys are way better. I also find Sumner’s views on debt, asset bubbles, and all that other stuff way off base and completely not true.

  • Tom Brown

    And you know I just love a parade!

    OK, that probably went to far… especially in light of today’s top news story. … but I couldn’t help myself.

    (that was a T-shirt design BTW!)

  • JK

    Thanks for the polite respones Suvy. I’m not even an amateur at this stuff. Just trying to understand. Pickng your brain.

  • Tom Brown

    JK, so wait, you’re NOT an amateur… does that mean? you’re a pro? What’s your background? I’m 100% amateur.

  • Geoff

    I had assumed that if Japanese NGDP was growing at 1.6% while interest rates remained at only 0.5%, then Japan would be fine. But I’m beginning to think that Suvy has a point.

  • Geoff

    I think JK means he’s less than an amateur :)

  • JK

    Geoff’s got it. The key word was “even”… “I’m not even an amateur” :)

  • Tom Brown

    Cullen, what say you to Suvy’s analysis here, re: Japan?

  • Vincent Cate

    The government is like a gang that controls some territory and collects protection money. The gang controlling a neighborhood with a big NGP (neighborhood gross product) can collect a higher protection fee.

  • Cullen Roche

    I haven’t tracked every comment on that. Care to give me the Cliff’s notes?

  • Tom Brown

    Shoot, I haven’t either… I just starting reading a little above this one:

    I assumed Geoff had been reading them all since he seemed to think Suvy made a good case. JK seemed somewhat mollified too.

    I think if you just read that link I give there … it might be enough to go off.

  • Dennis


    I have a question. If as you say: “I think the trigger will begin in either the FX market or the bond market. No one knows what the trigger will actually be. Also, I think the rational thing to do is to sell JGBs if you hold them. ”

    Why hasn’t this happened already? Does a comet need to crash into Tokyo? It seems to me that this is MR, the “national debt” is a joke and meaningless here in the USA and Japan. Japanese folks and businesses are by far the major holders of their own bonds. What would they trade them for, US Bonds?? no, Euro Bonds?? no, Russian?? no way? Their “National Debt” also is the source of their fiat Yen. No debt no money.

    The reason this hasn’t happened yet, during all these tragedies, is there is no better place to store their savings. You say that there is going to be a trigger…but you don’t know what it is. OK If there is some kind of trigger then How will this dive happen? What are these folks going to trade their Yen bonds for? Yen or Greenbacks. As for the USA and Uncle Sam’s bonds, considering that 60% or more of the world’s fiat money is made up of electronic greenbacks, what are we going to trade our bonds for? Yen?

  • JK

    I’m not sure what mollified means in this context :) … Suvy’s comments were interesting. Didn’t convince me, then again I don’t think I really understand these nonlinearities that Suvy claims are so sudden and significant.

  • Tom Brown

    Well “mollified” was too strong then I guess. :D

    How about “not outraged?”

    I didn’t understand what he was saying about the non-linearities either.

  • Suvy

    It’s the nonlinearity that’s the key. Remember that debt service costs are a function of the debt stock and the rate of interest. So debt servicing costs were falling for a very long time even though the debt stock was rising because the debt stock was being refinanced at lower and lower rates. Now, all the debt is basically refinanced at 0% rates and debt service costs move exponentially from here.

  • Suvy

    As I was saying, when debt/tax revenues get really high and debt servicing costs consume very large portions of your tax revenues, inflation actually leads to default due to the nonlinearities.

    Again, you have an entire economy that’s basically locked into a Yen that holds its value and a strong bond market. However, yields can’t get any lower and they want to get rid of deflation and reach 2% inflation while their bond market holds still. Japan is an economy relying on exports at a time when worldwide demand is falling and they want to devalue their currency to stimulate exports while they import all their food and energy. None of this makes any sense and the only solution is monetary expansion. Don’t forget the worsening demographics as well.

  • Suvy

    Tom, do you remember how we were talking about what happens when you try to peg the long end of your yield curve at 2% when inflation is running at 5%? If inflation hit 5%, that’s what the BOJ would be forced to do to the Japanese yield curve because debt service costs move exponentially to shifts in interest rates. The problem is that the BOJ will be forced to peg the yield curve and when that happens, everyone’s gonna run. Interest rates can’t move 200-300 bps without Japan having major issues.

    Another issue about the nonlinearity is that with very high debt levels, inflation goes from 20% to 40% quicker than it does from 10% to 20% which occurs faster than going from 5% to 10%, etc.. If you look at the literature of the nonlinearity of these types of events, the doubling time decreases as time moves forward, which is the problem.

    I also can’t emphasize the importance of the shift in the Japanese current account and the trade balance going negative. All of this is just huge along with the population.

  • JK

    suvy says so sudden n significant. repeat that 5 times fast.

  • Tom Brown

    Suvy, what’s to prevent them from just issuing short term debt exclusively? What are the consequences of that?

  • Suvy

    They could do that, but the problem still exists. Try keeping short term rates at 0% when a private sector has clean balance sheets(now the case in Japan) and inflation just went up 300 bps, assuming they hit their target of 2% without overshooting. If they overshoot, things are even worse.

    Short term debt does have lower rates, but it also has to be rolled over more often. Remember that the difference between the 10 yr and the 1 yr in Japan is running at around 50-60 bps, so I don’t know how much it would even help Japan in this current situation.

  • Tom Brown

    But no matter what, if excess reserves > 0, then the overnight rate will be driven down to the IOR rate. Do the Japanese have a large stock of ER? As long as a stock is present, ER = FFR.

    I think the yield curve can steepen. It doesn’t have to maintain the same slope.

  • Suvy

    I actually think a steepening yield curve is the sign of inflation. If the yield curve begins to steepen, what will people start doing? They’ll borrow short to buy long dated assets. This entire procedure will be inflationary.

    The money supply is endogenous and credit is created out of thin air. If the yield curve were to steepen, I think we’d see private sector credit demand in Japan again.

    If the yield curve starts to steepen, economic activity would also increase, pushing interest rates higher. This is precisely the conundrum that Japan is in. Any sort of inflation or growth would blow them up.

  • Dennis

    I think you’re writing about the other side of the “ledger”. The private debt, owned by homeowners, companies etc, generated by banks in the form of debt-Yen (credit), was marketed fiercely and got totally out of control in Japan during 1988-1989. The Japanese credit bubble burst big time. The amount of Yen that went up in smoke was huge! Deleveraging continues to this day. The people can’t create money, they have to pay it back.

    On the public side, the government’s debt spending does not have to be paid back. Yes, you get monetary expansion when that happens. BUT they obviously don’t have enough Yen, still…so make some more. As long as folks don’t raise prices there will be no inflation. The issuance of bonds and the amount of taxation are tools attempting to keep this inflation / deflation under control.

    You realize that I am no more than a novice at this stuff.

  • Greg

    It may not be fair to say that MMists all call for lower wages now but it does seem as if most, if not all, buy into the idea that large scale unemployment events like the GD and more recent LD result form workers refusing to adjust wages. I beleive Scott did a recent post about workers holding their employers hostage, so to speak, during the GD until Roosevelt adjusted the gold exchange rate.

    This is an implication I think that flexible wages would cure unemployment. Have you seen any support a minimum wage?

  • Tom Brown

    Greg, I know exactly the post you’re talking about… he mentioned workers “crucifying their employers on a cross of gold” … and was pretty proud of himself for that image too.

    But my read was a bit different. I think what he was getting at there was not to break the will of the workers (although he may very well think that’s a good idea) by forcing them to accept lower nominal wages, but instead that devaluing the dollar against the gold standard, as was done in 1933 by changing it from $20/oz to $35/oz turned out to be one of FDR’s best moves. I.e. that supports the MMist point of view: don’t fight wage inflexibility (too much)… simply grow your (NGDP) way out of it. Here’s the post:

    What do you think? Do you think I’m off base there? I think that’s why the MMists don’t care much for the “hard money nuts”… because they’re unrealistically fighting this wage and price inflexibility. Even though they are fellow neo-liberals… the differ sharply on this point.

  • Suvy

    Public debt may not have to be paid back, but many risks are created by ballooning government debts, very large deficits, and current account/trade deficits. Japan has been financing its deficits with a massive current account surplus which is now dwindling in the face of a massive slowdown in global growth. There’s gonna be massive downward pressure on the Yen(there already is) and JGBs are gonna be in trouble. Pretty soon, the BOJ is going to have to pick between choosing saving the JGB market and the Yen. There really isn’t a choice considering the capital is only moving one way regardless of what happens.

    There is a way out for Japan, but it involves many tough choices and taking on a very, very severe recession, which won’t happen voluntarily.