WARREN BUFFETT DOES MMT
In the Q&A today Mr. Buffett responded to the idea of a debt crisis in the USA (CNBC reports):
Warren Buffett says if Congress fails to raise the U.S. debt limit, it would be its “most asinine act” ever.But he told shareholders today there’s “no chance” lawmakers will fail to do so, despite “waste of time” debates on Capitol Hill.
While Buffett doesn’t want the nation to keep increasing its debt relative to GDP, he says there’s shouldn’t be a legislated debt limit to begin with, because circumstances change.
Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.” Inflation resulting from a “printing press” approach, however, is a serious threat.
If that sounds familiar then you’ve likely been reading this website and the work of other MMTers. I have hammered on politicians and this nonsensical idea of a “debt ceiling”. For years now I have focused on the fact that Greece is not our endgame, but that hyperinflation is the animal we need to combat. This weekend’s “Woodstock for Capitalists” isn’t the first time Warren Buffett has sounded a bit like an MMTer. Back in March I cited an article where he made similar comments:
Let’s talk about the macro-economy; a lot of people are concerned, with U.S. debt at about $15 trillion – you are still very optimistic about America. How do you reconcile this?
“America and a lot of other countries too are remarkably resilient. I mean, we make all kinds of mistakes in our country and we will continue to make them. But we are a country that has gone through a civil war, a country that has gone through 15 recessions, a great depression a flu epidemic, a cold war.
“There are always problems, but there are always opportunities, the thing that really counts is having 309 million people or so with a great number of them trying to make their lives better and the lives of people around them better.
But today foreigners have a bigger claim on this pie. Compared with the past 10-20 years, foreigners hold more equity, and more stock and more debt of America.
“Foreigners across the world have about a $3 trillion net balance against the United States. There was a time when we had a net balance against the rest of the world. It’s better not to have a $3 trillion balance, but we also have about a $60 trillion economy – we can handle it.
“I don’t like policies that lead to that number increasing and I have written about it, but let’s not get into that. Everything that we have is denominated in our own currency, and that’s a tremendous advantage.” (emphasis added)
I know Mr. Buffett spends quite a bit of time on-line playing bridge, but it is beginning to sound like he also spends some of his time reading the work of MMTers. In other words, it sounds like Buffett actually understands the way a modern fiat monetary system actually works.
Great news given how influential he is! This is also very typical of Buffett – he is more knowledgeable than he lets on.
He has to have been reading MMTers. You guys are the only ones that have been saying this for so long. And he’s using the exact same terminology.
Certainly sounds familiar!
Well Cullen, this should cheer you up a bit after watching the, ahem, questionable draft by the ‘Skins.* This post certainly lifted my spirits! Thanks again.
*Though, as a Big XII fan, I’m confident you’ll enjoy watching Roy Helu Jr.
Don’t make me think about it….We needed o-line. And we draft skill positions….typical skins.
Cullen, I mentioned in my first note to you that serious inflation of a currency is in a sense a defacto default. Sorry, but I still don’t get your point. Yes, the US will always be able to issue currency and buy its own debt and pay all creditors. That makes us different than countries such as Greece. So?? What am I missing? -Tom
Well, it highlights the fact that the money supply in the USA is not exploding. Our only contribution to high inflation in the USA appears to be the nonsense via QE2 and the speculation in commodities. There is zero evidence that fiscal policy is leading to inflation. So, with 2.7% inflation and the high probability that oil and gas will temper this fall we have politicians talking about cutting the budget, etc because they’re worried about default. The whole policy debate is missing the point!
Cullen,
Is MMT a theory or the theory? True governments operate according to MMT, or similar to what MMT says, but is it a way or the only way?
The T in MMT is a misnomer. It merely describes the actual workings of a modern fiat monetary system.
Got it. Thanks.
In other words, it’s as much a “theory” as the Theory of Relativity…
Yes, Warren understands MMT perfectly and he knows that the final act of this policy is an inflationary crisis.
The final act of what policy? The MMT prescriptions for this crisis have been ENTIRELY ignored. So anyone who ever tries to blame MMT for the current problems has totally missed the boat on our ideas.
The Abba Lerner fiscal and monetary prescriptions were and are esencially “money printing”. In the late 60s the final act was inflation. Why this time will be diferent?
Bretton Woods.
The recent spending agreement de facto raised the debt ceiling by authorizing spending that exceeds the statutory limit; therefore, the “debate” is nothing more than pre-selection-year drama and posturing.
Foreign individuals, institutions, and central banks hold about $4.3 trillion of the US debt outstanding held by the public. The US Treasury could conceivably default someday on these obligation, as well as seize the $1.4 trillion in Fed holdings of Treasury paper, i.e., refuse to redeem it to the banksters’ bank.
Note that corporate debt is $11 trillion (8 times after-tax profits), local and state gov’t debt is $2.5 trillion (115% of receipts but much more in terms of future pension and benefit obligations), and households have debts of $13 trillion (115% of disposable personal income and 141% of private GDP).
The corporate, local and state gov’t, and household sectors’ debt is THE problem; however, it, along with elder transfer payments will in turn overwhelm the federal fiscal budget in the years ahead.
Buffett gets it. There is no way a guy as smart as him doesn’t understand how the monetary system works. He might not agree with all the policies that some MMTers propose, but I would be willing to bet that he’d agree 100% with the outline of MMT and its description of the monetary system.
The true fiscal crisis isn’t the 10% deficit’s we are running right now (while private credit contracts) . Rather its the long term obligations of medicare, SS, and medicaid. Those imply a large, very inflationary future if adjustments aren’t made.
Unfortunately these decisions on spending on entitlements must be made years in advance, and cannot be adjusted quickly depending on the state of inflation, or where we are in the business cycle.
Short term we need more stimulus (like payroll holidays), but long term we need to hack down entitlement spending.
We appear to be doing the opposite. Cutting now, and not addressing the long term obligations.
The real problem is not healthcare, but that we spend too much money building bombs. We need to stop spending so much time killing foreigners and more time trying to save our citizens.
There is nothing more inflationary than a bomb.
It’s interesting actually. I largely agree with your line of thought. We should spend more time focusing on domestic policy and less time of foreign policy. This might not be a popular line of thought, but we don’t need to be policing the world. All the world needs to know is that we have the biggest guns. The old Paulson bazooka technique. No one messes with you when they know you can demolish them in an instant. We have the best technology in the world. We should use that to our advantage. You don’t need to intimidate the opposition thru force. Just flex your muscle every once in a while and remind them that we’re still the biggest baddest army around. That doesn’t require an army base in every country. Now, obviously there is some level of defense that is necessary, but we really do need to focus more on our own citizens and less time trying to make the world the perfect place that it will never become.
It is too bad that this site is falling prey to chauvinism. It blinds the clear mind and creates duality.
Chauvinism or reality? The USA is the most powerful nation in the world. Not by a small amount. By a large amount. Anyone who doesn’t believe this is blind. This site is based on reality. Not some fantasy.
Now, this might not be the case in 100 years, but for now it is and that is the framework within I work….
defense spending as a percentage of GDP is remarkably constant.
The facts don’t fit your ideological view. http://thenumbersguru.blogspot.com/2008/10/defense-spending-as-percent-of-gdp-1940.html
Medical spending/SS is the story
What’s your solution Scharfy? I have to admit that this is one subject I have not come close to conquering.
Don’t take my word for it. Here’s Krugman, as far left as you can go, – same idea.
http://krugman.blogs.nytimes.com/2011/02/18/realism-on-defense-spending/
Well put, Scharfy! Even, Herr Kulgman, got this issue right…
Those calling for reduction in defense spending are Peacenicks, Internationalists and unfortunately, even some myopic conservatives…It also includes MAWMD, code pink and military haters (abaters)….
If sending the Home Guard to the front lines is not an indication of depleted military resources, I do not know what is…
Are you aware of any inflation projections that have been made given the outlays that will be required by SS/Medicare/etc?
“Those imply a large, very inflationary future if adjustments aren’t made.”
It does not imply inflationary adjustments. You do not know enough about the future to make such a statement. If the baby boomers retire without SS or reduced SS what do you think happens to their consumption and hence GDP? At best we know that their will be greater demands for healthcare so we need a comparably larger economy to handle those demands and with rising odds of tighter world resources a more efficient economy. But since we don’t know the future size of GDP, if their will be an employment/resource utilization gap, the size of the net trade balance, or the tax rate we have no idea if inflation will be a problem or not.
I wish I had one TPC….
MMT going mainstream means that within a couple of years the average person will understand that federal spending is not actually constrained by tax revenue or funded by the Treasury market. This can only be inflationary in the long run, because how will the federal government ever be able to say no to anyone again, especially after the Fed used its power of money creation to bail out the undeserving leeches on Wall Street and foreign banks? Medicare and Social Security aren’t funded by payroll taxes anyway, the elderly are far more deserving than Wall Street, and the entitlement crisis doesn’t exist other than as a theoretical long term inflation threat that will be someone else’s problem years down the road. This kind of thinking is inevitable; Obama’s long term budget projections implicitly endorse it. If this is the future, then resources, commodities, metals etc. will only keep getting better as investments in the long run as more and more dollars are created by the Fed to cover (in nominal terms) the rapidly growing universe of federal obligations that well exceeds the growth of national productive capacity. MMT tells me that the federal government will never default on entitlements in nominal terms; significant inflation therefore seems inevitable unless we can get the country’s productive capacity growing again in real terms faster than the entitlement bubble.
I always have trouble with this retort, because why all the sudden should all the inflation fear that we have today disappear once everyone understands the monetary system? The logic doesn’t work in my mind. If anything, MMT makes it even more apparent that inflation needs to be the concern. Do you really think America’s economy can only work on lies?
I think certain controls could be put in place and that policy makers would still be able to steer fiscal policy in a responsible manner so as to avoid a damaging level of inflation.
you never quite got around to making an legitimate argument.
forgot about the inflation concerns, now or under MMT. let’s think about default.
if politicians and the public do not spend/invest wisely when they believe that default is possible, i do not understand why anyone would think that either politicians or the public would be more responsible with respect to spending/investment once they believe default is not a concern. put simply, if people do not act spend wisely with the the psychological constraint of default than with it, it is more than a stretch to assume that they would act properly without such a constraint.
i don’t care who is advising Congress. we have intelligent advisers now, but economic advisers don’t keep politicians in line or in office.
also, MMT may describe monetary functioning, but its policy prescriptions are purely theoretical. hence the “T”.
in theory, there is no difference between theory and practice. in practice, there is. i still stand by my opinion that MMT is behaviorally risky, particularly in a democratic system like ours.
like many of you, i love MMT, but some here tend to believe that MMT is some previously undiscovered holy grail of economic thought. sadly, it is not. it is very easy to become blinded to pitfalls by potential, and it is easy to disregard inflationary concerns without ever living through inflationary times.
excuse the typos.
No one has ever said it is a holy grail. No one. MMT is merely an accurate description of a modern fiat monetary system. None of us believe we have wandered upon some unturned stone. We are merely describing the system as it is. All of our prescriptions are what we believe the system can and should be able to sustain. I know the system cannot default like a household so when I heard politicians complain about this in 2008 I said they were full of it. That was right. I said the banking system was an unproductive resource that should not be saved. I believe that was also right. MMT focuses on reality and not theory. It focuses on what a modern society should really be concerned about.
The differences between this line of thought and the orthodox thought are dramatic. If the average person cannot see that then I am not explaining myself clearly enough….
yes, the accounting identities and similar concepts of MMT are realities. MMT policy prescriptions, however, are currently theoretical solutions to real problems and ineffectiveness of certain policies. and you have said this before, although with conciseness.
and im not pointing out to you as being blinded by the potential of MMT (if i had, i promise i would have said so!). but many here are, without a doubt.
man, im getting wound up. it mustve been the implication that Buffett “must have” been reading MMT because “now he gets it.”
Sorry Dan, but the old paradigm thought process that the US govt is not a like a household is exactly why the US govt entered a depression in the 30s. It is also what has caused the Japanese recession to resemble a depression. I don’t see how you don’t see this distinction. It’s plain as day. The last 36 months have proven that the MMT process is the right process.
The distinction between inflation and default has been proven 100% right during this crisis. Had we let the defaultistas run the ship we’d be in certain depression as the govt pulled in spending and households deleveraged. Greece and Ireland prove this is right. But you reject this somehow. I don’t understand it….
Dan,
I think I got around to the beginnings of a logical argument. I just didn’t write as much as you, and you want to be right.
“forgot about the inflation concerns, now or under MMT. let’s think about default.”
Uh. No? You can’t just abandon that concern which is VERY REAL today, as much or more than the default concern. By doing so, your model of the “MMT world” becomes oversimplified and your argument less robust.
“if politicians and the public do not spend/invest wisely when they believe that default is possible, i do not understand why anyone would think that either politicians or the public would be more responsible with respect to spending/investment once they believe default is not a concern. put simply, if people do not act spend wisely with the the psychological constraint of default than with it, it is more than a stretch to assume that they would act properly without such a constraint.”
Ok so I think there are two psychological constraints. One is the default fear and one is the inflation fear. So, first, don’t tell me to abandon the inflation fear, because even if you get rid of the default fear, the inflation fear can still hold a lot of sway. Given half the US’s aversion to big govt, I think the inflation fear would still hold very strongly and likely grow even stronger as people can no longer latch onto the “default argument” in order to resist large government. See, you’re making the assumption that once people realize default isn’t a possibility they won’t care about govt spending anymore. I think that’s completely wrong and way too simplistic. You base your whole argument on behavioral tendencies, but once we bring MMT into the world, you assume all behavior and desires simplifies to lots and lots of spending. BS. Politicians will be politicians and IDEOLOGIES will still be ideologies. People will still fear inflation and half the US will still want SMALL GOVERNMENT.
Secondly, I haven’t looked too much into the policy prescriptions of MMT (ELR for example). All I know is that it makes a damn good argument that the govt shouldn’t be cutting back spending NOW. Once the economy recovers, I think the insights MMT brings are less impactful, unless you actually want to pursue things like the ELR… but do you honestly think we’ll ever be able to implement this in the US if we can’t even implement a single-payer health system? So bottom-line, I really don’t think things would change as much as you’re assuming, because your assumptions oversimplify the world. I think you’re placing way too much weight on the whole “default-hysteria” thing, because once you convince people “traditional default” isn’t possible, they’ll still leach onto the whole inflation/hyperinflation thing. Their ideologies and biases will not disappear. Have you ever read this blog?
“like many of you, i love MMT, but some here tend to believe that MMT is some previously undiscovered holy grail of economic thought. sadly, it is not. it is very easy to become blinded to pitfalls by potential, and it is easy to disregard inflationary concerns without ever living through inflationary times.”
Again, I don’t think things would have to change that much. I think the times when things would change the most are times like now. But once the economy recovers and we near <4% employment, the govt likely goes about its way as it always has. There are still tons of constraints you are simply assuming away. You're literally assuming a world where every person fervently believes in MMT policy prescriptions, and you're completely simplifying the "behavioral assumptions." I am not. I am assuming a world that brings a bit more clarity of thought to economic policy but still allows much room for debate, disagreement, and varying ideologies. To me, that most likely results in a world where we don't cut the deficit back when we're at 10% unemployment and the world is still on the verge of recession. MMT offers a pretty convincing argument in that regard, if it is ever to offer a convincing argument for anything. But when the economy recovers? Then the old debates about inflation, big/small govt, etc, come back into play.
Totally agree. MMT is interesting, and it is not in the interest of the powers to be to educate the world about MMT – otherwise everyone would want a bail out like the banks. So yes, as MMT is more mainstream, gold, silver and others tangible resources will continue to inflate. Its common sense.
Cullen: would love to hear your current thoughts on gold. I think you are neutral on it, generally, but the fact is its going up and seems will continue up. MMT and reality are two different things.
MMT is reality. It is the fiat system we live in.
I have been and am bullish on gold.
I did not advocated bank bailouts.
MMT is not a prescription to spend in excess and in fact, if our politicians understood it they would be more thoughtful in terms of their spending.
what economic school of thought IS a prescription to spend excessively? i can’t think of one. the reason politicians (and people in general) spend excessively has more to do with incentives, perceptions, and other behavioral traits. MMT is not going to change those qualitative issues, especially incentives. elected officials are, by definition, incentivized by their electorate, and votes are not made based on logical and fact-based reasoning. education will not change that, at least not in our lifetimes. additionally, improper incentives and compensation structures pressure illogical people, including politicians, to do illogical things. politicians really have few boundaries or disincentives relating to their poor decisions, other than being elected out of office. and we know how often voters make that decision. not often enough, if ever. as long as they bring home that the bacon without falling backside-first into a scandal, voters will vote for “their guy”. no theoretical prescription, despite being based on total reality, can change that.
I think you’re missing the whole point. We wouldn’t even be having this discussion if people really understood how the system works. We didn’t understand the system in the 30′s and that’s why a recession turned into a depression. Now, our understanding is vastly improved and that’s why the current recession didn’t turn into a depression, however, we have many politicians who are still using this old line of gold standard thought.
You say the inflation constraint doesn’t matter. Pardon me, but that’s utter nonsense. In 2008 when QE1 was initiated I explained why it wouldn’t be inflatonary. But you had millions of people talking about how the fiscal and monetary operations would surely lead to hyperinflation. They made these arguments because they didn’t understand how the system worked. And they turned out to be 100% dead wrong. This is the same sort of thinking that turns recessions into depressions. They say we all need to hunker down and that the govt needs to rein in spending. They compare the govt to a household and say we need to tighten our belts. It’s classis Austrian economics. On the other extreme are the Keynesians who say we need to tighten up during expansion. They say surpluses are good. Again, they don’t make any distinction between the fiscal constrain and inflation constraint. They all believe we need to save in order to spend. That’s factually incorrect. MMT is the only school of thought that makes a clear distinction.
MMT provides a clear picture of how a modern banking system and monetary system works. With this sort of understanding we can avoid the mistakes of our past. Unfortunately, it is thinking such as your own that inhibits this progress and feeds the sort of thinking that is trying to turn this into 1937 all over again.
If the huge mass of borrowers with underwater mortgages realized that Congress could bail them out, they would certainly demand it. Remember, these people are an actual voting majority of the US!
Now, they may eventually be bailed out stealthily through inflation. This is what Bernanke is trying to do, but it isn’t working too well because there is no good quick mechanism for channeling the money he is printing into house prices or wages. All the excess liquidity is going into commodities and stocks.
@Dan Dell: Excellent comment!! I have been thinking along similar lines all the time. MMT does describe the workings of a floating fiat currency but the policy/fiscal implications are similar to classical keynesian theory:
In bad times governments spend and in good times they ALWAYS forget to cut. Democracies just don’t work in a rational, technocratic way (there might be exceptions like some Skandinavian countries or Switzerland). There is no way an MMT inspired democracy/government spends wisely, targeted and reduces spending when it is appropriate.
Even with “deficit hysteria”, almost all western governments keep on piling up the debt since the 1970s faster than GDP growth. Convince them that default is not an option and maybe even that government debt issuance is not really necessary and you will end up with bloated governments, semi socialist societies, and A LOT OF inflation.
So, MMT might describe reality, but other than that it involves loads of wishful thinking and should not be applied to policy. A bit of restraint in terms of outdated “gold standard” thinking is the last thing that keeps the allocation of resources between the private sector and government in balance.
I’d love to be a distant spectator with the Austrians running the world today. We’d be mired in a depression worse than anything the world has ever seen. And you’d all be singing a vastly different tune as you fail to put dinner on the table for your starving kids….Sure, we’d have no inflation at all, but we’d have deflation that choked you like an anaconda….
i wouldnt advocate “gold standard” thinking b/c spending is giving us some level of stability until the world develerages and recapitalizes. however, MMT and Keynes for that matter, think it is just easy to move taxes up or down to take out excess liquidity (or fund prior deficit spending). aside from the obvious effects on business and investment due to increased uncertainty about the future, tax increases don’t sit well with voters. political think tanks knew that the Bush tax cut was a HUGE republican victory, just because they knew that bringing them back up it political suicide. so it was a bigger “win” than most people think.
it’s like aversion to loss. money made brings less satisfaction than money lost brings pain- the emotional effects do not have a perfectly negative relationship. its just how it is. behaviors are reality, just like accounting identities. and many times (just as any MMTer knows), perceptions, misunderstandings, and behaviors matter more. i know its a cliche, but perception is reality. but as Buffett says, if its trite, its right.
All of what you say is true, but so what it’s always been true. Bad policy is always a risk regardless of the monetary system employed. If a significant number of people actually understood how the system worked they’d be far more understanding to the policy prescriptions when the “inflation” hits. Do voters really care if we say taxes must go up or spending must go down to avoid bankruptcy versus run away inflation? A fiat currency as described by MMT only provides us with more policy options, it does not do away with REAL limits. Politicians just have to adjust to the limits.
The tax/uncertainty argument is much weaker than you and everyone else makes it out to be, because today businesses and the investment community tolerate almost certain fluctuations in the discount rate, which impacts business decision making and valuation at least as much as changes in the tax rate. It almost certainly fluctuates more than the tax rate ever would. In an MMT-like world, not only would taxes probably be lower, but the discount rate would fluctuate a lot less.
Like seriously. Have you ever built a DCF model. Change “r” by 1%. Then change the tax rate by 1%. Which matters more?
That said, I understand tax rates impact real cash flow, which can have serious implications for debt repayment and so forth, but I think you’re only considering one side of the coin.
And one more than thing (and then I’ll shut up… for now
). You’re assuming huge fluctuations in the tax rate. Effective tax rates for corporations fluctuate as it is *today.* I don’t think this situation would change that much, especially if I stick with my above argument about a government which is still not that much different than it is today during normal times. If businesses can still make reasonable assumptions about what they can expect the average tax rate to be over a certain period of time, as they do today, then you’re in a similar world. And perhaps govts only change personal income taxes, if they must, instead of corporate tax rates. At the end of the day, the goal of economic policy is to foster a healthy economy. So if an MMT influenced world can do that, a world which I argue would not be that much different during normal times, you’re not wreaking all the havoc you are assuming. And during abnormal times, like now, an MMT-influenced world could arguably bring the economy back to speed much faster, with businesses in the end being much healthier.
Also, you’re forgetting about automatic stabilizers, which would do most of the job without huge tax changes.
I suppose he would not be in favour of the destruction of private credit money that has been malinvested.
Goverment money increases without default on bad bets is inflationary.
The simple reality is that the shadow bank sector is now all powerful and they intend to destroy your currency to remain on top – in Europe their strategic goal is to make people lose confidence in their goverment paper in favour of private money while peserving the value of the currency but their goal is the same – ultimate power without the slightest hint of executive sanction.
That DOLLAR is the major world reserve currency allow we print as many as money we like.
However I am afraid that DOLLAR will lose this privileges sooner than we thought.
China wants to use its currency-RMB as the currency of settlement in its international trade since last year. In 2011 Q1 already 7% of its international trade settlement currency is RMB while only 0.5% in 2010 Q1.
About a month ago, in BRICS(Brazil, Russia, India, China, S. Africa) meeting, they plan to use thier currency instead of DOLLAR as the currency of settlement
between their trading.
“That DOLLAR is the major world reserve currency allow we print as many as money we like.”
That is false. We can create as much as we want (hopefully prudently) because we are sovereign in our currency and it is free floating. Being the reserve currency has nothing to do with that.
Our reserve currency status allows us to create more money without as impacting our foreign exchange rate as much because their is an elevated demand for dollars because of the reserve currency status. That doesn’t mean it benefits all Americans. Yes we can buy imports more cheaply, but it also cost us in jobs. Our massive trade imbalance is in part do to the fact we are the reserve currency. If we lost the reserve currency status we’d likely see a bout of import inflation, but we would also see the trade deficit fall and higher levels of domestic production.
Here’s a thought experiment: what if the Fed had forced the TBTFs and homeowners to take their losses on the monetary side, and on the fiscal side the government had suspended all payroll taxes and cut income taxes until the emergency had subsided? What if the government had allowed the asset and housing markets to clear in a year or two of extreme pain for Wall Street and overleveraged homeowners but on the fiscal side had flooded Main Street with liquidity so as to keep the real economy going? Would we be better off today with what looks to me like a hybrid Austrian-MMT solution where Wall Street delevers and asset markets suffer badly while Main Street and the real economy receive most of the liquidity? As a matter of equity, it seems a lot more appealing than keeping the banksters fat and sassy and in control of the economy, which is what the Fed has accomplished with its $2+ trillion balance sheet.
I’m pretty much with you. Put main st to full capacity via (big) tax cuts, states don’t have to cut spending/raise taxes since their budgets don’t collapse either, those that can afford their debt service in normal times keep their houses, banks that have made loans that pay off in normal times remain solvent, and then say to the others, “sorry if you can’t make it in a full employment economy, but . . . .” This also assumes that the Fed temporarily stabilizes markets via credit easing (which was just the Fed stepping in to be a market maker in money markets when the latter wouldn’t do it–though perhaps no central bank currency swaps), but no QE1, QE2 (unless done explicitly to lower rates–setting a price, not a qty), no TARP, etc. Fed’s balance sheet shrinks back to normal size as money markets return to normal function mid-to-late 2009 (not that the size of the Fed’s balance sheet matters, though). Shut down/sell insolvent FIs and go after fraud as in the S/L aftermath.
Forgot this one . . . given the big tax cuts, no Obama stimulus (cash for clunkers, etc.). More tax cuts or per capita block grants to states as needed.
The use of the Zimbabwean dollar as an official currency was effectively abandoned on 12 April 2009.
Zimbabwean can not print too much money, can they?
Of course we are not Zimbabwean, but one thing is the same, that is even American can not print UNLIMIT DOLLAR(to me, hyperinflation equal to default), i.e. we can not print as much DOLLAR as we want though I know very well that we are far far away to reach that point right now.
I can’t image how much inflation will go up if DOLLAR lose the major reserve currency even though in today’s cost structure import cost only about 1/3 of its total cost. Why? Because we can use a few cents(DOLLAT’s printing cost) to import one hundred dollar goods/service. Just gas alone, how much per gallon it will be?
Look at how much wealth were given America for free from Japan just becuase of their currency appreiate against DOLLAR. To me that kind of free-given wealth(i.e. currency tax)is one reason to support today’s living standard.
That makes me wonder that a major reserve currency keep on depreciate(against other currency)remain to be a major reserve currency is SUSTAINABLE ?
We are a consum-driven economy today. Before we reduce import and finally increase jobs, most likely we will lose more jobs first.
I certainly know today we are still the leader in every aspects(military/economy/technology…) and lead far ahead.
All I like to say is that the trend is changing and may be in a faster pace than we thought. No one, yes, no one can see today’s BRICS 30 years ago. The same reason no one can see 30 years later what will they become.
30 years to American is too long but to America is too short.
Maybe he is on this website right now!
I have never posted here before but have been reading and trying to wrap my head around MMT. Some things are so simple yet so different from what passes for general economic knowledge that it almost seems crazy. Like the identity which says the private sector savings has to equal the federal deficit, with a correction for the trade deficit.
I could ask many questions of the more knowledgeable people here but to start:
Since the US is a currency issuer we can’t go bankrupt but can get high inflation. Is deflation possible?
Allen,
Inflation/deflation is THE bogey. Have you read my treatise?
Thanks for the reply Cullen. I think I have read the one about hyperinflation. Does it address deflation also? Maybe I missed that. It seems that mnany people who may never have heard of MMT and are afraid of the use of the “printing press” may not understand how the system works but they are afraid of the right thing, inflation. It may not be occurring now but it could. But deflation? Am I correct that in our system we should be able to avoid deflation but if policy makers don’t understand MMT, they will cut the budget too much, resulting in deflation?
“Am I correct that in our system we should be able to avoid deflation but if policy makers don’t understand MMT, they will cut the budget too much, resulting in deflation?”
Long and the short of it, that is basically correct.
GDP = Private Consumption + Government Spending + Investment + Net Exports. Too much of anyone of those components can be a source of inflation. Typically people get into hysterics over Government Spending but it is not the only source. Yes, net government spending (deficit spending) increases total outstanding financial assets (money) but most of the hysterics about this and government spending comes from the faulse beliefs that increasing bank reserves leads to increased lending and increased money supply and increased inflation. When and if government spending causes inflation it is because it is creating too much aggregate demand for the economy and NOT because it is causing too much bank lending via increased bank reserves. Banks are not reserve constrained in their lending.
When businesses determine that demand for their goods and services declines they typically respond with lower prices, reduced production, reduced wages and or reduced employment. If sufficient amounts of this occur overall general prices begin to fall and you have deflation. This can become a self reinforcing phenominia, particularly because debts are nominally denominated so as your income falls the portion going to debt servicing goes up and overall consumption then must fall faster than your income.
There is nothing about a fiat currency that technically prevents deflation, though if you subscibe to the Austrian School its a bit more difficuly to get there because they are only concerned with the actually supply of money in their definition of inflation/deflation and not the nominal price level paid.
Warren Buffet is talking his book. Period.
He, along with other beneficiaries of the bailouts and fed/treasury policy, needs government to spend to affirm the prices paid so that they can retain property rights to assets real and financial that they cannot afford (thanks FASB). Privileged rights to property, asymmetrical information (lemons), Gresham dynamics are the issues facing Americans. MMT proponents (ex Fullwiler) too enthusiastic to have government affirm prices paid by insolvent financial sector. I know that around here it’s all about AD but the real issue is that of unequal property rights and of unequal treatment under law of the different classes of Americans. Cullen, your counterfactual in the comments is beneath you. If I had drank more milk I would have certainly been the next Michael Jordan, probably better. What JWG said is spot on.
Hernando de Soto is worth a read.
http://www.businessweek.com/print/magazine/content/11_19/b4227060634112.htm
Great site Mr Roche. Cheers.
Moon,
I was not in favor of the bank bailouts…I almost entirely agree with everything JWG said….
http://online.wsj.com/article/SB10001424052748703922804576302172890761508.html
China, Japan, Korea to Study Local-Currency Trade Settlement MAY 4, 2011
4 May 2011 … HSBC predicts that by 2015, about half of China’s foreign trade wil l be settled in RMB, which may top two trillion US dollars.
http://www.istockanalyst.com/business/news/5117127/rmb-likely-to-become-one-of-world-s-three-major-trade-settlement-currencies-hsb
Not to burst your bubble, but you dont have to be a chartalist (MMTer) to accept the premise of what he is saying.
The problem is the consequences of raising the debt ceiling is to continue with the same monetary system, and that is the reason why it will be raised.