This is what happens when we elect people into office who have no understanding of our monetary system.  They make decisions based on misconception and enact policy that directly hurts the American public.  In this case, we have Republicans now discussing the possibility of raising taxes in order to avoid our Greek moment.  Bloomberg reports:

For Senator John Cornyn, it was the situation in Greece.

The Texas Republican said he is willing to back tax increases as part of a major deficit-reduction deal because he fears the European debt crisis could spread to the U.S.

“We’ve never been in this spot before,” said Cornyn, who also leads his party’s effort to elect more Republicans to the Senate. “We’re looking over at Europe and what’s happening in Greece and Italy — we risk having another huge financial crisis in this country, and we’ve got to try to solve the problem.”

So let’s break this down.   There has been no sign of a debt crisis in U.S. government bond markets (never mind the operational realities at work there).  We now know that the debt ceiling is an entirely self imposed constraint that can be lifted at any moment without bond market seizures.  And anyone following the debt crisis in Europe should now understand that the defining characteristic that differentiates the EMU nations from sovereign currency issuers is their ability to create money at will.   In other words, being a currency ISSUER makes you entirely different from being a currency USER (EMU nations are all currency users while the UK, Japan, USA, etc are all currency issuers).  Did it ever dawn on anyone in Congress that a nation with a printing press can never “run out” of the dollars it has an endless supply of?   Granted, we could suffer a different type of insolvency through inflation, but that’s an entirely different phenomenon than what is ravaging the revenue constrained countries in Europe.

But because our leaders can’t understand these very basic operational realities of our monetary system you are going to have to hand over more money from your paychecks so that a nation with an endless supply of dollars can pretend to “finance” itself and avoid a debt crisis that will never happen, by taxing you more during the middle of a recession.


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

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

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  • Neil Wilson

    Except if you put yourself in their belief system you’ll understand why they think like they do.

    To a Rep Senator (and frankly most Democrats) the government *is* a currency user. It is the Federal Reserve that is the Currency Issuer that must act only via the private banks or Bad Things Will Happen

    So they believe fervently that the government, as a currency user, must get its money from the private system and then spend it. Because they believe the US government should be like the Greek government, it becomes like that.

    That simple belief explains the current structures and the current inability to see that the Federal Reserve Emperor has no clothes.

  • beowulf

    I guess they think what’s missing is a 21st century version of Smoot-Hawley.

  • Cullen Roche

    Which is equally odd considering they view this entity as a “private bank” even though it exists via an act of Congress. Hmmmm.

  • Wilma

    It’s about time. We know the sole purpose of the Super Committee is to slash the deficit. That’s not going to change. I’d rather see them tax the filthy rich than slash spending that impacts the poor, the working class, and seniors. Remember, those latter groups are ALSO in the same recession. And they are feeling it a helluva lot more.

  • Pete

    What do the private debts, such as mortgage debt, student loan debt, credit card debt fit into the MMT system? Is Ray Dalio wrong about the private debt too high and we are deleveraging, and it takes 10 years to get through deleveraging? I watched Munk debate video last night, and it seems to me that debt doesn’t matter, at least to the academic economists like Krugman and Summer. But David Rosenberg kept talking about the debt, and we will be Japan. So what is debt to you, especially private debt? does it matter?

  • Fred

    I agree with Wilma.

  • BamBam

  • Robert Rice

    If you believe the boogie man is in the closet waiting to get you, you probably won’t come out from under the bed covers. Stupid beliefs result in stupid actions.

  • Bond Vigilante/Willy2

    Raising taxes doesn’t help any ecomomy. E.g. since the 1950s the US government never took in taxrevenues more than about 20 to 21% of GDP in any given year. Higher taxes only squeeze the economy even more.

    What the US needs is a MAJOR taxreform. Get rid of all taxexemptions and then rates can be go lower and the taxburden on labour can be lowered.

  • plain jane

    Funny they can look at Greece and Italy and conclude that cutting spending/raising taxes will result in anything other than more unemployment. Brilliant.

    Though… I have to say, it’s hard to imagine Congress actually cutting anything substantial without being absolutely forced into it. Those guys are good at wiggling out of things, bless their hearts.

    A few sacrificial lambs, lots of posturing, and hopefully that’ll be the worst of it.

  • tradeking13

    It’s not just politicians. The folks at Global Macro Monitor seem to think we could have a sovereign fiscal crisis using the Russian Debt Crisis in 1998 as their proof.

  • F. Beard

    The tragedy is that wasteful government spending is better than NO government spending since deficit spending is the only source of new money into the economy (Except maybe a trade surplus in which case the central bank sells our money to foreigners so they can buy our goods?). Hence the confusion about government spending; some see the waste, others see the new money.

    What we need is a way for government to freely spend but with little waste. A citizens’ dividend is one way since the middlemen (government bureaucrats) are eliminated. Another way is to eliminate the stealth inflation tax so that only government and its payees suffers if government spends wastefully.

  • geerussell

    Just anecdotally, when trying to explain MMT to a conservative, I run into exactly that brick wall. People smart enough to know better will look you in the eye and say “the Fed is fully private and can print money independently of the government” and that’s that.

    Once a person has dug themselves into that trench they are impervious to facts.

  • Jason

    Libs want higher taxes not to shrink the deficit but to create “fairness”.

  • Cullen Roche

    My whole balance sheet recession theory is based on private debts. Have you not read any of that? If not, let me know. I can link to a few pieces. It’s VERY important to differentiate between pvt and public debts.

  • Greg

    Great post as usual Cullen. I’ve been reading your site as well as others to try and better understand MMT. I am very satisfied to have finally found a framework in MMT that allows me to make sense of our financial system, without any of the usual POLITICAL bias. With economics it is notoriously difficult to separate political philosophies, which are fairly useless IMHO, from purely descriptive frameworks, which I believe is what you are aiming for with this website…

    So, along this line of thinking, and given that pragcap is about the macro picture, where do you see the US economy going 10, 20, 30+ years down the line? Would be interested in your and others’ feedback. Going with MMT, here are my predictions along with relevant assumptions:

    Assumption 1: Congress will not radically change its spending policies
    Assumption 2: Those in control of the US dollar monopoly (whoever they are) will not relinquish their power, and will squash any serious efforts towards alternative/competing currencies.

    -Spending on entitlements(Medicare, Medicaid, social security, etc.), defense, and other non-defense discretionary spending will continue to grow much faster than inflation.
    -Taxes will continue to increase, especially at the very top of the wealth pyramid. The occupy movement, while fairly small at the moment, is specifically about wealth inequality, and I don’t see this popular sentiment going away anytime soon so political support for taxing the wealthy should increase in the future.
    -Congress will keep churning out more and new regulations; I don’t see any major legislative reform happening that suddenly makes it easier/less expensive to do business in the US.

    All of this points to slow, stagnant or even declining GDP in the future. I personally believe the CBO GDP growth estimate (2.7%-3.8%) to be too generous, but I am open to changing my opinion on this. One of the cornerstones of MMT is productivity, so if that doesn’t move much, and spending increases dramatically, this means we will almost certainly be facing greater inflation within the next decade and that unfortunately means a stagnant or even gradually decreasing standard of living. I don’t think hyperinflation is possible anytime soon, but 10-20+ years down the line? Maybe…

    I have only considered the US in isolation here, but if we have to recapitalize bank balance sheets because Greece, Italy, and others default, might high inflation become a problem sooner? I realize these are all very basic and crude predictions, but I am NOT a professional in this regard by any stretch so would be interested in what people think.

  • Erik V

    The GOPers may not understand MMT, but neither do the Dems. Don’t blame the GOP for tax hikes, they are just meeting Dem demands to try to reach some agreement on the supercommittee.

  • Cullen Roche


  • Cullen Roche


    Thanks for the compliments. I am glad you found something that finally makes sense. And yes, it’s so important to get the political biases out of economics. They pollute the waters.

    I am in the muddle through camp until the private sector debt issue takes care of itself. I have estimated that that could last for several more years and this also assumes our govt doesn’t cut spending too much in the coming years. There are enormous downside risks to this outlook with China, Europe and the USA all fairly weak right now….

    But I am a raging bull about America in the long-term. So, the recession continues for a few more years (2013/14?) and then we likely begin to experience some decent growth and our great corporations take care of the rest…..I am almost 100% positive that this is merely a bump (a pretty big one) in the road on the way to much better times.

  • chewitup

    This is a go-to site if you want to understand MMT. Some of the other sites require a little time until it settles in a bit.

    Those that control the US Dollar monopoly are in Congress. They appropriate spending. Can you envision a shift in the character of those that represent us? Lobbyists are much more convincing than constituents. The 60 Minutes piece on congressional insider trading sets the tone for that vision. They know where the earmarks are going before the public does. Tough to pass up that temptation.

    As far a GDP growth, how fast do you see the private sector deleveraging? Our largest asset class is residential real estate, which is depressed. Does your crystal ball show any debt forgiveness? And how can anyone predict how foreign governments will act in the next ten years. Any of a number of countries could become belligerent within months. I agree with Cullen, too many variables to try to predict anything other than a muddle through.

  • http://None Pete

    I read all you stuff about balance sheet recession and Koo’s Japanese experience, etc. I understand the difference between private debt vs public debt. I like How Ray Dalio described it. Dalio mentioned many times about the money printing that your theory clearly denies it. Buffett clearly stated money today is worth more than the money tomorrow, that’s how he invests all his life. I have a feeling about your theory being backward, but I am not smart enough to fully comprehend it.

  • Greg

    Chewitup and Cullen, thanx for the comments. I agree it is too difficult to predict in the long run. My concern was that it seems very likely that the US government will spend in excess of the productive capacity of the economy even after private sector debt gets resolved. This level of spending seems to point to high inflation down the line, but glad to hear that you are bullish nonetheless…

    Add in the downside risks from China and Europe as well as a possible war with Iran and spending is not going down anytime soon.

  • plain jane

    Couldn’t we just abolish payroll taxes, a la Mosler? that strikes me as being pretty straightforward idea if you could ever convince people that it wouldn’t mean putting our grandmas out in the street. (or, perhaps worse, having them move in with us. lol)

    Believe me, I’m sympathetic to complaints of fraud/waste/abuse in government spending… seen enough of that to turn anyone into the goldbuggiest hard-right libertarian around, except I could just never gin up the guts to throw poor families to the tender mercies of the Invisible Hand. :) stupid bleeding heart.

  • beethoven

    this is where I have to disagree with you, Cullen. I am totally on board with a “muddle through” scenario for the next couple years, but I don’t like the long term prospects of the US. Growth requires energy, and that is something that is quickly becoming short supply. Global oil production has essentially peaked, US coal production has peaked, nuclear power doesn’t have political traction, and EcoEnergy can’t currently provide the needed supply. Add into the mix that the plant WILL (not maybe) add around 3-4 Billion people in the next 40 years, and we’re talking about really difficult situations. I have yet to hear anyone offer any compelling arguments on how the mega problems of over population and resource depletion can still yield an environment of pro-growth (barring some black swan event, like fusion or high efficiency solar).

  • tax

    “Higher taxes only squeeze the economy even more”

    I agree with you (in particular the need for tax reform), but if its true that taxes never exceed 20% to 21% of GDP, the it doesn’t really matter if tax rates are cut or doubled, since any which way tax revenue won’t exceed 21% of GDP.

  • F. Beard

    Couldn’t we just abolish payroll taxes, a la Mosler? plain jane

    The payroll tax should be eliminated since it is highly regressive. Just having worked in the US a sufficient amount should qualify one for retirement benefits.

    except I could just never gin up the guts to throw poor families to the tender mercies of the Invisible Hand. :) stupid bleeding heart. plain jane

    If we had an honest money system, we would have vastly less need for social welfare programs. But since we don’t then large social welfare expenses are the price we pay for doing (crooked) business.

  • Anonymous

    who cares if some of those “filthy rich” are inventors who saved their bartending tips and eventually started a business.

    SCREW THEM, lets save the people on welfare!

    I dramatize, but America is getting pretty far from its capitalist roots… penalize anybody who made it and throw grand, elaborate parties for everybody who refuses to get a job. I dramatize again, but…

    one of the real headwinds in this country, alongside financialization and whatever, is the demonizing of entrepreneurs, … at least if they are successful.

    You may reply that “well I don’t mean entrepreneur inventors, I mean those evil richies”, but in practice no such discrepancy is ever made. Rob job creators and inventors of their social motivation to do anything (if it becomes “cooler” to be a loser sitting on welfare, why would anybody go to all the pain and misery of trying to accomplish something?) and it won’t help anybody. Including seniors and the poor.

  • hangemhi

    “blame the GOP for tax hikes”??? I’m hard left and can’t imagine a scenario where i’d blame the GOP for tax hikes. What I blame them for is dumbing down already dumb conversations. Can you imagine a Dem taking up the MMT cause? The backlash he/she would get? And if someone in the GOP latched onto MMT – they’d be forced to pull a Romney flipping back to idealogy rather than the truth.

    Can we find an MMT candidate please? Maybe start a new independent party where all candidates refrain from commenting on their religious beliefs?

  • Barbra

    You realize entrepreneurs can’t succeed without consumers to buy whatever goods and services they produce, yes? And that includes the tens of millions of people you say refuse to get a job. Are you one of those that believe capitalism is so efficient that all these unemployed people voluntarily took an extended vacation at the same time? It’s not The Great Recession, it’s The Great Vacation. We all having fun yet?

    You want drama, you came to the right place:

  • Anonymous

    only by choice.

  • Jonathan Krajack


    Turns out your best bet is a self-identified socialist (don’t be scared)…

  • Anonymous

    Gailbraith, Black, Wray, Kelton…

    Imagine if we could get hours of video and audio footage of the MMT’ers going head to head with the rest of Bernie Sanders’ committee.

  • Hillbilly

    Beethoven, the economists will simply say that a tent and a solar panel is a very high standard of living compared to the rest of the world. The Global Commune is not where the economists will live…they will have fenced off the rest of the filthy excuse of a planet from themselves. Its kind of like one of those sickening chicken barns in Food Inc where the birds literally crap on each other. That is YOUR world. THEIR world is Brussels, VAncouver, some island in the tropics where Mosler lives.


    and yet you come here asking engineering questions? What a joke.

  • Anonymous

    of course i do, do you realize that consumers can’t consume without entrepreneurs to create jobs for them?

  • Anonymous

    Cullen, are tax cuts the same thing as government spending as far as mmt is concerned? Thanks

  • Anonymous

    but therein lies the point. singling out successful people and demonizing them is pointless, because the average joe, without those who take the time and pain to invent, is a hunter/gatherer (take it to an extreme and tahts true).

    I could come back to this if you like, but if the world never had welfare handed out to everybody without a job in the US, would it still exist, with people? Would those people still live and perhaps even thrive?

    What about without >insert every inventory/pioneer ever here<

    Leave them their money, as little as its worth (and I mean that in a social sense, not in an inflation sense), they get very little else these days. They do deserve much, much more than society gives them.

  • Cullen Roche

    Different in terms of their impact on the pvt sector, but identical in terms of their impact on the deficit. It’s more a matter of whether you like govt to allocate funding or not….

  • Barbra

    Exactly. You are tired of entrepreneurs being demonized, and I’m equally as weary of the unemployed/underemployed being demonized to no fault of their own. Neither can exist without the other. That’s my point. What’s yours?

  • Anonymous

    So says the guy living at the California beach thinking about where he’s going to take his boat next weekend. I don’t know if any of you MMT guys are in touch with reality. You might have a good understanding of the monetary system which has helped you make heaps of money, but that doesn’t mean you have any idea what it’s like out in the real world.

  • Pierce Inverarity

    Character attacks have no place here. Especially if you go by “Anonymous”. Nut up if you’re going to sling mud and give us a moniker.

    Besides, MMT is describes, and explains, the operational monetary *reality* of the U.S., the U.K., etc., better and more accurately than any other economic “theory” out there. Most economists are so detached from reality because their frameworks have no *basis* in reality. You may think it’s all intellectual masturbation, but economic theories and thinkers influence those politicians who determine legislation and enforcement policies that have material global impact. Getting it right is of paramount importance, regardless of your socioeconomic standing.

  • Cullen Roche

    I don’t see how that qualifies me as automatically being out of touch…..

  • Colin S.

    Those four of nineteen “economists to advise Sanders on Fed reform” legislation, including some august company – not bad. The word is getting out.

  • de nada

    Anonymous coward, Your little speech is full of dramatic self-delusion. Let me clue you in on something: entrepreneurs are everywhere – in the lower classes, in the working classes, not just among the wealthy. People everywhere start and run businesses. And people aren’t refusing to get jobs – that is such a damned lie! You should be ashamed. They’ve had their financial lives yanked out from under them by some of these self-styled entrepreneurs you would have us venerate – those innovative bankers who gambled and cheated with the financial system so they could pay themselves huge bonuses. And others too numerous to mention at this point.

    Nobody is demonizing genuine entrepreneurs in the upper classes – look at Steve Jobs for example, and Warren Buffet. Note that many responsible wealthy people advocate for raising taxes on the wealthy, taxes which are at multi-decade lows. Lets start by ending the tax breaks that destroyed the balanced budget and federal surplus we had just 10 short years ago.

    We are not far at all from our capitalist roots. What we have here is a recurring episode in the history of capitalism: temporary rule by a reckless tribe of ultra greedy narcissists who think they are special. These people need to be brought back to earth and reeducated, if you will. I like the sound of that.

  • pebird

    $250 billion in tax increases is nothing compared to the $1,250 billion in spending cuts (remember it is supposed to add up to $1.5 trillion “savings” in total). The Republicans aren’t stupid, they asked for 1.5 and are willing to settle for 1.25. So, we are going to see these super committee constraints put on Congress to avoid debate and just cut, baby. Austerity American Style.

  • Ted

    You joke, but one can see the early stages of this type of thinking with the all of the anti-China and job creation talk.

    We can’t have every single country relying on austerity and increased exports at the same time to get out of this mess – you’d have to be an economic moron to believe such a plan could work… or a leader in Europe.

  • JWG

    In the kleptocracy that the federal government has become, taxes are an instrument of power. Penalizing or rewarding designated constituencies and extracting tribute through the puzzle palace of the Internal Revenue Code and associated regulations are the true goals. The tens of thousands of pages of mind boggling nonsense foisted upon us by a parasitic federal politburo are an offense to constitutional government. No one at the very top really believes that taxes fund the federal government or that payroll taxes fund Social Security. These operators are smarter than you believe.

    An honest government would repeal the payroll tax so as to stop penalizing work and employment, broaden the income tax base dramatically, simplify the Code to a few hundred pages and adjust income tax rates so that everyone paid something but that the richest continued to pay the most as they do now. It would send thousands of lobbyists and rent-seeking camp followers home from Washington, save billions in administrative and bureaucratic costs, and help restore American competitiveness. It is such an obvious solution to our current doldrums that only corruption and inertia explain why it doesn’t happen.

  • Dennis

    Uncle Sam seems to be helping a lot already. Any futher suggestions?

  • Greg

    I am confused about the bank bailouts; did the $16 trillion that the Fed dole out to the major banks find its way into the money supply? What is the effect, if any, of all this money on inflation?

  • Joe

    Hi Cullen:

    I enjoy your website very much and find myself becoming an MMT disciple.

    Question: I’m excerpting the following from Barry Rithotz’s blog, the big picture. Is any of the following factual, and how does MMT explain any of it?

    “If a sovereign crisis is the result of an intransigent central bank that refuses to print money to refinance maturing bonds that the government can’t afford or is unwilling to pay, why in the world did the Russian government default on its local treasury securities in 1998?”

    “Remember that crisis? It eventually led to the collapse of Long Term Capital Management and what President Clinton called the greatest economic crisis since the Great Depression. He was only about ten years early.”

    “Why didn’t the Russian government simply monetize the existing treasury securities, known as GKOs? Couldn’t they hold rates down to say 10 percent instead of letting them soar to 200 percent?

    “We’ll also never forget being in the Bulgarian central bank in 1996 just before some very large maturities of treasury bills were coming due. The market had lost confidence in the government and a high ranking central bank official looked us straight in the eye and said “we will not let the government default.”

    “We knew instantly a massive amount of liquidity was about to hit the local markets, the demand for the currency was going to collapse, and the country was headed for hyperinflation. Rioting broke out, the government fell, and the country eventually implemented a currency board, not too dissimilar from that of the Euro, in order to enforce fiscal discipline upon the government.”

    Thanks in advance for your response,


  • Cullen Roche

    You’re in luck Joe. I just published this.

    In short, Russia was never really sovereign in its own currency. Basically the same thing we’re seeing in Europe. Hope it helps.

  • Dennis

    Clearly we seem to be in a deflationary environment losing lots and lots of public employees here in California and around the globe, even in the face of a Fed created currency dilution of the world’s reserve currency–if that’s what it is. Cullen, how do I figure this out???

  • CFS


    I read Dennis posting and it did confuse me a little bit. The best way is always going to the source, in this case the GAO document, available at:

    You can see specifics in the appendixes.

    The $16T number I am afraid is overblown, it is actually the addition of all the loans and MBS purchases by the Fed starting in early 2008 and until late 2010. $16T were never loaned all at once, and most of it was actually returned with some kind of interest. The Fed lost money most probably on MBS (mortgate backed securities) purchases and on AIG – which is something that we already knew.

    So, when you actually read the source you realize that the Fed acted as it is supposed: lender of last resort with infinite liquidity. In most cases, the Fed provided loans with a maturity of 28 days and they have been mostly repaid.

    In any case, what it is clear is that the banking industry reaped significant commissions for helping the Fed manage its loans, but that is to be expected in an operation of this size.

    So all in all, the answer to your question is no, these $16T will not make it to the economy, they were created by the Fed from thin air in exchange of collateral and most of them are back to where they came from: non-existence.

  • Macro

    Anonymous, this is nonsense. Screw the rich?
    Top level tax rates are at historical lows, income inequality is huge. The rich have been getting richers for decades, while the poor have barely moved forward.

    You are being overly dramatic, top income earners have had a great ride for the past 30 yrs, while the poor have seen none of it. It would be an ugly and incredibly unfair sight to see the deficit reductions hit the poor rather than the wealthy.

    Additionally, we know that for every dollar we raise in taxes or cut in welfare for the poor has a much larger negative impact on growth that every dollar made off the rich.

    If we’re going to cut the deficit (bad idea in the first place), it’s smarter and fairer to do it off the rich. After all, deficit’s soared over the past decade, and the poor didnt see a nickel of it.

  • Bond Vigilante/Willy2

    There shouldn’t be a tax reform at the federal level only but also a more equal taxregime among the different states as well. E.g. Florida has no state income tax. So, when Tiger Woods started to make serious money he moved to Florida. IMO- every state should have the same income taxrates (e.g. 0%, 2%, or …%). Some states have ridiculous high taxrates (e.g. the people’s republic of California ??).

    Perhaps I wasn’t clear enough. Yes, the government can increase taxation but when it tries to squeeze more than about 20% of GDP out of the economy in taxrevenues then it will fail to do so. Because – AFAIK – 20%/21% of GDP seems to be the ceiling. Of course the govt could lower rates but then the govt would have to make (EXTREMELY) unpopular choices. And when I am talking about govt then it would include municipalities as well. They do tax as well.

    Do combine this with what one Steve Keen has said: GDP = total income + change in debt. Apply that to the US with it’s rising unemployment and a consumer who’s deleveraging. Ouch, not a pleasant outlook for the FED or any other government around the world.

  • JWG

    “We knew instantly a massive amount of liquidity was about to hit the local markets…” It sounds like once the central bank purchased all of the sovereign debt that no one else wanted due to a loss in confidence in the government an a buyer’s strike, the keystroke money created and exchanged for bonds was not “rolled over”; i.e., reinvested. Instead, it hit the streets of the real economy and blew up the currency. Let’s all think about that one in the “loss of confidence” and “madness of crowds” context.

  • Andrea Malagoli

    Cullen, let me add one more bullet to the myth. The reality is that “honest” taxpayers in Italy are taxed at some ridiculous rates. A small business in Italy ends paying over 55% of it’s earnings in direct and indirect taxes. Despite the widespread evasion, the Italian government collects lots of taxes. However, it never has enough.

    The real problem with Italy and Greece is widespread fraud and collusion, plus punishing labor laws that guarantee too much to the employed at the expenses of the unemployed. The list goes on.

    So, the moral of the story is that Congress should be focused on eliminating corruption and crony capitalism, not changing the tax code. This on top of your well made points …

  • Greg

    Thanks for that reply CFS. Makes a lot of sense. Still, they did end up creating a serious moral hazard through the bailout, and I’m sure it will happen again soon.

  • Steve in CT

    The only choices are between higher taxes and ruinous (I believe) austerity. Your favored choice, recognizing that the debt ceiling is make believe, is beyond the understanding of Congress and Fox News. I think it has been clearly demonstrated in the past that we can have higher tax rates than now prevail without creating economic headwinds so fierce that they choke off growth. The calming effect on markets of containing the deficit without drastic dislocations for seniors or the military would be a net positive, I believe. Raising taxes is a sensible choice, not because it is ideal but because it is better than the other alternative on the table.

  • Colin S.

    Add a VAT type tax to tip the trade balance more toward exports, and as a trade-off for abolishing payroll taxes and for basic universal health coverage to control costs and get that monkey off the back of American businesses.

    However, what Andrea calls for below is also needed – and both will require a change in the values that have prevailed in our society (and have spread abroad) during the last few decades. In this respect, the OWS folks are on to something.

  • Alberto

    Sometines is better to clearly write again and again that the banks love this system and why… I mean the absurd idea that the Federal Reserve is the Currency Issuer that must act ONLY via the private banks. We are not in a free market but under a bank owned money monolopy that doesn’t have any reason to exists. All the prblems are there. ALL of them.

  • Ted

    There’s a more subtle point here, Anonymous, that I think you neglect (as do many others) that it’s not really “demonizing the rich” and promotion of “welfare for people who do nothing” that many are pushing. Rather, it’s acknowledging the fact that society has become more unequal as we have been promoting policies of tax cuts, deregulation, union busting, exploding CEO pay, and so on since the 80’s. There have some benefits to this in good times, but taken as a whole they have made the purchasing power of the middle and lower classes weaker than it might otherwise be. We can ignore this at our peril, or take some steps to address it and ensure that our country continues to be a meritocracy and not an aristocracy.

    Also, I don’t think anyone is demonizing entrepreneurs, but rather pointing out there are people who earn high salaries w/o contributing as much to society (lobbyists, financial traders, athletes, etc.) who should be able to pay the tax rates that they did in the 90’s, so that we don’t have to obliterate the social insurance programs that have benefited the middle and lower class for several generations.

  • Geoff

    It is the US govt that has the money monopoly.

  • Ted

    Actually I think there is a lot to look forward to: nanotech, biotech, genetics, robotics, 3D printing, electric cars, and the fact that we are currently in a mobile internet boom that we probably can’t fully grasp yet. Throw in demographics that are better than most of the Western world and I’d say that it’s going to be a good time to be an American once we exit this balance sheet recession.

    On the energy front, there is a lot to be gained from increased efficiency in our country, which is by far the cheapest form of energy. Also, solar is expected to reach grid parity later this decade (2015-2020 from what I gather). As usual, we’ll find ways around our roadblocks.

  • Delta Financials

    Just to be clear, is your position that the US should run 8-12% of GDP fiscal deficits into the future? I’d also love to read an article by you on the causes of inflation and currency sustainability, in general. It often sounds to me like there is a basic denial of the money multiplier in MMT circles to a point where MMT loses the plot on how the macroeconomic world operates. You also need to explain high deficit, high inflation, monopoly issuer of currency nations such as India (at present).

    A generally deflationary environment where we’re still recovering from a negative wealth effect of 39 trillion dollars in equities alone (globally) during the crisis – presents a benign environment and an opportunity for expansionary policy. Deflationary threats emanating from Europe may allow such policy to survive a little longer – but a necessary component of the healing process is for deficits to be reduced significantly. You can run in a deflationary stall speed forever, but there’s no logical path to growth and deficits while avoiding inflation….

  • Cullen Roche

    I would only add that the end of oil dependence (I hope it occurs in my lifetime) has the potential to be the greatest bull market event in the history of man…..

  • Anonymous

    CFS & Greg, Thanks for looking into this! So these were just Fed loans that added up to $16T. (I did look at the underlying Fed report and it showed that the loans for the most part were paid back, so that web site’s data was overblown.)

    It seems to me that at least some of this “money” when into the economy temporarily then back out again as these debt $ were paid back. Could that pay-back process that took place over the next years (2009-2010) take us into the world wide downturn we are now in?

  • F. Beard

    That would almost certainly cause runaway inflation. CR

    Why? According to P = MY/Y prices should only rise 10% per year minus productivity increases.

  • F. Beard

    Correction: Make that P = MV/Y.

  • Gerald P

    It is very common in America to have a ‘good’ job that pays $10 or $11 an hour. A household of 3 or 4 managing to live at that level requires careful attention to the pennies. A few will try to be entrepeneurs, but cannot get capital. Ignoring the lifestyle of so many people results in ignorance of the climate we all live in.

  • Pierce Inverarity

    I don’t understand who is being accused of ignoring or understanding any of this?

  • Jtearre

    The thing that I continue to fail to understand is whether or not there is any possibility of a crisis or economic problem related to our current debt and unfunded liabilities – regardless of whether the Fed can create money. It seems that a funding crisis is not the issue. But where is the talk of other potential problems (let’s start with where and how inflation COULD actually be a problem for example)? Cullen, you clearly have a great understanding of MMT but it just seems like you spend so much time lamenting the fact that others misunderstand our monetary system that you are neglecting to broach other issues. Maybe I am wrong and it is not fathomable that we could ever as a country run into an economic crisis due to current and increasing debt levels – in any way, shape or form. Maybe. Maybe not? Anyone care to share ideas on this?

  • Jtearre

    (And I mean public debt levels, not private).

  • Texan

    Since someone mentioned US private debt in a post on this thread, I’ll ask this question even though it’s off-topic….

    I think too much private debt is the number one headwind the US faces, and I am trying to figure out at what level debt will cease to be a hinderance and how long it will take to get there. How do these two pieces of info relate and which one is more important in determining at what point the consumer will open up their wallet?

    -Household DSR (debt service ratio) has fallen fairly rapidly back to levels seen in the 80’s and 90’s. Which tells me the consumer has more income to spend.

    -Debt/disposable income is still very high in the 120’s (in 1997 it was 90) and is falling slowly which tells me that the consumer has quite a bit of deleveraging to go.

  • Roger Ingalls

    If Cullen won’t run for office, maybe Colin S Toe will!

    Yes, precisely the recipe needed. Ad to that, take the health care costs out of the private sector employers (currently making our exports less competitive),then run a dual system (govt basic care for all, a private cost overlay for those that want or can afford).

    I know Krugman often takes it on the chin here, but his piece on the VA health system was worth reading.

  • Trixie

    Colin S. Toe lives in a tree house. And he won’t come down. No really, it’s true.

  • silverhorder

    The rich are the owners of the trillions of dollars of toxic derivitives. Bailing them out was the biggest welfare program in history. Without the bail out (which actually wasn’t enough to really bail them out if everything was marked to market) they would be poorer than most welfare recipients are, as the average participant in that game would have negative net worth today.

    What the fools that always blast taxing the rich don’t want to acknowledge is that the pittance that is spent on feeding the poor so they don’t rob and kill the rich is nothing compared to the money that the rich steal from us all. Imagine a world where a fisherman charges a doctor a $100 a pound for pink salmon because he can. It’s a big monopoly game where some are rewarded for their labor while others are cheated. Is a CEO entitled to 1000 times what his workers are paid?

    The fool that incessantly believes that the poor don’t deserve help ignores what fortunes were earned by the military industrial complex during the war with Iraq at a cost to tax payers that would have paid for the health care of the entire nation for a very long time. This is what occupy wall street is all about.

    Anyone that is paying attention understands that we are broke as a nation and all can expect to suffer in the very near future. Deep cuts and higher taxes are unavoidable. The smart rich man will push for higher taxes on himself. The fool will suffer the anger of the hungry.

    Why is it such a crime to have progressive taxes as in the Kennedy era? If my memory serves me right, the really rich had to pay 80% in those days. Taxes similar to those levels are what are needed today. On the other side of the coin, well fare recipients shouldn’t be alloed to buy junk food and king crab with their food stamps.

    I’m in the one percent but I haven’t forgotten my roots, neither should you.

  • silverhorder

    I mean allowed not alloed….sorry

  • First

    Where do you think those taxes are going equalizer?

    Tax come in money and money is issued in favor of who exactly?
    You are exactly where they want you to be.

    Follow Government spending and you will find all “your phony bubble wealth billionaires” Military, health care industrial complex, Investment Banking, Dysfunctional Energy, farming subsidies. If you think raising tax will affect them you are naive. (No disrespect)

    The richest liberal tax increase proposers live from Trust Funds and pay very low rates and will not be affected at all. The more Government spends the more contracts for them.

    This has nothing to do with free markets. Its crony capitalist.

  • First

    “What we need is a way for government to freely spend but with little waste.”
    That is not realistic Beard . Never happened never will. Its human nature but “A citizens’ dividend is one way since the middlemen (government bureaucrats) are eliminated. That make much more sense especially when creative destruction reaches unbelievable level it makes it very difficult to recycle so many workers.
    Good idea MR Bear.

  • First

    “80% as in the Kennedy era?”

    A) This was on the marginal rate and take a good look at where that amount was and would be in to days money.

    B) If you think that families such as the Kennedy paid 80% tax you need to investigate this a lot more.

    The Kennedy did not get so rich by paying any thing close to 80%.
    As mentioned above:

    Tax do come in and money is issued but in favor of who exactly?
    You are exactly where they want you to be.

    Follow Government spending and you will find all “your corrupt and phony bubble wealth billionaires” Military, health care industrial complex, Investment Banking, Dysfunctional Energy, Farming subsidies. If you think raising tax will affect them you are naive. (No disrespect)

    The richest liberal tax increase proposers live from Trust Funds and pay very low rates and will not be affected at all. The more Government spends the more contracts for them.

    This has nothing to do with free markets. Its crony capitalist. Feed the pig and it will get father.

  • First

    In Modern money the PIG does not even need that Tax income it feeds it self by issuing currency against its citizens production.

  • Lori

    There is no such thing as a capitalist system without unemployed and poor people. The market capitalist economy NEEDS them as much as it needs capital. They are part of the system, so the system must support them, otherwise it wouldn’t be a market capitalist system. The are necessary as a reserve labor force, because capitalist system is cyclical. It needs them, because they are consumers and capital needs more consumers. The social welfare programs create more consumers, e.g. higher DEMAND. What now is the American economy’s problem is that there is no enough consumers or consumption on the market, because there is no enough income in the hands of the mass consumers. Those are basic economic principles. Cheers

  • Delta Financials

    So Y is actually quantity in the P = MV/Y equation.

    In quantity theory terms, with a high fiscal deficit – M increases, V stagnates/fall, Y rises at a disproportionately low rate for the corresponding MV increase, so P actually increases. As long as you believe that the private sector is more productive than the government (particularly as the share of government rises), the impact of Y will be lower than the expansion of M in that equation in the case of a substantial increase in deficits. This will be true, while V isn’t severely constrained by a BSR/deleveraging, etc.

  • Delta Financials

    I definitely agree with the sentiment here. I use MMT to understand a fundamental difference between currency issuers and currency users. However, some of the other assertions that you often hear fall into what is a funny money paradigm.
    For instance, the assertion that the Fed can drive 10-year yields to 0. Theoretically possible, but it would mean the bond issuer becomes an almost exclusive bond buyer and so there would be no legitimate reason left for faith in currency. That would, to my mind, be hyper-inflationary.
    What is equally consequential is that the Fed expanding its balance sheet while the velocity of money increases to more normal rates would also be deeply inflationary. Expansionary policy can run at stall speed, but to run a ship at a fair clip – you need the boring stuff to work right. Savings to fund investments made by a banking sector that allocates resources under strict profitability conditions (i.e. no TBTF). Somewhere along the way in this debate, we move to an alternate universe where the government as a share of GDP moves to a cripplingly large share and you then have the Japanese paradigm without the Japanese blessing of significant current account surpluses. Fiscal spending funded in terms of flows by QE isn’t a sustainable path to sustained recovery. It’s a path to a prolonged bumpy ride, where markets work in peculiarly destructive ways. Inter-market folks will recognize what I’m talking about.
    At some level, the great difficulty is one of time horizon. People reach grand conclusions every three months, but the economy works in cycles of 4-5 years. And certain paradigms show themselves over 3 or 4 cycles.

  • Delta Financials

    Presumably, an important variable there would be future rate expectations. If rate expectations were anchored at current rates for the long-term, the de-leveraging process could end sooner. However, part of the de-leveraging process is a resistance to investments, particularly long-term investments with a high variance of returns even if the spread to risk-free returns is significant. Reversing that paradigm isn’t a purely monetary phenomenon. So, I don’t have a firm view on how far deleveraging will go, but I suspect govt/fed intervention makes the yield curve less reliable as a predictive signal of future rates.

  • Tampa Toot

    We don’t need to increase taxes we just need to collect them from everyone. The elimination of hard currency could accomplish this, all tranactions would have to go through the banking suystem allowing the government to track income on all citizens. Technology has advanced to the point where this is almost possible. The only way to dodge taxes would be through a barter system. The underground ecomomy would disappear or in the case of illegal activities also be taxed.

  • Colin S.

    Thanks Roger. Your prescription for health coverage is just what the doctor should order.

    The intelligence and good ideas appearing on this site could create a platform that would put that of any current political grouping to shame.

    I don’t quite live in a tree house (though I have friends down the road who do); but it is hard to get me out of my mountain valley.

  • Texan

    I agree future rate expectations affect the deleveraging process, but do you know how the household DSR was able to fall fairly rapidly to levels that seem to indicate it is acceptable while the debt/income ratio has barely moved and looks like it needs to fall considerably more?



  • Texan

    Sorry, DSR graph link should have been…..

  • boatman

    debt is not good that is a given all agree with.

    yes we can credit the US treasury with a keystroke(printing money is what it is, an asset swap would be a big stretch), solving our debt bubble temporarily.

    i can just see the reaction of the voting public…..”wow, we can print n give everyone a caddallac, man”

    and if you aren’t campaigning on this, you will then not get elected.

    beer is up 13% a year for 3 years….beef up more…..when anything does finally get going again(years) the increased money supply will produce a velocity that will give us bigtime inflation instead of the 9% it is now(strip out housing n thats what it is–how many houses does the average person buy?)

    constraint is intrinsically good for homo sapiens, a species who has come to rule(ruin) the planet by being the best at ‘maximizing resources’……ask the neanderthals how it worked out for them.

  • Delta Financials

    DSR is a function of interest rates, so Debt Service Payments have dropped dramatically as a result of Fed action.
    The total quantity of debt itself hasn’t fallen very much. So debt/disposable income has declined a lot less.

  • Dunce Cap Aficionado

    I’m concerned for you, I fear you lost a Toe.

  • Texan

    Aha, makes perfect sense now. Thanks!

    So DSR tells me that people have more income left over, due to extremely low interest rates, to add to debt reduction, spending, or saving. This must be why personal spending keeps inching up at the same time more debt is worked off.

    I think Cullen suggested the debt/income ratio needs to come down to 90% or below to be sustainable. Past doesn’t equal future, but at past rates of reduction it could be 3 to 4 more years for this.

  • Cullen Roche

    Yeah, the DSR reflects the fact that debt payments have become easier to make. But it doesn’t reflect the fact that aggregate pvt sector debt is still very high and unlikely to surge any time soon (unless the budget deficit craters).

  • Colin S.

    It happened when at Trixie’g urging I registered in the forum. (It wouldn’t accept the comma – South Toe is where I live; S. is my actual initial.)

    In sddition to being informed, I get a kick out of your banter with her and others.

  • partha shakkottai

    The facts do not agree with “debt is not good that is a given all agree with.” Actually, deficits are good. Most of the years from 69 to 2010, GDP kept in step with government funding, mostly deficits and sometimes surpluses. The empirical plot is shown in
    The plots were derived from US Gross Domestic Product data from years 1969 to 2009 available at