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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Minneapolis Fed President Kocherlakota Warns Massive Debt Load Can Only Be Paid By Tax Collections Or Debt Monetization

Posted by WARREN MOSLER on February 17th, 2010

Maybe someday we will get an FOMC that actually understands reserve accounting and monetary operations, and maybe even recognizes the currency for the simple public monopoly that it is and moves away from ‘expectations theory’ as the reason for ‘inflation.’

But for now that seems to be only a very remote possibility.

“Why might households expect an increase in inflation? The amount of federal government debt held by the private sector has gone up by over 30 percent since the beginning of 2008. This debt can only be paid by tax collections or by the Federal Reserve’s debt monetization (that is, by printing dollars to pay off the obligations incurred by Congress). If households begin to expect that the latter will be true—even if it is not—their inflationary expectations will rise as well.”

13 Responses to “Minneapolis Fed President Kocherlakota Warns Massive Debt Load Can Only Be Paid By Tax Collections Or Debt Monetization”

  1. Scott Fullwiler Says:

    Yet they (the Fed) weren’t worried at all when the private sector’s debt load did that and more over the past 15 years, in fact they called it the Great Moderation, and here we sit in the worst recession/depression in 80 years. Now, with the private sector fixing its balance sheets necessarily via government deficits, THIS is apparently what’s going to do us in.

    Reply

  2. Ralph Musgrave Says:

    Kocherlakota says “Suppose that households believe that prices will rise. They would then demand more deposits to use for transactions. Banks can readily accommodate this extra demand, because they are holding so many excess reserves.” That’s rubbish, isn’t it?

    A typical commercial bank has large reserves because institutions have sold securities to the Fed and dumped the cash in the commercial bank. Is Kocherlakota saying the commercial bank will just pinch money from some institution’s account and give it to any household wanting “more deposits”???? If so, Mr Kocherlakota, (if you’re listening) I’m a household in need of “more deposits”. $10m would do nicely. Hope to hear from you.

    Reply

  3. Tom Hickey Says:

    I cannot accept that this is purely ignorance rather than willful or feigned ignorance masking disingenuousness. Nothing was/is said when obviously irresponsible things were/are being done/allowed that increase banks’ fees, profits, and bonuses. But when debt that can’t be paid threatens to implode, then the Fed and the bankers make the case that bailout and forbearance are needed to rescue the system from collapse due to an exogenous shock that could not have been foreseen. All the talk about controlling inflation arises from bankers’ fear that debts will be inflated away. They don’t seem to get it yet. Debt that cannot be paid will not be, and that the public is in no mood for more bailouts and shenanigans. This is a global problem and it is just in the process of unfolding, not unwinding down. Lots more big shoes to drop.

    Reply

  4. Nathan Tankus Says:

    do people’s expectations of the future really not matter? that sounds absurd. everything she said was true even from an MMT perspective. It doesn’t matter if you and i don’t think that debt is a problem, what matters is that the vast majority of people do think debt is a problem and it doesn’t seem out of the question that all the deficit mongering would lead to a change in people’s expectations of the future.

    Reply

    Scott Fullwiler Reply:

    And what will that do?

    Expectations do matter, of course, but mostly for interest rates what matters is expectations of the Fed’s target rate.

    Reply

    Nathan Tankus Reply:

    people may start demanding higher nominal values in contracts in the expectation of increased inflation. i don’t really know. i just find it hard to believe that people’s views of government deficits don’t change how they act as economic agents significantly.

    Reply

  5. Jason Says:

    Or this from the NYT: http://reason.com/blog/2010/02/17/economists-at-least-three-agre

    Reply

  6. knapp Says:

    via Zero Hedge, a story about Total Bank Assets to host GDP.

    No distintion is made between countries with and without sovereign currencies but the numbers look highly deflationary for those within the Euro zone if the thing starts to unravel.

    “With the threat of sovereign default and contagion now pervasive within the Eurozone periphery, it is relevant to quantify the relative exposure of various banking centers’ assets as a percentage of host countries’ total GDP. The reason for this is that in Europe for many countries a sovereign default would not have as great an impact, as a risk-flaring contagion impacting these countries’ primary financial entities, whose assets account in some cases for multiples of host GDP. For example in Switzerland, the assets of the top two banks, UBS and Credit Suisse, alone account for nearly 600% of the country’s GDP. And while Switzerland is relatively isolated from the budget and deficit crises in the PIIGS and STUPIDs, other countries such as Italy, Belgium and ultimately France, Germany and the UK, are much more exposed.”

    Belgium – Dexia: 180%of GDP
    France – BNP Paribas, Credit Agricole, SocGen: 237% of GDP
    Germany – Deutsche Bank: 84%
    Italy – Unicredit, Intesa Sanpaolo: 101%
    Netherlands – Fortis: 155%
    Spain – Banco Santander: 92%
    UK – RBS, Barclays, HSBC: 337%
    Compare that to the top 5 banks in the US (a list which excludes hedge funds such as Goldman Sachs).

    US – JP Morgan, Citigroup, Bank of America, Wells Fargo and Fannie: just 56% of GDP.

    Reply

  7. Min Says:

    Sorry, but I find it hard to believe that anyone over the age of 30 expects the national debt to be repaid. Even if they haven’t thought the matter through. (Besides, I expect that most people don’t know what monetization is.)

    Reply

  8. joebhed Says:

    The private bankers at the Fed smiled and allowed the financialization of the economy through the creation of Trillions of bad debts in the shadow banking sector (a.k.a. toxic assets), forcing the contraction and near-collapse of the economy and greater financial burdens on the public.
    In the same fashion as Americans have observed the IMF usurp the taxing and fiscal powers of indebted nations throughout the second- and third-world, we now see the call of the Fed, acting on behalf of the international bankers, for further shrinkage of this nation’s public sector due to the scale of those inevitable public debts.
    Which they, the Fed, caused.

    Let’s see, what’s missing?
    Oh, yes, monetary sovereignty.
    That’s what’s missing.
    See monetary.org for the better solution.

    Reply

  9. Ken Says:

    Warren,your outlook has a lot in common with Richard C.Cook Major Clifford Douglas and Frederick Soddy . Are you familiar with their work and in Cooks case maybe joining forces ?

    Reply

  10. Ken Says:

    Reply

  11. Ken Says:

    http://www.youtube.com/watch?v=6cBafaTItck Richard C Cook

    http://www.nationaleconomy.net/soddy.html Frederick Soddy

    http://social-credit.blogspot.com/ Major Clifford Douglas

    Reply

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