MMT on MarketWatch

MMT breaking through???

Deficit hysteria grips Washington

By Darrell Delamaide

February 16 (MarketWatch) — Deficit hysteria is rising to fever pitch in Washington as the political jockeying over the budget begins in earnest.

“Fiscal nightmare,” “buried under a mountain of debt,” “awash in red ink” – these are some of the colorful phrases being bandied about by politicians, pundits and even journalists ostensibly reporting facts. Most of them are winging it on a single undergraduate course in economics, if that, but they know they’re right because everybody agrees.

Yet, if you look out the window, you don’t see any red ink or mountains of debt. The only nightmare is unemployment continuing near 10% and ongoing waves of foreclosures – neither of which is attributable to the federal deficit and neither of which will be fixed by budget cuts.

There is no visible harm from current deficits. Yields on U.S. Treasurys are up a tick but still near historic lows. Core inflation in the U.S. is still so far below the 2% annual rate deemed desirable by the Federal Reserve that deflation continues to be more worrying. There is no crowding out of private borrowers in the debt markets.

Just you wait, cry the deficit hawks, it will be a nightmare by 2016 or 2020 or 2050. Well, let’s wait and see. If we put those 15 million people back to work and get the economy growing at a steady clip, tax revenues will rise and cheat all those bloodthirsty hawks of their fiscal Armageddon.

Worried? Confused? Alarmed at the slow-motion train wreck in Washington?

There is cause for alarm. There is the possibility that the government, held under the sway of misguided and obsolete economic theories and driven by a not-so-hidden corporate agenda, will make genuinely harmful cuts in both discretionary spending and entitlement programs – cuts that will cause real and needless misery to millions.

The overwrought hysteria of the deficit hawks – one economist calls them deficit terrorists – has already sabotaged government stimulus that could have rebooted the economy much more quickly and alleviated unemployment to a greater extent.

It’s certainly useful to comb through the budget and reexamine programs for possible cuts. Military spending can certainly be cut back. Some recalibration of entitlements is also necessary.

But the helter-skelter axing of programs to meet a target pulled out of thin air – what’s so magic about $100 billion in spending cuts this year? – risks causing much unnecessary harm.

Before you succumb to the deficit hysteria, think about the disconnect between the dire language and the observable facts. Be careful about false comparisons – such as the U.S. going the way of Greece.

The U.S. is not Greece. The U.S. has full monetary sovereignty – that is, it has complete control over its own currency. Greece, as a member of the euro, does not, which is why it has constraints on its borrowing.

When the U.S. was bound by the gold standard, it also faced constraints. Most of the thinking and language about budgets and deficits actually goes back to this time, when the U.S. genuinely had to “finance” its deficit.

Since abandonment of the gold standard and the de facto adoption of a fiat currency, however, these constraints no longer apply. The U.S. is free to print as much money as it likes; the U.S. government is free to spend money without financing it.

How crazy, you say. What about inflation? Inflation occurs when there is more demand than supply and this simply isn’t going to happen when there is 8-10% unemployment. Treasury and the Fed have ample tools – selling debt securities and raising interest rates – to deal with inflation when it does threaten.

Modern monetary theory – which is espoused by a growing number of economists and investment managers because it explains the observable facts better than the obsolete theories driving most of the public discussion – deals with the world as it is without a gold standard.

A better comparison for the U.S. than Greece is Japan, which also enjoys full monetary sovereignty. Japan has a public debt approaching 200% of GDP. This compares to the U.S. at 60% in 2010 and on its way up.

Deficit terrorists have decided arbitrarily that 60% is the maximum limit. They have been predicting the imminent collapse of Japan – for the past 20 years. And yet Japan continues to finance its deficit with rock-bottom interest rates.

The federal government is also not comparable to a household. It does not have a checkbook to balance or a credit card to max out, even though our folksy politicians like to use these metaphors. It does not have to “live within its means” like a family or individual. Our grandchildren will never have to repay all that debt. No one will, ever. It will continue to grow as our economy grows.

All this flies in the face of all the groupthink going on in Congress, in the press and on cable TV. So if you want to reject modern monetary theory as hogwash and cling to theories that worked a century ago, you’re in good company. But think about it, look around you, and decide for yourself what best describes the world you live in.

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534 Responses to MMT on MarketWatch

  1. Vincent Cate says:

    “Yet, if you look out the window, you don’t see any red ink or mountains of debt.”

    This reminds me of the joke about the guy falling off a 100 story building. When he passes the 50th floor someone asks how he is doing and he says, “so far so good”.

    Until hyperinflation hits things may look just fine. But they won’t after that.

    Reply

    Tom Hickey Reply:

    Gotta give you credit, Vincent, you never give up. See any signs of hyperinflation yet? If you do, please let us know. :)

    BTW, did you read Cullen Roche’s post on hyperinflation at Pragmatic Capitalist yesterday? I didn’t see your name in the comments.

    Reply

    Neil Wilson Reply:

    Hyperinflation nuts see hyperinflation everywhere, green nuts see nuclear disaster everywhere, neoliberals see government waste everywhere.

    They must all find the real world a terrible disappointment.

    Reply

    WARREN MOSLER Reply:

    i see deficit terrorists everywhere

    :(

    ESM Reply:

    I don’t think neoliberals are ever disappointed if they expect to see government waste everywhere.

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  3. Mario says:

    Warren,

    I read natural rate of interest is zero and liked it. When you state that risk free rate is 0% for our economy is this to prove that the natural structure and architecture of our economy is sound and positively functional? Whereas under a gold standard for example, as you state, the risk free rate is negative due to storage issues and the like, making the architecture of a gold standard economy less efficient and functional than our floating exchange system?

    Also the second to last line of the essay you state:

    “Furthermore, there are a number of reasons why allowing the rate of interest to settle at its natural rate of zero makes good economic sense.”

    Do you think you could name these reasons? Also is this to say that you suggest the Fed Funds to be at 0% all the time? Just trying to clarify. Thank you!

    Reply

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  5. Vincent Cate says:

    “all one can say is that govt is unique in that it is not operationally constrained.
    all constraints are political.”

    If they do things too crazy they can get hyperinflation and destroy their currency. But as long as they don’t do that they can print money and pay for real goods and services.

    It is much like a corporation that can print and sell shares, as long as they are not crazy about it.

    Reply

    Peter D Reply:

    Sounds reasonable to me. You can always drive even the best car into a ditch. Nobody says a fiat currency regime is a fool proof system. Pointing out that under some very extreme circumstances the system breaks is neither here nor there, IMHO, since this is true for any system.

    Reply

    Vincent Cate Reply:

    “Sounds reasonable to me. You can always drive even the best car into a ditch. Nobody says a fiat currency regime is a fool proof system. Pointing out that under some very extreme circumstances the system breaks is neither here nor there, IMHO, since this is true for any system.”

    Yes. I agree. But if you can understand what would cause a system to break and avoid doing that you can avoid a lot of pain.

    Reply

    Vincent Cate Reply:

    PS. I don’t buy that the failure of a fiat currency was ever really caused by anything other than the monopoly issuer of that currency. Makes no sense that some supply shock could cause a healthy currency to suddenly go bad. If it were near failure anyway I could see a supply shock pushing it over the edge. Like $200 oil might cause the dollar or the yen to go into hyperinflation, but only because they are in bad shape. The yuan is at no risk from a supply shock.

    Oliver Reply:

    There are other political organs attached to the central bank that are perfectly able to induce a supply shock of their own. No need for foreign entities to do that. Think Mugabe.

    Oliver Reply:

    except that government can force demand for its shares upon its unsuspecting populace by levying taxes.

    Reply

    Vincent Cate Reply:

    “except that government can force demand for its shares upon its unsuspecting populace by levying taxes.”

    Up to a point. If things get too hard you get refugees leaving, which lowers demand for the currency. If people are going to starve to death they may instead try to kill off the government. And in the case of hyperinflation the population moves to the black market, which lowers taxes and demand for the currency as the black market does not operate in the local currency in hyperinflation. Eventually so much of the economy has moved to the black market that the government needs to tax the black market to survive, so they legalize it. This means legalizing other forms of money and giving up on the old currency.

    Reply

    studentee Reply:

    it’s absolutely bizarre that you think that anything like this will happen in the us.

    WARREN MOSLER Reply:

    right, they are not operationally constrained from producing hyper inflation. the constraints are political

    Reply

    Vincent Cate Reply:

    “right, they are not operationally constrained from producing hyper inflation. the constraints are political”

    Right. This makes me think of some science fiction book I read long ago. It was set on some generational ship going between the starts. Several generations had happened since the ship departed and the current generation did not really understand the reasons for the way some of the systems were designed on the ship. This led to trouble.

    Central banking is like this. Initially the system is designed to avoid trouble. Rules are setup that the central bank can only have short term debt of the highest quality on its books. This means it can always get the full value back if it needs to take money out of the system to avoid inflation.

    But generations later people start buying long term debt, debt that is not the highest rating, even toxic assets. The ECB buying Greek debt when it is not investment grade is against the bank’s rules, but they do it anyway because they don’t understand why it would be a problem. And Bernanke buying 10 year and longer debt, he does not understand the trouble. As interest rates go up the bond values can go way down. As the velocity of money goes up he will not be able to take out enough money to avoid inflation.

    After a few generations the political constraints against hyperinflation fail due to lack of fear and lack of understanding.

    One good thing is that after the USA has hyperinflation they will probably not have it again for 80 years.

    Reply

    WARREN MOSLER Reply:

    agreed with your premise, but then you fall into the situation you warn about.

    for example, initially the fed was set up in the context of the gold standard of the time.

    what almost no one seemed to notice was that switching off the gold standard ‘changed the channel’

    anyway, most of the rest of what you said is out of paradigm

  6. Ramanan says:

    Vjk,

    Will read Milton Friedman’s article. Just browsed through.

    Milton Friedman knew a lot of things better than the Keynesians but his ideology blinded him to say many things not possible.

    He says

    # the use of gold as money, which I shall call a “real” gold standard;
    # governmental fixing of the price of gold, whether national or international, which I shall call a “pseudo” gold standard.

    “A worldwide free market in gold might mean that the use of gold as money would become far more widespread than it is now. If so, governments might need to hold some gold as working cash balances. Beyond this, I see no reason why governments or international agencies should hold any gold. If individuals find warehouse certificates for gold more useful than literal gold, private enterprise can certainly provide the service of storing the gold. Why should gold storage and the issuance of warehouse certificates be a nationalized industry?”

    He seems to understand money endogeneity but wishes that the monetary world behave differently than the times. So while he understood that central banks do not control the money supply, he wanted them to do so and thought it is just a question of will.

    Anyway, I refer you to some literature in endogenous money/Horizontalism where the proponents argue that money is always credit driven. The world with a fixed supply of money doesn’t work.

    Reply

  7. Vincent Cate says:

    “taxes fund the tsy, they do not ‘fund the govt.’

    it’s a self imposed constraint imposed by congress, which is the govt., on the tsy, one of congress’s agents.”

    This seems important and I am not sure I get this. Are you saying that the current self imposed constraints make it where the Treasury has to get money from taxes and bond sales before it spends money but that since the government could change these self imposed constraints they are not really binding? In other words, we could have the treasury just print the money it wants to spend, even though that is not how it is done at the moment.

    Reply

    ESM Reply:

    That’s correct. The Treasury does retain the ability to print bills, notes, and bonds, though, including 1-day T-bills which are about as close to cash as you can get while still being a bond. The Treasury can print bonds up until the debt limit, another self-imposed constraint. If it wasn’t for the debt limit, Treasury could print bonds until the cows come home.

    Reply

    vjk Reply:

    “the government could change these self imposed constraints ”

    The legislature could, not the “government” ;)

    The constraint is “self-imposed” to the same degree as any law is.

    Reply

    studentee Reply:

    i don’t understand the purpose of your latest comments here. what are you trying to get at?

    Reply

    Tom Hickey Reply:

    There are operational rules applicable generally to a fiat system and special cases constructed by imposition of political restraints. For example, the US Treasury is prohibited from running an overdraft at the Fed, so it must sell bonds to get reserves needed to clear its checks when it spends. In addition, the Fed is not allowed to exchange reserves for tsys directly with Treasury, so it auctions them through its primary dealers.

    This means that, temporally, the Treasury has to issue bonds before issuing currency by marking up deposit accounts, although, operationally, deficits fund tsys since the US is operating under a fiat regime in which deficits inject the net financial assets that nongovernment saves as tsys.

    If this looks like a shell game, it is.

    MamMoTh Reply:

    so government cheques can actually bounce, right?

    WARREN MOSLER Reply:

    sure, govt ‘clears it’s own checks,’ so it could decide not to.

    all one can say is that govt is unique in that it is not operationally constrained.
    all constraints are political.

    the difference is between what the ratings agencies call ability to pay, vs willingness to pay.

    Neil Wilson Reply:

    They do in Ireland.

    Any particular reason why semantics are more interesting than substance?

    Tom Hickey Reply:

    so government cheques can actually bounce, right?

    This can happen in the US if Congress appropriates funds in the budgetary process that exceed the debt limit and then doesn’t raise the debt limit to make the funds it has appropriated available. Sounds crazy? It is. There is no actual lack of funding operationally under the present system.

    The consolidated Treasury/Fed can always provide funding for whatever Congress appropriates, unless Congress prevents this. The executive branch and its agencies are prohibited from exceeding legislative appropriations or circumventing laws passed by Congress. Congress controls the purse strings iaw the Constitution. The executive only executes what Congress has approved iaw conditions Congress attaches.

  8. Vincent Cate says:

    “Again – buying a govt bond itself is not reducing demand; the purchase is simply a portfolio shuffle.”

    In the private case we end up with someone with the money and someone with a bond. In the case of the government bond we only have the bond and the money is gone. Even if you count bonds as “fuel” then in the government case there is 1 unit of fuel and in the private case there is 2 units of fuel. So clearly the government selling bonds, in competition with private companies, reduces “fuel”.

    Reply

    vjk Reply:

    Vincent:

    You are forgetting that the Treasury, having sold a bond to person A, immediately, more or less, spends the proceeds on person B, let’s say pays him salary. Person B can go and buy a company bond if he is so inclined, so no competition, theoretically.

    Reality is of course more complex.

    So, forgetting for a moment bonds dynamics, the amount of zero maturity money, or “fuel”, remains the same, abstracting from the small time lag.

    I believe you are confused by the money destruction metaphor which, I think, is not a very good metaphor in the current operational reality.

    Reply

    Vincent Cate Reply:

    “You are forgetting that the Treasury, having sold a bond to person A, immediately, more or less, spends the proceeds on person B, [...]”

    You are thinking that bond sales fund the government. This is not the MMT way of thinking about it. If you are going to think that you might as well think taxes fund the government. I think you can get kicked off this forum for saying that. :-)

    Reply

    vjk Reply:


    You are thinking that bond sales fund the government

    In the current operational reality, they do.

    In the MMT imagined universe, they don’t ;)


    taxes fund the government

    Ditto ;)

    WARREN MOSLER Reply:

    taxes fund the tsy, they do not ‘fund the govt.’

    it’s a self imposed constraint imposed by congress, which is the govt., on the tsy, one of congress’s agents.

    vjk Reply:

    “taxes fund the tsy, they do not ‘fund the govt.’”

    Sure, but that’s an immaterial nit, the treasury being part of the executive branch of the government.

    WARREN MOSLER Reply:

    the tsy follows instructions set by congress. it doesn’t make the rules

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  10. Vincent Cate says:

    “again, along with taxation, savings desires reduced aggregate demand.

    and savings desires are not caused by bonds nor is it likely they are enhanced by bonds.”

    When someone buys a regular company bond that company can then invest the money. So the money is not destroyed. But when someone buys a government bond that money goes away. So while regular savings/investment does not reduce demand buying government bonds does.

    Reply

    Ramanan Reply:

    When someone buys a US Treasury security, the funds move to Treasury’s account at the Federal Reserve.

    The Federal Reserve spends the funds.

    Reply

    Ramanan Reply:

    Oops .. that should be .. the Treasury then spend the funds, not the Federal Reserve – similar to what you say about a corporation.

    Reply

    Vincent Cate Reply:

    “Treasury then spend the funds, not the Federal Reserve – similar to what you say about a corporation.”

    You are thinking as if the government sells bonds to fund the government operations. This is not the MMT way of looking at things.

    The government can make all the money it wants, so we can imagine that all the money they spent they just printed out of thin air.

    Taxes and bonds are just done to to control aggregate demand and inflation, not to fund the government.

    In reality the government may in fact save some printing costs by reusing an existing bill but this is just an optimization detail. You are better off to imagine they shred or burn every dollar they get from taxes or bond sales if you want to “get” the MMT way of thinking about it.

    If you are too “green” to imagine that much burning, then just define “money supply” to be money outside of government and you can get the same result without burning.

    WARREN MOSLER Reply:

    bonds are not ‘done’ to control aggregate demand, as previously discussed.

    the desire to ‘not spend’ income is what reduces demand.
    the unspent income is in the first instance is reserve balance, with alternatives of cash or securities offered by the govt as well.

    and the imperative behind tsy secs is interest rate management.
    see ‘soft currency economics’ under ‘mandatory readings’

    WARREN MOSLER Reply:

    not spending income reduces demand, whether that income is held as overnight balances or as time deposits of one sort or another.

    and yes, for the non govt sectors, there can only be net savings of local currency financial assets if that govt. spends more than its income.

    that is, govt deficit = non govt savings of financial assets.

    Reply

    Vincent Cate Reply:

    “not spending income reduces demand, ”

    If I don’t spend my money but buy a bond from a company they then can spend my money. So my not spending does not mean my money is not spent, just not by me.

    However, if I give I loan it to the government they don’t spend any more than they would have anyway, since they can make all the money they need. At least in MMT way of looking at things.

    These 2 cases are very different.

    Reply

    WARREN MOSLER Reply:

    right, it’s about non govt savings desires. that includes corp decisions to spend or not spend

    spending is aggregate demand, not spending isn’t

    Scott Fullwiler Reply:

    Of course, it’s roughly the same with the corporation, too, since if you don’t give them the “money” you’ve saved and instead give it to the Tsy, there isn’t any less “money” available for the corporation–loans create deposits.

    Anders Reply:

    Vincent – to expand on Warren’s comment, if you save $100 one year and buy a bond, then your ‘not spending’ has indeed reduced demand. Now, if that is a govt bond, then you are simply rearranging your stock of govt claims to get more interest. But if you buy a corporate bond, then your ‘not spending’ has been offset by that corporation spending beyond its income, which increases demand so as to offset your reduction in demand. So buying a corporate bond is a wash in demand terms.

    Again – buying a govt bond itself is not reducing demand; the purchase is simply a portfolio shuffle.

  11. Ramanan says:

    Anon,

    Sorry what about currency board versus other systems ?

    Reply

  12. anon says:

    can’t tell off the top if you agree or disagree with me

    i think maybe you agree

    if disagree, with what exactly?

    Reply

    anon Reply:

    p.s.

    what i’m saying is that the (bonds required for fixed) / (no bonds feasible for floating) is a false comparison

    bonds aren’t really required in either, because the CB still needs to control policy interest rates in both, and can do it in theory with or without bonds in both

    Reply

    Ramanan Reply:

    Yes. More than Agree.

    Its possible for the central bank to set the yield curve in the Gold Standard.

    For someone with too much hahaheehee on the usage of “borrow” – i.e., quibbling on the usage of borrow – the root of a lot of things.

    Reply

    Ramanan Reply:

    Was that for me ? I don’t disagree with anything.

    Reply

    anon Reply:

    yes

    good

    didn’t take sufficient time with your comment yet

    sorry

    Reply

    anon Reply:

    and (bonds required for fixed) / (no bonds feasible for floating) is a cornerstone of MMT “theory”

    so I’d sort of like to be proven wrong, but i don’t see it yet

    Reply

    Scott Fullwiler Reply:

    I don’t see how you can say it’s a cornerstone of MMT. I would actually agree with that statement if what you’re referring to is a basic fixed exchange rate peg like Mexico pegging to the $ or something like that. For a gold standard or currency board, it’s a bit squishier, though, as Warren suggested above in comments on the gold standard and bonds.

    Reply

    anon Reply:

    my brief reading of Warren’s treatment of the HK currency board is that there’s a different kind of quantity constraint there that definitely restricts commercial bank freedom to transact in the conversion object, due to specified quantity limitations and requirements

    but it looks to me like that’s best treated as a special case because of its particular treatment of commercial banks

    Scott Fullwiler Reply:

    Yes. I didn’t interpret your comment as referring to currency boards–sorry if I was wrong. Even in currency boards and gold standards, though, it would seem that Tsy wouldn’t have to issue bonds if CB drained via time deposits and such.

    anon Reply:

    no, you were right; that was just a side comment on currency boards, somewhat separate from the bond question; i’m looking more at gold and dollar pegs, etc.

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