Welcome to the 7th US depression, Mr. bond market

Looks to me like the lack of noises out of Japan means there won’t be a sufficient fiscal response to restore demand.

If anything, the talk is about how to pay for the rebuilding, with a consumption tax at the top of the list.

That means they aren’t going to inflate.
More likely they are going to further deflate.
Yes, the yen will go down by what looks like a lot, maybe even helped by the MOF, but I doubt it will be enough to inflate.

In fact, all the evidence indicates that Japan doesn’t don’t know how to inflate, nor does anyone else.

Worse, what they all think inflates, more likely actually deflates.

0 rate policies mean deficits can be that much higher without causing ‘inflation’ due to income channels and supply side effects.
There is no such thing as a debt trap springing to life.
Debt monetization is a meaningless expression with non convertible currency and floating fx.
QE mainly serves to further remove precious income from an already income starved economy.

Only excess deficit spending can directly support prices, output, and employment from the demand side, as it directly adds to incomes, spending, and net savings of financial assets.

The international fear mongering surrounding deficits and debt issues is entirely a chicken little story that’s keeping us in this depression (unemployment over 10% the way it was measured when the term was defined) that’s now taking a turn for the worse.

The euro zone is methodically weakening it’s ‘engines of growth’- its own (weaker) members being subjected to austerity measures that are reducing their deficit spending that paid for their imports from Germany. And now China, Japan, the US and others will be cutting imports as well.

UK fiscal austerity measures are accelerating on schedule.

The US is also working to tighten fiscal policy, particularly now that both sides agree that deficit reduction is in order, beaming as they make progress towards agreeing on the cuts.

The US had 6 depressions while on the gold standard, which followed the only 6 periods of budget surpluses.
And now, even with a floating fx policy and non convertible currency that allows for immediate and unlimited fiscal adjustments,
we have allowed the deflationary forces unleashed by the Clinton budget surpluses to result in this 7th depression.

We were muddling through with modest real growth and a far too high output gap and may have continued to do so all else equal.

But all else isn’t equal.

Collective, self inflicted proactive austerity has been working against growth, including China’s ‘fight against inflation.’

And now Japan’s massive disaster will be deflationary shock that, in the absence of a proactive fiscal adjustment, is highly likely to further reduce world demand.

Hopefully, the Saudis capitulate and follow the price of crude lower, easing the burden somewhat on the world’s struggling populations.
If so, watch for a strong dollar as well.

And watch for a lot more global civil unrest as no answers emerge to the mass unemployment that will likely get even worse. Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.

And it’s all only likely to get worse until the world figures out how its monetary system actually works.

This entry was posted in Asia, Bonds, CBs, Comodities, Deficit, ECB, Employment, Equities, EU, GDP, Government Spending, Japan, Politics, Recession. Bookmark the permalink.

52 Responses to Welcome to the 7th US depression, Mr. bond market

  1. beowulf says:

    Taxes are too high for the level of govt spending we have. Cut taxes until we’re at full employment. Insist that every dollar in spending cuts or tax loophole reduction be matched by a dollar in other tax cuts. The battle the Administration should be waging is WHAT taxes to cuts (payroll, state sales taxes vs capital gains, corporate taxes).

    As for cutting govt spending, there is between $300 billion to $1 trillion a year in wasted govt spending and tax loopholes (see USPIRG “next trillion” and Calvin Johnson “shelf project” reports), zero them out and recycle the savings into tax cuts that will boost aggregate demand and reduce income inequality. For example, a wage subsidy to employers to reimburse them for a large hike in the minimum wage (which in turn would reduce means-tested welfare spending, which could “pay for” another round of tax cuts).

    Where the Republicans are hammering the Administration is that they have the field of “tax cuts” to themselves (of course, the Tea Party is messing things up for the GOP by being as out of paradigm as the WH on deficits). Since “deficits don’t matter” is both true economically and nearly impossible to explain politically, a better slogan is Kennedy/Nixon goal of a “balanced budget at full employment” (which implies a trade deficit of zero, we can worry about this parenthetical once we reach full employment). Granted, a “full employment budget” is still out of paradigm, but at least moves the ball in the right direction.


    Mario Reply:

    great calls Beowulf. I think people skeptical of MMT would also appreciate hearing the proposal on cutting “wasteful govt spending” too. It really highlights the integrity as well as efficacy MMT policies can achieve.


  2. pebird says:

    One of the problems non-conservative critics have of MMT is that they feel the political problems in the world are so overwhelming that: 1) they don’t have the time or interest to become knowledgeable in MMT, 2) there is this conspiracy mentality where one sees all institutions as monolithic representations of corrupt power instead of historical compromises between conflicting interests, so that any view that says institutional processes are politically neutral becomes immediately suspect.

    And there beyond any doubt that within government political leadership there are huge levels of corruption. So when MMT says a sovereign “government” can spend without constraint (a true operational statement), it is translated by MMT critics as saying the current government political leadership can spend without constraint – when these critics want to constrain the leadership. So there is a knee-jerk reaction against MMT, as well as misrepresentations.

    I prefer the term “public” spending to government spending – it’s not perfect, but the political baggage of using the ugly G word (gov’mint) is too much to overcome at times. I also prefer using the theme that the political leadership has taken corrupt control of a very good economy – which happens to include a very good monetary operational infrastructure.


    Mario Reply:

    “I also prefer using the theme that the political leadership has taken corrupt control of a very good economy – which happens to include a very good monetary operational infrastructure.”

    yes!! great call!! agreed completely


    Craig Reply:

    “I prefer the term “public” spending to government spending – it’s not perfect, but the political baggage of using the ugly G word (gov’mint) is too much to overcome at times.”

    yes – public spending sounds much better. are you channeling frank luntz? :-)


    roger erickson Reply:

    > I prefer the term “public” spending to government spending

    absolutely; I’ve been saying that in comments here for 2 years;
    with millions of uninformed people, interleaved semantics is always a much bigger problem than even MMT ops-experts realize

    the GOP & banksters thrive on semantics as the enabling feature of propaganda; you always have to fight fire with fire

    ops people are often their own worst enemy, since they forget how few actually understand the language & jargon they use


    Craig Reply:

    From “Warren’s Natural Rate is 0″ paper: “Therefore, unlike currency users, and counter to popular conception, the issuer of a currency is not revenue constrained when it spends.”

    The straw man argument against MMT is that it implies public spending is unlimited if it’s not “revenue constrained”. i wonder if it’s better to refer to “public spending” as “inflation constrained” rather than “revenue constrained”.

    it’s semantics but it could serve to steal the thunder from straw man critics that use easily misconstrued phrases as an excuse to derail any meaningful conversation around the subject.


    Neil Wilson Reply:

    I prefer ‘resource constrained’. Inflation is a humpty dumpty word.

    Tom Hickey Reply:

    Craig, then all spending looks to them like inflation.

    I think Neil has it right with “resource constrained.” I believe that this is the way Bill Mitchell frames it.

  3. jahbu says:

    You guys are missing the whole point. The Good Ol Boy Club knows how simple this really is. They obviously dont want the public to know. Why would they? It makes them rich and powerful. So they pay damn good money to slick talking salesmen to keep the public misinformed.
    It sure was easy for the Good Ol Boy Club to come up with the money to bailout their wallstreet buddies. Not so much for the public employees in Wisconsin.

    Spreading your message is in direct conflict with the most powerful men in the World.

    Good Luck!


  4. “This is a Ponzi scheme, as the dollar is the reserve currency.” Huh? Classic example of someone spouting words he doesn’t understand, but thinks someone else might.

    A Ponzi scheme takes money from early investors to pay later investors. So who are the investors? And why would a Monetarily Sovereign nation, having the unlimited ability to create dollars, need to take dollars from anyone?

    And what does the dollar being the so-called “reserve currency” have to do with anything. All “reserve currency” means is it is the most universally popular currency. So?

    Warren’s summary is excellent. Here’s another one you might enjoy: Summary. Warren and I still argue about inflation.

    Rodger Malcolm Mitchell


  5. Roger Erickson says:

    Smedley Butler (called it outright fraud, 1930s), http://en.wikipedia.org/wiki/Smedley_Butler

    JK Galbraith (called it “innocent fraud”, 1950), http://en.wikipedia.org/wiki/John_Kenneth_Galbraith

    Dwight Eisenhower (called it a military-industrial complex, 1961), http://en.wikipedia.org/wiki/Military%E2%80%93industrial_complex

    Bill Black (called it Control Fraud 2005), http://www.amazon.com/Best-Way-Rob-Bank-Own/dp/0292706383

    Warren Mosler (called it Innocent Economic Fraud, 2009) http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

    many saw this coming – but no one’s stopped it yet ( Imhotep probably wrote about it too! http://en.wikipedia.org/wiki/Imhotep )

    in fact, we’re repeating fundamental lessons a smaller population learned (and thought they’d captured) ~1776;
    and of course there’s a remarkable parallel with military and scientific literature

    In a nutshell: every system science knows that all growing systems inevitably spawn dis-regulated extensions before either regulating them, or succumbing;

    mutation/regulation/expansion has been studied to exhaustion in hundreds of model bio systems, and in many model simulations; it’s a trivially well known problem to an insignificant proportion of every electorate; this is either comical, tragic or both (Greeks?)

    Here’s my update:
    “All systems can remain irrational longer than individual components can sustain interest.”

    Nevertheless, this is once again a direct challenge for the US electorate, who so far aren’t even perceiving the context in threshold numbers, let alone exploring their options fast enough. What’s lagging is our basic methodology for mobilizing group alignment to context. As usual, we’re making it harder than it needs to be

    What to do about it remains the issue. I feel that this has to be summarized in succinct, leanest possible wording and taken in private to a number of existing Congresspeople (adequate briefing, CSW = completed staff work), giving some of them a chance to reorient before taking it public to the electorate at large.

    Whistleblowers & WikiLeaks are attractive, last-gasp martyr methods – popular to some, but they operate from a defeatist premise of self-disruption.

    What’s always needed is what I’ll call productive self-challenge, a “WikiPeeks”. Something that continually looks at self-operational-clarity as fast as possible, in plain view. (a group mirror?)

    Traditionally, it’s just called familiarity with both co-workers and context. (and at the personal level, actual thinking)

    We always make this task far harder than necessary, simply for lack of regulating our methodology. We treat group mobilization as a special case, to be avoided during “normal” times. This is a recurring regulatory problem solved through group practice, not invention (the solution was invented millions of years ago way before even Imhotep; we just to need to invent subtle catalysts that get new generations to apply the general solution to emerging contexts sooner rather than later.)

    Remember the joke “Why did the moron stop beating his head against the wall?”
    The systems version is: “Why did the moronic-electorate stop neglecting-to-engage-in-adequate-group-discourse?”
    (why did either start in the first place? see above, about mutation/growth, & don’t ask)

    For 312 million co-citizens in a context, what’s the analogy to one person standing in front of a mirror? A group-context-mirror?

    We need group context-mirror methodology. Don’t tell me it’s not possible; we know that’s complete bullshit. Whatever group-context-mirrors, we need to half-silver ‘em, so more people have a sense of where the Titanic’s going at any one instant.


    Matt Franko Reply:


    “we just to need to invent subtle catalysts that get new generations to apply the general solution to emerging contexts sooner rather than later.”

    Or we could all go golfing…..



    Tom Hickey Reply:

    Of course, “golfing” was secondary. O was chiefly raising funds for the next campaign. That’s what getting to play golf with POTUS is all about. First things first.


    Mario Reply:

    dude awesome stuff all the way through and stated brilliantly…couldn’t agree more…I think the internet is the key to all this…facebook is a group mirror where we can all tell each other what pair of socks I have on today. great. The funny thing with a group-mirror is that all the technology is there…there’s just lagging interest. For most people economics (and hence MMT) is more an emotional game than a mental or intellectual one. I love how when times are bad everyone seems to be an expert on the economy (myself included)…we all feel so intently that we don’t stop to think. The emotion for most people with economics is what’s causing them to be so easily manipulated and is also stopping them from actually thinking about the situation…”we have our grandkids’ future to consider man!! what’s wrong with you!!” that kind of thing.

    regardless it lies in the internet imho and it lies in just talking with your friends and family and neighbors imho. It’ll spread. Societies are fascinating in how quickly “psychic information” can pass through it and we’re all of a sudden on the same page. It happens all the time and is shown throughout history where great thinkers are on the same page but in different parts of the world and have never communicated before. I think right now our job as MMT-es is to hold the line and keep on going…it will catch on…it’s been here for 30 years now…it has to catch on eventually.


  6. Ramanan says:

    Meanwhile Krugman continues to struggle with saving/investment …



    Tom Hickey Reply:

    PK: So government borrowing doesn’t have to come at the expense of private investment, driving up interest rates; instead, it just mobilizes some of those desired but unrealized savings.

    He doesn’t seem to get that government deficit that offset demand leakage created by the increased private domestic desire to save funds the saving.

    BTW, The Animal Spirits Page has a post critical of MMT. I submitted a comment in rebuttal yesterday, but it hasn’t been put up.

    Here’s the essence of it:

    The MMT solution, of course, is to continue printing our “monopoly money” (really!) until inflation becomes a problem, which they say is far away.  This is a Ponzi scheme, as the dollar is the reserve currency.  We are exporting our fiscal failures.  Carry trade excesses are inevitable, as is major blowback from the rest of the world when they get tired of holding our fiscal feces.  War-induced inflation is more probable in the near term.

    The one inescapable implication of the identity above is that when as a nation you’re spending more than you make, you must borrow from the rest of the world.  To remedy that requires an across-the-board belt tightening.

    Given that, the only long-run solution is to rebalance domestic demand to avoid the country splitting apart (see http://www.theburningplatform.com on “the gathering storm”).  In the intermediate term this will require mitigating extreme income inequality with more progressive taxation; a poverty level dole for families displaced by the depression offered as workfare; a decent education for the kids; and an extension of Medicaid in lieu of the ridiculous “solution” forced on the Democrats by the health insurance industry.



    all mmt criticisms seem to misrepresent it.


    Tom Hickey Reply:

    I had an exchange with this person some time ago telling him that his understanding of MMT was incorrect and provided him with references. Apparently, he did not follow up or did not understand. He seems to have a made-up mind. He still hasn’t put up my criticism in his moderated comments, and it’s over 24 hours. So I assume he is not interested in interacting.

    Craig Reply:

    MMT requires a paradigm shift in thinking. to get these ideas across MMT needs good marketing. teasers to pull people in and ask basic questions to challenge their microeconomic perspective?. since people know revenues fund expenses for businesses, why wouldn’t they assume tax receipts fund govt spending? why wouldn’t they think more debt increases the risk of bankruptcy? we need animations to help people conceptualize MMT. distill these ideas down to their bare essence to give people a foothold on the concepts. until these ideas go mainstream i can’t help but to think the economy will continue to suffer while the risk of instability increases.

    Mario Reply:

    yeah agreed craig. MMT needs a movie to move it like how “An Inconvenient Truth” moved the green movement. That’s the kind of thing to get these ideas across. Didn’t Lawrence Bender produce that film? He’s the guy that works with Tarantino on all his freaking awesome films. :D

    Maybe we could start an MMT trading fund to raise capital for a movie? I do live in LA…though I am a nobody in those terms. haha!! Just thinking out loud.

    roger erickson Reply:

    Just discuss monetary operations, and don’t fall into the trap of taking arbitrary “sides” in any argument. Once trivialized by a label, one has been pigeonholed and hence manipulated in debate strategy.

    If you even fall into arguments over only tactics, you’ve been taken out of the strategic discussion, and of course you’ve lost control of any coherent operation campaign.

    This is ancient military, national and “British Banking” strategy. It’s exactly how – in any colony – the British titrated exactly how few people were required to achieve enough local infighting to continue their control. [Look up the history of the East India Corp, the Hudson Bay Corp, etc.] (Romans; Greeks; even Sumerians knew this.)

    “Just because a colony is independent, doesn’t mean it’s no longer a colony.” Benjamin Disraeli


    anon Reply:

    there’s nothing wrong with that Krugman post

    its MMT compatible; among other things he refers to excess demand for saving

    you can quibble about what he says about the connection between saving, investment, and interest rates, but the fact is that interest rates will tend to go up at full capacity


    ESM Reply:

    I have to agree with Ramanan here. Krugman is completely out of paradigm. What you call a quibble is something of fundamental importance. For starters, risk-free interest rates are determined by the goverment. Full stop. For finishers, government borrowing doesn’t compete with the private sector for funds. Full stop.

    Krugman is reaching the right conclusions but for the wrong reasons. I have little doubt that if we had a Republican president, he would be sounding the alarm about inflation and higher interest rates, and therefore the desperate need to raise taxes (or at least not lower them). This is not just speculation. He did the same thing in the middle of a slowdown back in 2003.


    anon Reply:

    for starters, Krugman is too smart not to understand national accounts identities; he understands that spending generates income

    moreover, he’s run circles around the Chicago crowd over the past couple of years regarding identity dynamics over time

    second, what he writes is not inconsistent with the CB determining policy rates; real capacity constraints will impinge on the policy process

    third, he fully understands the net financial asset aspect of MMT – that’s obvious here and elsewhere

    fourth, its unfortunate he uses loanable funds language; but again, that’s not proof that he doesn’t understand the account identities highlighted by MMT

    finally, his politics are what they are, but he understands this MMT stuff; speculation about his scenario politics is just that – speculation


    setting the bar pretty low for a nobel prize winner?

    Ramanan Reply:

    hmm … ok ..

    saw your comment at BB on “borrowed back”… keep pursuing on those lines :-)

    ESM Reply:

    “second, what he writes is not inconsistent with the CB determining policy rates; real capacity constraints will impinge on the policy process”

    Do you agree with Warren that higher interest rates actually end up feeding inflation and lower interest rates feeding deflation? Do you think Krugman does?

    anon Reply:

    I think higher rates on net financial assets feeds inflation

    I don’t think higher rates on the endogenous banking system feeds inflation

    I think the second effect overpowers the first

    I don’t know what Krugman thinks on this, but would guess he’s closer to me


    Ramanan Reply:

    One needs to make a distinction between price rise between the points of rate rises and inflation.

    (i.e., its more correct to say rate rises increases prices than saying rate rises leads to inflation)

    A rate rise increases interest costs and hence prices (which is different from inflation).

    A price rise – in the absence of a change of fiscal stance – causes demand drain.

    Hence a rate rise doesn’t “feed” inflation.

    An increase in interest income on the other hand may have an effect depending on the distribution of income i.e., depends on propensity to consume out of interest income. But this effect is a “long run” effect.

    Higher interest rates, leads to a contraction bias on the fiscal stance of the government as they try to cut interest income.

    So the whole analysis is full of complexities – my ceteris may not be your paribus – but I agree with Anon on the overpowering part.

    Scott Fullwiler Reply:

    Ramanan, Anon, and others

    I’m with RAmanan on rising interest effects on costs and prices, though an increase in the price level driven by costs is temporary inflation, at least.

    Whether the income or leveraging effect of rates matters more isn’t independent of context. Lower rates where the non-govt sector is prepared/willing to add leverage is one thing, and lower rates where the non-govt sector is not prepared/willing to add leverage is quite another.

    In other words, if lower rates “work” through leverage–which they must in this case–then the desire to do this is key to whether the income effect matters more/less than the leveraging effect.

    Mainstream economics has been so clouded by its belief in things like money multipliers, real-balance effects, and liquidity effects that it has failed to truly grasp that monetary policy can only “work” as desired through changes in non-govt sector’s leveraging of its income.


    inflation is technically a continuous rise in prices.
    anything less is a one time adjustment or a relative value story, etc.

    and in practice it’s easy.
    leave the risk free rate at 0 and mind the output gap with fiscal adjustments

    Scott Fullwiler Reply:

    meant to say “liquidity traps,” not “liquidity effects,” though the latter isn’t necessarily out of place in that list, either.

    mdm Reply:

    Scott, Ramanan, Anon, and others,

    If it’s not too much trouble could you please provide some additional readings on your comment.


    anon Reply:

    agree generally; I was responding to an overly simplified statement of inflation transmission by ESM in the same terms, without qualifying it further

    returning to Krugman, the liquidity trap phenomenon he likes to talk about is essentially the same dynamic as the MMT emphasis on the demand for net financial assets

    and demand for private sector leverage may be insufficient to get you out of that trap, so you need fiscal NFA to do it

    however, returning to my Billy comment Ramanan, private sector leverage can obviously boost income just like government fiscal when it does work

    anon Reply:

    MMT should adopt some counter-Friedmanite mantra about inflation

    i.e. something opposite to “inflation is everywhere a monetary phenomenon”, which I think has been extremely damaging to economics

    something like “inflation is nowhere a purely monetary phenomenon” or something like that – I dunno

    anon Reply:

    as MMT frequently points out, the truth is often the opposite of convention

    Ramanan Reply:

    “however, returning to my Billy comment Ramanan, private sector leverage can obviously boost income just like government fiscal when it does work”

    Yes of course. deficit spending units add demand. Such as the US private sector running deficits at such a massive scale for so many years before the crisis.

    anon Reply:

    Here’s one of Krugman’s earlier posts on loanable funds:


    I guess my point is that if you read it, he gets NFA right.

    And he also knows that the central bank sets the policy interest rate.

    The question is how he continues to reconcile this with a loanable funds framework – which is indeed a blend that is very mangled from a pure MMT perspective.

    roger erickson Reply:

    > the truth is often the opposite of convention

    More accurately, convention bears no correlation with what to do next. This is a fundamental aspect of all systems science, from quantum physics to thermodynamics to chemistry to biology and on up to human markets. It’s why we’re evolving, vs designing.

    “There is no point of stability in the natural world that is not most efficiently shaped as a dynamic equilibrium between conflicting forces.”

    If you ponder the consequences of that plus “no predictive power” it’s obvious that “what worked yesterday” has only random correlation with “what works tomorrow”. Things will always be subtly different, but we can never predict exactly how.

    As Warren says, how do you get people to explore their group options, instead of bickering over what they think “should” happen?


    did i say that?

    Ramanan Reply:


    May not be given in one place. Check this article by Marc Lavoie about his opinion on the New Consensus http://www.econ.fea.usp.br/gilberto/eae5948_2_2007/Lavoie_New_Cons_Metro_2006.pdf

    but keep in mind his conclusion “Needless to say, there are limits on what can be achieved through monetary policy, most particularly on the upside, limits that could not be discussed here.”

    Also, importantly, with “central bank independence”, uncoordinated attempts (fiscal/monetary) can simply lead to undesired outcomes which mainstream doesn’t understand because fiscal policy seems to have no role in mainstream.


    Ramanan Reply:


    My summary view of the new consensus is the following. The newconsensus is simply a variant of monetarism, but without any causal role for money. The crucial ideas embraced by Milton Friedman can be found in his Nobel Lecture (Friedman, 1977). There Friedman reiterates his belief in the natural rate of unemployment and the validity of the vertical Phillips curve, which is essentially equation (2) of the new consensus model.

    What I gather is that whatever central bankers write about their “dual mandate”, the New Consensus seems to work directly by throwing some people out of employment.

    This is of course obvious in the current situation but even in normal times, its true …


    how about marc’s later stuff?

    vimothy Reply:

    “something like “inflation is nowhere a purely monetary phenomenon” or something like that – I dunno”

    But this is pretty information free. Why not say what actually causes inflation?


    anon Reply:

    cause Friedman was so wrong

    vimothy Reply:

    But wrong how? And if he was *so* wrong, why insert a caveat about a purely monetary phenomenon–why not go for the straight negation of the statement? Unless you explain what inflation is, your slogan is ambiguous, which is not an effect that seems very useful to me.

    Sloganeering–Friedman did it better ;-P


    rates go up if the fed votes to hike

    krugman believes there is a long term deficit problem and his arguments about inflation longer term don’t cut it


  7. mike norman says:

    This is an excellent post. I think one of the best and clearest you have made. I agree with all of this.


    Mario Reply:

    agreed. great post Warren.



    thanks. and thanks for helping formulate it


  8. Winslow R. says:

    “Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.”

    And on a ‘happier’ note……

    PepsiCo unveils 100 percent plant-based bottle
    PepsiCo creates entirely plant-based bottle, plans to cut carbon footprint

    “The bottle is made from switch grass, pine bark, corn husks and other materials. Ultimately, Pepsi plans to also use orange peels, oat hulls, potato scraps and other leftovers from its food business.”



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