US Approaching Insolvency, Fix To Be ‘Painful': Fisher

I waited a couple of days before doing this thinking there might be some retractions.
Or some serious mainstream push back.
But apparently not.
Apparently this high ranking Fed official, as well as the mainstream financial press,
actually believes the US Government could lose it’s ability to make payments,
demonstrating they all have no grasp of actual Fed monetary operations.

This is further confirmed when he goes on to discuss
‘tightening’ where he indicates that in addition to rate hikes,
‘tightening’ can be done by reducing reserves per se.
He doesn’t seem to realize that this went out with the gold standard.

Highlights below:

US Approaching Insolvency, Fix To Be ‘Painful': Fisher

March 22 (Reuters) — The United States is on a fiscal path towards insolvency and policymakers are at a “tipping point,” a Federal Reserve official said on Tuesday.

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when,” Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt. “The short-term negotiations are very important, I look at this as a tipping point.

But he added he was confident in the Americans’ ability to take the right decisions and said the country would avoid insolvency.

“I think we are at the beginning of the process and it’s going to be very painful,” he added.

Fisher earlier said the US economic recovery is gathering momentum, adding that he personally was extremely vigilant on inflation pressures.

“We are all mindful of this phenomenon. Speaking personally, I am concerned and I am going to be extremely vigilant on that front,” Fisher said in an interview with CNBC.

Fisher also said that the U.S. Federal Reserve had ways to tighten its monetary policy other than interest rates, including by selling Treasurys, changing reserves levels and using time deposits.

He added that he does not support the Fed embarking on an additional round of quantitative easing.

“Barring some extraordinary circumstance I cannot forsee…I would vote against a QE3,” Fisher told CNBC. “I don’t think it’s necessary. Again, we have a self-sustaining recovery.”

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244 Responses to US Approaching Insolvency, Fix To Be ‘Painful': Fisher

  1. Craig says:

    warren – i’ve been a interested follower of your site. it seems the activity (comments) have been increasing. good indicator of interest in MMT. can you provide some analytics. compete.com and google trends provides statistics but are usually only accurate for larger sites. how many pageviews are you averaging per month and how has it changed over time?

    http://siteanalytics.compete.com/moslereconomics.com/
    http://www.google.com/trends

    thanks
    a curious marketing guy

    Reply

    WARREN MOSLER Reply:

    It’s been going up reasonably steadily. This week is up again to a new high with just under 2,000 hits a day on average.
    Was less than half that a year ago.

    Don’t know how that measures up with anything.

    Reply

    hbl Reply:

    The hits per day measure is most likely pretty misleading. You have very active commenting on your posts and that hits/day is probably dominated by all the page reloading by your commenters, unless that is somehow configured to be filtered out.

    Unique visitors is a much better gauge of site traffic.

    Reply

    WARREN MOSLER Reply:

    ok, will check on google analytics

    Craig Reply:

    HBL is correct – unique visitors growth would be a better indicator.

    Anyway you can add me as a viewer to your google analytics so i can see how people are arriving to your site. I spoke to you over the phone this summer about the possibility of putting together a media project. (ctaustin at gmail dot com)

    http://www.google.com/support/analytics/bin/answer.py?answer=55500

    MMT needs marketing. A good story built around a subject people are looking for answers too. Looking at google keyword tool there is alot of interest around “federal debt” at 300k searches a month. Not much competition in the space from a SEO perspective either.

  2. MamMoTh says:

    I posted this in the currency as commodity page where it might be more appropriate to get the answer to my questions. Thanks.

    WM: there are liabilities you call ‘money’ but taxes are paid by the debiting of member bank reserve accounts at the Fed, and reserves come only from govt. itself.

    I understand that. I’ve read 7DIF and the other mandatory readings as well.

    Maybe I didn’t get them, but I don’t understand what you mean precisely when you say the govt is a price setter.

    I understand it can set the price of reserves loaned to banks. But how does it set the price level of the economy?

    The private sector owns NFAs equal to the past deficits which they use to buy goods and services. So how does the govt set prices?

    I think I could ask the same question about the corn producer. Once the private sector has warehoused plenty of corn they use among themselves, to what extent can the corn producer set its price?

    Reply

    studentee Reply:

    wouldn’t the corn producers ability to costlessly destroy and create corn at will matter?

    Reply

    MamMoTh Reply:

    Actually, in Warren’s analogy, the corn producer does not have the ability to destroy corn at will, as opposed to the ability of the govt to destroy NFAs of the private sector.

    I don’t know if this does matter for the purpose of analysis.
    I’m really struggling to understand this so I would welcome any insights but I think it would be better to do it in the comment section of the currency as commodity article, for future reference.

    Reply

    WARREN MOSLER Reply:

    with a currency, a simple public monopoly, the govt controls notional supply and demand.

    it happens like this;

    1. A govt desires to provision itself

    2. the govt sets a tax liability which creates unemployment as we define it- people looking to sell their goods and services for the now needed unit of account- the govt’s currency of issue.

    3. Goods and services will be offered for sale to the extent the population needs the currency to pay its taxes and net save

    4. the govt now can provision itself by spending it’s currency to buy the goods and services offered for sale.

    and if unsold labor remains after the govt has provisioned itself, it means the tax created too much unemployment and was too high for the given sized govt.

    WARREN MOSLER Reply:

    yes, and they now do, to make ethanol.

    however it all depends on the level of competition.

    in the case of perfect competition- infinite and tiny buyers and sellers- no one producer can alter price by cutting back on his supply. of course there is no such thing, but that’s another story.

    in the case of a single supplier, the case that’s easiest to understand, the producer sets a price and lets quantity sold float, then adjusts price to suit.

    and volumes have been written about all the in between cases, indicating that like perfect competition they aren’t all that easy to grasp either.

    Reply

  3. Ramanan says:

    “so in theory, taxation creates demand for endogenously created money, and reserves are just a side story”

    Anon,

    Yes its possible for the Government to be a creditor of the rest of the world such as a situation in which the “funds to pay taxes come from” come from exports :-)

    Though this may be an extreme example, one can think of a nation which is running persistent external surpluses and government debt going down…again funds to pay taxes coming from the external sector.

    Reply

    anon Reply:

    never fear, Ramanan

    one of these days, I’ll get around to your external sector focus

    as soon as I finish domestic

    :)

    Reply

    Ramanan Reply:

    yea!

    Reply

    Neil Wilson Reply:

    It’s not that extreme is it? Doesn’t Norway run like that – they have to run a persistent government surplus.

    Reply

  4. Tim says:

    Discussions motivated by the perceived fear of an unsustainable deficit does have important value. It prods us to analyze allocation of money. How would an economy managed by MMT principles keep politicians from misallocating money? Right now, it is partly the fear of insolvency that motivates us to inspect where money is spent. Once insolvency is no longer feared, I have concerns self interest of federal policy makers will result in greater ‘pet projects’ and likely less productive allocation of money. The current perception of deficits is pretty successful at keeping attention on where money is spent, the relative price paid and the benefit. I think an economy managed by MMT principles has the best potential to optimize productive capacity and likely raise standards of living for it’s citizens. But. I also have a nagging thought MMT will create a new set of problems that I hope are less challenging than current. If we keep operating as is, then I expect all will be fine, just less than optimal. Any thoughts shared as to how MMT can keep a healthy debate on allocation of money once the fear of insolvency is gone will be appreciated.

    Thanx in advance,

    Tim

    Reply

    Kristjan Reply:

    Then the discussion would be about real costs and trade-offs I guess.
    Should our streets be more safe or should we have a better education? Or whatever in this line..

    Reply

    Neil Wilson Reply:

    For me the allocation should be via enhanced automatic stabilisers, ie the economy should ensure that ‘zero’ is an amount that allows somebody to live a minimum standard lifestyle for the supply of a reasonable week’s labour.

    That’s why the job guarantee is such a prominent policy recommendation. The stabilisation is automatic. The private sector and conservatives can reduce the spend by simply investing and hiring more workers.

    The more automatic the stabilisers the less manipulation options there are. Discretionary government spending that requires thought should be discouraged IMO.

    Reply

    WARREN MOSLER Reply:

    think the earmark thing and vote buying would get worse?

    could be.

    seen my proposal that all states get an equal pro rata/per capita share of total gov expenditures? then there is no vote buying as they get the same $ in any case

    Reply

  5. Ramanan says:

    New post by Krugman

    http://krugman.blogs.nytimes.com/2011/03/26/a-further-note-on-deficits-and-the-printing-press/

    Comments open in yesterday’s post

    Reply

    Kristjan Reply:

    There is a link on Krugman’s post James Galbraith debating him about MMT and there Krugman doesn’t post Jamies second responce, I got It here:

    Paul, thanks for this response.

    Let’s first notice that the concerns about national bankruptcy, hyperinflation and so forth that characterized your first post have now disappeared.

    At this point, we agree on the (fairly trivial, and highly remote) thesis that at full employment, a higher rate of (garden-variety) inflation can be a problem.

    And we agree that this thesis is both trivial and highly remote.

    However, there still remains an important question.

    Should we, or should we not, act *today* to cut *projected* deficits at some future date?

    For instance, by cutting Social Security and Medicare?

    I say no.

    I say there is absolutely no economic reason to enact future cuts in these vital programs.

    I say that the economic forecasts of vast deficits and high interest rates *after* the return of full employment are implausible and internally inconsistent, for reasons given in my testimony to the deficit commission, and elsewhere.

    I say that good policies cannot be based on bad forecasts, that we should solve the unemployment problem first, and that when we have done so, the most likely thing is that tax revenues will rise and the deficit forecasts will be proven wrong.

    This is what happened in the late 1990s. Why should we think it wouldn’t happen again?

    Paul, I challenge you to drop the long-term deficit argument entirely — it will be used in a few months, in a dishonest way by unscrupulous people, to support cuts in Social Security and Medicare that cannot be justified by economic logic. These are cuts which, I am sure, you will oppose when they are proposed.

    Don’t set yourself up.

    Reply

    Tom Hickey Reply:

    It’s up at Krugman’s blog in his second post in July here.

    Reply

    WARREN MOSLER Reply:

    right on all but this is problematic:

    “the most likely thing is that tax revenues will rise and the deficit forecasts will be proven wrong.

    This is what happened in the late 1990s. Why should we think it wouldn’t happen again?”

    needs a ‘not that it matters’ and ‘not that we have any reason to care’ qualifiers

    Reply

    Kristjan Reply:

    I guess he was trying to talk to the mainstream against arguments “deficits can’t go on forever”
    he meant “most likely they are not going to”
    but yes you are right just like Japan 200% to gdp and Japanese government has exactly the “same amount” of money to spend like It always does. :) i love this stuff

    WARREN MOSLER Reply:

    yes, downgraded below Botswana, debt ratios off the charts, an earthquake and leaking nukes, and no inflation and a strong currency and 10 year jgb’s going through at 1.21%.

    and they all act like they are at the ‘tipping point’ for the sky to finally fall

    Kristjan Reply:

    I meant most likely the huge deficits are not going to be there forever

    WARREN MOSLER Reply:

    right, a strong economy will bring them down which will end the cycle again proving full employment is not sustainable under current institutional arrangements.

  6. studentee says:

    “yes, and it’s too peculiar to even comment on.”

    nonsense! comment away, warren! :)

    Reply

    WARREN MOSLER Reply:

    i’ll let someone else here go first…

    Reply

    Tom Hickey Reply:

    I’m in the queue. No comments visible yet.

    Reply

  7. Keith Newman says:

    Re Krugman:
    For anyone interested Krugman’s blog is still saying no comments yet at 14h00 Eastern time.

    Reply

    Tom Hickey Reply:

    Comments up at Krugman’s (147)

    Reply

    Tom Hickey Reply:

    Warren’s comment is #26 if you want to cut to the chase. To his credit, PK OK’d the whole comment, even though its way over his limit.

    Great comment, Warren, as always. This is a classic.

    Reply

    Neil Wilson Reply:

    New post at Krugman. He still doesn’t get it.

    http://krugman.blogs.nytimes.com/2011/03/26/a-further-note-on-deficits-and-the-printing-press/

    WARREN MOSLER Reply:

    yes, and it’s too peculiar to even comment on. he’s losing whatever credibility he might have had.

    Kristjan Reply:

    And he mentioned Jamie too. The war is on now :)
    Very good publicity lately Warren’s Reuters Insider interviews, John Harvey in Forbes, Bill Mitchell and The Nation. You can’t ask for more. This is not going to end here.
    he is using “modern monetary theory people” and MMT, if Krugman is talking about It then they can’t be “crazy money printers”.

    This is what the first impression usually is: are you crazy? you want to print money? you know what’s gonna happen.

    WARREN MOSLER Reply:

    and it seems to be getting quite a bit of broad based support that won’t go away.
    it’s just too obviously correct once you get started with it.

    WARREN MOSLER Reply:

    thanks! wrote it in extreme haste but came out ok. Sad the burden of proof is on us.

    but very encouraged by the overwhelming majority of responses emphatically in our favor!

    beowulf Reply:

    I just dropped a comment at Krugman’s round 2:

    “full employment and… a federal deficit equal to 6 percent of GDP”. Hmm, I think you’re forgetting something Paul (hint you won a Nobel Prize for your work in this area). To quote Randy Wray:
    “With a trade deficit, the budget has got to offset it to avoid a domestic private sector deficit…At the aggregate level, the private sector balance must equal the public sector balance plus the foreign sector balance… If the federal government has a balanced budget, and the trade deficit is 5% of GDP, then the private sector must have a deficit of 5% and the outstanding stock of private sector debt will also grow. employment can only be rarely achieved, and only when the private sector runs sustained deficits.”
    http://www.cfeps.org/pubs/pn/pn0202.html

    Obviously, this explains why Clinton’s balanced budget at full employment in 2000 was unsustainable. Not so obviously, Wray and Wynne Godley pointed this out… in 1999.
    “the notion that a federal budget surplus is sustainable come hell or high water and that it promotes economic growth must be abandoned. Given the realities of the U.S. trade imbalance, public sector surpluses are consistent with economic growth only so long as the private sector’s financial situation deteriorates at an accelerating pace.”
    http://www.epicoalition.org/docs/99-4.htm

    WARREN MOSLER Reply:

    and with all the domestic demand leakages the govt deficit may need to be 3 or 4% of gdp just to fill that spending gap alone

    beowulf Reply:

    Right, and Randy does make that point about private savings in his paper. I excerpted what he wrote about trade deficits simply because Krugman’s Nobel was “for his analysis of trade patterns and location of economic activity”.

  8. hbl says:

    I can’t say whether Krugman’s misrepresentation of MMT is intentional or not… I know there are opinions on both sides.

    However, one clear motive he would have for misrepresenting it is a concern that MMT might make it too “easy” to justify allowing the richest segment of the population to accumulate wealth faster (i.e., lower taxes for those with marginal propensity to spend of zero).

    Tom Hickey, I’ve seen you bring up the concept of taxing economic rent. Doing so would of course reduce the deficit, without much negative impact on economic activity! You argue the case openly and honestly based on an accurate understanding of the monetary system. Krugman may have decided that using the deficit as a motivator for change may be more effective politically than being honest.

    Or maybe he really doesn’t fully get it… as I said previously I think PKs do have some unique understandings among economists, e.g., properly conceptualizing the accounting and its implications all the way up to the macro level.

    Reply

    Oliver Reply:

    The part I find problematic about a very strict definition of functional finance , is that it is a: patronizing and b: as you say not primarily concerned with distributional issues. To be optimally effective, a functional finance fed/cb would have to target those with the highest propensity to spend out of income – i.e the lowest earners. So one would be left with a situation in which the financial ‘puppeteers’ control effective demand by adjusting taxes of the common man. The Bill Gates and Warren Buffets of this world don’t figure in this at all.

    Monopoly taxes on the other hand are really a political choice (a right one, I might add) but not an immediate economic one within the strictest FF sense.

    So I’d argue, that in order to become more palatable to the mainstream, one would always have to mention both – while also stressing the functional distinction.

    Reply

    WARREN MOSLER Reply:

    your ‘optimally effective’ assumes a minimum deficit at full employment is optimal.

    misses the point, seems

    Reply

    Oliver Reply:

    possible :-). I’ll give it another thought, am not quite following you.

    beowulf Reply:

    Oliver, Lerner’s 1943 article Functional Finance focused on govt’s duty to regulate aggregate demand.
    http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf

    Lerner’s book, Economics of Control, came out a year later and also discussed secondary govt goals of controlling income inequality and monopolies.
    http://203.200.22.249:8080/jspui/bitstream/123456789/1052/1/The_Economics_of_control.pdf

    Reply

    Oliver Reply:

    thanks! i realize that was a gross oversimplification of FF above. should have said something like: the focus on taxation only as demand management is too limited and then qualified that nobody is actually saying that.

    beowulf Reply:

    You’re welcome. All three govt regulatory duties (aggregate demand, income inequality and monopolies) can be accomplished most efficiently through the tax code. As Justice Harlan Stone advised FDR’s Labor Secretary Frances Perkins while she was drafting the Social Security Act, “The taxing power of the Federal Government, my dear; the taxing power is sufficient for everything you want and need.”
    http://findarticles.com/p/articles/mi_m4325/is_n5_v43/ai_n25025009/?tag=content;col1

    Aggregate demand through tax holidays (and adding back Perkins’ “employment assurance” job guarantee cut from original Social Security Act), income inequality via progressive taxation/tax credits, rent seeking monopolies and cost push inflation via some kind of gross markup tax (limited, say, to large corporations and only the markup above their particular industry sector’s avg gross profit margin). The “Lerner Index” at first link is a reference to Abba Lerner’s work on monopoly pricing power.
    http://www.economics-ejournal.org/economics/discussionpapers/2008-28#comments
    http://www.daniel-james-scott.com/strategy-execution/financial-matters/gross-profit-margin-benchmarks

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