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

Posted by WARREN MOSLER on March 24th, 2011

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.”

244 Responses to “US Approaching Insolvency, Fix To Be ‘Painful’: Fisher”

  1. Joe Says:

    “I waited a couple of days before doing this thinking there might be some retractions…But apparently not.” LOL, sad but funny.

    Reply

  2. james hogan Says:

    How did this guy get appointed to the FED in the first place? Isn’t there some means of removing officials for incompetence?

    This afternoon CNBC had some guy on (Richard somebody), delivering a spiel about how the US was going broke, and would be UNABLE TO PAY ITS DEBTS. Does CNBC not have anyone on their staff that knows better than this? I see this kind of nonsense all the time, and it gets a free pass from the interviewer. It’s almost like someone had said that the world was flat, and the treated the remark a just another “observation”? This kind of stuff is becoming a joke.

    Reply

    WARREN MOSLER Reply:

    agreed

    Reply

    beowulf Reply:

    The serious trouble with Fisher is that he WASN’T appointed. He was hired by the Dallas Fed board of directors. Since the US Constitution is not an element of of Larry Meyer’s Washington University Macro Model I guess it doesn’t matter, but the Appointments Clause gives the President and his designated officers the power to hire and fire people who are entrusted with federal executive authority.

    It seems anomalous to me that every member of the 2000+ Selective Service draft boards (yes, there are still draft boards) is appointed by the President of the United States, but someone like Richard Fisher can be a voting member of the Federal Open Market Committee without a Presidential appointment nor without any risk of the President firing him for cause (as he can, err, “can” the appointed Fed governors).

    Local Board members are volunteers appointed by the President. They play an important community role closely connected with our nation’s defense. If a military draft becomes necessary, approximately 2,000 Local Boards throughout America would decide which young men in each community receive deferments, postponements, or exemptions from military service based on federal guidelines.
    https://www.sss.gov/localboardmembers/bminquiry.asp

    Reply

    mike norman Reply:

    This is NOT a joke. It is very serious matter because Fisher is a high ranking Fed official as Warren stated. His failure to understand monetary operations and our monetary system is a disaster waiting to happen. Policy prescriptions will be guided by his thinking and the thinking of those who believe the same things that he does.

    Reply

    Steve Reply:

    Mike,
    You were looking for debate topics for your Friday show; this is a good one. “Do the Federal Reserve heads understand monetary policy”.

    Reply

    Tom Hickey Reply:

    When institutions fall, there is generally either something is amiss in the selection process, or cheating. Here it is a combination of the two, in that the selectees are not only “interested” in Tom Paine’s sense, and also ignorant of the field. Deadly combo.

  3. Art Says:

    Re his competence, governorships are fairly political appointments, aren’t they? I wonder if (hope that!!!!) there are folks on the inside who disagree with him but are being polite…letting Richard be Richard. There always seems to be one or two governors on the fringe at any given point in time, and they rarely air internal disagreements. It would be nice to see the “fiscal authorities” stand up and defend themselves though.

    Reply

    beowulf Reply:

    Art, he’s NOT a Fed governor, FRB governors are appointed by the President and confirmed by the Senate and may be fired for cause. Fisher is a Fed bank president. The Dallas Fed hired him, not the President and Senate, Its confusing for the simple fact that its a blatant violation of the Appointments Clause for Congress to grant federal executive power to individuals (Fed bank presidents) who are not presidential appointees.

    Richard W. Fisher assumed the office of president and CEO of the Federal Reserve Bank of Dallas on April 4, 2005. In this role, Fisher serves as a member of the Federal Open Market Committee, the Federal Reserve’s principal monetary policymaking group.
    http://dallasfed.org/news/bios/fisher.html

    Reply

  4. roger erickson Says:

    At it’s core, this is a problem of isolation. We now have tens of millions of people extensively trained is specialized areas, to the point that they’re losing cross-domain connectivity, and hence losing ability to tune-and-be-tuned-by the group process.
    That ends up like having an engine with perfectly tuned components, but no way to actually tune the damn engine!

    Maybe Hansel & Gretel can save us from the BiPartisan Thinking Deficit Conundrum?

    If we can have fiat currency, why not fiat thinking? What a concept! Allow Congress & other Public Agency staff to think, freely, without any required subsidy from any lobbyist. Should be “Libertarianating”.

    Start by having Congress re-read basic folklore? Is that the path back to common sense?

    Common sense requires adequate interaction with common people. Our policy wonks are all shielded behind impenetrable curtains. There are system-science equations belaboring that point, but it’s hard to get most people to see it.

    Any suggestions? Any scalable methods for forcing adequate re-connectivity? It doesn’t matter who’s right. Usable data & knowledge follow group methodology, not the other way around. Causality flows from group methodology to leveraged components. We need methodology for recruiting group alignment, before the target is even chosen. Like it or not, all the tasks discussed here are now in the realm of politics, where existing methodology is all outdated and failing to scale.

    We need methodology first. Any ideas?

    Reply

    Tom Hickey Reply:

    Roger: Any scalable methods for forcing adequate re-connectivity?

    The traditional method is revolt. If Ravi Batra is correct, this is the method that will be applied. It is already being applied in some parts of the world. There are hard revolutions and velvet revolutions, but that’s what it takes to break through the bubble. The Tea Party in the US gets that, for example, but we’ll see what happens to them now that some of them are in the bubble. The bubble is suffocating.

    Reply

    Mario Reply:

    Well there’s also conscious non-violence and protest. If anything I only support this type of “revolt.” Sometimes I wish I wasn’t so non-violent b/c of the things I see but then I just cool myself down and get my perspective readjusted.

    Ghandi, MLK, Thoreau, John Lennon, etc. Peaceful protest is my method of choice. There are a few things “they” don’t know how to handle…laughter, peace, non-violence, authentic power, truth, honesty.

    I think the reason we haven’t had revolts here sooner is b/c much of the X and Y generations (my generations) is inherently non-violent regardless of how bad it may be.

    Reply

    Mario Reply:

    also I anonymously created a petition for this Congressional Reform Act idea you may have seen come through your email as it did mine.

    Apparently, this petition website SignOn.org is run by MoveOn.org and if enough signatures get on a petition, MoveOn.org may pass it along to various reps and channels in DC and see what they can do with it as well. Pretty cool and I think makes this worthwhile.

    You can see the demands of the petition here and also sign if you care to.

    http://signon.org/sign/congressional-reform-2?source=s.fwd

    Reply

  5. Alex Says:

    Judging by these comments, I think a USA sovereign debt downgrade by Moody’s is in order!

    ….not because the USA can’t “afford” to meets its obligations, but rather because of the risk of political incompetence!

    Reply

    WARREN MOSLER Reply:

    Agreed!
    I would definitely downgrade on ‘willingness to pay’ and make that point crystal clear. In fact, I’ll write something up on that

    Reply

    beowulf Reply:

    “Willingness to pay”, you make it sound like a choice and not a disease. I’d downgrade on grounds of “mental incapacity”.

    The US Government is like a senior citizen with $10 million in the bank but who lives in a squalid house without running water. While this poor soul has more money than he could ever spend, he lacks the mental competence to take care of his basic needs.

    If however, the person lacks sufficient mental capacity to make decisions, society may, under certain circumstances, intervene on their behalf without their consent… As more is learned about mental function and greater attention is paid to preserving individuals’ rights, greater emphasis is placed on identifying, in functional terms, specific mental tasks and skills people retain and lose. Describing a person’s ability or “capacity” to perform particular tasks, such as remembering to pay one’s bills or calculating how much change one is owed, is a more useful and meaningful way of looking at mental disability.

    The amusing part of that legal position is that the mentally incompetent can’t be bound by the contracts they make– sorry bond market. :o)

    Consent is when someone accepts or agrees to something that somebody else proposes. For consent to be legal and proper, the person consenting needs to have sufficient mental capacity to understand the implications and ramifications of his or her actions. (same link)

    Reply

    beowulf Reply:

    Sorry, here’s the elder abuse website (which is, to be clear, no laughing matter), I retrieved those definitions from.
    http://www.preventelderabuse.org/issues/capacity.html

    Roger Erickson Reply:

    “Willingness to pay” tracks “political incompetence” which simply tracks “electoral incompetence.”

    When group intelligence degrades below some minimum, the safety valve resorts to survival of subgroups and individuals – painfully embarrassing as that is to even consider.

    Reply

    Tom Hickey Reply:

    It’s about coordination, and when that falls below the threshold of stablity, cohesion breaks down. This is what the survivalists are preparing for. We are a way from that yet, but civilization hangs by a thread, as we see when it breaks down.

  6. anon Says:

    Maybe he’d think about it a bit harder if the Fed was a department of the US Treasury.

    :)

    Reply

  7. JJTV Says:

    I think one of the biggest problems with economics, as a discipline, is that it is not standardized across Universities. Some individuals will graduate with PhD’s in neo-classical economics, general equilibrium, Monetarism, Post-Keynesianism, Chartalism, etc. People believe that the best Universities in US (Harvard, U Chicago, etc.) train their students in the correct paradigms. This is an obvious fallacy; however, unless you’re practicing medicine people are unable to see the immediate effects of their policy recommendations. It is the equivalent of a medical student going to University of Chicago and being taught the demon theory of disease and another going to UMKC and being taught modern medicine. U. Chicago would lose all credibility as their doctors continued to kill sick patients while UMKC would gain credibility as students continued to heal theirs. There is little room for debate over facts in hard science but a significant amount in economics.

    Statements from people like Richard Fisher confirm this disconnect in economic theory. There are people at the Fed who have PhD’s but were not taught central bank accounting during their coursework and instead taught general equilibrium (or whatever theory their professors ascribed to). My neighbor in Kansas City works at the KC Federal Reserve and received his PhD from Carnegie Mellon. He knows almost nothing about Central Bank accounting but lots about econometrics, general equilibrium, monetarism, etc. The people in charge of US central bank operations are completely unqualified for the job, however, that is already apparent for the people who visit this site.

    Reply

    Oliver Reply:

    I think one of the biggest problems with economics, as a discipline, is that it is not standardized across Universities.

    The problem is that it claims to be an exact science, when it as actually a social science which is as much a study of quality as it is of quantity. I don’t think homogeneity of theory is what we should be aiming for, in fact I’d say we first need the opposite to happen, namely to completely dismantle all all things that are currently believed, innocently or not, to be ‘true’. Once you get to the point where people know that 90% of what’s being said depicts the world as the economists would like it to be and not as it actually is, it should become easier to distinguish between such ‘social’ realms of the profession and those that are more or less quantifiable. Economics need to be demystified.

    Reply

    Tom Hickey Reply:

    Brad DeLong argues that economics as it is presently practiced is not even a discipline, let alone a science. Many economists, sone in high places, just make stuff up, a lot of which has been previously refuted.

    Is Economics a Discipline?

    Reply

    Jim Baird Reply:

    Well, I’m glad Brad agrees – since seeing him spewing nonsense and still being held up as a respected economist was a big factor in my decision to drop out of a grad program in economics…

    Reply

    ESM Reply:

    Good point.

    “Many economists, some in high places, just make stuff up, a lot of which has been previously refuted.”

    Yup, he should know as well as anyone.

    WARREN MOSLER Reply:

    and refutiated

    anon Reply:

    its worse

    most economists don’t have a grasp of accounting in general

    and they’ll insist it isn’t important

    somewhat like a physicist saying math isn’t important

    the “discipline” is intellectually bankrupt

    start over

    Reply

    Tom Hickey Reply:

    start over

    Godley & Lavoie, Monetary Economics (2007).

    Reply

    Greg Reply:

    Yes Anon

    It has always struck me as the absolute dumbest criticism, the one that says “Its just accounting”. ???

    Without accounting how do we know who has how much of what?

    These same people quote the “deficit” which is of course……. accounting of the difference between federal money creation and destruction.

    These same people also feel good when they get their 401k statement and it is a larger number…… and this is simply accounting of the prices of various stocks and bonds.

    Everything which we quantify and then tabulate into a distributable form IS accounting.

    Reply

    MamMoTh Reply:

    Accounting might be important but it’s not economics.

    You can keep record of the initial and the final position of an object in any period of time, but it doesn’t tell you anything about which trajectory the object took, nor why did it take such trajectory.

    Now MMT is not about accounting although that is the impression you give. As far as I understand it, it’s an accounting consistent operational description of transactions. It might be wrong, but it’s consistent.

    Reply

    anon Reply:

    and then there’s the economist who blamed accounting for not predicting GDP growth or Fed rate changes

    Neil Wilson Reply:

    Standard economics doesn’t do dynamic modelling. That’s the beef that Steve Keen appears the have with it.

    vimothy Reply:

    “Standard economics doesn’t do dynamic modelling. That’s the beef that Steve Keen appears the have with it.”

    That’s a totally absurd criticism.

    Neil Wilson Reply:

    Better take that up with Steve Keen then.

    “But it is the wrong mathematics because the analysis compares two equilibria separated by time rather than being truly dynamic by analyzing change over time regardless of whether equilibrium applies or not, and wasted brain power because the initial premise—that aggregate debt has no macroeconomic effects—was false.”

    http://www.debtdeflation.com/blogs/2011/03/04/%E2%80%9Clike-a-dog-walking-on-its-hind-legs%E2%80%9D-krugman%E2%80%99s-minsky-model/

    Calgacus Reply:

    “somewhat like a physicist saying math isn’t important”Oh, they used to. Google gruppenpest. The ill effects of a divorce between mathematics and physics in the middle of the last century, largely because of the demise of the German research univerities due to the war and the center of research moving to the overly pragmatic, “shut up and calculate”, USA, are still felt.

    Reply

    beowulf Reply:

    “somewhat like a physicist saying math isn’t important”

    Yeah, Economists are to the economy as astrologers are to astronomy. A pity that the City of Chicago has pretty onerous legal obstacles (in defiance of all who love free markets) to burning witches at the stake within city limits. Kudos to the Inquisitors of the Minneapolis Fed who extracted these confessions from David Card (treason) and James Heckman (heresy).
    Your research on the effects of raising the minimum wage, much of which was compiled in your book with Alan Krueger, generated considerable controversy for its conclusion that raising the minimum wage would have a minor impact on employment…
    “I think economists who objected to our work were upset by the thought that we were giving free rein to people who wanted to set wages everywhere at any possible level. And that wasn’t at all the spirit of what we actually said… I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.”

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3190
    Guilty!

    “I studied the textile industry, where I had data going back to 1915, and found tremendous changes occurring in a three-year period after the passage and enforcement of Title VII [of the Civil Rights Act] in 1964. In South Carolina and the South in general, there was massive integration.

    It took me a long time to piece this evidence together. And to be honest, I found that some of my colleagues at Chicago were very hostile to this finding, and some remain so. Some want to believe that markets by themselves will solve problems like racial disparity. Markets do many useful things, but they did not solve the problem of race. Not in America. That’s probably heresy to admit it as a Chicago economist, but I became convinced that a doctrinaire notion that markets would solve the problem of discrimination is false.”
    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3278
    Guilty!
    :o)

    Reply

    Ramanan Reply:

    “Yeah, Economists are to the economy as astrologers are to astronomy.”

    Lol!

    Reply

    ESM Reply:

    Beowulf,

    I’d say your snark is awfully unfair. Before smugly ridiculing Chicago economists based on one side of the story, you should probably take a closer look at the arguments involved.

    As for Heckman’s blanket assertion that markets didn’t solve problems of racial discrimination, I will only make the obvious point that Jim Crow laws were promulgated and enforced by GOVERNMENT (at the state and local level). A business owner who wanted to open his doors to black people was strongly discouraged, not only by vigilante racists, from which the government would not protect him, but by the government itself.

    Reply

    beowulf Reply:

    All legal markets (so sex slave trafficking excepted) are the product of the legal regime they operate under. A government failure that leads to a market failure means… there’s a market failure. Heckman’s point is indisputable: It wasn’t the invisible hand that desegregated schools, it was men wearing guns and US Marshal badges.
    http://smidgetdesign.files.wordpress.com/2009/09/the-problem-we-all-live-with-norman-rockwell.jpg
    Norman Rockwell, guilty!

    beowulf Reply:

    One other point, the issue isn’t about “the arguments involved”. Even if we assume Card and Heckman have made erroneous conclusions, its the reaction to their conclusions that is interesting. Card: “it cost me a lot of friends”. Heckman: “very hostile to these findings”. They likened the response to their published research to accusations of treason or heresy.
    I was snarky about it because its amusing to read about champions of rational expectations acting so damn irrationally. Oh, and I apologize for not adding a link to a gong side effect next to each “Guilty!”.
    http://gooong.com/

    ESM Reply:

    “A government failure that leads to a market failure means… there’s a market failure.”

    Oh, good grief. And I suppose the failure of communism was a market failure too. This is the same kind of pedantry that Erickson guy was spewing at me when he said that a chair had something to do with physics.

    beowulf Reply:

    Yup, Soviet Union earned foreign reserves from sale of oil. However, Saudi Arabia controlled the world price of oil and was, unfortunately, was allied with the USSR’s chief nemesis, the United States of America… monopolistic competition = market failure.
    Then the final shove: In 1985, the Reagan administration persuaded Saudi Arabia to increase oil production.

    Between 1985 and 1986, Saudi Arabia increased oil production from two million barrels a day to five million barrels. The oil price tumbled as oil supply surged: from US$30 a barrel to US$20 in just a few months. The effect on the Soviet economy was devastating. Oil was the Soviet Union’s main – practically only – exportable product, the most important source of hard currency for the economically stagnant regime.

    As former Soviet prime minister Yegor Gaidar details in a 2006 book, the Saudi action cost the Soviet Union $20 billion a year, money that had been used to pay for food imports from the West… By 1989, the Soviet Union needed US$100-billion to avoid food shortages. That desperate need for Western loans precluded any Soviet intervention when first Poland and then the rest of the Warsaw Pact shook off Soviet rule in the spring, summer and fall of 1989.
    http://www.frumforum.com/the-unravelling-of-reagans-mideast-policy

  8. vimothy Says:

    Oh come on. No one thinks there is any possibility that the US is going to run out of dollars.

    Reply

    Kristjan Reply:

    And you know what they say when you remind that to them: “I knew that, we are going to have inflation.”

    Well, why didn’t you say so? Why were you talking about insolvency?

    And then they start with that increased money supply and how that is going to cause inflation to the point where you have to trash the currency. Then you explain a little and they come up with bullshit that things are not so simple. If they were, we wouldn’t be in this mess because all these smart economists would know about It. “Are you smarter than the Nobel prize winners?” they ask you. And that’s the end of It until the next time when they applaud for exports and lowering wages. Then you explain that exports are cost and the say they knew It.

    Reply

    Mario Reply:

    exactly!!! haha!!! LOL I have been through that loop so many times with various people.

    I now have a buddy who just says, “it’s inflation. it’s coming. I promise you.”

    LOL

    Reply

    WARREN MOSLER Reply:

    and then there are those who say inflation is default

    Reply

    Tom Hickey Reply:

    You’ve been talking to Austrians, I gather. :)

    Greg Reply:

    Uhhhh excuse me Vimothy……………….. but bullshit!

    There are scads of people who think the govt is going to run out of dollars. They believe there is a fixed stock of money that must be exchanged between those who currently have them and those that dont currently have them.

    Reply

    vimothy Reply:

    Okay–some people also believe in hollow earth. But no one who knows what they’re talking about believes that the US is going to run out of dollars. Certainly no one who works for the Fed.

    Reply

    Tom Hickey Reply:

    ?

    POTUS apparently believes this, and none of his economic team clarified it. This is the presumption of the political debate going on now and no one on either side, politician or economist, is questioning it. Bernanke hasn’t clarified it. No one at the Fed that I have heard speaking out has clarified it.

    Of course everyone knows privately that under a fiat system, there is no operational on issuing currency. The only constraint is real resources, which shows up nominally as inflation. But everyone also believes that there are political restraints in place that prevent the US from operating as a fiat currency issuer. The question is whether this is true, and if it is, whether the political restraints should be removed. On the other hand, there are those that think they should be tightened down with things like a balanced budget amendment.

    Neil Wilson Reply:

    Then why persist with the ‘spending follows taxation and borrowing’ nonsense – which patently isn’t true as a matter of logic.

    If the US can’t run out of dollars then it can spend first – an amount that it can choose precisely.

    That will then cause a certain amount of taxation and a certain amount of nominal saving to arise – the composition of which it cannot dictate for certain.

    The model must reflect the structure of the real system – which is that the US is nominally unconstrained as a result of non-convertibility.

    Therefore the constraints must come from elsewhere – within the parallel real system.

    Oliver Reply:

    I see what you mean, Vimothy. But most laypeople intuitively think and argue from a ‘real’ perspective, not a nominal one, because that is closer to their personal experience – which is where the vicious cycle of innocent frauds begins. Surely, breaking this cycle and separating the dynamics of the real and (what counts as) nominal, warrants the use of some mantras?

    Reply

    Min Reply:

    My three syllable mantra:

    Mo’ money. Mo’ money. Mo’ money. . . .

    :)

    Reply

  9. hbl Says:

    The more I follow this sort of stuff the more it seems to me it really is all about politics, and most of those who seem so ignorant very likely know better. (Yes, I know many others hold this view.)

    I was recently skimming an undergrad macroeconomics textbook and it was very direct in explaining how government deficit debates are simply the political manifestation of the debate over the mix of public and private spending. It was very clear that government is not like a household. It seems like almost all economics majors/graduates worldwide must understand this, whatever they say in public… though I’d understand if some of the Chicago schoolers (a minority in numbers if not in power, right?) have fooled even themselves.

    I still recall a statement by a friend from a particularly conservative family probably a decade ago. I don’t remember the context, but he expressed a fear about the public all “voting themselves a pay raise.” And I believe he was *genuinely* concerned about economic stability, and *not* simply afraid of a risk to corporate profit margins.

    Reply

    Tom Hickey Reply:

    It involves the logical fallacy of arguing to the conclusion.

    Reply

    Craig Reply:

    Can’t the free flow of capital and public debt be viewed as simply political decisions – a byproduct of institutional structure?

    Abandoning the gold standard removed the internal mechanism that limited government borrowing. Under the gold standard government borrowing is constrained by the government’s gold reserves. The more government borrows the less likely the gold reserves will be able to cover the obligations of the debt. Market forces translate the default risk into a term structure of interest rates” .

    Free flow of capital requires government borrowing. Capital naturally flows from capital rich countries to capital poor countries where labor costs are lower and profits are higher. US firms pay Chinese for products in US dollars. The Chinese firms convert the Dollars to Yuans which increase the Dollar reserves at China’s central bank. Since trade agreements dictate that central banks can only purchases assets from other central banks, the Chinese purchase our bonds which increases US public debt.

    Everything seems political it’s just a question to what ends. I wonder if that’s why Smith referred to it as the “political economy?”

    Reply

    WARREN MOSLER Reply:

    first you need to separate ‘real capital’ from ‘nominal capital’ for this analysis?

    Reply

    Craig Reply:

    warren, i’m a laymen can you expand on what you mean? the reason i am interested is because i’m trying to flush out ideas on the role of institutional structures within systems. closing the gold window may sound benign but it actually completely changes things – eliminates the risk of default, enables governments to borrow without revenue constraints, enables the free flow of capital, enables capital rich countries to outsource to capital poor countries. all this from a small little institutional change like closing the gold window. any thoughts?

    vimothy Reply:

    “I was recently skimming an undergrad macroeconomics textbook and it was very direct in explaining how government deficit debates are simply the political manifestation of the debate over the mix of public and private spending”

    What were you expecting?

    You guys have built up a straw man of the mainstream.

    Reply

    WARREN MOSLER Reply:

    thank goodness- and I thought there was a problem!

    :)

    Reply

    Tom Hickey Reply:

    An MMT’ers who has been a fierce critic of the mainstream is Bill Mitchell. He is very specific and cites the sources he is attacking. I don’t see that this a a straw man argument.

    MMT’ers have a standing offer to debate. Almost no one takes them up on it, and at least one has refused. I conclude that the mainstream is marginalizing MMT, as they do with anything that doesn’t address questions in the way they want to frame them.

    When mainstream economists do debate, they don’t actually enter the debate, apparently because they don’t understand the accounting and don’t want to. They just want to talk in terms of their models, which MMT’ers point out are ill-conceived because they ignore monetary operation and accounting.

    The other objection one gets from mainstreamers is that MMT is “just accounting identities” and tautologies don’t really show anything.

    Reply

    vimothy Reply:

    “I don’t see that this a a straw man argument.”

    Do you ever read the stuff he is critiquing?

    “When mainstream economists do debate, they don’t actually enter the debate, apparently because they don’t understand the accounting and don’t want to”

    This is a cliché, repeated ad nauseum.

    Accounting is not nearly enough.

    Tom Hickey Reply:

    Vimothy, bill quotes exactly what he is criticizing. He is certainly correct on his criticism of Mankiw’s textbook.

    For example, here is Mankiw’s ninth of ten principles of economics: Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation’s money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 

    Regarding the few debates, I am speaking from personal experience, and there are plenty of other here who participated in such debates, including MMT academics and finance professionals. Moreover, people participating from the MMT side have written about this in comments on MMT blogs. This is well-known.

    Neil Wilson Reply:

    “Accounting is not nearly enough.”

    Perhaps not, but it certainly is a pre-requisite.

    The main problem I see is that economists fail to understand that they are working with an abstraction, and that abstraction is not the real world.

    Min Reply:

    “Accounting is not nearly enough.”

    I tend to agree. However, accounting identities are like conservation laws in physics. Conservation laws are very powerful. :)

    Reply

    hbl Reply:

    Tom Hickey said: “It involves the logical fallacy of arguing to the conclusion.”

    Sorry, not sure I follow. I’m guessing you mean the ‘everyone votes themselves a pay raise’ comment?

    Vimothy said: “You guys have built up a straw man of the mainstream.”

    I think there may be some truth in this. Maybe 50/50, but I don’t follow it all closely enough to really judge. Another thing that struck me is that the mainstream macroeconomics textbook had plenty of balance sheet accounting examples (though admittedly more at the micro level). Same with a separate Federal Reserve pamphlet on money I looked over. It’s probably only the more radical minorities in economics (but boy are they vocal!) who don’t understand accounting.

    Keith Newman (below)-

    How many actual *economists* are really clueless on this stuff? (As opposed to government officials who used to be, say, lawyers, and never studied economics.) Are they all Chicago-school educated, and if so, isn’t that only a small number of departments worldwide?

    Reply

    Tom Hickey Reply:

    What I am saying is that people know the conclusion they want to reach and construct and “argument” to get there. That is pretty much what most economists are about. Interesting that economist of different persuasion always get to the conclusions they want to arrive at. Coincidental? Or is is built into the assumptions and the way data are selected?

    Reply

    Min Reply:

    Oh, Tom! The reason for rationality is rationalization. ;)

    Tom Hickey Reply:

    Good point, Min. I realized though my study of philosophy of that people create rationales to rationalize their feelings, preferences, biases and imprinting. Ideologies are justifications for different lifestyles.

    The prefrontal cortex is a veil over a pool of information into which we are not given the ability to see clearly. For example, Kant realized that “reality” is logical construct. Now we are beginning to figure out through cognitive science how the brain constructs our world, and through the social sciences how we collaborate in this, validating those with whom we agree and invalidating those with whom we disagree.

    vimothy Reply:

    “Another thing that struck me is that the mainstream macroeconomics textbook had plenty of balance sheet accounting examples”

    Of course.

    Again, what did you expect?

    MMT misrepresents the mainstream. I suppose that it’s not surprising that you think they’re idiots. If they believed all the stuff you think they believe, they really would be idiots.

    Reply

    WARREN MOSLER Reply:

    who was the author of that particular text?

    hbl Reply:

    Warren,

    I looked at two textbooks. One was by Olivier Blanchard ~2003 and I forget the other author. The accounting may have only been in one… I’ll have to check next week.

    I should clarify from my dialog with Vimothy that I don’t think any MMTers *intentionally* misrepresent the mainstream. I think for me it partly came down to who is the mainstream exactly? The most vocal commentators on economics are self-selected because they usually have political agendas.

    I continue to believe that MMTers (and other Post-Keynesians) are unique in their correct understanding of multiple things.

    WARREN MOSLER Reply:

    Blanchard, MIT, here’s an abstract from an 09 paper he co authored. Proposes a serious fiscal response but unfortunately, like the other mainstream deficit doves, can’t supply the support needed on the monetary operations side:

    Abstract:
    The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy.

    The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers.

    vimothy Reply:

    “I should clarify from my dialog with Vimothy that I don’t think any MMTers *intentionally* misrepresent the mainstream.”

    An innocent fraud?

    BTW, Blanchard is chief economist at the IMF and has a chair at MIT–I think it’s pretty safe to say he’s mainstream. You can see his RePEc ranking here: http://ideas.repec.org/top/top.person.all.html

    hbl Reply:

    Tom Hickey said “What I am saying is that people know the conclusion they want to reach and construct and “argument” to get there.”

    Yes, good observation, and I agree.

    Vimothy,

    I think there are ways in which MMTers misrepresent the mainstream, but it’s very complicated and I don’t feel like writing a long comment :) They are right about many things the mainstream get wrong.

    For example, I just read the post of Krugman’s linked to below. Aside from completely misrepresenting MMT, he clearly doesn’t “get” the financial sectoral balances, nor other ways in which being off the gold standard fundamentally changes economics.

    Reply

    vimothy Reply:

    Fair enough. I don’t really feel like writing any long comments either. But think about this: the logic of sector financial balances is not complicated. Don’t you think it’s weird then that a senior figure, a Nobel prize winner, one specialising in international economic no less, hasn’t managed to get his head round them?

    ESM Reply:

    Yes, very weird. And yet what Krugman wrote in his blog was complete nonsense (and I can’t just chalk it up to partisanship, since MMT is technically apolitical). Who am I supposed to believe — the Nobel Prize committee or my lying eyes?

    MamMoTh Reply:

    Now you are misrepresenting Krugman. He get sectoral balances and had a blog entry about them some time ago.

    Today’s entry is about monetizing debt eventually leading to inflation. You might disagree with him, but it has nothing to do with sectoral balances.

    Reply

    hbl Reply:

    MamMoTh,

    Krugman’s post, given the casual blog format, was vague in several ways. The way I initially read it was that he thought a deficit was incompatible with full employment without accelerating inflation, which would imply a lack of understanding about savings desires, sectoral balances, etc.

    Upon re-reading, that may have been an incorrect interpretation on my part. He may have been saying if the deficit STAYS as large as it is NOW while all the while we reach full employment, then we’ll have bad inflation. And he’d be correct, which just means his misrepresentation of MMT was broader than I originally thought.

    WARREN MOSLER Reply:

    why would he be correct?

    when the time comes, the ‘right size’ deficit could be any size. he completely ignores possible demand leakages, credit conditions, etc.

    i agree he may be correct.

    And in the late 1990′s a surplus was the ‘right size’ for fiscal balance for 3.7% unemployment, due to credit conditions.

    Doesn’t mean that will always be the case

    Tom Hickey Reply:

    I really don’t think that Krugman has read Lerner or Godley, let alone MMT. I criticized him over at his place for talking out his butt.

  10. Keith Newman Says:

    Re Hbl@1:38,

    Of course it’s all political BUT I divide the issue into two categories:

    1-Trade-offs: more spending on something reduces spending elsewhere – i.e lots of military spending and huge waste on health care (a couple of trillion wasted in total for those two in the US probably) reduces spending to help the unemployed, excludes tens of millions of people from health care, prevents the development of better transportation systems, etc., etc… This has to be dealt with in the political arena.

    I am not assuming full employment. I recognize that if underemployed resources exist these can be mobilized at little real cost. Nonetheless as a political and economic consideration this wasteful spending is already occurring and so intuitively it could simply be redirected to better uses.

    2- Employment of unemployed resources; This is where MMT explanations come in. The belief that household finance applies to the federal government powerfully influences this debate as almost everyone believes we are constrained by nominal, not real factors. The ”we’ve run out of money” argument. Senior government people and influential economists, let alone media types believe this in my experience. And I don’t think they are being dishonest. They are very sincerely clueless!

    Reply

    beowulf Reply:

    Keith Newman, Your dichotomy is a very interesting point. But your first category is exactly where you should assume full employment…
    1. Set the level of govt you desire (in terms of govt services and spending programs) and then set the level of taxation to pay for it at maximum employment (1953′s U3 rate of 2.5%, the postwar “maximum employment” rate) and zero trade deficit, otherwise current account imbalance must be matched with govt sect deficit. Once “balanced budget at full employment” number is set, you walk back from Shangri La to reality in step 2.

    2. Okun’s law holds 1% cut in unemployment increases GDP by 2%. Cutting unemployment by 6 points would increase GDP by 12%, that’s $1.8 trillion output gap… unpack the trade deficit (which will vary anyway), and use off-budget public investment bank to fill demand leakage (and potholes). Then cut taxes to make $1.3 trillion fiscal adjustment, starting with payroll taxes.. Since Okun’s handy little law shows relationship betwen unemployment and GDP– keep things simple and set tax rates based on unemployment rate, adjusting tax rates monthly at the same time DOL adjusts unemployment rate. As U3 rate goes down, taxes go up. Or to put it anyway the tax holiday from the maximum employment statutory rate we set above gradually ends as the economy improves.

    Reply

    Craig Reply:

    “keep things simple and set tax rates based on unemployment rate, adjusting tax rates monthly at the same time DOL adjusts unemployment rate.”

    interesting idea. thanks for the comment. i’m a laymen but wasn’t familiar with okun’s law.

    Reply

    beowulf Reply:

    You’re welcome and thanks for the kind word. To give credit where due, the tax cut formula above is a variation of the “automatic fiscal policy” that Larry Seidman proposed several years ago. Seidman based his level of fiscal adjustment on GDP, but the unemployment rate is the better target. 1. Full employment is lready one of the Fed’s mandates and 2. the BLS’s unemployment figures offers a monthy sounding line of the economy. The BLS’s U3 rate updates provides timely data (BLS had February’s U3 rate out by March 4) that Congress could peg tax rates to by formula. Seidman is a fan of a balanced budget across the business cycle (that is deficits during recessions would be matched by surpluses during full employment). That is, of course, crazy talk. Jack Kennedy’s formula of a “balanced budget at full employment” is the better angle of attack (just don’t forget to adjust for the trade deficit). The trick is to set the full employment rate as low as possible. Clinton got it down to 3.8% in the spring of 2000, so it should be no higher than that and perhaps much lower (a job guarantee would be of great value in bringing unemployment down by offering a job to anyone willing to work).

    Keynesian countercyclical fiscal policy seemed in the 1990s largely fallen into disrepute in the United States since its heights in the 1960s, but according to Seidman (economics, U. of Delaware) has witnessed a revival with the 2001 tax rebates… He suggests a number of countercyclical mechanisms that would be independent of Congress including automatic tax rebates and consumption tax cuts that would be triggered by certain economic indicators…
    http://external.worldbankimflib.org/uhtbin/cgisirsi/x/0/0/5/?searchdata1=774531{ckey}

    Craig Reply:

    what is “political” and what is “not political” is not always clear. private spending is constrained by revenues – this is not political. we all know we can’t spend more than we make for very long or we will go belly up. likewise, public spending seems that it would be constrained by revenues (tax receipts). this statement seems “non-political”. political or not, either way it’s not a true statement of how things work operationally. according to MMT, public spending is not constrained by tax revenues. if public spending increases the risk of national default then let’s not spend. however, if public spending doesn’t pose a risk and can actually be used in productive ways then lets explore spending options. since technology is the primary competitive advantage of capital-rich countries over capital-poor countries let’s explore R&D and deep technology developments that can be used for military and spin-off commercial applications. public spending of this nature creates long term sustainability. talk about “leveraging” the true potential of this country.

    sorry for the play on words “leverage” = “debt” :-)

    Reply

  11. Ramanan Says:

    Breaking News

    Krugman

    Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.

    http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/

    Reply

    Ramanan Reply:

    I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation.

    Reply

    Ramanan Reply:

    Ridiculous!


    Well, the first month’s financing would increase the monetary base by around 12 percent. And in my hypothesized normal environment, you’d expect the overall price level to rise (with some lag, but that’s not crucial) roughly in proportion to the increase in monetary base. And rising prices would, to a first approximation, raise the deficit in proportion.

    So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year.

    Reply

    beowulf Reply:

    Oh yes, our old friend the money multiplier.
    http://pragcap.com/the-myth-of-the-money-multiplier-a-follow-up

    At least he didn’t start talking about M3 money supply. :o)

    Reply

    BFG Reply:

    BFG,

    He’s being disingenuous there, they never said that deficits are never a problem. They have always emphasized that inflation was the constraint at full employment.

    Is this the same argument he had with Jamie Galbraith?

    Reply

    WARREN MOSLER Reply:

    i just posted under comments, pending moderation

    Reply

    Matt Franko Reply:

    Ram,

    He owes many thoughtful, scholarly people an apology for these dismissive and I say disrespectful remarks. Not the least our host here Warren. If he had questions why couldn’t he have checked with any one of the MMT thought leaders? As a professional courtesy?

    My opinion of him was never high, and now it is lower.

    And furthermore, HE probably gets the monetary details wrong… He’s not really an Economist imo he’s some sort of politician… he proves that here.

    Reply

    Kristjan Reply:

    Krugman is marketing MMT. Any publicity is good.
    Warren might get the bill.

    Reply

    WARREN MOSLER Reply:

    agreed on both…

    Reply

    Neil Wilson Reply:

    Have you all got your emails into the editor at the New York Times requesting a right to reply from one of the MMT published economists. I’m sure Warren would be up for it, or Scott/Randy/Bill etc.

    Get those emails in telling them that Krugman is misrepresenting a system that has the potential to be of vast benefit to the American people and that the editor should commission an article from an MMT published economist.

    If you’re American, get writing!

    Reply

  12. Benedict@Large Says:

    Uh-oh. Krugman just decided to talk about MMT on his blog. Yech!

    “Krugman Blog: Deficits and the Printing Press (Somewhat Wonkish)”
    http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/

    Maybe some folks might want to drop by and help me straighten him out?

    Reply

    Tom Hickey Reply:

    Done

    Reply

    rvm Reply:

    As well

    Reply

    Oliver Reply:

    still can’t see any comments.

    Reply

    Ramanan Reply:

    Oh thanks for confirming Oliver. I came here just now to check if others can see it, or was it only me.

    Reply

    Oliver Reply:

    He’s probably filtering the onslaught of reason to save his own face :-).

  13. Dan Kervick Says:

    Perhaps they are terrified about what will happen if voters come to understand that, operationally, the government doesn’t have either to tax or borrow in order to spend.

    It’s much easier to sell the message that people need to be taxed in order to pay the government’s bills. It’s much harder to sell the message that we need to be taxed as part of the government’s management of the money supply, but that creating money and extinguishing money are operationally separable.

    Reply

    Oliver Reply:

    One could reframe it politically to say something like: if you evade taxes, you are helping to cause inflation. Since inflation is the boogey man, might as well use it for one’s own purposes. I think that would be rather a bomb shell in places like South America or, (formerly) Italy where tax evasion is a gentleman’s sport.

    Reply

  14. Richard Says:

    “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.”

    Personally, I don’t understand why you people stubbornly insist that at those levels–not at mid-levels–it is a question of not understanding, when it is clearly a question of strategy permitting the largest transfer of wealth and power in history–globally. It think it is you who don’t get it. I think they get it very well.

    Bernanke, Rubin, Summers, Blankfein, Paulsen, they just don’t get it. Please.

    Reply

    WARREN MOSLER Reply:

    I’ve met with 3 of them and i know they at least didn’t get it at the time

    Reply

    Danf Reply:

    And you have a photo of him with your book.

    Maybe he is getting back at the kids that tricked him?

    Reply

  15. Richard Says:

    From a comment at Billy Blog:

    “Krugman is big news – he had that spat with Jamie Galbraith before but this is the first time the phrase MMT has appeared on his site, the #1 rated financial blog.

    Too bad he refuses to accurately reflect what MMT says. He falls in my estimation all the more because Mosler says they had dinner and PK does actually get it…”

    Precisely.

    Reply

  16. Peter D Says:

    Hey, guys, just a thought – maybe the MMT crowd “doth protest too much”? Krugman never said that the school of thought was MMT, did he? Maybe he meant, I don’t know, Dick Cheney or something. :)

    Reply

    Peter D Reply:

    Actually, I was wrong, he did say “the modern monetary theory people”. I missed that..

    Reply

  17. anon Says:

    Krugman’s core problem:

    “if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.”

    What he clearly doesn’t understand and what almost all mainstream economists don’t understand is that the so-called monetary base has two VERY differently functioning components – bank reserves and currency notes.

    While any argument he might be thinking of here might be vaguely applicable to currency notes, it is fundamentally inapplicable when it comes to bank reserves

    He doesn’t get it at all. I’m quite surprised at his ignorance in this particular post.

    And the correct interpretation is in fact primarily a function of understanding the accounting for bank reserves, including the nature of the Fed’s interest rate control in the case of excess reserves, as per MMT.

    Reply

    vimothy Reply:

    “What he clearly doesn’t understand and what almost all mainstream economists don’t understand is that the so-called monetary base has two VERY differently functioning components – bank reserves and currency notes.”

    I think Krugman understands that. But both make up the stock of outside money, and this is the stock of money supplied by the central bank. How that stock is allocated between currency and reserves and the price level that results is down to the private sector.

    If you pay the right amount of interest on the excess reserves, then increasing the monetary base might not result in any change in the price level, but I think this is conceptually separate–not what he has in mind. I mean, what you’re suggesting seems even more problematic, in many ways.

    Reply

    Tom Hickey Reply:

    vimothy, what do you think he is saying, and is it a valid criticism of MMT. If so, how?

    Reply

    vimothy Reply:

    Krugman is saying assume (no IOR and) that we’re already near the optimum point on the Philips Curve–money financed deficit spending will cause inflation. A lot of inflation. This has to be correct.

    WARREN MOSLER Reply:

    the spending might cause inflation. depends on savings desires

    but ‘money finance’ vs ‘normal tsy issuance’ isn’t a factor with regards to aggregate demand.

    Tom Hickey Reply:

    And we know from sectoral balances that this has to be incorrect now, with unemployment running at over 10% (Gallup), a ton of idle capacity, the private sector deleveraging, and the nation running a CAD. (Never read Godley)

    Krugman also seems to forget or not know that MMT has a way of addressing inflation through functional finance. I guess he has never read Lerner.

    vimothy Reply:

    “And we know from sectoral balances that this has to be incorrect now, with unemployment running at over 10% (Gallup), a ton of idle capacity…”

    He’s not talking about that:

    “So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation”

    Tom Hickey Reply:

    So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation

    First, automatic stabilizers reverse and taxes increase as we “go back.” Secondly, functional finance recommends adjusting the fiscal balance iaw changes in sectoral balances. What’s so hard about this?

    Krugman’s “suppose” seems to be cet.par. Well, other things don’t remain equal. That’s a strawman argument against MMT. There’s a scenario operative that PK ignores in his “suppose.”

    ESM Reply:

    “Krugman is saying assume (no IOR and) that we’re already near the optimum point on the Philips Curve–money financed deficit spending will cause inflation. A lot of inflation. This has to be correct.”

    And it’s also correct that (given the economy is at capacity) debt financed deficit spending will cause inflation. Roughly the same amount of inflation. Money versus debt has nothing to do with it. It’s simply nonsensical to believe that a few percent interest per year is going to make a material difference.

    I’ve yet to meet somebody who thought “Man, I would really love to buy that 60″ LED HDTV, but the opportunity cost is just too great. Treasuries are yielding 4 freakin’ percent!”

    WARREN MOSLER Reply:

    ok, but deficit spending at full employment won’t necessarily cause inflation from the demand side. depends on the demand leakages and credit conditions. and seems to me there’s no reliable way to know about those in advance.

    and don’t forget that the decision to save and price adjustment comes at the point of deficit spending.

    And yes, the decision to buy or not buy the TV vs 4% tsy’s alters the price of the TV,
    but don’t forget the higher rate has increased net interest income of the economy.

    vimothy Reply:

    “the spending might cause inflation. depends on savings desires”

    I don’t see how that follows.

    ESM Reply:

    “ok, but deficit spending at full employment won’t necessarily cause inflation from the demand side. depends on the demand leakages and credit conditions. and seems to me there’s no reliable way to know about those in advance.”

    Agreed. I was more focused on the money-financed vs debt-financed distinction. If a money-financed deficit caused inflation, so would a debt-financed one. The opportunity to earn an extra few percent interest per year as a risk premium is not going to dampen aggregate demand materially.

    And as you have correctly pointed out, the extra interest income going to the private sector from debt-financed deficits may even increase aggregate demand (particularly since people are more inclined to spend out of income vs savings).

    Vimothy: “‘the spending might cause inflation. depends on savings desires’
    I don’t see how that follows.”

    Money that is earned to satisfy savings desires is just socked away under a mattress, literally or figuratively, and does not contribute to aggregate demand for goods and services, and therefore does not create inflation pressure. It’s a freebie. Kind of like our trade deficit with the Chinese.

    vimothy Reply:

    If people want to save, what will they do with the excess base? Try to get rid of it. You need to think about supply and demand for money, not savings.

    WARREN MOSLER Reply:

    you’re not starting from the beginning which is the tax liability. again, check out some of the readings thanks

    vimothy Reply:

    Warren you’re missing the point. The tax liability is not relevant. ESM is saying that for a given level of nominal income, the stock of money supplied will have no effect on prices. Of course it will, even if people want to save. At the margin, the return on other assets is the opportunity cost of holding the monetary base. Look at it from an expectations hypothesis point of view: if people are to be indifferent between money and other assets, the nominal return on those assets will have to come down. That’s why you need IOR.

    Peter D Reply:

    ” if people are to be indifferent between money and other assets, the nominal return on those assets will have to come down.”

    Other assets, not consumption items. Inflation in assets – could happen, inflation in consumption items – does not follow. The same as in out discussion over at heteconomist.

    vimothy Reply:

    Peter, What goes in the money demand function? If people want to save, they will only want to hold cash if the nominal return on other assets comes down >>> asset price inflation. Inflation in consumption goods is a different issue, but we’re considering a situation in which we’ve already said that people want to save (not spend income on consumption).

    vimothy Reply:

    That’s the first order effect. To see how it affects consumer price inflation, we need to think about the problem in more dynamic terms. As the interest rate falls, this will feed into the consumer’s intertemporal consumption-saving decision. If the real interest rate falls (nominal interest rate falls and no inflation) then the marginal return to deferred consumption has fallen–how that plays out on an individual level depends on preferences and how substitution and income effects interact, but it seems reasonable to expect that if you make the opportunity cost of saving higher at the margin, saving will overall.

    WARREN MOSLER Reply:

    for every dollar borrowed there is a dollar saved- so changing rates only changes aggregate demand to the extent the propensities differ.
    and don’t forget the govt is a net payer of interest, so as rates fall the economy loses income. so the propensities have to be that much more different as well.

    this is all in ’0 is the natural rate of interest’

    you say you’ve read all this? sure doesn’t seem like it?

    vimothy Reply:

    It is possible to read your writing and still disagree with it, warren.

    What I’m saying is bog-standard elementary micro. Are you sure you’re familiar with it?

    If the return on saving falls, cost of consuming today relative to consuming in the future has fallen. At the margin, the cost of saving is higher. What is that likely to do to the overall level of saving? You’re making an implicit claim about the supply function of saving here: that it is price inelastic.

    WARREN MOSLER Reply:

    the total net dollar savings for the economy = federal deficit spending.

    that’s an accounting identity.

    at the micro level savings only shift from one entity to another.
    without govt, nominal savings always net to 0

    need to watch out for those pesky fallacies of composition

    vimothy Reply:

    Sorry, my reply at March 27th, 2011 at 3:04 pm should be here.

    Peter D Reply:

    Vimothy
    What goes in the money demand function? If people want to save, they will only want to hold cash if the nominal return on other assets comes down >>> asset price inflation. Inflation in consumption goods is a different issue, but we’re considering a situation in which we’ve already said that people want to save (not spend income on consumption).

    Are we agreeing here? As I tried to make clear in my comments over at heteconomist, people first decide to save, then choose a particular vehicle of saving. So, interest paid on bonds can only shift their savings to or from bonds, not between bonds and consumption. So, the price of, say, real estate may go up, but the price of computers would not, just as an example.

    WARREN MOSLER Reply:

    i don’t see the evidence (or theory) the price level is a function of interest paid on reserves

    Reply

    vimothy Reply:

    It’s not function of the interest paid on reserves. But without the interest on reserves, it’s a function of the stock of outside money (subject to some conditions).

    WARREN MOSLER Reply:

    it’s not about ‘the stock of outside money’ either

    have you read ‘soft currency economics’ or ‘the 7 deadly innocent frauds’?

    vimothy Reply:

    “that’s an accounting identity.”

    Now this is something I agree with. It’s an accounting identity. It’s not behavioural. It doesn’t imply anything about how private agents will react to changes in the interest rate or supply of outside money.

    “at the micro level savings only shift from one entity to another… need to watch out for those pesky fallacies of composition”

    Right, in which case we can dispense with the income effect altogether, which only leaves the substitution effect–and that goes in the same direction for both lenders and savers so on aggregate, income effects cancel out and subst. effects -> increase current consumption, reduce saving.

    vimothy Reply:

    Yes. And I still think you’re wrong!

    Tell me what determines the price level then.

    Reply

    WARREN MOSLER Reply:

    prices paid by govt when it spends and/or collateral demanded when it lends

    the currency is a (simple) public monopoly.
    tax liabilities establish the nominal demand, and the funds needed to pay taxes come from govt spending/lending

    time to read the 7DIF, thanks!

    vimothy Reply:

    All wrong, I’m afraid.

    vimothy Reply:

    Take any data set relating to inflation–a CPI time series, for instance, or a cross section of different countries at a particular point in time. What you’re saying is that all the variation you observe in the data can be explained by “tax liabilities” and “prices paid by govt when it spends”. Is this plausible?

    WARREN MOSLER Reply:

    no what i’m saying. but public sector compensation over time will give you clue.
    and no more until you at least read soft currency economics.
    :)

    vimothy Reply:

    I’ve already read it, plus loads of other stuff. I understand the arguments–just disagree with them.

    vimothy Reply:

    All I’m asking is what factors in your view explain the price level.

    Tom Hickey Reply:

    vim, a monopolist is an arbitrary price setter. The government is the currency monopolist — US Constitution, article 1, section 8. As Warren says, go through the mandatory readings and you’ll see where he stands. If you disagree with something, quote it and say why you disagree. I’m sure we will all learn from the exchange.

    WARREN MOSLER Reply:

    the govt is the currency monopolist via tax liabilities that can only be paid with the govt’s currency of issue

    MamMoTh Reply:

    but the govt has only the monopoly on newly created money. there is plenty of money within the private sector already.

    WARREN MOSLER Reply:

    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.

    (actual cash could be used which also comes only from the govt of issue)

    WARREN MOSLER Reply:

    yes, the cumulative deficit spending has been ‘stored’ in the economy as tsy secs, reserves, and cash in circulation.

    so say you have the water monopoly for a community.
    you set price at a penny a gallon. you could somehow try to set quantity- tell them all to bid on some quantity you estimate they ‘need’ like maybe 1 million gallons, but that’s highly problematic to the point monopolists don’t do it.

    If there is too much demand or waste etc. at a penny/gal you might raise the price. If there is hardship you might lower it. But either way you set price and let quantity adjust.

    Now suppose at a penny/gal the first year everyone fills up their water storage tanks to feel good about things.
    and then someone needs cash so goes to sell his stored water. he’ll probably get less than a penny a gallon. the price will be said to fall.
    and it can/will stay below 1 penny until he stops selling. not much the water monopolist can do but wait him out. but when he’s finished
    the price goes back to a penny.

    etc.

    same with the currency. we need the govt’s $ to pay the tax. if the govt decides to not pay 1 penny more (forget about transfer payments for this example) for anything than it paid last year, and somehow everyone raises the prices they are willing to sell at, govt spending goes to 0 and taxes remain at 2.5 trillion. That tax liability can get paid out of prior savings as above, but when it runs out, and for sure long before that, prices will start coming back to what the govt will pay as it’s the only channel to get the funds needed to pay the tax.

    by the way, this is not a proposal!!! ;)

    Tom Hickey Reply:

    Conclusion of “A general analytical framework…” (link above)

    Conclusion
    This paper outlines an alternative way of viewing the monetary circuit that takes into consideration the central role of the State from the beginning of the analysis. Vertical and horizontal components of the monetary circuit were introduced and their relation analyzed. It was shown that this framework is applicable not only to currency, but to any commodity. This is because, while currency does not obtain its value by virtue of its status as a commodity, once endowed with value a tax driven currency can be analyzed like any other commodity. In addition to debunking the myth that deficits imply future taxation, it was also shown that such a framework is highly applicable to the current Asian financial crisis.

    [Emphasis added]

    Tom Hickey Reply:

    Final settlement of all transactions takes place in either reserves or cash. With cash, settle occurs on the spot, and with reserves, settlement is intermediated though the banking system by banks that are member of the FRS.

    vimothy Reply:

    “here’s where it’s analyzed in depth”

    Why can’t you just tell me, the price level is a function in what arguments…? It shouldn’t be necessary to refer me to two different essays and a book.

    Your claim at March 26th, 2011 at 2:28 pm was that the price level is determined by “prices paid by govt when it spends and/or collateral demanded when it lends”. I then asked if this really explains the variation we see and the data, to which you replied “no”.

    So what does?

    WARREN MOSLER Reply:

    just posted a reply on how a monopolist sets his price, etc.

    anon Reply:

    “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.”

    but its possible in theory for there to be no net reserves, currency, or bonds outstanding, and still have taxation:

    banks debit (endogenously created) taxpayer deposit balances

    government debits bank reserve accounts into negative position

    CB reinjects reserve accounts to flat by lending to banks

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

    WARREN MOSLER Reply:

    right, reserves are a component of the net dollar financial assets that come from govt spending more than it taxes.

    there’s a pretty good diagram in showing how nfa go into the ‘warehouse’:

    http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/

    anon Reply:

    ie.

    taxation doesn’t require pre-existing NFA in theory

    only a technical point of course – since it would be massively deflationary in practice

    but how does this theoretical point correctly mesh with your monopoly issuer perspective?

    vimothy Reply:

    ^Yes–the real action is in income, not money. Money just facilitates final payment. Holding a larger stock of base money relative to a given level of income doesn’t make it any easier for the private sector to pay taxes. It’s wealth is the same in either case, and so are taxes.

    MamMoTh Reply:

    Warren I understand how a monopolist sets the price and lets quantity float, or the other way round.

    But I still don’t get what you infer from that. In the case of the water supply when the private sector has saved enough water, they could do without the monopolist’s supply. They would sell it at 1 penny/gallon unless the monopolist lowers the price, which means it’s not a monopolist anymore. It could also impose a tax to decrease the level of private savings, but that would mean running a budget surplus, right?

    WARREN MOSLER Reply:

    right, the monopolist loses control of value on the downside when there’s an inventory liquidation that’s sufficiently large to cover the current consumption demand. Otherwise, the price stays close to his price and he just sells less.

    We see this with the Saudis. When supply shows up from somewhere else, or demand falls, their output falls, but not necessarily the price.

    And when there is a fall in supply from other producers, or demand increases, their output increases, but not necessarily their price.

    But back in the early 80′s, when there was a supply shock and our utilities shifted to nat gas after it was deregulated in 1978, the drop in demand was overwhelming. OPEC cut production by maybe 15 million bpd and it wasn’t enough to keep their status as price setter.

    And today, with high prices and no shortage of demand- in fact storage tanks are over flowing- and Saudi production is only running about 8.5 million bpd, the Saudis are firmly in the catbird seat as swing producer/price setter.

    So as for the currency and the price level, yes, the govt sets the terms of exchange for its dollars when it spends them. And yes, prices can be driven up over what the govt offers to pay, particularly at the micro level. But ultimately the the economy will ‘use up’ it’s savings paying taxes and be ‘forced’ to lower prices to the point it hits the govts bids in order to get the funds it needs to pay its taxes.

    again, i’m not proposing this as policy, just making the point.

    vimothy Reply:

    “same with the currency. we need the govt’s $ to pay the tax. if the govt decides to not pay 1 penny more (forget about transfer payments for this example) for anything than it paid last year, and somehow everyone raises the prices they are willing to sell at, govt spending goes to 0 and taxes remain at 2.5 trillion. That tax liability can get paid out of prior savings as above, but when it runs out, and for sure long before that, prices will start coming back to what the govt will pay as it’s the only channel to get the funds needed to pay the tax.”

    You’re still confusing money with income.

    The only sense in which the govt is a monopolist here is as supplier of a particular type of money: narrow money / base money etc. It is not a monopolist in product markets. Monopolists are on the supply side and the govt is on the demand side.

    You seem to be imagining a situation in which the govt refuses to buy at higher prices and so stops spending, and then instructs the central bank to stop supplying new outside money, and then eventually the private sector runs out of it and has to start accepting govt set prices on certain goods, which then resets the whole price level somehow. Only in practice this doesn’t happen, so it must be the govt’s ability to force this outcome if it wanted it to that allows it to determine the level of prices.

    Does this process (or threat of) explain the different rates of inflation we see in different times and places? I don’t see how it can. And notice that, even in this case, it’s the supply of money that is important, not govt spending per se.

    WARREN MOSLER Reply:

    without using the word money:

    taxes debit reserve accounts, spending/lending is the only source of net reserves for the member banks

    anon Reply:

    IOR is not an option – its mandatory – if there are excess reserves and if the Fed runs a positive fed funds target – i.e. if the Fed wants to tighten at some point in the future. And he’s talking about excess reserves as a result of what he calls “monetizing” the deficit.

    That makes the difference between excess reserves and t-bills immaterial in terms of the interest rate and economic effect.

    He doesn’t seem to understand this.

    The failure to differentiate reserves and currency as distinct monetary components is quite foolish. That’s a trap that all economists who don’t understand the monetary system fall into.

    Reply

    vimothy Reply:

    He understands that:

    “if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.”

    But if IOR is functionally equivalent to issuing bills, then what’s the point? You’re back to paying interest on the debt, and there’s no material advantage. Krugman is just taking you at your word.

    Reply

    RSJ Reply:

    IOR is horrible. Levy a tax of 4% on any non-monery base assets held by banks instead, if you want interest rates of 4%. Put the “cost” back in “opportunity cost”.

    Seriously, making something expensive is not hard to do.

    It’s the easiest thing to do.

    It’s just massive cognitive capture to think that the government needs to pay banks money in order to not make loans, or to charge sufficiently high rates for making loans.

    anon Reply:

    its to anchor the overnight rate

    vimothy Reply:

    Yes: “if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.”

    Ramanan Reply:

    “Krugman is just taking you at your word.”

    Krugman showed the world the Monetarist inside of him.

    Neil Wilson Reply:

    Nobody has to be persuaded to hold the additional base in the US. The US ability to enforce their taxation is without doubt. There’s the persuasion – nobody is going to be turning down the government’s orders.

    They either will hold the base in which case you’ll have a private sector nominal surplus, or they won’t and you’ll get extra real transactions and more taxation.

    And if you’re up against your real transaction limit you’ll start to get demand inflation – at which point the government will have to increase taxes or reduce spending to keep it under control.

    The interest rate thing is weird, which is essentially running up extra discretionary government spending to persuade wealthy people with loads of nominal assets not to spend it in this period.

    I don’t understand this ‘persuade people to take the additional monetary base’. The whole point is to get people spending. People holding money in aggregate is what causes the demand slump.

    WARREN MOSLER Reply:

    unemployment and excess capacity in general is the evidence that the economy ‘wants more monetary base’

    vimothy Reply:

    “unemployment and excess capacity in general is the evidence that the economy ‘wants more monetary base’”

    I don’t see how that follows.

    WARREN MOSLER Reply:

    same, have a look at the 7DIF and ‘mandatory readings’ thanks

    vimothy Reply:

    Your confusing income and money.

    beowulf Reply:

    IOR is horrible. Levy a tax of 4% on any non-monetary base assets held by banks instead, if you want interest rates of 4%. Put the “cost” back in “opportunity cost”.

    RSJ, that’s a very interesting idea, would that really anchor Fed Fund rate? If so, it would make interest rate maintenance costs a net credit to Tsy instead of a net debit. Let’s see, CBO anticipates govt to spend $5 trillion in debt service over next decade (their estimate if avg interest rate of 5% seem too high, but its used in all CBO budget projections). If Fed Fund rate target were locked by law at current .25% (and Tsy issued nothing longer than 3 month T-bills, which tracks FFR), it would cut net interest costs by approx. $4.75 trillion. On the other hand, consider if Congress authorized Tsy to spend by issuing interest-free US Notes (“Lincoln Greenbacks”) with interest rate anchored by a tax instead of IOR. Even if half of CBO’s avg rate of interest was the yield spread between FFR and 10 yr Treasuries, its a swing from a $5 trillion Tsy debit to a $2.5 trillion Tsy credit. Of course we’d have to cut taxes by $750 billion a year (more than is collected by Social Security FICA) to keep fiscal stance neutral, but that’s a sacrifice we should be willing to make. :o)

    Of course, instead of a “tax of 4%”–only Congress can levy taxes– it’d be simpler to call it a “user fee of 4%”, which can be set and adjusted by Fed governors (“The Monetary Control Act of 1980 requires that the Federal Reserve establish fees to recover the costs of providing priced services”). Of course, Fed’s net earnings end up at Ty General Fund anyway.
    http://www.federalreserve.gov/newsevents/press/other/20101101a.htm

    WARREN MOSLER Reply:

    banks would have to have their ‘normal’ markups over actual cost of funds to attract capital, so what is proposed is a tax on borrowers?

    seems moot at the moment, but might be useful some day if there is public purpose in discouraging borrowing.

    that’s the point of transactions taxes- to discourage those transactions

    beowulf Reply:

    Sorry RSJ, I should have noted that $2.5 trillion net credit to Tsy (over 10 years) is only if Fed continued to set monetary policy by adjusting FFR. If Congress locked current Fed Fund target, then a tax/user fee to anchor FFR would only generate a $250 billion net credit. It is a very good idea, but too many moving parts for me to keep the numbers straight. :o)

    beowulf Reply:

    Warren, a transaction tax would be the same upon entry (or exit) regardless of holding period. I think RSJ meant an asset tax payable for each day an asset is held. In net effect, it’d be like the daily interest accruing to Tsy (via Fed) on discount window loans.

    Reply

    WARREN MOSLER Reply:

    yes, which would require charging an interest rate that much higher to make a profit/roe, right?

    it’s all part of a bank’s real cost of funds?

    beowulf Reply:

    Yes, the prime rate is the markup above Fed Fund rate for most creditworthy borrower, with a bigger interest rate markup for sub-prime borrowers. So however the bank’s real cost of funds is anchored (Fed funds rate, IOR or tax on non-monetary base), banks have to mark up interest rate to make a profit.

    If Fed governors and Congress understood how monetary system actually worked, best solution is to simply lock interest rates at zero bound (the natural rate of interest is zero after all) and fine tune economy by adjusting fiscal stance instead of interest rates.

    Second best solution is for Fed to continue adjusting interest rates but by means of a fiscal tool (RSJ’s tax/ user fee, which the Fed governors could adjust per Monetary Control Act). Higher interest rate target would mean larger reserve drain flowing to Tsy (most practically, as “user fee” revenue refunded by Fed). Lower interest rates means a smaller reserve drain. In either case, the more drained “upstream” by Fed, the less needs to be drained “downstream” by IRS.

    By jerry-rigging monetary tools to adjust fiscal stance, the Federal Reserve would be like an out of paradigm ship captain who can remain happily ignorant that ordering the ship hard to starboard ((e.g. “right”) is translated by the crew as an order “hard left rudder”.

    WARREN MOSLER Reply:

    at the macro level, the only reason any govt can spend more than it taxes is because of the desire to ‘hold the additional base’ which I’ve called ‘savings desires’

    and the evidence is the goods and services offered for sale, including labor

    it has nothing to about finance or funding. it’s about the ability to spend in the first place.

    Reply

    vimothy Reply:

    “vim, a monopolist is an arbitrary price setter.”

    This is not really correct. A monopolist has market power, but it isn’t able to arbitrarily set prices. In any case, the govt does not supply all goods and services for sale in the economy. It supplies outside money. If it wants to fix a particular price for that money, then the quantity it supplies needs to be determined by demand.

    “If you disagree with something, quote it and say why you disagree. I’m sure we will all learn from the exchange.”

    I’ve given my model: the price level is the terms on which the private sector agrees to hold the stock of outside money. There are other factors, of course–how the money is backed is important, but I think that this simple model gives a good first approximation.

    I don’t think you guys have a model–but I can’t prove that any more than I can prove the Flying Spaghetti Monster’s non-existence. You can quite easily prove me wrong though…

    Reply

    WARREN MOSLER Reply:

    see ‘full employment and price stability’ where the idea is the govt offers to pay a fixed wage for unskilled labor and lets the quantity hired (and the deficit) float.

    in a market economy the currency monopolist only needs, in theory, to ‘set’ one price which defines the currency’s value, and the rest expresses relative value.

    Reply

    vimothy Reply:

    Warren: Everything is getting mixed up here. Let’s leave the JG for now and focus on how the government’s ability to spend and tax enables it to determine the price level.

    The government’s abilities as a monopoly supplier of /base money/ give it some control over the price level–because the price level is determined by the supply of money and the demand for it, and the government controls the supply. This was actually my original claim, which you disagreed with.

    Because the govt is monopoly supplier, it has some market power and can set a price to pick a quantity or equivalently a quantity to pick a price over some range. It cannot do both–that’s logically impossible. If you want a particular price, then you have to take the quantity as given and vice versa.

    The government’s role in the demand side of product markets is a separate issue. A monopolist is a seller of goods and services–supply side.

    If govt spending goes to zero, private income does not go to zero.

    WARREN MOSLER Reply:

    the only source of funds to pay taxes is the govt of issue.

    if the tax liability remains at 2.5t and govt spending goes to 0, where do the funds come from to pay the tax once the cumulative net dollar financial assets have been used up? and what does the process of using them up look like? people cashing in their pension funds, ira’s, breaking piggy banks, etc. to make payments ultimately going to the govt to cover debits in fed reserve accounts. this is a highly contractionary/deflationary scenario that in the real world probably wouldn’t even retire 10% of the outstanding savings before it all got a whole lot worse than the great depression.

    let’s put it this way, the fed debits a member bank reserve account for payment of taxes and it’s overdrawn.

    how can that overdraft get covered? Only from govt spending or lending.

    so what would first happen is the private sector would borrow from the fed vs collateral demanded by the govt.

    vimothy Reply:

    Not source of funds, means of final payment. Money is not the same as income.

    If govt spending goes to zero, stock of base money doesn’t go to zero. Stock of base money is determined by the central bank and private demand.

    Why would people need to draw down savings to pay taxes? They still have an income. If you stop supplying new base money, the private sector will draw down its stock as it pays taxes, but its wealth is unchanged. That’s true regardless of the particular mix of taxation and govt spending as long as the govt runs a surplus and the central bank doesn’t supply any new base.

    WARREN MOSLER Reply:

    it’ sure doesn’t read like you’ve read what you claim to have read?

    one man’s income that adds to his net financial assets is another man’s loss of net financial assets.

    the private sector can’t create net reserve balances

  18. studentee Says:

    “He may have been saying if the deficit STAYS as large as it is NOW while all the while we reach full employment, then we’ll have bad inflation.”

    is this really true though? i may be mixing up concepts, but if the productive capacities of the economy increases, couldn’t it support a higher level of deficit spending?

    krugman is still implicitly invoking multiplier theory with the monetary base comments, correct?

    Reply

    hbl Reply:

    I realized after I submitted what you quoted that it could be considered wrong, as stated, but have not had a chance to reply til now.

    As I wrote it I was thinking of the “common” scenario in which the private sector savings rate rises in recession and falls in recovery (due to a pause in investment if nothing else), and the deficit grows larger during recession and smaller afterward. Thus I thought Krugman was questioning what would happen if you pushed the deficit larger than it would otherwise be at the stage of full “recovery.”

    But in a broader sense I think the financial sectoral balances do tell us that a large deficit could be appropriate even at full employment (depending on how you got there), so in that sense I misspoke.

    IMO Krugman’s main error is “suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers” — that is not going to happen unless government deficits are pushing so far above the desired non-government savings rate that there aren’t enough incremental desired savers, right? And even then the additional spending of those deficit dollars that comes instead of saving would partially work to automatically reduce that over-large deficit…

    Reply

    WARREN MOSLER Reply:

    right, it’s about ‘savings desires’

    Reply

  19. Kristjan Says:

    “So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation. The last time we were in that situation, the monetary base was around $800 billion.
    Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates.”

    If the economy will pick up then the deficits will shrink. Doesn’t Krugman know that? He makes it look like he doesn’t. The situation he is describing is not real.

    Reply

    beowulf Reply:

    In the real world, the tradeoff is not between unemployment and inflation, its between unemployment and budget deficits (in peacetime, that is, more about WWII below). The last time the budget was in surplus was at the end of the Clinton Administration and before that, the end of the Johnson Administration. I leave it to the reader to look up the last two presidents to balance the budget.

    Oh and this is just wrong–
    So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation. The last time we were in that situation, the monetary base was around $800 billion.

    The last time we were in that situation, the Fed was not authorized to pay interest on excess reserves. So long as the Fed controls the rate of interest paid on reserves, the monetary base and T-bills will be the most perfect substitutes this side of a Brazilian human cloning clinic.

    Even if mankind lost that tool (err, paying interest on reserves, not human cloning), the Fed is perfectly capable of controlling interest rates. As I’ve mentioned before, during World War II, Tsy and the Fed capped interest rates even as the wartime boom overclocked the economy by running enormous deficits year after year after year. Interest rates don’t have to move if the govt controls inflation by fiscal policy instead of by monetary policy (Old Man Galbraith over at the OPA established a system of price controls and rationing to keep prices stable but, but since we really don’t expect the GDP to grow 28% a year anytime soon, moderate GDP growth could be controlled by fiscal policy).

    Inadvertently, Tsy discovered that in terms of draining reserves from an overheated economy, war bonds were almost a perfect substitute for taxes, yet politically, “saving for the future” goes down better with votes than “paying more taxes” even though the economic effect (reserve drain) is the same. If Social Security was simply paid out of general revenue, the FICA tax could be converted into a personal savings account system (so instead of modifying fiscal stance by adjusting tax rate inversely to unemployment rate, Tsy would adjust IRA withholding rate).

    Reply

    beowulf Reply:

    “The last time the budget was in surplus”

    I stepped on my own punchline! I meant to write, the last time unemployment moved under 4.0%. The point is, as Jack Kennedy put it, “only full employment can balance the budget” (just don’t forget to account for trade deficit demand leakage).

    Reply

    WARREN MOSLER Reply:

    yes, full employment happens to balance the budget under current tax structure.

    but all that does is make full employment unsustainable.

  20. MamMoTh Says:

    He actually considers deposits and bonds as perfect substitutes at the 0 rate bound, so he agrees with MMT in that respect as well.

    The difference is that he claims they will not be perfect substitutes when the economy picks up and the interest rates are positive.

    I’d say he might have a point.

    Reply

    WARREN MOSLER Reply:

    depending on definitions of perfect substitutes

    interest rates for the term structure of rates continuously gravitate towards indifference levels

    so if fed funds are 6% and 10 year tsy’s 7% those are the indifference levels at that time.

    seems that’s pretty close to the ‘perfect substitute’ condition, for all practical purposes?

    Reply

    vimothy Reply:

    If they’re perfect substitutes then their expected return must be equal. The expectations hypothesis suggests that the yield curve should be flat on average. In practice it seems as though bonds of different maturities are substitutes but not perfect substitutes.

    Reply

  21. Tom Hickey Says:

    Cullen Roche posted on Krugman at Pragmatic Capitalism.

    http://pragcap.com/dear-paul-krugman-you-do-not-understand-mmt

    Reply

  22. 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

  23. 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”.

  24. 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

  25. 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.

  26. 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

  27. 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

  28. 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

  29. 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.

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