Harvard’s Mankiw- a disgrace to the economics profession



It’s 2026, and the Debt Is Due

By N. Gregory Mankiw

March 26 (NYT)

The following is a presidential address to the nation — to be delivered in March 2026.

My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means.

A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal and not the real resources.

We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The hard reality is that for a given size government, there is a ‘right level’ of taxes that corresponds with full domestic employment, with the size of any federal deficit a reflection of net world dollar savings desires.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security.

Yes, they decided they would like our elderly to be able to enjoy at least a minimum level of consumption of goods and services that made us all proud to be Americans.

They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embracedhealth care reform with subsidies for middle-class families.

Yes, they elected to make sure everyone had at least a minimum level of actual health care services.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

The real cost of this ‘expansion’ (which was more of a reorganization than an expansion of actual real resources consumed by the elderly and consumed by actual healthcare needs) may have consumed an increasing share of real GDP, but with continued productivity this would have been at most a trivial amount at current rates of expansion.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Yes, they are consuming real goods and services produced by others. The important consideration here is the % of the population working and overall productivity which he doesn’t even begin to address.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

Still no indication of what % of real GDP he envisions going to health care and real consumption by the elderly.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

At least he gives real economic growth a passing mention. However, what he seems to continuously miss is that real output is THE issue. Right now, with potential employment perhaps 20% higher than it currently is, the lost real output, which compounds continuously, plus the real costs of unemployment- deterioration of human capital, broken families and communities, deterioration of real property, foregone investment, etc. etc. etc.- are far higher than the real resources consumed by the elderly and actual health care delivery. Nor does he understand what is meant by the term Federal borrowing- that it’s nothing more than the shift of dollar balances from reserve accounts at the Fed to securities accounts at the Fed. And that repayment is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed. No grandchildren involved!!!

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk.

This is all entirely inapplicable. It applies only to fixed exchange rate regimes, such as a gold standard, and not to non convertible currency/floating exchange rate regimes. This is nothing more than another rookie blunder.

Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

With our non convertible dollar and a floating exchange rate, the Fed currently sets short term interest rates by voice vote, and the term structure of interest rates for the most part anticipates the Fed’s reaction function and future Fed votes. Nor is there any operational imperative for the US Government to offer longer term liabilities, such as 5 year, 7 year, 10 year, and 30 year US Treasury securities for sale, which serve to drive up long rates at levels higher than otherwise. That too is a practice left over from gold standard days that’s no longer applicable.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

As above, the US Government is under no operational imperative to issue Treasury securities. US Government spending is not, operationally, constrained by revenues. At the point of all US govt spending, all that happens is the Fed, which is controlled by Congress, credits a member bank reserve account on its own books. All US Government spending is simply a matter of data entry on the US Governments own books. Any restrictions on the US government’s ability to make timely payment of dollars are necessarily self imposed, and in no case external.

So where do we go from here?


Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

Mankiw’s display of ignorance and absurdities continues to compound geometrically.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

The only reason we would ever be ‘forced’ to make those cuts would be real resource constraints- actual shortages of land, housing, food, drugs, labor, clothing, energy, etc. etc. And yes, that could indeed happen. Those are the real issues facing us. But Mankiw is so lost in his errant understanding of actual monetary operations he doesn’t even begin to get to where he should have started.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

He fails to recognize that federal taxes function to regulate aggregate demand, and not to raise revenue per se, again showing a complete lack of understanding of current monetary arrangements.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

Ok, finally, apart from the revenue error, he’s got the rest of it sort of right, except he left out the part about that tax being highly regressive.

As I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

Due entirely to ignorance of actual monetary operations.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

N. Gregory Mankiw is a professor of economics at Harvard.

And no small part of the real problem we face as a nation!

Feel free to repost and distribute

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86 Responses to Harvard’s Mankiw- a disgrace to the economics profession

  1. Kristjan says:

    Gregory Mankiw answered my letter to him but he really didn’t answer:

    here is my letter to him:

    I regularly read your blog, too bad I can’t ask you there all the questions I would like to.
    I am writing you from Estonia regarding the interesting article you recently wrote.
    The topic is very much talked of recently. There is crises in Eurozone and all these countries are supposably living beyond their means. Everyone is asking how this is going to end. Is there going to be a cathastrophic end to all this?

    I didn’t understand the part in your article where you were talking about securing a credit line with IMF. US is the sole issuer of dollars, IMF is not. Were you talking about borrowing resources from abroad. I am confused. Can you guide me please.

    Yours truly,

    his reply:

    Yes, borrowing from abroad.

    Thank you for your comments.



    Joe Reply:

    LOL, Greg’s response makes no sense. I sent him an email as well asking for his response to Warren’s piece and all he said was “thank you for your comments.”


  2. Panayotis says:

    Warren, This is no surprise! If you read his latest paper in Brookings Papers you will see that he allows government spending to have no welfare benefit except when monetary policy has no punch and prices are sticky!He assumes that preferences are distorted by government spending and only tax rates in the restricted case of zero lower bound interst rates can restore incentives. Obviously, never thinks that preferences can be effective only if you have income and investment can take place only if you anticipate profits from disposable income, exports and deficit spending !


  3. Ramanan says:

    Yes nations do get bailed out by the IMF.

    Letter to Domininque Strauss Kahn here:

    (Mexico: Arrangement Under the Flexible Credit Line—Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion)

    (page 31)


    Kristjan Reply:

    And monetarily sovereign countries default(Russia).
    Do you think there is any justification for that?


    Dan F Reply:

    That (russia) has been cover several times.


    Kristjan Reply:

    My question is not about Russia.
    I just want to know if there is any reason for monetarily sovereign country borrowing in the currency It issues to get bailed out by IMF.
    US can default tomorrow if it wanted to, It can get a bailout by IMF, It doesn’t have to wait for year 2027 or whatever Mankiw said.
    is it different for Mexico somehow?


    correct, makes no sense for any country to borrow its own currency from the imf. particularly as the imf has to get the currency to lend you from you.

    that’s why imf participation in the euro bailout schemes made no sense.

  4. Mario says:

    Hi all,

    I have some questions about the discussion that was going on in regards to going to no bonds, joining the Fed/Treasury together, and using interest on excess reserves. I can’t find the post that discussion was located on, so I figure I’ll just post my questions here. Sorry if I’m re-hashing any old wounds or asking questions already answered. If anyone can lend me a hand on these questions it’d be much appreciated.

    #1. Are you proposing that the IOR rate be the same as the FFR? How does this work if you are also suggesting the overnight rate go to zero? The FFR is the overnight rate no?

    #2. If the FFR rate is always at zero, isn’t that always going to be inflationary? How do we combat against that? What am I missing?

    #3. Won’t the IOR rate generally speaking always be lower than bond rates? Therefore won’t banks not be as interested to agree to this kind of system? I’m not saying we shouldn’t still do it but I am just saying…

    #4. Wouldn’t excess bank reserves grow ad infinitum forever and ever as the government spends each and every year? That doesn’t seem fair to me. Isn’t there a way that the government can spend without giving any subsidy to the banks? Why does government spending need to “matched” by anyone or anything? Why can’t the new money in people’s bank accounts simply be accounted for at the required fractional reserve rate that banks are required to hold for all their outstanding liabilities? In other words when the Treasury deposits a $1,000 check into Sue Bob’s checking account for social security, (assuming a 1/10 reserve requirement for banks), then the Fed just adds $100 to Sue Bob’s bank’s reserves. No bond sales, no excess reserves, just straight up accounting. This of course means that the Treasury doesn’t need to compensate the Fed when it spends. The Fed and Treasury can still be one on the books but operationally they can still be separate as they are now.

    #5. What would happen to the bond market if banks stopped buying so many bonds at auction all the time? Wouldn’t the US bond market implode or at least take a serious hit? What are the repercussions of that?

    #6. I don’t see how the Fed are “technocrats.” I mean somebody has to adjust rates…whether it’s at the Fed or at the Treasury…somebody is going to do it. Why not have the Fed do it? They are more insulated against political hamstringing than the Treasury is.


    Peter D Reply:

    Mario, check out this, including the comments.



    1. yes
    2. no inflation is a function of other things. see japan, the us for the last few years, etc.
    3. doesn’t matter. and banks don’t own many tsy bonds anyway
    4. yes. reserves plus tsy secs plus cash = deficit. no bonds means more reserves. with no interest paid on reserves the rest is moot?
    5. nothing of consequence would happen. worst case term rates go up a tad
    6. the ff rate should be left at 0. but in any case congress should decide


  5. studentee says:

    “‘no bonds’ mean that many more reserve balances at the fed which are functionally ‘one day bonds’ so the difference is that of the average duration of outstanding govt. liabilities (bonds and reserves)”

    thanks warren. what are the net benefits of a no bonds regime (replacing them with reserves, bills, etc.), assuming the fed wishes to maintain a non-zero interest rate target? just to eliminate a distraction?



    the main benefit is no bonds = no bond traders!



    Kristjan Reply:

    but no way to save inflation and risk free for the private sector?


  6. roger erickson says:

    This is all repeating things covered by Ben Franklin vs Alexander Hamilton, 200 years ago.

    in 200 years we haven’t come to grips with a banking lobby that has undue influence, and doesn’t even know what it’s doing;
    narrow lobbies, by definition, pursue tactics, not nation-centered operational strategies

    Quote: In the mid-1700s the American Colonies were prospering, in part because they were issuing their own money called “Colonial Scrip,” which was strictly regulated and did not require the payment of any interest. When the bankers in Great Britain heard this, they turned to the British Parliament, which passed a law prohibiting the Colonial Scrip, forcing the colonists to accept the “debt” or “fiat” money* issued by the Bank of England. Contrary to what history teaches, the American Revolution was not ignited by a tax on tea. According to Benjamin Franklin, it was because “the conditions so reversed that the era of prosperity ended.” He said:

    “The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”

    gets better

    Working with Hamilton, Aaron Burr helped to secure a charter and raise subscriptions for a private company to improve the water supply of pestilence-ridden Manhattan, but New Yorkers were shocked to learn that the surplus capital from the venture had been used to establish the Bank of Manhattan (renamed the Bank of New York). The Bank of New York was created by Hamilton and other wealthy New York investors that included Burr and the Bank of England. It was, and still is, underwritten by the Bank of England and was later chartered by the Congress as the First Bank of the United States.

    Quote: Alexander Hamilton was a talented political figure in American history, but he was prevented from achieving widespread recognition because of an overbearing nature and an inability to relate to the concerns of the common man.
    [sounds like Mankiw & Larry Summers – except Hamilton actually made some useful contributions before selling out his country for personal gain; unlike Mankiw/Summers et al, his impact wasn’t ENTIRELY negative]

    Actually, this implies rather forcefully that Hamilton, after innovating a fully fiat national scrip, later sold out his country by going in with foreign bankers to set up a US currency regime costly for his nation yet personally profitable.
    A far worse traitor than Benedict Arnold, and yet never even prosecuted!

    What does that say about current bankers and economists saying yet again that THERE IS NO ALTERNATIVE? TINA runs the world by limiting logic & options? Why? Poisoning the golden goose simply to get a shaving off the last egg? How stupid is that?

    How misinformed is this electorate to even be swayed by Mankiwish arguments? We have to hope that PT Barnum wasn’t right about us.


  7. roger erickson says:

    > servicing our debt ..
    > vicious circle of rising budget deficits
    > and falling investor confidence

    You’re right, Warren. Mankiw talks as though he never learned that the Gold-Std ended. [Someone ask whether the earth is flat or round, and how fast the speed of light is inside vs outside a moving car.]

    Publishing him is a waste of national bandwidth.


  8. roger erickson says:

    > Our parents and grandparents … created [automatic stabilizers]
    > … an increasing share of our national income

    First off, he’s confusing sovereign “income” with bookkeeping.

    Secondly, automatic stabilizers have to grow, as the simple cost-of-coordinating a larger population. It’s the overhead that allows any population to achieve the even bigger return-on-coordination.
    What part of contingency management doesn’t Mankiw understand?

    Third, without a fixed model relating cost-of-coordination to return-on-coordination [hint: that would defy observable thermodynamics], there’s simply no definition of what “share” of fiat currency supply automatic stabilizers should have. There aren’t even fixed tolerance limits. They were DESIGNED to be flexible. That’s why they’re CALLED “automatic”. [I mean, really! How ignorant does Mankiw think his audience is?]

    Fourth, if Automatic Stabilizers ever DO dominate a nation’s currency supply, they’re a) likely about to come down automatically, and b) only that high BECAUSE someone or something has caused a significant Output Gap (say, a bunch of Neanderthals trying to re-institute an Austerian policy toolset that already became extinct for obvious reasons).

    Either Mankiw is shockingly ignorant (or ill), or he’s an outright traitor guilty of sedition. Plus, he seems to think PT Barnum was right about the American electorate.


  9. roger erickson says:

    > “we have not faced the hard reality of budget arithmetic”

    Is Mankiw descended from Benedict Arnold? The “hard reality” is that the option spectrum open to a nation-state is not described by post-event transaction accounting.

    Budgets follow reality, they do NOT adequately describe or drive it.


  10. roger erickson says:

    thanks Warren, I love your comments!

    ps: wouldn’t it be even better, for millions of non-financial people, to further drive home a simple, key point about fiat currency?

    “Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us.
    [Therefore, a fully fiat] currency is [ultimately simply a] means for [denominating, not causing, these transactions].”


  11. Jeff65 says:


    Under what circumstances would the US Govt be unable to spend the dollars it creates to acquire the private sector “income” it desires?

    This scenario is certainly dire, but no one has explained how the present circumstances change to arrive at this situation – you and Mankiw simply assume the scenario arises at some point in the future.

    All of the evidence now available shows zero progression toward this scenario.



    he knows that the govt doesn’t require the acquisition of private sector ‘income’ to be able to spend.
    he was just being argumentative


  12. Max says:

    Tell me whether this idea makes sense. People worry that taxes might have to go up in the future in order to pay SS etc. without generating inflation. Why not hedge this risk by monetizing assets today (i.e. buying stocks and foreign currency)? If need be, they can be sold in the future, which will suck money out of the economy just like a tax increase but without the political issues.



    buying and selling financial assets is simply an exchange of financial assets. that changes compositions of portfolios but not net financial assets.


    Max Reply:

    Yes, good point. But wouldn’t this portfolio operation serve to increase inflation today and dampen inflation in the future?


    ESM Reply:

    Yes, but inflation isn’t a (or the) problem per se. Take the money out of the equation, and just look at real resources. In 25 years time, we’re going to have 2 workers supporting their own families plus the lifestyle and health care of a senior. Those workers better be pretty productive in 25 years, or else somebody’s going to end up very unhappy. It doesn’t matter how the government transfers resources from workers to seniors (could be via taxes or by cashing in claims on workers, or by just printing money for seniors), the effect in terms of real resource allocation will be the same.

    Perhaps it might work better politically for the government to build up claims on the private sector now and then cash them in later, but it doesn’t do any real good. And I am inclined to think it would do damage. Having the government own stocks just seems non-optimal for economic growth.


    agreed, and with the 30% corp income tax the govt functionally already owns 30% of all the stock

    if it wants more or less it can alter that tax

    Max Reply:

    “In 25 years time, we’re going to have 2 workers supporting their own families plus the lifestyle and health care of a senior.”

    It’s not exactly like that, because the seniors can also be supported by foreign workers (insofar as their needs involve tradable goods). Of course we have to give the foreigners something in exchange for the goods – which can be their own currency which we bought in the past.


    even japan’s monumental building of fx reserves wouldn’t last them a year.

    and you’re vulnerable to being charged ever high prices (inflation) when you try to spend your fx and markets see you coming

    Neil Wilson Reply:

    That’s not really sustainable Max. You are depending on ‘immigration’ to bail you out – whether that is physical immigration or immigration of production by foreigners joining the currency zone.

    ESM is right – productivity is the key to this – as is working out ‘wants’ and ‘needs’.

    We really need to discover how many people and how many machines are required to fulfil people’s needs. That then sets the lower limits on the production of the economy.

    Everything else is then just wants which can probably be left to the market to sort out.


    in any case we can alway’s keep ‘today’s economy at full employment with the right fiscal adjustment

    Max Reply:

    I’m looking at it from the point of view of, “how do you assure that the government isn’t making promises it won’t keep?” People often say that the government can’t save. I’m suggested it can save (just not in its own currency).


    ESM Reply:

    Yes, you’re right. The government can save, or US residents in the aggregate can save, by building up claims on foreigners. However, the expected return on such savings will probably be low if it is the government making the investment decision. Better to leave such investment decisions to the private sector (specifically, individuals)and have the government focus on providing the best possible environment for domestic economic growth.

    As Warren has pointed out before, what does Japan have to show for 50 years of mercantilism? Not all that much actually.


  13. Tom Hickey says:

    Warren: A rookie, first year student mistake.

    I doubt this is a mistake. I find it much more likely that Mankiw knows exactly what he is doing — writing a political screed as an appeal to fear, the most powerful motivator.

    Harvard’s Mankiw- a disgrace to the economics profession

    Exactly. He is using his economics chair as a political soapbox. He is either ignorant or disingenuous, and I doubt he is ignorant.



    serious charge!


    Tom Hickey Reply:

    Warren, I find it interesting that unlike other sciences, many if not most economists come to conclusions that are predictable based on their political ideology. This screed of Mankiw’s is just more over the top than most, because it is not concealed in math and models. It is sheer political rhetoric with no basis in fact or theory.

    The idea that the US would have to go to the IMF for funding isn’t wrong, it is absurd. One can forgive the president for saying that the US can run out of money. But a Harvard economist? I dislike being harsh, but this is really way over the top. Unless it is meant satirically and I am being punked by taking it seriously.




    Calgacus Reply:

    Tom, he is purposively going overboard, writing satire to illustrate his DEEP THOUGHTS. But the problem is not with his “satire”, which would be pardonable, but with his DEEP THOUGHTS – which are in reality a conceptually incoherent, empirically invalid pile of nonsense usually disguised by “mathematics”. But logical understanding and empirical validity are not what gets you tenure at Harvard econ. He is in essence ignorant rather than disingenuous.

    To your credit, you are too much of a philosopher and see others as ones, to see that all Mankiws, by their nature, seek not to know.

    Tom Hickey Reply:

    Probably true, Calgacus, but “ignorance is no excuse before the law,” and it is certainly not an excuse for Harvard profs in their own field. If that’s the case, fire him already.


    true, especially when you consider the imf gets its dollars from the US

    Calgacus Reply:

    Indeed, Tom. Tenure is hard to deal with, but the Harvard, Chicago etc econ departments should be disbanded and reorganized after the rest of the faculty learns of the ludicrous pretense of “science” they engage in. Something like what happened at Notre Dame, but in reverse. The Mankiws could be absorbed into Folklore & Mythology, given offices in a dusty sub-basement of Widener, etc perhaps.

  14. Anders says:

    Vimothy: “I disagree with the premise, which is that bonds are issued to soak up reserves. But I think if the govt financed its spending by issuing new money it would cause inflation pretty quickly.”

    Whoa. I gather you are an MMT dissident, but this is fundamental stuff right from Lerner’s “Functional Finance”. You actually think bond sales for a govt are functionally (as opposed to institutionally) a financing activity? What part of Lerner’s argument don’t you like?

    And as for ‘financing’ govt spending by printing money – don’t you think that QE demonstrates you can ‘underfund’/monetise your deficits quite meaningfully without inducing (consumer price) inflation?


    studentee Reply:

    it seems your argument in that thread is that mmt people don’t understand the difference between income and money, correct?


    studentee Reply:

    agh, this was @ vimothy again. i’m not sure why i’m screwing up on this.

    anyway, i should say your argument is *rooted* in this misunderstanding. could you clarify?



    he knows better and just insisted on being argumentative to be disruptive so I emailed him directly and told him to work with me offsite if he was interested in continuing our discussion. Haven’t heard from him since then

    Peter D Reply:

    Warren, I don’t think Vimothy is being disruptive. He really believes this stuff but we’ve had a 169 comments thread on this at heteconomist.com, where we tried to convince each other as tot he inflationary effect of no-bonds regime and did not come to a resolution. I think Vimothy is too used to think in real terms while MMT usually concentrates on nominalist terms. I think – but am not sure – that Vimothy sometimes gets things wrong because he mixes real and nominal (not as in inflation adjusted, but rather as in “atoms and sweat vs. units of account.)
    I’d love to see him posting and having more MMT people take on his arguments – we can all learn form it – please, don’t ban him.


    we’re getting it sorted out off line first with a point by point exchange.
    so far so good

  15. studentee says:

    you’re saying that no bonds is more inflationary than bonds?


    studentee Reply:

    (this was @ vimothy)


    vimothy Reply:

    Yes, absolutely.


    studentee Reply:



    Anders Reply:

    Studentee – the monetarist argument, at any rate, assumes that we start being happy with the level of money we have, so any more money being created (ie unsterilised deficits) is excess money which we will get rid of by spending; too much money chasing too few goods >>> inflation!

    MMT says – sure liquidity is important but the main thing is balance sheets. People may be happy with their cash balances but, as the kinds of environment in which large deficits abound is the kind of environment where private balance sheets are strained with excess debt, a cash windfall would be largely used to pay down debt.

    I’ve yet to hear a monetarist explain why money is so much more damn important than balance sheets.


    spending requires a seller

    the govt can only spend more than it taxes,
    which adds that much in net financial assets to ‘the economy,’
    if ‘the economy’ wants to sell real goods and services to increase its ‘savings’

    studentee Reply:

    @ anders

    i think you are discussing more closely fiscal policy, when a gov’t adds nfa’s, whereas the bonds vs. no bonds is a question is more closely a question of monetary policy (excepting the interest payments factor), no changing of nfa’s (?). bonds vs no bonds wouldn’t really affect the non-government sectors ability to fix balance sheets (excepting, once again, the interest payments factor).

    bonds vs. no bonds i think can be addressed irrespective of balance sheet quality issues. assume even full employment. why would the issuing of bonds be relatively disinflationary? this is what i’m asking vimothy


    ‘no bonds’ mean that many more reserve balances at the fed which are functionally ‘one day bonds’ so the difference is that of the average duration of outstanding govt. liabilities (bonds and reserves)

    ESM Reply:

    We had a nice long discussion with Vincent Cate on this issue last month. I encourage you (Vimothy) to take a look at that thread.

    Vincent seemed to think that the key reason to issue a bond was to take base money out of play for the duration of the bond, which presumably would reduce aggregate spending power. Of course, this doesn’t actually happen. A Treasury bill/note/bond is a pretty close substitute for cash because of its liquidity and ability to be repo’d.

    Empirically, the evidence is strong that the cashification of bonds does not have much effect (see QE in Japan, and QE and QE2 here).


    studentee Reply:

    mosler, fullwiler also say that bonds can be more inflationary because they allow for credit (?) creation. what do they mean by this? by providing a risk free rate in derivative instrument creation, etc?

    ESM Reply:

    To the extent that the interest paid on bonds is higher than the interest paid on reserves, this increases income to the private sector and net financial assets in the private sector, ceteris paribus. That could increase aggregate demand. Obviously, there is the offsetting effect: if savings earn a greater return, people will be incentivized to save over spend. Which factor dominates depends on circumstances.

    Seems right now that the zero interest rate policy is dampening demand. People are too nervous to spend out of savings. They might spend out of investment income, but they aren’t getting very much right now.



    Oliver Reply:


    I think they were addressing the fact that bonds can be used as collateral for loans.

    Peter D Reply:

    if savings earn a greater return, people will be incentivized to save over spend

    I cannot understand this argument. People decide to save first, then decide on a particular vehicle of savings. Nobody goes to buy “more stuff” just because the rate on bonds fell. You can have money shifted between asset classes, yes, but not between consumption and saving/investment.

  16. MamMoTh says:

    At least he is right on one thing. The IMF will in 2026, having moved to Beijing because it was much cheaper than DC after the Chinese real estate bubble burst, keep imposing the same recipe for disaster it always did.


  17. Calgacus says:

    A rookie, first year student mistake. Warren, you are too kind, unless you mean first year at elementary school.

    The seeds of this crisis were planted long ago, by previous generations.Indeed, when they granted Mankiw & his generation of economists tenure, instead of JG employment at sheltered workshops.



    i was trying to be nice…


  18. vimothy says:

    “When the government creates money, it IS borrowing from the private sector.”

    When the govt runs a deficit, it is borrowing from the private sector. When the govt creates money, it changes the composition of the stock of govt debt held by the private sector.

    “And the value of the dollar, which is allowed to float freely (for the most part, no price controls and no fixed fx regime exist), has been reasonably steady”

    Right, because the system we have now is generally (not always) good at producing (consumer) price stability.

    “Presumably, enough people believe in the stability of the US government, and the credibility of its taxing authority, that they are willing sell real goods and services in exchange for it, as well as stockpile it for future use or in case of a rainy day.”


    “Do you think that the issuance of bonds to soak up reserves helps to prop up the value of the dollar?”

    I disagree with the premise, which is that bonds are issued to soak up reserves. But I think if the govt financed its spending by issuing new money it would cause inflation pretty quickly.



    all govt spending already is, and has always been, the simple act of crediting a member bank reserve account on the fed’s books.

    you can call it printing money or whatever you want to call it.
    and you can call taxing ‘unprinting’ money to be consistent if you want, as ‘collecting taxes’ is the simple act of debiting a reserve account at the fed


    vimothy Reply:

    I don’t call it printing money–because it’s not! ;-)


  19. Mike Valotta says:

    If everyone could send him this that would be great:


  20. Kristjan says:

    Vimothy you wrote under US Approaching Insolvency, Fix To Be ‘Painful’: Fisher: “Oh come on. No one thinks there is any possibility that the US is going to run out of dollars.”

    At least there is one :) He is securing credit lines with IMF.


    vimothy Reply:

    You’re mistaking income and money as well. The nominal stock of dollars is not a constraint. The constraint is the PDV of future taxes–i.e. present disc. value of govt’s lifetime “income”, i.e. it’s “wealth”.


    Kristjan Reply:

    No, I think he does. Is he talking about borrowing resources from abroad?


    vimothy Reply:

    I think it’s safe to say that Mankiw knows the difference between the two.

    He is claiming that the US doesn’t have enough income to provide pensioners with the level of real income (= living standards) that they have been promised. Govt supplies the nominal stock of dollars, not income, though it contributes to agg demand.

    Kristjan Reply:

    ok, if he knows that then why is he talking about credit line with IMF? Is that going to help provide the services and goods needed for retirees? He doesn’t talk about increasing immigration quotas for example? How is that IMF credit different than US government created money?

    vimothy Reply:

    Govt’s ability to create money is not the issue. It is constrained by its current income and ability to borrow against future tax revenue. It would like the private sector to lend it some of its income, but the private sector appears to have other plans for it.


    how is government spending, operationally, constrained by current income and borrowing?
    you sure you’ve been reading what you say you’ve been reading?

    Kristjan Reply:

    “Govt’s ability to create money is not the issue.”

    If It is not then why is Mankiw securing credit line with IMF? To get money in the economy!!!

    “It is constrained by its current income and ability to borrow against future tax revenue.”

    What are you saying here, government cannot create money, because the resources are not available? If so IMF credit lines don’t help.

    ESM Reply:

    When the government creates money, it IS borrowing from the private sector. It is issuing a liability and getting something in return (although sometimes that something is just votes for current political office holders).

    And the value of the dollar, which is allowed to float freely (for the most part, no price controls and no fixed fx regime exist), has been reasonably steady. Presumably, enough people believe in the stability of the US government, and the credibility of its taxing authority, that they are willing sell real goods and services in exchange for it, as well as stockpile it for future use or in case of a rainy day.

    I don’t think this has anything to do with Treasury bonds per se. Do you think that the issuance of bonds to soak up reserves helps to prop up the value of the dollar? If you do, please explain the mechanism.


    when the Fed credits a member bank account it is borrowing?

    i call it exchanging a tax credit for real real goods and services.

    the only thing the govt owes is it’s promise to accept the credit back for payment of taxes that it legislates.

    vimothy Reply:

    I’m saying that the govt wants income, not “money”. Govt’s ability to create money does not provide it with income–it’s ability to expropriate real resources via taxation is, and its against this ability that it borrows, so to speak. Mankiw thinks USG is near the limit of its ability to do that.


    the govt doesn’t ‘get’ anything when it taxes you. it just changes the number down in your account, on its books.
    you sure you read the 7DIF as you stated?

    Kristjan Reply:

    “I’m saying that the govt wants income, not “money”. Govt’s ability to create money does not provide it with income–it’s ability to expropriate real resources via taxation is,”

    right, and the real taxation happens when government spends
    how do you see It not being able to spend anymore?

    MamMoTh Reply:

    ESM: Do you think that the issuance of bonds to soak up reserves helps to prop up the value of the dollar? If you do, please explain the mechanism.

    I thought the interest rate paid on govt bonds in different currencies played a role in their relative value. Isn’t that so?


    hard to say with floating fx.
    various cb’s have done studies, including the bank of england, which hasn’t been able to find a sufficient correlation to consider interest rates a policy tool for that purpose.

    changing rates does change the price of spot vs fwd crosses but that’s in fact a definition of what an interest rate is

    vimothy Reply:

    Are you thinking of interest rate parity? en.wikipedia.org/wiki/Interest_rate_parity

    MamMoTh Reply:

    Something like that, although I wouldn’t go for parity, just to play a role. Maybe it’s bollocks, I’m no economist nor fx trader… But it makes sense to me.

    Of course there are many other factors that can play a role in the fx exchange, the external sector position, the profitability of investment, etc, so if you take them all together the exchange rate is almost random.

    vimothy Reply:

    “the govt doesn’t ‘get’ anything when it taxes you. it just changes the number down in your account, on its books.”

    Transfer of dollars just facilitates the transfer of goods an services. Govt doesn’t need dollars, as you’ve observed many times. In any period the govt is consuming the real income produced by the economy. Some it borrows and some it taxes.

    “you sure you read the 7DIF as you stated?”

    I’m afraid that I just plain don’t agree with you–on almost anything related to macro theory.

    Peter D Reply:

    Vimothy, how is that dollars injected by spending do not provide the govt with real resources but those taxed away do? You should either look at both sides in nominalist terms or look at both sides in real terms, otherwise you’re getting confusion.

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