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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

The elders of Jonestown contemplating the Kool-Aid mix

Posted by WARREN MOSLER on July 29th, 2011

The actual problem with the US economy is the federal deficit is way too small given current credit and global demand.

That should be a good thing.

Congress should be arguing over whether we need tax cuts and/or spending increases.

But instead they all have the misguided idea that we are at immediate risk of some kind of unknown financial crisis
that would cause us to suddenly be unable to fund ourselves, much like Greece, and be faced with the choice of default or hyperinflation.

It’s all inapplicable nonsense. There is no such thing as the issuer of a currency running out of money, or being dependent on foreigners or anyone else for finance. And inflation from over spending comes from trying to buy more than there is for sale, which is hardly the case right now. But the President and members of Congress believe what they believe, however misguided, as do the majority of the voters, and are acting accordingly as they attempt to pass measures to make the federal deficit smaller.

And doing nothing makes the federal deficit smaller still, making the economy that much worse, as doing nothing means the debt ceiling is not raised and the Treasury goes cold turkey to balance.

So the actual best case for the US economy is that they get a bill to the President that he signs, and the deficit reduction and economic harm will at least be less than the catastrophic deficit reduction from doing nothing.

But for too many in power, the best case is doing nothing.

It’s all like drilling holes in the bottom of a sinking ship to let the water out.
The more you drill, the worse it gets.
Unfortunately, it’s now drill, baby, drill!

57 Responses to “The elders of Jonestown contemplating the Kool-Aid mix”

  1. Neil Wilson Says:

    I’d argue the opposite. The best thing that could happen in the US now is that the idiots in charge blow the whole thing to pieces.

    At least that would be quick end to this nutty economics, rather then the decades long decline you’ve otherwise got to look forward to.

    Reply

    rvm Reply:

    Agreed !

    Reply

    Art Reply:

    @rvm,

    I think Neil’s right that the surest way to demolish Tea Party economics is too go cold turkey.

    But in that scenario, neoclassical and neolib economists will still hold tight to their catechisms, claiming that we just moved too fast. They’re going to take decades (at least – Japan has made no progress after 20 years) no matter what happens now.

    Reply

    Ralph Gardner Reply:

    @Neil Wilson,
    The US has lost 50,000 factories and 5,000,000 jobs to China when China devalued its currency to lure businesses to China.

    Doctors take an oath which has the phrase “First do no harm” which was/is very helpful when one is not sure of the effects actions will have. Our economic theory is like medicine in the 17th century. We can bleed the economy with taxes to stop inflation, we can feed the economy with spending when growth is anemic.

    With every nation in the world competing and ready and eager to take advantage of any weakness that will net them profit the world is a quite dangerous place to be gambling especially when not knowing the possible outcomes.

    Reply

    WARREN MOSLER Reply:

    You missed the trade chapter in the 7dif?

    Reply

    rvm Reply:

    Loved the markets today – please, markets, keep going….down!

    Reply

  2. wh10 Says:

    Love the analogy!

    Reply

  3. Unforgiven Says:

    Warren -

    I’ve been trying to approach it from very basic point of truth about our currency – that it is fiat, non-convertible and that you can’t demand anything for it but the currency itself (as it is with most other nations).

    This would seem to be a fact that NOBODY can deny and a point that we all can agree on. From there, since a fiat currency producer can can create dollars at will, (here you may get the WeiBabwe argument, to which you could say “you’re right, inflation would be the concern rather than running out of money or needing “loans”) taxing for Federal revenue makes no sense at all.

    So it would seem to me that if we could establish the following points:

    1. It’s fiat.
    2. We can produce it at will.
    3. Therefore taxes can’t be for revenue.

    That we would shift perception with 3 undeniable apolitical facts and create a HUGE shift right there. I’m not sure that the flow is best though. Input?

    Reply

    wh10 Reply:

    @Unforgiven,

    Add a big disclaimer saying “INFLATION IS THE RISK” and perhaps add a 4. that says “and it’s been this way since 19XX,” so you have X years of proof this doesn’t automatically lead to hyperinflation.

    Reply

    Unforgiven Reply:

    @wh10,

    We could test it both ways to see. I just don’t want to spoil the first three points with any controversy, as just those 3 are enough to create a tsunami of understanding.

    Any argument or contention? “So you deny that the USD is non-convertible?”

    Reply

    wh10 Reply:

    @Unforgiven,

    Maybe you’re right. I am just so used to seeing the typical reaction, which is “this theory is crazy, it will lead to hyperinflation.”

    I guess waiting to address would potentially be better if done in real life.

    Actually, I see Ramanan refute this ‘non-convertibility’ thing frequently, citing an IMF article, but I don’t understand the implications of his claims.

    Ramanan Reply:

    @Unforgiven,

    Not a fan of hyperinflation discussions, but of the opinion that Zimbabwe’s government clearly acted irresponsibly. These situations arise due to various things going on – there is already a wage-price spiral and the government makes this worse. Or the government itself increases wages of its employees at an ultra-fast rate. The Monetarists’ confusion arises by confusion wages with money.

    Now, coming to the point on convertibility, which Wh10 raised, I believe currencies are convertible.

    All bankers say it (which of course is not a proof, since they say so many obviously wrong things). The IMF articles just make these things more formal. Like .. we are well mannered when we meet and interact with people, but there still are laws.

    To export to a nation, exporters need to assured that they can repatriate funds and that they don’t have to wait for another foreigner to buy the local currency to exchange the currency. The banking system takes up this job of acting by making markets and offering to convert the currency. To cover itself, it needs to attract funds by hook or crook. If you look at the international payment systems, its pretty obvious currencies are convertible.

    Neil Wilson Reply:

    @Ramanan,

    That’s not convertibility, it’s just banking intermediation.

    It’s just like you can draw on a bank deposit even if the banks reserve position is currently weak.

    Liquidity is one of the roles of a central bank.

    And just like with domestic banks is it moves from being a liquidity issue to a solvency issue then it stops.

    Ramanan Reply:

    @Unforgiven,

    “That’s not convertibility, it’s just banking intermediation.”

    Keep changing definitions.

    WARREN MOSLER Reply:

    pretty much as in the 7 dif?

    toss in that if you pay taxes or buy securities with old cash they shred it?

    only the issuer of a currency does that

    Reply

    Mario Reply:

    @Unforgiven,

    I’ve done this so many times with people and still for some reason it doesn’t work.

    First they go to the inflation freak-out.

    Then if you say right that’s true, but we have high UE, deleveraging, an output gap, and a trade deficit…they may at that point at best just shut up (if they do that). They won’t agree though…God forbid!!!

    If that issue is covered then they bring up their next point…bonds. So now they roll into the tirade of government debt and huge deficits and grandkids, etc.

    So then if you say, bonds are savings accounts, we just pay the interest through fiat. They now think you’re crazy and just write you off. If you try to explain that China cannot give us more US dollars, b/c we OWN ALL US dollars…they just don’t hear it. They literally don’t hear that. They really think bonds “fund” something. So then if you say, listen, if all bonds were to be destroyed tomorrow and paid out and never again issued, the US government would still be able to write its checks and spend (putting the whole treasury/fed thing aside for now just to prove the point)…they then think you’re crazy or they’ll say…so it’s all just monopoly money then eh? Is that it?!?! And you say, well yes that’s true…but it’s still quite real and effects us all. Or they’ll say, so then none of us have to work or do anything then is that it!?!? We can all just slack off and let the government print money for us all eh?!?! Then you of course say, no that would be hyper-inflationary b/c there’d be no output and the dollars would essentially be worthless. I never said that.

    And on and on it goes. Until one day…BAM they get it.

    The great news about MMT is that fundamentally it’s all about a paradigm shift. However the terrible news about MMT is that fundamentally it’s all about a paradigm shift.

    None-the-less keep it up and keep going with spreading the message. It’s what’s needed regardless.

    The more ways we can experiment with getting the message across the better. But how to “stage” a paradigm shift moment? I am not too sure that you can.

    Reply

    Neil Wilson Reply:

    @Mario,

    I heard a good one today.

    “Money comes from the same place Tesco Clubcard points come from. The government isn’t going to run out of money any more than Tesco is going to run out of Clubcard points.”

    Tesco does not have a vault full of Clubcard points waiting to be issued. They just mark up your account when you fulfil the criteria for receiving them – like reusing your free plastic bag.

    And when you have enough you get to spend them on real stuff.

    Reply

    pebird Reply:

    @Neil Wilson, That is a great example. At some Bitcoin forum, I said that Bitcoins were basically airline points and I guess it was the equivalent of calling someone’s baby ugly – I almost had to pull the internet cable out of the wall.

    Unforgiven Reply:

    @Mario,

    Great post and thanks so much for all your effort so far.

    I’m beginning to be inclined to leave it at the basics and say “I’ve said what I came here to say” and let them work the rest out themselves, or perhaps point them to 7DIF or some thread where it’s all been hashed out before. There will always be those three things that can’t be denied, whatever argument they come up with. At least, some may let go of their positions and start asking questions again.

    Reply

    Unforgiven Reply:

    @Mario,

    Addendum:

    Stick around too long and it seems that you end up being required to come up with the solution for God, The Universe and Everything.

    Not that one shouldn’t continue the discussion if you’re cool with it…

    Reply

    Unforgiven Reply:

    Great feedback, all! Thanks!!

    Yeah, best to try to stay away from the protracted inflation discussions…

    Reply

  4. Broll The American Says:

    How can it be that there in nobody in Washington, mainstream economics, or media who believe in MMT?

    • Are we all delusional nut-jobs? The insane person is always the last to know.

    • Is there a sinister conspiracy of NWO types who suppress and manipulate the truth?

    • Is the truth to counter-cultural and counter-intuitive to be believed?

    I’m sure there’s a lot of the third reason going on, but I fear that the second reason plays a bigger role.

    Reply

    wh10 Reply:

    @Broll The American,

    I want to know from Warren Mosler how much he thinks Wall Street thinks in an MMT-type way and (understandably) keeps these ‘trade secrets’ in fact secret and perhaps even contributes to misunderstanding for their benefit.

    Warren posted an email from Glenn Hadden (ex-head of govt bond trading at GS, now at MS) which pretty much stated MMT concepts word for word after S&P put the US on watch a couple months ago. I’m sorry- that says A LOT.

    Warren?

    Reply

    wh10 Reply:

    @wh10,

    Might I add, reading Warren’s bio, he is a bit of a legend in the finance world himself. Warren and Glenn are enough for me to be suspicious that it’s more widespread than it seems, or at least the potential for the paradigm shift is there, barriers notwithstanding.

    Reply

    WARREN MOSLER Reply:

    thanks!
    been telling everyone i meet for 20 years so some’s bound to have made an impression

    Art Reply:

    @wh10,

    As someone on the inside, I can tell you confidently that very few do.

    The non-dogmatic ones will grasp it rather easily. But they tend to be the ones who never really invest themselves in macro or policy issues anyways.

    The folks who are invested in macro and policy issues tend to be very stubbornly mainstream-macro. There are a handful that I know of who, despite working in mainstream paradigms, let the evidence tell them what to think, rather than their biases (e.g., Paul Kasriel at Northern Trust, Mike Darda at MKM Partners).

    But there are very, very few with even a clue about MMT.

    Reply

    wh10 Reply:

    @Art,

    Ok. Fair enough :(.

    Geoff Reply:

    @Art,

    Eric Green at TD Securities is the only mainstream dude I know who seems to have a clue.

    Broll The American Reply:

    @wh10, I found that Glenn Hadden piece. That is one of the most clearly stated and non-arguable pieces I’ve yet read on the topic. Thanks for mentioning it.

    Reply

    WARREN MOSLER Reply:

    many traders get it, as suggested. senior management is a different story. same at the fed and tsy. sr staffers get it, but not the political appointees running the show

    and quite a few fund managers get it

    Reply

    Matt Franko Reply:

    @Broll The American, I agree with Zanon here wrt the Economics academe ultimately being responsible.

    Its like all of the bridges one day collapsed and the American Society of Civil Engineering would take no responsibility.

    Resp,

    Reply

  5. TylerF Says:

    I’ve enjoyed the discussion on how to explain MMT principles to everyday people. To me, it goes without saying it’s unquestionably vital with the damaging cuts being proposed and the suicidal BBA being promoted.

    One helpful thing is to walk someone through the platinum coin option with citations to the USC that permits it. It clearly demonstrates dollars are created not a result of taxes or bond sales.

    As something of an aside, I’m curious how folks finesse a proverbial water cooler scenario. You’ll be with a group of well intentioned people who’ll be concerned about the budget cuts and they’re all agreeing that taxes need to be raised on the wealthy and corporations. How do you respond in a way that’s not immediately alienating or inordinately jarring to their sensibilities or in some way appearing to endorse the present degree of extreme inequality?

    Reply

    Broll The American Reply:

    @TylerF, I usual break into the discussion by offering up the analogy that the US Government isn’t our partner or family member who has a “credit card” that will eventually drag us down. Rather the government is on the other side of a zero sum equation and we’re on the other. A more visual analogy would be a see-saw -one side up, one side down. People usually grasp the whole idea of not wanting to go down in order to get the government up. It also comes off as a-political.

    Reply

  6. Paul Palmer Says:

    Ronald Reagan got it. Carter was paralyzed by deficit fears, even ran a surplus. Reagan came in, cut taxes, increased spending, and ran the deficit everyone else was afraid of, and even said the deficit was less important than winning the cold war and stimulating business activity. It was called “Voodoo economics” back then.

    Try it some time, ask anybody who ran bigger deficits, Reagan or Carter. Almost everybody says Carter.

    Reply

    Art Reply:

    @Paul Palmer,

    The economic misconceptions around Carter and Reagan years are pretty significant. You’re right that Carter was a deficit-phobe. The economy still managed to perform OK overall, thanks to an explosion of household formation by baby boomers and nascent consumer credit expansion. But maybe it didn’t all start with Bob Rubin?!?

    Economic revisionism over the FDR years is also astounding.

    Reply

  7. Walter Says:

    Warren,

    About hyperinflation and the remark that you mentioned in your post of July 25th …’And this and $25 will get you a cup of coffee’…

    People often think that hyperinflation comes from a sudden rise in demand due to increase in the money base. Hence the QE fear etc.
    However, hyperinflation may come from an output collapse instead. In Russia e.g. in the early 90-s the hyperinflation did not come from a sudden strong rise in demand, but was caused by output collapse when all those Soviet factories came to a standstill.
    To close factories is easy and rapidly done. Capacity increase takes much more time.
    How do you see the risk that the deflationary spiral that may be triggered now will lead to so much capacity destruction that the tipping point will be reached when it easily turns into hyperinflation when aggregate demand bounces?
    The whole thing becomes kind of self fulfilling prophecy then and those mainstreamers will say ‘you see there you have it’.

    Reply

    hamish Reply:

    @Walter, I think you are correct. I believe the same thing happened in Zimbabwe. Mugabe collapsed agricultural production with all his farm seizures etc, then tried to cover it up with printing. It seems to be the common theme with hyperinflations that they are caused by some sort of major disruption in the society, war, revolution etc.

    So I think there might be something in that idea that austerity measures aimed at “balancing” the budget will slowly destroy productive capacity – unemployed experienced workers lose old skills, and the young unemployed never gain them, therefore eventually you could end up with high inflation as all these unemployed people still demand the necessities of life, but don’t have the skills to produce them so the price goes up. (gross simplification)

    Reply

    Walter Reply:

    @hamish,
    Thanks for your reply.

    I just wonder how ‘slowly’ this destruction will go. How fast such a deflationary spiral could get out of control?

    Reply

    WARREN MOSLER Reply:

    6 weeks of cold turkey balance would be an eternity

    WARREN MOSLER Reply:

    and the currency only goes to 0 when taxing authority is lost

    Reply

    Walter Reply:

    @WARREN MOSLER,

    Yes, taxation can counter inflation, but most of the time high unemployment goes hand in hand with more criminality, larger shadow economies etc. which do not make tax collection easier.
    Taxation may also lag behind too much.
    And on top the taxman also starts to think differently when his sister, brother, and parents are unemployed and his nephew has no toys to play with.

    I further doubt whether the present circus in the US is contributing to a higher tax moral.

    Don’t get me wrong, I just wonder how fast cold turkey can lead to an out of control deflationary spiral.

    Reply

    WARREN MOSLER Reply:

    during high unemployment like today tax cuts are in order. that’s easy to enforce
    :)

    cutting 150 billion in spending cuts retail sales, employment, and tax revenues which further cuts spending, etc.

    MamMoTh Reply:

    @WARREN MOSLER, you really believe if government spends only 1$ a year and taxes nothing away, the currency will go down?

    Reply

    Walter Reply:

    @MamMoTh,
    It seems to me that:
    Tax holidays(i.e. temporal no tax)(see Warren’s proposals)are ok as countercyclical policy, but structural absence of taxation will eliminate the need for the currency and as a consequence drive the demand for it and its value to zero.

    WARREN MOSLER Reply:

    yes, 0 taxes, state and federal, and the currency buys nothing

    MamMoTh Reply:

    Walter, yes that would be the tax driven currencies view which I do not share. I consider taxes as a sufficient condition but not necessary to drive a currency that is already well established.

    WARREN MOSLER Reply:

    with no federal or state taxes the currency buys nothing.

    unless geithner’s signature has some collector value…

    pebird Reply:

    @Walter, You are right, the money supply is an effect, not a cause of almost all hyperinflation scenarios.

    Reply

  8. Art Says:

    From Dave Rosenberg’s note this AM:

    “Tea time? Why is there so much fear about admitting that living within your means is not a terrible thing. Government spending, in the United States, is simply out of control”

    Good grief…

    Reply

    Jim Baird Reply:

    @Art,

    Well, he’s right. I’d like to live to see the day when the U.S. lives within it’s means. The last time it did was 1945 or thereabouts. Maybe this time we won’t need a war that destroys half the world to convince ourselves to do it…

    Reply

    WARREN MOSLER Reply:

    you mean full employment and max real terms of trade, of course

    Reply

    Dan Metzger Reply:

    @Jim Baird,
    Perhaps the phrase needs to be turned around to read the “US must live up to its means.”

    Reply

    pebird Reply:

    @Art, Our means is well in excess of where we are living.

    Reply

    Ralph Gardner Reply:

    @Art,
    With 50,000 US factories or 10 percent of the total factories of the US moved to China to use their purposefully devalued currency to pay bills at half-price of here what should be done?

    Reply

    WARREN MOSLER Reply:

    Keep US taxation at the right level where we can buy everything we can produce here at full employment plus all that China wants to sell us.

    Read the 7DIF on this website?

    Reply

  9. The elders of Jonestown Mixing The Kool Aid - TanToday - Tanning Salon Business Forum Says:

    [...] elders of Jonestown Mixing The Kool Aid The elders of Jonestown contemplating the Kool-Aid mix Posted by WARREN MOSLER on July 29th, 2011 The actual problem with the US economy is the federal [...]

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