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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.

post debt ceiling crisis update

Posted by WARREN MOSLER on August 3rd, 2011

With the debt ceiling extended, the risk of an catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.

What’s left is the muddling through with modest topline growth scenario we’ve had all year.

With a 9% budget deficit humming along, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.

It still looks to me like a Japan like lingering soft spot and L shaped ‘recovery’ with the Fed struggling to meet either of its mandates will keep this Fed ‘low for long’, and that the term structure of rates is moving towards that scenario.

With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs the 7-10 year maturities. And the reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end work to that same end as well.

The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.

However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.

With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level.

However, the market seem to have forgotten that the US has been supplying crude oil from its strategic petroleum reserves, which will soon run its course, and I’ve yet to see indications that Lybia will be back on line anytime soon to replace that lost supply. So it is possible crude prices could run back up in September and inflation resume. For the other commodities, however, the longer term supply cycle could be turning, where supply catches up to demand, and prices fall towards marginal costs of production. But that’s a hard call to make, until after it happens.

With the debt ceiling risks now behind us, the systemic risk in the euro zone is now back in the headlines. Unlike the US, where the Treasury is back to being counter cyclical (unemployment payments can rise should jobs be lost and tax revenues fall), the euro zone governments remain largely pro cyclical, as market forces demand deficits be cut in exchange for funding, even as economies weaken. This means a slowdown to that results in negative growth and rising unemployment can accelerate downward, at least until the ECB writes the check to fund counter cyclical deficit spending.

China had a relatively slow first half, and the early indicators for the second half are mixed. Manufacturing indicators looked weak, while the service sector seemed ok. But it’s both too early to tell and the numbers can’t be trusted, so the possibility of a hard landing remains.

Japan is recovering some from the earthquake, but not as quickly as expected, and there has yet to be a fiscal response large enough to move that needle. And with global excess capacity taking up some of the fall off in production, Japan will be hard pressed to get it back.

Falling crude prices and weak global demand softening other commodity prices, looks dollar friendly to me. And, technically, my guess is that first QE and then the debt ceiling threats drove portfolios out of the dollar and left the world short dollars, which is also now a positive for the dollar.

The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.

Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990′s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980′s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

So muddling through seems here to stay for a while.

62 Responses to “post debt ceiling crisis update”

  1. Paul Says:

    From a banker’s perspective in the great state of Texas I can say we are VERY cautious, looking to steal good business from other banks by hiring their bankers, we are not doing ANYTHING speculative. And we are supposed to have one of the best economies in the country.

    Reply

    roger erickson Reply:

    @Paul,

    So has Texas come a long way from the days of being the most profitable by having the most corrupt S&Ls?

    have your politicians really changed? or just supporting a different form of fraud? One we haven’t learned about yet.

    http://www.benzinga.com/economics/11/08/1820877/if-you-liked-sheila-bair-you-would-have-loved-ed-gray-and-tim-ryan-part-2#ixzz1TtRvxagG

    Reply

  2. Colin Says:

    I think what we’re trying to say is that George W. Bush destroyed value on a biblical scale across all of humanity by lying us into two wars and concentrating wealth into the top 0.25%. The tea-party screws itself (idiots deserve it, and it’s hilarious also), and the climate change deniers have a lovely 100+ degree summer. Waging war and paying teachers dog shit = a bankrupt country full of retards who don’t produce any value. We have Harvard, but 400 million retarded people dwarf their 4k graduating class. Our culture will be our end, starting with the tea party. Arbitrage works with labor, too. Growth will be slow? Try, “we will be a joke compared to China in 30 years.”

    Reply

    Vincent Reply:

    @Colin,

    Gee Colin. I would think you’s be happy with the current situation. Lower GDP means lower green house gas, and fewer strip malls. You rarely see it mentioned, but there are a fair number of folks who actually benefit from low GDP environment.

    Reply

    Colin Reply:

    @Vincent

    I prefer higher GDP over a cleaner environment, but they aren’t mutually exclusive. I’m glad you agree with the rest of my post!

    Reply

    Tom Hickey Reply:

    @Colin,

    Colin, actual GDP is real GDP plus and minus externalities, some of which are positive and uncounted, and some which are negative and uncounted.

    WARREN MOSLER Reply:

    higher gdp = way cleaner env. if you do it right

    Colin Reply:

    Tom, I thought it was obvious that I was referring to real GDP because I was referring to environmental externalities separately and also said that there are ways to increase this measurable real GDP without necessarily increasing pollution (“but they aren’t mutually exclusive”). But thanks for throwing that out there.

    Tom Hickey Reply:

    @Colin,

    Just wanted to make things clear, not correcting you, Colin. If we aren’t dealing with true cost, we are not dealing with actual GDP. It’s just a fantasy number. Same with comparing statistics among different countries when they are not computed on the same basis.

    Jackson Reply:

    @Colin, Colin seems to only like wars run by Democrats who were the party screaming about Afghanistan being the only just war. When the Big “O” has two wars going ( is he lying to us also) plus involvement in Lybia? and Guantanamo still open, Dems suddenly go blind to the utter hypocrisy of their silence. Vincent makes a great point, flat GDP growth is the green utopia trademark so Colin please put the Tea Party on your X-Mas card list this year.

    Reply

    Colin Reply:

    Jackson, the tea party consists of racist idiots and you know it: scared and angry people who don’t understand the world around them who found an outlet to vent. Obama is doing the best he can with what he has, and has in good faith kept every promise he possibly could (with more in the works). Tea Party = Koch Brothers’ creation. Jackson I hope you’re in the top 1% because that’s the only part of the population the tea party’s votes will benefit. And in the short term only.

    Reply

    Vincent Reply:

    @Colin,

    One of the problems with President Obama is his unpredictability. One day he’s establishing a form of universal healthcare, the next he’s proposing to cut it, along with social security. Who can possibly plan for the next week, let alone the next 5 years? And, I really think that fundamentally the folks who advise him, worship at the altar of the Clinton budget surpluses.

    Anyway, I have a question re inflation and MMT. Isn’t inflation often a regional phenomenon? How can one control (with federal taxation) inflation in a place like NY,NY, without having a deleterious effect in Colombus,OH.

    WARREN MOSLER Reply:

    People and businesses move around

    Mario Reply:

    @Vincent,

    I never thought of it like that but you’re right…he is unpredictable…even if his rhetoric and poise is so darn good. Why can’t we have the drive and focus of W and the diplomacy and rhetoric of O all in one person? Oh probably b/c that would be too good for America and its people instead of the “owners” of this place.

    Tom Hickey Reply:

    @Colin,

    Vincent: ” I have a question re inflation and MMT. Isn’t inflation often a regional phenomenon? How can one control (with federal taxation) inflation in a place like NY,NY, without having a deleterious effect in Colombus,OH.”

    The alternative to fiscal policy is monetary policy, and interest rates are less targetable than taxes. Moreover, interest rate setting advantages either lenders or savers depending on the direction.

    Mario Reply:

    @Jackson,

    it’s true…Obama is only slightly better than Bush at this point simply b/c of the whole NSA wire tapping thing and the fact that (somewhat) less soldiers are out there (I think). Other than that he’s just as bad. The wars thing is getting less coverage right now b/c of the economy/debt kabuki dance…and in that regard I’d LOVE to have Bush back to ramrod some spending through and get some shit done regardless of how many people are in the house/senate against him…and honestly…if you really knew me…you wouldn’t believe I just said that I would rather have Bush for anything. This is what MMT does to you! It divorces you from party lines.

    All around Tea Party candidates are insane, stupid, corrupt, and dangerous.

    Reply

  3. GLH Says:

    Thoughout this so called debt crisis many of the good people here and other sites have offered one way after another that O could defeat the Repub’s, but Mr. O hasn’t been interested in any of them. The other day Michael Hudson was on Democracy Now explaining to Amy Goodman about the faux debt crisis. He explained that without more government spending there would be no growth unless the government used private lenders.
    It did seem curious that Mr. O was so calm about the so called debt crisis and didn’t seem concerned at all about unemployment. Then, I read this statement by Robert Reich about how O could be able to increase employment, “He says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart.”
    How do like that, now Mr. O and the repubs are concerned about jobs and they want to borrow from private banks to finance government works programs? Ever feel like you’ve been screwed? I need a cigarette.

    Reply

    Tom Hickey Reply:

    @GLH,

    Michael Hudson is a former Wall Street economist. He knows how they play from close up. Everything he writes is must-read, and he is getting closer to being in paradigm with MMT.

    Reply

    Leverage Reply:

    @Tom Hickey,

    I think Hudson is on MMT paradigm, but he is more realist than most mmt’ers bloggers (including Mosler).

    This has been never about policy or good economics, is about politics (and would say about class warfare). Until that’s fixed MMT would be only used to wage war, like Bush did, and ruin USA.

    Reply

    WARREN MOSLER Reply:

    and sumner said i’m too realistic. whatever…

    Leverage Reply:

    @Leverage,

    Sorry Warren, Sumner is clueless about how the system works, you’re not. But you still have some faith on US political system and ‘american democracy’. I think Hudson doesn’t, and that’s the main difference.

    Until something ‘big’ happens the probability of some sort of functional finance being applied EVEN if it’s understood by politicians and ‘technocrats’, policy makers and bankers (which some do, Bush administration did understand) for the good (real growth or at least stability and employment) is nil.

    Jacob Reply:

    @GLH,

    That sounds ominously like PFI, which we have been inflicted with in the UK for some time. It’s been nothing more than a colossal rip-off, why would a country that issues it’s own currency need to borrow from the private sector to pay for infrastructure projects? it’s insane.

    Reply

    Mario Reply:

    @GLH,

    wow so that’s really what this whole thing has been about…who gets to the do the financing. It’s like those banks that would issue student loans for the government and take a profit on it for essentially doing exactly what the government should be doing. If I recall…I thought it was Obama that at least talked about putting an end to that sham…I thought he did stop it but I don’t know anymore. If he did…he sure made up to the lenders with this one!!!

    Of course ESM or others of like mind would say this is better b/c the “free market” will provide better services and there’d be better resource allocation, etc., etc. Honestly, I’ve worked in both public and private businesses and do you know what I find…I see the same people doing the very best they can with their jobs. I seem them both working hard and using the skills they have to get it just right. I really think this whole one is better than another stuff is a little on the overkill side both ways.

    Reply

    Tom Hickey Reply:

    @Mario,

    “wow so that’s really what this whole thing has been about…who gets to the do the financing.”

    This is one of Hudson’s major points. The financial sector sees any type of government expenditure that it does not finance as lost rent. The objective is transform all spending in the economy into private credit and extracting rent. In other words, instead of paying taxes to the government, people would be giving the financial sector rent. That is the plan, Hudson claims.

    Reply

    Mario Reply:

    @Tom Hickey,

    sounds about right to me…and all in the name of a “free and balanced market”…whew!! The devil sure does come disguised as a gentleman!!!! Wolves in sheep clothing. Already I feel Obama will likely be the biggest let-down of the 21st century…to get the changes we need now will require a serious turn of events and thinking and policy in DC. I am holding for it…but man I have a pretty good sense of the odds at the same time.

    Roger Erickson Reply:

    @Tom Hickey,

    There are endless examples of exactly that in biology. Parasites, by definition, never learn that they can’t win by consuming the host. Survival & advancement comes directly from the host’s defense, and the artfully novel combinations the duel produces.

    Rt now, however, we aren’t even mounting a defense. It’s a very dangerous time.

    If the USA collapses, the parasites won’t learn anything. They’ll simply say “No one could have predicted this,” and they’ll be right. No one could have predicted that we’d go down so meekly, without even a fight from progressives.

    Greg Reply:

    And of course where would banks ultimately “get” their money? FROM THE GOVERNMENT!

    This of course will become immediately obvious when a bank gets in trouble and the govt has to “make interventions to enhance liquidity” ie………………..BAIL THEM OUT!

    Its tragic that we allow the myth of “banks as private institutions” to prevail. The largest and most influential are anything but private institutions, they are government capturing counterfeiting cartels.

    WARREN MOSLER Reply:

    actually, the causation is loans create deposits. see soft currency economics thanks

    zanon Reply:

    @Mario, The financial sector is PART OF THE GOVERNMENT. Financial industry workers are just the most well paid, and useless, form of governments worker.

    Reply

    Tom Hickey Reply:

    @zanon,

    I wish that the people could hold Blankfein, Dimon, etc., accountable. They are not exactly “part” of the government; they own the government.

  4. Vincent Says:

    I don’t see a difference between the republican desire to lower taxes and spending, and the democrat desire to raise taxes and spending. Aren’t they both a wash, and both contrary to MMT.

    This blog has become overly one-sided political, and although it’s been enlightening to read, I don’t see the point anymore. Thanks Warren, you’re the beethoven of financial essayists (it’s really hard to stop reading what you write!). I wish you would push the tax holiday hard, because it seems to me Republicans have never met a tax they didn’t want to gut. Cheers.

    Reply

    Mario Reply:

    @Vincent,

    exactly. they are the same and both a wash. Our politics is all about two losers fighting tooth and nail to be the best loser. It’s all a shame and con and in the end they always win and the people get shafted.

    Seems to me this site is all about thinking outside the box and beyond party lines. I have never heard democrat or republican suggest any of the things I’ve suggested here nor anything I’ve heard suggested here. This site is beyond politics but of course we all come with our own filters to the table…the funny thing is that when you get down to it, the differences amongst us real people (versus the politicians) is really rather slim and slight. It shouldn’t be hard at all to find a real compromise amongst the people…I see MMT as a wonderful bridge to do just that.

    Reply

    zanon Reply:

    @Mario, You are all idiots.

    The problem is HARVARD, not DC.

    If HARVARD or KRUGMANS become MMT, you will see the Govt follow MMT prescriptions in seconds.

    Since 1930, US has become run by academia. Welcome to the mad house result

    Reply

    Mario Reply:

    @zanon,

    that sounds so easy…but then again who funds those universities…the financials right?!!!? I mean it is all east coast money. They all go to harvard, yale, princeton, etc. and again we have a closed circuit loop feeding itself more and more.

    Tea Partiers and Austrians and others think too much government is bad & blame this type of thing on government involvement. Progressives and liberals and others think business is to blame & blame it on GS, GE, etc. I can understand both pov’s…but both are inaccurate. It’s the PEOPLE in the government and in those businesses that are to blame NOT the gov. or the biz or the system itself. These people are unintegrous a-holes, corrupt to the core. The gov and biz systems have the right framework, there’s just bad people in there messing it up…much like the parasites Roger talks about.

    And areas where the framework may need some massaging, we are intelligent enough now to adjust & tweek it appropriately to make it even better and an even more “perfect union.” But the tweeks are frankly minor in comparison to the relative success of the system as a whole. However it’s the people in these positions that need to change (not the positions themselves)…& that means new people in all sorts of offices and roles…but not if those new people are just as evil as these ones. I only hope that with time (and death and old age) that the roles will change and we’ll get a new batch of good people…but then again maybe not.

    It’s like having a good trading system but still losing money on it. The system itself is good…the trader is not.

  5. anon Says:

    “So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom?”

    all tapped out on multi-year horizontal, so we still need more vertical

    Reply

    Mario Reply:

    @anon,

    “all tapped out on multi-year horizontal, so we still need more vertical”

    not unless it’s the richest of the rich borrows from their “buddies at the bank” to ostensibly build and therefore own the infrastructure of the 21st century USA. I’m sure with an offer like that they already have the borrowers lined up (remember lenders are always ready and able if there’s a borrower). It’s beyond sinister.

    Reply

    Tom Hickey Reply:

    @Mario,

    It’s “free market capitalism.” :o

    Reply

    anon Reply:

    @Mario,

    aren’t those guys waiting for the “confidence fairy”?

    :)

    Reply

  6. Marcello Says:

    Warren,

    Perhaps when we evaluate economic performance relative to money flows we should consider human nature too.

    If the inflow of extra dollars into the private sector is going into savings then its not going to help the economy. If the money does not increase “animal spirits” and encourage spending then it won’t help the economy.

    Reply

    Ronald Doan Reply:

    Finally, someone states the obvious.

    Reply

    Roger Erickson Reply:

    @Ronald Doan,

    Yet the obvious is always set up by the obviously preceding factors. In our case, we have endless amounts of animal spirits among 312 million people. Most of it, however, is effectively kept bottled up by overtaxing the lowest income brackets, with FICA etc.

    It’s class war indeed, between stasis-seekers trying to preserve a nest egg, vs innovators recklessly exploring all options. Death is either side winning, instead of maintaining the dynamic equilibrium that got us this far.

    If our population doesn’t shed enough complacency, fast enough, it could easily be too late.

    Reply

    Tom Hickey Reply:

    @Roger Erickson,

    The question is whether to have a government of, for and by the people, with each citizen have an equal “say” through a meaning vote, or a government of, for and by the ownership class, with each having a “say” in terms of real and financial wealth. Right now we have the latter in the guise of the former.

    zanon Reply:

    @Marcello, It will not HURT the economy either.

    It will just give people bigger cushion with no negative consequence.

    How is this bad?

    Reply

    WARREN MOSLER Reply:

    that’s what ‘savings desires’ are all about. human nature is at the core of mmt

    Reply

  7. Philip Pilkington Says:

    “So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom?”

    I think you’re onto something here. Some (Marxians) will claim that this has to do with ‘financialisation’ and the decline of manufacturing (and the trade deficit), but I think they’re wrong. After all, as you point out, the same thing happened in Japan which has none of those quote-unquote ‘problems’.

    So, what’s at the root of this? I have no idea. But if its true the global economy may be entering a very different era where it might have to be run in a very different way (and, of course, I think MMT points the way forward). Who knows? Perhaps this has been developing since the late-60s and we’re only becoming fully aware of it post-crisis.

    Reply

    Roger Erickson Reply:

    @Philip Pilkington,

    It could simply be an inevitable result of scale producing both distractions & complacency.

    Several, growing populations seem to be losing affinity & alignment, and hence are taking too long to select inspiring group goals. Maybe we need to go back to the moon, or mars, or … [something insanely great] … instead of just to the bookies & oligarchs? Even the idea of going off to fight “bad guys” to the death is getting a bit stale.

    What campaign architecture sustains a living nation? What might Ludwig Boltzmann or Walter Shewhart or Robert Morris say?
    “Continually survey fantastic, group goals, get consensus, and then keep reaching for the next top 3?”

    This essay is the closest Warren’s come to agreeing with many others on the importance of selecting what to do, not just how. He’s always seemed to agree in principle, but always indicated it was a trivial afterthought that would be taken care of by waving enough options in front of people. The question is, how many options does it take, given the growing distractions that may be overwhelming our innate biological drives. Seems Warren’s agreeing that recruitment via options may not be automatic, and that the very method can be saturated. Maybe Bill Black’s arguments, or other simple facts, convinced him otherwise.

    There is no system mechanism, even inherent biological drives, whose utility can scale endlessly. We may be overwhelming the core adaptive value of our animal sprits, by overproducing everything from Bacardi Rum to iPhones to electronic sex toys and seemingly endless volumes of videos – and many other distractions to boot. Yesterday’s useful drive mechanism is tomorrow’s addiction threat – that’s inevitable.

    Solutions aren’t immediately clear, but can certainly be parsed, with a little work. You don’t simply ask young kids what they want. Rather, you mostly consider what they need. Ditto with any young nation, or the youth of any nation. We need ways to produce parents and Congresspeople with more ambition and reason, so they will consider what we need, and select wisely, not just drunkenly.

    Reply

    Philip Pilkington Reply:

    @Roger Erickson,

    I guess, broadly speaking, something along those lines could be true. If, as Warren says, we might need far more substantial budget deficits or private sector borrowing (and the consequent ‘wealth effect’ of speculative booms) to maintain steady levels of economic growth, then what we’re essentially talking about is more and more money.

    Modern capitalist economies seem to need more an more money rushing through their veins to ensure good circulation. This could well have to do with rampant consumerism and the way we live generally.

    But then, what’s the alternative? As far as I can see it could only be a low-growth model with high employment, sustained household saving and a dampening of speculative bubbles. To accomplish this we’d have to stop using increased GDP growth as a measure of economic success. That’s asking a lot.

    Reply

    Charles Reply:

    @Philip Pilkington, This would also mean some wealth redistribution would have to occur. MMT proponents often, but not always, ignore or give distributional matters short shrift. However, even at the current budget deficit levels things would be better for a larger number of people if some money were redistributed from corporate profits and out of the top personal income brackets to the lower brackets. This would lead to an increase in standard of living for the people at the bottom with minimal harm to the wealthiest. Taxes serve to create demand for currency, and regulate aggregate demand for goods and services. They also are a tool for altering the distribution of wealth produced by the markets, if this is something the population and/or the government desires. If we are to transition into low growth economies, which eventually we all shall unless we open new sources of resources (asteroid mining anyone?), without disastrous effects on standard of living for large swaths of the population, then distributional concerns are going to become paramount.

    Philip Pilkington Reply:

    @Charles,

    Couldn’t agree with that more. In fact, one ’cause’ of this phenomenon could be the wealth distribution.

    Since wealth is so unevenly distributed tomorrow, aggregate demand needs to be ‘propped up’ by extremely large deficits or private sector borrowing. This would also explain the speculative bubbles. With nowhere else to go the rich speculate with their fortunes.

    In fact, I think you may have hit the nail on the head regarding causality here…

    WARREN MOSLER Reply:

    that makes it a good thing- lower taxes for the same size govt!

    suspend fica now!
    rev to the states
    $8/hr transitionjob to anyone willing and able to work

    WARREN MOSLER Reply:

    why even publish gdp.
    all we need to do is count bodies in the unemployment line

    roger erickson Reply:

    @Philip Pilkington,

    Exactly. There are parallels to this topic in any system that grows in scale. Take the relative blood volume per tissue volume in a mouse, horse, elephant, whale, etc. Take the the # of adenosine molecules per tissue volume in different size cells. Take the amount of message passing required to achieve similar organizational alignment in a small,medium & large network. Take the relative size of government and/or relative required currency supply in a small-lethargic vs large-dynamic economy. Yada, yada.

    Walter Shewhart discussed this back in the 1920′s, in his famous maxim that “In all complex systems, the highest cost, by far, is the cost of coordination.” An implicit corollary is that relative coordination-cost scales faster than absolute system size.

    Regardless of system size, however, another obvious corollary is that return-on-coordination scales orders of magnitude faster than either system size or cost-of-coordination. Otherwise, we wouldn’t be here, still evolving even bigger populations & more dynamic economies!

    Deficit Terrorists terrified at the absolute magnitude of public spending and/or currency supply should consider cracking a basic physics, networking, thermodynamics, or systems-analysis textbook – and learn to keep things in perspective.

    Tom Hickey Reply:

    @Philip Pilkington,

    1. Most of the deficits go to increased corporate profits and wealth accumulation at the top. This is a “bad” deficit from the viewpoint of distributional effects.

    2. Owing to globalization, a lot of the deficit stimulus flows abroad to external FDI and through the multinationals to stimulate growth externally, especially in the emerging countries. This is a “good” deficit if you are a globalist and internationalist, as I am.

    3. A lot of the deficit has gone into increased energy costs, especially petroleum imports.

    These have not been much help to domestic employment, income distribution and increased effective demand, which is a reason that inflation is low.

    Reply

    Philip Pilkington Reply:

    @Tom Hickey,

    That’s almost certainly true. The current deficits — in all countries, Japan included — are woefully targeted. This, of course, reflects government anxiety about having anything at all to do with these deficits.

    Regime change is needed, methinks.

    Reply

    WARREN MOSLER Reply:

    yes, and how awful if we have to have lower taxes for any given size govt!!!

    did i say all sides are acting counter agenda?

    ;)

    Reply

    roger erickson Reply:

    @WARREN MOSLER,

    worse yet, they’re simply random agenda;
    there IS no coherent agenda – which translates to no progress allowed

    Reply

  8. Neil Wilson Says:

    The problem is that we have overloaded the term ‘tax’.

    Fortunately in the UK we’re a bit arcane and so we still have ‘excise duty’ and ‘levies’.

    I’ve often proposed a simple scheme.

    ‘Tax’ is what you use to control the temperature of the economy. It takes hot money out of the economy as required.

    ‘Levies’ and ‘duty’ are then charged against any form of rent or externality. And Bad Stuff in other words.

    ‘Grants’ and ‘allowances’ are then handed out against things the state wishes to encourage.

    By straightening out the nomenclature you can separate the redistribution and anti-hoarding mechanisms from the system for stopping the entire economy overheating.

    Reply

    Charles Reply:

    @Neil Wilson,
    This is an interesting point. I like distinction of purpose, though of course in the end the money all goes to the same place, that is, nowhere. In any case in the US levies, and duties would likely be attacked anyway: taxes by any other name are just as foul, and so on.

    Reply

    Mario Reply:

    @Neil Wilson @Charles,

    great distinctions Neil.

    agreed Charles…in the US we’d argue about it all anyway…all we do is argue these days over irrelevant opinions and ruminations…we don’t even discuss (let alone argue) over facts anymore…it’s all just jerk-me-off conjectures ala wolf blitzer. freaking america!!!

    Reply

  9. PZ Says:

    “Even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.”

    Have dollar savings of the rest of the world been taken into account? Those trillions of dollars in foreign currency reserves are not US private sector wealth.

    Looking at the Case-Shiller index, it looks ominously like the house prices are about to decline again because of foreclosures. That would wipe out private sector wealth and increase savings again. Also, Personal Consumption Expenditures look like they are about to move down again: http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=PCE&s1range=10yrs Now that we have lost primary economic steering wheel, the interest rate policy, it’s hard to imagine economy just “bouncing along” at the bottom.

    Reply

    WARREN MOSLER Reply:

    right, with the trade deficit we can have taxes that much lower for any given size govt

    Reply

  10. Henry Says:

    http://www.itulip.com/forums/showthread.php/19949-The-Big-Bet-revisited-Part-I-Turkeys-grounded-Eric-Janszen?p=203788

    The debt ceiling debate reminds me of that old Seinfeld episode, “A Show about Nothing.” It was a manufactured crisis, right up there with weapons of mass destruction and the Iraq War. There is no question in my mind that the probability of a bond crisis over the debt ceiling was zero. The only question is, To what purpose?

    The two year long Greece bond default process shows us what a real default looks like versus the fake US version that is being pushed as a meme here for political purposes.

    Not a single government bond default has ever resulted from a debtor government’s self-imposed debt limit. The US business media is popularizing a fiction that one day a country hits a self-imposed debt limit set by the legislature and the next day it defaults on its debt, that a debt limit has some bearing on creditworthiness and interest rates.

    The notion of a US debt default is absurd. As I’ve said here since 2001 when we first started to discuss the likely outcome of America’s accelerating rate of dependence on debt growth for economic growth and money supply growth — and bought gold — the US will never miss a debt payment.

    “Of course, the U.S.A. is not going to go bankrupt. The point of this piece is to make the inevitable alternative obvious. The U.S. will repay its debts, backed with the full credit of the government. Debts will be paid in full… with itty, bitty little dollars.”

    The US has and will continue to repay outstanding debt in a gradually depreciating currency. The trick is to depreciate the dollar ever so slowly so that the frogs in the pot of water — the bond holders and tax payers — don’t notice.

    There was and is no possibility of a US debt default. Not ten years ago, not today, not in ten years. Not going to happen. The US will make every debt payment, foreign and domestic. The US Treasury bond market correctly reflected this zero default risk level before and after the fake debt crisis that just “ended.” When — some day — Treasury bond yields do rise it will be due to inflation risk not default risk.

    My theory is that it’s about using meme management — a modern form of propaganda — to shift the cost burden of post-financial crisis stimulus off of the actors who caused the financial crisis and the resulting recession and output gap (Recession + Output Gap = Depression) and onto the victims of the crisis.

    CI: Meme management?
    EJ: It’s also known by the term meme-jacking. Here’s an example of what I mean by meme management, getting the term “global warming” dropped and “climate change” substituted. I’m not offering an opinion here on climate issues — way too emotional a subject for rational discussion. I’m using it only as an example of how effective meme management can be.

    Remember, when shaping public policy, it’s not about who has the best argument. That’s for public policy amateurs. He who succeeds in framing the debate wins the debate.

    In the case of the debate is about warming of the climate by human activity and damage done by it, the proponents of that position put competing interest groups on the defensive by the act of raised the warning. The competing groups, the producers of greenhouse gasses and the politicians who represent them, wanted to change the debate to get out of a defensive position. Consider this memo from 2002:

    “The phrase ‘global warming’ should be abandoned in favor of ‘climate change,’ Mr Luntz says, and the party should describe its policies as ‘conservationist’ instead of ‘environmentalist,’ because ‘most people’ think environmentalists are ‘extremists’ who indulge in ‘some pretty bizarre behavior… that turns off many voters’.”

    – Whitehouse memo by the leading Republican consultant Frank Luntz, 2002

    The program to get the term “global warming” replaced by the term “climate change” succeeded. Nine years later both the proponents and detractors of the idea of anthropomorphic climate impact universally use the new phrase “climate change.” A small minority are even aware that the issue started off as a debate about “global warming” and that interest groups in opposition to the idea of global warming intentionally re-framed the debate. Today the debate isn’t about warming at all. The climate change debate is about a range of impacts from warming to nothing to cooling as a result of human activity. The debate went from being about the dangers posed by human activity that heats up the climate to a debate about the possible negative, neutral, or positive impact of climate changes caused by human activity, if any. Anyone who continues to use the term global warming instead of climate change identifies themselves as “biased” whereas those who adopted the new neutral language are accepted as independent-minded. This subtle shift in language via meme management turned the original proponents of the idea of global warming into agents of the opposition by forcing them to adopt the new debate framework. Some fought back by inventing the term “climate change deniers” but even that term accedes to the new language regime. A google search for “global warming deniers” produces as the first link the wikipedia entry http://en.wikipedia.org/wiki/Climate_change_denial. The latest date of a story that uses the term global warming is 2008, the year that the term mostly disappeared from the debate.

    CI: I hope your thread doesn’t turn into a rant-fest about climate change — I mean — global warming.
    EJ: It won’t. FRED will see to that. Again, the topic is the way that public policy debates are shaped. Let me give you another example of meme management that’s not so subtle. What if I told you that the Defense Department is now using Facebook and other social media sites to manage certain memes that it deems detrimental to the State, without any due process of law.

    CI: I’d say you’re scaring me.
    EJ: Here’s the Wired story:

    On Thursday, Defense Department extreme technology arm Darpa unveiled its Social Media in Strategic Communication (SMISC) program. It’s an attempt to get better at both detecting and conducting propaganda campaigns on social media. SMISC has two goals. First, the program needs to help the military better understand what’s going on in social media in real time — particularly in areas where troops are deployed. Second, Darpa wants SMISC to help the military play the social media propaganda game itself.

    This is more than just checking the trending topics on Twitter. The Defense Department wants to deeply grok social media dynamics. So SMISC algorithms will be aimed at discovering and tracking the “formation, development and spread of ideas and concepts (memes)” on social media, according to Darpa’s announcement.

    More specifically, SMISC needs to be able to seek out “persuasion campaign structures and influence operations” developing across the social sphere. SMISC is supposed to quickly flag rumors and emerging themes on social media, figure out who’s behind it and what. Moreover, Darpa wants SMISC to be able to actually figure out whether this is a random product of the hivemind or a propaganda operation by an adversary nation or group.

    – Pentagon Wants a Social Media Propaganda Machine, Wired, July 28, 2011

    The Pentagon is openly stating that it is influencing the way our beliefs are shaped in social media. It positions this activity as a defense against hostile foreign influences but of course there is no way to determine the origin of a meme, whether domestic or foreign. Given this fact, is it a stretch to think that a highly concentrated media is pushing a fake debt crisis meme to further the political aims of the main interest groups behind those media?

    CI: What about all of the guys we see on TV every day exposing…
    EJ: Exposing what? The deficit crisis? A friend introduced me to a term today to describe them: presstitutes. Guys selling books. Guys selling funds. Guys selling product — gold, stocks, whatever — in return for not talking about the FIRE Economy and other topics we have covered here for 13 years.

    CI: If the debt ceiling crisis is a managed meme to divert costs from the perpetrators to the victims, how does the “replacement meme” as it were operate?
    EJ: By diversion of public discussion toward the emotionally charged government spending and taxing problem and away from the root of the public debt problem, the mountain of private sector debt, especially financial sector private debt, that was produced during the FIRE Economy era.

    Reply

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