Invade the USA

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58 Responses to Invade the USA

  1. The best comment was James Hogans, “Where ya been, bro?”

    Marc Lavoie and Mario Seccareccia merely have said the U.S. is Monetarily Sovereign and the PIIGS are not, which we’ve been saying for at least 15 years.

    But who knows, maybe this will be the long-awaited straw that breaks the debt-hawk back.

    Rodger Malcolm Mitchell

    Reply

    roger erickson Reply:

    @Rodger Malcolm Mitchell,

    Not until we run out of back-braces & wheelchairs.

    Reply

  2. Anders says:

    Is Lavoie/Seccareccia’s comment that:

    “if you hold a government security that you would like to cash, the respective governments of these three countries would be able [to] draw a cheque on their accounts at their respective central banks”

    strictly false under current US institutional arrangements?

    Reply

    Matt Franko Reply:

    @Anders, Not sure what they mean by “cash”. If they mean “redeem” (at maturity date) by the issuer (US Treasury) then I may understand their point; ie the US Treasury can conceivably send you a Treasury check for the redemption amount at maturity which will be drawn on a Treasury account in the FRS.

    Sort of reads like they think an individual can “cash” a Treasury security before the maturity date… but they probably didnt mean it that way…. Resp,

    Reply

  3. Art says:

    Here’s a scary observation on the term structure of interest rates…

    The yield curve is probably a worthless recession indicator when short rates are anchored at zero.

    Japan’s first post-crisis recession started with a term spread close to 200 basis points.

    The U.S. term spread is hurtling towards those levels, and eurozone is already well below them. And of course some key emerging markets are already close to flat or inverted.

    There’s really a chronic lack of creativity among technocrats, isn’t there? Why wouldn’t they be looking more closely at Japan c. 1997 and getting ahead of the curve (so to speak)?

    Reply

    Art Reply:

    Forgot to add, all three of Japan’s post-crisis recessions have started with term spread > 0. In fact, it hasn’t been below zero since 1990 or 91. Makes sense as you’re a lot more likely to see negative nominal rates at the short end rather than the long end.

    http://symmetrycapital.net/wordpress/wp-content/uploads/2011/06/20110609_JGB-curve-recessions.jpg

    http://symmetrycapital.net/index.php/blog/2011/06/will-the-yield-curve-predict-the-next-recession/

    Reply

    WARREN MOSLER Reply:

    true!

    Reply

    roger erickson Reply:

    @Art,

    “There’s really a chronic lack of creativity among technocrats, isn’t there?”

    Bingo! Which only reveals a chronic lack of both creativity and coordination across our electorate.

    If components aren’t adequately aware of one another, then they’re not likely to discriminate group outcomes from local ones.

    Reply

  4. anon says:

    “The European Central Bank (ECB) cannot accommodate any national government within the Eurozone. The ECB can only refinance banking institutions. It cannot make any cash advances to their national governments, nor can it directly purchase any newly-issued bonds.”

    No different from the Fed in terms of operational capability.

    The Fed can’t make a direct cash advance to TGA and can’t buy new bonds.

    But it could with a change to self-imposed constraints.

    ECB can’t make a direct cash advance to member government deposit accounts and can’t buy new member bonds.

    But it could with a change to self-imposed constraints.

    Why would you have proposed your trillion pro rata Euro credit otherwise?

    There’s no difference in these two situations at the general level of “self-imposed constraints”. It is only a matter of legislative or executive complication.

    Reply

    Ramanan Reply:

    @anon,

    Of course, there is a difference. The European nations have surrendered their sovereignty.

    Reply

    anon Reply:

    @Ramanan,

    And the US government, until it gets rid of TGA?

    Reply

    Ramanan Reply:

    @anon,

    Not necessarily. The removal of the government’s power to take a draft at the Federal Reserve is a rule made by economists to achieve fiscal discipline, not a constraint. It acts psychologically to achieve fiscal restraint. The government can easily relax fiscal policy without seeing rising interest rates.

    The important point being that the US has the powers with itself to protect itself in case of failures but the Greeks do not have it and have to provide a pound of flesh to their creditors everytime.

    anon Reply:

    @anon,

    look at the original quote I referenced, Ramanan

    it’s about central banks exercising options regarding their government “customers”

    not about governments exercising their sovereign options

    anon Reply:

    @Ramanan,

    “The important point being that the US has the powers with itself to protect itself in case of failures but the Greeks do not have it and have to provide a pound of flesh to their creditors everytime.”

    But Europe does have the power to act on Greece’s behalf, just as Congress has the power to act on Treasury’s behalf.

    From an “emergency” monetary policy perspective, why should the bar be any higher for Europe than it is for Congress? Why wouldn’t Ron Paul be just as resistant as Angela Merkel?

    Currency issuer and user are very relative terms; not absolute.

    Oliver Reply:

    @anon,

    But Europe does have the power to act on Greece’s behalf, just as Congress has the power to act on Treasury’s behalf.

    Who is Europe if not the parliaments of its member states?

    But I agree, that is, I also suspect, that there is nothing inherent in the Euro, other than a bunch of ‘self-imposed constraints’, i.e. legal impositions, that technically prohibits the ECB acting on behalf of all its member nations.

    And I’ll rephrase the question I posted here some days ago: is there no conceivable way in which the ECB could intervene in the national bond markets in an orderly manner that would prevent an inflationary race to the bottom but at the same time allow for something closer to non-inflationary full employment spending? I.e., what would functional finance look like under the current European architecture with one supra-national central bank and many national parliaments? There must be a way, I just think it would have to be much more differentiated than the ‘one size fits nobody’ Maastricht rules. It would just be harnessing the powers that the ECB have already inherited with crisis.

    Matt Franko Reply:

    @anon,
    “The Fed can’t won’t make a direct cash advance to TGA and can’t won’t buy new bonds.”

    FRA: “To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.”

    I dont know how you can read the FRA here, and not think that it would be legal for the Fed to go to the competitive Treasury auctions, just like anyone else, and compete for the purchase of Treasury securities in those open auctions.

    “Open” in the law implies the requirement for price ‘transparency’ or ‘objectivity’… it is not an ‘inflation prevention mechanism’ to appease the Monetarists. Resp,

    Reply

    WARREN MOSLER Reply:

    right, may not vs can’t

    Reply

    beowulf Reply:

    @Anon,
    Ha ha, love that MacArthur, Hirohito picture. After Truman recalled him from Japan (just after the Tsy-Fed Accord, one of the reasons Tsy backed down, in fact), the General and his wife moved to a suite at the Waldorf-Astoria, his widow living there until she died a decade ago.
    http://www.newsmax.com/Ruddy/douglas-macarthur-remembrance-korea/2011/04/11/id/392543
    I heard secondhand from someone at GSA (the govt’s “property manager”) that Uncle Sam was quietly paying the rent up until Mrs. MacArthur passed away. Fine by me, but I’ve always wondered what other payments go out every month from Tsy year after year that don’t show up on the books anywhere.

    Reply

    anon Reply:

    @Matt,

    Matt,

    not from that particular provision

    “open market” is a well understood term

    it doesn’t include direct bidding at auctions

    although there’s a separate provision that allows maturity rollovers

    “won’t” implies an active option to do so, which is not the case for the Fed

    it’s Congress that “won’t”; not the Fed

    the Fed can’t, given that Congress won’t

    thanks for making my earlier comment look like Jim Morrison’s grave

    :)

    Reply

    anon Reply:

    @Matt,

    or:

    the Fed may not, given that Congress won’t

    Reply

    anon Reply:

    @Matt,

    or:

    the Fed can, if Congress will

    Reply

    anon Reply:

    @Matt,

    or:

    the Fed can, if the President will

    but that’s much more political, as in Beowulf hammer-time, and much more uncertain as a political process

    Reply

    anon Reply:

    and this President probably isn’t the one to do it

    Reply

    beowulf Reply:

    @anon,
    Tsy needs Fed to guarantee auction will sell out (either indirectly by supporting primary dealers or by direct purchases during WWII whenever T-bills hit 0.375% cap). And of course the Fed needs Tsy to issue Treasuries for there to even be a market. If Tsy and Fed bicker, Congress would step in w like Sen. Paul Douglas and others were doing just before 1951 Fed-Tsy Accord was reached.

    Since Tsy is free to set auction terms (see below), The 1951 Accord was a case Tsy voluntarily giving up power, to avoid Congress taking away even more power.
    If Tsy tried that again, I think Fed would again buy up any auctions that didn’t sell out, knowing that Congress would take its side (Prior to the Accord, there was never any threat of the Fed letting an auction fail, the Fed governors just grumbled loudly to Congress). So if it happened again, senators of both parties would likely tell the President that he wasn’t going to see any more appropriation bills on his desk until Tsy to back down.

    In issuing obligations under sections 3102–3104 of this title, the Secretary of the Treasury may prescribe—
    (1) whether an obligation is to be issued on an interest-bearing basis, a discount basis, or an interest-bearing and discount basis;
    (2) regulations on the conditions under which the obligation will be offered for sale, including whether it will be offered for sale on a competitive or other basis;
    (3) the offering price and interest rate;
    (4) the method of computing the interest rate;
    (5) the dates for paying principal and interest;
    (6) the form and denominations of the obligations; and
    (7) other conditions.

    http://www.law.cornell.edu/uscode/31/usc_sec_31_00003121—-000-.html

    Reply

    anon Reply:

    @beowulf,

    right

    so one way or another, directly or by inference, Congress has to be willing

    but weren’t you arguing at one point that the President could/would just jam your P. coin into the Fed whether or not Congress liked it?

    beowulf Reply:

    @beowulf,
    The President has the authority to launch a air strike on any country (ex United States); whether he could, should or would are different questions that depend on the circumstances. Likewise, with using his constitutional and/or coinage powers to pay the debt. Since Congress was willing to drive the US into default unless the President caved on other issues, there’s no question the President could have kept paying anyway and that the Fed would have backed his play (he could have jammed it on them if he had to).
    If the President had violated the debt ceiling, the political consequences could have been House impeachment charges. Using coin seigniorage would have avoided that political risk by allowing the President to obey both the Constitution and the debt ceiling.
    And yes, President Obama has more “grand bargains” ahead of him if he expects to see another appropriations bill on his desk. For a precedent of a national leader still “on the throne” and yet lacking any actual power to do anything (random air strikes excepted on Obama’s case), I would point to this photograph.
    http://ww2db.com/images/person_macarthur3.jpg

    anon Reply:

    @beowulf,

    maybe what it comes down to is that these different mechanisms for lifting “self-imposed constraints” have different hurdles in term of their legal and/or political feasibility

    e.g. the coin seems fairly clean in terms of apparent legality without congressional approval; congressional buy-in would become more political than legal

    a more brutal fire bombing of the no overdraft rule might require ultimate legal cover via the supremes, in case of a stand off between congress and pres

    Ramanan Reply:

    Beo,

    “In issuing obligations under sections 3102–3104 of this title, the Secretary of the Treasury may prescribe—
    (1) whether an obligation is to be issued on an interest-bearing basis, a discount basis, or an interest-bearing and discount basis;
    (2) regulations on the conditions under which the obligation will be offered for sale, including whether it will be offered for sale on a competitive or other basis;
    (3) the offering price and interest rate;
    (4) the method of computing the interest rate;
    (5) the dates for paying principal and interest;
    (6) the form and denominations of the obligations; and
    (7) other conditions.
    http://www.law.cornell.edu/uscode/31/usc_sec_31_00003121—-000-.html

    Not sure how this has been interpreted here!

    Reply

    beowulf Reply:

    @Ramanan,

    Neither do I. On paper, it certainly gives the high cards to the Secretary. But this is an area of law that should be interpreted politically instead of legally.
    Going back to my favorite section of the FRA (conflicts in Tsy & Fed powers, Tsy wins and exercises supervision and control of Fed), on monetary policy and pretty much everything else, Tsy could surely find a conflict to legally justify stepping on the Fed at any time. But doing so would bring an almost certain backlash from Congress. Its like the Secretary is the Queen of England with all kinds of legal power that if she ever tried to exercise, Parliament would push back in some way.

    In rare cases, it would be still be the smart play– in ’08, Paulson should have found a conflict in banking regs and directed the Fed to lean forward on opening up the discount window for 13(3) lending.
    But he’d have gotten away with that precisely because Congress would have preferred Hank Paulson close out his govt career with a bang than force them to take a career-killing vote to bail out banks. Dozens of Members of both parties were voted out of Congress last year due in large part to their TARP vote.

    Ramanan Reply:

    Beo,

    I have seen the reference to 13-3 more than once here, but didnt follow it up. According to this http://www.federalreserve.gov/oig/files/FRS_Lending_Facilities_Report_final-11-23-10_web.pdf it was about the lending to banks not the Treasury.

    More importantly, one can keep arguing about laws – not it avoids the issue of how the institutions behave at present and what has caused that behaviour.

    Since there is nothing preventing the government from behaving wildly (at least there is perception), people have put various checks in place – such as no direct lending etc.

    vjk Reply:

    Ramanan:

    13-3 is interesting.

    It allows the feds to lend to anyone, including, as someone put it, “a pizza parlor” in “exigent” circumstances.

    That’s how they substantiated their lending to AIG in particular which was a shameful proposition, on any account, largely forgotten by everyone by now (there were other “tools” to save AIG, but 13-3 was one of them). AIG ain’t no bank.

    Ramanan Reply:

    @Ramanan,

    Vjk,

    Sorry rushed to write my comment. Yes they were lending everyone not just banks.

    Btw, you should check http://krugman.blogs.nytimes.com/2011/08/11/franc-thoughts-on-long-run-fiscal-issues/

    precisely incidences which lead to banning of central bank financing governments.

    vjk Reply:

    Ramanan:

    Thanks, I’d read it.

    There is a lively discussion going on on pragcap :)

    http://pragcap.com/krugman-still-doesnt-understand-mmt

    Ramanan Reply:

    @Ramanan,

    Thanks don’t often check that site but made one comment there.

    However, I am a bit apathetic to what is going on there. The discussion seems to be going into same old direction: “Krugman doesn’t understand monetary operations”, although he is making a point.

    vjk Reply:

    @Ramanan,

    “However, I am a bit apathetic to what is going on there.”

    Likewise.

    beowulf Reply:

    @Ramanan,

    Sorry reference to Paulson and 13(3) lending wasn’t about govt financing but, as mentioned above, lending to non-banks. Bernanke refused to go any further w/ 13(3) (necessitating the TARP bill), even though Paulson and Tsy staff, Geithner at the New York Fed and even President Bush thought he should.
    If Paulson had used the conflicting powers section FRA to force the Fed to act, very few on Capitol Hill would have minded a bit (since it was their necks he was saving). But that was a pretty unique situation.

  5. anon says:

    The balance sheet recession and deleveraging are just a special case of the general case of the paradox of thrift.

    Reply

    WARREN MOSLER Reply:

    right, and every recession is a lack of aggregate demand.
    they are all balance sheet recessions if defined by rising unemployment.

    only negative gdp and sustained full employment is not a balance sheet recession

    Reply

    Anders Reply:

    @WARREN MOSLER, Yes when people talk of a “balance sheet recession”, I’ve often wondered what kind of recession _wouldn’t_ couldn’t as one.

    You suggest falling GDP with full employment; but this can never have actually happened, right? Recessions have often historically been prompted by deliberate fiscal/monetary tightening to prompt unemployment, in order to bring down inflation (or restore gold reserves).

    Reply

    jim Reply:

    @WARREN MOSLER,

    A “balance sheet recession” refers mostly to the large drop in real estate values against the large increase in liabilities in the years before the meltdown.

    This is a graph of homeowner equity against
    household liabilities

    http://tinyurl.com/3jtwb9a

    That is not a full balance sheet but it is how it looks to households who kept home equity and debt in balance for 60 years and then the roof caved in

    That means this recession is not going to recover by a renewed start in housing like every other recession has. Households simply no longer believe in the promise of ever increasing real estate values. It may take a generation to restore that faith.

    Reply

    WARREN MOSLER Reply:

    if unemployment rises it’s because savings desires aren’t being met, which is another way of saying balance sheets are savings deficient as defined.

    if the nation is at full employment, a recession, defined as negative growth, which would be extremely unlikely, and probably something that’s never happened, has to be the result of something other than a balance sheet problem.

    so in that sense they are all balance sheet recessions

    jim Reply:

    @jim,

    I agree that if unemployment rises then saving desires aren’t being met,

    but whether unlikely or not, Japan
    managed to keep their unemployment
    extremely low (lower than US has ever been)
    during their first periods of negative growth which was (just as in the US) driven by private sector delevering.

    The bottom line is the private sector is for a good long while going to continue to spend less than income after the 70 year run of spending more than their income.

    That is what makes the economy today prone to a balance sheet recession whereas all other post-war recessions were not balance sheet recessions. In prior recessions the desire to spend more than income went flat (or close to flat) for a period but it never disappeared entirely as it has now. If the private sector doesn’t perceive that they are under water or in danger of going under water then they return to surplus spending at the first sign that the recession is over. That is not happening and won’t happen for years in this recession.

    The federal deficit level is at the moment just barely meeting the desire to save (spend less than one makes).

    If the govt reduces the deficit there will be a recession. I think if Washington makes that move, it will make the private sector even more determined to spend less than they make, So the contracting effects are going to be appearing quickly

    WARREN MOSLER Reply:

    agreed with a lot of what you say but can you give me an example of a recession that wasn’t a ‘balance sheet’ recession?

    jim Reply:

    I believe it was Richard Koo who coined the phrase “balance sheet recession”. According to him it is when the private sector favors minimizing debt over maximizing profits. The main characteristic is the lack of borrowing.

    This is a chart of US private sector annual increase in debt over the last 60 years.

    http://tinyurl.com/4x9zcgu

    The amount of new debt declined during past recessions, but it never went negative.

    WARREN MOSLER Reply:

    just a spike in savings desires. that’s what causes all unemployment hikes

    jim Reply:

    Yes the desire to save caused the hike in unemployment

    But calling it a spike sounds misleading.

    Currently the strong desire to save has endured for 3 years and it looks like it will continue into the future.
    The point Richard Koo makes is that the Japanese private sector delevered for 15+ years. However, Japan is an exporter and the composition of Japan’s private sector debt is different than US private sector debt so the analogy only goes so far.
    A better analogy would be the US great depression where the private sector delevered from 1930-1945. At the end of WW2 the federal debt was 120% of GDP and the private sector was now flush with savings and willing to lever up against those savings to start new businesses, build homes, buy cars and appliances.

    WARREN MOSLER Reply:

    Still seems to be they are all balance sheet recessions

    Tom Hickey Reply:

    @WARREN MOSLER,

    Seems to me from the MMT perspective that the way Koo uses the term “balance sheet recession” implies the winding down of a financial cycle (Minsky) in which excess leverage (Ponzi finance) is the primary issue rather than a business cycle in which unplanned inventory is the chief issue. The latter is characterized by a “V” recovery when inventory is liquidated, and the latter by an “L” due to extensive saving, in which deleveraging predominates. That is to say, using “balance sheet” recession implies recession with different causality. What Koo is saying is that the problem lies in most economists not recognizing the difference and therefore prescribing the wrong remedies.

    Reply

    WARREN MOSLER Reply:

    the remedy is the same, cut taxes and/or increase spending

    if Koo hadn’t been Nomura’s chief economist or had some other similar credentials no one would be talking about this, imho

    Tom Hickey Reply:

    @Tom Hickey,

    “if Koo hadn’t been Nomura’s chief economist or had some other similar credentials no one would be talking about this, imho”

    Also being Japanese, and comparing the US to Japan. That got a lot of people thinking.

    anon Reply:

    a balance sheet recession by definition is one in which people are using saving in the form of cash to pay down liabilities

    it’s called a balance sheet recession because balance sheets are contracting

    it is synomous with deleveraging

    all recessions include the basic balance sheet recession dynamic to some degree, but this one has been particularly acute at the macro level, as seen by Fed flow of funds stats on balance sheet developments

    the severity of the dynamic at the macro level is the basis on which Koo labels it a BSR

    as I said, it is a special case of the paradox of thrift and a special case of recessions

    its got nothing in particular to do with an unemployment dynamic other than the general fact that recessions in general have everything to do with an unemployment dynamic; but it’s not called a balance sheet recesion because of any particular unemployment stat

    Koo’s writing oddly tends to gloss over the fact that balance sheets are “in recession” because of excess saving, and that excess saving is the prerequisite for something labelled a balance sheet recession

    Reply

    WARREN MOSLER Reply:

    all recessions are because balance sheets aren’t ‘strong enough’ for full employment.

    Reply

    anon Reply:

    one could view the extremely high deficits as a response that partially “plugs” the balance sheet recession, since NFA is a balance sheet expansion

    it’s a question of degree

    but i get your point that all recessions at least have elements of this

    Reply

  6. James Hogan says:

    Where ya been, bro?

    Reply

  7. This guest post is from PEF members Marc Lavoie and Mario Seccareccia, both of whom are full professors of economics at the University of Ottawa.

    The “Japanization” of the World Economy

    Over the last twenty years, the Japanese economy underwent a long period of economic stagnation that some economists have characterized as a protracted “balance-sheet recession”. The period has been dubbed by some as the era of the two “lost decades” in Japan. However, there are now ominous signs that seem to presage a widening of this contagion to the world economy, or at least to the industrialized Western countries. This long recession in Japan was preceded by the breaking of the bubbles in both the stock and the real estate markets, whose sharp decline in prices pressured Japanese households to de-leverage, which, in turn, led to terrible negative consequences on overall spending. For over a decade, the central bank of Japan pursued a monetary policy of zero interest rates in an effort to kick-start private spending, but this was to no avail. The Japanese fiscal authorities pursued generally a mildly expansionary fiscal policy, but only to back track on too many occasions, in a futile attempt to implement fiscal austerity and reducing budget deficits and debt.

    The United States is facing a similar situation with the all too familiar behavioural reaction on the part of the policy authorities. We are now probably witnessing the bursting of a third bubble in ten years in the stock market. The real estate market which began to collapse in 2006 still remains in a state of disarray. Both US banking institutions and American households remain overly indebted, while non-financial business enterprises prefer to keep their profits highly liquid rather than risk investing in new machines and equipment. Much like in Japan, the only avenue left to sustain growth in the economy is through greater net public spending. However, as we have seen with the political wrangling over the debt ceiling, the Obama administration has largely been held hostage by fanatics of the Tea Party movement and other advocates of balanced budgets à outrance, including some within the Democratic Party itself. Tragically, these political leaders do not understand the full macroeconomic and financial implications of their strong opposition to budget deficits in this “balance-sheet recession”, in which every sector is seeking to de-leverage itself on the backs of some other sector in a dangerous financial game of musical chairs. The dramatic volatility and sharp decline in stock market prices recently is not caused by some irrational fears that the US government will default on its debt payments which everyone knows it will not and cannot. Rather, behind all the smoke screen about the public debt, private investors now understand that the American and European economies, which have historically been the motors of growth in the world economy, are now headed straight towards another serious recession, with their governments being politically or institutionally incapacitated to implement pro-growth policies in the short to medium term.

    The downgrading by Standard and Poor’s of US government debt on August 6, 2011, from AAA to AA+, will have absolutely no impact on long–term yields, such as yields on 10 year US governments bonds which had actually fallen to 2.20% at the beginning of this week. In the case of Japan, which Standard and Poor’s had downgraded to AA- on January 27, 2011, the yield on 10 year Japanese bonds was 1.05% on August 9, despite the fact that Japan’s public debt to GDP ratio was over 200%, about double the US ratio! At the same time, notwithstanding the lower debt ratios in some of the European countries, these yields on 10 year bonds in Greece, Portugal and Ireland, varied between 10 and 15%, and they were between 3.1 and 5.2% for Italy, Spain, Belgium and France. In the case of Canada, these same yields were at 2.41%. What difference is there between Canada, the United States and Japan on the one hand, and the European countries within the Eurozone on the other?

    The difference is that Canada, the United States and Japan are sovereign states and issuers of their own currency, while the countries of the Eurozone are not, because of the existence of a single supranational currency. Hence, those three countries (with their own sovereign currencies) cannot possibly default on their payments, regardless of the opinion of the analysts of Standard and Poor’s, unless their governments recklessly choose not to want to meet their obligations because of some opportunistic political motives. These three countries issue their own currencies, their foreign exchange rates are not fixed, and they face no institutional constraint with regards to the central bank purchases of government securities. In other words, if you hold a government security that you would like to cash, the respective governments of these three countries would be able draw a cheque on their accounts at their respective central banks, and could then reissue and sell new bonds, directly or indirectly, via their central banks without any other consequence.

    The situation of the countries of the Eurozone is quite different. The European Central Bank (ECB) cannot accommodate any national government within the Eurozone. The ECB can only refinance banking institutions. It cannot make any cash advances to their national governments, nor can it directly purchase any newly-issued bonds. Indeed, the ECB would historically not even engage in purchases of national government securities in their secondary markets — a self-imposed constraint which it abandoned on May 10, 2010 when it was confronted with the startling fact that Greek and Irish debt had become unsustainable. When the Portuguese, Spanish and Italian bonds began to succumb to speculative attacks this year, the ECB abandoned once again its long-standing principle of not intervening in the secondary bond market. With the excuse of better achieving its objective of Euro-wide price stability, on August 7, 2011, the ECB began once again to purchase government securities in the secondary markets, and was able to prevent a sharp rise of long-term interest rates in Spain and Italy with a certain degree of success. However, the stabilisation measures of the ECB are conditional: its governor, Jean-Claude Trichet, requires of the Italian and Spanish governments to implement drastic austerity measures that will plunge these already precarious economies into recession. If the Greek scenario of a vicious cycle is also played out in these two countries, the European Financial Stability Facility (EFSF) initially set up to help bail out smaller countries such as Greece, Ireland and Portugal, will have to be replenished and it will inevitably increase the speculative attacks against France, which, together with Germany, will be forced to finance the largest share of the new funding. And if France also collapses as a result of these speculative attacks, then even Germany that most analysts see as the stalwart or unfailing pillar of the Eurozone would itself be at risk of default. However, even before reaching such a situation, European banks, which are the principal holders of European “sovereign” debt, would themselves have become insolvent. It is perhaps this fear that would explain why the prices of bank stocks have been declining over the last several months, much as during the 2008 debacle.

    During the 2008 financial crisis, governments had committed themselves to pursue contra-cyclical fiscal stimulus packages to secure growth via deficit spending. However, over a year later, in Toronto the G20 leaders decided to revert back to the well worn policy of fiscal austerity in support of sound finance that our finance minister, Jim Flaherty never ceases to remind us and seems to wear as a badge of honour. The mistakes of Japan over the last two decades and the errors committed during the Great Depression of the 1930s are being repeated once again on a colossal scale. Politicians internationally and bureaucrats of the ECB continue to believe that public sector deficits cause inflation and low private sector spending, even though Japan has shown that, despite large deficits and an enormous growth in the money supply, it has remained in a state of practically zero inflation for two decades. Regardless of their effects on public debt ratios, national governments must return to expansionary fiscal policy, which would be the only source of growth in the world economy today. Without it, we would have achieved what most policy makers least want, which is the “Japanisation” of the world economy.

    Reply

    jim Reply:

    @WARREN MOSLER,

    “Japanisation” sounds like the best case scenario

    Reply

    Art Reply:

    Great stuff! And don’t overlook the demographic forces at work, which argue that (1) Japanization is probably inevitable (as long as pro-cyclical policies are avoided!) and (2) *far* more active fiscal policies are the only way to avoid it. Ironically, Japan could be the first advanced economy to ‘de-Japanize’ if policymakers can manager to stay out of the way!

    Japan’s baby boom is about 10 years ahead of western democracies, including the US. The size of those cohorts relative to the overall population has caused significant swings in culture, behavior, employment, inflation, interest rates, financial markets, etc, etc, and it’s been doing it since the mid-19th century, when sanitation and transportation improvements (perhaps made possible by the massive gold discoveries of mid-century??) led to demographic transitions (a decline in birth rates that lags improvements in child mortality by about a generation, so you end up with a ‘pig in the python’ cohort). The home buying years of the echo boomers, whose roots can be traced to those mid-19th century social investments, probably peaked around 2006, for example (if memory serves…).

    We’re only about 10 years into ours. Same for other developed economies. And many emerging economies have now peaked in terms of household formation, which often leads to recession. That said, in a few years, some of them could be positioned for their own ‘great moderations’ (peak earning years of the largest age cohort, saving, investing, falling int rates, etc) as US was by the early 1980s.

    Reply

    jason m Reply:

    @WARREN MOSLER, nice to see my home town and university alumni joining the MMT community!

    Reply

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