Central Banks Cannot Go Bust – But Can Cause Trouble
Posted by WARREN MOSLER on August 29th, 2011
As previously discussed, since the S&P downgrade, the talk of the US becoming the next Greece has gone conspicuously quiet.
And, as suggested may happen, the anti deficit talk is shifting to inflation.
And that’s a much tougher sell in Congress. Especially with no forecast showing any inflation risk, including tips, and a Fed still fighting deflation.
August 29th, 2011 at 9:12 am
Fickle bunch, eh? You’d have to wonder sometimes…
Maybe control over fiscal policy should go to an independent entity. Of course, if it did they’d probably be called ‘communist’ or ‘politburo’ or some other such nonsense.
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Unforgiven Reply:
August 30th, 2011 at 12:11 am
@Philip Pilkington,
An economist is a man who states the obvious in terms of the incomprehensible.” – Alfred A. Knopf
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August 29th, 2011 at 12:30 pm
This is still confusing rubbish in thsi art=ilce though
Like this
“and do not force the central bank to turn to the printing press and put the bank’s policy objectives into jeopardy.”
And this
“The central bank’s monopoly on issuing currency thus provides the central bank with a steady stream of income, called seigniorage”.
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WARREN MOSLER Reply:
August 31st, 2011 at 9:04 am
yes, still lots of garbage. but they aren’t invoking greece, and most seem to recognize that the US can’t be the next greece, so they’ve gone quiet on the deficit for the most part
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August 29th, 2011 at 12:50 pm
I posted this on another site. How much should Govt debt be if Govt debt funded 50% of required retirement savings?
Government $deficit = non government $surplus (net financial assets)
How much credit is required in the USA for
Consumption and
Financial saving for retirement
us$ 15 trillion certainly does not seem like an excessive amount
Per head it comes to us$50,000 per head. This seems appallingly inadequate to me
So ideally Govt debt required to fund savings for retirement should be much much higher
The only answer is massive Govt deficits and debt until retirement saving reach an adequate level. I unsure what the calculated level is but maybe at least an average of us$250,000 per head
If this credit is funded
50% private sector
50% Govt debt
Then Govt debt should at least double to triple
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beowulf Reply:
August 29th, 2011 at 2:07 pm
@RJ,
RJ, the USG can create money on demand and will outlive us all so there’s no reason for it to stockpile savings. It should do two things:
1. Increase Social Security benefits, average SS annual benefit is around $12,000– less than a minimum wage job– and its maximum benefit is $26,000, that should be standard benefit. SS could means test via a phaseout rate or leave it to the tax code to clawback.
2. Provide a low cost annuity products. Both single and married retirees should be allowed to cash out any investments with no capital gains tax if they put the money into a life annuity offered by Treasury Direct (HUD could work out the details of a reverse mortgage program).
Come to think of it, there’s no reason to limit it to retirees (prior to retirement, premiums could be invested in index funds). Since life annuities expire with the deaths of policyholding individual or couple, a Tsy life annuity is basically a 100% estate tax on those assets. Rolling over cap gains into a Tsy annuity at any age would simply be an election to pay a death tax in the future instead of a capital gains tax in the present.
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RJ Reply:
August 29th, 2011 at 2:22 pm
@beowulf,
Thanks
But what I am asking is in relationship to this
Government $deficit = non government $surplus (net financial
assets)
If the US Govt ran deficits until every US citizen had 50% of adequate private saving for retirement
How much would that be roughly??
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Ed Rombach Reply:
August 30th, 2011 at 2:17 pm
@RJ,
Problem is this….
The following is from a recent interview with Chairman Greenspan:
RYAN: “Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?”
GREENSPAN: “Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to
somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”
RJ Reply:
August 30th, 2011 at 2:26 pm
@RJ,
I guess the only way to achieve this would be to run deficits and
Issue private (non bank bonds for US citizens only) Govt bonds at a high enough interest rate to ensure retirement saving are invested in these bonds.
This would soak up bank reserves and also remove and equal amount of bank credit
WARREN MOSLER Reply:
August 31st, 2011 at 9:23 am
you could just leave the funds as reserve balances as well.
RJ Reply:
August 30th, 2011 at 2:26 pm
My above comment was in reply to Ed
Neil Wilson Reply:
August 29th, 2011 at 3:02 pm
@beowulf,
Why not just pay an earnings linked pension and have done with it?
Then you don’t need to save at all other than to cover ‘rainy days’ up to retirement.
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beowulf Reply:
August 29th, 2011 at 6:00 pm
@Neil Wilson,
Because the government should mop up all the voluntary tax revenue it can (a Tsy life annuity would essentially be a pre-paid estate tax) before it levies involuntary tax revenue.
WARREN MOSLER Reply:
August 31st, 2011 at 9:05 am
the rest can come from private sector debt
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RJ Reply:
August 31st, 2011 at 9:50 am
@RJ,
Warren
Can you leave it as a reserve balances?
If the Govt runs a us$20 trillion deficit over time funded by Fed credit (to finance retirement savings)
This will
Increase commercial bank credit AND
Increase bank reserves
So the banks balance sheet will change as follows
ASSETS
Fed credit + 20 trillion
LIABILITIES
Customer deposits + 20 trillion
TO MOP UP THESE DEPOSITS
The Govt / Fed must issue bonds for the non bank sector only
Otherwise this additional credit will find its way into investments and consumption and just cause massive price rises
Or have I missed something.
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WARREN MOSLER Reply:
August 31st, 2011 at 9:56 am
think of reserves as, functionally and for all practical purposes for the economy, one day tsy secs
they don’t ‘find their way’ into anything.
they are just a bank assets offset by a bank liability.
yes, the deficit spending itself adds income and ‘savings’ to the economy, and that ‘finds its way’ here and there.
but at the end of each day total govt deficit spending- the national debt- sits as some combo of cash, reserves, and tsy secs. With all three being govt liabilities.
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RJ Reply:
August 31st, 2011 at 10:32 am
@RJ,
Warren
What I’m referring to is additional commercial bank credit that results from Govt deficits.
If this spending is funded by Fed credit then
Commercial bank reserves increase (a bank asset)and
Commercial bank deposits also increase (a bank liability)
If Govt / treasury bonds are purchased by a commercial bank
All this does is swap one bank asset (Fed credit) with another one (treasury bonds) The commercial bank deposits (bank liability) does not change. This credit will put pressure on whatever area it flows into (consumption or investment). It will not just be left sitting in the bank earning low interest.
But if treasury bonds are issued just for the non bank sector (at the required interest rate to attract investors) then
Commercial bank credit or reserves decrease (the banks asset) AND
Commercial bank deposits (banks liability customer asset) also decreases
This is the only point Im making. If Govt deficits were to fund retirement saving without causing investment inflation or consumption inflation. The Govt must issue bonds for non bank investors. (Or pay bank interest on reserves so that the banks can offer higher interest rates to depositors)
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Mario Reply:
August 31st, 2011 at 11:12 am
@RJ,
is your point that the reserves would increase the banks’ basal requirements for lending capabilities? Is that what you mean by credit? B/c as far as I know increased reserve levels have nothing to do with increased ability to lend. However the larger a bank’s owners equity is then the larger amount of loans it can make according to basal capital requirements.
If that is what you’re saying by increased credit, I don’t see why the bonds wouldn’t still be considered assets on the books of the banks and therefore their owners equity is still greater so their lending capabilities are unchanged. In fact they are now getting a subsidy through the bond interest for what appears to be no reason at all.
I am assuming reserve balances do get recorded as assets on the books of banks. Is that correct?
RJ Reply:
August 31st, 2011 at 11:41 am
@RJ,
mARIO
Fed reserves is the same as Fed credit
So if the treasury pay ABC Ltd $1 million who banks at BOA
BOA accounting entry is
DEBIT Fed reserves or Fed credit $1 million (bank asset / Fed liability)
CREDIT ABC Ltd Customer account 1 million (bank liability Customer asset)
If the bank buys $1 million of treasury bonds
CREDIT Fed reserves or Fed credit $1 million (minus bank asset)
DEBIT Treasury Bonds (plus bank asset)
If ABC Ltd buys $1 million of treasury bonds
CREDIT Fed reserves or Fed credit $1 million (minus bank asset)
DEBIT BOA Customer account 1 million (minus bank liability)
WARREN MOSLER Reply:
August 31st, 2011 at 5:36 pm
doesn’t work that way.
the ability of a bank to lend isn’t a function of reserve balances.
it’s a function of bank capital
Mario Reply:
August 31st, 2011 at 12:32 pm
@RJ,
right. That part I understand already. What I’m trying to understand is what you are saying the difference will be for the bank being in bonds versus the reserve/cash. Consumption or investment in relation to those reserves is based as far as I know solely on loans being made. And those loans can be made regardless of the reserve levels.
It’s really no different than what we are experiencing these days with very, very high excess reserve levels and little lending. The reserves don’t appear to be putting pressure on anything if there’s no demand.
RJ Reply:
August 31st, 2011 at 2:45 pm
@RJ,
Mario
What I’m concerned about is commercial bank credit NOT Fed credit (or Fed reserves).
And commercial bank credit increases from
Govt deficits and
Bank lending
The only other way as far as I can see is expired Govt bonds.
If Govts run large deficits then commercial bank credit (along with Fed credit) will increase unless it is mopped up some how
Treasury bonds will mop it up but only if these bonds are NOT purchases by banks.
Neil Wilson Reply:
August 31st, 2011 at 3:32 pm
@RJ,
Central Bank reserves are an asset to the commercial bank and a liability to the Central bank.
What you call commercial bank credit are just bank reserves (assets), which are offset by customer deposits (liability).
The channel for interest is then through the commercial bank. Central bank pays interest on bank reserves to commercial bank. Commercial bank pays interest to deposit holder.
If a deposit holder swaps their deposit for a Tsy then all that happens is the Treasury pays interest to the deposit holder. And the commercial bank balance sheet has slightly smaller numbers on both sides.
There is no functional difference between customer deposits receiving interest from the government via the commercial bank channel or via the Treasury. It’s pretty much the same journal in either case – increase bank reserves and customer deposits by the amount of interest.
The target rate of interest has to be imposed via repo or reverse repo systems using Treasury bonds, or just by paying interest on reserves which pretty much all central bank now do
The common mistake when reading MMT models is to assume that bank reserves attract no interest whereas government bonds attract interest. That is never the case in the MMT model. The rate of interest is always equivalent between the two. (Are you listening Paul Krugman et al!)
What value that rate of interest should be in general and how it should move in response to other dynamics is an entirely different debate.
Matt Franko Reply:
August 31st, 2011 at 3:46 pm
@RJ, Here is the Fed’s H.8 report, suggest start on Page 2…. Resp,
Matt Franko Reply:
August 31st, 2011 at 3:56 pm
@RJ, Sorry.. Link:
http://federalreserve.gov/releases/h8/current/default.htm
PS: I dont believe there is a direct cause and effect between govt deficits and balances accruing in line item 3 on Page 2.
RJ Reply:
August 31st, 2011 at 4:01 pm
@RJ,
Neil
Thanks. That’s clear. At present the interest on reserves is very different to interest on treasury bonds
And agree with all of this.
So what MMT would do is pay interest on reserves equal to (or similar to) interest on treasury bonds.
The only problem I have with this is the banks would take a cut. And this could be a big one.
Surely it would make more sense to issue treasury bonds for the public only. Banks excluded. This would then soak up bank credit and bank reserves.
(This is only if the Govt ran deficits to fund financial saving needed for retirement. Which is unlikely to happen. Deficit hawks would have a breakdown).
Mario Reply:
August 31st, 2011 at 4:06 pm
@RJ,
“What I’m concerned about is commercial bank credit”
okay but why? What is the concern? I thought perhaps you were concerned that with larger reserves (assets) then the banks would have larger owners equity figures and with a larger OE they would have more room to move within the basel requirements for lending. Which just means they can make more loans according to capital requirements (note: not b/c of any reserve requirements).
People like Tom and others I have spoken with are concerned with subsidies going to the banks for doing essentially nothing through bond purchases to allow the government to deficit spend but I haven’t heard concerns about the size of reserves or credits at commercial banks before. More than likely in our economy these days, most of the money will be stored/held at banks and depository institutions so the wealth of a given economy will likely be reflected in bank reserves, etc. It’s the subsidies those banks receive that MMT seems to have issues with as I understand it.
Mario Reply:
August 31st, 2011 at 4:10 pm
@RJ,
oh I just saw your post. np. ;)
Mario Reply:
August 31st, 2011 at 4:12 pm
@RJ,
“The only problem I have with this is the banks would take a cut. And this could be a big one.”
yes I was thinking that too. Why pay the banks interest at all for their reserves? Aren’t they still getting a subsidy in this way? What is the value/purpose of reserve interest?
RJ Reply:
August 31st, 2011 at 4:25 pm
@RJ,
Mario
I can see why MMT would recommend paying interest on reserves. Because then the banks could use this interest to pay a much higher interest on deposits.
Say banks get 10% on reserves (or whatever rate is needed)
And banks pay say 8% on deposits
But if treasury issues bonds at 10%. Then depositors get 10% not 8%.
Maybe treasury could do both. Issue bonds that banks could not purchase (they would get interest on reserves instead) Then the public and companies would have the choice. Either leave the money in the bank and earn deposit rates. Or buy treasury bonds.
Mario Reply:
August 31st, 2011 at 4:46 pm
@RJ,
or the government could credit savings accounts directly perhaps and skip the banks and still keep no or super low reserve interest rates. Personally the less free money we give to banks the better imho.
or the government could add a refundable tax credit onto tax returns that uses a savings table just like they use the tax table to award savers with a certain interest rate on savings (possibly adjusted for inflation every year or 2 years or 5 years or something).
WARREN MOSLER Reply:
August 31st, 2011 at 5:31 pm
what is ‘commercial bank credit’?
Tom Hickey Reply:
August 31st, 2011 at 6:37 pm
@RJ,
Mario: People like Tom and others I have spoken with are concerned with subsidies going to the banks for doing essentially nothing through bond purchases to allow the government to deficit spend but I haven’t heard concerns about the size of reserves or credits at commercial banks before.
Since issuance of tsys is operationally unnecessary, the interest paid on them constitutes a subsidy. Unless it can be justified in terms of public purpose, it should be eliminated by ending the requirement to offset deficits with tsy issuance.
Should this happen, then if the cb wants to set a target rate above zero, it must pay IOR. This is essentially a subsidy to the banks, since fiscal policy is more effective and efficient than monetary policy. That subsidy constituted by IOR is eliminated if the cb sets the target rate to zero.
Mario Reply:
August 31st, 2011 at 8:21 pm
@RJ,
But Tom if they are getting the IOR regardless of where rates are…they are still getting the IOR. How is the IOR not a subsidy to them?
Why does MMT even suggest we need an IOR? What good is it doing or bad is it preventing?
WARREN MOSLER Reply:
September 1st, 2011 at 3:53 pm
ior/fed funds, etc. is the cost of funds for the banking system, not a subsidy
Tom Hickey Reply:
August 31st, 2011 at 9:09 pm
@RJ,
Warren recommends setting the overnight rate to zero, which implies no IOR paid out. IOR is only needed if the cb desires to set the overnight rate greater than zero, given no issuance of tsys to drain excess reserves. IOR rate sets a floor below which banks will not lend excess reserves but rather will hold them for the IOR. So to set a target, the cb just pays IOR at that rate.
Mario Reply:
August 31st, 2011 at 10:22 pm
@RJ,
ahhhhh thank you Tom (again). ;)
RJ Reply:
September 1st, 2011 at 3:17 am
@RJ,
@ WARREN
“what is ‘commercial bank credit’?”
Commercial bank deposits
I call money = (commercial bank) credit. (The credit balance of the debit and credit accounting entry when trade occurs between two parties).
So central bank credit or reserves is NOT money as it can not be spend in the real economy (so QE is not money printing)
But commercial bank credit (or bank deposits) is
What should it be called (for clarity) on this site?
WARREN MOSLER Reply:
September 1st, 2011 at 4:04 pm
no need to use the word ‘money’ unless there’s some further implication for that entry?
Definition:
Commercial bank deposits at the Fed are called reserves.
If you do want to include bank reserves in your particular definition of ‘money’ and not include tsy secs as ‘money’ then QE can be said to be ‘money printing’
And you/the fed/china/ etc can call qe anything you/they want, and it still won’t have any further economic consequences per se.
Tom Hickey Reply:
September 1st, 2011 at 11:15 am
@RJ,
How does one spend bank money in the economy without cash, which the bank gets from the cb in exchange for reserve, or reserves to clear one’s checks and electronic transfers? Banks cannot create either cash or reserves. Only government can.
Banks can only extend credit, they cannot settle accounts without government under the existing system in which transactions settle in state money. Final settlement of all transactions that do not occur intrabank take place through either cash or reserves, i.e., state money. A bank’s crediting a deposit account is just numbers on spreadsheet until they are connected with either cash or reserves in settlement of transactions.
Neil Wilson Reply:
September 1st, 2011 at 12:04 pm
@Tom Hickey,
You do what the British have done and merge all the banks together into a small number of mega retail banks.
Transaction intra-bank clear without needing any reserves. The bigger the banks the more of the economy can run without needing any inter-banks transactions at all.
Similarly banks can clear the system where they trust each other simply by agreeing an overnight overdraft with the other bank.
There’s no operational need for the central bank to mediate between the private banks. You could run a system without that function, but it is likely to be very unstable at points of stress (as we’ve seen when the Inter bank market dried up).
Tom Hickey Reply:
September 1st, 2011 at 12:20 pm
@RJ,
Neil: You could run a system without that function, but it is likely to be very unstable at points of stress (as we’ve seen when the Inter bank market dried up).
Yup. After a series of panics, the Federal Reserve was created as LLR to provide liquidity in unstable time. No way a developed nation is going back to the 19th century, the free banking advocates notwithstanding.
Mario Reply:
September 1st, 2011 at 4:36 pm
@WARREN MOSLER,
“ior/fed funds, etc. is the cost of funds for the banking system, not a subsidy”
how is paying interest on money considered a “cost” and not a subsidy? How is that possible? What “cost” are you referring to? A holding cost? Banks shouldn’t be paid simply b/c they exist in my view. I would be willing to forgo cheap ass savings rates in my checking accounts so that banks don’t get any interest at all. Then if you want your money to work for you it’s equities, commodities, state/local bonds, (and I do think the government should offer savings rates for the public NOT for banks/companies). But that’s just me.
I wonder what would happen if banks had to find ways to generate revenues directly from their customers instead of through the government simply b/c they exist? They’d probably go out of business due to fall-offs in demand and increased competition!! LOL
WARREN MOSLER Reply:
September 2nd, 2011 at 8:07 am
banks pay interest on their liabilities which ‘fund’ their assets.
the fed funds rate/interest on reserves sets the cost of the liability side of the banking system’s balance sheet.
so if the fed’s target rate and interest paid on reserves is .25%, then the bank’s ‘base’ cost of funding itself is about that.
after which it invests its funds in the likes of loans, securities, and reserves.
Tom Hickey Reply:
September 1st, 2011 at 7:00 pm
@RJ,
Mario, I don’t think it is a subsidy if the Fed figures it is in the public interest to set the target rate above zero and pay IOR absent tsy issuance. Where it becomes a subsidy is in terms of the MMT view that the natural rate is zero and fiscal policy is more appropriate than monetary policy. One could argue that since monetary policy is less efficient and effective than fiscal policy, as well as operationally unnecessary, the cost of monetary policy — interest to banks — is an unnecessary subsidy for a special interest since it is not justifieable in terms of public purpose.
WARREN MOSLER Reply:
September 2nd, 2011 at 8:10 am
It subsides rentiers- those living off of interest type income. But not so much banks etc.
Mario Reply:
September 1st, 2011 at 8:14 pm
@RJ,
tom if the natural rate is zero why ever move the rate? Interest for doing nothing is a subsidy. How else can it be?
WARREN MOSLER Reply:
September 2nd, 2011 at 8:14 am
the rate used to change via market forces with gold standards and fixed exchange rates, so they think they should keep changing it based on the old and now inapplicable correlations
Tom Hickey Reply:
September 2nd, 2011 at 10:48 am
Warren: “It[IOR] subsides rentiers- those living off of interest type income. But not so much banks etc.”
Not following you here. IOR increases bank assets. How does it pass through to rentiers?
WARREN MOSLER Reply:
September 2nd, 2011 at 12:27 pm
it’s the ‘support rate’ which becomes the minimum interest rate in the economy
August 29th, 2011 at 1:02 pm
And of course, there is no printing press. Nobody prints dollars. Those green, paper things you have in your wallet are not dollars, they are receipts for dollars. They are like the paper title you have for your house. The title is not the house; it is evidence proving you own the house.
Similarly, those “federal reserve notes” merely are evidence the bearer owns a dollar, which itself is not physical. It’s just a number.
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RJ Reply:
August 29th, 2011 at 1:49 pm
@Rodger Malcolm Mitchell,
I call notes and coins a Govt guaranteed monetary asset. To enable bank credit to be exchanged usually for small amounts without the debit and credit resulting from trade being processed and directly recorded by a bank.
And some monetary reformers get excited about seigniorage because they think the accounting rules can be changed to treat this as treasury revenue rather than Govt debt
http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit
But here’s a post I made on Ellens Brown website on this topic
“Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins. Congress has the Constitutional power to “coin money,” and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.”
My response
I’m a big fan of Ellen. But not of creative (fraudulent) accounting tricks like this. Money reform should be based on sound logic but also ethical behaviour. And this is not even close.
It would likely have accountants up in arms. And would likely fool no one.
This is how I understand the situation.
In the past Govts financed deficits in significant part by new notes and coins (rather than Govt bonds or central bank credit)
New notes and coins is now coded to Govt debt
Dr Treasury expenses
Cr Liability (Govt debt?)
In the past the credit accounting entry was coded to CR Treasury revenue (or not Liability / Govt debt)
Some money reformers see this as our salvation. It is not. This accounting treatment (cr revenue) was dubious at best. It is not the way forward.
If accounting is to be changed treat Govt debt as say
Cr base money or better still
Cr Non Govt Retirement provision (which is what it really is)
But as you can see in the past new notes and coins (Govt debt) was hidden as revenue (or as a liability account but not included as Govt debt). Why in part I believe Govt and non Govt debt is so much higher now.
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beowulf Reply:
August 29th, 2011 at 6:06 pm
@RJ,
What’s that great line in Master and Commander?
“You’ve come to the wrong shop for anarchy, brother.”
http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/
:o)
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roger erickson Reply:
August 29th, 2011 at 7:52 pm
@Rodger Malcolm Mitchell,
Yet even these authors are hedging their bets:
“Central banks are not like commercial banks, though, so the question of whether one could go bust needs to be looked at in a very different way, ACCORDING TO BROSENS.”
[Sounds like they're not necessarily on board themselves, until someone tell 'em it's ok to be on this ship. :) ]
Their companion article is also misleading:
“We’ve mentioned that the Fed makes decisions over monetary policy. So what is that? It’s the regulation of interest rates and the availability of money in order to provide economic growth and prevent downturns. This is the nuts and bolts of what the Fed does.”
http://www.cnbc.com/id/43752521
“The Fed can also lower banks’ reserves—meaning banks would need to carry less money on their books—and can lend more to businesses and consumers as well as to other banks. This tactic increases the money supply in the economy.”
[What are they talking about? There either is or isn't a reserve requirement? No fractional reserve with fiat currency, since 1933 in the USA?]
“Another way the Fed increases the money supply is by buying government securities, like treasury bonds, from the public. This is a form of what’s called quantitative easing [QE explanation at http://video.cnbc.com/gallery/?video=3000026497 ; (I couldn't bear to look at this)]. Buying government securities makes more money available with the aim of increasing consumer spending and boosting the economy.”
http://www.cnbc.com/id/43752521
Also includes this gem:
“WHERE DOES THE FED GET IT’S MONEY?
The Federal Reserve makes money — lots of it. … However, the Fed doesn’t really keep the money. The government receives all of the system’s annual profits — after certain expenses. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.”
That’s mixing more than a few apples & oranges. Sure glad CNBC explained this so clearly to the electorate!
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roger erickson Reply:
August 29th, 2011 at 7:55 pm
@roger erickson,
ps: forgot this part:
“In response to banking and other financial problems that developed in the 1980s, the Fed Board adopted a policy in 1985 requiring the Reserve Banks to inspect once a year the various holding companies of the nation’s larger banks. THIS IS TO MAKE SURE THE BANKS THEMSELVES HAVE ENOUGH RESERVE FUNDS.”
??
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WARREN MOSLER Reply:
August 31st, 2011 at 9:05 am
it’s ok to call them dollars. no harm done. dollars are tax credits, etc.
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August 29th, 2011 at 1:23 pm
And as for the relationship between federal deficits and inflation: http://research.stlouisfed.org/fredgraph.png?g=1SA
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WARREN MOSLER Reply:
August 31st, 2011 at 9:09 am
we’ve already been through this too many times, so please qualify it if you put it on this website again, thanks.
the causation is that (deflationary) recessions cause the deficit to increase, which is an inflationary bias that reverses the deflationary forces of the slowdown. and during the expansion phase from the inflationary bias of the deficits built up by the slowdown, the auto stabilizers bring the deficit down and thereby provide the deflationary bias that reverses the expansion.
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August 29th, 2011 at 2:17 pm
theoretically I guess we can consider this progress though since the “greek dilemma” is now over we seem to be moving into the “inflation dilemma.” Honestly I think this one will be tougher to crack though with the people. It seems to me that most people’s inflationary concerns are not rooted in “dollar printing” but rather oil supply shocks being passed down the supply chain. Inflation is more of an energy issue than a helicopter issue seems to me.
It would be really neat if someone put together somehow a chart that broke down the causes of monthly CPI/PPI inflation not just the effects of it.
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August 29th, 2011 at 2:58 pm
Once you realize that taxes are no longer necessary for revenue, it seems inescapable that most tax policy is actually driven by mental laziness & class-fear that have-nots may be smarter than haves, and hence must be constrained. Either way, haves might have to start thinking more, and adapt to more change! Heresy!
Is that aversion to thinking, exploring options and “change” stupidly self-limiting or what?
This was covered over 2000 years ago, in one of Aesop’s fables.
http://www.aesops-fables.org.uk/aesop-fable-the-belly-and-the-members.htm
Somehow, our country is missing the options for the hoarding?
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roger erickson Reply:
August 29th, 2011 at 3:01 pm
@roger erickson,
A timely version today would be Aesop’s Parables: “The innovators & the Luddites.”
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roger erickson Reply:
August 29th, 2011 at 3:04 pm
@roger erickson,
to be more specific: “We’re missing the scalable group options for the Libertarian personal hoarding?”
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August 29th, 2011 at 4:24 pm
Hey Warren,
A bit off subject, but Alan Krueger, the next chairman of the White House Council of Economic Advisers, is yet another debt hawk. See: http://www.nytimes.com/2011/04/17/opinion/17krueger.html?_r=1
Just what we need. Another excessively educated fool to advise the President.
Rodger Malcolm Mitchell
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roger erickson Reply:
August 29th, 2011 at 7:39 pm
@Rodger Malcolm Mitchell,
Bang my head on the keyboard! Sometimes it seems mindless. One trip forwards, & two Luddites back.
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WARREN MOSLER Reply:
August 31st, 2011 at 9:13 am
and hoping his brother Freddy isn’t involved
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Robert Kelly Reply:
August 31st, 2011 at 8:42 pm
@WARREN MOSLER,
Freddy will use his glove to slash spending. No more deficit. Nightmare on Main St.
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Mario Reply:
August 31st, 2011 at 10:21 pm
@Robert Kelly,
that’s a good one!!! LOL
WARREN MOSLER Reply:
September 1st, 2011 at 3:54 pm
If you don’t mind I’ll use that last bit, thanks!
August 29th, 2011 at 7:54 pm
Does this sound like an MMT world ??
Excerpt from From Us,The living by Robert A. Heinlein..
“We discussed before the cause of economic depressions and I asked you to take on faith the idea that the only thing that caused depressions was a financial system that automatically caused a spread between goods to be bought and money to buy them, or ‘over-production’ as it was euphemistically called. I’m not going into the mathematical theory even now.
You can take it up later with an economist or in several
books I can recommend. But President Holmes was one of
the few men to occupy the White House who had sufficient
insight and mathematical ability to see the trouble, the reasons
behind it, and to devise a cure. He had a powerful weapon to
work with, the Bank of the United States, and he had the free
intellect necessary to do what needed to be done without clouding
the issue with a lot of moralistic tape. In fact he helped to formulate a realistic social ethic that justified his new departure. To begin with he saw the ‘over-production’ or, as he looked at it, under-consumption or shortage of purchasing power. He directed a staff of actuaries to supply him with approximate figures showing the percentage of under-consumption and its dollar value for the past year. Then he undertook to make up the missing purchasing power by literally giving away through the Bank of the
United States the necessary amount of money. He was aware
that to do so without some control over prices would result in
inflated prices and a new spread between production and consumption.
So he held back about half of the newly created purchasing
power and used it to control prices in the following
manner: All of the retailers of consumption goods in the country
were invited to join in the New Economic Cycle. If a dealer
joined he agreed not to raise his prices over what they were when
the new regime started. On the contrary he was to sell all his
goods at a ten per cent discount, and the Bank of the United
States would hand him the difference on presentation of his sales
records. Then Holmes proceeded to give away through the Bank
twenty-five dollars per month to anybody who would take it.
Naturally business boomed. Prices didn’t go up because all of the
business went to the merchants who had joined the agreement.
Presently all the other merchants joined, too, in order to get in on
the rush of business. Factories re-opened, labor was needed and
unemployment disappeared like snow in July. The country
hummed. And that is a thumbnail sketch of the present situation,
Perry.No unemployment, plenty of well paid work for anybody
that wants a job, and enough credit issued every month to anybody
that wants it to keep body and soul together in decency.” .
Perry looked bewildered. “Wait a minute. It looks fine at
first glance, but where did he get the money? Not from taxes,
surely,with the country already broke. And not from the private
bankers, They were ruined in the war.”*
Cathcart grinned. “He got the cash money the same way we
have gotten all cash money since Roosevelt put the gold back in
the ground-right off the printing presses. But he didn’t have to
print much of it. The checks were issued at the Bank and the
merchant and a great many others had accounts at the Bank and
very little cash money changed hands. The bulk of it was mere
bookkeeping entries, made by the bank clerks. Holmes had
implemented what the bankers had known for centuries but
were barred by LaGuardia from doing-taking money out of an
inkwell. What’s the matter, son? Still not satisfied?”
“Well, I don’t know. Everything you have said seems okay,
but how about this? If you keep pouring money into a country
indefinitely, you are bound to get inflation, fixed prices or no
fixed prices.”
“You don’t pour it in. You add just enough to keep it running.
Each fiscal period the additional amount is the closest possible
approximation of the amount necessary to prevent a spread
between consumption and production, based on the value of the
nation’s inventories.”
“But why do you have to keep adding money all the time?”
“I said I would stay away from theory but I’ll give you this
hint to chew over: the amount necessary to add each period is
theoretically equal to the amount of savings invested as capital in
the preceding period. And one more hint: Doesn’t it take more
money to run the country’s industry now than it did when
George Washington was President?
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Unforgiven Reply:
August 29th, 2011 at 11:36 pm
@KKKen530,
That’s a great blast from the past! I love it!
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KKKen530 Reply:
September 2nd, 2011 at 9:11 pm
@Unforgiven, Glad to see a couple of you have read it..
“You can take it up later with an economist” What I want to know is whether or not his “Social Credit” world is viable.
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beowulf Reply:
August 30th, 2011 at 1:22 am
@KKKen530,
Aye, I remember President Holmes well. He was one of the good ones.
http://books.google.com/books?id=bG2GNAJWcCoC&pg=PA79&lpg=PA79#v
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Matt Franko Reply:
August 30th, 2011 at 3:25 am
@KKKen530/Beo,
“But President Holmes was one of the few men to occupy the White House who had sufficient insight and mathematical ability to see the trouble, the reasons behind it, and to devise a cure”
I knew it! You have to have what some call Mathematical Maturity (a gift imo) to be able to truly understand MMT.
http://en.wikipedia.org/wiki/Mathematical_maturity
PhDs or not, Krugman does not have it sorry, Sumner does not have it, in fact, any Monetarist/Quantity Theory adherent here in the post 2008 world, who is exposed to the MMT paradigm and cannot make the paradigm shift immediately does not possess Mathematical Maturity I would say. They have little/no cognitive mathematical ability to “see” what is going on. You have to feel sorry for them actually; this makes it very hard/impossible to explain MMT to them… they may never get it. Resp,
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ESM Reply:
August 30th, 2011 at 9:27 am
@Matt Franko,
Sorry Matt. I can’t agree with this assessment. There’s no way that Warren or any of the other MMT “theorists” have as much mathematical maturity as a Paul Krugman.
The problem (if there is a problem — I’m assuming that MMT is the right way to look at things, but I wouldn’t stake my life on it, by the way) is a mental block caused by having invested a significant amount of professional and intellectual capital into a particular paradigm that is now coming into conflict with reality.
The natural, human response is to tweak the paradigm in ever more complex and convoluted ways to bring it into harmony with empirical evidence, rather than tossing it out completely.
The best analogy I can think of is the Geocentric Model for how all the celestial bodies revolve around the Earth. It developed into an exquisitely complicated model where “each planet required an epicycle revolving on a deferent, offset by an equant which was different for each planet.” And it worked quite well for 1500 years.
If you spent 30 years of your professional life helping to make a Geocentric Model more accurate, you’re not going to junk that for a Heliocentric model without a long, drawn out fight.
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Neil Wilson Reply:
August 30th, 2011 at 9:37 am
@ESM,
It’s simple cognitive dissonance. We’re seeing it all over at the moment.
ESM Reply:
August 30th, 2011 at 10:24 am
@ESM,
From wikipedia,
“Cognitive dissonance is a discomfort caused by holding conflicting ideas simultaneously. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance. They do this by changing their attitudes, beliefs, and actions.[2] Dissonance is also reduced by justifying, blaming, and denying.”
So what exactly are the conflicting ideas that are causing dissonance?
I’m starting to feel a little dissonance myself, as I would have expected 10% of GDP deficits to be enough to get the unemployment rate down.
Neil Wilson Reply:
August 30th, 2011 at 10:50 am
@ESM,
For Krugman it seems to be the idea that wiggling the Interest rate lever doesn’t work like he thought it did.
The MMT view conflicts with that and he has wilfully misinterpreted it in the same way several times.
That’s the classic indication of a cognitive dissonance. The conflicting idea is being subconsciously bypassed, usually with a lot of anger.
MMT *must* be saying something different to what it is and he asserts that continuously in a desperate attempt to protect something he sees as a core value.
All you can do in that case is gather evidence and present the same facts from various different angles hoping that one will bypass the blockage.
As you know the level of deficit depends upon the net-saving of the private sector. All it is telling you is that the bank recirculation system is completely FUBAR at the moment.
And that will continue until the private malinvestment from the last credit bubble is resolved. The larger the government deficit (up to the point of inflation), the faster the malinvestment can be resolved without too much human suffering.
Or you can go for a small deficit which will resolve the malinvestment with a very large bang – taking a lot of sound infrastructure out with it at the same time.
So we either need a much larger deficit or a much smaller one. Both will resolve the situation faster than being sat where we are in muddle-through land.
Tom Hickey Reply:
August 30th, 2011 at 2:39 pm
@ESM,
I’m starting to feel a little dissonance myself, as I would have expected 10% of GDP deficits to be enough to get the unemployment rate down.
Not if a lot that gets saved?
WARREN MOSLER Reply:
August 31st, 2011 at 9:25 am
right, and looking back at prior cycles, it seems to be without no infamous ‘credit booms’ from the likes of the sub prime expansion, the dot com boom, and the s and l expansion phase before that, etc. we may have always needed much larger govt deficits
MamMoTh Reply:
August 30th, 2011 at 3:24 pm
@ESM, I don’t think the 10% deficit not being enough to reduce unemployment is a reason to doubt MMT (although it’s always a good thing to have doubts).
Neil’s point is a good one. It definitely seems that the deficit is either too small and deleveraging is too slow, or too large and malinvestment is not being cleaned out of the system fast enough.
oliver Reply:
August 31st, 2011 at 7:01 am
@ESM,
@all
I think the term ‘saving’ in the MMT sense is far too aggregated to shed light on what is happening to those deficits. A further breakdown of specific sectors and their respective balance sheets and question of distribution as well as flows would be more helpful. I’m quite certain that there could be more effective measures wrt GDP at lower levels of overall deficits if ‘holes’ were more consistently plugged and spending targetted to the demand rather than the supply side. This part of the equation is where MMTers should be open to suggestions from the likes of Krugman. Those who, for whatever reason, feel compelled to work within a ‘finite money’ paradigm, are forced to come up with all the more intricate ways of dealing with this self-imposed constraint, after all.
zanon Reply:
August 31st, 2011 at 10:18 am
@ESM,
you are correct. knowledge progress one funeral at a time
ESM Reply:
August 31st, 2011 at 10:31 am
@ESM,
@Zanon:
“knowledge progress one funeral at a time”
Great line. I hope you don’t mind if I steal it.
Neil Wilson Reply:
August 31st, 2011 at 11:03 am
@ESM,
It’s a contraction of a Max Plank quote:
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”
Matt Franko Reply:
August 30th, 2011 at 12:29 pm
@Matt Franko, ESM/Neil, How long can CD go on? And Krugman is now back to “banks lend out the reserves”, I thought he was past that…does CD include retrogressing? It seems to me that there is a deeper, basic problem here, perhaps with some sort of mathematical cognition (call it “mathematical maturity” or whatever) by many who remain outside of the MMT paradigm. For some reason they cant grasp the modern abstract nature of our current systems. This is why they go back to “lending the reserves”; the idea of banks “lending out” from a pool of funds is not very abstract at all; does not require much abstract thought. Quantity Theory is not very abstract if you think about it, most can understand it (it’s like “dilution”, somewhat simple). Problem is that it is not actually descriptive of how our systems operate today… Resp,
I know this is easy for you two, but that doesnt necessarily follow for most others.
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Neil Wilson Reply:
August 30th, 2011 at 3:55 pm
@Matt Franko,
How long can CD go on?
A lifetime. Core values are very important to the psyche. Collapse in core values can lead to mental breakdown.
Remember those people who believed in the Rapture?
Adam (ak) Reply:
August 30th, 2011 at 5:08 pm
@Matt Franko,
Sorry for jumping just in the middle but it’s morning in the place where I live.
Yes there is a dissonance or whatever. I would not say that Krugman believes in geocentrism. Above all this was just a different reference frame. If you subtract rotation of Earth the rest (the relative movements of the celestial bodies) are OK.
Krugman believes in phlogiston – a theory which explains the results of a few experiments but cannot describe the reality in general because it is fundamentally flawed.
The essence of the economic phlogiston theory is the loanable funds theory. Somebody should sit with Krugman and show him the net impact of bank lending. Somebody should explain to him the instantaneous impact of the deposit-loan pair creation on the aggregated saving rate. Someone should patiently explain that the equation savings=loans (in a closed economy w/o government) does not describe an equilibrium but is just an accounting identity – a border condition imposed on the model. He should look for other components of the model to determine the volume of the investment flow.
Another fundamentally erroneous element of the foundation is his microeconomics – based on marginal utility theory. To understand how far detached this theory is from the reality one needs to read any modern social psychology textbook. Behavioural economists know that. But let’s leave this point for now.
Krugman is a very intelligent person but he spent all his life perfecting the phlogiston theory (of course the moderately progressive version). His maths seems to be OK to me but this is not enough. He is as attached to his theories as religious people are to their god(s) – I agree with Neil.
The problem is that economists are not trained in building viable models of the reality. Krugman would not be able to design a simple control system if he stuck to his models. The art of computer programming hinges on perfecting these modelling skills. (Otherwise we have 10-thousand-lines-in-C++ behemoths copying a single image file – like the system I am currently refactoring).
I think that there might be slim chance of confronting Krugman and forcing him to re-think the very basic foundations of his theory provided that:
1. a few people commit enough time to injecting comments on his blog at the right time to challenge him publicly – at the very detailed level rather (“this equation here does not describe the reality”) than at the very highly abstracted level (like “the nature of money or human nature”)
2. at the same time a paper or two criticising his views on liquidity trap are published
3. it is not “MMT vs Krugman” but “one random guy showing that the principles of the models built by Krugman are incorrect and therefore he must think about an alternative”
I know the weak points. I am not an economists but I think that I can easily demolish his edifice and that he might be honest enough to admit his mistake. As long as I am a random guy w/o the skin in the game (not an academic) he cannot retaliate or use the “you’re an ignorant” argument. I am an ignorant but so what?
Do you want to go after Krugman?
WARREN MOSLER Reply:
August 31st, 2011 at 9:28 am
i explained all that to him at dinner about 2 years ago
Matt Franko Reply:
August 30th, 2011 at 8:52 pm
@Adam, It looks like K wants to have the debate with Cullen at PragCap…
But no I dont think I would even try at this point. Warren has sat down with him and I’ll assume they got as far as “banks dont lend out the reserves”, but yet just the other week Krugman is back to saying banks lend out the reserves. So I think K does not possess the mathematical cognition that many would give him credit for, and not to single him out, but he is a “type”. There are many others in the same position I believe. Many in prestigious positions, those already in the MMT paradigm think these people should be able to pick this right up but unfortunately they cant. It is a big challenge to educate these people (the non-Mathematically Mature) in MMT. Resp,
Mario Reply:
August 31st, 2011 at 12:39 am
@Matt Franko,
I’m not even that good at math and I get it. I don’t even see how math maturity has much to do with it. To me it’s more conceptual and people resist the concepts. I would think that if it were mathematical, it’d be alot easier to prove perhaps b/c it’s objective…hahahaa that’s a good one right!! LOL
Matt Franko Reply:
August 31st, 2011 at 7:14 am
@Neil, I see your point, but even those rapture people have had to move on in their thinking. IOW (Im not sure what their belief was) the world was supposed to end in May or whatever, but then it became June and the world didnt end, so now they are going to move on. Perhaps they had CD for a few days, but then you have to look at the calendar and admit that its now June and the world didnt end. IOW to be the same as the Quantity Theory people, these rapture people would have to be going around believing/saying it is still May or something.
Not so with the Quantity Theory people, you have the big event (“Money Supply” spike in 2008, QE1/2, etc) and then prices collapse and interest rates plummet to zero now. And these people are going around like this never happened. They are worse morons than these rapture people, who have at least embraced reality and moved on after perhaps a brief bout of CD as is probably normal for humans. I’m sure many have completely left that teaching and sobered up. I dont see any evidence of this with the Quantitiy Theory people at all. They think “it is still May”… I believe there may be something very deficient in their mathematical cognition. It’s like the rapture people couldnt read the calendar when you would show them it was now June…. the QT people cant make the connection between the quantitative data on interest rates/prices vs “money supply”, etc.. very abnormal. There is something deeper at work here than CD. Resp,
Neil Wilson Reply:
August 31st, 2011 at 7:47 am
@Matt Franko,
Have you checked how many of the committed suicide, were committed with mental issues, or are currently under the doctor with severe depression.
Or they have rationalised it saying that the date changed. The chappie cannot *possibly* have said May 2011. They then ignore all the documentation to the contrary. Quite literally their senses cause it not to exist.
In my field you see cognitive dissonance all the time. Computers don’t suffer from cognitive dissonance and a line of code does exactly what it says – regardless of what you think it says. You often have to get somebody else to look at it because you literally *cannot* see the problem.
The mind really struggles to criticise what it sees as its own work.
I’ve always found it fascinating – mostly because I’m very aware it is happening to me all the time and even awareness cannot stop it occurring.
MamMoTh Reply:
August 31st, 2011 at 8:46 am
@Neil, that is true in programming and why you have people working in tandem even if one of them is not doing anything else than read the code. But also of people who write articles, books, they are often unable to spot all their typos (or other mistakes) because they read what they intended to write and not what they actually wrote.
KKKen530 Reply:
August 30th, 2011 at 12:33 pm
@KKKen530, Glad to see a couple of you have read it..
“You can take it up later with an economist” What I want to know is whether or not his “Social Credit” world is viable.
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August 29th, 2011 at 8:03 pm
Brosens himself ends with this gem:
“Credibility is the reason why central banks fret about losses, not solvency.”
[If it's not insolvent, what's the credibility limit?]
“Finally, we should not kid ourselves into thinking that siphoning off losses to the central bank makes them disappear. One way or another, losses incurred by the central bank will end up on the taxpayer’s plate,” said Brosens.
That seems to be in conflict with an insight from Beardsley Ruml (and you have to include, from Marriner Eccles as well).
http://tinyurl.com/y3dkda3
C’est la Vie. Back to banging my head on the keyboard.
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August 31st, 2011 at 8:09 am
think about all that the dollars the chinese are saving. ten percent is miniscule.
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August 31st, 2011 at 8:11 am
the mother of all demand drains!
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August 31st, 2011 at 2:31 pm
I just spent $146 at the grocery store. Cannot afford it. Food and energy costs—both real (viz deflation) and/or nominal viz income flatlines—are becoming impossible to keep pace….with. I will need SNAP subsidies soon…and I work 5 jobs. The world’s central banks had better figure out a a way to keep the monies they “create” out of the hands of the plutonomists, or people like me are gonna be in dire straits.
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WARREN MOSLER Reply:
August 31st, 2011 at 5:37 pm
i just thought i was getting stronger. 40 years ago i could barely carry $20 worth of groceries. today i can easily carry 200
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Mario Reply:
August 31st, 2011 at 10:23 pm
@WARREN MOSLER,
or it’s just the cost of living in the Virgin islands!! LOL ;)
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Mario Reply:
August 31st, 2011 at 10:22 pm
@danw,
trader joes man!!! LOL
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Unforgiven Reply:
September 1st, 2011 at 1:02 am
@Mario,
Yeah, you even have to keep an eye on TJ’s. Sometimes they keep the price the same and cut the quantity.
Prices at the grocery store seem like they’re volatile. They’re testing the waters; two years ago house brands were flying off the shelves while premium brands languished. They’re checking to see what the market will bear. Subsidies might be disappearing too, driving consumer prices up.
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danw Reply:
September 1st, 2011 at 8:16 am
Food stamp subsidies and unemployment insurance have kept this recession from causing the kind of suffering we witnessed in the 1930s. Those programs will get slashed substantially if the liquidity “created” by the Fed continues to get soaked up by the top 1%. With food and energy costs on the rise (as I said, in nominal and/or real terms), and with subsidies getting cut, the Tea Party and its supporters will eventually get what they ask for. London of last month will look like a walk in the park. I know you guys here are kind of making light of my perhaps dramatic comments…but you probably don’t worry about where your next meal is coming from. 50 million Americans do.
August 31st, 2011 at 9:23 pm
i just thought i was getting stronger. 40 years ago i could barely carry $20 worth of groceries. today i can easily carry 200
lol!
Incidentally, you have friends that are worse than enemies confusing the public. I was just over at M. Hudson’s, and he just posted a video which is a couple months old. Check it out. At about minute 3 he talks about the military budget and how we “owe” countries tons of money that we’ll never be pay back, etc. Well that ought to throw a monkey wrench into the MMT effort. Thank you, Mr. Hudson!
Tom Hickey and others recently commented that it’s all about his strategy. Maybe so, I’m not a mind reader. But I do know that this video is full of beans and that it sows confusion. Great “strategy.”
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WARREN MOSLER Reply:
September 1st, 2011 at 3:46 pm
From Michael, no comments necessary, thanks:
Dear Warren,
> Our mutual opponents obviously are hoping to divide and conquer.
> Of course the US isn’t going to “pay off” its debt, any more than it
> will pay off its paper money supply.
> Deliberate attempt at disinformation.
>
> I’m working on a more sophisticated model, by the way. I realize that
> our earlier discussion of the balance of payments (“international”) in your
> diagram, can be clarified by separating capital account and current account.
> I’ll be working on this for the Boeckler meetings in Berlin next month.
> Michael
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September 1st, 2011 at 10:54 pm
I am not an “opponent.” I greatly admire Michael Hudson’s writings, in fact. The idea of “divide and conquer” verges on paranoia, and it never crossed my mind. It’s just that I had assumed he pertained to the MMT perspective, since he is associated with the Univ. of Missouri. That’s why I said he was a “friend.”
The fact is that Hudson often says things which have to be “interpreted” as “strategy,” since at least on the surface appear to contradict the MMT paradigm. If I am wrong in my interpretation of Mr. Hudson, would it not have been a better idea to simply correct the misunderstanding with an explanation? I simply perceived what seemed to be a serious error of formulation, given my admittedly amateurish knowledge of MMT. Can’t Mr. Hudson tolerate that?
However, I do apologize for the overly strong phraseology I used. I assure Mr. Hudson that I have absolutely no ill-will towards him, but on the contrary admire his erudition and his courage in his articles, which are so clear in most respects.
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WARREN MOSLER Reply:
September 2nd, 2011 at 8:17 am
And academics are ethically bound to intellectual honesty, last I checked, and not propaganda
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Tom Hickey Reply:
September 2nd, 2011 at 11:05 am
@WARREN MOSLER,
I don’t think that Michael Hudson is being intellectually dishonest when he sometimes speaks out of paradigm, e.g., saying that the burden falls on the backs of taxpayers. While that is not in the case wrt MMT paradigm, I understand what he means by it, which is different from what most people listening to him hear, i.e., they understand it out of paradigm. He just doesn’t distract attention from his principle point — the rip-off — by explicating the complex details, which most people could not follow anyway, since it is counter-intuitive and goes against the context into which they have been brainwashed into believing.
His point is often that worker income that is not taxed is free for the picking by rent-seekers under present institutional arrangements, so that rent on borrowed money becomes a hidden tax reaped by the financial sector. This is quite consistent with MMT and fits into the Minskyian view. This is his point about taxing economic rent and not productive contributions in order to obviate this hidden “tax” that is unearned and parasitic on the economy.
This looks like a pretty good strategy to me and it is working, judging by the exposure he is getting, since the great rip-off is the topic of the day.
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WARREN MOSLER Reply:
September 2nd, 2011 at 12:26 pm
I’m ok with ‘the burden falling on taxpayers’ notion. In fact, I’ve used that to criticize Bernanke when he said the funds he spent weren’t taxpayer money.
to the extent spending ‘uses up’ aggregate demand created by tax liabilities that spending can be considered taxpayer money, etc.
September 2nd, 2011 at 4:55 pm
@ Tom Hickey
Permit me to disagree. To me your explanation verges on sophistry. At any rate we agree he “sometimes speaks out of paradigm.” And that is why I said that Mr. Hudson could have cheerfully admitted the fact and also clarified his points, rather than accusing me of being an “opponent.” Economics is not religious dogma, and there is no reason to freight it with sentimental reactions.
As to the effectiveness of such tactics, I do not share your optimism. “Exposure” of itself is not tantamount to conviction or clarity in the minds of your public.
If you want writing on “the rip-off,” go and read Austrian gold bugs. I thought the idea here was to clarify the real workings of things, not to implement esoteric “strategies” that only insiders understand.
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