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

Rising Deficits Pose Major Threat to Economy: Bernanke

Posted by WARREN MOSLER on February 2nd, 2012

Not much progress here:

Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

31 Responses to “Rising Deficits Pose Major Threat to Economy: Bernanke”

  1. Save America Says:

    Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

    http://www.zerohedge.com/news/under-twist-fed-has-purchased-91-all-gross-issuance-long-dated-us-treasurys

    One of the salient questions asked of Bernanke by Congress relates to a Kevin Warsh oped in the WSJ, in which he said the following: “Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs.”

    Reply

  2. Jonf Says:

    Oops . He’s even got the crowd out meme in there too.I knew it. You guys had it wrong all along, I guess.

    Reply

  3. Broll The American Says:

    Bernanke is rather non-specific about what the threats and consequences would be. He may have a point with the “crowding out” theory when it comes to where the government spends it money. Channeled into markets that already capably managed by private investment may create hazardous bubbles. Spending on Social Security shouldn’t be a problem unless you believe those payments are keeping all those seniors home instead of being in the labor pool to be exploited in their old age.

    Reply

    jonf Reply:

    @Broll The American, Got any particular channel in mind? Or just a WAG.

    Reply

    Broll The American Reply:

    @jonf, ???

    Reply

  4. Tyler Says:

    I suspect he supports letting the Bush tax cuts expire. Maybe he thinks we should go even further. According to research by Peter Diamond and Emmanuel Saez, the optimal top income tax rate for wealthy earners is about 70 percent. Of course, these guys believe federal income redistribution is something that actually happens.

    Here’s their study: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165

    Reply

    MamMoTh Reply:

    @Tyler, maybe it does happen

    http://www.economist.com/blogs/graphicdetail/2012/01/focus-2

    Reply

    Tyler Reply:

    @MamMoTh,

    Since federal taxation destroys money, I believe that makes income redistribution at the federal level impossible.

    Reply

    Hepionkeppi Reply:

    Not at all. You just have to think in real resources.

  5. roger erickson Says:

    what on earth is his quid pro quo?
    just protecting his job?

    lying at this level is worse than innocent fraud; it’s treason

    compare this to Marriner Eccles, 1941:

    “ECCLES: We [the Federal Reserve] created it.
    PATMAN: Out of what?
    ECCLES: Out of the right to issue credit money.
    PATMAN: And there is nothing behind it, is there, except our government’s credit?
    ECCLES: THAT IS WHAT OUR MONEY SYSTEM IS.”
    – Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.

    Fiat currency = group credit, backed by distributed public initiative. We cannot run out of our own initiative. End of story.

    We need Congresspeople like Patman was, to again highlight this fact, and act on it. And we need Fed staff like Eccles was, to scream it from the rooftops for all to hear. Anything less reduces public policy to a mockery lacking all substance and initiative.

    Reply

    SteveK9 Reply:

    @roger erickson,
    What is more incredible is to read Eccles testimony before the Senate Finance Committee in 1933 (before he was the Fed Chairman) at their ‘Investigation of Economic Problems’. You could teleport the questions and the answers by Eccles to today, without changing a lot of words … what is old is new again. Eccles name is on the Federal Reserve Building in Washington.

    Here is a quote from the article in Eccles in Wikipedia:

    “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

    Then as now, we have wise men and fools. Maybe Warren Mosler will get a chance to testify before Senate one day.

    Reply

    James Reply:

    Here’s the transcript from the 1933 hearings if anyone is interested, it’s just sad we don’t have men like Eccles in power now, someone like him is sorely needed.

    http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf

    Reply

    roger erickson Reply:

    @James,

    Exactly. I’ve found that it’s politically very effective to introduce Warren’s writings by explicitly saying that he’s the reincarnation of Eccles.

    When I intro people to the 7Difs cold turkey, they invariably say, “IT SOUNDS SO IMPROBABLE! IF THAT WERE TRUE, HOW COME NO ONE ELSE TALKS THAT WAY?”

    If I say Mosler’s the first to again say & extend what Eccles said during the 30′s-40s, they say “OH, WE SHOULD LISTEN TO HIM.” Even before they read the 7Difs.

    How about a campaign getting, say, 1000 people to simultaneously send 3 pdfs to Bernanke, plus mailing glossy, printed copies of the same to his Fed address. Some way to force him to acknowledge them, and get media to discuss their content. Should be minimal, distributed costs & effort.

    http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf
    http://www.econ.utah.edu/activities/papers/2006_04.pdf
    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    Dan Metzger Reply:

    @SteveK9, After reading most of Eccles’ 1933 statement, he appears to be a previous incarnation of Warren Mosler.

    Reply

    roger erickson Reply:

    @Dan Metzger,
    Oops, thought sure I replied to SteveK9 above. Meant to. Not sure this comment linking system always works as intended.

    Save America Reply:

    @SteveK9, http://www.zerohedge.com/news/presenting-only-beneficiary-record-global-leverage

    The banker boom seems to have benefitted them better this time around than back when eccles was around. Institutionally they must be getting smarter, as Warren says, 99% of the financial sector is more trouble that is worth.

    http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/01/20120202_Banker%20Boom.png

    Reply

    roger erickson Reply:

    @Save America,

    Actually, far dumber. This is a killer statement quoted by Eccles in his 1933 testimony:

    It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving.
    They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.
    It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. I am speaking of business during normal times.
    This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

    http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf

    Save America Reply:

    @Save America, they can save empty office buildings and closed banks;

    Yah, that is what the occupy oakland people are freaking out about, hundreds of empty vacant abandoned buildings all over the city with police in military grade riot gear protecting these ASSETS while citizens are sleeping homeless in the streets. It makes no sense to me,

    Over on silicon investor the former temporary acting emporor of china in the 1920′s (eugene chen) has a grandson that is a big gold bug and for years he told me when the great crash happens, he is going to turn all his gold into real estate holdings, he has many hedge fund friends that are chomping at the bit to get all this abandoned or cheap global real estate for a song, while people NEED this stuff and could be using it, but he is convinced he is a religous and moral person and doing the best thing, I said if he wanted to do some real good, he should tell his hedge fund friends to let go of some of those vacant building and turn them over to war vets, he basically stopped talking to me after that saying I don’t understand the modern world or capitalism yada yada, what a loser….

  6. beowulf Says:

    According to research by Peter Diamond and Emmanuel Saez, the optimal top income tax rate for wealthy earners is about 70 percent.

    Diamond waited till his nomination as a Fed governor was good and dead before he published this. :o)

    Reply

    roger erickson Reply:

    @beowulf,

    Why isn’t ANYONE among the elite promoting far less taxes on the 99%? Our population is bursting with initiative & innovation, and it’s not just being ignored, it’s being actively suppressed!

    First we beat ‘em into dull submission in school. Then we overtax them. Brilliant! That plan sounds dumb enough to be a product of Harvard Economics.

    If we’re going to hoard anything at all, we need to transfer our hoarding instinct to hoard coordination methods, not obsolete commodities. That boils down to hoarding access to increasing group intelligence & group capabilities.

    Reply

  7. DOB Says:

    Unsustainable?

    Reply

    jonf Reply:

    @DOB, Forget about the last 60 years. It was all a dream.

    Reply

    Robert Kelly Reply:

    @jonf,
    Cut to Marriner Eccles taking a shower…

    Reply

  8. Paul Mineiro Says:

    He could be accidentally right. Since the Fed ignores interest income channels, when they try to raise rates to quench the economy at some future time of excess growth, the huge debt will cause interest to flow into the economy, leading them to raise rates further, etc.

    At this point the Fed is like a washing machine with the hot and cold inputs reversed, which is being asked to automatically set the water temperature.

    Reply

    John O'Connell Reply:

    @Paul Mineiro,

    It has long been known that the Fed is pro-cyclical because it acts late and over-reacts, but this (the interest income channel) helps explain why that tendency is doubly deadly.

    Reply

  9. DOB Says:

    Alright, curious to see what people think about this one, so time for a quick poll:

    What is more harmful in a bubble: the fact that it formed or the fact that it popped?

    Vote here.

    Reply

    WARREN MOSLER Reply:

    policy response that doesn’t sustain aggregate demand

    Reply

  10. Save America Says:

    States consider alternative currencies of gold and silver By Blake Ellis | CNNMoney.com – 1 hour 55 minutes ago
    A growing number of states are seeking shiny new currencies made of silver and gold. Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place. “In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year. Unlike individual communities, which are allowed to create their own currency — as long as it is easily distinguishable from U.S. dollars — the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.” To the state legislators who are proposing state-issued currencies, that means gold and silver are fair game, said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said. The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes. Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness. “A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C. Local currencies: In the U.S., we don’t trust South Carolina Republican Representative Mike Pitts proposed a currency system that would allow people to use any kind of silver or gold coin — whether it’s a Philippine Peso or a South African Krugerrand — based on weight and fineness. Pitts said in the bill, which currently has 12 co-sponsors, that the state is facing “an economic crisis of severe magnitude.” Republican representatives from Washington State followed suit in January, introducing a bill that would also allow any gold and silver coins to be considered legal tender based on metal values. Minnesota, Iowa, Georgia, Idaho and Indiana are also considering similar proposals. Many of the bills would make it possible for residents to exchange the physical coins for goods and services, so you could use coins to buy anything from groceries to a car as long as the store chooses to accept them. However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins — especially if they come from different parts of the globe and are of different sizes and shapes — will get tricky. It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said. Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals. Before deciding on a specific form of currency, some states — including Minnesota, Tennessee, Virginia and North Carolina — are considering proposals that would first require a committee to review their alternative currency plan. The future of U.S. currency: The states’ proposals have been gaining steam among Tea Partyers and Republicans, many of whom also endorse a nationwide return to the gold standard, which would require the U.S. dollar to be backed by gold reserves. Tea Party “father” Ron Paul is sponsoring the “Free Competition in Currency Act,” which would allow states to introduce their own currencies, and rival Newt Gingrich is calling for a commission to look at how the country can get back to the gold standard. But it will be the individual states that could really get the ball rolling, said Vieira. Even if several of the current proposals get killed, the introduction of so many bills at the state level is drawing national attention to the issue, he said. Of all the state proposals circulating right now, Republican-controlled states including South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year, said American Principles Project’s Danker. If just one or two states implement an alternative currency, it could have a Domino effect, he said. Funny money: 11 local currencies “I think we could get a couple passed in this legislative session, and that would show this is mainstream, popular and it would be a justification for more of the risk-averse states for doing this,” he said. There are, of course, many people who think the recent push for alternative state currencies should be stopped in its tracks. David Parsley, a professor of economics and finance at Vanderbilt University, said he thinks state-issued currencies are a “terrible” idea. “Having 50 Feds” could debase the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine,” said Parsley. “I have no idea why anyone would want to destroy something so successful — unless they actually wanted to destroy the country.”

    http://finance.yahoo.com/news/states-consider-alternative-currencies-
    gold-100700922.html

    It is all so funny! Warren what about a Rum Backed Currency for the USVI? ;)

    Reply

    John O'Connell Reply:

    @Save America,

    Fascinating. If a State were to issue enough coins, say 1-ounce silver coins in a denomination of 500 or 1000 Carolinians, peg them to dollars, and accept them as tax payments, and set up a banking system to clear accounts electronically, could they not take advantage of seignorage and become monetarily sovereign?

    Reply

    WARREN MOSLER Reply:

    states can just spend their own tax credits and save all that work dealing with metals, etc

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Huh? I thought the Constitutional issue was that they are allowed to use only gold and silver coins.

    What does “spending their own tax credits” mean? Paying for things they buy by issuing a tax credit instead of $US? Why would that work any better than traditional borrowing, using bonds? The price in tax credits vs. the price in $US would reflect a risk premium, just as the interest rate does, would it not? They’re still not monetarily sovereign.

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