Category Archives: Government Spending

April 28 DC event

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Bloggers out in force:

Time to Sweep the Vampire Squid Off Our Faces and Make Room for the Real Change

April 22nd, 2010 by selise

Warning: At the end of this diary, I’m going to be asking for your support. Your financial support. Please consider making a donation today.

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I remember the fall of 2008 not as the time of an historic election but as a time of astonishment at the massive amounts of money our government, a Republican administration and a Democratic Congress, was willing to throw at the financial elites while demonstrating, for the most part, their utter cluelessness about why the money was needed or what would be done with it. At first is was $700 billion, then $850 billion and then trillions. All within the space of a few weeks.

Chris Floyd captured the moment perfectly (from Oct, 13, 2008 via x-post):

Perhaps the most striking fact revealed by the global financial crash — or rather, by the reaction to it — is the staggering, astonishing, gargantuan amount of money that the governments of the world have at their command. In just a matter of days, we have seen literally trillions of dollars offered to the financial services sector by national treasuries and central banks across the globe.

The effectiveness of this unprecedented transfer of wealth from ordinary citizens to the top tiers of the business world remains to be seen. It will certainly insulate the very rich from the consequences of their own greed and folly and fraud; but it is not at all clear how much these measures will shield the vast majority of people from the catastrophe that has been visited upon them by the elite.

But putting aside for a moment the actual intent, details and results of the global bailout offers, it is their very extent that shocks, and shows — in a stark, harsh, all-revealing light — the brutal disdain with which the national governments of the world’s “leading democracies” have treated their own citizens for decades.

Year after year, the ordinary citizens were told by their governments: we have no money to spend on your needs, on your communities, on your infrastructure, on your health, on your children, on your environment, on your quality of life. We can’t do those kinds of things any more.

Of course, when talking amongst themselves, or with the believers in the think tanks, boardrooms — and editorial offices — the cultists would speak more plainly: we don’t do those things anymore because we shouldn’t do them, we don’t want to do them, they are wrong, they are evil, they are outside the faith. But for the hoi polloi, the line was usually something like this: Budgets are tight, we must balance them (for a “balanced budget” is a core doctrine of the cult), we just can’t afford all these luxuries.

But now, as the emptiness and falsity of the Chicago cargo cult stands nakedly revealed, even to some of its most faithful and fanatical adherents, we can see that this 30-year mantra by our governments has been a deliberate and outright lie. The money was there — billions and billions and billions of dollars of it, trillions of dollars of it. We can see it before our very eyes today — being whisked away from our public treasuries and showered upon the banks and the brokerages.

Let’s say it again: The money was there all along.

A deliberate and outright lie. The money was there all along.

And now, just a year and a half later, the deficit hawks at the Peterson Foundation are at it again: attacking Social Security and Medicare, this time with a “National Fiscal Summit” including such notable “experts” as Robert Rubin and Alan Greenspan, among others “to Discuss Nation’s Rising Deficits and Debt.”

We have a massive need for a counter-narrative to their lies: that Federal deficit spending is bad, that it is a burden to the next generation, that deficit spending risks insolvency — basically that the Federal Government Budget is some how analogous to a household budget when, in fact, it is no such thing.

The Fiscal Sustainability Teach-In Counter-Conference on April 28th, 2010 in Washington, DC (At the George Washington University’s Marvin Center, Room 310, The Elliot Room, venue info here.) — the same day as the Peterson Foundation’s “Fiscal Summit” — aims to do just that. Here’s what Jamie Galbraith said about the Teach-In:

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“The Fiscal Sustainability Teach-In Counter Conference will be the important event in Washington on April 28. Unlike the other meeting, this one will feature important work by honest scholars. It deserves at least equal attention, and very much more respect.”

— James K. Galbraith, The University of Texas at Austin. [April 19, 2010 via email with permission]

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We can move beyond the false economic orthodoxy that got us into the current economic mess and that now is being promoted to attack Social Security and Medicare — and harming our Nation and its People in so many ways. But our help is needed (I warned you this was coming) to raise the money needed for speaker travel, venue, and other related expenses. No money is going to the organizers or to anything other than the conference. The Teach-In is being organized, at the last minute, with no charge for attendance and on a shoe-string budget, because the people involved believe in what they are doing.

Here is the program (see here and here in case of updates).

Time Period Topic Team Leaders
8:00–8:15 AM Welcoming Remarks
8:15–9:45 AM What Is Fiscal Sustainability? Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog
9:45–10:00 AM BREAK
10:00 AM–11:15 Are There Spending Constraints on Governments Sovereign in their Currency? Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri – Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives
11:15–11:30 BREAK
11:30–12:45 The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy Warren Mosler, International Consulting Economist and blogger at moslereconomics.com
12:45–1:00 PM BREAK
1:00–2:15 PM Inflation and Hyper-inflation Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives;
Mat Forstater, Professor of Economics, Director of CFEPS, Department of Economics, University of Missouri — Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economic Perspectives
2:15–2:30 PM BREAK
2:30–4:00 PM Policy Proposals for Fiscal Sustainability L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri – Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College;
Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives

Please help by contributing to the cost of the Teach-In today. Donate Here. Every little bit helps.

Some other things you can do:

  1. Ask your friends to donate too
  2. Attend the Teach-In
  3. Spread the word — write a blog post, tell your family, friends, neighbors and co-workers
  4. Educate yourself — some great introductory resources are:

Finally, here is a bit of inspiration from Rob Parenteau, who also gave me the title of this post (both via email and used with permission):

Of course, there is a need to reconstruct the way economics is taught in academia. But this is not the highest priority at the moment. We have many average people and citizens walking around looking for answers. We need to learn to speak to them and persuade the entrepreneurs, the unionists, the teachers, the housewives, the priests, the cab drivers, etc. They are hungry for answers and vulnerable to demagogues.

We have demonstrated some capacity to finally forge our way through the last mile problem on MMT, functional finance, and the financial balance approach in the blog world and elsewhere. Some like Marshall, Bill Black, and Jamie are even able to get the message across through more mainstream media channels. The tenured academics will surely be the last to follow, and of course, that is their perogative. We should let Rob Johnson and INET continue to work on that contigent while we take our case to the misinformed and extremely frustrated public. They are desperate to make sense of what has happened and to figure out how to find a plausible way forward to a more sensible and satisfying world. We can do that. We can completely engage them, and get the ball rolling.

Marshall and I have dialogued with pure blooded Austrian Schoolers on blog sites and actually gotten some traction with them. It is possible to help people find new perspectives or at least question and possibly move beyond limited old ones. I unfortunately cannot attend this one because I have other commitments I cannot break that day, but I have a funny feeling it will not be the last one either and I wish you all the greatest success and effectiveness with this inaugural teach-in. I am certain you will be making history. Feel the power of this moment and wield it wisely.

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Altman is back

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America’s disastrous debt is Obama’s biggest test

By Roger Altman

April 21 (FT) — The global financial system is again transfixed by sovereign debt risks. This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina, Russia and Mexico.

Yes, all fixed FX blowups.

But the real issue is not whether Greece or another small country might fail. Instead, it is whether the credit standing and currency stability of the world’s biggest borrower, the US, will be jeopardised by its disastrous outlook on deficits and debt.

This comp completely misses the fundamental difference between the two. The Fed is an arm of the US govt, while the ECB is not an arm of greece.

America’s fiscal picture is even worse than it looks. The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product – nearly equal to Italy’s.

Another apples/oranges comp. This is less than poor analysis.

Global capital markets are unlikely to accept that credit erosion. If they revolt, as in 1979,

There was no ‘revolt’ in regards to the US in 1979.

ugly changes in fiscal and monetary policy will be imposed on Washington. More than Afghanistan or unemployment, this is President Barack Obama’s greatest vulnerability.

His greatest vulnerability is listening to this nonsense, and not recognizing that taxes function to regulate aggregate demand, and not to raise revenue.

The unemployment rate is all the evidence needed, screaming there is a severe shortage of aggregate demand, and a payroll tax holiday would restore private sector sales by which employment immediately returns.

Instead, the admin is listening to this nonsense and working to take measures to tighten fiscal policy which will work to reduce aggregate demand.

How bad is the outlook? The size of the federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20,000bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792.

Point? Govt deficit spending adds back the demand lost because of ‘non govt’ savings desires for dollar financial assets.

The cumulative govt ‘debt’ equals and is the net financial equity- monetary savings- of the rest of us.

You could change the name on the deficit clock in nyc to the savings clock and use the same numbers.

It is so rapid that, by 2020, the Treasury may borrow about $5,000bn per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defence budget. Unfortunately, the healthcare bill has little positive budget impact in this period.

That just means our net savings is rising and the interest payments are helping our savings rise.

In fact, treasury securities are nothing more than dollar savings accounts at the fed. Savers include us residents and non residents like the foreign countries that save in dollars.

Why is this outlook dangerous?

Because it leads to backwards policies by people who don’t get it.

Because dollar interest rates would be so high as to choke private investment and global growth.

There is no such thing.

First, rates are set by the fed.

Second, there is no imperative for the tsy to issue longer term securities or any securities at all.

Third, there is no econometric evidence high interest rates do that. In fact, because the nation is a net saver of the trillions called the national debt, higher rates increase interest income faster than the higher loan rates reduce it (bernanke, sacks, reinhart, 2004 fed paper).

It is Mr Obama’s misfortune to preside over this.

It’s his misfortune to be surrounded by people who don’t understand monetary operations. Otherwise we’d have been at full employment long ago.

The severe 2009-10 fiscal decline reflects a continuation of the Bush deficits and the lower revenue and countercyclical spending triggered by the recession. His own initiatives are responsible for only 15 per cent of the deterioration. Nonetheless, it is the Obama crisis now.

It’s the obama crisis because taxes remain far too high for the current level of govt spending and saving desires.

Now, the economy is too weak to withstand the contractionary impact of deficit reduction. Even the deficit hawks agree on that.

It’s too weak because the deficit is too small. And yes, making it smaller makes things worse.

In addition, Mr Obama has appointed a budget commission with a December deadline. Expectations for it are low and no moves can be made before 2011.

Yes, and then to cut social security and medicare!!!!

Yet, everyone already knows the big elements of a solution. The deficit/GDP ratio must be reduced by at least 2 per cent, or about $300bn in annual spending. It must include spending cuts, such as to entitlements,

Here you go!!!!!!!!!!!!!!

and new revenue. The revenues must come from higher taxes on income, capital gains and dividends or a new tax, such as a progressive value added tax.

Yes, all working to cut aggregate demand and weaken the economy.

It will be political and financial factors that determine which of three budget paths America now follows.

Yes, the backwards understanding by our leaders.

The first is the ideal. Next year, leaders adopt the necessary spending and tax changes, together with budget rules to enforce them, to reach, for example, a truly balanced budget by 2020. President Bill Clinton achieved a comparable legislative outcome in his first term. But America is more polarised today, especially over taxes.

Clinton was ‘saved’ by the unprecedented increase in private sector debt chasing impossible balance sheets of the dot com boom, which was expanding at 7% of GDP, driving the expansion even as fiscal was allowed to go into a 2% surplus, which drained that much financial equity, and ending in a crash when incomes weren’t able to keep up.

The second possible course is the opposite: government paralysis and 10 years of fiscal erosion. Debt reaches 90 per cent of GDP. Interest rates go much higher, but the world’s capital markets finance these needs without serious instability.

Japan is well over 200% (counting inter govt holdings) with the 10 year JGB at 1.35%. Interest rates are primarily a function of expectations of future fed rate settings, along with a few technicals.

History suggests a third outcome is the likely one: one imposed by global markets.

There is no history that suggests that, just misreadings of history.

Yes, there may be calm in currency and credit markets over the next year or two. But the chances that they would accept such a long-term fiscal slide are low. Here, the 1979 dollar crash is instructive.

A dollar crash, whatever that means, is a different matter from the funding issues he previously implied.

The Iranian oil embargo, stagflation and a weakening dollar were roiling markets. Amid this nervousness, President Jimmy Carter submitted his budget, incorporating a larger than expected deficit. This triggered a further, panicky fall in the dollar that destabilised markets. This forced Mr Carter to resubmit a tighter budget and the Fed to raise interest rates. Both actions harmed the economy and severely injured his presidency.

The problem was the policy response to the ‘dollar crash.’ rates went up because the fed raised them with a vote. Market forces aren’t a factor in the level of rates per se. They are part of the Fed’s reaction function, which is an entirely different matter.

America’s addiction to debt poses a similar threat now. To avoid an imposed and ugly solution, Mr Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.

So it’s all about avoiding a dollar crash?

So why are we pressing china to revalue their currency upward which means reducing the value of the dollar? Can’t have it both ways?

Altman was in the Clinton admin confirms they were in the ‘better lucky than good’ category.

Feel free to distribute, thanks.

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Ruml 1946

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Note the US was back on gold internationally after Bretton Woods:

The Bretton Woods Conference took place in July 1944, but did not become operative until 1959, when all the European currencies became convertible. Under this system, the IMF and the IBRD were established. The IMF was developed as a permanent international body. The summary of agreements states, “The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties.” Wikipedia

So Ruml’s analysis didn’t apply until after 1971 when the US finally dropped convertibility.

Might be why Ruml’s points didn’t gain any traction back then.

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Email exchange with Dan

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On Thu, Apr 15, 2010 at 12:08 PM, wrote:
Hi Warren,

I must admit that your writing and thoughts have had a significant impact upon me. Interestingly—at least from where I sit—your Soft Currency Economics paper, which I have now read 5 or 6 times, has provided me with an odd peace of mind…not sure if that is a GOOD thing or not. :)

thanks!

KNOWING that—so long as trust and confidence in our fiat system remains—we are always able to mitigate, at least in some manner, the impact of global financial crises through the changing of numbers ‘upward’ in the accounts of men and of institutions, is somewhat akin, I’d imagine, to an alcoholic knowing that, no matter what, an endless supply of Johnny Walker Black always exists in his basement stash.

Actually, as long as we can enforce tax collections the currency will have value.

Problem is the currency can’t be eaten or drunk, so if the crops fail it won’t help much.
All we can insure is enough currency to pay people to work, not enough things to buy

OK, so maybe the analogy is a tad morose…but hence my funny feeling about my peace of mind.

So, my question of the week revolves around the U.S.’s apparent choice to monetize (again, if you will) the IMF coffers. I point to the following from Zerohedge:

“…As we reported a few days ago, the IMF massively expanded its last resort bailout facility (NAB) by half a trillion dollars, in which the US was given the lead role in bailing out every country that has recourse to IMF funding.

We buy SDR’s with dollars which the IMF then loans, so yes.

Yesterday, Ron Paul grilled Bernanke precisely on the nature of the expansion of the US role to the NAB: “The IMF has announced that they are going to open up the NAB which coincides with the crisis in Greece and Europe and how they are going to bailed out. The irony of this promise is that in the new arrangement Greece is going to put in $2.5 billion in. I think only a fiat monetary system worldwide can come up and have Greece help bail out Greece and be prepared to bail out even other countries.

Greece needs euros, so the IMF will sell SDR’s to the euro nations to fund Greece, not the US.

SDR’s are only bought with local currency.

But we are going from $10 to $105 billion… We are committing $105 billion to bailing out the various countries of the world, this does two thing I want to get your comments on one why does it coincide with Greece,

Coincidental.

what are they anticipating, why do they need $560 billion, do we have a lot more trouble, and when it comes to that time when we have to make this commitment, who pays for this, where does it come from?

Seems they anticipate more nations will be borrowing dollars from the IMF?

We buy them by crediting the IMF’s account at the Fed. If and when the IMF lends dollars we move those dollars from the IMF’s account to the account at the Fed for the borrowing nation.

Will this all come out of the printing press once again, as we are expected to bail out the world?

Short answer, yes. long answer above.

Are you in favor of this increase in the IMF funding and our additional commitment to $105 billion?”

No.

Bernanke, of course, washes his hands of any imminent dollar devaluation – it is all someone else’s responsibility to bail out life, the universe and everything else. Bernanke pushes on “I think in general having the IMF available to try to avoid crises is a good idea.”

2 problems. First the borrowers would probably be better off using local currency solutions rather than dollars, and second the IMF terms and conditions can and often do make things worse for the borrower.

Yet Paul pushes on “Where will this money come from? We are bankrupt too.” Indeed we are, but nobody cares – that is simply some other poor shumck’s problem…”

He’s flat out wrong about the US being bankrupt but that’s another story.

best,
warren

Warren, this strikes me as problematic. YES, we can add zeros to the end of accounts and thus ‘create’ more liquidity in the global economy. HOWEVER, at what point does the world choose not to believe that those numbers in those accounts have true value?

As long as we enforce dollar taxes the dollar will have value.

warren

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Counter Conference

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Background

Fiscal sustainability is very much in the News these days because of the activities of the President’s National Commission on Fiscal Responsibility and Reform, The Peterson Foundation’s very vigorous efforts to present a point of view on fiscal sustainability that reinforces and expands the outlook of the National Commission’s statement of purpose, The Washington Post’s continuing expression of the deficit hawkism point of view, and CNN’s “news alliance” with The Peterson Foundation. All this and more is part of a steamroller being formed to ensure that only one point of view on fiscal sustainability, namely a neo-liberal point of view dominates the landscape of public discussion.

When that sort of thing happens, as it did in the health care debate, the people suffer, because any policy, based on an alternative framing of the fiscal sustainability problem, is immediately off the table of policy consideration because it is outside the frame of “legitimate debate.” Let’s not let that happen with fiscal sustainability. Let’s keep a number of frames under consideration, so that we can consider all fiscal sustainability policies that might work. The test we use to determine whether a policy will work needs to be an evaluation of its consequences; not an evaluation of whether it’s outside a dominant frame of ideology. Continue reading →

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Upped my eurozone proposal to 20% of gdp

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“”The backstop package for Greece and the ECB’s climb-down on its collateral rules set a bad precedent for other euro area states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness, and higher inflationary pressures over time,” said Joachim Fels, head of research, in a note to clients.””

I agree with the moral hazard theory, however I would counter by saying market is making it in practice impossible (even with backstops and colateral climbdown) for this endgame to occur given the cost/lack of funding it is offering to profligate states??

Yes, under current, limited thinking.

My proposal for the ECB to make an annual payment to each national gov. of 5% of total eurozone gdp on a per capita basis still looks to me as the only proposal that instantly repairs credit concerns and gets to all the problematic issues.

However there is no reason to not quadruple that original proposal to a 20% annual distribution.

Additionally, any nation not in compliance with ‘growth and stability’ requirements would risk losing its annual payment.

This would ensure that national debt to gdp ratios will fall for all member nations who comply with the rules.

It also means any nation who doesn’t comply with the rules risks losing its payment and will be ‘punished’ by markets
while nations in compliance getting their annual 20% payment will be secure in their ability to fund themselves.

Over time the 20% annual payment can be scaled down until it equals their self imposed rules for permissible annual deficits for the member nations as desired.

The 20% annual distribution does not foster increased government deficit spending, apart from removing the ramifications of default and risk of default. In contrast, it provides a powerful incentive to limit national govt deficits to desired levels.

This proposal dramatically strengthens the finances of the eurozone with incentives that are the reverse of what are called ‘moral hazard’ incentives.

This proposal is not yet even a consideration so until then anything short of a dramatic export boom where the rest of the world is willing to reduce its ‘savings’ of euro net financial assets by net spending on eurozone goods and services isn’t going to cut it.

>   
>   (email exchange)
>   
>   On Fri, Apr 16, 2010 at 7:44 AM, wrote:
>   
>   Talked to an ECB guy about this proposal. He says ECB will NEVER agree. Says they can’t
>   by law do what you are proposing as he claims it is “monetising” the debt and will be
>   ”inflationary”.
>   

That’s what happens when no one in charge and no one in the medial understands actual monetary operations.

>   
>   Down we go!
>   

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April 28 Conference

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Looks like it’s on and I’ll be there.
All invited to attend. Will get details later today and tomorrow.
Will be getting a press release out as well.

Fighting Back Against the Drive to Slash Entitlements

By Ian Welsh

April 14 — Back when I was at FDL I had a chat with the Peterson Foundation folks. They struck me as sincere, but off-balance. To the extent that Social Security is in deficit at all any problems are decades out (which they admitted), and while Medicare has issues, the simplest and easiest way to cut medical costs overall is single payer, something they won’t push. More to the point, somehow “entitlements” always get mentioned first, and not things like Defense spending.

But the folks at the Fiscal Sustainability Teach-In Conference have a broader point: that fiscal sustainability, according to Modern Monetary Theory, isn’t based on debt-to-gdp, or how much the private sector will lend. The government can spend a lot more if it needs to, and doing so is a good idea if it leads to full employment and gets economic growth going again. They are having a free counter-Fiscal Summit on April 28th, the same day as the Peterson foundation has its summit.

There’s going to be some interesting speakers and topics at the summit, so if you can make it to DC, it’ll probably be worth going:

– What Is Fiscal Sustainability? (Team Leader: Professor Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billyblog.)

– Are There Spending Constraints on Governments Sovereign in their Currency? (Team Leader: Stephanie Kelton, Assistant Professor of Macroeconomics, Finance, and Money and Banking, University of Missouri, Kansas City, and blogger at New Economics Perspectives)

– The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and
Government Economic Policy; (Team Leader: Warren Mosler, International Consulting Economist, Independent Candidate for the US Senate in Connecticut, and blogger at moslereconomics.com)

– Inflation and Hyper-inflation (Team Leader: Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives); and

– Policy Proposals for Fiscal Sustainability (Team leaders: L. Randall Wray, Professor of Economics, University of Missouri, Kansas City, and Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, and bloggers at New Economic Perspectives)

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