Debt ceiling dynamics

My best guess is there will be little or no fight over the debt ceiling extension.

I think the President will agree to pretty much whatever the Republicans want, and get more than enough Democrats to join him.

Best I can tell, the entire Congress agrees the deficit is a long term problem that absolutely must be addressed. The only arguments against ‘fiscal consolidation’ that I’ve see are the ‘bleeding heart’ arguments which don’t cut it when they all believe Greek type insolvency looms.

Also, the ball is in the Republican’s court, as they can’t just be against raising the debt ceiling.

So it will be up to them to take the lead and offer terms and conditions for their votes, after which enough Democrats will pretty much agree to it all, including cuts in Social Security and Medicare expenses, of one type or another, current and future.

All of which dooms the US economy to suffer from a severe lack of aggregate demand for the foreseeable future.

The one very faint glimmers hope are the Senators from CT- Joe Lieberman and Richard Blumenthal, only because they alone know better.

Both have read my book, the 7 Deadly Innocent Frauds of Economic Policy, and have engaged me in thorough discussion, and both know as a fact of monetary operations that:

1. The federal govt can’t run out of money.

2. Paying off China is nothing more than debiting their Fed securities account and crediting their Fed reserve account, with no grand children writing any checks.

3. The Social Security issue, therefore, can’t be about solvency, only potential inflation.

4. For a given size of the federal govt there is always a level of taxation that corresponds to full employment

5. The trade deficit is an enormous benefit, and we can set taxes at a level where we have enough spending power to support both domestic full employment and the purchase of anything the rest of the world wants to sell us.

However, it is highly unlikely they will even attempt to be heard, because, based on their history, they don’t act with specific regard to public purpose. They are more micro oriented, acting solely for political gain from their immediate constituents. So on this issue they will likely play along with what think is their voter’s understanding of these issues, and make no effort to educate them for the public good.

The words that come to mind when that happens are ‘intellectually dishonest.’

But I do hope I’m wrong and that at least one of them comes through for all of us.

There are also others outside of Congress who could come through and save the day. Current and senior Fed officials in the Department of Monetary Affairs are more than well versed in monetary operations, and know for a fact that operationally, federal spending is in no case revenue dependent. And much of the CBO, including former heads, know as a fact of accounting federal deficit spending equals and is in fact the only source of net savings of financial assets for the rest of us. But it’s highly doubtful any of them will come forth to save the day.

Bottom line- believing we could be the next Greece continues to keep us on the path of becoming the next Japan.

(Feel free to republish and otherwise distribute)

post boat ride recap and a reader’s questions answered

After my brief recap is my response to a very good and typical inquiry I thought I’d pass along.

Meanwhile, the tax cuts were extended, and perhaps a bit of restriction removed, eliminating that source of risk of a sharp contraction that could have happened otherwise.

With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts, there was some consideration of declaring victory and moving on, but I’m feeling more the opposite.

First, it’s tiny and at the macro level the propensity to spend of the recipients is trivial.

And it probably doesn’t even offset the drag from prices for imported crude and products.

And it may just be an interim step in letting the next Congress ‘pay for it’ with Social Security cuts.

The large increase in ‘spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.

And a President who seems to think that’s all a good idea as well.

And my nagging feeling that a 0 interest rate policy is highly deflationary, meaning that for a given size govt we need even lower taxes than otherwise, remains.

Lastly, for this post, China has been a first half/second half story, with much of their economic year front loaded into the first half, and they have apparently capped state sponsored lending, which could mean a relatively weak first half, or worse.

The euro zone is forecasting lower growth for next year as austerity bites and the ECB’s job becomes more problematic, as slower growth will slow the ‘fiscal improvement.’

And the recent extreme absurdity of the ECB raising more capital serves to highlight the risk of having incompetents in control.

Reader’s Questions:

I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.


– Should the federal deficit and associated payments be taken completely out of the budget discussion?

Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.

That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).

Right. And potential consumption is always what goods and services we are physically capable of producing.

I understand that, but does value (rather than money) get added to the economic system when the transfers are made?

Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.

Does it have any impact on inflation or taxation?

Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.

For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.

But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.

The first example is spending on a ‘price rule’ that says $8 max

The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.

I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?

The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.

Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?

There is the risk that China might do that.

But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.

Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.

I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.

It allows available savings to be added to the economy.

For a given size of govt, there is a level of taxes which keeps the real economy in balance.

Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.

My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along

Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.

and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.

Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.

Press Release

MOSLER FOR SENATE

Tea Party’s Economic Agenda Would Cause Next Great Depression
Says Former Tea Party Democrat



Waterbury, CT – August 30, 2010, Warren Mosler, Independent candidate for US Senate, former Tea Party Democrat, and frequent speaker at Tea Party rallies, lashed out today at the political movement for its ill-thought demands to balance the budget which he contends is based on abject ignorance and counter to true Tea Party values. “The Tea Party’s demands to balance the budget and reduce the Federal deficit aren’t merely misguided, but dangerous, and would cause the worst depression in history,” stated Mosler, a financial expert with 37 years of experience in monetary operations. “I have been, and continue to be, a strong supporter of the core Tea Party values of lower taxes, limited government, competitive market solutions, and a return to personal responsibility. However, their proposals to balance the budget are the same suicidal policies that caused the 6 horrible depressions in the U.S. over the past 200 years. At the worst possible time to take money out of the economy, the Tea Party’s proposals would remove an estimated $1 trillion and cause the worst depression in world history, destroying tens of millions of jobs and ruining our children’s future.”

Explanation of the Modern Monetary System
Modern money, after the demise of the gold standard, is akin to a spreadsheet that simply works by computer. As Fed Chairman Bernanke explained on national television on 60 minutes, when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce. The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything. To better understand this, think about when a football team kicks a field goal; the number on the scoreboard goes from 0 to 3. Does anyone wonder where the stadium got those 3 points, or demand that the stadium keep a reserve of points in a “lock box”?

Moreover, government deficits ADD to our savings – to the penny – as a fact of accounting, not theory or philosophy. This means the Mosler payroll tax (FICA) holiday will directly increase incomes and savings, thus fixing the economy from the bottom up. For example, if the Mosler tax cut amounts to $20 billion per week, that will be the exact increase in income and savings for the rest of us as anyone in the Congressional Budget Office will confirm. For the Federal government, taxes don’t serve to collect revenue but are more like a thermostat that controls the temperature of the economy. When it is too hot, raising taxes will cool it down. And in this ice-cold economy, a very large tax cut is needed to warm the economy back up to operating temperature.

While Mosler fully supports the Tea Party desire to cut taxes, and recognizes the need to cut wasteful and unnecessary spending – in fact, his economic proposals will save the government hundreds of billions of dollars of unnecessary interest expense – he also recognizes that tax cuts have to be much larger than spending cuts in order to ensure that less money is taken out of the economy, and not more as the Tea Party is currently demanding.

About Warren Mosler
Warren Mosler is running as an Independent. His populist economic message features: 1) a full payroll tax (FICA) holiday so that people working for a living can afford to buy the goods and services they produce. 2) $500 per capita Federal revenue distribution for the states 3) An $8/hr federally funded job to anyone willing and able to work to facilitate the transition from unemployment to private sector employment. He has also pledged never to vote for cuts in Social Security payments or benefits. Warren is a native of Manchester, Conn., where his father worked in a small insurance office and his mother was a night-shift nurse. After graduating from the University of Connecticut (BA Economics, 1971), and working on financial trading desks in NYC and Chicago, Warren started his current investment firm in 1982. For the last twenty years, Warren has also been involved in the academic community, publishing numerous journal articles, and giving conference presentations around the globe. Mosler’s new book “The 7 Deadly Innocent Frauds of Economic Policy” is a non technical guide to the actual workings of the monetary system and exposes the most commonly held misconceptions. He also founded Mosler Automotive, which builds the Mosler MT900, the world’s top performance car that also gets 30 mpg at 55 mph.
Learn more at www.moslerforsenate.com


Media Contact:
Will Thompson
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will@hedgefundpr.net