The G20 has dropped its support for fiscal expansion. The deficit hawks are prevailing. But why is that? We all either know or should know that operationally Federal spending is not constrained by revenues, as Chairman Bernanke stated last year, when asked on '60 Minutes' by Scott Pelley where the funds given to the banks came from :
"...we simply use the computer to mark up the size of the account that they have with the Fed."
We know that when the Fed spends on behalf of the Treasury it simply credits a member bank or foreign government's reserve account at the Fed.
We know that a US Treasury security is a credit balance in a securities account, also at the Fed.
We know that buying a Treasury security means US dollars (numbers on the Fed's spreadsheet) shift from a Fed reserve account to a Fed securities account, which adds to the 'national debt.'
We know that government deficits = 'non government' saving (net dollar financial assets) to the penny, as a matter of national income accounting.
And we know paying off the Treasury securities happens continuously when Treasury securities mature and the Fed simply shifts those US dollars from the securities account back to a Fed reserve account (including the interest).
So why should we care if US dollars are in a Fed reserve account or a Fed securities account?
We should not, yet most still do.
There are two featured sides to the argument, pro and con, deficit hawks and deficit doves. The deficit hawks aren't the problem. They have no argument that makes any sense as a point of simple monetary operations. There is no such thing as the Federal Government running out of money, being dependent on foreigners or anyone else for funding to be able to spend, and the US is not the next Greece.
The problem is the deficit doves featured by the media don't understand actual monetary operations and reserve accounting, and so they take the same 'fundamentally wrong' positions as the deficit hawks. The difference is nothing more than timing and degree. In effect, the media is showing only one side of the argument.
To be a credible media deficit dove, you agree deficits are 'bad' but only in the long term, arguing that in the short term we need tax cuts or spending increases now, and deficit reduction later. You agree that deficits can be too high, but argue they have been higher, particularly in World War II, so current levels should be easily manageable, further agreeing there is a level that could not be manageable. You agree markets could be 'unfriendly' and a lack of confidence could translate into far higher interest rates, but argue that the current low rates for Treasury securities are the markets telling us that currently they do have confidence in the US and they are eager to fund current deficits. You agree that 'bang for the buck' matters and support tax cuts and spending increases based on higher 'multipliers.'
The two 'sides of the story' are in fact on the same side, just with differing degrees. The media does not feature the true deficit dove story. Nor do any of the true doves have even a small piece of the administration's ear, or the ear of anyone in Congress willing to speak out. There are maybe a hundred of them, including many senior economics professors. The nagging question is why this professional, highly educated, highly experienced collection of true doves, who happen to be correct and could get us back to full employment and prosperity in reasonably short order, does not get a fair hearing.
The answer may be credentials. My BA in Economics from the University of Connecticut in 1971 doesn't cut it, nor the fact that the very large fund I managed was the highest rated firm for the time I ran it. And my net worth never getting anywhere near a billion hasn't helped either. Seems billionaires get celebrity status and airtime for just about anything they want to say.
The same is true of the Economics professors who've got it right. Without being from and at the usual 'top tier' schools none can even get published in main stream economics journals, where submissions featuring obvious accounting realities are routinely rejected. In fact, any economist who states accounting identities and operational realities such as 'deficits = savings' or 'loans create deposits' or 'Federal spending is not constrained by revenues' is immediately labeled 'heterodox' and unworthy of serious mainstream consideration. Even the late Wynne Godley, who did have reasonable credentials as head of Cambridge Economics, and was the number one UK economics forecaster, was labeled 'unorthodox' because his mathematical models featured the deficits = savings accounting identity.
The breakthrough could happen at any time, in addition to economists at the 'right schools' or right financial sector firms, there are government officials with sufficient credentials to lead the breakthrough, including the head of the CBO and OMB, the Treasury Secretary and Fed Chairman, as well as former Fed officials, particularly from monetary operations.
Unfortunately Treasury Secretary Geithner, a potential hero due to the celebrity of his office, and the rest of the G20 are acting out the deficit hawk position, acting as if they do indeed believe the US has run out of money, is dependent on its creditors, and could be the next Greece. They speak as if they have no idea that the euro nations operate within a unique institutional structure that puts them in a 'revenue constrained' financial position similar to the US States, but with nothing equivalent to the US Treasury to run the countercyclical deficits for them. They speak as if they have no idea that the US, UK, Japan, and others with 'normal' central governments taxes function to regulate aggregate demand, and not to raise revenue per se. They act as if they don't realize they can immediately make the fiscal adjustments- cut taxes and/or increase government spending- that will restore aggregate demand, employment, and output. In short, they act as if they were all still on the gold standard, an institutional arrangement where indeed government spending was constrained by revenues, and, as a consequence, the world witnessed repetitive, devastating deflationary depressions, far worse than what we've seen so far in this cycle.
The results of unnecessarily allowing a universal lack of aggregate demand to persist are already tragic, and if policy continues along the line of this weekend's G20 results no relief is in sight, and it could all get a whole lot worse.
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http://wjmc.blogspot.com/2010/07/what-about-default-option.html
All public comments are welcome through the link above, and thank you in advance for helping me out with this potentially devisive issue for public policy...
You really think there is no consequence to printing and borrowing into eternity? Please explain that.
Also explain how $13 trillion is "manageable" debt. How exactly is that number going to be paid off? Better yet, tell me how that's going to be paid off while factoring in all of the US government's liabilities, i.e. Social Security.
As for the $13 trillion, it will never be paid off. All they need to do is roll it over, roll it over. The feds also set the interest rate and if need be they can buy this debt themselves.
The real damage is caused by idling a quarter of the economy because people claim that money will run out. Idling parts of the economy is real damage.
That being said, the $13 trillion is an assumption that there will be massive growth in the future that includes or exceeds $13 trillion worth of productive work. Given that the US produces practically nothing on its own soil anymore, I think it's foolish to believe that will be the case. Future generations are having their standard of living torn down before they're even born.
"All they need to do is roll it over, roll it over, roll it over." This is insanity personified. You really think that's a sustainable model? Just pile up debt, compound interest year after year? The bill never has to be paid? Just because the rest of world has accepted this crap from the US up to this point does NOT mean they always will. It's an absurd game and it simply cannot last forever.
What was also claimed was that Government spending on the right things can end the great recession, and that implementing austerity programs all over the world is likely to lead us into a double-dip or even another great depression.
It was also recognized trhat too much Government spending, beyond the point of full employment can lead to inflation and that Government must be prepared to tax and cool the economy when that point is reached. So, no one has advocated that the Government ought to be "printing and borrowing into eternity," which means that no one has to explain anything to you.
You agreed with Procrustes' comments, which included "All they need to do is roll it over, roll it over, roll it over." That's not playing the debt game into eternity? He/she most certainly advocated it.
Austerity is going to come one way or another, whether by will or by force. That $13 trillion can't just disappear. It's demand pulled forward, and someone is going to pay the price. Most likely, the cost will be passed on to future citizens, in the form of a significantly lower standard of living.
Perhaps there truely would not be any inflationary pressures, particularly when the deflationary lack of demand is so strong.
I would love to see a debate between you and Peter Schiff. I'm sure he would argue that your proposal would skyrockter the price of Gold
It's theoretically possible, but I've never seen it. In the late 90's with strong growth and unemployment below 4%, core inflation was relatively low and looking lower.
But yes, it's always possible the price of gold or any other commodity could go up. And equities, and homes would probably find buyers as well.
I don't think anyone thinks the benefits of gold not going up are worth the real cost of keeping 20 million Americans out of work?
Our real wealth and standard of living are a function of whatever we can produce domestically plus whatever we can import minus whatever we have to export.
With domestic full employment we maximize our real economic well being.
This is not to minimize the importance of having the 'right' domestic production and consumption.
but that's another story.
see 'the 7 deadly innocent frauds of economic policy' at www.moslereconomics.com
It would be more fair to the people of America (fair being defined as paying taxes in proportion to your benefit from government) to raise revenues by taxing the rich more rather than mint more money and effectively tax the poor more.
The US can balance its' books by simply saying, "There are ten trillion new dollars now, and we have all of them. Bam, debt paid."
However, introducing more money into an economy without a corresponding growth devalues that money. In the example I gave, it's particularly glaring as now there's ten trillion more US dollars in the world, but there isn't any more wealth for those dollars to actually reflect - so now it takes more dollars to express any given piece of wealth.
When it takes more dollars to express a given amount of wealth, then the value of the dollar has decreased. If your wealth is stored in dollars rather than assets like stocks, then you're effectively losing wealth.
And the lower and middle class generally hold more of their wealth as cash for emergencies than the upper class.
I see deflation mentioned, so far I have not seen any cost reduction, I spend as much or more for food, gasoline, etc. as I did before the bust. Where deflation works is where it reduces wages, which if it meant that costs would follow-might be acceptable.
My problem is-I have seen no indication by the banks or wall street that they are prepared to take a reduction in their grossly inflated pay packets, and that all of the pain and suffering will be felt only by the middle class and poor. Actually Wall Street has done very well out of the recession so far.
I think it wouldn't take much more bad news to generate a three party system with fudnamentalists and tea party sympathizers in one party; corporatists in a socially liberal, fiscally conservative "centrist" party, and progressives in an, activist Government, secular, wealth redistribution-oriented third party. We can see the outlines of such a system now.
You might find the weblog: China Financial Markets by Professor Michael Pettis of interest.
http://mpettis.com/
He seems to have very similar (rational) views to your own. I wish I had time to understand more clearly the implications of the various 'accounting identities', that both of you frequently use.
By the way, if physics had the same predictive value as economics, airplanes would have a 50% chance of taking on any given try and half the time, it would be gravity repelling it rather than aerodynamics that got it off the ground.
He's just describing the accounting practices behind the US federal debt, and why bankruptcy isn't a problem with it.
Also, deflation is not bad if we are over-inflated. Haven't you heard people complaining about their cable/telephone/cell phone bills? Too many services perhaps?
Finally...what is your prescription?
Warren's prescriptions are here:
http://moslerforsenate.com/?page_id=22
they function to regulate aggregate demand
for a given level of govt spending, there is a level of taxation that best coincides with our goals of full employment and price stability.
the resulting deficit is, at that point in time, the right sized deficit