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The US is living below its "means"

The US press was awash with claims over the weekend that the US was “living beyond” its “means” and that “will not be viable for a whole lot longer”. One senior US central banker claimed that the way to resolve the sluggish growth was to increase interest rates to ensure people would save. Funny, the same person also wants fiscal policy to contract. Another fiscal contraction expansion zealot. Pity it only kills growth. Another commentator – chose, lazily – to be the mouthpiece for the conservative lobby and wrote a book review that focused on the scary and exploding public debt levels. Apparently, this public debt tells us that the US is living beyond its means. Well, when I look at the data I see around 16 per cent of available labour idle in the US and capacity utilisation rates that are still very low. That tells me that there is a lot of “means” available to be called into production to generate incomes and prosperity. A national government doesn’t really have any “means”. It needs to spend to get hold off the means (production resources). Given the idle labour and low capacity utilisation rates the government in the US is clearly not spending enough. The US is currently living well below its means. But the US government can always buy any “means” that are available for sale in US dollars and if there is insufficient demand for these resources emanating from the non-government sector then the US government can bring those idle “means” into productive use any time it chooses.

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We should ban financial speculation on food prices

The Great Hunger Lottery report shows how such speculation on food has impacted on the poor around the world. Hunger and starvation escalated between 2007 and 2008 with over 1 billion people considered chronically malnourished at the time they prepared the Report. The major players in creating this havoc are Goldman Sachs, Bank of America, Citibank, Deutsche Bank, HSBC, Morgan Stanley and JP Morgan. In my view, this speculation creates no widespread good and should be declared illegal. We should ban financial speculation on food prices.

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The role of bank deposits in Modern Monetary Theory

I get a lot of queries from readers about how the banking system operates. One recurring theme relates to the role of deposits in the banking system. Mainstream economic theory considers banks to be institutions that take in deposits which then provides them with the funds to on-lend at a profit. Accordingly, the ability of private banks to lend is considered to be constrained by the reserves they hold. While students find it hard to think outside of this construction, the reality is very different. Banks do not operate in this way. From the perspective of Modern Monetary Theory (MMT) private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. We say that loans create deposits. So then what is the role of deposits in MMT. That is the topic for today. I am deliberately simplifying to get the essential understanding across.

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Default is the way forward

I am travelling today and over the next few days and so I am stealing moments at airports etc to write the blog in between other commitments. Today we consider the research evidence available which bears on the question of national government debt default. The question is becoming increasingly pressing in the failed Eurozone and there is clear resistance among the elites to the proposition that Greece, Ireland, Portugal – for starters – might ease their domestic economic woes by defaulting. It is clear from the actions and statements of the political and economic leaders that they are more interested in protecting the private interests of capital than they are in advancing the welfare of the citizens in the nations under attack from bond markets. It is also clear that they have lost grip of the an essential aspect of capitalism – private return means private risk. The boundaries between private and public have become so blurred in the EMU as the elites strive to socialise losses. The reality is the evidence that is available doesn’t support the conservative arguments being used to eschew the default option and, instead, impose fiscal austerity on these economies. The evidence suggests that the costs of default while significant are short-lived and evaporate quickly. It is also clear that austerity also imposes significant costs on a nation that span generations. The comparison in the context of adding up these costs over the long-run is a no-brainer – these nations should default and follow a domestic-led growth strategy by expanding their budget deficits. That would require them to leave the EMU which is also essential if they are to regain their capacity to advance the interests of their citizens. Default is the way forward.

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The IMF needs a budget deficit-biased head

Let Peter Costello work his magic at IMF – mounted a case for our former Treasurer (one of the worst this country has ever had) should get the baton and head to Washington. The problem is that Costello left a destructive mess in his wake and is a budget surplus obsessive. What the IMF needs is a budget deficit-biased head.

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