They were wrong before … so what’s changed?

Back in warm and sunny Newcastle. It is quite amazing how strident the attack on government deficits has become. There is very little recognition of the scale of the economic disaster that still plagues our economies. Even relatively unscathed economies like Australia is carrying 12.5 per cent labour underutilisation rates. That is bad enough. The majority of nations are in much worse shape. The scale of this disaster is so great that you might wonder who is going to be made to pay – given that the crisis was brought on by human folly. Why are those responsible being brought to account? The reality is that the criminals who led us into this disaster have done very well out of the bailout packages that they now oppose. You would have to indict the majority of my profession to achieve justice. So we might want a “national reconciliation” process to allow us to move on and forgive those that caused this. The problem is that the perpetrators are not humble in their failing. Far from it – they are now leading the charge attacking budget deficits using the same economic theories that caused the crisis. How the hell does anyone think these characters have anything to say any more? They were wrong before … so what’s changed?

The French have taken over the G20 administration – and hosted their first meeting last week in Paris (February 18-19, 2011). The results of that weekend were summarised in the Official Communique.

All I can say is what did the world do to deserve this sort of leadership. Anarchy would be preferable. I suppose at least the “leaders” get a nice city to spend their expense accounts in while on “official duty”.

The Communiqué noted that:

We reaffirm our willingness to ensure a consistent and coordinated response to the challenges we face, address the root causes of the crisis and restore global economic growth on a sounder basis.

So given that austerity is the direction the big economies are taking “a consistent and coordinated response” means the G20 is an institution preaching and enforcing austerity.

But they have gone one step further at this meeting – they are now proposing a (watered down):

… set of indicators that will allow us to focus, through an integrated two-step process, on those persistently large imbalances which require policy actions.

I say watered down because the overwhelming sentiment is anti-Chinese yet they declined to tackle that question (which is a non-issue anyway) head-on.

What are these indicators? My preferred indicators which address the “persistently large imbalances” across and within nations would include:

1. Gap between full employment and the current official rate of unemployment (where I would measure full employment to be around 2 per cent but only include frictional unemployment – that is, people moving between jobs). These should be available at regional, national and international levels. There are “persistently large imbalances” in this area across nations.

2. Extent of underemployment – many nations are now also enduring rising underemployment as demand-deficient economies fail to produce enough hours of work to match the preferences for hours by the willing labour force. Underemployment means loss of income and loss of potential output. There are “persistently large imbalances” in this area across nations.

3. Broader forms of labour market exclusion including the discouraged worker effect (so participation rate falling during recession) as workers give up looking for work that is not there. Then we know there are many marginal workers that could be productive in given circumstances. We need to measure that group and articulate the reasons so that if they are amenable to policy relief, such interventions can be designed. There are “persistently large imbalances” in this area across nations.

4. Extent of disability in the labour market so that policies can be designed which enhance the workplace design to allow those who are willing to work and can achieve some active role in the workplace. There are “persistently large imbalances” in this area across nations.

5. Extent of corporate welfare built into budgets – so there is no reason for the private firms to receive any government support (whether it be risk free income flows from bond issuance or other tax lurks and subsidies etc. These need to be flushed out entirely because they largely are drains on the expenditure system. There are “persistently large imbalances” in this area across nations.

6. Extent to which private firms obey regulations. These indicators would allow the government to prosecute more freely the corrupt private corporate behaviour. There are “persistently large imbalances” in this area across nations.

7. Extent to which real GDP growth is consistent with environmental sustainability. Companies that go into poorer nations and pollute would be identified (for example, the mining companies in Papua-New Guinea). Advanced nations would be judged in terms of “green-consistent” growth and firms/industries that failed to meet green growth principles would be first of all fined then rendered illegal. There are “persistently large imbalances” in this area across nations.

8. Extent to which trade between nations is fair rather than free. These indicators could drill down to the firm level to weed out companies that exploit child labour and kill unionists. Major US companies like Apple could be heavily fined for breaches of a “fair trade” doctrine. There are “persistently large imbalances” in this area across nations.

9. Extent of poverty alleviation at poverty levels that actually mean something rather than the puerile $US1 a day or $US2 a day benchmarks used by the World Bank and other international institutions. Relative and absolute poverty indicators should be publicly available and updated regularly.There are “persistently large imbalances” in this area across nations.

10. Extensive information about which public officials are being paid by private firms for favours etc. There are “persistently large imbalances” in this indicator across nations.

So in terms of resolving the “persistently large imbalances” within nations and between nations these are just a few of the new indicators the G20 might usefully develop to guide them in serving the best interests of the people.

I welcome other suggestions from readers.

So what did the G20 decide to focus on? One guess! They say in the Communiqué:

While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.


If they really cared about private debt accumulation they might have acted differently in the lead up to the crisis. The major finance ministers, central bankers, and virtually the entire (lackey) economics academics extolled the virtues of the credit binge – we were all going to become wealthy.

Remember all the nonsense about that the endless nature of the “long boom” now that central banks were inflation targetting and treasuries were holding deficits down and governments, in general, were deregulating at the whim of the corporate (particularly the banking) sector?

I looked back into my archives today and here is an example of the arrogant hubris that was common during the growth period. This was an interview with Stanford economic John B Taylor (who is now a trenchant critic of deficits and claims they don’t work) published by the Federal Reserve Bank of Minneapolis’s internal Magazine “The Region” in June 2006. In the following quote Taylor was talking about the way the IMF has matured to be a more “rule driven” organisation:

And I think that’s one of the reasons people are saying, “What’s the IMF doing? Are they going into obscurity?” Well, they don’t have to do much now because, fortunately, these crises have diminished. As a result, we are moving into a period where people are wondering what the IMF is for.

He then got onto the idea of that the world institutions had finally been able to contain “contagion” when a local crisis occurred. He said the Asian crisis had “caused a lot of damage” but:

But look at what happened after Argentina defaulted in 2001, and you see there’s no similar jump in spreads anywhere around the world. So it’s a huge difference.

The question is whether it is a lasting phenomenon. I’ve thought a lot about it and written about it. And I think it is a lasting difference. One reason is the more predictable response of the IMF. Second, country policies are better … better monetary policy and fiscal policy. So the policies in a lot of countries are better, and that’s the surest way to stop the contagion. And then finally, I think investors are discriminating more between countries. They don’t automatically think there’s a problem in one country when they see another having a problem.

Then on the long boom:

As for the “Long Boom,” I think I first defined it in the April 1998 Homer Jones lecture that I gave at the St. Louis Fed called “Monetary Policy and the Long Boom.” In that lecture, the empirical phenomenon that I focused on was that the size of fluctuations in the economy has diminished substantially. If you looked back to 1982 from at that time-1997 was the last completed year-you saw what looked like a long boom. You had just one historically very small and short recession-in 1991. So the 15 years from 1982 to 1997 were like a long boom. I asked the question, What was the long boom due to? And I gave the answer that it was monetary policy. I documented how monetary policy had changed since the bad old days of frequent recessions. As long as monetary policy stayed on track, I argued, the long boom would continue.

And the long boom has continued … And now maybe we’re in one that will be even longer, but that will depend on keeping with the good policies. So this phenomenon of long, strong expansions and short, small recessions was how I defined the long boom. The same phenomenon is now called the Great Moderation, and there is continuing debate about its causes. I continue to point to the role of monetary policy in making the Long Boom, or the Great Moderation, happen. I think there really is something to that.

I could have accessed similar quotes from countless economists who during that period extolled the virtues of self-regulated markets, passive fiscal policy and inflation-targetting monetary policy.

Why didn’t they see the crash coming? One year after Taylor was claiming that as long as governments held to their policy stances the long boom would continue the GFC hit? It was easy to see the crash coming but Taylor and his fellow clowns were obsessed with their own self-aggrandisement.

The point is that they didn’t see the crisis coming because their economic theories did not allow them to see the way the sectoral balances were emerging and the rising private sector indebtedness and increased financial risk. Any commentator that was blowing the whistle was vilified by these characters such was their self-confidence and position.

But the likes of Taylor and Co are now leading the charge to cut back public deficits to restore stability and wealth. Why should we believe them now when they were so wrong in the past?

Why should we consider their theories are an adequate guide to the future when they failed to predict and understand the biggest economic event in most of our lives?

Answer: they should be disregarded totally.

Can I also just say that I am sick to death of Dominique Strauss-Kahn and he could also usefully piss off and leave the world alone.

In this article (February 19, 2011) – More Action Needed for “Right Kind of Recovery” – he praises the “compromise agreement at the Group of Twenty (G-20) meeting in Paris” and claimed that “there is an increasing need for a multilateral institution like the IMF.”

The IMF helped cause the crisis. It has no credibility in lecturing us on what we should do to resolve it. Its notions of fiscal sustainability are based on meaningless financial ratios. It talks about being worried about jobs and poverty but then forces agreements on nations which unambiguously cause a loss of jobs and increasing poverty.

They should be scrapped and a new world bank-type organisation set up to help vulnerable sovereign nations get enough food to eat!

In parting, I liked Dean Baker’s column this week in the UK Guardian – Further Fiscal Folly. I have my differences with Dean centred on his misunderstanding of macroeconomics but I think he gets it absolutely right when he talks about the hypocrisy and the incompetence of those who are now lecturing us all on the need to tighten our belts but:

… (b)efore anyone prepares to surrender, it is worth remembering, once again, how we got into the current situation. Before the downturn, the budget deficits were relatively modest … Then, the economy ran off the track. The reason was the collapse of an $8tn housing bubble. This bubble was easy to see for people who knew basic economics and third-grade arithmetic. It was also easy to see that the collapse of this bubble would derail the economy and lead to serious downturn. That is why some of us were warning about the bubble as early as 2002.

But where were the current group of anti-deficit crusaders back in 2002-2006, when it might still have been possible to do something to stem the growth of the housing bubble before it reached such dangerous levels? Well, they were crusading against the budget deficit, of course …

The deficit hawks somehow think that their case is more compelling because of the damage done by their incompetence.

It should not work this way. In most lines of work, incompetence is not a credential; it should not be one in designing economic policy either. Anyone who cares to tell us about the urgent need to deal with the deficit should first be expected to tell us how they managed to overlook the growth of an $8tn housing bubble. They should also be expected to tell us why they have a better understanding of the economy now than they did before the collapse of the housing bubble.

Christchurch devastation

Yesterday I predicted that it wouldn’t be long before the deficit terrorists were starting to worry about how they could continue to cut the NZ government deficit but provide a credible reconstruction response to the devastation in Christchurch.

Well today you can read – Earthquake strikes large blow to NZ economy – where bankers etc, presumably sitting in comfortable, air-conditioned offices are starting to wax lyrical about the issue.

People are still trapped and some are having limbs amputated to free them and the economists think it is appropriate to start speculating on whether higher taxes are going to be required (when the NZ economy is already stagnant and unemployment is high).

That sort of speculation will get worse – which is a sad testimony on how warped our perceptions of values have become under neo-liberalism.

I remind everyone of the fact that the NZ government is fully sovereign in the Kiwi dollar, the exchange rate floats and private spending is weak. The NZ government can “afford” to reconstruct Christchurch by expanding it already too low budget deficit as long as there are adequate real resources to be brought into the task.


It is a common theme with my blog that those who are most vocal now about deficit retrenchment were the most culpable in the lead up to the crisis. They are also typically very well-paid and wealthy individuals who will bear no burden from the fiscal retrenchment. In some cases, they were also recipients of the fiscal bailouts that were thrown at the financial sector in 2007 and early 2008.

I think we should be constantly asking – what qualifications do these creeps have to be lecturing us in this way? A PhD in Economics (I have one) is not sufficient. The majority of these degrees are awarded to people for rote-learning and applying the nonsensical economic propositions that helped cause the crisis.

Further, having made millions in the financial markets is not enough to allow one to parade themselves as an authority on policy.

Moreover, the economic theories that were used to justify the deregulation and lack of oversight of the financial sector are still being used in the public arena as authority to justify austerity. These theories are bereft. They should never guide policy.

That is enough for today!

This Post Has 44 Comments

  1. Aha. Another IMF publication. I think the IMF staff decided some time ago to write science fiction novels about more pure economies in a far away future in another galaxy because the reality on planet earth is such a mess. Yesterday I read the IMF Economic Outlook on Libya published on Feb 15 2011.

    IMF Executive Board Concludes 2010 Article IV Consultation with the Socialist People’s Libyan Arab Jamahiriya

    It’s a Hurray report about the economic future of Libya and how sooner than later Libya will be paradise on earth. The IMF directors are full of praise for the enlightened policies of the Libyan authorities ( “They [IMF directors] commended the authorities for their ambitious reform agenda, and looked forward to the effective implementation of the many important laws passed in the last year, complemented by policies aimed at adapting the labor force to the economic transformation.”) Everything is well under the rule of Muammar al-Gaddafi – the self-proclaimed “Guide to the Revolution”. So much for IMF science fiction.

  2. I was in quite a high level meeting today where there was much excitement about a return to surplus, etc. All I could do was shake my head and grimace. Questioning the “need” to quickly return to surplus, and indeed, to remain in surplus in perpetuity, is a thoughtcrime in Canberra.

  3. As a Christchurch resident, I know that if ever there were a time for a government job guarantee, it would be now. Currently, the media is mostly focusing on those still trapped in buildings. In the coming days, that will change. A good percentage of people are without power, water or sewage – and that’s if they still have a home.

    “Adequate real resources to be brought to the task”? Thousands of unemployed people, and tens of thousands of university and high school students that have nothing to do for now. The solution is obvious: Arrange for these thousands of people to do basic tasks in order clean up the city. The minimum wage can be paid to these workers.

    Reality? Not only will these tens of thousands of workers/students be sitting at home doing nothing, but their parents may face an additional tax to pay for the clean-up.

  4. Alex – sorry to correct and I hope that you and your loved-ones are safe and well but imposing additional taxes on your fellow citizens, as our government is hoping to do here in Australia, isn’t going to ‘pay’ for anything. It will simply reduce the amount of money available for private spending.

  5. Kaiser,

    Before someone answers more broadly, Baker believes that the deficits have to be paid back, and that the deficit has to be “borrowed” in the market. He is close to Krugman in that regard, mentally stuck in the gold standard mentality when any government spending had to be financed, just like household or corporate spending.

  6. I really can’t understand why MMT people are so obsessed with the taxes do not fund anything mantra, to the point that you consider necessary to “correct” someone like Chris just did.
    Any given G-T is funded by T, even though those dollars paid for T were destroyed and new ones were created out of thin air to pay for G.
    The only relevant point is whether the size of G-T matters or not.

  7. @Kaiser
    Can’t speak for Bill on that. But Dean Baker sometimes lapses in the typical defense mode of deficit doves and progressives. The argument goes along the line “Yes on the long run we must do something about the federal deficit and debt but today we’ve other things to worry about”. An example from Dean Baker:

    “There are scary projections of large long-term deficits for the more distant future, but these are attributable to our broken health care system. We currently spend more than twice as much per person on health care as countries with longer life expectancies. This ratio is projected to rise to three or four times as much in the decades ahead.”

    What exactly is “scary” and “large” is left as a mystery to the audience. But it sounds like in “the more distant future” the USA runs the risk to be broke. I wouldn’t formulate the health care issue in that way. I would say the private sector is obviously unable to deliver good health care compared to other OECD health care systems. Millions of citizens are not insured, … Thus something must be done.

    Anyway I’m pragmatic in regard to this typical defense mode of deficit doves and progressives. If the federal deficit and debt must be dealt with in the more distant future so be it. Who knows when this future will arrive?

  8. Kaiser ~
    Dean is an unrepentant Keynesian who doesn’t seem to understand the nature of fiat currency. Other than that, he is a good-hearted champion of the little guy, and like “the boss” here, he’s getting more than a tad annoyed with neoliberal quackery.

  9. “I really can’t understand why MMT people are so obsessed with the taxes do not fund anything mantra”

    Because it is important to break the psychological crutch. It’s one of the key points of the model. It shows that you can control what you spend, but the amount of taxation you receive depends upon the spend/save decisions in the economy, and therefore it is best to think of spending coming first.

    Currency isn’t really created or destroyed either. It’s a bunch of transaction journals. You can model the system on an alternative view with the central bank acting as any other bank, but without the capital restriction (which obviously allows a bank to create money as required). In that model government effectively does all its spending on a central bank issued charge card and the taxation is cashback into the account.

    One advantage of this model view is that it allows you to see the monetary operations as though the government is borrowing from its bank, which is *actually* the same as what individual’s do. Individuals don’t auction investment bonds to allow them to buy a house. They go see the bank manager.

    It also shows you that you can control what you spend but not what you receive. The taxation ‘cashback’ is variable depending upon the spend/save decisions in the private economy.

    The downside is that it doesn’t clearly separate the currency issuer from the currency user and therefore the hierarchy of money is less visible.

    MMT’s standard model puts the hierarchy of money and the vertical nature of state money front and centre. One of the key parts of the model is to show clearly that government spending is not directly connected with taxation.

  10. Hey all–
    I have been at this about a year. Read Billyblog on a regular basis, cotu, nepkc. I have a few questions about MMT:

    1. Much of MMT rests on the accounting dynamics of sectoral balances, but I am wondering what MMT has to say about bankruptcy? It seems that bankruptcy can add equity or “net assets” to the private sector in absence of G. For example, if I get a 60K business line of credit to start a blog and I spend all that money on marketing coaches and ghostwriters but the revenue generated is not enough to make the debt payments then a bankruptcy judge can wipe out that debt or reduce it, however the spending I did still remains in the system. Even if the judge just reduces the debt to 25K, then there is still 35K of spending in the circuit with no debt attached to it. I have either missed or not seen this point addressed.

    2. To a similar point the statement “loans create deposits” seems to indicate that the liability side of banking is almost completely irrelevant. I have read Bill’s post “Lending is capital-not reserve-constrained,” as well as the Brookings institution primer on capital pointed out in that blog as well as a number of publications from the Levy institute and Mosler stuff on COTU and the operations of commercials banks is still jamming my brain. If, for example, a bank lends out 100K for a house and a deposit is created (for the seller), the bank can then go and get reserves from the CB to meet their reserve/capital requirements. However, if the buyer stops making payments on the loan, then the bank is limited only to the extent of having to take over the property, which may cost 20 or 30K. They then take over an asset which cost them nothing (except labor input) to acquire. From this perspective it seems that a bank could be cash flow negative during times of economic distress but it is nearly impossible that a bank would be insolvent (this only reinforces the insanity of the current system). Is this a valid perspective on the way banks operate or is there more to it than that?

    3. Finally, there seems to be some conflict in various MMT perspectives on how the private sector is affected when the Treasury sells bonds. In this account–,

    Stephanie Kelton indicates that the process is much like the process stated above in that “loans create deposits.” i.e. when the Treasury sells bonds there is always a PD at the other end creating a new deposit (for the Treasury) in exchange for the asset (the bond). In other accounts (including the Pragmatic Capitalists primer on MMT, which he at least credits Mosler with assisting) the sale of Treasuries actually drains reserves from the banking system because the currency taken in by the Treasury in exchange for the bond is already existent in the system. Depending on how this process works it will create very different currency aggregates. I am from the USA so I am curious which method is correct, or is it possibly both, i.e., some bonds are purchased with newly created deposits and some are purchased with existing currency?

    Thanks any guidance on these issues is appreciated.

  11. For MamMoTh, Thursday, February 24, 2011 at 2:29:

    The ‘taxes don’t pay for anything’ point is to counter those who say we’ll have to pay higher taxes in the future if we run large deficits today. That is often said by conservatives even though it is not true in the absence of full employment of resources.

  12. “I welcome other suggestions from readers.”

    Bill, just to add to the bullet point on corporate welfare. I would also mention International Aid.
    Payments to countries such as Egypt with little going to where most people imagine Aid ought to be spent.
    Instead it is funnelled back to US and UK corporations, often in return for Arms that end up being used against their own people.

  13. Krugman, Baker, Laffer, Chenney (to name a few) are all political hacks. They are in favor of deficits when their party is in power. They say deficits must be paid for in the future so they can keep the political battle alive when the other side takes over. All are traitors and should be treated as such.

  14. Thanks for the info, Peter, Stephen et al

    I’ve read a few of Baker’s books “Plunder and Blunder” and “False Profits” and really enjoyed how he laid it out for a “little guy” like me with no Economics training(indoctrination)! Also keep an eye on his blog every so often. I quite liked his idea on Job Sharing through reduced working hours as an idea to unemployment but have come across debates raging about this having a go at him also.

    All round I quite like his stuff. Just wondering what his problem on Macro was. Does he engage with people on MMT or just ignore it?

  15. Government spending (G) is not connected to taxation, true.
    Government net spending (G-T) is. In that sense, T funds (partially or not) net spending.
    I find irrelevant to argue about whether funding is the right word or not, that doesn’t change reality.
    That’s why I say the only real argument is whether budget deficits (G-T<0) matter or not.

  16. Keith Newman: “The ‘taxes don’t pay for anything’ point is to counter those who say we’ll have to pay higher taxes in the future if we run large deficits today. That is often said by conservatives even though it is not true in the absence of full employment of resources.”

    As far as the U. S. is concerned, my reply to that line is this: “We haven’t done so for 175 years. Why start now?” 😉

    Even under a metal based currency, deficits now do not mean a greater tax burden in the future, even if tax revenues increase because the economy grows. To the regular person, “higher taxes” means a greater tax burden, not greater tax revenue. 🙂

  17. @ Chris

    Chris, I fully understand that taxes are not required to fund spending, and that an additional tax will reduce non government net financial assets. However, I was talking about the governments point of view, since they clearly don’t understand these facts. In hindsight, I should have used quotes when making that comment.

  18. “It seems that bankruptcy can add equity or “net assets” to the private sector in absence of G.

    Isn’t this just a transfer of assets from the lender to the bankruptee ?

  19. @Kaiser
    My recommendation: keep on reading Dean Baker! He’s definitely not on the dark side of force. I agree with @Benedict@Large: he is a good-hearted champion of the little guy and that is a very RARE very valuable thing given he’s an economist. Most probably Bill will hate what I’m saying now but these disagreements on macro only matter to the ivory tower. As long as there are poor / disadvantaged / unemployed / … people they will fight on the same side of the fence. Once the neo-liberal lunatics are where they belong (cage) they can fight out their disagreement on macro in the academic OK corral. I don’t care who will walk away alive.

  20. Min and MamMo Th;

    Min, unfortunately I cannot use US examples as I live in Canada. Our federal government ran surpluses 8 or 9 years in a row recently. Economic growth was fairly good nonetheless due to large net exports and increasing household debt. Both main parties fall over themselves saying spending must be brought under control although our Conservative government has been very careful to not engage in cuts as has happened in the UK and elsewhere.

    With respect to the ‘taxes don’t pay for anything’ point, I should have added that it also counters the idea that increased interest payments from the debt will crowd out program spending. This is one of the main stories we face here. See the following article:

    MamMo Th, while I don’t disagree with what you say it can be useful to counter intuitively appealing falsehoods in a simple way, i.e. taxes don’t pay for anything so what’s the problem?

  21. @Andy:

    bill said, in the comments section of Deficit Spending 101: “Net financial assets (in the currency of issue) can only enter the economy when the sovereign government spends (it has the monopoly of issue). The non-government sector can create financial assets (including bank deposits – which we think of as “money”) but not net assets. Because in the non-government sector for every asset created there is a corresponding liability.” His bold on “net.”

    It seems to me that bankruptcy or debt writedowns are an exception to this.

    to say that it merely transfers assets from the lender to the bankruptee doesn’t ring true. The “asset” is the note but if the asset is reduced without a corresponding destruction of the liability then “net” assets seem to have been created.

    I’m seeking an MMT explanation of how this effects the circuit.

  22. Dave, balance sheets always balance. A borrower default (asset) results in the reduction in capital (liability) of lender.

  23. Keith, since you’re on the topic of Canada, I thought of linking this recent TD Bank report:

    Although in my view the report contains a lot of nonsense regarding the “twin deficit problem” Canada is now facing, I find the chart at the top of page 2 quite revealing. It shows sectoral net lending going back twenty years. In that chart, we clearly see the deterioration affecting households. Also, it’s very clear that the corporate sector is riding pretty high these days. Very high indeed. BTW, if other readers have a better view of Canadian sectoral balances, I’d be interested in knowing where to find one.

    Great post Prof. Mitchell. Truly enjoy your critique of Davos/free-market types.

  24. @Sergei,

    Ok. I understand that balance sheets always balance. When I trace the transaction in my head it doesn’t add up. Thanks for the reply.

  25. Dave – if a lender writes off a 50k loan to me then his NFA fall by 50k, mine rise by 50k.

    If he writes off a 50k loan and forecloses on my house worth 40k, then he writes down his NFA from 50k to 40k, whilst I write up my NFA from minus 10k to zero.

    As Sergei says (that guy knows what he is talking about), all balance sheets balance.

    When Bill says NET, he is netting off the entire private sector – which means that my transactions with my mortgage lender cancel out.

  26. Anders, Sergei
    Re all balance sheets balancing.
    I take the point but you might be putting out the wrong message.
    One of the most important things in me ‘getting’ MMT, after reading the Deficit Spendings, was getting rid of the concept of government balance sheets in my head. Once I realised that the intertemporal budget constraint was voluntary, many things fell into place.

  27. Great article Bill. I think you do a great job in exposing the utter uselessness of the IMF, and I also particularly enjoyed your previous blogs on the issue. Unfortunately, it will require a huge shift in philosophy for the IMF to break its current groupthink culture. In the meantime, nations like Greece will suffer greatly under their austerity programmes. A visit to the country is all that is needed to see that the austerity drive is simply not working. (The only positive is that perhaps the crisis will clean out the deep-seated corruption and nepotism that unfortunately pervades Greek society – but at what cost?).

    In the words of an amusing satirical video currently doing the rounds in Greece, sung to the tune of The Police’s “Roxanne”:

    You want to turn us into Afghanistan….”

  28. Andy – try this: the consolidated balance sheet for the govt/CB certainly exists, but unlike for every other economic actor, concepts of “healthy” or “overlevered” do not apply to a monetarily sovereign govt/CB.

    In other words, there is no stock effect on current activity / behaviour from the level of debt at the beginning of period – unlike private sector actors, who pose credit risk and whose propensity to spend / borrow / save will be sensitive not only to economic prospects but also the beginning of period balance sheet position.

  29. mammoth,

    Ignoring your actual point, that was really funny!

    “Government spending (G) is not connected to taxation, true.
    Government net spending (G-T) is.”

    “Apples are not connected to oranges. The number of apples, and the number of oranges, are.”

    Like your logic there 🙂

  30. Ok Anders. Correct me if I am wrong on this. Been through this in my head a bunch of times. What I am seeing is that the bank doesn’t actually create a liability for itself when it creates a loan, It creates a liability of the government. The “loan” (asset) creates the “deposit” (liability) but the creating bank doesn’t know or care where the liability ends up. They keep the asset but not the liability. True?

    And if that’s true, then when my debt is written down (the bank asset) the liability of G remains intact (increasing “net” financial assets in the private sector) even though G never spent that money into the economy. Also True?

  31. Nevermind. I think I answered my own question. Answer is likely No b/c bank has to keep that liability on their b/s, so if they write down the asset, they still owe 10 to G or whereever. Not clear on the liability side of banks b/s and how that works but I am getting there. Thanks.

  32. “I find irrelevant to argue about whether funding is the right word or not, that doesn’t change reality.”

    yes, but who are you? this is relevant to many, many people.

  33. “yes, but who are you? this is relevant to many, many people.”

    not someone really interested in discussing linguistics. and you?

  34. the point is you’re someone obviously familiar with mmt and many of the points it makes. another person who just happened to come across this blog doesn’t necessarily understand the distinction, or its semantic ‘irrelevancy’. people don’t comment with you in mind

  35. i wonder why!
    my point is that, in this case as in many others i’ve seen, the remark was unnecessarily directed towards someone who knew the distinction. and i give my opinion, which might be totally irrelevant to all of you, as someone who is familiar with MMT, embraces some of it but not all of it, and tries to give somehow an outsider view so that reading this and others blogs remains interesting and doesn’t look like a bunch of lunatics belonging to some freaky cult worshipping the spreadsheet god. (which of course you are, but that’s not what i wanted to say.)

  36. you’re welcome to your valiant efforts, but you just seem to be tilting at windmills. was that comment really freaky or cultish? it seemed correct and harmless. could it be the case that you’re just easily annoyed, a grumpy gus?

  37. i am definitely grumpy. and easily annoyed by many things.
    having being reading this blog for quite some time, i thought that made me a good candidate to join the cult.

  38. ha, fair enough. lashings-out are useful, keep things fresh and non-epistemically closed…

  39. Dave, loan creates a deposit which is a liability of the bank which created this loan. The creation of asset (loan) and liability (deposit) increases the balance sheet of this particular bank as well as the aggregated balance sheet of the banking system. However the distribution of assets and liabilities within the balance sheet of the *banking*system* is driven by completely different processes from lending/borrowing by the non-financial sector. Assets and liabilities of the banking system constantly change owners within banking system, i.e. they constantly change balance sheets of individual banks. Well, assets are less dynamic in this sense but flows of liabilities are pretty much unconstrained from the point of view of banks. This means that a liability of one bank on day can become a liability of another bank on another day.This redistribution is *typically* done with government money (cash/central bank reserves). Another connection to government money is deposit guarantee schemes. But besides these two points, which are exogenous to “loans create deposits” and “default reduces liabilities”, there is no connection to government money.

  40. But besides these two points, which are exogenous to “loans create deposits” and “default reduces liabilities”, there is no connection to government money.

    Connection to government money or vertical money occurs in settling transactions. Final settlement of all transactions occurs in either bank reserves or cash, unless the transaction is an intrabank exchange of funds from one account to another. For example, giving someone a check doesn’t automatically settle the transaction. The check has to clear and that is done with bank reserves in the FRS in the US. If the check is not good (NSF, forged, out of date, etc.), the bank it is drawn on refuses to supply reserves to cover it, and the check bounces.

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