3 million Americans or so may find out the truth

I watched the US President speaking live today from the White House. I wish I hadn’t. The local media (here) characterised him as talking tough. What I heard was a leader who doesn’t know what he is talking about. But he isn’t alone out there in the “debt ceiling” debate land. I have noted before that when the crisis really hit I thought it would spell the end of the stranglehold that mainstream macroeconomics had on public policy. That body of theory had led the world into the crisis by endorsing policies that set the financial system up to collapse. As it was becoming obvious (as far back as 15 years ago) that a major crisis was approaching mainstream economists were in denial and claimed that the “business cycle” was dead. I was wrong in assuming (more hoping) that the mainstream paradigm would be wiped out by the travesty. And as the months pass, their erroneous theories seem to be getting more credibility not less. The debt ceiling debate has reached proportions of madness that I didn’t think were possible in a broadly educated country (at least to primary school level). What must the Martians be thinking of us now. Anyway, certain practical matters not counted on by the ideologues suggest that 3 million Americans or so may find out the truth.

Early on the US president revealed how poorly he understands the economy he is ruling over:

Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money – the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.

The US government budget is not remotely like a family/household budget. Households have to finance their spending, the US government does not. Households use the currency that the US government issues (under monopoly conditions).

No tax dollars go “toward paying off the interest on our loans”. Please read my blog – Taxpayers do not fund anything – for more discussion on this point.

A government that tries to “balance its books” while the external sector is draining demand and the private domestic sector is trying to save to reduce its exposure to debt (after the credit binge) will force businesses to close up shop and sack workers.

Government deficits put downward pressure on interest rates. Please read the suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3.

Also reflect back on yesterday’s blog – Why we should abandon mainstream monetary textbooks.

Interest rates will only rise if the US Federal Reserve increases them. It controls interest rates.

The US government always has “enough money” to “make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid”. Where does the US President think the US dollars come from?

He also said that:

The first approach says, let’s live within our means by making serious, historic cuts in government spending. Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President. Let’s cut defense spending at the Pentagon by hundreds of billions of dollars. Let’s cut out waste and fraud in health care programs like Medicare — and at the same time, let’s make modest adjustments so that Medicare is still there for future generations. Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.

This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.

Who exactly is the “our” that the “means” refers to. Households have to live within their means. A sovereign government doesn’t have any means to live within. Its role is to ensure that the means available to the economy (that are in the private sector) are maximised to the benefit of all citizens.

Primary targets are low unemployment, well-paid employment growth, environmentally-sustainable production.

The “balanced approach” he recommends will undermine those targets.

The persistently high unemployment and idle machines tells me that the US population are not exhausting their means at present.

Helping “helping small businesses and middle-class families get back on their feet right now” requires more spending overall in the US economy not less. There are only two sectors – government and non-government and at present the non-government sector is not wanting to spend at a sufficient rate to keep aggregate demand growing fast enough to help firms hire and families save.

This was one of the worst speeches that the US President has made. Why anyone thought he would be the answer for America is anyone’s guess.

US Secretary of State completely “lost” in China

If the President’s speech wasn’t enough, I refer you to the speech of the US Secretary of State who travelled to China (Hong Kong) to reassure the Chinese that the US “Congress will do the right thing and secure a deal on the debt ceiling, and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.”

Now in the current circumstances I would suggest that meant ensuring the budget deficit was large enough to ensure there were enough well-paid jobs to employ all those Americans that wanted to work. Indication? The budget deficit needs to expand.

The problem is that the Secretary of State meant that the “right thing” to do was to cut the deficit.

She also said that:

We in the United States are in the middle of a necessary transition: we must save more and spend less. And we must not only save more and spend less, we must borrow less, as well. Our partners must meet this change with changes of their own. There is no way around it: Long-term growth requires stronger and broader-based domestic demand in today’s high-saving Asian economies. This will raise living standards across the region, create jobs in America, improve business for many in this room, and help stabilize the global economy.

Message 1: more domestic saving.

Message 2: higher domestic demand is good for living standards and creates jobs.

Her understanding of the relationship between these messages? Very minimal I would think.

Highly indebted American households/firms definitely have to save more to reduce their exposure to the debt levels that they accumulated in the hey-day of the financial engineers prior to the crisis.

That means they have to spend and borrow less. That is absolutely crucial right now. Private balance sheets have to be restructured and rendered less precarious.

Question: How to we get more saving?

Answer: Make sure national income grows

Question: How do we get more domestic demand?

Answer: there are only two sources: (a) non-government; and (b) government. If the net exports are negative and you want the private domestic sector to save more then the solution to the US Secretary of State’s aspirations is obvious.

The government deficit has to rise. End of story – there are no exceptions.

Please read on for more explanation.

US Public Pension Funds want citizens to save but recommend policies that will thwart that goal

Yes an astute reader referred us to this July 25, 2011 – Joint letter to the US President – from the several US Public Pension Funds, which just about sums the whole mis-conceived debt/deficit debate up in one short piece.

The Letter said that:

Dear Mr. President and Members of Congress,

The undersigned state and local government pension funds and plan sponsors from across the country represent more than 7.7 million active and retired members with combined assets in excess of a trillion dollars. We work on behalf of millions of Americans – firefighters, teachers, nurses, policeman, government workers and others, who save for their retirement through our pension funds.

The hard-working people we serve are the nation’s savers; they want a strong future for America because their economic future depends on it. But today our nation’s economic future is in doubt, and so is America’s financial leadership in the world. Our country faces threats to its economic well-being that will inflict pain and hardship on all our citizens for many years to come if we fail to act – and act now.

America is now a debtor nation and it must show the world that the nation’s word is its bond. It is critical that the debt ceiling be raised to avoid a default. But raising the debt ceiling just addresses the immediate problem of default. The huge budget deficit, both current and long-range, is the real problem.

As custodians of Americans’ savings, we strongly urge Congress to reduce the deficit. Without a credible action plan from Congress to reduce the budget deficit, the U.S. debt will likely be downgraded by one or more rating agencies.

And so it went.

Question: What determines the level of saving by all those hard-working US people that the US pension fund industry is so concerned about?

Answer: Apart from individual discipline, growth in national income.

Question: What determines the growth in national income?

Answer: The growth in aggregate demand.

Question: Is there capacity for real national income (and hence real private domestic saving) to grow in the US at present?

Answer: The unemployment rate is close to 10 per cent and capacity utilisation continues to stagnate.

Question: What will happen if the US government cuts its deficit – that is, its net spending?

Answer: It all depends on the response of private spending and net exports. It is highly likely that the private spending will fall further as confidence about the future takes a beating because firms who enjoy government contracts will lay workers off and people who receive income (transfers etc) from government spending clam up. Net exports are not likely to add sufficient to aggregate demand to fill the spending gap either.

So a cut in government spending at this stage, especially with so much idle capacity will reduce aggregate demand overall and damage economic growth.

Question: What does that mean?

Answer: More of those hard-working people will lose their jobs and overall they will not be able to save more.

Question: How can the Public Pension Industry ensure that the hard-working US people enjoy higher savings and a more secure future?

Answer: By encouraging the US government to expand its deficit and bring more of the idle resources into production and to stimulate the output and income growth rate.

Some of their fund participants should take a class-action against the Directors who signed that letter to the President for acting against their interests. Get the matter into the courts and have these characters explain under oath what economic model they were thinking off when they claimed that the:

… huge budget deficit, both current and long-range, is the real problem.

What exactly is a “huge budget deficit”? Why not focus on what is stopping their members from saving – such as near-10 per cent unemployment, idle machinery, firms going broke, etc because there is not enough spending.

If the non-government sector cannot add enough demand to stimulate sufficient production to employ the idle labour (and allow saving overall to rise) then there is only one sector left. You guessed it – the government.

Spending equals income. Saving is dependent on income. It is not rocket science.

The CEOs of the major US pension funds do not seem to know what day it is.

Come in … the IMF

And finally the IMF – always trying to be relevant but never quite making it claims in its – latest Consultation statement about the US – (July 25, 2011) that:

… the fiscal impulse for the current fiscal year is likely to be about zero … The outlook is for continued albeit modest growth. With sluggish private domestic demand economic slack remains large: in particular, the unemployment rate has declined only modestly from its recent peak. As a result, inflation pressures will likely remain contained …

So you would hope that they would conclude that the US government had erred in cutting its fiscal impulse back to zero. Persistently high unemployment and low (contained) inflation are sure signs that the budget deficit is too low.

After acknowledging that the “depressed real estate markets, persistent high unemployment, and weak consumer confidence have held back growth prospects” in the US, the IMF Executive Directors said that:

… fiscal policy faces tighter constraints going forward, given unsustainable public debt dynamics.

That is not a given it is an outright assertion. There are no unsustainable public debt dynamics in the US. The US government will always be able to pay its US -dollar denominated liabilities. If it defaults it will be a voluntary act (of political madness) not remotely associated with any financial constraints.

But once you start with a false assumption, then why not take it through to its logical nonsensical conclusion.

The “Directors” claimed that the “fiscal adjustment should start in FY2012 to guard against the risk of a disruptive loss in fiscal credibility”.

Their solution to the depressed labour market – “a re-examination of existing active labor market programs, including job training and education programs”.

They also forecast an external deficit of 2.6 per cent of GDP and private domestic saving rising faster than private investment. So how can they suggest that real GDP will grow more strongly in 2012 and unemployment will fall from 8.9 per cent to 8.4 per cent at the same time that there is to be a 1.4 per cent of GDP cut in the structural fiscal balance as part of the “consolidation”.

Not only does training not create jobs but their sectoral forecasts are mutually inconsistent. As noted above, you cannot have the private domestic sector increasing its overall saving, the external sector draining aggregate demand and the public sector cutting net spending (its deficit) and expect growth to occur.

As an aside, one reader wrote to me this week claiming that the current Congressional impasse made me look like a total fool and that I should learn from the conservative message that there are financial constraints faced by governments and I should stop saying otherwise. My rendition of the comment (which I deleted) is rather more polite than the actual text received.

What this person seems unable to comprehend is that the current impasse validates Modern Monetary Theory (MMT) and highlights the purely voluntary and political nature of all of these constraints on US government spending.

And now about those 3 million or so Americans

In this Reuters article (July 7, 2011) – Treasury secretly weighs options to avert default – we learn that a “small team of Treasury officials” in the US has been planning in case the “Congress fails to raise the country’s borrowing limit by an August 2 deadline”.

Amid discussions about all sorts of loopholes including invoking the “14th Amendment of the U.S. Constitution” (that the US cannot default), the most significant thing about the article is this fact:

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.

So on August 3, 2011 if the US Congress continues to misbehave, at least 3 millions Americans (firms/people) will get bank credits from the US government despite the political shenanigans.

Those newly educated Americans will from then on know that there are no financial constraints on the US government’s capacity to spend.

And with all this talk of cheques bouncing …

There was an incident in Canberra today where according to the ABC News this afternoon there was a – Czech bounced.

Apparently, the Czech President Vaclav Klaus “refused to go through the metal detector at Parliament House”. The Report said that:

Czech Republic president Vaclav Klaus, made famous in a viral internet clip showing him pocketing a ceremonial pen in Chile, was not taking any chances of souvenirs being found in his pocket at Parliament House today. The president, in Canberra to address the National Press Club, was on his way for an interview with ABC1’s 7.30 – which has its Canberra studio within the House – and through the security checkpoint.

Waiting for him there was Michelle Ainsworth, mild-mannered producer for 7.30, ready to usher him up to the ABC studio where reporter Chris Uhlmann was already seated at the desk, lights on, cameras focused.

But going through security with all the plebs was not on the Mr Klaus’s agenda.

Apparently after he refused to go through the check the security guard was told that he was the “Czech president” to which he responded:

I don’t care who he is, everyone goes through.

The Prez then “didn’t even say goodbye. He just left.”

As to the pen in Chile incident, make up your own mind – as YouTube captures the “theft”.


Speaking of Americans prominent in the news today I saw that Glen Beck likened the Norwegian summer camp where the shooting occurred as akin to a Hitler Youth Rally. He said on his radio show:

There was a shooting at a political camp. Sounds a little like the Hitler Youth or whatever. I mean, who does a camp for kids that’s all about politics? Disturbing

I thought the response of the Coalition to Stop Gun Violence was apposite:

As to “who does a camp for kids that’s all about politics?” Well, among others, followers of Beck’s 9/12 project have done exactly that this summer with a program called “Vacation Liberty School.” In these classes, children are taught about the supposed values of the country’s founders. The school is organized and run by followers of the conservative tea party movement, although they have no official ties to Beck.

Beck seems to be obsessed with Hitler Youth. Have a read of this 2009 Article on Crooks and Liars. I especially liked the assessment: “Unfortunately for Beck, he is also handicapped by not having a very firm grip on reality in the first place … It shows up in his great fondness for right-wing populist conspiracy theories.”


From afar the debt ceiling debate has reached the proportions of a comic tragedy. The comments and positions being put are ridiculously funny when assessed against the reality. The only problem is that the policy makers are so detached from reality that they have lost touch with the damage they are already causing to those who look to them for sensible government.

The US is looking more and more like a failed state to me.

That is enough for today!

This Post Has 40 Comments

  1. Sorry you listened to the US President. I haven’t listened to a word he has said since his faux health care reform. You can never tell where he stands by what he says.
    Now, I would like to recommend a movie called; ‘ Inside Job’ by Charles H. Ferguson. The movie covers the financial crisis and I think it is an excellent synopsis of what happened.

  2. Bill,

    I try to understand your really interesting information, I truly do.
    There are two things I just don’t get, though.
    1. In a globalised world, if the value of a currency goes down, the more people have to pay for imported goods, especially oil.
    Now, in countries like Australia and US (for example), life without ample supply and use of oil is
    almost unthinkable. How would industrial agriculture survive without tractors and fertiliser?
    2. Again, globalised world — countries have to pay for their imports. If you ain’t got the money,
    you don’t get the goods. The money is real. It may not be based on gold anymore, but it seems when
    you talk of money, it’s ‘money’. It’s not real. It can’t run out.

    Thanks, Bill. I do try, I like what I read but then when I get home and think about it I realise I just haven’t got it.


  3. It was a cringeworthy speech wasnt it, the same goes for Boehner, his line about his daughter.. It’s sad and mindboggling how they are so oblivious to reality.
    I hope for the day that I can turn on the financial news without hearing from some enormous money market fund manager spewing crap about credit ratings and insolvency.
    As much as I was sick of hearing about the news hacking after the first 5 minute segment, I would far rather hear that then ‘experts’ and their dire warnings about the US’s unsustainable fiscal path.

  4. “There are only two sectors – government and non-government and at present the non-government sector is not wanting to spend at a sufficient rate to keep aggregate demand growing fast enough to help firms hire and families save.” So MMT suggests govt should step in and stop aggregate demand from falling.
    I undestand this, i mean i understand this like an accountant could understand. But my doubt is: if the non-govt sector doesn’t spend at a sufficient rate is because it doesn’t need it anymore… so why should the govt step in? For example, let’s say that in 2010 we produced and sell 1million cars, and in 2011 non-govt sector jut want to buy 500000 cars, why should the govt step in to fill the gap? We could just work less and produce 500000 cars! If we need less we can work less, i can’t understand why the govt should intervene and i should go on working like a beast all my life…

  5. Elizabeth,
    if you like, I can try to help you. I know Bill well – personally. If you wish you can permit Bill to send me your email address and we can email directly rather than via the blog commentaries, thus distracting everyone else.

    I’m no great expert on these matters but I’ve been following this stuff for a few years now and appreciate how difficult it is in getting your head around it.



  6. @Jan

    We would not ‘work less’ but rather unemployment would increase. Some people would keep their jobs, some would lose them and some would work for less hours. The point though is that all this does not happen voluntarily but rather involuntarily. People don’t stop buying cars because they just want longer vacation or bigger houses, new flat screen TV’s. They buy less because they earn less and save more. There’s nothing ultimately positive in someone losing his job without being able to find another one anywhere else (that’s the point of aggregate demand falling instead of just demand moving from one type of product to another one). That’s what happens in recessions and only another part of the sectoral balances (foreign sector, government sector) can make up for the lost consumption/investment.

  7. @ Neil Wilson, I think Murdoch has a lot to do with that. Both directly with his partisan use of his own media outlets, and in the influence he has had on the way other media operates – he’s dragged them down to his level in order to compete. Then of course there is all the lobbying and donations from vested business interests ‘crowding out’ other ideas.

  8. @Kostas

    Yes i know that actually unemployment increase and we do not “work less”. But what i was trying to point out is that from a MMT perspective, the solution is the govt stepping in and sustain aggregate demand. I was just saying that there could be another solution, the govt stepping in avoiding unemployment but not sustaining aggregate demand but intervening in the labour market so to decrease worked hours per person and employ the persons that otherwise would become unemployed. Am i wrong?

  9. @Jan

    If you follow Bill Mitchell you ‘ll soon find out that his most important proposal is for a government backed Job Guarantee for all unemployed willing to provide paid work. That would maintain labor utilization and skills and provide price and aggregate demand stability in the long run.

  10. @Kostas

    I already know the JG proposal. It’s the MMT proposal to avoid unemployment and sustain aggregate demand and prices. Iknow that. But what im saying is that i just can’t understand why the govt should step in sustaining aggregate demand and we should continue to work 8-10 hours a day like it’s at the moment. If aggregate demand is low is because we need less products than before. The govt could step in but without sustaining demand, it could adjust the labor market to let everybody have a job but working 6 hours for example. Let’s go personal. I’m a truck driver working 12 hours a day more or less, 5 days a week. So, in the past here in Italy we produced and sold lots of car, as in the US i think. Then the crisis hit that sector (and others of course…), there are unemployed now ’cause we don’t need much cars as before. OK. So what should the govt do? From MMT perspective, the govt should employ the unemployed as a JG program would do, providing new jobs. From my perspective we don’t need new jobs from the govt, all we need is to match every unemployed to every truck driver like me working 12 hours a day, and we’ll have people working 6 hours a day. U know, when i see my friends unemployed and i’m working hard, i do not think of the govt to employ them (althought it should be better than nothing), i think of me working less hours with one of them working the other 6 hours! That’s why im skeptical about the govt sustaining aggregate demand, cause from my point of view when aggregate demand decrease, well that’s time to let people work less and enjoy life.

  11. It is in a sense astonishing that the eight hour day / 40 hours week date, as a request, from 1817, got implementation in the early / mid twentieth century in the industrialized world (http://en.wikipedia.org/wiki/Eight-hour_day) and nobody is discussing further reductions anymore, despite continuous technological improvements in productivity.

  12. Neil and Hamish,
    It can’t all be lain at the feet of Rupert Murdoch, he is but one of many power hungry people who exploit the post Thatcher contention that

    “I think we’ve been through a period where too many people have been given to understand that if they have a problem, it’s the government’s job to cope with it. ‘I have a problem, I’ll get a grant.’ ‘I’m homeless, the government must house me.’ They’re casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It’s our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There’s no such thing as entitlement, unless someone has first met an obligation.”

    As the lady put it. This point of view lays out that there are only individuals and we should all look after ourselves, in pointed denial of the numerous and powerful non-governmental organizations known as corporations that in fact do exploit and coerce individuals on a massive scale through economic manipulation and predation that it is fact the rightful place of government to confront and constrain for the benefit of all those human individuals.

    But subject to the libertarian fantasies of Lady Thatcher and her American ilk, Anglo American politics have created a corporatist utopia in which only “corporate individuals” have absolute rights and those liberated corporations seek and promote the Obamas and Blairs to function as fig leaves to hide the massive corporate genitalia that are assaulting the society of actual people, just like an IMF Chairman.

  13. @Jan

    “If aggregate demand is low is because we need less products than before. ”

    People’s needs haven’t changed rapidly, their income has. In the USA house prices fell, households net worth fell (http://research.stlouisfed.org/fred2/series/TNWBSHNO) while their debt burden didn’t fall as much (since you cannot have a negative interest rate) and they started saving more in order to improve their balance sheets. Remember that i can halve prices and wages but that does not mean that your available income stays the same because nominal debt does not drop as much (or does not drop at all if interest rates are already near zero). If you were working for 6 hours you ‘d earn half the income (compared to 12 hours of paid work) but aggregate debt would not decrease by the same amount. As a result household financial situation would not improve. The only way to improve things, especially in a balance sheet situation where the actual productive capacity of the economy remains intact (there’s no war, or limited supply of necessary commodities/fuels, just lower capacity utilization), is for the government to step in and balance out the increased leakages (because of increased savings rate) through increased deficits.

  14. To Neil Wilson @19:50:
    Good question. We seem to increasingly be getting policy-free election campaigns and political parties entirely centered on one individual who is very effective on camera. That severely limits who can run for high office and results in a very small group to be corrupted or co-opted once in power. You might try reading some of George Lakeoff’s stuff as a start. He describes how over 30 odd years the US right spent billions of dollars working out the neuro-science and best techniques of persuasion and built up various networks to propagate its message. This has spilled over into Canada in a big way over the past decade or two and greatly affected our politics.

  15. @ Elizabeth

    I’ve often wondered the same thing and I haven’t delved enough into all of the blog posts to gain an understanding of how a necessary import, like oil, plays within the MMT framework. Much of the rest of the theory makes sense to me. I guess the long-term risk to me in the US is if oil-producing nations decide to only accept yuan or some other currency than dollars, then the value of the dollar as compared to other currencies does matter a whole lot more as does the bond market’s opinion of the strength of the dollar. In the short-term, as long as oil stays dollar denominated, then the dollar will always be sought out as a safe haven and the budget deficit really doesn’t matter.

  16. Graham,

    Thanks! That would be very much appreciated. Bill – go right ahead.

    Best wishes,

  17. @Jan

    so according to your idea – if you share your job with some newly unemployed – do you still get paid the same, or only half your former salary?
    If you get paid half – then the aggregate demand still decreases – and economy gets worse with the result of unemployment increasing further. Then you would share your job with 3 people? Then 4? Then 5? etc..

    If government steps in and makes you share your job with somebody while still paying your full salary, while paying the guy who shares your job what? Also you full salary? Or just a minimum salary?
    If government pays full salary to him – then it has to fund 1.5 jobs – full job to him and half to you. Rather wasteful. Also – what about other truck drivers who still have to work full time to get the same salary? Not fair to them.

    If it pays minimal salary to new guy working your job, but full to you – it is not fair.

    But if you work your job, and the newly unemployed works at minimal paying new job – it seems minimally wasteful and rather fair.

  18. I agree with Marshall Auerback. I’ve noted that some so-called “progressives” (not so – better term: “left” neo-liberals) refer to the US president as Barack Herbert Hoover Obama. Now I’ve learned that this is an insult. To Herbert Hoover. Herbert saved the live of countless people. Nobel Peace Price gnome Barack blows up innocent people with his predator drones. And Herbert was intelligent. Not so Barack. He don’t even grasp the basic lessons in negotiation tactics. My number #1 rule in negotiations: Don’t start them if you can’t credible walk away from the deal.

    Thanks to Marshall for the link: Salon: Barack Hoover Obama (Note to the author: Herbert YES. It sounds like he was the best and the brightest who blew it. But Barack is NOT the best and the brightest but he will also blow it.)

  19. Neil: “Why do modern political systems keep throwing up Blairs and Obamas?”

    Bought and paid for. The plutocratic oligarchy (top 0.1%) decides who they want representing their interests.

  20. ” Let’s go personal. I’m a truck driver working 12 hours a day more or less, 5 days a week.”

    Therefore you’re not being paid enough – because otherwise you would choose to work 7 hours a day.

    And the reason you don’t is because you don’t have any choice.

    However if you have a choice of a job guarantee position paying a living wage for 7 hours a day, 5 days a week for not much less than your 12 hours day currently, then you will quit and pick the Job Guarantee.

    Now your employer is subject to competition and they either have to beef up your terms or go bust. If they beef up your terms, you’ll either earn a lot more money or cut your hours. If you earn more, you’ll spend more which employs more people. If you cut your hours somebody else will have to be employed to pick up the slack.

    If they go bust everybody gets a JG job, competition is reduced in the trucking market and prices may go up until truck companies can pay people a decent wage for a decent amount of time.

    So what Job Guarantee does is set the minimum job in the market place in terms of price and quality. No job that is worse than that can survive. The JG then disciplines the rest of the market to fall in line with the minimum standard.

    The trick with more leisure time is to make sure that productivity increases are shared fairly between employee and employer. The JG minimum standard should reflect the productivity of the economy it is operating in.

  21. “Why do modern political systems keep throwing up Blairs and Obamas?”

    Because they look good on Telly

    We have to face up to the fact, in the UK at least, that our elected representatives who, in turn, elect these bozos are not there to serve, if they ever were. The expenses scandal and the Murdoch brown nosing confirm this.

    What I don’t understand is why we, collectively (or at least the 60% who vote), put up with it

  22. I undestand this, i mean i understand this like an accountant could understand. But my doubt is: if the non-govt sector doesn’t spend at a sufficient rate is because it doesn’t need it anymore… so why should the govt step in? For example, let’s say that in 2010 we produced and sell 1million cars, and in 2011 non-govt sector jut want to buy 500000 cars, why should the govt step in to fill the gap? We could just work less and produce 500000 cars! If we need less we can work less, i can’t understand why the govt should intervene and i should go on working like a beast all my life…

    Good deficits and bad deficits. Bad deficit fix things after they are broken, whereas good deficits are public investment to expand and upgrade productive capacity, so they actually pay for themselves many times over in terms of increased GDP and improved standard of living. President Obama had this right in advocating alternative energy tech, hi-speed rail, and other capital intensive projects that the private sector is either unable or unwilling to undertake, or just routine infrastructure maintenance and upgrading. Then there is also the JG. If this kind of countercyclical expenditure is preplanned and ready to go before the problem needs to be fixed, no problem.

  23. Bill,

    My brother and I, both college students who actively read and talk about current events, have been discussing economics since summer break, partly because I am beginning to focus on economics in school. I have been reading your blog for a few months now, and have been taken in by its arguments. Recently, I have been arguing MMT’s line to my brother, who counters using the quantity theory of money argument. Although I have looked for a few reasons why QTM is bunk, I don’t have a complete enough grasp of either MMT or QTM to defeat my brother in a debate. Unfortunately, that continually leaves us in the similar situation where I argue that because the US gov. is the monopoly issuer of the currency, it can create money until the economy is at full capacity. While my brother repeatedly argues that this would cause inflation with the increase in money supply and that “you can’t create value out of nothing”. It seems that we cannot get over this sticking point and so have reduced our discussions. I was wondering whether you, or your colleagues, who regularly post in the comment sections would be able to provide me with arguments against QTM in either a comment, blog post, or email to me.

    Thank you,

  24. I prefer to think of the government as the public relations arm of the corporations whose interests it represents. Government officials publically profess to serve in the interests of the people, but the reality is clear for those with eyes to see. The ultimate goal of government sponsored upward wealth transfer appears to be a kind of neofeudalism, with the majority reduced to debt peonage. The sophisticated propaganda machinery of the modern state is fully engaged in maintaining the ignorance of the general population and encouraging them to clamour for the very policies that will be their own undoing. The success of this strategy is particularly evident in the case of the debt ceiling debacle, where millions of Americans have been convinced that catastrophe awaits should the public debt ‘crisis’ not be resolved, while issues of substantial concern such as climate change and resource depletion are consistently downplayed, ignored, or denied.

  25. Arnold,

    stability of the money stock is just an illusion. I recommend this documentary as an basic illustration of the banking operations: http://www.youtube.com/watch?v=rCu3fpg83TY

    Stocks and flows are two different things. You can add to the stock of money and that will only affect aggregate demand to the extent that it causes flow. In fact budget deficits ARE the printing of money, they add directly to the money stock, just like expanding bank credit adds to the credit-money stock. (indistinguishable from real money)

  26. @Jan:

    Well, if people -want- to buy less, let them. It’s not like you can force them to buy cars anyway. But many could be losing their jobs thanks to policies like the ones we’re seeing now, which in turn translates into even less spending and even more jobs lost.

    Like i said, you can’t force people to buy cars anyway. Now, obviously, the government shouldn’t buy 500 000 cars just to maintain demand in the automotive sector, but who said that anyway? That’s very targeted demand.

    As an aside: I don’t like cars, i prefer to take buses/trains when available.

  27. @Arnold:

    The QTM assumes full utilisation of all resources in the economy at all times and a constant velocity of money and that all spending is equal.

    If you can increase utilisation by increasing spending (and thus demand), you’re producing more, so there’s more goods and services for that money to “chase”. A typical example of underutilisation is unemployment. A typical example of decreasing unemployment is by deficit spending.

    Velocity of money, that is how many transactions each dollar does per time period, changes from day to day through private sector decisions. So it is not constant, as the theory assumes. The effects of a varying velocity would indicate that
    a. A slow-down would cause deflation, which we want to avoid.
    b. A speed up would increase utilisation of resources, or if at full employment, would cause inflation.

    My point is that you can’t really use that theory to explain or control inflation. If we can assume we’re always at full employment, that people will always spend in the same manner and that all spending is equal, we can also assume inflation is impossible. It’s a load of crock, basically.

    Also, imagine what would happen if you tried to control the money-supply! Now, that causes problems that are way worse than a little bit of inflation.

    I believe Bill has way better critiques of the QTM somewhere on this blog.

  28. Bill, i have a question… The concept of “Cantillon Effects”, how does it work theoretically, does it hold empirically and does it have any practical value for explaining stagflation? I don’t know the concept too well, but in a debate with a well-read Austrian, s/he used it to counter the concept of the wage-price spiral.

    If you get the time, an answer would be very helpful!

    Also, thanks for holding on of the best blogs on the net! I’ve learned alot from here!


  29. arnold, first you will need to define some terms and some assumptions.

    I suggest money should be medium of exchange (and also the M in QTM) and suggest inflation should be price inflation. Next, junk the velocity of M is constant and full employment assumptions. I hadn’t heard of HarPe’s “that people will always spend in the same manner and that all spending is equal” assumption before, but it is OK to junk that too.

    arnold’s post said: “Unfortunately, that continually leaves us in the similar situation where I argue that because the US gov. is the monopoly issuer of the currency, it can create money until the economy is at full capacity.”

    Right now, the gov’t isn’t really using the currency part, nor do I believe it should (a different story). I believe the people in gov’t think this is an aggregate demand shock. They are trying to create gov’t debt to attempt to get the economy back to full capacity. They hope the economy will somehow snap back. Then, the excess savers will start spending, and the lower and middle class will start going back into debt. I don’t believe that is what is happening.

    And, “While my brother repeatedly argues that this would cause inflation with the increase in money supply and that “you can’t create value out of nothing”.”

    Positive productivity growth and cheap labor produce price deflation, especially in tradable and manufactured goods. The increase in the medium of exchange from the debt is supposed to offset the price deflation from positive productivity growth and cheap labor. I agree that if “nothing was being created”, there would probably be price inflation.

    I don’t believe that QTM is bunk if you get M correct and junk the assumptions.

    Hope that helps.

  30. Elizabeth, what you are describing is the current account deficit problem. If I’m remembering correctly, bill had a paragraph/comment about that recently which agreed with you about a current account adjustment. If the dollar pegers start using their oil and/or goods for themselves or send them somewhere else instead of the USA, the USA could have some price inflation problems as the currency adjusts. High debt levels and then higher interest rates from the price inflation are a nasty combination.

  31. Jan said: ” That’s why im skeptical about the govt sustaining aggregate demand, cause from my point of view when aggregate demand decrease, well that’s time to let people work less and enjoy life.”

    I agree, and any further productivity gains or other should go towards lowering the retirement age. The problem is the rich, the economists, and the people in gov’t don’t see it that way. They believe real aggregate demand is unlimited, so this is an aggregate demand shock. If people are allowed to retire and then the aggregate demand shock ends, there will be price inflation from a shortage of labor. I believe it is pure drivel.

    However, I suggest you try to tell almost all economists that real aggregate demand is NOT unlimited. Try also to tell them there can be too much debt (whether private or public). Let me know what kind of response you get. I’m betting it will all be negative and/or that’s not right and/or you don’t know what you are talking about.

  32. “The US government budget is not remotely like a family/household budget. Households have to finance their spending, the US government does not. Households use the currency that the US government issues (under monopoly conditions).”

    The way the system is working now, I believe the gov’t budget is acting more like a household budget. Even if that changed, I don’t believe that is the best way to get more medium of exchange into the economy.

  33. @Fed Up:

    “The way the system is working now, I believe the gov’t budget is acting more like a household budget. Even if that changed, I don’t believe that is the best way to get more medium of exchange into the economy.”

    Yeah, it’s being emulated, for no real purpose, except to shoot the gov’t in the leg, effectively hampering democracy. And what’s needed is stabilized spending, to allow the private sector to deleverage and regain confidence whilst not causing GDP to shrink and unemployment to rise further. Oh, and also harsh regulation on certain finance and insurance activities.

  34. @Har Pe

    Those who discovered the “boom” in the economy and the “bubble” in the stock market and who predicted either a “bust” in the economy or a crash in the stock market work within an analytical tradition dating back to Richard Cantillon, whose Essay on the Nature of Commerce in General was published in 1755. The Cantillon tradition was carried forward and extended in the works of Turgot, Say, Bastiat, Menger, Wicksell, Bohm-Bawerk, Mises, Röpke, Hayek, and Rothbard, and it is now a hallmark of the modern Austrian school of economics.
    At the core of this mode of analysis is an emphasis on entrepreneurship and the study of what causes prices to rise and fall, encompassing wages, rents, profits, interest, and the purchasing power of money. With respect to the business cycle, the Cantillon tradition shows that disturbances in the supply of money and credit, especially when a monetary authority expands the supply of paper money, changes relative prices. Artificial reductions in interest rates encourage investment and increase the valuation of capital assets, longer-term assets increasing in value more than shorterterm ones. The resulting changes in the structure of production (buildings, technology, and the pattern of industrial organization) are called Cantillon effects. They occur during the boom, a phase when resources are misallocated, both to malinvestments and to misdirected labor. As relative prices correct themselves in the bust, resources are reallocated by mechanisms such as bankruptcy and unemployment. Capital-asset prices are extremely volatile during this process.


    Traders often use Cantillon effects intuitively without knowing about Cantillon’s work. Markets are not efficient in allocating resources, either financial or real, and traders know they can make a killing by recognizing when this is happening in a particular area.

    I think that Austrian economics and MMT dovetail in some respects through Minsky and Fisher, who realized that financial distortions develop that affect the real economy also through mispricing risk and misallocating resources. This inevitably leads to correction when the distortion becomes unsustainable or is widely recognized.

    What Minsky found, as I gather it, was that there are two cycles, a financial cycle and a business cycle, and these cycles diverge. A disruption in the financial cycle generally influences the business cycle, affecting the real economy, thereby bringing the financial cycle that culminated in Ponzi finance to a close in debt deflation.

    The Austrian solution is liquidation of malinvestment, which exacerbates the debt-deflation and damages the real economy. But Austrians believe that this is necessary on the theory, no pain, no gain. This is to say a hard landing is necessary to clear. MMT disagrees, holding that a soft landing can be engineered while clearing take place and reform is undertaken.

  35. Mr. Mitchell:

    I have read great interest many of your recent blogs concerning MMT. As a retired American, I had become rather tired of hearing all about the “end of America” and how the growing deficits surely meant that all we held dear would soon pass – but I don’t worry so much about that any more.

    What I am curious about is just how many political leaders (in the US and out of it) actually do understand about MMT, but will not let on about it. I am wondering whether this is do to the following:
    1 – It is far more convenient as a political weapon to pretend we still have a gold standard, as most Americans continue to compare the government to a household (as you reference above with your review of Obama’s Monday night speech).
    2 – If more Americans understood MMT, there would be endless clamor for government “handouts” which would lead to less desire to work. Ultimately this would lead to greater and greater inflation. I am aware that is not a problem right now.
    3 – One of the main features of US federal policy is something called “baseline budgeting”, which is use of the previous year’s budget figures (for any department or agency) and their rate of increase as the “baseline” for the succeeding year. Considering the large increases of the 2009 Obama “stimulus”, there now appears to be a rather rapid set of increases built in to the system. It was remarked today on a radio program I listen to that were Speaker Boehner to simply propose keeping 2012 spending level with that of 2011, then the overall budget in 2021 would be $9.5 trillion lower – all without any “cuts” as they are currently understood.

    I very much want to be able to convince my friends and associates (I chair a local “Tea Party” group in Florida) of how the monetary system actually works, and how best to use that understanding to promote more sensible policies. Increased deficit spending is a rather hard sell in the US today, for many of the reasons you hae written about previously.
    I hope you are able to see my questions – if not, I may be able to ask them again later … thank you much for the education I am getting from you at this site. The graphs are very good and well illustrate your basic points. It just goes to show you CAN teach an old dog (Melia just turned 60 last month) new “tricks”.

  36. @ Melia-Aneta
    Warren Mosler founded MMT with (“Soft Currency Economics“), and it was subsequently developed in concert with academics and financial experts. Warren ran as Tea Party candidate for president initially and then ran for Christ Dodd’s Senate seat in Connecticut. There are several videos of Warren addressing Tea Party groups on YouTube/Mosler Economics. His book, The Seven Deadly Innocent Frauds of Economic Policy should be considered as a must-read text for all, and especially for the Tea Party. It’s available in print and also as a free download. Warren’s blog is The Center of the Universe. There is generally lively discussion there, much relating MMT to the US. There is also an MMT Wiki for reference.

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