I read an article in the Financial Times earlier this week (September 23, 2023) -…
Last night we were watching the ABC news on TV and there was a story about American airports not being able to afford to pay security staff because the federal body who pay the bills had run out of money. I have been reading regional newspapers in the US which report on things like street lights being rationed not on environmental grounds but because the local authorities are starved of funds. Police beats are being trashed as rapes rise in the darkened, unpatrolled streets. Schools are being closed. People will die this coming northern winter because the governments have cut heating subsidies to the poor. Workers who saved all their lives then became unemployed in 2008 are still unemployed and have exhausted their life savings and are staring at poverty. And all of this is because the conservatives and the dullard progressives who have fallen into line lock-step have convinced us that our governments – which issue the currency we use – have run out of money. The people who are being most damaged by the fiscal austerity are the front-line troops in the conservative army attacking governments. It doesn’t make sense at all. For all the human achievements we are really a very dull lot. Governments have all the capacity to maintain adequate levels of spending and employment growth to allow the private sector to sort out their debt issues. This is a totally confected crisis which doesn’t mean that it isn’t real nor incredibly damaging.
The ABC News carried the headline captured in the next picture earlier this morning.
Sometime later, after the local markets had opened, the picture remained the same but carried a different headline.
My phone has been ringing a lot with journalists seeking my views on what is going on and radio stations lining up interviews and “news grabs”. There is a sense out there that we are sliding backwards quickly into financial collapse and recession. I sensed some panic today among the press. And they won’t believe me when I tell them it is a crisis but a totally confected crisis that has origins in class conflict (the top-end-of-town seeking ways to get more of the real output for themselves).
My phone was also busy because this story came out in the press this morning (interviews I did yesterday) – Experts dismiss Treasury concerns over job cuts. I live in an area where coal mining is important and the local industry just hate me for talking like this. They have managed to convince people that their industry is keeping Australia growing and without it we would be impoverished. It is a strong lobby to come up against but then I am well trained in opposing the mainstream.
This is what they were alarmed about – the All Ords following the path of world markets – down.
The Sydney Morning Herald later carried the story (August 5, 2011) – This time it’s serious – by one Ian Verrender (who I often like to read even though he is in the mainstream (reasonable) camp).
The article says:
If you thought round one of the financial crisis was pretty rough three years ago, that was just a dress rehearsal for the main act. And the performance has just begun.
For the past 10 days, the markets have been doing the dance of the uncertain. Serious falls but nothing to get too alarmed about. On Wednesday things began to get ugly. Then came last night, when it finally dawned on traders in Europe and North America that there is almost no way to avoid an economic calamity.
That is definitely what is happening.
Verrender claims it is because of “(m)assive deficits, enormous debts, and no obvious way to pay for it all”. I also agree that the larger than usual deficits and rising debt have sparked this renewed crisis. But they are not the cause. To think that is to get the “horse before the cart”.
The fault lies in the ignorant way in which we view economic events like rising deficits and public debt. This ignorance is exemplified in the appended phrase “and no obvious way to pay for it all”.
The reality is that the deficits are flows and are being paid for every second by electronic transfers from a government that issues its own currency to a non-government sector which doesn’t.
There is no financial limit on this exercise. All limits on sovereign government spending are real – what real goods and services that can be purchased in the currency that the government issues under monopoly conditions. The government can always purchase whatever is for sale in its own currency and can always honour its liabilities denominated in its own currency which includes debt interest servicing and redemption.
There is never a financial reason for the government not being able to “pay” its way. To say otherwise is a lie. To not know this is ignorance. To comment as a professional on such matters and not know this is a sham!
I caution readers always at this point. To say there are no financial constraints on government spending does not mean that the government should spend “like a drunken sailor”. The conservatives who attack Modern Monetary Theory (MMT) like to insinuate otherwise which then allows then to hyperventilate into allegations that MMT = hyperinflation. It does not. The public deficit should be whatever is required to ensure that overall aggregate demand is consistent with the full employment of productive resources – and not a penny more!
When private spending is inadequate and/or there is an external drain on demand via the current account, then the only way the economy can grow is for the government to deficit spend.
Anyone who knows anything about the way the monetary system operates and the way the government spends and its relation to the central bank will realise that the way to “pay for it all” is obvious. It lies within the very definition of a monopoly currency issuer.
Verrender is better at description than he is at explanation:
Global markets now have given up on the pretence that it all will somehow work out. They’ve given up on the soothing statements from politicians. Even those eternal optimists, stockbrokers, no longer believe their own rhetoric about “green shoots” and “return to a bull market”.
And once greed turns to fear, as has been occurring for the past week and a half, it’s everyone for himself.
It is clear that a wider group are now realising that fiscal austerity – the promise of growth and private prosperity – is a con. Imposing limits on government spending and deliberately introducing harsh cutbacks has done exactly the opposite to the mainstream claims – it has sabotaged the nascent growth that was emerging off the back of the fiscal deficits.
MMT predicted exactly what was going to happen and now we are living through it again.
Verrender’s grasp on what is happening is deeply limited by his misunderstanding of economics:
In round one, governments bailed out the private sector. The financiers who engineered the problem got away scot-free. But who will bail out the governments?
Why not all those bond traders who are falling over themselves to buy government bonds at present? But then they are just using the funds that the government spent in the first place to buy the bonds. The government just offers debt instruments to provide the private sector with a safe asset that earns a return above cash (in normal times). Bonds are corporate welfare. The government calls all the shots.
Which means the government will continually fund its own spending from its intrinsic capacity as a monopoly issuer of the currency. Please read my suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – which address these first principles.
The terminology “bail out the governments” is also totally inapplicable to a fiat currency issuing government. It only applies to nations that have surrendered their currency sovereignty – such as the EMU states. Those governments face default risk. The US, Japan, UK, Australia and most nearly all other governments do not.
Verrender claims that he heard on “Wall Street last night” that more stimulus was in the offer “to stave off an imminent recession”. I hope they know something the rest of us do not. More stimulus is definitely required.
Verrender things that “the much vaunted QE2” was a stimulus measure which means he doesn’t understand that it was just an asset swap and could only be expansionary if long-term investment was sensitive to long rates, which at present, with everyone pessimistic because of lack of sales growth, it isn’t.
He claims it “did nothing except add more debt to the national accounts”. It did very little because it was a flawed strategy. But it was based on the economic theories that Verrender himself is perpetuating here. QE was driven by the erroneous belief that banks need reserves to lend and that if the central bank swapped assets (bonds) and created reserves in the banking system – then lending would follow. Money multiplier mythology. Please read my blogs – Money multiplier and other myths and Money multiplier – missing feared dead – for more discussion on this point.
Verrender claims that:
Western consumers seem to have picked up what the financiers and governments don’t seem to understand; that there is too much debt and that it is time to pay it down.
Yes, it is time to pay the private debt down. But that cannot happen if the government is also invoking fiscal austerity. A government deficit is a non-government surplus – as a matter of national accounting. The only way the private sector can overall reduce its debt levels (given external deficits are the norm) is for the government to support income growth with deficits.
As long as governments hang on to the gold standard conventions of issuing debt to match their net spending (which is totally unnecessary in a modern fiat monetary system) then the on-going deficits will mean higher public debt levels. That just means that the government is willing to provide interest-earning assets to the non-government sector as part of their spending commitment.
It also means – higher national income, higher employment, higher private wealth – which is all good.
The problem with the first fiscal interventions is that they were not employment-targetted nor of sufficient size. The rising debt is not a problem. The bond markets at the moment certainly don’t think there is a problem. They would prefer more public debt rather than less.
You see the same mis-reporting in this article (August 5, 2011) – The last plan failed. So what’s the plan? – which is breathtakingly inapplicable.
Here is a selection:
The last plan, to respond to the global financial crisis in 2008, was the mother of all stimulus programs. It was designed to flood the world with money and restore confidence.
Instead, it flooded the world with more debt. Although that plan did prop up markets for a time, taxpayers have paid handsomely for it. It is our debt now. It was transferred from the private to the public sector. We own it, and it’s higher by the trillions. … …
It is quite conceivable, especially as Washington has always danced to Wall Street’s tune, that the plan now, if any, is just to keep printing money till paper currency and therefore $US-denominated debt is rendered worthless.
Now then, what’s the plan? There seem to be two choices on the policy menu.
One, the deflation option: let market forces take over, let the defaults begin and provide a social safety net.
Two, the inflation option: keep splashing the cash to reduce the debts to zero. Kick the can down the road. This is clearly the Wall Street option. The proxies in Washington will duly deliver more stimulus, stimulus the public can ill afford, stimulus which could bring another Weimar Republic with its hyperinflation, but stimulus which will diminish the size of the debt.
Oh, how sad this level of ignorance is.
Why not this plan?
1. Discipline the financial markets – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks.
2. Render the housing crisis benign with sensible – rent and buyback offers to those at the risk of default. Please read the blogs in point 1 for more details.
2. Stop issuing public debt and consolidate the central bank with the treasury – as it really is anyway.
3. Announce a Job Guarantee and ensure anyone who wants to work but cannot find work has a (socially acceptable) minimum wage job in the public sector advancing community development and environmental sustainability.
4. Provide generous funding to public infrastructure development which will underpin future prosperity – hospitals, schools.
5. Fund research into renewable energy.
6. In federal systems, provide demo-grants to the states to allow them to turn their street lights on and keep their schools operating.
7. Fund public education campaigns built around an understanding of MMT.
8. Wait for the private spending recovery – once the private debt levels are brought under control by the increased income that will flow frmo these stimulus measures.
Which brings me to this article by Cambridge (UK) academic Tarak Barkawi (July 27, 2011) – The biggest threat to Western values – which carried the sub-title – Multiculturalism does not pose a significant danger to Western values – but neoliberalism does.
He begins by noting that:
The paranoid style in politics often imagines unlikely alliances that coalesce into an overwhelming threat that must be countered by all necessary means.
The “alliance between “Confucian” and “Islamic” powers – that would challenge the West for world dominance” etc. Barkawi notes that the Norwegian mass-murder “invoked the improbable axis of Marxism, multiculturalism and Islamism, together colonising Europe”.
Always in these “conspiracies” is the opposite – a posed or “invented purity”. If only we get rid of the evil alliances that are going to destroy our freedom and civilisation things will be fine.
Evil debt-laden governments with leftist ambitions – fall into the queue with evil islamists-marxists etc. All have to be destroyed to cleanse our societies and restore order.
Barkawi emphasises that the right-wing agenda is laced with paranoia about “immigration and cultural difference” which threaten our “social cohesion”.
He writes that even though the islamic component of western societies is tiny:
… the fantastical fear of the “loss” of Europe to Islam animates many on the right. It is part of mainstream electoral politics in Europe, and has long been an element of right wing discourse in the US.
In this vision of danger, multiculturalism plays a key role.
Apart from the irony that the advanced Western nations drew their “cultural, economic, and political strength from interconnections with all parts of the world” it is missing the point to blame ethnic minorities for our woes.
It is very common to start separating minorities out because they “are taking our jobs” or otherwise eroding our values.
Barkawi though thinks something else is undermining the continuity of our western societies – neo-liberalism.
He writes that “capitalism”:
… progressively turned everything into something that could be bought or sold, measuring value only by the bottom line. Slowly but surely such measures came to apply to the cultural values at the core of society … Note for example the ways in which the great professional vocations of the West – lawyers, journalists, academics, doctors – have been co-opted and corrupted by bottom line thinking. Money and “efficiency” are the values by which we stand, not law, truth or health. Students are imagined as “customers”, citizens as “stakeholders”. Professional associations worry about the risk to their bottom line rather than furthering the values they exist to represent. Graduates of elite Western universities, imbued with the learning of our great thinkers, are sent off to corporations like News International. There they learn to shut up, obey, and collaborate in the dark work of exploitation for profit, for which they will be well rewarded, at least financially speaking.
This is reinforced by the “grip of corporate power on the media and on political parties” while “the income differential between the poor and the wealthy already resembles that of banana republics”.
The manifestation now is that fiscal austerity is squarely aimed at the weak and the poor who must pull their belts in because the banker dropped their pants. Barkawi says that this is exemplified by the fact that:
The downtrodden are asked to bear the burden of a financial crisis created by bankers. America’s wealthy fly their children to summer camp in tax-free private jets amid a real rate of unemployment of over fifteen per cent.
Neoliberalism is the “accelerated” form of these basic capitalist processes. Long ago (1974), Harry Braverman published Labor and Monopoly Capital: The Degradation of Work in the Twentieth_Century – which predicted the trends we are now witnessing that have brought the world to its feet. It is a wonderful book and I urge everyone to read it.
Neoliberalism has undermined the legitimate role of government (to use fiscal policy to maintain full employment and price stability) and has perverted the powers of government to aid the process of transfer of increasing proportions of real income to the top-end-of-town. It “legitimised” the socialisation of private losses when the casino fails. It has punished the poor and the weak. It has used unemployment as a deliberate strategy to ensure that productivity growth is expropriated by capital while real wages grow modestly if at all.
I agree with Barkawi that:
Here is a far more convincing threat to Western values and “social cohesion” than the lunatic fears of fascists. Notably, this is a threat that emanates from within, not without.
This crisis is totally confected by our governments. They have been taken over by conservative elements that benefit from the suffering of others – both in material ways but probably also in spiritual ways (they consider public support to be evil and the realm of the lazy while overlooking any public handouts they get along the way).
It staggers me how unnecessary all this is. And now we are digging the hole even deeper and I don’t mean the budget deficit (although that will rise as economies slow).
Which brings me to my next challenge for today which is to make the case for renewed deficits in 500 words. The UK BBC Radio Program – Broadcasting House – is running a segment on the farcical debt ceiling debate this weekend and invited me to write something about the MMT approach to it.
So I am now writing my 500 words. Here is my first 217 words or so:
Imagine during a test cricket match at Lords that the scoreboard manager announced they had no more runs and that the batsmen should retire because the game was effectively over. We would intuitively respond that there was no limit on the number of runs that the scoreboard could tally, that the “runs” on the board were just numbers entered into the record of account, and that any “scoreboard austerity” was confected and without foundation.
The same sense of public outrage that would accompany such a stupid intervention from the scoring authorities at Lords should be applied to those who claim that the government has run out of money and that damaging fiscal austerity measures need to be imposed.
Just as the “runs” on the scoreboard come from “nowhere” and are created by a computer inside the facility, a government can create dollars, pounds etc whenever it wants to at the stroke of a key. A governments that issues its own currency does not have a store of money that it spends. There is never any sense that a government is “financially” constrained. It can always purchase whatever is for sale – for example, labour – in the currency that it issues.
The government is not a super “household”. Households use the currency that the government issues and are always have to “finance” their spending (by borrowing, working, etc). Governments never have to fund their spending. This is not to suggest that governments should “print money”. They have to spend responsibly to ensure that the economy is operating at capacity – not above and not below.
etc. Now I better write the next 273 words and then tighten it up.
The point is that the crisis we never left which is intensifying is totally unnecessary. It is a totally contrived – confected – concocted crisis which reflects the failure of governments to utilise their fiscal capacity for public purpose. It is obvious that deficits are too low at present.
But because the US and the UK think they are going to be the next Greece – which is impossible because there is only one Acropolis quite apart from the obvious difference that the non-EMU governments issue their own currency – they are heading into a long period of calamity. Those at the bottom of the heap – the poor and unemployed and their children bear the brunt. Those with mobile financial assets are all queuing up to get the evil government debt at present safe in the knowledge that they will enjoy the redemption and interest income in due course.
It’s Friday and I have to get my 500 words done in between a lot of interruptions. Have a nice weekend.
Friday music segment
When the share market plunges and everyone starts flocking into government bonds because they know they are risk free as a result of the government having a monopoly over currency issuance it is time to lay back and listen to some guitar music from Anson Funderburgh (of The Rockets fame).
We should be secure in the knowledge that at least the government is there to bail us all out when we are too stupid to act sensibly ourselves. The only problem is that we have to get the governments to realise this is their lot in life – none other.
The Saturday Quiz will be back sometime tomorrow – about as hard as last week!
That is enough for today!