Fed Reserve about to take over New York Times!

Strange events come together sometimes. One was the continuing railing against the ABC, our national broadcaster by the failed former federal treasurer. He somehow thinks the national broadcaster continues to display left-wing bias. The other event was an astonishing interview on a popular national ABC program where the content was about as far away from the sort of thing the failed former treasurer was railing against. The ABC program interview will have New Yorkers marching in the streets to defend the buildings of their famous newspaper. Here is how the events unfolded.

Yesterday, the failed former federal treasurer Peter Costello wrote in his opinion piece in The Age that Everyone’s ABC? Only if you lean left. The thesis he mounts is that our national broadcaster is anti-conservative and therefore, anti-liberal. He said among other things:

With the ABC the line of questioning is always predictable. It always comes from the Labor/Green perspective … Labor will never be criticised for entrenching union power, or going soft on law enforcement, or spending money it doesn’t have … the flagship national current affairs programs – AM, PM, The 7.30 Report – have a consistent editorial perspective …

Five nights per week Phillip Adams broadcasts on Radio National. Adams claims that he has been close to every Labor leader from Whitlam to Beazley. Robert Manne has described Adams as “the emblematic figurehead of the pro-Labor left intelligentsia”. Back in 2001 the then managing director of the ABC declared he would look for a right-wing Phillip Adams to balance up that program. It must be an exhaustive search. The new managing director is now in his fourth year of office. Apparently the corporation is still looking.

Anyway what else would you expect from him. The government that he failed to lead but was an instrumental force in worked over the ABC so badly through funding cuts, constant criticism of its editorial positions, and forced enquiries into the same. Recall the poisonous appointment they made to CEO position. That obnoxious character left soon after – a total failure. But the constant harassment of the ABC did reduce its capacity as an independent broadcaster.

This was most evident in the types of economic commentary they relied on. Before the liberals took over, I was constantly on the ABC as an economic commentator. During the Howard years, my role was reduced – I was still heard but not nearly as much. I could (but I won’t) tell you some anecdotes about phone calls made and whatever about my appearances. Maybe in a book later on. But they relied on financial market types (bank economists) who had an obvious vested commercial interest in the matters they were giving expert commentary on. It was a disgrace. Night after night we heard the same neo-liberal mantras being rehearsed by the so-called experts. The interviewers were well versed in the standard neo-liberal lines about the benefits of budget surpluses etc etc. They just fed this to the bankers and we all heard the predictable responses – reinforcing the myths.

But, Costello’s on-going hatred of the broadcaster is not the story particularly.

The second related event occurred today. I was listening to the repeat of last night’s Late Night Live (this is the Phillip Adams’ radio show referred to above) because I was in-between meetings and had the radio on in my car.

Phillip Adams, the presenter started the program by referring to recent comments made by the failed former Treasurer Peter Costello and defended the independence and unbiased nature of the ABC. Anyway, having said that he moved into a segment about China and the global crisis.

Adams set about interviewing his regular financial commentator – one Satyajit Das who is a supposed risk consultant and author. His last book was Traders, Guns & Money: knowns and unknowns in the dazzling world of derivatives (Prentice Hall, 2006) and it is one book you can avoid buying given that it displays his fundamental lack of understanding of the way the monetary system operates.

You can listen to the segment if you dare but the relevant aspect of the interview goes like this:

PA: … Lets look at their stockpiles of US dollars. Tell, tell the listener,and in fact, tell me, about the foreign currency exchange system that China set up, set up under Deng Xio Ping.

DAS: Well it was actually very very interesting because Deng Xio Ping when he came to power in the 80s, reformed China economically up to a point. And essentially what they did was borrow from the Japanese which they would hate to admit and they essentially built an export built model. So what they did was set aside parts of the country as essentially special economic zones like around Hong Kong and they used their large labour force to import in goods then do some manufacturing on them and export them out. And this was the basic model they were going to use for two reasons. One, they had a large labour force to employ. But also on the other side they needed foreign capital and foreign technology and know-how. And that was the model they built.

So far, I have no problems with that. The Chinese fell prey to the neo-liberal emphasis on development via exports. This deprives the domestic market of goods and services and ships them abroad. In return the Chinese are able to stockpile financial assets denominated in foreign exchange, presumably for strategic reasons, not the least being to keep their currency low to ensure exports sell. A self-reinforcing approach. Anyway, whether this is a sound strategy when you have massive poverty in most of the rural areas is questionable but beyond the aim of this blog.

The interview continued:

DAS: And then, miraculously in the late 1980s early nineties, they found a way to turbo charge it. The turbo charging was as they exported more than they imported they built up all this foreign exchange and they didn’t know quite what to do with it. But they hit upon accidentally I think, the ponzi schemes of all ponzi schemes.

Which is that they started to lend the money to the countries which were buying their goods like the United States. And the way this was done is that the Chinese central bank invest these dollars that they get when they trade, actually invest them in US Government bonds. And this had the miraculous effect of keeping US interest rates very low, and providing them with abundant money to fund the government deficit and it encouraged consumer borrowing at a level which we’ve obviously never seen before

Now the problem the Chinese have is that they have most of their $2 trillion in US dollars but most importantly its in fairly toxic assets I would argue which is US Treasury Bonds, because at the moment …

PA, interjected saying: Your not suggesting a US Treasury bond could be a toxic asset.

DAS: Oh indeed I am because at the moment Ben Bernanke and Larry Summers and Tim Geithner are printing them as furiously as they can. There is a rumour that they will take over the New York Times and use the printing presses actually to print dollars.

So there you have my American friends. The NYT is about to be taken over by the Federal Reserve and the re-appointed Bernanke and his Treasury pals are going to ramp up those printing presses. If this wasn’t so serious it would be laughable.

Late Night Live is a major national radio program which is listened to by a significant number of people. Having this character on as an expert – on a regular basis would seem to destroy Peter Costello’s allegations of left-wing bias in one fell swoop.

And if you listen to the interview in total you will see how the presenter “fawns” over Das and advances his genius. All this reinforces the veracity of the message he is presenting which when you bring it down to fundamentals is total, unadulterated nonsense. Having this character on as the expert and letting him ramble on which this rubbish without any significant challenge from the presenter or additional guests on the program is a disgrace.

Lets debrief … for those who might actually believe the stuff DAS is pontificating about. First, the Chinese knew exactly what they were doing. They wanted to keep their currency as devalued as possible against the currencies of their trading partners – to ensure their export-led growth model would operate in the best possible circumstances.

Second, they desired to build a stockpile of financial assets in US dollars because it wanted to export favourably into that country (given the size of the US domestic market).

Third, the Federal Reserve sets the interest rate in the US, the Chinese government does not. Buying US Federal Treasury bonds had little to do with it.

Fourth, the US government spends in US dollars. The Chinese government does not issue US dollars. Therefore it cannot fund any US dollar spending. That is complete nonsense. You will realise that the US government is sovereign in its own currency and does not need to fund its net spending. This is a common myth that I hear all the time.

Fifth, US government bonds are not capable of being toxic in the sense that DAS is using the term. The US government can never be insolvent in its own currency. It might (but won’t) for political reasons choose to default on its debt obligations. But that has nothing to do with running out of capacity to service or repay its debt.

The system actually operates in real world as follows: The Government sells a bond to the non-government investor and debits the bank account you hold and credits some account within the government reflecting your bond holdings. Numbers just go into ledgers. You get a letter outlining the parameters of the bonds you just bought which includes the maturity date and the interest to be paid on the face value. On maturity, some operator in the Government reverses these transactions – credits your bank account with the bond repayment plus interest and debits the account recording your bond holdings.

There is no financial constraint on meeting all obligations in their own currencies irrespective of how large these obligations are. Even if the private markets “stop buying the debt” the government will still be able to spend. The debt after all does not finance the net spending!

In each of the budget deficit countries (where the currency is not convertible and the exchange rate flexible), the national government is not revenue constrained. So the concept of “financing” net government spending is inapplicable. Households need to finance their spending – sovereign governments do not.

These so-called ballooning deficits are all denominated in the currency of issue in the respective countries. Take the US as an example. The US Government spends in $US. It does so by crediting bank accounts (using electronic delivery systems) or writing cheques. The US dollar is the sole creation of the US Government just as the Chinese Government, for example, is the sole issuer of the Yuan. So it would be impossible for the Chinese to finance US Government spending in US dollars.

So what this twisted logic is trying to get to is the story that the Chinese trade surpluses with the US (for example), generate holdings of US dollars which are then used, in part, to buy US Treasury bonds. The mistake is then made that these bond sales by the US Government provide it with increased capacity to run deficits. Accordingly, as the trade surpluses grow, so do the Chinese holdings of US bonds and hence they have been increasingly unwriting the “over-consumption” of the US Government.

You might like to read this blog – The piper will call if surpluses are pursued … to work through the trade issues.

But the message is clear from DAS that US consumers have had to borrow $ trillions from the Chinese to keep consuming whereas in fact the modern money reality is that the US consumers are funding $trillions in foreign savings (accumulation of $US-denominated financial assets by the Chinese).

It is through this route that foreigners can gain access to the domestic currency and, in turn, use that currency to purchase things denominated in it (including financial assets).

In the blog – Debt is not debt! – I provide a transaction-by-transaction analysis of the implications of all of this.

The Late Night Live Radio audience is being grossly mislead by DAS. The build-up of US Government debt in the hands of foreigners presents no particular problems to the US economy quite apart from the fact that the debt was voluntarily issued in the first place and of no consequence to the ability of the US government to spend (in US dollars) whenever its chooses.

To really understand how the public component of the “national debt” is paid off you have to understand the operational mechanisms. Most commentators (and politicians etc) who make statements about these sorts of things haven’t the slightest conception of how the accounting transactions actually unfold.

What we call money and what we refer to as Government debt are really just numerical entries that appear in the government accounting structure. If a US commercial bank buys a government bond (for the Chinese Government) then the monetary system records the following impacts.

  • The US Government debits the commercial bank’s account with the Government (used to transact government bond sales and purchases). So the account balance is reduced. Simultaneously, the US Government credits the commercial bank’s bond asset account held with the Government for the same amount – recording that the bank now holds $US x worth of government bonds. These are electronic adjustments to numbers in the accounting system. Nothing real is transferred other than a an official receipt!
  • The transaction provides the government with no greater capacity to spend. Anytime it wants to spend it just credits whatever relevant bank account it wants in the private sector) to signify it has spent $AUD.
  • On the day the bond matures its face value and interest has to be paid in full. The US Government would once again make two electronic adjustments to the accounts – one up and one down. They would debit (reduce) the commercial bank’s bond asset account held with the Government by the value of the bonds being repaid. They would credit the commercial bank account held at the Government to record bond issue sales by the same amount. Once done – two keystrokes – the debt is repaid – nothing real changes hands (except for another bit of paper sent by the Government to the Chinese representatives that they no longer hold the bonds).
  • Interest payments are similarly handled – nothing real is involved.

The sky remains in place above our heads!

Anyway, if you thought the statement that the NYTs building is about to be stormed by Ben and his fellow Fed Reserve Brigands was bad enough, the interview deteriorated from there. Here is the next bit which followed some exchange about Bernanke being reappointed.

PA: … You don’t like Bernanke much do you.

DAS: I don’t actually like Bernanke for a couple of reasons. One is I think overall he is cut from the same cloth as people like Friedman and Greenspan and I find this sanctimonious thing that he actually saved the world to be kind of anomalous. When firstly he said that he, like Greenspan, could never see a bubble and therefore did nothing about it. Now then he also blamed the entire crisis on exactly the process we were talking about which is in fact was the Americans weren’t borrowing but everybody else was saving too much. And finally he has built up an enormous infrastructure where the Federal Reserve’s balance sheet has become something like 30 per cent of the US economy and he actually is saying that this is going to save the United States.

PA then talked about how many commentators are coming to a consensus about China and the dangers it poses the world economy:

DAS replied: I think generally speaking almost there is now a consensus building that this Chinese growth and this whole way that we are trying to get out of the recession is highly flawed and I think the test will come over the next 18 months or 24 months as we see the withdrawal of the effects of the stimulus … I mean China’s extraordinarily their growth is about 8 per cent, 6 per cent of that comes from government spending but more importantly, their banks have lent a trillion dollars this year. Now to put that in perspective that is 25 per cent of their GDP that they have lent .. that is an astonishing figure.

PA: Are you not also concerned that China is producing its own stock market and indeed property bubble.

DAS: Oh absolutely, because of that 20 trillion dollars of lending the statistics that are coming out … is roughly 20 to 30 per cent ended up in stocks and the other 20 per cent ended up in property which has essentially propped up these markets and, effectively what they have done is created their own sub-prime mortgage problem. Because essentially the bank lending that’s going here is not to productive assets as to productive speculation. And I think that’s going to come home to roost.

First, the banks doing the lending in China are State-owned. State-owned banks lending in their own currency cannot go broke. There is nothing remotely like a sub-prime meltdown coming in China as a result of this.

Second, note the bias against public spending. When you are building your economy on a net export strategy and exports fail you have to replace it with domestic sourced spending. China has relied on public demand for years as a major contributor to its growth (particularly in infrastructure development). To claim that the high percentage contribution is something new is to totally misrepresent the last decade.

You might like to read this blog – When crisis means death! – which gives a much different view of the way in which the Chinese government has redirected spending.


All you New Yorkers who love your paper get out in the streets and picket all Federal Reserve buildings to keep Ben and the Brigands (sounds like a blues band!) from taking over.

If it wasn’t so serious that this rubbish is allowed unfettered and unbalanced time on our national broadcaster then we could have a real laugh about it.

Digression: Why does the US government issue bonds when it doesn’t need to?

A regular reader sent me an E-mail yesterday that went like this:

Indulge me for a moment. Since we agree as a first principle that the government is never operationally constrained on fiscal policy (assuming a freely floating non-convertible exchange rate), and since we agree that bonds are nothing more than a defensive measure by the Fed designed to maintain a set reserve rate, I have the following question:

Today, the FT has a front page headline: “US says debt outlook worsening”. The article is below. Of course, this is based on the usual gold standard type thinking that afflicts organs of traditional orthodox economic thinking such as the FT. But since Bernanke has already said that it would likely be years before it would be considering raising interest rates, why bother issuing bonds at all?

This is not an uncommon question. This was my reply.

The answer to your question as far as I can tell is ideological. They have fallen prey to the seigniorage arguments from the gold standard and hate the concept of the central bank monetising the government spending. Not that the central bank can do that anyway with a positive interest rate target (but the neo-liberals don’t understand that).

They firmly believe that the government has to finance its debt. They see debt issuance as a fiscal policy act rather than what is – a part of monetary policy (interest maintenance). They believe the fiscal policy will become undisciplined if it is not backed by rising debt – the latter imposes a political penalty on governments who somehow know the public hate public debt. It is a self-reinforcing script.

In the US it is illegal not to issue debt $-for-$ with net spending. In Australia in the last two decades we have moved in that way too – the government now has operating regulations forcing it to cover the deficits to the cent in private markets.

Nonsensical in the extreme.

The reply I received was:

So it’s a legal constraint based on a totally false paradigm! The Treasury by law has to “fund itself” even though in actuality it doesn’t actually fund itself! So the law establishes an operational constraint, in effect legally circumscribing full prosperity and employment. It’s enough to turn one into a Marxist!

I warn anyone against dangerous tendencies but I have started calling the reader “comrade” just in case.

But even with the stupidity of it which effectively takes it back to a gold standard approach the national governments can still use fiscal policy to maintain full employment as they did more or less between 1945 and 1975. But then they have to deal with the political issue of rising debt.

Nonsensical in the extreme.

This Post Has 25 Comments

  1. Following on from ‘when leading economists become part of the problem’- as an economics undergraduate I am increasingly confused about which way is up? I have a good understanding of modern monetary economics and real willingness to learn but as you discredit Das’s comments I reflect on the Symposium on the Global Financial Crisis held at the Uni of Newcastle earlier this week at which Das was the guest speaker- i even got a free book. I am not discrediting the value of the conference nor your blog but just expressing a real frustration as I try and grasp often difficult concepts which only seem to hinder my ‘academic performance.’ How can I ever aspire to be an economist when seemingly everyone is wrong depending on who you talk to?

  2. Dear Chris

    It is a long-standing plight for any student who questions the orthodoxy. Ultimately you have to become strategic in matters relating to “academic performance” and give them what they want. But you should never let that compromise your own intellectual development and behaviour as you build an understanding of how the system operates. The Symposium this week that you refer to had no speaker who understands the way the economy works but plenty who still think it lives in the days of the gold standard. To me that is cut and dried. But then, I understand … I am further down the road than you are.

    My advice is to keep an open mind as you seek further understanding and question everything you read or hear. Opinions reflect ideology and you should work out where someone is coming from in that regard as you assess what they are saying. But one thing that modern monetary theory has going for it that is not found elsewhere in macroeconomics is that it starts with a thorough understanding of the basic accounting relationships that have to hold – models have to be “stock-flow” consistent between the macro sectors. Only modern monetary theory can claim that higher ground. You might believe persistent budget deficits will be inflationary, which after all is an opinion. I would share that view under some circumstances. But you cannot believe (it is not at that level of understanding) that a government deficit and a non-government deficit can coincide (for example).

    Good luck working it all out. It is an exciting time for you to be confronted by so much.

    best wishes

  3. Hi chris.

    As a non-economist, I am beset with the same problem. It seems that if you ask 10 different economists to give you a basic explanation of how the economy functions you will get at least 10 different answers, with most of them insinuating “everyone else is a ****head but I’m not”.

    In the time that I have been reading billyblog, Bill has carefully and precisely laid out the functioning of our modern fiat monetary economy versus earlier gold standard/gold exchange models. Most of the anti-deficit, pro-perpetual surplus types I have questioned seem to hold it as an article of faith that the economy still actually does function as it did many decades ago. It is almost as if for them, the transformation into a modern monetary economy never occurred. I am still surprised at how many of these people with an education superior to my own simply disengage when I bring this up. Many of them don’t even tell me that I’m wrong and why – they just cease correspondence.

  4. @ Lefty – the Gold Standard Theory was also wrong in the US in the late 1800′, days of the Gold Standard and wildcat banking … though wrong in a different way than it is today.

    However, in understanding the monetary system, we are running directly up against the process of institutionalization of patterns of behavior, as folkviews develop and are passed on regarding the rationale for regular rules of behavior. Under the way our a modern monetary production is organized, money is tremendously useful, and people must learn to treat it as if it is intrinsically valuable, even though it clearly is not. That leads to two widespread misconceptions:

    (1) first, that there is something “backing” dollars that is intrinsically valuable, which the easiest answer to quiet questions about why money should be treated as intrinsically valuable when it is not; and

    (2) second, when someone works out that not only is money not intrinsically valuable, and that there is nothing intrinsically valuable “backing” the money, that there OUGHT TO BE “something valuable” backing money to give it value.

    What’s valuable, of course, are the resources in our economy, including the ability of people in our economy to mobilize those resources, and our social organization is an essential part of that ability to mobilize resources.

    It may be that fostering misunderstanding is a useful strategy in gaining and maintaining control of strategic choke points that allow some people to run a protection racket – “nice economy you’ve got ‘ere, shame if somefing should ‘appen to it”. So no matter how strong the biases in favor of the misconception, it remains necessary to fight it.

  5. “The US government can never be insolvent in its own currency. It might (but won’t) for political reasons choose to default on its debt obligations. But that has nothing to do with running out of capacity to service or repay its debt.”

    I think it will choose to default. Because those debt obligations are nominated in its own currency – that’s the “exorbitant privilege” (De Gaulle’s words) a reserve currency maker has. It can simply inflate those obligations away if it finds it convenient to do so. And rather than transfer real goods and services in satisfaction of the debt, with consequences for voters’ living standards, why wouldn’t they do that? Its a perfectly rational fear if you’re holding massive US currency assets that those assets will in fact become worthless.

    It’s a bit unfair to describe China’s policy of boosting exports through exchange rate policy as neo-liberal. It’s classic mercantilism; they are ripping off their consumers mercilessly in pursuit of accumulation of national “assets”. The error of the neo-liberals is the opposite of what you imply: they assert that this policy can never work. But it is in fact a very good strategy for economic takeoff, though it eventually runs into limits (as China is now beginning to find out) that leave lingering problems if you can’t transition to a more sustainable policy (as Japan found out).

  6. Dear DD (if I may – I notice the convention emerged the other day!)

    Good comments as usual. The US government certainly has the option of doing what you say. Although while the Chinese want to accumulate financial assets in $US why would the US government not want to give them access to the US domestic market and induce them to ship more real goods and services to Americans than the other way around?

    And remember that the French President was commenting during a period when there was a gold standard and governments had to deprive their citizens of net spending to repay public debt. It is quite a different situation now as you will appreciate.

    As to the neo-liberal tag … I was using it in the sense that this has been the principle IMF/World Bank strategy over the last 30 odd years for less developed countries. We could have an interesting debate as to whether it has served the nations well. I don’t think it has done much for Africa or South America and to some extent the swing to the left in South America is a reaction to the failure of IMF strategies.

    best wishes

  7. Dear Bill,
    can you please explain why deregulating agriculture has lead to lower prices and returns to farmers. Dairy dereglation, the aboandonment of the Single desk for wheat are just the latest crimes committed against Australia’s struggling farmers and yet the neo-liberals in the Ag departments and ABARE persist with the deregulation mantra. It seems to me all our industries did better with some barriers to unrestricted trade and with , what we used to call “orderly marketing”,in the 50s, 60s and 70s.
    While Labor got rid of the single desk the Coalition were the worst, claiming to support farmers while doing their utmost to undermine our future….hypocrits.

  8. Dear Prof. Mitchell, I will declare my priors and say that I have been conventionally educated in macro in Australia, but have since rejected this indoctrination and have become interested in the Austrian School. I just have a few questions for you. I am genuinely trying to engage you here, so please do not see my post as being antagonistic. It is certainly not intended that way. Rather I am trying to engage in reasoned debate. 1) Do you see no problems from having a zero interest rate, in terms of encouraging malinvestment in sectors of the economy that are far away from the final consumer? 2) Do you believe that money has a store of value function? If so, can you please elaborate, or if not, what do you see as a store of value in a modern monetary economy? 3) Do you trust bureaucrats and politicians to make sound decisions that are in the national interest even if you make the heroic assumption that they actually have the knowledge, information, power and general werewithal to execute their plans without unintended consequences?

    On my readings of your blog articles, I believe the main flaws in your thinking are that you see output, capital and labour as being homogeneous and this leads you to the erroneous conclusions that deficit spending will not be inflationary whilst there is excess capacity.

    I will say that while I don’t endorse your job guarantee, I do think it would be a better way to spend public money than fighting wars or building memorials in schools to our illustrious leaders. Trouble is, why do you trust that politicians and buraeucrats won’t revert to this type of behaviour? Best in my view to limit their power with a strong constitution.

    I do enjoy reading your blog, particularly the labour market analysis. I have found your analysis of transition probabilities to be some of the best i have seen of the current crisis, in terms of drilling down and really getting to the crux of what is happening in the labour market. On that front, please keep up the good work.

    I look forward to your response.

    Cheers Skuter

  9. Dear Chris,
    I can confirm what Bill had to say in his response to you and offer the following few words about my experiences.

    I had heard the Satyajit Das interview Bill referred to and was considering pointing it out to Bill because I too had realised what a lot of misunderstandings were being propagated. But then Bill beat me to it.

    Now why do I mention this? It is for the following reason. I am not an economist by my training; I am a retired academic in computer science. A few years before I retired I was researching in electronic cash technology, in particular encryption matters. People would often say to me that electronic cash is not money. In order to find out what money is I went to Bill, who I didn’t know at that time, for him to clarify this matter. (It is really strange, we use money everyday but it seems that most of us don’t know much about it.)

    As a result of this I became more interested in what Bill was on about when it comes to the Job Guarantee and modern monetary systems. However it took me quite a while to get my head around some of the aspects of the fiat money system but finally I managed. The business card model (see an earlier posting in the blog) and the Buckeroo model (contact Randy Wray’s blog) helped a lot. I am not too sure why I had this difficulty (probably because of my gold standard paradigm way of thinking) but finally it clicked. I was able to construct a sort of “mental map” of what a fiat money system is and how it works.

    Now, after several years, I feel reasonably comfortable in assessing much of what I hear in the media on economics etc and so my response to the Satyajit Das story. I think the valuable thing I now have is a coherent and consistent building block of concepts upon which I can judge other claims and assertions. This building block is not simply just a theoretical construct but is backed by much empirical evidence as you no doubt have noticed in Bill’s blog, as well as that of others like Randy Wray and Warren Mosler, just to mention a few. Of course, whenever I hear another claim which contradicts this I like to see the justification, including the evidence.

    I must say though that I always have to keep my wits about me so as not to fall into the “erroneous” ways of thinking – unfortunately this still happens to me although far less frequently now.

    Hope this helps a bit.

    All the best with your studies

    Graham Wrightson

  10. Dear Skuter

    This requires a longer reply and I have been promising various readers who have written to me that I would do a blog on the Austrian school. I would say that I am not the slightest bit interested in what they have to say after studying it relentlessly some years ago. But the ideas are out there and therefore I will provide a lengthy reply.

    Perhaps Scott might beam in in the meantime and clear some of your points up as well. I would note that I have never advocated a reverse-L shaped aggregate supply response (that is, a dichotomous state – no demand pressure on prices, all demand pressure). That is one of the reasons I say that Job Guarantee eliminates unemployment well before you hit that question. Then you have to explore the curve around capacity to see whether specific bottlenecks will occur before all sectors are at full capacity.

    Anyway, more some other day … and for today’s blog, you get more labour market analysis!

    best wishes

  11. “Fifth, US government bonds are not capable of being toxic in the sense that DAS is using the term. The US government can never be insolvent in its own currency. It might (but won’t) for political reasons choose to default on its debt obligations. But that has nothing to do with running out of capacity to service or repay its debt.”

    Bill, I get the impression that Das is referring to inflation risk, rather than credit risk. “Toxic” may be a bit OTT, but isn’t there a very real fear on behalf of US creditors that the US will inflate its way out of its debt predicament? Isn’t this just a form of gradual “death by a thousand devaluations” default?

  12. Chris,

    Unlike Graham, I do not know Bill and his collaborators personally and my perspective on all this:

    I fortunately never bothered to learn any Economics and as soon as I started learning, I reached this blog! Imagine my good luck!

    Even though I have only interacted with them on blogs, I can easily imagine the amount of thinking put by Bill, Randy Wray, Warren Mosler, Scott Fullwiler into all this. I don’t really know how I could handle academic performance if I were you, but I as far as learning Economics is concerned, I can ask you to be Logical at every step and construct zillion thought experiments and ask yourself questions.

    For example, try to come up with some story of the sequence of events when a new country is formed. (Just a thought experiment, hopefully they do not form any more countries). Where does the cash come from? What precisely is the overnight market? What are open market operations ? When a bank gives you a loan, what is the sequence of events?. How do deposits increase over time ? When you write a check, what events happen ?

    There are more questions – what happens if consumers want to increase savings ? Also, as Bill pointed out stock-flow consistency is really important.

    These questions are not the easiest to answer especially because they require a lot of thinking.

    Once you figure such stuff, it will help you more rather than be a hindrance – you will be able to beat others in their own game 🙂

  13. Dear Skuter,

    The only contribution the Austrian School made to macroeconomics was producing Nicholas Kaldor and Abba Lerner – from then on it pretty much all went downhill.

    As far as methodology goes though Mises “Theory and History” is probably my favourite economics book.

    cheers, Alan

  14. Dear Skuter and ParadigmShift

    As Bill invited me to comment, I think I will simply focus on one aspect that you both mentioned . . . inflating risk of the national debt.

    The neoclassical story . . . and generally accepted view . . . is that rising debt service ultimately leaves the govt with the unhappy choice of paying the interest obligations and inciting strong inflation or defaulting to avoid the inflation. In fact, then, the neoclassical view DOES acknowledge a govt’s ability to service its own debt and thus to not be inherently at risk of default (a point which even most neoclassicals don’t understand), just not its ability to set the interest on its national debt and thereby keep debt service from becoming inflationary.

    Bill has laid out here in a number of posts . . . and I have explained in some detail in a paper titled “Interest Rates and Fiscal Sustainability” on the CFEPS site . . . that for a govt issuing its own currency and operating under flexible exchange rates, the interest on the national debt is in fact a monetary policy variable. Therefore, we argue (via the realities of reserve accounting, monetary operations, and so forth) that it is entirely within the control of the govt (cb inclusive here) to avoid the unhappy choice neoclassicals consider inevitable when the national debt grows significantly.

    For examples, we need look no further than Japan now, the US in the 1940s, and the US now. Japan has outstanding securities held by the non-govt sector 3x larger than that in the US as a percent of GDP,yet debt service there is less as a percent of GDP than in the US. During WWII and through the late 1940s and into early 1950s, the Fed set interest rates directly on Treasuries at around 1% or significantly lower. In the US right now, even with a defict about 12% of GDP, large deficits projected into the future, and the rolling over of half of the pre-existing debt (since these are held in bill form) this year, total interest on the national debt is projected by the Congressional Budget Office to fall by $60 billion this year from last year. Note from these examples we have the only 2 possible situations of government debt held by the domestic private sector (Japan and US in 1940s) and held in large amounts by the non-government international sector (US now). The common denominator isn’t who holds the government securities, but rather where the policy makers set target rates. It is only under fixed exchange rates or gold standards where the former becomes the key determinant.

    Also, to briefly respond to one of Skuter’s other questions (by the way, very much appreciate your declaring your “priors”), the zero interest rate target is intended only as the overnight rate on risk-free debt. (Mosler/Forstater argued in “The Natural Rate of Interest Is 0” that this would in fact be the rate set by the “markets” if the govt did not “intervene,” by the way, given flexible exchange rates.) Rates on longer maturity debt and debt with credit default risk would be set by markets at whatever levels markets desired to set them. So, the “encouragement of malinvestment in sectors of the economy that are far away from the final consumer” would not occur unless markets put the rates at zero for debt raised in those sectors.


  15. Dear Skuter,

    Sorry, for some reason I got it into my head that you asked about inflation risk of deficits related to debt service and then started writing away without looking more closely.

    Regarding money as a store of value, I’d be interested in seeing where you are going with that. The basic position is that enabling a particular “thing” to discharge tax liabilities gives that “thing” value. But “money as a store of value” can mean many things (it’s pretty central to the American school of PK, for instance, but not as much to some other PK’ers), so I’ll wait for more on that.

    Regarding bureaucrats and politicians, I certainly have little faith in politicians (in the US, where I am, at least) for the time being. However, I personally don’t necessarily envision a program such as the job guarantee being run by bureaucrats. The job of the federal government in such a program would be to fund the program and set priorities to some degree (again, would need more faith than currently have, but that’s the point of trying to educate). The actual program itself could be “run” at whatever level is desired. Argentina’s head of household program (which created jobs for 5% of the population within 18 months or something like that) was very decentralized and locally controlled.

    In the US, having served on boards of directors of non-profits that both serve and fund other non-profits, I can envision running the program (or at least a significant part of it) through local non-profits that simply could apply to receive funds to hire what would otherwise be volunteers (which there are always a shortage of, while both community needs and private employment (and thus non-profit donations) move opposite one another). Of course, the political culture of the US is, like you appear to be, deeply suspicious of bureaucracies and such (though there are some regional variations); other countries may design the program quite a bit differently.

    Certainly running a job guarantee requires a shift in thinking (as has been noted many times here before) and some competence in the public sector. But, of course, deregulating and promoting “competition” as neoliberals prefer also requires competence from existing public sector institutions and politicians if it is going to work as neoliberals hope it will, and the fact that they sometimes don’t get such competence has never stopped them from repeatedly proposing it.


  16. One more thing, and apologies for all the posts.

    One of the beauties of the job guarantee proposal is that, if it can be effectively implemented such that it creates a fluid buffer stock of workers employable for the private sector, then it’s stabilization properties are automatic (leaving your concerns regarding homogeneity/heterogeneity of capital/labor, etc., for Bill to deal with). There are clear benefits to this, particularly for those less trusting of public sector institutions, compared to traditional approaches to stabilization policy. In an earlier paper, I put it this way:

    “On the other hand, [the proposed program’s] complexities and difficulties are related to one of the program’s potential strengths vis a vis the other policy rules: namely, if effectively implemented and sustained, the simulations here suggest an ELR program’s stabilization effects could be automatic in the sense that they would not be dependent upon any policymaker’s forecasts, targets, or conceptual understanding of the economy’s functioning-which can clearly have an ideological bent. On the other hand, the effectiveness of an interest rate rule, tax rate rule, or transfer rule would be (or in the case of interest rates, already is) dependent upon the abilities of policymakers to correctly estimate and forecast current versus “potential” or “target” variables, as well as upon their (potentially ideological) perspectives regarding the relationship of policy instruments to ultimate policy objectives. This is so even where a small, somewhat politically-independent decision-making committee can avoid the “decision lags” that plague a larger body such as the U. S. Congress, as already demonstrated by the FOMC.”


  17. Dear Ramanan,
    I like your suggested “thought experiment” re imagining what would need to be done to establish a monetary system in a new country. Great idea, especially for didactic purposes.
    best wishes

  18. They believe the fiscal policy will become undisciplined if it is not backed by rising debt – the latter imposes a political penalty on governments who somehow know the public hate public debt. It is a self-reinforcing script.

    An analogy is not difficult to find – religious views on the use of physical relationship for just reproduction.

  19. Dear Ramanan

    Very nice quote. That is what the World is up against. Bad luck if you are unemployed, underemployed or otherwise income deprived. Humans will look back on this era with amazement and conclude this period of history was inhabited by idiots who didn’t even understand basic national accounting relationships. That will probably spawn a research program to understand why. They will all be modern monetary theorists by then.

    best wishes

  20. Yes. I can imagine a historian giving a seminar which ends

    ” .. there are some unresolved questions in my findings, though. Just a few days ago, my student used his program which tracks how people learn online. He reported that readers of Bill Mitchell’s blog had an alpha_1 – the parameter which measures how fast one learns – close to 0.9 against the general average of 0.001. Readers quickly realized that the loanable funds theory did not make sense for banks because loans create deposits; and that modern governments are not revenue constrained; taxes reduce aggregate demand and do not go anywhere; the NAIRU is a hoax and all the things we have read from the literature of the modern monetary theory.” .. “.. the only piece of evidence that my student found using – satellite imaging – was that these readers had a water tank in their home terraces while others seem to have used mineral water bottles everywhere”

  21. Dear Ramanan

    We want the alpha_1 to approach the limit of unity. Then all the opposition who initially ignored modern monetary theory, then attacked it with vehemence, will be saying “it is just a self-evident truth”.

    First I guess we have to get them to turn their urban housing land into permaculture farms and get some natural food to feed their brains.

    best wishes

  22. Hi Bill


    I use teasers such as Public Debt is National Wealth to make people think. It seems to me that, what happens in their heads is the opposite of the confusions where it is pointed out that correlation does not imply causation. People reply, “…yes the two are correlated but …” Sadly mainstream economics which is about M completely messes answering the question “where does M come from”

    Quoting below, a friend of Taleb – Paul Wilmott from his blog. Messes up M. Amazing.

    First my standard disclaimer, Economics Makes My Brain Hurt. I am but a mathematician, and businessman, I suppose. And although I cannot and do not claim to know anything about running a country (which is at least an honest position, one I wish were shared by those temporarily in power), I can draw on my own experiences and on simple logic.

    It seems to me that the choices facing the UK government now are not dissimilar to those that might be faced by anyone running a household or a business, e.g. me.

    When in debt you have limited choices:

    a) Make more money. For the individual this means getting another job. For the government it means increasing tax revenues, which may be the same as increasing taxes (or it may not, depending on disincentives so introduced). Keeping the numbers simple, the goverment/IMF is talking about £200billion debt. Divided across the UK population not such a big number, but still enormous for the man in the street, divided across the rather smaller 200,000 high earners that the government has in its sights, hmmm, not such a small number. However you divide it up though it’s all quite frankly impossible (unless you believe Darling’s forecasts for growth in 2010, which I don’t think even he can believe).

    b) Cut spending. Painful for a Labour government (or New Nasty, as I now call them after the scandal of the attempted email slurs), but at least there is lots of waste they’ve introduced and which they could cut out. But no, cutting waste and public spending is not what Labour do, it’s a vote loser.

    c) Sell off the silver. Any foreigners want to buy a piece of the UK right now? Going cheap. But wait a while, the country will be even cheaper.

    But there’s one thing that the public cannot do, and which only governments can, and that is make the debt disappear like a David Copperfield trick. No mirrors, no distracting bright lights, no body doubles or revolving stages (sorry if I’m giving away his secrets!), just simple inflation.

    d) Inflate, reduce the value of the pound. Debt disappears (compound interest acts remarkably quickly). And a vote winner among all the borrowers who started this mess. Of course there is the slight problem that the ‘independent’ Bank of England (made so by Gordon Brown in 1997 remember) has a specific remit to control inflation. So watch out for subtle changes in the BoE rules.


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