Sometimes one journalistic piece captures the problem facing those who are trying to change the…
I make a prediction about the relationship between US government debt and impending crisis
Over time we observe a pattern of idiocy in the financial press, where different fictions, dressed up as allegedly shattering propensities, are regularly cycled through in succession, each one getting headlines for a day or so, only to be replaced by the next sensationalised issue. So-called experts or corporate bosses are wheeled out and make horrendous predictions that one country or another is entering a catastrophe of its own making – too much government spending, too much debt, or some other policy position – is usually fingered as the culprit. None of the predictions ever come to pass and the media never follow up to reflect on why. They are too busy pushing out the next headline and the next issue, which, in turn, will be replaced by something else, and then something else, and so on, until the initial prophesy of dooms is recycled, despite failing dismally to engage with the real world when it was last aired. And this pattern has unfolded over decades. Who ever checks the veracity of the predictions? How does the reputation of these so-called experts survive continual failure? The problem is that most of us believe this fiction and elect politicians and accept poor economic policy based on the fictional world we live in. Anyway, I have a prediction … read on.
There are countless examples of this succession pattern.
I still remember the claims by the prominent US commentator during the early days of the GFC that:
But make no mistake, we are coming close to the end game. Some countries and economies are closer to that point than others, but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement.
You know a fancy word – dénouement – ‘the outcome of a complex sequence of events’ – the ‘climax’ – the “end game” – it’s all over folks.
The commentator in question ran a rather large mailing list to make money for himself and told his readership that “Over the next several months, we are going to start to explore various aspects of the end game. Whither Japan? … Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion?” etc.
It all sounded authoritative.
It was just bunk, the lot of it.
I discussed that specific case in this blog post – Watch out for spam! (January 25, 2010).
And then we had guys like Martin Feldstein who regularly predicted the US social security system would become insolvent.
He featured in the 2010 film – Inside Job – by Charles Ferguson who wrote this about Feldstein in the – The Chronicle Review (Chronicle of Higher Education) – on October 3, 2010:
Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.
I discussed Feldstein in this blog post – Martin Feldstein should be ignored (May 3, 2011).
I could cite countless examples.
And recently there have been a whole swag of characters being wheeled out by the mainstream media and getting lurid headlines predicting a debt meltdown in the US.
It is like a cracked record – blah, blah – followed by blah, blah – and then again.
The only meltdown the US faces is if they elect either Trump or Biden in the November election and expect something good will come of it.
One of the favourite media strategies in this space is to wheel out a major player in the financial markets who they consider to be a neutral assessor in the question of government debt, despite requiring such debt to underpin their speculative activities in many cases.
For example, in this relatively recent ‘Markets Insider’ report from CNBC (April 24, 2024) – Billionaire investor Leon Cooperman: We’re heading into a financial crisis in this country – a big hedge fund character predicted a crisis was coming because of excessive US government debt.
This guy was formally with Goldman Sachs after doing an MBA at Columbia Business School.
That particular school gained notoriety in Charles Ferguson’s 2010 movie when the then Dean of the School, one Glenn Hubbard was exposed and embarrassed for his advocacy as the chief advisor to George Bush of further deregulation while accepting ‘consulting income’ from financial investment firms, which raised the likelihood of conflict of interest.
Cooperman himself was charged by US authorities for insider trading in 2016.
At the same time another criminal matter was also pursued against him.
Like many of these cases, Cooperman and his firm Omega Advisors used their financial clout to settle with the SEC without a formal finding against him.
And then, as is usual, they hid behind the secrecy to attack the authorities claiming in an open court battle he would have won the case.
Which always raises the questions of why did they settle?
He spoke up during the pandemic claiming that the government support provided was really just a bunch of “people sitting at home getting checks from the Government” (Source) and rails against any idea of wealth taxes and capital gains taxes.
More recently he has supported Israel which has been murdering tens of thousands of innocent Palestinians in Gaza.
Nice guy.
In the CNBC interview (linked above), the journalist claimed that “We have worried forever about it” (US government debt) and “it continues to climb”.
Cooperman responded claiming that:
US debt is pushing the country toward a financial crisis … Deficits matter, and I think we’re headed into a financial crisis in this country. Utan don’t know Grace the Nah
Cooperman talked about how everyone was “worrying about this in the early 70s” and kept saying “we have no idea when this hits the fan”.
The juxtaposition with worries going back to like, at least 50 years or so, with no prediction ever coming to fruition, and having no idea when their predictions will be realised should have alerted their listeners that this was just another media beat up.
But the rising interest rates over the last few years and the higher than usual public debt to GDP ratio has triggered stacks of similar types of interviews and claims
Those who just want the government to feed the rich and their corporate interests and be always prepared to socialise the losses of these interests when greed gets ahead of prudence have been out in force claiming there is an impending public debt crisis.
And while they eschew any tax shifts that might impact negatively on the upper ends of the wealth and income distribution, they simultaneously demand fiscal rectitude, which in the absence of any contribution from the top-end-of-town means cuts in welfare spending, cuts to public education, health and transport etc to name a few of the usual targets for their proposed cuts that are ‘desperately needed’ to save the nation from government insolvency.
It always amuses me that when a nation faces a national security emergency the front-line response are people from ordinary income backgrounds – working class kids etc in the military while the rich kids remain immune.
And when the nation faces an ‘economic emergency’ (so-called) it is the lowest income people that are required to endure the burden.
During the GFC, the spreadsheet kings – Rogoff and Reinhart – claimed that “when debt in advanced economies exceeds 90 percent of GDP there is an associated dramatic worsening of growth outcomes” (Source).
Even the IMF concluded that their own research “found little evidence that there is any particular debt ratio above which growth falls sharply.”
And many nations merrily carry on with much higher public debt ratios than the so-called danger threshold.
It was always a fiction but got them plenty of media coverage at the time and helped politicians justify the unjustifiable austerity imposed (in the Eurozone, the UK etc).
The normally moderate British journalist Martin Wolf article (November 22, 2023) – The looming threat of fiscal crises – was another of these lurid interventions into the debate.
He notes that “It is unquestionable that public debt has reached high levels by past standards” and therefore:
… is public debt disaster looming? If so, will there be defaults, inflation, financial repression (forcible attempts to keep debt cheap), or some combination of all three? If none of these is to happen, what must be done?
He cites Olivier Blanchard former IMF chief economist, now working with the Peterson propaganda machine, who regularly warns the world of the “risks of debt” but does follow up to report his warnings came to nought.
Remember back in February 2010, when the IMF was forced to release a new staff position note – Rethinking Macroeconomic Policy – where they apologised for getting the policy advice so wrong.
I discussed that in this blog post – We are sorry (February 14, 2010).
Further in 2012 we remember that the IMF (with Blanchard as Chief Economist) was instrumental in the design of the Troika’s Greek bailout, which devastated the economy and left it in an impoverished state (from which it has never recovered).
The fancy IMF economic forecasting models underestimated the Greek contraction by 2.9 per cent in 2010 (based on the April 2010 predictions); by 6 per cent in 2011 (based on April 2010 predictions); and by a staggering 7.1 per cent (based on their April 2011 predictions).
The errors were systematic in direction and very large.
Why so? Apart from using a model that has no basis in reality, they also made fundamental mistakes as to the size of the expenditure multipliers, which meant they recommended fiscal austerity and predicted that the negative growth effects would be minimal, when in fact, the reality was that the austerity was always going to be devastating.
In late 2012, the IMF admitted that “Our results suggest that actual fiscal multipliers have been larger than forecasters assumed”.
This was revealed in a its publication – Growth Forecast Errors and Fiscal Multipliers – which appeared on January 3, 2013 and attempted to explain why the fiscal austerity measures foisted onto the advanced economies (especially Greece) by the IMF were more damaging than they had predicted.
In that paper, the IMF admits that the evidence supports the finding “that actual multipliers were substantially above 1 early in the crisis”. That is, the $1 of extra spending would multiply to be much more than $1 (crowding in) because of induced consumption spending and favourable investment response to the initial increases in output.
No IMF official went to prison or were sued for professional malpractice!
I wrote about that in some detail in this blog post – Don’t fall for the AAA rating myth (April 19, 2016).
So using Blanchard as an authority is not, in my view, a very good idea.
Martin Wolf rehearsed the usual nonsense about explosive debt growth all of which ignored the fact that for most nations, the currency-issuing government can always, without question, meet all of its liabilities as long as they are denominated in the currency of issue.
And if the interest payments result in nominal expenditure exceeding the supply capacity of the economy to respond in real terms (that is, pushes the economy into the inflation zone), then there is no necessity to cut back on other expenditures (welfare etc) because the central bank could just control yields and/or the treasury could stop issuing debt.
No crisis of this type is inevitable for such nation.
Even in the Eurozone, the ECB can always prevent a financial crisis arising from government debt increasing if it wants too.
So blabbering on about high debt ratios, and the rate of interest exceeding the growth rate and all the rest of the nonsense that takes up media space is just a waste of time for the readers.
Conclusion
Here is a prediction: There will never be public default from the US government on its outstanding debt obligations.
Never is never.
That is enough for today!
(c) Copyright 2024 William Mitchell. All Rights Reserved.
Thanks Bill for all your hard work keeping us informed on the political economy.
This reminds me of a clip (which an Internet giant recently thought might attract my attention) from the British 70s comedy series It Ain’t Half Hot Mum in which the twittish Captain says, ‘As a university graduate I hardly fall into the realm of the village idiot Sgt. Major’, to which the Sgt. Major replies, ‘That may be so lovely boy but most of the world’s problems is caused by university graduates and not the village idiots.’ The British army solution to keep an officer class as largely the preserve of public school alumni while bridging the disconnect between officers and the ranks, while at the same time ensuring some means of steering away from the worst of officer idiocy, is to have non-commissioned officers. Sadly, even this solution doesn’t seem to apply to politics where the ruling class seem to seek cred by getting the worst of the village idiots to join them round the table.
Hi Bill
Your steadfast resolve to bring clarity to the machinations of government finance and economics is admirable, but I suspect there are days when frustration and disbelief are familiar companions, especially when the disinformation machine has cranked out another whopper. However, reading this post gave me a “what if?” moment
What if everyone understood everything you have written on these pages and realised that MMT really could be the magic money tree for their currency issuing government, bringing all the potential benefits to their economy and society you extoll. The knowledge that we could all have well paid productive jobs and a new green transition economy would be an enlightenment, which opens up many possibilities, right?
But would the easy availability of money really be the panacea we hoped it could be? Or does it make the make the human enterprise even more precarious? Would politicians, bankers and industrialists suddenly adopt a radically different ideology and use the cash wisely – for a change – when they have harvested the magic money tree for more than a few decades now to maintain the status quo?
There have plenty of opportunities already, but if they are unable to understand the problem, there is little chance of a solution. Stimulating the economy with the global use of fiat money at the juncture where civilisation is in critical overshoot risks accelerating the inevitable collapse. If the question being discussed was “how do we use our knowledge and ingenuity redress the ecological imbalance we’ve created that is rapidly making this planet inhospitable to life?” – then I would have some optimism for the future.
Are we not just the hopeless heroin addict; unable or unwilling to quit the habit that’s killing them, yet now has access to unlimited free diamorphine on prescription?
Not the makings of a happy ending.
Brillant post Bill. I wonder if you could explain in more technical detail for readers the mechanics and processes involved with the Office of Financial Management and the Reserve Bank in controlling yields.
“And if the interest payments result in nominal expenditure exceeding the supply capacity of the economy to respond in real terms (that is, pushes the economy into the inflation zone), then there is no necessity to cut back on other expenditures (welfare etc) because the central bank could just control yields and/or the treasury could stop issuing debt.”
Again, I put forward the suggestion that MMT stop talking about government spending and instead talk only about government investment or management of fiat money. Were such alternative language to be used, there would be no misleading and manipulative focus on government debt appearing on some accounting sheet, but rather on the condition of the society being governed; i.e., on whether the government investments were successful, whether government management of money fostered good outcomes. My father always told me not to play the other guy’s game. It seems to me that when it comes to language, MMT has ignored such advice, and thus has been forever struggling to make its case in the outmoded terms of a gold standard-type economics predicated on monetary scarcity. You don’t spend fiat money, with the connotation of loss that is built into the word spend. With fiat money, by definition inexhaustible, you only direct its flow. There is no debt, can be no debt, whatsoever.
One bit to add: the promotion of the “Eeek! we’re out of money!” meme doesn’t just favor austerity in government spending. It’s a variety of disaster capitalism which sabotages sectors of the economy so speculators can pick up assets on the cheap. Every time the US has “balanced” its budget is followed by a wave of asset forfeitures and foreclosures–a deep hole in the economy. Someone gets to pick up those foreclosed assets at fire sale prices. The large private equity holdings that now control record numbers of rentals are squeezing the tenants and exploiting their fire sale purchases. Pete Peterson was one such speculator, and his think tanks live on, promoting “fix the debt” as the meme-du-jour.
I agree that that the notion of “bond vigilantes” or direct funding of the deficit from X pie of savings or Y taxes or whatever is incorrect, but so is the notion that deficits do not matter.
Every printed unit of currency devalues the existing installed base of currency. Ideally, this devaluation is offset and more by growth engendered through sage investment of said printed money, but it is very true that the greater the speed of devaluation hence amount of printing, as well as the greater the existing amount of debt which forces further devaluation in the form of interest payments, the less likely the possibility that any form of investment is achievable which can justify said printing. It is a major fault of MMT’ers who don’t address the reality that the number of dollars needed to drive $1 in growth has been steadily increasing for multiple decades.
As such, ad hominem attacks on people who say that money printing is not good or that deficits matter, is just as wrong as blindly attacking all money printing and deficits as bad.
I would further note that there are external factors beyond the domestic US money supply. In particular, the massive foreign dollars of which I believe the Eurodollar is the largest. These dollars are ideal for money printing purposes – they increase the monetary inertia/mass of the US dollar while devaluing of same does not impact Americans remotely as much. But the problem is – there is no question that a huge part of the global GDP is actively dedollarizing – this is a major force multiplier on present and future money printing.
Reading the comments above there is no recognition of the the commercial banks and their ability to create new broad money as credit and its roll in causing asset price inflation and economic instability.
Taxation and/or borrowing is used to reduce the amount of money in circulation, just as bank credit & government spending increase the amount of money. The real value of MMT is the paradigm shift it engenders — the rich can no longer consider the government’s money to be theirs.
c1ue writes:
“Every printed unit of currency devalues the existing installed base of currency”
Who cares; price controls and rationiong if necessary, in a zero interest-rate scenario, can eliminate inflation.
Dear c1ue (at 2024/07/03 at 4:34 am)
Whoever said that “deficits do not matter”?
The size of the fiscal deficit relative to the financial balances (and their dynamics) of the external and private domestic sectors is crucial to maintaining full employment and price stability.
No credible MMT proponent says deficits do not matter.
Further, you talk of “printing money” as if it is a thing that exists in the real world rather than being some textbook construct.
Governments do not spend by printing money. They issue currency.
If you are going to critique MMT at least get it right.
best wishes
bill
@Neil Halliday
Your words make it seems like you have no problem devolving directly into a Soviet style command economy. Is my understanding correct?
If so, I and a whole lot of other people would object.
@bill
As an MMT expert – can you then inform when deficits do matter? In particular, what are the criteria to judge the relative deficit sizes where negative effects begin – as well as the levels at which ongoing changes to the sizes of said deficits may also create negative effects.
As for your comment on money printing – what precisely is the difference between currency issuance and money printing?
To me, they are the exact same thing – the creation of new money/currency by a government.
If this is the best you can do in response to the questions I put forth in my original comment, you are failing to either educate about or to defend MMT.
C1ue – First, you need to define what “matter” you have in mind.
Inflation? Deficits matter when they are used to purchase real resources in excess of production.
Risk of default? Only relevant to countries that use or peg against a foreign currency.
Bond markets? Central banks can always bring them to heel if there is the political will by controlling yields either with on the primary market or the secondary market.
And the difference between printing money and crediting an account is one method transfers ink to little pieces of paper or polymer, and the other changes numbers in a spreadsheet. It doesn’t hurt to be accurate about what the real process is.
@c1ue,
The current free-market neoliberal orthodoxy is failing nations everywhere; eg today the Brits have elected Starmer because “they want change”, but most are well aware Starmer won’t be able to fix the NHS, public infrastructure, and cost of living, because he has already promised he won’t lift taxes – somthing all politicians have to ‘promise’ , if they want to get elected. And of course politicians and mainstream media won’t touch MMT, which is why most ordinary hassled people people have never heard of it, while we are subject to endless nonsense about “balanced government budgets, and independent CBs lifting interest rates to kill inflation” etc etc.
I’m well aware lots of MMTer’s (let alone you) won’t agree with me; otoh I’m totally disappointed by the complete rejection of MMT by even LW economists like Yanis Varoufakis…though he did concede to me “only the US can do MMT” (presumably because of the the dollar’s status as the global reserve currency).
Meanwhile your “devaluing currency” comment is irrelvant; the issue is *availabilty of resources*, which defines the limits to the quantity of money which the government might create (ok….”print”….) , to purchase said resources.
Dear c1ue (at 2024/07/05 at 2:43 am)
I have written millions of words in this blog and published several books and lots of academic journal articles on the topic so I don’t feel inclined to reenter the debate with you on your terms.
If you genuinely want to understand what I said then I urge you to spend a little time reading the blog posts under the Debriefing category as a starting point.
best wishes
bill
@c1ue
“Your words make it seems like you have no problem devolving directly into a Soviet style command economy. Is my understanding correct?”
I can’t speak for him, but not really, only at the point where resources could and should be better spent elsewhere, but for the health of the economy, the environment, and the general welfare.
“If so, I and a whole lot of other people would object.”
Would you though? Not many are objecting to a small amount of cloud capital deciding what products are viable, at what price, with what margins, and buying or burying it for pocket change if it’s an inconvenience. But I supposed they’re bred that way, having a minority military complex decide who they support starving or murdering, or the small minority of financial capital deciding how much the homeless and/or sick employed KPIs must rise. I suppose we are weird for the people to actually have some power over the managers, so, alas, nothing can be done but managing the vibes better.
Given that here is where we are, I have another other way to frame it.
The Deficit is not the thing that matters. Suppose you come to me and say “Mel, I’m governing a small country which is a monetary sovereign. We can’t decide on a deficit. We were thinking 300billion, but would 275billion be enough? Or should we wing it and do 375billion? Or should it be per capita? Or a percentage of something?”
The right answer is “You’re asking the wrong question.” Those numbers and ratios and things do not matter.
To govern the right way, you pose the questions “What do we need?”, “What do we have?”, and then “What do we do?” When you’ve settled on necessary things to do, you arrange a way ot do them. Then you do them. Since you say you’re a monetary sovereign, you probably have a market where a lot of the resources are distributed, and where decentralized decisions about distribution get made. Things done in the market get done using money, so you use the money you’re sovereign in to do those necessary things.
Some other blogs have been discusssing the “Magic Money Tree” for various reasons. Sometimes trying to rehabilitate the idea so it can’t be used as a weapon against us by our enemies, some just generally as a metaphor for the power of money creation. What I don’t like about these discussions is that they keep us bogged down in numbers. Those debates never seem to get beyond “What is the *best* number for running our economy?” and that is the wrong question.
Similarly Cameron Murray, who is generally friendly to MMT, wrote a blog post including two questions that MMT would have to answer. I don’t remember if they were his questions, or questions that “people” would ask. One was basically “If we want to run a deficit, does that mean we have to raise taxes?” This question doesn’t fixate on some magic number, but it also does not advance into the realm of what we want and need to do. We might acccomplish things we need with deficit spending, but I truly doubt we ever need to run a deficit, just for itself.
What we want to do is the issue that matters. All the following questions and answers start from there.
昧子
Here’s a prediction: The public debt of (insert name of fiat issuing government here) will never be paid off. At some point hopefully far in the future it will become, like the unresolved public debt of the Assyrian and Hittite and many other empires, irrelevant.
How utterly silly to suggest equivalency of Biden and Trump.
I was incredulous the first time I heard Bill Mitchell express this view to a podcaster about 4 years ago. Now here it is again.
A collosal blind spot!
@Paulo Marques
“I can’t speak for him” …but you are on the right track.
Funny thing about tax: politicians are forced by taxpayers to reduce them, but when Liz Truss tried to reduce taxes, the money lenders crucified her because they ‘lost confidence’ a low-taxing UK government would be able to repay its debts to (wealthy) bond-holders. It’s time for (private) money lenders to be banned from funding government, given governments are sqeezed on both sides from taxpayers to moneylenders (bondholders).