Watch out for spam!

Today I delve into the world of financial advice by E-mail. There are a growing number of subscription lists that people are exhorted to join to receive the latest in analysis from so-called experts. Most of it would qualify as spam. They seem to follow a formula – stir the emotions, offer great deals (which appear to be the motive – to make money), and spread dangerous half-truths and total fallacies. I get a lot of E-mails myself from readers asking me to comment on some of the claims that they have been reading in these “products”. So today I thought I would meet those requests by focusing on a particular newsletter that is broadly representative of the genre. My advice is to avoid wasting your time on these lists and read billy blog instead!

Several billy blog readers appear to subscribe to an “Austrian” take on macroeconomics provided by one John Mauldin who publishes a weekly E-mail newsletter with the somewhat pretentious title “Thoughts from the frontline”. He calls himself a “recognised financial expert” and talks a lot about inflation and debt default.

He claims in his latest newsletter that the “distribution list is 1.5 million closest friends” – which made we wonder how he has the time to be out on the front-line yet keep up so many close relationships. Okay, lets allow him the license – they are not close friends at all but people who without better advice nominate to receive his newsletter each week.

His latest newsletter begins:

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.

Hmm, the end game. Our dénouement.

In literature, the dénouement usually are the things that emerge after some dramatic climax and end the story.

From Merriam-Webster:

Etymology: French dénouement, literally, untying, from Middle French desnouement, from desnouer to untie, from Old French desnoer, from des- de- + noer to tie, from Latin nodare, from nodus knot – more at node
Date: 1705

1 : the final outcome of the main dramatic complication in a literary work
2 : the outcome of a complex sequence of events

Okay, so what is the economic climax of the drama? And what will the end of the story look like?

Once you read the newsletter you realise that it is its “own drama” – rather than being applicable to anything much else. You also realise that it is a hard sell marketing tool for making the author money.

To stir up the emotion he makes the following pronouncement of our impending economic dénouement:

Over the next several months, we are going to start to explore various aspects of the end game. Whither Japan? Are they actually, as I think, a bug in search of a windshield? What does that mean for the world? How safe is the euro? Everyone over here seems to think Germany will bail out Greece. A breakup seems unthinkable to the people I’ve been talking to (so far). But what about Spain? Italy? Can you spell moral hazard?

The Fed has said it will exit quantitative easing (QE) at the end of March. But what if mortgage rates rise? Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion? By definition, savings and foreign investment and the federal deficit must add up to zero. (We will go into that later – just take it as gospel for now.) How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate – with it all ending up in treasuries. How can that happen? Really?

From where I sit a financial expert should be someone who knows how the monetary system operates. From these paragraphs I glean that the writer doesn’t really understand the intrinsic nature of the currency systems he is commenting on.

First, Japan is currently beset with a real crisis no doubt but exactly which windshield are we talking about here? The government is sovereign in their own currency and have no foreign currency-denominated debt. There is no risk of insolvency.

Even extending insolvency to inflation – which is a popular ploy by those who detest the government’s use of debt – Japan is mired in deflation. They haven’t had any signs of inflation for 20 years and over that time have often faced a negative inflation rate.

The government bond yields are very low and stable and interest rates have been around zero for years. Budget deficits have typically been used to support the weak domestic spending. When neo-liberalism did force a fiscal contraction in the late 1990s, the economy double-dipped.

So what is exactly going to happen to Japan that is just around the corner – the end game? Please read the following blog – Japan – up against the neo-liberal machine – for more discussion on this point.

Second, the Euro is safe but individual countries within the EMU are not. As I have written in a number of blogs, the intrinsic problem facing the Euro system is not moral hazard. Rather it is the inability of the system to deal with asymmetric shocks in a reasonable manner given that member countries surrender all major policy tools to a non-elected body the European Central Bank. These are tools that a sovereign government (one that issues its own currency) can use readily to reduce the impact of real shocks (a demand collapse) on standards of living.

The requirements specified in the theory of optimal currency areas zones, which was used to justify the creation of the Euro zone, are not present in the existing EMU nations.

Spain and Italy are not particularly gaming the system. They are just victims of an absurd system that should be dissolved forthwith so that the citizens of the individual countries can get reasonable policy outcomes from their governments.

Please read the following blogs on the EMU – Euro zone’s self-imposed meltdownA Greek tragedy …España se está muriendoExiting the Euro? – for more discussion on this point.

Third, what exactly is the connection between QE and mortgage rates? Quantitative easing may reduce long-maturity rates as it swaps long assets for bank reserves. It does nothing in itself to support aggregate demand (unless there is some rise in investment as long rates decline somewhat, which is unlikely). Please read my blog – Quantitative easing 101 – for more discussion on this point.

The added reserves do not provide the banks with any increased capacity to make loans. They are only constrained (in the main) at present by a dearth of credit-worthy customers.

The added reserves are also not inflationary – because they do not add to nominal aggregate demand. Please read my blog – The complacent students sit and listen to some of that – for more discussion on these last two points.

Further, the central bank sets the term structure of interest rates (by and large) because it exogenously sets the short-term rate. So unless there is something very odd going on (and there is no evidence that there is), mortgage rates will only rise significantly if the central banks decide to push rates up. Presumably that will be at a time that they consider the crisis is over and according to their (flawed) logic believe a return to more neutral monetary policy settings are required.

Where is the climax and dénouement going to come from there?

Fourth, the old faithful that the US is going to run out of money argument again! “Where do we find $1 trillion (plus!!!) in US savings to fund the deficit” – he doesn’t seem to understand that the funds that are borrowed from the non-government sector were provided by the net government spending (the deficits) in the first place – $-for-$ – as a “wash” – so what is the problem?

He also doesn’t seem to understand that there is not a finite pool of saving but a flow of saving that grows with income. So the deficit spending, inasmuch as they stimulate economic growth, are actually the source of finance for non-government savings. If the non-government sector desires to increase saving and withdraws spending in order to pursue that objective then aggregate demand falls.

With output and income in decline, total saving will also fall – the so-called Paradox of Thrift. Please read my blog – When ideology blinds us to the solution – for more discussion on this point.

It is also clear that anyone who understands the basics of national income accounting would not say something like this. Modern monetary theory (MMT) allows you to appreciate that if the non-government sector is spending less than they earn (a spending gap) then the government sector has to be running deficits equal to that gap for GDP (aggregate output and income) to remain stable at full capacity.

If the government does not support the desire to save by the private sector then the spending gap will be positive and GDP will fall as firms realise they are over-producing relative to effective demand. This leads to a spiralling down of output, income and employment, and, ultimately, a recession results.

The budget deficit rises as the economy recesses even if the government leaves its fiscal policy settings unchanged – this is the operation of the automatic stabilisers in force – tax revenue collapses and welfare payments rise.

There is a debate that can be had about the form of the fiscal intervention – but never about the principle that a rising non-government spending gap requires a rising government budget deficit if you don’t want income losses to occur.

Unfortunately, the dominant ideology seeks at every point to disconnect these ideas. That ideology is continually running smokescreens aiming to convince the uneducated masses that fiscal consolidation is a good thing at the same time they are paying their private debt down and saving more. In general, the two ambitions are contradictory and cannot work. But then the neo-liberals have never really been concerned about public purpose. The scam has always been to redistribute as much national income to the profit elites as possible.

Mauldin clearly doesn’t understand how the sectors interact. You can safely conclude that from his statement (repeated from above):

How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate – with it all ending up in treasuries. How can that happen? Really?”

First, the government spends in the same way whether it is running surpluses or deficits and independent of the other operations that might accompany the net spending position which appear to the uninformed to be “financing operations”. In all cases, a sovereign government credits bank accounts (or issues cheques) and thus expands bank reserves.

In the case of a budget surplus, the taxation revenue it raises more than drains those added bank reserves and the net position between the government and non-government sector is negative. The opposite is the case with a deficit where net spending is positive.

The taxation is not required to “finance” the spending position. It serves to add or subtract purchasing power from the non-government sector according to the logic of functional finance. Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

Second, the debt operations are also not required by a sovereign government other than to manage the bank reserves status to ensure the monetary policy of the central bank is coherent (again see Functional finance and modern monetary theory).

But to repeat, the funds that are injected into the non-government sector by the net spending are equivalent to the funds they borrow back given the voluntary constraints they place on themselves (as if they were still in a gold standard) such that they match the net spending $-for-$ with debt issuance. Totally voluntary. But as noted above, its a wash baby!

And if, for example, non-government didn’t want to purchase the government debt but chose to spend the funds elsewhere (say on consumption or private capital formation) then the deficit would fall anyway because at high levels of economic activity the automatic stabilisers push the budget balance towards surplus (and in some cases, into actual surplus).

A 10 per cent deficit/GDP ratio just tells you that at least that much income has been withdrawn from the expenditure stream by the non-government sector. I say that – at least – because even a 10 per cent deficit/GDP ratio might still be associated with a declining economy which means the deficit is too small.

Anyway, what you soon realise is that the newsletter uses a common ploy among these “terrorist” types – ask a lot of pointed questions – make it sound like the sky is falling in, but don’t go into too much detail. The tactic just turns all the emotional knobs that the author knows will exploit the ignorance (in these matters) of the readers. Work on the emotional rather than reasoned and informed plane.

It is a disgusting way of making a living.

Having warmed his readership up with the one-liners (the turning the knobs) and predicting the end, he then launches into his marketing ploy:

But before we get into that, a few housekeeping items … [the first point is some boasting about the size of his readership and how his E-mail list keeps stuffing up – maybe that is the dénouement – his readers get so annoyed with his failing IT systems that they leave and find a better life] … Second, the invitations are starting to go out for our annual Strategic Investment Conference (co-sponsored by my partners …) which will be April … In addition to .. [a host of very conservative speakers] … There are several more rather exciting announcements I will be making in a few weeks. This conference will sell out … This year we are going to focus on “The End Game.” I can guarantee you lively debate, fun times, and over-the-top wines – plus, you will be with people who are simply the coolest ever. The speakers are all friends who “get it.” They called the crisis well in advance. These are the guys who sit and think every day about how this will all end up. The panels are going to be fun. Do not procrastinate. Register now.

Just imagine – if armageddon or the apocalypse was approaching – a.k.a as “The End Game” – would you be planning to hang out with “the coolest people ever” and have “fun times” and listen to all his mates (friends) who “get it” and attending “fun panels”. In his own jargon-ridden manner – where does this guy get off?

Anyway, after that interlude it is back to the hot gospelling otherwise disguised as credible economic commentary and analysis.

Like a lot of commentators at present, he seizes on the recent book by Carmen M. Reinhart and Kenneth Rogoff entitled This Time is Different and calls it a “a very important book, which I will be referring to a lot in the future”. All the deficit terrorists are quoting from this book these days, although I wonder how many have actually read it in detail and understood its applicability.

Here is draft version of This Time is Different that you can read for free.

This is Mauldin’s claim about the book:

Reinhart and Rogoff have catalogued over 250 financial crises in 66 countries over 800 years and then analyzed them for differences and similarities. This is a VERY sobering book. It does not augur well for the developed world to blithely exit from our woes. The book gives evidence to my adamant statement that we have a lot of pain to experience because of the bad choices we have made. This is the entire developed world, and the emerging world will suffer, too, as we go through it. It is not a matter of pain or no pain. There is no way to avoid it. It is simply a matter of when and over how long a period.

In fact, Reinhart and Rogoff’s research suggests that the longer we try to put off the pain, the worse the total pain will be. We have simply overleveraged ourselves, and the deleveraging process is not fun, whether on a personal or a country basis.

Of critical importance, quite apart from the other issues that one might have with Reinhart and Rogoff’s analysis (and I have many), one has to appreciate what they are talking about. Most of the commentators do not spell out the definitions of a sovereign default used in the book. In this way they deliberately (or through ignorance – one or the other) blur the terminology and start claiming or leaving the reader to assume that the analysis applies to all governments everywhere.

It does not. On Page 2 of the draft, Reinhart and Rogoff say:

We begin by discussing sovereign default on external debt (i.e., a government default on its own external debt or private sector debts that were publicly guaranteed.)

How clear is that? They are talking about problems that national governments face when they borrow in a foreign currency. So when so-called experts like Mauldin claim that their analysis applies to the “entire developed world” you realise immediately that they are in deception mode or just don’t get it … full stop.

For a start, the US government has no foreign currency-denominated debt. Remember it has domestic debt owned by foreigners – but that is not remotely like debt that is issued in a foreign currency. Reinhart and Rogoff are only talking about debt that is issued in a foreign jurisdiction typically in that foreign nation’s currency.

Japan has no foreign currency-denominated debt. Many other advanced nations have no foreign currency-denominated debt.

It turns out that many developing nations do have such debt courtesy of the multilateral institutions like the IMF and the World Bank who have made it their job to load poor nations up with debt that is always poised to explode on them. Then they lend them some more.

But it is very clear that there is never a solvency issue on domestic debt whether it is held by foreigners or domestic investors.

Reinhart and Rogoff also pull out examples of sovereign defaults way back in history without any recognition that what happens in a modern monetary system with flexible exchange rates is not commensurate to previous monetary arrangements (gold standards, fixed exchange rates etc). Argentina in 2001 is also not a good example because they surrendered their currency sovereignty courtesy of the US exchange rate peg (currency board).

Further, Reinhart and Rogoff (on page 14 of the draft) qualify their analysis:

Table 1 flags which countries in our sample may be considered default virgins, at least in the narrow sense that they have never failed to meet their debt repayment or rescheduled. One conspicuous grouping of countries includes the high-income Anglophone nations, the United States, Canada, Australia, and New Zealand. (The mother country, England, defaulted in earlier eras as we shall see.) Also included are all of the Scandinavian countries, Norway, Sweden, Finland and Denmark. Also in Europe, there is Belgium. In Asia, there is Hong Kong, Malaysia, Singapore, Taiwan, Thailand and Korea. Admittedly, the latter two countries, especially, managed to avoid default only through massive International Monetary Fund loan packages during the last 1990s debt crisis and otherwise suffered much of the same trauma as a typical defaulting country.

Britain has defaulted only once in its history – during the 1930s – while it was on a gold standard. The Bank of England overseeing an economy ravaged by the Great Depression defaulted on gold payments in September, 1931. The circumstances of that default are not remotely relevant today. There is no gold standard, the sterling floats. Britain has never defaulted when its monetary system was based on a non-convertible currency.

A large number of defaults are associated with wars or insurrections where new regimes refuse to honour the debts of the previous rulers. These are hardly financial motives. Japan defaulted during WW2 by refusing to repay debts to its enemies – a wise move one would have thought and hardly counts as a financial default.

But if you consider the “virgin” list – how much of the World’s GDP does this group of nations represent? Answer: a huge proportion, especially if you include Japan and a host of other European nations that have not defaulted in modern times.

Further, how many nations with non-convertible currencies and flexible exchange rates have ever defaulted? Answer: hardly any and the defaults were either political or because they were given poor advice (for example Russia in 1998).

Reinhart and Rogoff don’t make this distinction – in fact a search of the draft text reveals no “hits” at all for the search string “fixed exchange rates” or “flexible exchange rates” or “convertible” or “non-convertible”, yet from a MMT perspective these are crucial differences in understanding the operations of and the constraints on the monetary system.

Further, if you consider the Latin American crises in the 1980s, as a modern example, you cannot help implicate the IMF and fixed exchange rates in that crisis. The IMF pushed Mexico and other nations to hold parities against the US dollar yet permit creditors to exit the country. For Mexican creditors this meant that interest returns skyrocketed (the interest rate rises were to protect the currency) and the poor Mexicans wore the damage.

It was clear during this crisis that the IMF and the US Federal Reserve were more interested in saving the first-world banks who were exposed than caring about the local citizens who were scorched by harsh austerity programs. Same old, same old.

It is also interesting to recall the recent comment made by former President of the Federal Reserve Bank of Dallas and former member of the Federal Open Market Committee, Bob McTeer who had such strident views that during his tenure the Dallas Fed was known at the “The Free-Enterprise Fed” (Source):

Yesterday, we saw a sharp market reaction when one of the rating agencies that gave AAA ratings to mortgage-backed securities larded with subprime loans called into question the credit worthiness of Britain. As is the case with the United States and the Federal Reserve, Britain and its Bank of England have the ability to create new money if necessary to pay off its debt at maturity. There is no sovereign credit risk. There is no need for credit rating agencies to opine on the credit worthiness of sovereign debt.

Enough said really. What the hell is Mauldin on about?

There was much more in this newsletter along the same lines. Always conflating concepts to the point of false analogy. For example, considering that household debt is equivalent to public debt. Failing to understand the difference between foreign currency-denominated debt and domestic currency debt.

MMT clearly argues that a sovereign government which enters debt arrangements in a foreign currency is compromising its sovereignty and risking insolvency. But Mauldin doesn’t make this distinction.

MMT clearly tells us that growth strategies that rely on ever-increasing levels of non-government debt (say when current account is in deficit and neo-liberal governments are running surpluses) are doomed to fail. In this sense the messages from Mauldin and co about the dangers of household and corporate leverage are partially correct.

But then they expose their ignorance by claiming that all debt is bad and governments have to delever as the private sector does the same.

They never tell you what they expect the outcome of that strategy would be. They never demonstrate an understanding that in a period such as now – what would happen if the government tries to withdraw the fiscal stimulus while at the same time the private sector continues to rebuild its balance sheet (run down debt) and the external sector remains in deficit.

While this would damage GDP growth significantly and risk a further crisis, the deficit would likely increase as the automatic stabilisers overwhelmed the discretionary contraction.

History tells us that over and over again and provide a much more convincing warning for policy makers than the highly selective and sometimes archaic examples proffered by Reinhart and Rogoff.

But for Mauldin, this sort of analysis would be too involved and his readers would have to think rather than emote.


Advice for the day: hang out here – on billy blog – where only the coolest people come to have fun and talk about amazing things …. The gang who hang out here “all get it”. eek! (-:

Quote for today

This was the opening paragraph in an article – How to Squander the Presidency in One Year:

There’s only one political party in the entire world that is so inept, cowardly and bungling that it could manage to simultaneously lick the boots of Wall Street bankers and then get blamed by the voters for being flaming revolutionary socialists.

The so-called progressive parties are the same all over these days.

This Post Has 31 Comments

  1. Thanks for reviewing Mauldin’s newsletter. I’m a long time subscriber to that newsletter (which is free), and Mauldin does have some good guest posters. For example, he recently posted excerpts from a newsletter by Gary Shilling, which I thought was excellent. He also takes a lot of material from David Rosenberg, who is very good in many respects, although Rosenberg does suffer from the fiscal blindness disease.

    I am particularly glad that you addressed the book by Reinhart and Rogoff. That’s the part I was wondering about.

    Anyway, thanks! I’ll be linking back to this…

  2. Under a fiat currency regime a government can never default. Instead, an increase in government spending in a period of sub-optimal economic growth will lead to deficits which will actually finance itself (the increased govt spending makes its way through the economy and is eventually used to purchase the increased debt securities). In this way the govt should always step in to make sure nominal GDP doesn’t fall in a period of collective irrational risk aversion.

    But what is the limit on your view? Your underlying assumption is that a decline in nominal GDP is always a bad thing; that even a periodic deflation will lead to a downward spiral into chaos and anarchy. If government can make sure that GDP is +2% rather than -2%, why not also use fiscal policy to bump GDP from +2% to +6%? Surely higher GDP equals higher prosperity? Why not push GDP to 9% so as to match China since all that is needed to do this is to raise G?

    The fact is GDP is a very imperfect approximation of economic progress just as inflation measurements are imprecise (e.g. they failed to catch housing, education, health inflation), and the very concepts of G, I, C, etc. are flawed in that they fail to consider the specific nature of the spending.

    For instance, you assume that govt has to step in with G to compensate for a lack of C and I. But not all G is the same. In fact, your call is to grow the economy by G commanding a larger share of the resources relative to the (irrational) private sector. I would agree with your view if in fact that G was allocated efficiently but I have no reason to think it would be (in most instances), nor would any objective analysis.

    The last decade was a period of massive mis-allocation of capital to unproductive (and eventually non cash-flowing) ventures. Housing is not a productive asset. The causes of that mis-allocation can be attributed to many things including moral hazard, poor regulation (allowing for un-backed lending), misguided institutional incentives, tax policy (mortgage interest deductibility, lowered cap gains tax on RE, etc., and easy money directed from Fed to GSE’s and banks.

    But rather than end this mis-allocation and let capital return to productive ventures (perhaps after prices and fixed costs decline to levels commensurate with cash flows), you propose a new mis-allocation to take up the slack. Now, to your credit, you seem to genuinely believe that these resources will be used efficiently but, either way, you are advocating for a larger share of government control of finite collective resources.

    The end result of continued mis-allocation of capital away from wealth generators toward wealth consumers/destroyers is less goods to distribute than would otherwise be the case. At what price those goods are transacted doesn’t matter to the economy as a whole (even if it does to individuals- debtors/creditors), all that matters is that your standard of living is improving and a higher G is generally not coincident with a higher quality of life, unless you like to wait on line for toilet paper or deal with periodic blackouts.

  3. I used to read Mauldin until I discovered MMT. Then I just couldn’t take it anymore.

  4. Bill, when Nixon unilaterally shut the gold window on August 15, 1971, on Treasury Sec. Connally’s advice, wasn’t that in effect a default? As far as I can tell, not only did the sky not fall in, but also no one really said much about it that amounted to anything – just as Connally had assured Nixon.

  5. @ Yossarian

    The way it works in the US is that the government funds public purpose that private enterprise is either not able to handle because it is too capital intensive or else does not wish to invest in. But, other than the military and government itself, the federal government generally does not manage these projects. Usually, this work is bid out at going rates, or is left to the states. The states are competitive with each other in attracting personnel and other resources, and usually they also bid out what work they can.

    I don’t see any inherent reason that the government cannot invest pretty much as private investors do to fund needed programs that are either beyond the capacity or interest of private investors. The bulk of the work is handled through markets, auctions, or competitive bidding, just as occurs among large corporations in the private sector. I fail to see the problem here as long as there is regulation and oversight to prevent cheating. But the same holds in the private sector, where this is plenty of cheating and cronyism, too. The notion that there is perfect competition in private sector markets is just not the case. Certainly funds are allocated inefficiently there, too, as the present crisis proves. (Hint: There was a lot of cheating.)

    In addition, there are spin-offs. For example, I live in a university town with a major university hospital funded by the federal government, the state government, and private contributions. This environment has spun off a vibrant and fast-growing industry specializing in medical innovation. It contributes far more to the community that the university hospital does, which itself is considerable. Of course, examples like this can be multiplied. As far as I can see, the unemployed, many of whom don’t have shelter or food, let alone waiting for toilet paper, weren’t turned out by government inefficiency. If the government was involved at all, it was by omission instead of commission, when regulators were on holiday on the job due to corporate capture.

  6. I was wondering about private debt. I assume that one of the reasons the government stimulus in the US hasn’t been effective is that, apart from being misdirected, it is nowhere near enough to cover the reduction in aggregate demand caused by the private sector massively deleveraging. Assuming they did increase the stimulus, and assuming they targeted it correctly (yeah, right), once the private sector felt it was safe to start leveraging up again wouldn’t this cause potentially high inflation?

  7. @ Yossarian– In addition to what Tom Hickey said, the MMT group seems to be interested in full employment, not increasing GDP.

    @ Tom– Interesting comment re the U.S. defaulting on its gold commitment. And you and I seem to have a similar perspective with regard to Mauldin.

    @Vestan– Of course inflation could be problem at some point. As an example of the thought the MMT people have given to the question you ask, there is an MMT group in Kansas City called the Center for Full Employment and Price Stability. Full employment and price stability are the goals.

  8. Dear Vesant

    The clue is in your term “potentially” high inflation.

    The upside risk of all components of nominal aggregate demand (including government spending) is inflation. Rising deficits have to be carefully managed to ensure that that risk stays a risk not a reality.

    The point is that it is not inevitable.

    best wishes

  9. Vestan,
    Another reason the stimulus has not yet helped and probably will not help is because there is an income distribution problem in the U.S. that the stimulus plan does not address. Job creation with direct govt spending may help 5% of the popualtion (when unemployment falls from 10% to 5%) and as the profits from the govt spending get distributed the top 5% income bracket will benefit. As for the other 90%, they will have the same old job with the same income and the same debt load and the same lack of savings. This is why I support Mosler’s payroll tax holiday. This will improve the income, balance sheet, and spending power of middle class America.

  10. Vestan:” I was wondering about private debt. I assume that one of the reasons the government stimulus in the US hasn’t been effective is that, apart from being misdirected, it is nowhere near enough to cover the reduction in aggregate demand caused by the private sector massively deleveraging.”

    Debt that cannot be repaid will be defaulted on. There are a lot of ramifications to this, which Irving Fisher treated in his theory of debt deflation. Hyman Minsky describes how this situation develops in his financial instability hypothesis. The upshot in relation to the present crisis is that the government allowed the situation to develop by turning a blind eye to Ponzi finance (including cheating).

    The fix is either massive liquidation and a depression driven by debt-deflation, or the government has to massively intervene in order to make up for its previous mistakes in allowing the situation to get so out of hand. That means, forcing the accountable parties to take responsibility for their actions, “encouraging” voluntary debt reduction or forcing cram downs, and even instituting a debt holiday if necessary. The government must also provide sufficient NFA through deficit spending and tax reduction to take up the slack of the public’s increasing desire to save as well as to pay down debt, which results in business’s paring back and cost-saving due to contraction, as well as reluctance to invest due to bleak future prospects. Inflation is not a remote possibility now and won’t be for some time, at which time the tools of functional finance are available to avoid excessive NAD in relation to real output capacity.

    See also Warren Mosler’s Mosler’s 11 steps to fix the economy.

    Unfortunately, either the US president is economically ignorant and sitting in a bubble, receiving bum advice, or he is an ideological conservative.

  11. Tom, I think you are quite misguided regarding the efficiency of govt spending. You referenced the bidding process when a project goes ahead. There are many no-bid contracts awarded as well as a long series of bureaucratic red tape (often=connections) to navigate before even qualifying to bid on a project. Now I believe the bidding process is corrupt and inefficient but that is not even the relevant misallocation I referenced.

    The misallocation arises when politicians decide what projects are worth investing in. Another community center, new schools, more bridges, high speed trains? Some of those projects may be worthwhile but wouldn’t such projects be worthwhile in an expanding OR contracting economy? After years of neglect we have to invest more in infrastructure but that has nothing to do with MMT but more basic efficiency economics. If you assume that we should always go ahead with worthwhile LT projects regardless of the ST economic environment, then spending more than was originally budgeted due to MMT response to ST cyclical movements is by definition wasteful. I know that point may not be clear so let me restate it this way: always spend on worthwhile projects but suddenly spending for the sake of spending is a recipe for waste.

    You know what creates unemployment? Using MMT to justify policies whose goal is to prevent prices from falling to market clearing levels commensurate with cash flows. The restaurant down the street from me is hanging on trying to survive at their old rent when what should be happening is over-levered and under-water commercial investors should default (sorry banks) and the properties sold to new investors at a far lower price. The new investor with the lower cost base will then be able to lower the rent of the struggling restaurant. The restaurant can then lower prices and increase volume. I will no longer be paying $20 for a plate of pasta and will start eating there more often, increasing monetary velocity.

  12. Yossarian, you are apparently about to get your wish. The word is that the president will announce a spending freeze in the 2011 budget that will reduce the deficit by $250 B in 10 years. (1937, here we come.)

    As far as no-bid contracts go, that only applies in special situations, like when George Bush decided to forget following the rules and hand no-bids to Halliburton. I wonder if former Halliburton CEO had anything to do with this. Of course, we will never know because was done in secret.

    The point of government spending is twofold. First, the government must either spend or reduce taxes when demand for goods and services falls short of what the economy is capable of producing or an output gap and unemployment will result. In a perfectly flexible economy, the elasticity of supply and demand would reset prices and wages automatically, but this is just on the case with a modern economy where prices and wages are “sticky.”

    Secondly, according to the preamble of the Constitution, one of the purposes of the government it constitutes is to “promote the general Welfare.” This has been interpreted to mean that the government shall undertake to provide what promotes the general welfare, i.e., advance public purpose, in specific areas, when the private sector is either incapable or uninterested in doing so, and also assisting the private sector as needed. There is never a reason to just spend in order to spend. Of course, spending should be worthwhile and it is a presumption that spending is not worthwhile. However, the same result can be accomplished by reducing taxes, so the government can always increase NFA that way, as Warren Mosler suggests in the proposal cited above, where he recommends a payroll tax holiday along with a $500 per capital block grant to all 50 states, most of whom are tanking due to falling revenue.

    “You know what creates unemployment?” When nominal aggregate demand is insufficient to purchase all the goods and services that would be offered with the economy operating at full capacity an output gap results and unemployment rises as businesses lay off workers as they contract production to reduce supply to adjust the lower level of demand.

    “The restaurant down the street from me is hanging on trying to survive at their old rent when what should be happening is over-levered and under-water commercial investors should default (sorry banks) and the properties sold to new investors at a far lower price. The new investor with the lower cost base will then be able to lower the rent of the struggling restaurant. The restaurant can then lower prices and increase volume. I will no longer be paying $20 for a plate of pasta and will start eating there more often, increasing monetary velocity.”

    Maybe, and it looks like we are about to find out if the president actually does cut the deficit while the economy is still in the toilet. Nothing like a empirical test of a theory, although I thought we had already proved this.

  13. “Third, what exactly is the connection between QE and mortgage rates? Quantitative easing may reduce long-maturity rates as it swaps long assets for bank reserves. It does nothing in itself to support aggregate demand (unless there is some rise in investment as long rates decline somewhat, which is unlikely). Please read my blog – Quantitative easing 101 – for more discussion on this point.”

    I will probably need JKH’s help here but …

    From what I have read and assuming the U.S. gov’t won’t let the fed fail, central bank reserves are actually gov’t debt in disguise with a time period of one day that can be (but don’t have to be) “renewed” every day.

    So, the fed buys the mortgage asset and the “bank” gets the central bank reserve(s). However, is the central bank reserve’s capital requirement 0% while the mortgage asset’s capital requirement is say 8% (I just made that number up). If so, does that “add” or “preserve” capital for the bank possibly allowing for more lending?

    Feel free to correct what is wrong.

  14. Thanks for the responses above. I think my concern (as if we’d get to that position with the current buffoons) is that private debt would have the propensity to increase at a much faster rate than public debt could be reduced. So, for example, we introduce a job guarantee to take up the slack of the private sector and everyone’s surprised that the world hasn’t ended with such massive public debt. Everyone feels good and so starts buying plasma TVs on credit, and Harvey Norman starts recruiting again – would it be feasible to switch so quickly between public and private employment?

  15. I have written to John Mauldin several times to point out that he is simply not getting the difference between households and sovereign governments that issue in their own currency, etc. And his latest hysteria about Japan was simply too much. Yet all I receive is a canned reply “thanking me for my input”. A shame, because sadly, he is widely read, and he often has some good guest commentators, all of whom of course are his “good friends”.

  16. Tom and Yossarian, I think you are both right.

    The restaurant owner should default if his debt load is too high ( and all his workers should be ABLE if they wish to get a guaranteed job via an ELR program) and force the bank to deal with him. He can make a new offer or just walk away.

    Tom, I think your picture of aggregate demand explains unemployment much more accurately than does Yossarians.

    Yossarian I’m not sure where you get that MMT endorses polices that lend to moral hazard (that would be the current non MMT policies). In the current environment where neo liberal policies have skewed the risk reward system in favor of the big guys, an MMT advocates position is simply forcing austerity on everyone is a stupid policy. Especially since in the current milieu the austerity will mainly be shouldered by the public servant and the lower wage worker in the private sector. This austerity is not NECESSARY since we can not RUN OUT OF MONEY, so the only question remains how do we REALLOCATE our wealth. We still have as much as we’ve ever had but current policies have said bankers and stock/bond holders are sacred cows not to be sacrificed at all lest we have chaos in the “financial” markets.

    As soon as we realize that we dont need “financial” markets because we have all the financing we need we can get back to letting some people play around with money if they wish (it is a somewhat useful activity in that it keeps particularly devious minds off the streets where they might plot really horrific acts against society) but only if they promise not to act like they “own the place”.

  17. My reaction to Mauldin has been expressed very well by Tom Hickey – I just couldn’t take it anymore.

    His boundless hard work and research ethic accumulate to a persistent, fundamental misunderstanding of how things work in the monetary system. It’s a shame, and unmentionable on an efficiency/effectiveness scale.

  18. Fed Up,

    The central bank’s “swap” of reserves for mortgages assets removes risk from the non government sector. Therefore it removes a capital requirement and frees up bank (and non-bank) capital, other things equal.

    That said, I don’t know the details of the commercial banking capital requirements for the type of GSE guaranteed mortgages the Fed is acquiring. I don’t think its zero, but it may not be that significant.

  19. Greg, I did not say that moral hazard is the result of MMT. Since I am no MMT scholar, can you tell me what the MMT position would be on asset price deflation? Does MMT support govt intervention in the residential property mkt via FHA/GNMA/FNM/FRE so as to keep prices elevated above what cash flow can support (in the hope cash flows come back)? I thought this was interesting from Maudlin’s latest email (is there anyone not on his dist list?) which touched on what I was saying regarding the policy of maintaining elevated asset prices stifling growth:

    “When maintenance is required, a borrower with a property worth less than the loan is very reluctant to reach into his pocket. If you have a $10 million loan on a property now worth $5 million, you’re clearly not making any cash flow. So what do you do when you need new roofs? Are you going to dig into your pocket and spend $600,000 on roofing? Not likely. Why would you do that?

    Or a borrower who is sitting on a suburban office property – he’s got two years left on the loan. He knows he has a loan-to-value problem. Well, a new tenant wants to lease from him, but it would cost $30 a square foot to put the tenant in. Is the borrower going to put the tenant in? I don’t think so. So the problems get bigger”

    Now prices remain elevated because of an irrational fear of deflation (even after periods of sustained and rapid inflation) due to the sticky wages/prices fallacy. Nothing I buy has a price that is stick over a 1-2yr period. I recently negotiated a 10% rent reduction versus last year, my auto insurance went down, cars are cheaper, TV’s cheaper, cell phone cheaper, cable cheaper, landline nearly free, clothes on sale, electricity cheaper- prices are not sticky. Nor are wages, or at least they shouldn’t be. Obviously the big problem is unions and their silly wage and benefit demands that will not be affordable without a period of strong inflationary growth. Oh, and debt payments are fixed, but they are also fixed for the creditor so for every debtor loser there is a saver winner.

    You think that the guy who gets laid off from the restaurant because of these interventionist policies that don’t allow for rents to fall as quickly as they should is entitled to a govt job so that labor capacity does not go unused. But where do you employ him- GOVT Restaurant- maybe a trendy govt Tapas bar or something? I’d rather prices fall in the first place so he doesn’t have to lose his job but, if he find himself unemployed nonetheless, he will have time to find another job as prices stabilize at mkt clearing levels and new businesses start. All the while the prices of everything he buys goes down, as it does for the 90% of the employed economy.

    The problem with your views are that they are entirely Ivory Tower in nature. You believe in what Complexity Economics would call Big Men- a hierarchical structure whereby the most rational among us- presumably Geithner, Obama, Reid, Pelosi, and Frank in this case- can adeptly manage the economy from the top down. They can expertly make sure that there is no idle “capacity” and all labor is full exploited.

    But what they don’t understand is that economic growth comes from the bottom-up; it is the often spontaneous result of millions of individual interactions (call it enlightened self-interest) freely operating within an integrated network. Much of the excess labor capacity was formerly employed making and selling Hummers, McMansions, esoteric financial products, and servicing those in the aforementioned industries. Do we start GOVT Builder to continue building McMansions, GOVT CDS Trader, and GOVT RE Broker, and GOVT Doggy Gym to go along with GOVT Motors? The fact is, there is no way for you or any govt bureaucrat to know what capacity is underutilized and what is antiquated- the laws of supply and demand will determine that.

    But if you operate under the assumption that economies can be managed from the top down then I see why you believe in the MMT full employment mandate.

    Now don’t go misconstruing what I said as some sort of call for anarchy in place of govt. I thing public projects should be pursued in all instances if the return on investment is above the cost of capital, with the cost of capital being the REAL growth potential of the private economy in terms of goods and services. Obviously this is garbage in, garbage out as the assumptions are key- for instance how do you measure the return on a park (I like parks, maybe more than others)? But by in large projects that add sufficient value should go forward REGARDLESS of where an economy is in a given cycle (but projects do become more attractive in a downturn because alternative returns are lower (lower cost of capital) and cost of investment falls (or it should without union mandates, etc.).

    Tom, having known people involved in the govt contracting process I see how incompetent the bureaucrat overseer is relative to the profit-hungry (and well-connected) contractor. But intelligent people can disagree on this matter. What I think we can both agree on is that every last penny in and out of the govt (state, local, federal) should be thoroughly documented and available on the web for the general public- this would be the best way to control graft. I see no reason why this shouldn’t be possible given the technology available and prevalence of electronic payment.

  20. Yossarian,

    You said:

    “What I think we can both agree on is that every last penny in and out of the govt (state, local, federal) should be thoroughly documented and available on the web for the general public- this would be the best way to control graft. I see no reason why this shouldn’t be possible given the technology available and prevalence of electronic payment.”

    DO you think this should apply to the private sector as well ? Why ?

  21. I have started liking the phrase deficit terrrorists. When our friend Sean Carmody objected to your usage, I thought his objection was valid. However, I am now in the camp for the usage of this phrase.

  22. Yossarian, you seem to me to be presuming that micro markets based on aggregate supply and demand are efficient, and that macro is essentially the aggregation of micro markets, with government as some sort of appendage to this that constitutes a drag. The presumption is that government “intrusion” into the economy should be limited for two reasons, inefficiency and political cronyism, which are of course related.

    This supposes that society is based on the aggregation of its members. However this commits the fallacy of composition. The whole is equal to the sum of its parts on with respect to sets, and not to systems, where the relationship of the elements (individuals) and subsystems (groups) is intrinsic. The society is much more that an aggregation of the “representative consumer,” and the general welfare much more nuanced than the aggregate satisfaction of the representative consumer. (See Steve Keen, Debunking Economics (2001), chapter 2.)

    The mainstream view that you seem to be under the influence of also presupposes that society is the aggregation of a “representative agent,” who is perfectly rational, (Rational Expectations Hypothesis), which contradicts cognitive science, and that markets are perfectly competitive, therefore optimally efficient (Efficient Market Hypothesis). when this is demonstrably untrue because the playing field is not level. These presumptions is attributed to the authority of “Adam Smith’s invisible hand,” when Smith said no such thing. (See Gavin Kennedy, Adam Smith’s Lost Legacy (2005). Neither REH nor EMH are provable, however, and they are not falsifiable either. This implies that they are normative assumptions rather than empirically-testable hypotheses. (See Do economists make markets?: on the performativity of economics‎ by Donald A. MacKenzie, Fabian Muniesa, Lucia Siu (2007).

    Peter F. Drucker sagely observed that “efficiency is doing things right and effectiveness is doing the right thing.” The mainstream emphasis on supposed efficiency in policy-making ignores the role of effectiveness in achieving the general welfare. You seem to be saying that anything short of a laissez-faire system is either a command economy or will inevitably lead to it, Hayek’s argument in The Road to Serfdom. It is a bogus argument that is based on ideology, not reality. It is normative, not empirical.

    I would agree with you that every last penny in and out of the govt (state, local, federal) should be thoroughly documented and available on the web for the general public- this would be the best way to control graft,” as long there would a corresponding requirement of open books for all firms operating in the US to prevent cheating. A lot more people are now on the street because of cheating than graft. See Winterspeak, Sanity and Insanity as Macro Man

  23. Yossarian has some valid questions here. How would MMT deal with the hyperinflated asset prices of the current situation, where income cannot service the debt? All these underwater commercial and residential real estate loans have to be dealt with. My guess is that MMT would NOT be trying to keep them levitating at the current inflated levels. That is what the Obama team is doing now, by shoring up the mortgage-backed security market. I think this debt, like the debt owed by Icelandic banks or the Haitian debt or Third World debt in general, will increasingly be repudiated as illegitimate, odious, whatever you want to call it. Crammed down, written off, forgiven, jubileed away. For mortgaged homeowners, a much expanded govt deficit will offer relief in numerous ways, but I think much of this deeply underwater real estate debt will have to be written off by the banks. This problem really relates more to the endogenous money creation of banks than it does to MMT (though govt fiscal surpluses helped to create the explosion of debt). This side of things is addressed much more by Steve Keen, but he also seems to feel that expanding the govt deficit is the way to ease the pain of this deleveraging.

    Also, I feel Y’s question about whether the political process under MMT can actually be less corrupt than the current system needs also to be addressed. Lobbyists may not skip a beat in the changeover to the new system. A Chartalist nation-state can wage war as easily as a neoliberal one (see Henry CK Liu on Naxi Germany, where a kind of chartalism was in place even before they turned to armaments in 1935). And who is to say that a Chartalist economy would be any more sustainable or any less destructive of the earth? It will deplete our stock of rare earth minerals and other rare elements needed in green technology as effectively as a neolberal economy. Bill’s interest in permaculture is of interest here—I would love to see him tie it in with his economic ideas.

    And Y’s remarks about the kind of jobs that would be created, are also pertinent. Since Bill has written so much on Job Guarantees, I feel sure that he has addressed this somewhere. Our economy today is quite different from that of the 1930s. I think passing out shovels to work gangs may not fly with some.

  24. Yossarian, I am certainly a neophyte to MMT but I do think I have a pretty good grasp of many of the principles. As far as asset price deflation I think you have to realize in a world that was run from the start with solid MMT principles there would be less private sector debt levels so you wouldnt have the boom bust cycles from leveraging/deleveraging. The financial sector would be a much smaller and less dangerous part of the economy. Governments wouldnt be “financing” anything because they would have sound understandings of how fiat money works so you would not see the acute losses in aggregate demand you are seeing today. I’m not sure that answers your question but as far as how to battle the asset price deflation we are seeing MMT is pretty clear that keeping the debtors spending and paying off as much of their debts as possible is much more effective than all the “reserve building” projects undertaken thus far. I would say that Bill and the other MMT people I’ve read do not think keeping asset prices inflated is a good policy.

    You cite an irrational fear of deflation when I think the “irrational” fears are the inflationary ones. The finance/lending sector loves deflation, you pay your loan back with dollars that buy more than you could when you borrowed. As a debtor I prefer inflation, so I can pay back with “cheaper dollars”. This is the fight going on and the deflationistas are winning (they always do the game is rigged in their favor) Deflation is much worse for main street because debt doesnt change. I do not think your story of saver winner/ for every debtor loser lines up with reality. There are waaay more debtor losers.

    No, I’m not suggesting the laid off restaurant workers work for a govt cafe however instead of measly unemployment benefits a queue of govt jobs could provide bridges that keep aggregate demand from falling off a cliff.

    The main thing that needs to happen is that we need to shrink dependance on our financial sector to provide loans to sustain private demand. With the neo liberal policies stripping the good jobs and leaving everyone else in debt, no economic paradigm will make things look rosy very soon, but
    I do think MMT principles when applied consistently leave the best chance of a public/private partnership that puts the finance sector in its proper place and leaves workers with chances to get and stay ahead.

  25. Andrew “Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to ‘liquidate the workers, liquidate the farmers, purge the rottenness.'” Quoted today by Paul Krugman in Obama Liquidates Himself.

    We saw how well that worked back then. (To be fair, Herbert Hoover didn’t actually take it, but that’s what ended up happening anyway due to ignorance and poor policy. It could happen again.)

    The US and world are now in the late stage of a long financial cycle described by Minsky’s financial instability hypothesis, which is characterized by Ponzi finance, just as the world was at the onset of the Great Depression. Irving Fisher developed his theory of debt deflation to describe this after he was spectacularly wrong in predicting what would happen in 1929.

    The trick is for the government to manage the necessary deleveraging to end the cycle without causing a deflationary spiral. There is is reason that the people in charge of promoting the general welfare are wont to step in to prevent a general liquidation of debt in a period of debt deflation due to Ponzi finance that occurs at the tail end of a financial cycle. It will literally bring the house down and engulf the nation. This is the challenge the US faced in 2008, and still faces now.

    How this is accomplished this comes down to what one thinks the proper role of government is in using the tools available to it to “form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” Let the debate begin, but let it be based on fact, not on myth. MMT provides a fact (accounting) based description of the monetary system and stock-flow consistent macro models. It is naturalistic rather than performative.

    MMT is a description the operation of the vertical-horizontal relationship of government and non-government finance. It is descriptive, not normative. It simply says what happens monetarily, in terms of the accounting, when any particular policy is put in place. The various policy options involve political decisions to be made based on informed debate instead of myths based on unprovable or disproved theoretical assumptions or conditions that applied under a convertible fixed rate currency.

    MMT does not prescribe a job guarantee or anything else. It simply says what can be accomplished financially under the present monetary regime. It also reveals that the current law requiring $4$ offsets for deficit spending is a voluntary constraint imposed politically, so that it can be removed politically to allow the government to use its full range of tools for pursing functional finance. It recommends adoption of an updated version of Abba Lerner’s principles of functional finance in managing the economy for optimal results, because this is how the monetary system actually works. Neoliberal monetarism is a fiction, as events are proving.

    MMT does not say how what the present monetary makes possible should be done or what options should be implemented. Different MMT’er have different ideas about this. Again, these options are political decisions that are normative. There are a variety of options, liberal and conservative, libertarian and radical, but all these options are governed by what is possible under the present monetary regime.

    The US (the administration, the Congress, and the people) must recognize the situation we are in and the options that we have given the current non-convertible floating fx monetary regime. Otherwise, the challenge that is being addressed will be the wrong challenge and the options for addressing the challenge will be erroneous. Right now, that’s where the US is.

  26. Dave H. “Yossarian has some valid questions here. How would MMT deal with the hyperinflated asset prices of the current situation, where income cannot service the debt?”

    Michael Hudson addresses the private debt problem that is leading to debt deflation today here. His critique is based on his Minskian view, similar to Steve Keen’s, but it correctly characterizes the present situation, in which rent-seeking FIRE sector, which includes Wall Street, does it best to set the agenda politically in a way that promotes its interests.

    MMT doesn’t make any specific policy pronouncements, but only shows how different policies work with respect to the monetary system presently in place. In this case, FIRE finds it to its advantage to encourage the “fiscal responsibility” myth that MMT shows to be just that. MMT also shows that there are a variety of options that can be taken instead that would produce a more equitable outcome for consumers and workers, as well as increased economic growth through production, using targeted government action. However, choice among these options involves political decisions involving values, and is therefore beyond the scope of MMT, which is descriptive rather than normative or prescriptive.

    What MMT does is show that conservative solutions are often based on obsolete assumptions about monetary matters that are relics of the gold standard, or else erroneous theories based on monetarism, which misunderstands how the monetary system operates. It also shows how progressive solutions involving deficit spending do not need to “funded” by taxes or “financed” by government debt. MMT also shows how such options can expand the productive capacity of the economy without increasing the private debt that feeds the parasitic FIRE sector. Therefore, even more conservative MMT’ers often favor apparently progressive options like a job guarantee. But those favoring a job guarantee might have different ideas regarding its implementation.

  27. Tom,

    You are a very impressive imdividual. I always enjoy reading your contributions.

  28. Tom,

    Good response. Thanks. One question lingers in my mind though: Will the political process be able to create sustainable growth? It seems very doubtful, as there are too many vested interests in unsustainable growth, and building some automatic stabilizers into the money system may be a good idea if it is feasible. Perhaps Frederick Soddy’s idea of 100 percent reserves as a control on growth should be considered (I know Bill addressed 100 percent reserves recently, but not from this angle)? Note that Soddy also encouraged countercyclical fiscal action by the government. Yet Soddy’s more contemporary followers in ecological economics (Herman Daly et al.) are quite disappointing on the whole. Bill’s ideas and MMT ring truer somehow.

  29. Alan, thanks for the kudos.

    Dave H. First, the government has the prerogative and corresponding obligation to provide enough currency to balance NAD with real output capacity, avoiding inflation by not providing too much in relation to capacity and to avoid recession and unemployment, and above all, deflation, by providing too little. A great deal of this can and should be managed through automatic stabilizers.

    Secondly, to meet its mandate to provide for the common defense, the government also has to provide for the military, which generates the military-industrial complex, a major component of the US economy. As part of this mandate the government has also chosen to provide for its veterans through the Veterans Administration, which reportedly runs the most efficient medical system in the country. This also adds to the productive capacity of the nation, although military spending adds little in the way of products for domestic consumption to offset the income generated. This must be offset by saving and investment, or it is inflationary.

    Third, to meet its mandate to promote the general welfare the government also provides for the operation of the government itself, as well as creates government programs and public/private partnerships, all of which add to the productive capacity of the country. All of these are monitored by the CBO for efficiency.

    As part of this mandate, the government also funds programs that the private sector either cannot or does not wish to, or which the public wishes to maintain control of directly, like public education. Such programs, like basic research, also increase productive capacity while promoting public purpose.

    The government also undertakes social programs that not only act as long-term automatic stabilizers, like social security, that add to productive capacity while vastly improving the lot of the aging population, which otherwise would be a drag on society and reduce the national standard of living. The “cost” of social security is amply paid for by the currency that the government provides to the economy to sustain and increase productive capacity. The proposed job guarantee also does something similar, while also providing a stable price buffer.

    Moreover, such social programs like Medicare and Medicaid greatly add to productive capacity. Most health care is used by people over 55, and the bulk by people over 65. Their would be much less money available for such services and this would reduce the amount of care provided, as well as restrict the funds for medical R&D. The US is able to provide excellent health care and expand its medical technology largely because of the government spending/investment in this area.

    As far as sustainability goes, the US president has set as a top priority the development and deployment of green energy in order to reduce the externalities that are poisoning the planet by replacing carbon-based fuels with sustainable energy technology. This is a mammoth project running into the trillions that is beyond the ability of industry to tackle alone even if it wanted to. Moreover, it involves international coordination. Only government working together and with industry can achieve this goal in the timeframe required. I have commented previously here (last comment in t’s A Hard RoadI) on decreasing EROEI, which is a serious problem economically as globalization proliferates and cheap energy disappears, putting pressure on prices pretty much across the board. This will result in contraction and declining living standards in developed nations unless it is addressed. Even if new petroleum is discovered to meet the growing demand, there is still the issue of externalities that will drive up real cost and eventually nominal price. Here, governments must act with a Manhattan Project for sustainable energy as well as reduction in the externalities of the present system.

    Fiscal scolds hold that this will increase the government debt to GDP ratio to the degree that it threatens the financial position of the US. MMT shows that this is based on erroneous gold standard thinking that is no longer applicable. Conservatives also hold that private industry is more efficient. To his we answer with Peter F. Drucker, “Efficiency is doing things right, effectiveness is dong the right thing.” Government is charged with promoting the general welfare by advancing public purpose, that is “doing the right thing.”

    Moreover, the vaunted efficiency of the private sector is based on private funding, which involves private debt. Private debt service extracts funds from the productive economy and transfers these funds to FIRE, as Michael Hudson points out in the citation in my comment above. This results in increasing inequity in the name of free market “efficiency.”

    The brings us to the final point, whether government should use its power of money provision to enter the financial system in competition with FIRE, or even to replace it. Similarly with the health insurers. That is a political questions, but MMT makes clear that there is no financial reason preventing the government from doing this, should the people decide to to so because it feels that it is being taken advantage of by the system in place.

    And just as businesses institute checks and balances to prevent waste, fraud and abuse, so too can government. This is another red herring that is based on the supposed superiority of free markets to self-regulate, which ended in crashing them and adversely affecting billions of mostly innocent people and resulting in untold loss of foregone opportunity (that is seldom mentioned by the powers that be or the media as a cost).

    For example, the government as lender of last resort stepped in to save FIRE, but left Main Street to fend for itself when it could have been the lender of last resort to Main Street also, instead of trying to stimulate new private lending in an environment in which Main Street had been tapped out by Wall Street. What’s the logic in that? Same with supporting unsustainable growth in other areas like energy with corporate welfare. This is just socialism for the have’s and capitalism for the have-not’s. However, this is a political issue. But MMT can remove a lot of the financial and economic myths being used to support it, either erroneously or disingenuously. (Kudos to Bill in this regard.)

    In the final analysis, prudent government deficit spending is an investment that greatly increases GDP (growth) while promoting the general welfare, strengthening the nation, and increasing the standard of living. Such spending/investment through money provision pays for itself, and it adds funds (NFA) to the economy rather than siphoning anything from national income generated by the private sector, as many erroneously believe due to ignorance or propaganda.

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