Hyperbole and outright lies

Its been a big weekend for hyperbole which in this context is a polite term for outright hysterical lies. Today’s blog reviews a few of the choice selections from a weekend’s reading. It amazes me how people can even mis-represent their own research when they know the audience hasn’t even read it in detail. It also is interesting to follow the way the media commentators are trying to out-do each other in use of superlatives – how much catastrophic can a catastrophy get – sort of thing. The analogies, the adjectives … are all designed to transport uninformed readers into a particular ideological space where the conservative forces can garner more of the national pie than otherwise might be the case. Anyway, that is what today’s blog is about.

While we all think of Harvard University as some high quality ivy league sort of a place up there Cambridge, MA its economists are among those leading the charge in the mis-information stakes. I feel sorry for their students who get such a warped idea of how the economy works.

Over the weekend I read that Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity. That sounds bad. I wondered which countries he is talking about.

At the outset this is a case of someone who has conned a publisher into supporting the publication of a book that is timely – that is, will sell heaps to the growing deficit-terrorism market – but, which is highly misleading in several ways that are not necessarily apparent to the untrained reader.

And the more I read about the adventures of Rogoff and his co-auther Reinhart out into the popular media and the derivative articles that reference them the more I realise that the general public doesn’t really know what is in the book and the authors use the book in ways that cannot be justified by its content and analysis.

Please read my blog – Watch out for spam – for more discussion on this point.

Anyway, the journalists Aki Ito and Jason Clenfield started out in a familiar way:

Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff …

At least children won’t be getting scared with all these articles – they increasingly talk about balloons – and as we know balloons are fun for kids (until they go bang!).

But, we now have a prediction from Rogoff – several countries will default on their sovereign debt – but who and when? No precision just innuendo is provided.

The article quoted Rogoff as saying that “following a banking crisis”:

we usually see a bunch of sovereign defaults, say in a few years … I predict we will again … We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that’s happening … Greece is just the beginning.

He also mentioned that Greece’s debt is “five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001”.

Hmm, I know a bit about Russia and Argentina and last time I recalled I would not have characterised their crisis as being sourced in the banking system although ultimately the banks became implicated by the policy failures that led to their crises and defaults. I will deal with that soon.

In the interview, Rogoff did not say that the US was likely to default – but then, notably, he didn’t say they would not either. This is a ploy I think. What he said was that the US had to “tighten monetary policy before cutting government spending” which would “send “shockwaves”through financial markets”.

He claimed that US “(f)iscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts”. So you get the drift – tie the demands for fiscal austerity everywhere to the possibility of sovereign defaults in some nations – which have particular circumstances – like currency pegs or loss of currency sovereignty more generally.

However, Rogoff does not want to get too specific in helping the reader understand the complexity of sovereign default. Instead he wants to muddy the waters some more by saying:

Most countries have reached a point where it would be much wiser to phase out fiscal stimulus … Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S. … [Japanese fiscal policy is] … out of control

So you see the associations are repeating – I predict sovereign defaults … most countries are in trouble … investors will punish all countries that have debt … including the US … Japan … the uninformed reader hasn’t a chance of sorting out the truth from the fiction and the ideology.

I don’t like their book – This Time is Different – for several reasons which I have discussed before. But quite apart from the other issues that one might have with Reinhart and Rogoff’s analysis, 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 (or both) blur the terminology and start claiming or leaving the reader to assume that the analysis applies to all governments everywhere.

It does not. 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 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.

While Rogoff does not say the economies of the US or Japan are included in their countries that will default the fact that he continually links the sovereign default forecasts with the need for the US to introduce an austerity program or that Japanese fiscal policy is “out of control” leaves the uninformed reader (or listener) with the impression that the US and Japan and any nation with rising public debt – are in the camp of defaulters.

The hyperbole at this point becomes lies.

For a start, the US government has no foreign currency-denominated debt. 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. The UK has very little 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). See next section.

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.

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). See below for more on Russia.

Reinhart and Rogoff never 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 “convertibility”, yet from a modern monetary theory (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.

But what about Argentina and Russia?

Argentina 2001-2002 …

In April 1991, Argentina adopted a rigid peg of the peso to the dollar and guaranteed convertibility under this arrangement. That is, the central bank stood by to convert pesos into dollars at the hard peg.

The choice was nonsensical from the outset and totally unsuited to the nation’s trade and production structure. In the same way that most of the EMU countries do not share anything like the characteristics that would suggest an optimal currency area, Argentina never looked like a member of an optimal US-dollar area.

For a start the type of external shocks its economy faced were different to those that the US had to deal with. The US predominantly traded with countries whose own currencies fluctuated in line with the US dollar. Given its relative closedness and a large non-traded goods sector, the US economy could thus benefit from nominal exchange rate swings and use them to balance the relative price of tradables and non-tradables.

Argentina was a very open economy with a small non-tradables domestic sector. So it took the brunt of terms of trade swings that made domestic policy management very difficult.

Convertibility was also the idea of the major international organisations such as the IMF as a way of disciplining domestic policy. While Argentina had suffered from high inflation in the 1980s, the correct solution was not to impose a currency board.

The currency board arrangement effectively hamstrung monetary and fiscal policy. The central bank could only issue pesos if they were backed by US dollars (with a tiny, meaningless tolerance range allowed). So dollars had to be earned through net exports which would then allow the domestic policy to expand.

After they introduced the currency board, the conservatives followed it up with widescale privatisation, cuts to social security, and deregulation of the financial sector. All the usual suspects that accompany loss of currency sovereignty and handing over the riches of the nation to foreigners.

The Mexican (Tequila) crisis of 1995 first tested the veracity of the system. Bank deposits fell by 20 per cent in a matter of weeks and the government responded with even further financial market deregulation (sale of state banks etc)

These reforms loaded more foreign-currency denominated debt onto the Argentine economy and meant it had to keep expanding net exports to pay for it. However, things started to come unstuck in the late 1990s as export markets started to decline and the peso became seriously over-valued (as the US dollar strengthened) with subsequent loss of competitiveness in the export markets.

Lumbered with so much foreign-currency sovereign debt the decline in the real exchange rate (competitiveness) was lethal.

The domestic economy by the late 1990s was mired in recession and high unemployment.

And then the “Greek scenario” unfolded. Yields on sovereign debt rose as bond markets started to panic – a vicious cycle quickly became embedded.

In 2000, the government tried to implement a fiscal austerity plan (tax increases) to appease the bond markets – imposing this on an already decimated domestic economy. The idiots believed the rhetoric from the IMF and others that this would reinvigorate capital inflow and ease the external imbalance. But for observers, such as yours truly, it was only a matter of time before the convertibility system would collapse.

Why would anyone want to invest in a place mired in recession and unlikely to be able to pay back loans in US dollars anyway?

In December 2000, an IMF bailout package was negotiated but further austerity was imposed. No capital inflow increase was observed. Duh!

The government was also pushed into announcing that it would peg against both the US dollar and the Euro once the two achieved parity – that is, they would guarantee convertibility in both currencies. This was total madness.

Economic growth continued to decline and the foreign debts piled up. The government (April 2001) forced local banks to buy bonds (they changed prudential regulation rules to allow them to use the bonds to satisfy liquidity rules). This further exposed the local banks to the foreign-debt problem.

The bank run started in late 2001 – with the oil bank deposits being the first which led to the freeze on cash withdrawals in December 2001 and the collapse of the payments system.

The riots in December 2001 brought home to the Government the folly of their strategy. In early 2002, they defaulted on government debt and trashed the currency board. US dollar-denominated financial contracts were forceably converted in into peso-denominated contracts and terms renegotiated with respect to maturities etc.

This default has been largely successful. Initially, FDI dried up completely when the default was announced. However, the Argentine government could not service the debt as its foreign currency reserves were gone and realised, to their credit, that borrowing from the International Monetary Fund (IMF) would have required an austerity package that would have precipipated revolution. As it was riots broke out as citizens struggled to feed their children.

Despite stringent criticism from the World’s financial power brokers (including the International Monetary Fund), the Argentine government refused to back down and in 2005 completed a deal whereby around 75 per cent of the defaulted bonds were swapped for others of much lower value with longer maturities.

The crisis was engendered by faulty (neo-liberal policy) in the 1990s – the currency board and convertibility. This faulty policy decision ultimately led to a social and economic crisis that could not be resolved while it maintained the currency board.

However, as soon as Argentina abandoned the currency board, it met the first conditions for gaining policy independence: its exchange rate was no longer tied to the dollar’s performance; its fiscal policy was no longer held hostage to the quantity of dollars the government could accumulate; and its domestic interest rate came under control of its central bank.

At the time of the 2001 crisis, the government realised it had to adopt a domestically-oriented growth strategy. One of the first policy initiatives taken by newly elected President Kirchner was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants which was around 13 per cent of the labour force. This not only helped to quell social unrest by providing income to Argentina’s poorest families, but it also put the economy on the road to recovery.

Conservative estimates of the multiplier effect of the increased spending by Jefes workers are that it added a boost of more than 2.5 per cent of GDP. In addition, the program provided needed services and new public infrastructure that encouraged additional private sector spending. Without the flexibility provided by a sovereign, floating, currency, the government would not have been able to promise such a job guarantee.

Argentina demonstrated something that the World’s financial masters didn’t want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed.

The clear lesson is that sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies – such as the introduction of a Job Guarantee – which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.

However, the other lesson that Rogoff and his ilk don’t emphasise – is that pegging a currency to another, guaranteeing convertibility and then allowing the financial sector to “dollarise” your economy (drown it in foreign currency-denominated debt) – is a sure way to force the country into financial ruin.

It has nothing to do with the volume of public debt issued in the local currency by a government which has sovereignty in that currency.

Please read my blog – Why pander to financial markets – for more discussion on this point.

And Russia 1998 …

Russia is another victim of a pegged currency and the financialisation of its economy.

I took some notes at the time the Russian government defaulted which go like this. After the breakdown of the Soviet Union they made their first major mistake – conveniently not mentioned by Rogoff – they pegged the ruble within tight range to US dollar – and thereby surrendered their currency sovereignty.

Their second mistake was to allow heavy borrowing in foreign currencies. There was considerable optimism in Russia at the time and all sorts of opportunists were set loose and their foreign currency exposure rose dramatically.

Then in November 1997, the Asian crisis causes a speculative attack on the ruble. The speculators knew that (a) it was going to try to maintain the peg; and (b) it was borrowed to the hilt in foreign currency. So, sell it short to death was a sure way to scoop the pool.

The problem was that the Russian government played right into their hands and instructed the central bank (CBR) to defend the ruble (that is, maintain the peg) and they lost around $US6 billion in reserves in doing so.

On top of the currency attack, a second shock came in late 1997 with the collapse of oil and nonferrous metal prices, upon which they heavily depended on to earn them foreign exchange.

Soon after (April 1998) there was another hedge-fund inspired speculative attack on the ruble which saw further foreign exchange reserves lost. The obvious reaction should have been to suspend the peg, float the currency and default on all foreign-currency loans (or negotiate conversion into local currency).

However, not to be beaten on May 19, 1998 the CBR increased their lending rate from 30 percent to 50 percent and spent a further $US1 billion defending the peg.

This mistake was magnified as oil prices kept dropping and the CBR kept bleeding US dollars.

Eight days later (May 27, 1998), the CBR increased the lending rate to 150 percent and the domestic economy was being scorched.

In August 1998 (the 13th), prices on Russian share and bond markets collapsed as investors sold off in the face of major fears of devaluation. Annual yields on ruble-denominated bonds exceeded 200 percent at this point.

Finally, four days later (August 17, 1998), the Russian government devalued the ruble, defaulted on domestic debt, and pronounced a moratorium on payments to foreign creditors (effectively a default).

On September 2, 1998, the government floated the ruble.

First, this was not a bank crisis. It was the result of the currency peg and the massive exposure to foreign-denominated debt.

Second, at any time they wanted to they could have floated which would have stopped the need to hike interest rates and kill their economy.

Third, they never needed to default on domestic debt. That was the act of sheer stupidity and the poor advice they were getting. There was never a solvency risk in their own currency. The IMF were in there telling the Russian government that they had to implement an austerity plan and convincing them that they needed to “raise money” to fund the deficit – both erroneous propositions.

They could have simply floated and become sovereign and then there was no solvency risk in all debts denominated in that currency.

The foreign debt was another question. Combined with the (voluntary) peg it was a lethal cocktail. The CBR lost huge stores of foreign exchange trying to defend the impossible. The rising interest rates to try to attract capital inflow to help shore up the excess supply of ruble into the foreign exchange markets only damaged the domestic economy further.

The problem stems from the early stages of capitalism where they embraced market liberalism with panache and allowed the foreign banks to hold them to ransom. It was madness to run a currency peg and then allow significant portions of the economy to borrow in foreign currencies.

They also go caught up in the Asian crisis and the collapse of oil prices.

The US, Japan, the UK, Australia and most nearly every other nation is nothing like this – (a) they have no foreign currency public debt; (b) they floats their currency; and (c) the IMF is not able to bully them around.

Greece and the EMU nations are another story!

Then I read about spending explosions …

The Washington Post carried a story on Sunday (February 28, 2010) entitled – Germany’s frugality bemoaned for inhibiting euro zone growth.

The article was about the imbalance in spending within the EMU with the Southern European countries splurging and buying “everything from BMW sedans to Miele washing machines” which has kept Germany afloat – “where stagnant wages and a culture of conservative consumers has led to years of anemic domestic demand”.

It is clear that aggregate demand in the Eurozone has been below that necessary to sustain full employment and the crisis has exposed that more brutally than ever.

It is also clear to me that part of the problem has been the artificial rules placed on government spending by the Maastricht treaty which have forced the private sector overall to use debt to maintain growth in spending. That was always going to be an unsustainable growth strategy.

But the hyperbole is something again.

The journalist Anthony Faiola, opened with the line:

Greek extravagance touched off the biggest crisis in the 11-year history of the euro. But the world’s most ambitious monetary union faces a less obvious problem that might be even harder to lick — German frugality.

So we read about the “debt-fueled splurges” of Southern Europe (Greece< Spain, Italy, Portugal) and "Southern European profligacy" and "Greece must slash spending and put its books in order to restore faith in the euro" etc. According to Faiola, the Germans now are feeling indignant towards the Greeks (we will just add the Greeks to most other European nations that Germany feels indignant towards - same old story really) because while they have:

… made painful cuts in social services even as countries like Greece had an explosion in government spending.

Okay enough already! I decided to see how bad government spending in Greece was and so I did what one might reasonably do and I consulted some relevant data.

I just love the way journalists use phrases like “Greece had an explosion in government spending” as if it means something and is based in fact. I was expecting a sharply upward-sloping government spending curve – outstripping everything.

The following graph is taken from the National Accounts data available at the National Statistics Office of Greece. It shows real GDP growth (indexed to 100 at first quarter 2000) and the other main components of aggregate demand – consumption (C), investment (I), government spending (G) and net exports (NX).

Unless you have a different definition of exploding I cannot see evidence of any expenditure item exploding.

I see a spike in G in recent quarters driven by a collapse of net exports and investment (that is, reacting to a major collapse in aggregate demand – a strong portion of the reaction being automatic stabilisers). But General Government spending over this period has not even grown as fast as real GDP.

I wonder if the journalist actually has studied the data before writing the article. I sent him an E-mail over the weekend suggesting that maybe he hadn’t taken the time to examine the expenditure data. No reply!

Would be President reveals herself to be a terrorist …

Reuters reported last Thursday (February 25, 2010) that U.S. deficit now a security issue. Who other than a rabid Austrian schooler or Barrow, Mankiw, and Rogoff (BRM) would say something as stupid as that?

Answer: US Secretary of State Hillary Clinton that’s who!

She is reported to have told the US Senate Committe on Foreign Relations that:

“outrageous” advice from former Federal Reserve Chairman Alan Greenspan helped create record U.S. budget deficits that put national security at risk … It breaks my heart that 10 years ago we had a balanced budget, that we were on the way of paying down the debt of the United States of America …

I served on the budget committee in the Senate, and I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan came and justified increasing spending and cutting taxes, saying that we didn’t really need to pay down the debt — outrageous in my view …

We have to address this deficit and the debt of the United States as a matter of national security not only as a matter of economics … I do not like to be in a position where the United States is a debtor nation to the extent that we are.

The moment of reckoning cannot be put off forever … I really honestly wish I could turn the clock back.

You can watch the whole proceedings but I wouldn’t waste the time. You get the gist.

In wanting to turn the clock back, I would just remind her that the budget surpluses of the late 1990s not only squeezed the private sector and helped start the private debt-binge but also led to the recession in the early 2000s and allowed Bush to gain office.

Further, the deregulation during those years helped lay the basis for the current crisis.

And, what exactly is the day of reckoning? What does she expect will happen? The debt might acquire arms and legs and take over America! Idiotic talk.

I would sack her for promoting terrorism which I thought was one of the key things that the US State Department wanted to reduce.

Then I read that Australia is back to full capacity …

The trend among the bank and financial commentators at present is to make outlandish claims about the impending inflation threat and the need to keep a lid on economic growth. Last time I noted (September quarter) GDP growth was still crawling along near the zero line. We will have the December quarter figures on Wednesday.

Anyway, today, the ABC News reported that a “leading unofficial measure of inflation edged up last month” (by 0.1 per cent) and showed that annual inflation was “below the Reserve Bank’s inflation target band of 2 to 3 per cent”. The trend indicated by the series is downward.

Tomorrow the RBA will meet to determine interest rate settings and all the “markets” are predicting a further rise, although they predicted that last month “with a probability of one” (as some cocky character said at the time) and the central bank held rates constant.

Anyway, the only so-called “expert” the ABC bothered to interview today was a financial market economist at a securities company. After accepting that “inflationary pressures are being contained” (looking at the data what other conclusion could you reach), she went on to claim that there was a strong case for the RBA to raise interest rates tomorrow. This is her assessment:

Recent monthly inflation reports were sending signals that inflationary pressures were building up a head of steam, hence this benign report suggests runaway inflation isn’t entrenched, yet … As the unemployment rate continues to shrink and spare capacity is all but absorbed, the RBA Board tomorrow can comfortably recommend another 25 basis point rate rise to 4 per cent …

First, the estimated inflation rate is below the RBA’s mindless band (2-3 per cent) and falling so even under inflation targetting you could not make a case that interest rates had to rise.

Second, the use of terms like “runaway inflation isn’t entrenched, yet” suggests we have runaway inflation but it isn’t entrenched, but it will be unless monetary policy action thwarts it.

Since when has a falling tendency of a level been “runaway” anything? Seriously.

Third, “unemployment rate continues to shrink and spare capacity is all but absorbed” suggests a very high pressure economy. The fact is that the unemployment rate has fallen 0.3 percentage points in recent months and is still 43 percent above the low-point of the last cycle (February 2008). Further, underemployment has now risen to 7.5 per cent.

Total labour underutilisation is now at 13.5 per cent of available labour resources. More than 1.5 million Australians in a labour force of just over 11 million are either unemployed or underemployment. 895 thousand haven’t got enough hours of work and 612 thousand haven’t got any work at all.

What part of the word “duh” doesn’t this so-called expert commentator understand (thanks to Roger for the quip!).

Fourth, capacity utilisation in industry is still estimated to be well below the previous peak.

The following graphs put this into pictures.

First, the labour market. The following graph is taken from the ABS labour underutilisation data and shows total estimated labour underutilisation. As noted above, 13.5 per cent or more than 1.5 million workers are not being fully utilised.

The next chart is taken from the latest NAB Survey of Capacity Utilisation (January 2010) and shows the estimated capacity utilisation since January 2000. From my examination of the data … and I might be stupid … but it looks to me as if there is spare capacity to work with the huge pool of underutilised labour.


You can see what sort of weekend it was in the keeping up to date with the financial press.

I am thinking a Truth Commission should be set up and these characters forced to appear before it to account for themselves. I would be chairperson, of-course, and please don’t comment that this just proves that MMT is a sly way of imposing communism (-:

That is enough for today!

This Post Has 42 Comments

  1. I had five teeth removed on Friday morning. It wasn’t half as painful as listening to Hillary Clinton pretending she understands economics.

    No wonder Bill went to Monica for “economic advice”.

  2. Alan,
    Why are they both women you are talking about. Males are the ones that don’t know anything about economics. The only reason men were put on this earth is to cause destruction.

  3. Last Mile update: Yves Smith at Naked Capitalism included this post in her daily links today. Naked Capitalism is an “A” blog with large readership. Word continues to get out.

  4. “The IMF pushed Mexico and other nations to hold parities against the US dollar yet permit creditors to exit the country.”

    It seems to me this is exactly what the EU is doing to Greece with their underfunded bailout plan:


    By not providing sufficient funding, Germany, France, and the other large EU nations are just buying time for their large banks to get out of Greek sovereign debt. It’s like a giant game of musical chairs. I wonder who will be left standing when the music stops.

  5. One strategy for getting links from Naked Capitalism is to occasionally post a picture of a koala or possibly a baby bilby (a blog mascot would be good).

  6. Dear NKlein1553

    I used the examples to provide a resonance with the Greek case now. The situation is slightly different in that the EMU is an even more confected version of the peg and convertibility but in effect all these sovereign default issues come down to a loss of sovereignty or sheer ignorance (in the case of Russia defaulting on their domestic debt).

    One of the aims of this blog is to expose the lies that my own profession dishes up as “science” and to spread the news to ordinary people to engage in mass political action to stop the charlatans destroying their living standards and social fabric. Big aim … but you have to start somewhere.

    best wishes

  7. Ramanan, various “A” blogs link to a variety of viewpoints without any consistent rationale. Mark Thoma’s links are similar, for example. George Washington’s blog, which Yves often mirrors as a guest post at NC does the same thing.

    While it is commendable to call a variety of viewpoints to attention, I also get the impression that some of the choices reflect a lack of operational understanding on the part of the bloggers. Perhaps they have a foot in two worlds and don’t want to take a stand. But these people are generally heavily invested in the status quo because of their backgrounds, and it is not surprising that they favor it to maintain credibility. I take it as a good sign that MMT is starting to make an appearance in the mainstream blogs, if not yet in the mainstream itself. That means it is being taken as credible. (That it would need to be is incredible.)

    Since they are widely read, I and some others like Greg often comment on these blogs, giving the MMT viewpoint. Perhaps these comments played a part in the inclusion of MMT posts. At any rate, it is good to see that MMT is no longer being ignored, even though it is not yet being featured either. But there are signs of progress taking place.

    I believe that comments do have an effect. For example, Yves ran a guest post by Randy Wray recently on the household-government finance analogy. The first comments were negative, some even chiding Yves for putting it up. However, many others came in and by the end the MMT position was at least holding it own. Moreover, the comments against were obviously ideological rather than operational, so I regard it as a huge victory for the MMT’ers. Things like that have an effect. At the very least, it influenced Yves in a positive way. I think that Marshall had gotten her ear in the first place, and that’s why she was open to this direction, even though it is a relatively obscure position. Lobbying works.

  8. Tom,

    Yes of course … I just meant to say that your links made me click various links out there. Yeah I do follow Naked Capitalism and see articles by the modern money gang – but don’t comment. I just wanted to share a few clocks with you and others.

    I do like NC – Yves tries to investigate various frauds on Wall Street. Plus the animal pics there are nice too.

  9. Bill Gross today on the issue:

    To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today: (1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn’t the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager. (2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy. In order to get us out of the sinkhole and avoid another Great Depression, the visible fist of government stepped in to replace the invisible hand of Adam Smith. Short-term interest rates headed to 0% and monetary policies of central banks incorporated new measures labeled “quantitative easing,” which essentially involved the writing of trillions of dollars of checks to replace the trillions of dollars of credit that disappeared after Lehman Brothers. In addition, government fiscal policies, in combination with declining revenues, led to double-digit deficits as a percentage of GDP in many countries, a condition unheard of since the Great Depression. (3) For awhile it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards. Risk markets returned to normal P/Es as did interest rate spreads, and GDP growth resumed; it was only a matter of time before job growth would assure the world that we could believe in the tooth fairy again. Capitalism based on asset price appreciation was back. It would only be a matter of time before home prices followed stock prices higher and those refis and second mortgages would stuff our wallets once again. (4) Ah, but Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves.

    But what if they didn’t? What if, as Carmen Reinhart and Kenneth Rogoff have pointed out in their book, “This Time is Different,” our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike. What if – to put it simply – you couldn’t get out of a debt crisis by creating more debt?

    You are now up-to-date and I’ve used up all of my 90 seconds, but bear with me, patient reader. I may not be able to get your kid a job at PIMCO, but maybe I could give you an idea or two as to what lies ahead. Let’s explore the last line in the previous paragraph first – can you get out of a debt crisis by piling on another layer of debt? The answer, of course, is that “it depends.” Replacing corporate and mortgage debt with a government checkbook is initially beneficial because the sovereign is assumed to be more creditworthy than its private market serfs. It taxes, it prints, it confiscates wealth if need be and so this substitution is medicinal in the early stages of a financial crisis aftermath – especially if debt/GDP levels are low to begin with. That is the case currently at most G7 countries, with the exception of Japan, although the balance sheets of Germany/France are obviously contaminated by its weaker EU members, and that of the U.S. by its Agencies and other off-balance-sheet liabilities. But based on existing deficit trends and the expectation that not much progress will be made in reducing them, markets are raising interest rates on sovereign debt issuance either in anticipation of higher future inflation, increased levels of credit risk, or both. This places a potential “cap” on the “debt” that supposedly can be created to get out of the “debt crisis.”

    The threat of credit deterioration is clearly evidenced in the CDS or credit default market for sovereign countries. Greece has taken the headlines with its 350-400 basis point cost of “protection,” but even Japan and the U.K. approach 100 and the U.S. is nearly half of that. Markets, in fact, are demanding 20-30 basis points of higher insurance premiums for the best of credits relative to levels prior to Dubai and Greece. The inflation component of sovereign issuance is obvious as well. Potential serial reflators such as the U.K. and U.S. both show an increase of 50 basis points in their 10-year notes since the Dubai crisis in late November. While a portion of that 50 may in fact be credit related as pointed out above, the combination of credit and inflationary protection demanded by the market suggests, as Reinhart and Rogoff point out in their book, that government securities following a financial crisis are subject to huge increases in supply and accordingly, significant increases in risk and real yield levels.

    It is interesting to observe that over the past few months when investors have begun to question the ability of governments to exit the debt crisis by “creating more debt,” that increases in bond market yields have been confined almost exclusively to Treasury/Gilt-type securities, and long maturities at that. There has even been a developing debate in the press (and here at PIMCO) as to whether a highly-rated corporation could ever consistently trade at lower yields compared to its home country’s debt. I suspect not, but the narrowing in spreads since late November solicits an interesting proposition: Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.

    This metaphor doesn’t really answer the critical question of whether a debt crisis can be cured by issuing more debt. The answer remains: It depends – on initial debt levels and whether or not private economies can be reinvigorated. But it does suggest the likely direction of sovereign yields IF global policymakers are successful with their rescue efforts: Sovereign yields will narrow in spreads compared to other high-quality alternatives. In other words, sovereign yields will become more credit like. When sovereign issues become more credit-like, as evidenced in Greece, Spain, Portugal, and a host of others, they move closer in yield to the corporate and Agency debt that supposedly rank lower in the hierarchy. That process of course can be accomplished in two ways: high-quality non-sovereigns move down to lower levels or governments move up. The answer to which one depends significantly on future inflation, the aftermath of quantitative easing programs, and the vigor of the private economy going forward. But the contamination of sovereign credit space with past and future bailouts is a leveler, a homogenizer, a negative for those sovereigns that fail to exert necessary discipline. Only if global economies stumble and revisit the recessionary depths of a year ago should the process reverse direction and place Treasuries, Gilts, et al. back in the driver’s seat.

    Investors should obviously focus on those sovereigns where fundamentals promise lower credit or inflationary risk. Germany and Canada are amongst those at the top of our list while a rogues’ gallery of the obvious, including Greece, Euroland lookalikes, and the U.K. gather near the bottom. PIMCO’s “Ring of Fire” remains white hot and action, as opposed to cocktail blather, is required to maintain or regain trust in sovereign credits approaching the rocks. Just last week Bank of England Governor Mervyn King said that it would be difficult to cut government spending quickly, but that there needs to be a clear plan for doing so. Not good enough, Mr. King. Don’t care. Show investors the money, not vice-versa. An investor’s motto should be, “Don’t trust any government and verify before you invest.” The careful discrimination between sovereign credits is becoming more than casual cocktail conversation. A deficiency of global aggregate demand and the potential impotency of policymakers to close the gap are evolving into a life or death outcome for the weakest sovereigns, with consequences for credit and asset markets worldwide.

  10. Dear Bill,

    I think the problem is not with the viewpoint of mainstream economists it is the fact that a lot of people simply rely solely on what the media and other persons in supposed positions of authority tell them without ever making their own investigations.

    Regardless of whether or not the orthodox schools or any group for that matter is speaking the truth or lying – people still need to ask themselves: “Why is this correct or could this be wrong?” rather than just blindly accepting someone elses word because they are in a position of authority or have a few “qualifications.

    Ask undergraduates if they want to be taught the truth or the lies that will earn them the most money and it is a sad but true fact that they will choose the lies more than 99% of the time.

    Hence, if MMT ever does become the accepted ideology (I doubt it ever wiil) it probably won’t be because it is the correct interpretation it will be because people will gain more financially by accepting it rather than rejecting it.

    Which in my view is just as sad and sorry as the current situation where neo-liberalist ideologies are blindly accpeted by the masses simply because people rank earnings potential above the truth.

    NOTE: Anyone who even mentions how people would be better off under MMT is merely confirming my point.

    Cheers, Alan

  11. Scott, since you brought up Rob Parenteau’s piece about the sector financial balances I have a brief question about your previous post about the sector financial balances here:


    Specifically, I’d like to know where you got the data for “private net saving,” in figures two and three. I ask because in a recent discussion with someone over the relationship between public sector debt and private sector debt I was presented with this data set:


    which seems to show a pretty constant increase in private-sector household debt despite the fact that public sector debt fluctuates over the same time period. I know the household sector debt to GDP ratio is not the same as net-savings so maybe the two aren’t comparable. My question is what exactly is private net-savings in your two charts? Also can you explain why the Household Sector Debt as a Percent of GDP data series doesn’t seem to be influenced by either increasing or decreasing public sector deficits? Thank you.

  12. Dear NKlein1553

    The private sector balance can be negative as people run down previous saving or sell assets. There does not have to be a 1-for-1 correspondence between that balance and household sector debt.

    Computing the balances is difficult and I may do a special blog on how to do it including data sources one time.

    best wishes

  13. Nostradoofus, while the default font here is indeed both teensy and tiny, your browser can easily resize it to readability unless you are still using something ten years old and out of date like IE6. With Firefox you can simply hold down the {Ctrl} key and hit the {+} key a few times. The site design does take font resizing quite well.

    Bill, Nostradoofus is right, and you should set the site’s default text size to 1em, which will work well with all browsers.

  14. The idea that creating too much money causes that money to loose its value is intuitive and the basis for most gold buggery. Gold buggers don’t like floating currency because they like currency better than they like people and think it is just fine if people die off massively when occasionally all of their precious hard money manages to concentrate itself in too few hands. Better that poor people starve than money be debased.

    That rant now behind me, I’m just some shmoe who works with his hands trying to find some erudite validation for the apparent reality that as money has its way with political systems, even in free market democracies, at some point investment tips over into hoarding. All that money Ben and Alan made and yet we teeter on the brink of debt deflation. It seems intuitively obvious that this is because the money is being hoarded but the hoard has taken, in the absence of gold to stack in caves, the form of financial instruments that are clearly not really understood by anyone.

    I get the basic premise that Gov Balance + Business Balance + Household Balance + Foreign Balance = 0 but how on earth with our apparently Constitutionally mandated equivalence between money and speech can we hope that our Government can lead our Business culture to actually invest in the old fashioned sense of making new THINGS that mutually benefit households, governments and businesses themselves, and might even be of interest to foreign buyers? Rhetorical question I know, that last one, but has anyone seriously looked at when “financial investment” tips over into hoarding or rent seeking?

  15. Thank you Professor Mitchell, that would be very helpful. Looking forward to it.

  16. Tom

    I really think Yves is starting to come around. She has Marshal on there frequently and has linked to billy blog at least twice in the last couple weeks. I agree that this is a positive thing because she is widely read. She was one of the bloggers invited to meet with some of the administrations financial team so I think she has been noticed.

  17. Regarding “Hyperbole and outright lies”, about the dangers of deficits and national debts, I have two questions:

    Could Weimar Germany be considered an example of a country with its own currency that effectively defaulted on its debts (via hyperinflation), at great cost to its citizens and to political stability?

    And, how many historical precedents are there for countries with similar debt levels and deficits as ours (in relation to GDP) successfully reducing those debt levels without instability or excessive pain? To what extent are current debt levels (USA in particular but also Greece, Portugal, England, Japan, etc.) unprecedented in “modern” history?

  18. When I hear talk of the markets forcing this or that, I’m reminded of this graph.

    There are always going to be people shouting “fire” in Noah’s flood, and sometimes markets will listen to them for a while. But eventually time proves which predictions are correct and which are not. Yields spiked from 1930-1932. The government ignored the markets, substantially increasing deficit spending in nominal amounts, let alone in real terms or as a ratio of GDP. And that was before automatic stabilizers. On the gold standard. And it was Herbert Hoover!

    It would truly be sad if a fiat government, given what we know now, would base its fiscal policy on anything other than economic fundamentals, and be less steadfast than the Hoover administration.

  19. Hence, if MMT ever does become the accepted ideology (I doubt it ever wiil) it probably won’t be because it is the correct interpretation it will be because people will gain more financially by accepting it rather than rejecting it.

    Alan, I think that this will happen at the international level. Countries that adopt economic policy crafted on at operational basis are going to do better than economies that stick with a theoretical approach. I don’t expect any developed country to lead the way in this. I would be surprised if it is not China, India, Brazil, or some other emerging nation that is not heavily influenced by the theoretical status quo. Whoever gets out front in this is going to have a head start. I am relatively sure that the Chinese pay attention to what Henry C. K. Liu as to says, for example, here and here . The first link contains a clear exposition of MMT principles.

  20. John: Rhetorical question I know, that last one, but has anyone seriously looked at when “financial investment” tips over into hoarding or rent seeking?

    Hyman Minsky. Those who followed Minsky’s lead have been writing about this.

    MMT’er L. Randall Wray was a student of Minsky and author of “Minsky’s Analysis of Financial Capitalism,” with Dimitri Papadimitriou in Financial Keynesianism and Market Instability, edited by Riccardo Bellofiore and Piero Ferri, Edward Elgar Publishing, 2001. See also Michael Hudson, Financial Capitalism v. Industrial Capitalism.

  21. “Karen says:
    Tuesday, March 2, 2010 at 14:55
    Regarding “Hyperbole and outright lies”, about the dangers of deficits and national debts, I have two questions:

    Could Weimar Germany be considered an example of a country with its own currency that effectively defaulted on its debts (via hyperinflation), at great cost to its citizens and to political stability?”
    bill has written about those hyperinflations here: https://billmitchell.org/blog/?p=3773

    “And, how many historical precedents are there for countries with similar debt levels and deficits as ours (in relation to GDP) successfully reducing those debt levels without instability or excessive pain? To what extent are current debt levels (USA in particular but also Greece, Portugal, England, Japan, etc.) unprecedented in “modern” history?”” chartalists see this is as irrelevant. having to run a larger deficit then ever before simply means that aggregate demand is more depleted (in dollar terms) then it has ever been before. second in world war two the united states ran deficits equal to 25 percent of gdp and had a debt to gdp ratio in 1945 of 120 percent. i seem to remember the post war period being a prosporous time for america and not suffering severe austerity measures to get its debt levels under control. third government debt does not finance deficits. see https://billmitchell.org/blog/?p=332

  22. Tom I think you are right about China possibly leading the way. In fact I think they may already have. Their currency peg does not follow strict MMT principals but because they are receiving so many dollars in trade with us its easy to maintain the peg. They have virtualy unlimited access to US dollars to maintain the peg. As I understand Argentinas situation a few decades ago the problem was that all the while the peg was being maintained they didnt in fact have enough US dollars so they ended up defaulting when push came to shove. Pegging to the US dollar is exactly like pegging to gold or anything else right?? When a trade imbalance results you owe more of whatever it is you are pegged to right?? If you cant acquire enough US dollars you cant maintain the peg and thus default. Argentina didnt have enough of what we wanted so they ran short of dollars. China is not close to that situation now so maintaining the peg is easy for them.

    While MMTers would decry the peg maybe they are in an unusual situation it seems where they can maintain it to their betterment.

  23. So Bil… I guess what you are saying is that this time IS different!

  24. Thanks, Nathan!

    That piece about Zimbabwe was very interesting; looks like both Zimbabwe and Weimar Germany suffered very large, sudden reductions in output that led to a very large one-time price shock, and then the government responded to the situation by revving up the printing presses, which caused hyperinflation – did I understand that correctly?

    The current global recession also produced a reduction in output, though not nearly as extreme as Zimbabwe’s.

    Still, it seems to me that if investors were to suddenly shun a country’s government debt, leading to a large increase in the cost of servicing that debt, the result would be very unpleasant for that country regardless whether it had its own currency or not. If that country’s central bank creates more money to help the government avoid explicit default, that would likely lead investors to demand yet higher interest rates, necessitating additional money creation, which then leads investors to up the ante again, and so on. My thinking here can be summed up as: there is no such thing as a free lunch (except when investors are stupid, which does seem to happen but in my opinion cannot be counted on every time).

    I do worry that (1) a significant share of U.S. government debt is now held by amoral opportunists and neutral or unfriendly foreigners, instead of patriotic American families who viewed war bonds as more of a donation than an investment, (2) so much U.S. government debt is short-term and needs to be rolled over frequently, and last but far from least, (3) unlike after WWII, the rest of the world has a lot of production capacity to compete with ours.

  25. Dear Greg and Tom

    A nation that has huge external surpluses can always maintain a peg without running out of reserves. China is in that position. But most countries are not and by definition cannot be in that position.

    The problem China has is explaining to its citizens especially the vast bulk of them who are still impoverished why they are net shipping real goods and services which could improve the material welfare of the citizens in returns for ever increasing piles of paper (US dollar denominated financial assets). That political problem in China is solved in one way but that won’t always be an option I suspect. But do not take this as a plea for “democracy”. Democratic systems – so-called – also coerce their citizenry – they just use lies and deceit rather than perhaps the gun. But Kent State also reminds us that when “push comes to shove” (to quote Greg) even so-called democracies pull out the guns and murder their citizens.

    But in terms of its net exports position, China is an outlier and so can maintain a peg safely. Argentina relied on an ever increasing world export market which failed (in both volume and price) and that sent them insolvent because of the currency board arrangement and the foreign currency-denominated debt.

    best wishes

  26. Dear Steve

    If you are implying I have a particular faith this time that would not have been wise given historical events of the past – then you will need to explain more. The reality – historical and by arrangement of the monetary system – is that you will struggle to find a country that has a sovereign currency that floats freely, that doesn’t have significant foreign currency-denominated public debt, and hasn’t had the IMF imposing structural adjustment packages on it – that has defaulted by financial necessity. I think I would be safe to say NO example.

    That doesn’t mean that some countries have not had to go through difficult adjustments as external circumstances have changed. But that is a different matter altogether.

    The sovereign default history is littered with gold standards, pegged currencies and huge exposures to foreign currency-denominated public debt.

    There are clearly nations in that position now that may default (Greece etc). But the reasons relate to their monetary and currency arrangements not the level (or rate of increase) of their budget deficits and public debt.

    best wishes

  27. Dear Karen and Nathan

    The current global recession also produced a reduction in output, though not nearly as extreme as Zimbabwe’s.

    It wasn’t just the reduction in output in Z’s case. It was the destruction of the productive capacity that was the issue (same in Germany in the 1920s). They destroyed the supply-side of their economies which meant that aggregate demand had to be cut severely (and leave people starving and dying) to reduce the risk of inflation.

    In that situation, you can hardly implicate the budget deficits. All spending in Z had to fall in nominal terms to avoid inflation.

    If it had only been a case of falling output with capacity intact – then the expanding budget deficits would have reasonably quickly restored the output levels (and growth) and improved material standards of living.

    Further, the rate at which the government borrows is entirely at the determination of the government (via the central bank) if it chooses. The fact that bond markets hold governments to ransom in the way you describe is a voluntary choice by governments driven by the neo-liberal idea that (a) markets should be given power; and (b) that government spending is dangerous and needs curbing – and who better to do that than the “wise” bond market dealers.

    So the “no such thing as a free lunch” rhetoric is pure neo-liberal lies when it comes to the financial arrangements of the monetary system which is what you are referring to. The no free lunch concept only applies to the use of real resources when they are all fully utilised. Then the increase in government demand for those resources will squeeze private use. Or the increased private use will diminish the capacity of society to enjoy public goods. Whichever way your ideology constructs it.

    Further, the arrangements that nations use to issue debt are voluntary and if it was a political issue that the “unfriendly foreigners” should not be able to buy debt then you could stop that immediately. But then you might not like the trade consequences. Further, the selling of bonds at short maturities is preferred to selling them at long maturities if you are intent on issuing any public debt at all. It is much easier to manage the demand effects of the interest payments in short-horizons than at periods into the future when you are not going to know what the state of the economy is and what other adjustments to public spending might have to be made to accommodate the liquidity injection of the interest payments.

    But having said that – it makes zero difference to the government whether its debt matures at 30 days or 30 years in terms of its capacity to repay that debt and service the interest payments. It just means more keyboard entries (crediting bank accounts) if the debt is continually rolling over.

    Finally, there are no shortage of domestic employment opportunities in the US at present. The rest of the world is wealthier than in the 1940s that is true. But the capacity of the US to expand employment in productive areas of activity is enhanced now – given technology can free labour from a substantial number of activities that are required to survive. Have a look at the state of the environment and the state of the urban landscape in America – I see millions of jobs working to improve the damage that has been created over the last 100 or more years.

    best wishes

    best wishes
    best wishes

  28. bill, isn’t the difference between China’s and Argentina’s currency pegs the fact that China is artificially keeping its currency LOW, where Argentina was pegging to reassure its citizens the currency would stay HIGH (i.e. not be devalued)?

    China depresses its currency by creating as much of its own currency as needed – an easy job. Argentina had to make sure its exports remained sufficient to earn enough dollars to redeem every real with a dollar (or whatever the fixed ratio was). Same thing as being on the gold standard, essentially. Argentina was trying to prevent capital flight; China doesn’t have that problem to any significant degree, and worries instead about keeping growth up.

  29. Computing the balances is difficult and I may do a special blog on how to do it including data sources one time.
    Please do. And please please discuss leverage and the horizontal relationships. One more thing for my Christmas list, for god’s sakes make a glossary.. “one sector is must be issuing liabilities” Liabilities? as in anything on someone’s liability side of the balance sheet? The government spends by issuing financial assets. The banks can create liabilities, which are financial assets, and buy imports with them, which can lead to a trade deficit, but we can only pay taxes with reserves…


  30. Stupid, The government spends by issuing financial assets. The banks can create liabilities, which are financial assets, and buy imports with them, which can lead to a trade deficit, but we can only pay taxes with reserves…

    We don’t pay taxes with reserves. Reserves are interbank only. Taxes are paid by nongovernment through extinguishing our liabilities to the government with the government’s liabilities to us, namely, the currency of issue. Currency is a financial asset for nongovernment and a liability for government. We use an asset which is a government liability to extinguish our liabilities to government in the form of taxes, fees, and fines. When we write a check to the Treasury, it is settled in the interbank system through reserves, just as when the Treasury writes a check to us, e.g., tax refund or SS disbursement. Settlement occurs in a FRS regional bank through transfer of reserves between our bank’s reserves and the Treasury’s reserve account at the Fed.

  31. Tom,

    Thanks for responding. It seems like you just explained how we (ok not we, our bank because of us) extinguish our tax liability 1:1 with reserves.

  32. Clinton “Yesterday when we had a hearing in which Alan Greenspan came and justified increasing spending and cutting taxes, saying that we didn’t really need to pay down the debt – outrageous in my view …”

    It would be interesting to know what Greenspan meant when he said the debt didn’t have to be paid back. Actually I’m searching through archives for a reference to statement that by Mankiw that there is no solvency problem in the US, that I thought I had read sometime ago. Anyone, for either?

  33. Hi,
    I find your blog exceptionally elucidating. I hope to teach from it in the future. Could you explain/elaborate the following: the budget surpluses of the late 1990s not only squeezed the private sector and helped start the private debt-binge but also led to the recession in the early 2000s?
    I would much appreciate it and I would like to understand this, and I think others would too.
    Roz B.

  34. Roslyn Balogh: Godley & Wray wrote a number of papers with “Goldilocks” in the title, on the “Goldilocks” economy of that time, that led to the “Perfect Fiscal Storm”.

    Wray’s Recent USA Sectoral Balances: Goldilocks, the Global Crash, and the Perfect Fiscal Storm “revisits the Clintonian Goldilocks economy to find the seeds of the GFC”.

    Bill’s When a former US president makes things up provides interesting background, but while it is frequently enough mentioned here e.g. Budget deficits are part of “new” normal private sector behaviour, I don’t find a perfect match for what you want either.

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