{"id":13751,"date":"2011-03-09T17:46:05","date_gmt":"2011-03-09T06:46:05","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13751"},"modified":"2011-03-09T17:46:05","modified_gmt":"2011-03-09T06:46:05","slug":"right-for-wrong-reason-equals-wrong","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13751","title":{"rendered":"Right for wrong reason equals wrong"},"content":{"rendered":"

\t\t\t\tI read two articles in the last few days which tell me that the bond market traders generally do not understand the intrinsic characteristics of the monetary system and that IMF economists have even less of a clue. The bond traders attribute to themselves an air of importance that it not a reflection of their real role in the monetary system. However, my own profession continues to disgrace itself and is nothing more than a propaganda machine. The mainstream economists are too stupid to realise that their models and frameworks do not explain anything that we are interested in. But such is their position of dominance in the policy space that their neo-liberal grandstanding is given credit. It is embarrassing but worse it is dangerous. Anyway, sometimes a journalist comes to the correct conclusion but for the wrong reasons. While the conclusion is correct, the erroneous reasoning does as much damage by way of misinformation than if the overall conclusion was also wrong. It is a case of being right for wrong reason equals wrong.
\n
\nI considered the views of US House speaker John Boehner in this blog – Employers have too much power<\/a> referring to them as bone-headed. I note that the expression “boenality” is emerging from the Internet. His views are banal but they are much more than that.<\/p>\n

In my view, having a senior politician having such a poor technical grasp of major topics (macroeconomic policy) that he pontificates about is a danger. His statements are just plain wrong in a technical and operational sense. To then push for policies that are based on these statements amounts to vandalism.<\/p>\n

In a recent speech<\/a> that Boehner made he really set out the scale of his ignorance on such matters. The speech was made to the Convention of the National Religious Broadcasters on February 28, 2011. As a non-American I found the religious references – that God basically motivates, creates and determines everything – to be sort of unreal. But then I know Americans get off on that sort of stuff.<\/p>\n

But the tone of the speech apart, when he tried to articulate his understanding of matters macroeconomic the wheels really fell off.<\/p>\n

Consider this statement:<\/p>\n

\nYou have fulfilled the Scripture’s call to be not just hearers but doers of the Word.<\/p>\n

“I come here tonight because we are called together to be doers.<\/p>\n

“Right now, freedom and free expression are under attack by a power structure in Washington populated with regulators who have never set foot inside a radio station or a television studio.<\/p>\n

“We see this threat in how the FCC is creeping further into the free market by trying to regulate the Internet.\n<\/p><\/blockquote>\n

So apparently the “free market” (a textbook construct not seen in the real world) is the exemplar of freedom and free expression. But in that construct who is free? Answer: those with dollar votes (capacity to buy) – the more dollars the more votes. If you have no dollars you are coerced.<\/p>\n

I am not about to stamp out a person’s right to believe – no matter how kooky the belief is – and Christianity is about as kooky as it gets. But I find it insidious in the extreme when the religious right try to tie their theological belief system into neo-liberal structures that pervade mainstream economics.<\/p>\n

There is no basis for it other than to gain political legitimacy for invoking economic policies that favour the power elites and damage the disadvantaged and poor even more. There is nothing virtuous about a “free market”. Regulation is not a scourge against our inalienable rights. It is a response to the abuse of power that coerces and steals from others.<\/p>\n

But that is an aside. Boehner then made the following macroeconomic-moral philosophy pronouncement.<\/p>\n

\nIn my view, America’s ‘Sputnik moment’ is our shocking national debt.<\/p>\n

Now surpassing $14.1 trillion, our national debt is on track to eclipse the size of our entire economy this year. In other words, we’re broke. Broke, going on bankrupt. Just as a bankrupt business has trouble creating jobs, so does a bankrupt country.<\/p>\n

Italy, Spain, Greece, Ireland – even France – face sovereign debt crises and social unrest. Much of our debt has been bought up by China and Japan. Gas prices are rising.<\/p>\n

Economists have laid out the nightmare scenarios we may soon confront. One is known as ‘capital flight.’ This occurs when businesses stop investing and investors lose confidence, causing interest rates to rise, the debt to skyrocket, and the standard of living to fall.<\/p>\n

But we are now at risk of losing a much more potent source of capital. That is the moral capital we gain from having a society that honors freedom and opportunity, and protects these values for our children and grandchildren.<\/p>\n

Consider that a child born on this night will immediately inherit a $45,000 share of our national debt. By the time that newborn is getting ready to visit colleges, Medicare, Medicaid, Social Security, and the interest on our debt will consume all government revenues.<\/p>\n

Here we must speak the truth. Yes, this level of debt is unsustainable. It is also immoral.<\/p>\n

Yes, this debt is a mortal threat to our country. It is also a moral threat.<\/p>\n

It is immoral to bind our children to as leeching and destructive a force as debt. It is immoral to rob our children’s future and make them beholden to China.<\/p>\n

No society is worthy that treats its children so shabbily.\n<\/p><\/blockquote>\n

That is about as manic (and wrong) as it gets. It almost reads as a parody on the deficit terrorists. The way Boehner starts with technical errors then leads up to the revelation that running a budget deficit is immoral and a “mortal threat” is breathtaking.<\/p>\n

All the errors are there to see:<\/p>\n

1. “Shocking debt” – the public debt for a sovereign nation (that is, one that issues its own currency) cannot be “shocking”. It means that the manifestation of non-government financial wealth held as bonds is shocking. Financial wealth is one measure of success in a material society. But, it makes no sense to be “shocked” by the outstanding public debt. As it matures it is paid off. A guaranteed income flows from it while it is outstanding. It is risk free. What can be shocking about any of that?<\/p>\n

2. Erroneous conflation of household\/private sector budgets with government budgets. There is no valid analogy. Households use the currency, governments issue it. Households have financial constraints, sovereign governments do not. The US can never become bankrupt in the sense that the US federal government is unable to meets its obligations denominated in US dollars. It is a lie to say otherwise.<\/p>\n

3. Erroneous conflation of monetary systems – the nations mentioned are in the EMU and surrendered their currency sovereignty and face the risk of insolvency. The US government runs a fiat monetary system which it controls as a monopoly – and has no insolvency risk. It is a lie to say otherwise.<\/p>\n

4. What gas prices have to do with a nation’s capacity to run an independent fiscal strategy is beyond me. Presumably, he is trying to link the public deficits to inflation. That argument will not hold in the current environment.<\/p>\n

5. Productive capital finds it very difficult to “take flight”. Machines and buildings are bolted to the floor. If private businesses won’t invest and households are trying to increase their savings then the only way the economy will grow and renew the confidence of the private investors is for the government to fill the spending gap.<\/p>\n

6. Budget deficits put downward pressure on interest rates. The interest rate structure in place is largely the result of central bank decisions. The rising public debt is supporting the US standard of living and preventing its from collapsing. If the US federal government had not intervened fiscally the economy would have headed into depression with much more serious losses than have already been sustained. The fiscal intervention was too small.<\/p>\n

7. There is no burden on the future generations from the rising public debt in the US. Taxes are not raised to pay back the deficits. There has never been a time in the 100 years when the US government has paid off its debt by running surpluses equal to all past deficits. It is a lie to say otherwise.<\/p>\n

8. The descent into religious morality means Boehner has given up the economic argument (because his claims are not supported by an understanding of the monetary system or<\/strong> the facts on hand).<\/p>\n

9. The US is treating its children very shabbily – but that is because the Government is running scared as a result of the pressure from the likes of Boehner and not creating the necessary jobs that are required. Children who grow up in jobless households inherit the disadvantage and take the losses into their own adult lives.<\/p>\n

Anyway, it was interesting to read an article from a Bloomberg journalist (March 7, 2011) – Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech<\/a> – which came to the right conclusion (US being “broke is a figure of speech”) but for the wrong reasons (what the “bond” markets are doing).<\/p>\n

It is a case of right for wrong reason equals wrong.<\/p>\n

The article (by David Lynch) said that:<\/p>\n

\nBoehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.\n<\/p><\/blockquote>\n

It is categorically wrong and an outright lie.<\/p>\n

Lynch quotes a “global head of currency strategy” type from New York who said:<\/p>\n

\nThe U.S. government is not broke … There’s no evidence that the market is treating the U.S. government like it’s broke.\n<\/p><\/blockquote>\n

Which means that neither understand the actual situation. The correct statement is that the US government can never be broke in terms of not being able to honour all obligations denominated in US dollars.<\/p>\n

What the bond “market” thinks is irrelevant. They always want to subscribe more importance to themselves than they actually have.<\/p>\n

Moreover, being broke is not about being able to borrow or not. It is about being able to spend. The US government will always be able to spend its own currency.<\/p>\n

Yes, there might be a time (hopefully) that the economy is at full employment and further spending would be inflationary and have no further real effects. But even in that situation (mindless as the additional spending would be) the US government could still spend and drive up prices.<\/p>\n

But the more realistic situation is that the economy has excess capacity (because of policy failure) and the US government spending supports real production and employment growth.<\/p>\n

The US government can never be “broke” because it can always spend. End of story. What the bond markets do or think is irrelevant.<\/p>\n

Why? Answer: the US government is not financially constrained and can spend whenever there are things available for sale in US dollars.<\/p>\n

Lynch claims that things are okay because:<\/p>\n

\nThe U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.\n<\/p><\/blockquote>\n

All statements are totally irrelevant if not technically in error.<\/p>\n

The rate at which the US government has to borrow does not limit its capacity to spend. The US government does not need tax revenue to spend. So the so-called extra capacity because tax revenue is low is without meaning.<\/p>\n

Lynch then claims:<\/p>\n

\nTo be sure, the U.S. confronts long-term fiscal dangers. Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.\n<\/p><\/blockquote>\n

I just love it when these journalists think they will have no credibility unless they repeat the “long-term fiscal dangers” worry somewhere in their articles – usually followed by some asinine statement about pensions not being able to be paid down the track.<\/p>\n

What, exactly, are the “long-term fiscal dangers”? Insolvency? Impossible. Rising cost of borrowing? Irrelevant. What else? Answer: this is just mindless hyperbole without any substance.<\/p>\n

Lynch building on Boehner’s erroneous analogy between family budgets and the budget of the US government says:<\/p>\n

\nA person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.\n<\/p><\/blockquote>\n

The correct statement is that the US government budget is not a super-sized household budget and all such comparisons are void of meaning. The further correct statement is that the US government can always<\/strong> pay its bill. What “investors” say is irrelevant.<\/p>\n

The impossibility of US government insolvency is not dependent on the opinion of investors – it is an intrinsic feature of the fiat monetary system.<\/p>\n

Lynch makes an interesting point:<\/p>\n

\nFinancial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the G20.\n<\/p><\/blockquote>\n

This amused me. It shows how the stupidity of the US politicians making statements based on ignorance as created a market for insurance that is totally unnecessary and just funnelling wealth into the hands of a few.<\/p>\n

There should be no default risk insurance market for any sovereign government’s debt. Insurance is about risk. In this case default risk. If there is no default risk intrinsically then there should be no market. That certainly should be the case for the US federal debt.<\/p>\n

But the default risk can be sold because of the way the US politicians behave and it is possible (though highly improbable) that the religious right zealots will go crazy one day and voluntarily default on public debt even though there would never be a technical reason to do so.<\/p>\n

What a joke!<\/p>\n

Another myth is also rehearsed in this article. Lynch quotes a “senior economic advisor” bank-type from London who says the low risk of US default is because the US dollar is the international reserve currency:<\/p>\n

\nYou have the reserve currency … You can print as much as you need. So there’s no question all debts will be repaid.\n<\/p><\/blockquote>\n

Yes, Yes, irrelevant.<\/p>\n

Yes – the US dollar does play a global role as a reserve currency.<\/p>\n

Yes – the US government can print as much as it needs whenever it likes.<\/p>\n

Irrelevant – the two statements are not related.<\/p>\n

The Australian federal government has no default risk. It can spend what it likes whenever it likes. It is not a reserve currency. All sovereign governments (which issue their own currencies under monopoly conditions) can repay all obligations denominated in the same currency whenever they arise.<\/p>\n

Lynch repeats the point that the bond markets are lending “the U.S. money for longer periods at interest rates that are below long-term average” and cannot get enough of the public paper. He chooses to quote a “a finance professor at New York University’s Stern School of Business” (Edward Altman – be warned – students do not study in this school – you will be fed with nonsense rather than educated).<\/p>\n

Altman “created the Z-score formula that calculates a company’s likelihood of bankruptcy” which has nothing at all to do with the US government’s fiscal capacity. Again, the erroneous conflation of household\/company budgets and the budget of a sovereign government.<\/p>\n

Anyway, Altman was quoted as saying:<\/p>\n

\nYou are never broke as long as there are those who will buy your debt and lend money to you.\n<\/p><\/blockquote>\n

As above! Being broke is about your capacity to spend not borrow.<\/p>\n

We read more drivel from “a former advisor to President Bill Clinton” who claims:<\/p>\n

\n… he saw how bond investors could determine the success or failure of economic policy.\n<\/p><\/blockquote>\n

That is an outright lie. Bond investors cannot “determine the success or failure of economic policy”. If the sovereign US government announced it would introduce a Job Guarantee<\/a> overnight they would be able to start offering jobs and paying wages irrespective of what the “bond investors” thought.<\/p>\n

Same for any spending policy. The Job Guarantee might fail because of administrative incompetence or no-one might turn up for a job but what the “bond investors” thought would be irrelevant.<\/p>\n

Please read my blog – Who is in charge?<\/a> – for more discussion on this point.<\/p>\n

The nonsense goes on. So it is a case of the author having the correct overall conclusion – the US government is not broke (and cannot be) – but has arrived at those conclusions using aberrant logic.<\/p>\n

Which brings me briefly to the second article (March 8, 2011) – Fiscal space in advanced countries<\/a> – which demonstrates the poverty of my profession in spades. It was written by two IMF economists and a US academic economist.<\/p>\n

I won’t provide a detailed critique as I haven’t the time. The essential story is the repetitive mantra that we hear from the mainstream macroeconomists every day:<\/p>\n

\nFinancial bailouts, stimulus spending, and revenue declines during the Great Recession have also taken their toll on the public finances in a number of other advanced economies such as Japan, the UK, and the US. At the same time, many of these countries continue to face public spending needs, including continued stimulus spending in the context of an uncertain recovery, making their available “fiscal space” a hotly debated topic and a pressing policy question.\n<\/p><\/blockquote>\n

The concept of a “toll on the public finances” for a sovereign nation is meaningless. What does a toll mean? Is a rising deficit bad and a falling deficit good? Answer: you cannot say anything about an economy based on these narrow financial considerations.<\/p>\n

A rising deficit with falling unemployment and stronger economic growth is good. A rising deficit (driven by automatic stabilisers and discretionary inaction) associated with rising unemployment and recession is bad.<\/p>\n

But the good and the bad relate to the real things – falling (rising) unemployment and rising (falling) economic growth rather than the numbers published under the heading budget outcome<\/em><\/p>\n

The only “pressing policy question” relating to “fiscal space” is that there are millions of people unemployment who could be engaged productively generating income and feeling better about themselves.<\/p>\n

Unfortunately, that is not the “hotly debated topic” and that is because economists like this lot have a completely warped sense of priorities and a mistaken understanding of how the monetary system actually operates.<\/p>\n

They go on by “providing an operational definition of two key concepts”:<\/p>\n

\n* the government’s debt limit (the debt ratio above which debt dynamics become explosive), and
\n* the government’s fiscal space (which we define as the distance between current debt ratios and the corresponding debt limit).\n<\/p><\/blockquote>\n

They then calculate “available fiscal space in advanced economies” using these definitions. Problem is they have not relevance to anything.<\/p>\n

A sovereign government’s debt limit may or may not be finite. So it is possible (but highly unlikely) that the bond markets could stop lending to the US government. So what? Does that limit the US government’s capacity to spend? Answer: not by one dollar. The central bank could step in or the US government could legislate to outlaw bond sales in the future (the preferred solution).<\/p>\n

Government spending amounts to crediting bank accounts electronically. The dollars come from no-where. The US government actually borrows the funds that have been created by its own spending. There is no financial constraint on US government spending.<\/p>\n

So the definition of “the government’s fiscal space” is meaningless and has no operational relevance.<\/p>\n

The fiscal space of any sovereign government is what it can purchase in its own currency in terms of real goods and services. The role of fiscal policy is clear – to ensure there is enough aggregate spending (demand) given the spending decisions of the external and private domestic sector to fully employ all available productive resources.<\/p>\n

The more idle real productive resources there are the larger the fiscal space. What the deficit is or has been in the past is not a binding factor on the ability of any sovereign government to close that identified fiscal space.<\/p>\n

They estimate that nations with the highest unemployment (typically) have “little or no fiscal space” and that their work is “a definite wake-up call” for such nations.<\/p>\n

The concept of inflated ego bolstered by self-aggrandising statement comes to mind. The nations with the highest unemployment have the most
\nfiscal space.<\/p>\n

The rest of the article is thus irrelevant.<\/p>\n

Conclusion<\/strong><\/p>\n

My profession is an embarrassing disgrace. The financial journalists that feed off my profession are no better when they write this sort of nonsense.<\/p>\n

No wonder the public are persuaded by misguided governments to vote for policy mandates that undermine their prosperity rather than contribute to it.<\/p>\n

That is enough for today!\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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