{"id":13787,"date":"2011-03-11T18:24:48","date_gmt":"2011-03-11T07:24:48","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13787"},"modified":"2011-03-11T18:24:48","modified_gmt":"2011-03-11T07:24:48","slug":"the-record-needs-breaking-very-soon","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13787","title":{"rendered":"The record needs breaking very soon!"},"content":{"rendered":"

\t\t\t\tApparently, the US government has just announced that their budget deficit is the largest in absolute terms. Given that the US makes a net gain of one person every 16 seconds<\/a>, I guess they recorded a record population today as well. Nine records were also set yesterday by junior athletes at the annual sport’s carnival held by the Charlestown Secondary School<\/a> (Nevis, US). The latter are certainly more interesting and have more relevance for the health of the community. The fact is that the budget outcome is like a score at a sport’s game. Imagine if the cricket authorities decided to place a limit of how many runs a team could score in the current World Cup. You wouldn’t have much of a game. And then they decided to become austere about it and cut the available runs! Just like the runs on the scoreboard, the budget numbers (dollars) can be whatever it takes. The record deficit is not going to stop any game. The fact is that with the extent of idle capacity that you witness in the US, the record needs breaking again very soon!
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\nThe Sydney Morning Herald carried a syndicated Bloomberg news story today (March 11, 2011) which would have been better not published at all. The article – US posts record $US222.5b budget shortfall<\/a> – tells us that the US government:<\/p>\n

\nThe US government, facing a record annual fiscal shortfall and a congressional impasse over financing, posted the largest monthly deficit ever in February, reflecting increased spending.<\/p>\n

The gap totaled $US222.5 billion last month compared with a $US220.9 billion shortfall in February 2010, according to the Treasury Department’s monthly budget statement released today in Washington. Last February’s deficit was the previous monthly record, government data show.\n<\/p><\/blockquote>\n

Fine although they may have noted that as a percentage of GDP (the essential scaling factor) the latest deficit is no where nera being a “record”.<\/p>\n

Further, the language is all wrong – “shortfall” and “gap” – negative terminology when there is no significance in the deficit outcome per se<\/em>.<\/p>\n

But the narrative descends into lies when the report says:<\/p>\n

\nThe deficit is a long-term threat to the economy and the dollar, the world’s reserve currency.\n<\/p><\/blockquote>\n

There is no explanation given for that statement. It is an uncritical repetition of the mindless rhetoric that is increasingly swamping our media and public discourse.<\/p>\n

Why is the US budget deficit a “long-term threat to the economy”? What exactly is being threatened? What will happen if the US government actually succeeds in cutting its discretionary net spending? Won’t that be a short-term, medium-term and long-term threat to the health of the economy?<\/p>\n

Why did the deficit rise in the first place? Have to conditions that caused it to increase resolved themselves? Is an unemployment rate around 9 per cent and a broader underutilisation rate of around 16 per cent too low?<\/p>\n

The fiscal austerity proponents imply – they would dare say it – that the current level of labour underutilisation and spare capacity within firms is in fact too low. They want to increase unemployment because they somehow – in their twisted state – define their priorities in terms of changing some figure downwards in the public accounts (the deficit) at the expense of higher unemployment.<\/p>\n

They hide that implication by claiming that cutting public spending leads to more private spending – a fanciful assertion at best. There is no empirical gronds for this assertion. It is derived from empirically-rejected mainstream economic theories that seem to be able to survive despite having no credibility at all.<\/p>\n

If an engineer said that he\/she had a theory that if we pushed our cars over a steep cliff it would come through unscathed and showed you an elaborate set of equation purporting to demonstrate that conclusion we would reject the theory the first time someone was stupid enough to push their sedan over.<\/p>\n

But the mainstream economic theory survives even though its policy applications led to the GFC and the following recession in the real economy.<\/p>\n

Consistent with the dishonesty of this article, the journalist chooses to quote only commentators who reinforce the notion that the deficits are bad. Some “chief economist” type from one of the corrupt ratings agencies claims:<\/p>\n

\nPeople in Congress seem much more interested in yelling at each other instead of fixing the problem … Bluntly, there is no way out of this unless you cut spending, raise taxes or some combination of the two.\n<\/p><\/blockquote>\n

Full marks for knowing that a budget balance is the combination of government spending and taxes.<\/p>\n

Zero marks for identifying a non-problem.<\/p>\n

Another “chief financial economist” type said:<\/p>\n

\nThe US has developed an unfortunate culture of entitlement that has taken us down the road of fiscal profligacy … That will burden future generations unless Washington develops a sense of reality … Regretfully, I think that the politicians will only take the necessary, painful steps if forced to do so by a crisis … We will not get the job done by focusing on discretionary spending because that is less than 40 percent of spending. We got here because politicians have been willing to mortgage the future with unfunded liabilities for current political gain.\n<\/p><\/blockquote>\n

I checked the operations of the company this character works for – they have their snouts in the public bond pig trough just like all of the hypocrites who eschew public debt yet publicly talk about fiscal profligacy.<\/p>\n

I wonder if the increasingly impoverished American underclass is enjoying their “unfortunate culture of entitlement” – the unemployed who lost their jobs when the financial sector (where this character works – well I wouldn’t call it work but he gets an income) indulged itself at the expense of the rest of us and brought the system to near collapse.<\/p>\n

Where is the evidence of fiscal profligacy? What exactly is it? You might be able to mount a case that fiscal policy was overextended if there was a demand-pull inflation problem and all productive resources were fully utilised. I only see an economy struggling to exit a deep recession – being propped up by the inadequate fiscal stimulus – with major cities in crisis as their urban environments collapse under the strain of entrenched unemployment and failed property markets.<\/p>\n

You get a sense of the hypocrisy when you read the final paragraph of the article which tells us that:<\/p>\n

\nTo grapple with the debt, a committee of Wall Street bond dealers and investors that advises the Treasury recommended the government expand its domestic demand and offer new securities, including “ultra-long” bonds of as much as 100 years, to reduce dependence on foreign holders. China is the largest holder of US government debt, followed by Japan.\n<\/p><\/blockquote>\n

That would be a treat – a risk-free annuity for 100 years.<\/p>\n

There is no dependence on foreign bond investors. The US government does not<\/strong> require the Chinese or the Japanese to buy their debt in order to spend. It can always spend in US to satisfy its policy ambitions. The debt-issuance arrangements are logically separate from that function and ultimate operationally separate.<\/p>\n

I note that there is some talk about the Chinese bond holders cashing in their bonds and spending the US dollars on goods and services and the claims that even under the fiat currency system government currencies are “convertible” just as they were under the gold standard.<\/p>\n

In this context, I have noticed reference to Article VIII of the IMF rules which relates to what is known as “current-account currency convertibility”. That was a cornerstone of the original IMF agreement to ensure that current transactions between nations would not be thwarted by exchange restrictions.<\/p>\n

First, not all IMF members have indicated an acceptance of the Article and still use the “transition arrangements” which allows them to place exchange controls on currency movements. Around 80 per cent of members have accepted the obligations under Article VIII.<\/p>\n

Second, the Article has been violated many times by nations who have previously indicated acceptance. Violation can be in the form of exchange restrictions or multiple currency practices without the approval of the IMF.<\/p>\n

Third, membership of the IMF is voluntary. The US (being a major financial contributor to the fund) could effectively exit and leave the fund with severely diminished resources any time it liked. I would recommend it does that. So any arrangements – issuing debt maintaining current-account convertibility under Article VIII are voluntary and not intrinsic constraints of the fiat monetary system.<\/p>\n

Fourth, the Article applies to “current account convertibility” which relates to “payments which are not for the purpose of transferring capital.”<\/p>\n

My prediction is that if adhering to the Article caused a major nation headache for a nation such as the US then the voluntary nature of the acceptance of the Articles would become quickly transparent. The IMF has no legal authority to issue or limit the issuing of US dollars. It cannot force the US government to provide Yuan in return for US dollars.<\/p>\n

Under the Articles of the IMF – a nation violating Article VIII – may be declared ineligible to “use the Fund’s general resources”, have its voting rights suspended or be forced to withdraw.<\/p>\n

I also not that these sanctions have never been applied despite many violations of the specific Article.<\/p>\n

So to construe this Article as in some way compromising the statement that under a fiat currency system the unit of account in not convertible into anything other than itself is far fetched indeed.<\/p>\n

As an aside, I read in the comments section this week that alleged that “This has led the MMTers and MMT fans to argue that foreigners as a whole to a nation cannot do anything with the balances they hold. Maybe they should consult IMF lawyers”. I don’t know of one of the key MMT writers (academic or otherwise) who have ever said anything of the sort. The only thing the IMF lawyers should be doing is defending their organisation from charges that should be brought – that the IMF has engaged in crimes against humanity.<\/p>\n

The essential point is that there is a fundamental misunderstanding of the way external transactions work. I think of it in terms of the US dollar is always in America! When China net exports to the US it acquires US dollars which are accounted for in the American banking system somewhere.<\/p>\n

When they swap these balances for treasury bonds, some accountant swaps the funds from one part of the central banking system (where the funds earn little or no interest but are liquid) into another part of the central banking system (account) where the funds earn interest and are redeemed at some specified point.<\/p>\n

We can add all sorts of fancy names to the accounts etc but that is all that happens. When the debt is repaid the central bank just swaps the funds back.<\/p>\n

So what are China’s options? They might decide they no longer wanted to maintain a portfolio of financial assets denominated in USD. They might instruct their bank to authorise the purchase of goods and services for sale in US dollars.<\/p>\n

Any problem with that? None. Such an action would stimulate the US economy, reduce the budget deficit and increase local US employment. <\/p>\n

If that spending became inflationary then fiscal policy could be use to increase taxes generally or specifically.<\/p>\n

Finally, what if the purchase of assets threatened America’s sense of national security or national identity? Most nations have rules about what foreigners can and cannot purchase. For example, there are strict rules on foreign acquisition of real estate in Australia. The US government could ban the Chinese from buying anything they chose to.<\/p>\n

What could the Chinese do about that? Answer: they might try to sell the US dollar in the foreign exchange markets. The consequence would be to drive the US dollar value down – which would not only leave it with the Chinese government with substantial losses but also would undermine its trade competitiveness with respect to the US. That would not be a wise strategy.<\/p>\n

The point is that there are consequences for the Chinese in holding huge stockpiles of financial assets denominated in a foreign currency. There are no real downsides for the US in this context. That doesn’t mean foreigners “cannot do anything with the balances they hold”. It just disabuses one of the notions that all the power is in the hands of the Chinese.<\/p>\n

The reality is that, external sector notwithstanding, all the power lies in the hands of the currency monopolist – the national government. They can always pursue domestic policies which enhance welfare by spending their own currency – irrespective of what the bond markets, the foreigners or any other “bogey entity” might think, do or want to do.<\/p>\n

A thorough understanding of the historical evidence supports that claim. I have not seen one example where a sovereign nation has been destroyed because they have run a continuous external deficit. I also live in such a nation that has large terms of trade swings accompanied by sympathetic exchange rate movements and our standard of living remains intact – budget deficit or not.<\/p>\n

As a parting note this week, I liked this UK Guardian article (March 9, 2011) – The fallout from the crash of 2008 has only just begun<\/a> – which captures many sentiments that I also hold.<\/p>\n

The article notes that the power elites (including “government ministers and boardroom barons”) have declared the crisis is over and are busily restoring “the failed economic model … [that was] … so comprehensively discredited in the crash of 2008”.<\/p>\n

The point is that:<\/p>\n

\n… the evidence is piling up that the full impact of the crisis is only starting to make itself felt – and that both the economy and politics will be transformed before it has run its course.\n<\/p><\/blockquote>\n

The author indicates how weak the British government is in dealing with the “bankers’ greed” – even though the “banks survival might depend on the greatest public handouts and guarantees in history” – they are back to awarding their executives “hundreds of millions of pounds in pay and bonuses, while real wages are being forced down across the workforce”.<\/p>\n

The reality is that the conservative parties are bank-rolled by the financial sector. The impending double-dip recession in the real economy doesn’t really undermine the financial sector’s capacity to make huge profits.<\/p>\n

The conservatives claim that we need less public spending, more privatisation and more deregulation.<\/p>\n

But as the author notes:<\/p>\n

\nBut it isn’t public intervention that is behind the failure to invest or lend – it’s the lack of it. And it wasn’t New Labour’s over-regulation of the City that made Britain especially vulnerable to the credit crash. It was the opposite. Right now, publicly owned banks and their cash mountains should be at the heart of an investment programme to propel recovery. But that would mean moving on from an economic model broken by its own excesses. Instead, they’re being fattened for privatisation.\n<\/p><\/blockquote>\n

As sure as the last crisis was created by the application of the neo-liberal order, the conditions are emerging again which will re-create the crisis.<\/p>\n

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

The BS mountain grows by the day. As the empirical evidence mounts that expose the conservatives as frauds they just become more vehement.<\/p>\n

My approach is if they can say the same thing each day so can I! As time goes by more readers are accessing my blog and those of my colleagues. Small beginnings are now becoming larger if size of audience is any guide.<\/p>\n

As Paul Kelly sings – From Little Things Big Things Grow<\/a> – which is a song about the famous Wave Hill walk-off<\/a> – where indigenous workers went on strike to challenge the caprice of the large international in terms of working conditions. The strike ultimately turned into a major land rights victory.<\/p>\n

I always think about those sorts of inspirational pieces of history when I realise the conservative to MMT ratio is in the hundreds of millions!<\/p>\n

Saturday Quiz<\/strong><\/p>\n

The Saturday Quiz will be back sometime tomorrow.<\/p>\n

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

Apparently, the US government has just announced that their budget deficit is the largest in absolute terms. Given that the US makes a net gain of one person every 16 seconds, I guess they recorded a record population today as well. Nine records were also set yesterday by junior athletes at the annual sport’s carnival…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[18],"tags":[],"class_list":["post-13787","post","type-post","status-publish","format-standard","hentry","category-economics","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/13787","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13787"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/13787\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13787"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13787"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13787"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}