\t\t\t\tI watched the US President speaking live today from the White House. I wish I hadn’t. The local media (here) characterised him as talking tough. What I heard was a leader who doesn’t know what he is talking about. But he isn’t alone out there in the “debt ceiling” debate land. I have noted before that when the crisis really hit I thought it would spell the end of the stranglehold that mainstream macroeconomics had on public policy. That body of theory had led the world into the crisis by endorsing policies that set the financial system up to collapse. As it was becoming obvious (as far back as 15 years ago) that a major crisis was approaching mainstream economists were in denial and claimed that the “business cycle” was dead. I was wrong in assuming (more hoping) that the mainstream paradigm would be wiped out by the travesty. And as the months pass, their erroneous theories seem to be getting more credibility not less. The debt ceiling debate has reached proportions of madness that I didn’t think were possible in a broadly educated country (at least to primary school level). What must the Martians be thinking of us now. Anyway, certain practical matters not counted on by the ideologues suggest that 3 million Americans or so may find out the truth.
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\nEarly on the US president revealed how poorly he understands the economy he is ruling over:<\/p>\n
\nNow, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money – the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.\n<\/p><\/blockquote>\n
The US government budget is not remotely like a family\/household budget. Households have to finance their spending, the US government does not. Households use<\/strong> the currency that the US government issues<\/strong> (under monopoly conditions).<\/p>\n
No tax dollars go “toward paying off the interest on our loans”. Please read my blog – Taxpayers do not fund anything<\/a> – for more discussion on this point.<\/p>\n
A government that tries to “balance its books” while the external sector is draining demand and the private domestic sector is trying to save to reduce its exposure to debt (after the credit binge) will force businesses to close up shop and sack workers.<\/p>\n
Government deficits put downward pressure on interest rates. Please read the suite of blogs – Deficit spending 101 – Part 1<\/a> – Deficit spending 101 – Part 2<\/a> – Deficit spending 101 – Part 3<\/a>.<\/p>\n
Also reflect back on yesterday’s blog – Why we should abandon mainstream monetary textbooks<\/a>.<\/p>\n
Interest rates will only rise if the US Federal Reserve increases them. It controls interest rates.<\/p>\n
The US government always has “enough money” to “make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid”. Where does the US President think the US dollars come from?<\/p>\n
He also said that:<\/p>\n
\nThe first approach says, let’s live within our means by making serious, historic cuts in government spending. Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President. Let’s cut defense spending at the Pentagon by hundreds of billions of dollars. Let’s cut out waste and fraud in health care programs like Medicare — and at the same time, let’s make modest adjustments so that Medicare is still there for future generations. Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.<\/p>\n
This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.\n<\/p><\/blockquote>\n
Who exactly is the “our” that the “means” refers to. Households have to live within their means. A sovereign government doesn’t have any means to live within. Its role is to ensure that the means available to the economy (that are in the private sector) are maximised to the benefit of all citizens.<\/p>\n
Primary targets are low unemployment, well-paid employment growth, environmentally-sustainable production.<\/p>\n
The “balanced approach” he recommends will undermine those targets.<\/p>\n
The persistently high unemployment and idle machines tells me that the US population are not exhausting their means at present.<\/p>\n
Helping “helping small businesses and middle-class families get back on their feet right now” requires more spending overall in the US economy not less. There are only two sectors – government and non-government and at present the non-government sector is not wanting to spend at a sufficient rate to keep aggregate demand growing fast enough to help firms hire and families save.<\/p>\n
This was one of the worst speeches that the US President has made. Why anyone thought he would be the answer for America is anyone’s guess.<\/p>\n
US Secretary of State completely “lost” in China<\/strong><\/p>\n
If the President’s speech wasn’t enough, I refer you to the speech of the US Secretary of State who travelled to China (Hong Kong) to reassure the Chinese that the US “Congress will do the right thing and secure a deal on the debt ceiling, and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.”<\/p>\n
Now in the current circumstances I would suggest that meant ensuring the budget deficit was large enough to ensure there were enough well-paid jobs to employ all those Americans that wanted to work. Indication? The budget deficit needs to expand.<\/p>\n
The problem is that the Secretary of State meant that the “right thing” to do was to cut the deficit.<\/p>\n
She also said<\/a> that:<\/p>\n
\nWe in the United States are in the middle of a necessary transition: we must save more and spend less. And we must not only save more and spend less, we must borrow less, as well. Our partners must meet this change with changes of their own. There is no way around it: Long-term growth requires stronger and broader-based domestic demand in today’s high-saving Asian economies. This will raise living standards across the region, create jobs in America, improve business for many in this room, and help stabilize the global economy.\n<\/p><\/blockquote>\n
Message 1: more domestic saving.<\/p>\n
Message 2: higher domestic demand is good for living standards and creates jobs.<\/p>\n
Her understanding of the relationship between these messages? Very minimal I would think.<\/p>\n
Highly indebted American households\/firms definitely have to save more to reduce their exposure to the debt levels that they accumulated in the hey-day of the financial engineers prior to the crisis.<\/p>\n
That means they have to spend and borrow less<\/strong>. That is absolutely crucial right now. Private balance sheets have to be restructured and rendered less precarious.<\/p>\n
Question: How to we get more saving?<\/p>\n
Answer: Make sure national income grows<\/p>\n
Question: How do we get more domestic demand?<\/p>\n
Answer: there are only two sources: (a) non-government; and (b) government. If the net exports are negative and you want the private domestic sector to save more then the solution to the US Secretary of State’s aspirations is obvious.<\/p>\n
The government deficit has to rise. End of story – there are no exceptions.<\/p>\n
Please read on for more explanation.<\/p>\n
US Public Pension Funds want citizens to save but recommend policies that will thwart that goal<\/strong><\/p>\n
Yes an astute reader referred us to this July 25, 2011 – Joint letter to the US President<\/a> – from the several US Public Pension Funds, which just about sums the whole mis-conceived debt\/deficit debate up in one short piece.<\/p>\n
The Letter said that:<\/p>\n
\nDear Mr. President and Members of Congress,<\/p>\n
The undersigned state and local government pension funds and plan sponsors from across the country represent more than 7.7 million active and retired members with combined assets in excess of a trillion dollars. We work on behalf of millions of Americans – firefighters, teachers, nurses, policeman, government workers and others, who save for their retirement through our pension funds.<\/p>\n
The hard-working people we serve are the nation’s savers; they want a strong future for America because their economic future depends on it. But today our nation’s economic future is in doubt, and so is America’s financial leadership in the world. Our country faces threats to its economic well-being that will inflict pain and hardship on all our citizens for many years to come if we fail to act – and act now.<\/p>\n
America is now a debtor nation and it must show the world that the nation’s word is its bond. It is critical that the debt ceiling be raised to avoid a default. But raising the debt ceiling just addresses the immediate problem of default. The huge budget deficit, both current and long-range, is the real problem. <\/p>\n
As custodians of Americans’ savings, we strongly urge Congress to reduce the deficit. Without a credible action plan from Congress to reduce the budget deficit, the U.S. debt will likely be downgraded by one or more rating agencies.\n<\/p><\/blockquote>\n
And so it went.<\/p>\n
Question: What determines the level of saving by all those hard-working US people that the US pension fund industry is so concerned about?<\/p>\n
Answer: Apart from individual discipline, growth in national income.<\/p>\n
Question: What determines the growth in national income?<\/p>\n
Answer: The growth in aggregate demand.<\/p>\n
Question: Is there capacity for real national income (and hence real private domestic saving) to grow in the US at present?<\/p>\n
Answer: The unemployment rate is close to 10 per cent and capacity utilisation continues to stagnate.<\/p>\n
Question: What will happen if the US government cuts its deficit – that is, its net spending?<\/p>\n
Answer: It all depends on the response of private spending and net exports. It is highly likely that the private spending will fall further as confidence about the future takes a beating because firms who enjoy government contracts will lay workers off and people who receive income (transfers etc) from government spending clam up. Net exports are not likely to add sufficient to aggregate demand to fill the spending gap either.<\/p>\n
So a cut in government spending at this stage, especially with so much idle capacity will reduce aggregate demand overall and damage economic growth.<\/p>\n
Question: What does that mean?<\/p>\n
Answer: More of those hard-working people will lose their jobs and overall they will not be able to save more.<\/p>\n
Question: How can the Public Pension Industry ensure that the hard-working US people enjoy higher savings and a more secure future?<\/p>\n
Answer: By encouraging the US government to expand its deficit and bring more of the idle resources into production and to stimulate the output and income growth rate.<\/p>\n
Some of their fund participants should take a class-action against the Directors who signed that letter to the President for acting against their interests. Get the matter into the courts and have these characters explain under oath what economic model they were thinking off when they claimed that the:<\/p>\n
\n… huge budget deficit, both current and long-range, is the real problem.\n<\/p><\/blockquote>\n
What exactly is a “huge budget deficit”? Why not focus on what is stopping their members from saving – such as near-10 per cent unemployment, idle machinery, firms going broke, etc because there is not enough spending.<\/p>\n
If the non-government sector cannot add enough demand to stimulate sufficient production to employ the idle labour (and allow saving overall to rise) then there is only one sector left. You guessed it – the government.<\/p>\n
Spending equals income. Saving is dependent on income. It is not rocket science.<\/p>\n
The CEOs of the major US pension funds do not seem to know what day it is.<\/p>\n
Come in … the IMF<\/strong><\/p>\n
And finally the IMF – always trying to be relevant but never quite making it claims in its – latest Consultation statement about the US<\/a> – (July 25, 2011) that:<\/p>\n
\n… the fiscal impulse for the current fiscal year is likely to be about zero … The outlook is for continued albeit modest growth. With sluggish private domestic demand economic slack remains large: in particular, the unemployment rate has declined only modestly from its recent peak. As a result, inflation pressures will likely remain contained …\n<\/p><\/blockquote>\n
So you would hope that they would conclude that the US government had erred in cutting its fiscal impulse back to zero. Persistently high unemployment and low (contained) inflation are sure signs that the budget deficit is too low.<\/p>\n
After acknowledging that the “depressed real estate markets, persistent high unemployment, and weak consumer confidence have held back growth prospects” in the US, the IMF Executive Directors said that:<\/p>\n
\n… fiscal policy faces tighter constraints going forward, given unsustainable public debt dynamics.\n<\/p><\/blockquote>\n
That is not a given it is an outright assertion. There are no unsustainable public debt dynamics in the US. The US government will always be able to pay its US -dollar denominated liabilities. If it defaults it will be a voluntary act (of political madness) not remotely associated with any financial constraints.<\/p>\n
But once you start with a false assumption, then why not take it through to its logical nonsensical conclusion.<\/p>\n
The “Directors” claimed that the “fiscal adjustment should start in FY2012 to guard against the risk of a disruptive loss in fiscal credibility”.<\/p>\n
Their solution to the depressed labour market – “a re-examination of existing active labor market programs, including job training and education programs”.<\/p>\n
They also forecast an external deficit of 2.6 per cent of GDP and private domestic saving rising faster than private investment. So how can they suggest that real GDP will grow more strongly in 2012 and unemployment will fall from 8.9 per cent to 8.4 per cent at the same time that there is to be a 1.4 per cent of GDP cut in the structural fiscal balance as part of the “consolidation”.<\/p>\n
Not only does training not<\/strong> create jobs but their sectoral forecasts are mutually inconsistent. As noted above, you cannot have the private domestic sector increasing its overall saving, the external sector draining aggregate demand and the public sector cutting net spending (its deficit) and expect growth to occur.<\/p>\n
As an aside, one reader wrote to me this week claiming that the current Congressional impasse made me look like a total fool and that I should learn from the conservative message that there are financial constraints faced by governments and I should stop saying otherwise. My rendition of the comment (which I deleted) is rather more polite than the actual text received.<\/p>\n
What this person seems unable to comprehend is that the current impasse validates Modern Monetary Theory (MMT) and highlights the purely voluntary and political nature of all of these constraints on US government spending.<\/p>\n
And now about those 3 million or so Americans<\/strong><\/p>\n
In this Reuters article (July 7, 2011) – Treasury secretly weighs options to avert default<\/a> – we learn that a “small team of Treasury officials” in the US has been planning in case the “Congress fails to raise the country’s borrowing limit by an August 2 deadline”.<\/p>\n
Amid discussions about all sorts of loopholes including invoking the “14th Amendment of the U.S. Constitution” (that the US cannot default), the most significant thing about the article is this fact:<\/p>\n
\nIf Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.\n<\/p><\/blockquote>\n
So on August 3, 2011 if the US Congress continues to misbehave, at least 3 millions Americans (firms\/people) will get bank credits from the US government despite the political shenanigans.<\/p>\n
Those newly educated Americans will from then on know that there are no financial constraints on the US government’s capacity to spend.<\/p>\n
And with all this talk of cheques bouncing …<\/strong><\/p>\n
There was an incident in Canberra today where according to the ABC News this afternoon there was a – Czech bounced<\/a>.<\/p>\n
Apparently, the Czech President Vaclav Klaus “refused to go through the metal detector at Parliament House”. The Report said that:<\/p>\n
\nCzech Republic president Vaclav Klaus, made famous in a viral internet clip showing him pocketing a ceremonial pen in Chile, was not taking any chances of souvenirs being found in his pocket at Parliament House today. The president, in Canberra to address the National Press Club, was on his way for an interview with ABC1’s 7.30 – which has its Canberra studio within the House – and through the security checkpoint.<\/p>\n
Waiting for him there was Michelle Ainsworth, mild-mannered producer for 7.30, ready to usher him up to the ABC studio where reporter Chris Uhlmann was already seated at the desk, lights on, cameras focused.<\/p>\n
But going through security with all the plebs was not on the Mr Klaus’s agenda.\n<\/p><\/blockquote>\n
Apparently after he refused to go through the check the security guard was told that he was the “Czech president” to which he responded:<\/p>\n
\nI don’t care who he is, everyone goes through.\n<\/p><\/blockquote>\n
The Prez then “didn’t even say goodbye. He just left.”<\/p>\n
As to the pen in Chile incident, make up your own mind – as YouTube<\/a> captures the “theft”.<\/p>\n
Digression<\/strong><\/p>\n
Speaking of Americans prominent in the news today I saw that Glen Beck likened the Norwegian summer camp where the shooting occurred as akin to a Hitler Youth Rally. He said<\/a> on his radio show:<\/p>\n
\nThere was a shooting at a political camp. Sounds a little like the Hitler Youth or whatever. I mean, who does a camp for kids that’s all about politics? Disturbing\n<\/p><\/blockquote>\n