Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security ( He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute (


Government Spending is the Solution–Not the Problem

Tens of thousands of people marched to the U.S. Capitol on Sunday, carrying signs with slogans such as “Obamacare makes me sick” as they protested the president’s health care plan and our so-called “out-of-control spending”. The marchers were chanting “enough, enough” and “We the People.” Others, channeling their inner Joe Wilson, screamed “You lie, you lie!” while waving U.S. flags and the now omnipresent images of Obama as Hitler, Obama as the Joker, along with the usual placards decrying the “march to socialism”.

And the reaction against the expansion of the state is by no means restricted to America.  According to the London Sunday Times, voters are overwhelmingly in favor of cutting public spending rather than tax rises to close the budget “black hole”. Sixty per cent want to shrink the size of the state to curb the £175 billion deficit amid mounting government disarray over the public finances.  Naturally, there is also growing support for this line of thinking in the financial community, despite having successfully received tens of trillions of dollars, even for deeply insolvent financial institutions.  The large banks and brokers lobbied for special treatment and got it.

To the extent that government spending is being used to prop up these economic zombies, I sympathize with the prevailing orthodoxy about wastage of our money.  However, the fasct remains  that the principle opposition to increased government spending is predicated on the simplistic notions about  fiscal activism. We need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas.  In the words of economist Bill Mitchell of the University of Newcastle, Australia:

“Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)…In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.  The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.”

A seemingly growing populist drive toward a return to fiscal orthodoxy follows a stream of similar pronouncements from Wall Street, the Fed, the European Central Bank, the OECD, all of whom are legitimizing a campaign against further public spending and mobilizing support for “exit strategies” as they confidently pronounce the end of the recession. Implicit is the view that somewhere along the line ongoing government involvement in the “free market” reaches a tipping point where fiscal “intrusions” no longer act as a stabilizing force, but serve to impede the natural tendency of the market to equilibrate to recovery. The major hypothesis is that anytime the government is involved in the economy, eventually things go bad.  But markets do not self-regulate in ways that avoid major financial upheavals and activist government is required as a counterbalancing force.

President Obama himself has legitimized this line of thinking himself, committing himself to the goal of “fiscal sustainability” (whatever that means) as a medium term policy objective.  He said as much last Wednesday again during his speech on health care.  Having failed to understand what got us into the crisis, and equally having failed to appreciate the extent to which government spending actually prevented an economic catastrophe along the lines of the Great Depression, our policy makers who are championing this move toward neo-liberal fiscal orthodoxy are almost certain to drive us into the next recession if they take these demands to shrink government too aggressively.
Deficit hawks fail to understand that not all debt is created equally. As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. The former does not have a financial constraint and can spend freely whereas the latter has to “finance” all spending either through earning income, drawing down savings or liquidating assets.

Although the global debt problem is very serious, the focus on growing government deficits and the need to rein in fiscal expenditures is profoundly misplaced, particularly in the U.S., where (relative to Europe and Japan), the government debt is low, relative to the size of the economy.  Additionally, as a matter of national accounting, deleveraging in the private sector cannot happen without an increase in the government’s deficit (the government’s deficit equals by identity the non-government’s surplus.  Consequently, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue; the only other possibility is that the rest of the world begins to dis-save massively—letting the US run a current account surplus—but that is highly implausible). In addition, if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, and, given the size of the private sector’s debt problem, a full-blown debt-deflation process will emerge.

Yet today we are still overwhelmed with a chorus of criticism against fiscal activism:  we hear constantly that governments are an impediment to the operation of a genuinely “free market” which alone can generate sustained growth and prosperity.  The reality is very different on a number of levels.  Based on current account and fiscal balance results through Q2, it appears the private sector as a whole is running a net saving position rivaled only once before in the 1973-5 deep recession. At 8 per cent of GDP, the private sector net saving position is probably very near its peak given the rebound in equity prices, stabilizing home prices, and a labor market limping its way back from the abyss. What most commentators fail to acknowledge (Paul Krugman being a conspicuous exception), is that without the automatic stabilizers of fiscal policy, and the turn in the trade balance, the attempt by businesses and households to spend less than they earn would have otherwise been thwarted by a depression sized drop in private income.

Even though private individual and firms face external constraints as they accumulate debt, “household budget” analogies do not hold true for government, as Galbraith, Wray and Mosler argue:

“[I]f we take households or firms as a whole, the situation is different. The private sector’s ability to spend more than its income depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus (saving). In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.

“In the real world, we observe that the federal government tends to run persistent deficits. This is matched by a persistent tendency of the nongovernment sector, which includes the foreign sector, to save. Its ‘net saving’ is equal (by identity) to the government’s deficits, and its net accumulation of financial assets (or ‘net financial wealth’) equals, exactly, the government’s total net issue of debt—from the inception of the nation. Debt issued between private parties cancels out, but that between the government and the private sector remains, with the private sector’s net financial wealth consisting of the government’s net debt.”

The reality is – and it is a tyranny of accounting, not a theoretical impediment, since the financial balances of the three sectors must sum to zero – the only way to return to a fiscal surplus, or even a fiscal balance, without taking the private sector back into a deficit spending position, is if the trade balance can be heroically improved. The failure to recognize this relationship is the major oversight of neo-liberal analysis.

Beyond the benign neglect of the dollar depreciation, it is hard to see much in the way of policy measures to achieve either import replacement or export extension in the years ahead. If the fiscal balance is to return to surplus by 2013 – a more aggressive reversal than the CBO depicted in its August Outlook, but consistent with the political tone of returning to fiscal orthodoxy – one can trace out the implications for the private sector financial balance given various assumptions about the trajectory of the trade balance. To get both the fiscal and private sector financial balances to converge at a net saving position of 2 per cent of GDP, the trade balance will have to migrate to a 4 per cent of GDP surplus – something we have never seen before in the US during the post WWII period.

That leaves the emergence of a foreign middle class, and the shift toward domestic demand -led growth abroad as the key elements that could support a better US trade trajectory, which are largely elements outside the control of US policy makers. All of this likely means the path of US fiscal deficit as a share of GDP is probably a better route to full employment and prosperity than the misguided sentiment to cut government expenditures precipitously in a return to financial orthodoxy.

In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.

By the same token, the US is no more a “free market” today than the Soviet Union was during the heyday of its empire. The United States is now a species of State Capitalism. The top federal government executives are a partnership of top political and corporate managers who operate a war economy to enlarge their power as their main continuing goal. Less Adam Smith, more Mussolini style corporatism. Today’s unemployment levels that are the hallmark of deep depression are now visible as additional millions “leave” the labor force and are not counted as unemployed by the Federal government even though they are actually jobless. Hence, an 9.7 per cent “unemployment” rate as counted by the Federal government actually refers to a number almost twice as high if we incorporate underemployed and those who classify themselves as independent consultants but who are loathe to describe themselves as genuinely unemployed.  Meanwhile, the infrastructure of American society shows decay that can no longer be concealed despite the practiced showmanship of leading public officials.

By the same token, the emphasis on “sound fiscal management”, which allegedly created the platform for vigorous, low inflationary growth, generating jobs and higher incomes is false. Similarly, it is clear that the current reliance on monetary policy (accompanied by the budget deficit phobia) will always fail to deliver full employment and relies on the impoverishment of the disadvantaged for its ability to achieve low inflation.

In the “market fundamentalist” era, prior to the current economic crisis, governments began to rely on monetary policy for counter-stabilization. According to the logic, this rendered fiscal policy a passive player. Under the misguided inflation-targeting regimes that emerged in the early 1990s, central banks adjusted short-term interest rates to control inflation and therefore saw the unemployment rate as a policy tool rather than a legitimate target in its own right. Given the erroneous belief that expansionary fiscal policy was inflationary and its use would compromise the primacy of monetary policy, governments began to pursue surpluses and put in place frameworks to punish deficits and penalize workers who obtained high wage settlements, on the grounds that this was inherently inflationary (though this logic is never extended to CEO executive compensation or Wall Street bonuses).

The results have been clear. They indicate that this way of managing the economy cannot possibly be a sustainable long-term strategy. The emphasis we have placed on “financial responsibility” on the government side has actually introduced a deflationary bias that has slowed output and employment growth (keeping unemployment at unnecessarily high levels) and has forced the non-government sector into relying on increasing debt to sustain consumption.  The complaints about “private sector debt fuelled” consumption miss the mark:  the debt accumulation is a direct consequence of our failure to use fiscal policy in a manner which supports aggregate incomes and job growth.  Targeting wages and the use of a buffer stock of unemployed labor have been the preferred methods of controlling inflation, but minimizing economic output below full potential.

This was not, however, the model which gave the US its greatest period of prosperity.  In fact, until the mid-1970s, the U.S. consistently paid the highest industrial wages in the world. According to the late Seymour Melman (a professor of industrial engineering at Columbia University), this fact actually helped the U.S. maintain its economic supremacy.

Melman’s concept that explained this unconventional wisdom he called “alternative cost”. The basic idea is this: faced with high labor costs, firm managers will be more willing to mechanize, that is, use more machinery, and more sophisticated machinery, instead of using labor. By using more, better machinery, they increase labor productivity, which leads to higher wages, and they also stay at the cutting edge of technology. Melman compared factories in England and the U.S. after World War II, and found that the English, who paid lower wages, were using more primitive equipment than the Americans.   More recently, his theory has been echoed in Suzanne Berger’s new book, How We Compete, in which she argues that employing cheap labor is not the most effective way of responding to global competition.  The activities that succeed over time are those that involve conditions – such as long-term working relationships with customers and suppliers and specialized skills – which companies whose main asset is cheap labor cannot match.  A company policy of forcing down wages is not a recipe for long-term economic success.

Economic growth has never been strong enough to fully employ the willing workforce and inequalities are rising throughout the Western world not falling. Further, the disparities between wealthy and poor countries have widened.  By curbing the role of government and fiscal policy, we risk reverting to an approach which not only established the pre-conditions for the current crisis including the massive build-up of non-government debt and persistently high labor underutilization, but will almost certainly ensure a return to intense recessionary pressures (at a time when we are still experiencing double digit unemployment).  To be clear: I am not advocating unlimited government deficits or spending. Rather, the size of the deficit (surplus) should be market determined by the desired net saving of the non-government sector. This may not coincide with full employment and so it is the responsibility of the government to ensure that its taxation/spending are at the right level to ensure that this equality occurs at full employment.

Accordingly, if the goals are full employment AND price stability then the task is to make sure that government spending is exactly at the level that is neither inflationary, nor deflationary but sufficient to create full employment.  This is the true “Goldilocks” scenario, much beloved by Wall Street.  It can be better achieved through fiscal policy, rather than the preferred approach of the majority, which suggests that the same outcome is engineered via a monetary manipulation of short term rates by the central bank.  Fiscal policy is relatively direct – that is, the dollars go into aggregate demand – immediately they are spent. The standard view that government budget deficits lead to future tax burdens is problematic it assumes a financial constraint which in reality is non-existent.  The idea that unless policies are adjusted now (that is, governments start running surpluses or that we experience a “deflationary recession”) is a recipe for social turmoil and revolution.  The sooner our policy makers understand that, the more likely we avoid repeating the mistakes that got us into this mess in the first place.

Category: Bailouts, Economy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Government Spending is the Solution–Not the Problem”

  1. djackson says:

    Unreconstructed Keynesianism, WOW. There is always one little logic problem. If government deficits do not matter and the Keynesian multiplier is greater than one, why not run an infinite deficit?

  2. Bruce in Tn says:

    Not well thought out today are we?

    ” is a recipe for social turmoil and revolution. ”

    No. The 50′s 60′s and 70′s had less governmental tampering and normal interest rates. No laws were enacted or suggested to try to put people into houses they couldn’t afford. What happens when we did such a thing? Social turmoil. No Greenspan 1% rates that he thought were needed, but obviously were not, as they are the main reason (not only reason) for the housing bubble. When the average American (not the disabled American, or the crushed American) has less responsibility for him/herself, and government plays a bigger and bigger role, schisms are the natural result.

    You seem to be saying that we have more social turmoil today as a result of not enough governmental planning and intervention….

    …I would happily take the other side of that discussion.

  3. call me ahab says:

    “The former does not have a financial constraint and can spend freely”

    and can continue to do so until the curency is debased and the debt is repudiated through default or inflation

  4. WaveCatcher says:

    Spoken like a true socialist / Keynesian. What you fail to recognize is that our markets lost much of their ability to self-regulate when the government law and regulations distorted the risk/reward relationship that would otherwise keep the animal spirits in check.

  5. impermanence says:

    “We need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas.”

    The myth of a positive outcome being possible by living beyond one’s means is uttered only by fools or outright liars.

  6. Mike M says:

    “To alcohol – the cause of and solution to – all of life’s problems.” – Homer Simpson

    “To debt – the cause of and solution to – all of life’s problems.” – Typical keynesian economist

  7. Pat G. says:


  8. Brendan says:


    The first sentence of the last paragraph of the post seems to answer your question. Infinite deficits would eventually lead to price instability which fails to meet the policy goals. If I’m reading this right, given the “permitted” tools in his model, the only way for the government to run a deficit is to print money, borrow from the private sector, or borrow abroad. Alone, the first would lead to inflation (price instability) and the second requires the permission of the private sector (by being willing to save, rather than spend) who surely wouldn’t decide to save all their money and stop production for the benefit of Uncle Sam. The third can’t be maintained without a trade surplus. Makes sense to me, then, that government is limited by the economic output of industry, creating an incentive for government to promote domestic industry over maintaining a trade deficit. Since, as the article also mentions, the US government can’t control what the rest of the world buys from us, it’s therefore at the mercy of the domestic output and international demand. So the third method also cannot lead to indefinite deficits. So no, infinite deficits aren’t possible. Short term deficits? Yes. Indefinite? No.

    Bruce in Tn,

    That’s sarcasm right? You don’t really think the government did less tampering in oh, say, the 50′s when they were drawing lines around neighborhoods determining who could qualify for FHA loans by not so inconspicuously dividing white and black neighborhoods (leading to, amongst other things, a little thing affectionately known as “white flight”)? And of course there were no massive public housing projects in the non-qualifying neighborhoods (that were so affectionately referred to as “The Projects”), right? I mean, look at all that “affection” for the free market in the 50′s. And this was also not the era when rent controls were being implemented in many cities. There’s nothing to see here! The 50′s, 60′s and 70′s were free market bliss in the housing market! I love revisionist history! To add another Simpson’s quote to the comments, this reminds me of when Ned Flanders said, “I wish I could live in that magical land of yesteryear that only exists in the minds of Republicans.”

  9. GregMoon says:

    When I read highly noxious bullshit such as this, it makes me sad about my own life. I get up every day and try to carve out a meager living while douche bags like this run around with titles like “global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security.” I’m sure the zipper on his 501s are hard pressed (pun intended) to restrain Captain Happy when he reads his title, reads his own toxic thoughts, and then buys into his line of academia inspired nonsense. This hole now has me committed to rise up off of my ass and make something of myself!

  10. djackson says:


  11. djackson says:

    That’s fine. But why are we wrapping a very long apologia to Keynesianism into don’t worry about deficits in 90% of the article to qualifications in the last paragraph. I’m talking about avoiding the complications of an open system vs. a closed one that are ignored early on and only modestly acknowledged later with statements that do not relate to earlier obfuscations of the private sector with the non- US government part of the world. This reads like something the government of Zimbabwe would publish to defend their spending. Deficits do ultimately matter. Ignoring the balance sheet of the country is part of what got us into this problem and Krugmanism is not what is going to extricate us.

  12. djackson says:

    And I forgot to add, which genius in the government is going to find the right balance of deficits for us, the ones who in 2008 did not think we were in trouble?

  13. jswap says:

    I feel dummer having red dis

  14. strousd says:

    I have been in the investment business for over 20 years and I have to say, this is the biggest pile of garbage I have ever read. Anyone who thinks excessive government spending in the long run benefits anyone other than the politicians running the system is living in la-la land and ought to have their head examined. The most recent $700 & some odd million pork laden stimulus plan is nothing but wasteful government spending that has not and will not help the economy. Furthermore, Obama’s plans will increase the size and power of the government, increasing the deficit and the nation’s debt load along with it. Debt will rise to a dangerous level of GDP over the next 10 years, and then the US will be in trouble. In the past when debt rose to a high percentage of GDP, such as after WWII, the debt was paid down after spending for the war declined. That will not happen this time, because we are talking about a permanent expansion of the US Government with the Dems healthcare plan, cap & trade, etc.

    Capitalism has been falsely blamed for the most recent crisis. I totally agree with readers who blame the government. The Federal Reserve under Greenspan blew up bubble after bubble with his faulty policies, and along with Robert Rubin created a moral hazard by bailing out LTCM, Russia, etc. The Glass Steagal Act was abolished, allowing banks to take more risk, Fannie and Freddie were allowed to grow out of control, the Dems refused to investigate accounting irregularities at Fan & Fred (see Barney Frank on youtube), and the skids were greased to allow lending to subprime borrowers. There is a lot more I could say, but the point is, huge mistakes were made by the government regardless of what party was in control. So Auerback wants to trust these idiots to make things right by spending more money? Give me a break! Most of them are weasles who have never had real jobs and didn’t get rich until they got involved in government. Anyone who understands basic economics knows that free markets will allocate capital more efficiently than corrupt politicians if they are allowed to operate free of manipulation by the government. That means we need to have market cycles that clean excesses out of the system instead of constantly bailing out idiots who make bad decisions with their money. Apparently these concepts are foreign to Auerback.

  15. FrancoisT says:

    “Capitalism has been falsely blamed for the most recent crisis. I totally agree with readers who blame the government. The Federal Reserve under Greenspan blew up bubble after bubble with his faulty policies, and along with Robert Rubin created a moral hazard by bailing out LTCM, Russia, etc. The Glass Steagal Act was abolished…”

    Glass-Steagall was a creature of the government wasn’t it?
    The Federal Reserve is a consortium of PRIVATE banks, isn’t it?

    Capitalism *per se* has not been blamed…it is crony capitalism that is at the root of a lots of evils were facing right now. (Read “Free Lunch” and “Perfectly Legal”)

    “the skids were greased to allow lending to subprime borrowers.”
    Of course, the private sector couldn’t possibly has ANY role in lending to subprime borrowers, right?

    “free markets will allocate capital more efficiently than corrupt politicians if they are allowed to operate free of manipulation by the government.”

    I sincerely hope your use of the word “manipulation” means that you make a clear distinction between this and “regulation”.

    As for the corrupt politicians, you got my vote on that one. As long as we, the ordinary people, refuse to be the only ones financing elections, politicians will work for those who pay. How’s that for free market behavior?

    “Frank is such an evil blablabla”

    Sure! he’s the fav whipping boy of pretty much everyone on the left of Lyndon Larouche, it seems.
    Now, where were ALL the regulators who HAD a say in financial matters?
    Did Barney Frank used the Vulcan strike against all of them? (Imagine Barney, in his Star Trek uniform, phaser on the hip…ROFLMAO!!!!)

    Or was it a more systemic problem?

  16. As the above posts indicate, the notion that deficits are bad and surpluses are prudent is so powerfully ingrained into the public psyche, there really is little chance that facts will prevail.

    You said, “As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. ” Randy, Warren and I often have lamented this pervasive reluctance to see the difference between federal debt and all other debt (even including state and local government debt).

    Back in 1979, the public expressed concern that the debt would be unsustainable and would cause recessions, depressions, huge tax increases and federal bankruptcy — just like today. At the time, the gross federal debt was $800 billion. In the next 30 years the gross debt grew an astounding 1,400%, to $12 trillion, and the same voices continue to bleat the same message, predicting the same apocalypse.

    I am reminded of the guru who repeatedly predicts the end of the world, and repeatedly marches his followers up the mountain to await judgment day. The world doesn’t end, but that doesn’t concern the guru, who continues preaching the same old nonsense.

    You think surpluses are prudent? Did you know that every depression in U.S. history (there have been 6) was preceded by several consecutive years of federal surpluses? Did you know that every recession in the past 60 years (there have been 9) was preceded by years of reduced federal deficit growth?

    One other question: Have you ever noticed that the debt hawks use derision, sarcasm and insults to make their case but never, that is *never*, use facts? For those few who want facts, you can see them at

    Rodger Malcolm Mitchell

  17. djackson says:

    My intent was not to say deficits are inherently bad just as surpluses are not inherently bad. My contention would be that they are not always the solution. If you truly believe more government deficit spending is always good, please provide the logic behind how infinite deficits are manageable. You cite history. I think it also shows when governments are deemed too profligate their currencies become debased.

  18. strousd says:

    I guess you can call a set of charts and a number of opinions “facts”, but I disagree. The economy is much more complex than that, and lines on charts do not fully capture the interrelationships that occur in today’s markets, particularly those between the public and private sector. Your analysis also is focused strictly on the US. Why have Latin America and other emerging economies had numerous debt and currency crises? Because deficits and too much debt don’t matter? Argentina used to be just like the US in the good old days until Peron took over.

    The public was right to be concerned in 1979 considering the massive inflation we had in the 70s. The only reason things turned around was because Volcker jacked up rates so high that it squashed inflation, and Reagan’s policies spurred economic growth again. I disagree that oil was or is the cause of inflation. The rise in oil in the 70s and early 80s was a symptom of inflation, not the cause of it. If the US Gov’t was not debasing the dollar, the rise in oil would not have occurred. If you don’t believe me, read the “Invisible Crash” by James Dines. The book documents the inflation in the 70s via a series of newsletters Dines wrote after he was fired from Merrill Lynch after predicting the fall of the dollar and the rise of gold. Similarly the rise in oil to $140 per barrel last year was a symptom of the massive credit inflation, not the cause of it. The latest rise in oil did not cause a universal rise in the cost of goods and services to the degree that one would have expected (although I acknowledge that the CPI does not measure the true cost of living). That’s because the increase in oil was a sign of excess credit flowing into speculative assets as opposed to being a cause of traditional inflation.

    I agree with the notion that sometimes surpluses are bad and increases in gov’t debt are good. However, this cannot be analyzed in a vacuum. It depends on where you are in the cycle and what the relationships are between public and private sector debt levels. For instance, the US government was running surpluses and its debt level was not alarming at the beginning of the decade, but private sector leverage was at a high level historically. It spun out of control after Greenspan held the Fed Funds rate at 1% for a year and a half after the economy was growing again, and the private sector levered up at a staggering rate. I agree with earlier comments that the private sector bears blame for this, but when the Fed and Treasury continually bailout speculators who make bad investment decisions, it encourages more and more speculation and penalizes conservative savers and investors.

    Now that the private sector is deleveraging, the trade off between public and private debt will again come into play. If the level of US government debt gets too high, at some point it will crowd out private investment. Interest costs will also become a burden, especially if rates rise significantly above the artificial levels currently being maintained by the Fed. Unless economic activity increases significantly to offset the debt burden, which is a valid concern given that the US is a mature, service-driven economy, the debt will be have to be inflated away. Alternatively, we will have another deflationary episode like the one we just experienced, only this one will be caused by excesses in the public sector as opposed to the private sector. Who will bail out the US Gov’t if it’s debt load gets too large? China?

    The bottom line is this : 1) Past experiences in the emerging markets and in the US prove that excessive debt and deficits do matter at certain points in the cycle, particularly if you take into account the impact of inflation; 2) The impact of inflation is devastating on economies, penalizes savers and investors, and hits the lower and middle class the hardest.

    I am not familiar with the sarcasm, derision and insults used by debt hawks that you refer too. I have noticed that a number of astute economists and investors have made valid arguments that the US debt burden will become a problem in the long run. I have also noticed, and I say this with all due respect, that those who argue against the expansion of government are accused of being uncivil regardless of what the say. However, I acknowledge that uncivil behavior by some people has unfortunately obscured many valid arguments by good people.

  19. Mr. Jackson provides the perfect example. There is the non-factual reference, “governments are deemed too profligate” (Which governments? What were the individual circumstances? Specifically, how profigate? Who did the deeming? What is the data?). Next, I expect to read the usual data-free mentions of pre-war Germany, China, Brazil, Italy, Zimbabwe and other nations that experienced hyperinflation, each for different, specific reasons.

    In addition to not citing data, we see the usual creation of straw men by exaggerating someone else’s position. So we see references to “always good” and “always the solution”, plus “infinite deficits,” which I’ve neither said nor believe. It’s as fair as if I were to tell a someone “you always think infinite taxes and zero government spending always works.”

    If you truly want to know how much deficit I feel is safe — at least safe from the currency debasing you fear — go to

    After you read that, please show me your data calculation for what you believe the deficit or surplus should be.

    Rodger Malcolm Mitchell

  20. WaveCatcher says:

    Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc.

    Note to self: Do NOT entrust ANY of my money to this fool.

  21. Thorton says:

    I look forward to The Big Picture every day because as Hercule Poirot would say,”It stimulates the little gray cells.” The article by Marshall Auerbach, which is consistent with views that John Maulden has expressed, is particularly useful. Although he doesn’t quite say it, the solution to the country’s problems will depend heavily on what is done to make Main Street prosper, and Wall Street can’t be counted on to help much.

    I am the author of What If Boomers Can’t Retire? How to Build Real Security, Not Phantom Wealth, which was published about nine years ago. Wall Street and most economists avoid discussing the flaws in baby boomers’ stock-based retirement plans. But the flaws will become obvious as boomers age, and coming after the present troubles, they could lead to a true depression. If you Google “Thornton Parker” the first four items are about me.

    You are welcome to publish the attached “How Economists Are Missing Another One.” It will probably stir up the natives.

  22. Charles Swann says:

    “How Economists Are Missing Another One.”

    The worst thing I have ever read. It completely lacks an understanding of savings, investment and how the capital markets work. It does include enough facts that it seems plausible but I am still baffled as to how this was printed at The Big Picture at 10:18 AM 10/6/2009.

    First, I would like to state that yes shares are traded on the secondary market and that people or corporations buying these shares are not really inserting new capital into a company unless they are buying an IPO or a seasoned offering. The reason this is done is to buy portions of current and future earnings that will be ultimately be returned to the shareholders through dividends, stock repurchases by the company or selling it to another entity who wishes to diversify their holdings and have a claim on the company’s earnings.

    The “quelle horror” of total return versus dividends is because there is a tax benefit for shareholders in that dividends are taxed as ordinary income in the year received. However, when the corporation buys backs it shares and thus concentrates the earnings to the surviving shareholders; the shareholder can either choose to sell some of his holdings back to the company for income or hold on and be taxed later on. The taxation all depends on the shareholder’s preference. This is why total return is a better mark than dividends.

    The argument that companies can create money is ridiculous. The Federal Reserve is the only entity that can create money using the banking system multiplier and open market purchases. There are newer tools but I won’t bore you with them now. This bold statement is made but then later on in the essay the author then decides that it isn’t really creating money it is shifting money from savers to investors, which is exactly the raison d’etre of the financial system. I would liken this to being angry with the sun because it basks us with sunlight every morning.

    The paper fortune that you describe Bill Gates has is because each of those shares he has includes a claim of the near monopoly pricing and therefore earnings of Microsoft. If everyone traded in their laptop for an iPhone than guess what; those shares would drop in value not because they were worthless to begin with but because the future earnings of Microsoft would be in peril. Thus, the incendiary remark that it is a legal form of counterfeiting is placed in there only to excite the automatons. The whole piece reeks of this economic populism. For instance, “Despite Wall Street claims, retirement plans invest little in companies. Instead, the plans buy stock that insiders sell, thus transferring middle class savings to the richest people in the country and increasing the wealth gap.” While it may be true that entrepreneurs are benefiting by selling shares in their enterprises to the common man, they are not doing so without giving the common man a claim against any and all future income that the corporation may receive.

    I cannot even fathom how the author comes up with the idea, let alone the evidence, that “These LBO outfits acquire a company with strong assets including cash but low stock prices; sell some of the assets; close down operations and eliminate jobs to cut costs; extract the cash with dividends; borrow large amounts to pay for the process; and sell the companies back on the market in a weakened condition.” If the “hulk” of the company was in such a “weakened” position than who would purchase it? This assumes that the i-bankers underwriting the IPOs are snake oil salesman and that this is done with the tacit agreement from the SEC. Both of these statements may still be true, however, at the end of the day the buyer of these IPO shares has to have done due diligence and expects to earn a return not a bankruptcy.

    Here is a report by a Harvard and Chicago professor about the job loss at private equity firms.

    If no time read the article by Andrew Sorkin of the Times describing that paper and its results here.

    Both find little evidence that private equity firms do more firings than is necessary to clear dead wood than any other firm. “[Portfolio companies] compared with those public companies with similar junk debt ratings, buyout [portfolio] companies defaulted at half the rate.” Tends to show that PE firms are more adept at managing a fiscal crisis than their public counter-parties. I will agree that the behemoth pe firms can have their incentive structured skewed to earn management fees and transaction advisory fees, ahem KKR, but the majority of funds and the GPs only make money once it has been all returned to the LPs. (indeed the carried interest doesn’t start until the principal and the management fees are returned.)

    After that section though I have no quips with the analysis. The boomers turning from buyers to sellers is a valid argument, especially in the face of the liquidity crisis cum solvency crisis of the past few years. If on a whole investor’s risk appetites switch to shorter duration investments for income generation or just in cash or cash-like equivalents than yes the stock market could tank as there would be more supply than demand. But markets have a funny way of clearing. So if investors preferences do change to more income producing investments, I believe stock buybacks might be accelerated to decrease the supply of stock shares outstanding. Alternatively, the government may change its rules, as it is want do when a large portion of voters now need dividends, having capital gains and dividends receive the same tax treatment. This in turn would shift CFOs to go back to offering dividends with its excess cash instead of share buybacks, which would make the author happy?

    Finally, I should think in concurrence with the author that baby boomers who planned on having twenty plus years of retirement may instead be more realistic and work later on into life, thus, decreasing the amount of time in which they have to live off of their investments.

    I apologize for being so shrill to begin with, but there is some good analysis in this piece, it’s just that there is a ton of rhetoric contained in this piece that has been refuted.