If it works for Washington…
(Hat tip to Economicrot)
Source:
Cartoons by Rick McKee
Augusta Chronicle, Dec. 2, 2009
http://spotted.augusta.com/chronicle/display.html?collection=14378&gallery=28124&page=1&photo=827382
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
"Overall household indebtedness is up from $7 trillion to almost $10 trillion since 2000. On this sum, we estimate, the American consumer has an annual interest bill of more than $500 billion; a sum, by the way, that vastly exceeds his current income growth." —Kurt Richebacher
Knowing that the vote over the weekend in Greece was really a referendum on Euro membership, a majority of the Greek Parliament said yes to staying. European Finance Ministers meet again on Wednesday to solidify the 2nd bailout package for Greece at the same time hopefully a deal is consummated between Greece and its creditors this week. The Greek 14.5b euro bond that matures on March 20th is up by 2 pts. The optimism that all will be completed and contained AGAIN to Greece has yields lower in Portugal, Spain and Italy. The iTraxx Financial Index is also narrower by...
read more »
Tweet
Facebook
Reddit
Digg this!
December 5th, 2009 at 8:04 pm
The difference is that the sovereign government is the monopoly provider of a nonconvertible currency of issue with a floating rate (since April 15, 1971), while neither firms nor households can legally issue currency. That is to say, the government is the issuer of the currency in use, and non government uses this currency. The government as sovereign issuer does not need to tax or borrow in order to spend. Any analogy between household budgeting and government monetary and fiscal policy involves a category mistake.
Since US currency is not convertible, the government is not revenue constrained in its issuance of it. The US government cannot default on its debt or become insolvent since it is the currency issuer. Of course, there are real constraints, like inflation. However, inflation only occurs when the government issues currency in excess of the public’s desire to save. As long as the public desires to save, national income will be insufficient to purchase all of the goods and services that can be produced at full capacity. Therefore, unless the government makes up for the public’s desire to save by its own spending, there will be an output gap and unemployment. This is simply national accounting.
Cartoons like this simply perpetuate a myth that the government is like households and firms. It being the currency issuer and they the currency users, there is no parallel. In fact, the true relationship is inverse.
December 5th, 2009 at 8:15 pm
BR…an interesting Cartoon…more applicable to “past times” from Reader’s Digest Funnies.
I worry more about the Wall St. Folks and Tiger Woods piling up too many “goodies under the tree” to cover up what they are doing with their Mistresses and “brief encounters” across the globe.
Maybe this Cartoon was true in the 80′s “Shop ’til you Drop” funny years…but it’s just not the way many of us see it here in the “Outlier States” in America this Christmas…
Just saying…the damned thing is skewed.
December 5th, 2009 at 9:21 pm
I really haven’t heard anyone claim we spend our way out of debt, at least without inflating our currency. We can, however, spend our way to prosperity, at least if we buy what we produce. Spending and consuming creates far more jobs than saving. If we become a nation of savers we may add a few bank tellers to the employment rolls but the banks will be financing factories overseas since we won’t be buying enough of our goods and services to warrant any sort of serious expansion. Saving more and spending less may sound good in theory but in reality it’s counterproductive, shortsighted and more than a bit stupid.
December 5th, 2009 at 10:18 pm
Tom Hickey,
I LOVE YOU! OMG, I spent months and months arguing with idiots (goldbugs, Austrians, “conservatives”) on economics blogs trying to explain to them this whole point that you spelled out so succinct.
And Barry, stop putting this garbage up. It takes advantages of people’s misunderstanding of the economy. The last thing we want to do is for our leaders to think that the government is just like a person. If we cut the deficit now, we will cut off the only support that this economy has. I know you understand this. You are just putting this crap up to get some hits from the people I just mentioned (goldbugs, Austrians, “conservatives”)
December 5th, 2009 at 10:50 pm
Tom H – “while neither firms nor households can legally issue currency” .. in definition I guess .. I disagree in practice
households can MEW (MortgageEquityWithdrawl) and then default – shield’g the gains somewhere
firms can issue stocks – the connected shareholders can EW – shield’g the gains somewhere in a firm default*
bank firms can loan at 10:1 – 40:1 .. borrowed at .25% & collect interest at 29%
all 3 are a paperwork shuffle for gain
http://en.wikipedia.org/wiki/Currency
“The origin of currency is the creation of a circulating medium of exchange based on a unit of account which quickly becomes a store of value.”
* coda – or leave at an opportune time with a fall guy in charge
December 5th, 2009 at 11:41 pm
Grego658, only the sovereign government can legally provide its currency of issue. Counterfeiters beware! When the government spends creating a deficit, it adds to the net financial assets (NFA) of non government. When the government taxes it reduces NFA. When the government borrows it shifts assets held as reserves into interest-bearing securities. Borrowing is used to drain bank reserves so that the central bank (Fed in US) can hit its target overnight rate.
The government stands in a vertical relationship to non government by provisioning currency by crediting and debiting reserve accounts, increasing/decreasing NFA through spending and taxing, and managing the risk-free (overnight) interest rate on reserves through the CB’s open market operations. It is the government’s responsibility to provide NFA that maintains full capacity/full employment with price stability, avoiding inflation and deflation. This is not happening because the government is being viewed as the same a households and firms, even though it is the currency issuer and not revenue constrained.
The non government sector is horizontal. While financial intermediaries can increase of decrease money supply, they do this through transactions that net to zero, e.g., loans create deposits. This is true no matter how much the bank leverages its capital. Reserves are a liquidity provision and don’t materially affect banks ability to lend other than in terms of the Fed funds rate and the discount rate.
The important point is that the non government sector cannot increase NFA because its (horizontal) financial activity nets to zero. Yes, crime, fraud, embezzlement, and other finagling can siphon money, but this is accounted for by a write off on the books and nets to zero in the economy, even though someone pockets some cash. This type of activity does not add to NFA.
If you want to understand how the monetary system works based on national accounting, not monetary theory, see L. Randall Wray, Understanding Modern Money (1998). It’s available to read at Google Books.
December 6th, 2009 at 5:49 am
*Sigh* How did I guess when I saw this cartoon that someone would have come in the comments thread posting a bunch of Chartalist nonsense? They make completely ignorant mistakes right out of the gate: it’s not even true that the government issues the currency — that is done by independent central banks. (Sometimes that “independence” is a polite fiction but it is one that central bankers and economists pay lip service to for good reason.) Yes, the government could always just nationalize the Fed, but don’t you think there might be a reason that hasn’t been tried?
Yes, you can try taking a bunch of neat little accounting equations and applying them to the messy field of political economy and see what happens. Try raising income tax rates to 60% to neutralize the inflation caused by printing your way to full employment, as MMT proposes … when the voters resist I guess you can always say the system would work “if only we had the political will.”
Treat the dollars people are paid for their labor as a mere “lubricant of exchange” with no usefulness as a store of value and see what that does to confidence and long-term economic planning. Should make for entertaining viewing, at any rate.
December 6th, 2009 at 9:16 am
Graphite said, ““Try raising income tax rates to 60% to neutralize the inflation caused by printing your way to full employment” Creating money causing inflation — a common belief, probably begun in the 1930′s during the German hyperinflation. Historically however, it simply isn’t true. See the graph in point 8 at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/
Yes, increasing the supply of money could reduce the value of money, but supply is only half the equation. Demand, being the other half, is determined by risk and reward, and reward is interest. So the Fed cures/prevents inflation by raising interest rates. Not really a big problem to solve, especially when compared with the problems caused by too little money creation, which prevents government support of universal health care and improvements in Social Security, eduction, the infrastructure, the military, research, etc.
Ever since we went off the gold standard in 1971, inflation has been related to oil, not to money supply. (See: http://rodgermmitchell.wordpress.com/2009/09/24/is-inflation-too-much-money-chasing-too-few-goods/
And by the way, why is Chartalism nonsense? I’d be interested in your take on that.
Rodger Malcolm Mitchell
December 6th, 2009 at 10:43 am
Tom Hickey,
Good explanation, I like em simple. As the issuer of currency, it essentially has complete power too set the rules and agenda, as they so please, of course I could be wrong. When it is percieved that those rules and laws LAVISH a few at the detriment of many, you have a confidence and perception problem, imho. Working at a large corp or private business you understand those at the top will take a bigger slice, when government purports to be equal and it is not you have a conflict in value systems that perpetuates and grows……………..other countries throughout history have failed miserably due to monetary reasons, that is true, imho, you can spin it dozens of different ways, the perception is the people at the top believe everything always turns out rosey………..whereas others, mostly business owners, educated, self-educated see things happen at the top that have collapsed them personally or others, so the illogic of it all is confusing…………if you’re own people feel this way, what do other countries percieve, at this point my guess is there is similar acrimony over the same issues in most countries, in total you have a total lack of confidence…………..where it ends up and goes, i sure don’t know…………yet, when the folks at the top proof clueless time and time again, it does not repair the damage.
I will get that book though, I am very interested in understanding, and know my knowledge on the subject is limited.
thanks
December 6th, 2009 at 11:04 am
@Tom Hickey
“The US government cannot default on its debt or become insolvent since it is the currency issuer.”
Maybe not, but the debt can become worthless, and other nations can refuse to lend us the funds to fuel the deficit.
And I’m not so sure that the goobermint cannot default on its debt — all they have to do is stop paying it back. You seem to be making the assumption that the US economy is a system closed unto itself, that our debt is not heavily supported by foreign lending.
Lots of other nations have defaulted in the past (please read the Reinhart and Rogoff paper — This Time is Different: A Panoramic View of Eight Centuries of. Financial Crises — it’s fairly short, and provides a nice historical backdrop to sovereign default), and I see no reason why our Bananamerican United States cannot do so as well.
All that is required is for the political pain to support the debt load to become greater than the pain of international default.
The fact that the US dollar in the global reserve currency, and the hope that such a thing will prevent our lenders from saying “NO” means only that there is increased pressure to change the international reserve currency. It might not happen tomorrow, but the pressure is building to make it happen. The weaker and more volatile the USD becomes, the greater the likelihood that such a change will come sooner rather than later.
There is nothing written into the laws of economics that says the USD must be the international reserve currency, now and forever more. There have been other reserve currencies in the past, and there will be others in the future. Please revisit the history of how the pound sterling fell by the wayside.
When foreign lenders fail to support our deficits by providing capital to bridge the gap, we will be forced to either make massive cuts in spending, or to print money out the wazoo to cover the gap between spending and revenue. No matter how much people save, they will not be able to match the printing volumes, as people still have to eat, and spend some of their money for living expenses.
And so long as we import substantial amounts of “stuff”, we will be facing severe price inflation as the USD dwindles away to nothingness.
December 6th, 2009 at 11:07 am
Okay, I spent a quick 15 minutes at rodger mitchell’s site, I gotta say, the man is passionate, I’m just a little confused…………..if I am understanding this correctly, creation of central banks are one of the greatest triumphs in human history, solely because it can create deficit spending en mass………this has allowed all modern societies to prosper, at times things will happen and it get’s out of whack, which is just life, yet, the overall concept is sound………………it’s almost as if, money is good, and as populations grow we need to grow it also, sometimes the growth of it get’s off balance, but, in essence it can go on idefinitely because I guess in concept a person is a capital producing maching, ie, they work, and thus, always more will be produced over time, perhaps the lesson learned this time is simple ehhhhhh we can’t run the presses at 40-1 leverage, thus we end up with one real truth on wall street, never ever fight the fed because they are trying to help you become rich…………..am I seeing this correctly?
December 6th, 2009 at 11:30 am
constantnormal,
i’m reading the link, thanks, i find it very interesting
December 6th, 2009 at 11:50 am
The objections raised here to Neo-Chartalism aka Modern Monetary Theory (MMT) have been met in numerous papers and books. It is based on stock-flow consistent macro models (See, for example, James Tobin, and also Wynne Godley & Marc Lavoie on this). Check out the publications section at http://www.levy.org, and for a simple non-technical summary, see L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (1998), which is available to read online at Google Books. Don’t jump to a conclusion that this can’t be done based on the established narrative, which is still stuck pre-1971, without investigating the argument made by professional economists working in this field. I have to admit that I was skeptical when I first heard about this but decided to check it out. I was quite pleasantly surprised at what I found.
December 6th, 2009 at 12:08 pm
Debt increases are a useful short-term strategy to get past a short-term problem, but they are never a long-term solution to anything. When a family expands their debt load to acquire a house, they are balancing that with an expectation that their incomes will grow and the load will become less over time. But when a family buys a McMansion using an ARM that resets to a payment level they have no way on Earth of managing, they are buying a future filled with pain.
I see no indication that the goobermint is making any plans to repay the debt load they are rapidly stoking, and a future filled with even greater government expenditures. Looks quite similar to the picture of the homeowner with too much house and a lethal ARM. The fact that the government can print more money begs the question (as we “print money” by issuing debt (borrowing it from the future), who will we sell our debt to, when our debt load is growing by trillions annually, and our productive capacity is shrinking, not growing?
The fact that the USD is currently the international reserve currency means that over the short term, our lenders are forced (with ever-increasing amounts of pain) to keep lending us credit (buying our debt) — but there is a point at which the pain of changing the global reserve currency is less than the pain of supporting a United States that is out of control.
When people say “annual deficits of trillions for as far as the eye can see”, that’s a pretty scary picture, especially when the rate of employment is not showing any particular response to the huge amount of deficit spending that has been thrown at it to date.
Perhaps we are throwing the money at the wrong things? In which case, if we don’t get it back, it will just as well have been burnt to heat our homes. Those of us that still have homes, at least.
December 6th, 2009 at 12:19 pm
@Tom Hickey
I take it that you find Simon Johnson, Nialls Fergusson, Joeseph Stiglitz to be merely deluded souls?
For an alternative take on economic theory, I might offer up the work of Steve Keen (http://www.debtdeflation.com/blogs/).
And this page (http://www.ianwelsh.net/what-would-be-required-for-full-employment/) makes the point that for the Fed to be able to influence employment, they need to be able to control (in addition to monetary policy) fiscal policy (ie, Congressional spending) and financial regulation (also (mostly) under Congressional control).
Maybe in a perfect world the Fed+Treasury is going to be able to pump sufficient money/credit/debt to restart the economy through sheer force of funds, but that perfect world resides in an alternate reality, not in the one we inhabit.
December 6th, 2009 at 12:24 pm
constantnormal,
The government is not borrowing at rates of 15-20%. If it was, I would agree with you, we are in a debt crisis. Instead, right now, people are willing to lend to the US government for 10 years at just 3.5% interest. That’s low. That’s HISTORICALLY low. In fact, if anything, this crisis has reinforced US government debt, as the ULTIMATE safe haven. When you listen to bearish analysts right now, where do they recommend you hold your money? US Treasuries!
If there was ever a time to borrow lots of money, it would be now. And actually we are no longer as dependent on foreign financing as we used to be. People have begun saving themselves. They put those savings in banks. Who put that money into Treasuries. So, in fact, its a myth that we are dependent on Chinese lending. However, even if we were, they are dependent on our demand, so they would never EVER stop buying our debt. They depend on us. And all this talk about creating a new reserve currency from them is just BS. If they really wanted to create a new reserve currency, just let the remnibi rise. NOOO, they don’t want that.
“and our productive capacity is shrinking, not growing”
Our productive capacity is actually far, FAR in excess of consumer demand at this point. That is why we have no risk of inflation right now. But our productive capacity could fall if we let our factories lay idle for years and years. That is one of the many arguments for why we need stimulus now.
Anyway, these arguments are very hard to make. Tom Hickey pretty much gets it and explains it as succinctly as possible, but its still not succinct enough. Because most people feel that the government budget should be like their budget. And that the rise of other countries is a threat to America just like a rise in a rival company would be a threat to your company. All these notions are wrong, but its just “common sense” and common sense is obviously always right. It’s common sense that heavy objects fall faster than light ones, and there’s absolutely nothing commonsensical about the correct answer to the Monty Hall Problem.
The whole situation is pretty depressing. I think we are quickly moving to a world of Sarah Palin and Glenn Beck. A world where blogs like The Big Picture and publications like The Economist will be seen in the same light as The Communist Manifesto. Because they DARE to say that the government can actually do something.
December 6th, 2009 at 12:30 pm
OK, I took a brief peek at the Google Books copy of L. Randall Wray’s, Understanding Modern Money: The Key to Full Employment and Price Stability (1998).
And gosh, what a revelation. So sovereign nations, by virtue of their control over their currency, do not borrow when they issue bonds, but rather they issues interest-paying “shares” on the national money supply.
So truly, there is no way that ANY sovereign nation could ever default.
But somehow that flies in the face of the well-documented history of sovereign defaults.
Chartalism strikes me as economic Scientology.
December 6th, 2009 at 12:34 pm
And lest others think me too harsh, check it out for yourselves — here is the Google Books link to the (abbreviated) tome in question: Understanding Modern Money: The Key to Full Employment and Price Stability (1998) Go to page 18, the chapter titled “Money and Taxes: The Chartalist Approach”
See how far you get before you chuck it all as nonsense.
And if you find it to be a compelling argument, please throw some actual history at it, and see whether it bounces or sticks.
December 6th, 2009 at 12:54 pm
Going off the gold standard in 1971 changed the world of economics. Prior to 1971, it was possible for a sovereign nation to default on its debts if it could not obtain enough gold to back its money creation. That is why Nixon took us off the gold standard.
Today, not only does a sovereign nation never need to default, it doesn’t even need to borrow.
The government borrows by creating unlimited quantities of T-securities out of thin air, backed only by full faith and credit, then selling them for money it created earlier. It just as easily and prudently could create money directly, also out of thin air and also backed by full faith and credit, and skip the T-security step. This would eliminate federal debt and all the misguided worries about federal debt. Federal borrowing is a relic of the gold standard days.
Debt is a problem for you, me, cities, states and corporations. The federal government is unique. Servicing debt is not a problem for the federal government, no matter what the interest rate.
I know Randy Wray. He asked me to speak at UMKC several years ago, and we have shared many ideas, since. To take a “brief peek” at what this outstanding economist has written, then come to a negative conclusion, is ludicrous.
Rodger Malcolm Mitchell
December 6th, 2009 at 12:55 pm
constant,
well, I thought I sumerised it pretty well, and glad you looked at it, as you said, bond is basically a share of money supply
I’ve never heard of the Chartalist Approach, so this is new too me…………….
I don’t see other countries as competition myself, they just have competitive advantages that they exploit like everyone else, and that acually helps the whole world imho, a better standard of living imho creates peach and prosperity.
I like explanations a twelve year old can understand, that is why I said, Central Banks are great things, you could also say soverign deft defaults are dependent on Central Banks Purity or Stability.
I also think the government can do lot’s of things, i’m not anti-government in the least, i am anti-stupid governement, like never shutting down a worthless program or having 50 divisions that do the same thing, that lobbyist big money influence certain laws…………
I also don’t fear the Sarah Palins or Glen Becks, imho, it is a rising middle class that sets the agenda, people here like ourselves trying to self-educate, too educate others……………
What I liked about constants link, is the historical perspective on soveriegn defaults going back 700 years, I have not finished it, yet, it’s obvious to me at least, that countries do in fact at times act like people become overleveraged, make bad decisions and default, and then start all over again, hopefully with learned experience.
One of the things that has irked me thru the years is the shipping off too foreign countries of manufacturing jobs, historically, well at least over the last 100 years it has been a way for the lower middle class to prosper too middle and upper middle…………..
December 6th, 2009 at 2:39 pm
The “. . . the historical perspective on sovereign defaults going back 700 years. . .” is misleading. It’s like the historical perspective of cross-ocean travel — before airlines. Everything changed in 1971, with the end of the gold standard. Now, there is no reason for the U.S. ever not to service its debts.
Rodger Malcolm Mitchell
December 6th, 2009 at 7:27 pm
Steven Keen is a Circuitist who looks at debt horizontally, pretty much passing over the vertical relationship of government and non government that Neo-Chartalism (MMT) treats in detail.
Steve recently arranged a debate with Neo-Chartalist Bill Mitchell. You can find it at http://bilbo.economicoutlook.net/blog/?page_id=1667 and searching on “In the spirit of debate.” It’s in several parts.
For a short summary of Neo-Chartalism, check out Bill Mitchell’s blog post, “Stock-Flow Consistent Macro Models,” while you are at the sitemap page cited above. There’s a wealth of other stuff there that addresses most issues specifically, like inflation, deficits, etc.
It is important to emphasize that MMT is based on national accounting, not models based on (ideological) assumptions. Therefore, MMT is value neutral and can be interpreted policy-wise either progressively, emphasizing deficit spending, or conservatively, emphasizing tax cuts. Both accomplish essentially the same thing, that is, increase net financial assets of non government. Deficits add directly and reducing taxation subtracts subtraction, and these are mathematically equivalent. Of course, spending and tax cuts can be used to do different things, even though the accounting effects are essentially the same for the same amounts. Probably most economists would recommend a mix of the two. The arguments would be over the proportion and targeting.
December 6th, 2009 at 9:07 pm
BTW, I like Steve Keen (and Michael Hudson) a lot. Steve’s Debunking Economics (2001) is a must read. I believe that it is important for ordinary folks to understand that a lot of popular economics, the stuff one reads in the media, politicians spout, and what one learns in Econ 101, is myth-based. Moreover, these myths result in ordinary folks voting against their own interests because they fall for the them as the memes of the established narrative.
If policies based on “sound money” and “fiscal responsibility” were adopted due to pre-1971 thinking, ordinary folks would suffer greatly because of it and suffer needlessly. Why did so many professional economists get it wrong? To paraphrase the words of one well-known one, we didn’t know enough about finance or sufficiently take it into consideration. Most professional economists are not acquainted with national accounting and stock-flow consistency, for example, and they were also oblivious to the effect of growing private indebtedness relative to income and assets, about which Irving Fisher had warned in his theory of debt deflation, and Hyman Minsky in the financial instability hypothesis. This isn’t new stuff. Most economists just blew it off.
So it’s important to get educated in economics as it relates to policy-making, and that means understanding how the monetary system actually operates in terms of stock-flow consistency, and how government deficits are the opposite of private debt. While it is true that this crisis was largely due to mishandling of private debt and underpricing of risk, it is not true that anything like this therefore applies to government borrowing. Government as currency issuer is simply does not constrained in the same way that currency users are.
December 7th, 2009 at 6:31 am
Tom and Roger,
I’m not saying you’re wrong, I’m saying I just don’t get it, ie, you’re point of view is hard to comprehend, when there seems to be only pluses no minuses.
Many countries have defaulted since 1971. And economist not seeing it, getting it, as a small businessman I saw it, it was pretty clear to me, income did not support debt, certain prices had gone too far, this was all just common sense.
If we the public are the government, the point of view will be of a person will be projected to how the government should act, cause in essence it is just people.
December 7th, 2009 at 8:50 am
Torrie-amos, if you truly want to be able to comprehend it, go here: http://mosler2012.com/wp-content/uploads/2009/03/7deadly.pdf This is a brilliantly simplified explanation by an outstanding economist, Warren Mosler.
His logical, intuitive examples demonstrate why income does not support debt for major, sovereign nations. Like Randy Wray, Warren is an acquaintance of mine, but don’t hold that against him!
Rodger Malcolm Mitchell
December 7th, 2009 at 9:12 am
By the way, (and with all due modesty) I think I’ve summarized the main implications of neo-chartalism pretty well at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ and with other posts at this site. Check it out and let me know if you have any questions/disagreements.
Rodger Malcolm Mitchell
December 7th, 2009 at 9:27 am
I did check out you’re site even before i asked questions, thus my questions, i’m in skeptic mode right now, lol, but i’m open enough as a part time teacher to learn new things and have old views shattered.
December 7th, 2009 at 10:02 am
Read Warren Mosler’s paper that I mentioned above. I beg people to read it. It’s simple. No complicated academese. Sadly, most people people would rather rely on lazy intuition that expend the ten-minute effort to learn something. Torrie-amos, as a teacher, you know what I’m talking about.
Hey! I wonder whether Warren is sending people to my site. I’ll have to ask him.
Rodger Malcolm Mitchell
December 7th, 2009 at 10:23 am
well, Rodger, I just read it, and it is like you say simple and succint, now my job is to understand it, i’m an engineer by training, so it’s kind of like i proposed ealier, we are in a closed system a person is considered capital which will generate some value,
let me ask this question, what is the balance for government employee’s or government programs, taken to a certain extent, one could say this is a socialist or communistic theory, whereas I’m not saying that, it could be taken to that conclusion
in summary, the system we have is correct, the things they are doing is correct, and every now and then shyte happens along the way………………40-1 leverage was not a good idea and too much money went into unproductive area’s…………………..and now we clear as much as we can as fast as we can and start over
thanks for the links and helping to explain the theory, torrie
December 7th, 2009 at 1:50 pm
The issue of why the crisis happened is explicable in non-MMT terms, that is, in terms of non-government debt ratio and quality, as well as the size and influence of the big financial institutions. The issue is what to do after the financial crisis struck and spread to the real economy, resulting in a huge output gap and massive unemployment. The financial losses and human suffering aside (and that’s obviously a big aside), the real loss associated with an output gap of 30% relative to the economy operating at full capacity is enormous, and the real losses engendered by unemployment and unemployment are also huge. The total dollar value of lost opportunity will undoubtedly run into the trillions before this is over.
If the government had an understanding of MMT, it could have acted quickly to close the output gap and limit unemployment by increasing aggregate demand through fiscal policy, instead of trying to bail out the fools that created the mess through monetary policy that had little effect on the real economy and only served to reflate asset prices that were already too high relative to incomes, instead of letting them stabilize at realistic levels.
This is not “socialistic” or “communistic.” That’s just libertarian propaganda, and it’s dumb. If the libertarians had their way, the US would revert to Dickensian times. The economically efficient way to deal with output gaps is to increase aggregate demand through fiscal policy that fills in for the public’s increased desire to save, which reduces the funds available to purchase all the goods and services that would be available at full capacity, especially when the country is running a CAD, which means that it is importing more than exporting. This contributes to the gap also.
The government is instead trying to reflate asset prices to make bad debts held by the banks whole, and to increase exports. It’s strategy is to drive the value of the dollar down, which is dangerous, because it is also leading to an increase in the cost of imported energy. This strategy is all about rescuing the top echelon, and letting the rest of the country bear the brunt. MMT has a better answer — better that is for both the real economy and working people. Right now, we are just seeing an extension of crony capitalism, and the people calling for “fiscal responsibility” are acting against their own interests out of ignorance of how the economy operates. The government is not like a household or firm, so applying the principles used in household finance to government is a mistake, and it’s just making room for more crony capitalism at the top.
BTW, banks do not lend against reserves, they lend against capital. Bear Sterns and Lehman were not commercial banks and had zero deposits. They went under because they imprudently leveraged their capital as investment banks.
December 7th, 2009 at 3:05 pm
Tom,
thanks for taking the time to answer, again I am TRYING to understand
if I understand you correctly, the theory of central banks and federal reserve in theory is the correct and sound way to do things, ie, which is why we’ve been doing it for almost 100 years
it seems we agree on what happened, high leverage, bad investments, not many controls, which they could have done alot better at
so, going forward, it is not correct to hammer on the system, yet, the general public is correct in that crony capitalism is rampant, you see, if they see and hear this one, they believe what else they believe is correct, ie, the fed is bad, whether right or wrong it is how folks think
i also, agree and my huge fear, is years of cheap energy and ben says no inflation, yet, you can see the easy money has just gone back into commodities, and once oil goes above 100 your average person or business there balance sheets get out of whack again
like i said, i read the links and others, and while I can’t say, i total get the theory of each myth, I do have a better understanding of the other side, and I do believe I understand why you folks say at this point soverign default is not possible
Here’s where perhaps my ignorance shows, you talk of the Gap, and I get that, yet, in my way of thinking, costs of goods, ie, commodities have a direct impact on the gap, especially when it comes to what someone has projected for the costs of such items for x amount of years
I also believe it would be nice if Gaps are filled by things of value as opposed to keep busy work
My whole theory on the thing whether right or wrong, is that it’s all about keeping prices of homes as high as possible, because that effects states and counties with real estate taxes, and these folks after two decades of bond leverage are in deep hurt with future costs of maintenance and pensions, and the basic costs of providing services…………….so, its all a gambit to keep home prices up, i guess each person in there own way see’s a certain gambit they do not like
either way, i know how much time it takes to educate and answer stuff, so i’m most gratefull
December 7th, 2009 at 3:09 pm
Or put simply, recession is a symptom of a per capita money shortage. [Every recession in the past 50 years has come on the heels of decreased deficit growth, and every recovery has come during increased deficit growth]
The cure for a money shortage is to add money, which the federal government does through deficit spending.
There is nothing wrong with pumping money into the banks. The real problem was not so much where the money went, but rather how much money was pumped in. Had the government given Tom Hickey something like $5 trillion last year, the recession would have ended by now.
No matter what Tom would have done with that money, it would have acted as a powerful stimulant.
Rodger Malcolm Mitchell
December 8th, 2009 at 6:30 am
Well, I see a recession as Lack of Sales, i believe in growth in sales leads to growth in profits, you have a lack of sales when prices are too high, or value or a product detiorates, there is less and less benefits too ownership of the product………..or your market is saturated, you reach the top of the S curve.
140 oil broke the economy imho because you’re average family was paying 5k more per year for gas versus other stuff
I bookmarked your sight, and I will put more time effort and energy into studying it.
thanks again
December 8th, 2009 at 8:34 am
In a recession, there is a lack of overall sales, which is a symptom of an overall money shortage. I maintain two sites. The blog is at http://www.rodgermitchell.com and another at http://rodgermmitchell.wordpress.com.
Rodger Malcolm Mitchell