51% Predict U.S. Government Will Go Bankrupt Before Budget Is Balanced

Just over half of U.S. voters are still skeptical that their elected officials will get the federal budget under control before it’s too late.

A new Rasmussen Reports national telephone survey finds that 51% of Likely Voters believe the federal government will go bankrupt and be unable to pay its debt before the federal budget is balanced. Thirty-six percent (36%) disagree and think it’s more likely that the federal budget will be balanced first. Thirteen percent (13%) are not sure. (To see survey question wording, click here.)

100 Responses

  1. Huh? Nobody suggested the gov can’t go broke? Guess that means we will see some serious spending cuts or tax increases. My bet is cuts to SSMM programs. Nice excuse for both parties to agree on something and race to the bottom. Bet we all know which side of the solution both candidates will be on. Bipartisan solution? Play out in upcoming debt limit crisis? May not matter, we will all pay.

    1. @Jonf, http://www.businessinsider.com/the-majority-of-the-unemployed-have-some-college-education-2012-5?utm_source=readme&utm_medium=rightrail&utm_term=&utm_content=4&utm_campaign=recirc

      Well there goes the myth that a college degree will get you a job! If warren’s job gaurantee type initiative isn’t adopted soon, it’s just beyond comment at the wasted economic output our leaders have squandered, time for the colins of the world to quit depending on others and get up from behind the keyboard and start doing something about it themselves personally. Lots of things out there for bored humans to do, they need to start organizing at the grass roots level and doing them, quit waiting for the government to give them the incentive or authority to do it. Government has failed the people as Warren points out time and time again!

  2. I feel a slogan coming on. “We are the 51%”

    I guess we should be optimistic that it wasn’t 99%?

    Or maybe the other 48% think we’ll go bankrupt soon after?

    1. @roger erickson, Roger, 36% say we need to balance, so in total that is about 90% that are on the wrong side of the trade eh? And the rest are not sure. I don’t like a lot of these surveys anways, they are ed bernays propoganda garbage and structed in a way that gaurantees certain responses to influence general opinion.


      Your friends in Washington DC should be proud of this Roger, it has bi-partisan support too!

      It pains me to say this Warren, but your efforts to educate joe 6 pack about this “solvency” issue has failed so far it seems. Why don’t we discuss why it has failed, what can be done to better educate joe 6 pack, like some poster here just said about free-trade versus fair-trade – the public seems to confuse a solvency issue with a purchasing power issue.

      As Greenspan often said and as you often quoted warren, he can print all the dollars congress wants, but he can’t gaurantee thier purchasing power.

      1. @Save America, how about billboards or bumper stickers “Clinton’s surplus caused Bush’s first Ressesion that’s what surpluses and balanced budgets do”

      2. @Charles Yaker,

        I kinda liked “We don’t owe China anything but a bank statement”.

        or how about:

        “If you want the US to balance it’s budget, you want the Federal Gov’t to take your savings away.”

  3. Well, hopefully we will never balance our budget again. And we won’t go bankrupt either. So it makes no sense to ask which will occur before the other.

  4. I actually think the respondents are being quite rational.

    I’m almost 50. All of my adult life, I’ve heard about fears over how “the deficit” (as ‘the debt” used to be called) was going to be the ruin of us all. People have probably internalized that the budget will never be balanced over the long term.

    What they have not been educated about is that the govt. is not like you and me and can create all the money it wants. In fact, they have been mis-educated that creating that money would cause inflation. Thus they realize that a sustained budget balance is impossible, but believe the can just keeps getting kicked down the road. Look at how there has been no popular uprising about the mortgage crisis, nobody put in jail, etc.

  5. The dollar in its role as world reserve currency is the source of Washington’s power. It allows Washington to control the international payments system and to exclude from the financial system those countries that do not do Washington’s bidding. It allows Washington to print money with which to pay its bills and to purchase the cooperation of foreign governments or to fund opposition within those countries whose governments Washington is unable to purchase, such as Iran, Russia, and China. If the dollar was not the world reserve currency and actually reflected its true depreciated value from the mounting US debt and running of the printing press, Washington’s power would be dramatically curtailed.

    The US dollar has come close to its demise several times recently. In 2011 the dollar’s value fall as low as 72 Swiss cents. Investors seeking safety for the value of their money flooded into Swiss francs, pushing the value of the franc so high that Switzerland’s exports began to suffer. The Swiss government responded to the inflow of dollars and euros seeking refuge in the franc by declaring that it would in the future print new francs to offset the inflows of foreign currency in order to prevent the rise in the value of the franc. In other words, currency flight from the US and Europe forced the Swiss to inflate in order to prevent the continuous rise in the exchange value of the Swiss currency…

    Last year gold and silver were rapidly rising in price (measured in US dollars), with gold hitting $1,900 an ounce and on its way to $2,000 when suddenly short sales began dominating the bullion markets. The naked shorts of gold and silver bullion succeeded in driving the price of gold down $350 per ounce from its peak. Many informed observers believe that the reason Washington has not prosecuted the banksters for their known financial crimes is that the banksters serve as an auxiliary to Washington by protecting the value of the dollar by shorting bullion and rival currencies…

    With an eye on the approaching dollar crisis, which will wreck the international financial system, the presidents of China, Russia, Brazil, South Africa, and the prime minister of India met last month to discuss forming a new bank that would shield their economies and commerce from mistakes made by Washington and the European Union. The five countries, known as the BRICS, intend to settle their trade with one another in their own currencies and cease relying on the dollar. The fact that Russia, the two Asian giants, and the largest economies in Africa and South America are leaving the dollar’s orbit sends a powerful message of lack of confidence in Washington’s handling of financial matters.


      1. it still affects their trade picture whether they know it or not

        and not to be confused with portfolio managers deciding which currencies best serve their clients

      2. @MamMoTh, Much more accurate to say that the source of our success is simply our initiative to explore a greater range of the options that all populations have.

        “HOW” we manage to get ourselves to explore them, faster than other countries, is entirely outside economics … and is the topic of a more open culture & economy.

        Never forget that currency & economics only denominate & track what an agile electorate chooses to do, not how.

      3. @WARREN MOSLER, Right, bingo Warren, all these people are so against the USA, they paint all our efforts as evil and ugly, china powerbrokers (and others) have to keep the idle hands busy or they will have mass chaos on thier hands, if anything having us as consumers of thier workers excess output is keeping the world more stable than it otherwise would be. You have harped on this point for so many years and many people still can’t get it.

        Some local group is starting this Agenda 21 conferences, saying the world masters of the universe are no longer creative enough to figure out how to employ 8 billion people to keep the idle hands busy so now they are going the other route, reducing the supply of humans by a few billion, what a lack of vision and leadership, I thought our masters of the universe could be a little more creative in figuring out how to put idle hands to use, pathetic.

      4. @Save America, A few billion people cannot be ruled by “masters” if those people simply refuse to be ruled. Some hedge fund guy named Gandhi said that.

        “Success follows quality [& pace] of distributed decision-making. We generate pace by distributing decision-making.”
        US Marine Corp.

        ergo, a population with distributed members capable of making quality decisions tracks education, training & above all else … practice.

        We’re in danger of letting our “masters” throw out our babies with the bath.

      5. @Save America, “refuse to be ruled.”

        I watched braveheart, but mel gibson wasn’t facing predator drones with missles attached, nukular subs, CIA jackals, asian cyberwarriors and he got his entrails ripped out with a lot less technology and intelligence. Robert the bruce sold him out, his best friend.

        How do 1 billion starving to death africans look up at china and western europe and america (who all want thier resources, food, minerals, etc etc) and say FU guys, we refuse to be ruled by you!? If they do that the chinese engineered predator drone send in isreali missle with brazilian software code and russian fuel to blow up the whole village.

    1. @Lisa, “Washington is unable to purchase, such as Iran, Russia, and China.”

      As Warren just said in Italy, Obama went to China with hat in hand begging. Who are the REAL masters of the universe Lisa? Do you really think Obama and Summers and a few others are the shot callers? That they aren’t the puppets of a larger more global force that is made up of greedy people of all races and colors?

      Warren says currencies can float against each other to fix these imbalances in a fiat floating FX world, and everyday I wake up and china proves him wrong again and again with its peg.

      Lisa, I don’t fear the government in washington or the chinese government nearly as much as I fear the real power who has puppets in both those governments and many other governments throughout the world. Frankly I am sick and tired of the stupid propoganda trying to paint USA as the evil of all the world, not realizing it is the kleptocrats worldwide who have corrupted all the governments, but tom hickey assures me that worldwide these boyz will blow themselves up and a new order will rise from the ashes.

      At least in the USA I can criticize anyone and everyone and I haven’t been shot yet, there are some places in the world you can’t do that 😉

    2. @Lisa, What a silly comment. Lisa…explain to me why the yen has appreciated while their economy has experienced no growth and their budget deficits have exploded. Shouldn’t they be dead by now since they’re not the reserve currency?

    3. @Lisa,

      I agree that reserve currency is mainly a great political asset allowing for manual control of the banking sector almost everywhere in the world. Because of that the most severe sanction against Iran imposed so far is cutting their central bank off from the international system. Without USD as the reserve currency this could not be possible.

      The dollar hegemony was also used by the American administration and the IMF as a tool to bully the South American countries.

      The fact that the special status of USD allows to run greater CA deficits is not so important in that context and it is a “mixed blessing”.

      Another aspect of Dollar hegemony is not the domination of the US government but rather Wall Street. They “invest” money they lend and then milk profits from the countries all over the world – very real profits I dare to say.

      Yet another aspect is the preservation of the current irrational global pricing structure. Commodities even these we are running out at the global scale are dirt cheap but songs recorded by American or British celebrity drug addicts still sell at very high prices. Because they are “American” or “British”. The same applies to some consumer electronics products. This is purely psychological.

      Regarding capital flight – mentioned in another thread – I again respectfully disagree with Warren. What happened in 1989 in Poland was that saving propensity in Old Polish Zlotys was close to zero because of the initial acceleration of inflation caused by dismantling price controls in 1988/89. Whoever had any savings (the so-called inflationary overhang had existed before) tried to change them into USD/DEM so that they didn’t lose their value. Since the country didn’t have a massive trade surplus, there was a glut of buyers and a few sellers of foreign currencies. NB transactions in foreign currency were to some extent illegal before 1988/89.

      The interaction described above created a positive feedback loop leading to hyperinflation as rising prices of imported commodities filtered through the production process and resulted in higher prices of locally manufactured products. That in turn led to pressure on wages.

      Just because the existence of the historic phenomenon described above could not be deduced from the first principles of the Chartalist theory doesn’t mean that it didn’t exist. The theory must be extended to include cases when multiple currencies are used in the same country and inflation develops.

      I dare to say that the open threat to dismantle the global dollar hegemony made by some BRICS countries and the risk of capital flight leading to a massive adjustment of exchange rates is the most important hidden reason why the American leadership talks about austerity and abstains from stimulating the economy. This is the most serious real obstacle for implementing the MMT-inspired policies.

      (Yes I have read the book. But, respectfully, the majority of people involved in this debate haven’t lived in a country experiencing a bout of hyperinflation and capital flight.)

      1. @Adam (ak),

        (Yes I have read the book. But, respectfully, the majority of people involved in this debate haven’t lived in a country experiencing a bout of hyperinflation and capital flight.)


      2. @MamMoTh, You’re assuming our lobbyists & policy staff actually know what they’re doing.

        Show me any evidence of that. You can get the same outcomes simply through massive ignorance & stupidity. A foolish population & their options are soon parted.

      3. @Adam (ak),

        What’s missing in the chartalist theory is that the government cannot impose what kind of NFAs the private sector wants to save, and has no monopoly on saved NFAs.

      4. @MamMoTh,
        This is an excellent point. A democratic government cannot. An autocratic government may attempt to and in some cases this works quite well.

        NB the stability of the financial system in a free market economy in regards to prices depends primarily on the volumes of financial flows (dM/dt) but the total size of the stocks of savings (the broadest measure of financial assets including money and government securities, not the stock of net financial assets) is what determines the size of the disruption should the inflationary spiral start creeping on. This can also happen if there is a speculative attack on the currency.

        As long as Central Bank supplies reserves on demand to the commercial banks, bank deposits are as good as coins or bank notes.

      5. it directly controls actual nominal savings, but not savings desires, though it has pretty good indirect influence, like tax advantages for not spending income, etc.

      6. @Adam (ak),

        There’s MMT literature on capital flight and hyperinflation as well as accurate, otherwise orthodox material on it. I don’t see the conflict with MMT.

      7. there are probably brief discussions somewhere in the mandatory readings and elsewhere on this website.
        there isn’t much to talk about because there is no such thing with non convertible currency/floating fx.
        and with fixed fx it’s easy- people ‘cash in’ the convertible currency for the gov’s reserves.

      8. @I’llHaveADouble,

        there are probably brief discussions somewhere in the mandatory readings and elsewhere on this website.

        I think this thread shows that’s not enough.

        there isn’t much to talk about because there is no such thing with non convertible currency/floating fx.

        So what is it if not capital flight when a country like Argentina loses its dollars that move to another country?

      9. Correct. Argentina’s dollars are in it’s fed account, directly or indirectly.
        ‘losing’ them means they go to someone else’s fed account

      10. iran has been cut off from using non dollars as well. it’s all because all currencies have ‘member banks’ that are functionally and necessarily extensions of their CB’s spread sheet.

        yes, propensities to save can shift and cause currency prices to adjust. it’s that i don’t call that capital flight and what others call capital flight applied and still applies only to fixed fx regimes. I was trying to straighten out the semantics.

        The ‘inflation’ in Poland was caused by running govt. deficits that were too large for the savings desires, which circumstances caused to go negative. holding the currency steady probably would have required a govt. surplus.

        But inflation is a continuous process and not a one time shift. A relative value story turns into an inflation story when the govt of issue decides to continuously pay more for the same thing, which I agree can make good political sense to do. But when it doesn’t make political sense the govt policy can be altered.

      11. @WARREN MOSLER,

        “The ‘inflation’ in Poland was caused by running govt. deficits that were too large for the savings desires, which circumstances caused to go negative”

        Sorry, Warren, but this is plain wrong.

        I, as Adam (ak), lived in the similar environment. Inflation was caused by savings desires which have dramatically changed to which economy was not able to respond which triggered a positive feedback loop. It is about PREVIOUS budget deficits which ALWAYS represent latent real or financial (e.g. through fx-rate) demand in the economy and which trigger the loop. It is NOT about current running deficits.

        This has happened in many places floating fx-rate or fixed notwithstanding. To say that they forgot to increase taxes is equivalent to saying that they forgot to “nationalize” those savings. Well, one way or the other the savings are “nationalized” anyway but the process is ugly in both cases.

      12. please further explain ‘positive feedback loop’ thanks.
        sounds like the institutional structure I referenced that turns a relative value story into an inflation story?

      13. ” Inflation was caused by savings desires which have dramatically changed to which economy was not able to respond which triggered a positive feedback loop.”

        That’s a failure of the automatic stabiliser design to dampen sufficiently and prevent a cascade effect.

        We haven’t taken the evidence from these events and improved the design of the stabiliser system. Practically all the world’s stabiliser functions are based on 1930s experiences.

      14. @WARREN MOSLER,

        Yes the explanation that excessive government spending played a predominant role is true however in these circumstances the government could not have done anything else. In Poland there were serious political constraints initially because of the meddling of the Soviet Union (trying to reinforce the communist orthodoxy – while in China Deng Xiaoping started his successful experiments) and later because of the centrifugal forces pulling apart the collapsing communist economy. Then the desire to destroy the old system and rebuild the capitalist economy from scratch ASAP (before the ailing Soviets could object) prevailed.

        I think that prof Kolodko made in 1991 a few interesting observations and put the whole process in the wider context:


        “A specific feature of inflation in the socialist economy has been its duality. This consists in the simultaneous appearance of open and repressed inflation. While the former, in socialist economies typically finds expression in the rise of the general price level, the latter finds expression in shortages, equally typical of socialist economies. This phenomenon – known as shortage-flation (…) – has specific implications for stabilisation policy, since not only price stabilisation, but also the elimination of shortages must be sought during its implementation. So the problem is more complex than in market-type economies where shortages do not appear.”

        “The steady worsening of the situation in the latter half of the 1980s found its expression, among other things, in a deepening economic disequilibrium which affected practically all sectors of the economy. In spite of the ever higher inflation rate, disequilibrium grew in the goods and consumption services markets. In this case we were dealing with both a disequilibrium of flows (the inflationary gap opened being “filled” ex post by the increment in compulsory household savings) and a resource disequilibrium in the shape of the so-called inflationary overhang i.e. resources reflecting the excess liquidity of the household sector at
        the given time (with the given real supply, demand and price levels).”
        In a similar state of pronounced disequilibrium were the investment and labour
        sectors. In both these areas, too, a surplus demand typical of the socialist economy existed
        which -in the face of the lack of efficient market allocation- could not be balanced by the
        available supply of means of production.”

        “The economic disequilibrium had its external dimension too. Polish foreign debt in convertible currencies doubled in the 1980s. It grew from about US$ 20bn in 1980 to more
        than US$ 41bn at the end of 1988, and this in spite of repayments which amounted to about US$ 20bn over this period. It must be stressed that this was possible owing to a sustained trade balance surplus between 1982 and 1989 as well as to the positive transfer balance. At the same time however, the positive trade balance exerted an inflationary pressure.”

        “For many years, the Polish economy was practically a two-currency economy and the US dollar still plays a very important role, especially with respect to households. They still keep (at the present exchange rate) more than half their money balances in hard currency. So the scope of currency substitution is still very wide. A specific feature of the economic and financial system was the extreme, rarely encountered difference between the market price of the dollar (until March 1989 i.e. the start of the exchange rate liberalisation policy it was a black market price) and the official one. On the long-term average their ratio was usually 4-5:1.”

        The government could not “decide” when the system was collapsing and IMF is applying enough pressure to a country which is bankrupt and cannot source foreign currencies to import commodities and capital goods needed to sustain production processes. This is the whole point. The process of dolarisation of the economy is actually a severe symptom of capital flight.

        Please be aware that Poland circa 1987 was still a kind of communist authoritarian country. The government tried very hard to impose certain things on the people – also to mould economic processes. And it failed miserably – not because there were too few members of the communist party and secret service agents but precisely because there were too many.

        Let me also comment on the following statement:
        “it [the government] directly controls actual nominal savings, but not savings desires, though it has pretty good indirect influence, like tax advantages for not spending income, etc.”

        I would like to clarify. The government can control actual nominal NET savings, not overall savings. The increase in the amount of financial assets (saving) in a healthy growing economy depends on the budget position, current account position but also on the level of investment and consumption financed by the banking sector. It is well known that the CB can control either the stock of money (and risk bank runs or other instability) or interest rates – but not both.

      15. pretty much reinforces all the points I’ve been making on this website.

        shortages in the first instance are a relative value story, and ‘throwing more money at them’ turns it into an inflation story.

        and the govt doesn’t need to import anything to ‘sustain the productive economy’ that ‘the economy’ can’t do if the ‘demand’ is there.

        agreed, as previously discussed, that sometimes, politically, that’s the optimal policy response.

        as for the last part, better said that the cb can’t control quantity without pegging the exchange rate.

      16. @WARREN MOSLER,

        Neil: That’s a failure of the automatic stabiliser design to dampen sufficiently and prevent a cascade effect.

        Well, Neil, I am far from sure that you can make stabilisers reacting fast enough when a potential shock to demand goes to say 10% of GDP and growing in a snowball-like fashion. It is not just about absorbing the previously accumulated stock of savings via taxes but also about the dramatically increased velocity of money. Those bubble-like processes can really be explosive until they collapse often burying a very decent part of the economy with them. Such things most likely require exclusive and dedicated action which is, almost by definition, always too little to late.

      17. “when a potential shock to demand goes to say 10% of GDP and growing in a snowball-like fashion”

        As the Irish would say: it is best not to start from here.

        Outlier shocks are handle by reset processes, and you make sure that your buffers are big enough to reduce the occurrence of outliers to the minimum. If your buffers exhaust despite everything, then you activate the reset.

        What is bad policy is setting everything up in fear of outliers. They rarely occur and with good policy they should occur even less often.

      18. @WARREN MOSLER,

        “They rarely occur and with good policy they should occur even less often.”

        Maybe. I never said that they should always occur. But what is a good policy?

        This is something MMT never discusses because all discussions end in a “read 7dif” like manner which is a couple of steps before interesting questions start popping up.

      19. @WARREN MOSLER,

        Let me clarify my position about capital flight (also reconcile with some points made in http://www.concertedaction.com/2012/05/22/mosler-and-his-moslerisms/ )

        Capital flight is defined as “assets or money flowing out of country” (wikipedia).

        I agree that in the narrow sense used in the Warren’s speech capital flight cannot occur in the post-gold standard era if certain preconditions such as a rigid exchange rate with full convertibility or presence of the debt denominated in foreign currency are not met.

        We need to determine whether any of these conditions is met in the real life or not. It is true that they are currently not met in the USA. The Americans can sleep well – for now.

        If this is true as is the case in many developing and a few developed and currently retarding countries – nothing has changed from the gold standard era I am afraid.

        Let’s assume that there are 2 countries A and B trading in American Dollars and that there is a persistent current account imbalance leading to the following situation: A as a country is indebted in B for $100bln. If citizens of B want to repatriate their assets from the banks in A (the debt is denominated in USD) – how does this differ from the situation when gold rather than dollar was used as a common denominator? If the central bank in A doesn’t have enough reserves and nobody wants to lend dollars – not only the exchange rate is affected but the banks in A have lost their liquidity in USD.

        The key distinction is whether debt is denominated in a foreign currency or can be converted to that currency. If there are no capital flow restrictions, any domestic debt (deposits) can be potentially re-denominated in foreign currency.

        Even if this is not the case, if banks do not clear the fx transactions instantly and there is a compounded imbalance – foreign debt denominated in foreign currencies is accumulated by the banking sector as presented in Ramanan’s blog. Can this be avoided? Perhaps but not in the current global paradigm. Everyone wants to have a little free lunch – until it’s too late.

        Foreign-denominated debt can be hedged but hedging with cross-currency interest rate swaps may not work if there is a systemic liquidity issue.

        “Australian entities used forward foreign exchange contracts and cross-currency interest rate swaps as their main hedging instruments” (see RBA’s paper “AUSTRALIA’S FOREIGN CURRENCY
        EXPOSURE AND HEDGING PRACTICES” by Chris Becker, Guy Debelle and Daniel Fabbro, 2005)

        Even if the conditions are not met there is a potential issue of exchange rate stability.

        From RBA’s Ric Battellino’s speech “Aspects of Australia’s Finances”

        “For emerging markets, this measure has been shown to have some association with vulnerability to balance of payments crises. This is because emerging market economies often have a fixed or managed exchange rate and their foreign liabilities tend to be denominated in foreign currency, rather than domestic currency. In such instances a rise in the ratio of foreign liabilities to GDP does indicate increased vulnerability as it signals an increase in the country’s foreign exchange risk and liquidity risk.

        For developed economies with a floating exchange rate and the capacity to borrow offshore in their own currency, the risk from rising foreign liabilities is not that they will cause a traditional balance of payments crisis, but that they will undermine financial stability.”

        In our Polish case (1988-1990) capital flight in the broad sense manifested itself by the existence of the parallel monetary system based on hard currencies. We were paid in PLZ but used to change them into USD/DEM immediately or tried to offload money by purchasing whatever was available on the market. The banks did not change money at the official exchange rate as capital controls were still in place. One could change money at the market rate in hundreds of “kantory” (money change counters) which appeared in every city or town. The USD bank notes were held in Poland and were owned by Polish citizens but they were parts of the American monetary system as liabilities of the Fed rather than Narodowy Bank Polski.

        This was not a sign of the stability of the Polish financial system.

      20. thanks, making my points again, much appreciated!

        note, though, that the idea of a govt borrowing it’s own floating fx currency offshore is inapplicable.
        close examination shows that govt in fact spends first, adding clearing balances to accounts at its cb,
        then ‘borrows’ which is nothing more than shifting those clearing balances to securities accounts also at its cb.
        aka a simple ‘reserve drain, etc.

      21. @WARREN MOSLER,


        It is certainly undesirable for a parallel currency system to develop. That essentially puts a significant part of the domestic economy into a situation akin to a Eurozone country without the corresponding political representation and legal benefits, or even a gold standard.

        The question is why such a parallel system develops. I suspect it’s because the taxing authority does not have credibility. I don’t know what happened in Poland specifically but in most emerging market countries, tax collection is a big problem. This creates a vicious cycle where the government inflates instead, which further undermines confidence in the currency and drives more economic activity to the parallel regime, which then makes tax collection even more difficult.

        This could happen in any country of course, but it is least likely to happen in places like Japan, Germany, the UK, and the US where both the rule of law and confidence in the country is strong.

        This brings up another point I wanted to make in response to our resident conspiracy theorists. The US dollar is the reserve currency BECAUSE the US is a strong stable country, with a relatively free market in which the government will allow its residents to make their own decisions about importing and exporting. The conspiracy theorists have causality reversed. If the US was not willing to allow its residents to run huge trade deficits, the US dollar would not be the reserve currency.

      22. Sorry, but I don’t see why a govt. would care what other currencies were being used.
        all the govt cares about is being able to provision itself which it does by taxing to create that much nominal demand for its currency and then buying what it wants as it supplies the funds to pay that tax and meet any residual savings desires.

      23. @WARREN MOSLER,

        it directly controls actual nominal savings, but not savings desires, though it has pretty good indirect influence, like tax advantages for not spending income, etc.

        Government only controls nominal savings corresponding to its liabilities. It doesn’t control savings in fx, gold, shares, etc.

      24. @WARREN MOSLER,

        Warren: “please further explain ‘positive feedback loop’ thanks.”

        aka hot potato. Spending out of savings (or new debt) leads to ever more spending out of savings (or new debt) on the expectations of further fall of the exchange rate or further rises of prices

      25. spending out of savings can drive up imported prices via fx depreciation, but that’s a relative value shift, and one time adjustment that runs its course when the ‘savings’ is ‘used up’

        unless govt contributes to the process with ongoing spending that pays higher prices for domestic goods and services and/or conducts deficit spending that exceeds savings desires as evidenced by the higher prices the govt pays.

      26. @WARREN MOSLER,

        Warren: spending out of savings can drive up imported prices via fx depreciation, but that’s a relative value shift, and one time adjustment that runs its course when the ‘savings’ is ‘used up’

        There is no such thing as savings being used up and thus causing spending to stop. For one thing bank balance sheets always have to balance as well. Government savings is just one component of the spending machine while central bank always ensures there is enough liquidity.

        And besides that the relative value adjustment being a one time adjustment is a political position of an inter-generational transfer. All MMTers seem to be unconditionally in favour of such transfers presenting that is an universal and objective truth. So far I got no response as to where MMTers find justification for such claims.

      27. @WARREN MOSLER,

        Thank you for your response. Let me clarify further – it was prof Kolodko who was borrowing domestic currency from overseas not me.

        The key issue to analyse the potential system stability issues is the existence of deposits denominated in the local currency which can be freely exchanged into a foreign currency. The presence of the foreign debt denominated in foreign currencies and not properly hedged poses an immediate risk of liquidity issues if there is a financial crisis.

        However even if there is very little of foreign debt denominated in foreign currencies, sticking with the free capital flow principles for too long may lead to a disaster.

        The most of these deposits have been created by the banking sector by the endogenous money creation process.

        If we look at
        Mar 2012 (data in bln AUD)
        currency = 49.9
        current deposits with banks = 218.2
        M1 = 268.0
        if we include other forms of deposits
        M3 = 1433.1
        broad money = 1451.7
        This still excludes other forms of liquid financial assets such as long-term government debt.

        What I want to show is that we should not concentrate on the net size of the government debt denominated in local currency. This is rather irrelevant. What matters from the system stability point of view is the total size of the stock of all financial assets. In certain circumstances economic agents may panic and want to change local currency into a foreign currency – but they obviously cannot destroy local currency denominated assets by doing so. We can also imagine an deliberate attack on a currency.

        If this desire during a stampede is initially accommodated and the government / central bank gets involved – we end up having a bankrupt country begging on its knees the IMF to lend some hard stuff.

        The size of the stock of financial assets determines the absolute volume of a flow generated when a certain percentage of agents want to change the currency. If that flow is small compared with the volumes flowing due to normal trading related with import-export, the disruption of the exchange rate is limited and liquidity issues unlikely.

        A very good example what can go wrong and how the problems can be fixed by implementing non-orthodox economic policies is what happened in Malaysia in 1998/99.

        I know that the reference frame of the a-priori government budgetary constraint and bank deposit re-lending is used in the following text but this is really irrelevant as unrestricted currency emission by the Malaysian government during that period would have made things only worse, not better. I hope that we all can read between the lines and concentrate on facts.


        “The Malaysian economy and finances were very sound prior to the July 1997 attack on the ringgit. We had good reserves and very little foreign debt either by the Government or the private sector.

        There really was no reason why the currency should have become weak.

        But the currency traders, in their quest for big profits, borrowed the ringgit and sold it down repeatedly, thus devaluing it greatly.

        This meant our wealth was halved in terms of purchasing imported goods. Inflation set in, and people found difficulty in making ends meet.

        To make matters worse, the foreign investors in the stock market began to dump their shares and to short-sell.”

        “Between the depreciation of the ringgit and the severe fall in share prices, the companies and the banks rapidly deteriorated and were bankrupted or became nearly so.

        The Government, too, faced revenue shortfalls as businesses were unable to make any profit and could pay no tax.

        Clearly the country’s economy would have collapsed completely if the currency had continued to depreciate and the share prices remained very low.

        To prevent this it was imperative for the Government to regain control of the exchange rate of the ringgit and to stop CLOB from destroying the Malaysian share market any further.

        To devalue the ringgit the traders had to borrow and sell it. Singapore offered high interest rates so as to lure the ringgit to Singapore where it was lent to the currency traders.

        The Malaysian banks found themselves without money to lend.

        To stop this outflow of the currency, the Government decreed that if within one month the offshore ringgit in whatever form was not repatriated to Malaysia it would not be allowed to be brought back at all.

        Effectively this rendered offshore ringgit worthless after one month.

        This forced all offshore ringgits to be repatriated within one month, leaving nothing for the traders to borrow and manipulate.

        Trading in ringgit ceased and the Government was able to fix and stabilise the exchange rate at RM3.80 to US$1.

        As for CLOB and the short-selling activities, this was stopped by abolishing the right of nominee companies to hold the shares of their clients.

        Since all sales of shares must be registered with the KLSE in the name of the shareholders and sales outside the KLSE are not recognised the business of CLOB stopped.

        Short-selling of borrowed shares held by the nominee companies could no longer be done and manipulation of share prices ceased.

        The net result was stability of exchange rates and a rise in share prices on the KLSE. The forced repatriation of funds from Singapore resulted in more money being available for loans.

        It was therefore possible to lower the interest rates to stimulate consumption and business activities.

        Many other measures were taken such as setting up an asset management company to deal with non-performing loans and the recapitalisation of banks through a recapitalisation fund.”

        “The balance of payment which had been in deficit for many years was reversed and huge surpluses achieved in the trade balance. This enabled the reserves to increase from US$20bil (RM76bil) to US$30bil (RM114bil) in the space of six months.

        All other indicators show that the economy is now improving rapidly and it is expected that the target of 1% growth in the gross domestic product for 1999 will be achieved easily.

        It is expected that the growth in year 2000 will be around 5%.

        The controls have apparently succeeded in bringing about the recovery of the Malaysian economy. Although many still condemn capital controls, others now say that controls can resolve the problems brought about by the rapid devaluation of the currency by currency traders.

        Some even recommend that other countries open to attacks by currency speculators should adopt currency controls.”

      28. i’m not going to go through the whole post, but notices the ‘inflation set in’ after currency depreciation.
        same kind of casual statement about how the relative value change became ‘inflation’ defined as a continuous change in the general price level.

        and i agree that external debt can result in continuous sales of one’s local currency to service that debt and thereby sustain a continuous depreciation/increased imported prices subsequently ‘ratified’ by prices paid by the govt of issue.

      29. “To stop this outflow of the currency, the Government decreed that if within one month the offshore ringgit in whatever form was not repatriated to Malaysia it would not be allowed to be brought back at all.”

        That’s precisely the sort of stabilisation mechanism a monopolist should take to force a reset of the system.

        This can be designed into the banking structures and the automatic stabilisers.

        I define a currency area as the real space that a central bank has influence over. This doesn’t align with national borders, but with the people prepared to use a central bank’s liabilities.

        Obviously a government imposing taxes in a central bank liability ensures that a certain set of people have to obtain that liability, and the strength, and design, of the tax collection mechanism determines the default space the central bank has.

        Beyond that it is down to the influence of the country. The US has a wide ranging currency influence across the glove. Other countries would struggle to currency influence the national borders.

        So if the real space a currency influences gets squeezed artificially in an attempt to cause inflation, then you can start cancelling foreign held liabilities unilaterally (essentially confiscation). Telegraph the process ahead of time, and you’ll likely prevent the behaviour in the first place.

        Its all down to having a reset mechanism to use if the standard stabilisation buffers expire.

      30. it’s not about stopping an outflow if the currency isn’t convertible at the CB
        it’s about stopping the depreciation, which is an entirely different matter.

        when the euro first started trading, for example, it got as low as 85 or so before appreciating to well over 100 subsequently.
        That move up was a move down for the dollar of, maybe, 30% or more, particularly as the euro hit a high of 160 a few years later.

        So we had massive dollar depreciation vs the euro. Call it ‘capital flight’ if you want to redefine that term that way, whatever,
        but my point is letting it be and concentrating on full employment domestically via fiscal policy most often is the way to go.

      31. @WARREN MOSLER,

        “but my point is letting it be and concentrating on full employment domestically via fiscal policy most often is the way to go.”

        The side effect of that (and the ZIRP idea) is that your domestic real assets are the ones that maintain their value – rather than the financial ones.

      32. @WARREN MOSLER,
        “but my point is letting it be and concentrating on full employment domestically via fiscal policy most often is the way to go”

        I fully agree in short to medium run the smartest policy in the private debt deleveraging era is just to accommodate the saving desires of the private/foreign sectors.

        (Warren , could you please read this to the very end as I want to summarise the point I was making over the last few comments, I have to take a break anyway so I won’t bother you over the next few days)

        The issue which I have is that I am in one sense “pedantic” (as one well-known Post-Keynesian Circuitist economist once stated).

        The macroeconomic system modelled in a stock-flow consistent framework can be described by a several state FLOW variables such as government spending, taxation, import spending, export revenue, private consumption, debt-financed investment, debt-financed consumption, saving in financial assets, direct investment (I am making this distinction explicit to separate saving/investment involving banking system and direct purchases of equities – see “Figure 5.1 Two stage spending decision-making process for saving … ” in “John Maynard Keynes” by Paul Davidson). Then we have STOCK variables such as total private debt, public debt, deposits, (and non-financial such as the value of fixed capital). We also have other variables and parameters such as CPI, assets price index, wage to profit ratio, marginal tax rates, GINI index, etc.

        MMT is often misinterpreted in such a way that the only parameter the government should take into consideration in determining economic policy is capacity utilisation / unemployment rate and the remainder should be mopped up with Job Guarantee. Stocks are irrelevant – they are just integrals of flows (e.g. the stock of public debt are compounded budget deficits). Models created by Steve Keen lie at the opposite end of the spectrum – in his current continuous time framework it is even physically impossible to model flows dependant on other flows with any time latency. Everything is determined by the stocks. I disagree with that approach but I think that Steve’s intuitive understanding of the macroeconomic processes is correct. He simply has a different vantage point.

        I think that we should separate primary and secondary effects of the parameters treated as independent (or test) variables. Primary short-to medium term effects are caused by flows. I firmly believe that Michal Kalecki and J.M.Keynes were right. However we should not ignore secondary long-term effects of the size of stocks.

        I think that we should put upside down the results of the following para-empirical study made by Carmen M. Reinhart and Kenneth S. Rogoff:


        “Here we have chosen to focus particularly on some of the links between debt cycles and the recurrent pattern of banking and sovereign debt crises over the past
        two centuries. Banking crises are importantly preceded by rapidly rising private indebtedness. But, perhaps more surprisingly, our analysis suggests that banking crises (even those of a purely private origin) increase the likelihood of a sovereign default. We find a direct effect (perhaps in part due to the recession that typically arises) as well as an indirect effect (perhaps due to the typical post–banking crisis explosion in public debt). There is little to suggest in this analysis that debt cycles and their connections with economic crises have changed appreciably over time.”

        What if instead of rejecting the results we can reinterpret the data in a creative way? What has been shown in the study is that excessive financialisation of the economy characterised by an excessive stock of financial assets and (obviously) debt leads to increased probability of financial instability – be it a private debt crisis, wild swings in exchange rates or state bankruptcy on foreign debt.

        (Think Japan with its 200% public debt to GDP ratio. But that country was understimulated almost constantly for the last 20 years, bordering recession almost all the time. That’s why there has been no financial instability. Imagine a country with so large stocks of SAVINGS denominated in local currency (not public debt – this is not relevant) experiencing accelerating inflation. Wild swings of exchange rates would inflict real damage and lead to implementing the only “known” to 19th century quacks solution – austerity which is like mercury for syphilis.)

        Let me ask a naive question – what a normal person would do with a 1bln USD in cash or Treasury bonds? What is this for? Does the productive economy really need that much lubrication? Isn’t it all about usury? Taxation and restriction on the finance sector activities should not allow for the savings/debt bubble to grow exponentially. This is not about discouraging entrepreneurs. They can finance themselves without pumping up the debt bubble (as mentioned above in the reference to Paul Davidson’s book). This is about shaking off the leeches. I know that this is secondary issue compared with closing the aggregate demand gap but in the end a lot of progressive people are put off from exploring the reference frame and vantage point offered by MMT (and follow Paul Krugman who is oh-so-progressive) precisely because these issues are not exposed enough.

      33. note my deadly innocent fraud about needing savings to fund investment, and how it leads to today’s tax advantages for not spending income. Removing those tax advantages goes a long way toward reducing instability. So does banning publicly insured pension funds from buying equities, etc. etc.

        Point is, I recognize the source of the instabilites and make proposals cut them off at source.

      34. @WARREN MOSLER,


        Stocks are no more or less “productive investments” or “rent extracting instruments” than bonds. The real distinction is that stocks are not actually financial instruments, in the sense that their value is not directly derived from the currency in which they are denominated.

        Stocks represent fractional ownership in something real as opposed to an IOU composed of tax credits. I’m excluding stocks which are simply ownership interests in funds or trusts that own bonds of course.

  6. The important thing here is what is unquestioned. That the U.S. can ‘go bankrupt’ is not only assumed to be true, it is assumed to be beyond controversy–so much so that it can be incorporated as a premise in a poll question.

    This shows how at the heart of the austerity doctrine’s political success lies a set of very deeply embedded assumptions about how money and government work. So deeply are these assumptions embedded that those who hold them are not aware that they are assumptions at all. They present themselves as simple common sense.

    And until this changes, the chances for moving towards a more rational fiscal policy are probably nil.

  7. On the other hand it shoudn’t be that hard to convince the majority of the population that an entity that issues currency can’t ever run out of money.

    It’s just as much common sense as the opposite and ingrained notion that government debt is bad and may lead to bankruptcy.

    I guess that if MMTers controlled the media they would have no trouble convincing the population to accept the scientifically correct common sense.

    The present situation is likely an easily reversible consequence of decades if not centuries of brainwashing mixed with genuine ignorance.

  8. US will never stop paying out the welfare, can’t get elected that way. Handouts buy elections, that is the sole purpose of politicians today. They will print whatever they need. The dollar will be the casualty, and the American standard of living. You can not print your way to prosperity but you can print your way to re-election (that is the only care in DC)

  9. I posted the article to learn from the feedback I knew I’d get. Thanks for all that.

    As for the remark of being “sick and tired of the stupid propoganda trying to paint USA as the evil of all the world,” I find it silly in the extreme. The USA in this objection then becomes a mere abstraction. The concrete reality–by his own admission–is a corrupted government which, by the way, has a monstrously hypertrophied military which is there to ensure, in some measure, the Washington consensus–which is de facto “the kleptocrate consensus.” That it prevented the expansion of a horrible communism goes without saying. But that era is over, and it was the US who 1) let Stalin take over Eastern Europe (thanks to FDR’s underestimation of the monster), 2) it was the US who, while on the one hand trying to “defeat commmunism” in Vietnam, accomplished just the opposite, through mistunderstanding the entire picture there, and at the same time “opened the West” to the horrors of Chinese communism, which soon harbored our kleptocrats’ industries!

    One could also be “sick and tired” of an unthinking and useless sort of “patriotism.”

    1. @Lisa, You could obliterate all of USA, and the kleptocrats in china and india and elsewhere would replace the war machine/police force that vaporized to liberate demand of world resources for remaining 6.7 billion. Chinese parents want BIG SUV’s too (read article posted about JEEPs going for 200K USD in china), human nature doesn’t change because of a line on a map, washington DC isn’t the only source of kleptocrats, beijing and shanghai, bangalore, instanbul not constantinople got a whole bunch too, and so do many other places, but I never hear anyone talking about thier kleptocrats who benefits by current status quo.

      Its not so much that I am a patriot – promoting just one nation, but you are a reverse-patriot, attacking only one nation. Expand your horizons and see the big picture.

  10. @Save America

    I’m not attacking anything. I posted an article with a point of view of a respectable writer, and wishing, as I said, to hear feedback and what I knew would be instructive replies, particularly as regards the economics, which is what primarily interests me, actually.

    I agree with you, though. The very powerful corporate and banking interests that rule the day are internationalist in orientation, and not expressly American. They use nations and politics for their own ends. They are in the process of ruining Europe at the moment, for example. All that is going on is succinntly stated by Brzezinski:

    “The nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.”

    Brzezinski, Zbigniew, Between Two Ages: America’s Role in the Technetronic Era (New York: Viking Press, 1973), p. 246.

    1. @Lisa, This morning the cspan aired hearings with the SEC and CFTC, and both bodies complained the reason we still haven’t regulated the big banks 2 years after dodd-frank (they were given a 1 year time limit) is these companies are multi-national and they are having a damn hard time getting rules in place that will work across borders.

      The nation-state is dead as a source of power in the modern era, they cannot compete, innovate, regulate, as quickly as the multi-national entities can. As warren has said, perhaps one currency and regulatory body to rule over the whole globe with proper global counter-cyclical policies would save the day, but europe is having a hard time integrating.

      What was brezinski’s solution to reign in these multi-nationals who are more powerful and react faster than any regulatory body today can control?

  11. @Save America

    Thank you for those references.

    I think Brzezinski views the development as a good thing not a problem to be solved. He’s all for it. In his eyes I think it means finally getting government out of incompetent hands and into the hands of those who can get the job done most efficiently–a kind of financial elite, which assumes a humanity defined as “homo economicus.” Actually, pretty scary stuff. He is one of the original “Trilateralists” on the Rockefeller team, along with Jimmy Carter, to mention just two of the best known.

    With due respect Mr. Mosler, I think a world anything–government or currency authority–would be an absolute nightmare. “Power corrupts and absolute power corrupts absolutely.” Such an idea reminds me of the prediction in the Bible according to which at the worst time in human history no one will buy or sell unless they have the mark of the beast. Such an entity with such power would be a real “beast” in my view, to be avoided at all costs.

    1. @Lisa, Power does corrupt, ask warren to give away his car company, his plane company, all his money, and especially his super-yacht just to put himself into the same position as most of the 99% and I don’t think he will willingly do it. Would you Lisa? I have slept homeless with the mentally insane bum veterans at the shelters, starved in the streets with the occupiers, chopped plants with the starving mexican drug runners 😉 Its not a life I would want to live all the time, most humans wouldn’t.

      Still there are 7 billion humans and growing, we are either going to unite in a tower of babel and peace and love, or we are going to divide and conquer.

      Those entities are there, the 99% can either manipulate them to help us all, or be ruled by them, more transparency, more dispersal of power.

      I just heard the social security people say they won’t give SS benefits to kids who are birthed via artificial insemination! Holy smokes, I was hoping to clone myself a few hundred times, and then have the clones clone themselves, in a “save america” recursive orgy! But now the SSA is starting to make distinctions between REAL humans and Artificial ones, maybe the mark of the beast already here? 😉

      1. @Save America, Talk about the TAX MONSTER coming to eat you Warren:


        Now the congress going to RETROACTIVELY go back and make people pay more taxes – IE – they could say those 3% tax rates you have been paying for the past 20 years is BS and now you owe back taxes of 50% going back for 20 years? Can even the MIGHTY warren mosler COFFERS take such a TAX BLOW? ;’) You offshore boyz better lawyer and lobby UP! The PEOPLE are coming for U and they about to UNLEASH the KRACKEN tax monster! LOL!

  12. @Save America

    By the way, are there transcripts of that hearing available, or a report of the hearings?

  13. To be more fair to Brzezinski, he is no Bushite. Of course, he opposed the Gulf War. His book “The Choice,” basically is for a globalism of “shared interests,” rather than one whereby the US acts hegemonically to secure only its security. In short, he is more consequential and is truly a corporatist, and not so much an nationalist. He feels that globalism is the natural outcome of a “technetronic” era, and corporations are there to embody this phase. I think rather that he sees the US as the center and leader of this process–something which a Kennan rejected as fanciful, impossible of realization: “The best thing we can do if we want the Russians to let us be Americans is to let the Russians be Russian.”

  14. @Save America

    I think the unity you have in mind is akin to the siren’s song.
    I don’t think Mosler’s desire to keep his yacht is a manifestation of corruption–at least not the kind I had in mind. I assume his dealings have always been honest, and in the world there will always be inequalities, owing to the diversity and inequality of efforts and talents. I have absolutely nothing against the rich per se, and I detest the vice of envy (the very heart of Marxism, however dissimulated by its apparent humanitarianism). That is normal inequality, just as there is a “normal” poverty, as distinct from misery which is the result of abuses.

    1. @Lisa,

      “and I detest the vice of envy (the very heart of Marxism,”

      I think I see what you are saying but you may be going a little hard on the Marxists… I’m not so sure what drives them is ‘envy’ in their pursuit of ‘equality’.

      I think they may look at ‘equality’ as an ends in itself, not due to other factors (such as envy). Consider that they may look at ‘equality’ as you may look at ‘fairness’.


  15. Perhaps it is a siren’s call Lisa, could JFK imagine a few presidencies later a kenyan president? Tofflers future shock is here and you can’t put the genie back in…

    There are a lot of people that want to do something, to feel useful, to work or create or construct or to feel included, and current policies aren’t giving these folks an outlet, and humans being the animals they are can easily revert to violence and hate to get some needs met.

    Still Worldwide I think the people following the siren’s call vastly outnumber the remaining few who do not, with just a bit better structure, transparency, and oversight, we can have 7 billion borg, resistance is futile. War, famine, etc can be something read about in history books…

  16. @Save America

    I’m afraid I don’t understand what you are really driving at, and I am having difficulty understanding what principles govern your thinking and choices. I hope it is more than simple survival.

    1. @Lisa,

      “I’m afraid I don’t understand what you are really driving at, and I am having difficulty understanding what principles govern your thinking and choices.”

      LOL. Join the crowd.

      1. @MamMoTh, Perhaps mam, I met with some pentagon boyz last year in DC though, and thier cyberwarrior dudes were much bigger into blade runner than star trek though, and they all read that book snowcrash too but said that author was as nutty as a fruitcake, and they couldn’t understand how such a mentally unstable person could write what they considered such a great novel! LOL!

    2. @Lisa, LOL! ESM, how can I give an answer that I don’t know myself? I will also join the crowd.

      So Lisa you want to nail some things down and get some hard black and white definitions? (PS like if you watched that cspan derivatives link where the SEC still hasn’t properly defined SWAPS so that the market users can employ them – LOL!)

      If you did a word cloud on my posts I think stargate atlantis cities would stand out, taxes and super-yacht too;)

      It is frustrating lisa to brains that want to pigeonhole things, and simplify patterns of complexity to fit into smaller and more narrow concepts and ideas so more easily memorized, world is far too complex today though.. It is like these hedge fund managers that have these complex models with maybe 1000 variables, but that still isn’t enough to model reality, poor bernanke and the fed try the same thing I think.

      You may be suffering from futureshock, the world is changing far faster than some people can adapt too, thier political systems even slower adaptation, poor chimp brains can’t keep up with all this progress and adaptation, but we have the war of the AI algorithms to save us 😉

      here let this meme invade your wetware (it is similar to some of what mosler covers on this blog, and you and I have touched on with brezenski – and this guy was 10 years or so ahead of brezenski eh?):


      ^ “Alvin Toffler: still shocking after all these years: New Scientist meets the controversial futurologist”, New Scientist, 19 March 1994, pp. 22-25. “What led you to write Future Shock? — While covering Congress, it occurred to us that big technological and social changes were occurring in the United States, but that the political system seemed totally blind to their existence. Between 1955 and 1960, the birth control pill was introduced, television became universalized [sic], commercial jet travel came into being and a whole raft of other technological events occurred. Having spent several years watching the political process, we came away feeling that 99 per cent of what politicians do is keep systems running that were laid in place by previous generations of politicians. Our ideas came together in 1965 in an article called ‘The future as a way of life’, which argued that change was going to accelerate and that the speed of change could induce disorientation in lots of people. We coined the phrase ‘future shock’ as an analogy to the concept of culture shock. With future shock you stay in one place but your own culture changes so rapidly that it has the same disorienting effect as going to another culture”

  17. Menzie Chinn Reads the IMF on How the Multiplier Is Bigger in a Depressed Economy


    What I find of interest are the US results…. [G]overnment spending has large output effects, particularly in the presence of a negative output gap, once nonlinearities are allowed. Tax revenue changes have much smaller impacts (which are nonsignificant statistically in the linear specification). Similar results are obtained by Auerbach and Gorodnichenko (AEJ:EP, 2012) (ungated version), who use a similar methodology:

    Our findings suggest that all of the extensions we developed in this paper—controlling for expectations, allowing responses to vary in recession and expansion, and allowing for different multipliers for different components of government purchases— all have important effects on the resulting estimates. In particular, policies that increase government purchases have a much larger impact in recession than is implied by the standard linear model, even more so when one controls for expectations, which is clearly called for given the extent to which independent forecasts help predict VAR policy “shocks.” Given the historical experience of the US economy, our preferred estimates of the government spending multiplier are between 0 and 0.5 in expansions, and between 1 and 1.5 in recessions.

    One interesting implication of these results, beyond the fact that further spending cuts now would be disastrous, is that the hundreds of billions of stimulus during the 2004-08 period –- during which the output gap was slightly positive — could have been better spent now. (After all, publicly held Federal debt increased by $3.4 trillion going from 2001Q1 to 2009Q1.)

      1. @Adam (ak), LOL!

        Delong is a larry summers boy, and he seems to really agree with mosler, we need to spend, cut taxes, and boost employment, so how so many can agree, yet the american public in 99% against delong and mosler and others, shows what a terrible state of affairs we are in.

        The china article just posted shows they are going to cut taxes and try to boost thier spending in other areas.

        There are 2 guys from brookings institute on c-span right now saying we have to raise taxes (long term) to make the economy better, at the same time they say we have to tackle the unemployment problems and we need to get back to the clinton surplus, everyone is so confused, so yes, a simple diode would seem like an act of genius at this point!!

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