EU Daily- The EU is on a financially sustainable path

127 Responses

1. Enojoy your site, the why I see it, it is just a re-distribution of wealth / output.

   Who or what types of people get how much of the pie each yet.

   Wage Deflation – The pie has been massively re-distributed to a few people connected to financial services which has placed a kind of “tax” on real output – means those the work in normal output type jobs have worked harder for less.

   Wage Inflation – What is needed is what I call wage inflation. Or a redistribution of the pie for the few uber-rich back to a strong middle class. Seems Obama understands this, buy lobbyiests both Dec and Gop will not allow it.

   Any attempt at re-distributiong the pie to built a strong middle class are called “socialism”. As you state in your papers, it has nothing to do with socialism buy simply government accounting on who / which industry ect.. has an easier time to get more of the pie.

   Currently government employers in D.C. and the Military and a few uber-banks are making fortunes as they are close to the gushers of money being transfer out to savings account. No of this money is going into the savings account of average people.

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2. Enojoy your site, the why I see it, it is simply about distribution of wealth / yearly output.

   Who or what types of people get how much of the pie each year. The rest as you say is all account.

   Wage Deflation – The pie has been massively re-distributed to a less and less people connected to certain groups: financial services, military government contractos, very large uber corporations through numerous policies which has placed a kind of “tax” on what average people think of as real output – means those that work in normal output type jobs 9-5 (the middle class) have had to work harder and harder for less realitve percentage of the yearly output.

   Wage Inflation – What is needed is what I call wage inflation. Or a redistribution of the pie from the few uber-rich back to a strong middle class. It does seems Obama understands this at some level as his stated goal is that all policy favor the middle class. Special interest lobbyiests both Democrate and GOP will not allow it.

   Any attempt to re-distribute the pie and to re-build a strong middle class is fought but those powerfull interests that will lose a pience of the pie obtained simply by government policy favoring them.

   This on American TV is called “socialism”. Watch – any policy that shifts relative weatlh to the majority of Americans is called “socialism”.

   It has nothing to do with socialism but government accounting on who gets easy access to the pie and who loses out.

   I agree that the EU is on the right track, if as a government your goal is to help the majority of you people. The EU is just shifting the relative wealth back to the middle class – “socialism”.

   FDR in American oversaw a massive re-distribution of the pie back to the middle class through various government policy. Old money families in America, many generations later are still angry at FDR as it took away thier piece of the American pie.

   Over the last 40 years the policy from a middle class perspective has been “Bye Bye Miss American Pie …… but the Levi is Dry”

   What is needed in America is a massive re-distribution of wealth and re-setting of the “rules” to obtain wealth and how “money” is taxed, saved, created, ect.. in out economy so there is a true even playing field which benefits the majority.

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   1. “What is needed in America is a massive re-distribution of wealth and re-setting of the “rules” to obtain wealth and how “money” is taxed, saved, created, ect.. in out economy so there is a true even playing field which benefits the majority.”…

      NONSENSE! If you took all the money from the rich and gave it to the” majority”…even with your new rules, the rich would get all the money back within two generations! it’s about productivity ingenuity and hard work!

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      1. Jorge,
         While I agree with that projection, without a change from the current arrangements, that conclusion is a tautology of sorts if you think about it.
         Resp,

      2. Further, there is a huge difference between obtaining wealth through productive value, innovation, new business and through preferential access to lower capital costs, legal protections, scewed policy, and direct government hand-outs (military contracts), .. in other words bad government.

         A vast amount of wealth in America today was obtained through “de-reglation” and other such “free-market” policy which of course simply means changes th the law in order to divide up the pie differently than it is today. For the last 40 years it has typically resulted in a re-distribution of wealth up and destruction of America’s middle class.

         “Selling off the farm” as Warren Buffett puts it and then taking a commision on the transaction.

         Of course, I must state that I do not believe “just getting a seat at the table” is a productive skill. For example, signing up for a seat at one of the uber-banks or in corporate law. Boring but high paying, I beieve most of these folks are simply a “tax” on the productive world.

         On the optimistic side, many young Americans are choosing a productive career over a corproate “seat at the table” for 40 years and so they also are starting to vote for those few politicans with policy that favors a re-building of the American Middle class and so re-distribtion of relative wealth back to more of what it was during The American Century.

         Note this is not a left vs. right argument, because the real world is not linear.

   2. You need to broaden your horizons. In Asia, as workers strike for increased pay, they are replaced with robots, AI, automated software. They don’t have to worry about just the “wealthy” humans, now they have to worry about machines that make them obsolete. Many here say but we can “retrain” the unemployed to do higher order work – but where is the proof? I saw Mike Moore make a movie called Roger and Me about the death of detroit – for decades now companies have been leaving michigan instead of retraining the workers. Now automated drone airplanes fly over detroit ala SKYNET from the terminator movies to hunt down citizens stealing electricity so they don’t freeze to death. I wish more people here on this site can tell me why if it is so easy to “retrain” workers and unemployed, why wasn’t it done in detroit? Thier theories sound nice, but where the rubber meets the road, I don’t see the proof.

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      1. Sometime around 1810, the Luddites complained about machines replacing humans. The complaints neither have stopped nor changed. Somehow, despite the massive mechanization of the past 200 years, humans have not been replaced by machines.

         One might have hoped that history would have taught us something and the Luddite philosophy would have died by now, but like rats and roaches, it lives on.

         Rodger Malcolm Mitchell

      2. Machines do replace humans in tasks that machines can do more efficiently. That is the meaning of labor-saving devices.” The result has been far-reaching socially and economically. For example, machines relieved married women from the drudgery of housework, and allowed them to choose between leisure and a career. As a result, women began to become more educated and skilled, took positions in what was previously regarded as male territory, and began competing with males. They have done quite well in the few decades that this has been going on.

         Automation and robotics are not threats, but blessings. They will allow humans to spend more time acquiring knowledge and skill, and the result will be greater advancement instead of the mass unemployment that the Luddites feared. As a result, the concept of “work” will change drastically, too.

         Our ancestors all worked very hard to subsist. The advent of machines and other technology has released most of the world from that state. The concept of work has already changed drastically for just about everyone.

         Humanity has a lot further to go in this regard and it should be an exciting ride if we don’t kill ourselves on the way. As the recent spill in the Gulf of Mexico reminds us, sometimes our technology gets ahead of us, and then we don’t know what to do about it.

      3. Automation is not the problem. It is the twin ideas of “de-regulation” and “free markets” both are meaningless terms in the real world.

         De-regulation means changes a democratic law that favors the majority to an anti-democratic law that favors some special interest and selling as “capitalism”. If you oppose it then you are a “socialist” or “liberal” whatever all those terms mean.

         “Free Market” means policy that benefits corporations over individuals. We need to weaken labor laws so we can send your job overseas in the name of “free markets” and hence higher short-term profits.

         Democracy implies fair markets for individuals. Corporations should not even had a seat at the table. A corporation has become nothing be legal protection for individuals. At some point everyone in America will understand this and be both a person and a corproation. I’m 3 corproations myself, how many corproations are you? and why? it is to gain an advantage over individuals – legal protections, ect.

3. Warren,

   Trichet has said that the ECB (the NCBs in practice) will continue to buy bonds to fight the crisis.

   (June 10th)
   http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aBwxSMjHJrwY

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4. Pingback: –Salvation for Europe? « FEDERAL DEBT IS MONEY – Mitchell

5. Circumstance have crowned Trichet Emperor has he now controls the fiscal policy of all the euro member nations.

   He decides who is solvent and who is not solvent- who shall live and who shall die.

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   1. “The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank…sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” (Carroll Quigley, Tragedy and Hope, 1966)

      Professor Quigley (who was teaching history at Georgetown University when I was a student) had it right. Since he wrote these words, the direction has been clear. It is epitomized by the BIS, the IMF World Bank, etc., and especially the EMU, in which the ECB is a central bank without a corresponding political counterpart, there being no European sovereign central government. The push will be on for currencies managed by central banks like the EMU, to whom sovereign governments cede monetary sovereignty. The end in view is a single global currency managed by a world bank without a corresponding democratic world government. That consolidates the control of wealth without political accountability, which is the overall objective.

      This is the real motive behind central bank independence in the first place — which is why I am opposed to this institutionally as anti-democratic. While the New World Order conspiracy theorists are confused about the facts and issues, the basic insight that independent central banking is anti-democratic and threatens liberty is correct. As Michael Hudson observes, the road to serfdom now lies through debt peonage to financial capitalism rather than the totalitarian communism that Hayek opposed. Financial capitalism now depends on central bank “independence” and state capture to operate freely.

      The wealthy have always distrusted democracy, which is a reason that most democracies are representational rather than direct. These are in effect oligarchies controlled by the powerful and influential through state capture. The result is de facto oligarchy, specifically plutocracy. These people think that this is a natural state since they are the ones who have come out on top, or share in the genes that came out on top. Hence, they rule by “evolutionary” right, which is just another form of the ancient idea of aristocracy based on birth. We see this is the BP chairman’s calling his victims “the small people” and Alan Simpson’s echo of it in ‘the lesser people.”

      [Originally posted at billy blog here on 6.28 at 9:13]

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      1. Speaking of Fed independence, the Supreme Court just lit a stick of dynamite under the FOMC with its ruling this morning that the Public Company Accounting Oversight Board is unconstitutionally structured (I’ll note here that the only real practical change at the PCAOB is that the SEC, which already appoints the board members, now has “at will” firing authority as well).
         http://scotuswiki.com/index.php?title=Free_Enterprise_Fund_and_Beckstead_and_Watts,_LLP_v._Public_Company_Accounting_Oversight_Board

         http://en.wikipedia.org/wiki/Federal_Open_Market_Committee

         The Free Enterprise Fund v. PCAOB case decided that the SEC is, “a freestanding componentof the Executive Branch, not subordinate to or contained within any other such component, it constitutes a “Departmen[t]” for the purposes of the Appointments Clause.” (p.31)
         It also reiterated that, “[w]hether one is an ‘inferior’ officer depends on whether he has a superior… ‘inferior officers’ are officers whose work is directed and supervised at some level” by other officers appointed by the President with the Senate’s consent… “[t]he power to remove officers” at will and without cause “is a powerful tool for control” of an inferior”. (p.30)

         Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws—by holding his subordinates accountable for their conduct—is impaired. That arrangement is contrary to Article II’s vesting of the executive power in the President. (p. 15)
         http://www.supremecourt.gov/opinions/09pdf/08-861.pdf

         The seven governors on the FOMC should be OK (at least until the Court overrules Humphrey’s Executor as it eventually will), but the five bank presidents who sit on the committee are a problem if someone with standing files suit. Either the governors have the power to hire and fire bank presidents as inferior officers (like the SEC can now fire PCAOB members) or the president should be appointing them as well.

         Gosh, its too bad the bank reform conference committee just trashed Barney Frank’s proposal for presidential appointments a couple of weeks ago. Clearly they didn’t read through the 585 comments on the infamous Marshall thread (see my comment at 45). :o)
         http://moslereconomics.com/2010/05/14/marshalls-latest/#comment-20633

6. Your line about “who shall live and who shall die” is telling. In a free country, those types of decisions should only be made by democratically elected officials. Of course, the real question isn’t why unelected bankers in this crisis (clearly somebody had to act, but it is a terrible precedent ) are allowed to set fiscal policy, but rather why it is unelected bankers are allowed to set monetary policy in the first place.

   You never hear general or admirals assert– a la the Fed– that they’re not part of the government nor do they go out to stress the importance of the “independence of the armed forces”. Its curious really, the US, UK and France all entrust their elected leaders with the power to deploy nuclear weapons yet somehow these same presidents and prime mine ministers can’t be trust with the power to set interest rates.

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7. This is such an important observation/theory that I’m glad you’ve now given it its own post! But I’m surprised to not see more discussion of details… has it happened elsewhere?

   For one thing, isn’t this essentially the same point that “anon” has been making here and on billy blog for months? i.e., that there isn’t really that much difference in the “voluntary constraint” on the buying of sovereign debt by the central banks in the US vs EU, despite prior claims of the inherent limits in the EU structure? Admittedly I haven’t read the whole discussion as it was so long and maybe no one wants to reopen that can of worms 🙂

   Warren I guess you are optimistic that EU politics won’t become a problem for this process? Do you know if others share that assessment? They did already experiment with the 60 billion euro covered bond purchase program that started last summer and I suppose they got away with that just fine.

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8. HBL,
   Consider that if the US Fed started to buy $billions of municipal bonds issued by individual US States and other local authorities, their fiscal challenges would soon dissappear also.
   Resp,

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   1. Agreed!

      Still, from what I understood, up until Warren started discussing this recently, MMT authors did not present this as an option when they detailed the EU flaws (which still remain in many respects, of course).

      I was also curious about other possible comment threads I’ve missed regarding the details of this and assessments of its ultimate political feasibility.

      Reply

      1. HBL I think some Professional Economists here interpreted Warrens claim that EMU nations are “like US States” in too exacting a fashion. IMO WMs statement here was mostly for lay-persons in order to achieve a better view of what key differences were. But that did lead to some detailed discussions that were quite revealing (for me anyway). That 500+ comment thread would be good to read thru (I think it was called ‘Marshall’s Latest’ or similar you can search).

         IMO WM often makes statements that are intellectually provocative in order to stimulate debate and discussion (sometimes you have to ruffle some feathers). I just hope that key economists, policymakers and/or their staffs are peeking in here and seeking to understand what is being discussed/disclosed. Resp,

      2. At this particular juncture, in MMT terminology, Greece is less operationally constrained in “financing” its deficit than the US government

      3. …no more US states analogy, I suppose?

      4. Anon/Bx12,
         You know there is nothing stopping the US Senators and Governors of Cali,Illinois,NJ,NY from going to DC and lobbying the US Fed to re-institute Credit Easing by this time having the Fed buy the new issue and OTR bonds issued by those states and their municipalities vice MBS.

         They could point to the fact that this is analogous to what is being done in the EMU zone and is a comparative disadvantage for the US.

         Resp,

      5. Or

         Memo:

         Dear Ben,

         Just realized I’m not constrained.

         So I stopped issuing bonds.

         Hope that doesn’t cause any inconvenience.

         Regards,

         Tim

         P.S.

         What’s my overdraft rate? It’s fairly low these days, isn’t it?

      6. Memo:

         Dear Tim,

         Further to your recent memo, I am in hospital.

         Also, I’ve decided to take Scott Sumner’s advice and start charging interest on bank reserves.

         Please go slow. Or fast. I’m not sure which anymore. I’m confused.

         Regards,

         Ben

         P.S.

         I don’t know what your overdraft rate is. Maybe I should be paying you. I’m confused.

      7. The proposal of setting rates to zero permanently is an implausibility. This has to do with currency acceptability. Most countries keep the interest rates at high levels to keep their aggregate demand low because external imbalance threatens the acceptability of their currency.

         
         So long as countries trade with the rest of the world, they must avoid all expansionary domestic policy that threatens external imbalance. Countries that engage in international trade must attempt to maintain expected future conversion rates of their currency at their current values. If the exchange rate is expected to fall, CBs must pay a risk premium to attract funds to compensate foreign portfolio holders for expected capital losses. Since currencies represent a store of wealth in asset portfolios, countries are doubly concerned about the current size of their foreign exchange reserves and the future value of their exchange rate. When a country’s current foreign exchange outflows consistently exceed its foreign exchange receipts, it has limited choices. It must either pay out foreign currencies from its reserves, borrow foreign currencies to cover its negative balance, let the exchange rate depreciate, or devalue its currency.
         

         – Basil Moore, Shaking The Invisible Hand

         (“Must” not= Moore’s opinion, but he is putting himself in policy makers’ shoes)

         In this sense the “natural rate of interest” is high.

      8. A shocker from Ramanan!

         Heresy!

         Cast thy shadow elsewhere!

         🙂

      9. How can MMT disagree with Basil Moore?

      10. Et tu Ramanan? just when I had Anon and Bx12 ready to start their own MMT capital markets consulting Co. to advise state & municipal govts. 😉

          ” CBs must pay a risk premium to attract funds ”

          This sounds like gold standard statement? When did Moore write the quote you posted?….Resp,

      11. Actually, per Federal Reserve Act, Tsy can’t overdraft its reserve account. It had draw authority from the 40’s to the late 70’s, but Congress didn’t renew it (besides it was only for comparatively small sums on a temporary basis).

          So what can Tsy do? Well, it could require the Fed to buy Treasuries directly (which it isn’t supposed to do under the Act either, but thats easier to work around), since the Fed forwards net profits to Tsy, its basically interest-free money for Tsy.

          It would take an Act of Congress to resume issuance of Greenbacks, and my favorite option — using Tsy’s delegated seigniorage power (31 USC 5112(k) ) to coin money into creation — isn’t even on Tsy’s radar screen, at least wasn’t when they faced a debt limit crunch early in the Bush years.
          http://thepriceofloyalty.ronsuskind.com/thebushfiles/archives/000064.html

          Of course all this is irrelevant since the 3 month rate is so absurdly low, 0.17% (I believe the interest on reserve rate is still 0.25%), it’d actually be cheaper to buy the 3 month T-Bills than to create money by overdrafting or seigniorage since injecting new money into the system would still require increased IOR payments to keep the FFR above zero.

      12. MMT “No bonds” is equivalent to permanent, comprehensive “quantitative easing”.

          The Fed’s already done something similar in the crisis with “qualitative” or credit easing – i.e. has created reserves to facilitate unusual asset purchases.

      13. Matt, hopefully you’ll keep me on retainer for situations that require a blunt instrument. :o)
          Seriously though, there’s not much you could advise state and local finance officers about that they don’t already know. To set up a North Dakota-style bank and the acceptance of state script for taxes would require legislative and, in some states, constitutional changes.

          The real added value (to mankind I mean, there are easier ways to make money) would be looking overseas to advise developing countries BEFORE they do something crazy like borrowing in a foreign currency. Helping to reform a central bank along MMT principles and setting up an ELR program would do much good in the world. Find a country willing to give it a shot (at the very least, the ELR part to being with) and you have a track record to show other government, including our own.

          There are two groups that might be interested in this… Uncle Sam’s team and Oliver Stone’s team. As for Uncle Sam, The US Agency for International Development is the lead agency on promoting foreign development, though for understandable reasons, the Pentagon has also become very interested in winning hearts and minds (and in places you wouldn’t think of, like the Philippines).
          http://smallwarsjournal.com/blog/2008/08/usaid-civilianmilitary-coopera/

          As for Oliver Stone, he just released a documentary, South of the Border, profiling a group of Latin American presidents he’s befriended who are leftist in their politics and no fans of Wall Street or the Pentagon (ironically, Stone’s father had been an investment banker and a colonel on General Eisenhower’s staff). Any rejection letters received from USAID or DoD would only help your sales pitch here. :o)
          http://www.miamiherald.com/2010/07/01/1711076/south-of-the-border.html

      14. Here we go again. 🙂

          Ramanan, like Matt, I’ve understood that this is relic of the gold standard. But if it weren’t — and I’d like to see the response of MMT economists like Bill Mitchell who have recommended it before I conclude that it isn’t — why couldn’t the CB of a country adopting a no bonds/zero interest on reserves in the interbank market just pay a suitable interest rate on the CB deposit accounts of other countries?

          This would be similar to gold convertibility only for countries, which was done previously. Other countries holding funds in the currency of the CBs own country are not participating the overnight banking market, so there would be no direct effect on that market and the overnight rate could still be zero.

          In addition, if a no bonds is adopted and the CB lets the overnight rate fall to zero, as LLR the CB still has to set the discount rate and presumably this would be related to the interest rates prevailing in the country at the time.

      15. Ramanan,

          With no bonds and zero rates, taxes are supposed to replace monetary policy. The exchange rate shouldn’t matter except for inflation risk.

          So tightening through fiscal policy should fix any exchange rate “problems”?

      16. Also depends on whose currency is being used to pay for a current account deficit.

          If the deficit country is paying for imports with the currency of the surplus country, it simply pays the price to borrow it. It’s got nothing to do with domestic monetary policy.

          If the deficit country is using its own currency to pay for imports (e.g. US), the domestic interest rate isn’t an issue for FX policy. Let the currency depreciate until fiscal policy is required to deal with inflation risk.

      17. Anon,

          Yes important questions about which currency is used to pay etc.

          While the deficit country pays for the surplus country, it has nothing to do with monetary policy, I agree on that. The central bank doesn’t lose any control.

          However, faced with losses of foreign currency, the central bank may at its discretion, hike rates with the belief that it will curb demand.

          If the deficit country pays for imports with its own currency, then currency may depreciate but investors don’t want that. Also currency movements maybe big and worsen the current account deficit.

      18. ESM, the basic problem in US health care is providing quality health care to ALL citizens and guests. There are not enough existing resources to handle this, for several reasons. First, the number of physicians has not kept up with the increase in population. Secondly, the pay incentive for specializing has left a critical shortfall in GP’s. Thirdly, there is resistance in the profession to increasing competition. There are others.

          This is now a crisis in rural areas of the country, many large areas of which are inadequately served. It is also a crisis after hours. Now all after hours treatment is through the ER, which is stupidly expensive and inefficient beyond belief because physicians are too important to deal with crises other than during business hours. It was not like that not that long ago. This is a recent “innovation.”

          This is not a market problem, because supply is controlled. The real resources are available. There are plenty of qualified people that would love to become physicians if they had access to the means, both financial and educational. Secondly, we don’t need to rely only on primary care physicians and emergency rooms after hours as the first line of defense. This need can be served by expanding the number of nurse practitioners and emergency clinics. I estimated it a decade to address because a lot of the solution is training many more qualified people and that will take some time. But it can be done. The military did it in WWII with the medical corps in months not years.

          We need to be making services more available and encouraging people to use them promptly. This is cost-effective and a good investment, since human capital is our most valuable resources. In addition, it is the right thing to do, and it is relatively inexpensive and simple.

          For example, everyone should be able to call for information as easy as calling 911. It is relatively simple to set up hot lines that people can call with questions 24/7 about health care and mental health problems. They can be staffed with nurses that are trained to refer calls up the line that call for greater expertise. The next step takes one to a nurse practitioner and finally to a physician, if necessary.

          It is also relatively simple to check everyone regularly for early signs, such as hypertension. This would easily pay for itself many time over.

          I could go on, of course, but the point is that trying to institute a “market solution” using the existing flawed model is a fool’s errand. It won’t bring down costs by increasing efficiency, and it won’t be effective in produce better results. The system is not designed to treat patients. It is designed to make money and allowing deregulation will just serve the interests of profit, not people, because it will not create anything like a perfect market.

          I am a believer in the power of the market in price discovery, but it has to be a perfect market to be efficient in this. There are areas in which a perfect market can be at least approximated, e.g., in trading financial instruments, but we see how that worked out with deregulatoin.

          If we can’t get financial markets to work as perfect markets which should be simple, by reducing government “interference,” how are we going to do this In the many critical areas in which achieving a perfect market is a whole lot harder. As I see it, perfect competition is not possible in a modern complex economy. Health care is one, education is another, energy is another (due to externalities), and housing is another.

          Since this is not simply economics, but also politics the governing party cannot just let these areas become too unbalanced or they will suffer the political consequences at the polls. So some government intervention is inevitable. I agree that when government tinkers at the margins, the result is skewed by political interests. I would prefer to see government just take over responsibility for the performance of these areas in serving public need, with accountability for success and failure through elections. Presently, the system is corrupt, and the way to fix it not deregulation.

          I trust large corporations and professional associations much less than I trust government because they are unaccountable.When they wrest control of areas of public necessity, they have license to prey upon the public, and they use it. That is fact, not “theory.”

   2. Matt, allow me to edit slightly…

      Consider that if the US Fed started to buy $billions of municipal bonds issued by individual US States and other local authorities, their fiscal challenges would soon disappear also. the Fed would be cheating investment banks out of opportunities to bribe local officials.

      J.P. Morgan bribed city officials with chump change, and then got exclusive rights to sell the city debt-based derivatives that exploded over the town’s balance sheet. The city officials went to jail. J.P. Morgan paid a small fine, and nobody is going to jail.
      http://voices.washingtonpost.com/ezra-klein/2010/04/matt_taibbi_on_muni_finance_sc.html

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      1. Another good one, Beowulf. It’s not an isolated example. The courts are going to be clogged with lawsuits for years over the massive rip-off.

         This is a good illustration why the federal government, which is not financially constrained, should fund public purpose directly and finance borrowing by states and municipalities, as well as private borrowing, at a low fixed rates where this serves public purpose. Residential housing is one of these areas, at least for housing below the median, for instance.

         There is also no reason that people should have to forego health care or go bankrupt because of medical bills, either.

         There is no reason that people wanting to further their education should be prevented from doing so become they cannot afford it.

         These are matters of public necessity that are also opportunities for productive investment.

         The arguments against this are ideologically driven by interests that profit from privatization of what is properly public.

         Moreover, while we are at it, the huge subsidies to the private sector, including excessive military spending, privatization of the military, and no-bid contracts, should be ended.

         Energy should be priced at true cost including externalities.

         Did I forget anything?

      2. Toms Hickey:

         You forgot reality. I know it is not your friend.

         Please look at Govt funding of education for the poor:
         http://help.senate.gov/imo/media/doc/Eisman.pdf

         Much of “education” is a scam.

         Also, please look at actual section 8 housing in reality. if this was proposed by republican, you would rightly denounce the idea as human rights violation that it is

      3. “You forgot reality. I know it is not your friend”

         Zanon, that has to be the line of the century.

         Nearly fell off my MMT chair.

      4. Actually Zanon, your link makes Tom’s point. For-profit schools and for-profit lenders take advantage of government loan guarantees to stick hapless students with worthless educations and Tsy with worthless loans. I’m sure Tom would be the first to agree that nonprofit schools (in particular, state community colleges) and direct federal lending is a better deal for student and taxpayer alike.

         You’re correct that Section 8 is a mess. Its a rent subsidy program that should be phased out (along with the national minimum wage and food stamps) and replaced with a living wage tied to each metro area’s HUD fair market rent level.
         http://www.universallivingwage.org/

      5. I would review all existing programs and either modify them to eliminate the scams or else end them and replace them with “reality.”

         The reality is that the US is fully capable of providing its citizens, really and financially, with first-class education, health care, housing, food, and the other necessities of life. Real resources are not the problem. More is the funding. The government can always pay for all the real resources it desires to purchase since it issues the currency. Moreover, doing this would be public investment that would pay for itself many times over in a variety of ways. It is actually foolhardy not to be doing this.

         The “problems” are just made up in order to permit the predators that have captured the state to have their way in extracting rent from provision of necessities that promote the general welfare, per the Preamble. This is inefficient (wasteful) and also unfair in that it subsidizes special interests. It is also ineffective in promoting the general welfare, a constitutional obligation of government in the US.

         This principle also applies to legitimate guests. If you need medical treatment when are are a guest in the UK, or other countries with publicly subsidized, you will not be charged and if you offer to contribute, you will be told that there is no provision for taking your money.

      6. “This is a good illustration why the federal government, which is not financially constrained, should fund public purpose directly and finance borrowing by states and municipalities, as well as private borrowing, at a low fixed rates where this serves public purpose. Residential housing is one of these areas, at least for housing below the median, for instance.

         There is also no reason that people should have to forego health care or go bankrupt because of medical bills, either.

         There is no reason that people wanting to further their education should be prevented from doing so become they cannot afford it.

         These are matters of public necessity that are also opportunities for productive investment.

         The arguments against this are ideologically driven by interests that profit from privatization of what is properly public.
         ”

         I have good arguments against all of your public funding proposals, and none of them have to do with my personal financial interest. As Zanon has pointed out, reality intrudes. Reality in the from of moral hazard, misaligned incentives, corruption, and lack of accounting for personal preferences.

         Just to take the most controversial example, I disagree that nobody should have to go bankrupt or forego health care because of medical bills. The government can print all of the money it wants, but it can’t print heatlh care resources. Until we have an unlimited supply of health care resources, these must be rationed in some fashion. Better to do so by price.

      7. ESM: As Zanon has pointed out, reality intrudes. Reality in the from of moral hazard, misaligned incentives, corruption, and lack of accounting for personal preferences.

         Oh, and this didin’t happen already under the so-called “free market.”?

         The government can print all of the money it wants, but it can’t print heatlh care resources. Until we have an unlimited supply of health care resources, these must be rationed in some fashion. Better to do so by price.

         This is simply untrue. There are plenty of resources that can be marshaled quite quickly — in less than a decade, I would venture, if it were prioritized as the US prioritized war manufacturing in 1943-44. The health care field is a good case of monopolization by special interests. It’s not the resources, it’s the gateways.

         And I am not talking about the only the US, but worldwide — although this would take longer than a decade in many areas that are essentially unserved.

      8. Rationing health care resources by price? Fine, give everyone a national health insurance plan but require, say, a 20% copaymant so the patient shares the cost burden– oh wait we already have that with Medicare.

         The crazy thing is, per a recent Commonwealth Fund study, our healthcare system is so inefficient that universal coverage via Medicare (i.e. the HR 193 Americare bill) would actually cost less than current National Health Expenditures.
         http://farm3.static.flickr.com/2452/3620513241_9ccd0ef24d.jpg

      9. I would add that if we continue to think in terms of the existing conceptual models of health care, education, energy, housing, etc., then there are huge problem that may seem insurmountable. But these models are constructions of the past that are no longer appropriate for current conditions and future development.

         We need to rethink these models and revise them as needed. In some cases, it will involve scrapping some big chunks and replacing them with 21st century solutions. It will also involve removing gateways set up to protect and advance special interests, creating what amounts to subsidies.

         That’s why I claim that the problem is not the real resources but the organization and use of resources. The purpose of finance is serve this purpose, not vice versa, as it is in many cases now. Things are grossly out of whack, and the results of that will only multiply if the situation is left to itself.

      10. Beowulf,

          The system we have now is horrible, but I claim that it is not a free market at all. There are a few areas of health care where a free market exists because government subsidized and regulation stifled insurance doesn’t apply: 1) dentistry, because for some reason dental insurance is much closer to catastrophic insurance rather than a prepaid plan; 2) cosmetic surgery; and 3) corrective laser eye surgery. Price inflation in those areas has been lower than the general rate of inflation.

          Having a 20% copayment doesn’t create much in the way of price incentives. You’re still encouraging people to use more health care if you’re going to subsidize it to the tune of 80 cents on the dollar. Better to have free catastrophic health care above a certain level but 100% out of pocket payments below a catastrophic threshold. You can even have government give people the money to pay their expected non-catastrophic health care, a la the Mosler plan.

          Tom,

          We agree that we need more health care resources. But the best way to do that is to let the free market and private enterprise work. Let doctors charge and earn whatever the market will bear. The good doctors will work harder and become more productive. When doctors start making a million dollars a year, the best college students will decide to study medicine instead of finance.

          And yes, I know that medical licensing and certification is a racket. The same problems exist in the legal field and in public education. But these are government created problems. Who do you think doctors lobby to prevent Indian radiologists from reading your CAT scan?

      11. Healthcare, as well as education, are not going to be solved with the right price mechanism.

          Consumers are price-sensitive primarily to the portion of healthcare which they are least qualified to price. Moreover all basic healthcare is, in the economic sense, mandatory. It will cost society more in terms of subsequent treatment if the primary care is not provided.

          It would be similar to not performing maintenance on an airplane or other heavy equipment. And a proposal for government funding of emergency or catastrophic care but private sector funding of basic care would have the same economic effect as “free” government funding of heavy equipment but private sector funding of the maintenance of that equipment. That is not a system that would work.

          Neither would a system work in which government does not pay for catastrophic care, as we are not going to leave people bleeding in the streets without care. They will go to emergency rooms or county clinics and receive care no matter what.

          If you view healthcare as maintenance, then you immediately see that it needs to be an embedded cost. Currently, this is embedded in employment with medicare for the retired, but this creates problems for the unemployed, self-employed, and small business — areas that we want to encourage. In that case, it makes perfect sense to have a single payer system.

          That is on the consumer side. On the producer side, there are a series of perverse incentives related to the technology involved — that cannot be blamed on government — that make healthcare (as well as education) not responsive to standard price pressures as applied to consumer goods.

          For example, there is not a lot of market incentive to develop vaccines, but there is much market incentive to develop treatments (not cures) that must be applied repeatedly for mild chronic ailments.

          The producers do not have adequate information when determining whether a line of research will be economic. Just think about the risk analysis that a pharmaceutical company needs to perform when deciding to fund research of drug — the risks are extremely high and that must be multiplied by the cost of capital of the private firm.

          Litigation is a similar issue, in that it raises the risks, and therefore the cost, of everything else. And even ignoring the excesses, a botched treatment can leave someone incapacitated for the rest of their life, so the excess risks are embedded in the nature of the field. Either the private firm or the government will then fund that person until they die, regardless of any litigation caps we put in place.

          This is why government, with a lower cost of capital, can more efficiently fund basic research, and is pretty much the only entity doing it.

          Similar arguments apply to education. Parents cannot accurately determine the actual return that an education will provide, and their funding costs are much higher. Moreover the cost of a less well educated public is borne by the nation as a whole.

          Both healthcare and education should be viewed as public goods. For those necessary goods or services that are difficult to price by both consumers and producers, there will be massive premiums and misallocation of resources if the good is provided by the private sector on a for profit basis. Any “basic” need that is high risk in delivery, involves a long time horizon, and carries heavy externality effects if not provided is a good candidate for being a public good, and will most likely be more efficiently provided by the public sector.

          Energy, Transportation, Education, Communication, Health Care, Defense, Banking fall into these categories, at least at the wholesale level. It is no wonder that we see massive rent-seeking, rising prices, backdoor government subsidies, and phenomenal waste in these areas, and not say, in the provision of consumer goods.

      12. RSJ,

          “Moreover all basic healthcare is, in the economic sense, mandatory. It will cost society more in terms of subsequent treatment if the primary care is not provided.”

          There are many studies which indicate that this claim is false. There are other good reasons to provide preventive care, but from a pure economic perspective, we are already providing way too much preventive care.

          I don’t agree that health care should be treated any differently than any other area of economic activity. Food and shelter are much closer to necessities than health care, and we have much more of a free market in food and shelter. I also disagree that people are too stupid to understand their health care options and the costs and benefits of certain decisions. Through careful use of the google machine, you can probably learn more than your doctor knows about your specific problem in a matter of hours.

          “This is why government, with a lower cost of capital, can more efficiently fund basic research, and is pretty much the only entity doing it.”

          I would actually call this idea that the government has a low cost of capital an innocent fraud. When the government spends, it doesn’t have to pay a high rate of interest, or any for that matter, but that is not the true cost to society. The true cost is the allocation of real resources for a particular purpose or project which could have been allocated to better use elsewhere. If you take money out of the equation, and just look at how labor and other resources are used, you can see that the government has no advantage over the private sector, and yet it has many disadvantages.

          “Similar arguments apply to education. Parents cannot accurately determine the actual return that an education will provide, and their funding costs are much higher. Moreover the cost of a less well educated public is borne by the nation as a whole.”

          I disagree completely. Furthermore, I would argue that secondary education in this country is generally a government subsidized scam, and we spend way too much on education as it is, particularly higher education. Most people should go directly into the workforce after high school.

          “Energy, Transportation, Education, Communication, Health Care, Defense, Banking fall into these categories, at least at the wholesale level.”

          There is probably no area where you should have a 100% free market. Likewise, there is probably no area where shouldn’t have at least a partially free market. But, broadly, I would say that the problems we have in transportation, education, and health care are because we are not using free markets enough. I don’t quite see why you apparently perceive there to be a problem in energy or defense. As for banking and the GSEs (don’t forget Fannie and Freddie), a continuing problem is too much government subsidy (deposit insurance, implicit GSE guarantee, “too big to fail”) and not enough free market discipline.

      13. This fundamental disagreement in fundamental presuppositions is why we have two parties in the US. One side distrusts “big government” and “big labor,” and the other side distrusts “big business” and bought politicians.

          It is an unbridgeable divide in world views. Since neither party usually wins a filibuster-proof majority, or if it does, there is enough intra-party disagreement to prevent party unity, the result is either stalemate or some compromise that is ineffective and inefficient.

          The president tried to bridge this divide by an appeal to “bipartisanship” (whatever that means), and it has failed.

          So where do we go from here?

      14. Tom,

          You got me thinking. Of course, there will always be at least two parties, just as there are always two sides to an argument. People don’t waste their time arguing about stuff they agree on (well, we do about MMT I guess :^P).

          But one of the beautiful things about the American system of government is federalism — the federal/state division of power. People who want to live with less government involvement in their economic lives can choose to live in a “red” state. People who think more government involvment is necessary can live in a “blue” state. And there are 50 states to choose from.

          Perhaps we can agree that the federal government should voluntary give up some of its spending power to the states by making large annual distributions to the states on a per capita basis, and then let the individual state governments decide for themselves how to spend it. For example, my state of Massachusetts can proceed on its merry way down the path towards a nanny-state utopia and actually have the money to make it feasible. And Texas can continue to be an anarchic dystopia with even bigger ranches, cars, guns, and hats.

          That should maximize happiness don’t you think? And on top of that, we conduct the greatest experiment in government ever.

      15. I would actually call this idea that the government has a low cost of capital an innocent fraud. When the government spends, it doesn’t have to pay a high rate of interest, or any for that matter, but that is not the true cost to society. The true cost is the allocation of real resources for a particular purpose or project which could have been allocated to better use elsewhere…

          Somewhere beyond the river Styx, Ken Galbraith is grumbling…. Its no innocent fraud to harness the government’s low cost of capital to ensure provision of the basic human needs of its citizens. Its not just a decent thing to do but good economics.

          To quote from The Economics of Innocent Fraud:
          The one wholly reliable remedy for recession is a solid flow of consumer demand. Failure in such a flow is a recession. In the United States, especially with stagnation and recession, the lower-income citizen has an acute need for education, health, a basic family income in one form or another. (p.60)
          http://books.google.com/books?id=FraCX-GLxFQC&pg=PA60&lpg=PA60

      16. ESM, I agree with you in principal. The US does offer a spectrum of choice, not just between red, blue and purple, but even within states, different areas have different approaches. “Let a hundred flowers bloom.” (Chairman Mao)

          I am living in Iowa at the moment, which is a purple state, but it is divided among different shades of red, blue, and purple. I am living in Iowa City, home of the University of Iowa, and is one of the most liberal small cities in the country. Rep. King, one of the reddest of the red, also hails from Iowa. So even intra-state there is a lot of choice here if one’s situation allows one to make such choices. Some people are pretty locked in by job opportunities and so forth. I am here for family reasons, so I don’t have any choice in the matter. Luckily, this is a place I would gladly choose to live. But things could be different. I’d be a fish out of water in many places in the state.

          In practice, there are issues, however. Americans all believe that human rights are inalienable, but we disagree over those rights and how they should be interpreted, prioritized, and guaranteed by law. This is where a lot of the kerfuffles arise.

          For example, most progressives believe that universal access to education, healthcare, shelter, sustenance, and other necessities of life are inalienable human rights, not just in blue states but red states, too. A lot of conservatives dispute this.Conservative have their corresponding beliefs that conflict with liberal beliefs, too, such as abortion, gun rights, and the political status of religion

          This is what the major policy issues are about, and just like the pre-Civil War period, there was no common ground to be found.

          The nice thing about MMT is that it is descriptive, explanatory and predictive rather than normative, for the most part. So we can agree on the basics. However, when it comes to policy options that MMT shows are possible, then the controversy begins. But at least we can argue over the merits rather than over myths.

      17. Beowulf,

          Either you missed my point about how the cost of “monetary” capital is meaningless and all that matters is the opportunity cost of real resources, or I’ve completely missed your point.

      18. …I don’t agree that health care should be treated any differently than any other area of economic activity. Food and shelter are much closer to necessities than health care, and we have much more of a free market in food and shelter. I also disagree that people are too stupid to understand their health care options and the costs and benefits of certain decisions. Through careful use of the google machine, you can probably learn more than your doctor knows about your specific problem in a matter of hours…

          Some pretty outrageous statements, ESM. A healthy body and healthy mind are about as basic as human needs get. Good food is one factor in achieving this but by no means the only. Genetics, luck, old age, social status, cultural background, upbringing, education, fitness and climate are among the others. If anything, this is would call for better food and drug regulations and better education about prevention, not more choices in healthcare. I can’t make out one argument for increasing choice in treating diseases (cosmetic surgery and the likes are not covered by insurance anyway) because nobody chooses to be ill. And the idea that people should do self-diagnosis via the internet is dangerously naive. Are you suggesting people google their cancer? Housing is different, in a way. If the market guarantees everybody can afford to rent or buy some kind of respectable shelter, then the rest can be left to choice. On the other hand, that kind of equilibrium is not naturally sustained in all places. Many large cities develop very exclusive real estate markets which may call for intervention of some sort, for example.

      19. Oliver,

          The special moral status you and most people assign to health care is not deserved. People freely trade risks to their health and sometimes even certain damage to their health for monetary compensation or other pleasures all the time. And, remember, health care covers lots of things — from knee surgery that allows a 70-yr old to continue playing tennis to resection of a brain tumor in a child. People will be willing to pay any price for the latter; the former not so much.

          Furthermore, society accepts unequal consumption in many other areas which have quantifiable differential impacts on mortality and morbidity rates. Poor people have to drive smaller, older, less safe cars which probably increase the mortality rate for young poor people more than any untreated disease. And then there are the types of occupations poor people are forced to have. Generally, those are repetitive and manually intensive. Not good for either mental or physical health.

          Finally, health care is inextricably entangled with the rest of our economy. Resources (including labor) wasted on health care will not be available in other areas which might have had a more profound impact on health, life, and happiness.

          By the way, I was not advocating self-diagnosis via the internet. I was advocating using the internet to investigate the costs and benefits of various courses of action in the diagnosis and treatment of health problems. Somebody else claimed (and I’m embellishing a bit) that people are too stupid to make rational and informed consumer choices about health care. I disagreed, and I pointed to the internet as a fantastic resource. I think it’s actually far more difficult to shop for health insurance than it is to decide what to do about any specific health problem.

      20. …Furthermore, society accepts unequal consumption in many other areas which have quantifiable differential impacts on mortality and morbidity rates. Poor people have to drive smaller, older, less safe cars which probably increase the mortality rate for young poor people more than any untreated disease. And then there are the types of occupations poor people are forced to have. Generally, those are repetitive and manually intensive. Not good for either mental or physical health…

          Funny, those are examples I would have used to argue against financial incentives in health care. You’re basically saying that poverty often leads to bad health – I agree. Why now should these people, who hardly chose to be poor or perform idiotic and unhealthy jobs, be forced to bear a far larger risk in proportion to their financial state to, say the average white collar worker? It makes no sense to me whatsoever. I agree one may need more incentive to choose reasonable over luxurious treatments if morally acceptable, but I’m sure that could be dealt with in other ways. I personally find the right to the best, reasonable treatment should not correlate to ones social status, especially since a low status is already a statistical disadvantage. And that’s, sadly, what financial incentives do – they privilege the privileged. Welcome to class medicine.

      21. “Funny, those are examples I would have used to argue against financial incentives in health care. You’re basically saying that poverty often leads to bad health – I agree. Why now should these people, who hardly chose to be poor or perform idiotic and unhealthy jobs, be forced to bear a far larger risk in proportion to their financial state to, say the average white collar worker?”

          Because when the government subsidizes the cost of an MRI, it leads to the production of too many MRI machines. In a world of limited resources, this could mean the production of too few cars, which puts the price of a safe car out of reach of a poor person. Everything is linked and history has demonstrated that detailed management of economic resources by a central bureaucracy is horribly inefficient.

          The moral problem is poverty, not access to “quality, affordable” health care per se. Better to have a free market in health care and in cars (and food and shelter) and just have the government give enough money to poor people to meet what society agrees is the cost of basic needs.

          I’ll point out also that your moral philosophy based on equal outcomes or relativism is not universally shared. I do not think it is wrong that there are certain life-saving treatments that only the rich can afford. Society needs to agree on what the minimal standard of care is that everybody is entitled to, but that should not include every state-of-the-art treatment no matter what the cost. I have long felt that a good compromise is the state of the art in medical care as of 10 years prior.

      22. ESM: “I’ll point out also that your moral philosophy based on equal outcomes or relativism is not universally shared. I do not think it is wrong that there are certain life-saving treatments that only the rich can afford.”

          And a lot of us think that this is violation of human rights. As I said, the country is irreconcilably divided over what constitutes human rights, and that is reflected in the political gridlock that the US is facing, which is going to bring the country to its knees if it continues.

      23. ..I do not think it is wrong that there are certain life-saving treatments that only the rich can afford…

          Poor people deserve to die. I expected as much.

          Tom, where does this non empathic streak of American conservatism come from? I thought I was hardened through years of harsh Hong Kong favouritism and dogmatic Swiss neo-liberalism, but this beats everything I’ve experienced by a mile. How can such faux meritocratic cruelty come about? For all our shortcomings in Europe, something far more serious than not understanding monetary systems is wrong on your side of the Atlantic, in my humble opinion.

      24. “all that matters is the opportunity cost of real resources”

          And my point is that the Government’s obligation to protect public health, safety and welfare takes first draw on economic resources. No one here would suggest the government spend more than is necessary but it shouldn’t spend less than that either.
          If the consequence of this is that the US economy can afford fewer McMansions or we see the spectacle of private jet owners reduced to flying commercial again… those are opportunity costs I think most Americans are willing to accept.

          Of course, that’s really a moot point. I don’t see any potential strain on real resources when a universal system would actually utilizes a smaller fraction of GDP than the current system. We’re paying at least a $58 billion a year (per above chart) opportunity cost right now because we haven’t shifted to a single payer system… which I’d add, Warren’s excellent plan is. After the deductible is met, catastrophic costs would be covered by Medicare.

      25. ..I do not think it is wrong that there are certain life-saving treatments that only the rich can afford…

          “Poor people deserve to die. I expected as much.”

          These two statements are not even in the same ballpark from either a logical or moral perspective. That indicates to me that we’re approaching the fulfillment of Godwin’s Law in this discussion.

   3. I don’t know, Matt — only if the purchases significantly move the rates. The states still need to service the debt, whoever owns it.

      If there is a fear of default risk which is taken off the table by the bond purchases, then this would make financing easier.

      But it would need to be permanently taken off the table. If the story is “the ECB will support rates provided that there is good behavior”, then the risk gets transformed into “bad behavior” risk, or risk of lack of ECB support and is still non-zero.

      The cost of credit protection is still very high for the periphery, and yields are still high.

      That’s the problem with “stealth” bailouts. It is similar to a “stealth” confidence boosting announcement. They are always less effective, and this in itself makes it more likely that the bailout effort is not sustained.

      I don’t think any risks have been taken off the table as of yet.

      Reply

9. I think this will be a major political problem.

   Initially guaranteeing all the national govt debt was rejected due to the moral hazard issue.

   And I’ve been saying all along that the problem isn’t over until the ECB writes the check, one way or another.

   Matt, any idea where I can get running info on nat govt bonds bought by the ECB?

   Reply

   1. Warren,

      Thanks for commenting!

      I think this could be what you are looking for, if I understand it correctly?

      http://www.ecb.int/press/pr/wfs/2010/html/fs100622.en.html

      I was looking through it earlier… current ECB balance sheet is at 2124 billion, up steadily from 1895 billion at the end of March (an average increase of about 20 billion per week), and up from 1795 billion in May 2009 before the 60 billion euro covered bond buying program started.

      Though if this is the correct data, I’m not sure which bucket the sovereign bonds are going in (main or longer-term refinancing operations, perhaps?)

      Reply

      1. Hbl,

         LTRO was/is the lending operation of the ECB to credit institutions.

         Where the government bonds sit in the combined balance sheet is confusing – I thought I knew it. Anyway this is a guide

         http://www.ecb.int/ecb/legal/pdf/l_20220090804en00650081.pdf

      2. There are some confusing things happening. Normally most items appear in the NCBs books and the ECB doesn’t do much. The link you provided is the Eurosystem’s balance sheet.

         The swap which the ECB does with the Fed appears on the ECB’s balance sheet as well as the NCBs balance sheets.

         Also when the ECB issues debt certificates, there are some complications out there. If a CI buys the ECB debt certificate, the CI’s account at the home NCB is debited and the home NCB’s account at the ECB can go into an overdraft position. In that likely case, it will be recorded as an asset on the ECB’s books (claims on the rest of the Eurosystem or something like that).

         So if the ECB instructs NCBs to buy government debt worth €1b, the Eurosystem balance sheet may increase by €2b because of the ECB debt certificate issuance.

      3. okay maybe something stupid said by me @2:48 but something funny there with ECB debt certificates.

      4. Hi Ramanan,

         Thanks for the details… though I’m a bit lost on the interactions between the NCBs and ECB and other pieces you describe, and am not sure it’s worth the energy [for me] to try to understand more!

         I could see that the Eurosystem balance sheet I linked appeared to be growing roughly inline with the supposed sovereign debt purchases plus the tail end of the covered bond purchase program… I hadn’t dug too much beyond that, but “Securities held for monetary policy purposes” also seems relevant and has been growing. I couldn’t find a news release for the government debt buying program on the ECB site (unlike the covered bond one), nor further details on its implementation, though I may have not looked hard enough.

      5. Hbl,

         Its real fun trying to understand the interaction between the NCBs and the ECB. I did it and can let you know if you want to ask something.

         Try to ask yourself “what happens if there is a cheque written to someone cross-border” and things like that to start.

         I vaguely remember reading a headline somewhere (bloomberg?) that the ECB won’t reveal the details of the bond purchase or so.

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11. A slight heresy under the influence of Moore’s book. I think except for countries such as the US, Japan, Australia and a few of the reserve currencies, other countries face huge problems with acceptability of their currency. They try to build foreign reserves. It is impossible to sell them the idea of zero rates or no bonds.

    The assumption that exchange rates move smoothly is not the best one. When a country is facing a balance of payments issue, exchange rates are even more volatile and it increases the balance of payments problems. The debtor nation has to surrender before the creditor and she wants to continue purchasing foreign goods. The creditor is in a superior position. Hence the creditor makes a lot of demands.

    The gold standard anti-analogy isn’t too satisfying. Money was as endogenous in the gold standard heydays as is now. In fact before 1971, the employment rate was better. Of course, can’t go back to that setup because it failed.

    The idea that exchange rates will take care is like the idea of an invisible hand. Most central bankers know that they do not and are forced to intervene. Exchange rate is not just one number. Its a lot of numbers – volatility, rapidity of change/plunge etc. Weak exchange rates may be good for a country but plunging is bad even though the exchange rate is moving to the devalued number during a rapid fall.

    Put yourself in the shoes of a central bank governor of a developing nation to try to see what Moore is trying to say. You are not to assume that you have friends. Every nation is alone.

    Reply

    1. Developing nations, with a sufficiently large population base and natural endowment don’t need a lot of foreign goods. They need skills, best practices, and a very small amount of seed tools. They might need oil, for example, but if they are developing then they wont have a car culture. With coal, natural gas, wind and water, and nuclear, each nation should have some form of energy that it can exploit that should minimize dependence and foreign energy if the will is there.

       Nations that have already developed need large foreign markets. Their domestic industries will benefit greatly from expanding the pool of buyers and achieving economies of scale. Nations that have not developed need to cultivate their own markets. The intersection of the two is that nations on similar development levels should be open to each other.

       The constraints are really political. Each nation has a class of elites that filters the acceptable set of options. It may well be that selling to the foreign market is the only acceptable option, because raising domestic wages and creating domestic demand is off the table. In that case, exporting staples or raw materials may be the only game in town.

       But that is a political constraint, not an economic constraint. There is no reason why the Asian development program was export based, other than the requirement that local elites not suffer a relative wealth loss, which took domestic demand increases off the table, and left only foreign demand.

       If the nation does not have a sufficiently large population base or natural endowment, then it is not sovereign, period. It is dependent on others in both real and financial terms, and this will continue to be the case. In that environment, the next best option would be to find nations in a similar position and engage in a regional development program.

       Reply

       1. Have you ever actually been to developing nation, RSJ?

          The missing ingredient is not “skills, best practices, and a very small amount of seed tools” I assure you.

          This is obvious to anyone who has observed, participated in, or been at receiving end of endless caravan of “skill, best practices, and seed tools” that travel from US to developing countries for 60+ years producing nothing positive.

          Heck — how about Detroit, which revert to Prarie? Or post 1950 Chicago? Or post 1950 Harlem? Or Oakland? Can we please not send them “skills, best practices, and a very small amount of seed tools” or is Namibia not quite done becoming Copenhagen yet to part with them? Maybe once Mogidishu finally becomes Greenwich, we might think about Flint Michigan.

          You and Tom Hickeys can now hold hands and moan “dollar hegemony” together.

       2. The problems in the developing world are the same as the problems in the developed world, only magnified. They are massive cheating (corruption) and deeply rooted ignorance arising from selfish interest (the human condition). This is nothing new. The wise have been saying this for millennia.

          Moreover, I have absolutely no faith in economic theory because it is ideologically based and not connected with reality. Economic theory does not take into consideration either uncertainty (extreme complexity) or conscious and intentional abrogation of the fundamentals, largely through various forms of cheating. So I categorically reject economic argumentation as unrealistic nonsense.

          The world’s problem’s will continue to be approached as they always have been through competition of opposing forces. All the normative arguments are simply ideological justifications for particular interests and world views based on them.

          Yet, we are all condemned to think that our own world view is the correct one, and we justify it with an ideology so that it appears reasonable. So the game goes on, and civilizations rise and fall in the ongoing dialectic of history.

          For the most part, humans don’t even get to choose sides. Each individual is thrust by circumstances into a position and people in general take this to be the natural state. As individuals, we are all creatures of culture, but as persons we are capable of rising above it. Few do. They are commemorated across time as the wise and good. Lip service is paid to them, but few actually follow their teaching and example, of even comprehend it.

       3. Toms Hickey:

          And despite this eternal corruption and selfish interest, there have arisen good living conditions, at least for a time.

          For example, Detroit was once city, not wasteland. Harlem in 50s very different from 60s-present. Chicago in 50s very different from 60s-present. Oakland in 50s very different. Calfornia very different.

          Same with entier third world.

          The root of all this decline is the same, and therefore it should be obvious the issue is not “skills, best practices, and a very small amount of seed tools”. In fact, the crazy beleive that the problem is “skills, best practices, and a very small amount of seed tools” is part of the problem

       4. Indeed I have Zanon. I would surprised if you spent more time in developing nations than I have — I can log about a year, and I also did some very minor development work with non profits.

          All the problems you point out are political, not economic. It is corruption and power relations that prevents developing nations from developing.

          Compare, for example, the experience of Indonesia with South Korea. Indonesia has a far greater natural endowment, and a far larger population. But Indonesia is run by denationalized elites more interested in sending their kids to foreign schools and shopping in London than they are in developing their own nation. South Korea is run by nationalistic elites. Both nations are corrupt to some degree. But the development arc is very different.

          All industrial development happened in the context of elites aligning their their interests with the nation they rule and choosing to develop the entire nation, rather than focusing their efforts at extracting more of the current pie. That is a political decision, and has nothing to do with needing foreign aid or capital. You may need foreign capital to seed your domestic industries, but you don’t need a lot of it, and it wont help you if the ones running the show are not willing to risk their own position in order to further development.

    2. Ramanan,

       “It is impossible to sell them the idea of zero rates or no bonds”

       Well, no country is ever going to be sold on it. Just trying to have some pretend fun here. So do you think zero bonds/rates is a US applicable only idea?

       “The gold standard anti-analogy isn’t too satisfying.”

       More heresy! Where does it end, Ramanan?

       “Money was as endogenous in the gold standard heydays as is now.”

       In that context, can you operationalize the meaning of “endogenous” for me?

       🙂

       Reply

       1. Yes heresy 🙂

          Difficult to define endogenous than saying, “from within”. In the Gold Standard, the central bank doesn’t and cannot control the money supply. If there is a loss of gold, that doesn’t translate into a loss of demand automatically. Money is still demand-led and credit determined. Similarly an increase in gold in the central banks’ assets doesn’t increase demand and/or entrepreneurs’ animal spirits automatically.

          More than Basil Moore, I find myself more and in fact complete agreement with the late Wynne Godley. He has papers where he shows how it works in details and even in his books, the dynamics he ascribes is the same, gold standard or not. Its the central bank reaction function and the fiscal policy reaction function which constrain demand. Its not automatic, except perhaps due to the flow of funds effects due to current account deficits and factors such as uncertainty.

          He was also of the view that the current account deficits are problematic. For years, he warned that the outflow from servicing the foreign debt acts as “kind of hemorrhage from the circular flow of national income” and that fiscal policy alone cannot resolve the crisis. The US dollar needs to devalue a lot.

          It has happened to many countries – current account deficits ruining the fate of nations so imports are no costs.

          I was initially seduced by the unused ability of the government sector to take care of the current account deficit. (Since it is not financially constrained etc). However, I am no longer. Firstly in the real world, governments stance is fairly constant and stable. Secondly, public debt/gdp ratio increasing with no limits is an implausibility as well. It leads to rapid currency falls and makes the balance of payments even worse.

          Of course, there are good ways such as concerted action. However, a single country in isolation cannot expand fiscally without limits. The currency markets will punish “the State”. Doesn’t matter if you remove speculators. The non-speculators are as much the players as Keynes described them when he talked of the “beauty contest”.

       2. I meant .. imports are no “benefits”.

       3. “the central bank doesn’t and cannot control the money supply”

          because the CB can’t control the base or because the base can’t control credit money or both or neither?

          “the dynamics he ascribes is the same, gold standard or not”

          what an insightful fellow

          “I was initially seduced”

          strapped to the mast of unconstrained revenue, by the siren call of MMT?

          “However, I am no longer”

          free at last!

       4. “current account deficits are problematic. For years, he warned that the outflow from servicing the foreign debt acts as “kind of hemorrhage from the circular flow of national income” and that fiscal policy alone cannot resolve the crisis. The US dollar needs to devalue a lot.”

          So here is a local story showing this in action:

          http://wjz.com/local/job.cuts.paper.2.1776619.html

          The story from the US side is that The People’s Paper Mill is dumping coated paper on the US market beacause their warehouses are overflowing, they have no where to go with their product. Now The People’s Paper Mill doesnt want to lay anyone off (“idle hands”) so they just give the paper away to US paper merchants in exchange for some substantially smaller amount of USD than current market prices. US mill cannot compete so they throw 90 more people out of a job, continue to hoard what USD financial assets they still have and pray for the future. USD are changed out by the bank sector for a fee, so banks are happy. US paper merchants are happy because they make more USD due to lower COG. Corrupt morons in US govt are happy because banks and paper merchants make contributions out of their new profits. Chicomms are happy because they have their masses dumb and hard at work and their slush fund of USD is ever larger. Chinese workers are happy because they have a job and can go home tonight and eat more bugs on a stick in their 2 room apartment for 4. Let’s see who is the loser here, hmmmm, how about THE US WORKER who is now on the “automatic stabilizers”.

          So now this Prof Moore is going to show how this can be modeled by complex systems and “chaos theory”?? A fool’s errand, this is nothing more than pure corruption. The US should use fiscal policy to fully compensate the US workers who are losing their jobs (to the penny), and nothing will happen to the Chinese peg.

       5. Matt,

          Yes Moore keeps talking of complex adaptive systems etc but he really doesn’t mean many things. He just wishes to say that the future is unpredictable etc.

          I became more interested in his other work and his logic about how international trade and currency markets lead to a host of problems.

          Consider the following statements

          i. Devaluation is good
          ii. Fall in currency is bad.

          Which is correct ?

          The answer is that both are correct!

          The first one assumes an orderly decline in currency and since devaluation has its positives, its good if a nation’s currency is devalued if it needs to do so.

          A rapid fall in currency is bad because if a nation has a current account deficit, a plunge in currency leads to a worsening of balance of payments. This is so because prices take a digital hit upward and the quantity consumed doesn’t drop so fast. While the balance of payments worsens, the currency may suffer acceptability of currency in the international markets. This is not rare or a hypothetical scenario – it happens frequently.

       6. btw, if i understand what you’re saying, i agree with you

          the gold standard had its monetary effect through interest rates more than money quantity?

          e.g. adhering to the price of gold was like adjusting policy interest rates based on cpi behavior today?

          ironic that MMT gets the money multiplier right if it gets the gold standard and the gold standard analogy wrong

       7. Yes anon – completely like the CPI. There the “rule” was change r if gold changes. However, it is totally at the discretion of the central bank. The central bank increase rates by 100bps instead of 50bps, just like now where it may or may not increase etc – completely under the control of the central bank.

          The usual argument given is that since the exchange is fixed, the central bank cannot control rates. However that logic isn’t accurate because it assumes “perfect asset substitutability”.

12. Tom,

    You are making many assumptions. Unlike the gold standard, international settlements happen through a complicated mechanism involving banks. The central banks may also play a role.

    In the example where the US household purchases a Chinese car, and takes a loan and transfers funds to the Chinese exporter’s bank account … there is an assumption of currency acceptability – the reserve status of the US dollar.

    For many nations, the foreign reserves in the central banks’ balance sheet is important. When an importer pays, there are many transactions which may involve for example a bank going into an overdraft position in its bank account of another country (the correspondent banking system). It may purchase foreign currency from its central bank and the central bank has a loss of foreign reserves.

    The “risk premimum” is the payment to investors not the foreign central bank. Imagine, you are the governor of a central bank and your foreign reserves are falling. You have to entice foreign investors to sell you a foreign currency in exchange for accepting your (or the government’s) IOU. So for this, they have to do many things such as pay a premium, maintain exchange rate stability (not a peg, but stability), and also make sure that you are a net exporting country. To be so, you have to constrain domestic demand because that reduces imports. Imports are approximately proportional to the GDP statistically. Exports are dependent on the demand in foreign land and you make the export sector more competitive and constrain demand. This way you accumulate foreign currency.

    You cannot get rid of the foreign currency. For imports, you have to convince the world that they have to hold your IOU and it gets into circular logic like this.

    I am completely convinced about Basil Moore’s thesis. Instead of blaming the policies of government and central banks, he has put himself in their shoes and tried to see their point. The officials in developing countries are not so neoliberal.

    Reply

    1. I am completely convinced about Basil Moore’s thesis.

       Yes, but is everyone? Economic history is the story of ongoing dispute, like philosophy, and unlike the hard sciences, because the issues are not satisfactorily decidable based on experiment and evidence.

       This is shown in the terminology of the prevailing universe of discourse, where there is an “orthodox” (majority) position and a variety of “heterodox” positions that are marginalized since none of them has yet accumulated the momentum to seriously challenge orthodoxy.

       One of the heterodox positions might even be more in correspondence with fact than the orthodox position, but as long as the majority is unconvinced, orthodoxy’s perception and conception determines “reality.” That is what debate is about.

       However, it is not necessarily the soundest argument that wins the day.This is President Obama’s mistake for example. He thinks that one can debate issues objectively based on fact and that Americans share common values, so that “bipartisanship” is possible. That is demonstrably not the case where ideologies and their norms are pitted against each other in mortal combat for advantage, and where all is “fair” in a political war in which the stakes are high, and the major players consider it to be a zero sum game.

       The international currency game is now not only an economic factor but also a political one. Due to the fragility of the present system and dissatisfaction with dollar hegemony, there is a push on to extend the role of unelected and unaccountable technocrats in the eventual creation of a single currency to be administered by an independent body. It’s easy to see where that is headed.

       UN report calls for world to ditch dollar, migrate to new global currency

       “A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency,” the U.N. report said.
       The report said a new reserve system “must not be based on a single currency or even multiple national currencies but instead, should permit the emission of international liquidity — such as SDRs — to create a more stable global financial system.”

       Of course, this begs the question of who is going to control and adminster this?

       Reply

       1. Summers, Geithner, Orzsag, others) is just the way he and Rubin like it, says an NSC insider. Froman’s end-game scenario for the dollar collapse is to kick the problem upstairs and flood the world with SDR’s. Notice that the IMF has leveraged its balance sheet for the first time in history using the euphemistically named “New Arrangements to Borrow” or NAB. Stay tuned for high velocity NABs.

          http://us1.irabankratings.com/pub/IRAMain.asp

    2. so Ramanan, to recap, where exactly would MMT conflict with Moore?

       Reply

       1. I don’t agree with Moore on many points – for example he says that US current account deficit is not a problem 🙂

          Moore makes some suggestions that countries should decide depending on their economy. He has suggestions such as dollarization and Euroization etc, currency blocks, which I am not sure of.

          Its the exchange rate dynamics (narrative method, no math though) which is described by Moore which I found illuminating.

          The conflict is more on the current account deficits of non-reserve currencies. The style of description is also a bit different.

          I however think that even the US current account deficit is not sustainable. Of course thats my 2¢ but Godley thought so since many many years and one of the recent articles is

          The United States and Her Creditors – Can the Symbiosis Last?
          http://www.levyinstitute.org/pubs/sa_sep_05.pdf

          and

          Seven Unsustainable Processes (1999)
          http://www.levyinstitute.org/pubs/sevenproc.pdf

          Of all scholars, I like Godley’s views. He of course must have had Moorian description in his head since long. (It’s just that Moore’s description of exchange rates is more detailed and illuminating)

          As a long-term proposition the hypothesis of ever-increasing government deficit relative to income accompanied by continuous external deficits is implausible. A full steady state could be restored by a reduction in the fiscal policy or by a rise in trade performance ratio. These are two, related sets of pressures which might cause such adjustment to occur. One is the potential difficulty in financing the government budget when increases in government debt much directly or indirectly be taken up by foreigners. The other is the probability that continuous external deficits will make the national currency less and less acceptable in currency markets, provoking rapid falls in the exchange rate for the currency

          – Macroeconomics by Wynne Godley and Francis Cripps (1983)

          Of course, one may have objections to the wordings (I don’t), but the book is about how the monetary economy works, introducing balance sheets, stocks, flows, causation etc! The book is absolutely correct about everything.

       2. Andy Grove brings in another perspective in here.

          Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system — the freer, the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

          No. 1 Objective

          Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal.

          The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent- shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries. [emphasis added]

          Grove concludes:

          The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted.

          Trade imbalances have real consequences, and they will be addressed politically if they are not economically. Pressure is building in the US, not so much because of the nominal effects on the dollar but because real consequences are starting to pinch.

       3. so let me ask you this question:

          is MMT incompatible with non-zero policy rates?

          e.g. current account sustainability?

       4. Its of course compatible with non-zero policy rates.

          I am not sure of current account sustainability. For example Bill’s recent blog saying its no problem.

          MMT says exchange rates move smoothly (implicitly assumes). Me inspired by Moore says highly unlikely and it is this which is an issue. Small technicality but a big issue.

          There is a difference between a currency smoothly devaluing and a rapid fall. A big difference. Plus of course, for a given “fiscal stance”, current account is bad for aggregate demand.

          To suppose that there exists some smoothly functioning automatic mechanism of adjustment which preserves equilibrium if only we trust to methods of laisser-faire is a doctrinaire delusion which disregards the lessons of historical experience without having behind it the support of sound theory – John Maynard Keynes

       5. The US doesn’t have to ever go back to the bond market or even increase its statutory debt limit. It can issue US Notes (31 USC 5115, Congress would need to drop limits) or coin new money equal to the deficit every year (31 USC 5112(k), Tsy could do this tomorrow).

          Beyond that, there are two tools missing from the govt sector (Tsy-Fed) toolbox-
          1. A market based system for the govt to achieve its desired current balance account.
          2. A market based system for the govt to achieve its desired inflation rate.

          The solution is simple: Regulate current account balance with Warren Buffett’s import certificate market. Regulate inflation with William Vickrey’s gross markups market.
          http://moslereconomics.com/2010/06/11/bloomberg-millionaires-ranks-grow-14/#comment-21857

          In exchange for replacing the FOMC with Randy Wray’s robot (paying 0.25% IOR and charging a 0.50% discount rate forever, presumably, in true robot fashion, even after human life is extinct), we could throw the Fed a bone by letting them set up and run the Buffet and Vickrey markets as Tsy’s fiscal agent.

       6. “Beyond that, there are two tools missing from the govt sector (Tsy-Fed) toolbox-
          1. A market based system for the govt to achieve its desired current balance account.
          2. A market based system for the govt to achieve its desired inflation rate.”

          1. Who cares what the current account balance is? Unemployment and inflation are the only things we should worry about. I’ll point out further that the authors of the paper you cite do not seem to understand MMT. Buffett certainly doesn’t.

          2. The market based system for regulating inflation is anything but. What you want is for producers to charge whatever the market will bear and then adjust aggregate demand through taxation and government spending. That leads to the most efficient allocation and production of goods and services. What Vickrey is proposing seems as Rube Goldberg-ish as regulating the average MPG of new cars as a way to reduce gasoline consumption.

       7. Tom Hickey, I do not understand. Warren suggests we should sit back and watch our HDTV’s while those chinese work themselves to the bone. Imports are a benefit, the more the merrier. Andy Grove is trying to think in timeframes that are intergenerational it seems. What do I care if the USA kids born in 2050 are idiot drug using bums as long as I can get the china man to slave for me for the majority of my lifetime – and his kids getting the knowledge and skills that make my kids his kids slaves? Andy Grove is asking me to think of other people, but I like Warren Better, he only wants me to think of myself in the here and now. The USA kids of the future can fend for themselves. Numero Uno Senore!

       8. I’ll point out further that the authors of the paper you cite do not seem to understand MMT
          If you’d followed the link you’d see lead writer is Dimitri Papadimitriou who’s co-authored MMT papers with Randy Wray and Matt Forstater, among others. He’s also served as Vice-Chairman of the US Trade Deficit Review Commission.

          What you want is for producers to charge whatever the market will bear
          Right, and that’s exactly rent seekers create cost-push inflation.

          Certainly as Abba Lerner first pointed out, demand-pull inflation can be controlled by Functional Finance (adjusting taxes and spending). However, he also noted that cost-push inflation cannot be.
          Lerner was perhaps the first to recognize the importance of accounting for inflation in Neo-Keynesian theory.. he introduced the concept of “seller’s inflation”, a generalized form of cost-push inflation which was to become central to Sidney Weintraub and Post Keynesian economics… his analysis of inflation led to an early advocacy of incomes policies (1947) and, later, his remarkable “Market Anti-Inflation Plan”
          http://www.economyprofessor.com/theorists/abbalerner.php

          Strawberry Picker, “Numerp Uno Senore”? Are you picking strawberries on Sicily?

       9. Beowulf,

          Well I had followed your link and skimmed the paper. Upon re-reading, I can see that the authors make many “in-paradigm” statements in the introduction, but I still find the whole focus on current account balances to be horribly misplaced. If a large trade deficit is creating too much of a demand leakage, the government can make up for it with larger budget deficits. There’s no reason to attack the current account balance per se.

          As for inflation, “cost-push” inflation is “caused by substantial increases in the cost of important goods or services where no suitable alternative is available.” (see wiki page on cost push inflation)

          This does not happen simply because a producer wants to increase his profit margins unless he has a monopoly. Monopolies are pretty much a thing of the past unless it is government created and enforced.

          In any case, there are better ways to disable monopoly pricing power than some crazy profit margin entitlement auction and trading scheme.

13. errr, “current account balance”. Here’s the backfill on Buffett and Vickrey proposals:

    The authors thank Wynne Godley for helpful comments on an earlier draft [thought that was interesting b.]… a plan proposed by Warren Buffett, in which importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods. Exporting firms could then sell certificates to importing firms on an organized market… we estimate that the plan would raise the price of imports by approximately 9 percent, quickly reducing the current account deficit to about 2 percent of GDP.
    http://www.levyinstitute.org/pubs/wp_538.pdf

    “The achievement of a reasonably full degree of employment without accelerating inflation will require development of some additional tool.” As an example of the kind of instrument needed, Prof. Vickrey proposes a penalty tax on excess markups, as a means of containing inflation. Starting from a proposal by Prof. A. Lerner [why is that name so familiar? :o) b.] to develop “a market in rights to raise prices, with those wishing to raise prices being permitted to do so only by purchasing the right from others willing to lower theirs to a corresponding degree”, Vickrey concludes that to make it workable, instead of prices, gross markups should be the starting point:

    “Firms would be given initial entitlements to gross markup on the basis of past performance: These entitlements would be transferable and a market in them would be developed… the resulting equilibrium price of entitlements would automatically adjust to provide the degree of restraining pressure to keep inflation at this predetermined level.”
    http://www.monetary.org/smudget.htm

    Reply

14. since imports are real costs and exports real benefits why not just drop all import restrictions?

    govt’s job is to remove the restrictions it’s imposed that are currently keeping us from full employment, such as removing fica taxes NOW via a payroll tax holiday

    Reply

    1. Warren I had some friends out in the strawberry field who were changing their religion to be Amish, because those people don’t have to pay taxes like the rest of the religions and the rest of us do. Of course they don’t get disability or SS when they get old, but many tell me they don’t expect it to be there anyways. Lots of my latino friends are thinking about adopting the new religion to get out of paying payroll taxes. I am not sure what to do because I may get injured out in the strawberry field and need disability, what would be your wise advice?

       Reply

15. so it’s not at all about ‘job creation’

    it’s about sustaining public infrastructure to the full extent of public purpose with as few people as possible. That includes incentives for the economy to work towards public purpose.

    and adjusting taxes to ensure the remaining private sector fully employs itself.

    Reply

    1. Warren, I don’t think Andy Grove is saying anything different. He obviously is not talking about government creating jobs directly but rather insuring the conditions for full employment. He names this as the numero uno priority of public purpose. This clearly has to be accomplished mostly by the private sector, and the question is regarding the means. Should government support policies that constrict the bargaining power of labor, for example, as conservatives want, or should it insure that demand is sufficient to real output capacity along with creating enough investment for population growth. There is also the question of the JG, proposed my many MMT’ers, including yourself.

       As I understand the MMT analysis, e.g., presented by Bill Mitchell, the cost of foregone opportunity and waste of human resources far outweigh an other factor in considering priorities.

       What Grove is saying also, is that it not only an economic matter, but also a political and social one that a government eventually forced to act on precipitously, if it fails to anticipate the problem and head it off. LT employment in the US approaching depressions levels.

       Grove:

       I fled Hungary as a young man in 1956 to come to the U.S. Growing up in the Soviet bloc, I witnessed first-hand the perils of both government overreach and a stratified population. Most Americans probably aren’t aware that there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it.

       It seems to me that MMT’ers are in general agreement that full employment along with price stability, which conservatives claim is impossible, is the social and economic priority of government. MMT proposes a means for accomplishing this with minimum disruption of markets. On the other hand, Grove as a very successful capitalist is echoing the demand of labor that government do something about the jobs leak. The political pressure is rising, and some policy solutions will be forthcoming. The odds now are on squeezing China instead of adopting MMT-based monetary/fiscal policy domestically. China is noticing it, too, as their loosening the peg shows.

       The question now is shaping the means to meet this international challenge that is affecting US politics before a dangerous rift between the US and China develops. That’s the way we are headed.

       Reply

16. From Godley quote above:

    “One is the potential difficulty in financing the government budget when increases in government debt much directly or indirectly be taken up by foreigners.”

    This is complete crap for the US. I don’t have to be an MMT’er to understand that. How does one justify following Godley on this sort of thing?

    I like the idea of ignoring the deficit as a primary focus, keeping one’s eye on the ball of inflation, and responding to it through fiscal policy as per MMT (insofar as the MMT policy prescription is concerned).

    Reply

    1. meant current account deficit above

       Reply

    2. Thats because the idea is that government deficit widening leads to current account deficit widening as well. The domestic private sector has preferences to purchase government debt and if the national income doesn’t grow as fast as the government debt, someone has to purchase the leftover. If the central bank doesn’t want to purchase government debt, foreigners must buy the debt and it depends on their preferences of purchasing government debt and their expectations of the exchange rate.

       Foreigners not wishing to take your IOU is something closely related to currency acceptability.

       Many nations have gone through the indiscipline in the external sector to face these issues. Godley is right.

       Reply

       1. I think that’s backwards. Foreign central banks purchase US government debt because it yields more than deposits at the Fed or with JP Morgan. They don’t purchase it because domestic investors won’t. Foreign central banks on balance are more risk averse than domestic investors. That’s partly why the CDO was invented – too much foreign central bank demand for US treasuries.

       2. technically, the way its said is tsy secs function to offset operating factors at the fed.

          tsy spending adds balances to total fed reserve accounts of member banks and foreign govs and a few agencies.

          in aggregate, these balances have nowhere to go unless the govt offers an alternative account at the fed.

          tsy secs are said alternative accounts

          see ‘soft currency economics’

       3. Right – I’ve seen SCE and didn’t contradict it – China still chooses what it wants to buy with its dollar balances; the Fed doesn’t determine that choice.

       4. Firstly the participants are not just central banks. Secondly, an increase in current account deficits may induce some central banks to sell their holdings of Treasuries to other central banks to accumulate other currencies.

          The US is too special a case to make a theory out of it. A poor African nation running a current account deficit does NOT mean that foreigners wish to accumulate that nations Treasuries. Its a supply-sider argument to say that a current account deficit is because of foreigners’ desire to save in the currency. Its more complicated.

          Its true that the foreign demand for US treasuries is higher than domestic demand and hence you see low yields for US Treasuries. Completely agree. Doesn’t hold for most nations.

          At any rate, the US public debt is still not in the unsustainable levels to induce foreigners to sell their Treasuries. However lessons to be learned from nations who have gone through such things. Fiscal policy alone cannot resolve the crisis. The fiscal stance can be relaxed quite a lot but there are things needed to be done with the external sector as well.

       5. For example, the United Kingdom can import a lot of stuff from China and when the pounds reach the People’s Bank of China’s account at the Bank of England, they may simply purchase US Treasuries instead of buying gilts.

          The Bank of England can continue its monetary policy operations but Her Majesty’s Treasury may have troubles issuing gilts with a fiscal expansion may lead to a depreciation of the pound. The debt issuance is a bit troublesome because the income of the UK private sector wouldn’t have grown at the same rate as the government debt and an expectation in the fall in currency prices leads to foreigners not willing to buy the gilts. Debt monetization doesn’t help either, currency markets do not like it.

          No way the United Kingdom can run current account deficits forever! Fall in the pound may help exports and reduce imports but rapid falls leads to crash landing because it worsens the balance of payments for a while until some harsh measures are taken.

       6. For example, the United Kingdom can import a lot of stuff from China and when the pounds reach the People’s Bank of China’s account at the Bank of England, they may simply purchase US Treasuries instead of buying gilts.

          This is the advantage that the US has as issuer of the global reserve currency, along with denomination of petroleum in dollars. All other countries need to accumulate dollars to defend their currencies and to purchase petroleum. So the US current account deficit is offset by its capital account surplus. Henry C. K. Liu dubbed it “dollar hegemony” in a 2002 article and the name stuck.

          G. W. Bush bragged about this return of capital to the US for investment, and it is (at least partially) why Cheney said that deficits don’t matter. The idea was that the capital account surplus would be used to fund productive investment, leading to growth. But, as Michael Hudson has observed, it went instead to finance capitalism.

17. I went through these issues with Wynne quite often and if it matter could dig up the old emails.

    He would write things like ‘there is a shortfall of 9% of GDP the budget deficit can’t go up that high so it will have to be resolved via the trade deficit’ or something like that. When I asked why the budget deficit couldn’t go up that high he’d say there is no political will for it to be that high. I’d argue people wouldn’t read it that way. I guess I was right on that point.

    Anyway, he was very reluctant to propose double digit budget deficits as the answer to full employment and optimizing real terms of trade at least partially out of fear that there would be side effects yet to be determined. In other words, seemed he recognized that in theory there is no problem with whatever deficit results from full employment policy, in practice he was reluctant to go there.

    Reply

    1. Interesting. I seems that Godley was acknowledging that uncertainty is a key factor to be taken into account and that ignoring or minimizing it can lead to unforeseen and unintended consequences. This is one of the great limitations of the so-called social sciences. Too often, theoretical predictions based on hypothetical assumptions and questionable data are taken as factual outcomes.

       Sounds like the correspondence between you has historical value, and should be made available in some form more accessible than in a blog comment, if it isn’t already up somewhere.

       Reply

       1. From Warren’s summary, I take Wynne’s point to be that the trouble with high budget deficits wouldn’t be the economic side effects per se, but rather the political consequences. Which seems to be (considering the deficit hysteria paralyzing both parties) exactly what we’re facing now.

       2. Yeah, but how different would things be if the President got on TV and explained to people that the deficits are self-financing in the sense that government spending funds Treasury bond purchases? And that the only thing wrong with running large deficits is that it could lead to too much aggregate demand and hence inflation, both of which are clearly problems for the time until the economy picks up and unemployment gets to 2006 levels? Would it really be so dangerous politically for him to do that? More dangerous than 16% underemployment?

       3. ESM, That’s a good point, the President could use his bully pulpit to dramatically change the political facts on the ground. He could do that be explaining that that the budget deficit number by itself tells you nothing, that that our primary economic indicators we should be paying attention and responding to are the unemployment and inflation rates, whatever budget number is required to keep those two rates in line is acceptable.

          Wait a second, those are already supposed to be our primary economic indicators! It’d be a good start if the President and his team started recognizing that.

          *specific mandate of promoting “maximum employment, stable prices, and moderate long-term interest rates… moderate long-term interest rates is frequently dropped from statements of the Federal Reserve’s mandate… because moderate long-term interest rates are generally the byproduct of price stability.”fn 10
          http://www.federalreserve.gov/newsevents/speech/bernanke20100525a.htm

    2. Warren,

       From his texts, obviously he recognized that budget deficits and public debt are endogenous. This is clear in “Monetary Economics” as well as his text with Francis Cripps from 1983. He has precise expressions on the public debt and budget deficit – places where it is shown to be equal to numbers involving the “propensity to save” proxied as an expression related to propensities to consume from income and wealth. In his models higher fiscal stance simply improves employment with no effect on interest rates with minor effect on prices. His models have the choice of assuming exogeneity of the yield curve which he sets at various places.

       The important question is if fiscal policy alone can do the trick. Unfortunately – and I am sure without knowing him personally – he would have been adamant to not accept it.

       In closed economies, his “fiscal stance” does the job. Not in open economies. Open economy issues change the game altogether. As he keeps saying in various places,

       “Those hoping for a market solution may be chasing a mirage.”

       His points can be interpreted as “No country can expand fiscally on its own. It increases trade deficits and the later the currency fall happens, the more painful it is.”

       His book Monetary Economics has a model with floating exchange rates and hundreds of equations where the long run solution leads to a balance of trade. So its comforting. However, that is hardly seen in practice.

       And he has models where the public debt keep rising without any issue!

       The most important point is the currency markets. Doesn’t make a difference if we ban the speculators. They do not accept continuous trade deficits. There is a difference between slow falls – which is good and rapid falls which is bad.

       Wynne Godley’s attitude is different. One country cannot come to an international conference and announce that public debt is irrelevant. It needs concerted action and political will of ALL nations. It also needs new agreements on how we trade with each other at an international level.

       I am sure he would have agreed that if all nations take the “fiscal stance” to a higher level, a lot of problems can be solved. Hence you see him writing about concerted action.

       Imagine – after you become the President in 2012, you announce that the fiscal policy is ultra expanding. If the currency markets fall, that will give you hard time because you have to fight a problem of increased balance of payments. For example, oil prices undergo an “exchange rate pass-through effect”. A slow/orderly fall in the dollar may help you on the other hand.

       Almost all of Wynne Godley’s predictions came true. I think he would have expected a collapse of the dollar, though he doesn’t state it explicitly anywhere. It didn’t because there was a “flight to quality” because the markets thought/knew that the crisis has spread to all nations, not just the US.

       Reply

       1. PROSPECTS FOR THE UNITED STATES AND THEWORLD: A CRISIS THAT
          CONVENTIONAL REMEDIES CANNOT RESOLVE http://www.levyinstitute.org/pubs/sa_dec_08.pdf

          It seems to us unlikely that, purely for political reasons, U.S. budget deficits on the order of 8–10 percent through the next two years could be tolerated, given the widespread belief that the budget should normally be balanced. But looking at the matter more rationally, we are bound to accept that nothing like the configuration of balances and other variables displayed in Figures 3 and 4 could possibly be sustained over any long period of time. The budget deficits imply that the public debt relative to GDP would rise permanently to about 80 percent, while GDP would remain below trend, with unemployment above 6 percent.

          Fiscal policy alone cannot, therefore, resolve the current
          crisis. A large enough stimulus will help counter the drop in
          private expenditure, reducing unemployment, but it will bring
          back a large and growing external imbalance, which will keep
          world growth on an unsustainable path.

       2. Fiscal policy alone cannot, therefore, resolve the current
          crisis. A large enough stimulus will help counter the drop in
          private expenditure, reducing unemployment, but it will bring
          back a large and growing external imbalance, which will keep
          world growth on an unsustainable path.

          Ramanan, I doubt that anyone who thinks about it disagrees with this. While it is a short-term solution in the march to globalization to jump-start the emerging economies, it clearly is not sustainable in that this involves a transfer of real wealth to the US in exchange for paper. The US presently consumers 25% of the world’s energy although it has only about 5% of the world’s population. That’s not a stable situation as the world develops.

          In the interim, before the emerging nations develop sufficiently large consumer bases, it works for both developing countries and the US, since the US receives real goods for paper and the emerging nations have an eager market for their under-priced goods. But what is under-priced is consumed to excess, and over-consumption is unsustainable in the long run.

          What is taking place is a great leveling as the emerging nations and the developed nations converge. This involves great travail and will be take place without fits and starts, and also setbacks, but it is inevitable. Over the past decade or so the US consumer has had it good. That can’t last forever. Now Chinese workers are demanding higher wages and better treatment.

       3. Should be: “will NOT take place without fits and starts, and also setbacks

       4. In private conversations he agreed exports were costs and imports benefits and with fiat money full employment could be sustained with any size trade deficit, with the risk that the dollar would go down if deficits exceeded total savings desires.

          For the last several years he worked very closely with Professor Marc Lavoie in Ontario. He and Mario S are exceptionally good on all points as well from what i’ve seen.

18. my comments on wynn’s piece sent around for comments 10/8/07:

    Warren Mosler to WynneGodley,
    10/8/07
    HI WYNNE, SOME COMMENTS BELOW:

    Methods and concepts

    The real national income, Y, is defined as

    Y = G + X – M + PX A)

    where all variables are deflated flows, G is government expenditure, X
    is exports plus property income and foreign transfers, M is imports
    and PX is total private expenditure. Subtracting T, defined as
    government taxes and transfers, from both sides and rearranging we
    have

    Y – T – PX = [G – T] + [X – M] B)

    or 0 = [G – T] + [X – M] – PNC C)

    WYNNE, LET ME SUGGEST SOMEWHERE IN HERE YOU STATE THAT YOUR MODEL IS
    STRICTLY ONE OF FINANCIAL ASSETS.

    WHILE MAINSTREAM MODELS- BEST I CAN TELL- CONTINUOUSLY ‘MIX METAPHORS’
    WITH BOTH FINANCIAL AND REAL ASSETS LINKED BY ASSUMED NOMINAL VALUES
    OF REAL ASSETS, YOU DON’T DO THAT WITH YOUR MODEL. INSTEAD, YOU FOCUS
    ON ACCOUNTING FOR HOW FINANCIAL TRANSACTIONS ALTER STOCKS OF FINANCIAL
    ASSETS BETWEEN DEFINED SECTORS, AND THEN ANALYZE THE RAMIFICATIONS OF
    THE FINANCIAL ASSETS OF YOUR DEFINED SECTORS.

    THIS RAISES THE QUESTION OF HOW TO DECIDE THE RELEVANT SECTORS, AN
    EXERCISE SIMILAR TO FINDING RELEVANT MONETARY AGGREGATES.

    I HAVE MADE THE CASE THAT THE RELEVANT ‘M’ FOR QUANTITY THEORY AND
    ‘MONETARY POLICY’ IS (YOUR) ‘NET FINANCIAL ASSETS’ OF THE NON GOVT.
    SECTORS, WHICH EQUALS RESERVES, CASH IN CIRCULATION, AND GOVT.
    SECURITIES OUTSTANDING. IT DOES NOT INCLUDE BANK DEPOSITS AND MOST OF
    THE OTHER AGGREGATES THAT HAVE BEEN STUDIED OVER THE YEARS BY THOSE
    SEEKING THE ‘M’ OF QUANTITY THEORY.

    BANK DEPOSITS ARE ‘GROSS’ FINANCIAL ASSETS AND NOT NET FINANCIAL
    ASSETS, AS LOANS ‘CREATE’ DEPOSITS, FOR EVERY DEPOSIT THERE IS A
    CORRESPONDING ‘LOAN’ AS A MATTER OF ACCOUNTING. THIS IS MUCH LIKE THE
    ‘OPEN INTEREST’ IN FUTURES MARKETS. AND YES, OPEN INTEREST PROVIDES
    USEFUL INFORMATION, BUT IS NOT CONSIDERED THE ‘STUFF’ OF QUANTITY
    THEORY FOR THE UNDERLYING COMMODITY BY ANY FINANCIAL ANALYST.

    THE MV ASPECT OF QUANTITY THEORY TELLS A MORE RELEVANT STORY WITH M
    BEING NON GOVT NET FINANCIAL ASSETS (RATHER THEN THE OTHER M’S I’VE
    SEEN). AS THIS M IS THE NET FINANCIAL EQUITY OF THE NON GOVT SECTORS
    THAT SUPPORTS THE CREDIT STRUCTURE OF THAT CURRENCY.

    UNDERSTANDING NET FINANCIAL ASSETS AS THE M OF QUANTITY THEORY AND THE
    NET FINANCIAL ASSETS THAT SUPPORT THE CREDIT STRUCTURE FURTHER TIES
    YOUR MODEL TO CONCEPTS OF ‘FINANCIAL FRAGILITY’ STORIES WITH MINSKY’S
    CURRENTLY THE MOST NOTABLE. AS CREDIT EXPANDS (HORIZONTALLY)
    ‘SUPPORTED’ BY A GIVEN EQUITY BASE OF NET FINANCIAL ASSETS, FRAGILITY
    INCREASES AS INCOME DOESN’T KEEP UP.

    SPECIFICALLY, FOR EXAMPLE, IN THE US ECONOMY, WITH OUR COUNTERCYCLICAL
    TAX STRUCUTRE, WE EXPERIENCE A REDUCED RATE OF GROWTH OF NET FINANCIAL
    ASSETS (DECLINING GOVT DEFICITS) CORRESPONDING TO AN INCREASED RATE OF
    GROWTH OF THE NON GOVT. EXPANSION OF CREDIT NECESSARY TO SUSTAIN A
    GIVEN LEVEL OF AGGREGATE DEMAND.

    LASTLY AT THIS POINT, LET ME ADD THAT THE CHOICE OF HOW TO SUB DIVIDE
    THE NON GOVT SECTOR IS ARBITRARY. WHILE YOU HAVE SELECTED THE THREE
    SECTORS I ALSO FOCUS ON, I WOULD NOTE THAT AT TIMES IT IS ILLUSTRATIVE
    TO FURTHER SUBDIVIDE EACH OF THE SECTORS AS YOU DO TOWARDS THE END OF
    THIS PAPER.

    Equation C) says that private disposable income less private
    expenditure (private “net saving”), PNC, is always identically equal
    to the government’s budget deficit plus the current account surplus.
    Though it is in itself nothing more than an accounting identity, the
    equation has some important implications. It implies a change in a
    relevant stock variable; the budget balance implies a change in the
    stock of government debt, the current account balance implies a change
    in the net stock of overseas assets and the private balance implies a
    change in net private wealth.
    AS MEASURED IN NET FINANCIAL ASSETS. THIS CAN NOT BE RESTATED ENOUGH
    WHEN ADDRESSING THE MAINSTREAM.

    In view of the logical relationship between stocks and flows OF
    FINANCIAL ASSETS, there are limits to the extent to which any of these
    balances can (be allowed to) move.
    AS CREDIT AND INCOME RATIOS HAVE PRACTICAL LIMITS FOR ALL BUT THE GOVT SECTOR.

    If the ratio of any one of the balances to GDP exceeds the nominal
    growth rate, this implies that the counterpart growth of liabilities
    (or assets) is on an exploding trajectory .

    IF SUPPORTED BY A SIMILAR GROWTH RATE OF THE GOVT DEFICIT TO PROVIDE
    THE NET FINANCIAL ASSETS TO SUPPORT THIS GROWING CREDIT EXPANSION OF
    THESE NON GOVT SECTORS, THE PROCESS IS SUSTAINABLE, THOUGH LIKELY TO
    BE HIGHLY INFLATIONARY.

    THE (NOMINAL) LIMITS OF THE GOVT SECTOR ARE POLITICAL, WHILE THE OTHER
    SECTORS ARE CREDIT CONSTRAINED. AS AGAIN DEMONSTRATED BY THE LATEST
    ‘CREDIT CRISIS’

    So we may expect that the balances fluctuate within a range of roughly
    plus or minus 4%.
    IF 4% IS A LIMIT, THAT MUST ASSUME THE POLITICAL LIMIT OF GOVT DEFICIT SPENDING?

    And indeed the mean ratio of the budget balance to GDP between 1960
    and 2006 was xx% (SD xx), for the foreign balance it was yy% (SD yy)
    and for the private balance it was zz% (SD zz)). Note that when
    private expenditure exceeds income (ie when net saving is negative)
    borrowing from the financial sector must be taking place, with
    implications for private debt relative to income. [Chart showing
    this?]
    Although the three balances must always sum exactly to zero, no one of them
    is a residual more than any other. Each balance has a life of its own,
    and it is the level of real output which, with minor qualifications,
    brings about their equivalence.
    I WOULD ARGUE THE GOVT SECTOR IS QUALITATIVELY DIFFERENT AS IT IS NOT
    CREDIT CONSTRAINED AS THE OTHER SECTORS ARE.

    To get some idea how this works, define three ratios. Let t, a sort
    of tax rate, be defined

    t = T/Y

    m, the import propensity

    m = M/Y

    and b, the ratio of PNC to GNP

    b = (Y – T – PX)/Y

    we may then write, having collected terms and divided through by a
    quasi-multiplier

    Y = ( G + X )/ (t + m + b)
    C)

    These equations are all accounting identities, everywhere and always
    true by definition, and they are all describing the same phenomena,
    with C) having the useful property that it brings the level of real
    output into the system of concepts. Underlying the main conclusions in
    our reports we use an econometric model in which exports, imports,
    taxes and private expenditure are determined as functions of such
    things as world trade, relative prices, tax rates and flows of net
    lending to the private sector. However neither the knowledge that this
    is the case nor any perusal of lists of econometric equations is, on
    its own, going to impart any intuition as to why over any period, past
    or future, the economy moved as it did. While fully aware that every
    term on the right hand side of C) is subject to cyclical effects as
    well to trends and random disturbances, we claim to be able to weave a
    useful tale around B) and C) when put on the same chart.
    Chart 1 [will clearly distinguish the lines]

    The lower part of the chart shows the year by year growth rate of GDP
    between 1985 and the second quarter of 2007. The upper part shows the
    quarterly evolution, over the same period, of the three balances
    expressed as proportions of GDP but otherwise exactly as described in
    equation B) and demonstrates how they always sum to zero. Note that
    the negative sign on PNC/GDP in equation B) signifies that the
    relevant line in the chart is describing private expenditure less
    disposable income (i.e negative saving) so all three lines, our three
    “drivers”, are in equivalence with one another in that an upward
    movement in each denotes an upward impetus, of equivalent size, to
    aggregate demand, and vice versa .
    YES, YOU HAVE ‘THE’ MODEL FOR AGGREGATE DEMAND.

    Each balance is measuring an arterial flow of expenditure into the
    economy by one sector less a counterpart outflow by the same sector.
    No rise in a sectoral balance can continue for ever nor, as already
    mentioned, can it permanently sustain a level in excess of the nominal
    growth rate.
    APART FROM GOVERNMENT- GOV CAN SUSTAIN ANY LEVEL OF NET SPENDING AS A
    MATTER OF POLITICAL CHOICE.
    The configuration of balances illustrated in the chart suggests that
    some rehabilitation of fiscal stance as a key regulator of the economy
    may now be in order and, by implication, some demotion of monetary
    policy from its present exalted status, its effect operating
    indirectly, mainly via net lending to the private sector as well as
    through its effect on the balance of payments via the exchange rate.
    MORE THAN AGREED!
    The first strong vertical line is inserted in 1992 and marks the
    beginning of the famously long period of relatively smooth and rapid
    “Goldilocks” expansion. The second vertical line is inserted in 1999
    when the first major Levy strategic analysis (Godley 1999) was
    published.

    The conclusions we drew

    It is not easy now to remember the storm of self-congratulation which
    enveloped the public discussion around 1999. The economy had enjoyed
    seven years of smooth and rapid expansion without inflation. The
    Budget was in surplus and the CBO was projecting a rise in that
    surplus. The US was (supposed to be) possessed of a New Economy and
    “the good times [were] here to stay”. The business cycle had been
    abolished, leading Alan Blinder to compare the US economy to Ol’ Man
    River, who just kept rolling along. The use of fiscal policy as a
    regulator had for ever been foresworn. And the budget surplus, shown
    in the in the chart as a negative balance in 1999, was welcomed in the
    public discussion as a good thing in itself, a view still apparently
    endorsed by Alan Greenspan in his recently published autobiography.
    SADLY TRUE.

    We took a radically different view, however. As the chart shows, the
    government and foreign sectors had both been falling throughout
    1992-1999, while private expenditure was rising much faster than
    income, so that private private net saving, for the first time in
    history, had become substantially negative while private borrowing and
    debt had risen to record levels. It should have been obvious to
    everyone at that euphoric time that this configuration of “drivers”
    could not possibly be sustained and that a major change in policy
    would soon have to take place.
    We made no short term forecast in 1999, our view (p.3 of 7US) being that
    ” [b]ubbles and booms often continue much longer than anyone can
    believe possible and there could well be a further year or two of
    robust expansion. The perspective taken here is strategic in the sense
    that it is only concerned with developments over the next 5 to 15
    years as a whole. Any recommendations regarding policy do not have the
    character of “fine-tuning” in response to short term disturbances.
    They ask, rather, whether the present stance of either fiscal or trade
    policy is structurally appropriate looking to the medium- and
    long-term future.”
    Our conclusion (p. 17 of 7 US) was that since the boom in private
    expenditure could not continue indefinitely and must at some stage go
    into reverse “the whole stance of fiscal policy [was] wrong in that it
    [was] much too restrictive to be consistent with full employment in
    the long run”. The implication for policy was that when the tide
    turned there would have to be a fiscal reflation of the order of $400
    billion (p.ref). We also took the view in 1999 (and again, with more
    precision, in 2001) that in the absence of measures to improve net
    exports, an adequate growth in output would generate a balance of
    payments deficit in 2006 equal to about 6% of GDP. This projection,
    which turned out to be quite accurate, was derived from some very
    straightforward econometric equations which have so far served us well
    and we have been surprised that so many people (including Chairman
    Bernanke ), when they belatedly realised how large the current account
    deficit had become, put the whole thing down to a “saving glut” in the
    rest of the world and not the “fault” of the US at all. But our 1999
    conclusion (p.18 of 7US) was that in addition to a large fiscal
    stimulus there would have to be a large real devaluation of the dollar
    – which we put at 20%.
    These judgements look quite good today. The boom did indeed continue
    for another year or so, but private net saving, as shown in the chart,
    started to rise sharply in 2000 – shown as a fall in the chart
    (because it is describing a fall in expenditure relative to income) –
    and this would have generated a swingeing recession had there not
    been, simultaneously, a large fiscal stimulus (also clearly shown in
    the chart). It is not a simple matter to measure the scale of the
    fiscal stimulus, but between 19yy and 19zz the CBO altered its
    projection of the budget balance in [1992] from $b to $b, using
    nearly the same projections for GDP. The stimulus was probably in some
    degree reinforced in 2001 by the huge relaxation in monetary policy,
    but the effect of this cannot have been very large at that time as no
    effect on private net saving can be observed.
    RIGHT, FED RESEARCHERS TOLD US IN PRIVATE SESSION THAT THEIR
    ECONOMETRICS SHOWED NO EFFECT FROM THE LOW INTRESEST RATES AND THAT
    THE ENTIRE RECOVERY WAS BETTER TRACED WHAT THEY CALLED THE ‘FISCAL
    IMPULSE.’

    Nothing was done to improve the balance of payments, which continued
    to deteriorate rapidly in 2002 and for several years thereafter.
    (I PREFER THE WORD ‘IMPROVE’ AS IMPORTS ARE REAL BENEFITS AND EXPORTS
    REAL COSTS.)
    We have not rehearsed all this merely to underpin a claim that our
    work has been a useful, if neglected, contribution to the public
    discussion. We are also implicitly confronting our view about how the
    economy functions (favourably) with those fashionable at the time and
    subsequently. In our strong opinion, the huge fiscal stimulus saved
    the US from a much deeper recession than actually occurred in 2001.
    But because this stimulus was applied slap contrary to the philosophy
    and rhetoric of the time, few have seemed to admit, or even notice,
    that it happened.
    AGREED!

    Post recession

    Having weathered the 2001 recession, the US economy (as Chart 1 shows)
    became dependent, between 2003 and 2006, on a renewed rise in private
    expenditure relative to income.
    I’VE ALSO POINTED OUT THAT THE NET FINANCIAL ASSETS ‘LOST’ TO THE
    SURPLUS YEARS WERE NOT FULLY RECOVERED BY THE SUBSEQUENT DEFICIT
    YEARS, WHICH MEANS THE NET FINANCIAL EQUITY OF THE NON GOVT SECTORS IS
    STILL INSUFFICIENT TO SUSTAIN AGG DEMAND AT PREVIOUS LEVELS-
    PARTICULARLY WHEN THE ‘NEUTRAL LINE’ FOR THE GOVT DEFICIT IS DRAWN AT
    4%. IN OTHER WORDS, THE HOLE DUG IN THE LATE 90’S HAS YET TO BE
    FILLED IN. THE SAME HAPPENED IN JAPAN. IT TOOK MANY YEARS OF
    RELATIVELY LARGE GOVT DEFICITS TO FILL THE WHOLE THEY DUG FROM 87-92.

    To evaluate this it is necessary to disaggregate the private sector
    into its two component parts – business and personal. [A new chart]
    will show that [expenditure by the business sector was falling between
    2000 and 2003. Expenditure by business then stopped falling while that
    by the personal sector belted ahead at such a rate that expenditure by
    the private sector as a whole relative to income rose again, by [3%]
    of GDP between 2003 and the present time. The rise in personal
    expenditure, on which the continued growth of the US economy became
    100% dependent, was directly and indirectly caused by the hysterical
    boom in the housing market.
    We have nothing unusual to say about the causes of this boom. It was
    partly generated by the excessively lax monetary policy.

    AND ALSO A ‘SECTOR SHIFT’ OUT OF FINANCIAL ASSETS AFTER THE STOCK
    MARKET REVERSALS AT THE TURN OF THE CENTURY. AND, THAT SAID, IF AGG
    DEMAND WERE SUFFICIENT CURRENT HOME PRICES SEEM BOTH AFFORDABLE AND
    SUSTAINABLE AT CURRENT LEVELS.
    It was also helped along by the discovery that mortgages (many of
    which became virtually valueless because of absurdly lax lending
    criteria) could be “packaged”, securitized and sold on, to the great
    profit of the lending chain, as financial instruments in US and world
    stock exchanges. That this was happening was well known two or more
    years ago, and it was quite well described in our September 2005
    report (p.8), so it is a bit strange that it continued for so long and
    that anyone was surprised by the debacle when it arrived.
    YES, AND HISTORICALLY CREDIT BUBBLES AND FRAUD DO DRIVE GDP FROM TIME
    TO TIME. LIKE ALL THE TECH FRENZY FUNDING OF HOPELESS BUSINESS PLANS
    THAT DROVE THE NASDQ TO 5,000. BUT IF UNDERLYING DEMAND IS CONTINUOUS
    VIA SUFFICIENT GOVT DEFICIT SPENDING THE REAL ECONOMY CAN SUSTAIN
    ITSELF REASONABLY WELL, AS IN THE LATE 80’S POST EQUITY CRASH.
    In all the Levy reports since (say) 2004 we have taken a strong view
    that the housing bubble would eventually burst, and that when it did
    the only sustainable way to avoid a general recession would be to
    increase net export demand. And that remains our view. [The present
    sit. is quite different from 2001 because the budget is now in deficit
    so the use of fiscal policy has become problematical – tho one cannot
    be sure!]

    LET ME ADD HERE THAT THIS MODEL ALSO TIES TO KEYNES’ ‘SAVING DESIRES’
    WHICH CAUSE THE NOMINAL WORLD TO ALTER SAY’S LAW VIA ‘DESIRED
    INVENTORY ADJUSTMENTS OF FINANCIAL ASSETS’ AND THEREBY ALTER AGG
    DEMAND.

    FOR EXAMPLE, CURRENTLY IT SEEMS (FOR THE US) THE NON RESIDENT SECTOR
    IS ALTERING ITS DESIRE TO ACCUMULATE $US NET FIANCIAL ASSETS, AS
    EVIDENCED BY A DECLINING US TRADE DEFICIT. ANOTHER EXPRESSION OF THIS
    IS ‘PORTFOLIO ALLOCATION’ WITH THE EVER INCREASING SOVEREIGN WEALTH
    FUNDS PERHAPS THE CENTER OF ATTENTION.

    THE NET IMPORTS (ALWAYS A NOMINAL CALCULATION) OF ANY NATION ARE
    NECESSARILY AN EXPRESSION OF NON RESIDENT DESIRES TO NET SAVE
    FINANCIAL ASSETS OF THAT NATION. SO, FOR EXAMPLE, WHEN $AUSTRALIAN
    ARE PART OF THE GLOBAL CURRENCY INDEX THAT FUNDS DESIRE TO MIRROR, IT
    MEANS THEY ALL ACCUMULATE THE APPROPRIATE % OF $A, THEREBY GRANTING
    AUSTRALIA THE ‘PRIVILEGE’ OF NET IMPORTS.

    SO THE PORTFOLIO ALLOCATIONS AWAY FROM $US ADDING TO US DOMESTIC AGG
    DEMAND AND ARE BOTH PUTTING DOWNWARD PRESSURE ON THE $US AND
    SUPPORTING US GDP GROWTH VIA THE EXPANSION OF US EXPORTS. THIS IS
    COMING AT A TIME WHEN DOMESTIC DEMAND FOR HOUSING HAS TAILED OFF, FOR
    REASONS ABOVE WELL STATED BY WYNNE. NET EXPORTS CAN SUPPORT AGG
    DEMAND AND GDP TO THE EXTENT NON RESIDENTS DESIRE TO REDUCE HOLDINGS
    OF $US NET FINANCIAL ASSETS.

    THE GOV FLOWS, HOWEVER, SEEM TO BE SUPPORTIVE OF A STRONGER $US, AS
    THE US BUDGET DEFICIT IS FAR LOWER THAN JAPAN’S OR EVEN THAT OF THE
    EUROZONE. THIS IS SOMEWHAT LIKE A ‘CROP FAILURE’ OF $US VS YEN OR
    EURO (AND POUNDS), AND WHILE A CROP FAILURE TENDS TO INCREASE THE
    (RELATIVE) PRICE OF THAT CROP ‘INVENTORY ADJUSTMENTS’ CAN CAUSE THE
    PRICE TO FALL NEAR TERM, PARTICULARLY WHEN INVENTORIES ARE RELATIVELY
    LARGE.

    SO YES, I FULLY AGREE WIH WYNNE THAT AGG DEMAND IN THE US IS
    MODERATING DUE TO LEVERAGE LIMITS OF THE NON GOVT DOMESTIC SECTORS.
    HOWEVER, I ALSO SEE NON RESIDENTS ‘LIQUIDATING INVENTORIES’ OF $ US
    FINANCIAL ASSETS WHICH SUPPORTS US AGG DEMAND SOMEWHAT VIA NET
    EXPORTS. THE RESULT IS A MUDDLING THROUGH PERIOD AT LOWER RATES OF
    GDP GROWTH. HOWEVER, AS LONG AS GOVT DEFICITS ARE KEPT TO A MINIMUM
    VIA THE POLITICAL PROCESS THE NON RESIDENT PORTFOLIO ADJUSTMENTS WILL
    RUN THEIR COURSE AND THE DRAG ON AGG DEMAND OF THE GOVT SECTOR WILL
    ULTIMATELY PREVAIL.

    IN CONCLUSION, LET’S NOT FORGET THE FORCES AT WORK THAT CAUSE THE NON
    GOVT DOMESTIC SECTORS TO HAVE A PERVASIVE DESIRE TO NET SAVE $US
    FINANCIAL ASSETS- THE ERRANT BELIEF (INNOCENT FRAUD) THAT SAVINGS ARE
    NEEDED TO FUND INVESTMENT. THIS NOTION HAS RESULTED IN TAX ADVANTAGED
    ‘SAVINGS’ FOR PENSION FUNDS, INSURANCE COMPANIES, ETC. ETC. AND, EVEN
    MORE INTO THE ABSURD, THE IDEA THAT PUBLIC PENSIONS SOMEHOW ARE ONLY
    SOLVENT IF ‘FUNDED.’ ALL OF THIS TOTAL NONSENSE CREATES POWERFUL
    FORCES THAT DRAIN AGG DEMAND, AND REQUIRE EVER LARGER GOVT DEFICITS TO
    SUSTAIN REASONABLE LEVELS OF REAL OUTPUT.

    THE IRONY IS THE SAME PEOPLE WHO OPPOSE GOVT DEFICITS ARE THE ONES
    SUPPORTING GOVT SURPLUSES AND EXPANDED SAVINGS PLANS.

    ALL THE BEST!

    WARREN

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19. Thanks for sharing the email.

    I know Marc, through emails. Whenever, I need to know something and can’t figure out on my own and dying to find out, I write to him and he replies with great patience. I like collecting his journal papers and books he has a chapter written by him – whatever is available on amazon. I like his articles/books for historic content as well as his work tackling the most technical point.

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22. While the deficit country pays for the surplus country, it has nothing to do with monetary policy. The central bank doesn’t lose any control.

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