Haven’t yet hit the ‘get a job buy a car’ accelerator.

Watch for car sales to be the indicator of more rapid growth.

Meantime, muddling through with modest growth remains an ok equity environment as fear of becoming the next Greece is turning us into the next Japan.

And, of course, we continue to underestimate the deflationary effect of the Fed’s zero rate policy which should be a good thing in that it allows us to have lower taxes for a given size govt.

49 Responses

  1. Double-entry bookkeeping was a great invention. It is a shame that so many macroeconomists and political pundits – and therefore, politicians themselves – seem to have forgotten it. One who hasn’t is the Financial Times’ Martin Wolf. And to the delight of all friends of the Levy Economics Institute, Martin cited in a recent column1 the financial balances approach of the late Wynne Godley, who spent his last years as a Distinguished Scholar at Levy.


  2. I was listening to an auto industry analyst the other day, and she was saying that the US auto industry is recovering. Ford is well managed already, and the bankruptcy go rid of a most of the dead wood at GM. She sees car sales increasing in the near term, but with the caveat that we are not going to see 14 million vehicles a year being produced, as before the crisis. She also sees a preference for smaller vehicles developing, which means lower price points and tighter profit margins. LIght at the end of the tunnel, but not so bright.

    1. Small cars are not profitable for the car industry. There was a hue reason why you see commercials for SUVs and not the smallest cars.

      My dad works in the auto parts industry and many of the plants are going all out. There has been a rash of aluminum part plant closures and the ones that remain are working overtime.

  3. Warren says: “…Watch for car sales to be the indicator of more rapid growth…”

    I am at somewhat of a loss. How can the result of government subsidy—false demand pulled forward in the form of credit expansion—be considered ‘growth’? Seems to me that this is akin to calling an injection of Crystal Meth an ‘energy boost’.

  4. Warren Said:

    {Meantime, muddling through with modest growth remains an ok equity environment as fear of becoming the next Greece is turning us into the next Japan.}

    We will be very lucky if things turn out so well. Japan wasn’t laboring under he efects of a $500 billion a year trade deficit, as the US is. Taking away $500 billion a year works out to about 3.5% GDP. Less money + more goods = deflation.

  5. “deflationary effect of Fed’s zero rate policy”? The argument presumably being that if the fed pays little by way of interest, that is less stimulatory than if it pays out lots (as under a high interest rate scenario).

    But that argument is crucially affected by whether interest is funded by taxpayers or by money produced out of thin air by the fed.

    If it’s taxpayer funded, then there is no deflationary effect from a rate cut because taxpayers gain whatever tsy holders lose. On the other hand if interest comes out of thin air, then there IS a deflationary effect from the above mentioned reduced amount of interest paid out (though, as per conventional wisdom, the net effect of low interest rates might still be stimulatory).

    Now this is getting complicated. Is there a full explanation anywhere as to why low interest rates are deflationary?

    1. Welcome to a “recovery” at the zero bound. (no one can re-fi to lower rate down here).


      My take: To address the output gap, with the banks belly-up, right now we need the ‘flow’ to be from the govt to the non-govt sector to satiate the savings desires of the domestic non-govt sector and the always zealous for USD foreign sector.

      In FY 2008 Treasury paid out $165B in interest on Treasury Securities. So far this year (2010) they are at $139B with 10 weeks to go in the FY. This with probably $2T additional securities issued since then. Albeit a small one, this is a reduced (as % gdp) flow primarily driven by monetary policy (interest rates to remain exceptionally low “for an extended period”).

      Fiscal policy can hence be adjusted to lower taxes to increase the govt sector deficit and provide “missing” NFA to the non-govt sector. This would be fiscal and monetary working together.

      US non-govt sectors savings desires, while imo always robust (after all they are constantly being told Social Security and Medicare are “bankrupt” by morons in govt), are even more so now after the GFC. Govt should implement bottom-up tax cut to icrease flow to the non-govt sector.


      1. Matt: I don’t disagree with anything you said. But I don’t think you answer my question, which is this. When the fed cuts interest rates, it pays less to tsy holders (actually just new tsy holders rather than existing tsy holders). I want to know what other changes take place at the same time. E.g. is the reduced interest payment matched by a reduction in tax. If so, there is no change in net government spending. Thus (ignoring other or indirect effects that interest rate changes may have) there is no change to government’s inflationary/deflationary stance. And that casts doubt on Warren’s claim that low interest rates are deflationary.

        Incidentally, when I say “government” I mean “government and fed” combined.

      2. Welcome to a “recovery” at the zero bound. (no one can re-fi to lower rate down here).
        If by zero bound, you mean the FFR rate banks pay on the overnight market, then yes. If you mean the prime rate paid by bank’s best customers and the higher rates paid by everyone else– not so much. A I’ve mentioned before, prior 1991 the prime rate markup floated but averaged about 1.5% above Federal Funds Rate. Since 1991, its been fixed at 3% above FFR.

        As I’ve also mentioned, SBA-guaranteed loans range from 4% to 7%, but that the state-owned Bank of North Dakota will refi any SBA loan for any amount at 1.5% below prime rate (for borrowers living in North Dakota, that is). Likewise, BND’s student loan adjustable rate is currently 1.78%. Time for, as Krugman would say, a bit of modeling. Lets see, if the FFR is 0.25%… Hey, its like the BND is using the old prime rate markup, 1.5% above FFR!

        I’m not a fan of state-owned banks and there’s no need for them (nor for the Fed to order banks to cut the prime rate immediately). The Fed could simply buy up loan portfolios and unilaterally cut the rates. Since the Fed has no interest rate risk, it could even cut ARM terms and then convert the loan to a fixed rate mortgage.

    1. This is great!

      Krugman’s specialization is international economics so he knows that a country can go bankrupt if it tried hard enough etc. He is right.

      The mechanism he gives is completely wrong though, because he doesn’t seem to know how the monetary system works in detail and secondly there are so many assumptions about prices/causalities etc.

      Wynne Godley (The Genius Himself) knew every causality in economics firm in his mind. His causality starts with income/wages etc with fiscal policy in the background. Rapid currency falls which I have been stressing is the reason a country can go bankrupt if it tries hard enough, as mentioned in his 1983 book with Francis Cripps.

      Even in the case of Zimbabwe, in addition to supply shocks it was wage increases which caused hyperinflation.

      1970s inflation was caused by wage increases which led to huge bargaining power of the worker class.

      When I say his causalities are right, I mean it IS right. He doesn’t have governments “spending before borrowing”, (which you may like) except in the initial “circuit”.

      Current account deficits are “financed” in his models.

    2. Galbraith writes in his response:

      “Paul’s logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur.”

      which is basically a rejection of the quantity theory – that’s the critical error made by Krugman in his post

      1. Economists seem to be incapable of recognizing the entry point of money creation is extremely important in determining its path through the economy.

        In the long run, Money ends up doing something efficient. In the long run, we’re all dead. In the short run, the govt giving money to a:

        1. bum
        2. Low income worker
        3. middle class family
        4. banker
        5. Rich local businessperson
        6. top 5% income worker

        results in very different paths for that money through the economy.

    3. Can’t stop laughing on

      “Now, I’m sure I’m about to get comments and/or responses on other blogs along the lines of “Ha! So now Krugman admits that deficits cause hyperinflation! Peter Schiff roolz” ”


      1. that post by Krugman was a massive strategic mistake. Liberals are so stupid sometimes.

      2. Yeah, liberals have this odd instinct to denounce anyone who’s even the slightest bit more liberal than they are. I believe the term for it is “punch the hippy”.

        Conservatives, to their credit, don’t go about calling in air strikes on their own allies (even the ones more conservative than they are!) just for kicks.

      3. Beowulf, I am generally in agreement with everything you write, but I don’t think you have this quite right. There are major fights among conservatives over who is more “pure.” Lots of folks formerly considered conservative have been shown the door. If the GOP can’t coalesce soon, they are going to have a problem with electability. In fact, that is the Dems best hope, since they are strongly committed to shooting themselves in the head.

      4. True, but look at the dynamic… for conservatives, the apostates are those who are too liberal. And over on the liberal side, the apostates are those who are too liberal. :o)

      5. Right. But, ironically, “liberal” for conservatives means “socialist,” whereas liberalism — free markets, free trade, and free capital flows as the basis of political freedom under market capitalism — is the ideology that they profess themselves. It all depends in the meaning of “liberal.” 🙂

      6. Tom,
        I starting to think that alot of this revolves around the Job Guaranty that is an essential part of MMT.

        (Aside: I saw your comment at Krugmans where you explained that the fact that when a country goes to FFNC, and they take over the monetary system this way, then it becomes incumbent on that govt to provide for full employemnt as the non-govt sector gives up this capapbility to provide full employment when they let the govt go to FFNC. Im summarizing your point. I dont think it was explained this way (or maybe I misssed it) as part of the dust up that occurred due to the Naked Capitalism editorial that opined that a JG was not necessary in MMT. Perhaps you could expand on that sometime as I for one never thought of it that way but now I think I am starting to see the technical (I always saw the moral) requirement for it. Great comment btw)

        These finished goods/industrial component export nations may be just (in their own way) doing their best to implement full employment. They (japan, germany and an emerging China) like to make things, and they seem willing to sell them to any buyers regardless of the currency that the buyers pay them with and they collect those foreign NFA and they are ok with that, it helps them to stay at a job. If they came around to the MMT point of view and/or converted to FFNC, they perhaps would look inward as with a FFNC they could implement a job guaranty to advance the local public purpose within the borders of their own country, increase the collective standard of living for themselves without all of this focus on exporting and the fallout/chaos from that.

        Ive overlooked/discounted this JG aspect of MMT until recently, Im starting to think it may be the most important part.

      7. Thanks, Matt. My point there was just a summary of the MMT position that the introduction of state money creates the possibility of less than full employment through the withdrawal of nongovernment NFA through taxation. Having created this situation, which is intolerable for the unemployed, it has the moral obligation to rectify this if it has the ability to do so. MMT shows that under a nonconvertible floating rate currency of which a monetarily sovereign government is the monopoly provider, there is no problem in doing so be increasing NFA through issuance. In a modern economy this is done through automatic stabilizers, but this has not be sufficient. Therefore, deficits may be required.

        According to further MMT analysis, the way to full employment together with price stability is through setting an anchor price, namely, a floor price of labor and hiring all willing to work at that price through implementing a job guarantee (JG) or employer of last resort (ELR) program funded by government. NAIRU is supposedly the way to full employment without inflation, but it only reaches “full employment” by redefining the term. Now there is talk of redefining the redefinition upward to about 8%. So, yes, the JG/ELR is crucial in achieving actual full employment together with price stability, thereby meeting the government’s welfare responsibility.

        While I think that this is a way to rectify a serious economic, political, and moral imbalance, there is much more that needs to be done, as Minsky’s analysis shows. Economics generally ignores finance, and many of the imbalances that arise are financial. For example, Warren has a proposal for reforming the financial system. I regard that as an integral aspect of MMT.

        This approach needs to be implemented globally, and, in addition, global imbalances resulting from external trade also need to be addressed. Trusting floating rates to adjust and bring exchange markets in order with real conditions seems to me to be naive. International markets are not perfect either, and they need to be managed and policed, so that no one games the system.

        For example, see Michael Pettis on Chinese “financial repression” and its effects here. As someone points out in the comments, the Chinese learned this from the Western elite, James K. Galbraith goes beyond this in The Predator State to show how state capture siphon resources for private gain. Then there are externalities — “privatize the gains and socialize the liabilities.”

        As we enter the age of globalization, a new paradigm is required and we need to get it right, or as close to right as possible, out of the starting gate. That’s not happening yet, and voices need to be raised.

        The objective not only full employment with price stability globally but fair distribution of real resources instead of continuing the wealth extraction that has been taking place for millennia, with only the recipients changing. It is not possible to bring the global economy into balance without distributing demand, and that requires proportional worker participation in resource use and productivity gains reflected in incomes and wealth distribution.

      8. These finished goods/industrial component export nations may be just (in their own way) doing their best to implement full employment.

        Interesting observation, I think this is particularly true for Japan, even during recessions their unemployment rate stays very low. Our full employment goal keeps getting bumped up… a NAIRU rate of 8%? What a pathetically weak goal, only a point and a half lower than today. Meanwhile, check out this Tokyo headline from April.
        Japan unemployment rate soars to 5%

        It does seem that Western economics breaks down into two camps; those who share Keynes’s view that actual unemployment is a bigger problem than the risk of inflation, and those who share Hayek’s contrary view.

  6. I do not know the New Keynesian models but its what Krugman is using. For example, he says that people will take the hyperinflation scenario into account etc which looks like NK since NK talks of some hyperinflation possibility.

  7. Ramanan, I like that I can answer you in shorthand,
    “inflation caused by bargaining power”–> see William Vickrey’s gross markups market
    “current account deficits–> see Warren Buffett’s import certificates

    Neither are necessary for the US economy under the MMT model since fiscal adjustments can always be made (politically though, I think they’d be useful). However for a non-reserve country they’d be very helpful. They’d enable the government to move down the MMT path without trade or inflation shocks.

    1. Beo,

      Not sure.

      Well I know the markup well. Markups are for prices. Inflation is due to rise of wage levels above productivity. When employment approaches full employment, the bargaining power of workers increase, putting price pressures.

      Just markups do not explain anything. They just explain prices not price changes.

      This overconfidence about fiscal policy alone solving the crisis in the US is something I need to write about. At this point please refer


      Sustaining Recovery: Medium-term Prospects and Policies for the U.S. Economy – Zezza et.al.

      1. “Markups are for prices. Inflation is due to rise of wage levels above productivity. When employment approaches full employment, the bargaining power of workers increase, putting price pressures.”

        You could simply target simply wages, but targeting gross-markups (i.e. value-added prices) keeps business owners on the hook too.

        David Colander has written a lot about market-based anti-inflation plans and the earlier tax-based inflation plans (which did target wages). Here’s something he wrote about Vickrey (with a cameo by the creator of Functional Finance, Abba Lerner).

        In the 1970s it was I who brought Vickrey’s interest back to macro. He was intrigued by a little paper I wrote in 1974 called “The Free Market Solution to Inflation.” The paper proposed that, instead of its current institutional structure, rights to change nominal prices were rationed in the following way: Suppliers could lower or raise their nominal prices only if they found other suppliers who would agree to raise or lower their nominal value-added weighted prices by an offsetting amount. Such an economy, I argued, could have no inflation problem…

        It is here that my free-market solution to inflation, later reworked, further developed and, renamed the market anti-inflation plan (MAP) by Abba Lerner and me, came in. Vickrey saw MAP as the institutional change needed to guarantee that a true full employment – roughly 2 to 3 percent unemployment – could be reached in a way that was institutionally compatible with a non-inflationary economy. And it could do so in a way that was fully consistent with existing institutions.

      2. While I think that wage-driven inflation is likely a thing of the past with global labor arbitrage, supply shock inflation is in the cards due to globalization increasing demand for scarce resources like petroleum. MAP sounds interesting, but can it deal with commodity price rises due to demand pressure in commodity markets.

      3. Tom,

        True, a thing of the past. Thats because the influence of Monetarism completely took away all the power of the working class and put it into the capitalist class.

        Things such as NAIRU are hoax but important to keep in mind because at lower employment levels, and high demand levels, the class struggle shifts slightly in the direction of the working class (though the control is still with capitalists) and prices rise, though not like what Monetarists would say.

      4. Tom, for domestic suppliers of oil, the difference between the marginal cost of production and the increased market price is a gross markup (i.e value added) that the oil company would have to buy growth warrants for from companies willing to lower their gross markups an equivalent amount. As for imported oil—> see Warren Buffett import certificate plan. Oil importers would have to go to the IC market and buy the equivalent dollar amount of ICs from exporters. The higher the price of oil, the higher the value of export subsidies. Alternatively, as the Levy Institute proposed, ICs (still tied to volume of US exports) could be auctioned off by Tsy and revenue used to replace US income taxes.

        To quote the 4th law of Functional Finance (and then Abba Lerner’s young protege David Colander):
        4. The government must establish policies which stabilize the price level and coordinate both the money supply rule and the aggregate total spending rule with this stable price level at the unemployment level it prefers.

        Colander adds, “To integrate the necessity of dealing with the institutional problem of sellers’ inflation by changing institutions rather than accepting whatever unemployment was required to stop inflation, Lerner and I arrived at [this] modification of the rules of functional finance… With this fourth rule the rules of functional finance can once again be relevant to modern economic problems”.
        “Functional Finance, New Classical Economics and Great Great Grandsons”

        For the sake of completeness, here’s Lerner’s original 3 rules of Functional Finance–
        1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
        2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
        3. If either of the first two rules conflicts with the principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

      5. “This overconfidence about fiscal policy alone solving the crisis in the US is something I need to write about.”

        I guess it would depend on how you define solving. Can fiscal policy give more income to bring the economy to full employment? We both think that answer is yes. A lot of conservative investors are upset with themselves for not jumping back into the stock market back in March. They were waiting for meaningful financial reform to happen first. But a recovery can take hold, even without other things happening.

        Fiscal policy doesn’t prevent another crisis from happening agian, it doesn’t address distributional conflicts, it doesn’t fix wasteful government spending or unsustainable resource use/environmental destruction, there are probably more existential economic threats that I’m not even aware of.

      6. Yes it can bring back unemployment to low levels. At the same time, it will also lead to more income in perpetuity for foreigners. What’s the net foreign assets of foreigners right now in the US – 40% of GDP ?

    2. Inflation caused by labor bargaining power is nonsense in developed countries under globalization, where labor is fungible and when wages are leveling globally. It is going to happen in the emerging nations, though as labor demands a larger slice of the pie. But even that will be very moderate for the foreseeable future, considering the world population. Chinese and Indian workers are already feeling the effect of Indonesia coming online with cheaper labor. China is now focusing on assembly and farming parts manufacture out to places like Indonesia, where labor is less expensive.

      1. Yes. But that was the reason in 1970s. Thats how Monetarism came to power, unfortunately. Because wage increases caused more bank borrowing and hence the money supply increased, it led to all sorts of bad theories.

        Of course there are other factors in determining prices and changes, true such as oil prices but good to keep history in mind.

  8. Quick question for the veteran commenters here; If I’m looking to get an educated response to a question regarding MMT, where would be the best place to post said question? The question is in regards to a statement Mr. Mosler makes in his piece on “Soft Currency Economics” regarding the federal debt and its analog in the simple business card economy that he introduces. Thank you in advance for any assistance.

  9. The best criticism Krugman can make of Galbraith’s MMT ideas is that an increased monetary base will be inflationary when the economy returns to normal. See final 3 paras here:


    The answers are thus. First – what extra money? The monetary base expansion to date is no more than the collapse in commercial bank created money.

    Second, an increased monetary base does not increase banks capital. Banks are capital constrained, not reserve constrained, thus the base increase does not increase banks’ ability to lend. Thus there won’t be an EXPLOSIVE increase in demand or inflation.

    Third, it is obvious that the more monetary base is effectively in the hands of consumers, the higher demand will be (possibly leading to excess inflation). But governments and central banks are constantly forced to deal with excess or deficient demand anyway. For example if inflation looms, the extra monetary base can be reined in as quickly as it was created, e.g. by increasing the payroll tax.

    Galbraith wins.

    1. The extra monetary base could also be reined in by a bank tax, either de facto (increasing bank reserve requirements) or de jure (a tax on every transaction that passes through the banking system, such as the APT tax that Edgar Feige proposed to President Bush’s tax reform panel).

      In his 1962 State of the Union address, President Kennedy asked Congress for presidential discretion to reduce tax rates during a recession (Congress didn’t play along). I think he had the right idea but it’d be better to make it a rule-based system, say, multiply U3 unemployment rate by 10, so 95% today. Then automatically decree a tax holiday for that percentage from the $900 billion in payroll taxes levied. Tsy could also reimburse States who likewise reduce their collective $250 billion in sales taxes. Tsy would then adjust the holiday percentage quarterly based on the latest U3 numbers– we’d only pay full freight if and when we reached the pot of gold at the end of the rainbow, 0% unemployment. :o)

  10. Warren!! GM now has a new program where you have to PAY to do WORK for them building your own corvette engine – this is going backwards isn’t it? It would be like me paying to pick strawberries.

    Now, those who missed out on the fun of building a power plant have a chance to make good — providing, of course, that their pockets are sufficiently deep. For an extra $5,800, buyers of a Corvette Z06 or ZR1 can assemble their car’s engine.

    The personalized engines will be installed in the customer’s car at the Corvette assembly plant and come with an owner nameplate. So while build-your-own Corvette owners won’t experience the joy of working in a frigid garage under a single light bulb in the dead of winter, they will eventually get to hear the engine they assembled fire up. For many gearheads, that’s a thrill not easily matched.


    1. this is going backwards isn’t it? It would be like me paying to pick strawberries.

      You and your brothers at the Strawberry Pickers Union need to put your game face on. The wolf is at the door.

      Call your friends and neighbors, it’s time to pick strawberries! We are pleased to say that we will be opening our u-pick fields in Hobart on Thursday June 3rd. We know it’s early and we can thank mother nature! The hours are daily 8am – 6pm. The price for u-pick berries is $7.00 a bucket. If you pick six you only pay for five. We provide the buckets so just dress comfortably and bring a snack and something to drink and have fun!

      1. I am shaking in my boots! What madness that people would PAY to pick strawberries. Aren’t they making better use of thier time to pay ME to pick them while they sit on MMT blogs and debate back and forth for free? McCain said you couldn’t pay an american 100 per hour to pick strawberries, because they wouldn’t fight the snakes, heatstroke, skin cancer, herbicides and pesticides poisoning at any price! This is dreadful news, I am going to start voting for politicians who offshore all USA farms, lets see some local in HOBART pay to pick strawberries when the closest field is a 20 hour plane ride away in Gautemala!

      2. BTW, Straw, there are places on the East Coast where you pay to pick your own berries, although usually blueberries rather than strawberries. They even give you the basket. This is not an innovation either, It’s been around for a long while.

    2. Actually, it is absolutely brilliant. GM is definitely thinking out of the box. People pay to go to the gym to work out. Why not pay to build your own engine. Do they provide a trainer and equipment like gyms do?

    3. very clever!

      it probably does cost them something to let people do this, as it’s all probably fully automated with a very low marginal cost for the actual assembly. Today’s mass produced cars cost remarkably little more to build than the cost of the materials and energy.

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