Also, when net financial assets (savings) are being ‘supplied’ by deficit spending there it that much less need to borrow
for the same spending, and, in any case, the deficit spending can reduce what would have otherwise been borrowed to spend by that amount.
The amounts all depend on who gets the deficit spending. If the man in the moon wins the national lottery and gets $1T in deficit spending and just rolls it in t bills there is no further economic/financial effect on anything, to use the extreme example to make the point.
In general, the current deficit spending is functioning to allow more consumption out of income rather than out of savings/debt as income and net financial assets are added to the economy. The Fed’s financial burdens ratios are coming down, and financial equity is being restored.
Agonizingly and irresponsibly slowly.
It’s a disgrace to the economics profession that they haven’t figured out how to sustain demand when all it takes
are a few spread sheet entries by govt.
I could teach any third grader to do it in 15 minutes.
Yesterday we got a live Presidential announcement over $2.4 billion in new clean energy spending to create 2,000 jobs.
With over 15 million unemployed and an annual shortfall of aggregate demand that’s could be well over $1 trillion.
In November total credit dropped 8.5% annualized rate, and while auto-related nonrevolving loans dropped a mere -2.9%, revolving credit plunged 18.5% annualized. This is a full blown consumer borrowing revolt.
Here is the month over month change in total consumer credit:
UE Rate->FF Rate”>
A chart of total consumer credit: in November it was at $2.464 trillion, after a record 10 sequential months of decline.
UE Rate->FF Rate”>
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All the money in the economy is either currency of issue or bank money (credit money that nets to zero). The problem with credit money is that pulls demand forward and creates an interest obligation. History shows (Steve Keen, Michael Hudson) that over time, increasing debt is financial poison.
Some are suggesting (Ellen Brown) that it is more desirable for the government to fund public goods directly, like education, health care, infrastructure, basic research, and a job guarantee, just as it now funds the DOD. This would not only make more public goods and services available, but also reduce the need to compound debt in society, interest being a rent imposed by rent-seekers on workers as a hidden private “tax” on their future income.
There are two objections as far as I can see. The first is that spending must be funded by taxing or borrowing, which is erroneous in a fiat system such as ours.
The second objection is that this much spending would be inflationary. However, that seems to rest on the false assumption that simply increasing monetary aggregates increases inflation, when inflation only results when nominal AD exceeds real output capacity.
All of the spending on public goods results in increased production of goods and services, some which are provided by the private sector, since the government would function mostly as a contractor hiring subcontractors. This would increase real output capacity, GDP, and national prosperity (by lowering the Gini coefficient). Automatic stabilizers could be used to stabilize NAD relative to real output capacity to maintain price stability by altering spending and taxation appropriately.
Anything wrong with this picture that I am not seeing? Or is it just obsolete thinking that has us stuck where are are?
Tom,
I do not think there is much you are missing. Thanks for your brilliant post.
Ellen Brown (www.webofdebt.com) certainly leaves a high water mark for the rest of us. Stephen Zarlenga (www.monetary.org) and Richard C. Cook (www.richardccook.com) offer complemetary insights.
Charles Walters, former President of the National Organization for Raw Materials (see http://www.economy101.net & http://www.normeconomics.org) and my preferred mentor in all matters economic and agronomic for over 30 years wrote in October 2008:
“Now that the spin artists and speculative economists have had their day and era, perhaps a new administration will return us to a physical economy based on gifts from nature, then structural balance between economic sectors, and have done with the conceit of creating money from thin air without reference to real production,real employment and real national security based on feeding the people properly.”
I hope we don’t have to wait for the Mosler administration.
“Government to fund directly”
Agreed Tom, we need to expand social security to be the only retirement our populace needs, broadening its original mandate of just being supplemental retirement. These R Bonds could work to Warrens goal of reducing the financial sector by 90% no?
http://jessescrossroadscafe.blogspot.com/2010/01/us-government-is-eyeing-your-401ks-and.html
“If the man in the moon wins the national lottery and gets $1T in deficit spending and just rolls it in t bills there is no further economic/financial effect on anything…”
Interest rates would come down, correct?
“…deficit spending is functioning to allow more consumption out of income rather than out of savings/debt…”
Yes. Why is it desired though?
interest rates would be wherever the Fed wants to set them.
in this instance, deficit spending is supporting aggregate demand, and thus reducing unemployment and debt deflation.
You should read the Required Readings
1. My comment was about the effect of rolling $1T into Tbills, ceteris paribus. I thought it was obvious.
2. Whether I buy a car with my savings/debt or with money from deficit spending, I still buy just 1 car. No change in aggregate demand.
1. The FFR is actively managed. So ceteris paribus, $1T into t-bills would have no impact on interest rates.
2. By deficit spending, I assume you mean Federal Deficit spending. Change in AD is the same, but Federal deficit spending increases private sector net financial assets, while private sector activity does not, and cannot.
You REALLY should read the Required Readings
1. OK.
2. Zanon said: “in this instance, deficit spending is supporting aggregate demand…”
and also “Change in AD is the same…”
So is it supporting AD or not?
You REALLY should read the post that you responding to
???
Yes, deficit spending is supporting aggregate demand. It’s doing it in a particular way that the private sector cannot do alone because it funds private sector demand for net financial assets equity.
Yes, but that’s not the case here, because deficit spending only replaces spending otherwise done out of savings/loans. So aggregate demand is unchanged.
And that was my question: Why is that desirable?
The spending would not have come out of savings/loans. If the private sector has an increased demand for net financial assets (equity), then only deficit spending by the Govt can supply it. The private sector is incapable of supplying NFA. Since supply is zero, transactions fall as the private sector tries (but fails) to supply something it cannot. This manifests as falling AD (or falling velocity if you want to think in quantity of money model). Falling AD leads to higher unemployment and lower capacity utilization, which is bad for the real economy.
The sector level balance sheet effects of private sector spending (whether from savings or from loans) are different than those from Govt spending, and will therefore have different impacts.
Mosler’s point is that the deficit right now seems to be large enough to fund the private sector’s demand for NFA, so private sector can fund demand out of income and not through increasing its leverage (which is good, as it was overleveraged initially). You want the private sector to hold a debt load it can service out of income.
If you don’t understand this, you will need to read the required readings. They are required for a reason.
“I could teach any third grader to do it in 15 minutes.”
Nothing to say really. It made me laugh.
Which reminds me of something else you said in 2008- that a payroll tax holiday would begin to restore aggregate demand in about 90 days.
Hello, America? (*** MAY I HAVE YOUR ATTENTION PLEASE ***) Outside of war, something is very wrong when the person/people we hire to do a job are unable to describe what successful execution will look like and unwilling to commit to a time frame for completion.