Fiscal and monetary policy in a liquidity trap – part II

By Martin Wolf

Output is produced by work.
Work is a cost, not a benefit.
It is in that sense that there is no free lunch.

Might fiscal expansion be a free lunch? This is the question addressed in a thought-provoking paper “Fiscal Policy in a Depressed Economy”, March 2012, by Brad DeLong and Larry Summers, the most important conclusion of which is obvious, but largely ignored: the impact of fiscal expansion depends on the context. *

In normal times, with resources close to being fully utilised, the multiplier will end up very close to zero; in unusual times, such as the present, it could be large enough and the economic benefits of such expansion significant enough to pay for itself.

‘Paying for itself’ implies there is some real benefit to a lower deficit outcome vs a higher deficit outcome. With the govt deficit equal to the net financial assets of the non govt sectors, ‘Paying for itself’ implies there is a real benefit to the non govt sectors have fewer net financial assets.

In a liquidity trap fiscal retrenchment is penny wise, pound foolish.

I would say it’s penny foolish as well, as it directly reduces net financial assets of the non govt sectors with no economic or financial benefit to either the govt sector or the non govt sectors.

Indeed, relying on monetary policy alone is the foolish policy: if it worked, which it probably will not, it does so largely by expanding stretched private balance sheets even further.


As the authors note: “This paper examines the impact of fiscal policy in the context of a protracted period of high unemployment and output short of potential like that suffered by the United States and many other countries in recent years. We argue that, while the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times, discretionary fiscal policy where there is room to pursue it has a major role.”

There are three reasons for this.

1. First, the absence of supply constraints means that the multiplier is likely to be large.

Why is a large multiplier beneficial?

A smaller multiplier means the fiscal adjustment can be that much larger.

That is, the tax cuts and/or spending increases (depending on political preference) can be that much larger with smaller multipliers.

It is likely to be made even bigger by the fact that fiscal expansion may well raise expected inflation and so lower the real rate of interest, when the nominal rate is close to zero.

However the ‘real rate of interest’ is defined. Most would think CPI, which means the likes of tobacco taxes move the needle quite a bit.

And with the MMT understanding that the currency itself is in fact a simple public monopoly, and that any monopolist is necessarily ‘price setter’, the ‘real rate of interest’ concept doesn’t have a lot of relevance.

2. Second, even moderate hysteresis effects of such fiscal expansion, via increases in the likely level of future output, have big effects on the future debt burden.

Back to the errant notion of a public sector debt in its currency of issue being a ‘burden’.

3. Finally, today’s ultra-low real interest rates at both the short and long end of the curve, suggest that monetary policy is relatively ineffective, on its own.

Most central bank studies show monetary policy is always relatively ineffective.

The argument is set out in a simple example. “Imagine a demand-constrained economy where the fiscal multiplier is 1.5, and the real interest rate on long-term government debt is 1 per cent. Finally, assume that a $1 increase in GDP increased tax revenues and reduces spending by $0.33. Assume that the government is able to undertake a transitory increase in government spending, and then service the resulting debt in perpetuity, without any impact on risk-premia.

“Then the impact effect of an incremental $1.00 of spending is to raise the debt stock by $0.50. The annual debt service needed on this $0.50 to keep the real debt constant is $0.005. If reducing the size of the current downturn in production by $1.50 avoids a 1 per cent as large fall in future potential output – avoids a fall in future potential output of $0.0015 – then the incremental $1.00 of spending now augments future tax-period revenues by $0.005. And the fiscal expansion is self-financing.”

This is a very powerful result.

Yes, it tells you that the ‘automatic fiscal stabilizers’ must be minded lest the expansion reduce the govt deficit and, by identity, reduce the net financial assets of the non govt sectors to the point of aborting the economic recovery. Which, in fact, is how most expansion cycles end.

For the non govt sectors, net financial assets are the equity that supports the credit structure.

So when a recovery driven by a private sector credit expansion (which is how most are driven), causes tax liabilities to increase and transfer payments to decrease (aka automatic fiscal stabilizers)- reducing the govt deficit and by identity reducing the growth of private sector net financial assets- private sector/non govt leverage increases to the point where it’s unsustainable and it all goes bad again.

It rests on the three features of the present situation: high multipliers; low real interest rates; and the plausibility of hysteresis effects.

A table in the paper (Table 2.2) shows that at anything close to current real interest rates fiscal expansion is certain to pay for itself even with zero multiplier and hysteresis effects: it is a “no-brainer”.

And, if allowed to play out as I just described, the falling govt deficit will also abort the expansion.

Why is this? It is because the long-term real interest rate paid by the government is below even the most pessimistic view of the future growth rate of the economy. As I have argued on previous occasions, the US (and UK) bond markets are screaming: borrow.

The bond markets are screaming ‘the govt. Will never get its act together and cause the conditions for the central bank to raise rates.’

Of course, that is not an argument for infinite borrowing, since that would certainly raise the real interest rate substantially!

Infinite borrowing implies infinite govt spending.

Govt spending is a political decision involving the political choice of the ‘right amount’ of real goods and services to be moved from private to public domain.

Yet, more surprisingly, the expansion would continue to pay for itself even if the real interest rate were to rise far above the prospective growth rate, provided there were significantly positive multiplier and hysteresis effects.

I’d say it this way:
Providing increasing private sector leverage and credit expansion continues to offset declines in govt deficit spending.

Let us take an example: suppose the multiplier were one and the hysteresis effect were 0.1 – that is to say, the permanent loss of output were to be one tenth of the loss of output today. Then the real interest rate at which the government could obtain positive effects on its finances from additional stimulus would be as high as 7.4 per cent.

Thus, state the authors, “in a depressed economy with a moderate multiplier, small hysteresis effects, and interest rates in the historical range, temporary fiscal expansion does not materially affect the overall long-run budget picture.” Investors should not worry about it. Indeed, they should worry far more about the fiscal impact of prolonged recessions.

They shouldn’t worry about the fiscal impact in any case. The public sector deficit/debt is nothing more than the net financial assets of the non govt sectors. And these net financial assets necessarily sit as balances in the central bank, as either clearing balances (reserves) or as balances in securities accounts (treasury securities). And ‘debt management’ is nothing more than the shifting of balances between these accounts.

(and there are no grandchildren involved!)
(and all assuming floating exchange rate policy)

Are such numbers implausible? The answer is: not at all.

Multipliers above one are quite plausible in a depressed economy, though not in normal circumstances. This is particularly true when real interest rates are more likely to fall, than rise, as a result of expansion.

The ‘multipliers’ are nothing more than the flip side of the aggregate ‘savings desires’ of the non govt sectors. And the largest determinant of these savings desires is the degree of credit expansion/leverage.

Similarly, we know that recessions cause long-term economic costs. They lower investment dramatically: in the US, the investment rate fell by about 4 per cent of gross domestic product in the wake of the crisis. Businesses are unwilling to invest, not because of some mystical loss of confidence, but because there is no demand.

Again, we know that high unemployment has a permanent impact on workers, both young and old. The US, in particular, seems to have slipped into European levels of separation from the labour force: that is to say, the unemployment rate is quite low, given the sharp fall in the rate of employment. Workers have given up. This is a social catastrophe in a country in which work is effectively the only form of welfare for people of working age.

Not to mention the lost real output which over the last decade has to be far higher than the total combined real losses from all the wars in history.

Indeed, we can see hysteresis effects at work in the way in which forecasters, including official forecasters, mark down potential output in line with actual output: a self-fulfilling prophecy if ever there was one. This procedure has been particularly marked in the UK, where the Office for Budget Responsibility has more or less eliminated the notion that the UK is in a recession. Yet such effects are not God-given; they are man-chosen. They are the product of fundamentally misguided policies.

This is an important paper. It challenges complacent “do-nothingism” of policymakers, let alone the “austerians” who dominate policy almost everywhere. Policy-makers have allowed a huge financial crisis to impose a permanent blight on economies, with devastating social effects. It makes one wonder why the Obama administration, in which prof Summers was an influential adviser, did not do more, or at least argue for more, as many outsiders argued.

The private sector needs to deleverage.

It’s no coincidence that with a relatively constant trade deficit, private sector net savings, as measured by net financial $ assets, has increased by about the amount of the US budget deficit.

In other words, the $trillion+ federal deficits have added that much to domestic income and savings, thereby reducing private sector leverage.

However, as evidenced by the gaping output gap, for today’s credit conditions, it’s been not nearly enough.

The government can help by holding up the economy. It should do so. People who reject free lunches are fools.

41 Responses

  1. Quote from above: ”Most central bank studies show monetary policy is always relatively ineffective.”

    Sorry Warren, I guess I’m being lazy, but do you have the sources for this?


    1. just what i’ve read from the bank of england, ecb, fed.

      for example, the last ecb report i read showed a 100 bp cut in rates would raise gdp by maybe .1% with a two-4 year lag.
      and the way they probably do things is something like sending the same study to maybe 10 different places and pick the one they like best.

      1. @WARREN MOSLER,

        This is what bothers me so much about monetarist writing – no one denies that monetary policies have an effect, but it’s important to state exactly how much effect you’re talking about so that you can discuss why you think monetary policy would have a significant impact on the economy.

        When you’re talking about policies that might lower already-low long rates by a few bp (to use one example) is anyone really alleging that such a policy can deliver robust growth to an economy under current conditions? If not, what is the plan to actually return large, prosperous economies to growth as smaller economies continue to develop?

        Are we really still under the grips of the illusion that we can only have full employment if we’re all killing each other? Sometimes I think the best fiscal policy would be to start a rumor that aliens are planning to attack the earth in 2014 and the only way to stop them is to have extraordinarily clean streets and well-maintained bridges.

        When the aliens don’t show up we can make up a story about how dolphins will cause all the world’s volcanoes to erupt unless we end water insecurity. Mutant moon zombies are coming and their only weakness is universal health care!

        We have the greatest economic engine in human history at our fingertips and we’re worried if we use it we might run out of subway tokens.

  2. And with the MMT understanding that the currency itself is in fact a simple public monopoly, and that any monopolist is necessarily ‘price setter’, the ‘real rate of interest’ concept doesn’t have a lot of relevance.

    If the government is a price setter one way or another, why is it that austerity-driven government that cut public sector wages, pensions, benefits and other expenses don’t trigger a price deflation that reboots the economy, but instead they make aggregate spending collapse with basically constant prices?

      1. @WARREN MOSLER, CPI inflation is low but positive in austerity-driven countries. Why is that if the government is a price setter and it’s cutting spending? Or is it that total government spending is still rising in spite of all the cuts?

      2. currency issuing govts don’t know they are price setter and so don’t act accordingly and cause all the chaos we observe

        euro govs are ‘competing price setters’ kind of like oligopoly but with high frictions, so it’s seriously muddled

      3. Warren,

        Do the Saudis know that they are the oil price setters or are stupid like the currency issuing governments around the world?

      4. I’d love to hear where I’m wrong in this thinking:

        I’ve seen studies that show that the price of everything is essentially the price of the energy that must go into making it. (Ultimately. Disregarding short-term surpluses and shortages.)

        Thus price setting by government or anybody would amount to setting the price of a unit of energy.

        But just as the Saudis lose their price limiting capability once they are truly at maximum production, as they may be now (we don’t know), all governments may lose their price setting capability once net BTUs have reached maximum production, which may again already be the case.

        In that situation, there may not be an output gap even with high unemployment. Essentially, the idea is that there’s not enough energy to put the unemployed to work, but available energy is not yet expensive enough for humans to be able to compete.

        In this situation, all the money redirected to private use from any increase in government spending or any tax cut would simply find its way into the price of energy. It wouldn’t actually put any more people to work until human energy (for example, serfs) could compete with fossil fuel energy (tractors running on diesel).

        In other words, I’m not convinced we have an output gap. We may instead have a redirecting of output/human energy to an economy outside the cash economy. For example, think of women staying home and working for the benefit of themselves and their families outside the cash economy because it no longer makes economic sense for them to drive 50 miles to a job as a Wal-Mart cashier (true example).

        Wouldn’t peak energy (if we’ve reached that point) checkmate all government and central bank response to a shrinking economy?

      5. @ Moe Gamble

        Interesting view.

        So the available real resources (oil) diminished, and full employment could be achieved with smaller deficits than before?

        I see MMT as people’s servant. Although it can’t multiply the available recourses it will put them to work in a way beneficial for all of us.

        When everybody works thanks to job or basic income guarantee program (see here: ), then we will be more likely to make more discoveries and technological breakthroughs, which would expand the available resources.

        I am curious to see more opinions on the problem you raised.

      6. @Moe Gamble, Here are some thoughts similar to what you discuss – :

        As I noted in Why the Middle Class Is Doomed (April 17, 2012), advanced economies are caught in the pincers of rising costs of essentials (not just food and energy but education and medical care) and a global oversupply of labor that has been “localized” by the Internet, i.e. previously localized labor can now be performed anywhere on the globe.

        The build-out of Internet infrastructure that culminated in the dot-com boom boosted employment, wages and consumption, and the credit-housing bubble of the mid-2000s also boosted income and consumption. Now that these temporary conditions have faded, what’s left is the relentless chewing up of traditional industries by the Web as distributed software boosts productivity while slashing the number of people required to create value.

        Moe I was in Vegas recently, and there were a lot of elvis impersonators, but I really felt 1 or 2 was enough to bring the soul of Elvis to the strip. 100 Elvis’s was just overkill and making the fremont street experience not so fun. I was recently in St. Martin too, a few tourists was OK, but 10K from the cruise boats really made things too crowded and unpleasant to say the least.

      7. not if the energy content per dollar of gdp was reduced, as it has been.

        somewhat likewise, everything is ‘made of labor’

        and labor runs on food, shelter, and clothing, which can also contain an energy component, but not necessarily and in varying degrees per calorie of food.

        And, as previously discussed, burning up our food supply for fuel makes no sense at all to me apart from the politics which makes perfect sense. at least up to now

      8. @Moe Gamble,

        “I’ve seen studies that show that the price of everything is essentially the price of the energy that must go into making it.”

        To me that’s an extreme point of view. I see prices as partly objective (relative scarcity of materials, energy, skill, talent) and partly subjective (relative demand for quality, aesthetics, status symbols, enjoyable careers — or money to entice people to do dirty/dangerous work). Even if we had unlimited fusion power with negligible cost, I doubt it could drive all prices to zero.

  3. Actually, in the beginning, when the mammary glands provide lunch, the output is automatic and it’s the ingestion that requires work. That said, if an organism hasn’t already consumed lots of free lunch, it can’t work. First comes the eating; then comes the work.
    Some people might want it to be different, to make people work by curtailing or preventing their caloric intake, but, whether it’s coerced or done out of a resentment of the ordinary processes of nature (the genesis of anorexia), people who don’t eat first, can’t do productive work.
    However, I will grant that many people are incapable of discerning what comes first and what comes next. Largely, I would suggest, that’s because they have a poor sense of sequence and the proper order of events. Such people can be identified by their inability to follow recipes and directions. They simply don’t know that sequence is important. And since sequences can be programmed into machines, it’s not even important that they don’t notice — until there’s a crash.

  4. Warren,

    1. “With the govt deficit equal to the nfa of the non-govt sectors,….”

    I think this is not correct.
    The accumulated govt deficits equal the nfa of the non-govt sectors.
    The govt deficit equals the surplus of the non-govt, i.e. the addition to nfa of the non-govt sector.

    It looks to me as a mix up of flows and stocks.

    2. “as it (fiscal retrenchment) directly reduces nfa of the non-govt…”.

    I think that is not necessarily so. As long as there is a deficit it adds nfa to the non-govt.
    A govt surplus would reduce nfa of non-govt, but that is not necessarily the case when there is fiscal retrenchment.

    3. “..the aut stabilizers… reduce the govt deficit and, by identity, reduce the nfa of the non govt sectors ….”
    A reduction of govt deficit does not always mean a reduction of nfa of the non govt. See my comment above under point 2.
    This also contradicts your statement a little further, which I think is the correct statement:
    “reducing the govt deficit and by identity reducing the growth of private sector nfa”

    4. “It’s no coincidence that with a relatively constant trade deficit, private sector net savings, as measured by net financial $ assets, has increased by about the amount of the US budget deficit.

    In other words, the $trillion+ federal deficits have added that much to domestic income and savings, thereby reducing private sector leverage”.

    This looks to me incorrect.
    The US budget deficit flows to the non-govt, domestic and abroad. The fact that the amount that flows abroad has been constant does not mean that the US budget deficit goes all to the domestic non-govt sector.

    5. “the largest determinant of these savings desires is the degree of credit expansion/leverage”.
    Do you mean that the more leverage there is, the bigger the credit structure, the more equity the non govt requires. In other words: more credit requires more savings?

    6. Most expansions are driven by private sector credit expansion. To keep this sustainable govt deficits should not decrease via automatic stabilizers. They probably have to stay in line proportionately. How would you do that?
    I mean if we agree to set govt expenses on election day then we would end up with tax cuts. But we cannot reduce them to zero because that would make the currency worthless.

    1. 1. yes, i was careless. better to have said cumulative deficit equal to total nfa, or deficit equal to change in nfa for that period.

      2. yes, should have said reduces the growth of nfa, as i did elsewhere. sorry!

      3. yes, as above.

      4. right, what i was trying to say was the growth of the deficit all went to the domestic sector assuming the trade gap was constant

      5. restated, growing private sector debt requires growing nfa for ‘leverage’- the ratio of debt to equity in this case- to remain constant. So if output is growing via domestic credit expansion and the deficit is falling, overall leverage is growing.

      6. Just count bodies in the unemployment line and watch the output gap in general, and adjust taxes accordingly, not to forget the option to produce more public goods and services as desired by the electorate. Lots of people might like a big fat space program, for example, if everyone had a job and taxes were considered reasonable.

  5. Having learned a bit of MMT, I have to ask.

    1) In retrospect, was the 1944 Breton Woods re-introduction of fixed-Fx & pegging everything as dumb as it seems? An attempt to re-establish colonial “order” just when agile exploration of options was more possible than ever?

    2) Was establishment of the World Bank in 1945 relevant ONLY as long as fixed-Fx rates continued? Has the WB been operationally irrelevant since 1971 – and all those “borrowing” from it either don’t yet know that it’s irrelevant, or are taking vicious advantage of those that don’t?

    3) Is the IMF also only relevant to a fixed-Fx regime, & also been functionally irrelevant since 1971 – even if most still pretend otherwise?

    4) If all true, what’s that make the BIS? The official dating agency matching fools to Control Frauds?

    1. @roger erickson,

      A thought re your points 2 and 3. It seems to me that developing countries would still need to borrow hard currency as there is probably a very limited quantity of their financial assets that other countries would like to accumulate.

    2. pretty much all true,
      and there is no need for coordinated banking- each nation should do it’s own.
      that is, why would the US care if a foreign bank lent money to US residents who couldn’t pay it back?
      It’s their loss, not ours.

      So there’s no coordination where it would be constructive, and massive cooperation where it’s destructive.

      go figure…

      1. @WARREN MOSLER, For some people, power or the ability to control other people is more important than anything else. But power, to be felt, has to hurt. We do not, as a general rule, recognize do-gooders as powerful. So, the control freaks have to inflict damage. Doing so by utilizing figments of the imagination (the law and money) as tools has turned out to be particularly attractive because these entities leave no finger-prints and the victims of the resulting deprivation do not know upon whom to wreck revenge.
        Depriving humans of what they need to survive has been almost totally depersonalized. Deprivation of rights under cover of law has a long history. After all, the Constitution legalized slavery and not so long ago members of our “volunteer” military were legislatively deprived of free speech and the right to associate with whom they please.
        Fortunately, once we recognize how these figments of the imagination (money and the law) have been used to deprive, they can be changed. All we have to do is elect the right representatives–people prepared to serve and provide stewardship, rather than play the power card.

      2. @Monica Smith,
        > “Fortunately, once we recognize”

        “We” now constitutes ~311 million people. There’s a LOT of work to be done. It doesn’t matter what’s known, only what knowledge is adequately distributed in brief time windows.

        Techniques for adequately distributing insights matter equally or more than insights themselves. We need better/faster/more-selective communications, not race cars? The one big advantage we have is that all propaganda eventually fails. We just have to stay alive longer than existing education & marketing can remain irrational.

      3. @Monica Smith, I am glad you bring up the power card Monica, as I walked into my local church, bar, and shopping mall and saw all the females holding all the power. The ability to control thier fathers/husbands/boyfriends seemed very important to them, like pulling a puppet on his string, all the men seemed to have strings. You are one of the few females I have met that has identified this innate need of control as a basic instinct in most females. It is disgusting to witness. I was on a cruise ship recently and there was this t-shirt shop selling “throw rocks at boys, they are stupid” shirts, selling the CONTROL and POWER memes YOUNG to young girls, and I told the captain I would make sure never to cruise that line again since they are so gender biased.

        This quote is the best though Monica:

        “Depriving humans of what they need to survive has been almost totally depersonalized.”

        Oh the stories I could tell of fathers/sons/brothers who have been chewed up by our court systems and children and families destroyed while crackhead mothers get all the rights because our legal system is so gender biased it is disgusting. I have personal friends whose crackhead ex wives have basically pimped out thier children to dope dealers and there is no legal remedy for the fathers as they watch the children be destroyed.

  6. Dudes free lunch aint all it’s cracked up to be……….the haters make you pay for it one way or another…..especially if you’re a kid………..

  7. “Not to mention the lost real output which over the last decade has to be far higher than the total combined real losses from all the wars in history.”

    Do you have any numbers to back this up? No doubt you are ignoring present value effects as well as the human cost of war, but still … it seems like an exaggeration to me.

    1. seems the world is losing at least 10% of potential real output each year due to unemployment, and at today’s levels of productivity and today’s population and with compounding (path dependency, etc.) just the last 5 years lost output should easily eclipse the prior total for all the world’s wars combined.

      Heck, unemployment is probably costing us more than 250 million lost labor hours a year? For most of the history of the world the total population wasn’t anywhere near that high?

      1. @WARREN MOSLER,

        The 10% number seems reasonable, but I think you’re grossly underestimating the lost output from war. Unemployment, to first order, is an opportunity cost, and primarily of workers who are well below average productivity-wise. War not only destroys capital stock (which is far worse), but it diverts even extremely productive people (some of whom could easily be 100x-1000x the average) towards unproductive uses. And in the worst case, it destroys them, just like capital stock.

        ‘Isaac Asimov once wrote, “In view of what he [Moseley] might still have accomplished … his death might well have been the most costly single death of the War to mankind generally.”‘

        And there is also a compounding effect. Presumably, past wars have set us back from where we would be without them.

        On the positive side of the ledger, I guess, there is not much unemployment during a war, and people are incentivized to work harder. Still, I’m pretty dubious of the idea of war as stimulus, even looking at it purely from an economic perspective. Broken window fallacy and all that.

      2. @ESM,

        I definitely agree with you that war is not the answer and is to be avoided at all costs, b/c of how high the damages are in the present and in years to come.

        And there is also a compounding effect. Presumably, past wars have set us back from where we would be without them.

        There can also be a just as valid argument that the war prevented worse losses, although it appears most wars don’t pass the litmus test on that. American Revolution, Civil War, & WW 2 did it for sure, but Vietnam, Iraq 1& 2, Afghanie….ummmm not so sure about that one.

      3. @ESM,


        Oh, it’s definitely true that for one side fighting a war could be preferable to the alternative, or even inevitable. But I can’t imagine it’s true in the aggregate (i.e. for both sides at the same time). As for your examples, perhaps it’s the contrarian in me, but I actually think the wars you listed as preventing worse losses actually turned out to be worst case scenarios, which could have been mitigated easily.

        Iraq 1 (Desert Storm) is about as positive as a war can get. It resulted in relatively small losses in terms of life and infrastructure. It prevented a madman from acquiring a nuclear capacity (to which he was frighteningly close). And it kicked off a spirit of cooperation in the Middle East, as well as the Israeli-Arab peace process. If Bush 41 had declined to fight that war, I think we could be looking at 4-6 countries in the Middle East armed with nuclear weapons today. On the positive side, we might still be able to fly domestically without having to check our dignity at the security gate.

      4. I’m pretty sure with true full employment today the additional output would surpass the losses from all the wars in history in short order.

        remember, real output doubled in two years when ww2 started and unemployment was about where it was today before that happened.

      5. Mario,

        I’ve gotta say that I don’t see how any of those wars prevented greater deaths.

        The American Revolution didn’t prevent a single death. The British were not going around killing Americans or anything like that. In fact the British were trying to impose restraint on the colonists’ encroachment on the natives. After the Revolution that encroachment accelerated, probably causing more dead natives. And certainly lots of people died fighting the war itself.

        The Civil War freed the slaves, which is wonderful, but I don’t think it saved any lives. Tons of people died in the war from both combat and disease. After the war the South had severe food shortages and a lot of the newly freed–and suddenly unemployed–slaves starved to death.

        WWII: If you count the early Japanese conquests as a separate war, then the U.S. going to war with Japan might have saved lives by ending the very bloody occupation and ongoing conquest of China. But if we start our timer at the first Japanese invasion we must conclude that it would really have been preferable for Japan to decline having a war entirely. In Europe, maybe you’re thinking that Hitler would have killed way more Germans/Austrians/Czechs if the Allies hadn’t eventually stopped him, but when you look at the numbers that doesn’t hold up. Even if Hitler managed to kill every minority member and leftist in Germany that wouldn’t come close to the European war deaths.

        If your argument is not really about war itself but rather about American intervention in wars that have already begun, then I can buy WWII, Kosovo, and maybe WWI as being net improvements. Is that what you meant?

      6. @ESM, “but it diverts even extremely productive people (some of whom could easily be 100x-1000x the average) towards unproductive uses. And in the worst case, it destroys them, just like capital stock.”

        Yes Indeed, look at all this financial warfare that our citizens engage in, how many minds and wetware human cpu cycles are engaged in daytrading and derivatives abstractions? Roger Erickson says to make sure we have enough liver cells to do a proper job. But I like to think of what a guy like Warren Mosler could have done for humanity had he started his life in cancer research or some equally “useful to all of humanity” field instead of sending bean pit traders into the markets to mislead other bond “warriors” about misplaced trades, sad really when you think about it, all the lost potential of humans like warren tied up in financial abstractions that don’t really do much for human science and progress 🙁

        I just got through reading some book on Andrew Madoff, bernies son, and how he put a lot of that ponzi money towards some research of a rare form of cancer.

        I wonder if all these finance warriors like warren, on thier death bed, think to themselves, I spent a life trying to guess things about the movements of green pieces of paper, and instead I could have researched this disease that is going to kill me and maybe saved myself. hmmm…

  8. Warren – bought and read your “Deadly Innocent Frauds..” book recently – it blew me away! You’re a brilliant guy – I never realized how the monetary system works (although I did always have some suspicions). Anyway, many thanks for spreading the truth! John

  9. Examine your priors–your assumptions. If you think government spending is neutral you ignore the destructive effect government spending has on the economy, by forcing people to do what they would ordinarily not do but for government. Conclusion: short term, is this funk (the Great Recession Non-Recovery) simply lack of demand? If so, then Keynesianism is the answer. But if not, if the reason is structural, then more government spending is not the answer but the problem.

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