There’s a reason the hardcore budget balancer/deficit hawk does not last long under the microscope. Their numbers can’t add up, which leaves them with contradictory statements.

Why can’t they add up? The dollar is a ‘closed system’, what’s called a case of ‘inside money’ due to the fact that they all come from govt and/or its designated agents (apart from counterfeits).

This means the dollars in our pension funds, IRA’s, corporate reserves, cash in circulation, foreign central bank reserves, etc. all come from someone else spending more than his income.

Yes, the rest of the private sector can and does often spend a bit more than it’s income to supply those ‘saver’s dollars’ but most of it comes from the $15 trillion or so the US govt has spent in excess of its tax collections. That’s called federal deficit spending.

In fact, the US govt debt is equal to the net dollar denominated ‘savings’ of all the other sectors combined. To the penny. It can’t come from anywhere else.

That means any plan to balance the federal budget is also a plan that doesn’t allow global dollar savings to grow. This means the ‘automatic savings’ like dollars going into and compounding in pension funds, IRA’s, corporate reserves, cash in circulation, and foreign central bank reserves, etc. either can’t happen or are ‘supplied’ by equal private sector debt increases.

So a plan to reduce the deficit $10 trillion from current forecasts is also a plan that either causes private sector debt to increase by that much and/or causes pensions, IRA’s, corporate reserves, cash in circulation, and foreign central bank reserves to decrease by that much.

None of which is consistent with a growing economy, to say the least.

This means, any plan for long term deficit reduction that includes relatively high rates of growth is what can be called a financial optical illusion, that doesn’t hold up on close examination.

And that’s why all the budget balancers ultimately fail. Yes, their headline rhetoric can be casually convincing and even win local elections. But under serious scrutiny, it all falls apart.

But maybe this time it’s different.
🙁

82 Responses

  1. The problem is bankers with banker perspectives on usury and debt realize we are hitting debt levels that have no real chance of ever being repaid. And as Mcgeer said 100 years ago, it is this optical illusion you reference that is destroying us. The banksters have to go. They will NOT adjust thier perspective, they must simply be eradicated.

    http://www.heritech.com/ymagchy/mcgeer/mcgeer.html

    No sane individual with power to issue his own money and credit would ever dream of financing either his business or social enterprise by borrowing money and credit from someone else. Much less would he ever borrow at interest to the point of bankruptcy and then starve for want of buying power which he had the power to create.

    FOLLY

    No sound government in this age of intellectual and technological efficiency with power to mint at the prevailing price of silver, legal tender dollars costing less than 20 cents apiece, is justified in borrowing credit dollars from a private monopoly at interest. Surely, no one can justify as sound the practice of governmental borrowing at interest of credit from a private monopoly when the government has the power to set up a national banking system through which can be issued paper currency and bank credit more valuable as purchasing power medium of exchange than that which is issued by private bankers.

    The perfection of the technique of substituting credit for money has emancipated mankind from any but an artificial shortage of consumers’ buying power.

    LIVING STANDARD AND DEBTS

    With the establishment of a national banking system and economic organization, such as I have outlined, the task of developing the nation’s wealth, liquidating existing debts, keeping the standard of living in the agricultural communities in line with that enjoyed in commercial and industrial centres, and the problem of maintaining the standard of living of those engaged in producing for foreign markets on the same level as that enjoyed by those engaged in domestic trade under planned economy would cease to be insoluble problems.

    LESS HOURS AND MORE PAY

    The problem of promoting his enterprise and social service, the pursuit of wisdom and culture, the protection of health, the elimination of unemployment, the reduction of hours of labour without loss of wages, the dispensation of justice, the enforcement of law, the maintenance of the circulation of consumers’ purchasing power, the development of international trade and the maintenance of the going concern activity of the social system would be matters of practical administration.

    The depression could be broken at once. Credits could be placed at the disposal of national government departments, the provincial and civic government authorities, and our public utility corporations, with which a programme of needed and useful work could be inaugurated that would put every Canadian now unemployed at work. In the meantime the organization of the departments of taxation, economic regulation and trade management could be proceeded with. By using credit borrowed at interest to prosecute the war, we learned that we can use credit issued free of interest to promote the wealth-producing enterprise of progress. Anyone who argues to the contrary is serving no useful purpose.

    The wages so put in circulation would react on general trade immediately. Values and prices would respond normally to normal and proper levels. The value of the assets of banks, insurance companies, mortgage companies and loan associations, investments in real estate and all manner of industrial and commercial enterprise would be rehabilitated. The consumers’ buying power and the ability of men to meet their legitimate and just obligations would be re-established.

  2. This is literal all out globalthermalnuclearwar! They are going to bring on Geithner as part of the US National Security Council, him and rickards will have field days with the generals, admirals, spooks and CIA doing currency warfare all over this planet – and according to barofskys recent illumination of how patehtically compromised geithner and the ENTIRE treasury and all of Washington DC culture is, this will bring on ww3 and the end of humanity, nice knowing all you suckers 😉

    http://jessescrossroadscafe.blogspot.com/2012/08/currency-wars-move-to-make-geithner.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+JessesCafeAmericain+%28Jesse%27s+Caf%C3%A9+Am%C3%A9ricain%29

    1. @Save America,

      Terms of victory & surrender are not the point. Every nation has ample policy options to explore – all related to growing the capabilities of their population. Ceding paradigms & outlooks on reality to superficial financial accounting models is the problem, and it consistently leads back to maladaptive class warfare.

      They are richest who have country-folk able to do the most for one another.

      How much would you sell your citizenship – or your family – for? A tiny few always will, but it’s a moot point for most.

      1. @roger erickson, “Terms of victory & surrender are not the point.”

        Tell that to economic hitman tony perkins and the CIA jackals that he said regularly assassinate people. Explain that to ecuador who has just been threatened by the UK for harboring a man that exposes secrets. This is war! They will surrender Assange or ELSE!

        For many in the military, terms of surrender is the only point. Military keynesiansim is the warfare paradigm going forward, and team USA must win. It is what we train our military to do, win at whatever cost.

        And as barofsky just said, Geithner was so egrerious in his sellout to the banksters, using the 09 crisis as a tool for another way to massively profit, that even the fed (which he also says is ruiniously corrupted) had to intervene against treasury and geithner. That we are going to put this kind of bankster shill into a key policay making part of military framework where certainly the banksters are plotting how they can best PROFIT from ww3, only lead to certain destruction for sheeple. The generals, cia, and war machine will do what they train from birth to do, fight and win, and geithner, treasury, and fed will do what the bankster shills have trained them to do since birth, maximize profit off of crisis for the banksters. We are FREAKING DOOMED when you unite these forces and unleash them on the world.

        “Every nation has ample policy options to explore”

        Yah, syria is exploring policy options as they are carved up by the jackals, so is Iran, (snicker) china is hoarding gold at warp 11. Here is a recent rickards tweet:

        http://twitter.com/JamesGRickards/status/235288115839909888

        “We are in a currency war, and those who don’t fight lose.” – Juan Carlos Echeverry, Columbian Finance Minister.

        http://www.bloomberg.com/news/2012-08-13/currency-flows-reversing-china-to-colombia-as-trade-slows.html

        “Ceding paradigms & outlooks on reality to superficial financial accounting models is the problem, and it consistently leads back to maladaptive class warfare.”

        Franklin was at this MMT game for the people at the founding of the country, Spaulding was at this MMT game with Lincoln at the civil war, McGreer was with it at the founding of the bank of canada and during the time of ww2 (where prescott bush and thyssen were gonna make money off hitlers subjugation of slave labor in polish mines and did for awhile), and today we replay the same game, mosler v. the evil corrupt profit seeking banksters (and now thier war machine to make more profit), where he can’t get a few EASILY implemented policy goals to even be part of the national debate amongst the people, much less seriously in political discussions at top levels, Summers can’t even get a national infrastructure bank implemented as crony connected as he is, its time to admit defeat Erickson, the banksters won, and have always won throughout history.

        Profit must be removed as a reason for humanity to achieve higher goals, weiner was right, we are freaking doomed! 9 billion humans cannot co-exist in a world where usury and profit are in the underlying framework of our system. As this blog shows, the forces in that kind of paradigm cannot do what is best for the people, never has.

        “The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization.” Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination

      2. @Save America,

        “We are in a currency war, and those who don’t fight lose.”

        We went through this between WW1 & WW11, and yes, seemingly every generation throughout history. It’s the price we pay for population expansion.

        Why? Because complexity grows exponentially faster than system size, and no complex system is free from that reality. Hence, it’s a constant struggle to select ways to coordinate on a greater scale. Yet we do it, as 3.5Billion years of history shows – not to mention 100K years of human cultural history too. It’s always taken a generation or two, but progress happens.

        Cultural progress happens precisely because the old guard Luddites provide no alternative but eventual failure. It’s only a question of how badly they must fail before slinking off stage.

        We may be about to find out, yet again.

        Patience, grasshopper. Sometimes the best thing to do is prepare to pick up the pieces – yourself, your kids, or at least your neighbors.

      3. @Save America, If only mankind didn’t have weaponry to end all life on earth 500 times over and Kennedy almost was unable to prevent “the end”. Many of my professors say Kennedy would have killed us all. That Russia’s patience e that saved the world Picking up pieces are hard in nuclear fallout. Fukushima is begging for help. I want to be the eternal optimist. But mankind has no long term history with planet destroying power. Hopefully we prev ail and the masses can coordinate before a few hotheads at the top end everything like Kennedy almost did. Mistakes that took down Egypt or Rome can’t be afforded in a world of global nuclear war. The stakes are much higher today. Too easy for the baby to push a button when he doesn’t get his way. http://www.zerohedge.com/news/guest-post-assange-or-corzine. Baby gets really upset when he don’t get his way lol! 200 years of political accommodation to be flushed to get 1 dissenter my Gawd! What kind of world do we want Erickson? I can find pictures of warren shaking hands with corzine not with assange though. Warren please don’t shake corzines hand anymore. Nasty!

  3. Who is “Bachman?” I assume you don’t mean Michelle Bachmann, since that would be a nonsensical comparison.

    “In fact, the US govt debt is equal to the net dollar denominated ‘savings’ of all the other sectors combined. To the penny.”

    So you’re including reserves and currency in what you call US govt debt? I don’t mind, but you’re going to confuse people if you don’t point that out explicitly.

    “So a plan to reduce the deficit $10 trillion from current forecasts …”

    I think it’s the forecasts that are inconsistent. The forecasts that have debt growing to 300% of GDP are about as credible as the forecasts at the end of Clinton’s term that had the US running a $5T surplus over 10 years.

    If the forecasts are meaningless, then who cares about promises of debt reduction based on those forecasts?

    1. @ESM,

      “If the forecasts are meaningless, then who cares about promises of debt reduction based on those forecasts?”

      Who would care about having a lot of lying/misinformed/corrupt politicians confusing the electorate and making policy? Look at the lovely smoke and mirrors, never mind the man behind the curtain. There’s a good electorate, yes….

      1. @Unforgiven, Larry summers couldn’t get his infrastructure bank proposal off the ground as well connected as he is to the corrupt cronies. The entrenchment of the forces we fight are awesome indeed.

    2. @ESM,

      “the US govt debt is equal to the net dollar denominated ‘savings’ of all the other sectors combined.”

      Warren is right – just draw the balance sheets. The balance sheet of the Fed shows its assets (including the Government debt) and liabilities (reserves of commercial banks, cash). Excluding gold the net financial position of the Government is equal with the minus sign to the net financial position of the non-Govt sector.

      http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9

      This is not all the money which exists in the system – just the monetary base (currency). NB the Fed can lend “currency” to commercial banks but this does not alter the net position.

      Regarding all the broad money (money we can earn and spend) one needs to analyse balance sheets of commercial banks. Again deposits (that is “broad money”) are created at the same time as the liabilities.


      The key mistake made by Paul Krugman and the others is that they do not understand that the banking system as a whole can generate spending power (credit money) out of nowhere but it also can act as a sink (“black hole) to spending power when credit is repaid and broad money destroyed (in a “liquidity trap”). This happens regardless we believe or not in money multiplier and similar textbook fairy tales. It is enough to realise how monetary flows are generated when stocks (positions on the balance sheets) change. The balance-sheet view of the economy is the only one which is complete and non-confusing.

      http://econviz.org/macroeconomic-balance-sheet-visualizer/

      It is not true that patient agents lend their spending power to impatient agents – spending power is created “ex nihilo” by banks, lent to “impatient” agents and ends up on the accounts of “patient” agents (or rather the mythical “1%” and the Chinese).


      What the Austerians want to do is to force the “patient” agents to dis-save or the “impatient” to borrow more. It is so sad that they don’t understand that they are cutting off the same branch they are sitting on. So we, the humanity, have sent a robot to another planet but our political leaders cannot just draw a few simple diagrams with bar charts?


      I am not in favour of brainless printing just because there is a hole and the system may need other adjustments in the long run. To me it is true that excessive hoarding of money leads to other problems.

      One of course may consciously want to confiscate the savings. We must not be mistaken, this is called “socialism” and I do not necessarily support that position.

      1. @Adam (ak),

        “the US govt debt is equal to the net dollar denominated ‘savings’ of all the other sectors combined.”

        And as I understand it, a corollary to this statement is that the budget deficit equates to net private sector savings — to the penny. In this context, private sector savings is comprised of domestic household savings, business savings plus foreign sector savings as reflected in the trade deficit. So, the sum of household savings, business savings and the trade deficit should equal the budget deficit for any particular snapshot year….. yes? Am I missing anything or over simplifying the equation? I’m trying to plot out a chart for some of my Supply Side and Austrian friends because sometimes a picture can say a lot more than words.

        Also, I heard an argument that I was unable to refute off the top of my head about the deficit. If deficit spending in the U.S. boosts aggregate demand, giving U.S. consumers the wherewithal to go off to WalMart and Home Depot to purchase goods which are mostly made in China or some other EM country, are we not possibly providing as much or maybe even more stimulus to China than we are to the U.S.?

        For example, GM which is one third owned by the U.S. Government is reported to invest more than $1 billion annually in China. http://factsanddetails.com/china.php?itemid=360&catid=9&subcatid=61. I don’t begrudge multi-national companies targeting foreign markets like China, Brazil or Russia, but when you have a partially government owned company like GM doing so it sure creates the appearance that U.S. government policy is consciously or unconsciously exporting domestic manufacturing jobs overseas. It’s not a endearing narrative to have to tell to U.S. blue collar workers.

      2. @Ed Rombach,
        Deficit spending is required to grow an economy that has demand leakage. whatever the source. But foreign trade requires a great deal of diplomacy. So the trade off is buying one third of GM for the sake of auto workers and agreeing to trade with China and Russia to keep our comrades happy. Just think of all the business the restaurants and hotels get making all this happen. And all the haberdashers keeping all the big shots looking good while they do it.

      3. @Ed Rombach,

        Why are congressmen worried about blue collar workers? In thier out of paradigm mindset where we must borrow from china, then doesn’t china become the master in thier eyes, not j6p? According to Warren, blue collar workers should be exstatic that chinese are willing to work for worthless spreadsheet entries and send us real goods, while your blue collar workers sit around playing star wars Massively Multiplayer Online games all day and drink cruzan rum. Isn’t that what the article you posted about warren shows he is doing Ed? He sits around all day playing online computer games and drinks at the bar all the time, get with the program!

      4. @Ed Rombach,

        ” So, the sum of household savings, business savings and the trade deficit should equal the budget deficit for any particular snapshot year….. yes?”

        No. The sum of NET household savings etc…

        The sum of whatever savings and current account deficit over a given period of time is equal to the budget deficit PLUS a change in private debt over that period of time. One dollar of credit has to be matched by one dollar of debt.

        There is a (S-I) term in the sectoral balance equation. It doesn’t say anything about S and I. Specifically if there is a strong growth in private sector debt like in 2000 then the budget may be in surplus. However if the private sector accumulates too much debt then debt deleveraging takes place and the game is over – unless the government steps in with a big enough budget deficit.

      5. “One of course may consciously want to confiscate the savings. We must not be mistaken, this is called “socialism”.

        I thought it was just called “taxation”?

    3. @ESM,

      @Adam:

      “Warren is right – just draw the balance sheets. The balance sheet of the Fed shows its assets (including the Government debt) and liabilities (reserves of commercial banks, cash).”

      That’s a good point, but we have to decide whether we’re going to treat the Fed as part of the US govt or not. I think it’s less confusing to consolidate the Fed, as well as all of the various “trust” funds (e.g. Social Security, Medicare).

      Also, even if we leave the Fed as part of the non-governmental sector, are coins counted as liabilities of the Fed? Technically, they’re issued by the Treasury.

      1. @ESM,
        You have raised a very important point and I believe that both perspectives are valid:

        1. The Fed as a part of the consolidated Govt sector (this perspective allows us to see the causality in government spending)

        2. The Fed as a part of the banking system, a passive “scorekeeper” (this allows us to analyse the mechanics of controlling overnight interest rate)


        In Australia coins are not reported as a liability but this is an arbitrary exception. I don’t know how this works in the US but the issue is pretty marginal unless someone mints a 1 trillion dollars coin.

        http://archive.treasury.gov.au/documents/1858/HTML/docshell.asp?URL=02_Appendix_A.htm

        “ABS GFS treats coins on issue as a liability and no revenue is recognised. The ABS GFS treatment of circulating coins as a liability has not been adopted in the financial statements or in any reconciliation notes. Instead, the financial statements adopt the AAS treatment for circulating coins. Under this treatment seigniorage revenue is recognised upon the issue of coins and no liability is recorded.”

      2. @Adam (ak),

        So why not a #3, where both are true? Fed as a gov-controlled portal to a publicly licensed, distributed banking system? Seems obvious.

      3. ESM,

        “we have to decide whether we’re going to treat the Fed as part of the US govt or not”

        That decision has already been made for you.

        If you go to USA.gov you can see that the Fed is listed as a being within the executive branch of the federal government. It is “an independent agency of the federal government” (executive branch).

        Federal Reserve liabilities are obligations of the United States government.

  4. A balanced budget could potentially work if the US didn’t have such a ginormous current account deficit. You didn’t mention that “option”.

    As you say, you could also reduce the need for a government budget deficit by reducing private “savings”, i.e. taxing them and redistributing that spending power.

    This is what Sweden does. They have a current account surplus, high progressive taxes, and a ‘redistributive’ fiscal policy.

    They also have a balanced government budget.

      1. engineering sector accounts for 50% of output and exports. Telecommunications, the automotive industry and the pharmaceutical industries, machinery, paper products, pulp and wood, iron and steel products, chemicals, apparently.

      1. Switzerland also has a balanced budget and current account surplus. They supposedly have low taxes too. Their unemployment is also really low (2.7%, much better than Sweden’s 7%). I don’t know what their private debt situation is.

        They export: pharmaceutical products, watches and clocks, machinery for special industry, metals and metalworking machinery and tools, apparently.

        Of course both Switzerland and Sweden are tiny countries compared to the US. Germany is another example of a country that aims for balanced budgets (struggling at the moment) by maintaining a trade surplus. That’s not working out so well for the eurozone though.

        Both Switzerland and Sweden have their own currencies.

      2. In opposition to my previous comments, this is worth looking at:

        “Current Account Surplus Watch”

        http://currentaccounts.newamerica.net/

        “The Current Account Surplus Watch is a watch list of economies that have consistently large current account surpluses and that do not take adequate measures to reduce their surpluses by stimulating domestic demand or otherwise offset their surpluses with other constructive policies, such as international development assistance. These economies are deemed to pose a threat to the functioning of the global economy, because they subtract demand out of the world economy at a time of weak global aggregate demand and because they pose an obstacle to the adjustment policies deficit economies must undertake to avoid or to get out of financial crises.”

      3. So maybe if you wanted a more balanced budget the best way to do it would be to encourage foreign countries to boost their domestic demand, or help them to do it, and support them in doing it.

      4. @y, Yah we are gonna “help” them for sure Y:

        “To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create.

        What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.”

        Martin Wolf, Financial Times, 12 Oct 2010

        We are gonna help and support them in a military financial warfare shock and awe that is going to make thier heads spin! We are from the USA, and we are here to help.

        Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

        Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.

        After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.

        “Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

        To your other point:

        http://delong.typepad.com/sdj/2012/07/in-which-i-give-up-refereeing-the-war-over-the-treasury-matthew-yglesias-on-neil-barofsky-vs-tim-geithner.html

        Team Neil has never really presented a coherent alternative course of action…. From the original winter 2008-2009 argument over bank nationalization along Swedish lines, I’ve rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional “bailout” money. I think that still would have been the optimal policy, but it’s not a no-brainer….

        I can also say that I don’t actually think this disagreement was nearly as consequential as either side seems to think. The administration made a catastrophic blunder in failing to appoint and confirm a team of Federal Reserve governors who were committed to reflating the economy to something approaching its pre-crisis trend level of aggregate spending. Had they done that, the banking policies they chose would have worked. Having failed to do that, even alternative superior banking policies would have failed.

        Well, we do not know how well more aggressive and different housing policies in particular and financial market policies in general would have worked because they were not tried. Claims that they would not have worked because only monetary policy is important–or alternative claims that only fiscal policy is important or only banking policy is important or only new-Keynesian policies are important–seem to me to be strikingly unfounded: the victory of ideology and academic-intellectual factionalism over a frank admission of the limits of our ignorance. The stakes might have been low. They might not have been low. The example of Sweden in 1992 suggests that the stakes might have been high…

        There is also the question of which side, in the really existing political-economic situation of 2009-2010, Team Neil was really playing for. Yes, they wanted to strip the bankers of their wealth, put bankers in jail, and pull homeowners above water. But their was no coalition for such a super-Swedish-model solution in Congress and no possibility of creating one. And Barofsky’s allies in congress–the people who he was leaking games of “gotcha” to, the likes of Darrell Issa–wanted nothing done at all.

    1. @y,

      if the US does not import what others export, then who will?

      Trying to imagine the world where all countries have balanced current accounts. I imagine it would lead to war – since in that case resources would count, instead of imaginary financial products.

      So maybe the dollar illusion (I mean countries willing to export real stuff in exchange for dollars) prevents from wider global struggle for resources? On the other hand – the struggle for resources is still there, but less on a national plane, and more on class plane (class war instead of nation war).

      1. War has always been an option among humans.

        Perhaps more coordination and mutual support would be a better way forward.

        Once you realise that financial constraints aren’t the same thing as ‘real’ constraints, plotting a positive future path for the global economy becomes a lot easier.

        The confusion between financial and real constraints may well lead the world towards war, however. Humans have repeatedly proven themselves to be pretty stupid in the past.

      2. @y,

        where would coordination and mutual support come from?

        Looking at history – people only managed to be at peace when they were deluded by something: religion (only applies to peoples of the same faith), fear (of common enemy), money (wish to trade more than war, but that only applies if war is not an easier option)…

        Once dollar illusion is taken away – what is left are bare resources (water, food, oil, metals, etc) or manufactured goods, or slaves (for countries that have no resources nor manufactured goods). Although – this is the condition of most of the world already – I mean the countries that do not have globally desired financial products.

        But that is assuming that dollar is an illusion. If world countries actually have to have dollar to pay for necessities (oil?) – then it is more like a tax, than illusion.

      3. @y,
        I meant that there should be no need for countries to accumulate dollars if they are net importers and have free floating currency

    2. @y, Y, we have to look at the numbers. The current account deficit is not so ginormous right now. It’s about 3-4% of GDP. Savings is higher. It’s about 6% of GDP. So, right now if the Gov were to accommodate both, then we’d be running a 10% budget deficit or $1.6 T, rather than closer to $1.1 T.

      Now let’s say we reduced the CAD to 1%, then we’d still need a 7% deficit. If we wanted to maintain that 6% savings, then we’d need a current account surplus of 6% to justify a balanced budget. That’s a shift of 10% of GDP from where we are now. very heavy lifting, especially since nations that now operate with a current account surplus would fight us very strongly.

      Since exports are real costs and imports are real benefits, fighting the kind of trade war that would imply would mean joining a race to the bottom and lowering the standard of living of Americans. We don’t need that.

      What we should do instead is use the situation we have now as an opportunity. Except for those areas where we need to produce for reasons of national security or future economic sustainability (like solar and wind) we should let other nations produce our stuff if they want to, and use deficits to create full employment on value-producing activities within the United States that make us more economically sustainable for the future. Working on energy foundations, infrastructure, health care, and education are the most important of these.

      1. @LetsGetItDone,

        “It’s about 3-4% of GDP. Savings is higher. It’s about 6% of GDP. So, right now if the Gov were to accommodate both, then we’d be running a 10% budget deficit or $1.6 T, rather than closer to $1.1 T.” (emphasis added)

        Your math must be wrong. The government has to accommodate both, by definition.

  5. The budget balancers may fail in the end, but it certainly doesn’t stop them from trying, nor does it keep them from controlling the debate. That’s exactly what Ryan and people like him have done. Debt and deficits are among the top issues that voters care about and that’s what counts.

    1. @michael norman,

      That’s why the MMT macroeconomics textbook is of great importance.
      It should be heavily promoted (no money spared) when published.

      We can’t blame the general public when there was no textbook describing the new paradigm.

    2. @michael norman, The budget balancers do indeed control the debate. And it seems most of the world listens to them. I casually mentioned that deficits were not going to cause us to become insolvent at a meeting of my local BS group. You’d have thought I committed a crime.

  6. Warren,

    What would happen if the federal government seriously tried to balance its budget. Pratically speaking is it possible or would the economy simply go into freefall making revenues never balance no matter how much spending was cut? Would you briefly describe what would happen?

    1. @Roger,

      If the economy were overheating, it might actually be desirable to run a balanced budget, or even a surplus. Probably happens naturally, however, given our progressive tax system. Last time it happened was during the internet bubble, fiscal years 1998-2001. We actually came close to running a balanced budget again in fiscal 2007, just before the housing bubble popped. The deficit was only 1.3% of GDP.

      Under current conditions, the only way you could balance the budget is by outright confiscation of privately owned financial assets. If you tried to do it just by cutting spending or tweaking tax rates, I don’t think you could get there, despite what the CBO analyses tell you.

      1. @ESM,

        Sorry I did not preface it with our current demand/savings desire situation. You confirmed what I thought, it would be impossible currently.

  7. Fascinating state of affairs.

    The economic prosperity of the 99% hinges on them properly understanding the budget deficit and National debt. The political power of the 1% hinges on the 99% NOT understanding.

  8. Mosler constant claim of debits = credits has nothing do with reality, but only accounting for fiat currency.

    Fiat one side = Fiat one the other.

    The real issue is the fiat currency, not back by anything of value, is simple a license to steal from true savers (those that produce true value in an economy) through constant inflation.

    The other word for this constant inflation is “economic growth” – the currency is constantly debased so savers always lose, bank always win.

    1. there’s nothing that says the dollar is an investment vehicle or that anyone has to save dollars.
      it’s perfectly legal to save in anything you want, as most everyone does.

    2. Alexi, if oil prices rocket for example, to keep inflation low the government would probably have to totally crash the economy and indirectly put millions out of work.

  9. The US only gets to run a vast budget deficit because workers around the world are willing/forced to work for a pittance to export cut-price goods to the US so that their countries can accumulate dollar assets.

  10. I think that the MMT cause needs a canon for the common people (like me), a piece of work that puts it all together in an easy to understand package. The 7DIF gets the job done but we need alternatives that aren’t so anecdotal yet avoid beicoming an arduous epic read, a sort of MMT for Dummies but with a less cliche title. Currency flow charts would be a nice inclusion along with all of the 7DIF concepts.

    Most of the arguments against MMT concepts are due to the piece-mill presentation here and elsewhere. People are still having a hard time putting it all together. Switching mental gears from micro to macro can be very diffucult indeed.

    Please don’t misinterpret this as critisism of 7DIF, I think Mosler’s work is brilliant, I just think it’s so importaint that it needs to evolve and reiterate until it reaches the masses.

    1. @Chris,
      It’s basically like being forced to change your religion. You’re not unhappy with your current faith so there is no reason to take a giant leap to another faith until you start to feel some cognitive dissonance.
      Those that understand MMT all had the experience that something is not quite right with the way things have been explained. Unfortunately it is not until the student is ready that the teacher appears.

      1. @chewitup, Those that sense something is not quite right with the popular paradigm are the easy ones. More tools for the MMT evangelists would help plant the seeds of “cognitive dissonance” in those that are content with popular belief.

  11. The smarter people who worry about govt budget deficits are really worrying about a possible future collapse in the exchange rate (i.e. a balance of payments constraint).

  12. Warren,
    I believe you’re right, although I do wish you’d rake Obama over the coals a bit more–i think he deserves it as much as Ryan, perhaps more, since, as you could read on these pages, most don’t think Ryan as VP would have more influence over policy than Joe Biden is having today.

    1. @Vincent,

      Warren lets the mask slip every now and then. He obviously spends way more time in the progressive blogosphere than the conservative blogosphere, which encourages him to draw an outrageous analogy between a serious person (and potential ally) and a nutcase.

      Not sure how Ryan will fit into a Romney presidency though. FDR’s first VP once described the vice presidency as “not worth a bucket of warm piss.” Who Romney picks as Treasury secretary (if we get to that point) will be far more telling.

      1. @ESM,

        At which point The Bernank will only have 12 months left as the Chair …. and he’s already implied that he’s had enough of it.

      2. @ESM,
        Not sure if it’s white male guilt, or an uneasiness to offend progressives, but i can’t remember the last time Obama’s gotten a negative headline in this blog. Although certainly negative comments have been made.
        I mean Obama transferred 500B+ from Medicare to Hartford, CT, and no one blinked!
        Some kind of phenomena not understood to me.

      3. @Vincent, even delong is critical of Obama lately. However Obama has claimed his number one priority is energy independence. This would do more for world peace than anything else and shows the depth of Obama’s insight. People should think not of Obama failures without thinking how much worse things would have been under McCain Palin. Thank god for Obama.

      4. @Vincent,

        @Sdvan:

        “However Obama has claimed his number one priority is energy independence. This would do more for world peace than anything else and shows the depth of Obama’s insight.”

        Not sure why energy independence is desirable, since oil is a global commodity, and the price will be independent of whether or not the US is independent, but the US is well on its way, no thanks to Obama who opposes the production and use of fossil fuels in any ways he can.

        “People should think not of Obama failures without thinking how much worse things would have been under McCain Palin.”

        Well, I’ll tell you one way things would have been better under McCain. The mainstream press would be a watchdog rather than a lapdog. Obama is the most authoritarian president since FDR, perhaps since Woodrow Wilson, and it’s because the press covers for him.

        I guess another way things would be better is that the person who is currently a heartbeat from the Presidency wouldn’t be completely unqualified for the job.

      5. @ESM,
        How is US ‘well on its way’ to energy independence?
        All I see in that article are the calls of oil execs to drill in now restricted areas

      6. @Vincent,

        @Gary:

        Hmmm. The article is less than clear, but I had heard that the Shell CEO actually predicted that the US would be energy independent (in the sense that all of its energy would come from North American sources) within 15 years.

        From what I’ve read, it’s plausible, but it would probably require a President Romney for the next 8 years.

        It’s obviously price dependent too. At $100/barrel, the US is probably moving steadily towards energy independence. At $50/barrel, we would be probably be moving away. At $150/barrel, we would probably be energy independent in 10 years. That’s why the goal of energy independence is stupid. Only the price matters.

      7. @ESM,
        By the way, my point isn’t one of partisan bean counting. It’s that Obama (by way of his soapbox) had a rare opportunity to educate at least the people in his camp, which he did not, and for that i think he should be excoriated on a daily basis. When I speak with progressives about MMT, they invariably start talking about hyperinflation. Why should a “conservative” be teaching MMT to a progressive (well, I shouldn’t say teaching, because the enterprise hasn’t been successful for me). That’s Obama’s job. Shame on him, and his handlers.

      8. @Vincent, >, @Vincent, even delong is critical of Obama lately. However Obama has claimed his number one priority is energy independence. This would do more for world peace than anything else and shows the depth of Obama’s insight. People should think not of Obama failures without thinking how much worse things would have been under McCain Palin. Thank god for Obama. Zero hedge just had a post on the uselessness of cynics. http://www.zerohedge.com/news/guest-post-how-defeat-tyranny

  13. That was really, really good.

    What’s amazing to me is that this is exactly what Milton Friedman type monetarists would say, decrease the money supply, decrease the economy. The only difference seems to be about how the money supply is increased. Monetarists believe that it can be increased by the Fed, apparently through playing with interest rates, but here Warren and the MMTers have it right, I think. The money supply can only really be increased through government spending or tax expending, i.e., cutting taxes. Which really means that all of the Fed’s measures of the money supply are worthless, they’re not measuring the money supply.

    Milton Friedman said, as I understand it, the Great Depression was caused and continued as the result of failure to increase the money supply. MMTers would, I believe, say the Great Depression was caused and continued by the Federal Government’s failure to deficit spend. Hoover at the end of his administration, January 1932, bragged about how the Federal government had worked toward balancing the budget.

    What’s amazing to me is that conservatives believe that increasing the money supply can cause inflation but apparently don’t believe that decreases in the money supply can slow the economy down and even cause depression, though that’s what Friedman’s work was most focused on.

    1. @Greg Marquez
      I think that’s a great way to frame the argument. One of the problems is that average parents are faced with a 150-200K cost of getting one child college educated. 20 years ago it was about 50K. What happened? I think most incomes haven’t kept pace with that. What happened? Certainly government intervention (increasing avail of loans) has to have played a role. So people are scared when the government tried to fix a problem.

      1. @Vincent, With respect to the cost of college education I kind of wonder how the decrease in state support for college education works out in those numbers. In the late 70s early 80s UCLA undergrad tuition was less than $1000 a quarter, student fees brought it up to something like $1,200 if I recall. I think tuition for three years of Law School at UCLA was less than $12,000.

        Taxpayers thought they’d save money by cutting spending on college, but all they did was move the cost from the state to the individual.

  14. Sensei:
    Just for future reference, I found the language, about the dollar being a closed system very, very helpful. I don’t think I had heard MMT explained that way before.

  15. This paper “Does GDP measure growth in the economy or simply growth in the money supply?” posted on arXiv.org

    http://arxiv.org/pdf/1208.0642.pdf?fname=cm&font=TypeI

    purports to show that adding to the money supply is where GDP comes from. This sounds, in a way to this newbie to MMT, like what you are saying in this article.

    Am I correct? Or is this paper more monetarist in concept?

  16. great article ..politicians can suspend the laws of arithmetics during campaigns and long enough to get elected BUT no further ..

  17. WM,

    You may want to subtract the bonds held by the trust funds from the $ 15 trillion.

    That part is funded by cumulative SocSec (and Medicare) tax surpluses (so far), meaning it doesn’t correspond to NFA.

    The trust fund bonds are an internal funds transfer mechanism between taxes and spending.

    The debt net of that non-NFA generating piece will be closer to $ 12 trillion, which is true NFA.

    It’s just a detail, but the result is a few trillion closer to the penny.

    🙂

    P.S.

    I never got an answer from anybody on MMT high regarding my question passed on to you all by Tom Hickey:

    Are Treasury auctions settled through TGA or through TTL?

    (Wray (and Kelton previously) describe them as settled directly through TTL)

    My understanding is that it’s TGA.

    (And it matters because facts matter, not because it couldn’t be done either way.)

    thx

    1. @JKH,

      JKH, here are the only references I’ve seen.

      Please supply any relevant references later than these.

      “The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public.”
      Treasury tax and loan accounts and Federal Reserve open market operations
      http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf
      TTL Note Accounts and the Money Supply Process
      http://research.stlouisfed.org/publications/review/79/10/Accounts_Oct1979.pdf

    2. JKH,

      Perhaps you should have included the fact that Fed liabilities are US government liabilities in your ‘contingent approach’ paper.

      That might have helped to clarify things.

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