Just arrived from Professor Tcherneva.

It outlines the paradox between what the Chairman says about govt spending not being operationally constrained by revenues, aggregate demand management, and his stance on fiscal responsibility.

PDF:

Tcherneva: Bernanke’s Paradox

59 Responses

  1. I read Professor Tcherneva’s paper with interest. To be fair there is one aspect of Bernake’s worry regarding fiscal sustainability which she does not do much justice to (by not dealing with it). I believe that is a shortcoming of MMT in general. Bernake said:

    “The prospect of growing fiscal imbalances and their economic
    consequences… raises essential questions of intergenerational fairness”.

    While he does not dwell into this, it is clear that open-ended fiscal largess will affect the wealth distribution of past savers versus new recipients and savers. It will most likely also affect the value of the home currency, etc. Whether or not such an outcome is trivial compared to the goal of full-employment is an issue for the electorate to decide (assuming they are properly exposed to the repercussions of different policies). However, to gloss over this issue is not satisfactory and must be addressed in my humble opinion if MMT is to gain even more credibility.

    1. Nonsense argument as far as I can see. Real wealth has to do with real resources. Bernanke is focused on financial assets rather than real resources. The economic goal is not maximizing financial assets but optimizing use of real resources. Doing less than is optimal wrt the real at present rather than than optimizing use of real resources now will result in foregone opportunity that can never be recaptured, resulting in a smaller pie down the road and creating problems for coming generations through deprivation of education and other vital resources, reducing their lifetime opportunities and decreasing their competitiveness globally during a time of globalization. Crazy.

    2. If Japan tells us anything it’s that 0 rates and a lot of qe doesn’t hurt the currency or cause inflation, as MMT suggests as well.

      And the deficit is not a matter of intergenerational fairness in any sense of the words.

      1. “If Japan tells us anything it’s that 0 rates and a lot of qe doesn’t hurt the currency or cause inflation, as MMT suggests as well.”

        So you’re comparing the US with a chronic b.o.p deficit with Japan? And, let me remind you, a Japan whose currency has been a “funding currency” for the best part of 20 years? Think for a minute how many Yen do international protfolios have vs. the amount of non-resident Yen loans oustanding. Then make the same comparisson for the US$ case. I think anybody whose been outside the university will easily spot the difference.

        “And the deficit is not a matter of intergenerational fairness in any sense of the words.’

        How is that? The cumulative deficit (over the years) is the current size of the public debt – say the total outstanding govt. bond market. So if we chose to grow this sizably on account of Keynsian zealotry, won’t the existing bond holders (past savers) get dilluted? Do you think they will happilly aquiesce?

        Don’t get me wrong; I’m not being polemical; in fact I truly welcome your movement asw I am discussed by traditional economics. I just think there are some loose ends that haven’t been fully worked out.

      2. John,

        1. Federal T-securities are an unnecessary relic of the gold standard days. The federal government does not need to borrow.

        2. But, since the federal government can service an unlimited amount of bonds, how does issuing more bonds dilute anything? You buy a $10,000 bond and you get back $10,000 + interest, no matter how many other bonds are out there.

        If you are talking about inflation, then merely say, “Inflation dilutes,” not “Bonds dilute.” Big difference, because there is no relationship between federal debt and inflation (See: Inflation .

        Rodger Malcolm Mitchell

      3. and remember if the govt doesn’t ‘borrow’ it still has to pay interest (one way or another) on the reserves it creates if it wants a non 0 fed funds rate

      4. the only way anyone else has your ‘currency’ (net financial assets) is if you run a negative trade gap.

        so no nation with a trade surplus has ever had any inflation?

        and does japan demonstrate that high budget deficits, high debt, massive qe, etc. causes trade surpluses?

        how do bond holders acquiesce or not acquiesce?

        anyway, the intergenerational fairness is not about the real return to bond holders, whatever that is. it’s about ‘leaving the debt to our children’ and all that nonsense.

    1. To plug Rodger’s book (in fact, I think I first came to this site through a link at his website), its worth reading– if only for the appendix with the correspondence he traded with the Concord Coalition and various newspaper columnists. I think he kind of freaks out some of his correspondents (who no doubt had initially pegged him as a crank) that he was more knowledgeable about public finance than they were.

  2. To her credit, it was possible for this non-economist to comprehend the major points of ‘The Bernanke Paradox’. In addition to factors mentioned in Tom Hickey’s reply, one should consider the extent of cultural degeneration, as well as negative attitude development among both workers and all affected societal components which are currently being overlooked when the poor economic decisions of the Obama administration are put in place. It is as if the politicians/super-rich/religious leaders of the USA take pride in demonstrating how their ignorance/greed/faith in fallacies, etc. facilitate the degeneration of our ‘representative democracy’ so efficiently.

  3. No doubt about it – a “paradox” – to be polite about it.

    I like the reference to the possibility of deliberately running negative capital on the CB balance sheet. The point I think is that the natural capacity of a central bank balance sheet for negative capital is a reflection of its capacity for net fiscal content in its own policy. Pavlina’s obviously not afraid of a little accounting. I’ve been hoping that somebody someday might proclaim confidently in some paper what the accounting entry should be for a bona fide helicopter drop (and/or Warren’s $ 1 trillion Euro drop). That’s how I think it should be recorded – as negative CB capital (assuming reasonably that the drop is large enough to generate negative capital).

  4. I think there is some confusion here with regards to Bernanke’s academic views and statements he makes to broader audiences. Bernanke is a new-keynesian — he believes in a short run where fiscal and monetary policy can influence output gaps and a long run supply curve which is technically determined and cannot change with demand management. Looking at his academic work on the Japanese ‘lost decade’ it is clear that he understands there is no financial constraint to government spending. Bernanke articulates this operational understanding in his academic work and then advocates a set of policies which are designed to address the output gap in the ‘short run’.

    As a new-keynesian, however, he does believe in a long-run full employment equilibrium. This is where his deficit-hawk side comes from. If, in the long run, the economy is at its full employment equilibrium, government deficits will crowd out investment — in the ‘real’ sense — via increased inflation, increased interest rates, or both. That is why when you hear him talk about ‘fiscal sustainability’, he is not talking about short-run demand management policies such as the stimulus, tarp, unemployment insurance, etc., but rather social security, medicare, etc.

    It is important to remember that the quotes Professor Tcherneva uses which frame Bernanke as a deficit-hawk come from speeches delivered to a broader audiences. Clearly, in this context, Bernanke is not interested in lecturing about the nuances of NK models nor the operational realities of government spending. Instead, his intent is to express his opinion that in the long run, deficits crowd out private economic activity. So when Bernanke, in speeches to non-academic audiences, uses the term ‘fiscal sustainability’, I think he is talking more about inflation, high interest rates, etc., rather than government checks bouncing.

    1. One would hope, but he has to know how he’s coming across- fear mongering on the deficit and supporting the hawks, etc?

      And even at full employment govt deficits per se don’t crowd out anything.
      It’s only from govt spending that moves real resources from the private sector to the public domain and leaves the private sector resource constrained.

    2. Ds,

      That’s a point David Colander (interesting fellow, he was a protege of Abba Lerner but I’m not sure where he comes down on functional finance / MMT these days) has made. As Colander breaks it down:

      Functional Finance, there is short term disequilibrium without government intervening by either increasing spending and cutting taxes when the economy is not at full employment or the opposite when its approaching full employment. And the “long term” means, really, a series of short terms.

      NeoKeynesians (or New Keynesians, same difference), accept that there can be short term disequilibrium (“market failures”) that require govt intervention, but assume that the economy naturally adjusts to find a long term equilibrium.

      Neoclassical (or New Classical, if there’s a difference, I haven’t bothered to glean it) economists insist the market naturally finds equilibrium in both the short term and the long term. So any government intervention only moves the economy away from (as Voltaire would write) the best of all possible worlds.

      Most public economic debates are really just a disagreement between the neos about policy in the short term, since they’re on the same page about long term economic prospects. That’s why they’re always ready to hold hands and cut future spending, like Social Security for future beneficiaries.

  5. Roger,

    you say:

    “But, since the federal government can service an unlimited amount of bonds, how does issuing more bonds dilute anything? You buy a $10,000 bond and you get back $10,000 + interest, no matter how many other bonds are out there.”

    It dilutes the value of the bonds. A public debt of 14 Trillion is a much greater claim on assets, goods and services than say a 7 Trillion one. While this may not show up immediately in the CPI (especially to the hedonically adjusted version), It will get reflected in relative asset prices. Look around and you will see just that happening. Consequently people that have their savings nests invested in liquid form (bonds, MM,ect.) will see a loss of purchasing power vis a vis other assets of more fixed supply.

    Now, whether the goal of full employment is worthwile and overcomes the distributional effects associated with it is something debatable. Certainly from a societal viewpoint, foregone ouput is undisputable and is just that: a net loss to society. But to say that there are not other issues is an oversimplification.

    “If you are talking about inflation, then merely say, “Inflation dilutes,” not “Bonds dilute.” Big difference, because there is no relationship between federal debt and inflation ”

    I am talking about asset inflation. I would think you would agree that there is a connection between federal debt and asset inflation.

    1. John, assets are excluded from measures of inflation. Assets only “appreciate,” never “inflate,” which is why the Fed doesn’t act to control what you are calling “asset inflation.” The Fed and the bond vigilantes are only concerned when nominal prices rise to the degree that it results in upward pressure on wages.

      What asset inflation? It doesn’t exist. 🙂

    2. The ‘value of the bonds’ is either their current market price, what their interest can buy, or what their maturity value can buy?

      So which one of these went down recently due to the larger supply? market price is up, interest/maturity value buys a lot more house than it used to, less gold, and about the same amount of cpi’s?

  6. I am talking about asset inflation. I would think you would agree that there is a connection between federal debt and asset inflation.

    This kind of hysterical analysis is part of the problem. What connection are you talking about? The last two identifiable assets bubbles are housing, most recently, and stock market 10 years ago. So how did those bubbles have anything at all to do with treasury security issuance? If anything you could say these bubbles are more attributable to excessive and unregulated horizontal money creation which the MMT community believes comes from fiscal drag.

    1. I’m talking about the CURRENT asset bubble. And kindly leave your “hysterical” comments aside. I thought we were debating rationally but more & more I get the notion that there are alot of evangelist-types here.

      1. “What asset bubbles?” Check out the price of sugar, corn, precious metals etc. These are clearly budding bubbles. It seems that whenever interest rates are manipulated down by the Fed, some asset (dot.com stocks, then housing, now commodities) develop bubble behavior.

      2. Tom Hickey: “There is no generally accepted operation definition of an economic bubble that would permit definitive prediction ex ante. “Bubble” is an ambiguous term.”

        Maybe the economists can’t tell a bubble, but the con men can. As the saying goes, A fool and his money are soon parted. Con men smell out the fools.

  7. I think John and Jason have confused what generally is called “inflation” (“… price of sugar, corn, precious metals . . . “) with something they call “asset bubble.”

    Contrary to popular myth, there has been (since we went off the gold standard) no relationship between federal debt (aka the issuance of T-securities) and inflation. To see what does cause inflation, see: INFLATION

    Rodger Malcolm Mitchell

    1. It’s clear that MMT aficionados wish to limit the discussion by claiming what were clearly bubbles (NASDAQ 2000 and the housing bubble) either weren’t bubbles or were some sort of inflation and cannot be called bubbles. To claim by definition that one can’t identify bubbles while they are happening denies reality. I’m not claiming that deficits cause bubbles, but I think suppressed interest rates do contribute to bubble formation.

      1. Please, you should address Derpanopoulos concern.

        there is rampant speculation in commodity market, and much of it is driven by money manager searching for yield. In ZIRP, this can happen, and it was big player in recent credit bubble (but not in internet equity bubble).

        But this is potentially function of interest rate, not outstanding “debt” or deficit.

        Derpanopoulos: Federal debt should be called “paid-out capital” as it is not what government owes anyone, it is simply what government has paid out but not collected back. It is our savings. Public debt equal private savings to the penny.

        Required Readings says all this nicely

      2. Zanon,

        “Federal debt should be called “paid-out capital” as it is not what government owes anyone, it is simply what government has paid out but not collected back.”

        This ‘paid-out capital’ view is interesting, I do not recall those words per se in the Req Readings, is it there and where if you please? Otherwise can you expand on this concept if it is your own interpretation? Perhaps an analogy, accounting..

        Resp,

        PS Good luck with Jerry Brown! 😉

      3. Matt (November 3rd, 2010 at 8:11 am),

        It comes from here:

        http://www.winterspeak.com/2009/07/paid-out-equity.html

        In that post, winterspeak refers to the long conversation he and I had here:

        http://www.interfluidity.com/posts/1233118501.shtml

        It started out with my idea of negative equity on the consolidated G/CB balance sheet. Winterspeak picked up on that up, and labelled it “paid out equity” or “paid out capital”. It’s not terminology that I’m particularly comfortable with. I’ll stick with plain old negative equity, which I think is quite useful, since it dovetails with the idea of using the CB for fiscal purposes by driving its own equity capital negative, as per my point 4. above. Net deficits drive G and GCB balance sheet equity negative. If you’re comfortable with deficits from an MMT perspective, you shouldn’t be uncomfortable with the idea of negative equity from a balance sheet perspective, is my view – although I have noted some discomfort with it when I’ve mentioned it previously.

        (That interfluidity conversation was the first time he and I had ever conversed on the internet.)

      4. Matt,

        Just though I’d record the reason I don’t like the “paid-in” terminology (although I doubt you’ll care about this level of detail):

        The inverse of “paid-out” equity would be “paid-in” equity, which would be the non government effect that corresponds to government “pay-out” origination. The problem I have with that is that “paid-in capital” is commonly accepted accounting terminology for the actual formal capitalization (e.g. equity issuance) of corporate entities at book value. I think the application of the same terminology to a macroeconomic saving effect is confusing in that sense. There’s no equity issuance here.

        For example, when a firm undertakes consulting work for the government, and the government happens to deficit finance the payment, the alleged macro “paid-in” capital effect has absolutely no correlation with the firm’s own actual paid-in capital accounting position. In fact, to the degree that the firm participates in the income distribution from the net financial asset creation, it comes about through retained earnings or dividends – not through actual paid in capital. So it’s unnecessarily confusing. I’d simply leave it as a government balance position of negative equity and a non government position of positive equity (neither of which have formal capitalization connotations), and then drive on from there, explaining the macro effect the same way as is done with deficits. Deficits are the income statement origin of negative balance sheet equity. That’s consistent accounting. No need to making accounting terminology murky. Equity is the general term that works on both sides of the track in my view.

      5. JKH,
        Thanks, I have to look at it tonight T-accounts etc.., I keep searching for a ‘better’ terminology as “debt” has the negative connotation, this ‘paid out equity’ just sounds better… wrt ‘negative equity’, on the surface would probably sound bad to the uninformed people out there (the govt has gone negative/bankrupt, etc..you know the drill), but perhaps it could be explained that the govt sector negative equity is the non-govt sector positive equity…something like that…

        I want to explore this further. Resp,

      6. Interest rate maintenance covers some of the functionality, IMO, but not all of it. IRM covers income effect, but there’s still the capital and liquidity effect of net financial asset provision, etc. Also, IRM is a required function regardless of the reserves/debt mix, unless you set rates to zero permanently.

        IRM account does sound good though.

      7. wrt ‘negative equity’, on the surface would probably sound bad to the uninformed people out there (the govt has gone negative/bankrupt, etc..you know the drill), but perhaps it could be explained that the govt sector negative equity is the non-govt sector positive equity…something like that…

        Agreed. “Negative equity” may be correct accounting -wise, but it sounds, well, negative. Need another term for popular consumption.

        While we are at it, it seems clear from the present political discourse in the US that the problem lies with confusion due in part to terminology. The misapprehension of the issues of the day revolves around the false government-finance-is-like-personal-finance analogy. This analogy is reinforced by using the same terminology that applies operationally to nongovernment for government operations, which are not at all similar operationally under the present monetary system. New terms are needed with clear and precise operational definitions and also having popular appeal, like instead of “government debt,” using “nongovernment savings” (of net financial assets created by government currency issuance).

        Without puncturing the false analogy of government finance being the same as household and firm finance, we are toast. The deficit errorists will drive the US and world deeper into global depression.

      8. Tom,

        How about we saw off at “wise but ugly”?

        Agreed something for more popular consumption is needed, but I don’t particularly like the “paid in” thing for reasons noted, and I’d like to keep the pristine negative equity accounting up the sleeve for more technical reference purposes.

        I do like Warren’s IRM account for its pleasant macro ring, but not sure it covers the full functionality.

      9. And BTW, just to remind everyone, Pavlina did refer to negative capital in her paper – that idea applies not only to the central bank, but to the government and to the consolidated entity, IMO.

      10. JKH, I have no quibble about using the correct accounting terminology in professional work. However, for popular consumption, the medium is the message. The opposition has carefully crafted its message for maximum effect using disinformation. Obviously, the response cannot be in kind but it must be more effective. I think that is doable by taking operational definitions and crafting appealing terminology for public consumption. This is the job for the PR department. They need to come up with some terminology that the public will love and the professionals can sign off on as operationally correct.

      11. “the funds in the irma are financial assets/govt liabilities etc. so seems ok?”

        I guess so, but the funds in the account have separate quantity and price characteristics.

        The quantity reflects the deficit.

        The price is the IRM function that is set for the debt component and, if required, for the reserve component.

        So the IRM functionality expresses one dimension of the funds.

        E.g. could call it the NFA account.

        The IRM function applies to funds in the NFA account.

        Put another way, the purpose of NFA is more than IRM facilitation (isn’t it?).

        The NFA account does enable IRM.

        And this parallels NFA as enabling satisfaction of the demand for the currency as a result of taxes.

        Maybe I like “NFA account” better than “paid in capital”, and maybe more than “IRM account”. I don’t know.

      12. I guess if you’re referring only to bonds in the current system, and under normal conditions, IRMA makes sense – except that an IRM function is temporarily required also for excess reserves, until they are drawn down to previously binding levels.

      13. Matt Franko:

        I am very comfortably with Jerry Brown. Or at least as comfortable with him as anyone, or anything else. It is obvious to everyone that California is not run from Governer’s seat.

      14. Yeah “negative equity” sounds awful, the mental image for readers is a negative balance on a checking account. Winterspeak’s term was “paid out equity” sounds much better. Is a dividend an example of paid out equity? The other term, “paid out capital” sounds more like buying out a partner’s share.

        I’ll mention again, according to the EPA and OMB, a human life is worth (for regulatory cost/benefit analyses) $7 million and the 2010 Census will probably come back at 310 million. So, not counting our enormous, looming, scary $13 trillion debt, the human capital stock of the United States is $2.170 quadrillion, if you include the debt, net worth drops to $2.157 quadrillion. That’s what the paid-out equity is drawn against (and if the population grows this year by 1%, we’re $21.57 trillion richer).

        As Thomas Edison put it… “but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit…”
        http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

      15. Jason, if you can come up with an operational definition of “bubble” that is borne out empirically, you will be world famous. If you can predict their development, keep it to yourself, and trade on it, you will be a very rich man.

      16. MMT architects support a ZIRP on the FFR and no treasury securities ( basically no FED). Many years ago when Warren called for the ZIRP I said, “well won’t that cause housing prices to go up?” to which he replied, its a one time adjustment. Well, today, we are at effectively a zero interest rate policy and housing has been flat to going down.
        As far as speculation on commodities: it should be banned on commodities that effect the real economy such as Oil and food. As far as Gold? Who cares? I think it has zero bearing on the real world. If you want to put your savings into gold, be my guest, but you are liable to loose your ass.

  8. Ok let’s try one more time. Private debt equals private savings – agreed. So a high public debt endows the private sector with high nominal “wealth” of the liquid kind. I claim that this will lead to higher pirces of more fixed-type assets such as precious metals stocks of corporations or land. If you double the private sector’s net liquid savings, this should push up the prices of these other assets.

    Now am not saying that all bubbles are the result of deficit spending/ public debt. The 1990’s stock bubble you may point out took place in a peirod of declining deficits and eventually surpluses. However, the previous combined deficits under the Reagan-Bush era certainly did increase public debt quite considerably providing the fuel for the 90’s stock rally. Dito during the 2000’s housingh bubble. The Bush II Iraq war together with the previous stock of public debt provided the fuel. The matcha swell as further fuel in the form of horizontal credit growth was, I will concede, ZIRP.

    Over to today. You ask which asset bubble. In my book, the current rally in stocks together with commodities against the backdrop of depressionary conditions in the developed world certainly qualifies as an asset bubble. So does oil at $83. It is the result of debasement of the dollar through fiscal and monetary policy.

    This creates issues of distribution. People on fixed salaries or pensions are worse off on a wealth basis. Their savings yield very little return and buy fewer tangible assets. This has occured without even attempting to create (as you would point out) full employment. The fact that the CPI shows low inflation is little consolation to these people. We live in a stock (not) flow-dominated world. These stocks are much greater and hence more determining than the flows arrising from economic activity.

    1. I think what you are trying to say is what happens in the case of a demand driven inflation which is certainly a possibility under MMT policy? Before I say anything about demand, let me say that 83 dollar oil is more of a supply side problem and a issue to be addressed by a radical energy policy such as more nuclear power plants with massive government incentives ( if not subsidies) to produce electric vehicles, upgrading the electric grid, and mass transit.
      If you read the MMT literature ( note you can watch some great videoshere)
      they address price stability. In MMT, a sovereign issuer of currency is a price setter, just like a monopoly in mirco-econ. So the government, quite naturally, can set prices for labor etc. Additionally, if aggregate demand is too high, an increase in taxes maybe called for. But demand driven inflation/hyperinflation has never been witnessed here in the US.

      The asset bubbles you described I think are attributable to horizontal money creation and fraud. You’ve got the sub-prime bank fraud that is currently being chronicled by Dr. Wray and professor Black and the .com bubble was another wall street financial fraud. Also, look at the growth in credit over the past 15 years. In fact, it has been argued by MMT people such as Warren that the private sector leverages up in order to get the ‘funding’ it needs for consumption because of fiscal drag not fiscal winds.

      1. And also the increasingly unequal wealth distribution which shifts capital from consumption towards investing.

    2. So a high public debt endows the private sector with high nominal “wealth” of the liquid kind. I claim that this will lead to higher pirces of more fixed-type assets such as precious metals stocks of corporations or land. If you double the private sector’s net liquid savings, this should push up the prices of these other assets.

      My take:

      Public debt will only have any of these effects if the money is actually spent (>flow) on these classes of goods (or any other for that matter). The persistence of high deficits and low growth is proof of the fact that this hasn’t yet occurred, i.e. that the potential flows emanating from these stocks are not taking place. People are holding on to their money. The question of where these flows will go once they do take place (which is precisely what everybody is waiting for) is less a function of the size of stocks and more a function of regulatory bias and subsequent perceived opportunities. So the fact that you see what little flow there is going to places you’d rather not have them cannot be blamed on the size of stocks as such but on their distribution and a regulatory bias (as in Warren’s comment) before the fact.

    3. John Derpanopoulos:

      Yes, I get “paid-in” capital from winterspeaks, and JKH is probably correct that it is not correct. If you think “negative equity” explains concept better goods for you!!

      Higher public debt does endow private sector with higher liquid nominal wealth, as you say. Question is whether quantity of higher liquid nominal wealth is greater or lesser than desire for private sector to hold liquid nominal wealth (ie. “save”).

      If deficit is larger that desired savings, then the extra money will be spent on goods and yes, can drive inflation. If the deficit is smaller than desired savings, then the extra money just goes into bank accounts, and you get no inflation — you may even get shortfall of aggregate demand and unemployment.

      So, deficit needs to be big enough to support aggregate demand and employment, but not too big so you gets inflation. Correct size of deficit is relative to demand for private sector to net save.

      Currently, although US deficit is large, it is still too small relative to demand for private sector save. This is because, in part, private sector took on truly massive debt load, and therefore has very leverage balance sheet. It wants more equity to support this balance sheet (which, I think, is where winterspeak paid-in capital phrase come)

  9. To those who point out no asset bubbles in Japan or flat housing prices now, you’re either being deliberately disingenuous or missing the point. The reason there have been no bubbles in Japan is because they had the monster real estate bubble of all time and as Richard Koo describes they are still digging out from its bursting. Ditto here in the U.S. with housing. There was a bubble and it popped. It will also take years of sideways/down movement to wring out this bubble.

    As for Tom, it’s like pornography, tough to define but you know it when you see it. Also, very tough to trade a bubble because although you can recognize when you are in one, as has been said, the market can remain irrational long enough to clean you out if you try and short it.

    Once you burst a bubble, no amount of ZIRP will resurrect it, but ZIRP will contribute to bubbles in other areas.

    1. Once you burst a bubble, no amount of ZIRP will resurrect it, but ZIRP will contribute to bubbles in other areas.
      Again I think ,going from say 5% to ZIRP (0%) overnight, lowers the price of money and can cause a one time adjustment in asset prices. MMT people will concede that I believe. IMHO, the benefits of MMT far outweigh the risks of bubbles. And Once a ZIRP is reached and the one time adjustment occurs, then there will be no more ZIRP induced bubbles.

    2. aka a collapse in aggregate demand which had previously been coming from private sector debt expansion, which necessarily proved unsustainable.

      my point was, if I recall correctly, that zero rates, qe, did not reignite demand, fan inflation, or trash the currency. Even after maybe 20 years of almost high enough budget deficits.

    3. As for Tom, it’s like pornography, tough to define but you know it when you see it. Also, very tough to trade a bubble because although you can recognize when you are in one, as has been said, the market can remain irrational long enough to clean you out if you try and short it.

      Jason, so you admit that there is no operational definition of an economic bubble, and the only way to trade a putative bubble is by the seat of the pants.

      I rest my case.

  10. Matt (November 3rd, 2010 at 10:43 am),

    That’s perfectly understandable in the sense of optics that might appeal to a broader understanding.

    This approach may only work for me; it’s rather purist from an accounting perspective; and it’s just my opinion. But rationally it should really only be a small technical accounting leap to move from being comfortable with the idea of deficits (where MMT is perfectly comfortable) to being comfortable with the idea of negative equity as the result of cumulative deficits. But somehow, it doesn’t sound so good.

    Here’s another interpretation:

    Negative equity equates to an asset position from an accounting perspective, just as positive equity is on the opposite (funding) side of the balance sheet. If a private sector corporation were actually functioning with negative equity (unlikely, but not unheard of), the interpretation would be that future equity increases are expected by the entity (e.g. external equity injections; future retained earnings), allowing it to be viable at an operational level. I.e. negative equity is an asset in the rough sense of representing a receivable of future equity. In the case of the government, Ricardians might equate negative equity with future “required” surpluses. But we know that’s bunk.

    The way I might interpret it instead, attempting a bit of an MMT spin, is that negative equity doesn’t represent a receivable as per Ricardians, but it does represent value in the sense that it reflects the power of the government to create valuable liquidity for the non government sector (i.e. net financial assets) from its currency issuance role. It’s that liquidity provision value that allows the government not to run positive equity as is generally required for private sector currency users. That’s a bit of a fudge factor for the value of negative equity as a government asset, but it works roughly for me.

    Finally, I might also say (no smirk intended) that just as MMT has a problem with the use of “print money” – something that applies correctly only to the gold standard , I have a problem with the use of “paid in capital” – something that applies correctly only to the specific case of corporate equity capitalization.

    🙂

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