Friday, March 27, 2009

Hey blog readers! Test your knowledge of our financial system. Please take Prof. Scott Fullwiler's exam

Scott Fullwiler is an econ professor who has been on my radio show and who graciously contributes comments to this blog.

To test your knowledge on our monetary system, please take the exam he recently gave to his grad student. Either myself or Scott will "grade" it.


Winter 2009
Case Study 5

The following quotes from rather famous figures or institutions are all completely incorrect regarding the nature of government debt and deficits according to the modern money framework described in class. For this case the task is to explain how the following quotes are incorrect.

As with the previous two cases choose 2-3 points in these quotes contradicting modern money, and explain the refutation of the point in the modern money paradigm.

In the interest of political balance, the quotes here are from a Democrat (President Obama), a Republican (Senator Judd Gregg), and the bi-partisan Congressional Budget Office.

Writing grading criteria are in effect.

Quote 1:
President Obama on 60 minutes

Mar 22 (CBS) —

KROFT: Is there some limit to the amount of money we can spend?


KROFT: Or print trying to solve this crisis?

OBAMA: There is.

KROFT: And are we getting close to it?

OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.

Quote 2:
March 22, 2009
Gregg: ‘This country will go bankrupt’
Posted: 03:41 PM ET

From CNN Associate Producer Martina Stewart

GOP Sen. Judd Gregg warned Sunday that the country might be headed for a fiscal crash if spending isn’t controlled.

WASHINGTON (CNN) – Even though he was almost a member of the new Obama administration, New Hampshire Republican Judd Gregg Sunday slammed President Obama’s approach to handling the country’s fiscal outlook.

“The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.”

Gregg, known as one of the keenest fiscal minds on Capitol Hill, also told CNN Chief National Correspondent John King that he thought it was “almost unconscionable” for the White House to continue with its planned course on fiscal matters with unprecedented actual and projected budget deficits in the coming years.

“It is as if you were flying an airplane and the gas light came on and it said ‘you 15 minutes of gas left’ and the pilot said ‘we’re not going to worry about that, we’re going to fly for another two hours.’ Well, the plane crashes and our country will crash and we’ll pass on
to our kids a country that’s not affordable.”

Quote 3:
From page 43 of A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook published March 2009 by the Congressional Budget Office (CBO;

“The primary difference between the current projections and the ones published in January is the effect of the American Recovery and Reinvestment Act of 2009. Although ARRA will boost output significantly in the next several years, any short run effects of the stimulus legislation on the business cycle will have dissipated by the end of the projection period. In the latter part of the period, the legislation reduces projected output by roughly 0.1 percent, principally through its influence on capital accumulation.”

“Capital accumulation is affected because the increase in government debt is expected to displace, or “crowd out,” a smaller amount of private capital. That result occurs because the reduction in overall national saving dampens spending on business fixed investment and the construction of housing. Although the size of such displacement is very uncertain, CBO assumes that, in the long run, each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital).”


googleheim said...

I'm not impressed.

Nobody has explicitly differentiated between printing money, crediting accounts to the main banks (virtual creation of money), and borrowing.

I expect a flow chart with bubbles showing real economy borrowings separated from Fed/Tsy issuing of credits which in turn link to the real economy bubble via treasuries or bonds or whatever ...

of course china and dubai and norwegian sovereign funds would be in the real economy bubble with an arrow going out to buy the bonds and an arrow going in showing their return on investment.

nobody has laid down the schematic and if I don't see it, then I don't have time for this meandering dialog anymore.

anybody have a link or a couple seconds to draw and show this explicitly so once and for all the hoopla can be measured as to which bubble people are merging and blending and distorting ?

finally, please !

STF said...

"Nobody has explicitly differentiated between printing money, crediting accounts to the main banks (virtual creation of money), and borrowing."

Actually, it's been done zillions of times, here and on Mosler's blog. It's also in several publications on (see "Interest Rates and Fiscal Sustainability")and

googleheim said...

no, it's always piece meal.

here is a sample :


STF said...

You're entitled to your opinion. The issues you are raising are already settled in volumes of research in my opinion.

Anonymous said...

Mike: Just read this post AFTER forwarding the Kiplinger Report. lol How redundant!

googleheim, (meandering? Pardon moi!)
But seriously, goog, I can relate! I empathize with your frustration. Wanting to have a better understanding in regards to how Fed Reserve, Treasury, Fed Gov't all work together towards balance, I’ve thought about it more than once, wondering, how all of it would look in a flow chart or a decision tree. Demonstrating choices/policies/self constraints, the Federal Gov’t has while coinciding the effects, visually. (18 years later and I still wear my Ross Perot t-shirt) Microsoft Office Suite includes flow chart templates. Also, Smartdraw.

Heck, maybe even create a board game. How timely would THAT be in this economy? We could make it hip, market the bejeezus out of it and corner the family game market for the next decade bringing people together to have fun (rejoicing in truth!) all the while serving public purpose. Of course we'd need sort of a guerilla mktg strategy because if Obama and his mkting gurus saw us coming they'd ramp it up for sure before even a dent could be made in the minds of the public.

What do you think? Can we make this visual?

STF said...

I'm personally less interested in such flow charts, but can understand why others like them. My own preference is for linking financial statements . . every single transaction in the economy affects financial statements, and if you don't have the changes to financial statements correct, then you can draw all the charts you want, but you'll still be wrong. It all starts there.

As I said the interaction on financial statements between govt, banks, business, households, and central bank has been dealt with many times, especially in the last 10 years, in numerous publications by numerous authors.

For a sampling, there is a bit of this in a recent paper using the stock-flow consistent method (presenting social accounting matrices) that can be found here:

Another paper in the same vein presents a sort of flow chart of the horizontal vertical perspective on money here:

Again, these are just two of many, some with much more detail (for instance, the recent book by Godley and Lavoie), some with less. As I said, most of the authors doing this work can be found on the Levy, CFEPS, and CofFEE websites, but there is also the broader social accounting matrix literature that is quite voluminous (some of it relevant to the issues raised here, some of it not).

I don't know if these will satisfy every blog reader, but let someone who thinks it works differently present their own model or matrix, as the framework under discussion on this blog has already been presented in that context numerous times.

Paul said...

Bill Mitchell also has a weekly quiz based on his blog entries throughout that week.


Anonymous said...

:-) You make a great point. The numbers and what they were at points in time must be unequivocally undisputable. I've gone wide and now I'm ready to go deep. If this paradigm is authentic, and I'm confident that it is, it must be authentic to the core. And that's a great thing because it means it's all verifiable. It's not magic trick. It's not luck or even theory. It's calculated and it's methodical. You know?
I love what Mike said earlier this week in a post: "most people harbor biases and predjudices. It takes discipline, effort and courage to try to reduce or rid yourself of those beliefs." and I have two things to say about that. #1 MOST people DON'T make the effort. MOST people are happy enough following status quo. MOST people go "Everyone knows that!" which implies everyone has verified it. MOST people only need to hear something about twice in order to accept it as true.(that is, outside of contradicting morals,values,religion) okay and # 2 All of us here, clearly we ar not "most" people. Who is right who is wrong is unimportant. We want truth. We value authenticity. We loathe meandering. And so if it happens that there's a hole in any of this, I know I will find it by just doing what I naturally do.
But why am I taking the time to learn more and go deeper with all of this? Not only to hold the truth but to spread it as well. Right? We are not meandering philosopher types.
I know that I have enough influence in my circle of friends, family, collegues to say to anyone of them "if I can prove it to you by showing you will you accept it?" in turn persuading to set aside biases. Keep in mind, "most" of my network are like "most" people too which means I've got between 2 and 7 minutes to make my first impression. I can't do this with financial statements and words alone. Without mapping it visually MOST people will quickly dismiss it as though it's theoretic. But it's not. I don't want meander. I need results. Mindmapping is powerful. There's almost nothing that can't be mapped. In fact to walk the unbiased walk that I talk I'll say this: If Mike or Warren or were to say "It's just not possible to mindmap monetary operations" then I'm through here. "So long, meanders" and goog and I will ride off in to the sunset. Right, goog? lol I like to be funny and I'm serious too.

Finally, assuming that's not our destiny...

If we are visualizing this on a chart, mindmap, decision tree we've got bubbles, we've got supporting financial statements. just click a bubble and up pops your fincial statement. So we've got a bubble called 'the depression' and 'wwII' and "reaganomics" ....
Mind mapping is cool. Forget about smartdraw and office, mindjet's mindmanager is the ultimate -

I'll step down now....

STF said...

My point was more of an academic one . . . there's a large literature on this stuff relating the financial statements. When Gooogleheim suggests that "nobody has explicitly differentiated b/n printing money . . . etc." that is just patently false. In the academic world, you don't get to make statements like that in criticism if you don't know the literature you are criticising.

Having said that, I may have misinterpreted the point, since it sounds like what those posting here want is something for lay people. Not a problem. I'll check out the links Mortgageangel suggests and see what I can do. Not much time at the moment, but we'll see. In the meantime, I'd be interested in comments on the links in the previous post in terms of whether it's what people are looking for in this sort of forum.


googleheim said...

finally, some dialog here.

what i meant is that i need flowcharts showing all these money pipelines, as i like the purdy pictures.

i listened to bernanke's 60 minutes interview, and he first says that "taxpayers are on the hook for AIG" and then he actually very simply and calmly differentiates between "printing money" and crediting banks which are loans which generate money for the treasure, but he does so very quickly with a stroke or two but no more.

he basically says that crediting banks is akin to printing money and requires a big mop up afterwards to prevent inflation.

i've had enough of inflation for the past 5 years.

bernanke never scolds about greenspan, is it because greenspan singlehandly picked bernanke out back in 2004 because greenspan knew everything went south with his deregulation binge ?

blaming it on china and others ?

STF said...

OK . . will work on it. May take a bit of time to learn the software mortgageangel posted, though, and not much time available right now. In the meantime, I'll try to collect from posts what people want to see.

Regarding Bernanke, he's right that crediting bank accounts creates "money" (by definition), but if the Fed is doing it, it does add to net financial assets of the private sector, since the Fed is either making a loan or purchasing a bond when it creates the deposit.

googleheim said...

i knew there was something missing from my education with School House Rocks back in the last century.

They covered bills on capital hill, but it would have been redundantly useful for all the recessions since the 70's to have had a cartoon opera on how the fed creates money, credits, and how they are all actually different.

ok back to reality

Mike Norman said...

Thanks, Scott! And to all who participated!

Anonymous said...

My apologies everyone, for getting off track. I like the visual idea mostly because I could learn what I haven't yet grasped and be lazy at the same time. It's true!