Wednesday, February 22, 2012

Either Zero Hedge or MMT is wrong. They are both on record.

For the record.

ZH thinks it won't be long before we see who is right. Meanwhile, place your bets.

Read it at Zero Hedge
As US Debt To GDP Passes 101%, The Global Debt Ponzi Enters Its Final Stages
posted by Tyler Durden


Ralph Musgrave said...

Low grade emotive drivel from Tyler Durden of Zero Hedge. He has absolutely no grasp of any of the basic factors that determine the optimum level of debt, like supplying the private sector with desired savings.

He also makes much of the U.K.’s apparent appetite for U.S. debt, not realising that much of this appetite is INDIRECT: that is, it stems from the fact that the City of London specialises in re-investing other peoples’ money: some of it of dubious origin. That’s why the U.K. maintains those dodgy off-shore tax havens, like the Channel Isles, Bermuda, Isle of Man, etc.

dave said...

the next talking head, idiot politician, meatpuppet that brings up religion, or reproductive rights should be exiled. just saying. question, do they actually believe the shit that they are saying?

Matt Franko said...


"do they actually believe the shit that they are saying?"



Matt Franko said...

There has been a bit of pressure on the longer term USTs lately.

This I believe is our friends at the Fed again though, trying to "get a good deal for the taxpayers". The zero hedge people may be exacerbating this via fomenting a bit of debt doomsday spec selling, but no where near the magnitude of what these people were able to accomplish at the start of QE2.

The Fed is running a continuous maturity change-out, selling short term treasuries while buying longer term treasuries.

Hence we see talk about actual negative rate auctions (this is the Fed selling high) and recent pressure on the long end (this is the Fed buying low).

The monopolist again at work, setting prices to their liking again. When their 'operation twist' finally is over, else equal expect a bit of a bond rally on the long end...


paulie46 said...


"…like supplying the private sector with desired savings."

It isn't safe to use this phraseology anymore, what with the MMR grammer police claiming that improper use of the term saving has de-legitimized MMT thought.

Matt Franko said...


I havent the heart to point out to those folks what Bill Mitchell posted yesterday about what "savings" really is in a monetary economy.... see my post a couple down thread... "a hedge against uncertainty"... that would "open up a can of worms" for sure!


paulie46 said...


They're over there high-fiving their "victory", and they've already dissed Bill Mitchell's post, saying that he is flat-out wrong.

PeterP said...


Yes, this is really sad. Instead of making progress MMR regressed to being stuck on what S is. They got confused over whether it means accumulation of anything (the colloquial meaning) and oscillate between the technical and colloquial definition thereof, mixing in real assets to boot (their appreciation is not recorded in (G-T)+(I-S)+(X-M)=0 ). So like Austrians they "discovered" that you can save a coconut without a government deficit(!). And they insist MMT is unaware of this... (the appreciation and depreciation of real assets, like housing, was the base of MMT's predicting the financial crisis before they even heard of MMT).

MMR has a chance to bring a lot of people into paradigm, but they should slow down a bit and not insist on discovering "flaws" in MMT as a start.

Anonymous said...

Put this in your pipe and smoke it. Velocity of M2 Money Stock just put a new low in that goes back to 1950. It is a quarterly report that was released on 1/27/2012. Have I mentioned exponential math or maximum potential to you folks? Still haven't looked it up? LOL!

Anonymous said...

Why don't you just figure out how to turn straw into gold, as you wizards of monetary madness theory have this completely figured out. LOL!

Matt Franko said...


You sound like the book by Harry Figgie I read in 1992: "Bankruptcy 1995"... well 1995 came and went for me and guess what? no bk.

This led to my journey to MMT.


Matt Franko said...


At least put a clock on it.


Matt Franko said...

Something Ive been thinking about for a while, if anybody has a comment:

Why when the govt seeks to provision itself and pays currency for real goods and services from the non-govt, why should any tax be paid back to the govt at all?

ie if a rock quarry delivers stone for a govt road, the govt taxes the currency back, but do they give the road back to the quarry owners?


Clonal said...

Jerry Kachoyan had an excellent article elaborating on A Mosler interview - Warren Mosler: Because We Think We Can Be The Next Greece, We’re Turning Ourselves Into The Next Japan

Warren Mosler, economist and one of the primary founders of Modern Monetary Theory (MMT), had a very interesting interview recently on “Straight Talk About Money” that is a must listen (click the link to listen). He was giving his thoughts on how we’re not headed in the right direction and what we can do to fix that. As usual, he gives very clear and concise descriptions about the monetary system, the economy and what the solutions should be for our woes.

One thing that particularly caught my attention was when he said (at about 37:37): ”Because We Think We Can Be The Next Greece, We’re Turning Ourselves Into The Next Japan”. This is exactly what is happening. We think the deficits are hurting us while it is truly the only thing keeping us from going into a deflationary spiral. We think we can default like Greece because of our inability to “pay back our debt”.

To add some illustrations to this quote (and some of Mosler’s other points), just take a look at the following charts and graphs.

John Zelnicker said...

Matt -- I think you're right. The government shouldn't tax the currency back at that level. Rodger Mitchell has said all corporate taxes should be eliminated, and I agree. If we do need to tax then I believe we should tax at the level of the individuals who receive the income. Either tax wages or profits. And, unlike the current system, we should tax profits (and monopoly rent) at a much higher rate than wages in order to prevent the immense accumulation of wealth and, therefore, power, that our present system encourages.nesade

STF said...

Even by neoclassical standards it's the wrong measure of debt and thus the wrong ratio. The theoretically correct ratio includes only the debt for which the govt could actually default--which is that debt owed to the non-govt sector. That measure is "debt held by pvt investors" and is 8462B as of 2011:3. That same qtr, GDP was 15176B. So the correct ratio is 8462/15176 = .56 or 56%. Admittedly, this is down about 10%-20% due to the Fed purchasing so many Treasuries via QE, but even then you're still significantly below 100%. Not that it matters.

Tom Hickey said...

@ Matt

The point of MMT is that fiscal policy is different from the budgetary process, i.e., expenditure and taxation serve different purposes, since taxes do not fund expenditure. The first element in the fiscal process is the budgetary process, through which expenditure allocation determines the size and composition of government using private resources transferred to public use through the value of the state currency. This is dependent on availability of real resources. The second element of the fiscal process is adjusting the level of the govt fiscal balance to the non-government balance based on changes in saving desire.

Taxes serve two purposes, First they withdraw NFA from non-government, which is used in functional finance to adjust the discretionary govt fiscal balance to the non-discretionary non-govt saving desire to make space for that metting that desire and maintain effective demand at the level necessary for FE & PS.

Secondly, taxes are negative incentives and discourage the behavior that is taxed. Failure to recognize this can introduce frictions that lead to inefficiency. Recognizing and using this can lead to reduction of friction and greater efficiency.

So optimal formulation of fiscal policy is very precise and involves a balancing act, but not balancing the budget.

Matt Franko said...


Yes that is the way I'm starting to look at it but I can hear a lot of push back that this would be "inflationary".... so I need to think about how this should not logically lead to "inflation" when all that happens is that the non-govt sector exchanges a real asset for a financial asset... why would this be "inflationary" per se... I dont logically follow this????


Oliver said...

Thomas Palley talks about the next bubble being sovereign debt.

Is he in need of an MMT teach in?

Clonal said...


There is another excellent article out today by Isabella Kaminska - Why MMT is Like an Autostereogram

It is cross-posted from Financial Times FT Alphaville

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

geerussell said...


When Palley says sovereign debt bubble he's talking about a Japan-style stagnation, not a Greek-style default.

Also, Palley's name came up in in the context of the JG debate over at pragcap a while back. He's definitely familiar with MMT.

Palley's critique of the JG (PDF)

Video of Mosler talk where Palley questions him on the JG

Tom Hickey said...

Up already, Clonal.

Dan Kervick said...


According to the "taxes-drive-money" aspect of MMT thinking, the reason a government has to impose a tax obligation for the currency it issues, at least at inception, is to make people in the private sector want the currency in the first place.

If you create a new currency, Franko-Francs, and offer it to somebody for some gravel, they will just say, "No thanks, what am I going to with Franko-Francs?"

But if you can then say, "Didn't you hear? I'm in the government, and we just passed a law requiring you deliver $1000 Franko-francs to the government pay office by June 1st. If you don't deliver them, we will send you to jail and require you to deliver double the amount of gravel to bail yourself out," then the gravel guy will be willing to exchange his gravel for some Franco-franks.

However, this raises the following question: Why bother with the currency business? If the government is just seeking to provision itself, why not just require people to deliver gravel, bricks, police uniforms, etc., and forget about the currency business.

I made some suggestions about the reasons here:

But I don't think the story I told there tells the full story. The government has public purposes in establishing and monopolizing a universal medium of exchange that go beyond its need to provision itself.

Tom Hickey said...

Dan K, this is exactly what tyrannical governments used to do. The introduction of taxation was considered to be a more civilized means than outright confiscation. But if anyone chooses not to comply, well, the old method still works fine.

However, when constitutional government was introduced, the element of choice was introduced. So now most people accept that taxation with representation is not confiscatory. That is to say, taxation has become a cultural institution reinforced by tradition.

Matt Franko said...


Thanks I get the point that tax drives currency at least for sure initially.

Bill's post from yesterday tho introduced me to the concept of "hedging against uncertainty" as what is REALLY driving savings which may be A or perhaps THE factor that perpetuates the currency after the tax to provision the govt sector....

And the other thing I'm trying to get at is the RATE of taxation that would perhaps be optimal... there has to be some sort of optimal rate... ie govt spends 100 to provision itself and then takes back what? 10%, 20%? 100% but with a delay? civil govt spends 100, taxes back x within a month? or spends 100 and taxes back the full 100 within 1 year? something like this...


John Zelnicker said...

Matt -- I don't see where it could be inflationary. But I am not an economist. However, it seems to me that it's really just changing the stage at which the taxes are payable. Just like a partnership or S-corporation where profits and losses flow through to the owners. Almost all small businesses are set up this way and nobody has said this is inflationary. It would also end the double taxation of dividends, which I think is wrong because it makes debt a cheaper way to raise capital (among other reasons).

So we make all companies pass-through entities like S-corps and tax profits to the shareholders. Of course, you would want to make sure that what was taxed was also distributed. Allow the companies to withhold from taxable profits an amount that will cover their capital needs for some time period or a major project and pay everything else to the shareholders. This would also force these large companies sitting on $2 trillion in cash to put that money back in the economy. Talk about demand leakage!

Tom Hickey said...

Yet again, taxes serve two purposes. First to remove NFA from non-govt to control inflation. Secondly, to discourage the behavior that is taxed. Do we really want to be discouraging production by taxing it?

The no-brainers are taxing negative externalities, economic rent, financial transactions (sliding scale wrt changes in asset prices), and then goods consumption (e,g., sliding scale VAT wrt inflation rate).

Bob said...

I have a RESERVE BANK OF ZIMBABWE NOTE , OF 50,000,000,000,000 Trillion, in a picture frame on my wall. It was given to me by the Mad Hedge Fund Trader.

If everyone of you edmucated types think this can never happen to the US, than as a contrarian I say it will.

Tom Hickey said...

Bob, if the US goes down within the next several decades, it will due to energy profligacy, not financial profligacy. Unless the US puts denial behind it and starts getting serious about an energy policy that gets the country off its oil addiction, disaster brought on be because of it is a distinct possibility.

One of the big campaign promises of the GOP candidates last evening was a return to $2 through "drill, baby, drill." And the audience loved it. La-la land.

Anonymous said...

Looks like the "Low grade emotive drivel from Tyler Durden of Zero Hedge" has been dead on right right right and more right.

Trade accordingly.

Tom Hickey said...

The ZH people have sure been right on the direction of interest rates and Treasuries, haven't they?