Wednesday, April 11, 2012

Gov't spending collapsing!




From the Daily Treasury Statement, Total Withdrawals (this includes everything: SS, Medicare, Medicaid, Defense, Interest on the debt...EVERYTHING!) now down $433 bln versus the same time last year. That's about 3-percent of GDP. In other words a SUBTRACTION of 3-percent from GDP. A lot of other things must be good to offset this. Personal Consumption, Business Investment and Net Exports all need to post strong gains to keep GDP positive!


















*Chart covers period from Mar 2011 through Apr 9, 2012

35 comments:

Letsgetitdone said...

What are they doing? Saving up for the debt ceiling crisis before the election? Mint the $60 T platinum coin already!

Dan Kervick said...

The Occupy folks have too many eggs in too many different crazy baskets. Ground Zero is the incompetent and criminal United Sates Congress. Occupy needs to throw two or three million people at the Capitol mall and Occupy the Congress. Then press the whole agenda:

Mortgage relief
Student debt relief
Job Guarantee
More spending AND lower taxes
More banksters in jail

Tom Hickey said...

"The Occupy folks have too many eggs in too many different crazy baskets."

That's the beauty and ugly of protest movements. They are not well-organized, and if they were, the TPTB would quickly identify the organizers and disappear them.

This is asymmetrical operations, not fighting pitched battle, where the weaker is sure to lose. The weaker can win using asymmetrical ops though.

Mike Norman said...

@Dan:

Can't be done. Our rulers have instituted a police state. Assemblies of that size would never be allowed. Today, down here on Wall Street there are about 15 protesters, but there are also about 50 cops.

Dan Kervick said...

No more "million man marches" Mike?

I don't know Tom. Lately, little that I read from the Occupy folks gives me any confidence that even if they "win", the result will be worth having, or any better than what we have now.

I think it is all likely to fizzle out from an absence of coherent purpose. Or it might even turn into something totally stupid, like a junior league tea party, or some mindless spasm of purposeless anarchist "strikes" leading nowhere.

Mike Norman said...

Dan,

Law enforcement, Homeland Security, FBI, all focused on limiting and shutting down OWS, specifically. I don't know about other causes.

Tom Hickey said...

@ Dan

Protest and subsequent reform are generally different processes involving different people, unless there is revolution and revolutionary leaders take over. That usually doesn't work so well.

In the Sixties and Seventies there were people that were really brilliant in mounting asymmetrical ops but I wouldn't trust them for a minute with leadership of reform. They were clueless about governance.

The point is to shake the TPTB out of control and then install people with good ideas in their place. That is why it is important to have well-developed rationales like MMT on the table. Occupy is shaking things up, and will continue to do so.

Asymmetric ops now would call for mounting skeleton Occupy forces in places already a focus to keep authorities tied up while hitting with different tactics in new areas to keep them off guard and running around.

geerussell said...

Other causes...

U.S. filmmaker repeatedly detained at border

Dan said...

So . . . spending is down, but revenues are down as well, are they not ?

From Zero Hedge, claiming monthly deficits bigger, not smaller.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/04/March%20budget%20deficit_0.jpg

Tom Hickey said...

"U.S. filmmaker repeatedly detained at border"

Getting the word out that TPTB are playing hardball. But many dissidents in the past have been condemned to death in absentia. That is not happening quite yet, but the law is already on the books that the president can do secretly target US citizens for assassination secretly, as well as disappear people. The Great Experiment is failing.

Jonf said...

The neo liberals austerity program and deficit reduction program is working. Prosperity is just around the corner. OWS maybe not so much.

Mike Norman said...

Revenues are up. Total Federal taxes received are up $45 bln over last year.

Major_Freedom said...

Interesting to note:

SS has gone from being a buyer of typically 25% of Treasuries issued, to now being a seller of Treasuries just to make ends meet.

Tom Hickey said...

Interesting to note, too, how SS is a federally funded program, and the federal government funds itself directly with currency issuance rather than taxation or borrowing.

Dan said...

Thanks for the revenue data, Mike.

There must be a different way of counting going on over at Zero Hedge, but I have no way of knowing the details. :-/

Leverage said...

Aggregate levels of credit are close to 2007 highs, that's the only thing that makes collapse not yet to happen.

But that won't last a lot longer, the 'peak credit' or the capacity of private sector to leverage is getting lower with diminishing incomes and wealth of the overall population.

Only can get worse from here. Also I'm a bit concerned long term of how far inflation can go, because then we are really screwed and more money for everyone would not be the only solution. Then we would need redistribution of wealth and responsible consumption + loads of investment to change dependency on certain commodities.

Major_Freedom said...

Tom Hickey:

Interesting to note, too, how SS is a federally funded program, and the federal government funds itself directly with currency issuance rather than taxation or borrowing.

Even more interesting to note is that if the federal government were to finance its current spending with pure inflation, and did not borrow or tax, price inflation would spin out of control and the Fed would far overshoot its target.

In order to spend as much as they want to spend without causing undue inflation then, borrowing and taxation are necessary.

Yes, the feds don't really need to borrow or tax in order to spend. But in order to spend as much as they want, and avoid undue inflation, they have to borrow and tax.

What's even more interesting to note, is that you seem not to understand the significance of SS being a net seller of tsys instead of a net buyer, and what that means long term.

Tom Hickey said...

"What's even more interesting to note, is that you seem not to understand the significance of SS being a net seller of tsys instead of a net buyer, and what that means long term."

What it means is that people should wake up and realize that the "funding" doesn't fund anything, since government funds itself.

Increase in money supply doesn't fuel inflation. Effective demand in excess of the capacity of the economy to expand to meet results in inflation. Then government needs to decrease excessive demand by increasing taxation.

Tsy issuance is monetary op that drains excess reserves. It's an asset swap that doesn't affect amount of non-government net financial assets, just composition and term.

Letsgetitdone said...

"Mortgage relief
Student debt relief
Job Guarantee
More spending AND lower taxes
More banksters in jail"

And don't forget that $60 T coin if you want to get rid of the foundation for austerity-mongering for good.

Major_Freedom said...

Tom Hickey:

What it means is that people should wake up and realize that the "funding" doesn't fund anything, since government funds itself.

The government is practically limited in its ability to fund itself by the boundary of runaway inflation.

Increase in money supply doesn't fuel inflation.

Hahahaha, economic science disagrees.

Effective demand in excess of the capacity of the economy to expand to meet results in inflation.

Demand originates from the printing press.

Then government needs to decrease excessive demand by increasing taxation.

The government doesn't tax to hoard, they tax to spend. They cannot contain demand by taxation, not when they have voters to bribe.

Tsy issuance is monetary op that drains excess reserves. It's an asset swap that doesn't affect amount of non-government net financial assets, just composition and term.

It's not just a swap. You have to take into account the counterfactual of what could have otherwise taken place if the government didn't borrow out of the market's savings, and those savings were instead invested in private industry.

Anonymous said...

Major Freedom, this is how Mises defines 'inflation':

"Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur."

If the economy has spare capacity or expands capacity to meet additional demand then increases in the overall money supply are not inflationary, even according to Mises.

Of course most economists define inflation differently.

Tom Hickey said...

@ Anonymous

Nice one.

Anonymous said...

Major Freedom:

"In order to spend as much as they want to spend without causing undue inflation then, borrowing and taxation are necessary."

You're right that the government does ultimately have to tax if it spends, but it doesn't have to tax before it can spend nor does it have to tax as much as it spends.

Taxation serves in part to create a basic demand for the currency and to regulate its value, not to raise revenue (in a fiat/credit money system).

The government can also deficit spend without "borrowing" (i.e. issuing bonds), without necessarily causing inflation.

Again, if government spending leads to effective demand in excess of the economy's capacity to meet it then inflation can result.

However, deficit spending matched by bond issuance is NOT in fact less inflationary than deficit spending 'financed' with new money creation.

The answer to question 1 in this blog post by Bill Mitchell explains why this is the case:

http://bilbo.economicoutlook.net/blog/?p=17941


"You have to take into account the counterfactual of what could have otherwise taken place if the government didn't borrow out of the market's savings, and those savings were instead invested in private industry."

That's not how it works.

The answer to question 3 in the Mitchell blog post explains why your idea of financial "crowding out" is wrong:

http://bilbo.economicoutlook.net/blog/?p=17941

Major_Freedom said...

Anonymous:

Major Freedom, this is how Mises defines 'inflation':

"Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur."

It's also the original definition of inflation, which is what I go by. Whether or not the Austrians agree or disagree is irrelevant to me.

If the economy has spare capacity or expands capacity to meet additional demand then increases in the overall money supply are not inflationary, even according to Mises.

Only the market process in the sphere of a totally unhampered and unadulterated monetary system can find the most optimal use of a "idle" resource.

Simply printing money to get an idle resource moving again isn't the same thing as putting that resource to its most optimal use.

Of course most economists define inflation differently.

I don't really quibble over definitions, because it's a fool's game of semantics. I know what people mean when they say inflation, by the way they integrate it into their arguments.

Major_Freedom said...

Anonymous:

"In order to spend as much as they want to spend without causing undue inflation then, borrowing and taxation are necessary."

You're right that the government does ultimately have to tax if it spends, but it doesn't have to tax before it can spend nor does it have to tax as much as it spends.

The first states always taxed what existed prior to them becoming a state. Sure, they can then take control over whatever it is they are taxing, and then print their own money, but they are still limited in what they can spend to what they can print, because what they can print is practically limited by runaway inflation.

Taxation serves in part to create a basic demand for the currency and to regulate its value, not to raise revenue (in a fiat/credit money system).

If a state wants to have more control within the economy, it has to tax in addition to printing money. If not, then a given quantity of spending financed in large part by taxing and borrowing, would require runaway inflation.

Right now the government spends around $5 trillion a year, give or take. Most of it is financed by taxes and borrowing, with some inflation. If ALL of that spending were financed solely by inflation, then if the state wants to retain the same relative control in the economy, and have the same ability to take REAL resources from the people, then the currency would quickly collapse.

The government can also deficit spend without "borrowing" (i.e. issuing bonds), without necessarily causing inflation.

Yeah, if the deficit spending is so small that it is less than real productivity. But in the real world, states want to have more than 2% control over the economy.

Again, if government spending leads to effective demand in excess of the economy's capacity to meet it then inflation can result.

If the government financed its current spending out of inflation only, then prices would almost certainly rise, since the government now controls around 40% of the economy in terms of GDP. If 40% of that control is financed by inflation, then there is no way in hell that real productivity can keep up with it.

Major_Freedom said...

Anonymous:


However, deficit spending matched by bond issuance is NOT in fact less inflationary than deficit spending 'financed' with new money creation.

It is if one defines inflation as an increase in the money supply.

And, if you define inflation as rising prices, then deficit spending financed by bonds would in fact be less inflationary than deficits financed with inflation, because in the former case, no new money is being created, while in the latter, new money is being created.

Since this is the only difference between the two, and since we know that all else equal, more money in the economy raises prices from what they otherwise would have been, it follows that the latter is in fact inflationary.

"You have to take into account the counterfactual of what could have otherwise taken place if the government didn't borrow out of the market's savings, and those savings were instead invested in private industry."

That's not how it works.

Oh but it is how "it" works. That's how proper economic analysis works.

Here's an example:

Suppose you had an unemployed roommate who didn't work and mooched off the other roommates by eating food that goes into the fridge. Suppose he eats food at such a rate that the quantity of the food in the fridge remains unchanged. If you fail to grasp counter-factuals, then you might conclude that his behavior is not leading to a loss over time, because the quantity of food remains the same over time. If you do take into account counter-factuals, then you will realize that if the roommate didn't eat the food, then the amount of food in the fridge would have otherwise been higher, to feed the other roommates, or, if the fridge is already full, then the roommates would have otherwise been able to buy other goods with their money given they have enough food.

The answer to question 3 in the Mitchell blog post explains why your idea of financial "crowding out" is wrong

Did I say crowding out anywhere?

Bill Mitchell is up the creek without a paddle.

Crowding out is guaranteed in real terms. If the state spends ANY money, such that real resources to the state rather than to the private sector, then there is crowding out.

Economic resources are scarce. If you consume a resource, nobody else can consume it. If you buy a resource, nobody else can buy that resource. If you print money and acquire an asset, that asset cannot be acquired by anyone else.

This is called economic reality. Or, in short, just reality.

Anonymous said...

"It is if one defines inflation as an increase in the money supply"

That's not even how Mises defines inflation. You're alone with Rothbard on that one. The rest of the economics profession disagrees with you.

Increases in the money supply do not necessarily lead to a general loss in the purchasing power of money over time (the latter being a more accurate, less ideologically biased way of describing "inflation").

"Since this is the only difference between the two, and since we know that all else equal, more money in the economy raises prices from what they otherwise would have been, it follows that the latter is in fact inflationary."

Mises disagrees with you on this point, as explained above. Again, think spare capacity, expanding capacity.

"Only the market process in the sphere of a totally unhampered and unadulterated monetary system can find the most optimal use of a "idle" resource."

That's merely an ideological assertion. However, it is in fact the competitive market which makes it possible for government deficit spending (of new money) to expand without necessarily leading to inflation. Rather than put up prices in response to increased demand, businesses in a competitive market will increase output at the same price level.

An "unadulterated monetary system" is something you appear to have invented in your mind.

"If ALL of that spending were financed solely by inflation, then if the state wants to retain the same relative control in the economy, and have the same ability to take REAL resources from the people, then the currency would quickly collapse."

MMTers don't argue that the government can spend without imposing taxes (though the taxes can be imposed after spending in a fiat/credit money system). Taxes function to regulate the currency's value by creating a need/demand for it (in combination with other laws) and by regulating effective demand.

"Crowding out is guaranteed in real terms. If the state spends ANY money, such that real resources to the state rather than to the private sector, then there is crowding out."

I would agree that crowding out is possible in real terms, but not guaranteed (this is also Mitchell's view). But the idea that the government borrows out of the market's savings, and that those savings would instead invested in private industry, is simply based on a misunderstanding of the monetary system and how it works.

Anonymous said...

"deficit spending financed by bonds would in fact be less inflationary than deficits financed with inflation, because in the former case, no new money is being created, while in the latter, new money is being created."

When the government deficit spends and issues bonds, the quantity of deposit money in the economy increases, but the quantity of reserves remains the same. If the government deficit spends without issuing bonds, the quantity of deposit money in the economy increases and the quantity of reserves increases. Understanding the difference and relationship between deposits and reserves is crucial.

Increased reserves lead to a lower interest rate unless the Fed sells govt bonds (which it had previously purchased) or pays interest on reserves (with newly created reserves). Lower interest rates may be stimulatory or they may not, there's some disagreement about this. But increased levels of reserves are certainly not more inflationary than unchanged levels of reserves if the interest rate remains the same in both cases (which is possible with interest paid on reserves).

Tom Hickey said...

Interest payments on tsys to non-government increase non-government net financial assets. Therefore, Warren Mosler contends that tsy issuance is potentially more inflationary than not issuing tsys.

Anonymous said...

Tom,

By NFA I take it you mean the 'value' of the tsy, which is higher than the total value of reserves drained?

Bond issuance does eventually lead to an increase in reserves when the Fed purchases bonds in an OMO.

Tom Hickey said...

NFA is exogenous money injected by government (Treasury and cb). It increases net financial assets in non-govt because an asset is created with no corresponding liability in non-govt. The liability is on the side of govt. All financial assets generated within non-government have a corresponding liability in non-govt and so neet to zero. Non-govt. cannot create net financial assets although it can create real assets.

Net financial assets are injected into non-govt when govt deficit spends or the cb pays interest on govt securities.

The face value (redemption value) of a tys is exactly equal to the reserves drained when a tsys is purchased by non-govt. Fluctuation of prices in the market does not change NFA.

Major_Freedom said...

Anonymous:

"It is if one defines inflation as an increase in the money supply"

That's not even how Mises defines inflation.

Yes, it is. See Human Action.

You're alone with Rothbard on that one. The rest of the economics profession disagrees with you.

It's not a matter of disagreement. It's a matter of definition.

Increases in the money supply do not necessarily lead to a general loss in the purchasing power of money over time (the latter being a more accurate, less ideologically biased way of describing "inflation").

False. Increases in the money supply do in fact lead to a general loss in the purchasing power of money, if you understand that the reference point from which to compare purchasing powers is the purchasing power that exists, due to inflation, and the counterfactual world where inflation does not exist, which we cannot observe but must infer.

That inflation of the money supply leads to a decline in the purchasing power of money follows from the law of marginal utility. More of anything makes the additional marginal unit less valuable, and as a result, makes each unit less valuable.

This is irrefutable.

"Since this is the only difference between the two, and since we know that all else equal, more money in the economy raises prices from what they otherwise would have been, it follows that the latter is in fact inflationary."

Mises disagrees with you on this point, as explained above. Again, think spare capacity, expanding capacity.

False. Mises agrees. Even if he didn't, it wouldn't matter to me, because I'm not an Austrian.

And you didn't explain it above. You just asserted it.

"Only the market process in the sphere of a totally unhampered and unadulterated monetary system can find the most optimal use of a "idle" resource."

That's merely an ideological assertion.

No, it follows from the principle of individual economic calculation.

I know as an MMTer you're completely clueless about subjective preference, exchange, individual utility and economic calculation, which is why you don't get it.

However, it is in fact the competitive market which makes it possible for government deficit spending (of new money) to expand without necessarily leading to inflation.

Only if you define inflation as rising prices, and only if you define rising prices as prices rising over time.

In your narrow worldview, if a roommate ate food from the fridge and didn't buy any food to replace it, and others kept replacing the food such that temporally there is no decline in the quantity of food, you'd ignorantly conclude that the moocher is not imposing a cost on the other roommates.

Rather than put up prices in response to increased demand, businesses in a competitive market will increase output at the same price level.

Price levels are not independent from output.

Major_Freedom said...

Anonymous:


An "unadulterated monetary system" is something you appear to have invented in your mind.

It's no less invented than fiat money inflation from central banks.

"If ALL of that spending were financed solely by inflation, then if the state wants to retain the same relative control in the economy, and have the same ability to take REAL resources from the people, then the currency would quickly collapse."

MMTers don't argue that the government can spend without imposing taxes (though the taxes can be imposed after spending in a fiat/credit money system).

I didn't accuse MMTers of believing that governments can spend without imposing taxes.

Taxes function to regulate the currency's value by creating a need/demand for it (in combination with other laws) and by regulating effective demand.

Who cares.

"Crowding out is guaranteed in real terms. If the state spends ANY money, such that real resources to the state rather than to the private sector, then there is crowding out."

I would agree that crowding out is possible in real terms, but not guaranteed (this is also Mitchell's view).

It's not just possible. It's a certainty. It follows from the reality of scarcity of real resources.

You can't magically copy resources to an infinite supply. Each resource is scarce. That means if you buy something, nobody else can buy it. If the state acquires a resource, then nobody else can acquire it. If the state redirects a resource, then it necessarily prevents that resource from going where it otherwise would have gone without the redirection.

The state necessarily crowds out the private sector in real terms just like the private sector necessarily crowds out the state sector in real terms. Since it is only real terms that determines people's standard of living, it is silly to ignore real terms and only look at monetary terms.

But the idea that the government borrows out of the market's savings, and that those savings would instead invested in private industry, is simply based on a misunderstanding of the monetary system and how it works.

I am not saying that all money invested in government debt would have otherwise all gone into private investment. I said investors investing in government debt make it impossible for that money to be invested in private industry. Since we're talking about the difference between government spending $100, versus private industry investing just $1 of it, it follows that government debt reduces private investment, and hence reduces productivity. In other words, even if $99 of that $100 would have been hoarded, it still would have made the economy more capital intensive if that money was not lent to the government.

Major_Freedom said...

Anonymous:

When the government deficit spends and issues bonds, the quantity of deposit money in the economy increases, but the quantity of reserves remains the same.

The aggregate money supply remains the same, so there is no upward pressure in aggregate demand, and hence aggregate prices, and hence price inflation.

Anonymous said...

"The aggregate money supply remains the same, so there is no upward pressure in aggregate demand, and hence aggregate prices"

The fact that you believe this simply demonstrates that your opinions are based on a complete and utter ignorance of how the monetary system actually works.


Lets say you deposit $100 in a bank.

The bank credits your account with $100.

You now have $100 credit (i.e. $100 deposit money) and the bank has $100 reserves.

The bank keeps $10 reserves and uses $90 reserves to purchase a government bond.

The $90 reserves are taken by the treasury. You still have $100 credit in your account, the bank now has $10 reserves and a $90 bond.

The treasury then spends the $90 reserves it borrowed from the bank to pay Mr B, who has an account at that same bank (for simplicity).

The bank receives the $90 reserves and credits Mr B's account with $90.

The bank now has $100 reserves as well as the $90 bond. You have $100 credit (deposit money) in your account and Mr B has $90 credit (deposit money) in his account.

Overall, at the end of this process, bank reserves are the same quantity as they were before, but now the bank has a bond worth $90 and $90 of new deposit money has been added to the economy.

The bank can now use the reserves it has in excess of its reserve requirement to invest in something else.

Do you understand that or is it too difficult?

http://en.wikipedia.org/wiki/Deposit_money