Thursday, June 7, 2012

Wrong & Wronger

A reader at a widely circulated, state "Monetary Policy" group circulated the following statement. They'll go unnamed to protect the innocently ignorant from embarrassment. Neverthless, this is a warning example of how UN-informed our electorate has become, and their "expert advisors" as well.

"Paul Craig Roberts was an editor at the WSJ and worked at treasury. So, his observations are interesting and credible. I suggest his post today on Collapse at Hand."

And Herbert Hoover once worked for the US government! People are wrong all the time, even totally out of paradigm, and that is exactly what Paul Craig Roberts is.  There may well be a collapse, but it will be caused by public ignorance, not any problem with a fiat currency supply!

PCR's essay is so wrong that it's embarrassing to read. It's wronger than wrong.  It's so bad it's not even wrong!  I left the following comment at the site in question, but wish there were some way to distribute MANY VARIATIONS of the following introduction to all "experts," teachers, parents, students and citizens nationwide - this week!

Everything, and I do mean EVERYTHING, about fiscal & monetary policy changed when we exited the gold std for a fiat currency std. That occurred first in 1933, and the last vestige went in 1973, when Nixon closed the inter-gov gold/$US convertibility window.

First, look up the dictionary definition of "fiat." Then tell yourself that we have a fiat currency std.

Then actually think about what that means.

It means we manage the currency supply to serve economic demand, and the currency supply is NOT yoked to any arbitrary commodity definition of static value.

What IS the currency value linked to? First, fiat currency value floats, and is meant to float, exactly so that it can respond in real time to the agile demands of an agile, GROWING electorate. Fiat currency is essentially "backed" ONLY by the constantly expanding will, initiative and credit of the US population.

Until we run out of public initiative, we can't run out of fiat currency.

1) We have no national debt, except in an accounting sense, which is a total, semantic misuse of our daily understanding of debt. National "debt" tracks growth of the fiat currency supply, which by definition is that amount of currency spent into existence by the USA and NOT clawed back via taxes. As such, the supposed national "debt" = national private savings, to the penny. Sheesh! This is not rocket science, people. This has been amply discussed and written about since Ben Franklin's first paper on fiat currency, in 1727 (and long before that, too).

2) We owe China nothing. Our Treasury Securities are NOT national debt.
China sends us real goods, and receives $US as payment, which they accumulate as currency reserves. Hence, China has already been paid in full, as have all other groups who export to the USA. What do other nations DO with the $US currency reserves they accumulate? They either sit on them, exchange some of them back into their local currency (which drives up their currency & lowers the value of their exports, so they try not to), or they buy things sold in $US denominations (our exports, and notably oil). If they sit on them, they MAY decide to transfer some of their Currency Reserves to Treasury Securities, which simply transfers the reserves from one to another account at our Federal Reserve. Along the way, people buying TS's get some trivial, fiat interest, of no consequence to a fiat currency issuer.

3) The dominant goals of fiscal & monetary policy in a fiat currency system are:
a) don't have so much currency circulating that we cause inflation
(seen any NET inflation recently?)
b) don't have so little currency circulating that a growing population
experiences deflation (what we're currently seeing, overall).

Everything else falls under the heading of controlling graft, corruption and sharing of misinformation - which we're definitely seeing a LOT of the past 39 years. It's scarcely to be believed how poorly informed our electorate has become, about it's OWN, public operations. Tom Jefferson & John Adams would be appalled!

4) Why do we even bother selling Treasury Reserves? It's actually simply a habit left over from the long-ago gold-std days. The ONLY function of Treasury Reserves - since 1933 - is to fulfill bankers obsession with double-entry bookkeeping practices. Treasury Securities are sold ONLY to drain Banking Reserves from the Federal Reserve accounts of private banks. It's that simple.

"The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public."
Treasury tax and loan accounts and Federal Reserve open market operations

TTL Note Accounts and the Money Supply Process

Those wanting a primer on how a modern currency system works should read Warren Mosler's little Dick & Jane money book for citizens, or the many articles by Bill Mitchell, Randall Wray or Stephanie Kelton, etc, etc.

Maybe someone could even get Paul Craig Roberts to do a book review on Warren Mosler's book?  If PCR learns to read more widely, maybe Timmy the Mole could too?  Even some President of the USA?  Sky's the limit folks.  One little ounce of shared knowledge could set us free.


paul said...

"…Herbert Hoover once worked for the US government!…"

Touche'. Great zinger

Dan Kervick said...

2) We owe China nothing. Our Treasury Securities are NOT national debt.

Of course they are Rodger. If someone owns a Treasury Security, they own an obligation of the United States Government. They are owed not just the interest, but the principle. And by definition, those obligations are part of the national debt.

Agree that Roberts and the other Austrians are out to lunch.

Dan Kervick said...

I would prefer to describe the situation with China this way:

Suppose the Chinese one day say that they are not going to roll over any more of their debt. They are, from that date forward, going to demand all of their payments in benjamins. Then they are going to takes those physical bills out on a battleship and dump them into the South China Sea. Bwah, ha, ha, ha!

I get the feeling that the average citizen thinks this would be some kind of national fiscal and monetary disaster. But it means nothing. Every dollar the Chinese pull out of the system to dump into the see, the US government can recreate immediately with a few computer keystrokes on with Ben Bernanke's magic printing press. And the US government is not dependent on China to finance our fiscal operations with the dollars that we can manufacture at will, at zero cost.

Our debt operations vis-a-vis the Chinese, as with any other holder of US debt, are as Rodger says, mainly a tool for managing price stability in coordination with the holders of US dollars. If some current dollar holder doesn't want to play, we just move along.

So it's not that we don't owe China anything. It's just that what we owe them is the easiest thing in the world to make, and something we can never run out of.

paul said...

"They are owed not just the interest, but the principle"

Owing them the principal means another asset swap.

A swap that costs the government nothing (actually, nothing ever costs the government anything). It is but the reverse of an accounting operation.

Real debt payments require cash that has already been created.

A treasury is a cash equivalent. For the holder, it is equal to cash if slightly less liquid. But then it earns interest and is as safe as anything on the planet.

That cannot be said of cash.

When a bank makes a loan, it retains no liquidity re the loan amount.

Further, by not receiving payments including principal as agreed, the bank faces insolvency, loss of capital and death.

I fail to see any parallel between public debt and private debt except on (meaningless) semantic grounds.

Comparable to "step on a crack, break your mothers back".

Completely self-imposed.

paul said...


I see you were commenting while I was writing mine and we don't really disagree. Language is funny.

"So it's not that we don't owe China anything. It's just that what we owe them is the easiest thing in the world to make, and something we can never run out of."

Another way to look at this is we owe China products we can produce for the dollars they hold and it would be greatly beneficial to us if they would begin spending that cash on our stuff.

We would love to work for dollars.

Tom Hickey said...

When a tsys matures, the Fed credits the owner's account with reserves (Fed liability). The Fed than debits the Treasury for the reserves, which the Treasury either obtains from tax credits or else new debt issuance (Treasury liability). Since both Treasury and the Fed issue tsys and reserves respectively, this is intra-governmental, with the respective liabilities balancing, even though they pass through the private sector through tsy purchases and redemptions, and tsys auction.

The actual govt liability is tax credits. These tax credits are also claims on real resources so if held externally, they are ultimately resolved though export of goods or FDI in the US, unless they are roll over indefinitely or sold to a domestic buyer.

Dan Kervick said...

Paul, yes I agree that public debt is a very different animal than private debt. I do think we should try to be careful with our language, because anyone can go to the US Treasury site to see how the national debt is defined and what it consists of:

So if we say something like "treasury securities are not national debt" and that is clearly contradicted by an authoritative government statement, it can confuse people. I think the moral of the story Rodger was telling was correct. I guess I just wouldn't express it the same way.

By the way, I think Warren Mosler would not say that it would be beneficial to us if we started selling goods to China. Our people will get some dollars currently held by the Chinese - but we could have created those dollars for our people instead and given them to them in exchange for stuff we produce for ourselves. But maybe I have him wrong.

Tom Hickey said...

"So it's not that we don't owe China anything. It's just that what we owe them is the easiest thing in the world to make, and something we can never run out of."

The issue is that what the US as a nation owes its foreign creditors is real sources, USD being open-ended financial claims on real resources in the form of goods and assets. In balanced trade, these would have been part of the original exchange. The external savings of USD are postponed consumption or investment in USD denominated real resources.

It's also true that Benjamins that leave the US are no longer part of the US money supply. There are a lot of them out there since they are a preferred medium of exchange in the underground economy. Similarly in the case of Eurodollars, although these are in banks and financial institutions outside the US rather than in suitcases.

Tom Hickey said...

The parallel is the same as any USD as a financial claim on real resources of the domestic private sector in which those claims can be exercised. The only use of USD wrt the US government is in payment of obligations are govt payment offices, e.g., taxes, tariffs, fines and fees.

Tom Hickey said...

paul: "Another way to look at this is we owe China products we can produce for the dollars they hold and it would be greatly beneficial to us if they would begin spending that cash on our stuff,....We would love to work for dollars."

MMT calls this "demand leakage to external saving."

David said...

Dean Baker, in a recent post that was written to deconstruct some idiocy of Tom Friedman's, said that in the long run we need to get a handle on the trade deficit by devaluing the dollar. From the MMT perspective this seems almost as daft as building policy around fiscal deficit reduction. Of course, he used the typical New Keynesian hedge "in the longer term."

I suppose Baker's thinking is that we must become export leaders in order to have growth and jobs. I don't see why it would be somehow more legitimate to take China's fiat money for goods and labor rather than to use our own.

That said, I think there are some issues around trade that we should be concerned about if not the trade deficit per se. If we become too dependent for too long on imports then our productive capacity becomes diminished and there may come a time when the dollar won't enjoy the free ride it's been getting since Bretton Woods.

A. Lincoln once said that with free trade "we get the goods and they get the money," but with the tariff "we get the goods and the money." Now Lincoln didn't have a modern economics education to paralyze his mother wit and it seems he could usually get to the nub of most issues. Trade has its place, but maybe production for home consumption deserves another look.

Matt Franko said...


"must become export leaders"

We can easily be "leaders" in that race (to the bottom) if we right up front all agree to work for 2 rations of dog brain soup per day.

"more legitimate to take China's fiat money for goods and labor rather than to use our own."

Good point here too. No one here who is not a moron would want their balances.


Tom Hickey said...

DAvid "If we become too dependent for too long on imports then our productive capacity becomes diminished and there may come a time when the dollar won't enjoy the free ride it's been getting since Bretton Woods."

As an absstract notion, this sounds logical. but we have to look at the facts. What kind of jobs is the US losing, and what are the exports more likely to increase.

The answer to the first is lower skilled jobs, which is resulting in increased unemployment at the lower end of the economy. The US has a dearth of high and mid-skill workers, in spite of employer demand for visa to bring in lower paid higher and mid-skill workers from abroad. In other words, the US is exporting low quality jobs. As long as it creates high and mid-skill workers and jobs, productivity will be no problem, although issues at the borrom will increase that do need to be attended to.

Secondly, what are the exports that the US is likely to increase. Obviously, those of its dominant sectors, lik, finance, defense, technology, and management. So increasing exports translates into increasing foreign sales of military equipment, for example, just what the world needs to "fight terrorism," aka suppress dissidents.

So it is not just the principles that are relevant but also the details.

Of course another way to improve the trade position is to decrease imports such as energy, by increasing efficiency and replacing imported energy sources with homegrown green energy. But the US has an energy industry that is not interested in supporting that.

JK said...

Hey Tom,

Except for a blip about 3/4ths into the clip where Krugman talks about being willing to be a deficit hawk in the future after a recovery, PK does a lot of heavy lifting in this clip. He sounds very MMT for most of it.

And btw, how about the two people he's arguing with? Sheesh! :)

Dan Kervick said...

Hey Roger, sorry about mangling your name. I was confusing you with the other Rodger :)

JK said...

Or is it more accurate to say Krugman just sounds very Keynesian?

Tom Hickey said...

Krugman is a New Keynesian in that he puts monetary policy ahead of fiscal, but he also disssociates from mainstream New Keynesianism, e.g., of Greg Mankiw that assumes REH and EMH.

Krugman identifies as a Keynesian[142] and a saltwater economist,[1] and he has criticized the freshwater school on macroeconomics.[2][143] Though he applies New Keynesian theory in some of his work, he has also criticized it for lacking predictive power and for hewing to ideas like the efficient markets hypothesis and rational expectations.[143] Since the 1990s, he has promoted the IS-LM model as invented by John Hicks, pointing out its relative simplicity compared to New Keynesianism and continued currency in practical economic policy.[5][4][144]
In the wake of the 2007-2009 financial crisis he has remarked that he is "gravitating towards a Keynes-Fisher-Minsky view of macroeconomics."[145] Post-Keynesian observers cite commonalities between Krugman's views and those of the Post-Keynesian school.[146][147] [148] In recent academic work, he has collaborated with Gauti Eggertsson on a New Keynesian model of debt-overhang and debt-driven slumps, inspired by the writings of Irving Fisher, Hyman Minsky, and Richard Koo. Their work argues that during a debt-driven slump, the "paradox of toil", together with the paradox of flexibility, can exacerbate aliquidity trap, reducing demand and employment.[149]


He is, however, moving in the direction of PKE, if not yet MMT.

JK said...


An analogy that popped out to me in that little debate is when Krugman had to remind the other two that the economy is not a household (I've only heard the modern money folks make that claim).

Greg said...

The best way to describe to the uninitiated the difference between govt debt and private debt is to ask them a simple question.

If you held your 100,000$ treasury bill (govt debt) in your hand and I held my 100,000$ mortgage in my hand, would you switch the names on the documents?

Tom Hickey said...

Actually, this is why Hayek preferred "catallactics" to "economics" for the discipline. "Economics" derives from the Greek term meaning household management, which Hayek did not think appropriate for an economy. "Catallactics" comes from the Greek term for exchange, which also has the connotation of being social. Hayek saw economics as exchange based, that is, distribution unites production (supply) and consumption (demand). He claim was that price discovery through open markets is the optimal means of exchange in order to bring balance to supply and demand.

So even the name of the discipline as "economics" is fundamentally off base, suggesting the household analogy.

David said...

Well, Tom, I'm all for looking at realities, but, first of all, my comment wasn't about increasing exports it was about taking issue with the commonly expressed notion that that should be our preferred path to growth and employment.

What I said was that we should consider more domestic production for consumption. When I used the term "productive capacity" I meant the total productive infrastructure, including education, adequate job training, upkeep of physical infrastructure, etc. When we use words like "productivity" we seem to be stuck with narrow neo-liberal definitions which relates to output per worker. Your point at the end about energy is also part of what I mean by productive capacity.
The skills gap you mentioned is part and parcel of the deterioration of this capacity. Maybe they could hire back some of those 50 something engineers that got canned in the last few rounds of cost cutting. Or maybe even pay for some training. The current Walmartization of the workforce is indeed a reality, but it is not inevitable.

One of the attractive things about MMT is it shows how a conceptual shift shift and a few relatively simple policy adjustments could make a big difference very quickly. The New Keynesians, on the other hand, require 20 or 30 years and a complete retooling for their somewhat dubious recommendations to take effect.

Tom Hickey said...

David, my post was not directed as criticism. My intention was to unpack the details that get subsumed into a principle. Both are necessary in a theory and its articulation. The things I mentioned are the areas that I think are concerning and need to be highlighted.

paul said...


"The best way to describe to the uninitiated the difference between govt debt and private debt is to ask them a simple question.

If you held your 100,000$ treasury bill (govt debt) in your hand and I held my 100,000$ mortgage in my hand, would you switch the names on the documents?"

This is a very useful argument strategy - thanks.

JK said...


But what if the person responds…

"Of course I'd prefer the Treasury debt. That money is owed to me! Where my Mortgage debt I owe to someone else. So of course I'd rather money owed to me than for me to owe money to someone else. But that doesn't change the fact in order for me to be paid the government has to take money from someone else."

(btw, I know the govenrment doesn't need to tax us to "pay" for Treasurues).

I'm asking what your response would be the above reaction?

JK said...

I guess the post I just wrote is directed at Greg, not Paul

Anonymous said...

"people buying TS's get some trivial, fiat interest, of no consequence to a fiat currency issuer"

Interest can be an problem for a currency issuer, as too much of it can be inflationary. Anything other than low interest rates can be unsustainable in this regard if there is a large government debt.

paul said...


The trade only makes sense if the treasury is traded for the mortgage (the creditor), not the promissory note (the debtor).

I didn't see this right away.

That said, who gets the best side of the deal, the bank or the investor?

paul said...


You probably won't see this but I tried the argument the other day at NC and this ensued…

For those in this comment section complaining about government debt…
Would any of you be willing to trade your $100,000 treasury for my $100,000 mortgage? This would mean you would have to put the mortgage in your name.
I mean they’re both debt instruments right?
I would even pay a $5000.00 premium.
•  Nathanael says: 
June 8, 2012 at 2:09 pm 
Depends where your house is located and whether you have good title to that mortage. :-) I might be interested in seizing that collateral. :-)

•  FrankB says: 
June 8, 2012 at 2:21 pm 
You are talking about being on different sides of the debt instrument but then you know that or no one would have given you a mortgage.

◦  paul says: 
June 8, 2012 at 2:58 pm 
Well, from one side the bond earns interest and the mortgage receives principal plus earns interest – the holder or creditors perspective.
I’ll take the bond from this perspective.
From the other side the debtor pays interest or the debtor pays principal and interest.
I’ll take the bond from this perspective too, remember I get the face value of the bond in advance on which I will make interest payments. You can have the payment stream from the mortgage.

◦  paul says: 
June 9, 2012 at 8:54 pm 
After further review, Frank B. is correct on this, I am wrong.

After further review of my further review I was pretty close, I think, although maybe unclear.