Many of you may have already seen this on Warren Mosler's blog, but I just came across it and was floored at what the St. Louis Fed wrote in its report, Why Health Care Matters and the Current Debt Does Not.
| As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate, e.g., TIPS—Treasury Inflation-Protected Securities). Together with the unusually high, but manageable, level of the current debt, these facts imply that the current U.S. government can wait out any short-term economic developments until long-run growth is restored.7 Further, without an immediate need to drastically reduce the debt, the mechanism between high debt and slow growth loses most of its credibility. |
It’s what we in the MMT community have been arguing for years! Looks like the word is finally starting to get out through “respected” mainstream channels. This is great news!!!
39 comments:
Mike, Great find!
Somewhat related, Rodger Malcolm Mitchell has an interesting link over at Monrtary Sovereignty: It's time to get serious about science: http://www.washingtonpost.com/opinions/its-time-to-get-serious-about-science/2012/09/09/5b5c1472-f129-11e1-892d-bc92fee603a7_story.html?wpisrc=nl_opinions
I wonder what people like Bob Roddies make of the extent to which government-funded research has been a vital part of America's success?
Sounds like violence!
It's not over 'til it's over. The entire Fed got it back under Marriner Eccles.
Now we have Greenspan still talking about banks lending out banking reserves.
http://cdn.videos.bloomberg.com/t1MG5sNDoierLyVBOaJc5BJN4JQu7qxl/DOcJ-FxaFrRg4gtGIwOmw3OjBrOzSgXP
(thanks to Matt Franko for the tip)
"the government is not dependent on credit markets to remain operational."
No it isn't and if these morons at the current batch of Dealers won't shut up about this and want out, Mike we can put a group together to do a Dealer where we will handle ALL of the the UST issuance for a FIXED FEE per $M as long as Treasury agrees to not issue more than 90-day paper... what is the worst case? We have to wait at most 90-days to get our balances back if we couldn't place them?
We could probably run the whole thing on OTS software and 100k worth of IT.
They would never have to worry anymore about one of their agents stabbing them in the back and twitting "who's going to buy them now" when we have troops in the field that's for sure!
Good find! rsp,
"there will always be a market for U.S. government debt at home"
But what happens if foreigners sell their treasuries then sell their dollars for foreign currency?
Dollar value drops sharply, import costs rise sharply, inflation rises sharply.
What's the MMT answer?
What MNE and other MMT websites need is a quick reference which addresses these sorts of concerns. Finding answers to these sorts of questions should be quick and easy.
Above posted by me.
right Roger:
Mr Magoo: "JPM has a lot of deposits they have built up that they haven't lent out yet...."
Little does Mr Magoo realize that the current JPM deposit base is due to the Fed buying all of the USTs under their QE BS....
And this guy RAN THE FED!!!
Terrible!
I gotta find the time to go back over that video and break it down... there are some whoppers in there... I think he even gets the FF market wrong but I have to go back and listen more closely... rsp
The USD is still overvalued by maybe 15% right now relative to other relatively strong currencies. The level of saving in the USD is exerting a deflationary influence domestically that is showing up in a variety of ways that are throwing the US economy off balance, and the US is getting hollowed out as a result.
Greenspan says the FFR "arbitrages" against the market rates????
and the Bloomberg guy asks how the Fed can shrink it's balance sheet and Greenspan says the Fed can trade its deposits for USTs ????? Whaaaaat???
Maybe he didnt have his coffee yet??
I think Y raises an interesting question: "But what happens if foreigners sell their treasuries then sell their dollars for foreign currency? Dollar value drops sharply, import costs rise sharply, inflation rises sharply. What's the MMT answer?"
Then again, this is a situation any country could possibly find itself in. This is where MonetaryRealism hammer home a relevant point: productivity matters. So long has things that people want to buy are denominated in U.S. dollars, there will remain a strong demand for U.S. dollars. We ought to be concerned about that.
My feeling is that the enourmous human intelligence, infrastructure (etc) present in the United States, combined with a relatively strong amount of economic freedom, means that all we really need to do is 1) continue to support government funded research (the link I posted above), 2) make education a high priority, and 3) make sure there is enough aggregate demand. If we do those three things, entreprenaurs will keep entreprenauring.
@ JK
Right and an overvalued USD is counteracting that.
There's reason that Germany agreed to enter the EMU and a reason that it does not want to leave the euro for the DM that is related to this relative valuation.
Think about it.
Greenspan's senile.
Not sure if the progress will stick. Nick Rowe claims that the fact that the public debt is not a burden for future generations was considered obvious. Until people like him came, he claims the debt is a burden.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html
So don't get excited that St. Louis Fed gets it: we have already been there.
JK,
Here's a response from Wray in the MMT primer:
"Some fear—as discussed earlier—that suddenly the Chinese might decide to stop accumulating US government debt. But it must be recognized that we cannot simply change one piece of the accounting identity, and we cannot ignore the stock-flow consistency that follows from it.
For the rest of the world to stop accumulating dollar-denominated assets, it must also stop running current account surpluses against the US. Hence, the other side of a Chinese decision to stop accumulating dollars must be a decision to stop net exporting to the US. It could happen — but the chances are remote.
Further,trying to run a current account surplus against the US while avoiding the accumulation of dollar-denominated assets would require that the Chinese off-load the dollars they earn by exporting to the US — trading them for other currencies. That, of course, requires that they find buyers willing to take the dollars.
This could — as feared by many commentators — lead to a depreciation of the value of the dollar. That, in turn would expose the Chinese to a possible devaluation of the value of their US dollar holdings — reserves plus Treasuries that total over $2trillion.
Depreciation of the dollar would also increase the dollar cost of their exports, imperilling their ability to continue to export to the US. For these reasons, a sudden run by China out of the dollar is quite unlikely. A slow transition into other currencies is a possibility — and more likely if China can find alternative markets for its exports."
http://neweconomicperspectives.org/2011/11/mmp-blog-24-what-if-foreigners-hold.html
Tom,
Does it matter that the USD is overvalued? Doesn't that just mean that defiit spending needs to be higher than it otherwise would need to be?
I understand that our exports would be more competitive if the dollars wasn't overvalued, but really… do we have much of a choice here?
If you look at this Treasury report,
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
you can see how the Chinese have not net accumulated any USTs (actually fell) over the last year, but they run about a $25B/mo trade surplus with the US (300B)....
But Japan has increased their holdings by an amount well in excess of their trade surplus so looks like China must be accumulating Yen and Japan is accumulating USDs.... Japan exchanging USD forex positions with China....
rsp
JK,
what do you mean exactly by productivity?
Wall Street is supposedly super-productive, because its income per hour worked is so high. But is Wall Street really "productive"?
CR never really clarifies what he means. Most of his statements are quite vague really.
(Perhaps you could let CR know that Adam Smith referred to the "entrepreneur" as the "undertaker", and that "undertaker" translates into French as "entrepreneur").
JK: Does it matter that the USD is overvalued? Doesn't that just mean that deficit spending needs to be higher than it otherwise would need to be? I understand that our exports would be more competitive if the dollars wasn't overvalued, but really… do we have much of a choice here?
The overvaluation of a currency is a rent. Rent is an economic distortion that affects everything that rent influences. It's not accidental that the investment opportunities are not in the US presently but rather in the emerging economies, which tend to be undervalued relative to growth prospects. So US companies are investing abroad instead of the US.
The US domestic economy is instead dominated by rent-seeking behavior, typified by the upward trend of the financial sector relative to productive sectors. As a result production is getting hollowed out, and "good" jobs are being replaced by lower level ones and an increasing % of temp work.
One of the key issues in economics is the free rider problem. It is usually thought of in terms of the 'moochers" at the bottom, but most of the free ride is being enjoyed by the rent-seekers at the top. This will continue as long as the US not competing globally wrt production. So, yes, global competitiveness does make a difference.
As far as offsetting the external saving with deficit spending goes, that's a good idea wrt to returning the economy to full employment. But it alone does not guarantee that the input won't flow to rent instead of to productive investment domestically.
This parasitic flow is less likely if rent-seeking is discouraged through tax policy. Tax policy should be designed to encourage productive investment and discourage rent-seeking (Michael Hudson's constantly emphasized point). This will also require financial reform, as well as public investment in areas that foster production, like education, R&D and infrastructure.
Apparently Norway is more "productive" than the US, because its GDP per hour worked is higher on average. But that's basically because they have masses of oil and a tiny population.
Wall Street is supposedly super-productive, because its income per hour worked is so high. But is Wall Street really "productive"
"Productivity" is not the same as "productive." "Productivity" output per unit of labor input, while "production" is provisioning consumption of scarce goods, rather than shuffling paper, or the contemporary digital equivalent.
It's the difference between the the line and support in the military. Of course, support is required, but it's the line that does the job of actually fighting, whether on land, sea or air. If support is favored over the line, guess what happens to the readiness and quality of the fighting force.
Y,
By 'productivity' I simply mean stuff that people want to buy. And I agree, there's a big difference between producivitiy of real goods and services, and productivity in the financial sector.
I think we ought to have nationalized depository institutions where people can safely keep their money. Then get rid of Too Big Too Fail. If you want to deposit your money in a private sector bank that makes riskier bets, and could potentially fail, that's your choice and risk. There won't be bailouts. etc.
Tom, is there anything the U.S. can actually do about the value of it's currency? If policies makers try to decreases it's relative value, won't the countries that keep their currency artificially low just respond tit-for-tat?
What can be done?
Tom,
"In economics, production is the act of creating output, a good or service which has value and contributes to the utility of individuals".
Financial services are services (duh!). They provide a lot of so-called "utility".
JK,
TH, correct me if I'm wrong, if the US started paying a supporting rate on reserves and quit issuing debt to "neutralize" deficit spending, it seems to me our trading partners would be forced into the position of purchasing real assets in the US to finance the vender financing scheme they've been running for the last forty years. While China and German could buy Rockefeller Center, it caused quite a stink when the Japanese tried that twenty years ago.
JK,
Having a desirable currency means you can import more than you export, which can be a plus. However you have to be able to deal with the problems which can arise from that situation, such as an over-dominant financial sector, and you'll need govt deficits to offset the demand leakage to foreigners. However this means that you can spend a lot and/or have low taxes..
JK< there's not much the US can or should do at t this point wrt currency valuation other than recognize that the rent of overvaluation is offset by the free ride the US is getting in real terms of trade and stop bitching about the trade deficit or thinking that China holds the US in thrall due to their tsy position. It's nonsense.
The US has to look at the situation chiefly in terms of the domestic economy and domestic policy. Right now it is wasting the free ride in real terms of trade by erroneously policy that is resulting the US to waste resources on a massive scale and allowing rent-seeking behavior to substitute for actual productive investment.
The US needs to recognize that the trade deficit is an advantage in real terms of trade and that this advantage is being squandered needlessly on domestic waste and free rides due to ignorance of monetary economics. Moreover, the the US setting itself up for another more crisis, more serious than the current one.
y,
It's been a while since "financial services" were a utility. While the utility of finance, capital allocation and clearing of accounts, was the reason the Fed loaned 15 to 30 trillion to bail out "finance", the vast majority of "financial services" is a casino, quite the opposite of a utility and the reason the bailout had to be so large. What is the "utility" of a CDS other than gambling? It's a cheap way to avoid setting reserves aside to cover real risk relying on the Fed to make you whole with a bailout if gamblers exceed the house's ability to pay out on a credit event. Another neat way for gamblers to convert the Feds seingiorage power to rent.
Financial services are services (duh!). They provide a lot of so-called "utility".
This is a canard the the financial sector want you to believe to throw you off track. What they actually provided was enormous disutility.
I guess you haven't been reading people like Bill Black, Randy Wray, Bill Mitchell, Yves Smith, Janet Tavakoli, Frank Partnoy, Elliot Spitzer, many state attorneys general, blogs specifically devoted to the big rip off like 4closurefraud, and many others. Entire books have been written documenting this. I suggest picking up a copy of Yves Smith's Econned.
This was not even rent-seeking. A lot of it was criminal behavior arising in a criminogenic environment directed from the top, as Bill Black explains in detail.
JK,
TH, correct me if I'm wrong, if the US started paying a supporting rate on reserves and quit issuing debt to "neutralize" deficit spending, it seems to me our trading partners would be forced into the position of purchasing real assets in the US to finance the vender financing scheme they've been running for the last forty years. While China and German could buy Rockefeller Center, it caused quite a stink when the Japanese tried that twenty years ago.
The Us could quit issuing tsys other than short term bills and set the rate to zero. Then countries would likely only hold tsys if they wanted to accumulate fx. They might decide to increase imports from the US to balance trade, or else invest in the US. The Brits are the largest investors in the US for instance.
Americans tend to be xenophobic and hate foreign investment in US assets, although they love US ownership of foreign assets. That's a problem in many cases, especially where there is prejudice, which includes most non-European countries, excluding Russia from Europe.
Why is the US paying foreigners to hold USD, especially when the USD is overvalued?
A seperate request:
Are there any "official" (non-MMT) Fed or banking documents that explain how banks are not Reserve-constrainted, but rather Capital-constrained, in their lending?
I've introduced this idea to someone and they are cateogircally denying it, and saying that banks are indeed Reserve-constrained, and that fractional reserve banking and the money multiplier are how things work.
thanks.
"The Brits are the largest investors in the US for instance"
We run a huge surplus v the US & the Americas Tom so yep. the UKs deficits are mostly the Eurozone (ie Germany) and China everywhere else we run a surplus.
JK, check these out.
BIS Working Papers No 269
Monetary policy implementation: Misconceptions and their consequences
Piti Disyatat
Monetary and Economic Department
December 2008
BIS Working Papers No 297
The bank lending channel revisited
Piti Disyatat
Monetary and Economic Department
BIS Working Papers No 346
Global imbalances and the
financial crisis: Link or no
link?
Claudio Borio and Piti Disyatat
Monetary and Economic Department
Explain to your friend that the system he is describing only works for closed system with a fixed amount of reserves. Then banks can only obtain reserves by borrowing from depositors as a source of funding their reserve needs, as well as borrowing excess reserves from other banks at the overnight rate in the overnight market operated by the Fed. This accounts for all the reserves available in the closed system with a fixed amount of reserves.
That's not the present system with a central bank as the LLR, and the money market as a place that reserves can also be assessed by bank borrowing. The supply of reserves in not fixed but rather floating based on bank needs and the Fed's reserve management when it is not setting the overnight rate to zero to by paying IOR, in which case the Fed doesn't have to manage rb's to hit its target rate.
JK,
See also this video, which describes the situation in the UK -- along with the supporting documentation that you seek
The Consequences of Debt-Based Money
An excellent exposition from the Positive Money folks in the UK
Did anybody see Warren's post on this and Adam(AK)'s response?:
http://moslereconomics.com/2012/09/10/st-louis-fed-gets-it/comment-page-1/#comment-213233
Tom, my point was that people use the term "productivity" and "productive" to mean things that aren't really productive at all. This happens in economics, in the media. For example, right wingers simply define being rich as being "productive". This makes it possible for them to constantly assert that the richest individuals are "the most productive members of society".
Similarly, the US is considered one of the most "productive" countries in the world, because GDP per capita is so high. But much of that "productive activity" is just rent-seeking, financial casino and real estate stuff.
This relates to my point re "monetary realism". CR talks alot about "productivity" and "production" but never gives specifics.
That's true, y, and "productivity" and "production" have very specific meanings in economics that do not accord with common usage. Common usage is often shaped by sophists for their own purposes to delude.
"Did anybody see Warren's post on this and Adam(AK)'s response?:
http://moslereconomics.com/2012/09/10/st-louis-fed-gets-it/comment-page-1/#comment-213233"
This comment is excellent and should be posted somewhere for easy access. Can't we establish an MMT library link at MNE?
We need to make clear thinking easily accessible to newbies, because general discussions in comments sections can be very confusing to otherwise smart people.
paul, this is what the MMT Wiki is designed to do, thanks to selise.
I've contributed to it on occasion when time permits, but to keep it up to date, we need lots of hands constructing it.
There's definitely not enough on the MMT wiki, but I don't know enough to contribute to it
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