I’ve taken some criticism — particularly from advocates of modern monetary theory and sectoral balances and all that — for using total debt rather than just private debt in my work....
Governments controlling their own currencies are likely to continue to defy the prescriptions of the modern monetary theorists for years to come. And that means that expansionary increases in government debt relative to the underlying economy will continue to be a prelude to contractionary deleveraging, just as is the case with the private sector. All debt matters.azizonomics
Why Modern Monetary Theory is Wrong About Government Debt
John Aziz
Basically an Austrian view, but interesting in that John Aziz has taken the time to read up on MMT and sectoral balances. The post doesn't say anything new of note, but it's interesting as a summary of a trader's take on MMT.
What is interesting is that he admits that governments that are currency sovereigns can fund their debt through the central bank, but he claims they don't lest they undermine the value of the currency. And even if they do, Japan's massive national debt shows it just transfers to the public sector private debt from previous over-leveraging, which only postpones the deleveraging that it will take to get the economy going again.
While John Aziz regularly contributes to Zero Hedge, his criticism is not the usual ranting that appears there. It's thoughtful and worth a read.
41 comments:
What the Austrians never seem to do is present any kinds of calculations of the amount of monetary expansion through public spending that gets a country into inflationary hot water. Usually they take it for granted that government spending is wasteful, and so is not actually growing the economy.
I would look at the question presented here as why with all that stimulus, the Japanese economy hasn't been fixed yet? I think that this is a legitimate question. A similar question also can be asked about the US.
There are two answers. First, was the stimulus large enough? Two, are there other factors that have not been adequately addressed. I would say both.
His criticism seems to distill down to the notion that because politics are imbued with misunderstandings and biased towards panic over government debt, that we should simply give up on fiscal policy. Balance the budget and be done with it because... political pragmatism.
Oh and a debt jubilee would fix things just fine.
Whaaaaaat?
It floors me when people dismiss a straightforward solution as too politically unfeasible then go on to propose an alternative that is at least as radical if not more. (Shades of "job guarantee won't fly but cap-n-trade for inflation, there's an answer with no political hurdles to clear!)
When you put too much power into a centralized planned money center like the Fed, and rely on Greenscam and Bernankster who were both incompetent or colluded to ignore the credit bubble, and this is the problem, end the fed and put the money control back to treasury and let the treasury print money interest free end ursury
"It floors me when people dismiss a straightforward solution as too politically unfeasible then go on to propose an alternative that is at least as radical if not more."
Yeah!
The debt jubilee thing is stupid IMO.
I found it difficult to separate his own views from the story about mainstream he is trying to say. Commented there. However I think the confusion is on his side not mine. But not surprised he contributes to zero hedge - a total anti-Keynesian site.
I agree with Ramanan that debt jubilees are stupid. Do we write off the multi-million dollar mortgages that millionaires have got so as to enable them to buy McMansions? Where’s the social justice in that?
And take two people on average incomes or a bit below. One decides to buy with a 100% or 90% mortgage. The second decides to rent. Then along comes a jubilee, the one who has bought a house is effectively given a house for free: in effect paid for by the one who rents.
Barking mad.
Yeah Ralph, right!
why with all that stimulus, the Japanese economy hasn't been fixed yet? I think that this is a legitimate question
Precisely. What have the Japanese done wrong, with incorrect timing or not in sufficient amounts? This question must have a precise answer on the part of honest Keynesians of all stripes. Otherwise they'll keep being vulnerable to the criticism that fiscal policy doesn't work or doesn't work well enough to "fix the crisis" at any rate.
Warren posted this over at his site:
'The economics of Japan's lost decades', by Tanweer Akram, PhD.
http://moslereconomics.com/2012/12/18/the-economics-of-japans-lost-decades/
His whole post here is teleological Tom.... He writes of the stock measures of debt as having a 'purpose'... Unscientific.
'Debt' is nothing more than a part of the accounting record of human action.
He gets close, when he gets near to asserting that govt can choose to electively default, but no cigar...
RSP,
I give him credit for trying to get to the truth of the matter, which is not surprising for a trader, since traders are interested in outcomes much more than most economists appear to be. Plus, it is not solidly locked into ideology as are most of the Hedgies.
“why with all that stimulus, the Japanese economy hasn't been fixed yet? I think that this is a legitimate question”
We always seem to forget we’ve done and learned this one already. In 1933 the USA was prostrate and collapsing under the weight of debt deflation. The New Deal got the economy growing but as 1937 proved; it did not create a self-sustaining expansion. Once the government pulled back the non-government continued to deleverage and we fell back into recession. It wasn’t until late in the war that non-government debt truly fell as a percentage of GDP. With the economy at full employment, rising wages, and rationing households had limited options but to repair their balance sheets. When the war ended and with wages still rising they not only had the balance sheet economics to consume and grow the economy but they had mental economic security to spend. Without mental economic security people will continue to hoard money as a defense to economic insecurity leaving the economy deprived of spending and dependent on government stimulus.
In 1992, Japanese household savings of disposable income was almost 15%, today it is about 2% while corporate savings has exploded. I don’t suspect that economic security of a nation of aging people has been restored.
Bill Mitchell also wrote a piece that I think touches on this too…
http://bilbo.economicoutlook.net/blog/?p=13394
"Oh and a debt jubilee would fix things just fine."
A debt jubilee creates NFA, which is what he says the government shouldn't do...isn't this cognitive dissonance?
John Aziz responds to a comment by Ralph Musgrave at azizonomics: Ah but my point is that “running a deficit” is not the way to approach it because it will later be offset by tax hikes and spending cuts, irrespective of whether the economy is booming or not. That’s my point, and I’m pretty sure that’s what occurred in Japan. The way I would do it from here on out is by directly writing down debt by expanding the money supply without adding a cent to the “national debt” and thus increasing debt fears. The Fed programs post-2008 had the wrong target — they targeted reinflating the banks and financials when instead they could have targeted gradually writing down consumer debt.
Seems that JA is combining theory with feasibility given the way govts typically act. I would suggest separating them and suggesting a theoretically optimal solution in terms of a policy formulation and then examining what is and is not feasible politically.
As Ralph observes, the sticking point (in the US, Japan, UK, and EZ) is the banks, who hold the upper hand politically due to their "$ clout," a euphemism for legal bribes.
Stim can prevent delevering that unwinds the economy, leading to massive human carnage, social unrest, and political turmoil, but it does not heal the Ponzi and criminal rot.
That is a separate issue that is hardly discussed even through there has been a lot expert testimony about it in books, article, and blog posts. So far it is not being addressed at all adequately. so the rot continues to spread.
"but my point is that “running a deficit” is not the way to approach it because it will later be offset by tax hikes and spending cuts, irrespective of whether the economy is booming or not" - Ballinger
Another person completely unaware of the tyranny of the math.
This is the same scenario I have been railing about in recent threads...that the sequence of events as described in his comment cannot occur mathematically.
This is the "austerity scenario" writ large and the outcome will always be the same...with 100% confidence.
Cutting spending or raising taxes (on wage-earners) when employment is below maximum will ALLWAYS result in a larger deficit, even if increased borrowing delays the outcome for a year or two (and assuming the trade balance remains about the same).
In the end the deficit will appear at a level large enough to fill the gap that has been created...it is a demand for liquidity that cannot be denied.
Apologies...I attributed the quote in the previous comment to Clint Ballinger...should have been John Aziz.
Ralph Musgrave wrote: I agree with Ramanan that debt jubilees are stupid. Do we write off the multi-million dollar mortgages that millionaires have got so as to enable them to buy McMansions? Where’s the social justice in that?
The social justice is that you write down a portion of everyone's debt, and if they don't have any debt they get an equivalent lump sum. This doesn't pick winners and losers, it doesn't discriminate against anyone, and it can be done in small bite-size chunks so as not to overheat the inflation level. Those cheques would make a much bigger difference to the poor — e.g. fixed-income pensioners and the unemployed — than to the upper class. In the UK I would do something like a £10 billion injection direct to the public per month either until total-debt-to-GDP hits 150% or inflation hits 4% — similar to Evans Rule but targeting deleveraging rather than unemployment or NGDP. Significantly, this kind of stimulus would not raise the public debt level, either. The only variable that we would have to watch is the inflation level, which is depressed anyway due to the LZB.
And before people say it is infeasible, the BoE was actually considering a program along this lines a few months ago, or so said Anatole Kaletsky:
http://blogs.reuters.com/anatole-kaletsky/2012/10/25/is-a-revolution-in-economic-thinking-under-way/
Obviously that is jeopardised now that Mark Carney is in charge...
The only difference between the program I am suggesting and the program that is in place right now is that the program in place right now dumps the money into he banking sector, which is no panacea for unemployment, and which enriches entrenched interests via the Cantillon Effect.
"The only difference between the program I am suggesting and the program that is in place right now is that the program in place right now dumps the money into he banking sector, which is no panacea for unemployment, and which enriches entrenched interests via the Cantillon Effect." - John Aziz
What you are missing here is the baking sector cannot be expansionary without the fiscal authority following through with net spending.
Dumping money into the banking system does nothing...there is no transfer mechanism that leads to a net increase in income.
The banking system is a "helper system", it is useless without the existence of NFA (net financial assets).
The debt jubilee you seem to be advocating right now will effectively add $NFA to the system, but it is a one-off shot in the arm...economies require a continuous flow of new $NFA to function.
Economies are about flows not stocks.
Your solution amounts to a band-aid.
paul —
Why does a debt jubilee have to be a one-shot measure?
As I wrote above, you can do it continually until the economy has recovered targeting whichever variable of recovery you want — unemployment, NGDP or the debt level (I advocate the latter because I am fairly certain that that is the real issue). If the economy slips back into depression you can start doing it again — all without adding a penny to the public debt.
The real "band aid" is fiscal and monetary stimulus measures that ignore the real issue keeping the economy depressed, which is the weight of the total level of debt, and which when repealed further down the line (as happened in japan) just push the economy back into contraction.
I don't see any MMT economists favoring a "debt Jubilee" in the mode of Keen and Hudson. They would advise bank accountability (including criminal prosecution where the evidence calls for it) and banking reform to eliminate the rot, along with debt restructuring that would allow debtors the space to pay down legitimate debt. Debtors would be absolved of predatory loans, which by law are null and void as binding contracts. Bill Black, for instance, argues that handling this as the law requires instead of applying a double standard of justice would rectify most of the issues including the economic ones. Govt has the capacity to make space by either requiring that loans be restructured or else doing the restructuring itself through its agencies. This is in the US, of course. I would expect that something similar applies in other jurisdictions.
Why does a debt jubilee have to be a one-shot measure?
I would not call it a "debt jubilee" then. I'd put it in terms of "restructuring." A debt jubilee implies an all-at-once shotgun approach, whereas restructuring is selective and can be done over a period.
"The real "band aid" is fiscal and monetary stimulus measures that ignore the real issue keeping the economy depressed, which is the weight of the total level of debt," - John
John, before you can make this claim you will have to show a chain of logic that supports it.
I assume you are referring to private debt…the private debt of import is household debt and that is very easy to control…sound underwriting and education of the populace…don't spend money you haven't earned yet.
Businesses won't borrow any more than their projected sales will allow them.
Paul —
I am referring to all increases in debt above and beyond increases in income including (for reasons I explained in the article — the tendency toward post-stimulus austerity and tax hikes) public debt.
When debt increases faster than income, it creates a temporary boom, and more individuals and firms take on debt to take advantage of the boom. But rising debt service costs make this temporary boom unsustainable, leading to contractionary deleveraging. That is why debt as a percentage of product soars going into a depression, and why it slowly falls during the period of the depression.
This can be offset to some degree by increased public spending (or as I argue by a central bank rolling debt writedown program).... but rising public debt, as I have explained is often followed by austerity measures, which is why I advocate that such stimulus measures not add to any measure of public debt.
John,
Thank you for the thoughtful response...seems like we are pretty much on the same page wrt private debt.
The only difference I can see then is that I view public debt as a private sector asset with no negative obligations other than the printing of interest payments which do nothing or at least very little to help the economy, and add to an accumulation of financial assets among the richest cohort that only serves to give them more power and control.
but rising public debt, as I have explained is often followed by austerity measures, which is why I advocate that such stimulus measures not add to any measure of public debt.
So unfounded fear of bond vigilantes should prevent govt from using its policy space to address offsetting increased saving desire in order to prevent an economic contraction that would result in huge depreciation of asset values and idling of real resources, like workers, that would run into the trillions? Really?
John, this was a financial crisis that spread to the economy. There was and is no reason for the economy to contract due to the financial crisis. Govt can provides the necessary leverage and maintain effective demand by offsetting non-govt saving desire with appropriate deficits, while at the same time addressing the financial issue through restructuring debt, putting insolvent banks into resolution, and holding bank official accountable.
The reason that this has happen the way it has is crony capitalism and corruption. This is a political issue to be addressed at the ballot box if those charged with upholding the law refuse to do so because they are compromised.
What we are witnessing is a breakdown of the social and political system, which is much more serious than a financial or economic crisis. Taken together with the breakdown in law in foreign affairs as well since the Bush administration, the US is in crisis.
Tom, I mostly agree with you. However I would argue that it is possible to do anything that could be done through deficit spending without adding a penny to the deficit by doing it through the central bank. In the status quo, monetary policy is done through the banks, which enriches the financial sector and large corporations, however this does not have to be the case (for example doing QE directly to the public).
"I would argue that it is possible to do anything that could be done through deficit spending without adding a penny to the deficit by doing it through the central bank." - John Aziz
How?
John, I agree that there were and still are creative ways to do this, if that were the goal. Quite evidently, the govt (Fed and other regulatory agencies, Treasury, politicians, etc., gamed the system for the benefit of the banks and hung the economy and American people out to dry to serve the interests of the financial system instead, even to the point of ignoring the law, refusing to hold anyone accountable, and changing accounting standards. If they were willing to go to those lengths for a few, they could have fixed the economy and prevented massive unemployment, too. It was not either-or.
What they should have done is admitted this was a financial crisis resulting from a variety of causes but ultimately traceable to bank malfeasance, and treated it as such, preventing the spread of the crisis to the real economy.
President Obama did act decisively to prevent the shut down of GM and the US auto industry that is a backbone of manufacturing, but that is about it. Otherwise, it was all about the financial sector, e.g., using QE to drive riskier financial assets "higher than they would have been," to use the Fed's own words, and support housing prices. Without debt relief. That was a very stupid mistake that has already cost the country tillions in lost opportunity that can never be recouped. It has set back the progress of two generations and endangered retirement by affecting pensions and savings. In short, a needless fiasco, with no accountability so far, and the govt has actually declared that there will be none. A set-up for the next round.
There really was no need for this financial crisis to go viral, It was acquiescence to privilege pure and simple.
paul: How?
Lending. That's what banks do.
The crisis was resolved in Congress with the idea that banks would step in and restart lending to provide liquidity to the economy as the govt had provided it to them. They did not. Congress could have directed the Fed to do so directly. Or it could have temporarily nationalized the banking system, as it did with GM to save the auto industry.
In addition, in extremis, the president, Treasury sec, and the Fed BOG have extraordinary powers they can use, some of which beowulf has cited previously.
There was NO need for this fiasco.
Tom, lending doesn't do what deficit spending does…that's what I was asking John to explain…
…how does a Central Bank spend money into the economy?
Fed could have lent to debtors to provide service for bank loans to prevent loans from becoming non-performing. Fed could buy the loan assets and restructure them and even grant forbearance. As chief regulator, Fed could have held an investigation and declared predatory loans null and void. Lots of things that the Fed can do within the scope of its ordinary and extraordinary powers without going blatantly fiscal, which would require prior approval of Congress if the Fed was afraid that Congress might be upset by infringement on its powers. But generally speaking, Congress is happy to pass the buck on messy stuff like this, especially to get it done quickly. That is really why there is a Fed anyway. Congress delegated powers it regarded as a hot potato.
Tom, as I said earlier, these are stop-gap solutions that do not replace the long-term need for deficit spending.
There are two issues: liquidity aka cash flow and solvency. Lending can handle liquidity issues but $NFA is required for solvency issues. The Fed was and is still providing liquidity and allowing some banks to mask insolvency (which is illegal but the law goes out the window in crisis). Could do the same for ordinary debtors. But, yes, unless the fiscal deficit offsets non-govt saving desire, eventually there will be solvency issues. But provision of liquidity allows stringing out meeting the solvency issue over some time, reducing the need for huge deficits in any single period or few periods. It can be managed gradually.
Tom, I guess what I was looking for was an explanation from John on why he wishes to turn our US system into a Eurozone-type system, which has clearly failed.
It's an either-or…we fund growth with deficits or we fund growth with loans…the second option is seriously flawed in my view so why go there?
What we have works beautifully provided we don't arbitrarily choose to starve the system of liquidity.
paul: It's an either-or…we fund growth with deficits or we fund growth with loans…the second option is seriously flawed in my view so why go there?
The sad reality is that the cb is able to do things through stretching its powers that aren't possible politically due to "politics." So the Fed moved to save the banks and financial sector using its powers, as did the BoE and ECB. The rest of the country that was underwater. Let them drown.
"the Fed moved to save the banks" - Tom
All the Fed actually did was accept phony valuation of junk assets rather than dissolve the insolvent parties, which is ongoing.
It was nothing more than an accounting trick, no net "money" was added to the economy.
Who cares if the top 0.1% can shift assets among themselves? Their net gains are zero unless they can extract real "money" fron households.
In fact, their entire business model depends on stripping the 99.9% of their finacial wealth, otherwise those financial businesses couldn't survive.
Basically their business model is like that of a casino…they invite us to play at their table with the hopes of "winning big", all the while skimming the easy money and hoping we "go all in" so they can end up with everything we have.
The entire financial system is a game of gambling and musical chairs combined.
In a way we deserve what happens to us for being so ill-informed wrt money.
The whole idea of "trust" wrt finacial advisors is a joke…all we are doing is asking them to gamble with our money…the worst thing that can happen to them is a ruined reputation, unless they believe their own snake-oil and invest their own money too.
The point is that the Fed had no problem doing this for the bankers. It would have had no problem with fixing the underwater debts either if it had wanted do.
"The point is that the Fed had no problem doing this for the bankers. It would have had no problem with fixing the underwater debts either if it had wanted do."-Tom
Sure, but this is not what John Aziz was saying…
…he was making the argument that Fed operations should completely replace deficit spending, and could achieve the same or similar result.
And this is the root of our disagreement.
I am pretty sure the Fed could figure out a way to do this under its emergency powers, e.g., by purchasing underwater mortgages (claim on real assets) and restructuring the loans itself, if Congress couldn't get it together for another agency to do it. ONly one would argue whether the Fed as the resources available to do this, only whether it had overstepped its bounds.
Congress might not like it, but I doubt they would say much since they don't appear to want to act on this, and the Fed would be getting them off the hook. It would be very popular, I'll bet, and I doubt many congress critters would make much noise about the Fed "going fiscal."
I am not arguing that this is a good solution, of course.
But the Fed could do it.
And under the circumstances, with a dysfunctional political process, probably should have stepped in to fill the vacuum and prevent the disaster than has happened — from which we are still trying to recover.
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