Monday, February 11, 2013

Implying a "Novel" Way to Look at the National Debt? (plagiarizing a 400 yr old view?)

commentary by Roger Erickson

Here's another article you wouldn't expect to see in the Washington Post.

Maybe someone at the CFR read Warren Mosler's book & decided to have "one of their own" plagiarize - as a novel insight - it and all fiat-currency literature going all the way back to John Law.

Could this be the start of a campaign to puncture their own straw man? Does this mean that the DT's have decided it's time to recover from their own DTs? Admittedly, one advantage of having the DTs is that one can rearrange one's paradigm at will, as if in a self-editing dream. There's even a bevy of contractors - like Zachary Karabell - collectively known as the PICC, or Propagandist Industrial Controlfraud Complex.

Another way to look at the national debt

32 comments:

The Arthurian said...

Hi Roger

From the article:
"The establishment consensus is that there is too little growth and too much government spending everywhere in the developed world."

The focus is always government debt, and never private debt. Private debt is a cost borne directly by the private sector, a cost that directly hinders growth.

Jure Jordan said...

Yesterday on UP With Chris Heyes, Krugman sorta, kinda, endorsed MMT by saying; We do not disagree on anything now, but their claim that deficit doesn't matter EVER will not be true later on.

UP had an excellent discussion in second hour with Krugman and Dean Baker.

http://video.msnbc.msn.com/nbcnews.com/49518559/#50760434

David said...

That was a pretty good article, but the author makes a bit of a strawman of Jefferson. I think there were good valid reasons for opposing Hamilton's plan to tie us into the gold-bank-debt system of Europe. Hamilton's selling points were: 1. We'll get instant credibility internationally. 2. We'll get buy-in from the wealthy classes at home. 3. A centralized money system will allow us to raise money for wars. The problem for Madison and Jefferson is that they didn't advocate hard for the only real alternative: develop internally using a well managed fiat currency. They were hampered by a generally commodity view of money and T.J. was also suspicious of centralized government power, but he was much too smart to be "top tea-bagger" as the author suggests he would have been. By 1813 Jefferson regretted that congress wasn't given the explicit power to issue paper money:
"Although we have foolishly allowed the field of circulating medium to be filched by private individuals, I think we may recover it... the states should be asked to transfer the right of issuing paper money to Congress, in perpetuity."

Bill said...

@David

They were not hampered by any commodity view of money. They were hampered by the specter of the collapse of the Continental Dollar. Benjamin Franklin, who had been instrumental in the adoption of a fiat currency by the colony of Pennsylvania, advised the Continental Congress to back the dollar by taxation, but they did not.

Matt Franko said...

This is more of the "money is debt" rabbit hole type discussion...

Detroit Dan said...

Roger-- What do you mean by "DTs"?

I think this Karabell guy nails it right up front:

"debt is simply a new form of currency ... We have no debt problem."



Detroit Dan said...

Jure Jordan-- Thanks for the Krugman reference. Obviously he's been coming around on MMT. That comment is a bit weird though, as MMT doesn't claim that the deficit doesn't matter. Au contraire, the size of the fiscal deficit is a very important factor in MMT models...

y said...

Roger

what was the name of that book you mentioned, which was about China and had similarities with MMT?

y said...

I think the author's name was Chris something....

Red Rock said...

How are the Nordic countries decreasing govt debt and prospering? What say MMT? http://www.economist.com/news/special-report/21570840-nordic-countries-are-reinventing-their-model-capitalism-says-adrian

y said...

Sorry, found it. It was: Frank N. Newman, 'Six Myths that Hold Back America'.

Detroit Dan said...

I scanned the article in The Economist on the Nordic countries. Of course, The Economist defines success as reducing the size of government. However, the article concludes by saying that the changes are a work in progress. I'd also be interested in hearing an MMT perspective on these countries, which have been among the most socialized and most successful on planet earth...

y said...

"How are the Nordic countries decreasing govt debt and prospering?"

Sweden has a current account surplus and high levels of private debt.

The unemployment rate is currently 8.9%, GDP growth rate is currently 0.5%.

Tom Hickey said...

Art: From the article:
"The establishment consensus is that there is too little growth and too much government spending everywhere in the developed world."

The focus is always government debt, and never private debt. Private debt is a cost borne directly by the private sector, a cost that directly hinders growth.


The financial sector want to control the money stock for reasons of rent which means reducing or elimination govt money creation.

But the odd thing is that they also demand govt securities or guarantees as safe assets.

Tom Hickey said...

Jure Yesterday on UP With Chris Heyes, Krugman sorta, kinda, endorsed MMT by saying; We do not disagree on anything now, but their claim that deficit doesn't matter EVER will not be true later on.

UP had an excellent discussion in second hour with Krugman and Dean Baker.


Stephanie was invited but had to decline due to a prior engagement.

Detroit Dan said...

I'm signing up for email follow-ups. Don't know how to do this without posting a comment...

Tom Hickey said...

History is shaped by context. The issue in the early days of the republic was preserving it, not coming up with ideal monetary system. Hamilton and cohort wanted to build a strong central govt to prevent Britain from coming back and re-conquering its former colony. This was not an idle fear in light of the War of 1812 and the burning of the capitol.

Tom Hickey said...

DD That comment is a bit weird though, as MMT doesn't claim that the deficit doesn't matter. Au contraire, the size of the fiscal deficit is a very important factor in MMT models...

Zombie ideas die hard even when contradicted by facts. PK still hasn't gone through Godley and Lavoie or paid attention to what the MMT economists say about determining the appropriate size deficit wrt demand leakage.

But even Godley disagreed with the MMT economists over the viability of a persistent CAD, as Ramanan constantly harps on. So there is disagreement at the margin.

I would say that "substantial agreement" is a victory tho.

Tom Hickey said...

How are the Nordic countries decreasing govt debt and prospering? What say MMT? http://www.economist.com/news/special-report/21570840-nordic-countries-are-reinventing-their-model-capitalism-says-adrian

All depends on sectoral balances. We'll see how it works out. The EZ was a miracle until it wasn't.

But basically, if the saving propensity of the consolidated domestic private sector is constant and govt reduces its contribution then the difference must be picked up by net exports or the economy will be starved for savings. But generally speaking, reducing the govt contribution also increases private dissaving due to reduced benefits.

So we'll have to wait a bit to see how it plays out. But at this point it seems that exports are declining due to global competition, and that doesn't bode well.

Maybe Lars Syll will do a post on it.

Tom Hickey said...

y Frank N. Newman, 'Six Myths that Hold Back America'.

Here's a link to a review, Author Examines Six Myths About U.S. Economy

geerussell said...

But even Godley disagreed with the MMT economists over the viability of a persistent CAD, as Ramanan constantly harps on. So there is disagreement at the margin.

In that UP discussion, Krugman goes into a brief sidebar about capital controls at the 3:15 mark. This isn't an area I've seen touched on a lot that (in my naive view) seems like an important element in addressing the CAD criticism.

My understanding of the argument (again in my tragically superficial and oversimplified view) is a CAD can cause private banks to get on the hook for foreign currency and then by extension drag the sovereign down with them. An obvious answer would seem to be for the sovereign to say "don't do that". At some level, the ability of a CAD to transmit to foreign-denominated debt has to be a function of policy that allows this to happen, yes?

Are capital controls a way for the sovereign to say to the rest of the world "if you want to save in our currency, knock yourself out, but we're not going to borrow yours"? Also, any suggestions on further reading?

Tom Hickey said...

Detroit Dan, you can subscribe to the RSS feed for all posts and also all comments by scrolling down the left column beneath the videos and some other links.

Tom Hickey said...

@ geerussell

The world has decided on a neoliberal model — free markets, free trade, and free capital flow. The options are either to modify that, which is considered "protectionism," or else coordinate. The model breaks down under mercantilism, and that's the situation now. Countries have to begin looking at the global economy as a closed system and coordinating appropriately instead of competing for export markets.

Otherwise, what happens is that net exporters depress wages and net importers export jobs. This ends up being a race to the bottom that is unsustainable politically.

It need not be that way if the countries understood MMT and ran economic policy based on sectoral balances, functional finance, and the MMT JG, but that's not happening yet.

Detroit Dan said...

Thanks Tom. I previously subscribed to MNE posts via Google Reader. Based upon your tip, I'm now subscribed to comments with a separate feed in Google Reader.

Detroit Dan said...

I agree that the trade deficit is the greater concern at the moment. A lot of people mistakenly blame the fiscal deficit for the results of the trade deficit, we comments such as "we owe China..."

Detroit Dan said...

[QUOTE]
In that UP discussion, Krugman goes into a brief sidebar about capital controls at the 3:15 mark. This isn't an area I've seen touched on a lot that (in my naive view) seems like an important element in addressing the CAD criticism.

My understanding of the argument (again in my tragically superficial and oversimplified view) is a CAD can cause private banks to get on the hook for foreign currency and then by extension drag the sovereign down with them. An obvious answer would seem to be for the sovereign to say "don't do that". At some level, the ability of a CAD to transmit to foreign-denominated debt has to be a function of policy that allows this to happen, yes?

Are capital controls a way for the sovereign to say to the rest of the world "if you want to save in our currency, knock yourself out, but we're not going to borrow yours"? Also, any suggestions on further reading?
[/QUOTE]

Well said Gee. I would also be interested in further reading in this regard...

Jure Jordan said...

If S.Kelton could have accepted that invitation and appear with Krugman to clear up such missunderstanding, that would have been something to remember. Too bad she could not.

Problem of persistant CAD would be somewhat solved with flexible currency forex, but not for world reserve currency.

If currency is pegged then it really needs strong capital controls, otherwise unwise politicians can mess up an economy in a decade.

Real problem for open economies is that borrowing for imports is then deposited as interest bearing assets into other banks.
That is how you get that Croatia has about € 12B in reserves and € 8B in € denominated debt. That comes from inability of a currency to cross borders while economy collapses and imports with it. Even with persistant CAD, Croatia amassed more in foreign reserves due to croatian workers working in EU but living in Croatia.

Total public and private debt is around 100% of GDP but PM decided to accept austerity which was pushed by EUs Merkel.
I did succed to educate some jurnalists that are finally writing about such idiocy, but there is still a lot of jurnalists that need education.

The real problem is that Croatian Central bank is recquierd to borrow for deficit spending while printing a currency to cover for private banks reserves. I am still not sure if that is a EU requierd set up or self induced constraint installed as a leftover from Croatia being a part of a federation and currency user in such a system.

Roger Erickson said...

DetroitDan asked: "Roger-- What do you mean by "DTs"?"

DD, I added links to the original text, above.

DTs - deficit terrorists

DT's - delerium tremens
http://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0001771/

Sorry, I thought anyone who'd ever heard of alcohol had heard of the DT's

Jose Guilherme said...

If domestic firms borrow heavily abroad and then the currency depreciates that can spell trouble - at the limit, mass bankruptcies.

Or the CFOs may engage in derivatives trading, betting on the continuing improvement in the real exchange rate and then lose their bets when the foreign currency - e.g., the US dollar - appreciates instead. That did occur on a massive scale in Brazil in 2008/9. At the time the Real floated freely against the dollar.

So the view of Godley against the beningn neglect of a domestic economy's foreign exposure - even under a free float - certainly seems to accord well with the realities of emerging countries.

Detroit Dan said...

Thanks for clarifying that, Roger...

Tom Hickey said...

The way I understand it the issue is a sovereign borrowing in a currency in which it is not sovereign. I doubt the MMT economists would deny that private borrower can get themselves into trouble borrowing in a foreign currency. Clearly, management of fx is part of banks' risk management, and they can make serious errors. So can (and sometimes do) non-depository financial institutions.

Roger Erickson said...

I thought it was an axiom of the original Breton Woods agreements that no country could be required to repay debt in anything other than it's own currency.

Guess we immediately broke that rule by making the $/oil-sale agreements with the Saudis.

Politics is always a poker game.