Rising Deficits Pose Major Threat to Economy: Bernanke

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday. Full story here.

I heard Bernanke say that if we don't get the deficit under control then we could have problems like Europe. I nearly gagged when I heard him say this. He knows better. He absolutely knows better. To conflate the U.S. with Europe is absurd. Completely and mind-numbingly absurd when done by someone of Bernanke's stature.

He has become a major part of the problem.

Jonah Lehrer — Is the world just?

...Why do we ignore [things like] prisoner abuse? After all, we are usually empathetic creatures, sensitive to the suffering of others. Why does this suffering leave us cold?

Part of the answer is rooted in a human bias. It turns out that we all have an intuitive belief in justice – people get what they deserve. This instinct makes all sorts of social contracts possible, but it comes with a perverse side effect, causing us to ignore stories of suffering that directly contradict that assumption. Because we believe in justice, we ignore stories of injustice.

This is known as the Just World Hypothesis and it was first developed by the social psychologist Melvin Lerner. One of the classic demonstrations of the effect took place in 1965: Several volunteers are told that they are about to watch, on closed circuit television, another volunteer engage in a simple test of learning. They see the unlucky subject – she is actually a graduate student, working for Lerner – being led into the room. Electrodes are attached to her body and head. She looks a little frightened.

Now the test begins. Whenever the subject gives an incorrect answer, she is given a powerful jolt of electricity. The witnesses watching on television see her writhe in pain and hear her scream. They think she is being tortured....

Read the whole post at Wired: The Frontal Cortex, Is the world just? (h/t Edward Harrison)

This post by Lehrer shows about narrative shapes meaning and perspective, and therefore influences the apprehension and description of reality. This is not a new discovery, and it is not applicable only to matters like justice.

A lot of economics is based on a narrative that is widely accepted even though many of its assumptions have been falsified empirically, or are not even stated as testable hypotheses. This is an indication that a great of what passes for science is simply ideology.

This explains a lot of the misunderstanding of monetary economics and the resistance to MMT. MMT runs against prevailing narratives embedded in the contemporary economic universe of discourse that have filtered from academia to the media, public, and policy makers.

This is particularly troubling at this point, since the prevailing narrative just broke down big time when mainstream economists were not only unable to foresee the onset of the global financial crisis until in broke, but also they were unable to account for it afterward. But the narrative still stands, since it is so deeply embedded.

One of the powerful and growing narratives is based on the norm that all indebtedness is "bad," and that government deficit expenditure involves increasing public debt, which is exponentially bad since it is passed on to future generations.

There is also a narrative emerging shared by both left and right that "debt-based" money is one of the chief underlying problems. This is at the basis for some people calling for abolition of the Fed.

These narratives are gaining strength and breadth, and this phenomenon — I would call it a fad at this point — is creating obstacles in the way of understanding and acceptance of MMT. That's not only an economic problem; it is a social and political problem as well. For as long as the understanding eludes the public, media and policy makers, more financial crises are in store.

Congressman Paul Ryan should apologize to the American people!

This was posted on Warren Mosler's site. Warren says that Paul Ryan should apologize to the American people for his misleading comments on the debt.

Dear Congressman Ryan, Your response to the President Obama’s State of the Union address included something we’ve all heard a lot of ever since. You warned along the lines that that the US could become the next Greece, and be faced with some kind of a sudden financial crisis, where the world would no longer lend to us, interest rates would skyrocket, and the US, unable to spend, would be down on its knees before the IMF begging for the needed funding. And no one with any kind of national public forum took issue with you, including the President and the Democrats in Congress, who for all appearances quietly agreed and acted accordingly. Well, today, based on the near universal response to the S&P downgrade, everyone now knows, or should know, there is no such thing as the US becoming the next Greece. The overwhelming response to the S&P downgrade by everyone from Buffet to Greenspan, and most every financial and academic economist in the world was along the lines of: The US is the issuer of the dollar. It can print dollars. So it can always make timely payments without limit. THERE IS NO SOLVENCY ISSUE FOR THE US. There is no such thing as the US running out of dollars to spend. There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend. Greece is very different. Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro, any more than the US states, corporations, and households can print dollars. And so they are all indeed dependent on revenues from somewhere to be able to spend. So, Congressman Ryan, please apologize NOW for being so wrong and so misleading. There is no solvency risk for the US. The Fed is price setter for the interest rates for the US government and the banking system, not the market, just like the European Central Bank sets the interest rates for its banking system and its own debt. Congressman Ryan, your reasons for deficit reduction have vaporized. You see, the risk of overspending is inflation, not solvency. So if you want to argue for deficit reduction, apologize NOW, regroup, and come back with your next round of fear mongering about how the deficit can be inflationary, or something like that, and see how that flies.

Total Gov't debt issued since 1998: $229 TRILLION! And guess what? Rates are at zero!!

The daily Treasury statement is a fascinating document. Each day at 4pm on the dot you get a look at the Treasury's checkbook. Every item of expenditure (withdrawals) and every item of revenue (deposits) is shown in detail down to the dollar. And it's compiled to give daily, monthly and fiscal year to date totals.

Also included in that statement are the total amount of public debt that the Treasury has issued. This includes bonds and notes along with T-bills, savings bonds and whatever other debt the Treasury sells.

The numbers are really unbelievable and they shed light on how we really just live in a world of "Monopoly money." I don't mean that in a pejorative sense; I simply mean that this is all just a matter of accounting and record keeping, that's it. Nothing more than that. And the reason you know that's true is because the trillions $$ that come in and out on this statement are just mind boggling. There's not that much money in the whole, entire, world, yet there it is, in black and white, right on the Treasury's books.

For example, here's one crazy number: $53.7 Trillion. That's the amount of public debt that has been issued by the Treasury so far this fiscal year. (Less than 10 months.) Fifty-three T-R-I-L-L-I-O-N!

See for yourself by looking at the statement below:

I bring this up because the only thing we hear about, every day, is what a huge debt we have ($14 trillion) and that we ought to be scared because there is massive "supply" of Treasuries (usually only 10s of billions $) about to be auctioned off. (This usually comes as a rant from resident CNBC imbecile, Rick Santelli).

We are also told that this supply is going to cause rates to spike or that no one is going to buy this paper. OMG, what if the Chinese don't step up and buy?

Yet the fact is, the government has already sold nearly $54 trillion of debt in the last 10 months with no trouble or consequence. That is nearly four times the outstanding national debt (which took 220 years to accumulate). We sold four times that in 10 months and what happened? Nothing. Rates are at ZERO!

Even more enlightening is the fact that over the past 13 years (as far back as this data goes) the Treasury has sold a mind-numbing $229 trillion of debt and rates have gone down to zero.

I went back and jotted down the total annual debt sales that the Treasury has conducted from 1998 until now. (All came from the archives of the Treasury Statement.)

Here it is:

And finally, here's what interest rates did over that time when we issued $229 trillion of debt:

Fed funds 5.5% to zero
2yr note 5.5% to 28 basis points
5yr note 5.5% to 1.15%
10yr note 6% to 2.5%
30yr bond 6% to 3.7%

So my question is, when are we going to stop with this ridiculous hysteria about gov't debt issuance, spiking rates, our national debt "problem," and all the other nonsensical talk that we have been hearing? It's really worse than any warped myth.

Ron Paul introduces bill to cancel $1.6 trillion debt held by the Fed

The first good idea EVER from Ron Paul. The Fed could essentially rip up its holdings of Treasuries and the US debt would be lowered by $1.6 trillion. This is pretty much what Rand is proposing. It's a good idea and it shows the fallacy of the debt and how easy it is to “pay it back.”

The Fed is the largest single holder of U.S. bonds and notes. The Treasury pays interest to the Fed on those holdings. So the government (the Treasury) is paying interest to an agency of the government (the Fed). Then the Fed pays the Treasury back that interest. How idiotic is this???

Why are we holding ourselves hostage to debt terrorists and the rating agencies when it all can be solved so easily? Crazy!!

Here is the article on Ron Paul's proposal.