Good video explaining gov't debt myths

Collaboration by Prof John Harvey and Tschaff Reisberg.



Send this around to whomever you know.

John Harvey debunks the "Social Security is going bankrupt" meme

Since MMT advocate John Harvey recently had an article published in Forbes, I thought folks would be interested in a blog post by Dr. Harvey. Here it is: Why It's Logically Impossible for Social Security to Go Bankrupt.

MMT Invades Forbes

Prof. John T. Harvey has a column under Leadership at Forbes (3.18.11) entitled The Big Danger In Cutting The Deficit that sets forth the basics of MMT without mentioning MMT. (h/t Mario)

Like Bill Mitchell's article at The Nation, it is concise, precise, and accessible. However, The Nation is a progressive venue, whereas Forbes occupies the other end of the spectrum. Quite a spread in only a matter of days. Word is getting out on many fronts as editors notice and pick up on the growing momentum.

Prof. Harvey's column is a good one to pass on to MMT skeptics in that he anticipates the common objections voiced by neoliberals and conservatives, as well as progressives with neoliberal tendencies. The piece is well argued, and anyone who is open can readily absorb the policy message, regardless of their persuasion. The comments I saw there are positive, at least so far.

Breaking the Intergenerational Poverty Cycle

James J. Heckman, Henry Schultz Distinguished Service Professor of Economics, University of Chicago, has posted an important observation at vox.eu, entitled A post-racial strategy for improving skills to promote equality, While it chiefly addresses inequality and the cycle of poverty and underachievement, this post has direct bearing on employment, too, since poverty increases the number of chronically unemployed, a structural problem.

The chief finding that Prof. Heckman cites is one showing that "supplementing the early years of disadvantaged children addresses a major source of inequality."

An example is the Perry preschool programme that targeted disadvantaged, subnormal IQ African American preschoolers just outside Detroit. For two years, the programme taught children to plan, execute, and evaluate daily projects in a structured setting. It fostered social skills. There were weekly home visits to encourage parenting. The Perry programme was evaluated using random assignment with long-term follow-up for 40 years. Rates of return are 7%-10% per annum – higher than the return on equity over the post-war period 1945-2008 and before the recent market meltdown (Heckman et al. 2010).

Just as it is a mistake to conclude that current employment is structural (insufficient skills) rather than cyclical (insufficient jobs), so too, it would also be a mistake to conclude that all employment is cyclical rather than some of it structural. The structural unemployment due intergenerational poverty results in successive generations lost to poverty, hopelessness, and often crime, with no break in this destructive cycle foreseeable. This is a problem that not only destroys lives, but also constitutes a negative externality affecting society, involving both economic cost and social drag.

Prof. Heckman notes that the current approach is generally remedial — trying to fix the problem when it is already visible. He holds that this is a failed approach in this case, because it is too little, too late, and too expensive — often involving repeated incarceration. The efficient approach to address the problem in the womb, through a healthy pregnancy and gestation, and immediately afterward through early childhood upbringing and education. To be effective, the issue must be addressed in the formative years.

Public policy to promote skills has to reckon with three essential truths distilled from a large body of research conducted in the wake of the War on Poverty.

• First, the skills needed for success in life are many. Success requires more than just being smart. Soft skills are important. Conscientiousness, perseverance, sociability, and other character traits matter a lot, even though they are largely neglected in devising policies to reduce inequality.

• Second, skill formation is a dynamic, synergistic process. Skills beget skills. They foster and promote each other. A perseverant child open to experience learns more. Early success fosters later success. Advantages cumulate. Young children are flexible and adaptable in ways that adolescents and adults are not. It is much easier to prevent deficits from arising in the early years than to remediate them later.

• Third, families play an essential role in shaping the skills of their children. Skill formation starts in the womb. The early years of a child’s life before the child enters school lay the foundation for all that follows. Large gaps in abilities between the advantaged and the disadvantaged open up early – before children enter school.

MMT reveals that where resources are available, government is able to afford them. Prof. Heckman doesn't seem to realize this and proposes private and charitable solutions. However, this is not an area in which the private sector can easily turn a profit, and it is unreasonable to expect that charitable institutions have the required resources for an undertaking of this scope.

This is a fecund area for public investment in human resources that would not only reduce inequality and poverty, breaking a vicious cycle, but also yield a substantial return economically, both through enhanced contributions and in terms of reducing negative externalities. Of course, the government itself would only have to fund the programs and they could be administered through non-profits, using public service employees participating in the job guarantee, which would provide the needed training at the base wage. As skills improved and experience was gained, these employees could be hired up in the service organization or enter the private sector in comparable work.

The Humanity Standard, not the Gold Standard

One of the most appealing parts of the MMT framework is the idea of a Job Guarantee (JG) program, also called the Employer of Last Resort (ELR) program. If one examines MMT literature and discussions available on the web, the topics have tended to be about macroeconomic operational realities. This is mainly because the economic and political arenas are currently dominated by fear of government debt and deficits. Hence, specific MMT policy prescriptions are often given short shrift (a prominent exception being Warren Mosler’s proposals and Tom Hickey’s recent post).The JG idea deserves more attention as it has many positive features that should appeal to individuals across the political spectrum.

The Job Guarantee program should appeal to progressives because it would achieve a high degree of social justice: full employment. The socially corrosive effects of joblessness have been well documented (see here and here). Increases in drug abuse, alcoholism, depression, and crime are all linked to being unemployed. As a countervailing force to these social cancers, the JG would offer a full time job at a living wage to any individual who is willing and able to work.

A Job Guarantee program would be implemented as a non-discretionary spending program. It would be added to the tool kit of already existing automatic stabilizers. This means that it would be largely resistant to the political business cycle and the machinations of opportunistic politicians. Furthermore, the JG jobs could be provided through non-government, non-profit agencies. This should appeal to those who have an innate distrust of all things government.

The most powerful feature of the Job Guarantee program is that it would provide a large measure of price stability, much like the Gold Standard. By governmental decree, the JG wage can be fixed (at a living wage) much like the price of gold was fixed under the Gold Standard. A pool of low skilled employed labor at the JG wage is then created. If firms try to exert downward pressure (below the JG wage) on the wages paid to their low skilled workers, then the workers can join the JG labor pool. If low skill workers demand wages above the JG wage, then firms can obtain replacement workers from the JG pool. In this way, price stability is obtained.

The Job Guarantee program would deliver a perfect trifecta: social justice through full employment, great immunity from political manipulation, and price stability. Why do so many individuals desire to return to the archaic Gold Standard? Instead they should embrace the idea of a Job Guarantee program. Perhaps MMT advocates should use another name for the Job Guarantee: the Humanity Standard.

Read Bill Mitchell's article at The Nation and pass it on

Bill Mitchell has written an article for The Nation entitled Beyond Austerity. I found it to be an astounding accomplishment, even for Bill, who posts amazing MMT analysis daily at billy blog.

In a single article, Bill demolishes the position and arguments of the deficit hawks and deficit doves, and also buries the austerians, while setting forth the basics of MMT in terms that anyone can grasp. The article is a model for popular economic exposition that is concise, precise, and accessible. Bill even concludes with the job guarantee, working it in smoothly and convincingly.

Bill has created a model for talking about MMT to those not familiar with economics, as well as people that are not policy wonks. Just about everyone gets unemployment and what it does to an economy and to the country as a whole. Bill cuts through the fog of economic jargon and policy wonkery to present a persuasive case for mounting an MMT solution immediately, and he does it without even mentioning MMT explicitly.

This is not only a must-read, it is also a must-pass-on. Bill mentions other countries also, so the article is not applicable only to the US.

Congratulations, Bill, on a job well done. Encore.

Thanks also to The Nation for bringing this to its readership and putting MMT on the front page. Let's have more of this fare.

Biden Likens GOP Economic Strategy to Blaming Rape Victims

Vice President Biden is stepping up the rhetoric in the ongoing budget battle (good for him!).

Story at FoxNews here. Here is an interesting excerpt:

"But it's amazing how these Republicans, the right wing of this party – whose philosophy threw us into this godawful hole we're in, gave us the tremendous deficit we've inherited – that they're now using the very economic condition they have created to blame the victim..."

I find it hard to argue with the part of the VEEP's statement that I've highlighted, as it appears that many in the GOP are heavily and increasingly influenced by secular philosophies that, if not "handled carefully", can promote chaos, disorder and anti-social economic outcomes.

Among these philosophies I would include Ayn Rand's Objectivism and forms of Libertarianism.

Warren Mosler: Genius economist and genius supercar builder!

Many people may not know this, but our friend and fellow MMT genius economist, Warren Mosler is also a genius supercar builder. His Mosler MT900S recently won top honors as fastest car in the annual Road & Track "Lightning Lap" cumulative results. Mosler's car beat Lamborghini, Porsche, Ferrari, Corvette, Viper, to name a few. Click on the image below to see the results.



Way to go, Warren!

Here's a shot of the car.

The Bank of England Investigates Credit Cycles and Macro-Prudential Policy

David Aikman, Senior Manager, Prudential Policy Division, Financial Stability Directorate, Bank of England, Andrew G Haldane, Executive Director, Financial Stability, Bank of England, and Benjamin Nelson, Economist, Financial Stability Directorate, Bank of England posted on Curbing the credit cycle at Voxeu.

They note, "Credit lies at the heart of crises. Credit booms sow the seeds of subsequent credit crunches. This is a key lesson of past financial crashes, manias and panics (See e.g. Minsky 1986, Kindleberger 1978, and Reinhart and Rogoff 2009). It was a lesson painfully re-taught to policymakers during the most recent financial crisis."

This is an important step forward. When Her Majesty the Queen asked her economists why they did not see the global financial crisis coming, they had no good explanation. In the neoliberal model, which holds that money is neutral, that is, does not impact the real economy, there was no indication that the world was headed for deep recession due to a financial meltdown. The only explanation for such an event in that model is external shock, and the expectation of the model is that the economy will right itself (return to equilibrium) automatically after the shock through the "invisible hand" of the market. Of course, this turned out to be wide of the mark when credit collapsed, bringing the debt-driven boom to an end. A "balance sheet recession" ensued as people struggled to deleverage, thereby curtailing demand.

It is therefore heartening to see representatives of the Bank of England recognizing the work of Hyman Minsky, which, incidentally, underlies MMT. According to Minsky's financial instability hypothesis, there is a financial cycle different from the business cycle. Aikman, Haldane, and Nelson investigate this cycle.

Whereas business cycles culminate in malinvestment and overproduction, financial cycles culminate in Ponzi finance, driven by price momentum. Whereas business cycles result in supply gluts that markets eventually clear, credit cycles result in bad debt that must be restructured or defaulted on. Depending on the level and quality of debt overhang, this can be difficult to clear without resulting in debt-deflation, which can lead to depression if not addressed by appropriate policy. In the recent global financial crisis, the level was high and widespread, and the quality of debt was low, since much of the lending had been imprudent.

Business and financial cycles are inherently different and require different policy responses when they emerge. It is also possible to head off credit cycles to some degree with macro-prudential policy.

Micro-prudential policy, aimed at tackling financial imbalances in individual financial institutions, may also be ineffective for dealing with aggregate credit cycles. That is because bank-specific actions will not, by themselves, internalise the spillovers that arise across banks over the credit cycle. They may even worsen them if they allow individual banks to steal a reputational march over their competitors.

This coordination problem suggests systematic, across-the-system actions are needed to curtail effectively credit booms and busts. This is one dimension of macro-prudential policy. To be effective, these policies need to increase the long-term cost of credit extension to banks during booms and, as importantly, to lower these costs during busts. These actions would help smooth out credit supply over the cycle. There are a variety of macro-prudential tools which could have this effect, including pro-cyclical capital and liquidity requirements, or remuneration packages that tie individual earnings more closely to long term performance (Bank of England 2009, Kashyap et al. 2010, G30 2010).

Credit spillovers occur across borders as well as across banks. This suggests macro-prudential policies need also to have an international dimension if they are to tackle credit externalities. This is recognised in the macro-prudential policy framework currently being discussed by the international regulatory community (BIS 2010). For example, judgements on local credit conditions determine the amounts of capital to be held by international banks on their exposures in those countries. This reciprocity feature should help to reduce the arbitrage risks posed by the internationalisation of the credit cycle.

Their post is short and worth reading in full. It is a welcome relief from the who-could-have-seen-it-coming excuses that have been proliferating up until now from "the experts," even though a few people did see it coming, and why, and said so some time before it arrived. One of these was Wynne Godley, ironically formerly of Her Majesty's Treasury and later one of its "six wise men," although he was long retired from his position there by the time of the GFC. The sectoral balance approach Godley developed at Treasury is integral to MMT. The gathering financial storm was also foreseen by UMKC professor L. Randall Wray, one of the developers of MMT and a student of Hyman Minsky.

Good to see the Bank of England catching up with things. Hopefully, MMT will follow their interest in Minsky.

GOP Senators will introduce a balanced budget amendment

This is the Doomsday Amenmdment. We knew it was coming when the GOP and their Tea Party backed ideology swept into Congress. If it passes (and luckily, there's probably not a big chance, but you never know), we are doomed to years and years of below trend growth and massive increases in poverty across the land.

A balanced budget was achieved in 1937 when we were coming out of the Depression and it sent us right back into a depression. It took a World War to get us out! Isn't that prospect nice?

Now we are about to do the EXACT SAME THING. Read it and weep.

US Trade Deficits = Foreign Purchases of US Treasury Securities

One of the central points of MMT, and one that Mike has tried to make repeatedly (see his re-posted video from the RT below), is that it is not correct to interpret foreign purchases of US Treasury securities as a financing or "borrowing" by the US Treasury of US dollars from foreign entities. Rather, the records of these Treasury purchases are ex-post accounting records of the desire of foreign countries to export products to the US, and take the net proceeds of these exports and park these balances in guaranteed US Treasury securities.

In fact, these events apparently may comprise a functioning, long-term accounting identity. From the link:

"In finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true. The term is also used in economics to refer to equalities that are by definition or construction true, such as the balance of payments. Where an accounting identity applies, any deviation from the identity signifies an error in formulation, calculation or measurement."

So here we can summarize, for a mathematical accounting identity to be true, the terms must achieve equality; and to disprove an identity, you must show how the terms do not result in an equality, the terms cannot be equal.

Fortunately, the US government makes the data available for us to be able to test this identity.

For one side of the identity equation, we can take the total increase in foreign holdings of US Treasury securities over a significant period of time from the Z.1 "Flow of Funds Accounts of the United States" Report, released quarterly by the US Federal Reserve.

The snip below is from the latest Z.1 report, Table L.209 and shows the closing balances of US Treasury security ownership worldwide. Sub-line 11 identifies the amount of Treasury securities owned by the "Rest of the World" (ROW), or what some call "foreigners". This is the line the debt doomsday crowd uses to motivate their cries of: "Foreigners are lendin' us money ...we're a debtor nation!..."

I've identified two points in time that are separated by four years, Point 'A' which is the balance of ROW UST ownership ($2126B) on January 1, 2007 and point 'B' which is the balance of ROW UST ownership ($4314B) on December 31, 2010. Using the data from these two points in time, we can see how much foreign ownership of Treasury securities has increased over the four year period (by computing the difference between these numbers).

Now for the other side of our equation we can go to US Census Dept. data on foreign trade. Below are two snips from the latest US International Trade report, which identify the US trade deficits over our four year period of investigation, 2007, 2008, 2009, 2010.

So now we can test our identity: Over the four year period of Jan. 1, 2007 thru Dec. 31, 2010; does the total increase in ROW holdings of US Treasury securities equal the US Trade Deficit. According to MMT, it should.

ROW UST Ownership @ 'A': $2126B

ROW UST Ownership @ 'B': $4394B

Increase in ROW Ownership: $2268B

2007 US Trade Deficit: $ 702B

2008: $ 698B

2009: $ 374B

2010: $ 495B

Total: $2269B

So how do you like that. Off by only $1B, and this after over $9 Trillion of imports and just under $7 Trillion of exports over our four year period of investigation.

I'd say close enough!

What say you deficit terrorists?

Roubini recommends a "Marshall Plan" for the Middle East

My previous post, Dr. Doom's Latest Warning, put forward Nouriel Roubini's caution that previous stagflations resulted from oil price spikes. Roubini is now concerned that the situation in MENA (Middle East and North Africa) is threatening a repeat, which would result in a double dip for the global economy.

I also cited a post of Mahdi Darius Nazemroaya showing how Pan Arabism is on the rise and could present wider geopolitical problems for the West if not handled appropriately. The demographics of the region are youth-dominated, and the problem is that youth feels left out of the political process and is cut out of the economic picture.

The West must address this challenge creatively. The US especially cannot hang out the promise of democracy and progress without delivering on this promise. Roubini concludes that what is needed to do this is a new "Marshall Plan" for MENA.

... the time to act is now. The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best. In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises.

So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall. Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.

This is an area where MMT principles could play a formative role, especially the employment assurance program. The government acting as employer of last resort extends a job guarantee for anyone willing and able to work in order to provide employment for anyone without a job offer from the private sector.

The wage associated with the employment assurance program would be under the minimum wage offered in the private sector so that government would not be competing with the private sector. The employment assurance program provides a buffer of employed instead of a buffer of unemployed.

(If you are new to MMT and this raises your eyebrows, the employee assurance program has been exhaustively explored and documented by professionals studying employment. See, for example, CofFEE — Centre of Full Employment and Equity for explanation and references.)

The employee assurance program has several benefits.

1. An employment assurance program greatly reduces or eliminates unemployment. Unemployment is associated with many negative social and economic factors, and it is a key factor in the present unrest.

2. An employment assurance program transfers unused resources to the public sector for public purpose, which could be used for public improvements. This would also serve to train workers in various skills that could be drawn on by the private sector.

3. The income from the employee assurance program would increase demand, spur investment, and increase growth in the local, national, and regional economies.

4. The guaranteed wage serves as a price anchor in achieving full employment with price stability, a major objective of MMT.

The new "Marshall Plan" would not be needed to fund the employee assurance program in the MENA countries that are monetarily sovereign, hence, are able to fund themselves with currency issuance. However, the new "Marshall Plan" could provide foreign reserves needed for importing materials needed for projects, as well as enough goods, especially food, to meet increased demand. This would mean that the new "Marshall Plan" would also increase trade with the sponsoring nations, making it a win-win.

Undertaking such an international developmental program would demonstrate that the way forward is through cooperation and coordination in putting resources to work is a sustainable fashion. Failure to do this will result not only in huge forgone opportunity that can never be recaptured, but also it also risks a volatile area of the world spinning out of control with unpredictable consequences.

Debunking Lawrence Kotlikoff

It's just too good. Had to post it again!

Mainstream economics is about to bury Japan

The mainstream economic neo-liberal fascists are at it again, about to impose even more (needless) hardship on Japan when the country faces the most dire situation probably in its history.

They didn't even wait for the devastating tsunami waters to crest before making their ill-informed comments about how Japan was already so loaded up on debt that it was going to have a hard time "borrowing" the money necessary to rebuild.

Leave it to these deficit terrorists to do once again do what they have done so many times in the past, that is, impose unwarranted suffering on people because of their misinformed religious "fiscal fanaticism." It will end up causing more death and destruction than 100 Fuskishima quakes.

Japan is a sovereign nation with its own currency. It spends in that currency. It doesn't "borrow yen from somewhere." It can make any reparations and take any steps necessary to fix its economy given sufficient real resources and labor to do the job.

Whereas the rebuilding of the nation could have been an economic shot in the arm, it's about to potentially become a shot through the very heart of Japan's economy as the government has apparently bought into the admonitions of the debt terrorists lock stock and barrel.

In an article today I read that the government of Japan is considering a tax increase to PAY FOR the cost of rebuilding.

"The government is reportedly considering a temporary tax increase to pay for recovery efforts. It's a natural response -- -- when you have a great disaster, you need to fix the problem. The faster you do so, the better off everyone is -- so-called V-shaped economic recoveries are common after destructive events like earthquakes."

A TAX INCREASE!!!

As if the destruction to the economy were not enough of a tax on Japan's citizens, the government will impose taxes, to raise yen--the very currency that it issues by power of monopoly--because the debt terrorists say that is the only way they will give their blessing???

Are they kidding???

Well, another country has just lost its sovereignty to this neo-liberal fascist cancer. My heart goes out to the people of Japan.

We're next.

Dr. Doom's Latest Warning

Nouriel Roubini: Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions. The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975. The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981. And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession.

Oil prices also played a role in the recent finance-driven global recession. By the summer of 2008, just before the collapse of Lehman Brothers, oil prices had doubled over the previous 12 months, reaching a peak of $148 a barrel – and delivering the coup de grâce to an already frail and struggling global economy buffeted by financial shocks.

We don’t know yet whether political contagion in the Middle East will spread to other countries. The turmoil may yet be contained and recede, sending oil prices back to lower levels. But there is a serious chance that the uprisings will spread, destabilizing Bahrain, Algeria, Oman, Jordan, Yemen, and eventually even Saudi Arabia.

The Economic Consequences of the Arab Revolt

What are the chances of this scenario developing? Geopolitical analyst Mahdi Darius Nazemroaya lays it out in The Return of Pan-Arabism Amidst Upheaval: An end to Balkanization?

Nazemroaya: The Arab people ultimately constitute a major challenge to Washington and its cohorts.

Nazemroaya explains the challenge in terms of a dilemma. The West promotes democracy, but democracy does not always work toward the perceived interests of the West, as was recently seen in the election of Hamas, which the West then repudiated.

Nazemroaya also spells out how the challenge is becoming magnified as the Arab people unite in their demands. This is not the demand for a new caliphate and a return to medieval times, as some would have it. Rather, it is a demand to participate in the modern world.

The future of petroleum cannot be appreciated independently of the outcome of the Pan-Arab situation, since that is were the oil is. A fortiori, neither can the future of geopolitics. For example, the US and West are concerned with developing conditions in MENA (Middle East and North Africa), but not so much in the Ivory Coast, even thought the humanitarian concerns are comparable. Could that be because there is no oil in the Ivory Coast, and the Ivory Coast is peripheral to Western interests?

Nazemroaya: The interests of the U.S. government, Brussels, and Israel are to keep the Arabs divided in separate “feeble states.” There is, however, a new dynamic that is emerging in the Arab World. This new dynamic emerging from the upheavals and protests potentially challenges the Yinon Approach [divide and conquer], which is being applied against the Arab people. 



Pan-Arabism is a new dynamic, which constitutes a potent force. The trend of decades of divisions can eventually be reversed. Nor will the issue of Palestine be left in the hands of outside powers for much longer. The plurality of Arabdom was constructed on the basis of inclusiveness and multi-culturalism.

The Arab identity is a very open and inclusive one that has a wide embrace. According to the Arab League’s 1946 definition or description: “An Arab is a person whose language is Arabic, who lives in an Arabic speaking country, [and] who is in sympathy with the aspirations of the Arabic speaking peoples.” [5] This has brought different civilizations, ethnicities, creeds, traditions, and lands together and united them under one roof, from the pre-Arabized Levantine peoples to the pre-Arabized Egyptians, Nubians, and Berbers.

Pan-Arabism gives a political will to this inclusive Arab identity and paves the way for a political project amongst the Arab peoples. Thus, regardless of the initial successes or failures of these revolts, the Arab march towards unity as a political and popular project is an eventual assurance. Nor can its tides be contained for long as a new geo-political and sociological reality begins to take shape for the Arab Nation.

This is an evolving dynamic that is only in its beginning stages. So far, the West is rater nonplussed by it, as indicated by the inability to mount a coherent response. This suggests events that are raging out of control and unpredictable in outcome.

This situation is going to be around for some time. The Arab nations have predominantly young populations that are suffering from political repression and high unemployment. Now they are demanding a better life. The West needs to get on the right side of this and to be out in front of it instead of behind the curve. Political choices made now are going to have far-reaching economic consequences, and political expediency that does not confront the real issues is doomed to failure.

Bank of Japan does record injection and no cries of "money printing."

The Bank of Japan injected a record, $183 bln into the banking system overnight in reaction to the unprecedented crisis that is unfolding.

Yet despite this we didn't hear any cries of "printing money" or "taxpayer on the hook" as we do whenever the Fed even so much as talks about doing some monetary operations.

The Fed may spread its support (rate setting) out in dribs and drabs, over half a year or a even a year, but the dollar sellers will immediately come flying out of the woodwork and work themselves into a frenzy trashing the greenback. You'll hear cries of currency debasement and imminent hyperinflation both in the media and from mainstream economists.

So what did the yen do in response to this massive, one-day injection? It rallied sharply.

Two years ago, when the ECB did a $600 billion injection IN A SINGLE DAY, did the euro collapse? No, it rallied and once again, nobody talked about the ECB printing money.

These incidents clearly show where dollar sentiment lies: It's absolutely, 100%, incontrovertibly negative, whether that's justified or not.

The fact is, there is no serious reason for the dollar to be the target of nonstop selling...NONE! It's just being driven by a belief that the dollar should go down and that everything the Fed does is wrong. That's it...a BELIEF!

But when another central bank does the same thing investors act with bored indifference. This proves that the markets are truly irrational. But as Keynes said, "Markets can remain irrational longer than you can remain solvent."

Nobel Prize Offer — Any Takers?

Otmar Issing, for example, offers a Nobel for anyone who provides a proper theoretical treatment that combines credit and money, financial quantities and financial prices. That is what practicing central banker economists like himself have always been looking for, and not found yet, certainly not in the pre-crisis academic consensus.

Perry Mehrling, IMF Calls for New Economic Thinking

Housing Weeds To Choke Green Shoots?

Dr. Housing Bubble sends this warning:

The big story surrounding American housing has to do with distressed inventory that is not reported in any meaningful way. It is amazing that even after the National Association of Realtors had to revise home sales lower and was blasted by those who track the housing industry, little has been done to reform the system. Keep in mind this is the data that is quoted line by line on a monthly basis by the mainstream media as if it were gospel. It is hard for average folks to understand what is really going on with the housing market because much of it is hidden in the dark netherworld of bank balance sheets. Thankfully there are methods of shining a light on the true nature of the housing market but it takes time and using multiple sources. The shadow inventory is enormous and Bank of America is hinting at going forward with a “bad bank” model which is likely to make it even harder to track the true health of the U.S. housing market....

This suggests that the recent Minsky moment — a bursting debt bubble that culminates the long financial cycle ending in Ponzi finance — is hardly momentary and has some way to run. Remember, MMT not built just on a description of monetary operations. Minsky's financial instability hypothesis lies at its core, too.

The Financial Instability Hypothesis by Hyman Minsky (May, 1992)

Prof. L. Randall Wray, one of the developers of MMT and PhD student of Minsky, explains this in a five minute video, Crash Course on Hyman Minsky.

This is not an ordinary business cycle with the financial problems behind us now, as some are making it out to be. In the terminology of Nomura's Richard Koo, it is a "balance sheet recession." Prof. Bill Mitchell explains this from an MMT perspective in his post, Balance sheet recessions and democracy.

Housing says that we are not out of the woods on this yet, and there may still be some shoes to drop due to the toxic debt that is being swept under the rug or papered over. Dr. Housing Bubble is waving some red flags.

Michael Pettis on the Dollar, RMB, and Reserve Currencies

In yesterday's post, Currencies Stay Within Their Currency Zone, I made some remarks in the comments about reserve currencies and how different currencies are not in a position to replace the dollar anytime soon. Michael Pettis writes on this in detail with respect to Barry Eichengreen's saying that the dollars days as global reserve currency are numbered. I had been planning to comment on this in more detail than I did in the comments yesterday, but Pettis has saved me the trouble, especially regarding the RMB, which is supposedly a chief contender.

The dollar, the RMB and the euro?

Pettis develops the issues to which I alluded in passing in. Basically, the RMB is not ready for prime time because China has pressing internal issues that prevent it from coming a key global player in the near future. He also notes that the euro is beset with problems, which he does not see clearing within five years.

Pettis concludes by showing how being the issuer of the global reserve currency is actually a cost to the US, and it would be better for US growth if a substitute where deployed. But he doesn't see that happening in the foreseeable future.

MMT Alert!

This is a straightforward post and easily understood until the end, where Pettis talks about US "borrowing." This jargon should be understood in MMT terms of Treasury securities issued in offset of budget deficits, which is imposed as a political decision rather than being an operational constraint inherent in the present monetary system. Budget deficits arise from demand leakage, one source of leakage being the current account deficit.

The capital account surplus is equivalent to the currency account deficit as an accounting identity. What this says essentially is that what a country spends (current account) externally it what is owes the rest of the world in terms of foreign ownership of domestic assets minus domestic ownership of foreign assets (capital account). The capital account includes foreign ownership of such domestic assets as foreign direct investment (FDI) in real assets, portfolio investment (stocks and bonds), reserves, and "other," such as bank accounts. US Treasury securities held by foreigners are part of the capital account.

If China wishes to export to the US, then it has to receive ownership of US assets, financial or real in return, unless goods are traded in equal exchange. The fact of there being a current account deficit makes China an owner of US assets that the US "owes" to China. Presently, China wants to save in liquid financial assets. It could hold reserves in its Fed account for this purpose, but Treasury securities pay interest, so that is the preferred choice.

Thus, it is somewhat confusing to say that the US is "borrowing" from China when China is actually "funding" purchase of its exports to the US through the capital account. At any rate, the end result is that US consumers and business get real resources from China, and China receives claims on US resources that it can exercise in the future, or sell to someone else through the foreign exchange market in return for another currency.

It is in this technical sense that foreign saving "funds" the current account deficit, often equated with the trade deficit, although the current account also includes net factor income (interest and dividends) and net transfer income (aid). It is this willingness to save in dollars that makes space for the US to increase its imports of real resources in excess of a direct exchange of goods.

It is a tautology that in a closed global economy not all countries can be net exporters or net importers at the same time. There has to be a balance between these, in which net exporters offset net importers, at least until Earth begins trade with other planets.

At present, only the US has the capacity to absorb the level of saving desired by net exporters, which is a fundamental reason for the persistence of the USD as the global reserve currency. The president's plan to export the US out of its problems by doubling its exports in five years looks unrealistic in today's world.

"It's the demand, stupid."

The US is the key source of demand in the world economy. Pettis observes how difficult it is going to be for China to increase consumer demand other than in small increments. This is true of most of the emerging world, because of institutional constraints. It is also true of the two most economically powerful countries beside the US, that is, Germany and Japan, because they are net exporters and bent on remaining so.

While Pettis does not draw this conclusion, the result is that only the US is capable of carrying global demand on its shoulders at this time. But since global capacity exceeds the demand that the US and rest of the world can absorb, the world is faced with a demand shortage, which manifests as massive unemployment and underemployment, as well as sub-optimal economic performance resulting in massive foregone opportunity. The present approach is not working and cracks are widening in the foundation. The fact that the dollar is a source of controversy shows this. On one hand, China wants to export to the US, and on the other, fears dollar depreciation that would affect its savings in dollars.

The challenge is to increase effective demand in order to grow the global economy. Ideally, this would evolve from a democratic new world order based on interdependence in a way that is sustainable financially, economically, politically, socially, environmentally, and ecologically. For this to happen, a fresh approach to globalization based on a new vision of possibilities and a grand strategy for achieving this vision are required. This is the discussion that we need to be having now. Neoliberal austerity is leading to economic underperformance and social unrest.

Mosler vs. Friedman: Defining Moral Battle Lines

Warren Mosler made and interesting comment on his blog the other day. He was responding to an inquiry related to taxation and wrote (in comments of this thread):

"Unemployment is a monetary phenomenon."

I couldn't help but notice how similar sounding this statement was to one famously made by Milton Friedman, some years ago:

"Inflation is always and everywhere a monetary phenomenon."

These two simple statements, to me, reveal the essence of the two sides currently engaged in what is probably the most important domestic economic policy battle that our nation will fight since the Great Depression.

On one side, we have people who desire the best in regards to our country's twin domestic economic outcomes: employment and output. And on the other side we have people concerned with protecting the value of what they perceive to be something they call our 'money'.

This is a moral battle; this is a "values" issue; it is as important an issue on these terms as any others current in politics.

The desire to protect, or be concerned about the perceived value of "money", to the detriment of our domestic employment and output is immoral. The desire to protect, or be concerned about the perceived value of "money", to the detriment of our domestic employment and output cannot be reconciled with Judeo-Christian faiths, beliefs or values.

There are many on the Political Right who need a major "wake up call" on this.

Death by a thousand cuts!

House Republicans are proposing another stopgap spending bill that would include an additional $6 billion in cuts. This would keep the government operating for three more weeks. If the measure passes that would mean $10 billion in spending reductions have so far gone into effect.

The GOP's goal--and it's pretty obvious at this point--is to achieve the total $61 billion spending reduction target one way or another, even if it means passing these ridiculous stopgap measures every few weeks.

Obama is totally absent from the budget debate as usual (today he's busy holding a White House Conference on bullying) leaving the Dems to flounder and once again pretty much capitulate on this.

The pathetic scene of the U.S. government on the verge of shutting down every two or three weeks is bound to have an effect on confidence. No wonder that since the budget debate began in February, stocks have fallen about 4-percent and are probably getting ready to head lower.

Currencies Stay Within Their Currency Zone

Currencies stay within their currency zone. Transactions denominated in dollars, euros, rubles, etc. transpire within that currency zone, where prices are denominated in that currency.

If someone holding dollars, for example, wants to participate in another zone, they exchange the dollars for that currency. The buyer of the dollars holds them and has the option of saving them or using them for purchases in the dollar zone, or eventually exchanging them for another currency. Foreigners don't "bring dollars home."

Foreign Exchange

To use funds across currency zones it it necessary to exchange one currency for another, e.g., exchanging euros to obtain dollars in order to operate in the dollar zone, or vice versa. The world is running on a nonconvertible floating rate monetary regime. Currencies in demand are higher in value relative to currencies less in demand. This determines rates. Relative demand for currencies fluctuates based on a variety of factors. FX trading is about getting handle on this. Don't try this at home unless you are an expert. There are a lot of knives in the air.

The foreign exchange market is a huge market that is highly liquid, and all transactions clear easily with minimal volatility, unless there is a currency crisis, which is a relatively rare occurrence. Currency stability and exchange liquidity are required for international trade, so it is in the interest of nations to keep their currencies stable. This leads to the need for countries to maintain adequate foreign reserves to defend their currencies against excessive volatility, which would disrupt trade and ultimately the country's finances. Countries also use foreign reserves to neutralize inflation that might result from a strong net export position.

For example, one reason that China saves the dollars it receives from export sales is that it doesn’t want them exchanged for yuan for use in the Chinese economy, which they fear would drive up inflation at home. See Michael Pettis, What the PBoC Cannot Do With Its Reserves. While some of the dollars China gained from trade in the dollar zone are used to purchase goods and assets in the dollar zone while others are exchanged for use in other currency zones, most are saved at interest in US Treasury securities for future use, saving being defined as postponed consumption.

Whatever China decides to do with its dollars eventually, they will stay in the dollars zone and be saved or spent in the dollar zone by either China or someone else. There is a lot of fretting over what China may do with its dollars and very little talk of what the options actually are. Whatever China does eventually, the dollars will stay in the dollar zone one way or another.

Reserve Currencies

Reserves currencies are currencies used for holding foreign reserves and to denominate international prices in global trade, e.g., oil is priced in US dollars. The dollar being the world’s reserve currency creates an incentive for holding it, but this advantage is relatively slight owing to floating rates and liquid exchange markets. There are also disadvantages to being the issuer of the reserve currency. The reserve currency is in demand and the issuer has to insure that enough is available. This may mean taking other matters into account in addition to national interests as a global leader.

Foreign Reserves

Other countries save dollars as the reserve currency to build foreign reserves to manage and protect their own currencies in exchange markets. When China decides to abandon its peg, as it must do if it wants the renminbi to become a global currency, it will need foreign reserves to manage and defend it. Other Asian countries save strong and stable currencies as foreign reserves, after having gotten burned in the Asian financial crisis of '97-'98. Most Asians countries are US dollar savers presently for this reason.

Uses of Foreign Currency

When a country receives foreign currency from a trade surplus, it can use it to 1) buy goods in the currency zone of the currencies of the surplus, or 2) purchase assets denominated in those currencies, or 3) save it for later use, or else 4) exchange one currency for another currency, either for use or in defense of one's own currency. Of course, after exchanging one currency for another one just switches the same options 1-3 with someone else. Someone exchanging euros for dollars as these options in dollars, and the counterparty has them in euros. All that changes is the players. Of course, the relative demand for exchange affects floating rates.

What the US Owes China

Let's take China as an example, since China's holding of US Treasuries is a current topic of interest. Chinese companies sold goods to the US. Instead of promptly purchasing goods in exchange, China presently is saving in dollars, which is tantamount to "deferring consumption," that is, preferring to postpone making any decision to purchase goods or assets denominated in dollars, or, alternatively, to exchange dollars for another currency.

What the US "owes" China is represented by the claims on ownership of US goods or assets in exchange of goods already provided. In other words, instead of a direct exchange, China has postponed use of dollars gains from export sales, preferring instead to save them at interest in U. S. government securities rather than hold them in its deposit account at the Fed. China provided real resources to the US for dollars, and the dollars represent financial claims on US real resources. China can exercise those claims when it wishes. That's just how trade works.

What Happens Behind the Veil

When China desires to use the dollars instead of saving them, the Fed will simply mark up China's reserve account and mark down its securities account. It's just a switch in asset composition in accordance with China's current portfolio preference. What began as an increase in China's deposit account (reserve account at the Fed) due to sales of exports was subsequently switched into a time account (Treasury securities) and then switched back into China's deposit account for use as desired.

This is simply a matter of changing asset composition from zero maturity to non-zero maturity (higher interest) back to zero maturity. Really nothing to see here, let alone get worked up about. China is not controlling US policy or holding the US hostage because it is saving its trade surplus with the US in US Treasuries. Or if it is, then the people in charge of US policy are dolts and don't understand what is actually happening.

MMT's description of monetary operations makes clear that China is not funding the US by purchasing US Treasury securities. As the issuer of its own currency, the US funds itself without needing to tax or borrow to do so. Rather, China is saving its trade surplus with the US, through which it earned US dollars, in order to postpone future consumption.

When China no longer desires to save in dollars, it may choose to spend in dollars in the dollar zone, or exchange dollars for some other currency to spend in another currency zone, or exchange dollars for yuan and repatriate the yuan. For example, China might use some of its dollars to purchase oil for its own use. In that case, someone else has the dollars, and they stay in the dollar zone. Saudi Arabia might receive the dollars and decide to spend them to add to its military capability by purchasing fighters from a US manufacturer, or to save them as Treasuries for future use.

Balance of Payments

Changes in the balance of payments result in changes of foreign claims on real resources owned by the country of issue. The US is the largest recipient of foreign direct investment. Not all of it is welcome. For example, when Dubai desired to exchange some of the dollars accumulated from US oil purchases for US real assets, namely ports, there was strong opposition. China has also been shut out of deals deemed unfavorable to US national interest. Similarly, when Japan bought Rockefeller Center in the '80's from proceeds from exports to the US, many Americans complained that foreigners were taking over. People are happy to enjoy the benefits of imports, but they they are shocked when foreigners exchange them for assets, or now, save them as Treasury securities.

Countries can control the distribution of foreign ownership of real resources by restricting purchases of certain assets or asset classes. The US has prevented China from acquiring assets that the US deems vital to national interest. However, restrictions placed on use of a country's currency by foreigners may lessen foreign demand for the currency and may affect trade relationships. Free markets, free trade and free capital flow exist within limits.

This is my first post here. Thanks to Mike for the opportunity to share. This post is cobbled together from pieces of comments posted elsewhere, so if some of it sounds familiar that's why.

— Tom Hickey

Mikenormaneconomics adding another Contributor!

I am pleased to announce that Tom Hickey will be joining Mikenormaneconomics as a Contributor. Tom is already a long-time reader and posts numerous, insightful comments in our comments section. He will be a great addition to this blog.

I want to also introduce Kevin Fathi, who recently came on board as a Contributor. Kevin has been putting up some great stuff focusing on social and political developments and trends. It's wonderful to have him here.

And of course there is Matt Franko, who has been a Contributor for about two years. Matt routinely provides excellent fiscal analyses that you can't find anywhere else. In addition, he has engaged in some very intelligent and thought provoking discussions with readers.

This blog has been growing in readership. My goal is to make it the preeminent MMT blog in the blogosphere and an important source of relevant economic and policy information and insight.

I want to extend my thanks and gratitude to all of our readers and contributors. Let's keep up the good work and forge ahead!

-Mike Norman

Bill Gross can say what he wants because he's Bill Gross

I was listening to Bill Gross today on Yahoo Tech Ticker and as usual he was making some really ignorant comments.

For those who don’t know who Bill Gross is, he is Founder and co-CEO of Pimco, the world’s largest bond fund, which currently manages about $250 bln in fixed income investments.

Gross must be a great trader or great marketer or something because his economic knowledge leaves a lot to be desired. Yet because of his “money status,” the media fawns all over this guy just like they do with lots of other big money players who don’t have a clue about the real world.

Making money as a trader and having a real understanding of the fundamental forces that drive markets and economic systems are two different things completely. In my years as a floor trader I knew plenty of guys that made tons of money, but who didn’t know the difference between GDP or CPR and they didn’t care, either.

That’s fine. The problem comes in when guys like Gross start lecturing on economic matters that they really don’t have a clue about. I mean, at times it’s literally painful to listen this guy, but I do because I guess deep down I have serious masochistic tendencies.

In today’s Tech Ticker interview Gross starts off by agreeing with host Aaron Task’s concerns about America’s financial “stability.” Gross says that if the U.S. were a company nobody would lend money to it.

So right out of the box we get this totally deceitful and misleading comment. The claim is beyond ridiculous. Any seventh grader could Google some big American company—say, any one of the 30 companies that comprise the Dow Jones—and see that not a single one can even approach the favorable debt to income ratio of the United States of America. And they all are able to borrow money with ease.

Below are several examples of companies in the Dow (which are probably among the biggest, most well capitalized companies on earth) and you see that their debt to income ratios are far greater than the debt-to-income of the U.S.

IBM debt to income 2:1
Caterpillar 14:1
Boeing 4:1
Dupont 3:1
United Technologies 3:1
JPM 50:1
BAC negative income, negative return on equity, negative return on assets!

Now look at the United States, which has $14.5 trillion of income per year and $14.3 trillion of debt. We’ll call it a one-to-one ratio. In reality, however, it’s far better because when you exclude what the government owes itself (and in all seriousness, this should be excluded), then the U.S. debt to income ratio is like 0.6:1. That’s zero-point-six to one! Yet there’s Bill Gross saying that if we were a company no one would lend to us. That’s absolutely crazy.

It doesn’t stop there. Next, Gross starts rehashing that tired analogy about how we're going to become the next Greece or Ireland if we're not careful. Again, no distinction is made between those Eurozone members—who are no longer currency issuers—and the United States, which spends in the currency that it has the monopoly power to issue. None!

Still, Gross was not done, his best line was yet to come. Gross explains to us why the United States has been so “lucky” for so long. Borrowing from the Tennessee Williams’ play, A Streetcar Named Desire, Gross says it has been due the “kindness of strangers.”

Honestly, I find Gross thoroughly nauseating with his goofy analogies, but I digress.

Gross “explains” that the U.S. is the beneficiary because exporting nations like China, Japan and others have accumulated dollars to lend back to us. I mean, think about that statement for a second and how absurd it is! The United States of America, a sovereign currency issuer with monopoly issuing power over its own money, must “get back” the money that it issues so that it can spend more?? That would be like Ford having to “get back” all the Mustangs it sold in order to have enough cars to meet additional demand.

At this point step back for a second and realize that this guy is considered to be one of America’s financial and economic geniuses. (God help us, seriously.) This comment is so stupid that it is beyond stupid. Yet sadly, this is what most of the mainstream financial and economic elite believe.

Gross follows with a long-winded diatribe on debt and how there is no way out except bad ways and finally, mercifully, the interview comes to an end.

I think what I found most upsetting about all this is that the information to refute Gross’s comments are public and readily available and accessible. As I said before, you could get a seventh grader to go look it up and he'd have the truth at his fingertips. Yet the “host” of this show lets Gross get away with it. Aaron Task just gives him a free pass because he’s Bill Gross. Now you see what’s wrong with financial journalism: Not even the slightest effort to challenge or rebut the obvious lies and distortion. Nothing!

It’s pretty obvious to me that Gross has absolute contempt for anyone who is not in his “elite” world. It’s as if he is saying, “Listen, dummy, I’m about to tell you something and because I am Bill Gross you’d better listen to me and listen good. That’s all you need to know. I’m Bill Gross.”

Then, like obedient slaves, that's what we do; at least that’s what most people do. We give Bill Gross a pass and allow him to tell us all of these unsubstantiated lies and misinformation simply because he’s a money manager who manages a lot of money. He is relieved of the burden and inconvenience of having to tell the truth—something that would be demanded of me or you or any “common person.” Bill Gross can get away with it because he’s Bill Gross and you’re not.

I will be on Fox Business today, two times. 4pm and 6:25pm.

I will be on "Bulls & Bears" today on Fox Business at 4pm ET, followed by "Cavuto" on Fox Business at 6:25pm ET.

Please tune in if you can.

Animation: Crisis of Capitalism

Kevin came across an interesting site that uses a unique animated format to help explain complex issues. This is a segment that reviews the GFC and what the author perceives to be major issues within "Capitalism". Very unique, somewhat like the UPS commercials with the whiteboard.

The Humanity Standard, not the Gold Standard

One of the most appealing parts of the MMT framework is the idea of a Job Guarantee (JG) program, also called the Employer of Last Resort (ELR) program. If one examines MMT literature and discussions available on the web, the topics have tended to be about macroeconomic operational realities. This is mainly because the economic and political arenas are currently dominated by fear of government debt and deficits. Hence, specific MMT policy prescriptions are often given short shrift (a prominent exception being Warren Mosler’s proposals and Tom Hickey’s recent post).The JG idea deserves more attention as it has many positive features that should appeal to individuals across the political spectrum.

The Job Guarantee program should appeal to progressives because it would achieve a high degree of social justice: full employment. The socially corrosive effects of joblessness have been well documented (see here and here). Increases in drug abuse, alcoholism, depression, and crime are all linked to being unemployed. As a countervailing force to these social cancers, the JG would offer a full time job at a living wage to any individual who is willing and able to work.

A Job Guarantee program would be implemented as a non-discretionary spending program. It would be added to the tool kit of already existing automatic stabilizers. This means that it would be largely resistant to the political business cycle and the machinations of opportunistic politicians. Furthermore, the JG jobs could be provided through non-government, non-profit agencies. This should appeal to those who have an innate distrust of all things government.

The most powerful feature of the Job Guarantee program is that it would provide a large measure of price stability, much like the Gold Standard. By governmental decree, the JG wage can be fixed (at a living wage) much like the price of gold was fixed under the Gold Standard. A pool of low skilled employed labor at the JG wage is then created. If firms try to exert downward pressure (below the JG wage) on the wages paid to their low skilled workers, then the workers can join the JG labor pool. If low skill workers demand wages above the JG wage, then firms can obtain replacement workers from the JG pool. In this way, price stability is obtained.

The Job Guarantee program would deliver a perfect trifecta: social justice through full employment, great immunity from political manipulation, and price stability. Why do so many individuals desire to return to the archaic Gold Standard? Instead they should embrace the idea of a Job Guarantee program. Perhaps MMT advocates should use another name for the Job Guarantee: the Humanity Standard.