Here is a CBS video segment from their Sunday morning show that focuses on what portends to be the major fiscal issue this year: The politics of increasing the US "debt" ceiling.
On the GOP side, Rep. Bachmann looks like she will be in a leadership position on this issue, here in this video, her bottom line to the Congress is: "Stop spending money you don't have", think about the absurdity of that statement!. She is also running an online petition on her PAC website for citizens to sign urging Congress NOT to raise the "debt" ceiling.
On the Democrat side, Rep. Weiner, who takes what at best can be called a "deficit dove" position that only advocates raising the "debt" limit in order to protect the "faith and credit" rating of the US Treasury, looks like he will be representing this position from that side.
The leadership in the Congress on both sides looks like they are not aware of the true fiscal and monetary authorities vested in the government; a government that they play a major role in.
At this point, it looks like the best we can hope for is some sort of compromise where the GOP agrees to an increase in the "debt" ceiling, in exchange for some sort of future nebulous commitment to cut future expenditures that (hopefully!) may never materialize. This (at best) could result in a continuation of current fiscal policy that on average is providing approximately $110B per month of NFAs to the non-government sector with sub-par output growth and zero employment growth. Some sort of "balanced budget" initiative, with tax increases and spending cuts, which would be the disaster scenario, seems like an outlier at this point, but you never know how politics may twist events.
This issue will play out over the next 3-4 months as that is when Treasury will run out of this self-imposed government limit on it's authority to net issue new securities.
With a position of "deficit dove" the Democratic party can't adequately represent the progressive position. I doubt if Democrats can change themselves. There is a vacuum which can be filled by brand new political party which, based on MMT, could solve the problems of middle- and low-income Americans.
ReplyDeleteThere is going to be a lot of posturing on both side, but especially by the GOP to placate the far right. Then both parties will work out a deal dictated to them by Wall Street. What else is new.
ReplyDeleteHowever, due to political pressure the posturing will be intense and may have unintended consequences. There's room for a wild card.
Not to worry if you are of Matt's mindset. The debt ceiling will be raised because not only do the politicians fear the hard choices a hard cap would entail, almost none of them understand that government spending is the cancer.
ReplyDeleteExactly what kind of ceiling is it when once it is reached it is just raised again as a matter of course? Maybe the debt ceiling should be renamed the national turnstile?
Tom,
Far right? I take it that someone is an extremist if he thinks we can't keep borrowing forever to pay back old debt with newly borrowed money. Count me as an extremist if that is the case. The "far left" will begin to worry about deficits again once the current socialist is out of office. Then the Republicans can ignore the debt. By that point we will be in the middle of a currency crisis/bond market implosion anyway.
The issue of ever legitimately repaying the debt is a moot point anyway. We can either restructure it by paying back 40-50 cents on the dollar or simply inflate our way out. I'm betting that the fools attempt to inflate their way out.
rvm,
Gold help us if that ever happens.
Welfare, if you are concerned about debt, look at the sources — tax cuts while fighting two expensive wars. People who want to fight wars and not increase the debt have to accept the sacrifice of increasing taxes and the economic consequences of that.
ReplyDeleteBest,
tom
Can someone explain why the government is borrowing in order to spend? I was thinking the Republicans *should* block the debt ceiling and then the voters would be amazed that the world had not stopped spinning and their social security checks were still deposited and bond holders interest payment get made and war purchase keep happening. And this whole charade of draining reserves by selling debt would be viewed as a monetary system operation and not a treasury operation.
ReplyDeleteTom,
ReplyDeleteAgreed!...but with a caveat.
You may have noticed that my screen name on this site is welfare warfare state. Did you think I was complimenting the warfare state? It isn't just the wars though. It is a foreign policy that requies that we have at last count 700 military bases in something like 160 countries. The end of our military empire will be forced on us suddenly by economic events if we don't do it in an orderly way starting now.
My beef with the left is that they blame the debt on things that they dont' like but give a free pass to the welfare state and subsidies to their own favored pet causes. The neoconservative right does the same thing in reverse. It is the welfare state and the warfare state.
What really scares the hell out of me is the absurd fallacy prevalent on the left and right that war spending can get a country out of a depression as though it is an economic elixir. People living 200 years from now are going to laugh themselves silly at the folly of their ancestors. War brings the kind of prosperity that a natural disaster brings.
BTW, I am keenly aware of what the GDP numbers in the early fourties pretend to convey about the alleged health of the economy. Robert Higgs has written extensively on this and has even had some of this material, by some miracle, included in textbooks.
The big problem is that the US has intentionally been made dependent in the warfare state (military-industrial-governmental complex) economically and politically, just as it has been made dependent on the welfare state to keep the populace from revolting against a warfare state. They go hand in hand.
ReplyDeleteWithout these huge injections, US GDP would decelerate fast. What would the welfare-warfare state and how would it be financed?
@ TomatoBasil
ReplyDeleteRandy Wray: Don't Raise the Debt Ceiling: End QE2 And Stop Issuing Bonds Instead
Tom,
ReplyDeleteGood points in the first paragraph. It is the second paragraph that I disagree.
The government can't increase purchasing power. It can only transfer purchasing power from the individual to the state. Government can borrow to spend, but this must be payed back with interest. Government doesn't direct these resources efficiently because it lacks a feedback mechanism like a profit/loss test. All government spending is current consumption spending. Some of this money would have been invested in capital euqipment if left in private hands. A dollar spent in the economy isn't just a dollar spent in the economy as Robert Reich likes to endlessly parrot. Where the money is spent matters very much. Those who claim that a dollar spent by government is the equivalent of a dollar spent on capital equipment to increase productive capacity are ignoring the capital structure.
Our GDP numbers are a poor measure of our economy. The economy was growing very sick from 2002 to 2007, but the GDP numbers looked fine. It doesn't accurately measure growth. People are seeing their standard of living fall while the GDP numbers indicate growth. The American people aren't buying the government's dubious numbers any more.
It's true that the American people would experience a great deal of pain if the debt ceiling isn't raised this summer, but it just delays the day of reckoning. The pain that will come later will be far worse and sudden than the pain of not raising the debt ceiling now. The interest rate on our debt will spike suddenly some time in the next two years. The game is up at that point. The politicians need to level with the American people for a change. They foolishly think they can ride it for one more election cycle--they are wrong this time.
Government increases nongovernment net financial assets through deficit expenditure. There is no redistribution involved, since this comes from currency issuance.
ReplyDeleteIf government did not spend on the military and wars, on the order of nearly a trillion dollars a year now, and also on programs to promote the general welfare, running to the hundreds of billions, then that money would not enter the economy. It would have to be made up through the only other way that money is created in the US, that is, credit extension by banks and financial institutions like GMAC. Is the country ready and willing to take on that private debt load, or does GDP contract?
Tom,
ReplyDeleteGDP would contract... a lot. they have no plan for this should they shut down the GWOT.
WWS,
For the record put me down for tax cuts (as opposed to spending increases) for the bottom of the income brachets up, to increase the deficit.... see how this goes for six months. If no resultand change in unemployment, then implement a massive infrastructure program(s) to get unemployment down to zero...
btw we're not on a gold standard. I know you prefer those arrangements, but that is not the current reality now going on 40 years. I feel I have to keep reminding you of this.
Also, be advised there are other needed/enjoyed aspects to a society than investing in capital equipment. As a matter of fact, with how productive the west has become in producing these capital equipment type of things, it is causing a problem with maintaining employment in general. We may need a massive paradigm shift in how we view "work" if we want to maintain household incomes.
Tom,
ReplyDeleteIf the government never has to pay that money back for current expenditures then we would have found the economic equivalent of the perpetuel motion machine. Government economists have been singing the same tune as you for decades. Observe the results.
Also, it is redistributive because government spending is always directed for political ends. As a result this spending tends to benefit certain groups (read: organized interest factions) disproportionately. When the debt and interest payments come due though we all have to pay it back.
Matt,
The last thing we need to do is cut taxes (for anybody) if spending cuts don't come along with them.
We're not on a gold standard? (Start sarcasm) Thank you for informing me. I did not know that. (End sarcasm). It isn't a gold standard that I am ofter anyway as I have repeatedly pointed out. I simply want competing currencies.
"If the government never has to pay that money back for current expenditures then we would have found the economic equivalent of the perpetuel motion machine. Government economists have been singing the same tune as you for decades. Observe the results."
ReplyDeleteNot so. The folks in charge apparently think we are still running a convertible fixed rate regime, since they are conducting policy as though the US has to fund itself with taxes or else borrow, which is operationally not the case under the present monetary regime. No government has yet implemented the MMT paradigm, and all of them seem to be clueless about monetary operations.
Tom,
ReplyDeleteI take it that you mean that the Federal Reserve can just fund the government by issuing new money that the federal government will use to pay its bills? It looks like we are doing that to a degree right now. The Fed is buying U.S. Treasuries after all.
This sort of thing has been resorted to many times in U.S. history. The U.S. government relied on the printing press to finance much of the cost of the Revolutionary War. The Union relied on the printing press during the Civil War to pay for much of the cost of invading the South. Appoximately twenty percent of the cost of WWI and WWII was payed for through monetization. The Zimbabwean government pays for most of its bills by resorting to the printing press. There are countless other examples of this.
It is true that the government can transfer purchasing power to itself by monetizing debt and expenditures. I consider this taxation without representation. A government with that kind of power controls the individual and has a claim on all resources. The individual under such system is no longer a citizen but, rather, a subject.
Forgive me if I misunderstood, but isn't this what you mean?
WWS, you really need to read up on MMT if you want to be taken seriously here, where the people actually understand monetary and fiscal operations. You are spinning stuff out of your mind based on your ideology.
ReplyDeleteThe Fed buying up tsy's via QE/POMO is essentially irrelevant. It affects the composition of assets and term structure of liabilities, without affecting net financial assets (other than withdrawing the interest payment on tsy's bought from nongovernment, which is deflationary).
Deficit expenditure increases nongovernment NFA and taxation withdraws NFA. The cb (Fed in the US) supplies reserves to the Treasury's account in the interbank system for settlement. Tsy issuance just switches excess reverse to tsy's.This is like converting a demand account to a time account. It just adds some interest for a reduction in liquidity. Operationally, government doesn't have to issue tsy's at all. It's basically a holdover from the gold standard that is now an inefficient subsidy.
According to MMT, government is best advised to follow Lerner's principles of functional finance in managing the relationship of nongovernment NFA nominal aggregate demand to achieve optimal capacity use, full employment, and price stability. Taxation should be of economic rent in order to incentivize income/demand, and productive investment/supply. The macro is based on stock-flow consistent (SFC) modeling of national account using the sectoral balance approach.
There is a large body of literature on this.
WWS,
ReplyDeletePerhaps consider this:
It's like the Govt doesnt allow 'Shareholders Equity' or 'Capital' on the right side of it's 'Balance Sheet' if you could look at it from a pure accounting perspective. So they have to classify everything as a 'Liability' that is on the right side so they can have 'Assets' on the left side. Hence the Treasury bonds are the Liabilities and/or the RBs are Liabilities of the govt, big deal.
This is all accounting concepts... it doesnt matter. It's like you are saying: "the government cannot have Debits!" or "the govt cant have Credits!" or something. These are non-real accounting constructs so we can keep track of things quantitatively, that's what we do in the west since the Greco-Roman empires thousands of years ago now... we like to keep track of things and measure things quantitatively, that is all that is going on here.
I dare you, ask Michelle Bachmann and Anthony Weiner what 'dual entry accounting' is, that would be a howl! They both probably think a debit is something 'Real'. Based on their statements, they have to think this way. Bachmanns statement is equivalent to: "Stop making Credit Entries you dont have!" It is literally absurd.
If you have available labor and resources you can provide a good or service. In that sense it is always affordable and the only cost is opportunity cost. Saying we don't have the money is silly.
ReplyDeleteConversely, if you lack the labor or resources to provide a good or service, then all the money ever imagined would not allow that good or service to be provided.
Tom,
ReplyDeleteWith all due respect, I do understand MMT theory--I just think it is nonsense.
According to MMT theory the latest round of QE should have affected the term structure of liabilities. It did. The yields are rising though which is the opposite of what MMT predicted.
The Fed buying Treasuries does affect financial assets. They are trying to push asset prices back up(or at least keep them from falling) with their policy measures. Prices for financial assets, commodities, producer goods, and consumer products are all rising because of these policies. Consumers, producers, and investors get lost in a fog of inflation and make decisions that they would not have made in an environment of sound money and natural interest rates. Credit or saved capital can't be replaced by banking procedures. Titles to capital (stocks, mortgages) that are sensitive to interest rates are especially affected. Observe the bubbles in dotom stocks and the housing market over the last 15 years.
You are correct when you say that the government doesn't have to issue Treasuries. That they can rely on a central bank is the problem though. The Fed supplies reserves to the Treasury that it creates out of nothing. MMT'ers just view all of this as an accounting entry with credits on one side and debits on the other. It's all just so balanced! I consider that hopelessly simplistic despite the use of esoteric jargon to explain it all. There is no substantive difference between a government simply printing the money it needs to meet expenses and a central bank that does the same thing through byzantine banking procedures by means of accounting entries. It is just so much sophistry.
Matt,
It is money that we don't have. If you as an individual had a high debt load and weren't able to meet your bills without acquiring more debt, you could always try to go to a lender to get still more credit. You may even find a loan officer that is willing to loan you money to pay off the interest on your current debt. That you may still have access to credit despite your spend thrift ways doesn't mean that your current income is enough to meet your monthly expenditures. You are borrowing money that you don't have to meet current expenditures. An individual can only do this so long just as a nation of individuals can only continue its profligacy for so long. Saying that we have access to "credit entries" just really misses the point.
"It is money that we don't have."
ReplyDeleteThat's like saying Microsoft has run out of software copies of Windows. opec doesnt have oil. Cows have run out of milk. The NFL has doesnt have any quarters left for the playoffs. Iowa has no corn.
Question for Bachmann: Where are WE supposed to get the "money" to give to the government?
Matt,
ReplyDeleteAll of those examples you mentioned are correct. They all have real resources. You think because the government can create money out of thin air that it has an inexhaustible supply of money. Well, yes, but it is stealing purchasing power from the person who holds dollars.
Unlike those examples that you mentioned the government doesn't actually produce any real products though. Why do we punish counterfeiters? The federal government pursues counterfeiters with a zeal that it never seems to muster for any other crime. The reason is that they are claiming goods and services out of the economy without putting anything in. Those dollars represent products and services in the economy. The counterfeiter is equivalent to someone in a berter economy who takes your apples but doesn't give you oranges in return. How exactly is the government any different from the counterfeiter? It simply transfers spending power to itself and favored constituencies at the expense of dollar holders--especially those who save.
I have a modest proposal in the tradition of Swift: Let's simply do away with all manufacturing and farming jobs. Why do we need to produce anything? We'll still need service sector people and the like to man the cash registers and stock the shelves, but people who actually produce things aren't unnecessary. We can add credit entries to people's accounts in order for them to purchasae all the goods that they need. Foreign workers can busy themselves with producing those products that we exchange Federal Reserve notes for. The foerigners can then deposit those notes in their central bank, and the central bank can just buy more U.S. treasuries. It wouldn't do for them to cut us off because we are the engine of consumption after all.
Why we could even have each individual citizen assigned their own direct line to the Fed. Let's cut out the middle man. Everything will be all nice and neat because the credits assigned will offset by debit entries. Double entry accounting at its finest!
"Unlike those examples that you mentioned the government doesn't actually produce any real products though."
ReplyDeleteThe internet....Global Positioning System...Space Launch Facilites (FL & CA).... Army Corps of Engineers flood control systems....NOAA/NWS satellites.... US Air Traffic Control system.... DOJ/FBI.... Interstate Highway system.... US Coast Guard ... AMTRAK ... much of the rural US power grid ... FEMA ... MEDICARE/MEDICAID/VA (all doctors would be bankrupt without) ... USDA ag price supports .... NIH research ... nuclear power fuel ... Oh I'm tired!
Matt,
ReplyDeleteThe government has to take tax dollars to provide any of those services. Some of them could be much more efficiently handled by the private sector. Private contractors actually build many of those things you mentioned. The government simply directs the citizens resources to pay for them. Perhaps a better way to put it is that the government creates no wealth. It can only transfer it.
Also, it is the low reimbursement to doctors that lead many of them to refuse medicare payments. You've got it exactly backward. Things like the Coast Guard, Dept. of Justice, police forces, etc. while necessary are an expense.
BTW, what did you think about my idea of getting rid of the manufacturing and farming sectors with the magic of the printing press and double entry accounting?
"The government has to take tax dollars to provide any of those services."
ReplyDeleteNo they DONT, that's the whole point. They can just credit the bank accounts of the contractors.
Law enforcement is necessary for civilization.
The low Medicare reimbursements are due to policymakers thinking that 'we cant afford it". think of the absurdity here, you have doctors who can provide care refusing to engage becuse they cannot cover their variable costs of providing the care with the measly govt payments so what do they do? go play golf and let patients suffer/die? Good policy!
Your ag/manufacturing story is a strawman. No one is talking about eliminating them.... the US has never been more productive in Ag or manufacturing. The external effects vis a vis China are disturbing to me also. If we cant get policymakers to ofset the trade deficit $4$+ with fiscal we should shut that down I would agree.
Matt,
ReplyDeleteReread my last post. I don't recall calling for the abolition of police forces. I would point out that there are far more private security officers in our country than public ones at this point. It would seem that many of our fellow citizens don't think the govt. is protecting them.
"Credit the bank accounts.." Where does this money come from? State and local governments don't have printing presses last time I checked. You might have noticed that a lot of municipalities are on the verge of bankruptcy. Muni bonds defaults are going to be a big story this year. Even if the central government resorted to paying all of its expenses through the magic of bank credit entries there is a cost there. I swear I think you live in a magical-mystical land where pink unicorns crap skittles.
I'm glad that you unwittingly proved my point about medicare/medicaid. This is what happens when government partially socializes a sector and removes many people from the costs of their own health care. Each government interfernece requires a new "remedy" later to fix the unintended consequences of the last round of central plannning. Where else in our economy do you see paying customers turned away? The govt. has created perverse incentives for consumers and prodcuers in health care.
My modest proposal wasn't a straw man argument. I was just demonstrating absurdity by being absurd. Why do we have to worry about trade deficits, manufacturing, farming? We've got a central bank that can simply place credits in bank accounts. For every debit there is a credit, right? Why do we have to produce when we can simply flood the world with dollars for their goods? The world's problems are solved with more debt, spending, and money printing according to you guys.
Matt,
ReplyDeleteI am not sure if it is relevant, but you have just destroyed the whole Republican requirement that government has to be small, deficits miniscule, and so forth.
We know that the government can retract credits and create a recession ( Clinton 1999 - 2000 ) as well as expansions by injecting credits of dollars.
Republican tea would follows the tax dollars but does not do any of the real math on the real MMT stuff.
It's too complicated and complicitly outlines what Reagan did to work up a deficit and blame it on the Russians.
I still remember Mike Norman's pointing out of the fallacy of Reaganomics felling of the Soviet Union.
Anyway, WFWFS is mixing state levels with Federal levels.
If you create a town with a currency, the central banker does not have to be politically biased if he credits everyone equally based on some criteria.
However, when the Republicans step in and finance debt for Chinese so they can hand out smoke screen tax rebates as well as tax cuts for everyone, then the game does begin to look like ponzi scheme since the Republicans are tax dodgers and create unpaid liabilities like war and debts to China.
the problem is that we are crediting the wrong people- the multi nationals who park or ship the money abroad and not small business which creates the assets here in the USA.
We could have a strong currency and still have excellent exports if the OPEC and Chinese treasury accounts ( $2 billion total ) were spent here in the USA on USA products.
This comment has been removed by the author.
ReplyDeleteWFWFS,
ReplyDeleteIn fiat monetary system government is the only player designated to create and DESTROY money - an art of maintaining currency value (no deflation or inflation) and keeping everybody gainfully employed and happy.
Government shouldn't be seen as something separated from us, because we - the voters hire it to work for us.
When we - the private sector, change our mind or are not satisfied of our employee, we just fire him and hire new one.
rvm,
ReplyDelete" There job to keep everybody everybody gainfully employed and happy?" How's that working out?
WWS,
ReplyDeleteNot too well!
ps I listened to some of Bernanke this AM... he is an absolute failure. You should have heard him BRAGGING about how much money he is returning to the Treasury (rev 125B wow) from the interest the fed is 'earning' via the QEs, what a MORON. He has given up on the first part of his legal dual mandate, ie maximum employment. He stated it may take 4-5 years for employment to return... why does he even bother then, anything could happen in that length of time.
We're screwed.
He looks like he is willing to let 'nature' take it's course. Literally proposing or suggesting NOTHING in the form of policy to correct this. He is a disgrace.
Matt,
ReplyDeleteAgreed.