Saturday, April 30, 2011

Jeff Sachs rants about corruption

"Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on.

"Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress."

Nothing here we didn't already know from Bill Black, Frank Partnoy, Janet Tavakoli, Yves Smith, Elliot Spitzer and others. But it is nice to see a major economist saying it so forcefully. The question is whether anyone is listening?

Rogue Economist Encourages Austrians and MMT'ers To Get Together

"Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt...."

Read the rest, Austrians and MMTers should be on the same side, at Rogue Economist Rants.

Interesting take. Edward Harrison of Credit Writedowns is an Austrian economist that has incorporated MMT, for example, so it is not as farfetched as it may first sound.

Gallup: Public thinks that excessive spending is to blame for the deficit

Given a choice, Americans of all political persuasions are more likely to say that too much wasteful and unneeded government spending is the cause of the federal budget deficit, rather than too little tax revenue. Americans of all political persuasions also say cutting back on federal spending should be a major focus of efforts to reduce the deficit going forward.

Still, some emphasis on tax increases is part of the solution for almost half of Americans. Thus, it appears Americans would most likely tell their elected representatives to attack the federal deficit primarily using spending cuts, but with a secondary reliance on raising tax revenue.

George Soros on Hayek

GS: "Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations.

"This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

"I have an alternative interpretation — diametrically opposed to the efficient market hypothesis and rational expectations. It is built on the twin pillars of fallibility and reflexivity.

"I firmly believe these principles are in accordance with Hayek’s ideas.

"But we can’t both be right. If I am right, market fundamentalism is wrong. That means I must be able to show some inconsistency in Hayek’s ideas, which is what I propose to do."

Read the rest, Why I agree with (some of) Hayek, at Politico.

This is an eloquent and well argued presentation that George Soros made at the Cato Institute, a Libertarian bastion. I have followed this line of thought since Soros began elaborating it some time ago, and I am in accord with it on philosophical and cognitive grounds. Hayek was a good thinker, too, but his animosity for Communism made him a bit irrational, as Soros observes.

Friday, April 29, 2011

Hans-Werner Sinn Reveals The ECB’s Secret Bailout Strategy

"Normally, a country’s current-account deficit (trade deficit minus transfers from other countries) is financed with foreign private capital. In a currency union, however, central-bank credit may play this role if private capital flows are insufficient. This is what happened in the eurozone when the interbank market first broke down in mid-2007.

"The PIGS’ own central banks started to lend newly printed money to their private banks, and this money was then used to finance the current account deficit. These funds went to the exporting countries, where they circulated as part of normal transactions. The exporting countries’ central banks responded by reducing their emissions of fresh money to be lent to the domestic economy. In effect, central-bank money lending in exporting countries, above all in Germany, was diverted to the PIGS."

Read the rest, The ECB’s Secret Bailout Strategy, if you are into EZ government finance and where it is headed.

Dr. Housing Bubble Is Pessimistic Over Wages and the Consequences

"We have troubling economic headwinds that are being felt on the shoulders of many American families. Over a decade of stagnant wage growth is taking a toll on the psyche of many. Many large cities still have inflated home prices yet these bubbles are slowly deflating just like the rest of housing in America. The home price collapse stems from the massive bubble and mania, that could be categorized as stage one. Yet stage two will be more ominous because home prices are now falling lower to reflect the lower wages many Americans are combating. People can only afford so much based on their household income. The fact that so many people are taking lower paying jobs and filling the seats at less than quality colleges for $50,000 a year shows how desperate many Americans are even though the recession has technically been over since the summer of 2009. Let us examine three current economic trends that are likely to keep wages low and home prices just as low moving forward...."

Cut to some gripping charts, and then he concludes with,

"Early in the crisis I thought that people would be up and furious about what was going on. I’m not so sure about that anymore. If a crisis that was the worst since the Great Depression didn’t get large number of Americans out to the streets and demand substantive action then nothing will. Where is the organized movement to reform the capital markets? Where is the multi-million person organization to break up the too big to fail banks?
"This is why this leakage accompanied by falling wages seems to be the path forward. Do you think big east coast investment banks care if certain prime cities in California see a 50 percent price decline? They don’t and that is why we are seeing more homes leak onto the market. The profits made globally are now surpassing the chump change in housing so expect more lower priced homes to hit the market to reflect the lower wages Americans are earning. McJobs to accompany the McMansions."

Brad DeLong on Economics in Crisis

The most interesting moment at a recent conference held in Bretton Woods, New Hampshire – site of the 1945 conference that created today’s global economic architecture – came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. '[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?'

"Here is the most interesting part of Summers’ long answer: 'There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.' That may sound obscure to a non-economist, but it was a devastating indictment....

"...He talked about 'the revolution in finance as it was realized that asset prices show large volatility that does not reflect anything about fundamentals,' but added that 'macroeconomics [did not] keep up with [this] revolution.' As a result, 'to the great detriment of contemporary macroeconomics,' his fellow economists did not understand asset prices, manias, panics, and liquidity...."

Read the rest: Economics in Crisis

Maybe Prof. DeLong will wake up to MMT and learn that some "heterodox economists" have been working in this field for decades.

Trader's Crucible Slays the IGBC Bogeyman

"If the violations of the no Ponzi criteria are not observable for the most liquid and transparent possible market in any economy, then the EMH must be wrong. No EMH in the market for money has devastating consequences.

"It’s at this point where I raise the head of the IGBC and proclaim the dragon slain. Either you believe the inflation rate as the only way to tell if people believe the IGBC is holding, or go back to believing in crystal balls telling the future. If you insist on a strong belief in magic, then I hand over the head of the EMH."

TC mounts a clever argument in the form of a dilemma — either the Intertemporal Government Budget Constraint (IGBC) or or the Efficient Market Hypothesis (EMH), but not both.

China borrowing dollars to support their currency?

As usual, Warren Mosler saw this before anyone else. In a post yesterday he talked about China's growing external debt.

We know China has an inflation problem and we know they have been trying different measures to control it such as raising interest rates and reserve requirements.

MMT proponents realize this doesn't work because it simply raises incomes and prices (the former through the interest channel and the latter through higher bank cost of funds, which are passed along).

Now it appears they are trying to halt inflationary pressures by pushing their currency up. But how are they doing it?

Curiously, despite over $3 trillion in available foreign currency reserves, China appears to be borrowing (mostly dollars) and using these funds to buy their own currency. (That's Warren's speculation as well as mine.)

This is how countries typically get in trouble: by getting in debt in another currency.

China's $430 bln in foreign debt (as of 12/31/2009) effectively offsets some of their reserve position. How far will this go? Anybody's guess, but it could get out of control rather quickly if it persists.

By the way, even though the IMF and others harp about all the external debt of the U.S. the truth is, we don't have ANY external debt. All our debt is denominated in dollars and regardless who holds it, it all sits in accounts at the Fed.

Government spending highest under Reagan

Here’s an interesting chart I put together from data taken from the Bureau of Economic Analysis.

It shows the quarter-over-quarter average percentage increase in government spending under presidents Reagan through Obama. As you can see, average levels of government spending were highest under Reagan, by a huge margin. We had a boom back then. Next was Bush, then Clinton, then Bush I and last, but not least, was Obama. Average quarterly increases in gov’t spending under Obama have been a miserly 0.7%. This data belies the claim that spending has surged. The nominal amounts are large, yes, but the percentage increases have been very modest. In contrast, Reagan put the pedal to the metal.

Average quarter-over-quarter percentage gain in government spending

Reagan 3.5
Bush I 1.4
Clinton 1.7
Bush II 2.1
Obama 0.7

Thursday, April 28, 2011

Beowulf on "The Donald"

Bo Cutter had one of his usual propaganda posts over at New Deal 2.0, falling all over the Obama Administration's political handling of the current political emergence of Donald Trump on the GOP side. Excerpt:
'The Donald is the gift that keeps on giving. Every time he opens his mouth a million Americans move toward President Obama,"
This is the type of pure Obama apologist propaganda I've come to expect from Bo Cutter over there and he as usual does not disappoint.

For a dose of reality concerning this situation, our Beowulf posted a comment that I think provides a more accurate assesment. His comment:
Keep your eye on the ball Bo, its a flea flicker play. Trump is running as (in the National Review’s memorably dubbed George Wallace) as a country and western Marxist… though I guess Ed Glaeser’s term “small government egalitarian” probably sounds better. He’s running on cultural and foreign policy issues (pro-birther, pro-life, anti-gay marriage, pro-trade war with China and OPEC) and yet running left on fiscal policy. Thanks to the birther indirection (with a helpful assist from the Obama WH), he’s leading in the GOP polls even as he tells conservative supporters like Sean Hannity what he’d do about entitlement reform;
“I don’t care what plan the Republicans put, I’m protecting the seniors..”
And when Hannity asks how he’d balance the budget, Trump changed the subject from deficits to jobs (taking a whack at China along the way), “Don’t forget China is taking our jobs…. the best thing for balancing the budget is to have a strong economy. And the economy can never come back if we are going to always have high unemployment.”

That last part, of course, is a neat paraphrase of Kennedy’s famous line from his 1962 Economic Club speech, “only full employment can balance the budget”. Not quite accurate to blame China for our unemployment , if we spent enough in public investments to fill the $500 billion demand leakage created by our trade deficit, itt wouldn’t be a problem. But since one has to throw something out to appease the deficit zombies, Trump has the right idea, better to turn on free trade than the sick and elderly. What was it that Wynne Godley and Francis Cripps proposed in the mid 70s… “non-selective protectionism with matching fiscal easing” (i.e. use tariff revenue to cut payroll tax). if he ran on a “fair trade tax cut”, he would win over that fraction of the US population that doesn’t work in DC or on Wall Street (leaving the rest for Obama). (Ed: ooohhhh!)
Trump is rich enough to self-fund and has hit on the perfect angle of attack (if he pulls the trigger and runs), lock down the GOP base on cultural issues by going farther right than anyway else, and then down stand ready to pivot to economics to hammer the President from the left. Politico quoted an interview from last month where Trump sounds like he read Jamie Galbraith’s book.
“When this country becomes profitable again, we can take care of our sick; we can take care of our needy,” he told Human Events. “We don’t have to cut Social Security; we don’t have to cut Medicare and Medicaid. We can take care of people that need to be taken care of. And I’ll be able to do that.”… And he says we won’t need to raise taxes either. Trump is suggesting that, as our economy improves, it will expand to cover trillions of dollars in future deficits…”

I think Beowulf has some insightful analysis and nicely includes some perspective and history in accordance with MMT.

So Trump has so far been taking on Obama, on trade and jobs and our social safely net programs, but next I would like to see him kick the fiscal morons and ”free markets”, Paul Ryan types of the GOP right in the backside for a change, he'll have to do it sometime if he is going to run in the GOP primaries.

It’s a pretty sad state of affairs in our sitting government when it’s up to the flamboyant businessman Donald Trump to make the current political establishment on both sides look like a bunch of Marie Antoinettes.

MacDonald's Is The Future?

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, said it hired 24 percent more people than planned during an employment event this month.

McDonald’s and its franchisees hired 62,000 people in the U.S. after receiving more than one million applications, the Oak Brook, Illinois-based company said today in an e-mailed statement. Previously, it said it planned to hire 50,000.

[emphasis added]

Most of these are minimum wage jobs. Fancy that, over a million applications for a minimum wage job. Signs of desperation?

Q1 GDP slows sharply, Gov't spending falls at fastest pace in 28 years!

Government consumption expenditures and investment fell at the fastest pace in 28 years in the first quarter of this year. That largely contributed to the sharp slowdown in growth. If that 1.8% growth rate is not bad enough, consider this...more spending cuts are on the way...big ones!

Where are the Republicans showing us how spending cuts lead to growth? They're silent. What's worse, where is Obama? He is silent when he should be all over the Republicans now, pointing to these results and saying that the worst is yet to come.

This is just another glaring example that spending cuts and austerity will kill growth. The Eurozone, Britain and now us. But the dogma rages on.

Quantitative Easing: The most important ineffective strategy ever!

Quantitative Easing has become the new “hot term” for a policy that in reality does pretty much next to nothing.

Quantitative easing is the term used when the central bank has already lowered its target rate (Fed funds) to zero and can go no lower. So to act like it’s still doing something, it buys securities somewhere else along the term structure and continues adding to bank reserves. In QE2 the Fed targeted government bond yields and bought Treasuries. In QE1 the Fed targeted mortgage rates and bought mortgage backed securities.

When the Fed buys Treasuries it’s as if the Government never sold them in the first place. It is removing that supply of Treasuries that was first put there by government debt sales. And remember, Treasuries comprise part of the financial assets held by the public, so you’re basically taking those assets away.

Here’s what happens…

The public gets stripped of one asset—a Treasury—and loses the 3.5% interest payment (I’m using the 10-year) and gets another asset—a reserve balance—with a 0.25% interest payment.

The public has just lost 325 basis points of interest income!!! Some deal!!!!

Yet people view this as being wildly inflationary and stimulative. You can clearly see, it’s not. In fact, one could argue that the loss of interest income is really deflationary, particularly when so many people remain unemployed.

So why does the market rally on this and commodities go crazy?

Good question. I really don’t know. Probably a belief that QE does a lot more than it does.

But if that’s what it takes to move the market, it’s good enough. The Fed may know this and is manipulating expectations. The Fed is big on “expectations theory.”

Wednesday, April 27, 2011

Mish — Bogus Threats to US Reserve Currency Status

Issuing the world's reserve currency is a mixed blessing. Mish agrees with Michael Pettis that the disadvantages outweigh the advantages and the US should lead the charge away from the dollar as the global reserve currency.

"The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years."

I will be on Fox Business tonight. Tune in if you can.

I will be on "Cavuto" on Fox Business tonight. Hit times are 6:15pm and 6:50pm EDT. Tune in if you can.

-Mike Norman

Tuesday, April 26, 2011

MMT Plug from Trader's Circle

Mike Cornips of Trader's Circle advises his readers:

I notice that Modern Monetary Theory (MMT) is slowly gaining more prominence in the blogosphere with websites such as, Bill Mitchell's website, and others analyzing the economy in the context of MMT, rather than the Neo-Classical economic view of the world pushed by most politicians and main stream media.

MMT is a much more simplistic and rational way of viewing the flows of the economy, since it looks at the various national accounts from accounting perspective that requires all the flows to balance. Unheard of really, in terms of our addiction to "headline media", but MMT is truly a framework which allows the average interested reader to sort out the bull from the dust.

MMT's conclusions tend to be counter-intuitive, but it is a consistent and robust methodology that I would recommend to all readers with an interest in macro-economics to study. An understanding of MMT will also give you a perspective when analyzing investment trends....

Read the rest here: Modern Monetary Theory (MMT)

The, "don't tax the wealthy, they're more productive" fallacy

If I hear this one more time I'm going to throw up, seriously. It's a big, fat, lie and it's coming from the most unlikely places.

Why is it that Tea Partiers and others, who reside nowhere near the ranks of the wealthiest in this country, are suddenly so adamant about protecting the earnings of the rich? Have they been brainwashed that effectively? They seem oblivious to the fact that they are speaking against their own interests and more importantly, that what they are saying about the rich being more productive is just a total fallacy.

Now, to be square with MMT, I'll say that I am not arguing for higher taxes on the wealthy. Any MMTer worth his salt would tell you that; a) taxes do not fund governmment, they serve to regulate demand and; b) the problem we are having has nothing to do with excessive demand coming from rich folks.

Furthermore, as much as I am in favor of greater income equality I am not in favor of doing it by some "Robinhood" scheme of rasing taxes on the rich and giving it to the poor (or the non-rich).

On the contrary...what I am attacking here is this ridiculous statement that somehow the rich are more productive than everyone else and therefore, we should safeguard their earnings over everyone else's.

That's a bunch of crap.

Just take a look at the Forbes 400 list of richest Americans. The vast majority of the people on that list owe their fortunes to inheritance, real estate ownership and/or stock investment and speculation. They "produce" nothing. They basically collect rents off assets. They haven't added one iota of real capital to the economy. Why, then, do we prioritize their incomes over everyone else's?

Do you mean to tell me that some landlord collecting rents off a portfolio of buildings in Manhattan, LA or Chicago is more important or productive than the sanitation worker collecting his garbage? Is some hedge fund manager more productive than the teacher who teaches your kids or the cops and firemen that keep our streets safe and our property protected? Are they more important than a nurse in an Intensive Care unit or the construction worker that's fixing a highway or repairing a bridge?

I mean, come on...really!!!

Yet this is the dialogue we are having in our country today. There are people of limited means, working class people, saying that we shouldn't be taking money from productive people and giving it to unproductive people. They've got it backwards. We ARE taking money from productive folks, just not the folks they think are the productive ones.

Budget cuts, spending cuts, cuts in services, education, Medicaire, and all the rest are the fiscal equivalent of taking money from the most productive. This equates to taking money from the people that keep our streets safe and clean, protect our property, teach our kids, care for our sick and infirm, put things together on production lines, operate our trains, boats and planes and everything else that goes into making a modern society modern.

Now don't get me wrong, I'm not knocking the rich and I'm certainly not knocking those who made their fortune creating and adding to the overall supply of real assets (good and services). Those are the things that define our very standard of living. They deserve every penny as do the rich folks who got their money from inheritance or real estate and stock speculation.

But it's time to drop this BS that people who have lots of money are more productive or important than those who have less. It's just not true.

Monday, April 25, 2011

Joseph Gagnon and Gary Hufbauer On China Policy

Joseph Gagnon and Gary Hufbauer explain in CFR's Foreign Affairs, Taxing China's Assets: How To Increase U. S. Employment Without Launching A Trade War, how the US can tax China's holdings of US Treasuries to discourage China's currency manipulation that is undervaluing the RMB against the USD.

According to MMT, the interest paid on Treasuries is operationally unnecessary, since the US does not need to finance itself. Foreign holdings of Treasuries are the capital account offset of the current account deficit resulting from net imports, which constitute demand leakage and effectively export jobs. By paying interest on foreign holding of Treasuries by net exporters, the US is subsidizing export of US jobs.

Gagnon and Hufbauer explain how the US can counter this by using taxation as a disincentive to save in dollars, instead of resorting to tariffs. As net exporters lose their dollar subsidy, they will be less willing to save in dollars. This will reduce the capital account that must offset the current account. Therefore, to continue exporting to the US at the same rate, net exporting countries would have to balance their trade with the US by purchasing US goods in exchange instead of saving US dollars, or decrease the volume of exports to the US.

Jeremy Grantham - Time To Wake Up, World

Summary of the Summary

The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.

We all need to adjust our behavior to this new environment. It would help if we did it quickly.


• Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.

• From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.

• Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.

• The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.

• Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more
grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.

• The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

• The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

• But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now,
this entire decline was erased by a bigger price surge than occurred during World War II.

Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.

• Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.

• Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.

From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

[Emphasis added]

Read the full report: GMO QUARTERLY LETTER - April 2011

I will be on "Cavuto" tonight on Fox Business

I will be appearing on "Cavuto" tonight on Fox Business at 6:10pm EDT. Please tune in if you can.

-Mike Norman

Sunday, April 24, 2011

Dr. Housing Bubble — Comparisons with the Great Depression

Our current economy is facing unique circumstances. In no time in our past have we had such a large number of American retiring and living many years post-work. Average life expectancy in 1900 for a male was 46 and today it is up to 73 (for females it is 48 and 79 respectively). The baby boomer generation will draw on retirement plans, pensions, and Social Security. It is also the case that we have never had a housing market like the one we face today. Never had we had such a widespread bubble and we have never had a market where shadow inventory is actually larger than normal inventory.

That is actually where we stand on housing as of this moment. It is also the case that we have never gone through such a painful crash without any serious reform to fix the system. Nothing has changed and this is the biggest financial crisis since the Great Depression. Speaking of the Great Depression let us walk through significant events over the 1920s and 1930s and see if we can learn any lessons for our current economic predicament.

Read the rest of the article (with charts) at:

Saturday, April 23, 2011

More attention for MMT

Nick Rowe has another blog post about MMT. Check it out here:

Functional Finance vs the Long Run Government Budget Constraint

Here is an excerpt:

"Let's ask a slightly different question. Why do governments pay interest on their debt? Actually, it sounds like a different question, but it's really the same question. Why finance government deficits with interest-paying debt, when you could use non-interest-paying currency?

The answer is the same: you pay interest on the debt to encourage people to hold it and stop people spending it. If you cut the interest rate on government debt, will people sell it back to the government for money, spend the money, and cause inflation? If not, then Aggregate Demand is too low, and the problem is deflation, not inflation. So there's a free lunch from cutting the interest rate on government debt. And the government should eat that free lunch. And then the Long Run Government Budget Constraint kicks in again".

Friday, April 22, 2011

Winterspeak responds to SRW

Here is my favorite:

SRW: The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.

Winterspeak: What crap. It's like the Pope saying to Gallileo, "if you were only nicer about this whole earth revolving around the sun the Church would listen to you more". MMT is rejected because it is heretical.

Winterspeak's commentary is always excellent. Check out the rest.

UPDATE: Winterspeak also responds to Krugman

Bernanke on how the Fed/Gov't "spends"

Send this to your friends next time they tell you it's their "tax dollars their spending."

Thursday, April 21, 2011

Krugman at MMT again

Prof. Paul Krugman mentions MMT again in What Are Taxes For? He says:

Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

[Emphasis added]

Here is my response in his comment section:

Prof. Krugman, it is you who can't seem to fit the two pieces together. A monetarily sovereign government that is the monopoly provider of nonconvertible floating rate currency is not operationally constrained since it funds itself (although it is constrained by inflation and the exchange rate). Political restraints can be imposed, but this does not change the operational reality of the present monetary system; Political restraints simply hobble it, leading to political kerfuffles like the debt ceiling controversy that threaten the economy needlessly.

Taxes do not — and cannot — fund the federal government, since it is the currency issuer, unlike state and local government, and households and firms, which are currency users. Taxes are not revenue for the federal government as they are for state and local governments. Nor is borrowing required to finance the federal government. Nongovernment net financial assets are injected through federal expenditure (spending and transfers) and are withdrawn by taxation. Addition and subtraction on spreadsheets.

Treasury issuance shifts the composition and maturity of government liabilities, providing interest as subsidy to bondholders. Tsy issuance is not operationally required under the present system, so this subsidy for bondholders could be eliminated. Congress could remove the no-overdraft rule, and the Fed could carry negative equity. Tsy issuance is monetary operation to drain excess reserves to allow the Fed to hit its target overnight rate. The Fed can do the same by paying a support rate on reserves, as its does now.

You say you cannot figure out MMT. Have you read any of the literature? For example, consult Warren Mosler's "Soft Currency Economics" and Mosler and Forstater, "A General Analytical Framework for the Analysis of Currencies and Other Commodities."

This is important because the problem of the debt and deficit is a pseudo-problem, and accounting mirage. The only problem the US faces is the availability of real resources. Right now, the US has enormous idle resources while we are wasting time arguing over pseudo-problems. The opportunity cost of this is huge.

UPDATE: Traders Crucible responds, Paul Krugman, just read this post

I will be making two Fox appearances today!

I will be on the "Judge Jeanine Pirro Show" on Fox News Channel at 2pm EDT today and also on "Bulls & Bears" on Fox Business at 4:20pm EDT. The Bulls & Bears appearance will be my regular weekly debate with Charlie Gasparino.

Only $26 bln of spending power left under the current debt limit

There is only $26 bln in spending power for the Federal government under the current debt limit.

(Figures are in millions $)

You can see the full statement here.

Not much talk about this and the markets continue to kite higher. Negotiations on the debt ceiling remain at a stalemate. Oil prices at $112 now, other sensitive commodities surging. Is a crash coming? It "feels" like it.

Wednesday, April 20, 2011

I will be on Fox Business tonight at 6:30pm EDT

I will be on "Cavuto" tonight on Fox Business at 6:30pm EDT. Tune in if you can.

-Mike Norman

Tuesday, April 19, 2011

Calculated Risk - Residential Investment Recovery

Bill McBride of Calculated Risk offers his Thoughts on Residential Investment Recovery

This is a must-read post. Here is a brief summary:

• Residential investment (RI) is the best leading indicator for the economy. This isn't perfect - nothing is - but RI is usually a strong leading indicator for the business cycle....

• In 2011, residential investment will make a positive contribution to the economy for the first time since 2005....

• ...As the excess supply is absorbed, new residential investment will increase in some areas – and will probably return to normal sometime in 2014 - or as late as 2017 - depending on the actual number of excess vacant housing units. I'm leaning more towards 2015 or 2016...

The housing crisis is still very much with us.

John T. Harvey at Forbes - April 18

Prof. John T. Harvey posts at Forbes on The Big Danger In Cutting The Deficit

"I have been a professional economist for almost 25 years, but never have I been more concerned about the state of our macroeconomy. Yet it's not so much the current rate of unemployment or GDP growth that has me scared to death; it's the so-called solutions being pursued in Washington...."


Monday, April 18, 2011

Dr. Housing Bubble — Are We Setting Up for a Double Dip?

The U.S. economy is facing some serious challenges ahead. Looking at the current economic climate it feels eerily similar to the 1937-38 recession that occurred during the Great Depression. Some think that the Great Depression occurred overnight on a gloomy day in October of 1929 but we had a decade long build up of rampant speculation and bad investments that led up to the crash. The bottom hit in 1932 and 1933 with unemployment soaring to 25 percent. Yet the story never ended on that date. Throughout theGreat Depression even with massive government spending the unemployment rate remained above 15 percent for all of the 1930s. Without a doubt the early success that occurred for the government after 1933 was largely based on government spending. However government spending back then was largely focused on the working class while today most of the stimulus has been shoveled to the financial industry. It is helpful to look at history as a guide since we are facing many similar issues today even though things seem to be stable for the moment.

This is part 30 in our Lessons from the Great Depression series:

Perry Mehrling - What's Next?

"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.

"A decade ago, Olivier Blanchard wrote an influential paper, “What do we know about macroeconomics that Fisher and Wicksell did not?”, in which he put forth a kind of Whig history of the progress of macroeconomic thinking up to 2000. Compared to today, suggested Blanchard, macroeconomics pre-1940 looks like “a period where confusion reigned, for lack of an integrated framework”.

"According to his account, the inter-temporal general equilibrium model (DSGE) provided that missing framework. Now, ten years later, we can see that framework in a different light, as the origin also of the “beauty” that economists mistook for truth, and apparently still do, if only by force of intellectual habit. The important takeaway is that the crisis has opened the ground for alternative frameworks as well as tweaks of the existing one.

"To be provocative, let me put it this way. We are living today in a period not unlike the inter-war period, a period where confusion reigns for lack of an integrated framework. We are living in a period of exploration and experimentation, not only in the policy world but also in the world of ideas. Let the new economic thinking begin."

Is this realization making room for MMT?

"I'm Sorry"

"For over 45 years I have enjoyed making a living teaching. It hasn’t been easy or lucrative, but it had its rewards, one of which was a secure retirement plan.

"Now, after reading the recent California Little Hoover Commission Report that recommends that public school retirements be reduced, even for those who are already retired, and the actions of the Ohio, Idaho, and Wisconsin republicans in accusing teachers and their pensions and bargaining rights as mainly responsible for that state’s financial situation, I am sorry I became a teacher. I honestly didn’t mean to place so many states in danger of going bankrupt...."

William Hogeland- Thank Alexander Hamilton

"Hamilton wasn’t messing around. Empowered by the new government to do what he and [Robert] Morris had long been frustrated in trying to do, the young, charismatic, brilliant, diligent Secretary worked up a full-blown plan for connecting national wealth, and even more importantly national credit, to ambitious national aims. Like Morris, though to a far more sophisticated degree, Hamilton wanted the United States to become an economic powerhouse and financial empire to compete with England. And he’d been tireless in figuring out how to do it.

"The key, as Morris had always suggested, was to combine a big public debt with vigorously enforced taxes earmarked for funding that debt. That is: sell U.S. bonds to the small, rich merchant lending class and, as Morris had put it, “open the purses of the people,” collecting taxes from the American people, in metal, not paper, and earmarking revenues for paying the bondholders their 6% interest in hard, cold cash — 6% untaxed interest, that is. Federal power would thus shift national wealth upward and consolidate it. Yoking national credit to national interest, government would serve as an economic pivot between the creditors and the people and thus be in a position to finance roads, canals, wars, and other national projects...."

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at [from New Deal 2.0, link above]

Rodger Mitchell - Monetary Sovereignty versus Modern Monetary Theory

Some have asked what is the difference between Monetary Sovereignty (MS) and Modern Monetary Theory (MMT). Others use the terms interchangeably. Actually, while both share many features, there are differences....

The more important difference between MS and MMT is the handling of inflation. MS suggests increasing interest rates when inflation threatens. MMT holds that increasing interest rates exacerbates inflation by increasing costs, and that the correct prevention/cure for inflation is to reduce federal deficits, with higher taxes and/or with reduced federal spending.

MS says:
1. Deficits have not been related to inflation for at least 40 years. Instead, inflation has been related to oil prices. Since deficits have not been the cause, reducing deficits is not the cure.
2. Reduced federal deficits lead to recessions and depressions, meaning the MMT approach leaves a poor choice between inflation and recession, or a very difficult balancing act between the two.
3. Reducing federal deficits cannot be done quickly or incrementally. The questions surrounding which taxes to raise or which spending to cut are slow, difficult, cumbersome and politically charged, as witness the repeated battles over the debt ceiling. Deficit control is ill suited to inflation fighting, which needs fast, incremental action.
4. Interest is a minor cost for most businesses, and an increase in interest rates represents a minuscule increase in business costs – not enough to affect pricing significantly.
5. Money is a commodity, the value of which is determined by supply and demand. Demand is determined by risk and reward. The reward for owning money is interest, so when interest rates increase, investment tends to flow to money (i.e. bonds, CDs, money markets), increasing the value of money. When interest rates fall, investment tends to flow to non-money (stocks, real estate), reducing the value of money. Increased money value is the prevention/cure for inflation.

The full arrogance of the ratings agencies on display

Just watched some guy from S&P being interviewed on CNBC. Steve Liesman asked him if he thought that the probability of a default by the U.S. had just increased. The guy said, "yes." Then Liesman asked him to explain how the U.S. can default when it issues its own currency and when its debts are denominated in its own currency. The guy basically couldn't answer. He pretty much said it didn't matter and spoke about a "rich history" detailing the problems of countries with high debt, failing to make any distinction between what nations in that rich history were under gold standards or fixed exchange regimes (all). Then he just said "we do not accept the idea that a country with its own currency, treasury and central bank is immune to debt problems."

Now that's arrogance for you. Since S&P simply cannot accept the idea, they will rate on the basis of their misguided belief and bias. Ordinarily that would simply be a reason to laugh at them and see them for what they are: a bunch of arrogant and elite functionaires. Sadly, though, policy makers, investors and others listen to these idiots and their ratings and pronouncements, which means this will have a real impact on people.

I worked at S&P back in 2000 and was basically fired after getting into an argument with chief auto analyst Scott Sprinzen after I wrote a highly negative article about General Motors, whose stock was trading at 80 per share at the time. I questioned GMs outlook and the rosy assumptions that they were making for their finance unit. Sprinzen took exception to this saying that GM was strong and would not have any problems. Well, I was forced to resign.

Fast forward: GM went bankrupt and had to be saved by taxpayers. Sprinzen is still there at S&P. I am not.

These agencies have been conducting business for years despite the fact that they operate with huge conflicts of interest. They are paid by the entities they rate so there is massive incentive to make things look rosy when they are not. They are protected by the government and have no competition. This has made them arrogant to an extreme, as exhibited by the jerk being interviewed on CNBC. Sadly, nothing will be done to reign them in or make them more accountable for their ratings.

S&P revises U.S. outlook to "negative."

I’ve said for a long time that the rating agencies (idiots) will eventually downgrade US debt even though there is NEVER, EVER, EVER a solvency risk for a nation that issues its own currency and where its debts are denominated in that currency.

However, these are the same IDIOT agencies that rated all the toxic subprime debt AAA, so what do you expect? (Watch the movie, Inside Job for more unbelievably eye opening footage on how corrupt the financial sector AND mainstream economics has become. It will make you sick.)

The rating agencies WILL eventually downgrade the US, just as they did to Japan. (BTW, the bond market has barely moved on this announcement.)

This is just one near-term problem that could be presenting itself for stocks. The other is the debt ceiling. This ratings scare will likely cause Obama to panic and go with MASSIVE spending cuts, making the longer-term outlook somewhat negative.

CFR: Capitalism is failing the middle class

Reuters out with a story on a study published by the mainstream Council on Foreign Relations on how globalization and the IT revolution are leaving the middle class with much less of "the pie".

Hopefully this is evidence of what Tom has written about here lately: Is the global establishment finally starting to take notice that the current macro policies do not result in equitable, stable, robust economies? And will lead to major problems in the long run?

I hope this is the case. First we need these people to realize there is a problem, and then the next step would be to find a solution. Those solutions would hopefully recognize a new framework that includes the macro realities as disclosed by MMT.

Sunday, April 17, 2011

Brad DeLong on MMT

Disappointingly, Brad criticizes MMT based only on his reading of Steve Randy Waldman's post at Interfluidity and Nick Rowe's post at Worthwhile Canadian Initiative. It's pretty clear that he did not bother with the comments.

My comment at Brad's:

Come on, Brad, that's just being lazy. If you are going to comment on something at least make some effort to understand it by reading what the actual proponents have to say, not what others think that they may be saying and don't really get it because they have not read the lit. There are a number of working papers over at Here is a list of introductory MMT links, too. Thanks for your interest, though.

UPDATE: Only three comments are up, from Ralph Musgrave, Warren Mosler, and Nick Rowe. I guess Brad buried the rest.

Here is my comment to a post of Nick Rowe:

Nick: "Solvency is never an issue if it can print money and inflation isn't an issue. But future inflation might be an issue even if current inflation isn't."

Hi, Nick. MMT recognizes that, of course, and recommends addressing incipient inflation primarily through Lerner's principles of functional finance by withdrawing nongovernment net financial assets fiscally with targeted taxation. MMT follows Godley in saying that the government fiscal balance and nongovernment balance (consolidating private domestic and external) sums to zero, so that it falls to government to offset demand leakage to private private saving/net imports. If the government fiscal balance exceeds this demand leakage, then demand side inflation results as the economy overheats. Conversely, if the fiscal balance does not offset demand leakage, then either the economy will contract as capacity goes unused, or the private sector will choose to net dissave to maintain lifestyle and private indebtedness is not sustainable. According to functional finance, withdrawing net financial assets is superior to monetary policy because monetary policy is blunt and fiscal policy can be tightly targeted. The issue here is whether monetary policy or fiscal policy (functional finance) is the appropriate inflation remedy. MMT says fiscal and explains why not only in terms of functional finance, buit also a job guarantee instead of NAIRU and monetary rules. See Bill Mitchell, "Modern monetary theory and inflation – Part 1"

World Bank Concern

Robert Zoellick cited rising food prices as the main threat to poor nations who risk "losing a generation"....

IMF chief Dominique Strauss-Kahn raised particular concerns about high levels of unemployment among young people....

"Especially because of youth unemployment... there is now a risk that this will be turned into a life sentence, and that there is a possibility of a lost generation," he said.

Hmm. Rising food prices and no income. Sounds like a powder keg to me.

Virtual Money: Bitcoin

Bitcoin is an emerging non-government, non-bank virtual currency that operates without taxes:

Bitcoin, an open-source project created in 2009 by Satoshi Nakamoto, is the world's first distributed and anonymous digital currency....

Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can't be spent twice--because it's distributed (a lot like BitTorrent), there's no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don't have them anymore, all without the help of a third party.

...Because Bitcoin is an open-source project, and because the database exists only in the distributed peer-to-peer network created by its users, there is no Bitcoin company to raid, subpoena or shut down. Even if the site were taken offline and the Sourceforge project removed, the currency would be unaffected. Like BitTorrent, taking down any of the individual computers that make up the peer-to-peer system would have little effect on the rest of the network. And because the currency is truly anonymous, there are no identities to trace....

Saturday, April 16, 2011

MMT Links

Here is my list of links for getting started in MMT:

• MMT Bloggers:

Marshal Auerback at New Deal 2.0

Peter Cooper at Heteconomics

Joe Firestone at All Life Is Problem Solving

Scott Fulwiller at Economic Perspectives

Bill Mitchell at Billy Blog

selise at NetRootsMass

Warren Mosler at The Center of the Universe

L. Randall Wray at Economic Perspectives

• Working Papers

There are a number of working papers by these and others writing in the field that are available (free) at:

• Other resources:

Frank Ashe:

Mathew Forstater:

Scott Fullwiler:

John T. Harvey:

Bill Mitchell:

Warren Mosler:

Cullen Roche:

Neil Wilson:


L. Randall Wray:

• Conference (with audio and video):

• Macroeconomic Balance Sheet Visualizer

A Macroeconomic Balance Sheet Visualizer is available at Thought Offerings for those who would like to play with the numbers to see how basic MMT principles work.

• Not MMT, but contributory to it:

Irving Fisher:

Wynne Godley/Marc Lavoie:

Monetary Economics Palgrave Macmillan (2007)

Abba Lerner:

Hyman Minsky:


MMT Links at Corrente

Corrente now has a web links page for MMT here. Bookmark it, pass it on, and add to it.

Here's the page URL.

Thanks to Lambert Strether of Corrente and Joe Firestone of All Life Is Problem Solving.

Nick Rowe Reverse-Engineers an MMT Model

Nick Rowe of Worthwhile Canadian Initiative is trying to reverse-engineer a model of MMT to assist mainstream economists in understanding what MMT is saying. There are many good comments, too. Warren Mosler responds early in the thread.

"I'm trying to keep this as simple as possible, so it's accessible to second-year economics undergraduates.

"Many theoretical papers I read are full of impenetrable (to me) thickets of math. So I reverse-engineer the model. I try to figure out what the underlying model must be in order for the paper's conclusions to make sense.

"Many Modern Monetary Theory posts I read are full of impenetrable (to me) thickets of words. So I have reverse-engineered the model (with the help of Steve Randy Waldman's blog post and Scott Fullwiler in comments on that post). I think I have figured out what the underlying model must be in order for MMT's conclusions to make sense.

"I don't think my model is a straw man. It is a stick-figure. A very simple caricature that shows only the bare bones, but is still recognisable."

Request for feedback from Trader's Crucible

Trader's Crucible is working on an MMT fiscal policy rule and requests feedback:

I woke up this morning and had a bit of time to thing about a fiscal policy rule for MMT.

c(u-u) + (i-i) + f*Population Growth = %G [Update: This is %G Deficit]

Where :

c(u-u) is Okun’s law, relating the change in GDP to change in unemployment. According to most people, c is about 1.8 and (u-u) is the difference between the “natural” rate of unemployment and current unemployment.

(i-i) is the difference between the current core inflation rate and the target inflation rate
% Population growth is for the entire currency area – we might want to include China in this area given the current policy of China. f is a multiplier, set to 1 for now.

Note this rule also spits out projected rates of inflation. %G is the target rate, but we know the actual rate of %. The difference between the two should be the observed inflation rate.
What do you all think?

[Update: probably needs to be some adjustment for spending multipliers]

UPDATE: TC updates in a new post, based on feedback and comments to the first post. Good thinking. Take a look.

Fraud Watch: Fraudclosure Auctions

Just when you thought it couldn't get any worse:

"Properties purchased through Orange County Clerk of Courts foreclosure sales at one price are appearing in the county Property Appraiser’s Office records at a higher price, often tens of thousands of dollars more, according to an Orlando Sentinel review of 16 recent purchases.

"The discrepancy illustrates inherent flaws in a system that apparently allows investors buying up distressed properties to inflate the sale price of their real estate by paying a slightly higher state tax on the sale, commonly known as “documentary stamp tax.” The disparity in prices has gone unnoticed by the three county government bodies with a role in the sale and recording process — until now.

"By having higher sale prices on record with the Orange County Property Appraiser’s Office, investors looking to later unload the properties could mask their profits when they sell the real estate to new buyers.....

Quote of the Day: John Kenneth Galbraith

"As I have urged on earlier occasions, there are no useful propositions in economics that cannot be stated accurately in clear, unembellished and generally agreeable English."

John Kenneth Galbraith, Economics in Perspective: A Critical History (Boston: Houghton Mifflin, 1987), p. 4

Friday, April 15, 2011

US Default Anyone? Ask Jim De Mint.

Washington - Sen. Jim DeMint, who has wrought chaos in Congress over earmarks, immigration and health care, is preparing to launch a crusade that would make those fights look tame.

DeMint, a South Carolina Republican, is vowing to block [filibuster] any vote on raising the U.S. debt ceiling unless Congress moves to amend the Constitution by banning future federal deficits.

"I will oppose any attempt to vote to raise the limit on our $14 trillion debt until Congress passes the balanced-budget amendment," DeMint told McClatchy....

MMT gets another mention.

Economist Nick Rowe of the blog "Worthwhile Canadian Initiative" has written a post about MMT:
Reverse engineering the MMT model.

Ezra Klein Gets It!!! Well, Almost.

"It’s increasingly well understood — at least among the tiny slice of Americans who read wonkish economic blogs — that thinking about the government as a very big household that happens to employ an army is a bad thing."

Well and good, but what Ezra either doesn't get yet, or doesn't say if he does, is that the federal government is the opposite of households, firms and US states because it is the currency issuer and the others are all currency users. So close and yet so far.

Ezra quotes Karl Smith of Modeled Behavior here to the effect that government is different from household because it is easier for government to raise revenue (due to the power to levy taxes).

Now, to the government. The exact opposite is true. It is much easier for the government to raise revenue than to cut spending. Moreover, most of the movement in the deficit is tied to movements in revenue, not movements in spending.

This is the same mistake that Mark Thoma recently made here.

It's a mistake because a monetarily sovereign government that is the provider of a nonconvertible floating rate currency (like the US) funds itself directly, using currency issuance rather than taxation or borrowing. Government expenditure (spending and transfers) comes from the Treasury crediting bank accounts with the Fed supplying the reserves to clear. Neither taxes nor borrowing are operationally necessary under the present global monetary system, although Congress has imposed political requirements that make it seems so.

The issuance of Treasury securities in offset of the deficit is a reserve drain for interest rate maintenance, since deficits create excess reserves in the interbank settlement system that would drive the overnight rate toward zero. Draining the excess reserves allows the central bank to hit its target rate by controlling the quantity of reserves. But the same operation can be performed more efficiently by paying a support rate on excess reserves equal to or greater than the target rate, as the Fed does now, allowing it to take as many Treasuries onto its books as it desires without affecting the overnight interbank rate rate.

Watch me on Fox Biz today at 4:20pm EDT

I will be doing my regular Friday afternoon segment, "Market Smackdown" at 4:20pm EDT on Fox Business. Tune in if you can.

-Mike Norman

Thursday, April 14, 2011

Minsky Conference Audios

April 13–15, 2011

The 20th Annual Minsky Conference will address the ongoing effects of the global financial crisis on the real economy, and examine proposed and recently enacted policy responses. Should ending too-big-to-fail be the cornerstone of reform? Do the markets’ pursuit of self-interest generate real societal benefits? Is financial sector growth actually good for the real economy? Will the recently passed US financial reform bill make the entire financial system, not only the banks, safer?

Mario Seccareccia on MMT and Functional Finance at INET's Bretton Woods

Radiation Danger Increasing

Radiation Spreads Worlwide

This is not an encouraging report. We need safe, sustainable, renewable energy, and we need to ramp up now. Germany and China are addressing the issue, as well as being out front on the development of alternatives. Where is the US on this? Oh, right, bogged down in MENA where the oil is. Meanwhile, Iowa has shrugged off Fukushima and is proceeding with plans for a new nuclear plant subsidized by the state.

Wednesday, April 13, 2011

Mark Thoma Almost Gets It

"But what Republicans have realized is that most people assess whether government is too big or too small using the deficit. If the government is running a deficit year after year, then it must be purchasing more than it can afford.

"The problem, I think, is a false analogy with a household. When a household is in deficit month after month after month, it is a sign that the household is overspending relative to its income. And, since in most cases income cannot be changed in the short-run, or even in the long-run, a household in budget trouble has little choice but to work on the spending side of the equation.

"However, the government's income is different from a households. The government has powers that households do not have, the power to change taxes. An increase in taxes will raise the government's income and help to solve the problem. The right has tried to convince us with Laffer curve nonsense that this margin cannot be adjusted, i.e. the false claim that tax increases will not increase revenues, and they have also made arguments about employment and economic growth. Or they have simply proclaimed, without justification, that tax increases are off the table.

"None of those argument withstand closer scrutiny, but they are an easy sell due to the willingness of households to project their own troubles with balancing their budgets onto the government...."

Congratulations to Prof. Thoma for pointing out that government budgets are not the same as household budgets. But he mistakes the difference as the power to tax in order to fund instead the power to issue currency to fund. Close but no cigar — yet. There's always hope.

A monetarily sovereign government that is the monopoly provider of a nonconvertible floating rate currency funds itself through currency issuance and neither taxing nor borrowing are required for funding. In a fiat system, taxes do not fund government. Issuance does. That's what "fiat" means.

Taxes serve two purposes. First, taxation gives the currency value because nongovernment needs the state's currency to meet its obligations to the state in the form of taxes, fees an fines. Secondly, taxes withdraw net financial assets from nongovernment, reversing the flow of net financial assets into nongovernment resulting from government expenditure.

Government expenditure (fiscal injection) is used to increase nongovernment net financial assets in order to offset demand leakage to saving and net imports, which would otherwise result in economic contraction, while taxation (fiscal withdrawal) is used to decrease nongovernment net financial assets to control inflationary pressure.

Moreover, Prof. Thoma does not seem to understand the rationale of the Laffer curve. Art Laffer understands monetary economics, and he correctly noted that lowering taxes will increase nongovernment net financial assets. But he was mistaken is in thinking that this increase in nongovernment NFA would automatically translate into effective demand, which would send a signal to invest in order to increase production.

Tax cuts go primarily to the wealthy, and they have a high propensity to save. Therefore, the multiplier from broad tax cuts to growth is small, since most of the cut is saved instead of being spent on either consumer goods or capital goods. The Laffer curve did not work then, and there is no reason think it will work now to stimulate demand and increase investment.

Minsky Mention

In a guest post a EconMatters, Kurt Cobb asks, Could HIgh Oil Prices Cause A Global Economic Deflation?

In the course of answering this question, Cobb brings in Hyman Minsky and financial instability.

"Cars don't budge without gasoline (unless you can afford an electric one) and most people need their cars to get to work. The heat can be turned off rather quickly by the utility company in comparison to the glacial pace of a mortgage foreclosure that can take many months and sometimes more than a year.

"This situation is particularly problematic because it pulls money out of the financial sector. And, despite all the nonsense about the financial industry being on the mend, the industry is actually becoming more and more vulnerable by the day as it increases its exposure and leverage to financial and commodity markets....

"As Hyman Minsky might put it, stability and prosperity lead to instability and crisis as market participants become more and more emboldened on the upswing creating the illusion that all is well. Then, when prices and credit expansion go beyond what the economy can sustain, a decline ensues that is often dramatic as confidence suddenly shifts to revulsion and fear.

"As housing prices continue to sink, the immense amount of bad mortgage debt still floating around the financial system becomes even more putrid than before. Someday the institutions which hold the debt will have to stop pretending that they are going to get paid back.

"However, the prelude to that will be deflation brought on by the high prices of oil and commodities which tend to depress economic activity as household spending is reserved for essentials rather than discretionary items...."

Cobb makes a good case about how another oil shock could push this fragile system over the brink into a classic debt-deflation. With MENA in turmoil, his post not only raises timely questions bot also makes one wonder why it is taking the US and world so long to break the oil addiction before the inevitable overdose.

Some MMT Reactions to the President's Budget Plan

The speech exemplifies the policy disasters that arise from incoherent economics. The President embraced and gave further credence to two of the most harmful economic myths — that because governments are supposedly just like households, deficits signify excess and coming crises. He said: ‘Now, at certain times – particularly during periods of war or recession – our nation has had to borrow money to pay for some of our priorities. And as most families understand, a little credit card debt isn’t going to hurt if it’s temporary.’ Governments with sovereign currencies are not like households and are not like Greece. Unlike Greece, America has a sovereign currency. Nations typically run deficits, e.g., large ones,like that run during the supposed golden age of the 1950s. During the two decades of the “Great Moderation”, nearly every developed nation ran a deficit. The deficits did not cause inflation in either period. When nations run budget surpluses, they soon fall into severe recessions. Severe recessions produce substantial increases in budget deficits — due to automatic stabilizers. The automatic stabilizers are counter-cyclical — they reduce the length and severity of the recession. Cutting governmental spending while a nation is suffering from a recession is lunacy. It is a destabilizing policy. The automatic stabilizers and stimulus are nothing like ‘a little credit card debt.’ The stabilizers not only don’t ‘hurt’, they make the recession hurt far less. The Republican strategy of federal and state budget cuts is twice cursed. First, it harms the economy, the recovery, and unemployment. Second, by cutting, for example, useful education programs it harms our children and our future competitiveness.”

~William K. Black teaches economics and law at UMKC and is a former regulator

The President appears to be drinking from the same Kool-Aid as as Congressman Ryan. Just a different flavor.”

~Marshall Auerback is a Roosevelt Institute Senior Fellow

My conclusion: The president's budget plan and the Ryan plan are depression budget plans. Neither plan recognizes the role of demand, and neither addresses the depression level unemployment that continues to persist. Neither plan is sound, either economically or morally. Neither is relevant to the challenges that America and the world face. They are both political documents expressing different ideologies, staking out the issues for the '12 election.

Both plans are clueless.

ASIDE: Martin Wolf picks apart the Ryan budget at The Financial Times.

Wolf concludes: The Ryan plan is a “reductio ad absurdum” – a disproof by taking a proposition to a logical conclusion.

Arguing Economics (and MMT) on the Internet

Since my blog started up, I have spent an inordinate amount of time just responding to comments there and especially on Facebook (where the posts have been linked). I think some of this is completely necessary and productive, but it has already reached the point that several followers of the blog have specifically asked me to stop spending so much time doing that. They would rather read new posts than see me go “for another six rounds of back-and-forth” (according to my friend Jason).

Damn, that’s tough, because on the one hand I completely understand people’s reluctance to accept Post Keynesian economics (a term I prefer to MMT since it encompasses that and more). It requires a major shift away from the “common sense” view that not only feels right, but is reinforced daily by the media and politicians. It takes time and patience to help people make the necessary shift in thinking. However, there are also folks out there who are commenting just to take a break from making pipe bombs in their basement. They have no desire to engage in an honest exchange of ideas, but want to try to force their intellectual will on others. Nothing productive arises from such exchanges. You need to cut your losses and move on.

The problem is how do you do this without appearing either rude or simply unwilling to discuss? Personally, I have to answer someone at least once. I think that as an ambassador of Post Keynesian economics it’s part of the job, if not for the individual in question then for those observing. But–and this is the mistake I have made repeatedly and about which I need to develop more discipline–you have to keep the discussion on target and within a tight analytical framework. Not only does this quickly root out the nuts, it’s actually much more useful in general. Let me interject here that the point of this post is not to show “how to win,” per se. Hey, if we are wrong about something, then we should correct it. But, this isn’t something we are going to find out in a rambling discussion that boils down to repeatedly shouting, “I’m right and you are wrong!”

Here is how I like to frame a discussion, and I start almost every one of my classes by teaching this very thing. It’s a boiled down version of philosophical logic and it starts with the idea that every argument is a series of premises that leads to a conclusion:

P1: Bob is German.
P2. All Germans own at least one hamster.
Therefore: Bob owns at least one hamster.

Every economic model or theory is, in reality, no more than this. Of course, they are typically much more complex and the conclusion of one argument may then become a premise of the next one, and so on. But, this is still the basic structure. I think the most useful thing about conceptualizing it this way is that there are now only two possible errors: either the premises don’t really lead to that conclusion or there are premises that are unwarranted. An argument where the premises do lead to the conclusion is valid; a valid argument whose premises are warranted is cogent. Voila! You don’t agree with my argument? Fair enough. Are you saying that my premises don’t really support my conclusion, or that the premises are unwarranted? Stick to this, and you’ll a) end up with a much more productive discussion and b) drive off those who just want a place to shout out their opinion. Or, if they do hang around, it’s very obvious to the other participants that this individual is not worth engaging.

Take the above argument as an example. I don’t agree with it. Why not? I freely admit that it’s valid. The premises clearly support the conclusion, so the internal logic is fine. But, assuming we have established that Bob is, indeed, German (maybe we can have Donald Trump check on his nationality for us), I seriously doubt that every German owns a hamster. So, in this discussion I would put forward the contention that the argument is valid but not cogent. And now I can spend my time in a focused search for data on German hamster ownership. Say that I discover a 2009 study by the German Society for the Promotion of Hamster Welfare that shows that 12% of all Germans own at least one hamster. I state this, show my source, and on this basis suggest that the argument is not cogent because one of the premises is not warranted. We can now either toss out the argument entirely or amend it based on new information:

P1: Bob is German.
P2. 12% of Germans own at least one hamster.
Therefore: There is a 12% chance that Bob owns at least one hamster.

And it may be that there is a missing premise that affects the argument. Perhaps Bob is my next door neighbor and I know for a fact that he doesn’t own a hamster. Again, the original argument is valid but not cogent. Note that when we are done with the discusison, we are all actually more knowledgeable about the subject than when the conversation began. Furthermore, there is a tight focus without going off onto tangents about gerbils, Swedes, the problems of raising tropical fish, etc. We likely spent much less time on this, but made much more progress.

Unfortunately, this isn’t what usually happens. Instead, arguments jump off from different points simultaneously so that is it very difficult to enforce any structure. As a rule of thumb, I think the person who has laid out the initial argument should get the courtesy of having the subsequent discussion built around what they have said. You don’t agree that money creation is not inflationary? I already laid out my support for this–with what part of my argument do you disagree? Do the premises not lead to the conclusion or are there unwarranted or missing premises? Please be specific and I don’t want to hear a counter-argument yet–there is already one on the table. Of course, if you are critiquing someone else’s view, you should offer them the same courtesy. And no changing the subject until the central question is resolved!

As I suggested above, I actually haven’t been very careful about this and have allowed discussions to wander without any chance of resolution because they aren’t focused on the point. It becomes a process of trotting out a series of contending views, but without any effort to truly evaluate one. This is a waste of time as it obscures rather than illuminates. The advice I am offering you (and me) is to avoid this by gently but firmly insisting on disciplined discourse. Stick to validity and cogency. This is a double-edged sword, of course, so be prepared to admit that you may have made an error! But in the end it saves us all a lot of time and effort and is much more productive. And possibly the biggest plus is that trolls hate this because it requires them to think rather than shout. Plus, maybe I can get some more work done!