Monday, April 11, 2011

IMF off the rails

AFP via Raw Story:

"The International Monetary Fund on Monday urged the US to begin addressing its yawning budget deficit this year rather than putting off the pain and missing G20 fiscal targets.

In its semi-annual measure of global economic health, the IMF said the US will likely grow more slowly than originally forecast in January -- 2.75 percent instead of 3.0 percent.
It said that slack domestic demand, high unemployment and still-depressed housing prices will continue to dog the world's largest economy, and that the huge government deficit will limit its ability to address those problems.

"Even so, the IMF, echoing the ongoing battle in the US Congress over taxes and government spending, urged Washington not to try to borrow and spend its way back to economic health.
With a federal budget gap estimated at 10.8 percent this year, it said Washington will find it difficult to achieve its Group of 20 goal of halving the deficit between 2010 and 2013.

'The United States stands out as the only large advanced economy where the cyclically adjusted fiscal deficit is expected to increase in 2011 compared with 2010 despite the ongoing economic recovery,' the Fund said in the World Economic Outlook.

"Addressing this urgently' is important to avoid excessive US borrowing destabilizing global bond markets, it said."

Absolutely bonkers.


apj said...

Once again, will someone pleeeease show them the chart of the output gap consistently and unwaveringly leading the budget balance?

Ralph Musgrave said...

Keynes and Abba Lerner said that in a recession, governments should spend more, and fund the spending either from borrowing or creating new money. In view of the size of the national debt, those two individuals would probably suggest that further stimulus should come from money creation rather than debt creation. Plus they would doubtless suggest channelling the extra money to Main Street rather than into the pockets of the rich and Wall Street banksters.

So while the IMF is bonkers, there is a minute grain of truth in what they say.

Mario said...
This comment has been removed by the author.
Mario said...

the more I learn about the IMF the more I can't stand it.

The US essentially created the IMF for trade when the dollar was backed. WTF is the IMF doing now anyway? Monitoring each country's debt level like a whining wife it seems to me. LOL!!!

Tom Hickey said...

Here is the key: "'Addressing this urgently' is important to avoid excessive US borrowing destabilizing global bond markets, it said."

It all about bond markets. We know from MMT that a monetarily sovereign government that is the monopoly provider of a nonconvertible floating rate currency funds itself directly rather than through either taxing or borrowing. So bonds are operatonally unnecessary. But if government tried to go to no-bonds, the bond market would scream murder because it would go out of business.

Bonds are a subsidy that favors special interests rather than advancing public purpose. Countries should be providing for their people, not being controlled by rentiers.

The US should can the current system in which the Fed issues FRN and go to Treasury issuance of USD with no bonds necessary.

mike norman said...

Wholeheartedly agree, Tom. Too simple and logical for it to ever happen. That's the sad part.

Mario said...

no bonds at all?

would that also make the Fed completely useless and no monetary policy? Or would the Fed do everything it is doing now except issuing FRN?

Treasury would just credit its liability accounts through the Fed at no charge to various banks then I assume? And monetary policy, etc. would still be in tact. That sounds rather simple doesn't it.

however the idea of "no bonds" at all for anyone is rather radical don't you think? Why can't we still have bonds for the public but not auctions for the PD's? Surely you don't think we should have no bonds?

Tom Hickey said...

The no bonds solution is radical but logical — eliminate an unnecessary subsidy that enriches special interests.

Moreover, this is just part of a comprehensive MMT solution that involves revamping the entire approach to monetary and fiscal policy by changing the institutions.

Warren often says that the problems are institutional. This means that to solve the problem the institutional arrangements leading to it have to addressed.

I should add that not all professional MMT'ers are on board with no bonds as a policy option.

Mario said...

I am fine with no-bonds in the sense that the Treasury doesn't need to issue bonds to compensate the Fed who then sells them to PD's at auction. This doesn't need to happen whenever the Treasury wants to spend. You can either have the Treasury run a deficit at the Fed or as you suggest have the Treasury print and issue currency not the Fed.

Either way our government can still issue bonds to the public it seems to me.

What is "institutionally wrong" with public bonds for any nation?

Also you didn't address my questions about the Fed and monetary policy under the Treasury issuing money...I assume there would still be an FFR or no? Either way there could be if we poses not threat either way in my eyes.

Tom Hickey said...

Here is Warren Mosler on it:

Warren Mosler Reply:
April 13th, 2011 at 11:41 am

no interest rate support, no bonds, (0 rate policy like Japan and the US today).

just a server and two or three operators taking turns.
that’s all any modern monetary system is. the rest is all smoke and mirrors


Mario, this is a live thread at Mosler's. Go over there and ask the MMT expert. He'll probably tell you to consult the mandatory readings and then come back. But maybe he'll answer your points directly.

Tom Hickey said...

Mario, I am not opposed to bond issue for public purpose. I oppose it as subsidy. I can see ways that bonds could be issued for public purpose, e.g., like the E and EE series. But most of the bond "institution" now is involved in rent-seeking, corporate subsidy, and providing a subsidy for foreign savers that encourages a CAD instead of balanced trade.

Mario said...

why is a CAD bad? I thought trade deficits were not a bad thing according to MMT b/c we get goods for "little pieces of paper." And I thought it didn't matter that foreigners chose to buy our bonds b/c it is just a "transfer from checking to savings accounts at the Fed."

As long as we supplement the trade deficit with employment opportunities somehow then it's all good in the hood. I thought this was the MMT line more or less.

Tom Hickey said...

A CAD is a source of demand leakage. That demand leakage will result in economic underperformance and rising unemployment, unless it is offset by a corresponding fiscal deficit.

MMT'er Marhall Auerback has observed that imports are a real benefit at full employment; otherwise the country is exporting jobs. Neil Wilson likes to say that running trade deficits is tantamount to immigration that allows low wage, low benefit workers to compete with local workers.

Mario said...

well that makes sense to me.

However I hear Warren saying that Obama's goal to expand our exports is not a good idea.

What about currency depreciation as well as one effect of more exports and less imports?

Tom Hickey said...

What Warren is saying is that if other countries want to save dollar, great. It doesn't cost us anything and we get to use their resources, i.e., they are working for us, essentially for the interest on their savings.

What the US should be doing instead of trying to increase exports is taking steps to get to full employment ASAP through appropriate fiscal policy. They there is no job leakage and we get to have all the stuff we can produce and what other countries want to send us, while enjoying full employment and price stability. Warren is a smart guy.

Mario said...

right agreed completely. that's what I was saying above in this thread when I said, "As long as we supplement the trade deficit with employment opportunities somehow then it's all good in the hood."

agreed and we on the same page then. ;)

the only issue now, which musgrave is all about, is how to get full employment through fiscal policy and industry support. We can do it...lower taxes, build up the green energy industry across the boards, implement a jg, increase spending across the boards for now until the gap closes up some more, etc. It's actually so easy and so doable I can almost taste it!!

Mario said...

and yes Warren is a smart man...and very patient and kind too. :)

Tom Hickey said...

What's in the way is vested interests and political ideology. Institutional arrangement are also a drag. But the largest obstacle is ignorance of monetary economics.

Mario said...

The block is more consciousness in my view (greed, fear, control, etc.) not the system itself so much. This is why I am not so against the Fed or bonds per say.

I would also add that immigration issues are more political issues than economic ones. We don't necessarily need to see immigration issues in a CAD economy.

Tom Hickey said...

Mario, I agree that ALL "problems" stem from consciousness. What is just is. How human process informaton engenders "problems."

In this sense, all problems are pseudo-problems of our own making, due to our ignorance and cognitive-emotional biases, especially those arising from narrow self-interest. Cognitive economists and behavioral economists are finally integrating knowledge from other disciplines to illuminate this.

For example, cognitive economics shows the progression from memes to memeplexes, to conventions, to institutions. See Douglass C. North's short paper, "Economics and Cognitive Science."