An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Monday, August 1, 2011
The "deal" and the numbers that go with it
All the media is decrying the wonderful "deal" over the weekend that had us avert default. Republicans are grinning ear to ear. Democrats are saying, it's the best we could do.
So here's the deal in a nutshell:
$1 trillion in spending cuts now. Then around Thanksgiving a bipartisan "panel" of six lawmakers decide on another $1.2 trillion in cuts that will go into effect in 2013. This decision of this panel, by the way, is final and not subject to amendment or filibuster. (More on that later.)
Let's go over the numbers:
$1 trillion in cuts equates to about 0.7% of GDP. That's a SUBTRACTION of 0.7%. Given that the economy grew at 0.4% in Q1 and 1.3% (preliminary) in Q2, we'll average that together and say that the economy is growing at around a 0.8% rate.
Now do this math: 0.8 - 0.7
You got that? (I know it's tough, but I believe most of you can do it.)
Okay, that means after these cuts the economy will be growing at 0.1% FOR THE NEXT 10 YEARS!
Right...no growth for the next 10 years. Nice!
But wait...we forgot about the additional $1.2 trillion of cuts that happen in 2013 and beyond.
We'll start with the very, VERY, optimistic asumption that the economy is still around $14 trillion at that time. (In all likelihood it will be far lower.) That means from 2013 on, the economy SHRINKS by 1.0% percent per year as far as the eye can see.
Somehow the Republicans equate this to growth. (Ah, yes, the "Confidence Fairy" at work.)
What this means is that AMERICA WILL NEVER AGAIN CATCH UP to other nations who's policies are fostering growth right now. It will be IMPOSSIBLE to catch up. Our standard of living is about to embark on an irreversible decline vis-a-vis other nations. We're done.
And what about the bipartisan spending cut panel who's powers make it exempt from normal, Constitutional procedure? Well folks, we've just experienced a coup d'etat. Aren't you happy you went to the voting booth and voted for your Congressional representatives and Senators? Your vote means nothing. Your future will be decided by six guys who just gave themselves unlimited power.
Nice to live in a democracy, isn't it?
Hi ho, hi ho, austerity we go!
Only in the wacky bizarre world of MMT does reducing the rate of the increase in the deficit over the next ten years amount to austerity. In other words, there are cuts against an accerating baseline that are back loaded into the future and probably never happen anyway. This plan increases the deficit by over 7 trillion over the next decade.
ReplyDeleteGODFORBID the deficit only goes up by 7 trillion instead of 8 trillion! The whole world will end, right?
Gee, that sure is some Austerity! Cuts against an accelerating baseline. 7 Trillion In new debt instead of 8 trillion in new debt? How draconian! The economy is in BIG trouble now because of such Austere spending increases that are not increasing as fast as the MMT’ers would like but that will probably increases even faster because interest rates can’t stay this low forever.
When barley reducing the rate of the increase in the deficit amounts to “austerity” we are in big trouble. Don’t worry, you MMT’ers are getting 7 trillion in new debt over the next ten years.
Is that not “enough”?
That means from 2013 on, the economy SHRINKS by 1.0% percent per year as far as the eye can see.
ReplyDeleteso does that mean that they will be cutting 1.2 trillion yoy forever after 2013? Is there no end to those cuts ever? They are "engraved" into the economy? I don't understand.
@libertarian89 - I'd think you'd be more disturbed by the "super panel" that will not have to seek wider approval for their decisions. This aspect of the deal is the scariest part of this whole process. These 12 politicians will wield tremendous, unchecked power. They literally control the purse-strings to our country.
ReplyDeleteHope your job is secure. libertarian89, or maybe you are one of the rentiers who doesn't work for a living.
ReplyDeleteMMT is not concerned with the absolute size of the deficit but rather the amount needed to offset non-government desire to save in order to stabilize both employment and prices while closing the output gap. Maybe you have a better idea of how to do this? Or maybe this is just not a concern of yours?
Not to be too partisan, but I think this is where the HOPE for CHANGE comes in. HOPE exports rise and get used to a CHANGE in real terms of trade.
ReplyDeleteIf people want to save let them save. They probably need to save and should. There is no need for government to “offset” that desire nor does it have any business doing so.
ReplyDeletePoint being is that this deal does not resemble anything close to “austerity” and to suggest so is utterly laughable.
libertarian89, you don't know what you are talking about. If non-government saves an government does not offset, then the economy contracts because everything that can be produced is not being sold for lack of effective demand. Saving constitutes demand leakage.
ReplyDelete@Tom Hickey - its no use, I'm sure libertarian89 was bitten by the gold bug.
ReplyDeleteThat’s a bunch of Keynesian baloney. That line of thinking has been outright debunked for decades by numerous economists both Austrian and non Austrain. Thank god these types that say “government has to spend during a recession to offset the decline in consumer spending” are losing the public debate because it’s precisely their policies that have created the mess we are currently in. Thank god their being routed.
ReplyDeleteConsumers don’t cause recessions by somehow being too stupid to realize they need to demand more stuff. If they can’t demand as much as they previously could, like our current situation, it’s because they previously spent too much during the phony boom period and now need to save in light of the new reality. Savings is necessary for an economic recovery because it will help restore the structure of production in a way that is more in tune with consumer preferences. More government spending just maintains the existing structure of production that is consistent with government and bureaucratic preferences not consumer preferences.
Demand leakage is the most nonsensical term I think I have ever heard in my life. If people want to save, let them. They need to save, and probably should. We need savings for a genuine recovery and to restore the economy’s capital structure in a way that is more sustainable. Savings are necessary for economic growth, and yes, this is true even during a recession. And not, the government does not have to run a deficit in order for us to save.
MMT sounds like the type of nonsense one would read in the onion. Thank god no one listens to them. Thank god the debate is about spending cuts (even if there non existent) instead of more governemnt spending on pet political projects and other boondoggles that are no where near consistent with consumer preferences.
lib,
ReplyDeleteRead the post with the Roman coins.
You are supposed to be libertarian. Yet you are advocating for the same type of western policies that 2,000 years ago constituted literally a human enslavement machine.
Morons in political/economic leadership have learned NOTHING in 2,000 years. The only field or endeavor where this is true.
You are enabling them.
And Lib, we're supposed to listen to you why? You can't spell and your writing is full of grammatical errors. Get an education then come back and talk to us. Okay, clown?
ReplyDeleteKill the messenger instead of deal with the message. Of course, so typical. I'm terribly sorry for the typos.
ReplyDeleteIf people want to save let them save. There is nothing wrong with that. Savings is a crucial component of economic growth and necessary during a recession in order to restore the structure of production in a way that satisfies consumer preferences.
Hey Mike, is gold still in a bubble? Who's the clown?
"libertarian" no one is saying people shouldn't save. The problems is that if all the people saves and no one spends that means the economy will shrink and demand will be destroyed, with it employment, then increased deficits, etc.
ReplyDeleteDo you see where this ends? If you don't you're blind ideologically.
lib, I am a libertarian of the left, and I see Austrian economics as the road to serfdom. Hayek was all caught up in government being the problem, whereas it is the banks and financial sector that has turned the populace into debt peons. If you don't understand the dynamic, spend some time reading Michael Hudson and Bill Black, for example.
ReplyDeleteIf you want an Austrian economist to explain MMT to you, go over to Credit Writedowns and look at Edward Harrison's posts on MMT. He has seen the light and integrated MMT with AE.
Thanks for your interest in MMT.
libertarian89 - Actually MMT does say let private sector save. It comes to the conclusion only government deficits will let private sector to save right now because of weak balance sheets.
ReplyDeleteLibertarian89,
ReplyDeleteI was a libertarian adherent of the Austrian School, so I understand where you're coming from. Trust me, you need to be more humble and read up on MMT/postKeynesian macroeconomic accounting with an open mind. It's spot-on and, rightly understood, not totally inconsistent with at least some aspects of Austrian theory.
Of course private sector savings is good and appropriate at this time. The point is that if such savings desires are not offset by tax cuts, spending, or some combo thereof, the economy will shrink.
You scoff at reducing future spending (i.e., that we're only cutting the rate of spending growth), but you forget that future GDP POTENTIAL is constantly growing because of population growth, productivity advancements, etc. So even reductions in the growth of future spending constitute a widening gap between potential (Pot.GDP) and actual aggregate production in the economy (GDP).
How is a growing output gap good?
Best,
Scott
What this means is that AMERICA WILL NEVER AGAIN CATCH UP to other nations who's policies are fostering growth right now.
ReplyDeleteAre there any? Which other countries are getting it right?
S. kelton
As far as I’m concerned, calling a 7 trillion increase in new debt over the next ten years “austerity” is much more of a blunder than a few typos on some obscure internet blog.
ReplyDelete7 trillion in new debt over the next ten years, austerity? really? I still can’t get over that one.
Here, I will try to explain the Austrian perspective as best I can and lets set aside all the name calling.
ReplyDeleteIf people cut back on spending and increase their cash balances they are expressing their desire for more purchasing power, and all that happens is nominal prices fall but the real income and the real consumption/investment production proportion will be unchanged. If people want an increase in the real value of their cash balances in the purchasing power of the money unit there is no reason for government to offset this with spending.
People tend to cut back on spending and save because there is a recession, but the act of doing this is not in and of itself the cause of the recession. Most people spent too much during the phony boom period and save in order to repair their balance sheets and get out of debt in light of the new reality. There is nothing wrong with this in fact it is necessary for a recovery.
Furthermore, people “saving” also means that they desire future consumption over the present which allows the savings to be channeled into capital investments in order to satisfy that desire. People increasing their savings in the present just shifts the structure of production to satisfy future wants over the present. There is no reason why this would cause a recession or any general widespread plight.
In other words, people saving now is necessary and healthy for the economy and a recovery. People are expressing their desire for increased purchasing power. Government has no business meddling with individual preferences in the economy. In other words, consumers are not causing their own problems by saving to much. They are merely expressing their preferences and acting rationally to repair their financial situation after it was previously thrown out of whack during the phony boom period.
I wish I could say you're being shrill Mike, but it looks like we're in for a lost generation, along with much of Europe and Japan.
ReplyDeletelibertarian,
ReplyDeleteWhen the Fed fails to keep interest rates from falling below target and the debt/GDP is low(as it is now), more deficit spending is called for.
An economy is merely a network with a rate and average value of trades between actors. There's no reason for trading to go down just because we may have built a couple of million too many houses. Say's law doesn't hold in monetary economies, due to sticky wages and prices. Grow up and learn some basic econ, instead of going around online making a fool of yourself.
I'm not an MMT adherent, but even basic econ tells us we should be spending more and taxing less right now. And unlike many MMTers I read, I think the Fed should actually try to get NGDP back to trend. If the GDP growth rate increases, that does a great deal for the debt/GDP ratio, especially if spurred by monetary stimulus, which decreases the real value of debt.
"all that happens is nominal prices fall but the real income and the real consumption/investment production proportion will be unchanged"
ReplyDeleteBut this has been proven wrong empirically. Why you insist on this bullshit is nonsensical. Adapt your theory to reality, not otherwise.
"There is nothing wrong with this in fact it is necessary for a recovery."
Yes, repairing balance sheets it's necessary. But if everyone tries to repairs balance sheets at the same time there is no increase of money in the system to repay debts. Add to that that will shrink the economy and change expectations. That means no new investment, no consumption, unemployment (lack of income to repair balance sheets), lack of circulation of existing money (mostly on hand of few people or corporations balances), etc.
Ok, so business close down and output capacity shrinks too, destroying business and activity. Writedowns happen and this is what some austrians (Schumpeter) called "creative destruction" (something that comes attached most usually with poverty, pain, wars, protectionism, etc.).
Yeah, great solution.
"If people cut back on spending and increase their cash balances they are expressing their desire for more purchasing power"
No, they are not spending because things are looking grim and gloomy. It's called expectations and it's what drives the business cycle. They are saving because they need to get out of debt too (specially when things are looking real bad).
"Government has no business meddling with individual preferences in the economy."
Government is not saying people to not save. Don't you get it? What government has to do actually is to have larger deficits, not only because automatic stabilizers, but because people needs cash to repair sheets, and that money has to come from somewhere. Money does not grow on trees (coconuts deficit spending!), it comes from government as the monopoly issuer of currency (or from banks via debt & credit, but technically credit is not money, it's a liability with the state, but people does not differentiate between credit and fiat money; but people is not willing to get onto debt any more).
Here is the Austrian response if anyone cares to listen. I will try to articulate it the best I can.
ReplyDeleteSay’s law does hold even in a monetary economy. One must finance their expenditures from their prior production. People derive their purchasing power and their ability to demand anything from their prior production. Production drives demand, not the other way around. Prices and wages do not have to be sticky and the depression of 1921 illustrates that perfectly. Wages and prices can adjust, however, with unions, minimum wage laws, inflation, government spending, unemployment insurance and other interventions, wages and prices can be rigid. But again, it is only because of government or Fed intervention.
We should be taxing and spending much less right now. You're half right.
People saving more does not destroy the economy, but rather, grows an economy but allowing the accumulated savings to be channeled into capital investments that produce more goods and services which ultimately raises real wages. More savings increases the pool of capital in the economy promoting growth and rising standards of living. Savings is good, even during a recession.
The business cycle is not caused by psychological factors. Consumers don’t cause recessions. Business cycles are real events experienced by real individuals, and expectations and beliefs are just psychological phenomena that do not have a major impact on outcomes in the real world. Peopele always have different expectations, but expectations are not the cause of the business cycle.
Business cycles are caused by artificially lowering interest rates which misallocate resources into unsustainable lines of production that latter collapse because the savings necessary to finance them eventually dries up. Governments and central banks cause recessions.
More money in the economy does not make more goods and services magically appear. Money acts as a medium of exchange and more mediums of exchange will not increase production, capital, or create overall economic growth. Only through savings and capital accumulation can hose things take place. In an economy, what matters is the exchange and investment of goods, not money. Money is a standard by which economic agents decipher the exchange value of goods. Holding or using money will influence the purchasing power of money, but will not influence the flow of capital.
"Say’s law does hold even in a monetary economy. "
ReplyDeleteNO, this is one of the main myths discredited in postkeynesian economics (ie. read Keen). Say's law does not hold in a monetary economy (and because the only form of capitalistic economy & advanced production economy is a monetary one, it's plainly an absurd law; pre-capitalistic economies were not barter economies, contrary to 'asutrian' myth, but more like gift economies ala Marcel Mauss).
If you keep insisting on dated concepts which are just wrong we can't advance. Please get rid of ideology!
"Production drives demand"
Oh please, not more supply side faith!
"depression of 1921"
An other myth by austrian economics, the way this depression (in which there wasn't bank crashes anyway and balance sheets of financial system was in good shape) was by creating more leverage. Funny enough, government spending cuts started BEFORE the depression (because big spending cuts in governments have lead to recessions/depressions since forever! you an check the empirical data here too).
"The business cycle is not caused by psychological factors. Consumers don’t cause recessions. Business cycles are real events experienced by real individuals, and expectations and beliefs are just psychological phenomena that do not have a major impact on outcomes in the real world. Peopele always have different expectations, but expectations are not the cause of the business cycle."
Please tell me you don't trade or own a real business, or you must be constantly losing money! Off course psychological and sociological factors influence the business cycle, these are not the sole drivers (obviously is a very complex phenomena, were prices affect the cycle and how it develops) but are very important. I recommend you to study modern behavioural economics and psychology. People leverage more when expectations are good, also market sentiment creates booms & asset bubbles. I think
"Business cycles are caused by artificially lowering interest rates which misallocate resources into unsustainable lines of production that latter collapse because the savings necessary to finance them eventually dries up. Governments and central banks cause recessions."
Booms & bust happened on the gold standard, on free banking system, etc. I recommend you read Minsky.
"More money in the economy does not make more goods and services magically appear. Money acts as a medium of exchange and more mediums of exchange will not increase production, capital, or create overall economic growth. Only through savings and capital accumulation can hose things take place. In an economy, what matters is the exchange and investment of goods, not money. Money is a standard by which economic agents decipher the exchange value of goods. Holding or using money will influence the purchasing power of money, but will not influence the flow of capital."
First as you know money != capital, but you place them on the same level ("only through capital accumulation"), a typical austrian mistake.
But I agree that more money does not mean more production and wealth, this is why you can't print money infinitely or increase spending (which is actually the same thing). This is why inflation happens. But when the forces are deflationary you must offset them, but inflation monster will follow you always if production is not increased. But with an huge output gap and unemployment there must be more spending (targeting the main drivers of inflation, which are energy consumption and efficiency).
BTW the purchasing power of money can only be known when stuff is bought and sold, Holding money is not inflationary, it's when people uses it to buy stuff and prices are set by supply and demand that you know how much purchasing power does it have. So money has to circulate to create inflation or not.
Libertarian,
ReplyDeleteDoes Austrian theory lift the rules of algebra? Good for them.
For everyone else (private cash savings) = (government deficit), by accounting.
@libertarian - A lot of that makes some sense. But "production drives demand"? That seems to mimic the idea of the magical "job creators." Nobody creates a job for a product or service without willing and able customers and nobody produces a product without demand.
ReplyDeleteThis comment has been removed by the author.
ReplyDeletelibertarian,
ReplyDeleteA person in the 21st century claiming Say's Law is relevant in a modern economy! lmao
I'll cut to the chase. You've made positive statements claiming Say's Law holds in monetary economies, controlling for government intervention. Show me your data. If you have no data, you have nothing and you're an embarrassment to your gene pool.
"Say’s law does hold even in a monetary economy. "
ReplyDeleteNO, this is one of the main myths discredited in postkeynesian economics (ie. read Keen). Say's law does not hold in a monetary economy (and because the only form of capitalistic economy & advanced production economy is a monetary one, it's plainly an absurd law; pre-capitalistic economies were not barter economies, contrary to 'asutrian' myth, but more like gift economies ala Marcel Mauss).
If you keep insisting on dated concepts which are just wrong we can't advance. Please get rid of ideology!
"Production drives demand"
Oh please, not more supply side faith!
"depression of 1921"
An other myth by austrian economics, the way this depression (in which there wasn't bank crashes anyway and balance sheets of financial system was in good shape) was by creating more leverage. Funny enough, government spending cuts started BEFORE the depression (because big spending cuts in governments have lead to recessions/depressions since forever! you an check the empirical data here too).
"The business cycle is not caused by psychological factors. Consumers don’t cause recessions."
Please tell me you don't trade or own a real business, or you must be constantly losing money! Off course psychological and sociological factors influence the business cycle, these are not the sole drivers (obviously is a very complex phenomena, were prices affect the cycle and how it develops) but are very important. I recommend you to study modern behavioural economics and psychology. People leverage more when expectations are good, also market sentiment creates booms & asset bubbles. I think
"Governments and central banks cause recessions."
Booms & bust happened on the gold standard, on free banking system, etc. I recommend you read Minsky on financial stability.
"More money in the economy does not make more goods and services magically appear."
First as you know money != capital, but you place them on the same level ("only through capital accumulation"), a typical austrian mistake.
But I agree that more money does not mean more production and wealth, this is why you can't print money infinitely or increase deficit spending (which is actually the same thing). This is why inflation happens. But when the forces are deflationary you must offset them, but inflation monster will follow you always if production is not increased. But with an huge output gap and unemployment there must be more spending (targeting the main drivers of inflation, which are energy consumption and efficiency).
BTW the purchasing power of money can only be known when stuff is bought and sold, Holding money is not inflationary, it's when people uses it to buy stuff and prices are set by supply and demand that you know how much purchasing power does it have. So money has to circulate to create inflation or not.
Libertarian -
ReplyDeleteJust because you assert that Say's law holds in a moneatary economy doesn't make it true. It can only be true in a commodity money economy, which is really just a gussied up barter economy and.has the unfortunate property of never having existed (even under the gold standard gold was merely a fixed priced commodity, it wasn't "money" per se).
The laws of accounting simply do not allow some to save unless others go into debt, and if general savings desires go up, there is no real mechanism by which the "market for savings" can clear.
You are living in a fantasy world. The austrians, like many others, want so desperately for money to be a "thing"' separated from the messiness of human beings and their societies, that they convince themselves that it's true. It's not. Money is, and always has been, a social phenomenon. It is an abstracted social relationship between grubby, imperfect human beings - not a shiny, perfect metal substance. Deal with it.
libertarian89 --
ReplyDeleteIf you really think "production drives demand" go ask any business owner why he/she is not borrowing money or putting capital into plant and equipment or hiring people right now. As a business owner, I will tell you the answer: There is not enough demand. Only when demand exceeds production capacity will the business owner expand capacity. It appears that you have never owned and run a business.
Lib89,
ReplyDeleteAll US dollars originate in government spending. They are destroyed through taxes and drained from the economy by savings and imports. Is sales are down throughout the economy AND people are continuing to save AND we continue to net import, how will the economy grow?
Are banks lending? Are companies hiring? How patient are you willing to be for the pendulum to swing the other way.
How has that worked for Japan? Being libertarian is fine and dandy on an individual level. Knock yourself out with all your self reliance. I agree you can't help those who won't at least try to help themselves, but we can't sit complacently while we let this oligarchy rule our world. Live in your happy little world while the rest of us try to make our world livable for all.
@john z
ReplyDeleteMaybe I will try to restate it because the way I said it may be misleading. Ones prior production creates the wherewithal for one to exercise their ability to demand or spend. It does not mean production necessarily creates its own demand, but rather, people can only demand other goods and services because they previously produced other goods or provided other services that others value. This is where individuals derive their purchaisng power from. Their prior production is their means of payment which allows them to demand other goods and services.
Different business people claim different things when it comes to the poor economy. Some say it’s the uncertainty created by all the new taxes and regulations coming out of Washington. This tends to make longer term investment and entrepreneurial planning difficult when the business climate is uncertain. But a dearness of money is not the cause of the problem. People are cutting back on spending because of the recession but the cutback in spending is not the general cause of the problem to begin with.
Booms and busts happened on the gold standard pre fed because interest rates were being artificially lowered by commercial banks themselves or by pressure from government. Governemts also increased their money supply thereby lowering interest rates which ignities the boom and bust cycle.
ReplyDeleteSaying that they happened pre fed on a gold standard shows that you have no idea why they happen to begin with. They happen because the vital price signal that coordinates the structure of production which is the interest rate, is fatally impaired by an increase in the money supply either done by banks themselves or governments. In other words, the interest rate has to reflect the real pool of savings and the real time preferences of consumers. If it does not, boom and bust cycles will happen. You dont have to have a central bank to do that.
Money changes nothing. It’s simply a means of exchange and does not change the fact that ones ability to consume and demand other goods and services come from ones prior production. Say’s law still holds. I just explained it again in the comment above.
"This is where individuals derive their purchaisng power from. Their prior production is their means of payment which allows them to demand other goods and services."
ReplyDeleteSo what will happen when production is dropping everywhere? (check ISM data)
"But a dearness of money is not the cause of the problem. People are cutting back on spending because of the recession but the cutback in spending is not the general cause of the problem to begin with."
You're thick, it's not a question of it being the problem or not, it's a question that the problem can't be solved by cutting spending! The problem is too much debt in private sector, so how can too much debt be solved? Deleveraging. And how can you deleverage? Using income to repay debts. And how can income stay when production is dropping? It can't!
So your solution is: bankruptcy everywhere as we enter in a deflationary spiral and destroy output capacity. Yes I know now! You want to kill the economy so there can be hyperinflation and gold can rise to the sky and gold-standard can be imposed again.
Cut spending! Rise rates! Long live hard money & austerity!
libertarian89's a joke. It didn't offer any evidence.
ReplyDeletelibertarian89 ==
ReplyDeleteSo your first paragraph explains how and why a worker gets paid, but it says nothing about how the medium of payment gets into the economy. I may have purchasing power because of what I produce, but the medium I'm paid in is dollars so I can trade that power for other goods and services (medium of exchange).
Although I agree that over-regulation and uncertainty can be problems, if demand increases those barriers will be quickly overcome.
Of course the deleveraging and saving by the private sector is not the "cause" of the recession. The recession was caused by the bursting of the housing bubble that forced the deleveraging and saving by the private sector.
Excellent rant, Mike
ReplyDeletelib, the first thing that is obviously wrong with your argument is " all that happens is nominal prices fall but the real income and the real consumption/investment production proportion will be unchanged."
ReplyDeleteNo, nominal debts remain the same and when "prices and wages fall" they find themselves underwater and what was not "malinvestment" to begin with becomes so toxic that it must be liquidated. Irving Fisher called this falling domino cycle "debt-deflation" induced depression, and Hyman Minsky described the process in terms of the financial cycle.
The Austrian real business cycle glimpses this but misses the mark in its focus on malinvestment due to interest rates rather than the other aspects of creditary economics that Post Keynesianism and especially MMT consider. But there is perhaps a tenuous link, since Wray was a student of MInsky, Minsky of Schumpeter, and Schumpeter of the early Austrian school.
The debt overhand is high right now, especially in RE. Driving already underwater borrowers into default is just plan crazy. It will not only take them down, but it will take down the financial sector, and then the real economy.
It's already happening. The only reason that it is not collapsing now is that the Fed and regulatory agencies are exerting "forbearance" to prevent it. But when homeowners and other debtors begin defaulting en masse then a deflationary spiral will be difficult to avert without massive intervention, which will not be forthcoming under fiscal austerity.
But that's apparently fine with you, since you are hedge with gold and have a hideout will lots of dried food, water, guns and ammo, just like your buddies.
"You dont have to have a central bank to do that."
ReplyDeleteHaha, but you said: government & central banks create crisis. You now agree that financial system can drive to it too. Now you may get why it does and why does the business cycle happen in the first place.
"Money changes nothing. It’s simply a means of exchange and does not change the fact that ones ability to consume and demand other goods and services come from ones prior production. Say’s law still holds. I just explained it again in the comment above."
It doesn't matter how many times you repeat it, it will still be wrong! Off course money changes ALL. Check this, for example: http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenNudgeNudgeWinkWinkSayNoMore.pdf
Even Say didn't beleive in his own law: http://delong.typepad.com/sdj/2011/04/hoisted-from-the-archives-macroeconomics-is-not-hard.html?asset_id=6a00e551f080038834014e88231f4b970d
Right. People need to repay debts. They do not need to spend more and take on more debt right now. They have to save and repair their balance sheets and get out of debt. Their income will help them repay debts but in order to get an income one must first produce something or provide a service. So yes, we need more jobs and production. More production is necessary, no doubt, but only through encouraging more economic freedom will the economy produce more. We need a lot lower taxes, less government spending, fewer regulations, less monetary “stimulus” and less government meddling in general.
ReplyDeleteSavings will also help the economy produce more because it will allow an increase in the amount of capital available for investment. We will increase our production by saving more allowing for the capital stock to grow. Spending does not increase productivity, but rather, people spend because there is productivity. Production comes from prior savings that are channeled into capital investments that produce goods and services.
My solution is for there to be some temporary short term pain for the economy. I hate to say it. You can’t paper over the recession with stimulus. Stimulus is like giving a drunk more alcohol to help “cure” his hangover which makes him feel better in the short run, but ultimately hurts him in the long run by delaying the day of reckoning. In other words, we need to sober up with higher interest rates and by liquidating malinvestments. Prices need to fall, government spending needs to be lowered, savings needs to increase, and this will help realign the structure of production to be more in tune with consumer preferences and help the economy grow again in a meaningful and sustainable way. Basically, we need lower taxes, less government spending, fewer regulations, and more economic freedom in general.
Man, we're not stupid, no matter how you spin your political agenda we won't fall for it.
ReplyDeleteYou have yet to grasp how money does enter the economy so it can be 'saved'. When you do we can continue talking, until then, bye, and good luck in your coconut island.
"we need to sober up with higher interest rates and by liquidating malinvestments"
What is malinvestment? Malinvestment is already being liquidated, or don't you see real estate and construction falling apart? Or is the whole economy 'malinvestment' so it all has to go underwater? Is this just an other illusion of the supply-sider perverted mind?
Sorry but your economic theory is just about faith. You can't deal with reality and facts, so it's a failed theory which will only lead to disaster.
"People saving more does not destroy the economy, but rather, grows an economy but allowing the accumulated savings to be channeled into capital investments that produce more goods and services which ultimately raises real wages."
ReplyDeleteWhere does the saving come from? Don't tell us "real saving" in stuff. Saving by definition in economics is saving of financial assets. For non-government to net save at the macro level, there have to be net financial assets to save. Only government can generate non-government net financial assets, because all endogenous lending nets to zero. The government injects non-government NFA through deficit expenditure. The deficit has to offset non-government desire to save in the currency or else this saving will not be possible. The purpose of the deficit under functional finance is to make room for the desired level of saving, which includes deleveraging. This is what the sectoral balance equation says. See Stephanie Kelton's every simple explanation of this at What Happens When the Government Tightens its Belt? Part I and Part II.
Deflation is the inevitable consequence from a previous dose of inflation created. It does not need to be avoided. When prices rise to artificially high levels, they need to fall back down to reality after the bubble bursts. There is nothing wrong with this. The economy can’t recover in a meaningful or sustainable way unless we let prices and wages fall. Of course, government and fed intervention of various kinds interrupts this process. During deflation prices can actually fall faster than wages can which means that real wages can increase. An increase in real wages and incomes coupled with falling commodity prices are not a bad thing.
ReplyDeleteA malinvestment is an investment which scarce resources were channeled into that are no longer profitable in light of the new reality and only appeared profitable because of the false signals of artificially low interest rates during the boom period. They need to be liquidated and the resources tied up in these malinvestments needs to be re allocated toward more profitable lines of production. Yes housing is one of them, and other housing related sectors, and prices in those areas need to fall. The economy is not a malinvestment but the existence of malinvestments has a profound impact on the entire economy itself.
Tom I don’t buy it. People can save without the government running a deficit. It can and has happened before.
ReplyDeleteI’m sure you have seen this, but Murphy explains it pretty well here.
http://mises.org/daily/5260/The-UpsideDown-World-of-MMT
"When prices rise to artificially high levels, they need to fall back down to reality after the bubble bursts."
ReplyDeleteYes, this has been happening, or didn't you know most households are on negative equity because of this? We're on deflation right now, real estate is the biggest expenditure for most households.
"Yes housing is one of them, and other housing related sectors, and prices in those areas need to fall. The economy is not a malinvestment but the existence of malinvestments has a profound impact on the entire economy itself."
Big news to you, this has been happening for years. So, can we purge malinvestment without destroying the whole economy please? For those of us in the real world which are not in the business of speculating with gold and guns would be nice, so we can continue to be productive while you are unproductive and waste resources (energy mining gold, resources building weapons).
Thank you! A fellow citizen.
libertarian is just a troll. It's presented no evidence.
ReplyDeletelib, you are not the first Austrian/Libertarian to show up here and your arguments are not as well developed as others we have seen, so that is probably why you are getting strong push-back. This is ho-hum for us. You are just making assertions that we have all heard before many times. We already know what your position is, since we have have dealt with it before, and with Austrians who took the trouble to understand MMT. You have not engaged the debate on that level, so don't be surprised at the reaction.
ReplyDeleteHere are my thoughts on MMT:
ReplyDeleteAs far as I’m concerned, although there are difference between the two schools particularly on monetary policy, MMT revolves around the same Keynesian worldview of a perpetual motion device economy that needs to be managed by a bunch of superior beings with all knowing knowledge. That is my main problem with it.
There is nothing in MMT with respect to capital theory or any emphasis on the structure of production. It treats spending and investment as something good in and of itself without respects to where and how resources are employed and if government is in any position to determine that.
There is nothing in MMT about inflation and changes in the relative price structure, and how this impacts the economy. There is nothing in MMT about the role entrepreneurs have in the economy by engaging in economic calculation using signals from the price system in allocating resources. It also places too much of an emphasis on accounting tautologies and almost neglects human action entirely. I have many problems with MMT and from what I have read, most if it is derived from commie Abba Lerner’s “functional finance” and the “economics of control” which was eviscerated by Austrians decades ago.
I have read MMT and choose not subscribe to it, in terms of policy implications. However, the way MMT describes the monetary system in a lot of ways is accurate as I do find myself saying “the government is not operationally constrained in its ability to issue fiat currency electronically” however, I draw much different conclusions from that as most MMT’ers.
Another observation I have made is that many MMT’ers tend to be progressive/liberal democrats in the sense they are looking for an intellectual justification for more deficit spending on things like green tech, health care, etc.. However, I would say Mosler tended to be less ideologically liberal and more centrist when explaining MMT than someone like Mitchell.
In fact, I have taken the time to read Mitchell and Mosler. I have even looked over 7DIF. In fact, I have met Mosler in person and have heard him talk in person giving his whole MMT spiel in front of an entire crowd that I was sitting in. Most people were either just confused by the whole thing or laughing afterwards.
ReplyDeleteAustrian economics places more of an emphasis on how micro relationships impact the macro level. Austrians and MMTers tend to talk right over each other because of completely different world economic views.
Murphy doesn't know what he is talking about, other than wrt coconuts. He gets an F in monetary operations. The MMT economists showed that in the debate.
ReplyDeletelib, thanks for coming by and sharing your views.
ReplyDeleteLibertarian-->
ReplyDelete"Of Course You Don't Need the Government in Order to Save"
I read the cognitively simple example posted under this heading. Firstly we talking about fiat, not coconuts. Unlike coconuts fiat does not come from trees. The example talks about saving coconuts for future capital investments. In order for Crusoe to save coconuts they need to be created by the environment. Therefore the environment for accounting purposes must run a 'deficit' of 50 coconuts so that Crusoe can save 50 coconuts.
People can save using things other than money. But it's impossible for the private sector to save coconuts/fiat without the environment/government going into 'deficit'.
If your planning on taking civilization back to the dark-ages without fiat, then you're forfeiting the economic exchange advantages associated with fiat.
So when Austrians say 'we don't need governments to run deficits', what they really want is for the government to run surpluses to drain private savings and then return society to barter exchange. Nice, where do I sign up?!?
I looked through those comments recently and I’m not sure if you can declare that MMT “won” the debate.
ReplyDeleteReally, my initial remark was just that I felt it was a bit absurd to call a 7 trillion increase in debt over 10 years austerity. I mean come on, austerity? Really? Tom, you don’t at least agree with that?
You MMT’ers will get your huge deficits and debt. Don’t worry. However, convincing the public that more deficits are necessary to offset the desire for individuals to net save in the private sector may be a bit difficult considering how big our debts and deficits already are.
The tone of the debate certainly has shifted making that position increasingly difficult to sell to the voting public.
You say tomayto, I say tomahto Tomayto, tomahto, potayto, patahto...let' call the whole thing off.
ReplyDeleteThe government could offer any willing person in need of a job the option to mine for gold to help retire 'the debt'. We could make MMT folks happy with the job program. The Austrians and Tea folks will be happy to eliminate debt. The gold bugs can have something to 'invest' in. Obama could hardly come up with a better win-win. Mining gold is a wasted human endeavor, but at least it would fix the real unemployment problem and mollify the adversaries.
ReplyDelete"Really, my initial remark was just that I felt it was a bit absurd to call a 7 trillion increase in debt over 10 years austerity. I mean come on, austerity?"
ReplyDeleteThe point is that the US is experiencing almost 105 U3 and almost 20% U6, has a widening output gap, and GDP growth approaching 0. Meanwhile, the private sector is saving/deleveraging while the trade deficit is increasing.
Anything less than a deficit that offsets the non-government saving desire is toying with deflation, and at this point, deflation threatens a debt-deflation driven depression. This is a crisis on the order of 1931, not 1937. The UK is reeling from austerity and contracting. The EZ is in la-la land, trying to save the private financial sector at the expense of forcing depression on the periphery.
Meanwhile social unrest is increasing and right-wing extremism is rising in the US, UK, and Europe.
This is not the time to be cutting spending or raising taxes. They are approximately equivalent at the macro level. Cutting spending is essentially the same as raising taxes by that amount.
The beauty of functional finance is that fiscal policy can be targeted. MMT recommends cutting taxes in the middle, where it will be spend or used to rebuild broken balance sheets, and spending at the bottom where it will be spent immediately. This will increase effective demand, which sends a signal for businesses to invest and start hiring again.
Along with this reforms need to be put in place, insolvent banks put into resolution, and those who committed crimes investigated and prosecuted.
All this talk about deflation being a good thing made me wonder…
ReplyDeleteHow do you get around this?…
Lets see, you borrowed $80,000 to buy a $100,000 house ten years ago.
Now, your wages have declined by say 20% and the value of your house has declined to say $80,000.
But your mortgage is still around $79,000…
Your equity investment has nearly disappeared, and over the next ten years you will become upside-down and likely unable to make your payments because your wages are now down 40%.
Seems un-sustainable to me.
This comment has been removed by the author.
ReplyDeleteI think banks would need to reduce loan amounts and corresponding collateral prices inline with deflation. Otherwise the bank would become insolvent ?
ReplyDeleteBut there is the bigger issue of where does the money come from to pay for the interest on loans? How can interest be paid if the rich hold all the cash and the government doesn't want to print more money ?
Looks like US history has been Keynes/MMT or whatever name catches your fancy:
ReplyDelete"It is demonstrated that the US economy has on the long-term in reality been governed by the Keynesian approach to economics independent of the current official economical policy. This is done by calculating the two-point correlation function between the fluctuations of the DJIA and the US public debt."
http://www.unifr.ch/econophysics/paper/show/id/1107.3095
"Keynesian Economics After All"
Figure 1 says it all:
http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.3095v1.pdf
PaulJ -->
ReplyDeleteSomeone might want to correct me, but there are a few unlikely ways to get around debt deflation.
Banks would need to reduce collateral asset amounts and the corresponding loan amounts. Banks would need to acknowledge massive losses in order to do this, so prob. won't happen.
The more pressing issue is where does the money for interest payments come from? How can interest payments be paided if the banks and rich minority hold all the cash, and the state is unwilling to print more money?
Perhaps what the banks should do is reduce their total loan amounts below the market value of their collateral asset holdings. Also impose a call/put option structure over collateral asset holdings that prevents loan holders from exiting their positions. Banks could then issue new loans, but the credit from these new loans will only be accepted by other account holders with the same bank.
The bank-credits from the new loans would flow through and be used to pay for interest, but most importantly financial assets within the bank would start to move again.
Such a scenario would create a 'bank' sub economy. The market value of the bank's collateral assets would improve.
tom, you are a very patient man indeed. good luck with trying to convince a cultist to part ways with his (erroneous) beliefs.
ReplyDeleteSR, anyone can have an epiphany and become "saved." If it works in spirituality, why not economics.
ReplyDeleteThe difference between spirituality and normative religion is similar to the different between economics as a science and economic ideology. Truth is truth. Just as normative religion obscures spirituality, so too does ideology obscure science.
@ Tom
ReplyDelete…"Truth is truth"…
If only that were so (it is, but only if we recognize it).
I believe there is a subset of the population that cannot think logically - their brains are hard-wired against it.
The only way you could get to these people is to gain their trust. Then, you have a chance for them to transfer their reliance on authority for their arguments to you.
They still won't be comfortable thinking for themselves but at least they would agree with you.
PaulJ, in the case of MMT is is getting the other person to see "anew." Ideology is a set of blinders that focus vision through a tunnel.
ReplyDeleteOne has to "grok" MMT to get it. It's a reversal of normal perception, very similar to what distinguishes the "sacred" (holistic, open) POV from the "profane" (partial, closed) POV. It's like being able to see the duck-rabbit instead of only the duck or the rabbit in a Gestalt image.
The sacred v. profane relates not only to the way facts are perceived (structured) but also to values. Mircea Eliade examined this distinction in his work, especially The Sacred and the Profane. Eliade was a colorful character with a rather dubious (nationalist, fascist) past politically, but his professional insights are regarded as some of the best products of 20th century thought in the history, philosophy and anthropology of religion.
I introduce this because there is a much closer connection between homo religiosus and homo religiosus than most people suspect. There are epiphanies and conversions in both. Some merely involve shifting from on ideology to another, while others involve transcending of previous limitations.
@Tom…
ReplyDeleteI agree with everything you have said and I am glad you are fighting this fight.
My comment was an observation that if trust was the only thing that could get someone to begin to accept your arguments then logic may be useless. On the other hand a rejection of logic can cause a discussion to become circular.
How do you free someone from a cult?
PaulJ, generally ideologues are stuck as long as they insist on keeping their ideological blinders on, But reality (truth) has a way of intruding on ideology. Once people start being open, then truth can find them.
ReplyDeleteI say that truth can find them instead of they can find truth, because that is what an epiphany is. It is a sudden realization rather than the laborious outcome of logical reasoning, although laborious logical reasoning and deep reflection often must precede realization in order to till the ground and fertilize the soil of the mind.
The difficulty in achieving realization often lies in its simplicity. The MMT insight is quite simple, but it took a Warren Mosler to get that insight initially. Warren says that the insight was that fait currency is currency monopoly and the state is the monopolist. Everything else flows from that insight.
libertarian,
ReplyDeleteHowever, convincing the public that more deficits are necessary to offset the desire for individuals to net save in the private sector may be a bit difficult considering how big our debts and deficits already are.
I'd put it differently - more deficits are necessary to finance the desire for individuals to net save.
Ideologies fall apart when reality is too harsh, or evidence too strong, to ignore.
ReplyDeleteThen the cognitive disonance can't be avoided by other methods than revising one's own preconceptions which alter how you perceive events and reality.
Ideology is, always, ultimately, destroyed by facts. It can take days, months or years, but it always happens. Guaranteed. And then is when people starts looking for different solutions to their problems or simply get mad and autodestructive (but this rarely happens for whole societies).
libertarian,
ReplyDeleteYou're lucky this isn't my blog, or I'd demand evidence for every assertion you make and delete your comments if you failed to produce.
You are a big zero.
lib - can I ask: do you accept or reject the Sector Financial Balances approach?
ReplyDeleteI ask because your comments don't seem to me to be stock-flow consistent from an accounting perspective. Eg you say "saving more does not destroy the economy, but [allows] the accumulated savings to be channeled into capital investments that produce more goods and services". Savings represent income that could have been spent on consumption or investment this year being accumulated as deposits - ie as claims on the govt - which in itself is the opposite of what is required for economic growth. Your association of "savings enables investment" is based on an individual, not an economy.
If you have an Austrian objection to the whole Sector Financial Balances discipline (on which MMT is founded), I would love to hear it. But I am fairly sure that Austrians who have taken a little time to read up on it (eg Ed Harrison) agree with SFB, and hence the outlines of MMT.
Libertarian,
ReplyDeleteSay's law assumes that production is undertaken with an aim to acquire other products - creations of the private sector. But in a monetary economy the aim of production may be to amass financial assets - a.k.a money, creation of the state, not the private sector. What does it mean? Obviously, supply of goods does not create its own demand for goods, there can be a demand shortfall.
Say's law fails in monetary economy.
Tom -->
ReplyDeleteYou have more patience than most. I am 'beneficiary' of Tom's willingness to engage others, and show them a different perspective of the world. I have a better understanding of economics because of this.
:)
I also have been helped by Tom's persistence. I came from a place a lot closer to MMT though.
ReplyDeleteMMT is how we scoreboard the economy. Through knowing how it is scoreboarded we can change some variables to get a better outcome. But we can only change them through laws.
Thank you Tom.
Thanks for the kudos.
ReplyDeleteI'm just starting to catch on to all of this but didn't we lose something like 14 trilion when the housing bubble burst? wouldn't that mean that with a 7 trillion deficit over 10 years it would take 20 years JUST to get back to where we were 3 years ago? sounds like a downward spiral to me. Please correct me if I'm wrong, like I said this is new to me.
ReplyDeleteAnonymous, we are still in free fall with no chance of pulling out of it politically until after the next election. The hole is going to get a lot deeper. We are already in the double dip in housing and now the real economy is rolling over. One good shock is all that it will take, and the US is in political gridlock, the UK is contracting, the EZ is coming apart at the seams, Japan is on the ropes, and China is trying to cool inflation without experiencing a hard landing. And MENA is in flames. Not a promising outlook.
ReplyDeleteMoreover, if we miraculously escape all of this, there is still the specter of resources shortages and global climate change staring at us from the future.
The alarm bells should be going off and we should be going to general quarters, but instead Congress is on vacation and the president is out to lunch. Go figure.
Anonymous,
ReplyDelete"I'm just starting to catch on to all of this but didn't we lose something like 14 trilion when the housing bubble burst? wouldn't that mean that with a 7 trillion deficit over 10 years it would take 20 years JUST to get back to where we were 3 years ago? "
My understanding is exactly the same. People need savings cushion to spend. If we want them to spend as much as they did with 2006 assets we need to replace the evaporated 14T in housing wealth with dollar savings out of deficits. At present pace it will take forever.
The same exactly happened in Japan. Koo writes in his book "Holy grail of macroeconomics" that the 20 years of massive deficits merely replaced the stock of assets that vanished in the massive housing bubble collapse at the end of the 80s.
I recommend Koo's book although he doesn't fully understand the govt deficits - he thinks Japan is like Greece and can face a default on its debt.
http://bilbo.economicoutlook.net/blog/?p=3225