Doug Noland doesn't get MMT

The bottom line remains that the US economy continues to tread water, staying afloat through a historic expansion of federal debt. I maintain that the explosion of federal debt has been a bubble, and that our fiscal train wreck would not be avoided through a resumption of private-sector debt growth. The US household sector does not want to add debt, and the corporate sector does not need to.

Credit Bubble Bulletin
Q3 2011 "Flow Of Funds"
by Doug Noland December 09, 2011

For some reason, Mr. Noland thinks that accumulating private debt is superior to "public debt." He apparently does not realize that government deficits inject net financial assets into non-government, thereby increasing non-government financial wealth without imposing any debt burden on non-government. Obviously, he assumes that government is a currency user like non-government and must repay what it borrows from revenue.

Private debt can grow to become unsustainable due to both illiquidity and insolvency, while public debt is not limited in that a currency sovereign can always service its debt through currency issuance if it chooses, and the central bank as the lender of last resort is always able to provide unlimited liquidity.

Under the existing monetary system, the US government not only is the currency issuer but is also not operationally constrained, being the monopoly provider of its own non-convertible floating rate currency. Government funds itself directly rather than through revenue or finance, and the politically imposed issuance of Treasury securities in offset of deficit is a monetary operation that drains excess reserves from the interbank market enabling the Fed to hit its targe rate.

 I have as well noted the disturbing parallels between the eruption of subprime and the Greek debt crisis. From my perspective, at this point it is only a matter of time before the markets begin to impose discipline upon Washington. 

Mr. Noland also misses the obvious difference between the US federal government and the countries of the EZ. As the currency sovereign issuing a non-convertible floating rate currency, the US has no risk of insolvency. Inflation is the only constraint, and it is unlikely in an environment of high unemployment and a wide output gap. Conversely, the EZ countries are currency users, having forfeited currency sovereignty, and they can become insolvent under current arrangements. Yes, even Germany.

Let me repeat what Noland says:

at this point it is only a matter of time before the markets begin to impose discipline upon Washington. 

"Only a matter of time"? What is that supposed to mean? Mr. Noland should ask Bill Gross how that trade played for him. Has he not noticed that the US yield curve is collapsing to historical lows? And it also seems that Chairman Bernanke is finally figuring out that the Fed can control the yield curve to the degree it chooses by setting price and letting quantity float.

The "bottom line" is that with the domestic private sector increasing its saving/deleveraging and net exports not offsetting the demand leakage to saving, the sectoral balances are dominated by domestic private saving and external saving (CAD equivalent to KAS), with the result that if the government's fiscal balance doesn't sufficiently offset, then the economy will underperform. This means that the fiscal deficit and politically imposed requirement for offsetting Treasury security issuance are insufficient. As Warren Mosler likes to say, by trying to avoid becoming the next Greece, we are becoming the next Japan.