"The end game of the end game." -John Mauldin
This guy is a clueless doofus, yet he has a HUGE following. I have like, nothing.
His remarks are so ignorant that it really provides for some belly aching laughs. Unbelievably retarded comments. Check it out.
| According to Mauldin, Europe isn't solving its problems, but rather making things worse. Greece's "fundamental problem is its trade imbalance." And "Spain has lost access to the bond market. They can’t fund themselves."
"What we’re seeing is the real end game," says Mauldin. "We’re coming to the end of government’s ability to borrow money to fund current spending that’s beyond the growth of their economy. But Mauldin doesn't see this as all bad, because in the end, governments will begin to tighten. I actually find that massively bullish because that government funding misallocates capital. So governments are going to have to live within their means. Not just in European countries, not just in Britain, not just in Japan which has its own problems that will be coming to us next year, not just in France which will be the headline in 2 years, but also in the US. It’s going to end in the next 2 or 3 years, Europe first, then Japan, then the US. Hopefully we (the US) don’t end by becoming Spain and hitting the wall and losing access to the market, without the central bank massively funding ourselves and watching interest rates rise. That’s where Western governments are. They’ve run out of the ability to borrow money to finance their current consumption. This is a good thing that it’s coming to an end. I don’t see this as negative in the longer-term. It’s still going to be a bumpy ride for the markets. It’s certainly going to be (an interesting) ride for the business as usual crowd.” |
I have nothing to add other than to say I apparently suck at comedy.
Mike,
ReplyDeleteDon't sell yourself short...following you is far more valuable.
Mauldin has never addressed the differences with monetary sovereignty and therefore has been somewhat correct on Europe, although not necessarily for the right reasons. Let his followers continue to short the Yen and USD waiting for the endgame that never comes.
Isn't it the case that the US government could potentially get into a situation where it has no option but to finance itself directly through the Fed (money creation), as alternatively it would have to pay sky-high interest rates to get private investors to buy its bonds?
ReplyDeleteIn Argentina for example, the government is financing itself in part through central bank money creation, as it can't get foreign investors to buy its bonds without paying super-high rates of interest.
The problem with high interest rates on bonds for a currency-issuing government is not the possibility of default but rather that those high rates can become very inflationary if the govt is running a large deficit (as compounding high interest rates cause the deficit to grow at an ever-faster rate). This can lead directly to a vicious inflationary spiral, or else require harsh spending cuts and tax rises.
You might say "so what, the government can just create money directly, no problem". However, if private businesses are unwilling to invest in bonds due to fears over runaway inflation, it is equally likely that they will be unwilling to invest in the country or even hold on to the currency. So you could see a large currency sell off and depreciation, stoking higher inflation, which is not offset by an increase in foreign investment. The collapse in investment would lead to a contraction in productive capacity which would in turn send prices higher, leading to falling exports. The government tries to offset all of this by creating and spending more money, but just ends up with stagflation. There ends up being no way but down, unless the government is willing to massively cut spending and raise taxes, which means even more pain in the short term....
?
Mike,
ReplyDeletePerhaps an audio track can help ;)
If our readers would open this link below in another browser tab and let Boots Randolph's "Yakety Sax" in the background while they read your post it may provide for a more comedic effect:
http://www.youtube.com/watch?v=ZnHmskwqCCQ
;o
I used to have The Big Picture on my blogroll, up until maybe a year ago.
ReplyDeleteThis guys crap being cross-posted over there drove me away.
We already know that the Moon isn't made of green cheese. We don't have to keep revisiting silly ideas.
There is no "funding" need for any sovereign, currency issuing nation like the U.S. It spends by changing numbers in bank accounts, that's it. And it's "debt" is not debt; those are dollars that pay some interest. It's a simple matter to change them back to dollars that don't pay interest (cash, reserve balances, etc). That's what "paying" back is. Nobody needs to buy our interest paying dollars for us to pay our bills. Nobody.
ReplyDelete@y:
ReplyDelete"Isn't it the case that the US government could potentially get into a situation where it has no option but to finance itself directly through the Fed…"
This has been done in the past, many times I'm sure.
Why am I sure? If you start with nothing it's mathematically impossible to "borrow" your way to $16 Trillion.
It appears there is around $5 Trillion cash plus $10.5 Trillion in bonds in existence. Where did the cash come from?
Y: "Isn't it the case that the US government could potentially get into a situation where it has no option but to finance itself directly through the Fed (money creation), as alternatively it would have to pay sky-high interest rates to get private investors to buy its bonds?"
ReplyDeleteAnything is possible. The question is probabilities.
Someday the US will go the way not only of the British Empire but also of Rome and Byzantium. Who could have imagined then that this was possible in the future?
The question is timing. That something is possible says nothing without putting a clock to it.
"Nobody needs to buy our interest paying dollars for us to pay our bills. Nobody."
ReplyDeleteI asked the BoE some questions regarding their ability to control bond yields and they were adamant that under what they called "normal" conditions they would not try to control bond yields as they have been doing through QE. They were adamant that bond yields would rise if investors lost confidence in the government (i.e. govt fiscal policy).
We know that central banks try to control inflation with interest rates - raising interest rates if inflation is too high.
So, imagine that deficit spending continues to increase, then for whatever reason inflation picks up (oil prices for example) - to which the Fed responds by raising interest rates. Now the govt deficit is increasing at an even greater rate due to the interest payments, which are compounding.
Investors start to fear an inflationary spiral and so bond yields begin to rise further. The Fed does nothing to stop them.
Higher yields mean an even faster growing deficit, which means higher yields, etc. Inflation refuses to come down. Either the Fed cuts rates back to near zero and brings bond yields down through QE (which it wouldn't do as this runs contrary to its policy of using 'tight' monetary policy when inflation is high), or the government is forced to cut spending and/or raise taxes.
---
I understand that the govt is ultimately able to create its own money, but under current arangements the govt (via the Fed) tries to control inflation through monetary policy instead of through fiscal policy, and this means that fiscal policy can be limited by the Fed's actions. For fiscal policy to be unlimited requires that the Fed do what is necessary to keep fiscal unlimited (i.e. never raise interest rates too high and step in to control bond yields if necessary), and that inflation control be delegated instead to fiscal policy - which at present it isn't.
As I suggested above, you can argue that the govt has no 'need' for bond investors. But then again, if they lose confidence in govt fiscal policy, this is likely to indicate a wider loss of confidence in the economy - meaning a reduction in private sector investment (which would only exacerbate inflationary pressures through a contraction in productive capacity).
All these things put together could lead to a vicious stagflation-type spiral, which could be exacerbated further by a sudden sharp decline in the dollar (balance of payments crisis).
"Someday the US will go the way not only of the British Empire but also of Rome and Byzantium. "
ReplyDeleteWell if those did go Tom, it doesnt look like it was because "they couldn't borrow money"....
Thru at least Justinian we can see they had it rolling:
http://mikenormaneconomics.blogspot.com/2011/10/public-safety-as-private-security.html
Those in authority lost track of it at some time after Justinian looks like...
Resp,
@y:
ReplyDeleteAre you saying that if the private sector refused to buy bonds for whatever reason that the government, through the Fed/Treasury would not be able to sell bonds to itself?
I'm not saying that, I'm saying the Fed wouldn't necessarily choose to do that. Rather than accomodate govt spending by buying its bonds, the Fed might refuse to step into the market, effectively forcing govt to reduce spending or raise taxes (assuming my rising inflation scenario above). This could lead to a bad stagflation type situation or worse.
ReplyDeleteI would think the Fed has an implicit obligation not to let the markets explode and the economic system collapse - which means it would find a way to fund the debt.
ReplyDeleteAs I said earlier, this hasn't been a constraint in the past, so why would it be a constraint going forward?
Do we think the government would choose to self-destruct?
y,
ReplyDeleteIf it ever got to that, for the record I'd be glad to put a bank together in that case and take over ALL of the business from the current PDs and buy ALL of the 30-day securities that Treasury would want to issue at FFR + 1% and hold them to maturity ;) (I'd quickly become the richest man in the world in USD balances!)
Rsp,
Mauldin thinks that in wartime governments run out of money and surrender? The US debt to GDP ratio hit an all-time high during WWII; yet, inflation was controlled, and the US financed the Marshall Plan post-war. Apparently, he doesn't do history.
ReplyDeletey, as beowulf has pointed out there are emergency laws on the books that give the government dictatorial power. If a government understands the basics and uses its broad powers, these kinds of issues are not much of a problem.
ReplyDeleteI confess to missing the run up in equities in spring 2009 because I seriously underestimated the power of government to intervene and its willingness to do so, even though it went completely against capitalistic principles. Many traders were absolutely wild about this when trades they placed didn't work out not because their analysis of market conditions was wrong but because government action trumped market principles.
When the bankers wanted high rates to finance the Civil War, Lincoln told them where to go and issued greenbacks instead.
There is no reason that government have to just roll over and let the populace become victims of the market, read "ownership class." When push comes to shove and it looks like the natives are getting restless or the country is under attack, government that know what they are doing under emergency powers that all sovereigns have inherently, whether stated in law or not.
Matt, the way empires go is hotly debated in history and most historians now agree that trying to find a single major cause is a fool's errand in most cases. It's a cumulative thing and the simple answer is that everything rots away after time. However, finance and economics do play a key role as a general principle.
ReplyDeleteMarx did a lot of work on this and concluded that social and political infrastructure is economic and that the superstructure rests on this foundation. I am not claiming that Marx was entirely correct in thinking this, but he had a point.
y: "I'm not saying that, I'm saying the Fed wouldn't necessarily choose to do that. Rather than accomodate govt spending by buying its bonds, the Fed might refuse to step into the market, effectively forcing govt to reduce spending or raise taxes (assuming my rising inflation scenario above). This could lead to a bad stagflation type situation or worse."
ReplyDeleteAs beowulf has pointed out there are already laws on the books allowing the president to direct the Treasury secretary to order the Fed to take emergency steps that are beyond its delegated powers.
Bill Clinton said at the time of the debt ceiling kerfuffle that he would use such powers if the crisis were leading to US default.
Tom:
ReplyDelete"Mauldin thinks that in wartime governments run out of money and surrender?"
Over the 3 years during WWII the National debt rose from ~$48 Billion to ~$260 Billion, a five-fold increase.
Good thing all that money was already in the economy or we wouldn't have been able to borrow…oh, wait…
Not only do these guys not understand economics or the monetary system, they are ignorant of history too.
Tom,
ReplyDeletewrt Marx I believe it looks like he thought "money" was exogenous (as many do I know, I know).... so perhaps 'tread lightly' there around that issue, suggest to at least try to filter that out of his conclusions to obtain their full value.
Resp,
Matt, where would you get the money to buy all those bonds?
ReplyDeleteTom, I didn't know that. However, one still has to take into account how markets might react to such actions by the government. I presume steep fall in private investment and in the value of the dollar, both of which would exacerbate inflation. You could then say 'well the government doesn't really need private investment, it can fund anything it wants and nationalise anything it wants', but then look at how that's working out in south america.
"…I presume steep fall in private investment and in the value of the dollar…"
ReplyDeleteWhy would there be a steep fall in private investment if the government added new spending to the economy?
Are you claiming that there are no entrepreneurs out there that would want to get their hands on those dollars?
I have to assume the hypothetical situation you are referencing would occur once we reached near 100% employment and were zipping along at maximum production.
Further, I'm curious if you believe that the hypothetical is plausible?
Matt: "Marx I believe it looks like he thought "money" was exogenous (as many do I know, I know).... so perhaps 'tread lightly' there around that issue, suggest to at least try to filter that out of his conclusions to obtain their full value."
ReplyDeleteAs I said, Marx was not an economist and economics was still in its infancy when he was writing. His lasting contributions lie elsewhere than economic theory, which has moved on and conditions have changed. Marx's major contribution was to sociology and social and political philosophy in delineating the significance of class. Non-marxist economics tend to pretend that class is not a factor, or even to deny that it is. I don't think that is possible to do credibly after Marx.
The notion that capital not only the dominant factor but also the only really significant one, and that labor is a commodity on the level of other commodities as cost is just self-serving of the ownership class.
Congress would be 'seizing control of the printing press' at the worst possible time - in the middle of an economic crisis. Might not go down all that well.
ReplyDeleteabove comment @ paul
ReplyDeleteMarx wasn't an economist? How'd you come up with that one?
ReplyDeleteY: "one still has to take into account how markets might react to such actions by the government."
ReplyDeleteLook at what happened in the spring of 2009 when equities shot up when govt stepped in. And look at the EZ where the euro is relatively stable in spite of the crisis, most likely because markets have decided to bet that governments will continue to support the euro rather than accept the alternative. If markets thought that the alternative had any significant probability, there would be rush out of the euro instead out of peripheral country banks toward the core, still keeping funds in the euro but in a perceived safer place.
"…in the middle of an economic crisis"
ReplyDeleteWhat is the cause of the economic crisis?
"Congress would be 'seizing control of the printing press' at the worst possible time - in the middle of an economic crisis. Might not go down all that well."
ReplyDeleteWorked fine for President Lincoln. What happened when FDR ended gold convertibility for individuals. What happened when President Nixon unilaterally closed the gold window for external balances?
In spite of the all the dire advice and predictions.
One lesson I learned big time in the spring of 2009, never, ever underestimate the power of the government or its willingness to intervene massively when it deems that it is in its interest to do so. Of course, then Hank Paulson was Tsy sec and after him Obama's chief economic team were Rubinites, so it was entirely predictable in which direction the govt would tilt.
And then there is this…
ReplyDeletehttp://www.slate.com/blogs/moneybox/2012/06/20/pelosi_says_14th_amendment_makes_the_debt_ceiling_unconstitutional.html
"At a lunch roundtable with columnists earlier today, House Minority Leader Nancy Pelosi urged President Barack Obama to avoid a new debt ceiling showdown by stating that a statutory borrowing limit is inconsistent with Section 4 of the 14th Amendment which states that "the validity of the public debt of the United States ... shall not be questioned." …
"Read Marx'x biography. He didn't start reading economics until later in life, and he was an autodidictat in economics. He was what credentialed economists today would call an "inspired amateur."
ReplyDeleteBtw, Keynes was not trained in economics, nor was Wynne Godley.
And interestingly, Keynes's training was in math, yet what he is wrote is not formalized, although it wasn't because he lacked math chops. He apparently didn't think it applicable to what he wished to accomplish.
"This rapid systematizing of economics alarmed critics of the discipline as well as some noted economists.John Maynard Keynes, Robert Heilbroner, Friedrich Hayek and others have criticized the broad use of mathematical models for human behavior, arguing that some human choices are irreducible to mathematics"
Wikipedia - Mathematical economics
Others, notably Samuelson, Modigliani, and Hicks, attempted to formalize Keynes and botched the job, misinterpreting him.
paul, ""At a lunch roundtable with columnists earlier today, House Minority Leader Nancy Pelosi urged President Barack Obama to avoid a new debt ceiling showdown by stating that a statutory borrowing limit is inconsistent with Section 4 of the 14th Amendment which states that "the validity of the public debt of the United States ... shall not be questioned.""
ReplyDeleteLet's put it this way. In the previous debt ceiling crisis was the market betting on default or no default. Those betting on default or rising yields got squashed by the market.
"…some human choices are irreducible to mathematics…"
ReplyDeleteI don't know about that. It's either a zero or a one.
Y,
ReplyDelete"Matt, where would you get the money to buy all those bonds?"
From the Fed, the same place where the current batch of PDs get the USD balances to buy the Treasuries ('to do a reserve drain you first have to have done a reserve add').... If you get a bank license you have access to the Fed. And to be a PD, you dont have to be a BD, you can do it structured as a bank.
The bank assets would be the bonds at FFR +1, liabilities would be FF at FFR/DiscRate, would need some capital (for a while) which we could probably get from the Chinese (they have over $1T in USD balances) as redeemable preferred.
I think it may work if the PDs dont want to do it anymore as per your hypo.... think about Lincoln getting shut down by Wall street back in the 1860's.. in this case we would step up if Wall Street wants to step down... we could run the spreadsheet for the Treasury for a cool 100B per year if the current moron PDs didnt want to...
Resp,
As a matter of fact now that I look at this, if the Treasury was on the ball, they would put it out for bid these days...
ReplyDeleteCompete the spread over FF to run the spreadsheet... either as a % or perhaps for a fixed-fee or fee per transaction.
We are well beyond the only option that Alexander Hamilton had in who he could get to run the spreadsheet back then (Wall Street), we have wide choices today as far as getting firms in who can run what is just a glorified general ledger system.
Resp,
@Matt
ReplyDeleteSome folks believe the Fed function could operate out of a cubicle in the basement of the Treasury with one computer and one employee.
paul: ""…some human choices are irreducible to mathematics…"
ReplyDeleteI don't know about that. It's either a zero or a one."
Ever hear of fuzzy logic?
The US ran up a huge deficeit to fund WWII, so did Germany, Japan, and Italy, they lost and the US won, that is why it worked out for us, and no other reason.
ReplyDelete@ Bob. Right. They never expected us to ramp up so fast, but the US went all in.
ReplyDeleteThe problem is that we are still ramping up over six decades later, to the degree that DOD and and black expenditures have become a key contributor to GDP and support many Congressional districts.
"… that is why it worked out for us, and no other reason…"
ReplyDeleteWell, it created a massive build-up in savings that powered thirty years of unprecedented growth and resulted in a strong middle class.
One that is now being hollowed out so a handful of elites can hoard massive piles of wealth.
That's what concerns me now, that we print a lot of money that just gets hoarded and does no long-term good for the average citizen.
Tom, Godley studied economics at oxford and was a research fellow at cambridge. Of course he also worked as a business economist and an economist at the treasury.
ReplyDeleteScott Fullwiler:
ReplyDelete"it is the unbounded increase in interest payments as a percent of GDP that is the key characteristic of an unsustainable fiscal policy"
"As such, if in fact a functional finance-type approach to macroeconomic stabilization policy is the appropriate one, it follows that what is unsustainable is a high interest rate monetary policy since interest rates on the national debt are in fact set by monetary policy*. Not only do high interest rate policies directly lead to significant increases in interest payments as a percent of GDP, but they also indirectly raise interest payments if they slow the economy and engender a higher debt-ratio as a result of automatic stabilizers or other countercyclical fiscal policies to end recessions. An interest rate policy that is unsustainable could be defined as one in which rates on the national debt are held above the rate of nominal GDP growth."
*Fullwiler argues that there is a limit on how high Treasury yields can rise and that they are effectively tethered to the base rate.
Basically, high deficit policies aimed at attaining full employment (MMT policies) restrict the scope of monetary policy - i.e. they make anything other than a low interest rate policy (below NGDP growth rate) unsustainable. Fiscal policy in this sense can "crowd out" monetary policy.
We know however that the mainstream believes in things such as natural or equilibrium rates of interest, that rates are somehow 'endogenous', etc. They see monetary changes as the correct way to regulate the economy and control inflation, with fiscal policy reduced to cyclically balanced budgets. From this perspective, a fiscal stance which "crowds out" monetary policy (by restricting monetary policy to low interest rates) is essentially "unnatural" and "anti-market". They also see fiscal policy as unsuited to controlling inflation, being slow and caught up in politics.
So whilst it seems rational to MMTers that the government should regulate the economy through functional fiscal policy and that the central bank should just accomodate it, central banks don't see it this way. They see this as irresponsible over-reach by government which threatens to end in out-of-control high inflation. So rather than endlessly accomodating expansionary fiscal policy they are more likely to recommend reduced deficits, or else eventually 'force' deficit reductions through raising rates, or allowing rates to rise..
MMT predictions, such as those made by Mike, that rates wil never rise suddenly, that fiscal policy is operationally unconstrained etc, all depend on the Fed acting in a way which MMTers would consider to be rational. But they might not (just as many politicians are currently not acting in a way that MMTers would consider to be rational) - simply because they don't have an MMT agenda (they have a totally opposite agenda).
I don't know if that makes sense - in a bit of a rush.
above quotes from:
ReplyDeletehttp://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf
Also, does anyone disagree with the argument that high interest rates can make high-deficit fiscal policy 'unsustainable'?
(Rodger M Mitchell believes for example that higher rates increase savings desires, or what he calls the 'reward' for hoarding the currency).
y: "Tom, Godley studied economics at oxford and was a research fellow at cambridge. Of course he also worked as a business economist and an economist at the treasury."
ReplyDeleteWhile Warren Molser was an econ major as an undergrad and ran a successful fixed income fund. Yet, Jamie Galbraith dubbed him "an inspired amateur."
It's a matter of record that Godley was quite conscious of his lacking a terminal degree in econ.
y: "So whilst it seems rational to MMTers that the government should regulate the economy through functional fiscal policy and that the central bank should just accomodate it, central banks don't see it this way. They see this as irresponsible over-reach by government which threatens to end in out-of-control high inflation. So rather than endlessly accomodating expansionary fiscal policy they are more likely to recommend reduced deficits, or else eventually 'force' deficit reductions through raising rates, or allowing rates to rise..
ReplyDelete"MMT predictions, such as those made by Mike, that rates wil never rise suddenly, that fiscal policy is operationally unconstrained etc, all depend on the Fed acting in a way which MMTers would consider to be rational. But they might not (just as many politicians are currently not acting in a way that MMTers would consider to be rational) - simply because they don't have an MMT agenda (they have a totally opposite agenda)."
Right. The monetarists are operating on an exogenous money supply in which the supply is fixed by the size of the monetary base, which means that there is a fixed stock of loanable funds such that ISLM applies. As a result, interest rate setting changes the balace of saving and investment, allowing the cb to tune the economy.
Although that theory has been shown to be wrong, TPTB don't believe in falsifiability and they think that by continuing to run down an empty tunnel they will finally find the cheese. Rats learn which tunnels are empty in only three trips.