J. W. Mason — A Baker’s Dozen of Reasons Not to Worry about Government Debt

Good summary of the main points regarding public debt.

J. W. Mason's Blog
A Baker’s Dozen of Reasons Not to Worry about Government Debt
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Ben Holland — The Secret Behind Growth in Trump’s America Is Deficit Spending

MMT gets a mention. Increasingly, the mentions are not negative, just a statement of the MMT position. That's called educating the public.

Looking at the US economy, things are going quite well based on money creation, both through government injection and private credit extension. This is a reason that the Fed is raising rates as part of its reaction function to balance the trend, in addition to its commitment to normalizing after the effects of addressing the global financial crisis swelled the Fed balance sheet with government securities in order to "provide liquidity during a liquidity trap" by increasing the monetary base. (MMT shows why this strategy is wrongly conceived and won't have the desired effect.)

Raising the policy rate is a price increase that has an "inflationary" aspect in addition to a moderating influence by making credit more costly, which eventually has an effect on the housing market. Moreover, return interest bearing government securities to nongovernment increases interest income, which also has an "inflationary" bias.

But the so-called inflationary bias is due to the stimulative effect of these policy choices. There is no problem in absorbing the stimulus when the economy is still in an expansionary phase and is not "overheated," meaning that there is bidding for scarce resources that drives up market prices if the increased demand cannot be met by expanding production to meet the increased demand with increased supply.

The market's reaction seems therefore to be based on irrational pessimism, the opposite of "irrational exuberance on the upside. If this is so, the present market action would be more on the order of correction after a lengthy run up resulting in part from the historically low policy, instead of an indication of an emerging bear cycle or the signal of economic contraction. There are many factors involved in this sudden turn to pessimism with the monetary indicators signaling real expansion without any sign of accelerating inflation at this point. So the motivation is not without basis. However, the discounting seems excessive based on the factors, positive and negative. Again, "expectations."

Market price is based on both subjective and objective factors. The subjective rules in the day to day trading, while the objective — fundamentals, that is, facts — rules in the long run, that is, investing. Warren Buffet has built a fortune on understanding this and using it to pick up bargains at a discount.

If you want to understand more about this and how to use, treat yourself to a subscription to Mike's newsletter, which is based on using MMT principles in the current market. Info in the left side-panel.

Bloomberg
The Secret Behind Growth in Trump’s America Is Deficit Spending

Ben Holland

Syzygysue — The riddle of the deficit (or deficits for Dummies)

MMT without calling it that.

Think Left
The riddle of the deficit (or deficits for Dummies)

Syzygysue

D-Day and deficits

Today is the 70th anniversary of the Allied invasion of Normandy. June 6, 1944 was a day of unbelievable self sacrifice and devotion in the name of democracy. The iconic image of American GI's charging fearlessly into the salty spray of Atlantic sea water and German bullets always makes me question if I, or anyone else I know, would ever have the courage to make such a sacrifice. I find it difficult to ever answer "yes" to that question, especially in this era where self-sacrifice in the name of larger human cause is often denounced as socialism. Thankfully for the most part, it seems that Americans back in 1944 had no such qualms about service to their country. 

But what is rarely mentioned is the dry, bureaucratic work that went on behind the scenes, which managed the unprecedented mobilization of resources that made such an invasion possible. The bold leadership of men like Federal Reserve Chairman Marriner Eccles  played a crucial role in the military success of the United States. In countless letters, speeches, and testimonies before a confused Congress, Eccles calmly and clearly explained how in a post-gold standard world, the only thing standing in the way of total victory for democracy was real resources. Mr. Eccles' insistence that leaders in Washington focus on the real production capacities and constraints of the US economy, and not on the book entries known as "money", undoubtedly gave the US an advantage it had never before enjoyed. Emancipation from the gold standard and fixed money thinking, of which Eccles was a leader, deserves at least some credit for the emancipation of Europe from fascist occupation. Finally freed from self-imposed financial constraints, this new, functional approach to public finance allowed the allies to produce a war machine of unprecedented size and strength. Had the United States remained on a gold standard, and not had thought leadership from men like Eccles to clear out this old thinking, its hard to see how the massive deficit spending and resource mobilization during the war would have been possible. 

The military buildup before and during WWII was a massive, unprecedented mobilization of resources, which was almost completely managed and funded by the federal government. This war produced two types of massive debts-- one which we can never pay off, and another which takes only keystrokes.What I would give to go back to that spirit of the New Deal- a time when this country was fighting and dying and putting all of our resources on the line to defend democracy. We had incredible leadership, incredible sacrifice, and we smashed the Germans and Japanese in less than four years! That's why I get so angry when I hear Republicans saying “ we cant have a high speed rail system in America" or "we cant have universal health care in America", or "we cant have a green energy revolution in America”. This makes me think that its a damn good thing these people weren't around during WWII. Things looked so bad in 1941 that I might have been easy to say "the Axis is too powerful, we can't afford to take them on." But we did! We knew that we were Americans, and that we were firmly in control of our own destinies, and we made amazing things happen. Thats the spirit that this country desperately needs to return to. If a bunch of 20-somethings back in 1944 could charge headfirst into open German machine gun fire, surely its not too much to ask today's Americans to open their minds to the realities of modern public finance.

circuit —Deficit spending got the US out the Great Depression: Paul Samuelson on helicopter money

Great Paul Samuelson quote. He actually got it.

Fictional Reserve Barking
Deficit spending got the US out the Great Depression: Paul Samuelson on helicopter money
circuit

Jon Krajack — Guest Post: Obama a big spender? No way.

Obama, Big Government Spender??

According to the Heritage Foundation (a conservative think-tank), here is inflation-adjusted total U.S. government spending since 1993 in Billions of $$$ (with + or – from the previous year, and a * when government spending decreased from the previous year):

1992: $2,079

CLINTON
1993: $2,123 (+44 billion)
1994: $2,156 (+33 billion)
1995: $2,189 (+33 billion)
1996: $2,211 (+22 billion)
1997: $2,228 (+17 billion)
1998: $2,270 (+42 billion)
1999: $2,308 (+38 billion)
2000: $2,379 (+71 billion)

BUSH
2001: $2,420 (+41 billion)
2002: $2,570 (+150 billion)
2003: $2,705 (+135 billion)
2004: $2,801 (+96 billion)
2005: $2,924 (+123 billion)
2006: $3,038 (+114 billion)
2007: $3,032 (-6 billion)*
2008: $3,239 (+207 billion)

OBAMA
2009: $3,772 (+533 billion)
2010: $3,670 (-102 billion)*
2011: $3,746 (+76 billion)
2012: $3,611 (-135 billion)*
2013: $3,455 (-156 billion)*

Federal Spending by the Numbers, 2013: Government Spending Trends in Graphics, Tables, and Key Points Romina Boccia, Alison Acosta Fraser and Emily Goff

Ok. Let’s take note of some interesting things here:

Obama HAS NOT been a massive government spender. Of course his first year in office there was a huge spike in government spending because the economy was tanking… shedding hundreds of thousands of jobs per month. Both Bush and Obama enacted fiscal stimulus, which is part of the reason why the two biggest year to year jumps were 2007-2008 and 2008-2009.

What’s interesting though is that besides 2009, government spending has been decreasing more than it’s been increasing under Obama.

What about these $1 trillion+ budget deficits?  How could they be so large while government spending has not been increasing?

The budget deficit is a record of government spending relative to tax revenue. When the economy plummeted in 2008-2009, huge numbers of people were laid off work. When this happens, i.e. when less people are earning paychecks, tax revenue to the U.S. Government decreases. Make sense? But also, newly unemployed people apply for unemployment compensation and welfare and Medicaid etc., i.e. they need financial assistance. Make sense? The combination of these two things ~ less tax revenue + increased government spending on social safety nets ~ THAT is why the budget deficits are so high under Obama. This would have occurred no matter who became president because the social safety nets are “automatic stabilizers”…. They kick-in automatically when people lose their jobs. They STABILIZE the economic downturn. That’s what they are supposed to do (as well as not let people starve, etc.).

How can we get Obama to become that big government spender he's accused of being?

Jon Krajack

Chris Dillow — Supply-Side Socialism

I rashly promised yesterday to suggest what some supply-side socialist policies might comprise. Here goes.

Stumbling and Mumbling
Supply-Side Socialism
Chris Dillow | Investors Chronicle (UK)

Monthly deficit highest since Feb. Correction likely over for now.

The Federal deficit is running at the highest level since Feb 29, indicating that Apr-May tax receipts are now being recycled back into the economy in the form of higher spending.

With austerity off the table in Europe, talk of "fiscal consolidation" on the rise and deficit spending ramping up in the U.S. once again, the market selloff is likely over for now.

Gov't spending collapsing!

From the Daily Treasury Statement, Total Withdrawals (this includes everything: SS, Medicare, Medicaid, Defense, Interest on the debt...EVERYTHING!) now down $433 bln versus the same time last year. That's about 3-percent of GDP. In other words a SUBTRACTION of 3-percent from GDP. A lot of other things must be good to offset this. Personal Consumption, Business Investment and Net Exports all need to post strong gains to keep GDP positive!

*Chart covers period from Mar 2011 through Apr 9, 2012

Steve Roth — It’s a Spending Problem, Right?

Economist’s View: Per Capita Government Spending by President

Read it at Asymptosis
It’s a Spending Problem, Right?

by Steve Roth

Marshal Auerback brings the MMT message to AlterNet

Unless our policy makers can make job creation the top priority, the mass riots and burning streets of Europe may be coming soon to a neighborhood near you.

Only Jobs Will Get Our Economy Back on Track by Marshall Auerback

AlterNet is widely read by progressives, who really, really need to get up on MMT if they want to advance the progressive agenda without running up against the "affordability" obstacle thrown up by Austerians.

Bank loans surge as government spending slows

Followers of MMT understand that government deficits add to non-government (private sector) income and savings. That means high and rising deficits tends to cool credit demand because private sector balance sheets are getting healthier.

On the other hand, a slowdown in deficit spending tends to do the opposite: it DRAINS income and savings thus causing credit demand to rise in order to compensate for that loss in income and savings.

The chart below is quite eye-opening. It shows a very strong correlation between government spending and private credit creation. Bank loans have begun to grow since the slowdown in net government spending that started back in March-April of this year. And when net government spending went negative year-over-year in July, bank lending absolutely took off.

The private sector is now tapping credit as the government begins to step out of the economy. Unfortunately, this will not be a repeat of 2004 - 2007, where we had a credit boom, because credit conditions are, generally, much tighter now. And with unemployment high, the ability to get credit and service that credit is poor, so this credit cycle can collapse very quickly.

Yalies get it right, beat Harvard

...Economist Richard C. Levin, who is also president of Yale University, suggested that since Congress hasn't been able to take action to combat unemployment, a standby independent commission, similar to the Federal Reserve, should be created to make some fiscal policy decisions when the unemployment rate reaches a certain level. He said that during that 5 percent of the time when the Federal Reserve lacks the tools necessary to improve the economy, an independent commission probably would be a more effective arbiter of fiscal policy than Congress.

"You have to put a very large fraction of the blame on Congress for not acting," Levin told The Huffington Post before the panel discussion.

Some of the economists said that if economic growth does not improve, the Occupy Wall Street protests could transform into social unrest on a scale similar to that of the 1960s and 1970s....

Read the whole article at The Huffington Post, U.S. Economy Needs More Federal Spending, Yale Economists Say

Major budget items seeing sharp decline in spending

Major spending items getting crushed and total year-over-year spending now negative. This means fiscal drag is rising. It got started back in May. Charts below.

Medicare and Social Security are increasing year-over-year, but not enough to offset all spending items that are falling. Witness total spending.

The definitive solution to the debt crisis

Blogger, "Letsgetitdone," was kind enough to allow me to cross post this excellent piece that he wrote. It is the definitive solution to the debt crisis. He even prepares the speech the president would use to explain it to the public. (Too bad Obama won't use it, however.)

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint's costs in producing the coins and the credit provided by the Fed is the US Mint's profit. The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $2, and $3 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

Coin seigniorage is now being mentioned increasingly on popular blogs as a possible solution to the debt ceiling crisis. It is the only solution currently being suggested that requires no agreement in Congress and also no challenge to the debt ceiling law itself. If Congress fails to increase the debt ceiling by August 2nd, it may even become the constitutional duty of the President to use coin seigniorage to avoid default.

But the proof platinum coin seigniorage alternative comes in more than one flavor. It's actually a class of alternatives. Here are some different con seigniorage proposals.

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation. The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to reduce buy back the debt held by the Fed because that debt counts against the debt ceiling.

One objection made to coin seigniorage proposals is that the high face values of the coins would drive up the market price of platinum. However, the Mint is already scheduled to produce 15,000 platinum coins having relatively small arbitrary face value. There would be no conceivable need for more than enough material for 100 very high face value proof platinum coins. So there really is no supply issue.

Having said that, every time the Mint creates a high value coin for deposit at the Fed, it would have to create a duplicate coin, so that it had the means to swap with the Fed if it ever decided to redeem the coin for currency of equal value. This is not a likely event; but it is possible. So, it would be necessary to create duplicate coins and place them in a vault at the Mint.

A second proposal is to mint a $6.2 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.2 T in headroom, more than enough to carry us through the 2014 elections. Again, this wouldn't result in any “money” immediately going into circulation, but over time SS and Medicare payments would be adding to bank reserves without any reserves being withdrawn from the system due to debt issuance. Some might think this would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would have been. However, there's evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn't always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.2 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I'll estimate, roughly, that a $15 T coin is enough for that, including about $4.5 T to close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past year or so, that would result in a remaining public debt outstanding of roughly $4.6 T, which would please the bond markets except for the fact that the Us wasn't issuing any more debt instruments.

Again would this coin seigniorage proposal be inflationary? Well, the intra-governmental and Fed debt repayments won't be, for reasons already stated. Also, there's no reason to believe that the repayment of further debt will be, unless one believes, again, that reserves swapped for bonds, and not swapped again for more bonds, is inflationary. But, other than the interest payments which certainly add to private sector assets somewhat, payback of debt instruments is just an asset swap, followed by destruction of securities. There's no addition of net financial assets to the private sector.

How about the profits of $4.5 T set aside for closing the gap between tax revenues and spending? Will that be inflationary? Actually, I don't know if Congress will appropriate a $4.5 T spending/tax revenue gap over three years, but if such a gap is needed, and if it does, then the coin will cover it without new Federal borrowing. And as long as Congress doesn't do the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by coin seigniorage won't be inflationary.

If, on the other hand, they do the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there'll be no need for the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $3T could be left before the President might want the Mint to strike another proof platinum coin.

So far, I've discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here's a fourth, enough to handle Congressional appropriations for a decade.

Why not mint a $30 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the 30T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts. In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the 30T coin, and the profits derived from it, is that it is a concrete reminder of the Government's continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money and that the claim that it can is not a valid reason for rejecting spending that is in accordance with the Public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what's in the public purse, and it is unlimited as long as the Government doesn't constrain itself from creating currency. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $30 T coin, and getting the profits from depositing it at the Fed.

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $30 T coin seigniorage, then he could explain the deposit of the first $30T coin to the public in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret):

My Fellow Americans:

1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, which, as you know, we've now reached, so we can’t borrow back our own money, anyway.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.

6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.

8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T, reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.

9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.

11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.

Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won't be defaulting on any of its debts, and that I've prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution's prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment's prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you nor the rest of the world need ever doubt that again!