Alan Longbon — Good News: The CBO Reports The Federal Government Deficit Will Be Larger Than First Thought And Go On For Decades

Summary

• Contrary to mainstream opinion the CBO report is a positive result.
• The CBO finds that higher deficits will lead to higher and faster GDP growth and employment.
• The governement deficit is the private sector surplus and while the private sector balance remains positive and grows the likelihood of a stock market crash or recession is low.

The purpose of this report is to show the finding of the latest CBO about the Federal deficit is a good thing and should be celebrated. To produce this report an analysis of the national accounts will be used and a sectoral balance model constructed after the work of British economist Professor Wynne Godley.

First a quick review of the newly released Congressional Budget Office report.…

MMT-friendly.

Seeking Alpha
Good News: The CBO Reports The Federal Government Deficit Will Be Larger Than First Thought And Go On For DecadesAlan Longbon

Who made this call? I did!

Back in January when the market was selling off I said that it would end up to t be a major bottom for the year. In early February when the interruption of IRS tax refunds was rectified, I issued a "Buy, Buy, Buy" recommendation and the market literally took off the day I said that.

No one else out there made these calls. In fact there were some terrible calls, like the RBS "catastrophic selloff" call that I said would go down as the worst call by by any forecaster ever made (at least this year).

How did I do this? Do I have a crystal ball? Well, yes and no. I have been looking at flows. I have been talking about flows. Without question this has given me insight into the markets that have been far more prescient than those looking at anything else, including and especially, deficits.

This blog has been more accurate than any other source of market or economic information out there. It's something to think about. We're growing and I am pleased. We have a lot of really intelligent, thoughtful, followers and contributors and commenters, but why we don't have a million readers a month is beyond me.

I guess you don't find diamonds lying around in the street. That's what makes them valuable.

We got it ALL correct. Here. At MNE. Not anywhere else. Not even at other MMT sites.

We were following flows, not defiicts.

We got it all correct--the economy, stocks, gold, the dollar. Go back and do a search here on any of these terms and see how we called it. And you didn't have to wait three years (or more) and watch markets and economic forecasts go wrong in your face.

We called it precisely.

No need to go anywhere else.

Do Democrats Usually Get Credit For GOP "Deficits?" While Neither Notes That Co-selection Produces More Than The Sum Of All Their Parts?

   (Commentary posted by Roger Erickson.)

An admittedly zealous Democrat promotes his party and skewers the GOP.

They're Not Even Close? The Democratic vs. Republican Economic Records, 1910-2010

His many graphs sure seem to support his claim ..... except that his thesis founders on this sentence:

"Democrats Reduce, Republicans Increase, Government Deficits [= Public Fiat = Public Initiative]"

(My additions, in brackets.)

:) Makes you wonder whether Dems always get credit for GOP "deficits!"

And vice versa, whether GOP gets blamed for DNP austerity? :) LOL!

While neither group knows "Whiskey, Tango, Foxtrot" is really going on? :(

Two moronic processes captured in each other's orbit, neither noticing that the sum of their orbital interactions produces sparks of group intelligence?

They need outside observers to even see the sum of themselves. No wonder oligarchs usually wield the keys to every Democracy. It's usually a basic matter of perspectives in gridlock, & therefore easy prey for transistor-like "control" signals, no matter how weak in & of themselves?

Any discussion of conservatism ought to include questions about what, exactly, it is that they're trying to conserve.

If it's adaptive rate, then there's no fight between conservatives & progressives. The latter generate diversity, and the former help select additions from it, continuously.

Co-selection produces more than the sum of both parts?

(Thanks to Prof. Brad Lewis of Union College, for excellent discussion, leading to this train of thought.)

Video — New Economic Perspectives on the Government Budget, Deficits, and the National Debt

New Economic Perspectives on the Government Budget, Deficits, and the National Debt
Posted by Jon Krajack

Elias Isquith — Dick Cheney: I have “respect” for what the Tea Party is doing

We all knew that Dick Cheney is beyond the pale but....

Speaking with Savannah Guthrie of NBC’s “Today” show, the former vice president refrained from joining some of his fellow Republicans in criticizing the Tea Party, opting instead to describe the group as a positive development for the GOP and for the country.

“I’m not a card carrying member — I don’t think there is a card — but I have respect for what the people are doing,” Cheney said. “These are Americans. They’re loyal, they’re patriotic, and taxpayers, and fed up with what is happening in Washington. It’s a normal healthy reaction and the fact that the [GOP] is having to adjust to it is positive.”

Asked by Guthrie how a government shutdown, which some have estimated cost the economy $24 billion, helps address the Tea Party’s fiscal concerns, Cheney responded, “What’s the cost of not dealing with the debt? It’s more than that.” The former vice president, who infamously was reported to have said “deficits don’t matter,” went on to tell Guthrie it’s “outrageous that we’re not dealing with the debt problem.”

Salon
Dick Cheney: I have “respect” for what the Tea Party is doing
Elias Isquith

Couldn't be because his daughter is trying to unseat a sitting ultra-conservative senator from the extreme right, could it?

Bill McBride — States: Mo Money Mo Problems

Now some states are adding to the problem of demand leakage by saving (running surpluses).

Calculated Risk

States: Mo Money Mo Problems
Bill McBride

Matthew McOsker — History Lesson - Deficits as a % of GDP, Tax Rates

Based on Randy Wray. MMT gets more legs.

Angry Bear
History Lesson - Deficits as a % of GDP, Tax Rates
Matthew McOsker

Money and Public Purpose — 4. Debt, Deficits Or Unemployment:Identifying Real Threats To Growth

Money and Public Purpose
4. Debt, Deficits Or Unemployment:Identifying Real Threats To Growth

John T. Harvey and Jan Kregel
(h/t y in the comments)

Columbia U Restricting Public Access to William Vickrey Articles [that should be in the Public Domain]

JSTOR, Springer Verlag & Columbia U all want $10-$40 each, to read ~20 year old William Vickrey articles.

See this list at http://findingaids.cul.columbia.edu/ead/nnc-rb/ldpd_5455879/dsc/3/

Does anyone have links to existing copies of these articles?

It's a complete travesty. How are we supposed to have an "informed electorate" when basic information is subject to this kind of gate keeping?

This problem is biblical in scope, and reminscent of the Prodigal Son story, rephrased as the PARABLE OF THE PRODIGAL INSIGHTS.   In that parable, all of our best minds labor in public service.  Yet when they go away and leave their insights to us, do we distribute those insights far and wide, as fast as possible - so that they can be put to work for the general welfare of the public? NO! We let some idiots lock them up and charge a fee to anyone wanting to access publicly owned knowledge. @#$%^&!  Talk about a cruel, pious fraud!*

It's no surprise that there are so many gold-bugs and Deficit Terrorists in a supposedly educated, 21st Century USA, when such useful information as Vickrey's many essays are so thoroughly banned from public access!

Every highschool kid in the USA - nay, every single voter - should have free & timely access to this and similar papers. They should all be in Wikipedia or similar archives.

Is Columbia University purposely going out of it's way to limit or deny public access to these articles? Does this constitute racketeering between CU and publishers such as JSTOR and Springer-Verlag?  Personally, I think they should all be brought up on charges of High Treason against the USA, for preventing distribution of insights and arguments which would obviously alter public policy.

I called the Columbia U Rare Book Library, and was offered the alternative of having a copy of each paper copied "for my personal use only" for the price of ... get this ... $50 for the first (30?) pages, and $12 for each (10?) pages after that.

Aside from the price, it was the "personal use only" claim that stood out to me.

Was William Vickrey's research funded by US Government grants? Is it a gross perversion of public purpose to purposely shield and otherwise limit a Nobel prize winning economist's published work from public access?

If you feel the same, please register your suggestions with the Columbia U rare book library. http://findingaids.cul.columbia.edu/contact/nnc-rb

ps: Specific articles I'd like to be able to read, at will, whenever needed, are as follows.

All That Anguish Over a Phony Number, letter to editor, 12 Dec. 1995
(which editor, at which journal or news outlet?)

Averting Unemployment and Inflation in Transition to Market Economy, paper, 1992

Balanced Budget is Not the Answer, paper, 2 June 1992

Balancing the Budget is a Recipe for Economic Disaster, paper, Feb-May 1995

* Budget Balancing: A Cruel, Pious Fraud, letter to editor, undated

Chock-full Employment without Increased Inflation, paper, Jan. 1991
[For presentation at session entitled "Achieving High Employment without Inflation", New Orleans, 4 Jan. 1991.]

Debt Limits Throttle the Economy, essay, 14 Nov. 1995

Debts, Deficits, and Delusions, paper, 14 Dec. 1990

Effective Fiscal Policy, paper, 23 May 1993

Fifteen Fatal Fallacies of Financial Fundamentalism, paper, 7 Sept. 1995
(note that this one escaped the censors somehow, and is online; http://www.columbia.edu/dlc/wp/econ/vickrey.html)
(Note further: in another ironic twist, I called the CU Economics dept, which displays this page; they had forgotten about it, and said that if anyone knew, they'd probably take it down. So please, copy the text and archive it yourself, while you can.)

 (Meanwhile, the PNAS version is sometimes available here for free.)


A Growing Debt is a Necessity, not a Threat, letter to the editor, 31 May 1995

[Response to letter by Congressman Mark W. Neumann, 24 May 1995.]
(which editor, at which newspaper?)

How Big a "Deficit" Do We Need?, essay, 28 June 1993

How to Get Real Full Employment (Jobs for All), paper, 8 Aug. 1996

Letter to Senator, 1 June 1993
[Discusses government deficit.] (Which Senator?)

Necessary and Optimum Government Debt, paper, March-April 1993
[Discusses optimum government normal economy without capital but with money.]
(only a tease available, here; a very few used print copies at Amzon aren't so expensive, but copyright prevents quick and wide distribution of an electronic copy - go figure!)

Social Pathologies, Unemployment, and the Fatal Obsession with Debt Reduction and Other Fallacies, paper, 14 July 1994

Three Degrees of Separation between Budgets and Reality, paper, 9 March 1996

We Need a Bigger Deficit, paper, Aug-Sept. 1993

Why Balance the Budget?, article, 1959-1960 [Published in Challenge Magazine]

The Balanced Budget: DEFENSE AGAINST INFLATION?

 Challenge, Vol. 8, No. 7 (APRIL, 1960)



This tribute to Vickrey by Rick Arnott mentions Vickrey's use in 1986 of the familiar economic sector equation,
C + S + T = C + I + G , or D[eficit] = G − T = S − I,
and his opposition to a balanced budget amendment.

Finally, yet another review asks of Macroeconomics: Was Vickrey Ten Years Ahead?  David Colander  Challenge, Vol. 41, No. 5 (SEPTEMBER-OCTOBER 1998)

  (again, $30 from JSTOR)

Why can't the Treasury borrow directly from the Fed

Hat tip to Scott Fullwiler.

Marriner Eccles, Chairman of the Board of Governors of the Federal Reserve System 1947:

There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.

Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.

*****

It boggles the mind to see yet another reminder of how thoroughly this was understood 60 years ago. It's not feasible to imagine that later Fed staff, economists and financiers didn't know this. Most had to consciously choose to not believe it, and therefore to not teach the truth to later students.

Four score years ago, our forefathers set up a workable fiat currency system, with much trivia modified unchanged from the shambles of the failed gold-std. It is our job to see that monetary policy of the people, by the people and for the people does not vanish from the face of the earth?

My comments on Ben Bernanke

Bernanke made me so upset today, I just had to make this video!!

Rising Deficits Pose Major Threat to Economy: Bernanke

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday. Full story here.

I heard Bernanke say that if we don't get the deficit under control then we could have problems like Europe. I nearly gagged when I heard him say this. He knows better. He absolutely knows better. To conflate the U.S. with Europe is absurd. Completely and mind-numbingly absurd when done by someone of Bernanke's stature.

He has become a major part of the problem.

So this is how we win the future?

California may have to cut the school year because of money problems.

So this is how we "win the future?"

Obama's caving in to Deficit Terrorists means that states cannot get any fiscal help from the Federal Government. So now our kids won't be getting a proper education. Eduction is the single most important factor in determining standard of living and competitiveness.

California is so broke it will shorten the school year.

This picture pretty much resolves the Keynes vs. Austrian debate

Hat tip to Ralph Musgrave for this chart. He had it on his blog, but I cleaned it up.

Anyway, my intent was to show some perspective. I think that's always useful. We hear a lot about how Keynesian economics doesn't work and about how the world was better under the gold standard.

I think the chart below goes a long way toward resolving that debate. It plots annual changes in U.S. real GDP going back to 1860. Take a look at how many deep recessions and depressions the country experienced in the 19th century. Pretty much, every 10 years, a depression! And the swings in GDP were huge!

Compare that to the mid 20th century and especially 1971 forward. What a contrast! Very few recessions and no depressions. And even the recessions have been much milder, current one being an exception.

Remember that the U.S. was on a gold standard until 1933 (domestically) and completely off the gold standard and on a system of floating FX non-convertibility from 1971 on. Rather than get worse, things stabilized immensely.

All the recent troubles can be traced back to Clinton's surpluses, which essentially was the equivalent of putting us on a gold standard. The rebound out of the recent "Lesser Depression" was due to massive deficit spending. Did I hear someone say Keynes??

Warren Mosler — SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

[Reposted from The Center of the Universe]

Comments welcome, and feel free to repost:

MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!

And therefore, deficit reduction takes away our savings.

SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

Furthermore:

There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.

The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,

An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

John Harvey: "Why You Should Learn to Love the Deficit"

Why You Should Learn to Love the Deficit: Federal Budget Fallacies

Prof. Harvey corrects the common fallacies heard about why budget deficits are bad.

"Because we think we may be the next Greece, we are turning ourselves into the next Japan."

Tim Duy at Fed Watch:

Bottom Line: Both monetary and fiscal policy suffer from the same impediment – the numbers needed to be effective, in both the size of the Fed’ balance sheet and the magnitude of the federal deficit, are so big that policymakers view them as potentially destabilizing, while the magnitude to which they might be willing to commit would leave them open to criticism that their policies are failures. The obvious fallback position is to embrace the devil you know, which in this case is an economy simply limping along.

Fed on the Sidelines

Warren Mosler:

Because we think we may be the next Greece, we are turning ourselves into the next Japan.

CNBC Mention

Countering a common misconception about MMT and deficits

Here is a comment I posted over at FireDogLake in response to Larry Mishel, president of the Economic Policy Institute:

tjfxh June 5th, 2011 at 7:22 pm

comment 130

In response to Economic Policy Institute @ 106

Larry wrote: “I don’t agree completely with Jamie Galbraith’s and R Wray’s position on deficits (i.e., they never matter)”

It not the case that Galbraith, Wray and cohort say “deficits never matter.” That was Dick Cheney. They specify precisely HOW deficits matter. This is determined by sectoral balances and national accounting principles wrt macro.

The government fiscal balance, the domestic private balance and the external balance sum to zero as an national accounting identity. That is Macro 101. So if the domestic private balance is in surplus (S>I) and the country is running a CAD (foreigners saving in the nation’s currency), then the government fiscal balance must offset the demand leakage to saving or else private saving desire cannot be met.

As long as the US is deleveraging and rebuilding savings and also running an external deficit, the government fiscal balance must offset that leakage. Otherwise, either economy contracts, private debt increases, or the private sector draws down savings/sells assets. In a deflationary environment such the US now experiencing, this can result in mounting defaults and classic debt-deflation.

If there is insufficient fiscal offset of demand leakage to saving, as is the case now, then the economy will underperform and unemployment increase, Thus, we see that deficits have a very specific purpose and their appropriate size is determined by fluctuating saving desire.

Moreover, these economists say that the problem is never financial but real. As long as there are real resources available for purchase, the government can always fund their purchase. The balance between public and private is a political matter, but the government’s ability to fund its purchases is never an issue when it issues a non-convertible floating rate currency.

The only contraint on the government’s ability to fund itself as it wishes is the availability of real resources wrt money supply. If more money is created than the economy can expand to produce real resources to meet this demand, then inflation will result. As long as there is unemployment, the economy is capable of expanding and demand side inflation is remote. (This does not mean that supply side inflation cannot occur, e..g, due to an oil shock or natural disaster. But this is an entirely different matter.)

There is no problem with deficits in the short term, and the long term issue is a political one, that is, how the country decides to allocate its real resources wrt public purpose in the future — how much to defense, how much to health care, how much to the safety net, how much to infrastructure, etc. Decisions taken now will affect the quantity and quality of real resources in the future. Inappropriate concern with deficits and debt, which are pseudo-problems, will simply set the entire country back, and everyone will be worse off than otherwise.

A Chart That Speaks Louder Than Words

The Atlantic, The Chart That Should Accompany Every Discussion of Deficits