Bill Mitchell — Inverted yield curves signalling a total failure of the dominant mainstream macroeconomics

At different times, the manias spread through the world’s financial and economic commentariat. We have had regular predictions that Japan was about to collapse, with a mix of hyperinflation, government insolvency, Bank of Japan negative capital and more. During the GFC, the mainstream economists were out in force predicting accelerating inflation (because of QE and rising fiscal deficits), rising bond yields and government insolvency issues (because of rising deficits and debt ratios) and more. And policy makers have often acted on these manias and reneged on taking responsible fiscal decisions – for example, they have terminated stimulus initiatives too early because the financial markets screamed blue murder (after they had been adequately bailed out that is). In the last week, we have had the ‘inverted yield curve’ mania spreading and predictions of impending recession. This has allowed all sorts of special interest groups (the anti-Brexit crowd, the anti-fiscal policy crowd, the gold bug crowd, anti-trade sanctions crowd) to jump up and down with various versions of ‘I told you so’. The problem is that the ‘inverted yield curve’ is not signalling a future recession but a total failure of the dominant mainstream macroeconomics. The policy world has shifted, slowly but surely, away from a dependence on monetary policy towards a new era of fiscal dominance. We are on the cusp of that shift and bond yields are reflecting, in part, the sentiment that is driving that shift....

Bill Mitchell – billy blog
Inverted yield curves signalling a total failure of the dominant mainstream macroeconomics
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ramanan — Public Debt And Current Account Deficits, Part 2

This is a continuation of a recent post at this blog, Public Debt And Current Account Deficits, in which I argued that the current account balance of payments affects the public debt.

The Case for Concerted Action
Public Debt And Current Account Deficits, Part 2
V. Ramanan

Peter Cooper — Truth and Lies About Government Deficits

There is a lot of misinformation spread by politicians and much of the media on the topic of fiscal policy, particularly when it comes to the role and impact of government deficits....

There is a basic distinction that needs to be kept in mind to avoid falling for the lies. It is that although changes in government policy have an effect on the economy, the final fiscal outcome depends on what happens, partly as a result of those policies, to income and employment. This is why a larger fiscal deficit can occur alongside either weak income and employment (a “bad deficit”) or strong income and employment (a “good deficit”).

In reality, a currency-issuing government’s fiscal position is not important in itself. What matters is that the government’s fiscal policy is appropriate to the economic circumstances. During a period of economic weakness, the important point is to facilitate a sustained recovery. Once recovery is under way, incomes and tax revenues revive. The fiscal deficit narrows automatically as a result, although this is really neither here nor there. What matters is the strength and sustainability of the economic recovery.

heteconomist

Truth and Lies About Government Deficits
Peter Cooper

Zero Hedge — The Narrative Changes: Republicans "Pour Cold Water" On Trump's Massive Stimulus, Will Block Tax Cuts

Republican lawmakers warned "that there could be a major obstacle to enacting President-elect Donald Trump’s agenda: the national debt."

“I was disappointed that it wasn’t brought up in the campaign — anybody’s campaign really — it really wasn’t mentioned,” Sen. Jeff Flake (R-Ariz.) said of deficits and debt. “So I’m very concerned about it. It’s going to be tough to address if there’s no push from outside of the Congress,” he added. “I’m very concerned about it. It’s the biggest problem we face, by far.”

“We did not hear anything about entitlement reform from either of the candidates, and that’s a serious issue,” said Michael Sargent, a research associate at The Heritage Foundation. “You cannot address the growth in spending without addressing entitlement issues.”...

As Bloomberg explains, Trump’s race to enact the biggest tax cuts since the 1980s went under a caution flag Monday when during a news conference, "Senate Majority Leader Mitch McConnell warned he considers current levels of U.S. debt “dangerous” and said he wants any tax overhaul to avoid adding to the deficit."…

“What I hope we will clearly avoid, and I’m confident we will, is a trillion-dollar stimulus,” he said. “Take you back to 2009. We borrowed $1 trillion and nobody could find that it did much of anything. So we need to do this carefully and correctly and the issue of how to pay for it needs to be dealt with responsibly.”

Then there is the debt limit, which will need to rise next year to avoid defaulting on government obligations; McConnell said he wasn’t sure if that would be paired with any deficit-reduction measures next year as it was in 2011, when Republicans held the debt limit hostage and extracted more than $2 trillion in deficit cuts over a decade from President Barack Obama.

House Speaker Paul Ryan has also said he wants tax changes to be deficit-neutral, indicating that Republicans will assume positive macroeconomic benefits from tax cuts to ease the projected budgetary hit - a process known as dynamic scoring that is popular on the right.…

Finally, even if all the changes are implemented immediately, and the GOP rolls over, virtually none of Trump's stimulus package will generate any impact on the economy until some time in 2018 as Goldman calculated last week.…

Trumponimics DOA?

Zero Hedge
The Narrative Changes: Republicans "Pour Cold Water" On Trump's Massive Stimulus, Will Block Tax Cuts
Tyler Durden

Matthew J. Belvedere — Trump will end growth-zapping fiscal austerity, says top economist Paul McCulley

The stock market rally since Trump won the presidential election has been reflecting that notion, argued McCulley, who said he voted for Democrat Hillary Clinton. "The market is essentially celebrating the end of fiscal austerity. And it just happens to be a vehicle of Mr. Trump. But the end of fiscal austerity is the key economic issue."...

CNBC
Trump will end growth-zapping fiscal austerity, says top economist who supported Clinton
Matthew J. Belvedere

Egmont Kakarot-Handtke — Rethinking deficit spending

We've discussed this previously here at MNE in terms of the Kalecki profit equation.

AXEC: New Foundations of Economics
Rethinking deficit spending

Rethinking the Profit LawEgmont Kakarot-Handtke | University of Stuttgart - Institute of Economics and Law

David Dayen — Donald Trump Is Right: Deficits Don’t Matter

Trump’s statement sounds a lot like Modern Monetary Theory (MMT), a tenet of economists who believe in de-emphasizing the need for deficit reduction because the U.S. controls its own currency. Balanced budgets, to MMTers, take money out of the hands of ordinary Americans who can put it to more productive use through job creation and consumer spending. The deficit only matters once you reach full employment, when overheated consumer demand can lead to inflation. But we’re nowhere near that point right now, meaning there’s plenty of room for deficits, without any possibility of default.

One MMT advocate, Stephanie Kelton of the University of Missouri-Kansas City, worked for Bernie Sanders in the Senate and now advises his campaign. But even Sanders emphasizes deficit reduction, by promoting higher taxes on the wealthy and Wall Street transactions. Kelton’s worldview, and in this instance Trump’s, goes far beyond even Sanders’s comfort level on the issue.…

If the deficit really doesn’t matter, Democrats would have to live up to their image as the party of the people, and work to provide better opportunities for them. And they would have to spend federal money to do it. Behind the mockery of Trump’s monetary positions is the truth that mainstream Democrats aren’t prepared for the implications of an MMT world. They would rather hold off the left by claiming that their hands are tied because of the deficit.

Such moderation makes the wealthy funders of Democratic campaigns far more comfortable, and it leads many in the media to laud Democrats as the more responsible, serious party. But such cuts don’t lead to more jobs, higher wages, and a better life; spending on infrastructure or health care or education does. Democrats should listen again to Trump’s stray remark for the grain of truth in it: Deficits don’t matter. The sooner the party realizes that, the better off its constituents will be.

Right on, bro! Power to the people!

New Republic
Donald Trump Is Right: Deficits Don’t Matter

David Dayen
ht Kevin Fathi

Dylan Matthews — Donald Trump on the debt: "You never have to default because you print the money” – Updated

Trump's latest comments suggest that he grasps this notion. In doing so, he's echoing a heterodox left-wing economics movement that's gotten some buy-in from Bernie Sanders as well: modern monetary theory….

Vox
Donald Trump on the debt: "You never have to default because you print the money”

Dylan Matthews

UPDATE: MMT economist Scott Fullwiler is on this at Twitter.

Scott Fullwiler @stf18

Scott Fullwiler — Corbynomics 101—It’s the Deficit, Stupid!

The proposal obviously counters the austerity mantras going around in British politics (not to mention most other places), though Corbyn himself has paid lip service to balancing the budget, as well. The controversy, beyond the typical concerns with greater government spending of austerians, are fairly predictable for anyone who has taken a standard macroeconomics course (usually with a textbook written by someone who didn’t see the financial crisis coming)—

• first, the often heard QE = “printing money” = massive inflation argument is pervasive here with regard to PQE, as well;

• second, there are substantial concerns being voiced that “forcing” the BoE to finance the NIB will undermine the “independence” of the central bank and monetary policy;

• third, PQE gives the government free reign to spend by eliminating the need to fund its deficits in the financial markets.

So, here I want to look at the accounting and some basic operational realities of this proposal in order to understand how PQE does or does not do what the naysayers say it will.….

Leave it to Scott to tie things together in a neat bundle showing the accounting. Everything anyone wanted to know about PGE and a lot more. Hope the Corbyn people pick up on it and run with it.

New Economics Perspectives
Corbynomics 101—It’s the Deficit, Stupid!
Scott T. Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College

The Arthurian — This is the problem that topples nations

Art Shipman puts his finger on it, and it is endemic in capitalism with a monetary production economy in which most of the money is created through private lending.

However, this doesn't entirely absolve governments. It's not the spending, though but the lending. Where this is no central bank as the lender of last resort, excessive lending leads to boom-bust cycles that liquidate bad debt and this prevents extended periods of inflation as a tradeoff for recurrent depressions and panics. When central banking and the lender of last resort function is added, deep depressions are prevented but private debt is never deeply liquidated and the result can be demand-driven inflation.

While Austrian economic recommends liquidation of excessive debt, the powers that be have decided that recurrent depressions, panics and the potential for financial breakdown is too costly socially, politically and economically, and so have opted for central banking and the lender of lasts resort function. To counter inflation central banks are given politically independent control of monetary policy on the assumption that inflation can be controlled through managing the interest rate, the discount rate, and the reserve ratio.

Abba Lerner recommended using functional finance to manage fiscal policy instead of relying on "sound money" and monetary policy.

These are the principal approaches being put forward today, with central banking and monetary policy being dominant.

What Art doesn't mention is that while monetary policy might be able to contain inflation theoretically, historically it has affected the value of assets more than wages and prices. So the Fed's attempt to stoke some price inflation after the crisis in order to head of a deflation, the result has been largely a run up in financial asset markets, which are more sensitive interest rates than wages, prices, firm investment, or household consumption. 

So while the measures of inflation based on price level are almost unchanging in spite of the monetary "stimulus," what some would call "asset inflation" has been hot as asset valuation exceeds economic performance, which asset values are supposed to reflect. May be we need to start talking about "asset inflation" rather than the single category of asset appreciation regardless of circumstances.

The New Arthurian
This is the problem that topples nations
The Arthurian

Art has been working on this for some time. Download his paper, The New Arthurian Economics, 2009, at MPRA.

Dean Baker — Correction to Mankiw: Economists actually agree, just because you call something “free trade” doesn’t make it free trade

In principle we could get back to full employment with large government budget deficits, but that is not going to happen for political reasons. Aggressive use of work sharing leading to shorter workweeks can also move us toward full employment, but this is also not something we are likely to see any time soon.

This means that if we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw’s textbook.) Reducing the trade deficit means taking steps to lower the value of the dollar against other currencies. These trade agreements would be the obvious place to have currency rules. If we don’t address the currency issue here, where exactly are we going to do it?

Real-World Economics Review
Correction to Mankiw: Economists actually agree, just because you call something “free trade” doesn’t make it free trade

Dean Baker

Bill Mitchell on good and bad deficits in Eurozone battle lines being drawn again with Germany on the other side

Bill Mitchell on good and bad deficits. You might want to Evernote this.

Regular readers will know I don’t automatically use the term deterioration to describe an increasing fiscal deficit. I differentiate between good and bad. 

The national government has a choice – maintain full employment by ensuring there is no overall spending gap which means that the necessary deficit is defined by this political goal. It will be whatever is required to ensure there is enough spending in the economy to generate sufficient jobs to satisfy the preferences of the workers for work. 

However, it is also possible that the political goals may be to maintain some slack in the economy (persistent unemployment and underemployment) which means that the government deficit will be somewhat smaller and perhaps even, for a time, a budget surplus will be possible. 

But the second option would introduce fiscal drag (deflationary forces) into the economy which will ultimately cause firms to reduce production and income and drive the budget outcome towards increasing deficits. 

Ultimately, the spending gap is closed by the automatic stabilisers because falling national income ensures that the leakages (saving, taxation and imports) equal the injections (investment, government spending and exports) so that the sectoral balances hold (being accounting constructs). 

But at that point, the economy will support lower employment levels and rising unemployment. The budget will also be in deficit – but in this situation, the deficits will be what I call “bad” deficits. Deficits driven by a declining economy and rising unemployment. 

So fiscal sustainability requires that the government fills the spending gap with ‘good’ deficits at levels of economic activity consistent with full employment. 

Fiscal sustainability cannot be defined independently of full employment. Once the link between full employment and the conduct of fiscal policy is abandoned, we are effectively admitting that we do not want government to take responsibility of full employment (and the equity advantages that accompany that end). 

You might like this blog from the past – A voice from the past – budget deficits are neither good nor bad. 

In that context, the deficits in France and Italy are at present ‘bad’ because they are being sustained by the deliberately created recessed states and entrenched mass unemployment.

Bill Mitchell – billy blog
Eurozone battle lines being drawn again with Germany on the other side
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Bryce Covert — The Deficit Fell Faster Last Year Than Any Since The End Of World War II

We're supposed to celebrate this? The good news, though, is that it's mostly due to rising revenue rather than spending cuts.

ThinkProgress
The Deficit Fell Faster Last Year Than Any Since The End Of World War II
Bryce Covert

John T. Harvey — Four Reasons You Should Consider Washington's Deficit As Your Surplus

I could hear Meet the Press on in the background at my house on Sunday and the reporters were discussing various means of reducing the budget deficit. I didn’t bother to sit down and listen, however, because I knew that none of it made any sense. All were based on the same false premise: federal government deficits represent a burden on the private sector.

They do not.

Forbes
Four Reasons You Should Consider Washington's Deficit As Your Surplus
John T. Harvey | Professor of Economics at Texas Christian University

Warren Mosler — Not a Good Sign – Sector Financial Balances Showing The Deficit is Declining Faster than During Clinton

Soft Currency Economics
Not a Good Sign – Sector Financial Balances Showing The Deficit is Declining Faster than During Clinton
Warren Mosler

Think Left — Why do politicians tell us Debt/Deficit myths which they must know to be untrue?

The New Economic Perspectives’ video clip on the Government budget, Deficits and Debt presented below (produced for educational purposes), debunks the myths that politicians tell their populations to justify ‘austerity’. In the case of the clip, it starts with 3 full minutes of American politicians misinforming the electorate. An identical montage aimed at the UK electorate could undoubtably just feature George Osborne’s utterances from his forthcoming Autumn statement scheduled for this Thursday (5th December 2013).

However, the reality is that all economists know that the deficit and debt mythologies are not true and ’have long known that the idea of balancing budgets over the cycle is a bit like a fairy story we tell to frighten the kids’.

Nice post. Nice intro to MMT.  Good work, JK.

Think Left

Why do politicians tell us Debt/Deficit myths which they must know to be untrue?

(h/t Andy Blatchford on FB)

Peter Cooper — More on Budget Deficits

The previous post, which emphasized a currency-issuing government's capacity to deficit spend, generated lots of positive feedback but also numerous questions that perhaps should be addressed in a new post rather than getting buried in the comments. Although for regular readers the general answers to these questions will already be evident from previous posts and comments, it may be helpful for newer readers to expand on these answers. In doing so, I'll end up touching on a few points that have not been discussed explicitly in previous posts (though sometimes in the comments), which may make it of interest to regular readers as well. The post is a modified version of one of my contributions to the comments.

The following questions are addressed:

1. If the government is not like a household, how come Greece, Spain and Detroit have got themselves into financial trouble?

2. In what sense does government spending create money and taxes destroy it?

3. How can money created out of thin air have any value?

There were a couple of other interesting issues raised in the comments, but I will leave discussion of those to future posts.

Hetecononomist
More on Budget Deficits
Peter Cooper

Jessica Schieder — The US Federal Deficit Continues to Shrink

The federal budget deficit has been plummeting in size over the last few years; however, judging from polls, most Americans do not know that – indeed, their concern over the deficit has grown even as the annual deficit has shrunk significantly. And it continues to do so: the Congressional Budget Office (CBO) estimated yesterday that the deficit for the first eleven months of this fiscal year fell $400 billion from the comparable period last year....

Despite the decreasing size of the deficit, 72 percent of Americans surveyed in January 2013 said they felt reducing the budget deficit should be a “top priority” for the president and Congress this year. In January 2009, only 53 percent of Americans said reducing the budget deficit should be a top priority. But back in 2009, the deficit was higher than it is now.... 

As Jamelle Bouie at The American Prospect put it: “Voters associate high deficits with poor economic performance—the public might say that it wants more action to lower the deficit, but what it means is that it wants Washington to improve the economy.”

The public has the causality backward. They see high deficits in recessions and think that it's the high deficits that are causing the recession.

Truthout
The US Federal Deficit Continues to Shrink
Jessica Schieder, Center for Effective Government | News Analysis

Peter Cooper — What Everyone Should Know About Budget Deficits and Public Debt

Peter's back with a vengeance. Very nice simple explanation that just about anyone should be able to understand. Model elevator speech.

Hetecnomist

What Everyone Should Know About Budget Deficits and Public Debt

Peter Cooper

AFP — Massive $238 billion financial bailout 5 years ago ‘avoided catastrophe,’ but only $3 billion has been paid back: Treasury

The US Treasury said Wednesday the government’s massive response to the economic crisis five years ago paid off, avoiding a catastrophic breakdown of the financial system.
In a report marking the anniversary of the bankruptcy of investment bank Lehman Brothers — which snowballed into the worst crisis since the 1930s — the Treasury defended deploying hundreds of billions of taxpayer dollars to save other banks, major financial institutions and auto companies.

“Without the government’s forceful response, that damage would have been far worse, and the ultimate cost to repair the damage would have been far higher,” the report summarized.

While the rescue effort required piling up government debt, it was necessary, said Treasury officials who briefed reporters.
“We prevented a collapse of the financial system,” one said on condition of anonymity.

The Raw Story
Massive $238 billion financial bailout 5 years ago ‘avoided catastrophe,’ but only $3 billion has been paid back: Treasury
Agence Presse-France