Actions have consequences.

A friendly reminder to Austerians: austerity kills.

Here's another great encounter in the Fox green room.

I went over to Fox yesterday to do “Cavuto” and while waiting in the green room I saw my friend Bob Beckel and another guy who I thought at first was former White House Budget Director, Robert Orszag. Believing it was Orszag I thought to myself, “Here goes, I’m gonna be doing battle with this guy.” That’s because Orszag is a noted deficit hawk.

Just as I started gathering my thoughts for a debate with a Orszag I heard Beckel say, “Hey Mike, I’d like to introduce you to Senator John Barroso.” I was relieved to find out that the guy was not Orszag, but then I realized that Barroso was a conservative Republican Senator from Wyoming so if we ended up having a conversation it would go pretty much the same way.

Beckel said that although Barroso was a Conservative, “he was one of us,” meaning that he was open minded and willing to listen to both sides of the argument.

“That’s good,” I thought. Actually, Borrosso is a very educated guy. He’s a physician and a surgeon and as such probably believes in the scientific method; had a good understanding of math and was capable of rational thought and judicious reasoning.

I decided to get the ball rolling and strike up a discussion with the guy. I figured, what could I lose? I’ve had many of these “convos” with loads of others who had far less brains than Barroso and besides, it was a good way to sharpen my MMT debating skills.

I opened with a simple question. I asked him if he could explain the GOP’s position on the economy.

“Correct me if I’m wrong,” I said, “but the Republican plan is to cut spending significantly, right?”

“Yes,” he answered, “anywhere from $2 trillion to $4 trillion.”

Actually, Paul Ryan’s plan calls for spending cuts of $6 trillion, but I thought I could present my case well enough with the numbers he threw out. Moreover, Obama himself said he’d do $4 trillion so, presumably, a deal could get done at that number. I’d go with that.

So I said, “Okay, Senator, let’s say you agree to cut $4 trillion over the next 10 years. That equates to $400 billion taken out of the economy every year for the next 10 years, correct?”

He nodded his head.

I continued.

“Using current GDP of $14.5 trillion, that means shrinking the economy by 3% each year for the next 10 years,” I explained.

Actually it’s more because each year as the economy shrinks, that fixed, $400 billion reduction in spending equates to a larger and larger slice of GDP.

“So, Senator,” I went on, “the GOP plan would shrink the economy by 30% or more, roughly equivalent to what we saw during the Great Depression. Can you explain to me, sir, how that results in greater job creation and more prosperity for all?”

He looked at me completely dumbfounded. Seriously.

I saw that he seemed to grasp my example and my numbers and his face almost looked a bit worried as if to suggest that maybe it wasn’t such a good plan after all. You could see his mind going over the math.

At that point I asked him, “Do you know what makes up our economy? I mean, what is our Gross Domestic Product comprised of?”

I just figured a guy who’s making economic policy should know what the economy is, right?

He gestured to me as if to say, go ahead and please explain it.

“Well, there’s personal consumption,” I said. “That’s everything households spend money on . That’s the biggest part. Then there’s government spending and investment, which is everything the government spends money on. By the way, that also happens to be the second biggest component, nearly two times as big as business investment. Then there’s business investment and finally, there’s net exports, which is almost always negative because we run trade deficits.”

Once again I posed the question, “Senator, how can you shrink the second biggest component in the economy by such a huge amount and expect to create jobs and grow the economy?”

At that point I could see he lost all his logical arguments, so he fell back on the tried and true response of all Deficit Terrorists and hit me with, “So you’re one of those Keynesians who thinks it’s okay to just borrow and spend forever?”

That’s what they do. When all else fails, throw the labels: Keynesian, Socialist, Communist. I knew at that point there was no sense in proceeding any further. Cognitive dissonance had set in and his otherwise rational, scientific mind was stymied. There was no way he was having any of this. He shook his head and looked at me with incredulity. I was the crazy Keynesian.

Jim Rogers, the most monumentally misinformed guy in history

This is excruciating to watch. Jim Rogers: "The Fed will go bankrupt."

I have said many times that the only reason anyone knows of Jim Rogers is because he was the luckiest man in the world, getting hired by George Soros. Soros made him his money. Nowadays, he is a glorified snake oil salesman.

Progressives, be progressive!

Warren Mosler urges progressives to quit being deficit chickens and embrace MMT instead.

"The few lonely progressives, who do understand all this and have stayed the course with the progressive agenda, are those who recognize what has come to be known as Modern Monetary Theory (MMT). It is these MMT progressives who realize that a currency like the U.S. dollar is a simple public monopoly, and that the following are facts of actual monetary operations:

1. Federal taxes serve to regulate aggregate demand, not to raise revenue per se.
2. Federal borrowing serves to regulate the term structure of interest rates, and not to fund expenditures.

In other words MMT teaches us there is no such thing as the U.S. Government running out of dollars, that the U.S. Government is not dependent on foreign borrowing to be able to spend, and that hyperinflation comes only from sustained over spending far beyond full employment and our capacity to produce".

Why Tax Economic Rent Rather Than Productive Contribution?

Destruction of U.S. Manufacturing: The Unusual Suspects by Andrew Butter

That line is probably an under-estimate of the value that was sucked out of USA and sent elsewhere.

Because when you set up a factory in a Special Economic Zone in Guangdong Province or somewhere, to manufacture something that you know you can sell, particularly in USA; because you own the patents and the distribution and the brand. You also have the luxury of “transferring” intellectual capital, outside of the beady eyes of US tax-inspectors reading up the statutes on “Transfer Pricing”; so a lot of what get’s transferred is “intangible” (as in the tax-man can’t get his sticky fingers on it).

Here is a statistic, 80% of China’s exports have “value-added”, added, in what they call “Special Economic Zones” (and what I call Free Zones). That’s huge.

Here’s another one, 50% of the earnings of S&P 500 corporations (that’s the “E” in “P/E”) are generated outside of America...

There is a popular idea that cheap labor is why America lost its manufacturing jobs, perhaps that might play a part in something (although if it did, why didn’t Germany and Japan lose more?), but there is nothing I ever saw to support that notion....

Follow the trend-line on the chart from after the War to 1979, and extrapolate, if the investment had not piled out of America, there would perhaps be 24 Million people employed in manufacturing in USA today, as opposed to just under 12 Million....

The point of Free-Zones is to create an environment where free-enterprise, and free-markets can thrive; and when all the rest is so corrupted by silly laws, regulations, and special interests, sometimes you just need to start over.

And don’t talk about the 38% corporate tax which would be “lost”, you can only lose something you got, and there are plenty of ways to make that up taxing rich people, and people with jobs.

This is an interesting post in its entirety, and it shows the thinking behind the move of manufacturing offshore. In Butter's view, the reasons are primarily corporate taxation and regulation.

This relates to Michael Hudson's proposal to tax away economic rent instead of productive contributions in order to discourage rent-seeking and promote productive activity. Since a majority of the wealth that funnels to the top is the result of economic rent, there is an alternative to taxing factors of production that are not parasitical.

Taxation is operationally unnecessary to fund government with revenue, since a government that issues a non-convertible floating rate currency is not operationally constrained and funds itself directly. Taxation serves two purposes, first, to withdraw non-government net financial assets in order to dampen effective demand when inflation threatens, and secondly, to discourage negative economic and social behavior. Taxing economic rent discourages parasitical rent-seeking while promoting efficient use of capital and labor in production.

The other question is regulation. Regulation is required for several reasons. The first and most important is to minimize cheating and ensure a level playing field. Another is to set minimally acceptable social standards such as workplace safety. Another is to limit negative externalities.

As globalization proceeds, developed countries have to choose whether to forego social gains made over the past century or to allow the lowest common denominator to operate. This is going to be an ongoing issue as capital seeks "efficiency" and citizens look to government for effectiveness in pursuing public purpose and general welfare.

Zero Hedge: The Blame Game

WSJ — Not withstanding the euro zone's problems, Mr. Juncker said that both the deficit and overall debt in the U.S. and Japanese economy are substantially higher than in Europe.

"The debt level of the USA is disastrous," Mr. Juncker said. "The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy."

Tyler — Translated: "why are you picking on us?" and "Have you looked at the US and Japan recently?" Translated even more: the Nash equilibrium of the mutually assured avoidance of the topic of global insolvency is now broken. Next up: the US and Japan bash Europe and confirm that Europe's PIIGS are actually far risky than the US and Japan, plus they can't print their money etc. Then Europe retaliates. And so forth.

The blame game avalanche has officially started.

Read all at Zero Hedge: The Unwind Begins: Eurogroup President Juncker Redirects From A Broke Europe By Throwing US And Japan Under The Insolvency Bus: "The Debt Level Of The USA Is Disastrous"

Stay tuned. This is going to get "interesting" as the wheels start to come off.

Notice that Tyler gets it that the members of the EZ are not currency issuers, whereas the US and Japan are.

Jeffrey Gundlach tells his story

EXCLUSIVE INTERVIEW With Jeffrey Gundlach

Gundlach tells his story of how he got from being a drummer in a Hollywood rock band to becoming the world's hottest bond manager. There's a movie script in here.

And on the side, Jeff shares some insights into markets, the economy, and where he sees things going.

Neil Barofsky — Get Ready For the Next Crisis

Excerpt from Dan Rather Reports, HD Net

(h/t Washington's Blog)

Tim Duy — Unemployment or Currency Crisis

Tim Duy of Fed Watch is a very savvy guy. He has a must-read post on the current thinking at the top, which is how to navigate between high unemployment and, no, not inflation, as many think, but currency depreciation leading to a currency crisis. Current thinking seems to be that unemployment has to be suffered in order to avoid a possible currency crisis.

More on Geithner, Deficit Reduction, and Expenditure Switching

Steve Keen on debt-deflation

The [debt-deflation] process eventually exhausts itself as the debt to GDP ratio falls. But given that the current private debt level is perhaps 170% of GDP above where it should be (the level that finances entrepreneurial investment rather than Ponzi Schemes), the end game here will be many years in the future. The only sure road to recovery is debt abolition—but that will require defeating the political power of the finance sector, and ending the influence of neoclassical economists on economic policy. That day is still a long way off.

Read the whole post: Dude! Where’s My Recovery?

The equations don't show up in HTML. If you want to see the equations, then download the PDF.

Financial Illiteracy Widespread

Americans are mired in debt they don't understand, according to a new working paper.

Not only do many Americans not have a financial plan in place for emergencies or even foreseeable expenses, but a "sizable" number also don't understand the terms of their own mortgages and credit cards, the National Bureau of Economic Research report found.

And it seems Americans are also ignorant of their financial ignorance. Although many haven't mastered basic economic concepts, such as inflation, nearly 40 percent of gave themselves high scores when asked to rate their own financial literacy. Just 14 percent rated their knowledge level three or worse on a seven point scale.

Read more: Americans Struggle With Financial Problems They Don't Understand: Study

It's looking pretty simple to trap most people into debt peonage and expose them to financial ruin. Moreover, creditors like it this way and want financial reform off the table.

Time: Five Myths of the US Economy

Myth No. 1: This is a temporary blip, and then it's full steam ahead

Myth No. 2: We can buy our way out of all this

Myth No. 3: The private sector will make it all better

Myth No. 4: We'll pack up and move for new jobs

Myth No. 5: Entrepreneurs are the foundation of the economy

Read more:

What Recovery? The Five Myths About the U.S. Economy b

y Rana Foroohar

Chinese say US already defaulting

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

"In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies -- eroding the wealth of creditors including China, Guan said.

Chinese ratings house: U.S. government already defaulting on debts

Bitcoin in trouble in the US?

The Internet barter system known as "Bitcoin," which makes it difficult for law enforcement to monitor online transactions, has raised the ire of two U.S. Senators who learned recently about a new website that lets Bitcoin users buy and sell illegal drugs.

In a letter to Attorney General Eric Holder and Drug Enforcement Agency (DEA) administrator Michele Leonhart, Sens. Charles Schumer (D-NY) and Joe Manchin (D-W.Va) called for action against the website "Silk Road," which was the subject of a recent report by Gawker.

Senators call for crackdown on ‘Bitcoin’ as drug traffickers move in

The Austrian School responds to Dr. Galbraith

Austrian School economist Robert P. Murphy has written a response to Dr. Galbraith's previous American Conservative article. It's 'good, cold douche' time as Murphy channels Joseph Schumpeter and Andrew Mellon. An interesting side note: Murphy works for the Institute of Energy Research, a think tank that according to Greenpeace involves "Thomas Pyle, a former Koch and oil-industry lobbyist, is the President of IER and the American Energy Alliance, the 501c4 counterpart to IER" and "$175,000 received from Koch foundations 2005-2009 [Total Koch foundation grants 1997-2009: $235,000]" (source).




An excerpt: "But who cares if the dollar value of “Gross Domestic Product” goes down? If prices fall even more, then Americans’ standard of living goes up. For example, if the Tea Party activists actually held Republicans’ feet to the fire and Uncle Sam didn’t raise the debt ceiling, then the government would have to slash $750 billion or so from this year’s spending to avoid default on the existing debt".

"That would mean that there was a sudden loss of $750 billion in income to various people in the economy. A large part of it would probably be made up by income generated in the private sector, as the government’s deficit disappeared and people expected lower future tax burdens. But even if it didn’t, so what? The quantity of skilled workers, raw materials, and machine tools wouldn’t decrease just because Uncle Sam started living within his means. After prices adjusted downward, Americans would find they could buy more with their lower incomes".

Galbraith Attacks Pseudo-Keynesianism

Economist James Galbraith attacks false Keynesianism in an article for The American Conservative (interesting venue for Dr. Galbraith).

an excerpt:"And Thorstein Veblen, in The Theory of Business Enterprise, in 1904, explained what the sound principle underlying it all was. The bottom of the matter was emotional: “Depression is primarily a malady of the affections of the business men. … Any proposed remedy, therefore, must be of such a nature as to reach this emotional seat of the trouble. … What is required is a business coalition … loosely called a ‘trust’.

There you have it: business people need to be in charge. And more than that: they need to feel in charge. Anything else is fundamentally unsound.

That is what made Keynes insufferable. It wasn’t that as a young man he liked boys. It wasn’t that he taught that that thrift is a vice, or that savings are pathological, that deficits are helpful, that debt is necessary, that interest rates should be kept low, that the economy should be run at full employment for the good of all. It wasn’t even his reference at the end of The General Theory to the “euthanasia of the rentier.”

No, it was the fact that Keynesian policy required Keynes. And if Keynes were in charge, then the captains of industry could not be. Larry Summers is not Keynes. But he did give the impression, for a while, of running the show. This was a fatal error. It was the impression of making policy that business and the Tea Party could not stand. A better policy would not have been better liked".

Krugman Says "Rentier"

New post out from Krugman today, where he introduces his readership to the term "rentier"; excerpt:

rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.

I believe the term applies to a broader demographic, but it is a start at least for Krugman.

(*Headline form hat tip winterspeak)

Tim Duy is getting pessimistic

"It is beginning to look like the economy is circling the drain."

Read Tim's full analysis of monetary policy at Fed Watch: Circling the Drain

Janet Tavakoli on Anarchy in America

Third World America 2011: Forget "Fast Tracking to Anarchy" We've Arrived

Along with Bill Black, Frank Partnoy, Elliot Spitzer and other people with expertise in financial crime, Janet Tavakoli has been writing about corruption at the root of the global financial crisis for some time. Here she turns her attention to the consequences on the middle class and poor, who have borne the brunt, while the perps were bailed out and have gone scott free.

The post is pretty dramatic. Scary, in fact.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures(1998, 2001), Collateralized Debt Obligations & Structured Finance (2003),Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

Hell's Puppets

Zach Goldfarb's Washington Post article on Timothy Geithner confirmed what many have suspected about Geithner: he is a thrall of the financial sector and is willing to throw American workers under the bus to prove his devotion to the rentier class. Take a look at some of these revelatory gems:

"Even before the president had been inaugurated, Geithner had been urging him to set a target for the budget deficit that would require shrinking its size to 3 percent of the U.S. economy. At that level, the national debt would eventually become manageable.

“From the earliest moments of the administration and even before, he clearly had a big focus on long-term deficit reduction and making clear, not just to the markets but for the entire economy, that the government is living within its means,” Goolsbee said in an interview.

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt".

"In the summer of 2009, Geithner was asked by a television interviewer whether tax hikes would be needed to rein in the nation’s debt. Geithner responded it was too early to tell, an early hint of the priority he put on cutting the deficit.

Political strategists at the White House were mortified. Obama had promised not to raise taxes on the middle class. This had been a centerpiece of his election campaign. At a White House briefing a day after Geithner’s remarks, he was publicly chided by Obama’s top spokesman for engaging in a “hypothetical.”

But Geithner already had the president’s ear. Privately, Obama offered reassurance. “I’d have said the same thing,” Obama told him, according to two people familiar with the conversation".

MMT and Sectoral Balances — "It's the demand, stupid."

There are three sectors that make up the national economy — the government sector, the private domestic sector and the external sector. The private domestic sector and the external sector can be consolidated as the non-government sector. Macroeconomics deals with these sectors in aggregate in describing the operations of the national economy as a whole based on reported data. These data are generally nominal amounts that reflect transactions involving real resources, The accounting reveals how real resources have been allocated through financial equivalents in a monetary economy. Real amounts are nominal amounts adjusted for inflation.

A basic principle of MMT is that non-government saving creates demand leakage, which can be offset by government deficits in order to prevent economic contraction due to demand lagging under output potential. Non-government saving includes both private domestic saving and saving denominated in dollars by the rest of the world (ROW).

The Sectoral Balance Approach

Bill Mitchell breaks the sectoral balances down this way:

Income = Expenditure (def)

This means that everything that is sold is someone's income.

This implies that Y = GDP

1. Sources of national income (GDP):

Y = C + I + G + (X - M)

where Y is national income, and

GEP is Gross Domestic Product, or national output

where C is consumption of goods for that produce no return

I is investment in goods that produce a return

(Note: I is business investment, not financial investment, which is part of saving)

G is government expenditure net of taxes

(federal, state, and local)

(X - M) is the trade balance

X is exports

M is imports

2. Uses of national income:

Y = C + S + T

where S is private domestic saving

T is taxes

Equating:

C + S + T = C + I + G + (X - M)

Canceling:

S + T = I + G + (X - M)

Transposing:

(I-S) + (G-T )+ (X - M) = 0

This says that the private domestic balance plus the government fiscal balance + the trade balance sums to zero as an accounting identity.

What this implies is that the various components of the identity will necessarily shift to preserve the identity as national income is allocated differently over time. These components can and do shift relative to each other, so the equation is not a statement of equilibrium.

The Government Sector

(G - T) is the difference between government expenditure and taxation over a period. This is generally fixed by government over a fiscal period.

The Private Domestic Sector

(I - S) is the relationship of saving and investment over a period.

Domestic private income is made up of what is spent on consumption and what is not spent on consumption. Saving is that portion of income that is not consumed.

Y = C + S

Domestic private output is made up of what is sold for consumer use (no return) and what is sold for capital use (return). Capital use is business investment, which includes capital goods, improving human resources, residential real estate, and inventory. (Remember inventory. It will be important later.)

O = C + I

Income equals expenditure

Y = O

Substituting:

C + S = C + I

Canceling:

S = I

Again this is an accounting identity. It does not imply equilibrium because saving and investment are shifting quantities.

What this says is that if consumers decide to save more, then investment must rise. since inventory is a component of investment, business may then find itself holding excess inventory that it did not plan for and cannot readily sell. This is a signal of lagging demand. In this way, saving contributes to demand leakage.

This is called the paradox of thrift. Saving is good for individuals but in aggregate saving can creates demand leakage that results in economic dislocation when it leads to unwanted inventory buildup. High aggregate saving during recessions results in demand leakage that business interprets as a signal not to expand to meet demand. As result, the economy continues to underperform, with high employment and an output gap.

When unplanned and unwanted inventory builds up due to falling demand, businesses can either reduce prices or cut back production. If they reduce prices, then they will experience margin compression and profit will suffer if wages do not fall. Businesses generally prefer to cut production and layoff the least productive, inefficient, and non-essential workers, maintaining prices to the degree they are able, rather than slash prices and wages across the board to maintain employment.

When businesses cut back in aggregate, unemployment rises, worker income falls, demand contracts further, consumption drops, and recession ensues. If there is significant private debt, liquidity problems develop from reduced cash flow, and defaults and bankruptcies mount.

Private saving desire aka "propensity to save" is a given that is determined by the public at large. Private saving desire is beyond the ability of government to control or influence directly. Government can only respond to it by accommodating it, or else ignore it. Therefore, according to MMT government fiscal policy should follow the private sector by accommodating private saving desire. Ignoring changes in private saving desire will result in fiscal drag that will impede the economy.

The External Sector

(X - M)

The external sector includes the trade balance (X-M) and other transactions with the ROW, such as foreign direct investment, payment of interest and dividends to foreigners (factor income), and transfer payments such as foreign aid. This is called the current account.

The capital account is the ROW's saving in dollars.

The capital account (KA) equals the current account (CA) as an accounting identity.

KA = CA

This means that all the dollars that foreigners obtain in a period are used either for consumption of US goods, investment in the US, or are saved in US dollars.

The trade balance as part of the current account show whether trade is balance, or foreigners are either saving dollars or borrowing dollars. Since the trade balance represents the bulk of the current account, if foreigners are buying from the US in the volume that they are selling to the US, the ROW is saving dollars.

Saving by the ROW also constitutes demand leakage, since the amount spent on imports that is not offset by exports is money not spent on US output in the period.

Sectoral Balances Sum To Zero As An Accounting Identity

Recall that

(I - S) + (G - T) + (X - M) = 0

where (I - S) is the private domestic balance

(G - T) is the government fiscal balance

(X - M) is the trade balance

What this means is that the government fiscal balance is the inverse of the non-government balance (private domestic balance plus the external balance).

This implies that a private domestic surplus (net saving) and a trade deficit (ROW saving in dollars) necessitates a government fiscal deficit to offset this saving to keep the equation in balance at the present level of output, employment, and saving desire. If government fails to do this, then either output will adjust downward to balance the equation at a lower level, or the private sector will have to save less, or the trade deficit will have to decrease, or some combination of these adjustments.

When aggregate non-government saving increases, then less is spent than produced and inventory rises involuntarily. Then other components of the equation must adjust to maintain the identity, which as we have seen, reduces to an identity between income and expenditure.

Either the budget deficit increases, or the economy (GDP) contracts, or private sector borrowing increases, or the external deficit decreases, or some combination thereof.

The conclusion of MMT is that the non-government balance, which the government does not control, determines the appropriate size of the government fiscal balance in order to maintain full employment and price stability. The goal of MMT is to maintain equilibrium at full employment and price stability by using fiscal policy iaw the principles of functional finance, i.e., injecting net financial assets (NFA) into non-government though fiscal deficits to address demand leakage and withdrawing NFA through taxation to address inflation.

Note: This summary of the sectoral balance approach is only a part of MMT and it does not treat the role of debt in the economy, since the use of credit does not appear in the national accounting equations. The use of credit is also essential to MMT, which grows out of Hyman Minsky's analysis of financial instability. Because the private sector is revenue constrained, private sector borrowing becomes unsustainable over time. This happens when the budget is in surplus and net exports do not offset it. Then the private sector goes into deficit and dissaves in aggregate. "Budget surplus" sounds good to those not understanding sectoral balances. But if the budget surplus is not offset by net exports, then it results in private borrowing in aggregate, which is inherently unstable over time.

References:

Bill Mitchell: Barnaby, better to walk before we run

How do budget deficits finance saving?

Stock-flow consistent macro models

Richard Koo versus Paul Krugman

Economist Richard Koo attacks Paul Krugman for both his advocacy of QE2 and his misunderstanding of what QE2 actually does.

"The result of QE2 has not lived up to administration, or Krugman's expectations, according to Koo. Instead, we're left with only two policy choices: protectionism and dollar devaluation, or more fiscal stimulus.

It's important here, to note, WHY QE2 doesn't work, according to Koo... essentially all that happened is that by buying up Treasuries, investors were forced to look for returns elsewhere, in places like stocks and commodities. The latter, the commodity gains, ended up slowing down the economy. What's more, QE2 has had no positive impact on bank lending whatsoever".

Democracy or concentrated wealth? That is the choice.

Great program. A bit long, but worth watching. (Hat tip, Kevin Fathi and Naked Capitalism.)

Lifting the Veil from S DN on Vimeo.

Austan Goolsbee resigns as the Chairman of the Council of Economic Advisers

Goolsbee has been one of Obama's longest serving advisers. His ideas have been more or less progressive and even though he teaches at University of Chicago, he seems to come very much from a post Keynesian perspective.

It is rumored that he left out of frustration with the White House's stubborn resistance to move aggressively with policies to stimulate jobs and the economy.

So runs the narrative among those inclined to accuse the administration of failing to marshal an adequate response to the strains of the Great Recession, setting aside plans to put Americans back to work via government-financed projects in favor of scrimping to shrink budget deficits.

Goolsbee may not be the ideal guy from an MMT point of view to make policy, however, he was close enough than many of the others who currently advise Obama, so I consider it a terrible loss that he's now going.

GOP jobs strategy: Fire 10% of the Federal workforce

Here is another glaring example of the GOP's perverse economic policy. Have you been wondering, as I have, about their jobs strategy? Well, they've just announced it: fire 10% of the Federal workforce.

This will undoubtedly give private employers a huge boost of confidence when 215,000 people--many of whom may be their customers and clients--suddenly lose their income.

Well done, Republicans! Well done!!

Great Depression II?

Dean Baker: Disaster Not Averted

Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II. Deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.

There was no economic reason that the government could not have spent on this scale in 1931, as opposed to 1941; the obstacles were political. Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers. The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s....

The Huffington Post: U.S. States, Localities Not Providing Economy With Their Usual Boost

WASHINGTON — In a healthy recovery, states and localities produce jobs, expand social services and help fuel the nation's economic growth.

Then there's the 2011 recovery.

The U.S. economy is moving ahead, however fitfully. Yet state and local governments are still stuck in recession. Short of cash, they cut 30,000 jobs in May, the seventh straight month they've shed workers. Rather than add to U.S. economic growth, they're subtracting from it.

And ordinary Americans are feeling it – from reduced services to fewer teachers, police officers and firefighters.

Few see the pain subsiding soon. Mark Vitner, senior economist at Wells Fargo Securities, expects state and local governments to slash 20,000 to 30,000 jobs a month through the middle of 2012.

Joel Naroff of Naroff Economic Advisors notes that when states cut spending to balance their budgets, as required annually, a ripple effect multiplies the damage: Companies that do business with states and localities suffer. These companies, in turn, scale back their own hiring.....

Energy Challenge

Michael T. Klare, author of Rising Powers, Shrinking Planet: The New Geopolitics of Energy, has written an article about three trends that will impact energy policies for the entire planet: 1) political unrest in the Middle East 2) worldwide abandonment of nuclear power and 3) an ongoing Chinese drought forcing a turn from hydroelectric power and towards increasing use of hydrocarbons.

Read the article here.

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.

"...these days, the primary cause of foreclosures is unemployment."

NYT: For the Jobless, Little U.S. Help on Foreclosure

The Obama administration’s main program to keep distressed homeowners from falling into foreclosure has been aimed at those who took out subprime loans or other risky mortgages during the heady days of the housing boom. But these days, the primary cause of foreclosures is unemployment.

As a result, there is a mismatch between the homeowner program’s design and the country’s economic realities — and a new round of finger-pointing about how best to fix it.

[emphasis added]

Debt-deflation in store?

Is Climate Change Implicated in Rising Food Prices?

NY Times Bombshell: “The latest scientific research suggests” climate change is “helping to destabilize the food system” by Joe Romm

If this is the case, and Romm makes a good case it is, expect supply side inflationary pressure to increase going forward, which will result not only in higher prices but shortages that lead to global instability. If this is convincingly connected to CO2 emissions, which just about everyone admits other than the US public, also expect increased energy costs, also leading to supply side inflationary pressure as negative externalities are addressed economically.