Deficits (and Massive Debt Overhangs) DO Matter → Washingtons Blog
Deficits (and Massive Debt Overhangs) DO Matter - Washingtons Blog

Monday, November 23, 2009

Deficits (and Massive Debt Overhangs) DO Matter

The New York Times has a good essay on debt:










The Times continues:











And as Tyler Durden noted on November 1st:



But many experts disagree:
  • Nouriel Roubini writes:



And see this.


  1. Well, no. The Japanese experience says not. Hint: Japan's problem was an remains toxic debt on the banks' balance sheets, impairing their capital, hence, their ability to lend. It's not a problem with government finance, and the Japanese government has enjoyed low interest rates due to deflation, while running debt amounting to 200% of GDP without the bond market giving a hoot.

    See Bill MItchell, Japan grows along with the hysteria

    Anyone who understands modern money knows why this hoopla about government debt is just fear-mongering. Don't fall for it.

    This disinformation is based on comparing debt in the non-government economy with government debt. They are completely unlike in that the federal government is sovereign provider of a non-convertible currency of issue, while households and firms are users of that currency. Therefore, the relationship is inverse rather than direct, and vertical instead of horizontal.

    The government provides its currency of issue by crediting bank reserves. Bank reserves are like demand account in the private sector and Treasuries are like time deposits (CD's). Switching between them is just a matter of entering some figures on a balance sheet.

    Or think of it this way. High powered money (physical currency and bank reserves) is like tiddlywinks. The government is the tiddlywinks factory. It can issue as many tiddlywinks as it pleases with no problem as long as the tiddlywinks don't exceed the products and services available for sale or inflation will result. But the government can always take tiddlywinks back as necessary to keep the nominal in balance with the real by taxation.

    The government need neither to borrow or tax in order to spend or satisfy its obligations. In fact, the US as the issuer of the world's reserve currency really has an obligation to supply as many Treasuries (time deposits) as needed by those who want to park their excess reserves in interest-bearing instrument that are equivalent to dollars.

    In a flexible rate system, if there were a problem interest rates would be rising and/or the dollar would be crashing. As a matter of fact, interest rates are at historical lows and the yield curve is flat. The dollar is under pressure but it is being driven down by the Fed in order to relate assets prices, in order to pump up the toxic waste on bank balance sheets, as well as to make US exports more competitive (a hidden tariff).

    All this BS about the Us becoming insolvent or defaulting on its debt is just straight BS or just ignorance of how the monetary system works

    See L. Randall Wray, Understanding Modern Money (1998), available at Google Books.

  2. Laurence J. Kotlikoff's paper on "Is the United States bankrupt?" has an excellent suggestion regarding reforming taxation by changing from an income to a retail sales tax. It lists the important benefits of:
    1. Poor households paying no sales taxes in net terms.
    2. Eliminating the regressive FICA tax which is 0% for earnngs over $90,000
    3. Taxing the wealth of the rich
    4. Saving hundreds of billions in compliance costs
    5. Encouraging savings
    6. Enhancing generational equity

    There are additional benefits of:
    1. Reducing taxation on domestic production which would increase domestic manufacturing employment
    2. Making our exports more competitive.
    3. Reducing the intrusion of government in personal financial matters which would increase personal liberty.

    It is simple, progressive and offers the above benefits. Why is there virtually no discussion of it's merits?

  3. Tom, sounds like how it is SUPPOSED to work. But since private banks create credit and money out of thin air, the American people end up paying a LOT of interest on debt. See:

  4. GW - keep up the great blog.

    Funny how Paul Krugman calls debt a phantom menace now that Obama is president. Yet he rails on Bush and Reagan for running up deficits. I guess for Krugman, the importance of deficits is determined by whether a Republican or Democrat is in the White House.

  5. Tom, you don't have to worry about US becoming insolvent. We are insolvent! Talk about an unsustainable business model. Rick Waggoner is alive and well and living in Washington DC.

  6. George, this is how it actually works. It is important to realize that the government and private banking system stand in a vertical relationship. That means that the federal government can and does add and subtract net financial assets to the economy by spending and taxation.

    The private banking system controls the money supply in that bank lending creates deposits (against which banks then are required to hold reserves. Reserves come after the lending not before). That banks lend to create deposits that the balance of loans and deposits always nets to zero. The private banking system cannot increase or decrease net financial assets.

    On the government can do increase the net financial assets of non-government by increasing reserve accounts. This done through government spending (including interest paid on Treasuries). Only the government can reduce net financial assets of non-government. This is done though taxation.

    Modern monetary theory is based on Abba Lerner's functional finance:

    "The central idea is that government fiscal policy, its spending and taxing, and its withdrawal of money, shall be undertaken with an eye to the results of these actions on the economy and not to any established traditional doctrine of what is sound and unsound." (Lerner, 1943, p. 39)

    HIs two principles of functional finance are:


    2. "An interesting corollary is that taxing is never to be undertaken merely because the government needs to make money payments.... Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less to spend." (Ibid, p. 40)

    (Quoted in Wray, cited above, pp. 75-76)

    (continued below)

  7. (continuation)

    Neo-Chartalism expands on this in light of the change in the US monetary system on April 15, 1971, when President Nixon at the urging of Treasury Secretary John Connolly, then a Democrat, ended dollar-gold convertibility. (This did not cause either default or a dollar collapse, or a breakdown of the monetary system.)

    Since at point in time, the US government as a sovereign is not only not monetarily constrained, but also it is not constrained by convertibility or any fixed rate of exchange. This makes a whole world of finance possible of which progressives are not yet aware. As a result, they are struggling within an economic paradigm that does not reflect present reality. Nor is it likely to reflect future reality, because the world is not going back on the gold standard anytime soon, regardless of what Ron Paul thinks.

    Neo-Chartalism describes how the present monetary system works based on national accounting, with the government and non-government in a vertical relationship of currency issuer and user.

    Circuitism, as propounded by Steve Keen, for example, studies how money operates in horizontally the non-government system. Here it is vitally important to the health of the financial system that the financial system act responsibly in the fiduciary sense of putting other people's money at risk. Current laws and regulations did not limit that sufficiently, and there may also be violations of current laws and regulations that were not observed. See the work of William K. Black (an associate of Wray at the University of Missouri) on the latter. That is a separate issue, and it is what I believe you were primarily referring to above in your comment.

    It is vitally important that progressives understand these issues in terms of an economic paradigm that is reality-based. MMT is based on how the system actually works, explained in terms of national accounting identities that are common practice in the profession — not on economic models based on non-empirical assumptions, which are not borne out by facts. Otherwise, progressive will be suckered into a debate they cannot win because they cannot hope to counter sophisticated arguments of economists that appeal to complex mathematical models. See Steve Keen, Debunking Economics (2001).

    Moreover, it is vital over put an end to the erroneous and misleading analogy that equates government and household finance when they are actually opposites, issuer and user. There is simply no parallel, since the government is not revenue-constrained while households and firms are.

    As you say, households pay a lot of interest on debt. That is to the banks and is a horizontal relationship. Where government enter into it is in forcing people to go into debt by not injecting enough money into the economy in the first place (the Clinton surpluses) or by not redistributing wealth through progressive taxation when wealth accumulates at the top. But this has nothing to do with government borrowing.

    Governmment borrowing is, in fact, unnecessary. Randy Wray is recently out with a blog post for the government to just stop borrowing and monetize directly in order to end this ridiculous and needless handwringing over the "unsustainable national debt."

    Memo to Congress: Don't Increase the national debt limit.


  8. It's simple Math, spend more than you take in and.....
    We have built up 12 trillion dollars of debt in less than 30 years. It is the baby boomers selfish debt. They should pay it off before they pass on.
    Yes, that means raising their taxes and paying down the debt. Did they really think there is a free lunch? Do we really think we can cut taxes and still keep government services?
    When the politicians run on "No New Taxes" pledge, why didn't they also say, but we will have to cut Social Security, Defense spending, and every other department of government.
    By what right do they keep future American generations in deep debt, and stunt their ability to make decisions to move the country forward.

  9. Tom is of course right.

    The only remaining problem is a kinky one however.

    It is not capitalism. It is not capitalism, and will in fact destroy capitalism because the emphasis ends up politics, -not business.

    You cannot raise beef in the parlor.

  10. "It's simple Math, spend more than you take in and....."

    This is the classic mistake that everyone makes about government finance and household finance being similar. This relationship does not hold because the government is the issuer of currency, not the user.

    The government issues into the non-government economy by its spending. The government does not borrow or tax to spend. Taxes are used to withdraw net financial assets. That is all. Borrowing is paid off simply by crediting an account, nothing more.

    This is so simple, it is hard to get. But it is true. It is simply the way that a fiat money system works. The government cannot "run out of money" in a fiat system. When money creation outpaces the capacity of the economy to produce goods and services to buy, then the government slows spending and takes money out of the economy through taxation to maintain the balance. It's that simple.

    Presently, the Fed is trying to do this through lowering interest rates and excess reserves, which doesn't work, especially in a liquidity trap such as the one we are in now. MOreover, Treasury is perpetuating the fiction that the government needs to borrow to spend. As a result, President Obama and the Democratic Congress are in dander of crashing and burning as they turn attention to the deficit instead of attending to unemployment. Shades of 1937 loom, as Krugman has been pointing out lately. If progressives pile on the deficit dove bandwagon, they can kiss the Democratic majority goodbye.

  11. Be careful what you link to - this is part of a large coordinated attempt to reduce Social Security benefits and impoverish the public.

    First the document says:

    "...that the government has cut taxes well below the bone..."

    and then they say:

    "If, for example, agents who face confiscatory lifetime fiscal burdens refuse to work, there will be no lifetime resources for the government to appropriate."

    Is code for:

    Don't raise taxes on the rich.

    (Since workers can't refuse to work, they need income to survive, the only 'agents' who might go on strike would be the wealthy).

    So, the solution is:

    "...replace the current tax systems with a retail sales tax, personalize Social Security, and move to a globally budgeted universal healthcare system implemented via individual-specific health-insurance vouchers."

    Realize that the "new world order" many feat is being advocated by the document you are using to justify your thoughts on government debt.

    Now, the US administration is NOT using the financial resources at its command correctly - but this is not because of any debt being incurred. They are failing to spend sufficiently to create jobs and income. That is the issue - not debt repayment.

    If the Chinese don't want to purchase Treasuries with their excess dollars they can keep them in a Great Mattress, or they can spend them globally - which will return those dollars to the US for goods/services and assets and stimulate the US economy. But the Chinese lose the peg if they do that.

    So the Great Mattress is their only strategy outside of buying Treasuries until their domestic economy grows sufficiently - about a decade at least.

    Don't buy into this meme that the US is going to go bankrupt - it is the biggest head fake to justify the largest rollback of public wealth in history.

    BTW, since bank money is created with a corresponding offset (asset/liability), where do think the money comes from to create free-and-clear property ownership?

    The government must create it by spending - there is no other source to "pay the bank interest" or create net financial assets ("things" that are worth something and have no private debt attached to it).

    The public debt is a proxy for the total generated wealth of the country not encumbered by private debt. Pay off the public debt and the ONLY source of money becomes the banks (or foreign sources).

    Is that what you really want?

  12. Thanks Tom Hickey

    You've obviously been visiting Mr Mitchells and Mr Wrays sites as well. The level of ignorance regarding debt amongst the mainstream media and economists is staggering. Hearing folks talk about "defaulting" or going bankrupt is patently absurd.

    Learning how our fiat monetary system actually operates should be a prerequisite before you are permitted to talk about macroeconomics on TeeVee. Its really quite exasperating to listen to these morons.

    I was drawn to this article because of its title and was pleasantly surprised to see yours as the first response.

    Keep fighting the good fight.

  13. I think what you forget Tom is that as they create more money it becomes less valuable. With the U.S. dollar being the world reserve currency this upsets many people and risks them dropping it, which is part of the reason the Iraq war happened.

  14. I'm really eager to learn more about this and how the possible US debt crisis will affect me, but I would like to ask the Progressive poster who seems not to be alarmed about this the following question -- If sovereign debt isn't a problem then what is happening in Greece right now. Can't they just print more money to get themselves out of their crisis?

  15. Tom,
    You keep saying things like "The government must create it by spending", and "The government issues into the non-government economy by its spending. The government does not borrow or tax to spend", and "The government need neither to borrow or tax in order to spend or satisfy its obligations. In fact, the US as the issuer of the world's reserve currency",

    Yet, the government is separate and, as you say in a vertical relationship to the central bank ( which is private). So for the government to do all those things you say they can, they must print ( or issue) currency or the equivalent- call them credits if you like. Just like Iceland did. However,the Central Bank is really in the drivers seat, with the Constitutional authority to issue currency ( or ledgered credits if you prefer), NOT the US government. The US government can only either borrow and re-lend/spend, or tax and spend.


    Kruschev, Kosygin and Brezhnev tried this in the Soviet Union to fund their war machine. Worked for a little while, till people started starving and no one would trade their grain and machine tools for Soviet oil and gas anymore.






-- Comments that explicitly call for violence
