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Fairy Tales of the Coming State of the Union: Fairy Tales and Truths

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In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. In previous posts in this series I've analyzed and critiqued seven of the fairy tales I expect the President to tell us in his coming State of the Union speech. In this post, I'll look at all the fairy tales together side-by-side with the truth as I see it.

Table One: Fairy Tales and Truths

No.

Fairy Tale/Link To More Detailed Post

The Truth

1

The Government is running out of money.

The Government has the Constitutional Authority to create an infinite amount of money provided Congress appropriates the spending, and places no constraints on spending such as a need to issue debt when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary and are due to Congressional mandates that Congress can repeal at any time.

2

The Government can only raise money to spend by either taxing or borrowing.

The Government doesn't raise money to fund spending. Today, it spends mostly by marking up bank accounts in the non-Government sector in accordance with Congressional appropriations. The Government does collect previously created dollars by taxing or borrowing. But this money is not used for spending.

3

We can't keep adding debt to the national credit card.

Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends. So, it is only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.

4

We need to cut government spending and make do with no more money.

We don't need to do that as long as the economy is operating below its full productive capacity and full employment. Since the Government can always create more money, there is no need to make do with less. In fact, the Government must spend more to lift private sector aggregate demand and enable the Economy to get to full employment. Demand-pull inflation will not occur as a result of Government spending as long as the economy is operating at less than full employment.

5

If the Government borrows more money, the bond markets will raise our interest rates.

The bond markets don't control the interest rates paid to them. The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt when it deficit spends, in which case the bond market interest rates would be entirely irrelevant.

6

If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.


Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers' business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short they have little choice other than to buy our debt.

Even more importantly, we don't need to raise money by borrowing USD from them. We can simply spend/create it ourselves if Congress repeals its mandate to stop issuing debt. The result of this would be paying off the national debt over time, without austerity.

7

Our grandchildren must have the heavy burden of repaying our national debt.

No generation except one has ever repaid the national debt. That generation was rewarded with a depression. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession. It's a bad idea to repay the national debt or even to run surpluses, so our grandchildren won't do it unless they can do it without discontinuing deficit spending. That's possible, but only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its coin seigniorage power. In both cases the national debt can be repaid without requiring that tax revenues match or exceed Government spending.

Before you watch the State of the Union, print out this post and note how many of these fairy tales the President tells us. And when he asks for austerity, and tells us that we Americans must all sacrifice, keep in mind how much of his argument is based on one or more of these fairy tales. If any of it is based on these or similar fairy tales, you'll know that he deserves a big Bronx cheer, and that you need to get busy telling your Congressman and Senators that you were not fooled by the fairy tales, and that you know very well that no deficit reduction plan is necessary or desirable, and that what you want Congress and the President to do is to quit representing Wall Street and the financial oligarchs and to get all Americans who want to work fully employed, and the recession over, before any more American lives and futures go down the drain.

Tell them it's time for justice, though the heavens fall.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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Submitted by Hugh on

Good list, great series. I would add in 4 something like the following:

We don't need to do that because inflation will not occur as long as the economy is operating below its full productive capacity and full employment

Inflation is usually the great fear to this approach and it is important to address it. Of course, in our kleptocracy we have inflation in commodity pricing amid an overall climate of deflation. The deflation comes from the fundamentals, and the inflation comes from the bubbles the Fed is helping to blow via its quasi fiscal policies.

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Submitted by letsgetitdone on

Thanks, Hugh I revised #4 to mention no demand-pull inflation danger.

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Submitted by letsgetitdone on

Please feel free to develop more evocative names. In fact we might start taking about "fairy tales of Aztec Economics," also. Aztec Economics = the economics of human sacrifice.

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Submitted by CMike on

Might the bond market raise someone else's interest rates if the government borrows more money or if more money is created to finance government expenditures? And when the Fed engages in Open Market Operations isn't the intention to affect the interest rates for private actors in the economy, not the rate at which the government borrows short-term?

(I've all ready read about the examples that when an economy is in a liquidity trap the bond market doesn't respond to the central bank adding reserves in the short run. I'm asking about in ordinary circumstances.)

Submitted by Hugh on

We live in a kleptocracy. There is no ordinary. Besides it's more of a solvency trap than a liquidity trap.

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Submitted by CMike on

are suffering liquidity problems or ones of fundamental solvency are somewhat unrelated to what Keynesians refer to as a "liquidity trap."

When the economy is in a liquidity trap businesses and consumers with money do not want to spend, they want to stay liquid. Credit worthy businesses and individuals do not want to borrow. Likewise, their "animal spirits" having abandoned them, lenders [edit- should read investors] do not want to lend to entrepreneurs. Rather, banks would prefer to borrow short term at low rates [edit -- from the Fed window or elsewhere] and invest in safe long term AAA securities and pocket the spread (the purest example imaginable of rent seeking behavior). Jamie Galbraith points out in his book The Predator State that the Fed had to raise short term rates to get the economy going in the '80s. [edit- should read '90s, not '80s]

As the Wikipedia article explains, Joe Stiglitz warns low short term rates likely will lead banks to engage in the carry trade (foreign bond and currency speculation) or to invest in the real economies of foreign nations.

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Submitted by letsgetitdone on

Hi CMike,

Might the bond market raise someone else's interest rates if the government borrows more money or if more money is created to finance government expenditures?

This is the theory that Government borrowing crowds out private sector borrowing. It's a favorite theory of neo-liberalism. But, in fact, history refutes it since there's never been "crowding out" in the US when the Government borrows money.

Next, money isn't created by Governments to finance spending. What happens instead is that Government spends and in so doing creates money. Specifically, Government spending floods banks with overnight reserves and these affect three-month Treasury bond rates and lower them. These, in turn, benchmark other interest rates in the market. What can the bond markets do except adjust? They can't charge people more than the going rates in the market.

And when the Fed engages in Open Market Operations isn't the intention to affect the interest rates for private actors in the economy, not the rate at which the government borrows short-term?

The Fed can have more than one purpose. But right now, of course, the Fed is keeping short-term interest rates at near zero for its prime customers.

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Submitted by CMike on

You're right, the potential for government borrowing "crowding out" private sector borrowing is a favorite neo-liberal theory and one that makes perfect sense to me. I know there's one Brad DeLong post which is very clear on this point which I'll add to the thread if I find it. I've never looked into what the historical record says to support the theory. Hopefully, I'll find a paper that lays it out so I don't have to try to come up with the analysis myself. Observing the effect requires analyzing the ratio in corresponding time frames between GDP growth rates and deficits as percentage of GDP so its tricky.

The large Reagan deficits, for instance, were accompanied with relatively high unemployment rates and growing trade deficits which were deflationary phenomena which impacted on bond prices. Hopefully, in any event, that's not the route we're headed going forward.

Clarify one thing for me. When you say:

Next, money isn't created by Governments to finance spending. What happens instead is that Government spends and in so doing creates money.

Do you mean to say that when the government deficit spends it creates money or do you mean that when the central bank buys Treasury debt that it creates money? Those are two separate activities, right?

Until late 2008, the Fed had monetarized the National Debt to the extent that it was holding government bonds on its balance sheet. However, it had not done so to finance deficit spending but rather to expand the money supply over time as the economy grew in fits and starts. Do you disagree with that assertion?

Were you to use the term "Government spending" would you be referring to outlays both by the Treasury and by the Fed? This might be a point of confusion between us. For me, "Government spending" means outlays by the Treasury only. (At least that's what it meant to me before quantitative easing took on its recent dimensions.)

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Submitted by CMike on

It's a long one. For anyone who is interested, here's the neo-Keynesian view on the usefulness of deficit spending in our current economic predicament with the warning that," in normal times," there is a cost to deficit spending [my emphasis]:

********************
In normal times, a boost to government purchases or a cut in taxes produces a limited increase in production and employment while adding a substantial increase to the national debt. The increase in debt raises interest rates, which crowds out productivity-increasing private investment spending and, dollar for dollar, leaves us poorer after the effect of the stimulus ebbs.

The borrowing must then must be financed at a significant interest rate, and thus paid for with higher taxes, which reduce incomes by increasing the wedge between the private rewards and the social benefits of expanded production.

It's nasty business.

Normally, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking, but things are different now.

However, right now, as best we can tell, an increase in federal spending or a cut in taxes will produce (in the short run) no increase in interest rates and hence no crowding-out of productivity-increasing private investment. Indeed, government spending that adds to firms’ current cash flow may well boost private investment and so leave us, dollar for dollar, richer after the effect of the stimulus ebbs.

Why?

Because our debt today can be financed at extremely low interest rates—1.83 percent if financed via 30-year TIPS, and even less in expected real interest if financed over a shorter horizon.

In normal times, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking. Now, however, things are very different. Let’s run through the arithmetic...
********************

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Submitted by letsgetitdone on

In the above, I was talking about Treasury. spending/creating money. It does that, typically by marking up private accounts in return for goods and services. This recent post and ensuing discussion by Stephanie Kelton gives a factual account of what happens when Government deficit spends. If you or Brad DeLong disagree with this factual account, I'd like to see your counter-narrative.

One point of the post is that Government spending creates money in the non-Government sector, and when Government issues and sells debt it removes money from the non-Government sector, but adds a financial asset having equivalent value. So, even with debt issuance Government spending adds to non-Governments sector net financial assets.

When the Fed buys Treasury Debt from the private sector, it creates money in the form of new reserves, however, since it is buying the debt, it also removes removes the debt from the flow of private sector economic activity, so that counts as a swap of net financial assets, rather than as an addition to net private sector financial assets.

You say:

Until late 2008, the Fed had monetarized the National Debt to the extent that it was holding government bonds on its balance sheet. However, it had not done so to finance deficit spending but rather to expand the money supply over time as the economy grew in fits and starts. Do you disagree with that assertion?

I'm not sure I know what you mean by "monetarized," but I agree with what you say here. I think this is also what the Fed is doing now with its QE. As I said above, this supplies more reserves to banks, but it doesn't increase financial assets as Government spending does.

On "crowding out" I suggest a blog post by Bill Mitchell and the references he gives there. I think he shows that the "crowding out" theory is just false.

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Submitted by CMike on

"Monetarize" is the wrong word, I should have written "monetize." I was making a gratuitous play on the term "monetary policy" -- sorry for any confusion.

I read the Stephanie Kelton post but I have not read the ensuing discussion.

Kelton writes:

Whew! So where does all of this leave the private sector? My bank account has an additional $10 in it (my asset), which is offset by the fact that BoA owes me an additional $10 (their liability). This nets to zero. But, wait! There is still a new financial asset out there . . . the government bond! And this clearly shows that deficit spending, even when we account for the sale of government bonds, increases the private sector's holding of net financial assets.

But wait, again. Just as Kelton indicates "[i]n stage one" that the government "loses an asset (in essence, an accounts receivable)" when it collects a tax from her and "gets a credit in its bank account," here the government loses its own claim to an accounts receivable when it issues a bond to the private sector which, at a time certain in the future, it must redeem with interest (i.e. leave a credit in the bearer's bank account) out of tax proceeds from the private sector. So where's the new net asset?

Back in 2005 Mark Thoma, provided not a counter-narrative but a humdrum one on the subject of the Kelton post and government "debt monetization." He doesn't get into the details of Treasury Tax & Loan Accounts (TT&L) but I think he covers the essentials:

2. The government has $9,000 in cash from taxes, but needs to spend $10,000. Somehow (print money, borrow money, raise taxes, or lower spending) it must get $1,000 more.

3. Suppose it decides to borrow – issue new debt. Then the Treasury sells a government bond to someone in the private sector for $1,000. The person gives $1,000 in cash to the government and in return gets an IOU (perhaps for, say, $1,100 in one year).

4. The government now has $9,000 in cash from taxes and $1,000 it has borrowed from the public so it can now purchase $10,000 in goods and services.

5. Now let’s do the monetization step. This can happen automatically, as explained below, but for now let’s have the Fed conduct a $1,000 open market operation to increase the money supply. To do this, it cranks up the press, loads in some paper and green ink, and prints a brand new $1,000 bill. It takes the $1,000 bill and purchases a bond from the public, for simplicity make it the same bond the Treasury just issued. Then the money supply goes up by $1,000 (and may go up more through multiple deposit expansion) and government debt in the hands of the public goes down by $1,000 since the Fed now holds the bond. The increase in the money supply is inflationary.

6. What has happened? When all paper has ceased changing hands, the $10,000 in goods and services is paid for by the collection $9,000 in taxes and by printing $1,000 in new currency. The government debt simply moves from the Treasury to the Fed (in the U.S., the Fed pays for its operations from its earnings on these bonds and remits the remainder to the Treasury; I believe the remittance is weekly, but I’m not positive on that).

(In his item "1." Thoma says he's using the term "cash" for simplicity's sake. That would go for his references to "paper" and the "green ink" too.)

I haven't gotten to the Bill Mitchell post. I trust he gets into refuting the concept of "crowding out" in its more recent context:

On the one hand, international capital mobility completely undermines a simple model of crowding-out in a closed national economy, where the public sector's borrowings, if substantial, raise interest rates against the private sector. However, this availability of funds from across the globe means that borrowing is reliant on international credibility and 'confidence', which can provide a much more powerful constraint on public borrowing than allegations of crowding-out.

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Submitted by letsgetitdone on

First, on monetizing the debt; the historical meaning of "monetizing the debt" is the Central Bank buying the Treasury's debt instruments directly from the Treasury. Congress prohibits that here. So the Fed cannot directly monetize the debt.

I suspect that you think that the Fed creating money and then swapping it for Government securities is also "monetizing" the debt. But, 1) that's not the historical definition; and 2) in the US system, while the Fed buying debt from the private sector will save most of the interest expense on that debt, since Fed net profits mostly go back to the Treasury by law, such a move still leaves the Treasury with outstanding debt that must be paid to the Federal Reserve Regional Banks who hold the debt instruments when these come to maturity.

So, this "monetizing" doesn't reduce the national debt at any point in time very much, and will not have the effect of relieving us of the debt limit problem, or helping to reduce the debt-to-GDP ratio, which the deficit hawks or doves are worried about.

You also said:

But wait, again. Just as Kelton indicates "[i]n stage one" that the government "loses an asset (in essence, an accounts receivable)" when it collects a tax from her and "gets a credit in its bank account," here the government loses its own claim to an accounts receivable when it issues a bond to the private sector which, at a time certain in the future, it must redeem with interest (i.e. leave a credit in the bearer's bank account) out of tax proceeds from the private sector. So where's the new net asset?

The discussion on the Kelton piece is very important because it contained a lot of objections, which she handled in a very forthcoming way. It is worth your time. But, I must confess I don't understand your reasoning above. Kelton shows that when Government issues debt associated with its deficit spending it creates an asset in the private sector. Yes, it must redeem that bond in the future, but who says it must redeem it out of tax proceeds? Typically, the national debt increases over time and will, no doubt, continue to do that, and if the Government is still deficit spending when the debt is due, it will pay it off and issue another debt instrument; or it will get some common sense and no longer issue debt.

Either way, the asset will remain in the private sector unless there's inflation. Then the Government will destroy private sector financial assets, as it must, through taxing, and that taxing won't fall on a person or a company because it is holding Government debt as a financial asset. It will fall on them, regardless of whether they hold such an asset or not.

On Mark Thoma's account in 2005, I think I've already refuted that above in my own analysis of monetization. Let's see what Toma says again:

. . . It takes the $1,000 bill and purchases a bond from the public, for simplicity make it the same bond the Treasury just issued. Then the money supply goes up by $1,000 (and may go up more through multiple deposit expansion) and government debt in the hands of the public goes down by $1,000 since the Fed now holds the bond. The increase in the money supply is inflationary.

First, the total debt of the US Government doesn't go down. Second, while the Federal Reserve System, the Board of Governors, and the FOMC are Governmental, the regional Federal Reserve Banks are privately-owned corporations, technically they are in the private sector, and for CBO purposes own part of the Government debt in the hands of the public. So, I think that technically Thoma is wrong about the Government debt in the hands of the public going down. The Fed can't simply rip up the debt issued by the Treasury in any case. The principal on that debt and a small part of the interest must be repaid, and the Treasury will most probably borrow again to repay it if required to do so by Congress, as it is now.

Third, I also think that Thoma is wrong about the cash going into the private sector being inflationary. The banks now have larger reserves, than they had before. But they've given up an equivalent amount of financial assets in the bonds that they held. Thoma would have to show that the reserves are more inflationary, than the Bond they gave up. But, I think there's really no evidence for this. What does Thoma think the multiplier effect of adding 600B in reserves to banks is? To have any multiplier at all isn't is necessary for the banks to lend more because of the presence of the reserves?

But this is a gold standard idea, no longer relevant in the fiat system. Now the banks don't need any reserves to lend money. As long as they can find a credit worthy borrower they can always get the money they need for a lona by going to the Fed discount window.

Moving to "crowding out," Thoma says:

On the one hand, international capital mobility completely undermines a simple model of crowding-out in a closed national economy, where the public sector's borrowings, if substantial, raise interest rates against the private sector. However, this availability of funds from across the globe means that borrowing is reliant on international credibility and 'confidence', which can provide a much more powerful constraint on public borrowing than allegations of crowding-out.

In my view, Thoma is in error in thinking that the public sector's borrowing in a closed economy raise interest rates against the private sector. This theory is just wrong, and Bill Mitchell refutes it here.

I also think he is in error about the need for Governments sovereign in their own currency to have "credibility" and "confidence" in the bond markets. The bond markets don't have the power to raise interest rates on US debt instruments if the Government wants to float bonds at lower rates. The Treasury and the Central Bank can require these markets to accept rates that are near zero. I've blogged about this recently here. But, in addition, Warren Mosler and Mat Forstater, Bill Mitchell and Scott Fullwiler have all shown that such Governments can drive interest rates down to near zero and that the bond markets cannot do anything about it.

Finally, just a short note about Thoma's paradigm here. Thoma believes that Government spending is "funded" in fiat monetary systems. That's just not so. If one believes that one will continue to make errors in one's analysis and will believe that bond market credibility and confidence are necessary for Governments sovereign in their own currency to deficit spend. If you believe this, then you will continue to fail to explain cases like Japan, or the Argentine economic recovery after the default of the early 2000s.

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Submitted by CMike on

don't think it's all that useful, in this discussion, to differentiate between the Treasury selling debt directly to the Central Bank and the Central Bank immediately buying a just issued bond from the public as Mark Thoma suggested in his hypothetical.

I might mention the passage that begins:

On the one hand, international capital mobility completely undermines a simple model of crowding-out...

was not written by Thoma but rather by Jim Tomlinson,the Bonar Professor of Modern History at the University of Dundee. I was going to lead into another discussion with that quote but I'll save it for another thread.

Stephanie Kelton is right if she says a bond might be redeemed by the Government with funds raised by issuing another bond. She's also right that the U.S. might carry a large and growing debt interminably into the future. Nonetheless, the Government is paying the private sector for the use of that money until the Government retires the debt by paying the bearer with money generated by taxes, or other revenues, raised, one way or another, from the private sector.

The U.S. does take advantage of the rate of GDP growth to finance its debt by having the Central Bank monetize some of it, in the vulgar non-historical sense of the word monetize, but if the Government were to rely upon the Central Bank to buy up debt amounts at rates that are in excess of the growth rates of the underlying economy that creates inflation if the economy is at near full employment, in a stagflation trap, or if certain import costs become too great.

Politically, I don't think it's a good idea to deal with resistance to government deficits by coming up with a way to make the numbers disappear. I think this is just a distraction from doing the necessary work to sell the public on:

1) reversing the trend towards the concentration of wealth in society through tax, trade, and labor policies

2) putting in place, among other government industrial policies, a national energy policy which discourages oil consumption and promotes alternative energy development

3) dramatically reducing Pentagon and other national security spending

4) reducing the rising faster than inflation prices Americans are paying for health care goods and services through a series of steps which include going to a single payer system, changing patent laws, increasing the number of doctors practicing medicine, regulating hospital and medical equipment use fees

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Submitted by letsgetitdone on

Thanks for your reply. Here's mine.

don't think it's all that useful, in this discussion, to differentiate between the Treasury selling debt directly to the Central Bank and the Central Bank immediately buying a just issued bond from the public as Mark Thoma suggested in his hypothetical.

It's not my distinction. It's Congress's. They've prohibited the Fed from buying the Treasury's debt directly and consider that "monetization." Since it's a legal distinction it's politically important. From the economic standpoint, it may not seem important. But I think it is because it is one of the constraints on the Government's sovereign currency-generating power.

Stephanie Kelton is right if she says a bond might be redeemed by the Government with funds raised by issuing another bond. She's also right that the U.S. might carry a large and growing debt interminably into the future. Nonetheless, the Government is paying the private sector for the use of that money until the Government retires the debt by paying the bearer with money generated by taxes, or other revenues, raised, one way or another, from the private sector.

Not right. This is the Governmental Budget Constraint (GBC) paradigm. We do not agree on this. A Government with a fiat currency system with a non-convertible currency and a floating exchange rate isn't constrained by having to fund its expenditures through taxing or borrowing or otherwise raising its revenue from the private sector, unless it constrains itself, because it creates money in the act of spending, primarily by marking up accounts. Congress is now applying such a constraint by requiring debt issuance when the Government deficit spends. So, it is Congress's fault that there is a national debt at all.

In any event if Congress lifts that requirement, then the Government can either continue to maintain the debt by paying welfare to bondholders in the form of interest; or they can pay off the debt as it comes due and most of the debt would be paid off within 10 years.

On the possibility of inflation. We're nowhere near full employment, we don't have stagflation, and any specific inflation problems we might have from commodity shortages won't have anything to do with QE anyway. QE is about swapping bank reserves for securities. Reserves aren't spent or loaned out, and if you view the Securities as moving into the Government sector, the swap removes an asset of equivalent vale from the private sector. So the stimulus effect of QE is neutral. Even Krugman has said that if Bernanke really wanted to effect the economy he'd have to do $20 Trillion in QE. I personally think K is wrong. Even $20 Trillion won't have any effect on the economy. QE just isn't inflationary.

Politically, I don't think it's a good idea to deal with resistance to government deficits by coming up with a way to make the numbers disappear.

I could not disagree more. The resistance to Government spending comes squarely from the fact that the debt exists. the whole narrative of the deficit hawks is based on that. Their whole fiscal policy is structured around getting the rich advantages and using fear of the debt to make austerity happen. Begin to pay down the debt so that the hawks can't say it exists and the debate would then move to inflation vs. jobs. That's a debate we win, easily. This is not economics now. It's about politics. Get the debt off the table and it's a different political world for progressives.

I think that dealing with all the real problems you cite in your reply we need to get the debt off the table. I don't care whether that happens through people believing that it doesn't matter, or through the Fed buying debt to get it out of the private sector, or through Congress allowing the Treasury to pay it off over time as would happen if repealed the requirement to issue debt, or if the Executive decided to use coin seigniorage to pay it off. But if progressives want to make any progress, then they need to get this debt/deficit crap off the table.

Submitted by Hugh on

Both DeLong's crowding out hypothesis and Fed auctions of Treasuries are relics of the gold standard. With a fiat currency, the government creates money in the act of spending it and it does so as lets says by crediting accounts of those receiving this money. The only constraint on this process is inflation, and that only happens when you hit full employment and full capacity utilization. The whole Treasury auction process is an anachronism. Indeed it is a scam because it allows banks to receive fees and interest for what is an otherwise superfluous exercise. Even in the international context, I am not sure it is such a great idea. It allows China, for example, to recycle dollars so it can keep its export sector growing. But if China didn't have this avenue, it would have to buy American companies, goods, and services to recycle its dollars, and that, of course, would help our exports and reduce our balance of payments deficit.

Submitted by lambert on

But if you get in trouble with your bookie, it's always the vig.

Regardless, there's no reason for me to pay anybody to borrow my own money, though I congratulate those who devised and enabled such a neat trick.

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Submitted by letsgetitdone on

But using CBO projections to 2020 and further projections from those by AmericaSpeaks, I've calculated that over the next 15 years debt issuance will cost the US 11.8 T in interest costs, saving that money and bringing the US back to full employment and mostly keeping it there takes care of all of CBO and Peterson-like projections of fiscal armageddon for the US.

Of course, there's no need to choose between SS and debt issuance from the MMT viewpoint because neither presents "funding" problems for a Government that does not fund its spending. However, also from the MMT viewpoint, spending $11.8 Trillion over the next 15 years in interest fulfills no obvious public purpose, so debt issuance should be stopped on those grounds alone.

Submitted by Hugh on

Happy Birthday, JP. You'll know you're getting old when you feel too old for revolution, and start referring to the opposition as whippersnappers.

Submitted by MontanaMaven on

full employment even when England kept dumping their poor over here. It was so successful the British bankers got a law passed that disallowed these banks. Then we went into a severe recession which largely led to the Revolution. In those days, people could easily make the connection between having fiat currency and having to pay interest to English bankers. We've lost this narrative, but it is slowly making its way back into the discussion. This could be the bridge to the right wingers and their love of all things colonial. They just need to get off the whole gold standard rubbish.

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Submitted by letsgetitdone on

but how can we get them to do that? They love the crazy Paul goldbugs so much.

CMike's picture
Submitted by CMike on

Via Yves, Washington's Blog says [my emphasis]:

The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.

But as U.S. News and World Reported noted last month:

[12/03/10] By now, you've probably heard that the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy. Two years ago, the Fed set the federal funds rate (the interest rate at which banks lend to each other) to virtually zero, and this second round of quantitative easing--commonly referred to as QE2--is one of the few tools it has left to help boost economic growth. In spite of all this, a funny thing has happened. Treasury yields have actually risen since the Fed's announcement.

The following charts from Doug Short update this trend...

As former chief Merrill Lynch economist David Rosenberg writes today:

So the Fed Chairman seems non-plussed that Treasury yields have shot up and that the mortgage rates and car loan rates have done likewise, even though he said this back in early November in his op-ed piece in the Washington Post, regarding the need for lower long-term yields:

“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.”

[CMike adds in these Rosenberg grafs:

In August, we had Ben Bernanke verbally hinting that more central bank balance sheet expansion and liquidity were on its way. If the name of the game was to revive investor “animal spirits”, it has worked wonders so far even if Treasury yields are up around 100 basis points from the lows. I’m sure Ben would gladly accept 100bps on the 10-year note for a 10% runup in the S&P 500. Tiffany’s should probably consider giving Bernanke a discount after the high-end jeweler managed to rack up an 11% sales pickup in December.

...[A]fter years of large-scale current account deficits, the by-product of spending beyond one’s means for an elongated period of time, is that over half the Treasury market is owned by foreigners (outsiders who have invested in these bonds for their liquidity, safety, and optionality). But these folks are not U.S citizens and will ultimately act in their own interest.

So what if at some point, they lose confidence in U.S. economic policies? Economic policies, as well as fiscal policies, that are jeopardizing the sanctity of the central bank balance sheet and that are clouding the country’s future fiscal flexibility. And the point must be made here that what the governments are doing is creating the illusion of a prosperous recovery. But wealth is not created by printing money or by expansion of the public sector balance sheet....]

letsgetitdone's picture
Submitted by letsgetitdone on

it's just creating USD and then just swapping it for Government debt, which is primarily what they are doing.

Of course, this has nothing to do with spending/creating Government money for private sector goods and services.