deficit hysteria, MMT, and KC

[UMKCroo]

We are in the middle of severe deficit/debt hysteria in this country and the myths being propagated from both the left and right are getting out of control.  I find this particularly interesting because the UMKC econ department is becoming very well known, both nationally and internationally, for beginning to get some traction on this issue.  The UMKC econ dept is one of the few universities out there subscribing to the idea of modern monetary theory.  While I am a product of the school, I am no PHd, but the basic fundamentals are all from econ 101 and ideas all business students learn in the first weeks of class.  It is totally astonishing how almost every single politician in this country can not wrap their head around this very core accounting identity. 

Private Sector Surplus = Public Sector Deficit + Current Account Surplus

This isnt some "conspiracy theory," or crazy idea.  It is how our economy works.  As Fed Chairman Bernanke explained on national television on 60 minutes, when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce. The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything. To better understand this, think about when a football team kicks a field goal; the number on the scoreboard goes from 0 to 3. Does anyone wonder where the stadium got those 3 points, or demand that the stadium keep a reserve of points in a “lock box”?  Until we as a modern society, one that is not based on a gold standard, can understand this we will never get ourselves out of this recession.  The last thing we need to do in this incredible time of unemployment is cut spending and/or raise taxes. 

Governments do not operate as households!  A government with flexible exchange rates and a sovereign currency (US dollar, British pound, Mexican peso, etc.) can afford to purchase anything that is for sale in its own sovereign currency. 

There is plenty to debate politically, but the core idea of how our federal government spends and creates money has to be understood before we can make any progress. 

Some resources if anyone cares to learn more:

http://neweconomicperspectives.blogspot.com/

http://www.kcur.org/centralstandard.html#Monday

http://moslereconomics.com/2010/06/23/fox-video/

http://moslereconomics.com/

[grovester]

I agree with you about the hysteria part.  I think there is a bit of opportunism happening where political scores are being settled under the auspices of "deficit reduction".  That being said, there are serious side effects to debt, deficits and budgets.  Inflation, bonds and stock prices are some.  While we may never run out of money, our economic environs might get a bit uncomfortable.

The reason things are miserable now has nothing to do with government spending and everything to do with Wall Street machinations that reached their to be expected bubble burst.

[aknowledgeableperson]

This isnt some "conspiracy theory," or crazy idea.  It is how our economy works.  As Fed Chairman Bernanke explained on national television on 60 minutes, when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce.  

If that is the case then why does the government "borrow" money via selling bonds?  Whether that debt is held by China or via savings bonds.  Why is there a concern over the "money supply" if all they need to do is print more money?

[AJoD]

A government with flexible exchange rates and a sovereign currency (US dollar, British pound, Mexican peso, etc.) can afford to purchase anything that is for sale in its own sovereign currency.

I don't really know much about this, so maybe this is a dumb question, but...

Isn't a risk of deficits that your credit rating gets driven down so far >> the value of your own currency becomes less and less valuable relative to other currencies >> many things you want are no longer for sale in your own sovereign currency (along with the general household level uncertainty caused by hyperinflation)?

[rxlexi]

excellent post Roo.  I would say a reading of Mosler's "7 Deadly Economic Sins", likely found on his website, is essential to debating the merits of this economic view.  It addresses, in a simple and easy-to-grasp fashion, his ideas and is a quick and fun read, IMO.

[aknowledgeableperson]

I would take a grain of salt over the theories of Mosler.

Here is one take of the opposing view:

http://conant.economicpolicyjournal.com ... s-and.html

It is totally astonishing how almost every single politician in this country can not wrap their head around this very core accounting identity.

Don't forget, Moslr is a politician himself, even running for president in 2012.
http://mosler2012.com/?page_id=147

Just more Tea Party gibberish

[UMKCroo]

That being said, there are serious side effects to debt, deficits and budgets.  Inflation, bonds and stock prices are some.  While we may never run out of money, our economic environs might get a bit uncomfortable.

Absolutely.  Inflation is a core concern, but when we are rolling with nearly %10 unemployment our focus should be to heat up the economy not slow it down.  If anything (excluding fuel) we should be worried more about deflation, a far more serious problem.

If that is the case then why does the government "borrow" money via selling bonds?  Whether that debt is held by China or via savings bonds.  Why is there a concern over the "money supply" if all they need to do is print more money?

First, printing money is a totally inapplicable and outdated word going back to when we were on a gold standard.  The government spends by crediting bank accounts.  It is not just semantics but a core principle.  Second, the government selling bonds is a totally self-imposed restriction.

I don't really know much about this, so maybe this is a dumb question, but...

Isn't a risk of deficits that your credit rating gets driven down so far >> the value of your own currency becomes less and less valuable relative to other currencies >> many things you want are no longer for sale in your own sovereign currency (along with the general household level uncertainty caused by hyperinflation)?

Yes, this can become a problem but a problem that should not be our focus when we have 10% of our work force unemployed an an additional significant amount underemployed.  We are in a privileged position that most of the world is ready and willing to trade their widgets for dollars, an indication of a very strong currency.

Don't forget, Moslr is a politician himself, even running for president in 2012.
http://mosler2012.com/?page_id=147

Just more Tea Party gibberish

Warren has absolutely no association with the tea party except that he regrettably spoke at a conference before they become the whack jobs they have become.  He is no longer running for president, as you will see on the link AKP provided, and the campaign was more of an advertisement for MMT.  He did run for senate in CT as an independent.

I will tell you I lean left of center, but this debate needs to be removed from the political conversation.  These are core economic principles that have no bearing on politics.  My main point is that most people dont understand how our federal government spends.  We cant go "bankrupt!"  We are not passing on debt to our grandchildren, just like our grandparents didn't pass on debt to us after WWII.  The federal debt is a number, that is it, and we are free to enjoy and consume how ever many cars, i phones, or schnitzels that we have the resources to produce.....today.  And, we have the resources to produce many more things but we are burdening ourselves with unnecessary concerns and restrictions causing severe excess capacity i.e 10% unemployment.  Whether you are a democrat or republican or tea partier or independent this is a total shame IMO. 

 

[aknowledgeableperson]

Inflation is a core concern, but when we are rolling with nearly %10 unemployment our focus should be to heat up the economy not slow it down.  If anything (excluding fuel) we should be worried more about deflation, a far more serious problem.

Given most of what I am reading now deflation is not a concern now but inflation is.  And as one who lived through the inflation of the 70's it is not something I would want to live through again.  Besides, inflation affects everyone whereas unemployment doesn't.

People complained about Reagan's so-called voodoo economics.  What Mosler preaches is far worse.

[rxlexi]

  I finally took the time to read through the Taylor Conant link and following comments that AKP posted. 

  Whatever your feelings on Modern Monetary Theory, the counterpoints given in that particular article were pretty weak and presented poorly, and they were absolutely demolished by an anonymous commentor in the commercial lending biz, A Banker, over the course of multiple lengthy posts by someone who clearly DOES have an understanding of the ideas that Mosler and his ilk are trying to explore - FWIW.  I would love to read further writings by that Banker character.

[KCMax]

Interesting points. I've listened to a few lectures from UMKC economists and it does make a lot of sense, although I'd like to hear a strong counter-argument. One argument I took away from them that makes a lot of sense is that the government should always be running SOME sort of deficit. Otherwise, they are either withholding services or tax money from us (depending on your political point of view) that they should be giving back to us.

We've had a decade now of ramped up federal deficits and there doesn't seem to be any evidence of inflation that isn't correlated with oil prices. Maybe that is too short a window to conclude that inflation is not an issue, but some of the evidence on past long-term trends seem to suggest the correlation between inflation and an overabundance of money is simply theoretical, and hasn't been borne out by empirical evidence. (Take all of this with a grain of salt as I am very much a novice in economics.)

[rxlexi]

 ^^^ yes, core inflation is still very low to nonexistent (i.e. excluding volatile food and energy), in my limited understanding.

 Regarding MMT and inflation, obviously an increased money supply necessarily WILL create inflation, and you could say that inflation is THE main issue or downside factor that will limit such expansion of the money supply.  Mosler clearly agrees.  

 One of his main points is that that money supply is in no way "operationally" constrained (true)...and that some amount of deficit and/or inflation may be necessary given particular economic situations (our current recession, say) - that these are not NECESSARILY bad things, at a federal level (as opposed to household/city/state budgeting).  

 I too would love to see some powerful counter arguments, from a respected AND respectful source (unlike Conant).  I still think Mosler's 7 Deadly Innocent Frauds is a really fun and enlightening read, no matter one's political leanings, belief in the material or level of economic knowledge etc.  There isn't really anything political about it...

[KCMax]

UMKC teaches unorthodox economics through Modern Monetary Theory

Economist Randall Wray pushes a bold jobs plan: Everybody who wants one, gets one – guaranteed – courtesy of Uncle Sam.

Wray pitches more than a repeat of the New Deal to bring down staggering unemployment. He wants a federal job guarantee, and says it should be permanent.

Welcome to the outside-of-the-box thinking inside the economics department at the University of Missouri-Kansas City....

The basic idea is straightforward: The U.S. government isn’t bound by the same budget limits that a household or even a state government faces.

People and states, for example, can’t spend money without first getting the money to spend, from a job or from taxes. Modern Monetary Theory says that is not true for the federal government.

“They don’t need to get it from us in order to spend. They create money when they spend,” said Stephanie Kelton, the economics professor behind UMKC’s blog. “This is what we’re trying to reveal to people.”...

Critics would argue that flooding the economy with too many created dollars would undermine the value of the U.S. dollar globally.

The theory’s answer is that it won’t as long as the money soaks up idle resources. Kelton said recent experience proves their point.

[UMKCroo]

Getting some great press.

Big week for MMT and KC!

http://www.washingtonpost.com/business/ ... story.html

[KCMax]

So with the debt ceiling fight looming in Congress, an idea has floated around, I'm guessing from MMT corners, that Obama should call Congress's bluff with a crazy loophole idea of his own - print a trillion dollar coin. There is a legal loophole in the Constitution that allows the Treasury to print a platinum coin of any denomination. Obama creates the coin, deposits it at the Fed, and pays our bills when Congress fails to do so.

Now the typical fear of creating money like this is that it leads to inflation. But (a) inflation is caused by too much currency in the marketplace. This money would not go into circulation. Essentially that money is already in the marketplace. This is being used to pay bills. (b) Interest rates are at historic lows; and (c) We are still mired in recession, making inflation unlikely.

Politically, this probably doesn't wash because it seems like cheating. But desperate times call for desperate measures. An idea that once seemed crazy seems reasonable now in the face of the crazy idea of letting the US default on its obligations.

http://krugman.blogs.nytimes.com/2013/0 ... e-of-zero/

http://pragcap.com/lets-end-this-debt-c ... oz-1t-coin

[shinatoo]

Many people believe that Amendment 14 of the US Constitution makes the "Debt Ceiling" unconstitutional.

XIV. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

[grovester]

The disruption to the economy and the markets is not because they don't think they will get paid, it's a response to the fact that we have elected irresponsible yahoos to congress.

[bobbyhawks]

The perception of what happened is more important than the reality of what happened. The smart people lost control of the perception long ago. It used to be that Alan Greenspan could release a statement, and everyone would take it at face value (mostly). Enter hundreds of 24 hour news cycles and conspiracy bloggers, and every statement released from the Fed is spun negative because it sells subscriptions and captures viewers. Who cares about facts and basic theory and history? We have thousands of industry "analysts" (aka 24 year-old business and econ grads who just moved to NYC or DC on Mom and Dad's dime) telling the world what the Fed really means. For this reason, I think a trillion dollar coin would be a huge mistake. I don't think there is anyone that could sell that idea to the American people without the public getting stuck on the idea of a trillion dollars and a single coin. If Obama did this, I would imagine a huge panicky selloff of stocks by Rush, Paul, and O'Reilly folks which could do more damage to the economy than the good paying our bills would do. As much of our current problem is/has been due to market and consumer confidence, there is now a balancing act between convincing people that things are OK for the short term and preventing the right from convincing people we are in some dire situation that needs immediate fixing. As long as a significant portion of the population believes the right, I'm not sure there is a quick fix gimmick that can change enough minds. We are still too fragile to make bold moves like this.

[KCMax]

Many people believe that Amendment 14 of the US Constitution makes the "Debt Ceiling" unconstitutional.

XIV. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Some Constitutional lawyers also think Obama could just grab debt ceiling authority back from Congress anyway. Congress gave itself debt ceiling power - its not in the Constitution. So what's stopping the President from grabbing it? The courts would be reluctant to intervene in a "political question" It would be seen as a power grab by Obama, but he's not up for re-election anymore, and if it saves the economy, what's the downside? Beats negotiating with Congressmen that aren't interested in negotiating in good faith.

The perception of what happened is more important than the reality of what happened. The smart people lost control of the perception long ago. It used to be that Alan Greenspan could release a statement, and everyone would take it at face value (mostly). Enter hundreds of 24 hour news cycles and conspiracy bloggers, and every statement released from the Fed is spun negative because it sells subscriptions and captures viewers. Who cares about facts and basic theory and history? We have thousands of industry "analysts" (aka 24 year-old business and econ grads who just moved to NYC or DC on Mom and Dad's dime) telling the world what the Fed really means. For this reason, I think a trillion dollar coin would be a huge mistake. I don't think there is anyone that could sell that idea to the American people without the public getting stuck on the idea of a trillion dollars and a single coin. If Obama did this, I would imagine a huge panicky selloff of stocks by Rush, Paul, and O'Reilly folks which could do more damage to the economy than the good paying our bills would do. As much of our current problem is/has been due to market and consumer confidence, there is now a balancing act between convincing people that things are OK for the short term and preventing the right from convincing people we are in some dire situation that needs immediate fixing. As long as a significant portion of the population believes the right, I'm not sure there is a quick fix gimmick that can change enough minds. We are still to fragile to make bold moves like this.

Agenda21 could be behind all of this.

[phuqueue]

The perception of what happened is more important than the reality of what happened. The smart people lost control of the perception long ago. It used to be that Alan Greenspan could release a statement, and everyone would take it at face value (mostly). Enter hundreds of 24 hour news cycles and conspiracy bloggers, and every statement released from the Fed is spun negative because it sells subscriptions and captures viewers. Who cares about facts and basic theory and history? We have thousands of industry "analysts" (aka 24 year-old business and econ grads who just moved to NYC or DC on Mom and Dad's dime) telling the world what the Fed really means. For this reason, I think a trillion dollar coin would be a huge mistake. I don't think there is anyone that could sell that idea to the American people without the public getting stuck on the idea of a trillion dollars and a single coin. If Obama did this, I would imagine a huge panicky selloff of stocks by Rush, Paul, and O'Reilly folks which could do more damage to the economy than the good paying our bills would do. As much of our current problem is/has been due to market and consumer confidence, there is now a balancing act between convincing people that things are OK for the short term and preventing the right from convincing people we are in some dire situation that needs immediate fixing. As long as a significant portion of the population believes the right, I'm not sure there is a quick fix gimmick that can change enough minds. We are still too fragile to make bold moves like this.

I think you're not fully appreciating the gravity of the US defaulting on its sovereign debt obligations if you think it might be just as bad if people who listen to right wing radio sell off all their stocks.

[KCMax]

The platinum distraction

Having investigated the subject intensively for about an hour, it seems to me that the Treasury is "not allowed to just print money" at the order of the executive in about the same sense that the executive is "not allowed" to order the air force to drop nukes on Brooklyn, or "not allowed" to order the assassination of American citizens. Which is to say, it's just not done, until it is. The American habit of making a fetish of their written constitution tends to blind them to the fact that power is constrained at last by conscience, convention, and credible threats of social, institutional, and physical reprisal, not paper law.

No, a $1 Trillion Platinum Coin is Not Legal

No particular restrictions were placed on the design or issuance of platinum coins, but this paragraph was plainly intended to apply to bullion and commemorative issues for coin collectors. That's all.

There is, apparently, a widespread belief that courts will uphold a literal, hypertechnical reading of legislative language regardless of its obvious intent, but I'm quite certain this isn't true. Courts are expected to rule based on the most sensible interpretation of a law, not its most tortured possible construction. I don't think there's even a remote chance that any court in the country would uphold a Treasury reading of this law that used it as a pretense for minting a $1 trillion coin.