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Alan Grayson’s Right; But He Misses the Larger Point

5:23 pm in Uncategorized by letsgetitdone

The Cliffs of Sanity

The Cliffs of Sanity (Photo: aeu04117/flickr)

Alan Grayson’s e-mail on Moody’s warning that it might reduce the US’s AAA rating, suggested that Moody’s was either threatening a downgrade because it wants to get the Bush tax cuts for the rich extended, or, alternatively, that “Moody’s is living in what Aristophanes called “Cloud Cuckoo Land.”” He says this because Moody’s is upset about the possibility that the US may go over the so-called “fiscal cliff,” even though if it did, it would theoretically result in $560 Billion of deficit reduction annually, without further legislative changes, and it makes no sense on the surface for a ratings agency to think that the risk of US bond default is greater when the annual deficit is being reduced by $560 B per year, than by some lesser amount, which is likely to happen if Congress doesn’t take us over that “cliff.”

Grayson was right to call attention to this seeming contradiction and the possibility that Moody’s is just pressuring Congress to do more for rich people; but I think he should also have made the larger and more important point, that Moody’s warning, just like the one it delivered in January of 2010, is an empty threat without significant consequence, even if it were carried out. How do we know that? For a number of reasons.

First, as is widely known, all the ratings agencies including Moody’s gave the CDOs and CDSs that led to the collapse of AIG their highest AAA ratings. In addition, they downgraded Japan’s credit ratings a long time ago, with no measurable impact on its bond interest rates or costs, even though Japan’s debt-to-GDP ratio has continued to increase over time and is now in the neighborhood of 200%. More recently, in April of 2011, Standard & Poor’s downgraded the outlook on US debt from stable to negative. What happened thereafter? There was a flight to Treasuries on the International markets and interest rates have fallen more than 1% since S & P delivered its downgrade.

So, one may be forgiven for wondering why anyone should listen to the ratings ravings of Moody’s and the other agencies at all. In fact, one may begin to suspect that their ratings have little influence on the bond markets, and also, given the Japanese and US experiences, one might even suspect that the bond markets don’t influence to any appreciable degree or control the interest rates that Governments sovereign in their own currency must pay.

Second, since the United States is a nation with a fiat non-convertible currency system, with a floating exchange rate, and no debt denominated in any foreign currency, it is impossible for the United States to be forced into a default by any external party, simply because its ability to create the currency it owes its obligations in, is unlimited. Voluntary default could be caused by a Congress which acts stupidly, and in a manner contrary to the 14th Amendment of the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress’s constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.
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An Imminent Spending Blitz (?) and the Debt Ceiling

10:51 am in Uncategorized by letsgetitdone

About Two and a half months ago, Mike Norman pointed out that when Federal spending and tax collections in fiscal 2012 were compared with those for the same calendar date in 2011, data from the Daily Treasury Statements (DTS) showed that 2012 Federal spending was lagging behind 2011 spending by $433 Billion; while 2012 tax revenue was running ahead of 2011 by $45 Billion. So, the Federal stimulus for the macroeconomy in 2012 was $478 Billion less than it was in fiscal 2011 at a comparable time in the fiscal year, or looking at it another way, we can say that the 2012 fiscal drag produced by the Government was $478 B more in 2012 than at a comparable time in 2011. Given these numbers, and the continued reluctance of banks to lend for business expansion, the slow down in the economy and continued high unemployment are exactly what one would expect.

In a sense, austerity, has already come to America, courtesy of the Obama Administration, because the $109 B per month in deficit spending it has averaged so far this year is too small to do more than support slow growth, even though it corresponds to an annual deficit of almost $1.3 Trillion.

is a Spending Blitz Coming?

I checked the DTS again on June 21st, because I was curious about where the fiscal drag was relative to last year and also to see where the debt ceiling vs the debt subject to the limit was. I found that the closing balances on June 20th showed that Federal spending had caught up a bit with 2011 and was now behind by $412 B. However, tax revenues compared with 2011 had increased by $66 Billion. So, at almost 9 months into fiscal 2012, the total fiscal drag compared to 2011 was still at $478 B, almost as if someone was managing spending against revenues so that deficit spending would not increase in the 3rd quarter.

So this raises the question: what will happen in the 4th quarter of FY 2012 and the first quarter of FY 2013? Will the Administration suddenly ramp up Federal deficit spending, so that there is a massive deficit spending shock delivered to the economy over the next four months?

Let’s go to the DTS again for June 20, 2012:

– Statutory Debt Limit: 16,394,000 in millions

– Total Public Debt Subject to the Limit: 15,737,388 in millions

The difference or space between current debt subject to the limit and the debt ceiling is: $657 Billion with a little more than 4 months left until the election. In addition, there was another $140 B in operating cash in the Treasury general Account as of June 20th. Adding the two together, we see that the President has almost $800 B in head room before he reaches the debt ceiling, and amount comparable to the size of the Recovery Act of 2009.

So, the President can increase deficit spending to $170 B per month, provided Congress has already appropriated the money, an increase of $65 B per month for the next 4.3 months, and still have about $70 B in deficit spending to spare for November and December, before Geithner has to start juggling things to prevent default. In other words, the Administration can probably deficit spend at an annual rate of $2.0 T for the next 4.3 months in a blitz that can perhaps reduce U-3 unemployment quite a bit below the 8% level, a reduction that is probably enough for him to win going away in November.

So, 1) I think President Obama has been holding back 2012 deficit spending a good bit, probably thinking that if he can spend the money in July, August, September, and also in October, then he can see the U-3 numbers go substantially below 8% and also talk about a trend toward a stronger recovery but 2) I still don’t think he’ll get close to the debt ceiling until the middle of November.

The Debt Ceiling: What Will Happen?

On the question of what will happen in a debt ceiling crisis this time around, I think that depends on whether we come to the ceiling in October or November. The analysis I just did suggests that the President can make sure it will be in November, but If something goes out of control and it is October, then I think the President may go out of character and use the 14th Amendment, or the Trillion Dollar coin, or even Beowulf’s latest consols idea (which the President may prefer because it can be seen as a slick, merely technical solution taken to get around the debt ceiling) to avoid giving away stuff on key entitlements. He won’t want seniors going to the polls and voting disproportionately for Romney, or progressives staying home, because he gave away SS and Medicare, and other important “discretionary” programs like Head Start, rolled over on defense spending, and accepted tax cuts for the rich without a fight. He also really doesn’t want a Republican Congress next time, even if he wins himself, because then, they’ll try to impeach him.

So, he’ll fight this time if it’s in October. If it’s in November, the much more likely occurrence, however, then, if he wins the election, I think, he’ll do kabuki, make some BS statements, and do something in the Bowles-Simpson framework, but with more in spending cuts and less in tax increases than progressive Ds say they want.

Judging from his past behavior, I think he’ll start negotiating from Bowles-Simpson, go down from there, and then end up with a “compromise” that’s much worse from the viewpoint of progressives than even Bpwles-Simpson. He’ll do this especially, if the Rs win control of Congress. But even if the Ds win both Houses, I think he’ll still do it, because I believe his vision has always been to get rid of the New Deal as much as he can, and to implement neoliberalism more fully.

If Romney wins, finally, I still think that Obama will try to broker a deal based on Bowles-Simpson in the lame duck, and will probably call Romney in to bring some of the Republicans over on tax increases. So, given all the possibilities I think it’s November for the crisis and then a settlement using Bowles-Simpson or some variant of it, and that the middle and working classes, women, seniors, and the vulnerable will take another big hit from the austerians, while the rest of us experience the lost decade, or even more if we can’t get rid of the neoliberals before then.

What He Should Do?

What President Obama should do is to take the whole debt ceiling issue off the table right now, and for the foreseeable future by minting the $60 T proof platinum coin, and follow up by paying down the debt subject to the limit drastically, and pressuring the Rs with massive stimulus bills that won’t involve any “deficits” in the sense of a gap between revenue and spending. I’d like to see the Rs oppose massive spending to get the economy going, or Medicare for All, when the money to pay for these is already in the Treasury General Account (TGA). Good luck with that!

(Cross-posted from

Why Do “They” Want To Limit Our Sovereignty In Our Own Currency?

11:15 am in Uncategorized by letsgetitdone

One of the most emotional issues in American politics is the sovereignty of the United States itself, and its independence from foreign powers, interests, other nations and their ruling elites, and emerging globalizing elites who place their own interests against the nation interest of America and its people. The issues of fiscal sustainability and fiscal responsibility should be discussed from the viewpoint of our national interest, not from the viewpoint of abstract financial ratios, or supposedly critical indicators that generate a lot of sound and fury signifying nothing.

When we look at fiscal policy in the United States from the viewpoint of our national interest, among the first things we must consider is maintaining the national sovereignty of the United States. Most Americans want the United States to remain autonomous and independent, and to not be subject to the economic control of any foreign power, whether another nation, an international organization, or an international political grouping of a more informal character.

This desire is a constant throughout our history and it is the basis for the relative unpopularity of the United Nations here. A very important dimension of our national sovereignty is sovereignty in our own currency. The Constitution gives Congress authority: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” That authority, through interpretation by the Supreme Court over the years, has come to mean that it is constitutional for Congress to cause the issuance of fiat money, whose value may be regulated by the government, at will in order to serve the public purpose.

Today the Federal Reserve Bank interprets the power to “print money,” as the power to “mark up” accounts in the banking system by computer, in the process of augmenting the money supply or in implementing spending by the Treasury. There is no limit on the power of the Government to create money this way, provided that Congress doesn’t set such limits itself.

In addition, to its unlimited power to create fiat money, the United States also has a constitutional obligation that is worth mentioning when talking about economic sovereignty, since the classical notion of sovereignty is also related to obligation. Section 4 of the 14th Amendment states:

“. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned.”

Of course, constitutionally, the Government can only spend what Congress has appropriated; but, beyond that, there are other constraints that Congress has set for the Government which are not mandated by the Constitution, and which limit the degree of economic sovereignty of the Government. Here are three:

– the Treasury is not allowed to run a negative balance at the Federal Reserve,
– the Treasury must issue debt when it expects to deficit spend, and
– the Treasury cannot issue debt beyond the statutory debt limit,

The first two constrain the Government by forcing it to remove money from the non-Government sector before it can deficit spend; even when Congress has already appropriated the deficit spending. The last constraint is intended to impose an arbitrary limit on deficit spending by bringing it to a halt, even after it has been appropriated. Its purpose right now seems to be to provide periodic and very public opportunities for political kabuki theater during which the two parties can express their core political values as they apply to fiscal policy, while they dismantle the heritage of the New Deal.

The kabuki opportunities carry a very high cost, however, since the constraints making them possible:

– cause Government shutdown crises,

– sometimes create doubt that the Government will voluntarily become insolvent and fail to meet its obligations, and most important of all,

– are responsible for the existence of the National Debt of $14 Trillion, and for the “welfare” for the rich and foreign nations paid to them every year in the form of interest on Treasury securities, which, except for the Congressional requirement to issue debt, the Government would never have to pay.

Why does the Congress limit the fiscal flexibility of the Government, including its own flexibility, with constraints like the three above?

Why are some in Congress trying to get a balanced budget amendment passed to further limit flexibility in Government spending and fiscal policy?

Why do many in all three branches want to limit the monetary power of the Federal Government and its potential for helping America achieve in public purposes?

Why, in short, are so many politicians so much in favor of limiting the currency and fiscal sovereignty of the United States?

Why are we letting them do it?

Why aren’t we as protective about our currency/fiscal sovereignty, as we are about other aspects of sovereignty, such as our territorial integrity, and our political independence?

Before I try to answer these questions, I’ll review what fiscal/monetary sovereignty is.

What It means To be Sovereign In Your Own Currency

Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Only Governments:

– whose monetary systems are commodity-based, such as those on the gold standard; or

– those using fiat money, whose official fiat currency is issued by supra-ordinate authorities, or

– those who owe debts in a fiat currency issued by another governmental authority,

can all “go broke,” involuntarily.

Governments issuing their own fiat currency, subordinate to no higher authority, and owing no debt to anyone else in a currency other than their own, can never “go broke,” or put another way, become insolvent, due to events in financial markets, or decisions made by other nations. This is true, because all they need to do to spend money is to issue credits to non-government sector accounts in banks, and all they need to do to pay back other Governments who have lent them their own currency, is to credit the accounts of the lender Governments in that currency, an action which they have full authority to do, absent any political constraint they may have placed on themselves preventing them from exercising their full monetary sovereignty.

We call such Governments “sovereign” in their own currency. And because they have this kind of sovereignty, they also have flexibility to facilitate economic activity to accomplish public purposes that Governments without that kind of sovereignty don’t have. But with that fiscal flexibility also comes fiscal responsibility – the responsibility to use the operationally unlimited spending power of an economically sovereign government to use that spending power for public purpose and not for private gain.

One of the Governments that fit these criteria and so can never go broke is the US Federal Government. Other common examples are Japan, Australia, New Zealand, and Canada, and the UK. Governments that don’t fit these criteria and that can go broke include the nations of the EU, such as Greece, Portugal, Spain, and Italy. Even France and Germany can go broke, since they no longer issue their own currency. Other examples include all those developing nations with loans from the IMF, the World Bank, and other international authorities that must be paid back in US Dollars, or any other currencies they cannot issue; as well as state, local, provincial, and other governments subordinate to a super-ordinate currency-issuing authority such as California.

Most governments that are sovereign in their own currency haven’t been fiscally responsible in a very long time. While some have performed better than others in seeking and achieving public purposes, most have continued to act as if they are constrained by the gold standard, and have attempted to either reduce spending at the expense of the less well off, or to fail to pursue programs for full employment, or to fail to make enough investments that will fulfill other pubic purposes. In most of these cases, deficit hawkism and specifically the desire to either reduce deficits, or to balance budgets, has trumped the desire to fulfill public purposes.

In short, governments sovereign in their own currencies have been acting like governments on the gold standard, or those who owe debts in currencies they don’t issue. They have been acting in a fiscally irresponsible way given their fiat monetary systems, while at the same time claiming to be fiscally responsible. They can get away with this, because very few people make the distinction between governments sovereign in their own currency and governments that are not. And even fewer go on to recognize that what may be fiscally responsible for gold standard governments, or governments that are not economically sovereign, is most certainly fiscally irresponsible for economically sovereign Governments.

In systems where governments are economically sovereign like the United States, it is a big mistake to measure how well the nation is doing fiscally by using deficit, the national debt, or debt-to-GDP ratios. That mistake is one the United States and most other nations with monetary sovereignty are making right now.

Those measures, in fact, are the wrong things to measure. The government is a scorekeeper that can always credit accounts when it needs to spend or pay what it owes, or even set interest rates by flooding the market with reserves and driving short-term interest rates down to near zero. In such systems, the money is always there for the non-governmental sector, not in the sense that the government has accumulated some physical stock of it, but in the sense that the Government can always spend or pay back by crediting accounts, regardless of any physical stock it may have.

In such systems, fiscal responsibility is not about what the Government has accumulated either in debt or in surpluses, since given its unlimited ability to create new currency, these neither constrain nor support its further ability to spend What it is about, however, is the Government’s success in spending on worthwhile things that produce actual value, rather than spending on worthless outcomes.

Why Are We Self-limiting Our Currency Sovereignty?

There are a few contributing reasons. First, most Americans don’t understand that the power of Government to help the economy to recover from recessions and to achieve full employment, is dependent on the ability of the Government to deficit spend and to add net financial resources to the private sector. To the extent that the ability to deficit spend is limited by fiscal rules, the fiscal sovereignty of Government is impaired, diluted, or, in the case of balanced budget amendments like the one gathering steam in Congress, largely destroyed.

Second, most Americans don’t understand that deficit spending and the resulting deficits and debts, carry no solvency risk. They view the US Government as an analogue to a household, and they think that, like a household, the Government cannot spend more than the revenue it raises through taxing or borrowing without risking insolvency, and that the more it borrows, the more it will need to borrow and the less its ability to borrow will be. Of course, the Government is different from a household in many ways, but most importantly, in that: all money in the United States ultimately derives from Government-issued money, and the Government, of course, can always add more money to the private sector if it chooses to do so.

Third, most Americans don’t understand that every dollar of Federal deficit spending adds a dollar of net financial assets to the non-Government sector of the economy. The asset can be base money, if the Treasury is allowed to spend without issuing debt, as it sometimes has been, or it can be in Treasury securities if it is required to continue debt issuance. Many think that when Government deficit spends it impoverishes the private sector, because it competes with it for resources. But this is clearly not the case, when there is an output gap and much of our productive capacity is unused.

Fourth, most Americans don’t understand that global elites and corporations don’t want the United States to retain its currency/fiscal sovereignty, because they make more risk—free money if the Government’s currency power is constrained, and if we must buy/”borrow” our previously created USD, rather than make more. So, long as we issue debt instruments rather than just issue currency, they have a risk–free place to put the money they’ve previously acquired, and get an interest return besides. Over the next 15 years, the interest paid on the debt will be roughly $12 Trillion. If the Government can and does use its full currency sovereignty, and deficit spends, without issuing further debt, then the global elites can say goodbye to that money.

Fifth, global elites recognize that if Governments use their power to create currency to benefit any other groups other than the global elites themselves, then that potentially harms the elites and makes their USD holdings worth less. Perhaps not immediately, because demand is slack and businesses will try to increase production rather than raise prices for their valued goods. But, eventually when full employment is reached, they fully expect that either the need to regulate inflation will subject them to increased taxes, or, alternatively, the occurrence of inflation will cause the de-evaluation of their own money and Treasury Securities.


Issues about governments sovereign in their own currencies, as well as others having to do with fiscal sustainability and fiscal responsibility have been addressed at the Fiscal Sustainability Teach-In Counter-Conference last April 28th. It provides the answers to the continuing attempts of the deficit hawks and austerity mongers to orchestrate and implement a political process that will result in transferring more wealth from the middle class and the poor to the very well-off and the corporations, and that has already resulted in the failure of many nations, including our own, to end the sufferings of the unemployed and others victimized by the wholly avoidable crash of 2008.

The primary anti-deficit hawk message of the Teach-In was this: Since the United States Government is sovereign in its own currency: We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow. And. It. Will. Be. There. For. Our. Children. And. Our. Grandchildren. Too.

This is a message that needs to be sent to Congress, to the President, and to Republican budget-cutters like Paul Ryan, Jon Kyl, Mike Pence, and all the tea party folk, whose “pay off the national debt by cutting spending and taxing to get a surplus,” austerity nonsense, will ruin the United States, and create the second great depression, if we go along with it. We must not forget that every dollar less of deficit spending translates to at least a dollar subtracted from the dollars available to the non-Government sector, and the amount may well be more than a dollar if the dollar less is in a high fiscal multiplier segment of the economy. The attempts by budget-cutters to cut high-multiplier deficit spending will accelerate the downward spiral of the macro-economy, especially as compared with the impact that increased taxes on the wealthy may have had.

Finally, I have to wonder why the very legislators who are always so quick to wrap themselves in The American Flag, are also the ones who are quickest to put forward and implement fiscal rules that will constrain American currency sovereignty and subject the best interests of the American people and the public purposes of the United States to the interests of globalizing elites, foreign Governments like China, Japan, Middle east oil exporting nations, the Eurozone, Wall Street, the bond markets, and the wealthy like themselves. The fiscal rules Congresspersons have implemented and new ones they are seeking to implement to force the nation to pay off the national debt through economic surpluses, have the effect of subordinating the national interest, which they are elected to uphold, to the interests of multi-national corporations, global elites, and foreign nations.

We must recognize this problem for what it is. It isn’t just a technical issue of economics. It’s an issue of patriotism. It’s an issue of whether our economy will be run for we, the people, or interests both domestic and foreign who place their own needs for more wealth above the interests of most Americans to be able to influence our own economic futures and opportunities.

If you’re really worried about your children and your grandchildren, not to mention yourself, then you need to stop the deficit hawks and the deficit doves from destroying the economic sovereignty of the United States with their fiscal rules. You need to insist instead on the freedom and economic independence of the Government from the bond markets and all other elite interests. You need to insist that we act in our own national interest and not in the interest of the global elites. You need to insist that the Government keep its spending/currency creation power intact and use it for the public purpose. You need, in other words, to insist that we remain a Government sovereign in its currency, and to begin to act like one, taking responsibility for the miserable state of the economy within our national borders.

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

Is the Debt Held By the Public Really Debt?

6:50 pm in Uncategorized by letsgetitdone

A friend, Julia Williams, writes and asks:

Isn’t it true that in actuality, the US doesn’t, in fact “borrow’? It spends or trades? And if that is the case, doesn’t that just blow the deficit hawks out of the water?

Here’s my answer to her.

Technically, the US borrows because it issues “debt instruments,” which are bought at auctions in return for already issued US Dollars. It issues debt instruments, not because it “needs” money in an objective sense; but because Congress requires that the Treasury issue debt instruments whenever the Government deficit spends. Since that national debt is just the value of the outstanding debt instruments. It’s clear that the operative cause of our national debt is this Congressional requirement, which is a hangover from gold standard days.

Those who bother to try to justify debt issuance (most just accept it as the way things are), do so by saying that if we didn’t issue debt in order to withdraw USD from circulation, the result would be inflation, because the new money created by debt-free Government spending would then flood the economy creating inflation according to the dictates of the Quantity Theory of Money. However, Keynes showed in the 30s that the Quantity Theory of Money doesn’t apply to situations where 1) there is less than full employment and 2) the velocity of money is varying through time — both conditions which apply right now.

In addition, Stephanie Kelton has shown that the difference between issuing debt and not issuing debt in situations of deficit spending is that when debt is issued the process of deficit spending adds net financial assets to the economy in the form of the debt instruments; whereas if no debt is issued it adds cash reserves of equivalent value to the banking system. Scott Fullwiler points out that it is debatable whether cash or debt is more inflationary, since debt instruments can be used as collateral for loans, and therefore can be leveraged through the banking system, creating much more in deposits than cash would do alone. See Stephanie’s proof and Scott’s comment here.

Getting back to the question of how to think about the public debt, however. It is very different from ‘debt’ that we see in other institutions. First, the Government’s debt is not something that individual American citizens are legally accountable for. The national debt is often represented as approximately $45,000 for every man, woman, and child in the US. However, this debt is not the obligation of you, or I, or any other citizen. The obligation to pay the debt when it falls due is the Government’s, not yours or mine, and the Government has the constitutional authority to always create as much money as it needs to create to pay its obligations. Of course, you and I don’t have such a capability.

Also, the public debt, while a liability of the Government, is an asset for the entities in the non-Government sector who hold the bonds and the notes. If we paid off the debt as it came due, while at the same time taxing an equivalent amount to the debt payoff because we mistakenly think we need the tax money to pay off the debt, then we will end up removing $14 Trillion in assets from the economy, eventually. The process would cause the worst depression in the country’s history, if not the total collapse of the economy.

Finally, not only is the national debt at the same time non-Government financial assets i.e. financial wealth, but the best way to look at it is that the debt is like a savings account in the Federal Reserve System from the viewpoint of those who hold the debt. From this point of view, holding US Dollars in a reserve account which pays no interest is like having a checking account, whereas holding debt instruments in a securities account, is like having a time deposit savings account in a bank. So, in this view, when the Government issues debt, it is like a bank providing savers with an opportunity for time deposits, and those savers taking up that opportunity because they want to earn interest on their USD and make a risk-free investment, because they know that the US Government will never default on its debts.

The best things I’ve seen on this view of debt — “the debt is not debt” view are from Bill Mitchell, Warren Mosler, and and a recent very nicely written piece by Mike Norman.

Hope this takes care of the whole picture for you. It does blow the deficit hawks out of the water, because it indicates that we can begin paying off the public debt at any time, while continuing deficit spending, with no more demand-pull inflation than we have now.

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

John T. Harvey On the Austerity War

6:54 pm in Uncategorized by letsgetitdone

Is the Modern Monetary Theory (MMT) approach to economics beginning to crack the MSM? Well, very recently, Darrell Delamaide had an anti-deficit hysteria/austerity piece in MarketWatch, that strongly reflected MMT perspectives expressed at last year’s Fiscal Sustainability Teach-In Counter-Conference (see the audios, videos and transcripts), which Darrell attended. Then just a few days ago, Bill Mitchell, one of MMT’s leading practitioners published a great MMT summary article in The Nation. Then John T. Harvey followed with an anti-austerity article in Forbes Magazine, a paragon of neo-liberal virtue. And today, Mike Norman announced:

”Fox has asked me to do a regular, Friday afternoon debate segment on Bulls & Bears. I will be squaring off against Charlie Gasparino. The format will be a kind of “point-counterpoint” thing.”

I recommend all of these pieces, but this post is primarily about Professor Harvey’s piece in Forbes. He begins with:

“I have been a professional economist for almost 25 years, but never have I been more concerned about the state of our macroeconomy. Yet it’s not so much the current rate of unemployment or GDP growth that has me scared to death; it’s the so-called solutions being pursued in Washington.

Consider this for a moment: As of January 2011, we had 13.9 million unemployed people in the United States (and note that it takes very little to count as “employed”). Recommended cuts in the federal budget have ranged from tens of billions to hundreds of billions of dollars. In practice, what do these represent? They are at the very least a reduction in the wages of Americans who are currently working, if not outright job loss. This makes them functionally equivalent to a tax increase. Ask yourself this question: How would raising taxes by tens to hundreds of billions of dollars right now lower unemployment and speed recovery? You’re right, it wouldn’t. In fact, it’s not difficult to see that it would make it much worse. Unemployment is not reduced by cutting incomes and destroying more jobs. But that’s the policy currently being pursued with great enthusiasm in Washington, and the two parties differ only in degree. We are on the road to economic suicide. The gun is loaded, cocked and aimed squarely at the American worker.”

John then follows with a very readable and perspicacious analysis of the flaws of a deficit reduction/austerity strategy, which I urge everyone to read. John’s analysis underscores the proposition that an austerity strategy, i.e. taking part in an international competitive austerity race amounting to a race-to-the-bottom is suicidal.

There is one error in John’s otherwise very fine analysis, however. At one point in his article he says that if China cashes out its Treasury bonds, the new USD freed up “. . . would be in China.” This is in error. US currency always remains in the US currency zone. China can hold its dollars alright, but it can only hold them in its US reserve account at the Fed at nearly zero interest. It’s other choices are selling the currency, buying goods and services for sale in the US currency zone, or re-investing in US bonds. Tom Hickey has a good explanation of why this is true.

John Harvey acknowledges his error, and points out the difficulty of covering complexities like this in a Forbes article given its space limitations and the need to cover so much.

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

Bill Mitchell on the Austerity War

4:01 pm in Uncategorized by letsgetitdone

A number of people including myself have been furiously blogging for many months now on the world-wide austerity war that most Governments are fighting against the well-being of their citizens. The position we’re blogging is that there is no deficit problem requiring fiscal austerity for those Governments including the United States that issue their own non-convertible currencies with floating exchange rates, and have no external debt in currencies not their own; and also that there is no fiscal sustainability problem for these Governments because they cannot run out of money, and therefore the level of their deficits, national debts, and debt-to-GDP ratios are just irrelevant from a real fiscal sustainability viewpoint. I’ve offered a number of posts supporting this argument including here, here, here, and here. Others, including Bill Mitchell, Warren Mosler, Randy Wray, Stephanie Kelton, Pavlina Tcherneva, Jamie Galbraith, Marshall Auerback, Mike Norman, Matt Franko, Tom Hickey, and Scott Fullwiler have filed numerous posts and articles on the subject.

It’s been very hard to get our “deficit owl” views aired beyond the blogosphere, and into the publications of the progressive establishment. These publications publish pieces that reflect a “deficit dove” point of view, advocating spending now during the recession, but a long-term fiscally responsible” plan to solve “the deficit problem” and reach “fiscal sustainability,” by making the tax system much more progressive than it is today, and cutting corporate welfare. Implicit in the deficit dove view, in agreement with “the deficit hawk” view that is at the heart of the austerity propaganda machine, is the idea that the United States must raise money by taxing or borrowing to fund its spending, and also that surpluses, in the abstract, are a good thing, and that deficits are undesirable, and unsustainable, in the long term.

Today was a good day in the fight against austerity. One of the leading “deficit owls,” and a leading figure in the Modern Monetary Theory (MMT) School of Economics, Professor Bill Mitchell of the University of Newcastle, Australia published an article in The Nation entitled “Beyond Austerity.” Jamie Galbraith publishes there occasionally, but has pulled his punches in expressing the MMT point of view. This article, on the other hand, is an admirable summary of many of the main points of MMT as they apply to the issues of austerity and fiscal sustainability. It touches every base in the MMT argument, at least in outline.

Read it if you care about what progressives can do to bring back a prosperous America, where everyone can work, get the health care they need, and where the level of inequality is reduced enough to remove the threat to democracy from the rich that we’re experiencing today.

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

Memorable Modern Monetary Theory Answers To Economic Austerity

8:26 pm in Uncategorized by letsgetitdone

On December 30, 2010, George Jarkesy’s New Captains of Industry Program broadcast an Economist Round Table called: “Economics 101 for Politicians and Policy Makers”. The round table featured Warren Mosler, Randy Wray, and Mike Norman. Warren and Randy are two of the three “fathers” of the Modern Monetary Theory (MMT) school, and Mike is one of its most active supporters in the blog and radio worlds. The moderator of the program was George Jarkesy. The round table, almost an hour long, is a great opportunity to learn about MMT’s relevance for policy by listening to a very frank conversation in which the MMT practitioners talk very directly about the foibles approaches being taken by the economic establishment and today’s policy makers, on the point of impoverishing our country through Governmental austerity.

The talk is commonsensical, often a bit sarcastic, whimsical, full of frustration at people practicing “flat-earth” economic policy-making and preferring political compromises to real solutions to our economic problems. The discussion is also extremely wide-ranging covering such topics as: Quantitative easing and its effect on inflation; Ben Bernanke, his attempts to control expectations and his playing into the public perception that the Government is botching everything up for all except a few; payroll tax cuts and other measures for getting out of the economic mess; the economic doomsday scenario; the relationship between Government savings and deficits, and non-Government savings and deficits; how the Government spends; the duplicity some well-known people favoring austerity; China’s so-called financing of American debt; the relationship between Treasury Bonds and savings accounts; Bank of America savings accounts and debt; the gold standard system and our current system; what the Fed should do; Warren’s proposals to get to full employment and really end the recession for Main Street, not just Wall Street; Mike’s proposals for fixing the economy; Randy’s synthesis of proposals; imports as benefits; constraints on some of the world’s economies; and the independence of the US policy for regaining prosperity from other nation’s desires to exports.

In short, take the time to listen to this round table. You may or may not agree with the economics. But I think you’ll find it hard to deny that the approach offered by the three economists deserves your careful consideration and comparison with your own approach. That comparison might just persuade you that the MMT economists have some good answers to our present situation which don’t include austerity.

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

Kotlikoff’s Folly and the IMF’s Too

8:32 pm in Uncategorized by letsgetitdone

Laurence Kotlikoff has been making waves by using "inter-generational accounting" and CBO and IMF data, to compute a fiscal gap of $202 Trillion in present value. He concludes that this gap shows that the US is "bankrupt" as of now. Evidently, publications like Bloomberg take this sort of thing seriously since they publish it. But Modern Monetary Theory (MMT) economists, think it’s nonsense, due to the inapplicability of inter-generational accounting to Governments sovereign in their own currency.

Mike Norman, an MMT economist with a very good blog, got the chance to comment on Kotlikoff’s views, and also some nonsense of Tim Geither’s and President Obama’s, at

Mike has very emphatic views on Kotlikoff and inter-generational accounting. In addition, he doesn’t think much of the plans of Geithner and Obama to base our US economy on austerity and exports. In fact, his broad smile at the very mention of these ideas, along with his comments, tell the whole story. The idea that the US can or should have an export-led economy anytime soon is a recipe for economic disaster for ordinary Americans. As Mike makes clear, it asks us to forego receiving real wealth and live in poverty, while we send our own real wealth to foreign nations in return for their own non-convertible currencies.

The fact that Obama would even entertain such a policy for America indicates how wrong-headed and foolish the thinking of he and his economic team are. Anyway, enjoy Mike’s interview. He doesn’t pull his punches.

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