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Bernie Sanders: Self-shackled Champion of the People

1:48 pm in Uncategorized by letsgetitdone

I gotta love Bernie Sanders, because he seems so much like people I grew up with and like myself too, and he also seems to have that passion for equality and democracy that is so important for the future of America. Sometimes I think Bernie is one of the few champions of the people left in Congress. But I also think that along with other progressives he has constructed chains for himself that prevent him from being as effective a champion of the people as he otherwise might be.

His chains are the chains of either false beliefs or a decision not to speak the truth about fiscal matters for fear that the “very serious people” in the Washington village will marginalize him even more than they do right now. I can’t say which of these is true, but I think whichever reason is operative, his self-shackling hurts his effectiveness.
Read the rest of this entry →

Dick Durbin Insults Everyone Else’s Intelligence About Social Security

3:33 pm in Uncategorized by letsgetitdone

Yesterday on Fox, Senator Dick Durbin said:

WALLACE: I’m going to talk about ObamaCare on a second, but you’re not answering my question. Why does taxes — why do taxes have to be on the table? Why can’t you just make a deal, short-term spending for long-term entitlement reform — which, Senator, you support and President Obama support. You have supported the idea of some entitlement reform.

DURBIN: That’s right. I do, and I’ll tell you why — because Social Security is going to run out of money in 20 years. I want to fix it now, before we reach that cliff.

Medicare may run out of money in 10 years, let’s fix it now. And that means addressing the skyrocketing cost of health care. That’s what ObamaCare is focused on, and yet, the Republicans want nothing to do with it.

If we don’t focus on the health care and dealing with the entitlements, the baby boom generation is going to blow away our future. We don’t want to see that happen. We want to make sure that Social Security and Medicare are solid.

The “. . . may run out of money. . . . ” and “. . . dealing with entitlements. . . “ memes, in reply to Chris Wallace’s question suggests that a deal trading increased revenues for Social Security and other entitlement cuts is acceptable to him. So, Durbin’s argument is that because Social Security Trustee and CBO projections, based on very pessimistic economic growth projections for the whole period, show a shortfall in the Social Security “Trust Fund” in 20 years, it is acceptable to make entitlement cuts now if the Democrats can get increased revenue from higher taxes, as if entitlement “reform” were the only way to meet the perceived Social Security solvency problem. But who would it be acceptable to? Read the rest of this entry →

It’s Changing the Reality That Counts, Not the Words In His Job Proposals

11:27 am in Uncategorized by letsgetitdone

My friend and MMT mentor, Warren Mosler offered this fine, simply stated speech to President Obama for September 8th.

My fellow Americans, let me get right to the point.
I have three bold new proposals to get back all the jobs we lost, and then some.
In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.
First let me state that the reason private sector jobs are lost is always the same.
Jobs are lost when business sales go down.
Economists give that fancy words- they call it a lack of aggregate demand.
But it’s very simple.
A restaurant doesn’t lay anyone off when it’s full of paying customers,
no matter how much the owner might hate the government,
the paper work, and the health regulations.
A department store doesn’t lay off workers when it’s full of paying customers,
And an engineering firm doesn’t lay anyone off when it has a backlog of orders.
Restaurants and other businesses lay people off when their customers stop buying, for any reason. So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden all those people decided they’d rather collect unemployment than work.
The reason all those jobs were lost was because sales collapsed.
Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.
That’s a serious collapse that cost millions of jobs.
Let me repeat, and it’s very simple, when sales go down, jobs are lost,
and when sales go up, jobs go up, as business hires to service all their new customers.
So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone willing and able to work.
That’s good for businesses and all the people who work for them.
And these proposals are bipartisan.
They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.
So listen up!
My first proposal if for a full payroll tax suspension.
That means no FICA taxes will be taken from both employees and employers.
These taxes are punishing, regressive taxes that no progressive should ever support.
And, of course, the Tea Party is against any tax.
So I expect full bipartisan support on this proposal.
Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living. This is big money, not just a few pennies as in previous measures.
These are the people doing the real work.
Allowing them to take home more of their pay supports their good efforts.
Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over. When government stops taking FICA taxes out of their pockets, they’ll be able to get back to more normal levels of spending.
And many will be able to better make their mortgage payments and their car payments,
which, by the way, is what the banks really want- people who can make their payments.
That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.
And the payroll tax holiday is also for business, which reduces costs for business, which, through competition, helps keep prices down for all of us. Which means our dollars buy more than otherwise.
So a full payroll tax holiday means more take home pay for people working for a living,
and lower costs for business to help keep prices and inflation down,
so sales can go up and we can finally create those 20 million private sector jobs we desperately need.
My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments with no strings attached.
This will help the states to fill the financial hole created by the recession,
and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday
restores their lost revenues.
Again, I expect bipartisan support.
The progressives will support this as it helps the states sustain essential services,
and the Tea Party believes money is better spent at the state level than the federal level.
My third proposal does not involve a lot of money, but it’s critical for the kind of recovery that fits our common vision of America.
My third proposal is for a federally funded $8/hr transition job for anyone willing and able to work, to help the transition from unemployment to private sector employment.
The problem is employers don’t like to hire the unemployed, and especially the long term unemployed. While at the same time, with the payroll tax holiday and the revenue distribution to the states,business is going to need to hire all the people it can get. The federally funded transition job allows the unemployed to get a transition job, and show that they are willing and able to go to work every day, which makes them good candidates for graduation to private sector employment.
Again, I expect this proposal to also get solid bipartisan support.
Progressives have always known the value of full employment,
while the Tea Party believes people should be able to work for a living, rather than collect unemployment.
Let me add here that nothing in these proposals expands the role or scope of the federal government.
The payroll tax holiday is a cut of a regressive, punishing tax,
that takes the government’s hand out of the pockets of both workers and business.
The revenue distribution to the states has no strings attached.
The federal government does nothing more than write a check.
And the transition job is designed to move the unemployed, who are in fact already in the public sector, to private sector jobs.
There is no question that these three proposals will drive the increase in sales we need to
usher in a new era of prosperity and full employment.
The remaining concern is the federal budget deficit.
Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA, a very important lesson was learned.
Interest rates actually came down. And substantially.
And with that the financial and economic heavy weights from the 4 corners of the globe
made a very important point.
The markets are telling us something we should have known all along.
The US is not Greece for a very important reason that has been overlooked.
That reason is, the US federal government is the issuer of its own currency, the US dollar.
While Greece is not the issuer of the euro.
In fact, Greece, and all the other euro nations, have put themselves in the position of the US states. Like the US states, Greece and other euro nations are not the issuer of the currency that they spend. So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.
But the issuer of its own currency, like the US, Japan, and the UK,
can always pay their bills.
There is no such thing as the US running out of dollars.
The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.
The US federal government can not go broke like Greece.
That was the important lesson of the S&P downgrade,
and everyone has seen it up close and personal and they all now agree.
And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.
Does that mean we should spend without limit and not tax at all?
Absolutely not!
Too much spending and not enough taxing will surely drive up prices and inflation.
But it does mean that right now,
with unemployment sky high and an economy on the verge of another recession,
we can immediately enact my 3 proposals to bring us back to
a strong economy with good jobs for people who want them.
And some day, if somehow there are too many jobs and it’s causing an inflation problem,
we can then take the measures needed to cool things down.
But meanwhile, as they say, to get out of hole we need to stop digging,
and instead implement my 3 proposals.
So in conclusion, let me repeat these three, simple, direct, bipartisan proposals
for a speedy recovery:
A full payroll tax holiday for employees and employers
A one time revenue distribution to the states
And an $8/hr transition job for anyone willing and able to work to facilitate
the transition from unemployment to private sector employment as the economy recovers.
Thank you.

This is a fine speech. The visionary economic proposals in it will create full employment and, within a year, end the balance-sheet recession we’ve been experiencing for nearly three years now. The problem with it is not the economics. It is that it will require deficit spending and also will be seen as requiring new borrowing and increasing the national debt.

However, since passing the ARA in early 2009, President Obama, along with many of his appointees and a seemingly endless stream of blue dog Democrats and Hooverian Republicans have worked as hard as they can to persuade us that the US has a deficit problem, is running out of money, and cannot afford the massive deficit spending that may be required to restore full employment.

There is no such problem; but, also, there is no time to educate the public about this between now and September 8th. What the President needs to do instead, if he wants to pass a jobs program that will work, is to DEMONSTRATE that there is no deficit/debt problem we have to be worried about and that only problem is Congress legislating his program. In short, he needs to change the financial reality providing the background of Congressional action in few days. That reality now says that the US owes $14.5 TriIlion to creditors and is failing to reduce this amount, and also doesn’t have enough money in the Treasury General Account (TGA) to cover massive deficit spending and create jobs. He needs, in contrast, to create a reality where he has paid down a substantial portion of the debt, and had enough money in the TGA to cover all the spending he proposes without further borrowing. The president can and must create that kind of reality. Here are the steps:

A. Mint a platinum coin with face value of $60 Trillion, deposit it in the U. S. Mint’s Public Enterprise Fund (PEF) Account at the Fed, then have Treasury “sweep” the difference between the cost of minting the coin and its face value into the TGA.

B. Immediately pay off the $6.2 trillion owed by the Federal Government to the Federal Reserve Bank, the various Government Agency Trust funds, among them Social Security and debts to other Government Agencies.

C. Pay off the non-Government sector debt, as it comes due using Proof Platinum Coin Seigniorage (PPCS) revenue when necessary. Since the estimated cost is about $300 Billion paid off per month; we can expect another $1 Trillion to be paid off by the end of the year leaving a national debt of about $7.1 Trillion, with a bit less than $53 Trillion still left in the TGA.

D. Pay for any 2011 spending not covered by taxes between now and the end of the year, estimated at about $600 Billion, using the credits in the TGA, rather than issuing debt.

The function of minting the high face value proof platinum coin, filling the Federal purse using PPCS, and beginning to pay off the national debt quickly, is to demonstrate dramatically that there is no US solvency problem, nor any debt and/or deficit reduction problem.

Issuing the coin and getting the Fed to issue $60 Trillion in credits to Treasury, will demonstrate exactly that, and blow any justification for austerity and spending cuts out of the water. The Republicans won’t be able to spin that; and without a plausible claim that austerity is necessary, the drive to take hostages and force austerity on America will evaporate. Within a few weeks we will have a new political discourse, and no more excuses for not getting people back to work.

On the other hand, if the President doesn’t take these steps. Then it doesn’t matter how great his speech is, or how “big” he goes, he will fail again because he will have done nothing to change the perceptions people have of the underlying trade-offs we face.

(Cross-posted from Correntewire).

Connecting the Dots – Deficit Reduction Is Now Only About Inflation, Not Insolvency

3:18 pm in Uncategorized by letsgetitdone

By

Warren Mosler

(Editor’s note: I’m re-posting this here from moslereconomics.com with a follow-on commentary of my own with the permission of Warren Mosler)

From Warren Buffet to Alan Greenspan,

And from all the responses to the S and P downgrade by
economists and financial professionals from the 4 corners of the world,

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt. running out of US dollars.
The US government always has the ‘ability to pay’ any amount of US dollars at any time.

NOW CONNECT THE DOTS TO:

The US is not dependent on tax revenue or foreign borrowing to be able to spend.

And,
whereas Greece is not the issuer of the euro,
much like the US states are not the issuer of the US dollar,

THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending
by the financial markets and forced to go begging to the IMF
to get US dollars to spend.

Nor is the US government subject to market forces driving up interest rates on US Treasury bills.

EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%

Why, because, any nation that issues its own currency also sets it’s own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

Suddenly, it’s NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.

So now,

the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION 
or shut up!

they must FLIP FLOP
or shut up!

Yes, there is a new reason they can flip flop to.

Inflation.

They can start claiming the current path of deficit spending will lead to inflation.

Fine.

Bring it on!

First, they need to do the research,
as they haven’t even thought about this yet.

Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children

But ONLY because some day,
if we don’t do something when the time comes
and even though we don’t have an inflation problem now,
and haven’t had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.

Fine.

Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?

How about we get the word out and find out, thanks!

Commentary

By

Joe Firestone

I’ll try my best to spread the news that THE WORD IS OUT! And also spread the further news that the Government can’t run out of money, no matter how much it owes and that there is no solvency problem.

So there is also no deficit reduction problem, no national debt problem, or any Social Security, Medicare, or Medicaid problems, or grandchildren burden problems based on fears of, or claims about, insolvency unless we pay our debts back!

I have to say however, that even though THE WORD IS OUT that solvency is not a problem, and that the austerity/human sacrifice crowd must now either fall silent or flip flop to inflation as their new rationalization for driving working people into poverty; I don’t think for a minute that they will do either one.

Instead, I think they will assume that the news will never get out to most people and that they are free to go on with their same old narrative about possible insolvency making austerity necessary, without people either laughing at them or calling them liars. The MSM is unlikely to notice that the Government can create currency whenever it wants to, and they will just forget about the admissions made this week after the S & P downgrading, and reinforce the old money scarcity story, without missing a step, to please the Peter Petersons, Kent Conrads, Alice Rivlins and David Walkers of this world. The president already did this in a speech he made today.

So, I think that besides doing our best to spread THE WORD, we also need to pressure the President to prove that the United States Government has no solvency problems, and can never run out of money. In other words, we need to call for the President to use very high value Proof Platinum Coin Seigniorage (PPCS) to begin to pay back the national debt and also to create a balance in the Treasury General Account (TGA) that is so large that no insolvency claims are even thinkable.

The basic idea is to mint a $60 Trillion platinum coin, turn it into electronic credits at the Fed, use the money, first to pay down $6.2 Trillion in debt immediately and the rest as it falls due, and confront Congress with a balance of of about $52 Trillion in the Treasury General Account (TGA). Then, facing that $52 Trillion in available financial resources, and with the President using the bully pulpit, let’s see the austerity/human sacrifice crowd, even with all the money in the world behind them, try to justify voting for spending cuts in entitlements and other much needed areas of domestic spending.

(Cross-posted from Correntewire.

How do vanden Heuvel and Meyerson Expect Him to Get By “the Human Sacrifice Crowd”?

8:52 am in Uncategorized by letsgetitdone

"Human Sacrifice"

"Human Sacrifice" by heyyu on flickr

Yesterday, must have been jobs day at The Washington Post since they ran two columns calling for job creation: one by Katrina vanden Heuvel and the other by Harold Meyerson. The crux of vanden Heuvel’s column is:

Consistent, tenacious persuasion is an extraordinarily powerful tool. The Republican Party understands this. Over the past several months, it has relentlessly repeated its false mantra that spending cuts create jobs. And the public, in response, increasingly believes this to be true. What then, is to stop the president, powered by a movement of dedicated and mobilized Americans, from making his own case for the economy? What is to stop him from convincing the American people that the things the economy requires are the things we ought to be fighting for? What is required other than will? Great leaders, when confronted by crisis, act.

The answer to this question is that President Obama’s been telling people since 2009 that we are running out of money and can’t afford programs that aren’t deficit neutral, and recently he’s made clear that he’s for $4 Trillion in spending cuts/tax increases including cuts to entitlements over the next decade. So how can he now argue that we can afford the many things we need to do to create jobs and improve the economy?

Katrina vanden Heuvel doesn’t address this question. She advises him about what he ought do to improve the economy; but not on how he can show Congress, a media steeped in neoliberalism, and the people that not only do we need his job creation measures but also that we can afford them. Without that kind of explanation, what good is the exhortation that he should vigorously advocate for job creation policies? The first pushback he’ll get to any proposal is “that’s irresponsible; we can’t afford it”! Read the rest of this entry →

Still Superman?

7:00 pm in Uncategorized by letsgetitdone

There have been many reactions to S & Ps action in downgrading the credit rating of the US, Apart from the widespread annoyance and repudiation of S & P and its procedures, there are some who are saying that it won’t have much effect on interest rates. Others even saying that it is a “non-event,” and still others saying that S & P should be investigated and prosecuted on a number of grounds. However, I found two views of the “non-event” particularly interesting.

The first was Warren Buffet’s quoted by Fox Business news:

Berkshire Hathaway Chairman and CEO Warren Buffett told the FOX Business Network that S&P’s downgrade of the United States’ triple-A credit rating “doesn’t make sense.”

“I don’t get it,” Buffett told FBN late Friday night. In fact, Buffett reaffirmed his belief in the quality of the United States’ credit telling FBN, “In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I’d give the U.S. that.”

Buffett also said:

“Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”

And so, now we know that Warren Buffett gets a fundamental premise of MMT!

He knows that the US cannot become insolvent because it can make USD at will and it owes nothing that is not denominated in USD!

We can only hope that he’ll clue in his friend Barack Obama that the US is NOT running out of money. Perhaps Mr. Buffett even knows about Proof Platinum Coin Seigniorage (PPCS) and he can tell his friend Barack that using it would be a good way to give S & P a sharp stick in the eye.

The other reaction was one to my post on S & P tugging Superman’s cape. The commenter asserted that, considering the US Government’s domination by an increasingly powerful oligarchy, “the US Government is not Superman.” This squares with views being expressed by Yves Smith and others that this downgrade is about a power struggle. People who write about this struggle characterize it differently.

I think it is a power struggle between sovereign nation states and globalizing international elites whose loyalties are to the emerging new international feudalism in which corporations and enormously wealthy individuals wield the only real power. Some write as if they think that nation states are already and irrevocably subordinate to international elites. But I think that is not yet true.

The forces of nationalism are not yet spent, and will still be used against the international elites when the reality of their growing power and its negative impacts on working people are both fully recognized. People still need nation states for physical protection. People without a favored position in the emerging plutocracy still owe their primary loyalties to their nations, and I don’t think they will long accept the subordination of their national Governments and institutions to foreign powers, whether those are other nations or international financial interests. At the moment, the influence of globalizing elite institutions is very great and very real; but they still exist and function on the sufferance of nation states and their internal politics, however parasitical they may be.

Even with all its faults and the mess being made by the special interests and the parties, the US is still Superman if we can free ourselves from the constraints imposed by various Congresses in the past, and from the financial lilliputians.

1. As I say in this piece, and Marshall Auerback says in this one, the US (the Fed and the Treasury) can control interest rates contrary to the desires of the bond markets and the vigilantes. There is no realistic prospect that benchmark interest rates will go up unless the Government wants them to.

2. The US can also de-certify the ratings agencies and prosecute rating agency executives for fraud and other violations. I think they’d be well-advised to do so, if only to show S & P who’s boss. And

3. The President, finally, can use very high value PPCS and kill the “austerity” trope of the international elites for good.

So, forgive me my optimism, I still think that’s Superman!

(Cross-posted from Correntewire.

Standard & Poor’s Tugs on Superman’s Cape

10:13 pm in Uncategorized by letsgetitdone

Last December, my friend, beowulf, had this to say at the time Moody’s began to make noises about downgrading US debt. He said:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

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

Criminal Mischief statute

18 US 1361. Government property or contracts

“Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.”

But, Standard & Poor’s has decided to tug on Superman’s cape by downgrading US debt to Double A status for the first time in history. Don’t get me wrong, I’d love to see S & P executives frog-marched out of their offices and imprisoned for a year for violating the criminal mischief this statute. After their role in the Crash of 2008, that’s the least they should get from an outraged populace. However, I have to say that their action will be of little or no consequence if the Treasury responds correctly to their foolishness.

Contrary to popular belief, and also the apparent belief of this Administration, ratings agencies and the bond market itself don’t actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market.

However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this (As Warren Mosler suggests), is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest rates near zero, and that’s how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt in advance of deficit spending. If we did this, the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward. And we can do it using Proof Platinum Coin Seigniorage (PPCS) to generate revenues to pay back debt, and deficit spend current or future appropriations.

In short, the bond markets and the ratings agencies aren’t in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. So, their tug on Superman’s cape is of no consequence for us, directly.

On the other hand, the ratings agencies are currently hurting US states, and Eurozone nations with their deeply corrupted ratings processes and judgments. We should take very seriously Bill Mitchell’s Conclusion in his post on outlawing the credit rating agencies:

“The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

(Cross-posted from Correntewire.

Standard and Poor’s: Bring It On!

10:48 pm in Uncategorized by letsgetitdone

(Author’s Note: In December I posted a piece on Moody’s threat to downgrade the US’s Rating in International Bond markets. I argued that Moody’s action was foolish. Today, Standard and Poor’s actually revised the US ratings outlook from stable to negative, but continued its sovereign credit rating at ‘AAA/A-1+’. This roiled the markets yesterday and led the New York Times to carry a debate among 7 economists including Randy Wray, one of the best known among economists using the Modern Monetary Theory (MMT) paradigm in economics. Randy and a number of others in the Times debate, believe that the ratings change has little or no significance.

My post filed in December, presents a more detailed analysis of why Randy and the other skeptics are right, so I thought it deserved a reprise. Please use your imagination and just replace “Moody’s” with “Standard and Poor’s.” The arguments against the ratings agency morons remain the same. In my view Congress should just put ‘em out of business, and while they’re at it, bring some indictments against them for the fraudulent AAA ratings they gave to the derivatives that, in turn, triggered the Crash that ruined the lives of so many people. Let’s finally see some of these perps in jump suits.)

Yesterday, as reported in Money News, Moody’s made me laugh, with the following pronouncements:

” . . . it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama’s tax and unemployment benefit package becomes law. . . .

“The plan agreed to by Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years . . .

“A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

“For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasurys, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody’s analyst Steven Hess said in a report sent late on Sunday.”

Here Moody’s is referring to the increase in the debt, and the debt-to-GDP ratio caused by the tax deal, and also to the predicted lesser value of Treasuries which will presumably lead to the US paying higher interest rates and having greater interest costs on the national debt than it otherwise would have had. In addition, Moody’s believes that the likely $900 billion cost of the tax deal will make the US more likely to default on the national debt.

I found this a laughing matter for a number of reasons. First, as Jane Hamsher points, out only 5 days earlier Moody’s had said there was no prospect of a ratings cut if the tax deal passed. Their sudden change of opinion greatly undercuts their credibility.

Second, 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 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%. 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 case, that the bond markets don’t control the interest rates that Governments sovereign in their own currency must pay.

Third, 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 money 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 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.

The objective risk of default by the US Government is not increased by the increased size of the deficit, debt, or debt-to-GDP ratio. And Moody’s view that the risk of default is increased by such increases, only shows that Moody’s doesn’t understand the monetary operations of nations sovereign in their own currencies. Increases in these numbers don’t in any way lessen the constitutional authority of the Government (including the Congress) to spend or make money. It’s basic solvency, in other words is untouched by the tax deal, and if Congress allows the Executive to use its currency powers, then the risk of default as a result of the deal is exactly zero. Whatever additional risk exists as a result of the deal, comes only from the increased likelihood that Congress, mistakenly thinking that the Government is like a household, or, or ideological reasons, determined to “starve the beast” might constrain the Executive from meeting its obligations, and declare a US default of its obligations when there is no reason to do so.

Fourth, my biggest laugh came at the underlying assumption of Moody’s report, namely that its ratings and the bond market itself actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest near zero, and that’s how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for Congress to stop requiring new debt issuance in coordination with deficit spending, and for the Treasury to stop issuing debt. If we did this the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward.

In short, the bond markets and the ratings agencies aren’t in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. In fact, at this point in our history, Congress is mandating that we have a national debt. It is forcing us to have one.

Congress mandates that we borrow our own previously created money from the Chinese, Japanese, and Middle Eastern nations and pay them interest on a commodity (our money), that we have an unlimited ability to create, while they also complain about the very same national debt they are always re-creating and increasing, and then tell us that we can’t afford unemployment insurance, enough Federal Spending to create full employment, Social Security, Medicare for All, good educations for our kids and grandkids, and emergency programs to create new energy foundations for our economy.

Forget about Moody’s! They’re part of the great distraction preventing us from focusing on our real problems. There’s nothing that Moody’s and the bond markets can do to hurt us, unless we let them. Let’s not let them. Tell them to bring it on! And, if they do, tell them to keep in mind Beowulf’s admonition:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

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

Criminal Mischief statute

18 US 1361. Government property or contracts

“Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.”

And Bill Mitchell’s Conclusion in his post on outlawing the credit rating agencies:

“The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

Further. as part of my preferred financial market reforms I would render illegal a whole swag of derivative assets which would lessen the problem of pricing risk.

It is time to wean the private financial markets off these agencies. The best way would be to declare them illegal.

The last thing that a sovereign government should be doing right now is cutting back on its fiscal stimulus.”

Which, of course, is exactly what Moody’s wants us to do.

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

Once Again, the National Debt Is Congress’s Fault

6:38 pm in Uncategorized by letsgetitdone

(Author’s note: I’ve offered this idea a couple of times over the past few months here, with surprisingly little reaction. I’m trying once again, because I’m persuaded that much of the leverage that conservatives and Republicans have over our fate is due to the belief that most people hold that federal deficits, the national debt, and the GDP ratio are important, and that we must bring them under control to avoid Government insolvency. In addition every one seems to believe that the existence of the debt is due the to the profligacy of the Government, its monumental waste, and the lack of courage of its politicians who spend too freely to please constituents, gain campaign contributions, and help themselves to stay in office. None of this is true. The current existence of the National Debt, and also of a non-zero public debt-to-GDP ratio is the inevitable result of a technical decision that Congress has made about how the Treasury should finance its spending. This post talks about that decision, points out that its consequence is the National Debt, and also points out that the very existence of the National Debt is the fault of Congress.)

It is Congress’s fault that we have a national debt at this point in our history. And also Congress can largely get rid of this debt over a 10 year period any time it wants to.

The national debt exists today because when the nation went off the Gold Standard in 1971 and adopted its fiat currency system, Congress did not repeal its mandate, very appropriate when our currency was convertible to Gold on demand, in least in theory, requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends, is what has caused the national debt to persist.

Had Congress repealed it when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and our national debt today would be zero and our debt-to-GDP would now be at 0%.

The Congressional mandate to issue debt when the Government deficit spends has no useful function today, and the interest income it provides for mostly wealthy investors and foreign Governments who buy Treasury Securities is simply a form of welfare for the rich. In fact, it is welfare that will cost the Treasury almost $12 Trillion over the next 15 years if we continue the policy of issuing debt instruments.

Any positive effects this policy produces are vastly outweighed by the bad effects of having to cope politically and economically with the concerns of people who believe that the increases in the debt, and the debt-to-GDP ratio give us a fiscal sustainability problem whose priority outweighs everything else. Even though the national debt has no effect on national solvency; it is a political problem. It magnifies the political strength of conservatives and weakens progressives because it makes people afraid to deficit spend since then the country will be “going into debt.”

Congress needs to repeal the mandate forcing the Government to issue debt instruments on a dollar for dollar basis with deficit spending, right now. If it does so it will:

– cease to provide welfare payments in the many Trillions of Dollars over the next 15 years mainly for the rich and foreign nations,
– gradually pay off the $14 plus Trillion Federal debt entirely,
– have rapidly decreasing Federal interest costs over the next decade until they entirely disappear,
– have no further need to take difficult votes about increasing the Federal debt limit,
– have no further need to worry about borrowing money from the Chinese, or the oil rich states, or the Japanese, that our grandchildren will one day have to re-pay,
– have no further need to worry about what the bond markets think or are going to do, or
– to worry about our debt or deficit spending being “fiscally unsustainable” when we want the Government to spend money to sustain the unemployed, help us end unemployment altogether, provide a more generous Social Security system for aging Americans rather than cutting the inadequate benefits we have now, fulfill American needs for new infrastructure, develop a re-invented first class educational system, and provide Medicare for All, among our other needs.

If Congress refuses to remove its requirement to issue debt, when it can easily do so at any time, then it’s habitual complaints about its size should cease at once and no longer pollute our political debates.

My earlier posts on this subject were met with anticipated responses claiming that ceasing debt issuance would inevitably lead to inflation because of the increase in the money supply caused by merely “printing money.” People who believe this, do so because they think that dollar for dollar debt issuance associated with deficit spending removes as much currency from the non-Government sector as the Government spends, and because of this damps down any inflation that may result from the Government spending.

This reasoning is faulty on two counts. First, increases in the money supply caused by Government spending do not result in demand-pull inflation until the point of full employment is reached because the increased demand produced by the Government is met by the private sector with supply increases rather than price increases. We have known that since Keynes. A very good recent account of the consequences of just creating money through deficit spending unaccompanied by debt issuance is this post by Professor Bill Mitchell. Yet another is this very good one by Professor Scott Fullwiler.

In addition, Professor Stephanie Kelton, shows that while Government debt issuance may transfer money back to the Government, it still leaves a net financial asset in the private sector, specifically, the Government debt instrument. As Scott Fullwiler points out in a comment on Stephanie Kelton’s post, it is highly debatable that the net addition of a debt instrument to the private sector is less inflationary than just leaving additional cash would have been, and very likely that the debt instrument is actually more inflationary because 1) one can get more financial leverage from it than one can get from money, and 2) it adds more interest to the private sector than a cash deposit would.

The United States has many very real problems which it can help to address with Government programs. The deficit spending required to solve our problems shouldn’t be constrained by the non-existent problem of that national debt, or the fantasy of stabilizing a debt-to-GDP ratio that also represents a non-existent problem, or the misguided notion that the issuance of debt makes deficit spending less inflationary than it otherwise would be. To make sure that deficit spending is not so constrained, Congress needs to repeal its debt issuance mandate now before the American people learn the truth that Congress, itself, is responsible for all the angst we hear about the deficit, the debt, and the debt-to-GDP ratio.

(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).