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Beat the Deficit Hawkism Frame or Lose

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The corporatist-centrist politicians, such as Judd Gregg, Kent Conrad, Evan Bayh, no longer afraid of a total collapse of the world economy, are using deadly innocent frauds, scare, myths, and lies about the deficit and the national debt to undermine the possibilities of progressive change in the United States. It seems, also, that they're now being led by President Obama, who has emerged as a full-throated champion of deficit hawkism, while pretending to be concerned about the well-being of the Middle Class, during his first State of the Union speech, where the President treated us to the following statements, about the debt, and the deficit, among others.

“One year ago, I took office amid two wars, an economy rocked by a severe recession, a financial system on the verge of collapse, and a government deeply in debt . . . “

This was the President's first mention of the debt in the speech. He continued with this mention when talking about the health care initiative:

”Our approach would preserve the right of Americans who have insurance to keep their doctor and their plan. It would reduce costs and premiums for millions of families and businesses. And according to the Congressional Budget Office -– the independent organization that both parties have cited as the official scorekeeper for Congress –- our approach would bring down the deficit by as much as $1 trillion over the next two decades. . . . ”

No mention here of how many fatalities, bankruptcies, and foreclosures due to lack of health insurance would result from “our approach . . . ”, or that CBO only keeps score with respect to the gap between Government tax revenues and expenditures, but has nothing to say about the social costs and benefits of Government programs. But, of course, the important point is that this quote reflects Mr. Obama's assumptions 1) that the deficit matters and that it is important to bring it down, 2) that it is a significant accomplishment to bring down the deficit by an average of $50 Billion per year over 20 years, and 3) that it is worth mentioning that a health care reform will bring down the deficit by a fraction of a percent of GDP per year, when it will not end fatalities, bankruptcies, and foreclosures due to lack of insurance, or make insurance truly affordable for much of the Middle Class. The President continues with:

“. . . Our deficit will grow. . . ”

As if this was important and a bad thing. And then continues:

“Now, even as health care reform would reduce our deficit, it's not enough to dig us out of a massive fiscal hole in which we find ourselves. It's a challenge that makes all others that much harder to solve, and one that's been subject to a lot of political posturing. So let me start the discussion of government spending by setting the record straight. . . . ”

Again, there is the claim that the gap between tax collections and Government expenditures is a big problem. And then a little history:

“At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion. By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program. On top of that, the effects of the recession put a $3 trillion hole in our budget. All this was before I walked in the door. . . .”

Again, we see the unquestioned assumption that the deficit resulting from the Great Recession is bad and also that the Clinton surplus was good, even though many economists now think that this surplus was a big factor in the relatively mild recession that occurred at the end of the Clinton Administration, and that the deficits resulting from the recession are actually stabilizing the economy. And Obama proceeds with:

“. . . Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis. And our efforts to prevent a second depression have added another $1 trillion to our national debt. That, too, is a fact. . . .”

Again, the assumption that deficits are bad, and that bringing them down is a worthy goal. And next the inevitable analogy:

“. . . I'm absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. . . .”

So the justification of what's about to be proposed is the analogy of the Government and the nation of the United States of America to a family. Because families are having hard times, and have to tighten their belts, the Government needs to do the same. Never mind that if it does, then families will have to tighten their belts even further. Never mind that a family can't create currency that is legal tender and the Government can. In spite of these differences, the President evidently thinks that the Government, like a family, has to tighten its belt and to repay the trillion dollars it took to rescue the economy in 2009, even though, of course from the viewpoint of the 17 or 18% of the work force who are either unemployed or under-employed, and also many of those, who, in hope, voted for this President, the “rescue” of the economy is still far from complete. And so, the President continues with one of the most important proposals in his State of the Union Speech:

“Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will.”

Again, we see the false family analogy, and also a statement of the intention to enforce “discipline” because the American “family” is “cash-strapped.” Later we learned that Obama's “freeze” is really an overall cap on non-security discretionary authority, rather than on outlays, and also will not apply to Recovery Act extensions, or other deficit spending job-creating or saving, as well as other “emergency,” measures. Nevertheless, Obama's proposal is still asserting that America must economize because it is a “cash-strapped family,” a highly debatable proposition to say the least, since it's based wholly on the idea that the cumulative gap between tax revenues and other cash income and Government expenditures has grown substantially during the Bush Administration and since the beginning of the great recession, and not at all on the capacity of the American Government to create money. Mr. Obama assures us:

“We will continue to go through the budget, line by line, page by page, to eliminate programs that we can't afford and don't work. We've already identified $20 billion in savings for next year. To help working families, we'll extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year. We just can't afford it. . . . ”

While, I'm all for eliminating programs that don't work, and also for eliminating tax breaks for those who are not paying their fair share of taxes, the contention that we ought to do this because we can't afford to keep them is also debatable, since it is also based on the idea that the Government is “cash-strapped.”

“Now, even after paying for what we spent on my watch, we'll still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That's why I've called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can't be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline.”

“Now, yesterday, the Senate blocked a bill that would have created this commission. So I'll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s. . . . ”

These last two paragraphs again call for solving the deficit “problem” and state his intention to create an advisory commission in the Executive Branch after the Senate refused to pass the Conrad/Gregg proposal to create such a commission in the legislative branch, because he's concerned about “another generation of Americans” having to cope with the big bad deficit problem. By the way, the Senate passed the pay-go rule called for by the President the next day on a party-line vote, to match the one the House had passed in July. Pay-go probably would not have passed in the Senate if the Democrats had waited for Scott Brown to take the seat he just won in Massachusetts. This is interesting because the Democrats backed off any quick action on health insurance reform saying that the people of Massachusetts had spoken and that they should not try to act on health insurance and go around the results of the election. They had no such scruples about “pay-go,” however. Unfortunately, in my view, since the success of “pay-go” in the 1990s in bringing down the deficit and creating a surplus was one of the factors in causing the unfortunate recession at the end of Clinton's and the beginning of Bush 43's terms. Mr. Obama continues:

“Now, I know that some in my own party will argue that we can't address the deficit or freeze government spending when so many are still hurting. And I agree -- which is why this freeze won't take effect until next year -- (laughter) -- when the economy is stronger. That's how budgeting works. But understand –- understand if we don't take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.”

Even though I can certainly agree with this, and am relieved that the “freeze” won't take effect until the beginning of fall 2011, when the economy may be stronger, it is much more likely that any overall cap on Federal discretionary will damage our recovery, than it is that failing to have one, or even greatly increasing Federal Spending on rebuilding our energy sector, or our system of public education, or our health insurance system, would. The idea that increasing our expenditures would lead to increasing our debt and would damage our markets is a theory for which there is plenty of contrary empirical evidence. And, as for increasing our cost of borrowing, whether we borrow or not to make federal expenditures is the Government's choice. If Mr. Obama doesn't want to pay higher interest rates, he can just have the money for additional expenditures created and pay no interest at all. The President continues:

“From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that's what we did for eight years. That's what helped us into this crisis. It's what helped lead to these deficits. We can't do it again.”

What led to the very big deficits was the Great Recession. The precise causality that accounts for that probably has much more to do with lack of regulation, lack of investment in people, and lack of health care reform than it has to do with the Bush tax cuts, though the evidence is pretty clear that these certainly did nothing to forestall the Great Recession, and that the economy would probably have performed much better in the Bush years if health care and educational reforms had been passed rather than tax cuts and giveaways to the insurance companies. He continues:

“Rather than fight the same tired battles that have dominated Washington for decades, it's time to try something new. Let's invest in our people without leaving them a mountain of debt. Let's meet our responsibility to the citizens who sent us here. Let's try common sense. A novel concept.”

I think we can all agree that there are many “tired battles that have dominated Washington for decades” can be avoided if we try something new, but I think that the prime examples of tired Washington battles are those over budget deficits that must be opposed and eliminated at the expense of “discretionary expenditures” on maintaining and rebuilding a just society. This is the example of tired Washington thinking and myth-making that we must root out if we're going to solve our problems.

The reasons why deficits are not a problem are the following. First, the Government of the United States can never go broke, because it has unlimited authority to create money to use for whatever purposes it cares to. It cannot run out of money. It can never become insolvent, or fail to pay its debts, so long as it chooses to create more money. Second, the Government doesn't have to borrow money to repay its debts, or to spend more than it does now. If it does borrow money that is its choice, dictated by false ideas, not dictated by any real need. Nor does the Government have to increase taxes to collect money to pay for its spending. It doesn't need accumulated tax revenues to pay for what it spends unless it it needs to withdraw money from the economy to reduce inflation. As long as there's no inflation, and therefore no need to resort to increased taxation, or to other means to withdraw money from the economy to reduce inflation, there's no Governmental need for the tax money.

The belief that the Federal Government can't, or should not run, a deficit, is nothing more than a mistaken belief that prevents Progressives and Democrats from solving real problems. It prevents them from advocating for enhanced Medicare for All and making it effective within a year. It prevents them legislating an effective jobs program that will work quickly, and end the recession before the elections in the Fall. It prevents them from moving quickly to fund a rapid transformation to an economy based on alternative energy sources. It prevents them from rapidly improving our educational system or rapidly repairing our deteriorating infrastructure. It prevents them from spending the money needed in order to reconstruct our mass transportation system. The idea that when families tighten their belts, the Government, like a family, should also tighten its belt, is "stupid Hooverism." It is not only wrong but precisely the opposite of the right thing do, because when families tighten their belts, private sector demand falls and the economy spirals downward, unless business or Government increases expenditures and picks up slack demand. Since in recessions businesses also tighten their belts, Government must spend more and not less to stabilize the economy and foster renewed growth.

The truth is that the deficit hawkism of the Conrads, the Greggs, the Obamas, and even, yes, the Russ Feingolds (who's not only crazy for pay-go rules, but also for a line-item veto for the President, God forbid), is one of the greatest enemies of both the progressive movement and the Democratic Party on the horizon. In relation to our governing ideals of liberty and equality, and even in the sphere of having a society and a Government that works for most of our people, America has lost an enormous amount of ground since the 1970s, and, in our thinking at least, even since the 1940s. Progressives, and the rest of us, are not going to gain back that ground unless we set about solving our real problems and ignore false ideological myths like the need to reduce or eliminate the debt, or the deficit. Again, budget deficits are only a problem when inflation begins to appear. If there is no inflation, Progressives and Democrats should not even give lip service to the idea that deficits are important. We simply must not accord this frame of reference any validity at all, and we must fight the deficit hawks, regardless of Party, and including the President, every step of the way, when they attempt to push deficit hawkism or to make it a theme of our Government. Indeed, I think our choice hear is very stark. We must beat deficit hawkism and its deadly innocent frauds or progressivism will die, and neo-liberalism and a future in which life for ordinary Americans is "nasty, brutish, and short" will be the unchanging lot of the American people.

(Also posted at firedoglake.com and the Alllifeisproblemsolving blogwhere there may be more comments)

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Submitted by Lex on

Though i'd be willing to let the deficit hawks continue to squawk if they'd ever see fit to include "defense" spending in their plans to balance the budget.

Granted, convincing the mainstream that DoD is a part of the federal government and that it shouldn't be allowed to run up the deficit is about as likely as teaching the mainstream that the government cannot go broke.

Cries of "Down with Big Government!" never include the biggest government of all on the other side of the Potomac, and before we enter a stage where the people feel comfortable with deficits, i would like to see the five-sided monster brought to fiscal heel. Otherwise we all know who will be first in line for the trough, because some animals are more equal than others.

“Don’t believe them, don’t fear them, don’t ask anything of them” - Aleksandr Solzhenitsyn

Submitted by Joshfulton.blogspot (not verified) on

Second, the Government doesn't have to borrow money to repay its debts

Uh, yes, it does. In order to create money, the government must first sell treasuries. This is done so there is supposedly real wealth backing the dollar. If people aren't willing to buy our treasuries, theoretically, no more dollars.

If we print up as much money as we want, our currency loses value relative to other currencies. Imports go up. Cost of living goes down.

"As long as there's no inflation,"

First off, there is inflation now. CPI inflation, not just monetary inflation. And in the past, it's taken time for the effects of hyperinflating the monetary supply to show in the economy, a year or more.

"It prevents them from improving the school system, et al."

You're kidding, right? Arne Duncan has $4 or $5B at his disposal, the most ever for a Secretary of Education. If that's not helping, it's either because it can't help, as in money can't solve everything, or they simply don't know what to do with it.

As I said before, if simply inflating our currency works so well, don't you think everyone would do it?

Maybe we should ask Zimbabwe why it might be a bad idea.

Submitted by lambert on

The Zimbabwe talking point. Want to deal with it?

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

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Submitted by letsgetitdone on

Thanks lambert, I did. But feel free to chime in.

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Submitted by letsgetitdone on

Hi Josh, You begin with:

"Second, the Government doesn't have to borrow money to repay its debts

Uh, yes, it does. In order to create money, the government must first sell treasuries. This is done so there is supposedly real wealth backing the dollar. If people aren't willing to buy our treasuries, theoretically, no more dollars."

Sorry this is just wrong. The Government doesn't need to sell Treasuries, and our currency is no longer based on any "real wealth" or any commodity in any kind of precise correspondence. Money can be created by the Government simply by crediting the accounts of recipients at will. Our currency is based on fiat and on the Government's ability to enforce the law that says that everyone must accept it as legal tender. The value of our currency is based on our "real wealth" in a loose way, if we define real wealth as the cumulated existing goods and services produced by our economy or imported into it. And we lose wealth when we don't continuously add to these goods and services because we have idle productive capacity and unemployed people. For a simple account of how money is created see Mosler's paper on 7 deadly innocent frauds linked to above.

You continued with:

"If we print up as much money as we want, our currency loses value relative to other currencies. Imports go up. Cost of living goes down."

I think you meant to say cost of living goes up just above. In any event, have you any empirical evidence for the assertion that if we create enough money and spend it to employ all Americans who want jobs that our currency will lose value relative to other currencies? If you do I'd like to see it because I think this generalization is false.

Even if it were true however, and imports go up. So what? We'll import less, make more here, and put some people back to work.

You continue with:

"As long as there's no inflation,"

"First off, there is inflation now. CPI inflation, not just monetary inflation. And in the past, it's taken time for the effects of hyperinflating the monetary supply to show in the economy, a year or more. "

Inflation is near zero now, and until a few months ago economists were worried about deflation, which exists now in many markets. Next, what's your example of when it's taken time for "hyper-inflation" to be visible, and how much time do you think it takes? Also, please speak precisely. When I talk about hyper-inflation, I'm referring to price inflation, unless it exists, I don't think "hyper-inflation of the money supply" is more than some deficit hawk's opinion.

You continue:

""It prevents them from improving the school system, et al."

"You're kidding, right? Arne Duncan has $4 or $5B at his disposal, the most ever for a Secretary of Education. If that's not helping, it's either because it can't help, as in money can't solve everything, or they simply don't know what to do with it."

That's pocket change compared to the problem we have to solve. Our public schools are shit houses these days. They need to be re-organized, rebuilt, and re-equipped from top-to-bottom. Try thinking about $200 B per year and then we can talk. I have in mind solving the public education problem, not putting a few band-aids around the edges.

Finally, you said Zimbabwe. Do you really think Zimbabwe is relevant? Governments can create money. But money is not wealth or productive capacity. Inflation is caused by too much money chasing too many goods. You can create as much money as you need to so that your productive capacity is utilized. Beyond that, if you print any more you will get inflation and hyper-inflation.

That's what happened to Germany after WW I and Zimbabwe recently. the productive capacity didn't exist, so making money didn't help, but created inflation instead. The difference between those situations and ours, is that it does exist, but it is idle. If we print money to put it to work we will have both high employment and low inflation.

Submitted by Joshfulton.blogspot (not verified) on

I'm sorry, but we need to sell treasuries in order to print money. That's just how it's done in the current system. If we don't need to sell treasuries, why do we have treasuries auctions?

http://www.investopedia.com/articles/eco...

If you're saying theoretically the government doesn't need to sell treasuries and can just print the money, you're right, but that's not the current system we have.

have you any empirical evidence for the assertion

This is just a simple example of how the strength of your economy effect the value of a currency. It happens every day. That's what the whole currency market is.

and spend it to employ all Americans

Ah, what a key point. Of course, you have to spend a "stimulus" in the right way, but there's another problem with this. Is your stimulus even capable of producing growth, or is it simply temporary? The real problem with America, as far as I can see, is that prices are too high, not simply that there aren't enough jobs or wages are too low. The reason for that is because we have a fascistic system where there's collusion between the state and business and between businesses.

That's something that can't be solved by printing more money. It's a totally different problem. In fact, just printing more money would probably exacerbate it.

Next, what's your example of when it's taken time for "hyper-inflation" to be visible, and how much time do you think it takes?

Luckily for you, I just happen to have a copy of Antony Sutton's "The War on Gold" right in front of me.

"Value of Continental Notes in Silver Coin"

Nov. 1775: Total notes issues: 5 million; approximate value of $1 silver coin: $1.

Nov. 1776: Total notes issued: 19.5; approximate value of $1 silver coin: $1 (you can see here they virtually quadrupled the monetary supply, but inflation still takes time to catch up.)

Nov. 1777: 31.5 million; $3.

Nov. 1778: 86 million; $6.

Nov. 1779: 226 million; $26

Nov. 1780: (no more were issued) 226 million; $73

It doesn't catch up immediately, because it depends on the velocity of money, how quickly money is circulated. If this weren't the case, why would the Fed be concerned about sucking "excess liquidity" out of the system? They're doing it before people start realizing their money is now worth less and inflation speeds up the velocity of money.

So what? We'll import less, make more here, and put some people back to work.

Ah, yes, in this potential future state where its currency is rejected by all foreign countries, so it looks only inside its own borders and prints money at its whim (which despite common beliefs and rallying cries to the opposite, and what the Federal Reserve actually does now, is not suppose to be what happens.) If this total rejection of the need for international trade and the printing of money happened at will, in the current system don't you think it'd be like scrip at some turn of the century coal mine?

I think you and I are on the same page about the government actually not needing to sell treasuries to print money, and how with a responsible government, this would be a good thing. But we're still so far away from that. Right now, if we decided we could simply print up what we want, to hell with the other countries and we'll look only inside our own borders, we'd wind up with a completely totalitarian state.

You, or some people, might say that's a good thing, because it will hasten the collapse of the government. I don't disagree that a radical change is necessary for our government, but I don't think collapse is the way to do it.

Try thinking about $200 B per year and then we can talk.

Yeah, dude, we'll talk then. Sounds like a great idea. I personally think $200T, but I'm not really an expert in the issue.

By the way, anyone remember a few years ago when a billion sounded like a big number? And the government didn't do anything that cost a billion dollars without making people gasp? Also, I can't find the number right now, but if I remember correctly, and I'm virtually sure I do, Arne Duncan has not even spent close to all of that money, at least he hadn't a few months ago. So, I guess we need some new free thinkers, or free money thinkers at least, to decide how that money is spent.

Of course, that is a totally different problem. Should we simply throw money at a problem (and thereby devalue our currency) and do we even have the right people in place to decide on how to spend it?

Do you really think Zimbabwe is relevant? Governments can create money. But money is not wealth or productive capacity.

Yup, hyperinflation is hyperinflation whether you think you're the king of the world or some third-world country.

If we print money to put it to work we will have both high employment and low inflation.

This is the exact problem in your argument. You think it's idle because there's not enough money to put it to work. I think there's not enough money in the hands of the right people in order to put it to work. It's in the hands of just a few people. That's because there is a systematic problem that works to keep money out of the hands of everyday people and in the hands of the elites.

If you simply throw money at the problem, it will basically all go back to the people who created the problem unless you change the system.

Submitted by hipparchia on

I think there's not enough money in the hands of the right people in order to put it to work. It's in the hands of just a few people. That's because there is a systematic problem that works to keep money out of the hands of everyday people and in the hands of the elites.

this is where taxing the living daylights out of the rich and spending that money on free health care, affordable housing, food stamps, municipal fire departments, etc works.

Submitted by Joshfulton.blogspot (not verified) on

You also have to hit problems at their roots. If you don't get rid of the Fed, if you don't get rid of fractional reserve banking, if you don't get rid of every way one business is given an advantage over another, all the problems all come back. Simple income redistribution doesn't solve that. It's a problem in the structure.

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Submitted by letsgetitdone on

But political sequence is very important. We may be able to place certain restrictions on the Fed in the short run, but may have to wait to end it until later.

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Submitted by letsgetitdone on

Hi Josh, Your last reply began:

"I'm sorry, but we need to sell treasuries in order to print money. That's just how it's done in the current system. If we don't need to sell treasuries, why do we have treasuries auctions?

http://www.investopedia.com/articles/eco...

If you're saying theoretically the government doesn't need to sell treasuries and can just print the money, you're right, but that's not the current system we have."

Well, first, the Government does create money. It may not literally “print” a lot of it, but it does directly create and spend money by crediting accounts of its recipients using its Governmental authority. For accounts of this see:
http://www.gate.net/~mosler/frame001.htm
and a short statement by Mike Norman
http://mikenormaneconomics.blogspot.com/...

Second, the Government sells treasuries at auctions to support the funds rate and balance reserve requirements. These have to be balanced by the Fed on a daily basis. But the key here is that the Government can make money directly and it frequently does. Bernanke admitted this in recent testimony to the Congress where he replied to a question about using taxpayer money to bail out the banks, by replying that the Fed had not used tax money to do this. Of course not. The Fed and the Treasury created money to bail out the banks.

Next, I said:

“have you any empirical evidence for the assertion that if we create enough money and spend it to employ all Americans who want jobs that our currency will lose value relative to other currencies?”

And you replied:


". . . have you any empirical evidence for the assertion

This is just a simple example of how the strength of your economy effect the value of a currency. It happens every day. That's what the whole currency market is."

Sorry, I don't think the graph you linked makes the case. Why do you think so? I think you need US time series data showing relationships between deficit spending and currency values, and in addition you need to partial out the effects of other possible causal factors, to make your case that currency value will go down. Then you'd still have to show that any decline in currency value was greater than that experienced in other nations.

". . . and spend it to employ all Americans

Ah, what a key point. Of course, you have to spend a "stimulus" in the right way, but there's another problem with this. Is your stimulus even capable of producing growth, or is it simply temporary? The real problem with America, as far as I can see, is that prices are too high, not simply that there aren't enough jobs or wages are too low. The reason for that is because we have a fascistic system where there's collusion between the state and business and between businesses.

That's something that can't be solved by printing more money. It's a totally different problem. In fact, just printing more money would probably exacerbate it."

I'm not advocating just printing more money, I'm advocating Government deficit spending that will grow jobs and using new monetary creation rather than new taxes and new borrowing from other nations to do that. As far as the collusion between Government and business is concerned, I'm as opposed as you are to that.

"Next, what's your example of when it's taken time for "hyper-inflation" to be visible, and how much time do you think it takes?

Luckily for you, I just happen to have a copy of Antony Sutton's "The War on Gold" right in front of me.
"Value of Continental Notes in Silver Coin"
Nov. 1775: Total notes issues: 5 million; approximate value of $1 silver coin: $1.
Nov. 1776: Total notes issued: 19.5; approximate value of $1 silver coin: $1 (you can see here they virtually quadrupled the monetary supply, but inflation still takes time to catch up.)
Nov. 1777: 31.5 million; $3.
Nov. 1778: 86 million; $6.
Nov. 1779: 226 million; $26
Nov. 1780: (no more were issued) 226 million; $73
It doesn't catch up immediately, because it depends on the velocity of money, how quickly money is circulated. If this weren't the case, why would the Fed be concerned about sucking "excess liquidity" out of the system? They're doing it before people start realizing their money is now worth less and inflation speeds up the velocity of money."

I don't think your example applies here because it comes from a commodity-based monetary system. Our current system is fiat-based, so we need examples from that kind of system to begin to talk about the lag. Further, when the time lag between the monetary increase and inflation is great, you have to partial out the effects of other variables that may have caused inflation in the interim and that may have had nothing to with the increase in the money supply or the growth of employment.

"So what? We'll import less, make more here, and put some people back to work.

Ah, yes, in this potential future state where its currency is rejected by all foreign countries, so it looks only inside its own borders and prints money at its whim (which despite common beliefs and rallying cries to the opposite, and what the Federal Reserve actually does now, is not suppose to be what happens.) If this total rejection of the need for international trade and the printing of money happened at will, in the current system don't you think it'd be like scrip at some turn of the century coal mine?"

I think this is an extreme case, and I've not said that things would develop that way. What might happen is that we'd import less, begin to manufacture certain things here again, and also make entirely new products. our trade deficit would then decline, and since our own actual internal wealth would be increasing, the international value of our currency might increase as well.

"I think you and I are on the same page about the government actually not needing to sell treasuries to print money, and how with a responsible government, this would be a good thing. But we're still so far away from that. Right now, if we decided we could simply print up what we want, to hell with the other countries and we'll look only inside our own borders, we'd wind up with a completely totalitarian state."

Well, I'd be the last person to be working towards a totalitarian state. Look, I'm only talking about putting people to work and using Government funds to do it. With the slack demand we have now, that's not going to cause an inflation problem, but it will solve the unemployment problem until the stimulus provided by such policies, allows the private sector to get going again, and pull the Government workers into higher-paying private sector jobs. I think this discussion would be a lot more productive if you'd quit referencing extremes that are very, very unlikely in the real world.

"You, or some people, might say that's a good thing, because it will hasten the collapse of the government. I don't disagree that a radical change is necessary for our government, but I don't think collapse is the way to do it."

I have no idea where this is coming from. Totalitarianism? Collapse? What are you talking about? I'm talking about some mild corrections to the economic system, to restore a working system with low inflation and full employment. You're raising all kinds of specters about horrific consequences based on no visible models. I'm having trouble finding the touch points in this conversation.

"Try thinking about $200 B per year and then we can talk.

Yeah, dude, we'll talk then. Sounds like a great idea. I personally think $200T, but I'm not really an expert in the issue."

I'm not either, but I know enough to know that if you can't transform Iraq and Afghanistan on $300 B per year, you also can't reconstruct the horribly deteriorating US public school on $5 B. We need to get serious about that. That's the real deficit we have to close for the sake of our Grandchildren. We know that we have about $3T of work to do to modernize our infrastructure over the next decade or so. Why shouldn't we need the same order of magnitude to modernize our educational system? $5B annually? I can't believe you thought that was a serious effort. What did we just give to a few auto companies? $50 B? What did we give to a failed insurance Company, $170B? Talk about a country lacking proportion.

"By the way, anyone remember a few years ago when a billion sounded like a big number? And the government didn't do anything that cost a billion dollars without making people gasp? Also, I can't find the number right now, but if I remember correctly, and I'm virtually sure I do, Arne Duncan has not even spent close to all of that money, at least he hadn't a few months ago. So, I guess we need some new free thinkers, or free money thinkers at least, to decide how that money is spent.

Of course, that is a totally different problem. Should we simply throw money at a problem (and thereby devalue our currency) and do we even have the right people in place to decide on how to spend it?"

It is a different problem, alright. But you're looking at it the wrong way around. It sounds like Obama decided that Duncan would get $5 B and now poor Duncan has to decide how to do something worthwhile when the amount pales before the scale of the problem he has. In any case I'm not suggesting we throw money at a problem, I'm suggesting we quit fooling around and be realistic about the magnitude of expenditures it will require to solve it.

"Do you really think Zimbabwe is relevant? Governments can create money. But money is not wealth or productive capacity.

Yup, hyperinflation is hyperinflation whether you think you're the king of the world or some third-world country."

You've not answered my objection to your use of Zimbabwe. Try quoting all I said about it, then try to answer it. Don't simply take my remarks out of context and make a debating point out of it. Zimbabwe and the United States are very different cases, especially because Zimbabwe incurred debts in other currencies, and has a very insubstantial economy on which to base its currency. You need a model to show that direct Government spending without a corresponding level of borrowing or taxation would cause inflation. You have no such model, and you have no tests of it using data from both the US and Zimbabwe.

"If we print money to put it to work we will have both high employment and low inflation.

This is the exact problem in your argument. You think it's idle because there's not enough money to put it to work. I think there's not enough money in the hands of the right people in order to put it to work. It's in the hands of just a few people. That's because there is a systematic problem that works to keep money out of the hands of everyday people and in the hands of the elites.

If you simply throw money at the problem, it will basically all go back to the people who created the problem unless you change the system."

This is the best statement you've made from my point of view. I'm all for redistributing money so that more comes back to the Government and gets destroyed (scrapped) to compensate for the money it would, hopefully, place in the hands of people who need it through its job programs. But we really don't know for sure at this point whether more money is needed in the system or whether it's just more money in the right hands, as you suggest. If it's only the latter, we should soon see inflation entering the situation, and we should respond to it, then by taxing people who have been concentrating it over the years, so that we can get a more equal distribution of wealth, like the kind we had in the 50s and 60s of the past century.

Submitted by Joshfulton.blogspot (not verified) on

Second, the Government sells treasuries at auctions to support the funds rate and balance reserve requirements.

So, what you're saying is "The Fed only sells treasuries to perform its most essential functions." Well, I'd agree with that too, and it doesn't sound pretty minor to me.

I think you need US time series data showing relationships between deficit spending and currency values,

Sorry, dude, I already gave an example of how monetary inflation creates price inflation (are we even arguing about this?), and how a crashing economy creates a weaker currency. Do we need a million examples?

I don't think your example applies here because it comes from a commodity-based monetary system.

Booo. Not commodities "based." It had both fiat money and specie. In fact, that's the best example to show the effect of inflation on fiat currencies.

I think this is an extreme case, and I've not said that things would develop that way.

Extreme case? Is printing as much money as you want regardless of how much wealth you actually have not extreme?

I mean, I can't believe I'm even having this argument. This is the cause of hyperinflation throughout history.

if you can't transform Iraq and Afghanistan on $300 B per year, you also can't reconstruct the horribly deteriorating US public school on $5 B.

No, no, no, you can transform Iraq and Afghanistan on $300B a year. You just might not choose to transform it in the way you told the American people. I highly recommend reading Greg Palast's pieces on how the plan always was to secure Iraqi oil fields for oil companies to help create an artificial scarcity.

The reason the bailout of AIG was so big is because they have credit default swaps, totally made up derivatives, that are/were worth billions of dollars. It's not because they have any sort of real wealth behind them. It's totally made up, at least to them, not when the take it from us, of course.

Zimbabwe and the United States are very different cases, especially because Zimbabwe incurred debts in other currencies

One currency is convertible to other currencies. If your currency loses strength relative to other currencies, then it's going to make it more difficult to pay your debt.

You're right, however, we could turn on the printing press blindly and pay all our debt in a matter of seconds. That, however, would totally crush international confidence and isolate America from international trade. Try seeing how good of an idea that is when we need rare earth elements (the majority of which are controlled by China) or oil (from a country like say, Venezuela.)

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Submitted by letsgetitdone on

Hi Josh,

I didn't say that the reason why the Treasury has the Fed sell treasuries at auctions was a minor one. Rather, the point is that the Fed doesn't do that to get spending money for the Government. Instead, the Government spends first. Then the securities are sold to maintain the funds rate.

You replied to my objection:

”I think you need US time series data showing relationships between deficit spending and currency values,”

by saying:

"Sorry, dude, I already gave an example of how monetary inflation creates price inflation (are we even arguing about this?), and how a crashing economy creates a weaker currency. Do we need a million examples?"

Economics, I'm afraid, is not the kind of science whose generalizations apply to all real world cases. You're talking Zimbabwe. The economic conditions and other background context in Zimbabwe are very different from the US. In the US increases in Money Supply are not easily correlated with either rising prices or price inflation. The decade of the '80s should make that very clear to you. Money supply was increased through most of that decade but there was very little inflation.

Even more recently, the Fed kept increasing the money supply here in the United States. After the crash, the increased money supply alone didn't stop falling prices and would not have been any defense against deflation, had the banking system not been saved (please don't interpret this as a defense of the Bush-Obama bailout policies, since there were other, much better ways to have saved the banking system.)

You went on:

“I don't think your example applies here because it comes from a commodity-based monetary system.
Booo. Not commodities "based." It had both fiat money and specie. In fact, that's the best example to show the effect of inflation on fiat currencies.”

I think this is really vague. Why is it the best example, when we have only a fiat money system. Further, isn't it about time you defined what you mean by “inflation?” I keep getting the feeling that you're using it in different ways to make your points, and that in the process you're creating tautologies.

From the viewpoint of this discussion, creating money is not, by itself, "inflation." Inflation is the effect that you claim is caused by “making” more fiat money. I'm saying that there's no such across the board empirical relationship in economic systems.

It may be inflationary in Zimbabwe, or in post WWI Germany, and in some other historical cases. But in the United States, since the 1980s, it has not been inflationary, nor has it been in many other nations using fiat money. So, yes, you need more examples, empirical data, models and careful analysis to make your case that it is inflationary.

You continue:

“I think this is an extreme case, and I've not said that things would develop that way.

Extreme case? Is printing as much money as you want regardless of how much wealth you actually have not extreme?
I mean, I can't believe I'm even having this argument. This is the cause of hyperinflation throughout history.”

I haven't said we should print as much money anyone wants. What I've said is:

1) the Government can create as much money as it wants and needs to spend in order to create full employment.

2) if, in the course, of that effort, inflation occurs, it will then have to withdraw money from the economy through taxation

3) inflation will not occur in such a situation as long as supply and productive capacity exceed demand, and

4) In the historical case you cite, demand exceeded supply and productive capacity, which is why creating money led to price inflation.

And that's why we're still debating this. You've been insisting on a simplistic and false theory about the relationship between fiat money and price inflation based on one atypical example, Zimbabwe, which is perfectly well-explained by MMT. To make your point you need many more cases which show that inflation occurs after monetary creation even when supply and productive capacity exceed demand. I'm quite sure those cases don't exist.

“if you can't transform Iraq and Afghanistan on $300 B per year, you also can't reconstruct the horribly deteriorating US public school on $5 B.

No, no, no, you can transform Iraq and Afghanistan on $300B a year. You just might not choose to transform it in the way you told the American people. I highly recommend reading Greg Palast's pieces on how the plan always was to secure Iraqi oil fields for oil companies to help create an artificial scarcity.

The reason the bailout of AIG was so big is because they have credit default swaps, totally made up derivatives, that are/were worth billions of dollars. It's not because they have any sort of real wealth behind them. It's totally made up, at least to them, not when the take it from us, of course."

I'm aware of both of these points, however, I don't see that they're responsive to my point, which is that if you want to make major social changes you need to allocate lots of resources in both person power and technology, which takes money in our society. $5 B per year is not that kind of allocation. It's mere window dressing, like almost everything Obama has done so far.

“Zimbabwe and the United States are very different cases, especially because Zimbabwe incurred debts in other currencies.

One currency is convertible to other currencies. If your currency loses strength relative to other currencies, then it's going to make it more difficult to pay your debt.
You're right, however, we could turn on the printing press blindly and pay all our debt in a matter of seconds. That, however, would totally crush international confidence and isolate America from international trade. Try seeing how good of an idea that is when we need rare earth elements (the majority of which are controlled by China) or oil (from a country like say, Venezuela.)”

OK. First, this is supposed to be a discussion, not a debate for debate's sake, where you just try to make debaters' points which are not responsive to the things I've said. Our currency is convertible to other currencies, but what does that have to with the price of eggs?

The point I made was clearly that we don't have to convert our currency to theirs in order to pay our debts in those other currencies, and that things are different for us then for Zimbabwe, because they do. So, for them, when they printed lots of money and the world chose to devalue their currency, they were still left with the problem of repaying their debts using those now much more highly valued foreign currencies.

In contrast, our situation is that if we create and spend money to get our people working again, and other nations try to devalue our currency, rather than to just continue to accept it, and even prop it up against currency speculators, they have the problem that they are devaluing their own assets, i.e. our liabilities to them. They will have no incentive to do that, and every incentive to prop up the dollar in the short run.

Moreover, in the longer run our investment in the economic activity of our own population will create a healthy economy here, and that will drive the value of our currency and our debts to them up. Not to put too fine a point on it, by ignoring their own needs for internal consumption for so long and emphasizing exports to the United States, they have added to our material assets, in return for our "paper" or "electronic" currency whose quantity we control, and they are therefore over the proverbial barrel.

Finally, I've said that we could pay off all of our foreign debts with money the Government created tomorrow if we want to, but I didn't say that is what we should do. My point was just to show that there is no problem of solvency, or ability to pay, caused by the debts to other nations. The US can't run out of money to pay them, because it can make whatever money it needs to pay any interest or principal it needs to pay.

That is the point, I was making. Because there is no solvency problem, the fact that they may not like our making money and spending it domestically to rebuild our industries, just isn't nearly as important as our need to get our people working and rebuild our own society. If they don't like it, what can they do? Quit exporting so much, and begin to provide real wealth to their own people?

Throw me in that briar patch, please. That's exactly what needs to happen to begin to balance out the terribly unbalanced patters of international trade we've been seeing. And it's far better to cause that to happen, than it is to follow an austerity program here, trying to balance our budgets, so that other nations will have greater confidence in our fiat money.

Submitted by Joshfulton.blogspot (not verified) on

Hi,

Well, I think we're going to have to agree to disagree on this.

I would just like to respond to a few points though, which of course is not agreeing to disagree, but it seems like they keep coming up.

In the US increases in Money Supply are not easily correlated with either rising prices or price inflation.

I agree. There's also the velocity of money, which I've mentioned. It's amount of money and velocity of money. Right now, the velocity of money is low, but if it speeds up, you begin to see the effects of monetary inflation more.

The decade of the '80s should make that very clear to you.

I'm not exactly sure of what you mean by this, but I wouldn't mind taking a look at some of the inflation rates for the late 70's/early 80's.

1976: 4.9%
1977: 6.7%
1978: 9%
1979: 13.3%
1980: 12.5%
1981: 8.9%
1982: 3.8%

Why does it start going down from 1979 - 80? Because that's when Volcker becomes Chairman of the Fed, raising interest rates, meaning that he decreased the money supply. I mean, how much more evidence do we need that money supply is related to inflation?

if we create and spend money to get our people working again, and other nations try to devalue our currency, rather than to just continue to accept it, and even prop it up against currency speculators, they have the problem that they are devaluing their own assets

If we act without regard for other countries, we risk losing more than we gain.

letsgetitdone's picture
Submitted by letsgetitdone on

But we're just going to have to have some discipline about that. The truth is we can afford it, but we should cut much of it because it creates negative value.

Submitted by Lex on

Indeed, under a MMT regime we could theoretically afford however much military spending we wanted. But for the moment, we're not under that regime and if we remove SS and Medicare/aid from the equation (which we should since they're not funded by income tax receipts) we're confronted with the DoD (and related) expenditures eating a disproportionate amount of tax dollars.

My only point in making the statement is that if the goal is to establish a MMT regime, it should be the carrot proffered after much wielding of the deficit hawk stick against the deficit hawks over the military budget under the current regime...which will drag us down.

I know that as a % of GDP it's low compared to say WWII, but i'm not so sure about the value of comparisons given how much accounting fiddling has gone on between then and now and the massively different economies.

“Don’t believe them, don’t fear them, don’t ask anything of them” - Aleksandr Solzhenitsyn

letsgetitdone's picture
Submitted by letsgetitdone on

Hi Lex, I think our current "regime" can work with the application of MMT-inspired policies. Why not?

Also, I think we need to use MMT right away and blow the deficit hawks out of the water. They've created a tremendous amount of suffering in many countries since WW II, and are responsible for the loss of Roosevelt's second bill of rights. We'll just have to take them and the Military-Industrial Complex on at the same time.

CMike's picture
Submitted by CMike on

Inflation is caused by too much money chasing too many few goods.

Submitted by Lex on

Indeed, the Zimbabwe example is useless. CMIW, but the difference is that US debt is denominated in US dollars as opposed to Zimbabwe which has debt in foreign currencies while issuing the currency in the name that escapes me at the moment.

But isn't Josh correct given the current state of affairs? The US government doesn't really create the money but borrows if from a quasi-governmental organization in order to print it. (which seems like an utterly superfluous step in the process) And currently, it does - excepting trick plays - require bond sales to create new currency, does it not?

Establishing a MMT regime would first require either fully federalizing the Fed or dissolving it and establishing a true Bank of the United States, wouldn't it?

I really do like the idea; i'm just not sure how it can be immediately and simply implemented within the current framework. And if it cannot, then the first order of business is necessarily amending the current framework so that it can be implemented.

“Don’t believe them, don’t fear them, don’t ask anything of them” - Aleksandr Solzhenitsyn

Submitted by Joshfulton.blogspot (not verified) on

There's no difference between hyperinflation here and hyperinflation in Zimbabwe. It's not a matter of which currency debt is denominated in. In all cases, the government prints too much money and people lose faith in it.

People just don't like to be compared to Zimbabwe.

Submitted by lambert on

E.g.--

Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se.

Now that's an interesting way to look at things.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

Another great way to see things is to view the Federal Government as a monopolist with respect to its product -- currency. The monopolist can set the price of something, or its quantity, but not both. The US has been setting the quantity of its currency, but letting its price float. The MMT folks propose that this is the mistake that has made the Government try to avoid inflation by creating over-supplies of goods relative to demand which is kept low by living with less than full employment.

The MMT folks propose that both full employment and price stability can be achieved if the Government guarantees full employment and pegs the value of its currency to the wage it pays workers as the employer of last resort. In effect this is like a monopolist setting the price and letting the quantity float. See Davidson for a clear explanation.

sisterkenney's picture
Submitted by sisterkenney on

Since he is one of my biggest bugaboos. Framing the deficit problem per the right wing is ALL about the attacks on the "entitlement" programs of SS, Medicare , and anything else that helps the "common man" (see WH executive order to "study" cures for the deficit), rather than using proven interventions to stimulate the economy. (I can only hope that my view of economists as con artists ameliorates, -I was going to use "witch doctors", but there are shamans I totally respect and admire-especially as I attempt to craft some position papers on economic intervention for my US Rep race). I'm gonna need some serious help here, folks, since, apparently, common sense doesn't cut it in the "financial world".

"Rule number one: pay attention"-Ded Bob

john.halle's picture
Submitted by john.halle on

I was never a big fan of the Red Brigades, but they had a good line for these sorts of folks:

"It would be a tragedy if he were to die in his sleep."

letsgetitdone's picture
Submitted by letsgetitdone on

Hi sisterkenny, Pete Peterson is Herbert Hoover without a heart. Do you need suggestions about who to go to for economic advice, or some writing on position papers?

sisterkenney's picture
Submitted by sisterkenney on

:-) Hi lets! Well, I will admit that my sense of economics is rather simple, and frankly, informed by my admittedly scant understanding of Galbraith v Friedman. I am generally overwhelmed by the complexity of how our money is manipulated, and what the oversight groups should be doing. Elizabeth Warren has been a godsend in breaking it down lately, but a good over-arching review that is understandable would be greatly appreciated..got any suggestions? And, yes, it would be a great help if I could get some simple statements that could encapsulate the progressive viewpoint, and help writing position papers would be greatly appreciated down the road (although the "papers" would probably be just a few lines long).
One problem the left has always had is its wonkiness and the tendency to over-explain when trying to reach disaffected people...this is generally seen as patronizing and "elitist", and while I disagree with that characterization, the reality is that the conversations with the electorate have been successfully dumbed down by the Corp Media. To deal with low-information voters has become the main thrust of most campaigns, since they generally are the ones who decide the election. While I know that I will lose, the main thrust of running, for me, is to change the conversation, and help people to recognize what policies could help or hurt them. How to do this without alienating people is a problem, and any ideas there would be appreciated also.

"Rule number one: pay attention"-Ded Bob

letsgetitdone's picture
Submitted by letsgetitdone on

The Wikipedia article on him is enough to show this. His problem wasn't his heart. it was his ideas. His belief in the old time religion of budget balancing, come what may that undid him. Hoover's not the only one to be plagued by these ideas. Noted progressives today are still plagued by them, as we know.

On things to read, I'd really recommend Mosler's paper on 7 Deadly Innocent Frauds. He really tries to bring it down to simple language, and revises it every couple of months. Another good one is by Paul Davidson on Mosler's site. L. Randall Randy) Wray's textbook isn't simple, but it is an authoritative piece in this field.

On the progressive viewpoint, I'm not sure there is one shared by most or all progressives. I'd advise developing your own positions and then if you think you're a progressive, call it progressivism. Everyone else seems to be doing that. Eventually, there's going to be a big fight between progressives who believe in balanced budgets, and those who think that deficits per se are irrelevant. I guess you'll want to decide which side you're on.

Submitted by lambert on

The definitive takedown.

I don't see how there can be any such thing as progressive who believes in balanced budget. Then again, I don't think there's any such thing as a progressive, only "progressives." As demonstrated flawlessly by the Democratic Party and the access bloggers 2006-2009.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

letsgetitdone's picture
Submitted by letsgetitdone on

Good comment. But, in common parlance, Russ Feingold is a progressive who seems to believe in balanced budgets, paygo, and line-item vetos for Presidents. But, I do agree that term is very hard to tie down.

sisterkenney's picture
Submitted by sisterkenney on

possibly considered progressive is confusing, to say the least. Isn't the fact that the economic positions are all over the place a problem for progs? I may seem naive, but it seems to me that there must be a body of economic history that would inform a progressive point of view? Otherwise, isn't economics reduced to a kind of religion, just based on beliefs and faith?

"Rule number one: pay attention"-Ded Bob

letsgetitdone's picture
Submitted by letsgetitdone on

sk, I don't think it's very coherent. Even before the New Deal things were pretty confused. There were Republican Progressives and Democratic Progressives then. During the New Deal the Progressives seemed to melt into the Liberals and still there were Republican Liberals, but as we know they eventually disappeared. Anyway, that label seems to apply to people who vary greatly in opinions, except today they all seem to be left of center on various things, but a lot of them are pretty conventional in their views on economics, but it's probably true that they're all anti-corporatists, at least.