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letsgetitdone's picture

Warren Mosler is running for the Senate in Connecticut in the Independent Party primary. Unlike both the Democratic and Republican candidates Warren really understands economics and he's really brilliant at explaining it to regular folks. Here's a youtube on why we never have to worry about having enough money to repay the Chinese, or ant other nations that are holding US Dollars. The main point is that Government “borrowing” using debt instruments issued by the Government, is not like you and me borrowing money to fund something, because it carries no solvency risk for the Government.

So, all the panic in deficit terrorist circles whining about how we're ever going to repay the Chinese and Japanese and how they won't lend to us anymore is just another fairy story. It's all another BS distraction to prevent us from asking why the Government isn't creating full employment for Americans. Here's Warren:

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

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mikep's picture
Submitted by mikep on

"we never have to worry about having enough money to repay the Chinese, or ant other nations that are holding US Dollars."

Really? I sure am worried about it. I'm worried as hell that my social security money is going to be used to pay the interest on the debt (and note that Mosler doesn't even mention the interest). Mosler may not think it's a big deal, but the overwhelming majority of the people both in the US and the rest of the world sure as hell are worried about it. And I know for a fact that the Chinese are very definitely are worried about it. Why do you think the US Treasury Secretary is in China right now repeatedly assuring the Chinese that the US will get its budget deficits under control? Why do the Chinese keep raising the issue and making such a big deal about it? And, regardless of whether or not Mosler and the other bums (sorry, but those who don't pay their bills or pay off their loans are generally considered bums) are correct, the political reality is that if the Democrats don't get their multi-trillion dollar deficits under control they are going to get crushed at the polls later this year and in 2012. Perceptions are more important than reality sometime, and the fact is that there are an increasing number of people in the world who perceive the US as not having its economic act together and as rapidly becoming insolvent. And why do so many Americans constantly claim that European deficits and debts are a serious problem, but then claim in the same breath that the American ones aren't? Just doesn't make any sense.

Submitted by lambert on

I see that you're worried; what the post is explaining is why you don't have to be; no country that is sovereign in its own currency, as we are, has ever defaulted. Now, there are plenty of other things to worry about, including why our elite is acting as it is, but their expressed concerns have no validity. Of course, I grant that a majority of the American people don't (yet) agree -- that just says there's a lot of educating to do. Nor do the majority of professional economists, especially at the Ivies, agree. But then they were instrumental in getting us into this mess, so I can't imagine why their opinions count.

And as for the "bums" comment -- who's advocating what you claim is being advocated? Got a link to Mosler?

letsgetitdone's picture
Submitted by letsgetitdone on

haven't heard this explanation. When they do they'll realize that there isn't any problem. I really don't understand who you didn't get his explanation. It was perfectly simple.

The Government has the unlimited authority to mark up and mark down accounts at the Fed to do transactions. It also has the power to spend by paying interest. As long as the payments are in USD, they cannot run out of money to make such payments, regardless of size, because they have the constitutional authority to, and they routinely do, make money.

At any point in time China can do the following 1) leave their USD in their (reserve) checking account and earn nothing; 2) buy a Tsy and have it sit in what is functionally a savings account until it matures when they can get some interest at a rate that our Government can control, or 3) buy something with their USD such as US goods and services or other things including other currency available for sale to people paying in USD.

Only 2) above involves our Government paying anything and what is has to pay is an amount in USD that it always has the authority to create as needed.

So why is this a problem and why are we bums? We are not defaulting on any of our debts or breaking any of our contracts. So why are you calling us names?

Finally, you referred to:

And I know for a fact that the Chinese are very definitely are worried about it. Why do you think the US Treasury Secretary is in China right now repeatedly assuring the Chinese that the US will get its budget deficits under control? Why do the Chinese keep raising the issue and making such a big deal about it?

Warren has an answer for that question in his book which I'll quote by way of answering these questions:

China knows we don’t need them for ‘financing our deficits’ and is playing us for fools. Today that includes Geithner, Clinton, Obama, Summers and the rest of the administration. It also includes Congress and the media.

Now let me describe this all a bit more technically for those of you who may be interested.

When a Treasury bill, note, or bond is purchased by a bank, for example, the government makes two entries on its spreadsheet we call the ‘monetary system.’

First, it debits (subtracts from) the buyer’s reserve account (checking account) at the Fed. Then it increases (credits) the buyer’s securities account (savings account) at the Fed.

As before, the government simply changes numbers on its own spread sheet, one number gets changed down and another gets changed up. And when the dreaded day arrives, and the Treasury securities China holds come due and need to be repaid, the Fed again simply changes two numbers on its own spread sheet.

The Fed debits (subtracts from) China’s securities account at the Fed. And they credit (add to) China’s reserve (checking) account at the Fed. That’s all--debt paid!

China now ‘has its money back.’ It has a (very large) US dollar balance in its checking account at the Fed. If it wants anything else- cars, boats, real estate, other currencies- it has to buy them at market prices from a willing seller who wants dollar deposits in return. And if China does buy something the Fed will subtract that amount from China’s checking account and add that amount to the checking account of whoever China bought it all from.

Notice too, that ‘paying off China’ doesn’t change China’s stated $US wealth. They simply have dollars in a checking account rather than US Treasury securities (a savings account) of equal dollars. And if they want more Treasury securities instead, no problem, the Fed just moves their US dollars from their checking account to their savings account again, by appropriately changing the numbers. . . .

So what happens if China refuses to buy our debt at current low interest rates paid to them? Interest rates have to go up to attract their purchase of the Treasury Securities, right? Wrong!

They can leave it in their checking account. It’s of no consequence to a government that understands its own monetary system. The funds are not ‘used’ for spending, as we previously described. There are no negative consequences of funds being in a checking account at the Fed rather than a savings account at the Fed. What happens if China says—I don’t want to keep a checking account at the Fed any more? Pay me in gold or some other means of exchange!

They simply do not have that option under our current “fiat currency” system as they knew when they sold the uniforms to the US Army and had the money put into their checking account at the Fed. If they want something other than dollars they have to buy it from a willing seller, just like the rest of us do when we spend our dollars.

CMike's picture
Submitted by CMike on

Thank you for stepping forward with this comment. You sound like someone who has been paying attention to the financial news for a while and your thinking is representative of the conventional wisdom. Would you volunteer to be Corrente's man in the street, i.e. this blog's John Q. Public, and allow some of us to try to convince you that the conventional wisdom is wrong?

I'm pressed for time over the next few hours but later tonight I'll respond at some length to your comment if others don't do so before then.

Let me leave you with a rule of thumb that isn't mentioned too often -- bond holders profit when the actual inflation rate ends up being lower than what had been expected to be the future inflation rate when they bought their bonds. Bond holders would expect to do quite well when there is unexpected deflation. This phenomenon is central to the story of late nineteenth century American economic and political history.

And let me suggest a blog post by an Ivy League academic who doesn't get much respect around here lately. Please read this and consider whether or not the post suggests the conventional wisdom might be wrong. I'd be interested in your thoughts on what Krugman's data might mean.

I see letsgetitdone has made a reply while I was composing my comment. It makes for a good start. Let's see if we can make our position intelligible enough and friendly enough to convince mikep to agree with it. We're lucky to have him here. A lot regulars here can understand what Mosler is saying but I for one think that Mosler is hard to follow.