Fiscal Sustainability Teach-In: Session 3, Warren Mosler

SESSION 3, Warren Mosler

[00:00:00] I take my business cards out here, and these are twenty dollars apiece if anybody wants to buy any. Nope. Any takers? Nope. All right, if anybody wants to stay after and help clean up the carpet and tidy up the room, I'm going to pay one per hour. All right, well, five per hour. One per hour, anybody want to stay and help? Ok, not a lot of takers. Then I add one more thing, look, there's only one way out of here, and there's a man at the door with a nine-millimeter machine gun [laughter], ok, and you can't get out of here without five of my cards. [laughter] Ok, now things have changed. I've now turned litter into money, now you will buy these, you will work for these things if you want to get out. The man at the door is the tax man, and that's the function of taxes. Stephanie talked about how taxes do it. But you can recreate that.

[00:00:58] [some problems with the computer, some crosstalk]

[00:01:15] We wanted to replicate a currency for the students to understand national income accounting and how a currency works, and that it doesn't matter if you're a small open economy, and what they did is you need something like twenty buckaroos a semester to be able to get your grades in the economics classes. And the way you earn buckaroos is you can do public service, community service, at some of the local institutions, whether it's a hospital or the police department or helping out locally. And they pay one per hour. And so back ten, fifteen years ago, whenever these were started, they were worth - and they were freely exchangeable. So you would have to go earn your buckaroos, you'd have to get, you'd have to have twenty of them to pay your taxes, your buckaroo tax. But you didn't have to earn them; you could buy them from other students, you could do work for them, nobody really cared what you did for them, you just had to somehow get buckaroos to turn in. Just like you have to pay your taxes here, whatever you do to get your money. [sound of coins dropping in a pile]

[00:02:17] So the students would go to work and they'd earn these things, and at the end of the year, the first year, I did the accounting at the post-Keynesian conference for the buckaroos. And it went something like this: the total tax was 1000 buckaroos across the classes. The students came and earned 1100 buckaroos, and they paid 1000 for taxes. The school ran a deficit. They spent 1100 but they only collected 1000. Did that affect their credit rating with the rating agencies or anything? Of course not.

[00:02:53] Now notice the school's deficit, they spent [inaudible] [crosstalk having to do with audio?]

[00:03:15] The value went from five dollars apiece to fifteen dollars. The school has an infinite amount of them. Does that mean the school is infinitely wealthy? No. Was the school collecting them from these students to get the buckaroos to be able to pay them? No. It had a zero interest rate policy; it did not pay interest on these excess hundred buckaroos that were out there. Did that cause hyperinflation? No, the currency gained in value, it appreciated, it didn't go down in value.

[00:03:43] So none of that, and do we see that happening in the real world? Sure, we've had Japan with a zero interest rate policy for twenty years, it's been one of the strongest currencies in the world, with the lowest interest rates.

[00:03:54] Again, if the school needed to pay out, anticipate paying buckaroos out next year or the year after, should they start trying to run a surplus, collect more than they spend, so they'd have them to give out later? There is no such thing as accumulating a reserve in your own currency when there's a floating exchange rate like that. Could they even run a surplus? On day one they couldn't; how are they supposed to collect more than they spent? They gotta spend them first and then collect them.

[00:04:21] And if you look closely at the Federal Reserve, at how the accounts clear, that happens with our government. You guys who are in the markets, you know that on the days when we buy Treasury securities, when we're paying for those 44 billion dollars in notes that were just sold, in the old days anyway - now we have excess reserves - but two years ago the Fed would have to come in and buy securities the same day that it's selling them, because it has to do repos to add the money so we can buy them back.

[00:04:49] Ok. The p-word. There are three ways to spend with a gold standard: tax-financed, debt-financed, and money-financed, which was called "printing money". Tax-financed was easy: you'd tax and then you'd spend; debt-financed, you'd sell bonds and then you'd spend; and the last way was printing money. And that's where the term "printing money" comes from. It has no application whatsoever with today's currency arrangements, but it's still used and it still has the same connotations.

[00:05:18] The reason they used to debt-finance was because if the government just spent by printing money and didn't sell bonds to get that money back, that was convertible currency: you could get gold from the Treasury, you could cash it in. And that - so they were always at the risk of running out of reserves and going broke and that type of thing. So any government deficit spending had to be - and that's why the laws, rules Randy was talking about that are left over from the gold standard include the requirement that the Treasury borrow money before it spends.

[00:05:51] Inapplicable with today's currency arrangements. We're still on the gold standard thinking. What's the evidence? Why did the Democrats cut Medicare? Why did the Democrats raise taxes? Why did the Democrats visit China? I'm using Democrats for, I can't remember the word, emphasis. That's not that hard a word to remember, is it? [laughter] They tell me it gets worse, I just turned 60 last year. I'm using Democrats for emphasis, okay, not - I happen to be running as part of the Democratic party. Why did the Democrats form the bipartisan committee to report back on ways to reduce the deficit? Why did the Democrats put Social Security and Medicare on the table? Why are we here, right? Gold standard thinking: they think the government has run out of money. It's not because they're worried about inflation, although they are, they might be. They think that government is spending now, limited by how much it can borrow from the likes of China, leaving that debt to our children to pay back. We've all heard this many many times. We've seen our, President Obama, Secretary of State Clinton, Treasury Secretary Geithner over in China to negotiate with our bankers, to make sure everything's okay, because they believe we're dependent on them to fund everything from Afghanistan to health care.

[00:07:14] How does a non-convertible currency work? Well, we've already gone through this. Anybody need a repeat on turning litter into money?

[00:07:28] In the first instance, what is the purpose of a currency? And what - I'll just not go into the history, we've already heard that, but even with my example, with my cards, why was I doing that? It's because I wanted to get the carpet clean. I wanted to get resources from the private sector to the public sector, I wanted to provision the public sector. Why does the University of Missouri put this buckaroo tax on, why do they, what's the point of that currency? It's to provision the public sector.

[00:07:57] There are a lot of ways that - there are ways this has been done in the past. One is through a command economy where you just conquer somebody, take the slaves, and they do the work for you to provision the public sector. You used to wake up with a lump on your head and you'd be in the British navy; that was a popular way to provision the public sector. We pretend to be more civilized today with our monetary economy, where we impose a tax, with a man at the door with a 9 mm to enforce it, and then show you what you have to do to earn the money to pay the tax. And that's how we provision our public sector.

[00:08:33] Unemployment fundamentals. Unemployment is people looking for paid work. Taxes create unemployment. None of you were looking for paid work for my business cards when you came in the room. None of you were looking for paid work, work that paid in my business cards, until there was a guy at the door who won't let you out without five cards. The first thing that happened by requiring that tax is you all became unemployed, as we define it. People looking for work who couldn't find it, who need to get paid in that particular currency. The students were not unemployed until the school imposed a tax on them in buckaroos. Suddenly they needed, they were all now willing and able to work to get buckaroos to be able to pay the tax. In the first instance the point of taxes is to create unemployment.

[00:09:23] We take people out of the private sector, we get their time out of the private sector with taxes. Government spending then employs those we just unemployed. The whole point of unemploying you with my cards in the first example was to be able to then employ you to get the carpet cleaned when we left, otherwise why am I doing this? I didn't tax you because I needed my money. The whole point of getting the students unemployed with the buckaroos was to get student labor to help out in the hospital. They didn't do it for the currency. The whole point of taxing to create unemployment is to then use those people in the public sector. If we're going to tax, and then not hire all of them and leave 20 million people looking for paid work who can't find it, and because of our monetary system can't support themselves, and we're destroying our entire social fabric, why are we doing this? We should lower the taxes. You're going to do a certain amount of work for me based on how many cards you need to pay in taxes. If I don't want all that work I just cut the tax, and you'll go away. You're not going to be here beyond what you need to pay the tax and to net save. You're going to lose a few in the wash, the parents are going to take some home as souvenirs. Unemployment is the evidence that the budget deficit is too small, that the government has not spent enough to cover the demand to pay its own tax, plus any residual savings demand that comes from that tax liability. Unemployment can always be eliminated with a fiscal adjustment. You either cut the tax and the people go away, or go ahead and hire them to do what you wanted them to do, which is the reason you started the tax to begin with.

[00:11:00] Save the questions for later.

[00:11:04] Monetary operations. The federal government neither has nor doesn't have dollars. Government spending: how do they do it? Just like Chairman Bernanke said, they just mark up the numbers in our bank account. It doesn't come from anywhere; it doesn't use anything up. Government taxing: they simply mark down numbers in our bank accounts. They don't get anything; they don't pile anything up.

[00:11:34] Deficit spending: that means the guy in Treasury has changed more numbers up than the guy at the IRS has changed numbers down. There's a difference between the two, and it's called the deficit. We can call it whatever we want. The national debt is that difference from the beginning of time, 13 trillion dollars. [sound of coins clinking]

[00:11:52] Everybody says, you know what you forgot? You forgot about inflation; you forgot about what can happen if you overspend. So I just want, I don't want anybody to say that, so I'm doing this. They're going to say it anyway. [laughter] There are some reporters in this room; they're going to say this, but, look, my conscience is clear, I threw the slide up. [inaudible] [laughter]

[00:12:16] Now after the government spends, they don't just throw it out the window, they could, then it would be in cash, but what they normally do is put it in a checking account at the Federal Reserve. It's called a reserve account because it's the Federal Reserve Bank. (All right, I'm doing the second one first.) Reserve accounts are checking accounts at the Federal Reserve Bank. They call them reserve accounts, the Federal Reserve Bank, they give it a fancy name and then when people say, well, our reserve balances went up, they sound professional, but all - they're just checking accounts.

[00:12:44] The national debt - okay and there's another kind of account at this central bank, at the Federal Reserve Bank, called Treasury securities. They're savings accounts. That's already been covered, I'll just leave it at that. You give them money; you get it back with interest; that's called a savings account.

[00:13:01] Cash is the exact same information as your checking account but it's written on a piece of paper, so instead of getting your balance on a computer screen or bank statement, you get to carry it around with you; it is a bank statement. Cash is just a bank statement. It says a hundred dollars; it's the same thing, it's a thing you can use to make payments to the government for taxes.

[00:13:21] Once the government has spent, that money appears in one of those three forms. So if the government spends without taxing, just spends, that's called deficit spending, say on day one the government just spends a hundred dollars, it's going to be one of three places. It's going to be cash in circulation, or in your checking account, or in your savings account, somebody's savings account.

[00:13:46] There's no other choice: the dollar has no other existence, other than those three places. And all of this equals the world's net savings of dollar financial assets. There are thirteen trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That's how much the government has spent and stuck into those accounts, but hasn't yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don't take it out, it's a deficit; it's our savings; it's held by you, me, China, whoever owns Treasury securities.

[00:14:25] A little diagram to explain it here: to see how it works, just to make it graphic, that I did a long time ago. It appears in Randy's book Understanding Modern Money. Up at the top, you have (I'll do it from here so I have the microphone I guess). In the middle you have the non-government sectors; that's all of us, everybody except the government. Now let's start at the bottom: the government imposes a tax. We have to pay this tax or we can't get out of the room; we're going to lose our house and our car. When I say tax, just think of a property tax, because that's easy. If you start thinking of an income tax, what if you work, what if you don't work, it works, but you'll lose track of the rest of what I'm saying. Trust me, it does work, but think of it as a head tax or a property tax, just to keep it simple.

[00:15:13] So the government levies a tax, and now we need the money to pay the tax. Notice I have taxes going out - down into the drain. I don't circulate them back. There is no such thing. We ship real goods and services to the government - the government's doing this because it wants to provision itself - and the government gives us the money we need to pay the tax. Goods and services to the government, money to pay the tax, some gets paid in taxes, some gets saved. Where does it go? It goes to the tin shed in Canberra - the warehouse over on the right. In Australia, it's this tin shed; over here we've got a big concrete building. And that's how it's held: it's held in one of those three forms: cash, reserves, or Treasury securities. All that Fed operations do is shuffle around the difference between cash reserves and Treasury securities. When the Fed buys securities from the private sector their securities go down and their cash reserves go up. When the public wants more cash the reserves [sic] go down and the cash goes up. The total is always the same; it's always equal to the deficit.

[00:16:22] The only place that net financial assets can come from is government deficit spending. This is all accounting; no theory, no philosophy; ask anybody at the CBO, and they'll say, yeah, that has to add up to the penny, or we have to stay late and find our arithmetic mistake. So last year the government spent a trillion and a half dollars more than it taxed, that money went into the warehouse, it's now held as Treasury securities, reserves, or cash, otherwise known as savings, and sure enough last year savings went up by exactly that amount, to the penny, when you include all the non-government sectors. Deficit spending adds to our savings. I think I just said that.

[00:17:02] Now, we're going to walk through an example that's going to take intense concentration here, so are you ready? Okay, we're going to assume you're the only person in the economy - we're going to personalize this - and you happen to have a hundred dollars in your checking account, and the government wants to deficit-spend a hundred dollars to hire you as a consultant. Washington hires a lot of consultants, so I figured this is as good a thing as any of what deficit spending is - what money's spent on.

[00:17:30] First thing they do is they offer for sale - we can start in anywhere, but I'm going to start with them offering a Treasury security - they offer you a hundred dollars worth of Treasury securities, and you say okay, I'll buy it. Because you buy it at auction, you get to choose your interest rate, and the highest bidder gets it - the lowest bidder gets it, the highest - lowest yield, highest price. So you say yeah, I like that yield on that Treasury security, I'm going to buy it. So you just took your hundred dollars out of your checking account, it goes into your savings account, called a Treasury security. Have you lost anything? Has the government taken away your money? No. I've never heard anyone say, ah, I wish the government would pay off these Treasury securities so I could get my money back, and I don't think anybody else has either. They are money; in fact it's better than money, or you wouldn't have bought it; it's voluntary.

[00:18:14] So now you still have your hundred dollars, it's just in a savings account instead of a checking account. Now the government "has the money", in their mindset, to pay you your consulting fees. So you go in and you give them some advice, and they pay you a hundred dollars, and they put it in your checking account. You now have the new Treasury security, and you've got the hundred dollars back in your checking account, and nothing is crowded out. It has nothing to do with loans, deposits, banking, anything; it's just a self-contained thing. It has no effect on any other part of the private sector. And if you remember my previous example, the government spent more than it taxed, you held it in a warehouse, and you held it in a the form of a savings account: you had a checking account; now you have a checking account and a savings account.

[00:19:01] Government deficits add to savings, to the penny. The deficit clock could be renamed the savings clock. This has already been covered - the same thing.

[00:19:13] Fiscal sustainability review. Spending is not constrained by revenues. Spending is changing numbers up; putting numbers into our checking accounts. Taxing is changing numbers down, taking numbers out of our checking accounts. Borrowing is moving numbers from our checking account to our savings account. There is no numerical limit to any of this. Paying interest is changing the number up in our savings account. The government can always make any payment of dollars it wants to make. This is all we're talking about; it's a nominal system; we're talking about there are no nominal constraints.

[00:19:52] The risk is inflation, and not insolvency or not-solvency; there's no solvency risk.

[00:19:58] There are self-imposed constraints on this process. There's a budget process, which tells the guy at Treasury, you can't spend whatever you want, you can only spend what's been approved. There are debt ceilings; there are no-overdraft rules; there are all these silly things left over from the gold standard, when it mattered, because back then, if they didn't do it right, people could cash the money in and take the gold supply, which would be a default situation.

[00:20:23] So now we can get to the main thing, to why we're here: is Social Security broken? Well, we have to define what broken is: first, what's the public purpose? What's the presumed problem; what is the real problem?

[00:20:40] Public purpose of Social Security: well why do we do this? To provision seniors at a level that makes us proud to be Americans.

[00:20:50] What's the problem with Social Security? Are seniors taking their Social Security money and flying in private jets to the Super Bowl and staying in the box seats? No. [laughter] If the problem is that they're living at too high a standard of living, I can understand that. If the problem is, look, we're feeding our seniors and that food, we really need it for the soldiers in Iraq, or in Afghanistan, and so we're going to lose the war if we don't starve our seniors, I can understand that. We're producing 8000 calories per person per day; there's no reason to limit the intake of our seniors. We have a housing problem, which is vacant homes in record numbers; there's no reason to have them out on the streets. So what happens if we provision them too low; well then they're eating out of garbage cans and we really don't like those images on European TV where suddenly they think they're better than we are - and Australian TV. [laughter] So the idea is, the public purpose is to provision our seniors at some minimum level, or some level, which I'll call a minimum, at a minimum that makes us proud to be Americans, and not at some level that's too low where we're embarrassed or a level that's too high so it's embarrassing.

[00:21:58] Collective provision versus individual provision: our seniors are not happy when they have to tap their children for money, no matter how much money they have; it doesn't make them feel good, and it doesn't make us feel good. And it makes us all feel better to know that - and it gives the seniors a feeling of independence to be getting the money from the government collectively, and then spending it, even though they know it's coming from us - it's taking, it's consumption that we are forgoing for them to consume, whether you want to look at it in real terms or in nominal terms. It's certainly not the actual money, we know that, but it is still a shift in provisioning, and it allows - I believe - I like collective provisioning versus individual provisioning. I just think it's a much better way to do things. You might disagree; that's fine. That's a political choice. So what is the presumed problem? Are they living too well, which is what I was just talking about? Are the opportunity costs too high, that is, are they using resources we need? And the answer to those are no.

[00:22:58] Is the trust fund a limiting factor? Absolutely not. The trust fund is a record of what we've done. Every time we tax and the man at IRS changes down the number - at FI - wherever the guy is, I don't even know where that guy is - but whenever he changes down the number on our checking account, he changes the number up on the Social Security trust fund - why? Because those two balance and then he knows, okay, this went up a hundred, this went down a hundred and ten, wait a minute, we've made a mistake, oh no, this is a hundred, hundred and - okay, we're in balance, I found my mistake, I can go home. When somebody changes the numbers up in our checking account to make a Social Security payment they change the number down in the Social Security trust fund. Now they have something to balance against. Now we also have a formula for paying out benefits, and that trust fund helps us with the formula a little bit, because we have individual records. But it's not "the money". The government never has or doesn't have "the money"; there isn't any such thing; those are not dollars. "Accounting" means a count; it's record-keeping, it's a record, it's not a constraining factor. If it goes negative, it goes negative; a light doesn't go on and - you know - something breaks open and Bill gets drowned in the flood.

[00:24:04] The real problem, which has already been discussed - but I'll just tell it my way for a second - if there is a real problem, is the dependency ratio. That's the ratio of workers to retirees, is the real problem, not the money. If, in thirty years, we've got three hundred million people retired and one guy left working, that guy's going to be really busy. [laughter] Doing all the laundry, growing all the food, manufacturing all the Poligrip for us to keep our teeth in. And so, what do they say, and the mainstream economists agreeing, they say, therefore, we've got to make sure everybody's going to have enough money to pay this guy, but, uh uh, that's not going to matter.

[00:24:47] Mainstream economists also agree that the only real thing that will be useful fifty years from now is knowledge and education. We can build cars now and put them away for fifty years, but that doesn't work. There's hardly anything that we can build now, actually physically, plant and equipment, that's going to be of any value fifty or a hundred years from now. The one thing that we have, that people left us from fifty or a hundred years ago, is our technology, our know-how, our software, and that type of thing. It's not the hardware. However, because we think it's a money problem, we think the problem is these guys are all going to need a lot of money, because look at how high the prices for laundry services are going to be when there's only one guy doing it for three hundred million people, we need to cut back and sacrifice today and run surpluses and tax more than we spend, put twenty percent of our people out of work, and, ironically, the very first thing we cut is the only thing that they would agree they're going to need, which is education.

[00:25:42] More on Social Security: the trust fund is record-keeping. Social Security contributions are regressive taxes that function to reduce take-home pay and aggregate demand. Why is a Democratic administration supporting a tax that taxes those people at the lowest income levels the most? It's not even a fair tax, it's completely regressive. Why are they doing that? They're not trying to do that, it's not their agenda. They believe we've run out of money.

[00:26:15] Social Security payments are progressive distributions that add to take-home pay and aggregate demand. Why are they cutting these? Why did they just cut 500 billion out of Medicare? Not because they think we shouldn't have it, or because they think there's something wrong with a progressive distribution to help aggregate demand. Because they think we've run out of money. Why are they contributing to the unemployment problem? Who is unemployed? We just grew at 5% for a quarter, at six percent, maybe another five percent this quarter. That's very high real growth. Well, who's getting all that real wealth? It's sure not the people who've been losing their jobs or seeing real wages fall. It's not the lower income group. Well then, who is it? It's somebody else.

[00:26:56] We've seen a Democratic, populist administration preside over the largest upward transfer of real wealth from low-income to high-income people in the history of the world. That is not what they were elected to do, and not what they intended to do. It's because they don't understand the monetary system and monetary operations. It's not even theory. They don't understand actual operations.

[00:27:18] Oh - [laughter] - sorry, I forgot about inflation. [laughter] To get out of a hole, first you have to stop digging it, as they say, or you can't fall out of a ditch. Yes, when you buy everything that's for sale and use up all the excess capacity, the excess demand can drive up prices. And you can even drive them up a little bit in the meantime. But you do get supply-side considerations as volume goes up, prices per unit volume come down, you gain efficiencies. So it's not clear that you're going to get all that much, but certainly inflation can be an issue. It's certainly not the case now. Right now if you look at core CPI the risk is deflation, not inflation. If you look at housing prices I don't see a lot of inflation risk in that market. Will you suddenly gap from today's prices to hyperinflation because somebody spent an extra dollar? Of course not. That's not how it works.

[00:28:11] If you look at the worst financial collapses in the last twenty years, let's look at Mexico in approximately 1995, I forget the dates. The peso was three-to-one, something like that, three and a half to one, absolute collapse, the currency up in smoke, no faith in government, no faith in everything, and it went to nine. They had about a sixty percent drop. It didn't drop to zero, the peso didn't go to a million-to-one. Russia totally collapsed. The ruble machine was shut down. Everybody turned out the lights, pulled out the plug, and left the central bank for six months. The ruble went from 645 to 28, a seventy-five percent drop. It didn't hyper-inflate, or do anything like Zimbabwe, or Germany, which Marshall explained, which were entirely different situations. So even in situations far more extreme than anything we can imagine, which were fixed-exchange-rate regimes blowing up, which we don't have, you don't get sudden jumps in inflation; there just is no such thing.

[00:29:10] What happens if Social Security checks get too high? What happens if we are overpaying? How would we know? Well, unemployment would get too low with all the spending, whatever that means. The economy would grow too fast, whatever that means. Seniors would be living too high. Prices would start going up. Then what happens?

[00:29:30] Well, then the option to raise taxes or cut benefits might make sense. Right now, it doesn't make any sense. It only makes sense if you think we're running out of money because we're running a deficit. And that we're...I've got to race on; I've got to get to China. Not because the government doesn't have the money, but because spending no longer makes sense. It's a political choice.

[00:29:52] Why are Social Security cutbacks on the table? Only one reason: Our leaders don't understand the monetary system. They don't know spending is not constrained by revenues. They think that to spend what we don't tax we have to borrow from the likes of China for our grandchildren to pay back. It's all a tragic mistake of epic proportions.

[00:30:17] Let's talk about China for a minute, before I get to the Eurozone. How does China get their dollars? They don't start out with any dollars. They sell some things at Wal-Mart and K-Mart and Target and our department stores, and they get paid, and the money goes into their checking account at the Fed. Technically that's part of the national debt now; we now owe China that money. What do we owe them? We owe them a bank statement that shows how much they have there in their checking account. Then our debt management people take over, at Treasury, and they auction off Treasury securities, and China buys Treasury securities. And what does the Fed do? They move the money from China's checking account to China's savings account at the Fed. And now we owe China all that money with all that interest, and how are we ever going to pay them back?

[00:31:02] How are we going to pay back the whole thirteen trillion in those savings accounts? Just like we do every week, when tens of billions come due. We transfer that balance, plus interest, back to the checking accounts at the Fed - debt paid back. They have three choices with what they can do with that checking account: leave it alone, put it back in a savings account, or spend it.

[00:31:22] Well, what if they spend it? Then they go buy something from -- I don't know, euros from Deutschebank or something -- and then we transfer the dollars from their account to Deutschebank's account. And the European Central Bank transfers euros from Deutschebank's account to China's account. All these other countries are doing the same thing.

[00:31:42] So, what is the problem? What are we leaving to our children and grandchildren? They're just going to need one account, just like we need, to just debit and credit these funds. The whole thing could be done on one spreadsheet. You could run that whole part of the Fed with about a hundred thousand dollar a year budget if you wanted to. There's nothing to it.

[00:31:59] People say, "Well, what happens if China dumps all their dollars and the dollar goes down? What are we ever going to do?" At the same time, those same people are saying, "We need China to revalue, their currency's undervalued by 50%." On the one hand, they want us to revalue their currency up, which means have the dollar go down by 50%; on the other hand, they're panicked over what might happen if the dollar goes down 50%. Guys, you can't have it both ways, figure out what you want. I don't have time to get into it, but it's not a problem either way. It doesn't--

[00:32:27] [crosstalk about time remaining]

[00:32:39] What's wrong with the Eurozone? The UK, the US, and Japan are not the next Greece. We've talked about this. I'll just review a bit quickly. Greece is not the issuer of the euro; Greece has to have money in its account or its checks will bounce. It's the same with all the other member Euro nations. The Euro nations are revenue-dependent, like the US states, businesses, and households.

[00:33:04] Think about the US, the United States in the last two years. If we'd had all the states, but we didn't have the US Treasury; if we'd had the Federal Reserve Bank, but we didn't have the US Treasury to run a deficit. When the Treasury ran a deficit of $1.5 trillion last year, all that money went to the states and the people in the states. That wouldn't have happened. Instead, the slowdown and the collapse would have forced up the deficits of the state governments, because they would have been making the unemployment payments and they would have been losing the revenues.

[00:33:30] Could they have sustained that kind of deficit spending without collapsing? California's ready to collapse, and their deficit's only some...only 5% of GDP, or maybe a little less, depending on how you measure. No way.

[00:33:46] That's what's happened in Europe. They've put themselves in this situation. They've been in true Ponzi. Ponzi is when you have to pay somebody back from getting the funds from the next person. The US government, Japan -- Japan with 200% debt-to-GDP -- is not in Ponzi. They don't pay people by getting the money from somebody else. They don't get the yen from somebody else. They just change the numbers up, like we do. That is not Ponzi. Ponzi is when you have to get it from somebody else.

[00:34:10] Europe has put themselves in Ponzi from day one, and we've been pointing it out from day one. Now Ponzi works on the way up. Madoff went a long time before he collapsed, and so did Stanford. It's on the way down where it all comes apart. We're seeing the back end of this coming apart. And we're seeing the dilemma that they dealt with, at the beginning, when they set this thing up, and that was: How do you balance the idea that you don't want moral hazard risk for all your individual members? If the central bank would guarantee all their debt, they'd have no debt problems, they'd have no problem. However, then it would become a race to the bottom. Whoever deficit spends the most wins, whoever inflates the most wins. It would be an instant recipe for immediate hyper-inflation. So you have to have some kind of constraints.

[00:34:59] So they had two constraints. They had the growth and stability pact, which said you could only run 3% deficits, which at the time we said, and they knew, was unenforceable -- because you enforce it with fines. And that's just unenforceable, because if you're allowed to run any deficit you want and you get fined, you just run a larger deficit and you pay the fine. It doesn't make any sense at all. And the other thing they did was they left the nations as financially independent, like the US states. That made them market forces [unclear, possibly "to enforce it"]. But again, market forces don't come in right away. It's only when things are on the way down.

[00:35:29] On the way up, they were okay. As soon as things started turning down with a venegeance, like they did this time, suddenly the game's up and they've got some serious problems. Now they've got answers. They can just have their banking system loan to these-- buy all the government debt, and not haircut... allow banks to buy all they want, just pass a rule that says banks can buy all they want. But then they've got their moral hazard issue. Now they're back to whoever deficit spends the most wins.
[00:35:55] [crosstalk about time remaining]

[00:36:03] Ok, the shoes left to fall. They don't have credible bank deposit insurance. If Greece goes down and people realize they're going to lose their fifty thousand euros in their bank account, the rest of Europe can be a big problem. They're already having runs on the banks. It gets a lot worse. It shuts the whole payment system down. There's no credit-worthy government to act counter-cyclically.

[00:36:24] Thank you very much. I'll turn it over to questions. I do have a proposal for the Eurozone, which I'll save for question-and-answer, if anybody wants to hear it. That way I'm not using up my time.

[00:36:30] [applause]

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audio available here