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Take A Hike!

letsgetitdone's picture
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It looks like we're approaching an inflection point of great danger in working through problems in creating Economic Recovery. The inflection point is coming because there has been little economic recovery both internationally and domestically, with some nations continuing to run large deficits, and a growing chorus from many, calling for austerity and Governmental budget balancing even though it's well known that the consequences of these policies will be economic contraction and further hardship for all of us but the rich. The big question is: which way will nations that have debts held in their own sovereign currency like the United States, the United Kingdom, Japan, and Australia go? Will they listen to the domestic and international deficit hawks (e.g. the ratings agencies, the IMF, the European Commission (EC), and various currency traders and hedge fund managers) and cause further contraction and hardship for their citizens, or will they tell the deficit hawks to “take a hike,” create demand from the public sector, where private sector demand is falling short, full employment, and healthy economies?

I can't answer this question, but what they ought to do is stated quite clearly in a recent blog post by L. Randall Wray and Yeva Nersisyan. Here's an extensive sampling of their views along with some comments.

”It is very hard to avoid the conclusion that the Neoliberals at the EU (which seems to act on these matters as a front for the Bundesbank), the IMF, and the ratings agencies are trying to do to the UK and US what they already did to Greece. A real conspiracy theorist might even wonder whether they are trying to succeed where the Third Reich could not—destruction of the US and UK economies in a bid to annihilate the nations themselves. Obviously, that is not a view we suggest. But if one were to adopt it, it could be noted that Neoliberals in Germany have been picking off its neighbors one-by-one, first Greece, then Portugal and Spain, then on to Italy and finally France . . . These Neoliberals use a combination of mercantilism—trade surpluses that suck demand and jobs out of its fellow EU nations—and then “market discipline” that punishes any nation that tries to fill resulting demand gaps with government spending. . . . However, a more charitable interpretation is that it is the Teutonic Calvinism that guides EU prognostication on government deficits: today’s “excesses” must surely impose a tradeoff in the form of tomorrow’s costs. But when the EC begins to criticize UK and US policy, that is certainly a step that goes too far—even if it is simply due to muddled thought rather than to a nefarious agenda.”

And by the way, US-China relations have something in common with this pattern. First, China manipulates its currency to accumulate giant surpluses with the United States, and then it begins to express its alarm at US stimulus policies designed to awaken our economy, while at the same time it brings its own economy back by creating a giant Government stimulus to ensure its own continued expansion. Fortunately, China is not in a position to force us to adopt “market discipline,” and vindicate its own mercantilism, unless our leaders foolishly conclude that the interests of the Chinese and American investors in China, are more important than those of most Americans. Unlike the EC, which, even if it cannot force the UK to retrench, is in a position to force Greece, Portugal, and some other of its weaker members to inflict pain on their populations, if they wish to remain in the EU and retain the Euro. Wray and Nersisyan go on:

”The ratings agencies are another matter altogether. These blessed every kind of Wall Street excess with triple A ratings. They never saw a NINJA loan they did not love. Yet, they are engaged in an ugly form of deficit terrorism, attacking one country after another, downgrading debt, raising interest rates and causing budget deficits to rise, which then pushes up credit default swap prices and triggers further downgrades. Ratings agencies serve no public purpose. They are thoroughly incompetent, and probably irredeemably fraudulent. They should be shut down, investigated, and prosecuted.”

Indeed they should. Their function is to enforce the interests of Wall Street and the global elite. It is not to support the financial stability and growth of the Main Streets of the world. And there's every reason to believe that their ratings now have no objective basis in economic theory, but simply reflect the false idea that Governments are like families or households when it comes to assessing their financial capability

”President Obama and PM Brown should “just say no” to the attempted intervention by these fundamentally misguided deficit hawks into their economic and political affairs. Not only would fiscal tightening now or even within the next several years be a monumental mistake, the notion that continued deficits threaten our economies is unsound. . . . What these Neoliberals do not understand is that the UK and US operate with sovereign currencies—that is both of these nations issue their own non-convertible (floating exchange rate) currencies. For this reason the comparison with any nation that uses the Euro (such as Greece), or with a nation that pegs to precious metals or foreign currencies is invalid. In other words, there is no question of solvency or sustainability of deficits for the US and UK. Sovereign debt of these nations never carries default risk and hence cannot be rated below triple A.”

It is amazing how many discussions comparing the situations of nations don't recognize the vital distinction between nations that issue their own fiat currencies and nations that use the Euro or otherwise tie the value of their currency to a commodity like gold or some foreign currency. The simple fact is that nations whose currency is tied to something external can only create currency by borrowing money, or raising it through taxation, while nations that retain currency sovereignty are not operationally limited in their ability to spend, which is why their deficits are never unsustainable.

”Further, budget deficits are largely endogenously determined by economic performance, so that even if the US and UK adopted the Neoliberal recommendations, the budgetary outcome is not discretionary—indeed, tight fiscal policy would probably increase budget deficits by killing nascent economic recovery. Again, this would not raise any questions about solvency, but it certainly would impose unnecessary pain and sacrifice on the populations of the countries. Since we find it very difficult to believe that the ratings agencies, the IMF and the EU do not understand this, it is equally hard to avoid the conclusion that their policy recommendations are designed to subvert the economies of the US and UK. To what end we can only wonder.”

The ratings agencies are in bed with the big banks and the traders. If they bring down the US and UK economies these actors will advance the “shock doctrine” and solidify the victory of corporate globalism over the authority of National Governments, that are somewhat subject to democratic influences. If the ratings agencies could do this, it would be a significant victory for corporatism in the battle between it and democracy. However, we need not give corporatism that victory, because:

”Actually, there are always two ways to achieve the same budget deficit ratio: the ugly (Japanese) way and the virtuous way. If fiscal policy remains chronically too tight even in recession, economic growth is destroyed, tax revenues plummet, and a deficit opens up. So far, that is—unfortunately—the US path in this recession, a path already well-worn by two decades of Japanese experiments with belt-tightening. The alternative (let us call it the Chinese example) is that a downturn is met with an aggressive and appropriately-sized discretionary response. In that case, growth is quickly restored, tax revenue begins to grow, and the budget deficit is reduced.”

That is, the Chinese have shown us the way. Spend as necessary to employ your productive resources. Worry about growth; not about deficits.

”We emphasize that the deficit outcome is of no consequence for a sovereign nation. What is important is that the “ugly” Neoliberal path means chronically insufficient demand, high unemployment, and lots of suffering. The virtuous path—which is always available to a sovereign government—means less loss of output and employment, and relatively rapid resumption of economic growth. So it is not the deficit outcome that matters, rather it is the real suffering imposed by slow growth that results when fiscal policy is too tight.

”In conclusion, the Neoliberal agenda would impose the ugly path on the US and UK. President Obama and Prime Minister Brown should tell the Neoliberals to take a hike.”

In fact, if we don't tell them to take a hike, we will all be taking a very long journey ourselves: back to 1932 and the worst depression in American History.

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

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three wickets's picture
Submitted by three wickets on

So Treasury ought to increase spending at the same rate that the Fed is printing money to maintain some semblance of equilibrium in wealth distribution. Wonder if that would work. Because Japan and China both manage their budgets on the backs of large current account surpluses.

letsgetitdone's picture
Submitted by letsgetitdone on

that balancing wealth distribution is a legitimate goal of the Fed. By Law the Fed is charged with maintaining price stability and full employment. However, it ignores the full employment part in the Law and has been almost wholly focused on price stability. In any case, it's not its responsibility to be neutral with respect to maintaining wealth distribution.

three wickets's picture
Submitted by three wickets on

But doesn't price stability in effect help the investor class and full employment help the working class, roughly speaking that is.

letsgetitdone's picture
Submitted by letsgetitdone on

But their legal obligation is to accomplish those two things, not to seek neutrality in their impact on the distribution of wealth. In fact, since they've ignored their obligation to seek full employment, and only sought low inflation the impact of their activities has been to reinforce the long-term trend to increasingly unequal distribution of wealth.

Submitted by Lex on

While the US does issue its own currency, there's the hitch of how it does so: borrowing from the Fed to issue. It seems that our debt issuing is already running out of steam. The last Treasury auction didn't go so well, and a good many analysts are now working under the assumption that the Fed is buying large number of Treasuries.

I'd say that the big factor working against the US using its money for productive ends is that such a percentage of the money it borrows (kind of from itself) gets poured into the military. It doesn't matter how you shuffle everything around; if roughly half of your budget goes to military spending, then you're on the road to Imperial Collapse.

For example, how many historians consider military spending out of line with what the nation could reasonably afford to be a major factor in the collapse of the Soviet Union? True, there were other factors in that situation like the USSR's need for hard-currency, etc.

But let's take the realistic number of $1T spent every year on the US military. Put half of that to real economic purpose in the US and the debt wouldn't be so unsustainable. I still think that if we don't break this issue, even a switch to MMT isn't going to help much.

three wickets's picture
Submitted by three wickets on

I don't disagree we spend too much on the military, but the ratio is not that high. That said, the Fed can increase its balance sheet without approval from Congress. So in theory the Fed can keep financing our debt until...the dollar breaks down, and so far that hasn't happened, largely because the economies of the rest of the world suck too. Germany and China could indeed put pressure on the dollar or the pound. But the EU is dragging on the Euro, and China likes keeping its currency weak. So I say until China stops depending on US consumers, the Fed should keep printing away, and the Admin should push for a new stimulus. Damn it, only the corporations are making money right now, and they ain't hiring.

three wickets's picture
Submitted by three wickets on

is if China decides to liquidate all of its dollar denominated foreign exchange reserves. If the dollar were in some scenario to crash hard relative to other floating currencies, we could in fact default. Assuming we don't exist in a vacuum.

letsgetitdone's picture
Submitted by letsgetitdone on

What does that mean? Will they use them to buy US goods? Let them throw us into that briar patch. What about selling their treasuries? Will they sell those? Well, they have to find buyers. If they dump them too fast, they'll lose lots of money selling them. If they don't, then for their reserves to decline they have to sell less to us, and that will create unemployment for them. As for the US "defaulting," everything we owe is in US currency, so unless Congress decides to let us "default" by not authorizing higher Government expenditures, it is, literally, impossible for us to do that. Remember, a "default" is a failure for us to pay our obligations. But all of these are in USD, so to meet them, all we have to do is mark up the accounts in US banks of the creditors we owe the debts to.

That's it!

three wickets's picture
Submitted by three wickets on

Global currencies trade more than 4 trillion dollars everyday. If China were to sell a significant portion of their dollar reserves for other currencies, it could set off a chain reaction where everyone else begins to unload dollars in the global foreign exchange market. China has been careful and deliberate about reducing their dollar reserves because they want to avoid such a chain reaction plunge in the value of the 2 trillion in US treasuries they currently hold. However if they and other sovereign creditors believe their US debt would be devaluing anyway because we're printing too much money, they would proactively unload that debt, spiking up US interest rates. The Fed could try keeping the target rate low by printing even more money, and that spiraling cyle could eventually have us pushing our cash around in wheel barrows, figurately speaking.

letsgetitdone's picture
Submitted by letsgetitdone on

Not that China won't make that mistake. They might do that sometime, but they can't unload their dollar securities unless there are buyers for them. If they keep dropping the price and driving down the international currency price of the dollar. Guess what? The price of imports will go up and our exports will go down. This makes jobs here, and that's good for us. The more activity in our economy, the more the real value of our economy will increase. The greater that value, the more likely it is that China will find buyers for that currecy of ours which will again start to increase in price. Eventually an equilibrium will be found. There will be no hyper-inflation unless our money supply here increases beyond our productive capacity. But we have a long way to go before that happens. When it does, we start increasing taxes and pulling money out the economy.

The basic point here is that China doesn't control the value of our currency. The market does and if they do something with our dollars that is inconsistent with our real economic strength, they will take huge losses and the market will quickly adjust. The best protection, therefore, that we can have is that we strengthen our economy by putting all our people to work. I fear, however, that this Administration has accepted Hooverism and will in a futile search for budgetary neutrality, contract our economy and destroy real value, not to mention the lives of many millions of Americans.

Submitted by Lex on

that so many of the charts depicting government spending put Social Security and Medicare into the chart, when those two programs are funded by payroll taxes dedicated to them. It seems that that those are on or off budget depending on the message that someone wants to convey.

Technically, they're supposed to be off budget since they're funded separately from everything else (that the federal government uses surpluses in either/both at its discretion and replaces the money with IOU's is another matter).

Remove them from the picture of government spending and the military section looks a hell of a lot bigger. My point is that (and the $700B the NYT quotes is the baseline budget rather all the expenditures) it is not an efficient use of money. Were everything else the same, but $350B went to the military and the other $350B was plowed back into the real economy, i'll guess that the economic outlook would be different. And we shouldn't forget that $350B was about what the DoD budget was when Bush came into office. Doubling that in less than a decade is not exactly the height of economic wisdom.

three wickets's picture
Submitted by three wickets on

We should lower defense spending to Clinton levels. Historically though, current spending is still well below what we spent during the cold war and before as a percentage of GDP. On medicare and social security, they may appear on the budget more than off going forward, if for no other reason than there is more shifting going on, e.g. FICA revenue paying for small business stimulus incentives.

letsgetitdone's picture
Submitted by letsgetitdone on

The Iraq War was BS. As for Afghanistan, after throwing teh Taliban out, we should have just withdrawn and left them to themselves. Anyway, the deficit hawks are looking at the future in a very biased way. They forecast all the liabilities based on a projection of entitlement spending, but they never forecast what future GDP will be in 2050 or 2075, or what the ratio of debt to GDP will be. That's how one knows their analyses are in bad faith.

letsgetitdone's picture
Submitted by letsgetitdone on

We don't need to borrow money to spend it. The Government borrows to maintain its target interest rate. If it didn't do that interest would fall to zero. Since it wants to keep interest rates close to zero right now, that is really no problem.

Further, if Government auctions aren't successful, it's of no material concern. It's main impact would be that we would not have to pay out interest in future years. See Mosler's piece on this here. You might also want to look at this piece by Bill Mitchell and his references to many other posts going into the theory in detail.

Submitted by libbyliberal on

Article on drones usage on ICH. When I remember the author's name I borrowed the nintendo line from, will post.

Does US militarism bring about intimidation to keep the trading in US currency? We may be in trouble, but our violent militarism will keep countries, our leadership hopes, staying with the dollar? Wasn't Saddam threatening to end the reign of the dollar?

A transnational corporatist mafia is what I see. The movie Network was right.

letsgetitdone's picture
Submitted by letsgetitdone on

is one of the reasons why the dollar is still the reserve currency. Other nations are probably afraid that if this changed there's no way we could afford to assume the military burden we do. However, we don't need to be the reserve currency to prevent inflation. I'd gladly trade off that status for bringing our people home, and reducing our military expenditures drastically.