The President remains trapped in the talons of the deficit hawks

hawk-150Marshall Auerback here with a post which I originally published at New Deal 2.0.

Last Friday, Mr. Obama and the GOP staged the equivalent of a British Parliamentary Question Period in front of the TV cameras. It showed the quick-thinking, articulate President at his best. Unfortunately, the subsequent Saturday morning national radio address showed him at his worst. Obama reiterated the need for job creation, even as he decried government deficits, which allegedly imperil our long term economic prosperity. It’s like calling for an open house policy, whilst simultaneously putting explosives on the door knobs.

“As we work to create jobs, it is critical that we rein in the budget deficits we’ve been accumulating for far too long – deficits that won’t just burden our children and grandchildren, but could damage our markets, drive up our interest rates, and jeopardize our recovery right now”.

Give Obama credit. He packs a veritable trifecta of innocent, but deadly frauds into one sentence — government debt is bad, markets determine interest rates, and  deficits represent a form of “intergenerational theft.” Then, he adds several new ones to boot.

Unfortunately, he’s got it backwards. The deficits he decries actually help to sustain demand and create jobs, thereby supporting the economy — not destroying it. And he reflects a commonly held belief that growing government debt represents a burden on our children and grandchildren, implicitly suggesting that future generations will have to reduce consumption in order to pay the taxes required to pay off the outstanding debt. Related to this is the fallacy that too much bond issuance will create a “debtors’ revolt”, whereby “the markets” will force the country to pay higher interest rates in order to “fund” its spending.

A Few Overlooked Facts on Deficits

Where to begin? Since the days of George Washington’s administration, national budget deficits and increased public debt have been the rule on all but about six very short occasions. And the US has generally prospered. Why? Far from being a burden, the deficits, and the corresponding government bonds, constitute the foundation of private financial wealth in any nation that creates its own sovereign currency for use by its citizens. Debt owed by the government yields net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another. In basic national accounting terms, government deficits equal non-government savings surpluses.

Private holdings of government bonds also constitute an income source — that is, the government interest payments on its outstanding debt constitute another avenue for stimulus. So when the government retires debt, it reduces private incomes — just as when it runs budget surpluses, it constrains private sector demand directly by reducing private income and access to adequate currency. Just ask any pensioner if he/she is happy when the income stream from annuities has declined.

Take away that debt, and you take away income. It is no coincidence that the budget surpluses of the Clinton years (wrongly trumpeted as a great fiscal triumph by President Obama) subsequently led to recessions: government budget surpluses ultimately restrict private sector demand and income growth and force greater reliance on private debt. Does anybody think it is a coincidence that two of the longest and largest periods of budget surpluses in America history — the periods of 1997-2000 and 1927-1930 — were followed by calamitous economic collapses?

There are ample analyses which explain how government surpluses drain aggregate demand (here, here, and here). Suffice to say, a government budget surplus has two negative effects for the private sector: the stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls; and private disposable income also falls as tax demands exceed income. And, as Stephanie Kelton has noted, the case of Japan illustrates that despite a debt-to-GDP ratio in excess of 100%, the Bank of Japan never lost the ability to set the key overnight interest rate, which has remained below 1% for about a decade. And, the debt didn’t drive long-term rates higher either.

Furthermore, now that we’re off the gold standard, Chinese and other Treasury buyers do not “fund” anything for us, contrary to the completely false and misguided scare stories that deficit hawks and, and now Obama, implicitly endorse. (Click here for an explanation). Legions of economists, investment advisors, Wall Street practitioners and policy makers continue to peddle such gold-standard thinking to their citizens nationwide. To paraphrase Churchill, “It is as though a vast Gold Standard curtain has descended across the entire body of public thinking.”

Obama’s Deficit Confusion

Let’s consider a real world example to demonstrate the President’s conceptual confusion on government deficits. We’re in a recession. Our American citizen who was working in a pie shop has lost his job even though his productivity was just as high during the boom years. As the recession intensified, pie demand fell, as did consumer demand in general. Fearing that their wealth holdings are not going to appreciate as quickly as they did in prior periods, households are saving more money out of their income flows.

The pie guy wants to exercise his freedom to work hard for money. So do 152 million other people. But there are jobs available for only 138 million of them, given current business perceptions of money profit prospects from production now and in the future. The pie guy is stuck with over 15 million other people who would like to exercise their freedom to work hard for money. Over 6 million of those people have been trying to exercise that freedom for over half a year, with no luck. They are dumpster diving for leftover pie scraps.

In desperation, the pie guy has gone back to the pie shop to offer his services for a lower money wage, but unit pie demand is still down, even though the owner has cut pie prices. However, the pie owner, facing lower prices per pie, decides to hire the pie guy back at a lower wage and fires one of his other workers to scratch his way to a little higher profit. Are we all any better off? I suppose pies are cheaper, but then so to are incomes earned by pie makers lower.

In that situation, someone else has to take up the spending slack. Fortunately, we live in an economic system in which a government can freely spend and fill the gap left by the private sector. It has the unique capacity to spend without the constraint of a private firm on productive job creation, thereby increasing output, not just redistributing it. Just giving the pie firm a payroll tax cut on new hires is not going to generate more jobs. Rather, giving it to all employees will lead to more pie sales. Instead of decrying the government deficits, then, the President should be celebrating them as a form of economic salvation.

The problem obviously isn’t about money which a government can always create. The ultimate irony is that in order to somehow ‘save’ public funds for the future, as the President appears to be advocating, what we do is cut back on expenditures today, which does nothing but set our economy back and cause the growth of output and employment to decline. Worse yet, the great irony is that the first thing governments generally cut back on is education — the one thing the mainstream agrees should be done that actually helps our children 50 years down the road. Education cutbacks — as any Californian can tell you — are something that does hurt us, as well as harming our children AND our grandchildren down the road. This is the true “intergenerational theft”, not “runway” government spending.

The False Household Budget Analogy

Like many other people who embrace the nostrums of the Concord Coalition (an advocacy group supporting the deficit hawk themes), the President continues to view government spending through a false household budget analogy:

“There are certain core principles our families and businesses follow when they sit down to do their own budgets. They accept that they can’t get everything they want and focus on what they really need. They make tough decisions and sacrifice for their kids. They don’t spend what they don’t have, and they make do with what they’ve got.”

Yes, it’s true: If households spend more than their income now, they have to borrow. To pay the loan back they have to ensure that they can dedicate adequate income in the future, either by increasing incomes somehow or diverting existing income from consumption. If a household borrows too much, it will face major corrections in its balance of income and expenditure and consequently may have to seriously forgo spending later.

That is the logic that the users of the currency have to consider every day. They have to finance every $ they spend and so planning is required to ensure they don’t blow out their personal balance sheets. If all households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then private sector incomes and real output will decline absent an increase in government spending.

But it’s not the same for a government. The government is the creator of a currency. It can spend now. It can also spend later. And it can service and pay back the debt without compromising anything. A government, unlike a household or a private business, can choose to exact greater tax revenues by imposing new taxes or raising tax rates.

Notwithstanding the obvious reality that sovereign governments have no solvency risk because they create their own currency, most financial commentators (and the President’s own advisors) still waste their time talking about sovereign default risks. Unfortunately, the President implicitly legitimizes this sort of talk when he speaks about the need for government to embrace budgeting like a household does. This is what we presume he has in mind when he discusses the long term dangers of government deficits. Firms, households, and even state and local governments require income or borrowings in order to spend. But the federal government’s spending is not constrained by revenues or borrowing. It is constrained only by what our population chooses as national goals.

Getting Past the Deficit Myth

We would all rather live in a world where profit prospects are so abundant that business investment spending is high enough to insure full employment given household preferences to save out of income flows. But historical and current experience suggests that is a rare configuration indeed. Ideally, that would be the business sector investing more than it retains in earnings. But in recent decades, this happens only during asset bubbles, and we know how that story ends. Alternatively, the foreign sector could deficit spend — the US could run a trade surplus. But the reality is that US firms have chosen to reinvest in low cost production centers abroad (or would prefer to use free cash flow to engage in short run shareholder value maximization through various financial engineering efforts, including M&A) so the US-based production structure no longer matches foreign demand very well. Ironically that leaves government fiscal deficit spending as the sole remaining mechanism to insure the freedom of its citizens to work hard for money.

The President, unfortunately, has yet to put the pieces of the puzzle together. He also fails to understand the idea that a government like the United States — i.e. one that issues a sovereign currency — can meet any and all outstanding financial obligations, provided the debts are denominated in the national currency. In this regard, the size of the national debt is irrelevant. This myth, and this myth alone, underpins arguments by orthodox economists against government activism in macroeconomic policy. The President does his Administration and the country no service by continuing to jump on this mythical bandwagon.

Myths may constitute good grounds for literature, but they are a horrible foundation for sound economic policy.

Marshall Auerback is a market analyst and commentator.

34 Comments
  1. Larry Johnson says

    Yeah, deficits are great. Who would you rather be right now, China or Japan?

    1. Marshall Auerback says

      In a message dated 2/1/2010 10:50:00 Mountain Standard Time,
      writes:

      Yeah, deficits are great. Who would you rather be right now, China or
      Japan?

      Right now, probably Japan. If with its so-called “problems” and “lost
      decade”, Japan’s unemployment rate is 5.7%. They can do better, but it beats
      anything we’ve seen in the US, UK, or euro zone. China looks ready to
      experience an abrupt reversal of growth. China is able to handle a large
      fiscal surplus because it is running such a huge current account surplus. You
      can also sustain a full employment policy if some other countries are
      willing to deficit spend, but it does leave you open to protectionist threats and
      I also think it is socially undesirable to be exporting all of your
      economic output instead of letting your workers enjoy the fruits of their hard
      work.

      1. Larry Johnson says

        Let’s discuss again when Japan defaults in a couple of years.

        1. Marshall Auerback says

          In a message dated 2/1/2010 17:05:31 Mountain Standard Time,
          writes:

          Let’s discuss again when Japan defaults in a couple of years.

          Okay, but we’ve been waiting 20 years and counting…

        2. Larry Johnson says

          Someone should read the Black Swan.

          1. Marshall Auerback says

            I’ve read it. The evidence isn’t going your way.

        3. Larry Johnson says

          I wouldn’t wish Japan’s balance sheet on my worst enemy, much less my own children.

  2. Anonymous says

    $3 T in Federal deficits in this administration’s first 2 full budget years is caught in the talons of the deficit hawks?

    And how much overt Fed money-printing to buy MBS and Treasuries?

    This is a tres extreme POV. This is NOT WW II where the prize was world domination.

    1. Marshall Auerback says

      In a message dated 2/1/2010 11:17:56 Mountain Standard Time,
      writes:

      $3 T in Federal deficits in this administration’s first 2 full budget
      years is caught in the talons of the deficit hawks?

      And how much overt Fed money-printing to buy MBS and Treasuries?

      Look at government spending relative to GDP. It’s virtually unchanged over
      the past 10 years if you check out the BEA’s latest numbers.

  3. haris07 says

    So, the govt can just print money and spend away in abandon as long as its debt is issued in its own fiat currency? So, why doesn’t everyone just do that and put an end to the charade of issuing debt and repaying iot with printed money? Why not just give free money to every citizen of the US and get it over with? And if indeed what you are saying is easily doable w/o any consequences, then just printing money and using it can circumvent economic growth – why bother with productive economic growth etc., just print more money and spend it? What about inflation – is that the problem (that you don’t even mention) that prevents something as silly as this to be carried out? Debase your currency enough so that its utility as a store of value is gone? In a limited way, fiscal deficits may work, but eventually you need true economic growth to power a country’s future, not just handouts of pieces of paper which can be excahnged for real goods for now, but increasingly won’t! Otherwise, everyone would do it.

    1. Marshall Auerback says

      In a message dated 2/1/2010 14:00:51 Mountain Standard Time,
      writes:

      So, the govt can just print money and spend away in abandon as long as its
      debt is issued in its own fiat currency? So, why doesn’t everyone just do
      that and put an end to the charade of issuing debt and repaying iot with
      printed money? Why not just give free money to every citizen of the US and
      get it over with? And if indeed what you are saying is easily doable w/o any
      consequences, then just printing money and using it can circumvent economic
      growth – why bother with productive economic growth etc., just print more
      money and spend it? What about inflation – is that the problem (that you
      don’t even mention) that prevents something as silly as this to be carried
      out? Debase your currency enough so that its utility as a store of value is
      gone? In a limited way, fiscal deficits may work, but eventually you need
      true economic growth to power a country’s future, not just handouts of pieces
      of paper which can be excahnged for real goods for now, but increasingly
      won’t! Otherwise, everyone would do it.

      Well, you don’t give free money because ultimately it’s inflationary and
      you do need the taxation function to call forth public goods and services.
      Let me repeat what I said earlier:

      The primary reason the public accepts what we call “fiat money” is because
      it has tax liabilities to the government. If the tax system were removed,
      the government would eventually find that its fiat money would lose its
      ability to purchase goods and services on the market. In the words of Abba
      Lerner (one of the architects of “Chartalism”): “The modern state can make
      anything it chooses generally acceptable as money…It is true that a simple
      declaration that such and such is money will not do, even if backed by the most
      convincing constitutional evidence of the state’s absolute sovereignty.
      But if the state is willing to accept the proposed money in payment of taxes
      and other obligations to itself the trick is done.”

      Ultimately the fiscal deficits do create the growth that you desire and
      they REDUCE the debt as we get employment and output increasing. If you got
      inflation, that would be from too much aggregate demand and a too small
      output gap.
      That would mean that fatefull day would be an economy with maybe 4%
      unemployment and 90%+ capacity utilization and an overheating economy in general.
      Sounds like that’s the goal of deficit spending to me. And if we get to
      that happy state of affairs, we can raise taxes to cool things down some
      day. In fact I suggest that we start with a tax on interest income if we want
      to cut payments to bond holders.
      Regarding the supposed default alternative to inflation, in the full
      employment and high capacity utilization scenario that might call for a tax
      increase to cool it down, I don’t see how default fits in or why it would even
      be considered.
      In fact, with our countercyclical tax structure, strong growth that follows
      deficits automatically drives down the deficit, and can even drive it into
      surplus, as happened in the 1990’s. In that case one must be quick to
      reverse the growth constraining surplus should the economy fall apart as
      happend shortly after y2k.

  4. Gloomy says

    1.In your opinion, is there a level of public debt which is deleterious?
    2. What do you think of Rogoff’s latest, indicating that high levels of debt slow economic growth?

    1. Marshall Auerback says

      In a message dated 2/1/2010 14:59:55 Mountain Standard Time,
      writes:

      1.In your opinion, is there a level of public debt which is deleterious?
      YES, WHEN IT BECOMES INFLATIONARY. I’M NOT CONCERNED ABOUT A NUMBER PER
      SE, BUT THE EFFECT, AS ABBA LERNER USED TO ARGUE

      2. What do you think of Rogoff’s latest, indicating that high levels of
      debt slow economic growth?
      ROGOFF’S DATA IS INCOMPLETE AND I DON’T THINK HE SPENDS SUFFICIENT TIME
      DISTINGUISHING BETWEEN COUNTRIES WHICH OPERATE PEGGED RATE REGIMES OR CURRENCY
      BOARDS, VERSUS FREE FLOATING NON-CONVERTIBLE CURRENCIES. GOES BACK TO AN
      EARLIER POINT I MADE. IF YOU WANT PRIVATE SECTOR DEBT DELEVERAGING, THEN
      SOMEONE ELSE HAS TO ACCOMMODATE THAT. EITHER THE FOREIGN SECTOR (UNLIKELY, AS
      THE US HAS NEVER RUN A TRADE SURPLUS IN THE POST-WAR PERIOD), OR THE
      GOVERNMENT SECTOR. IT’S AN ACCOUNTING IDENTITY, PLAIN AND SIMPLE. ROGOFF’S
      ANALYSIS HAS RELEVANCE IN THE US ONLY TO THE EXTENT THAT OUR POLICY MAKERS
      REFUSE TO ALLOW PUBLIC SPENDING TO ACCOMMODATE THAT PRIVATE SECTOR DEBT
      DELEVERAGING.

      1. Gloomy says

        It has occurred to me that quantitative easing may be innocuous all competing currencies do it at the same time, maintaining a relatively reasonable balance between one another. This balance will naturally occur because no currency can be allowed to get too strong. Such simultaneous quantitative easing would allow economic stabilization without inflation. What you think of this idea?

        1. Marshall Auerback says

          In a message dated 2/1/2010 15:44:48 Mountain Standard Time,
          writes:

          It has occurred to me that quantitative easing may be innocuous all
          competing currencies do it at the same time, maintaining a relatively reasonable
          balance between one another. This balance will naturally occur because no
          currency can be allowed to get too strong. Such simultaneous quantitative
          easing would allow economic stabilization without inflation. What you think
          of this idea?

          No, quantitative easing merely involves the central bank buying bonds (or
          other bank assets) in exchange for deposits made by the central bank in the
          commercial banking system – that is, crediting their reserve accounts. The
          aim is to create excess reserves which will then be loaned to chase a
          positive rate of return. So the central bank exchanges non-or low
          interest-bearing assets (which we might simply think of as reserve balances in the
          commercial banks) for higher yielding and longer term assets (securities). It
          shifts things on a balance sheet, but does nothing in terms of creating new
          aggregate demand.
          It’s just an accounting adjustment in the various accounts to reflect the
          asset exchange. The commercial banks get a new deposit (central bank funds)
          and they reduce their holdings of the asset they sell.

      2. gloomy says

        You seem to be saying that large debts are helpful, until inflation takes off. We all agree on that. Some of us just want to be sure inflation doesn’t, because, once it does it will be a hard train to stop.

        1. Marshall Auerback says

          In a message dated 2/1/2010 17:25:28 Mountain Standard Time,
          writes:

          You seem to be saying that large debts are helpful, until inflation takes
          off. We all agree on that. Some of us just want to be sure inflation
          doesn’t, because, once it does it will be a hard train to stop.

          It’s a hard train to stop if you use interest rates to do so, just like
          it’s harder to conduct surgery with a butcher’s knife, rather than using a
          scalpel.

          I believe in using fiscal policy to curb aggregate demand and diminish
          inflationary pressures, not interest rates. We have this mythical fear of
          inflation, but I find it hard to find the likelihood of this occurring in the
          context of 17% under and unemployment.

  5. Scott Murray says

    Thanks Marshall.

    I have one question, isn’t private sector debt (and by this I mean intra-private sector debt not private sector holdings of government debt) what in the end puts a limit under the ability of government’s to run deficits. As although governments can control the short-end of the yield curve, even with a fiat currency they cannot control the yield curve much out beyond 2 years.

    Once the yield on 10 year risk-free government debt gets to a level that it forces the yield on risky private debt to rise beyond the debtors ability to pay there will be increasing private sector defaults?

    1. Marshall Auerback says

      In a message dated 2/1/2010 15:29:59 Mountain Standard Time,
      writes:

      I have one question, isn’t private sector debt (and by this I mean
      intra-private sector debt not private sector holdings of government debt) what in
      the end puts a limit under the ability of government’s to run deficits. As
      although governments can control the short-end of the yield curve, even
      with a fiat currency they cannot control the yield curve much out beyond 2
      years.

      Once the yield on 10 year risk-free government debt gets to a level that
      it forces the yield on risky private debt to rise beyond the debtors ability
      to pay there will be increasing private sector defaults?

      There is no reason at all why the central bank needs to offer longer term
      dated debt. The central bank sets the price of reserves but stands ready
      to provide whatever volume of reserves are required to support the credit
      structure.
      Second, as Bill Mitchell, Scott Fulwiller and Randy Wray have all pointed
      out, there is a close connection between short-term interest rates and the
      level of reserves and this drives central bank operations. When there are “
      excess” reserves – that is, levels that exceed reserve requirements (if any
      exist) and the minimum levels required by banks to satisfy clearing needs –
      then there is always downward pressure on rates unless the central bank:
      (a) pays a support rate on excess reserves; or (b) drains the excess
      through bond sales. The central bank can always induce the reserve movements they
      desire to maintain control of their policy rate by setting the price of
      reserves relative to any bond sales or purchases they deem appropriate.
      There is no reason for central banks ever to offer long dated bonds, once
      we understand that the true purpose of them is purely defensive – helping
      the central bank maintain a reserve rate, rather than being used to “fund”
      something. When you recognise the initial premise, the idea that we should
      be gifting rentiers with a higher yield simply because they ask for it is
      absurd.
      Read Randy Wray’s piece: _http://www.newdeal20.org/?p=6571_
      (http://www.newdeal20.org/?p=6571)
      And Scott Fulwiller:
      _http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html_
      (http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html)

  6. Scott says

    I am still questioning how Marshall does not incorporate into his argument any form of the “there’s no free lunch” basis to who pays for the government. Another postulate I’ll propose to counter the national income accounting identity is that G = US (as in us Americans). The government on the one side cannot go bankrupt because they have US to counter it. -1 (G) = 1 (US). Since we cannot default, we have to pay. In that case we pay either through higher taxes, or inflation. As part of US, I will always worry about what G does and whether or not that is going to cost ME, but ME is not a factor to Marshall because he only worries about US collectively, and I’m on board whether or not I want to be, so my opinion is worthless.

    In tribute to Hayek, and my layman’s paraphrasing (probably naive), the only way to attain higher G is to enforce upon ME, the rights of US. This is what deficit spending does. It redistributes wealth. The reason I bring this up is because of Marshall’s use of “freedom” in his rhetoric today. I disagree that spending other people’s money in the name of freedom so that people can still work to earn that money that was taken from others is freedom. It is the opposite if anything.

    Here are the references

    *The pie guy wants to exercise his freedom to work hard for money.

    *The pie guy is stuck with over 15 million other people who would like to exercise their freedom to work hard for money.

    *Over 6 million of those people have been trying to exercise that freedom for over half a year, with no luck.

    *Ironically that leaves government fiscal deficit spending as the sole remaining mechanism to insure the freedom of its citizens to work hard for money.

    My point:

    Laborers are free to produce as many houses, cars, or Xboxes as they want. They’re free to build them until the sun goes down, but if there is not a buyer, that limits their freedom because they’ll never have enough money to keep producing. Marshall would rather force the buyer to buy rather than let the consumer be free to choose what they want. His argument may make sense, but it doesn’t make sense in what I perceive as a free society and Hayek pointed out this exact abuse of the word freedom over half a century ago. The only out I can accede to Marshall is that we are not going to pay through inflation, taxes, or bankruptcy because perpetual defaults are possible. Prove that and your name becomes Ponzi.

    1. Scott says

      -1 (G) = 1 (US) is just bad math. Since I cannot edit, -1 (G) = -1 (US) is what I meant.

    2. Marshall Auerback says

      In a message dated 2/3/2010 06:18:15 Mountain Standard Time,
      writes:

      I am still questioning how Marshall does not incorporate into his argument
      any form of the “there’s no free lunch” basis to who pays for the
      government. Another postulate I’ll propose to counter the national income
      accounting identity is that G = US (as in us Americans). The government on the one
      side cannot go bankrupt because they have US to counter it. -1 (G) = 1
      (US). Since we cannot default, we have to pay. In that case we pay either
      through higher taxes, or inflation. As part of US, I will always worry
      about what G does and whether or not that is going to cost ME, but ME is not a
      factor to Marshall because he only worries about US collectively, and I’m
      on board whether or not I want to be, so my opinion is worthless.

      In tribute to Hayek, and my layman’s paraphrasing (probably naive), the
      only way to attain higher G is to enforce upon ME, the rights of US. This is
      what deficit spending does. It redistributes wealth. The reason I bring
      this up is because of Marshall’s use of “freedom” in his rhetoric today.
      I disagree that spending other people’s money in the name of freedom so
      that people can still work to earn that money that was taken from others is
      freedom. It is the opposite if anything.

      I always thought a “free lunch” was when you gave the guy food for not
      doing anything. I am trying to suggest policies which will actualy create
      employment, get our pie guy working again and adding productive assets to the
      economy. Why is government spending which fills an output gap, considered
      to be a “free lunch”? Who else is supposed to fill that gap? Yes, some of
      it can come via our trade partners “deficit spending” (i.e. running trade
      deficits), but that’s not happening now and, indeed, has never occurred once
      in America’s post W.W. II history. If nonbank businesses and households
      cannot create the money with which to invest and spend, how do they get the
      money? Perhaps some other money creating sector, like the government, must
      deficit spend. The government is not spending “other people’s money”. The
      government is the only entity that can create new net financial assets.
      It’s spending creates the money, not your taxes.

      1. Scott says

        I’ll always be stuck in the closed system of savings creates investment, not the other way around. My dream of a savings driven world as opposed to a credit driven world is probably the biggest pipe dream us libertarians have, but I still know that deficit spending is a threat to my personal savings. Your response demonstrates our disagreement to how wealth is attained. I think saved funds facilitate credit growth, leading to wealth, and you think credit growth leads to increased growth which leads to increased savings (or decreased deficit burden) so we’ll never see eye to eye.

        Either way, a Keynsian point of view is a good vent for all the other problems in my life so thanks for that. Also, please take to heart the slippery slope of political rhetoric as Hayek wrote about. “Deficit Terrorists” and “the freedom to work” are not that different from Obama’s “socialist takeover” of America when we let politics and rhetoric rule real decision making.

        1. Marshall Auerback says

          In a message dated 2/3/2010 22:25:28 Mountain Standard Time,
          writes:

          Either way, a Keynesian point of view is a good vent for all the other
          problems in my life so thanks for that. Also, please take to heart the
          slippery slope of political rhetoric as Hayek wrote about. “Deficit Terrorists”
          and “the freedom to work” are not that different from Obama’s “socialist
          take-over” of America when we let politics and rhetoric rule real decision
          making.

          Vent away! Always happy to help!

          Best,

          Marshall

  7. Namazu says

    If I read this correctly (and I read it twice to be sure), you’re comfortable saddling future generations with a higher tax burden, but you consider the term “intergenerational theft” fraudulent in this context, likewise the notion that markets determine interest rates. In what footnote or on which planet?

    1. Marshall Auerback says

      In a message dated 2/3/2010 18:23:59 Mountain Standard Time,
      writes:

      If I read this correctly (and I read it twice to be sure), you’re
      comfortable saddling future generations with a higher tax burden, but you consider
      the term “intergenerational theft” fraudulent in this context, likewise the
      notion that markets determine interest rates. In what footnote or on
      which planet?

      Greetings earthling!

      Levity aside, the standard government intertemporal budget constraint
      analysis that deficits lead to future tax burdens is ridiculous. The idea that
      unless policies are adjusted now (that is, governments start running
      surpluses), the current generation of taxpayers will impose a higher tax burden on
      the next generation is deeply flawed.
      The government budget constraint is not a “bridge” that spans the
      generations in some restrictive manner. Each generation is free to select the tax
      burden it endures. Taxing and spending transfers real resources from the
      private to the public domain. Each generation is free to select how much they
      want to transfer via political decisions mediated through political
      processes. See Bill Mitchell on this:
      _http://bilbo.economicoutlook.net/blog/?p=7717#more-7717_
      (http://bilbo.economicoutlook.net/blog/?p=7717#more-7717)
      If governments continue to try to run budget surpluses to keep public debt
      low then that strategy will ensure that further deterioration in
      non-government savings will occur until aggregate demand decreases sufficiently to
      slow the economy down and raise the output gap. That will force greater
      reliance on private debt accumulation which does act as a constraint on
      spending and growth, because individuals, unlike the federal goverment, cannot
      create currency and therefore must defer consumption to repay debt.
      Are we still sending real goods and services back in time to 1945 to pay
      off the lingering debt from World War II?
      On your second point, presumably you think that “bond market vigilantes”
      or “foreign creditors” can demand higher interest rates than the Fed might
      want to pay. If a bond investor, or a Chinese manufacturer refuses to buy
      our debt at current low interest rates paid to them, they can leave their
      dollars in their cheque account. It is of no consequence to us. We don’t have
      to offer them a higher savings alternative. If China says, I don’t want
      to keep a cheque account at the Fed any more and wants the money in a
      different currency or, say, gold? Tough luck. It’s not possible under our
      current fiat currency system.
      For more, read the following:
      _http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html_
      (http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html)
      Money quote from Professor Wray:
      “So here is what I propose: let’s support Senator Bayh’s proposal to “
      just say no” to raising the debt ceiling. Once the federal debt reaches $12.1
      trillion, the Treasury would be prohibited from selling any more bonds.
      Treasury would continue to spend by crediting bank accounts of recipients, and
      reserve accounts of their banks. Banks would offer excess reserves in
      overnight markets, but would find no takers—hence would have to be content
      holding reserves and earning whatever rate the Fed wants to pay. But as
      Chairman Bernanke told Congress, this is no problem because the Fed spends simply
      by crediting bank accounts.”

      1. Namazu says

        OK, Major Tom, I’ll take another crack at it, being as specific as I can. In any given year, I agree that we can borrow or print money in virtually limitless quantity. In the first instance, are you saying that this doesn’t pose risks to our cost of borrowing (and refinancing) in the future? If not, are we not engaged in a Ponzi scheme that must end some day (as they all do) leaving future generations to pay higher tax rates than we do. In the second instance, are you saying that money printing (QE or whatever) won’t at some point cause key prices (esp. oil) to rise to the point of causing great pain to the average American, and that it isn’t likely to hasten the day when the USD loses its privileges as a reserve currency? If not, are we not compelled to issue still more debt rather than extinguish it via QE?

        1. Marshall Auerback says

          In a message dated 2/4/2010 07:11:27 Mountain Standard Time,
          writes:

          OK, Major Tom, I’ll take another crack at it, being as specific as I can.
          In any given year, I agree that we can borrow or print money in virtually
          limitless quantity. In the first instance, are you saying that this
          doesn’t pose risks to our cost of borrowing (and refinancing) in the future? If
          not, are we not engaged in a Ponzi scheme that must end some day (as they
          all do) leaving future generations to pay higher tax rates than we do. In
          the second instance, are you saying that money printing (QE or whatever)
          won’t at some point cause key prices (esp. oil) to rise to the point of
          causing great pain to the average American, and that it isn’t likely to hasten
          the day when the USD loses its privileges as a reserve currency? If not,
          are we not compelled to issue still more debt rather than extinguish it via
          QE?

          Prices will go up when government spending is sufficiently high to fill the
          output gap and reduce unemployment. A Ponzi scheme is a total
          mischaracterisation of our system and demonstrates an ignorance of reserve
          accounting. A Ponzi Scheme is a scheme in which a private party is issuing debts
          which can only be serviced by issuing more debts to cover the interest. This is
          not a constraint on a sovereign government which controls its own currency.
          Never is, never will be. There is a lot of loose rhetoric about things
          like Ponzi Schemes and national bankruptcy which is typically the work of
          people who neither know nor care much about what they’re talking about.

          QE simply shuffles numbers around on a balance sheet. It has nothing to
          do with creating any kind of aggregate demand. The experience of Japan
          demonstrates that. The BOJ massively expanded its balance sheet via QE from
          March 2001 to Sept. 2003 and the economy did nothing until the government
          stopped obsessing about “fiscal consolidation” and began to spend again. See
          Richard Koo’s book on this.
          Under a non-convertible floating rate monetary regime, a monetarily
          sovereign government like the US and most other countries (the EU countries gave
          up monetary sovereignty to the EMU) is not financially constrained. It
          doesn’t have to “fund” its deficits with taxation or “finance” them with debt.
          Government issuance of Treasury securities is simply to clear excess
          reserves so the Fed an hit its target rate in the overnight interbank market. The
          same thing could be done without borrowing at all, just by paying a support
          rate equal to the target rate to prevent excess reserves from driving the
          overnight interbank rate below the target rate.
          All the talk about the so-called danger of the national debt and the
          growing deficit are ideologically biased, based on the gold standard convertible
          fixed rate currency that no longer applies in today’s world.

  8. Master of the Universe says

    It’s got to be the saddest thing in the world when the answer is right in front of you, but few (and not those in power) recognize it. Deficits do not matter when we are underemployed and undercapacity. We should be building bridges and roads and schools like there is no tomorrow. The only time stimulus is inflationary is when we are at full employment!!. Mr. President, I pray that you’ll get some real economic advisers up there. Krugman gets its, but guys like Rubin don’t. Sure, some of us holding bonds will take a hit, but millions could be put back to work and oh, by the way their children would benefit greatly if mom and dad had jobs. Not the stupid response of were laying all the future taxes on our kids and grand kids. What good does it to have a 10 million not paying taxes and sitting home all day? 90% of economist and just stupid guys in suits with some letters behind their name. Don’t even sell government bonds, just print up the money to pay construction and steel companies to get back to work building America. When we got everyone working and capacity near full then pull back the printing and soak up the excess money. Boy are ther a lot stupid people in Washington.

    1. Marshall Auerback says

      In a message dated 2/10/2010 15:49:27 Mountain Standard Time,
      writes:

      Boy are ther a lot stupid people in Washington.

      Unfortunately, I have to agree with you about that.

Comments are closed.

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