Wed 2010-07-21 10:31 EDT

Social Democracy for the 21st Century: A Post Keynesian Perspective: Galbraith versus Krugman on Deficit Spending

In a recent post, Paul Krugman has criticised James K. Galbraith's view of deficit spending. The latter is obviously influenced by Modern Monetary Theory...Krugman has misunderstood Galbraith...Galbraith understands that there are real constraints on deficit spending, not phantom ``financial'' ones. Moreover, it is perfectly clear that Galbraith is talking about deficit spending during a period of high unemployment and low capacity utilization, and perhaps even in the face of a double dip recession. In his response to Galbraith, Krugman adopts the flawed quantity theory of money and attempts to prove mathematically what is perfectly obvious: that hyperinflation can result from continuous budget deficits that are monetized by the central bank. But, since Modern Monetary Theory already acknowledges that inflation is a real constraint on deficit spending, Krugman's analysis seems rather pointless.

21st century; deficit-spending; Galbraith versus Krugman; Post Keynesian Perspective; social democracy.

naked capitalism Mon 2010-07-19 17:00 EDT

Satyajit Das Examines Eurozone Stability Fund Three Card Monte

...Central banks and governments have developed an alarming fondness for the very sort of fancy financial structures that investment banks used to camouflage and transfer risk and engage in regulatory arbitrage prior to the crisis...The Eurozone has taken this affinity for financial structuring legerdemain even further, drawing on the most abused structure of the crisis, collateralized debt obligations, to create (as before) super duper AAA credits from less promising material...Das has exposed one major source of vulnerability, that of the impact of ratings downgrades. Auerback points out another: a revolt by workers in the Austerian nations, who will recognized, intuitively, perhaps explicitly, that the sacrifices demanded of them are a transfer to bankers in other countries...

card monte; naked capitalism; Satyajit Das Examines Eurozone Stability Fund.

New Deal 2.0 Mon 2010-07-12 16:51 EDT

The Unlearned Lesson of the 1987 Crash

Henry Liu revisits the stock market crash of 1987 to dispel free market fundamentalism and the neo-conservative lust for deregulation...The Federal Reserve's actions under Greenspan in 1987 led market participants to conclude that the Fed would emphasize domestic market objectives with accommodative monetary stance, if necessary at the cost of a further decline in the dollar. By year-end, the dollar's value had fallen 21% against the yen and 14% against the mark from its levels at the time of the Louvre Accord while Greenspan, the wizard of bubble-land, was on his way to being hailed as the greatest central banker in history. Two decades later, by 2007, the Greenspan put was called by the market and trillions of dollars were lost.

0; 1987 crash; new dealing 2; unlearned lessons.

New Economic Perspectives Fri 2010-07-02 17:26 EDT

Europe's Fiscal Dystopia: The ``New Austerity'' Road to Neoserfdom

Michael Hudson

Europe is committing fiscal suicide -- and will have little trouble finding allies at this weekend's G-20 meetings in Toronto. Despite the deepening Great Recession threatening to bring on outright depression, European Central Bank (ECB) president Jean-Claude Trichet and Prime Ministers from Britain's David Cameron to Greece's George Papandreou (president of the Socialist International) and Canada's host, Conservative Premier Stephen Harper, are calling for cutbacks in public spending...It is a self-destructive logic. Exacerbating the economic downturn will reduce tax revenues, making budget deficits even worse in a declining spiral. Latvia's experience shows that the response to economic shrinkage is emigration of skilled labor and capital flight...A half-century of failed IMF austerity plans imposed on hapless Third World debtors should have dispelled forever the idea that the way to prosperity is via austerity. The ground has been paved for this attitude by a generation of purging the academic curriculum of knowledge that there ever was an alternative economic philosophy to that sponsored by the rentier Counter-Enlightenment...

Europe's Fiscal Dystopia; Neoserfdom; new austerity; New Economic Perspectives; Road.

Fri 2010-06-18 10:37 EDT

Monetary Economics Review

Pablo Gabriel Bortz

Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, W. Godley and M. Lavoie, Palgrave/Macmillan, London, 2007...Acknowledging the existence of a complex institutional structure that includes households, firms, banks and governments (sometimes separated from the Central Bank), "our aspiration is to introduce a new way in which an understanding can be gained as to how these very complicated systems work as a whole"...the "new way" referred above is currently known as Stock-Flow Consistent modelling (SFC)...The main bid of Godley and Lavoie (G&L, from now on) is to show (successfully, one could note) that the SFC models make it necessary to fully articulate an accounting structure, avoiding "black holes", gaining in consistency, accuracy, and providing a common framework for the comparison of different models...one gets really convinced that it is the type of approach that makes it possible to analyse a great number of elements and complexities of the real world, as much as one wishes!...G&L adopt an institutional classification (households, firms, banks, government and the central bank). All the models presented in the book start with a "balance sheet" matrix, where all the assets and liabilities of each sector are described...

Monetary Economics Review.

Wed 2010-06-09 18:39 EDT

billy blog >> Blog Archive >> The comeback of conservative ideology

Bill Mitchell

Today I have been writing about the resurgence of the conservative ideology...Ever hear the term Ruthanasia? You should have because she is still at it berating us about the wrongs of fiscal policy and the need for radical reform. Ruth Richardson was New Zealand's minister of finance from 1990-93...As an historical episode ``Ruthanasia'' followed ``Rogernomics'' as increasingly radical reform programs that were inflicted on the New Zealand population from 1984 onwards -- for the next few decades...Unemployment became a policy tool (for disciplining inflation) rather than a primary policy target. The inflation-first monetary stance (and undemocratic reforms of the central bank) combined with a harsh fiscal policy contraction to drive up unemployment and significantly reduce per capita income...Successive right-wing governments (which not only included the conservatives but also the Lange Labour Party government which started it all) used the concept of a "strategic deficit". David Stockman, the budget director under President Reagan, was the person to coin this term which is taken to mean using a budget deficit as a "political weapon". The strategy was to hand out huge tax cuts to allegedly "incentivise" (the word that was used at the time) private entrepreneurs even though there has never been any convincing research evidence to suggest that there are major losses of activity arising from taxation. The resulting deficits were then paraded as evidence of the need for dramatic public spending cut backs...The experience of New Zealand during those years of being ruthanased by the free market zealots should serve as a warning to all of us...

Billy Blog; blogs Archive; comeback; Conservative ideology.

billy blog Mon 2010-06-07 19:00 EDT

Central bank independence -- another faux agenda

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. ...Today, I am looking at another faux agenda -- the demand that central banks should be independent of the political process...The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy...I find it ironical that the freedom mongers have very limited appreciation of what freedom actually is. Allowing the unemployed to be ``bullied'' by amorphous bond markets is not a path to freedom...inflation targeting countries have failed to achieve superior outcomes in terms of output growth, inflation variability and output variability; moreover there is no evidence that inflation targeting has reduced inflation persistence...Central banks operating under this charter have forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities have further worsened the situation with complementary austerity...The conclusion that I have reached from studying this specific literature for many years is that there is no robust relationship between making the central bank independent and the performance of inflation...From a MMT perspective, the concept of CBI is anathema to the goal of aggregate policy (monetary and fiscal) to advance public purpose. By obsessing about inflation control, central banking has lost sight of what the purpose of policy is about...under the CBI ideology, monetary policy is not focused on advancing public purpose. Fighting inflation with unemployment is not advancing public purpose. The costs of inflation are much lower than the costs of unemployment. The mainstream fudge this by invoking their belief in the NAIRU which assumes these real sacrifices away in the ``long-run''...

Billy Blog; Central bank independence; faux agenda.

Tue 2010-06-01 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

Sat 2010-05-22 20:28 EDT

New Economic Perspectives: What If the Government Just Prints Money?

Scott Fullwiler

As Congress gets set in the near future to consider raising the debt ceiling yet again, my fellow blogger L. Randall Wray creatively suggests not raising the debt ceiling but instead having the Treasury continue spending as it always does: by simply crediting bank accounts...Wray's proposal is based upon modern monetary theory (MMT) that is the focus this blog and those by Bill Mitchell, Warren Mosler, and Winterspeak. Of course, given the lack of understanding of basic reserve accounting at the heart of MMT and Wray's proposal on the part of the public, the financial press, and the vast majority of economists, one can already anticipate the outpouring of criticism suggesting that such a proposal amounts to ``printing money'' and thereby destroying the value of the currency...The approach here recognizes the importance of understanding the balance sheet implications of both of these options that are central to MMT. While most economists typically assume a supply and demand relationship, as in the hypothesized loanable funds market, and then build models accordingly, such an approach can miss important relationships in the real world...Both the Treasury's bond sales and the Fed's operations affect only the relative quantities of securities, reserve balances, and currency held by the non-government sector; the total sum of these is set by the outstanding government debt. With or without bond sales, it is the non-government sector's decision to spend or save that matters in regard to the potential inflationary impact of a given government deficit. Indeed, to be more precise, a deficit accompanied by bond sales is actually the MORE potentially inflationary option, as the net financial assets created by the deficit will be increased still further when additional debt service is paid.

Government Just Prints Money; New Economic Perspectives.

zero hedge Sat 2010-05-22 13:41 EDT

Albert Edwards: Europe Is On The Edge Of A Deflationary Precipice That Will, Paradoxically, Usher In 20-30% Inflation

A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation."...

20 30; Albert Edwards; deflationary precipice; edge; Europe; Inflation; paradox; usher; Zero Hedge.

zero hedge Thu 2010-05-13 17:50 EDT

Willem Buiter Issues His Most Dire Prediction Yet: Sees "Unprecedented" Fiscal Crises, US Debt Inflation And Fed Monetization

...we were very surprised when we read Willem Buiter's latest Global Economic View (recall that he works for Citi now). In it the strategist for the firm that defines the core of the establishment could not be more bearish. In fact, at first we thought that David Rosenberg had ghost written this...Buiter presents a game theory type analysis, which concludes that the US and other sovereigns will soon be forced into fiscal austerity. Among his critical observations (we recommend a careful read of the entire 68 pages), are that the US is highly polarized, and that the Fed, which is "the least independent of leading central banks" would be willing to implement "inflationary monetisation of public debt and deficits than other central banks." The next step of course would be hyperinflation. And Buiter sees America as the one country the most likely to follow this route. Most troublingly, Buiter predicts that a massive crisis is the only thing that can break the political gridlock in the US in order to fix the broken US fiscal situation...

debt inflated; dire predictions; Fed Monetizing; fiscal crises; see; unprecedented; Willem Buiter Issues; Zero Hedge.

naked capitalism Tue 2010-04-20 09:43 EDT

Satyajit Das: New & Old Greek Lessons

...Like many of the economically weaker EU members, Greece fudged the numbers to meet the qualifications for entry into the Euro. One example of this is the use of derivative transactions with Goldman Sachs to disguise the level of its real borrowing. Membership of the Euro also reduced the ability of Greece to manage its economy. It lost the ability to use its currency, via devaluations, to improve competitiveness and stimulate exports. It also lost the ability to set interest rates (now set by the European Central Bank (''ECB'')). It also cannot print its own currency to fund sovereign borrowing. Greece also has low levels of domestic saving...Greece's problems are probably incapable of solution and terminal. Temporary emergency funding may help meet immediate liquidity needs but do not solve fundamental problems of excessive debt and a weak economy...the optimal course of action for Greece may be to withdraw from the Euro, default on its debt (by re-denominating it in a re-introduced Drachma) and then undertake a program of necessary structural reform...The current debate misses the fact that the ``bailouts'' are mainly about rescuing foreign investors...

naked capitalism; new; Old Greek Lessons; Satyajit Das.

Fri 2010-04-09 08:08 EDT

charles hugh smith-The Contrarian Trade of the Decade: the U.S. Dollar

charles hugh smith

The majority of economic observers seem convinced that the dollar is doomed, and not in some distant future...But perhaps this thinking is wrong on virtually every important count...While the Federal Reserve successfully goosed money supply in their massive "quantitative easing" campaign, money supply is no longer expanding at a fast clip...It seems the money "created" by the Federal Reserve and lent to private banks at near-zero interest rates is simply sitting in the banks as reserves to offset their continuing horrendous losses. As a result, it is not flowing into the economy, and thus it cannot trigger inflation...Indeed, as has often been noted by Mish and others, this is what has happened in Japan for the past two decades: the central bank shovels money into private banks, who either engage in "carry trade" activities (borrowing at near-zero interest and then moving the money overseas to earn a decent yield elsewhere for easy profits) or they stash the funds to offset their ongoing losses in defaulted/impaired portfolios...

Charles Hugh Smith; Contrarian Trade; decades; U.S. dollar.

zero hedge Wed 2010-04-07 18:26 EDT

The Latest Gold Fraud Bombshell: Canada's Only Bullion Bank Gold Vault Is Practically Empty

Continuing on the trail of exposing what is rapidly becoming one of the largest frauds in commodity markets history is the most recent interview by Eric King with GATA's Adrian Douglas, Harvey Orgen (who recently testified before the CFTC hearing) and his son, Lenny, in which the two discuss their visit to the only bullion bank vault in Canada, that of ScotiaMocatta, located at 40 King Street West in Toronto, and find the vault is practically empty..."The game ends when the people who own all these paper obligations say enough and take physical delivery, and that's when the mess will occur."...It is funny that central bankers thought they could take the ponzi mentality of infinite dilution of all assets coupled with infinite debt issuance, as they have done to fiat money, and apply it to gold, in essence piling leverage upon leverage. They underestimated gold holders' willingness to be diluted into perpetuity - when the realization that gold owned is just 1% of what is physically deliverable, you will see the biggest bank run in history.

Bullion Bank Gold Vault; Canada's; Latest Gold Fraud Bombshell; practically empty; Zero Hedge.

Culture of Life News Mon 2010-04-05 09:07 EDT

China Buys Volvo--Yuan Will Be #1 Currency In Future

...the Chinese are cutting out the use of dollars as international trade settlements. Right now, for various reasons, OPEC still uses the dollar in this way but they are now openly talking about changing their own policies. And change will come, no matter how deluded we are. Already, currency players and international investors are running from the sinking US dollar and rowing like mad to get aboard the euro and yuan ships. The near sinking of the euro scared everyone to death since Europe has no powerful central government but is rather, a very loose confederation. Which is very, very, very unstable. [dollar losing reserve currency status]

1 Currency; China Buys Volvo; Culture; future; Life News; Yuan.

Tue 2010-03-09 18:09 EST

Fed Audit Bitterly Opposed By Treasury

Ryan Grim

The Treasury Department is vigorously opposed to a House-passed measure that would open the Federal Reserve to an audit by the Government Accountability Office (GAO), a senior Treasury official said Monday... "It's interesting that the Fed regards the simple fact that people find out what it does as somehow being unduly restrictive. We are a government of laws, not of men," [said Representative Alan Grayson]. "It's certainly no surprise that banking insiders at Treasury don't want transparency at the Fed," said Jesse Benton, a spokesman for Rep. Paul. "They are wrapped up in the central bank shenanagins too, and do not want their wheelings and dealings out in the open any more than Alan Greenspan or Ben Bernanke,"

Fed Audit Bitterly Opposed; Treasury.