Social Democracy for the 21st Century: A Post Keynesian Perspective Thu 2010-09-30 08:12 EDT

Would Keynes have endorsed Modern Monetary Theory/Neochartalism?

Lord Keynes

...what would Keynes have thought of neochartalism/modern monetary theory (MMT)? MMT developed from Abba Lerner's theory of functional finance, as well as G. F. Knapp's theory of chartalism, as propounded in his book The State Theory of Money...MMT tells us that the government is the monopoly issuer of its own currency. Hence the government is not revenue-constrained. Taxes and bond issues do not finance government spending. No entity with the power to create and destroy money at will requires anyone to ``fund'' its spending. Having said this, one must immediately say that, even though deficits are not ``financially'' constrained in the normal sense, they do face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, labour available (= unemployment level), and external balance...My discussion is based on the fundamental article by David Colander on this subject...``Lerner approached Keynes and asked: `Mr. Keynes, why don't we forget all this business of fiscal policy, public debt and all those things, and have some printing presses.' Keynes, after looking around the room to see that no newspaper reporters could hear, replied: `It's the art of statesmanship to tell lies but they must be plausible lies.' ''...

21st century; endorsed Modern Monetary Theory/Neochartalism; Keynes; Post Keynesian Perspective; social democracy.

billy blog Wed 2010-09-29 10:15 EDT

Budget deficits do not cause higher interest rates

Bill Mitchell

...An often-cited paper outlining the ways in which budget deficits allegedly push up interest rates is -- Government Debt -- by Elmendorf and Mankiw (1998 -- subsequently published in a book in 1999). This paper was somewhat influential in perpetuating the mainstream myths about government debt and interest rates...Their depiction of...Ricardian equivalence...alleges that: ``the choice between debt and tax finance of government expenditure is irrelevant...[because]...a budget deficit today...[requires]...higher taxes in the future...'' ...I have dealt with this view extensively...Ignoring the fact that the description of a government raising taxes to pay back a deficit is nonsensical when applied to a fiat currency issuing government, the Ricardian Equivalence models rest [on] several key and extreme assumptions about behaviour and knowledge. Should any of these assumptions fail to hold (at any point in time), then the predictions of the models are meaningless. The other point is that the models have failed badly to predict or explain key policy changes in the past. That is no surprise given the assumptions they make about human behaviour. There are no Ricardian economies. It was always an intellectual ploy without any credibility to bolster the anti-government case that was being fought then (late 1970s, early 1980s) just as hard as it is being fought now...So where do the mainstream economists go wrong? At the heart of this conception is the [pre-Keynesian] theory of loanable funds...where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times...Mankiw claims that this ``market works much like other markets in the economy''...[assuming] that savings are finite and the government spending is financially constrained which means it has to seek ``funding'' in order to progress their fiscal plans. The result competition for the ``finite'' saving pool drives interest rates up and damages private spending. This is what is taught under the heading ``financial crowding out''...Virtually none of the assumptions that underpin the key mainstream models relating to the conduct of government and the monetary system hold in the real world...When confronted with increasing empirical failures, the mainstream economists introduce these ad hoc amendments to the specifications to make them more realistic...The Australian Treasury Paper [used advanced econometric analysis to find that] domestic budget deficits do not drive up interest rates. The long-run effect...is virtually zero. The short-run effect is zero!...toss out your Mankiw textbooks...

Billy Blog; budgets deficit; caused higher Interest rate.

billy blog Sat 2010-09-18 10:52 EDT

There is no solvency issue for a sovereign government

Bill Mitchell

...There is no debt crisis in sovereign nations. The only public debt problems that have emerged in the current crisis have been in non-sovereign countries and even then with appropriate ``fiscal support'' those crisis were managed. I am referring to the intervention by the ECB when they decided to purchase outstanding public debt in the secondary bond markets -- which amounte to a fiscal act within a flawed monetary system. But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this absurd journey in self-importance...From a Modern Monetary Theory (MMT) perspective public Debt/GDP ratios have no relevance at all. What exactly do they tell us? The implication is that the bigger the economy the larger the tax base and so the government can support more debt. But a sovereign government does not need to tax to spend and its taxation powers serve different functions...It might be that the size of the economy limits nominal government spending because it provides some indication of the real resource base but that doesn't tell us anything about the capacity of the government to service any outstanding debt. A sovereign government can always service its nominal debts. It simply credits a bank account when the interest or maturity payments are due...

Billy Blog; solvency issue; sovereign Government.

Wed 2010-09-15 13:55 EDT

billy blog >> Blog Archive >> Export-led growth strategies will fail

Bill Mitchell

The United Nations Conference on Trade and Development (UNCTAD) released their annual Trade and Development Report, 2010 yesterday (September 14, 2010). The 204 page report which I have been wading through today is full of interesting analysis and will take several blogs over the coming weeks to fully cover. The message is very clear. Export-led growth strategies are deeply flawed and austerity programs will worsen growth and increase poverty. UNCTAD consider a fundamental rethink has to occur where policy is reoriented towards domestic demand and employment creation. They consider an expansion of fiscal policy to be essential in the current economic climate as the threat of a wide-spread double dip recession increases. The Report is essential reading...

Billy Blog; blogs Archive; Export-led growth strategies; fail.

billy blog Wed 2010-09-08 19:04 EDT

Michal Kalecki -- The Political Aspects of Full Employment

...several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki -- The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki's argument given that it is often raised by progressives as a case against effective fiscal intervention...[Job Guarantee concepts briefly summarized]...While orthodox economists typically attack the Job Guarantee policy for fiscal reasons, economists on the left also challenge its validity and effectiveness. In 1943, Michal Kalecki published the Political Aspects of Full Employment, in the Political Quarterly, which laid out the blueprint for socialist opposition to Keynesian-style employment policy. The criticisms would be equally applicable to a Job Guarantee policy...Kalecki's principle objection then seemed to be that ``the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.''...the major political blockages are no longer those that Kalecki foresaw. The opponents of fiscal activism are a different elite and work against the ``captains of industry'' just as much as they work against the broader working class. The growth of the financial sector and global derivatives trading and the substantial deregulation of labour markets and retrenchment of welfare states has altered things considerably since Kalecki wrote his brilliant article in 1943...

Billy Blog; full employment; Michal Kalecki; political aspects.

New Deal 2.0 Fri 2010-09-03 18:57 EDT

The Real Lesson from the Great Depression: Fiscal Policy Works!

Marshall Auerback

...At the outset of the Great Depression, economic output collapsed, and unemployment rose to 25 per cent. Influenced by his ``liquidationist'' Treasury Secretary, Andrew Mellon, then President Hoover made comparatively minimal attempts to deploy government fiscal policy to stimulate aggregate demand...This all changed under FDR...The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown...once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements)...

0; Fiscal policy worked; Great Depression; new dealing 2; Real Lesson.

billy blog Tue 2010-08-31 18:22 EDT

Monetary policy under challenge ... finally

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City...some notable presentations...suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker [BOE deputy Charles Bean] indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession....

Billy Blog; challenges; final; monetary policy.

naked capitalism Sun 2010-08-22 09:32 EDT

Auerback: News Flash-- China Reduces US Treasury Holdings, World Does Not Come To an End

Marshall Auerback

In a post titled ``China Cuts US Treasury Holdings By Record Amount,'' Mike Norman makes the excellent observation that while China is moving its money out of Treasuries, interest rates are hitting record lows. In other words, the sky still isn't falling. So, Mike wonders, ``Where is the Debt/Doomsday crowd?'' He rightly concludes: ``They're nowhere to be found because they can't explain this. This is a `gut punch' to them. Their whole theory is out the window. They just don't understand or don't want to understand, that interest rates are set by the Fed...PERIOD!!!''...Also of note today: Tokyo's Nikkei QUICK News reports that the #309 10-year Japanese benchmark government bond, the current benchmark, traded to a yield of 0.920% Tuesday morning, down 2.5 basis points from yesterday's close. This is the lowest yield since August 13, 2003. This, from a country with a public debt-to-GDP ratio of 210%!...These are facts. Inconvenient for those who like to perpetuate the lie that the US or Japan faces imminent national insolvency as a means of justifying their almost daily attacks on proactive fiscal policy...

Auerback; China reducing; comes; ending; naked capitalism; News Flash; Treasury holds; world.

Mon 2010-08-16 13:54 EDT

Could The US Become Another Ireland? >> The Baseline Scenario

Peter Boone and Simon Johnson

As Greece acts in an intransigent manner, refusing to act decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably. Ireland is seen as the poster child for prudent fiscal adjustment among the weaker eurozone countries...Ireland's perceived ``success'' is partly due to its draconian fiscal cuts...Ireland's difficulties arose because of a massive property boom financed by cheap credit from Irish banks...Today roughly 1/3 of the loans on the balance sheets of banks are non-performing or ``under surveillance''...The government...guaranteed all the liabilities of banks and then began injecting government funds...it is planning to buy the most worthless assets from banks and pay them government bonds in return. Ministers have also promised to recapitalize banks than need more capital. The ultimate result of this exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (i.e., Irish taxpayers)...The government is gambling that GDP growth will recover to over 4% per year starting 2012 -- and they still plan further major expenditure cutting and revenue increasing measures each year until 2013...The latest round of bank bailouts (swapping bad debts for government bonds) dramatically exacerbates the fiscal problem...

Baseline Scenario; Becomes; Ireland.

billy blog Sat 2010-08-07 20:01 EDT

The government is the last borrower left standing

Remember back last year when the predictions were coming in daily that Japan was heading for insolvency and the thirst for Japanese government bonds would soon disappear as the public debt to GDP ratio headed towards 200 per cent? Remember the likes of David Einhorn...who was predicting that Japan was about to collapse -- having probably gone past the point of no return. This has been a common theme wheeled out by the deficit terrorists intent on bullying governments into cutting net spending in the name of fiscal responsibility. Well once again the empirical world is moving against the deficit terrorists as it does with every macroeconomic data release that comes out each day...On July 22, 2010, Richard Koo appeared before the Committee and presented his testimony...his views have resonance with the main perspectives offered by MMT although he does get some things wrong. His recent testimony is one of the better commentaries on the current economic problems but probably fell on deaf (or dumb) ears at the hearing. Koo told the hearing that there are recessions and then there are depressions. The correct policy response must differentiate correctly between these two economic episodes...

Billy Blog; borrower left standing; government.

naked capitalism Fri 2010-08-06 19:34 EDT

Auerback: The Real Reason Banks Aren't Lending

Marshall Auerback

...there is a widespread belief that government fiscal stimulus has run up against its ``limits'' on the grounds of ``fiscal sustainability'' and the need to retain ``the confidence of the markets''. Consequently, goes this line of reasoning, as private credit conditions improve the private sector must pick up the baton of growth where the public sector leaves off. If this proves insufficient, there is room for an expansion of monetary policy via ``quantitative easing``...The premise is that the central bank floods the banking system with excess reserves, which will then theoretically encourage the banks to lend more aggressively in order to chase a higher rate of return. Not only is the theory plain wrong, but the Fed's fixation on credit growth is curiously perverse, given the high prevailing levels of private debt...credit growth follows creditworthiness, which can only be achieved through sustaining job growth and incomes. That means embracing stimulatory fiscal policy, not ``credit-enhancing'' measures per se, such as quantitative easing, which will not work. QE is based on the erroneous belief that the banks need reserves before they can lend and that this process provides those reserves. But as Professor Scott Fullwiler has pointed out on numerous occasions, that is a major misrepresentation of the way the banking system actually operates...We would like to see the Obama Administration at least begin to make the case that fiscal stimulus, whether via tax cuts or direct public investment, is still required to generate more demand and employment...deficit cutting per se, devoid of any economic context, is not a legitimate goal of public policy for a sovereign nation. Deficits are (mostly) endogenously determined by the performance of the economy. They add to private sector income and to net financial wealth. They will come down as a matter of course when the economy begins to recover and as the automatic stabilizers work in reverse...

Auerback; Lends; naked capitalism; real reason Bank.

China Financial Markets Tue 2010-08-03 14:48 EDT

The capital tsunami is a bigger threat than the nuclear option

...China's ``nuclear option'', which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite -- a tsunami of capital flooding into the country...All the major capital exporting countries...are eager to maintain and even increase their capital exports. But the balance of payments must balance, and all that exported capital must be imported somewhere else...As net capital exporters try desperately to maintain or increase their capital exports, and deficit Europe sees net capital imports collapse, the only way the world can achieve balance without a sharp contraction in the capital-exporting countries is if US net capital imports surge. And at first they will surge. Foreigners...will buy more dollar assets, including USG bonds, than before...the US trade deficit will inexorably rise as Germany, Japan and China try to keep up their capital exports and as European capital imports drop...This tsunami will bring with it a corresponding surge in the US trade deficit and, with it, a rise in US unemployment. It will also force the US Treasury to increase the fiscal deficit as more of the jobs created by its spending leak abroad...in the past massive capital recycling has usually been very good for asset markets. Might we see a surge in the US asset markets, at least until next year when Congress starts getting tough on the trade deficit?...

bigger threat; capital tsunami; China Financial Markets; nuclear option.

New Economic Perspectives Tue 2010-08-03 14:12 EDT

The CBO's Misplaced Fear of a Looming Fiscal Crisis

Eric Tymoigne

The Congressional Budget Office (CBO) has just released an 8-page brief titled "Federal Debt and the Risk of a Fiscal Crisis." In it you will find all the traditional arguments regarding government deficits and debt: "unsustainability," "crowding out", bond rates rising to "unaffordable" levels because of fears that the Treasury would default or "monetize the debt," the need to raise taxes to pay for interest servicing and government spending, the need "to restore investor's confidence" by cutting government spending and raising taxes. This gives us an opportunity to go over those issues one more time...

CBO's Misplaced Fear; looming fiscal crisis; New Economic Perspectives.

Credit Writedowns Thu 2010-07-29 17:00 EDT

James Montier does MMT

It seems that a lot of analysts have caught onto the MMT framework popularized by the late economist Wynne Godley and made topical in this downturn by Rob Parenteau of the Richebacher Letter...Now, it's James Montier's turn...He concluded: ``There is a danger the proposed fiscal tightening in the eurozone will lead to further deflation and economic collapse. The Spanish government faces what Mr Parenteau calls ``the paradox of public thrift'': the less it borrows, the more it will end up owing. It is unfortunate that it has taken a severe global recession to vindicate Prof Godley's macroeconomic analysis. If economic policymakers start to pay more attention to financial balances, they might forestall the next crisis. European politicians might also understand the potentially dreadful consequences of their new-found frugality.'' ...A downward shift in the government's net fiscal deficit means a downward shift in the private sector's net fiscal surplus -- totally doable except for this little thing called debt in places like Spain, the US, Ireland or the UK. Moreover, the savings rate is already incredibly low in countries like the U.S. and the U.K. If the government tries to pare its fiscal deficit, the result will not be less private sector savings to meet the lower public sector deficit, but rather lower aggregate demand and a larger deficit -- that's the paradox of thrift...

credit writedowns; James Montier; MMT.

Wed 2010-07-28 10:55 EDT

Economics: No, America lacks the necessary commitment to stimulus | The Economist

Richard Koo

...the US today is suffering from a balance sheet recession, a very rare ailment which happens only after the bursting of a nationwide debt-financed asset price bubble. In this type of recession, the private sector is minimising debt instead of maximising profits because the collapse in asset prices left its balance sheets in a serious state of excess liability and in urgent need of repair...fiscal stimulus becomes indispensible in a balance sheet recession. Moreover, the stimulus must be maintained until private sector deleveraging is over...When the deficit hawks manage to remove the fiscal stimulus while the private sector is still deleveraging, the economy collapses and re-enters the deflationary spiral. That weakness, in turn, prompts another fiscal stimulus, only to see it removed again by the deficit hawks once the economy stabilises. This unfortunate cycle can go on for years if the experience of post-1990 Japan is any guide. The net result is that the economy remains in the doldrums for years, and many unemployed workers will never find jobs in what appears to be structural unemployment even though there is nothing structural about their predicament...

America lacked; economic; Economist; necessary commitments; stimulus.

naked capitalism Fri 2010-07-23 17:08 EDT

Deficits Do Matter, But Not the Way You Think

L. Randall Wray

In recent months, a form of mass hysteria has swept the country as fear of ``unsustainable'' budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government's stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still -- likely -- years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson's well-funded public relations campaign, fronted by President Obama's National Commission on Fiscal Responsibility and Reform -- a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness...[however] the notion of ``fiscal sustainability'' or ``solvency'' is not applicable to a sovereign government -- which cannot be forced into involuntary default on debts denominated in its own currency...If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Unemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve...

Deficit; matter; naked capitalism; Think; way.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-23 11:01 EDT

Charting The Second Half Economic Slowdown

Goldman's Jan Hatzius...summarizes all the adverse trends that continue to not be priced into stocks. He notes that while the inventory cycle has boosted growth, this artificial rise is now losing steam. Key headwinds facing the economy are that fiscal policy, which has been expansionary, has now become to restrictive; that there has been no overshoot in layoffs for a mean reversion expectation; that the labor market multiplier is very much limited; that while capital spending is just modestly above replacement levels, the large output gap suggests spending should be subdued; the housing overhang is still huge and house prices have further to fall; that there are risks to US from European crisis; that inflation is dropping (and non-existent) even as utilization is low everywhere, which creates a major deflation risk; that the scary budget deficit will destroy any hope for future fiscal stimulus as public debt is surging out of control; lastly, with Taylor-implied Fed rates expected to be negative, the Fed's monetary policy arsenal is non-existent...

chart; dropped; economic slowdown; long; survival rate; Timeline; zero; Zero Hedge.

New Deal 2.0 Thu 2010-07-22 15:54 EDT

The Summer(s) of Our Discontent

Marshall Auerback

Virtually every profile on Larry Summers tells us that he is one of the most brilliant economists of his generation...Only Robert Rubin and Alan Greenspan played a more important role than Summers in promoting the deregulation and lax oversight that laid the foundations for the current crisis...the latest FT defense reflects Summers's fundamental lack of understanding of modern money. Contrary to his view, the late 90s surpluses was not the reason for that period's prosperity. The surpluses are what ended the prosperity. And until the public understands this, we should expect no fundamental improvement in economic policymaking from the Obama Administration...he violates one of Abba Lerner's key laws of functional finance: a government's spending and borrowing should be conducted ``with an eye only to the results of these actions on the economy, and not to any established traditional doctrine about what is sound and what is unsound.'' In other words, Lerner believed that the very idea of what good fiscal policy means boils down to what results you can get -- not some arbitrary notion of ``fiscal sustainability''...The government budget surplus meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. Growth was a product of a private debt bubble, which in turn fuelled a stock market and real estate bubble, the collapse of which has created the foundations for today's troubles...

0; discontent; new dealing 2; s; summer.

Wed 2010-07-21 10:34 EDT

Paul Debates Jamie and MMT | Corrente

Paul Krugman, well-known for his opposition to the austerity concerns of the deficit terrorists and his advocacy of additional Government stimulus to lower unemployment and end the recession, just ignited a paradigm conflict which promises to clarify for many, the issues dividing ``deficit doves'' like Paul, from economists who take a Modern Monetary Theory (MMT) approach to economics, which holds, among other things, that Government deficits and surpluses are not, in themselves important, and that Government spending has to be evaluated relative to its impact on public purposes...this conclusion and also Paul's first post both set up a ``straw man,'' because Jamie never claimed that deficits are never a problem, and even pointed to circumstances (conditions of full employment) where deficits could lead to inflation. Given the comments on Paul's first blog, including a very clear comment by Marshall Auerback, it should have been clear to him that he was distorting the position of both Jamie and MMT. But evidently, Paul didn't want to admit that...Jamie and the MMT economists are opposed to the very idea, the very framing of Government's role in the economy in a way that makes everything subject to deficits, national debts, and debt-to-GDP ratios. The position of MMT is that these numbers are just endogenous consequences of real economic activity including Government fiscal activity, and that it is this activity that ought to drive them and not the other way around...

Corrente; MMT; Paul Debates Jamie.

New Deal 2.0 Fri 2010-07-16 18:50 EDT

Despite Foreign Debts, U.S. Has the Upper Hand

Henry Liu

U.S. public debt as of July 8, 2010 was $ 13.192 trillion against a projected 2010 GDP of $14.743 trillion. As of April 2010, China held $900.2 billion of US Treasuries, surpassing Japan's holding of $795.5 billion. As of 2007, outstanding GSE (Government Sponsored Enterprises like Fanny Mae; Freddy Mac) debt securities (non-mortgage and those backed by mortgages) summed up to $7.37 trillion. Does this mean disaster for the US? ...the U.S., while vulnerable, is not critically over a barrel by massive foreign holdings of U.S. sovereign debt. The reason is because U.S. sovereign debts are all denominated in dollars, a fiat currency that the Federal Reserve can issue at will. The U.S. has no foreign debt in the strict sense of the term. It has domestic debt denominated in its own fiat currency held in large quantities by foreign governments. The U.S. is never in danger of defaulting on its sovereign debt because it can print all the dollars necessary to pay off foreign holders of its debt. There is also no incentive for the foreign holders of U.S. sovereign debt to push for repayment, as that will only cause the U.S. to print more dollars to cause the dollar to fall further in exchange rates... ...trade globalization through cross-border wage arbitrage also pushes down wages in the US and other advanced economies, causing insufficient consumer income to absorb rising global production. This is the main cause of the current financial crises which have made more severe by financial deregulation. But the root cause is global overcapacity due to low wages of workers who cannot afford to buy what they produce. The world economy is plagued with overcapacity as a result. It is not enough to merely focus on job creation. Jobs must pay wages high enough to eliminate overcapacity. Instead of a G20 coordination on fiscal austerity, there needs to be a G20 commitment to raise wages globally. [Henry C.K. Liu]

0; Foreign debt; new dealing 2; U.S.; upper hand.

New Economic Perspectives Fri 2010-07-16 14:28 EDT

Goldman Vampire Squid Gets Bitch Slapped: JP Morgan Bitch Slaps the Dow; and Geithner Tries to Bitch Slap Elizabeth Warren

L. Randall Wray

Ok here were three pieces of news today. First, Goldman Sachs was fined $550 Million for duping customers...For Goldman it was a tiny slap on the wrist--it still controls the Obama administration, with its moles, Timmy Geithner and Larry Summers still in charge of fiscal policy, thus prepared to funnel whatever money is necessary to prop up their firm--and the fine amounts to just 14 days of Goldman's earnings...The other remaining investment bank, JP Morgan announced that its profits rose by 76%. Funny thing is that in all banking categories, JP Morgan's results were horrendous...the profits supposedly came from ``trading''. In reality they mostly came from reducing ``loan loss reserves''...Our favorite Timmy has weighed in on Elizabeth Warren...Timmy Geithner (let me repeat that: Timmy! Geithner!) the most incompetent and conflicted public official since ``heck-uv-a-job'' Brownie has dared to oppose Ms. Warren to lead the new Consumer Financial Protection Bureau...Actually I agree with Timmy. Elizabeth Warren ought to be gunning for Timmy's job. Fire Geithner. Now. Elizabeth Warren for Treasury Secretary! And in 2012, Warren for President...Time for a new face in the White House. Elizabeth is our man, or woman.

Bitch Slap Elizabeth Warren; bitch slaps; Dow; Geithner trying; Goldman Vampire squid; JP Morgan Bitch Slaps; New Economic Perspectives.

billy blog Thu 2010-07-15 16:58 EDT

We have been here before ...

The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the ``expectations'' belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate...

Billy Blog.

billy blog Thu 2010-07-15 16:35 EDT

Employment gaps -- a failure of political leadership

Overnight a kind soul (thanks M) sent me the latest Goldman Sachs US Economist Analysis (Issue 10/27, July 9, 2010) written by their chief economist Jan Hatzius...It presents a very interesting analysis of the current situation in the US economy, using the sectoral balances framework, which is often deployed in Modern Monetary Theory (MMT)...some of the top players in the financial markets have a good understanding of the essentials of MMT...he US is likely to have to endure on-going and massive employment gaps (below potential) for years because the US government is failing to exercise leadership. The paper recognises the need for an expansion of fiscal policy of at least 3 per cent of GDP but concludes that the ill-informed US public (about deficits) are allowing the deficit terrorists to bully the politicians into cutting the deficit. The costs of this folly will be enormous...

Billy Blog; employment gap; failure; political leadership.

billy blog Thu 2010-07-15 16:28 EDT

Trichet interview -- the cult master speaks!

The centre-left Parisian daily newspaper Libération recently published (July 8, 2010) an -- Interview with Jean-Claude Trichet, President of the ECB. The questions...probed some of the key issues facing the EMU... ...the likely response in the EMU will be to further constrain fiscal policy. The glaring design flaw in the monetary system is the lack of a supranational fiscal authority that can spend like a sovereign government and address asymmetric demand shocks. Trichet's solution is to worsen this design flaw by penalising nations that encounter deficits outside of the fiscal rules. The reality is that the automatic stabilisers have driven the budgets in many countries beyond the SGP rules given how severe the collapse in economic activity has been following the sharp decline in aggregate demand. Further constraining the fiscal capacity to respond to these negative spending shocks will entrench higher levels of unemployment and poverty...

Billy Blog; cult master speaks; Trichet Interview.

billy blog Fri 2010-07-02 18:17 EDT

A total lack of leadership

Bill Mitchell

Another G20 talkfest has ended in Toronto and the final communique suggests that the IMF is now back in charge...The line now being pushed is, as always, structural reform of product and labour markets -- which you read as deregulation and erosion of worker entitlements...They buy, without question the notion that ``(s)ound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt.'' But what constitutes ``sound fiscal finances'' is not spelt out. It is all fudged around what the bond markets will tolerate. But what the bond traders think is a reasonable outcome for their narrow vested interests is unlikely to be remotely what is in the best interests of the overall populace...A sovereign government is never revenue constrained because it is the monopoly issuer of the currency and so the bond markets are really superfluous to its fiscal operations. What the bond markets think should never be considered. They are after all the recipients of corporate welfare on a large scale and should stand in line as the handouts are being considered. They are mendicants. It is far more important that government get people back into jobs as quickly as possible and when they have achieved high employment levels then they might want to conclude the fiscal position is ``sound''...The G20 statement is full of erroneous claims that budget surpluses ``boost national savings'' when in fact they reduce national saving by squeezing the spending (and income generating capacity) of the private sector -- unless there are very strong net export offsets...The on-going deflationary impact on demand that persistently high unemployment imposes is usually underestimated by the conservatives...

Billy Blog; leadership; total lack.

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.

billy blog Mon 2010-06-14 18:13 EDT

The OECDs perverted view of fiscal policy

...the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks...

Billy Blog; fiscal policies; OECDs perverted view.

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.

naked capitalism Tue 2010-06-01 20:06 EDT

When Will Europe Have Its Wile E. Coyote Moment?

...The current program instead is ultimately about protecting Eurobanks from losses, and is destined to fail. John Mauldin, in his newsletters, has been featuring the work of Rob Parenteau, as featured first here on Naked Capitalism (and a source of much reader ire): that deleveraging the public sector and the private sector at the same time is impossible absent a big rise in exports. Pretty much every major economy is on a ``reduce government debt'' campaign. Many are also on a ``deleverage the private sector'' program too (which is warranted, given the amount of profligate lending that occurred). The problem, however, is that these states can't all increase exports, particularly to the degree sought...Rob Parenteau drew out the implications in an earlier post: ``...if households and businesses in the peripheral nations stubbornly defend their current net saving positions [continue to reduce debt levels], the attempt at fiscal retrenchment will be thwarted by a deflationary drop in nominal GDP. ''...This feels like 2007 all over again, with the authorities insistent that Things Will Be Fine, when a realistic assessment suggests the reverse.

Europe; naked capitalism; Wile E. Coyote Moment.