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.

Social Democracy for the 21st Century: A Post Keynesian Perspective Thu 2010-07-22 16:08 EDT

Money is not a Neutral Veil

Lord Keynes

Neoclassical economics has the erroneous belief that money is neutral...Neoclassical analysis sees economic life in terms of a moneyless, ideal barter system. In this system, money exists but has been introduced merely to make trade easier...[however] John Maynard Keynes' General Theory of Employment, Interest and Money (1936) argued that modern capitalist economies are pre-dominantly monetary systems. The starting point for any sensible economic theory must recognise that monetary factors are crucial to modern economic activity...

21st century; money; Neutral Veil; Post Keynesian Perspective; social democracy.

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.

Tue 2010-06-01 17:29 EDT

billy blog >> Blog Archive >> In the spirt of debate ... my reply

Bill Mitchell

...Steve Keen and I agreed to foster a debate about where modern monetary theory sits with his work on debt-deflation. So yesterday his blog carried the following post, which included a 1000-odd word precis written by me describing what I see as the essential characteristics of modern monetary theory. The discussion is on-going on that site and I invite you to follow it if you are interested. Rather than comment on all the comments over on Steve's site, I decided to collate them here (in part) and help develop the understanding that way. That is what follows today... We distinguish the horizontal dimension (which entails all transactions between entities in the non-government sector) from the vertical dimension (which entails all transactions between the government and non-government sector)...A properly specified model will show you emphatically that the horizontal transactions between household, firms, banks and foreigners (which is the domain of circuit theory) have to net to zero even if asset portfolios are changing in composition. For every asset created there will be a corresponding liability created at the same time...you will make errors if there is not an explicit understanding that in an accounting (stock-flow) consistent sense all these transaction will net to zero. In adopting this understanding you might abstract from analysing the vertical transactions that introduced the high-powered money in the first place, but never deny its importance in setting the scene for the horizontal transactions to occur. I think the differences between Steve's models and modern monetary theory are two-fold. First, I do not think that Steve's model is stock-flow consistent across all sectors. By leaving out the government sector (even implicitly) essential insights are lost that would avoid conclusions that do not obey basic and accepted national accounting (and financial accounting) rules. This extends to how we define money. Second, I think Steve uses accounting in a different way to that which is broadly accepted. It might be that for mathematical nicety or otherwise this is the chosen strategy but you cannot then claim that your models are ground in the operational reality of the fiat monetary system we live in. I have no problem with abstract modelling. But modern monetary theory is firmly ground in the operational reality and is totally stock-flow consistent across all sectors. If we used the same definitions and rendered Steve's model stock-flow consistent in the same way as modern monetary theory then Steve's endogenous money circuits would come up with exactly the same results as the horizontal dimensions in modern monetary theory. His results might look a bit different in accounting terms but most of the message he wishes to portray about the dangers of Ponzi stages in the private debt accumulation process would still hold.

Billy Blog; blogs Archive; Debate; reply; spirt.

zero hedge Thu 2010-05-20 15:41 EDT

Perspectives From Rosenberg On Hyperinflation As A Loss Of Faith In A Currency

In today's note by David Rosenberg, the economist quotes a reader letter which provides a unique perspective on how hyperinflation arises: ...Where I disagree is that you can't have inflation with such a significant slack in the economy. For those of us that lived or worked in the hyperinflationary South American zone of the seventies and eighties, inflation comes when people lose faith in the currency and see material goods as a store of value. Because commodities rise and the goods can no longer be expected to be made at the same cost structure, people assume that they will be worth more in the future creating a self fulfilling upward spiraling effect. You can anticipate that these state governments will introduce price controls as well as potentially fixing exchange rates worsening the situation...

currency; Faithful; Hyperinflation; losses; perspective; Rosenberg; Zero Hedge.

Wed 2010-05-19 13:01 EDT

billy blog >> Blog Archive >> The origins of the economic crisis

A good way to understand the origins of the current economic crisis in Australia is to examine the historical behaviour of key macroeconomic aggregates. The previous Federal Government claimed they were responsibly managing the fiscal and monetary parameters and creating a resilient competitive economy. This was a spurious claim they were in fact setting Australia up for crisis. The reality is that the previous government created an economy which was always going to crash badly. The global nature of the crisis has arisen because over the last 2-3 decades most Western governments including the Australian government succumbed to the neo-liberal myth of budget austerity and introduced policies which allowed the destructive dynamics of the capitalist system to create an economic structure that was ultimately unsustainable. Once this instability began to manifest it was only a matter of time before the system imploded -- as we are now seeing...

Billy Blog; blogs Archive; Economic Crisis; originally.

Mon 2010-04-26 15:01 EDT

Economic Plague in the Euro Zone

Marshall Auerback

President Obama has long decried our ``out of control'' government spending. He clearly gets this nonsense from the manic deficit terrorists who do not understand these accounting relationships that we've sketched out. As a result he continues to advocate that the government leads the charge by introducing austerity packages -- just when the state of private demand is still stagnant or fragile. By perpetuating these myths, then, the President himself becomes part of the problem. He should be using his position of influence, and his considerable powers of oratory, to change public perceptions and explain why these deficits are not only necessary, but highly desirable in terms of sustaining a full employment economy...

economic plague; Euro Zone.

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.

Mish's Global Economic Trend Analysis Tue 2010-03-09 17:27 EST

Short Selling Restrictions "A Great Indicator of Imminent Market Crashes"

Michael Shedlock

...The Securities and Exchange Commission voted on Wednesday to limit short-selling of stocks that are falling rapidly in price...[quoting friend HB:] "Short selling restrictions are a great indicator of imminent market crashes. The biggest market declines in history all happened shortly after short selling restrictions were introduced."

great indicator; Imminent Market Crashes; Mish's Global Economic Trend Analysis; short-selling restrictions.

The Guardian World News Wed 2009-11-25 10:31 EST

What was really behind the crash?

John Cassidy

In an exclusive extract from his new book, John Cassidy explains why the huge salaries of Wall Street bosses created a culture that helped trigger the financial crisis...In the wake of last year's crash, even some top bankers have conceded that Wall Street remuneration schemes lead to excessive risk-taking...But without direct government involvement, the effort to reform Wall Street compensation won't survive the next market upturn. For although the financial sector as a whole has an interest in controlling rampant short-termism and irresponsible risk-taking, individual firms have an incentive to hire away star traders from any rivals that have introduced pay limits. Compensation reforms, therefore, are bound to break down. In this case, as in many others, the only way to reach a socially desirable outcome is to enforce compliance. And the only body that can do that is the government.

Crash; Guardian World News; really.

Jesse's Café Américain Fri 2009-10-23 09:53 EDT

The US Needs to Get Less Competitive

Jesse

The hobgoblin that is often used by the Wall Street banks is that if this or that reform is introduced, it will lessen their competitiveness, and their craftiest and most clever employees will leave the country to work for foreign banks. Is that supposed to be a threat? That sounds like a plan. And let them deduct the price of a one way coach class ticket... It is time for a real change, in most cases bringing back what was taken apart over the past twenty years...[jesse's reform proposals]

competitions; Jesse's Café Américain; needed.

Jesse's Café Américain Mon 2009-09-14 12:03 EDT

Moral Hazard and Economic Donkeys

Jesse

Simon Johnson on moral hazard: the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'

Economic Donkeys; Jesse's Café Américain; moral hazard.

zero hedge Thu 2009-09-03 09:59 EDT

Deep Thoughts From Leucadia

With Leucadia coming boldly from behind the shadows, where Ian Cumming and Joe Steinberg have always enjoyed operating, and joining Buffett in a deal over Capmark's loan-servicing and mortgage business, it makes sense to introduce readers with some of the very original thinking of the Leucadia founders (and very close friends of the mellifluously named Dick Handler). We present their most recent annual investor letter, which frequently is cited as among the best hedge fund (even though they don't like to be seen as one) strategy reading material. downloaded pdf.

Deep Thought; Leucadia; Zero Hedge.

zero hedge Thu 2009-09-03 09:59 EDT

Deep Thoughts From Leucadia

With Leucadia coming boldly from behind the shadows, where Ian Cumming and Joe Steinberg have always enjoyed operating, and joining Buffett in a deal over Capmark's loan-servicing and mortgage business, it makes sense to introduce readers with some of the very original thinking of the Leucadia founders (and very close friends of the mellifluously named Dick Handler). We present their most recent annual investor letter, which frequently is cited as among the best hedge fund (even though they don't like to be seen as one) strategy reading material. downloaded pdf.

Deep Thought; Leucadia; Zero Hedge.

Fri 2008-11-07 00:00 EST

Fed Hires Bear Stearns Risk Boss

by John Carney; ormer Bear Stearns chief risk officer Michael Alix; ``he was the guy on the mast charged with yelling "iceberg" just before the titantic introduced its bow to a floating hunk of ice''

Fed Hires Bear Stearns Risk Boss.