naked capitalism Sun 2010-07-25 16:28 EDT

The Irish mess

Richard Smith

The Irish banks got in a big mess with duff RE loans. The government swapped discounted bad loans for government-issued bonds...the whole thing is the usual dump onto taxpayers...loans to no more than ten or a dozen of these developers account for EUR 20Bn of the EUR70Bn face value of the debts exchanged...The extra national debt incurred (so far) equates to EUR25,000 per taxpayer. And EUR6,500 of that goes to repair damage inflicted by just a dozen well-placed spivs. Then go for some fairly brutal austerity to sort out the new debt/GDP ratio (Irish unemployment was 13.5% the last time I looked). You will have some pretty discontented citizens, and the debt/GDP ratio will stay the same, or get worse, so you cut again...

Irish mess; naked capitalism.

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.

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.

Wed 2010-07-21 10:30 EDT

More On Deficit Limits - Paul Krugman Blog - NYTimes.com

Jamie Galbraith responded to this post in comments; what he said, and my counter-response...Galbraith: ...The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates. My response: there's no question that right now there is no problem: if the Fed issues money, it will in fact just sit there...But we won't always be in this situation -- or at least I hope not!...At that point, money that the government prints won't just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use...

com; deficit limit; NYTimes; Paul Krugman Blog.

Wed 2010-07-21 10:28 EDT

I Would Do Anything For Stimulus, But I Won't Do That (Wonkish) - Paul Krugman Blog - NYTimes.com

...there's a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he's not alone...OK, I don't think that's right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough...

com; NYTimes; Paul Krugman Blog; stimulus; wonkish.

Mon 2010-07-19 16:30 EDT

US gripped with offshore economy

Jobs are becoming scarcer and scarcer particularly in the United States. Is it cyclical or is it structural? Is it something that America has completely turned its back on in a way that could potentially be a factor for decades going forward? Max Keiser discusses this issue with Dr. Paul Craig Roberts...Keiser: Andy Grove, the co-founder of Intel has just written an opinion piece for Bloomberg that has totally vindicated your long held argument against outsourcing American jobs...What is left in the arsenal to fight for jobs? Roberts:Nothing, one of the reasons they like offshoring is to destroy the unions so that's one of the reasons free market economists and corporations are so keen on offshoring, it destroys the unions...the only jobs that have been created in the 21st century in America are domestic service jobs like waiters, bartenders, hospital orderlies, construction workers, real estate, they are continuing to lose manufacture jobs, and not creating jobs for scientists and engineers and this has now been going on for a decade...What the US is going through is a process of disdevelopment of becoming an undeveloped economy; it's the opposite of economic development going on in the US...

grip; Offshored Economy.

New Economic Perspectives Mon 2010-07-19 13:51 EDT

The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff

Yeva Nersisyan

...with nearly 10% of the US labor force unemployed and another 7% underemployed, the public debate is now focused on the false issue of deficits and debt. A case in point is a recent book by Carmen Reinhart and Kenneth Rogoff, ``This Time is Different'' that has become a bestseller...The media as well as academia have fawned all over this book...The crux of the book is that each time people think that ``this time is different'', that crises cannot occur anymore or that they happen to other people in other places. True. This is exactly what Hyman Minsky was arguing more than 40 years ago. Reinhart and Rogoff don't really explain why this perception leads to crises...The book is mostly on crises driven by government debt...[however] Aggregating data over different monetary regimes and different countries cannot yield any meaningful conclusions about sovereign debt and crises. It is only useful if the goal is to merely validate one's preconceived myth about government debt being similar to private debt...As far as I can tell Rogoff and Reinhart haven't identified a single case of government default on domestic-currency denominated debt with a floating exchange rate system...Professional economists are a major impediment on the way to using our economic system for the benefit of us all. And Reinhart and Rogoff are no exception.

Carmen Reinhart; Deficit; government debt; Kenneth Rogoff; myth; New Economic Perspectives; told.

Credit Writedowns Mon 2010-07-19 12:08 EDT

Misunderstanding Modern Monetary Theory

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)." The gist of Krugman's post was to refute Modern Monetary Theory's view on money and deficits...Krugman's post mischaracterizes both MMT and Galbraith's statement...Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world...the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can't spend at will under MMT; eventually the output gap closes and inflation becomes a big problem...

credit writedowns; Misunderstanding Modern Monetary Theory.

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.

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 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.

Mish's Global Economic Trend Analysis Tue 2010-06-01 19:42 EDT

FHA Volume Sign of `Very Sick System'; Fannie, Freddie, FHA Account for 90% of Mortgage Market

Michael Shedlock

The US mortgage market is extremely sick and getting sicker every month. For the first time ever, the FHA is issuing more mortgages than Fannie and Freddie. The reason is the FHA has lower down payments...Recovery my ass.

90; Fannie; FHA accounts; FHA Volume Sign; Freddie; Mish's Global Economic Trend Analysis; mortgage markets; Sick System.

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.

Tue 2010-06-01 16:23 EDT

billy blog >> Blog Archive >> In the spirit of debate ...

Bill Mitchell

Readers of my blog often ask me about how modern monetary theory sits with the views of the debt-deflationists (and specifically my academic colleague Steve Keen). Steve and I have collaborated in the last few days to foster some debate between us on a constructive level with the aim of demonstrating that the common enemy is mainstream macroeconomics and that progressive thinkers should target that school of thought rather than looking within...hopefully, this initiative will broaden the debate and bring more people up to speed on where the real enemy of full employment lies...The modern monetary system is characterised by a floating exchange rate (so monetary policy is freed from the need to defend foreign exchange reserves) and the monopoly provision of fiat currency. The monopolist is the national government. Most countries now operate monetary systems that have these characteristics...the monetary unit defined by the government has no intrinsic worth...The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.The analogy that mainstream macroeconomics draws between private household budgets and the national government budget is thus false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts)... Taxation acts to withdraw spending power from the private sector but does not provide any extra financial capacity for public spending...As a matter of national accounting, the federal government deficit (surplus) equals the non-government surplus (deficit). In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending...contrary to mainstream economic rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings...Unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour unable to find a buyer at the current money wage. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns. 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. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save...Unlike the mainstream rhetoric, insolvency is never an issue with deficits. The only danger with fiscal policy is inflation which would arise if the government pushed nominal spending growth above the real capacity of the economy to absorb it...government debt functions as interest rate support via the maintenance of desired reserve levels in the commercial banking system and not as a source of funds to finance government spending...there is no intrinsic reason for...

Billy Blog; blogs Archive; Debate; Spirit.

Sat 2010-05-22 21:13 EDT

EconPapers: An Alternative View of Finance, Saving, Deficits, and Liquidity

L. Randall Wray

This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have "soaked up" global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve's pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it's necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held--as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy. [MMT]

alternative view; Deficit; EconPapers; finance; liquidity; save.